Note Regarding Forward Looking Statements
This quarterly report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which are intended to be covered by the safe harbors created thereby. In
some cases, you can identify forward-looking statements by terminology such as
"may," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," "intends," and other variations of these
words or comparable words. These statements include statements relating to
trends in or expectations relating to the effects of our existing and any future
initiatives, strategies, investments, outlooks and plans.
Actual results or events may differ materially from those anticipated and as
reflected in forward-looking statements included in this report. Therefore, you
should not rely on any of these forward-looking statements. Important factors
that could cause our actual results and financial condition to differ materially
from those indicated in the forward-looking statements include, among others:
our ability to successfully develop and operate our properties; changes in the
competitive environment in our industry and the markets we serve, and our
ability to compete effectively; our cash needs and the adequacy of our cash
flows and earnings; our ability to service our debt obligations; our ability to
attract and retain qualified personnel; changes in applicable laws or
regulations; litigation; public health epidemics or outbreaks (such as the novel
strain of COVID-19 and related variants); accidents, equipment failures or
mechanical problems; and other risks.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. Except as required by law, we do not undertake to update or revise any
of the forward-looking statements to conform these statements to actual results,
whether as a result of new information, future events or otherwise.
As used in this quarterly report, "AMGAS," the "Company," "we," "us" and "our"
refer collectively to American Noble Gas, Inc., formerly Infinity Energy
Resources, Inc., its predecessors and subsidiaries or one or more of them as the
context may require.
Overview
Since 2009, we had planned to pursue the exploration of potential oil and gas
resources in the United States and in the Perlas and Tyra concession blocks
offshore Nicaragua in the Caribbean Sea (the "Nicaraguan Concessions" or
"Concessions"), which contain a total of approximately 1.4 million acres. Civil
unrest within Nicaragua and difficulties encountered with negotiations on
extensions and the issuance of permits to drill with the Nicaraguan government
made the exploration and development of the underlying concessions problematic.
In addition, the Company was in technical default of the certain terms of the
Nicaraguan Concession and the Nicaraguan government terminated both of the
underlying Concessions. As a result, the Company abandoned all of its efforts to
explore and develop the Nicaraguan Concessions effective January 1, 2020.
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We sold our wholly-owned subsidiary, Infinity Oil and Gas of Texas, Inc.
("Infinity Texas") in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas
of Wyoming, Inc. ("Infinity Wyoming"), was administratively dissolved in 2009.
Subsequent to the termination of the Nicaraguan Concessions, we began assessing
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 the Company has
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 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.
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. AMGAS 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 April 28, 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. AMGAS 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 first exploratory well commenced on May 7, 2022 near Garden City, Kansas
with a goal to evaluate its unconventional theory of where substantial oil,
natural gas and noble gases may be present in the Hugoton Gas Field. The Hugoton
JV believes that its unconventional theory has not previously been targeted for
exploration by historical operations in the field. The initial well in which
AMGAS has acquired a 40% participation together with three other venture
partners was spud on May 7, 2022 with production casing set after testing and
completion logs identified at least two potential zones with substantial gas and
helium reserves.
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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 is in process of being
connected to the pipeline as of June 30, 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.
We may find it necessary to obtain new sources of debt and/or equity capital to
fund the exploration and development of the oil and gas producing properties
enumerated above, as well as to satisfy our existing debt obligations. We can
provide no assurance that we will be able to obtain sufficient new debt/equity
capital to fund our planned development of the various properties.
Name Change and Reincorporation Matters
At the 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, the stockholders approved the
2021 Plan and we reserved 5,000,000 shares of Common Stock for issuance under
the 2021 Plan.
Reincorporation in Nevada
On December 7, 2021, pursuant to the Agreement and Plan of Merger, the
Predecessor merged with and into its wholly owned subsidiary, AMGAS-Nevada 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 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 and/or Series A Convertible Preferred Stock 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, par value $0.0001 per share, 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, and (iii) each outstanding option, right or
warrant to acquire shares of the 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.
