UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 333-266143
NEXT BRIDGE HYDROCARBONS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 87-2538731 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
6300 Ridglea Place, Suite 950
Fort Worth, TX 76116
(Address of principal executive offices)
Telephone No.: (817) 438-1937
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company x |
Emerging growth company x | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares outstanding of the registrant’s common stock, par value $0.0001, as of May 5, 2023 was .
1
NEXT BRIDGE HYDROCARBONS, INC.
QUARTERLY REPORT
For the Quarter Ended March 31, 2023
INDEX
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains “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”). All statements included in this report, other than statements of historical facts, that address activities, conditions, events, or developments with respect to our financial condition, results of operations, business prospects or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “budget,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “pending,” “plan,” “potential,” “projected,” “will,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements appear throughout this report, and include statements about such matters as:
● | amount and timing of future production of oil and natural gas; |
● | amount, nature and timing of capital expenditures; |
● | the number of anticipated wells to be drilled after the date hereof; |
● | the availability of exploration and development opportunities; |
● | our financial or operating results; |
● | our cash flow and anticipated liquidity; |
● | operating costs including lease operating expenses, administrative costs and other expenses; |
● | finding and development costs; |
● | our business strategy; and |
● | other plans and objectives for future operations. |
Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason. They can be affected by a number of factors, including, among others:
● | the risks described in “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, as amended on Form 10-K/A filed on May 1, 2023; |
● | the volatility of prices and supply of, and demand for, oil and natural gas; |
● | the timing and success of our drilling activities; |
● | the numerous uncertainties inherent in estimating quantities of oil and natural gas reserves and actual future production rates and associated costs; |
● | our ability to successfully identify, execute or effectively integrate future acquisitions; |
● | the usual hazards associated with the oil and natural gas industry, including fires, well blowouts, pipe failure, spills, explosions and other unforeseen hazards; |
● | our ability to effectively market our oil and natural gas; |
● | the availability of rigs, equipment, supplies and personnel; |
● | our ability to discover or acquire additional reserves; |
● | our ability to satisfy future capital requirements; |
● | changes in regulatory requirements; |
● | general economic conditions, status of the financial markets and competitive conditions; and |
● | our ability to retain key members of our senior management and key employees. |
Moreover, we operate in a rapidly evolving environment. New risk factors and uncertainties emerge from time to time, and it is not possible for our management to predict all the risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this report relate only to events or information available to us as of the date of this report. Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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DEFINITIONS
The following are abbreviations and definitions of terms commonly used in the oil and gas industry and in this report. Natural gas equivalents and crude oil equivalents are determined using the ratio of six Mcf to one barrel. All references to “us”, “our”, “we”, or “Next Bridge” mean Next Bridge Hydrocarbons, Inc. and where applicable, its consolidated subsidiaries.
“Bbl” means a barrel of U.S. 42 gallons of oil.
“BOE” means one barrel of oil equivalent.
“Completion” means the installation of permanent equipment for the production of oil or gas.
“Condensate” means natural gas in liquid form produced in connection with natural gas wells.
“Exploratory well” means a well drilled to find a new field or to find a new productive reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.
“Gross” when used with respect to acres or wells, production or reserves refers to the total acres or wells in which we or another specified person has a working interest.
“MBbls” means one thousand barrels of oil.
“Mcf” means one thousand cubic feet of natural gas.
“Net” when used with respect to acres or wells, refers to gross acres of wells multiplied, in each case, by the percentage working interest owned by us.
“NGL” refers to natural gas liquids, which is composed exclusively of carbon and hydrogen.
“Oil” means crude oil or condensate.
“Operator” means the individual or company responsible for the exploration, development, and production of an oil or gas well or lease.
“Proved developed non-producing” means reserves (i) expected to be recovered from zones capable of producing but which are shut-in because no market outlet exists at the present time or whose date of connection to a pipeline is uncertain or (ii) currently behind the pipe in existing wells, which are considered proved by virtue of successful testing or production of offsetting wells.
“Proved developed producing” means reserves expected to be recovered from currently producing zones under continuation of present operating methods. This category includes recently completed shut-in gas wells scheduled for connection to a pipeline in the near future.
“Proved developed reserves” means reserves that can be expected to be recovered through existing wells with existing equipment or operating methods.
“Proved reserves” means the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided by contractual arrangements.
“Proved undeveloped reserves” means reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling locations offsetting productive wells that are reasonably certain of production when drilled or where it can be demonstrated with certainty that there is continuity of production from the existing productive formation.
“Recompletion” means the completion for production of an existing well bore in another formation from which the well has been previously completed.
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“Royalty” means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
“SEC” means the United States Securities and Exchange Commission.
“Working interest” means an interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties. For example, the owner of a 100% working interest in a lease burdened only by a landowner’s royalty of 12.5% would be required to pay 100% of the costs of a well but would be entitled to retain 87.5% of the production.
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | December 31, | |||||||
2023 | 2022 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 5,301,647 | $ | 569,298 | ||||
Accounts receivable, related party | 177,519 | 177,519 | ||||||
Prepayments - development costs | — | 150,000 | ||||||
Prepaid expenses | 51,183 | 62,300 | ||||||
Total current assets | 5,530,350 | 959,117 | ||||||
Oil and natural gas properties, net | 88,626,670 | 79,695,928 | ||||||
Other assets | 80,179 | 80,179 | ||||||
TOTAL ASSETS | $ | 94,237,199 | $ | 80,735,224 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,375,670 | $ | 3,891,649 | ||||
Note Payable - Meta | 21,589,362 | 22,573,724 | ||||||
Note Payable - Related Party | 16,875,000 | 2,000,000 | ||||||
Related party payables | — | — | ||||||
Accrued interest payable | 1,935,084 | 1,571,336 | ||||||
Total current liabilities | 45,775,115 | 30,036,709 | ||||||
Asset retirement obligations | 252,731 | 246,866 | ||||||
Total liabilities | 46,027,846 | 30,283,575 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $ , shares authorized; - - issued and outstanding at March 31, 2023 and December 31, 2022 | — | — | ||||||
Common stock, par value $ ; shares authorized; issued and outstanding at March 31, 2023 and December 31, 2022 | 16,547 | 16,547 | ||||||
Additional paid-in capital | 51,345,640 | 51,345,640 | ||||||
Outstanding stock options | 145,155 | — | ||||||
Accumulated deficit | (3,297,989 | ) | (910,538 | ) | ||||
Total stockholders’ equity | 48,209,353 | 50,451,649 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 94,237,199 | $ | 80,735,224 |
The accompanying notes are an integral part of these statements.
6
NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, 2023 | March 31, 2022 | |||||||
Oil and natural gas sales | $ | 10,924 | $ | — | ||||
Operating expenses | ||||||||
Lease operating expenses | 15,816 | 10,621 | ||||||
Production taxes | 786 | — | ||||||
General and administrative | 2,381,774 | 825,737 | ||||||
Depreciation, depletion and amortization | — | — | ||||||
Total operating expenses | 2,398,376 | 836,358 | ||||||
Other income (expense) | ||||||||
Interest expense | — | — | ||||||
Franchise tax | — | — | ||||||
Interest income | 1 | 323 | ||||||
Total expense, net | 1 | 323 | ||||||
Loss before income taxes | 2,387,451 | 836,035 | ||||||
Provision for income taxes | — | — | ||||||
Net loss | $ | 2,387,451 | $ | 836,035 | ||||
Loss per common share: | ||||||||
Basic and Diluted | $ | 0.01 | $ | 836,035 | ||||
Weighted average number of common shares outstanding: | ||||||||
Basic and Diluted | 165,472,241 | 1 |
The accompanying notes are an integral part of these statements.