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Similar to the shares of common stock of the Predecessor prior to the merger,
the shares of AMGAS-Nevada common stock are 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 Preferred
Stock automatically represents, without any action of the Predecessor's
stockholders, the same number of shares of AMGAS-Nevada common stock or Series A
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 and bylaws. As of the 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 and Bylaws.
All references to the Company in this Quarterly Report on Form 10-Q refer to the
Predecessor prior to the merger, and AMGAS-Nevada subsequent to the merger.
2022 Operational and Financial Objectives
COVID-19 PANDEMIC
The financial statements contained in this Quarterly Report on Form 10-Q 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 three and six months ended June 30, 2022. Economies throughout
the world have been and continue to be disrupted by the continuing effects of
the COVID-19 pandemic, including the recent rise of the new Omicron variant. 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 Quarterly Report on Form
10-Q, 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 2022 operating objectives are focused on: 1) raising the necessary
funds to finance exploration and development of the Hugoton Gas Field Farm-Out
Venture, 2) raising the necessary funds to purchase our membership interest in
GMDOC, LLC, 3) raising the funds necessary to explore and develop the Central
Kansas Uplift 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 obligations that become due, or are in default and/or past due.
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Recent financings -
Issuance 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, par value
$0.0001 per share, with a stated/liquidation value of $100 per share; 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 $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 Warrant
Shares 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 Series A
Convertible Preferred Stock offering to complete the acquisition and development
of the Properties, to pay-off the 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 conversion shares and the
warrant Shares. 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 (90th)
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
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 and paid preferred dividends totaling $103,095 and
$60,528 relative to the March 2021 Series A Convertible Preferred Stock which
was charged to additional paid in capital during the six months ended June 30,
2022 and 2021, respectively.
The holders of March 2022 Series A Convertible Preferred Stock exercised their
rights to convert a total of 2,700 shares of Series A Convertible Preferred
Stock into 843,750 shares of common stock during the six months ended June 30,
2022. There were no conversions during the six months ended June 30, 2021.
June 2022 Issuance - On June 15, 2022 the Company entered into a securities
purchase agreement with an accredited investors 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, par value $0.0001 per
share, with a stated/liquidation value of $100 per share; 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 $0.30 per share, subject to customary adjustments
thereunder. The Series A Convertible Preferred stock is convertible into an
aggregate of up to 1,666,667 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 Warrant Shares
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 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 the 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 June 15, 2022 to register the conversion shares and the
warrant shares. 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 (90th)
calendar day following the closing of the acquisition of the Properties which
occurred on April 1, 2021.
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The holder of the 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 $2,055 and $-0- relative to
the June 2022 Series A Convertible Preferred Stock which was charged to
additional paid in capital during the six months ended June 30, 2022 and 2021,
respectively.
Issuance of Convertible Notes Payable
8% Convertible Promissory Notes due September 15, 2022 - On June 8, 2022, the
Company issued to an accredited investor an unsecured convertible note 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 $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 $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 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.
8% Convertible Promissory Notes due June 29, 2022 (in default) - AMGAS entered
into a securities purchase agreement with two accredited investors (the
"Investors") for the Company's 8% Convertible Promissory Notes Payable due June
29, 2022 (the "May 2022 Notes"), with an aggregate principal amount of $850,000.
The Notes are, subject to certain conditions, convertible into 2,125,000 shares
(the "Conversion Shares") of the Company's common stock, par value $0.0001 per
share (the "Common Stock"), at a price per share of $0.40. The Company also
issued an aggregate of 425,000 shares of Common Stock as commitment shares
("Commitment Shares") to the Investors as additional consideration for the
purchase of the May 2022 Notes. The Commitment Shares, and together with the May
2022 Notes and Conversion Shares, collectively, the "Securities". 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 was used to
purchase the Company's membership interests in GMDOC, LLC.