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NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Common stock shares | Common stock amount | Additional paid-in capital | Stock Options Outstanding | Accumulated deficit | Total | |||||||||||||||||||
Balance, January 1, 2022 | 1 | $ | — | $ | 100,546,596 | — | $ | (67,978,627 | ) | $ | 32,567,969 | |||||||||||||
Contributions from parent | — | — | 317,792 | — | — | 317,792 | ||||||||||||||||||
Net loss | — | — | — | — | (836,035 | ) | (836,035 | ) | ||||||||||||||||
Balance, March 31, 2022 | 1 | $ | — | $ | 100,864,388 | — | $ | (68,814,662 | ) | $ | 32,049,726 | |||||||||||||
Balance, January 1, 2023 | 165,472,241 | $ | 16,547 | $ | 51,345,640 | — | $ | (910,538 | ) | $ | 50,451,649 | |||||||||||||
Issuance of stock options | — | — | — | 145,155 | — | 145,155 | ||||||||||||||||||
Net loss | — | — | — | — | (2,387,451 | ) | (2,387,451 | ) | ||||||||||||||||
Balance, March 31, 2023 | 165,472,241 | $ | 16,547 | $ | 51,345,640 | 145,155 | $ | (3,297,989 | ) | $ | 48,209,353 |
The accompanying notes are an integral part of these statements.
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NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31 | ||||||||
2023 | 2022 | |||||||
Cash Flows From Operating Activities | ||||||||
Net loss | $ | (2,387,451 | ) | $ | (836,035 | ) | ||
Adjustments to reconcile net loss to net cash from operations: | ||||||||
Accretion expense | 5,865 | — | ||||||
Expense related to stock options issued | 145,155 | — | ||||||
Change in: | ||||||||
Accounts receivable | — | 21,468 | ||||||
Prepayments – development costs | 150,000 | — | ||||||
Prepaid expenses | 11,117 | 2,310 | ||||||
Accounts payable and accrued expenses | 1,499,658 | (2,081,524 | ) | |||||
Related party payables | — | 2,500,000 | ||||||
Net cash provided by (used in) operating activities | (575,656 | ) | (393,781 | ) | ||||
Cash Flows From Investing Activities | ||||||||
Investment in oil and natural gas properties | (8,437,883 | ) | (1,084,285 | ) | ||||
Net cash used in investing activities | (8,437,883 | ) | (1,084,285 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Contributions from parent | — | 317,792 | ||||||
Proceeds from notes payable, related party | 14,875,000 | — | ||||||
Payments on promissory notes | (1,129,112 | ) | — | |||||
Net cash provided by financing activities | 13,745,888 | 317,792 | ||||||
Net increase (decrease) in cash | 4,732,349 | (1,160,274 | ) | |||||
Cash—beginning of period | 569,298 | 1,989,419 | ||||||
Cash—end of period | $ | 5,301,647 | $ | 829,145 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 129,112 | $ | — | ||||
Cash paid for state franchise tax | $ | — | $ | — | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Capitalized Interest | $ | 492,860 | $ | — |
The accompanying notes are an integral part of these statements.
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NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)
1. | NATURE OF BUSINESS |
Next Bridge Hydrocarbons, Inc. (the “Company”) was incorporated in Nevada on August 31, 2021, as OilCo Holdings, Inc. and changed its name to Next Bridge Hydrocarbons, Inc. pursuant to its Amended and Restated Articles of Incorporation filed on June 30, 2022. The Company spun off from Meta Materials, Inc. (“Meta”) on December 14, 2022, resulting in the Company becoming an independent company (the “Spin-Off”). Prior to the Spin-Off, the Company was a wholly-owned subsidiary of Meta. Meta became the parent of the Company’s subsidiaries in June 2021 in a merger transaction with Torchlight Energy Resources, Inc. (“Torchlight”), the previous parent of the subsidiaries and developer of the properties from their inception up to June 2021.
The Company is an energy company engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties in the United States. The Company’s primary focus has been the development of interests in an oil and natural gas project the Company holds in the Orogrande Basin in West Texas in Hudspeth County, Texas (the “Orogrande Project”). In addition, the Company has minor interests in the Eastern edge of the Midland Basin in Texas (the “Hazel Project”), and two minor well interests in the Hunton wells located in Oklahoma (the “Oklahoma Properties”). The Company currently has six full-time employees, and the Company employs consultants for various roles as needed.