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 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.
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The Company paid half of the May 2022 Notes principal balance upon its maturity
on June 29, 2022 and the remaining half remains due and payable and is therefore
in technical default. The parties are negotiating a resolution to such technical
default including an extension and a roll-over of the principal into other
Company securities, although there can be no assurance that the parties will
reach a mutually agreeable resolution.
8% Convertible Promissory Notes due October 29, 2022 - On August 30, 2021 and
October 29, 2021, the Company entered into a securities purchase agreement with
the 8% Note Investors for the Company's 8% Note, with an aggregate principal
face amount of approximately $650,000. The 8% Notes are, subject to certain
conditions, convertible into an aggregate of 1,300,000 shares of Common Stock,
at a price of $0.50 per share. The Company also issued 8% Note Warrants to
purchase up to 1,8500,000 shares of Common Stock at an exercise price of $0.50
per share. The 8% Note Investors purchased the 8% Notes and 8% Note Warrants
from the Company for an aggregate purchase price of $650,000. The Company also
granted the 8% Note Investors certain piggy-back registration rights whereby the
Company has agreed to register the resale by the 8% Note Investors of the shares
underlying the 8% Note Warrant and the conversion of the 8% Note unless 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, as
defined in the 8% Note and 8% Note Warrant.
3% Convertible Promissory Notes 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 the 3% Notes with detachable warrants to purchase 5,732,994
shares of Common Stock for $0.50 per share. 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 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 March 30, 2026 at the rate of fifty cents ($0.50) per share,
subject to normal and customary adjustments. The warrants to purchase 5,732,994
shares of Common Stock issued pursuant to the Debt Settlement Agreements were
valued at $1,605,178 using the Black-Scholes methodology.
8% Convertible Promissory Notes Payable (paid-off) - On August 19, 2020, we
entered into the August Purchase Agreement with the August Investor for August
Note, with an aggregate principal face amount of approximately $365,169. The
August Note is, subject to certain conditions, convertible into an aggregate of
3,943,820 shares of Common Stock, at a price of $0.10 per share (the "Fixed
Conversion Price"). We also issued the five-year August Warrant to purchase up
to 800,000 shares of Common Stock at an exercise price of $0.50 per share. The
August Investor purchased such securities from the Company for an aggregate
purchase price of $325,000. We also granted the August Investor certain
automatic and piggy-back registration rights whereby we agreed to register the
resale by the August Investor of the shares underlying the August Warrant and
the conversion of the August Note, which was satisfied on August 5, 2021 by
filing a registration statement on Form 424B4 to register for resale all of the
shares of Common Stock issuable upon exercise of the August Warrant issued to
the August Investor
The August Note bears interest at a rate of eight percent (8%) per annum with 12
months guaranteed, may be voluntarily repaid in cash in full or in part by us at
any time in an amount equal to 115% of the principal amount of the August Note
and any accrued and unpaid interest, and shall be mandatorily repaid in cash in
an amount equal to 115% of the principal amount of the August Note and any
accrued and unpaid interest in the event of the consummation by us of any public
or private offering or other financing pursuant to which we receive gross
proceeds of at least $2,500,000. The August Note is convertible at any time by
the August Investor and we shall have the right to request that the August
Investor convert the August Note in full or in part at the Fixed Conversion
Price in the event that the VWAP (as defined in the August Note) of the Common
Stock exceeds $0.75 for twenty consecutive trading days. In addition, pursuant
to the August Note, so long as the August Note remains outstanding, we shall not
enter into any financing transactions pursuant to which the Company sells its
securities at a price lower than the Fixed Conversion Price, without written
consent of the August Investor.
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The conversion of the August Note and the exercise of the August Warrant are
each subject to beneficial ownership limitations such that the August Investor
may not convert the August Note or exercise the August Warrant to the extent
that such conversion or exercise would result in the August Investor being the
beneficial owner in excess of 4.99% (or, upon election of the August 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 or exercise, which beneficial ownership limitation may be increased
or decreased up to 9.99% upon notice to us, provided that any increase in such
limitation will not be effective until 61 days following notice to us.
We used the proceeds of the August Note to pay off $60,125 in principal balance
of notes payable that were in default, to pay the $100,000 required by the SKM
Exchange Agreement and for general working capital.
On March 26, 2021, the Company exercised its right to retire the August Note in
conjunction with the issuance of Series A Convertible Preferred Stock. In
accordance with the prepayment provisions contained in the August Note, the
Company paid all principal, accrued interest and the 15% prepayment premium
which totaled $453,539.
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 3% Notes with
detachable warrants to purchase 5,732,994 shares of Common Stock for $0.50 per
share. 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 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 warrants to purchase 5,732,994 shares of Common
Stock issued pursuant to the Debt Settlement Agreements 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 the August Note issued in August 2020 in
conjunction with the issuance of the Series A Convertible Preferred Stock. In
accordance with the prepayment provisions contained in the August 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 holder
of a $50,000 outstanding convertible note reached a settlement, pursuant to
which the Company issued to such holder a total of 145,000 shares of Common
Stock in exchange for the extinguishment of the outstanding principal, accrued
interest and associated common stock purchase warrants, which totaled $72,874 as
of April 1, 2021. The 145,000 shares of Common Stock issued to extinguish the
debt obligations were valued at $40,600 based on the closing market price on the
date of the extinguishment. The extinguishment of the debt obligations resulted
in a gain of $32,274, which was recorded in the year ended December 31, 2021.
On April 1, 2021, the Company and the holder of the $35,000 outstanding
convertible note reached a settlement, pursuant to which the Company issued a
total of 100,000 shares of Common Stock in exchange for the extinguishment of
the outstanding principal, accrued interest and associated common stock purchase
warrants, which totaled $50,956 as of April 1, 2021. The 100,000 shares issued
to extinguish the debt obligations were valued at $28,000 based on the closing
market price on the date of the extinguishment. The extinguishment of the debt
obligations resulted in a gain of $22,956, which was recorded in the year ended
December 31, 2021.
46
Acquisition of Oil and Gas 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 the Company has
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 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.
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. AMGAS 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 April 28, 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. AMGAS 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 first exploratory well commenced on May 7, 2022 near Garden City, Kansas
with a goal to evaluate its unconventional theory of where substantial oil,
natural gas and noble gases may be present in the Hugoton Gas Field. The Hugoton
JV believes that its unconventional theory has not previously been targeted for
exploration by historical operations in the field. The initial well in which
AMGAS has acquired a 40% participation together with three other venture
partners was spud on May 7, 2022 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 is in process of being
connected to the pipeline as of June 30, 2022.
47
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.
We may find it necessary to obtain new sources of debt and/or equity capital to
fund the exploration and development of the oil and gas producing properties
enumerated above, as well as to satisfy our existing debt obligations. We can
provide no assurance that we will be able to obtain sufficient new debt/equity
capital to fund our planned development of the various properties.
Letter Agreement with U.S. Noble Gas, LLC -
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
would provide 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 Properties. The USNG
Letter Agreement would cover all of the noble gas, specifically helium, and rare
earth elements/minerals potentially existing on the Properties and the future
acquisitions of the Company, 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.
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
AMGAS 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 June 30, 2022.
48
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 $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 $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 $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, 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).
49
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.
Pursuant to the terms of the Operating Agreement, each member agreed to pay
GMDOC, as its capital contribution, $50,000 in cash per membership 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
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 Three Months Ended June 30, 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
$43,563 and $20,828 for the three months ended June 30, 2022 and 2021,
respectively. The $22,735 or 109% increase in revenues during the second quarter
2022 as compared to 2021 reflects the significant improvement in the market
price of West Texas Intermediate ("WTI") crude oil which is the benchmark price
the Company receives for the sale of its crude oil. The average WTI crude oil
price during the second quarter 2022 was $108.72 as compared to $66.09 in 2021.