The Company operates its business through four wholly owned subsidiaries Torchlight Energy, Inc., a Nevada corporation (“TEI”), Hudspeth Oil Corporation, a Texas corporation (“Hudspeth”), Torchlight Hazel, LLC, a Texas limited liability company (“Torchlight Hazel”), and Hudspeth Operating, LLC, a Texas limited liability company and wholly owned subsidiary of Hudspeth (“Hudspeth Operating”). All intercompany transactions have been eliminated in the consolidated financial statements.
2. | GOING CONCERN |
At March 31, 2023, the Company had not yet achieved profitable operations. The Company had a net loss of $2,387,451 for the three months ended March 31, 2023. The Company expects to incur further losses in the development of its business. The Company had a working capital deficit as of March 31, 2023 of $40,244,765. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent on its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management’s plan to address the Company’s ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement, institutional, or public sources; (2) obtaining loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful.
These consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty.
3. | SIGNIFICANT ACCOUNTING POLICIES |
The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed and the methods of applying those principles, which materially affect the determination of financial position, results of operations and cash flows are summarized below:
Use of estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and certain assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Basis of presentation—The financial statements are presented on a consolidated basis and include the accounts of Next Bridge Hydrocarbons, Inc. and its wholly owned subsidiaries, TEI, Hudspeth, Torchlight Hazel, and Hudspeth Operating. All significant intercompany balances and transactions have been eliminated. As noted above, the Company was involved in the Spin-Off on December 14, 2022.
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In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates.
Risks and uncertainties—The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, and other risks associated with operating an emerging business, including the potential risk of business failure.
In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) and the significant risks to the international community and economies as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in exposure globally, and thereafter, COVID-19 continued to spread throughout the U.S. and worldwide. In addition, actions taken by OPEC members and other exporting nations on the supply and demand in global oil and natural gas markets resulted in significant negative pricing pressure in the first half of 2020, followed by a recovery in pricing and an increase in demand in the second half of 2020 and into 2021. However, multiple variants emerged in 2021 and became highly transmissible, which contributed to additional pricing volatility during 2021 to date. The financial results of companies in the oil and natural gas industry have been impacted materially as a result of changing market conditions. Such circumstances generally increase uncertainty in the Partnership’s accounting estimates. Although demand and market prices for oil and natural gas have recently increased, due to the rising energy use and the improvement in U.S. economic activity, we cannot predict events that may lead to future price volatility and the near-term energy outlook remains subject to heightened levels of uncertainty.
The Company is continuing to closely monitor the overall impact and the evolution of the COVID-19 pandemic, including the ongoing spread of any variants, along with future OPEC actions on all aspects of the Company’s business, including how these events may impact the Company’s future operations, financial results, liquidity, employees, and operators. Additional actions may be required in response to the COVID-19 pandemic on a national, state, and local level by governmental authorities, and such actions may further adversely affect general and local economic conditions. The Company cannot predict the long- term impact of these events on our liquidity, financial position, results of operations or cash flows due to uncertainties including the severity of COVID-19 or any of the ongoing variants, and the effect the virus will have on the demand for oil and natural gas. These situations remain fluid and unpredictable, and the Company is actively managing its response.
Concentration of risks—At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. The Company’s cash is placed with a highly rated financial institution, and the Company regularly monitors the credit worthiness of the financial institutions with which it does business.
Fair value of financial instruments—Financial instruments consist of cash, receivables, convertible note receivable, payables and promissory notes, if any. The estimated fair values of cash, receivables, and payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of any promissory notes approximate their fair value giving affect for the term of the note and the effective interest rates.
For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows:
● | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
● | Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. |
● | Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. |
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Cash and cash equivalents – Cash and cash equivalents include certain investments in highly liquid instruments with original maturities of three months or less.
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Accounts receivable – Accounts receivable consist of amounts due from a related party for their share of expenses paid on their behalf by the Company. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. As of March 31, 2023 and December 31, 2022, no valuation allowance was considered necessary.
Oil and natural gas properties – The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities.