The Company expects its revenues to continue to improve as the price of WTI oil
remains strong and the Company increases the volume of oil and gas sold as it
connects its Hugoton Gas Field initial exploratory gas well to the pipeline
during the third quarter of 2022.
Our revenue has been 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 the remainder of 2022 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 $56,178 and $226,779 for the three months ended
June 30, 2022 and 2021, respectively. The improvement in oil and gas lease
operating expenses are attributable to significant repairs and rework performed
in the three months ended June 30, 2021 that did not recur in the 2022 period.
Upon completion of our acquisition of the Central Kansas Uplift 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.
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 remainder of 2022 and perhaps beyond.
50
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense totaled $30,834 and $30,834
during the three months ended June 30, 2022 and 2021, respectively. The Company
began generating revenues from the production and sale of crude oil resulting
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. Total depreciation, depletion
and amortization was $30,834 and $30,834 for the three months ended June 30,
2022 and 2021, respectively. We have not placed the Hugoton Gas Field initial
exploratory gas well into service as of June 30, 2022, therefore we have not
begun the related depreciation. We expect to place the well into service and
begin depreciation during the third quarter of 2022 upon its final connection to
the pipeline.
Accretion of Asset Retirement Obligation
Total expense for the accretion of asset retirement obligations was $302 and
$279 for the three months ended June 30, 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 Central Kansas
Uplift Properties. 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
The Company began generating revenues from the production and sale of crude oil
since the acquisition of the Properties on April 1, 2021. Oil and gas production
related taxes totaled $82 and $966 for the three months ended June 30, 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 $43,563 for the three months ended June 30,
2022, which resulted in the deduction of $82 in production related taxes.
Revenues totaled $20,828 for the three months ended June 30, 2021, which
resulted in the deduction of $966 in production related taxes primarily due to
severance taxes paid in 2021. During the three months ended June 30, 2021 the
Company received notice of an exemption from the State of Kansas, which 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 three months ended June 30, 2022 as compared to 2021.
Other General and Administrative Expenses
Other general and administrative expenses were $479,437 for the three months
ended June 30, 2022, an increase of $237,141, or 98%, from other general and
administrative expenses of $242,296 for the three months ended June 30, 2021.
The increase in other general and administrative expenses is primarily
attributable to an increase of $271,591 in stock-based compensation due to the
noncash compensation awarded to the Company's executives, Board members, the
USNG letter agreement which awarded compensatory warrants to advisory board
members and other consultants in 2022 and in late 2021.
Equity in earnings of unconsolidated subsidiary - GMDOC, LLC
The Company reported equity in earnings of unconsolidated subsidiary of $114,336
for the three months ended June 30, 2022, compared to $-0- for the three months
ended June 30, 2021. Such income resulted from the Company acquiring a 60.7143%
membership interest in GMDOC, LLC 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, LLC. Management's judgment regarding
its level of influence over the operations of GMDOC, LLC 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, LLC.
51
GMDOC, LLC had previously acquired 70% of the working interests in certain oil
and gas 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 $188,319 of net income on
approximately $790,000 of oil and gas revenues during the three months ended
June 30, 2022. The Company owns a 60.7143% membership interest in such net
income which it has reported as equity in earnings of unconsolidated subsidiary
- GMDOC, LLC during the three months ended June 30, 2022.
Interest Expense
Interest expense increased to $332,234 for the three months ended June 30, 2022,
compared to $214 for the three months ended June 30, 2021. Interest expense
increased during the three months ended June 30, 2022 primarily due to the
issuance of the various 8% Convertible Notes Payable during 2022 and also in
August and October 2021 that was outstanding in the 2022 period and not in the
2021 period.