Oil and natural gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir. Unevaluated properties are reviewed for impairment at least quarterly and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions.
Gains and losses, if any, on the sale of oil and natural gas properties are not generally reflected in income unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the Company’s interest in the oil and natural gas property are treated as a reduction of the capital cost of the field, with no gain or loss recognized, as long as doing so does not significantly affect the unit-of-production depletion rate. Costs of retired equipment, net of salvage value, are usually charged to accumulated depreciation.
Capitalized interest – The Company capitalizes interest on unevaluated properties during the periods in which they are excluded from costs being depleted or amortized. During the three months ended March 31, 2023 the Company capitalized $492,860 of interest on unevaluated properties. Capitalized interest for the year ended December 31, 2022, was $1,363,538.
Depreciation, depletion, and amortization – The depreciable base for oil and natural gas properties includes the sum of all capitalized costs net of accumulated depreciation, depletion, and amortization (“DD&A”), estimated future development costs and asset retirement costs not included in oil and natural gas properties, less costs excluded from amortization. The depreciable base of oil and natural gas properties is amortized on a unit-of-production method.
Ceiling test – Future production volumes from oil and natural gas properties are a significant factor in determining the full cost ceiling limitation of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that determines a limit on the book value of oil and natural gas properties. If the net capitalized cost of proved oil and natural gas properties, net of related deferred income taxes, plus the cost of unproved oil and natural gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, net of related realizable tax affects, plus the cost of unproved oil and natural gas properties, the excess is charged to expense and reflected as additional accumulated DD&A. The Company recorded an impairment expense of $-0- for the three months ended March 31, 2023 and for the year ended December 31, 2022, respectively, to recognize the adjustment required by the ceiling test.
The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12-month period and excludes future cash outflows related to estimated abandonment costs.
The determination of oil and natural gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and natural gas reserves could result in significant revisions to proved reserves. Other issues, such as changes in regulatory requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future.
Asset retirement obligations – The fair value of a liability for an asset’s retirement obligation (“ARO”) is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, with the corresponding charge capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted over the useful life of the related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability.
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Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and natural gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.
Income taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an examination. Management has reviewed the Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements. Company tax returns remain subject to federal and state tax examinations. Generally, the applicable statutes of limitation are three to four years from their respective filings.
Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statements of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for the three months ended March 31, 2023, and for the year ended December 31, 2022.
Revenue recognition – The Company’s revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in oil and natural gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents the point at which control of the product is transferred to the customer. The Company elects to treat contracts to sell oil and natural gas production as normal sales, which are then accounted for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point.
Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Amounts allocated in the Company’s price contracts are based on the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two months after the sale has occurred.
Gain or loss on derivative instruments is outside the scope of ASC 606, Revenue Recognition, and is not considered revenue from contracts with customers subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales.
Producer Gas Imbalances. The Company applies the sales method of accounting for natural gas revenue. Under this method, revenues are recognized based on the actual volume of natural gas sold to purchasers.
Environmental laws and regulations – The Company is subject to extensive federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The Company believes that it is in compliance with existing laws and regulations. The Company accrued no liability as of March 31, 2023 and December 31, 2022.
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Recent accounting pronouncements adopted – In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for sale debt securities and beneficial interests in securitized financial assets. The guidance is applicable for fiscal years beginning after December 15, 2019 and interim periods within those years, however, the FASB extended the effective date for smaller reporting companies to fiscal years beginning after December 15, 2022. The Company adopted this standard January 1, 2023. It did not have a material impact on the consolidated financial statements.
4. | OIL & NATURAL GAS PROPERTIES |
The following table presents the capitalized costs for oil and natural gas properties of the Company:
Schedule of Capitalized Cost for Oil and Natural Gas
March 31, 2023 | December 31, 2022 | |||||||
Evaluated Costs Subject to amortization | $ | — | $ | — | ||||
Unevaluated Costs | 88,626,670 | 95,352,110 | ||||||
Total Capitalized Costs | 88,626,670 | 95,352,110 | ||||||
Less accumulated depreciation, depletion and amortization | — | (15,656,182 | ) | |||||
Total Oil and Natural Gas Properties | 88,626,670 | 79,695,928 |
Unevaluated costs as of March 31, 2023, and December 31, 2022, include cumulative costs of developing projects including the Orogrande and Hazel Projects in West Texas and the costs related to the Oklahoma Properties. In accordance with required accounting adjustments related to the Spin-Off, the carrying value of the oil and natural gas assets were adjusted to fair value as of December 15, 2022.