Gain on Extinguishment of Liabilities
The Company reported a gain on exchange and extinguishment of liabilities of
$-0- and $55,230 in the three months ended June 30, 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 three months ended June 30, 2021.
Income Tax
The Company recorded no income tax benefit (expense) in the three months ended
June 30, 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 June 30, 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 three months ended
June 30, 2022 and 2021.
Net Loss
The Company reported a net loss of $741,168 for the three months ended June 30,
2022, compared to a net loss of $425,326 for the three months ended June 30,
2021. This represents a deterioration of $315,842 for the three months ended
June 30, 2022 compared to the three months ended June 30, 2021.
Series A Convertible Preferred Stock Dividends
The Company recorded $52,289 and $56,784 in convertible preferred stock
dividends in the three months ended June 30, 2022 and 2021, respectively. On
March 26, 2021 and on June 15, 2022 the Company issued and classified its Series
A Convertible Preferred Stock as equity securities in the balance sheet. Series
A Convertible Preferred Stock bears 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 on March 26, 2021 and June 15,
2022 have preference over Common Stock and therefore such accrued dividend
amounts have been deducted from net loss to report net loss applicable to common
stockholders of $793,457 and $482,110 for the three months ended June 30, 2022
and 2021, respectively.
52
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, 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
three months ended June 30, 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 $(0.04) and
$(0.03) for the three months ended June 30, 2022 and 2021, respectively.
Potential Common Stock Equivalents as of June 30, 2022 totaled 32,330,948 shares
of Common Stock, which included 3,119,830 shares of Common Stock underlying the
Convertible Promissory Notes, 7,721,667 shares of Common Stock underlying the
conversion of Series A Convertible Preferred Stock, 19,947,451 shares of Common
Stock underlying outstanding warrants and 1,542,000 shares of Common Stock
underlying outstanding stock options.
For the Six Months Ended June 30, 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
$68,868 and $20,828 for the six months ended June 30, 2022 and 2021,
respectively. The $48,040 or 231% increase in revenues during the six months
ended June 30, 2022 as compared to 2021 reflects the significant improvement in
the market price of West Texas Intermediate ("WTI") crude oil which is the
benchmark price the Company receives for the sale of its crude oil. The average
WTI crude oil price during the six months ended June 30, 2022 was $103.26 as
compared to $61.94 in 2021. The Company expects its revenues to continue to
improve as the price of WTI oil remains strong and the Company increases the
volume of oil and gas sold as it connects its Hugoton Gas Field initial
exploratory gas well to the pipeline during the third quarter of 2022.
Our revenue has been 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 increasing the average WTI crude oil price. We expect this trend
to continue during the remainder of 2022 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 $142,714 and $226,779 during the six months
ended June 30, 2022 and 2021, respectively. The improvement in oil and gas lease
operating expenses are attributable to significant repairs and rework performed
during the six months ended June 30, 2021 that did not recur in the 2022 period.
Upon completion of our acquisition of the Central Kansas Uplift 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.
53
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 remainder of 2022 and perhaps beyond.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense totaled $61,668 and $30,834
during the six months ended June 30, 2022 and 2021, respectively. This increase
was attributable to the timing of the Central Kansas Uplift acquisition. The
Company began generating revenues from the production and sale of crude oil
resulting 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. We have not
placed the Hugoton Gas Field initial exploratory gas well into service as of
June 30, 2022, therefore we have not begun the related depreciation. We expect
to place the well into service and begin depreciation during the third quarter
of 2022 upon its final connection to the pipeline.
Accretion of Asset Retirement Obligation
Total expense for the accretion of asset retirement obligations was $580 and
$279 for the six months ended June 30, 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 Central Kansas Uplift
Properties. 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
The Company began generating revenues from the production and sale of crude oil
since the acquisition of the Properties on April 1, 2021. Oil and gas production
related taxes totaled $110 and $966 for the six months ended June 30, 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 $68,868 for the six months ended June 30,
2022, which resulted in the deduction of $110 in production related taxes.
Revenues totaled $20,828 for the six months ended June 30, 2021, which resulted
in the deduction of $966 in production related taxes primarily due to severance
taxes paid in 2021. During the six months ended June 30, 2021 the Company
received notice of an exemption from the State of Kansas, which 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 six months ended June 30, 2022 as compared to 2021.
Other General and Administrative Expenses
Other general and administrative expenses were $848,144 for the six months ended
June 30, 2022, an increase of $404,878, or 91%, from other general and
administrative expenses of $443,266 for the six months ended June 30, 2021. The
increase in other general and administrative expenses is primarily attributable
to an increase of $420,247 in stock-based compensation due to the noncash
compensation awarded to the Company's executives, Board members, the USNG letter
agreement which awarded compensatory warrants to advisory board members and
other consultants in 2022 and in late 2021.
Equity in earnings of unconsolidated subsidiary - GMDOC, LLC
The Company reported equity in earnings of unconsolidated subsidiary of $114,336
for the six months ended June 30, 2022, compared to $-0- for the six months
ended June 30, 2021. Such income resulted from the Company acquiring a 60.7143%
membership interest in GMDOC, LLC 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, LLC. Management's judgment regarding
its level of influence over the operations of GMDOC, LLC 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, LLC.
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GMDOC, LLC had previously acquired 70% of the working interests in certain oil
and gas 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 $188,319 of net income on
approximately $790,000 of oil and gas revenues during the six months ended June
30, 2022. The Company owns a 60.7143% membership interest in such net income
which it has reported as equity in earnings of unconsolidated subsidiary -
GMDOC, LLC during the six months ended June 30, 2022.
Interest Expense
Interest expense increased to $425,790 for the six months ended June 30, 2022,
compared to $34,439 for the six months ended June 30, 2021. Interest expense
increased during the six months ended June 30, 2022 primarily due to the
issuance of the various 8% Convertible Notes Payable during 2022 and also in
August and October 2021 that was outstanding in the 2022 period and not in the
2021 period.
Gain on Extinguishment of Liabilities
The Company reported a gain on exchange and extinguishment of liabilities of
$-0- and $86,602 in the six months ended June 30, 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 six months ended June 30, 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 detachable warrants to
purchase 5,732,994 shares of Common Stock for $0.50 per share, which was 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 six months ended June 30,
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 August 2020 Note. There
were no similar transactions during the six months ended June 30, 2022.
Change in Derivative Fair Value
The conversion feature in certain outstanding promissory notes and common stock
purchase warrants issued in connection with short-term notes outstanding during
the six months ended June 30, 2021 were treated as derivative instruments
because such notes and warrants contained ratchet and anti-dilution provisions.
The mark-to-market process resulted in a gain of $199 during the six months
ended June 30, 2021. There were no similar derivatives outstanding during the
six months ended June 30, 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 six months ended
June 30, 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 June 30, 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 six months ended
June 30, 2022 and 2021.
55
Net Loss
The Company reported a net loss of $1,295,802 for the six months ended June 30,
2022, compared to a net loss of $628,950 for the six months ended June 30, 2021.
This represents a deterioration of $666,852 for the six months ended June 30,
2022 compared to the six months ended June 30, 2021.
Series A Convertible Preferred Stock Dividends
The Company recorded $105,150 and $60,528 in convertible preferred stock
dividends in the six months ended June 30, 2022 and 2021, respectively. On March
26, 2021 and on June 15, 2022 the Company issued and classified its Series A
Convertible Preferred Stock as equity securities in the balance sheet. Series A
Convertible Preferred Stock bears 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 on March 26, 2021 and June 15,
2022 have preference over Common Stock and therefore such accrued dividend
amounts have been deducted from net loss to report net loss applicable to common
stockholders of $1,400,952 and $689,478 for the six months ended June 30, 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, 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
six months ended June 30, 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 $(0.07) and $(0.04) for the
six months ended June 30, 2022 and 2021, respectively.