The Company periodically adjusts for the separation of evaluated versus unevaluated costs within its full cost pool to recognize the value impairment related to the expiration of, or changes in market value, of unevaluated leases. The impact of reclassifications as they become necessary is to increase the basis for calculation of future period’s depletion, depreciation and amortization which effectively recognizes the impairment on the consolidated statement of operations over future periods. Reclassified costs also become evaluated costs for purposes of ceiling tests, and which may cause recognition of increased impairment expense in future periods. The remaining cumulative unevaluated costs which have been reclassified within the Company’s full cost pool totals $-0- as of March 31, 2023. As of December 31, 2022, evaluated costs are $-0- since the Company had no proved reserve value associated with our properties.
Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a write-down could occur. Proved reserves are estimated quantities of crude oil, natural gas, and NGLs, which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. The independent engineering estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place. Estimated reserves to be developed through secondary or tertiary recovery processes are classified as unevaluated properties.
Current Projects
The Company is an energy company engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties in the United States. The Company is primarily focused on the acquisition of early-stage projects, the development and delineation of these projects, and then the monetization of those assets once these activities are completed.
The Company’s primary focus is the development of interests in oil and natural gas projects it holds in the Permian Basin in West Texas. The Company also holds minor interests in certain other oil and natural gas projects in Central Oklahoma that it is in the process of divesting.
As of March 31, 2023, the Company had interests in three oil and natural gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas, and two wells in Central Oklahoma.
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Orogrande Project, West Texas
On August 7, 2014, Torchlight entered into a Purchase Agreement with Hudspeth, McCabe Petroleum Corporation (“MPC”), and Gregory McCabe (“Mr. McCabe”). Mr. McCabe was the sole owner of both Hudspeth and MPC. Under the terms and conditions of the Purchase Agreement, Torchlight purchased 100% of the capital stock of Hudspeth which held certain oil and natural gas assets, including a 100% working interest in approximately 172,000 predominately contiguous acres in the Orogrande Basin in West Texas. Mr. McCabe has, at his option, a 10% working interest back-in after payout and a reversionary interest if drilling obligations are not met, all under the terms and conditions of a participation and development agreement among Hudspeth, MPC and Mr. McCabe. Mr. McCabe also holds a 4.5% overriding royalty interest in the Orogrande acreage, —which he obtained prior to, and was not a part of the August 2014 transaction. As of March 31, 2023, leases covering approximately 134,000 acres remain in effect.
Effective March 27, 2017, the property became subject to a University Lands D&D Unit Agreement (“DDU Agreement”) which allows for all 192 existing leases covering approximately 134,000 gross acres leased from University Lands to be combined into one drilling and development unit for development purposes. The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues through December 31, 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 31, 2028 if compliance with the DDU Agreement is met and the extension fee associated with the additional time is paid.
Drilling obligations under the DDU Agreement include five wells per year in years 2021, 2022 and 2023. The drilling obligations are minimum yearly requirements and may be exceeded if acceleration is desired.
In the years prior, our operations team deployed a new mist drilling solution that increased hole stability, which we believe will result in meaningful cost savings for additional wells drilled in the Orogrande Project. Multiple test wells were drilled in the Orogrande Project in order to stay in compliance with the DDU Agreement. While these previously drilled wells may have potential to produce hydrocarbons to sell commercially in the future, we have no immediate plans to deploy the additional capital necessary to sell production from these wells to third parties. Instead, we plan to use the results from these wells to determine our drilling plans for future wells, including reservoir locations, target depths and designated acreage, in the Orogrande Project. Notwithstanding the foregoing, development of the wells continued through March 31, 2023, to further capture and document the scientific base in support of demonstrating the production potential of the property. As of March 31, 2023, a total of 15 test wells have been drilled on the acreage.