Potential Common Stock Equivalents as of June 30, 2022 totaled 32,330,948 shares
of Common Stock, which included 3,119,830 shares of Common Stock underlying the
Convertible Promissory Notes, 7,721,667 shares of Common Stock underlying the
conversion of Series A Convertible Preferred Stock, 19,947,451 shares of Common
Stock underlying outstanding warrants and 1,542,000 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, as we concentrated on the development of our
Nicaraguan Concessions, which was a long-term, high-risk/reward exploration
project in an otherwise unproven part of the world. We abandoned the Concessions
in early 2020 due to the challenging economic and political issues in Nicaragua
and the oil and gas industry in general. Subsequent to the abandoning of the
Nicaraguan Concessions, 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 have entered into the: 1) Central
Kansas Uplift properties, 2) the Hugoton Gas Field Farm-Out and the 3) the
GMDOC, LLC venture.
56
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 six months ended June 30, 2022 and for
the year ended December 31, 2021:
Six months ended
June 30, 2022
Capital raised:
Issuance of Convertible Promissory Notes together with the
issuance of 425,000 shares of common stock
$ 850,000
Issuance of Series A Convertible Preferred Stock with detachable
common stock purchase warrants
500,000
Issuance of Convertible Promissory Notes with detachable common
stock purchase warrants 350,000
Total capital raised $ 1,700,000
Year ended
December 31,
2021
Capital raised:
Issuance of Series A Convertible Preferred Stock with detachable
common stock purchase warrants
$ 1,929,089
Issuance of Convertible Promissory Notes with detachable common
stock purchase warrants 650,000
Total capital raised $ 2,579,089
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. 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 promissory notes
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 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 instruments with detachable
warrants to acquire Common Stock to fund our operational and capital expenditure
plans for the remainder of 2022.
Capital Expenditures
We have completed the acquisition of the following oil and gas development
projects that represent our business strategy for current and future operations
of AMGAS:
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 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 the Company has
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 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.
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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. AMGAS 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 April 28, 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. AMGAS 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 first exploratory well commenced on May 7, 2022 near Garden City, Kansas
with a goal to evaluate its unconventional theory of where substantial oil,
natural gas and noble gases may be present in the Hugoton Gas Field. The Hugoton
JV believes that its unconventional theory has not previously been targeted for
exploration by historical operations in the field. The initial well in which
AMGAS has acquired a 40% participation together with three other venture
partners was spud on May 7, 2022 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 is in process of being
connected to the pipeline as of June 30, 2022.
Investment in GMDOC, LLC - On May 3, 2022, the Company entered into an Operating
Agreement pursuant to which the Company acquired 17 (or 60.7143%) of 28 limited
liability membership interests in GMDOC, LLC, a Kansas limited liability
company, 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 certain oil and
gas leases from Castelli Energy, L.L.C. 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 2.0
million cubic feet of natural gas per day on a gross basis.
Going Concern
The Company has incurred losses from operations, has a net stockholders'
deficit, incurred net cash used in operating activities and has a significant
working capital deficit as of and for the six months ended June 30, 2022 and for
the year ended December 31, 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 Central Kansas Uplift 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.
These are substantial operational and financial issues that must be successfully
addressed during 2022 and beyond.
58
The Company has made substantial progress in resolving many of its existing
financial obligations during the six months ended June 30, 2022 and for the year
ended December 31, 2021.
The Company will have significant financial commitments to execute its planned
exploration and development of the Central Kansas Uplift 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 unaudited
condensed financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Cash and cash equivalents balances-
As of June 30, 2022, we had cash and cash equivalents with an aggregate balance
of $107,210, 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 $153,380 net decrease in cash during
the six months ended June 30, 2022:
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