On March 9, 2020, holders of certain notes payable by Torchlight entered into a Conversion Agreement under which the noteholders elected to convert $6,000,000 of principal and approximately $1,331,000 of accrued interest on the notes held by such holders, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in the Orogrande Project.
The Company intends to make offers and enter into agreements with one or more of the other current working interest owners in the Orogrande Project (each an “Orogrande Owner” and collectively, the “Orogrande Owners”). The Company anticipates offering the Orogrande Owners shares of common stock in exchange for such Orogrande Owner’s respective working interest in the Orogrande Project. The Company intends to offer the number of shares of common stock necessary such that each participating Orogrande Owner would own the percentage of common stock then outstanding in proportion to the percentage owned in the working interest of the Orogrande Project. For illustration purposes, if an Orogrande Owner owns 10% of the working interest of the Orogrande Project, and such Orogrande Owner elects to participate and accept the Company’s offer of shares of common stock, then such Orogrande Owner will be offered 10% of the aggregate amount of outstanding shares of common stock. The Company’s decision to enter into these transactions will depend on ability of the Company and each Orogrande Owner to negotiate and enter into definitive agreements related to such transaction and the Company’s board of directors receiving an industry-standard fairness opinion from an investment banking firm. One of the Orogrande Owners is Wolfbone Investments, LLC (“Wolfbone”), an entity controlled by Mr. McCabe. Mr. McCabe owns, directly and indirectly through entities he owns or controls, 7.75% of the Company’s common stock as of December 31, 2022, which would increase by the proportionate exchange of working interest for shares of the Company’s common stock if consummated.
The Orogrande Project ownership as of March 31, 2023, is detailed as follows:
Schedule of Orogrande Project Ownership
Revenue Interest | Working Interest | |||||||
University Lands - Mineral Owner | 20.000 | % | ||||||
ORRI - Magdalena Royalties, LLC, an entity controlled by Gregory McCabe | 4.500 | % | ||||||
ORRI - Unrelated Party | 0.500 | % | ||||||
Hudspeth Oil Corporation, a subsidiary of Next Bridge Hydrocarbons, Inc. | 49.875 | % | 66.500 | % | ||||
Wolfbone Investments, LLC, an entity controlled by Gregory McCabe | 18.750 | % | 25.000 | % | ||||
Conversion by Note Holders in March, 2020 | 4.500 | % | 6.000 | % | ||||
Unrelated Party | 1.875 | % | 2.500 | % | ||||
Total | 100.000 | % | 100.000 | % |
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Hazel Project in the Midland Basin in West Texas
Effective April 4, 2016, TEI acquired from MPC a 66.66% working interest in approximately 12,000 acres in the Midland Basin. A back-in after payout of a 25% working interest was retained by MPC and another unrelated working interest owner.
In October 2016, the holders of all of Torchlight’s then-outstanding shares of Series C Preferred Stock (which were issued in July 2016) elected to convert into a total 33.33% working interest in our Hazel Project, reducing TEI’s ownership from 66.66% to a 33.33% working interest.
Acquisition of Additional Interests in Hazel Project
On January 30, 2017, Torchlight entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with an entity which was wholly owned by Mr. McCabe, which resulted in the acquisition of approximately 40.66% working interest in the 12,000 gross acres, 9,600 net acres, in the Hazel Project.
Also, on January 30, 2017, Torchlight entered into and closed a Purchase and Sale Agreement with Wolfbone. Under the agreement, Torchlight acquired certain of Wolfbone’s Hazel Project assets, including its interest in the Flying B Ranch #1 well and the 40-acre unit surrounding the well.
Upon the closing of the transactions, the Torchlight working interest in the Hazel Project increased by 40.66% to a total ownership of 74%.
Effective June 1, 2017, Torchlight acquired an additional 6% working interest from unrelated working interest owners increasing its working interest in the Hazel project to 80%, and an overall net revenue interest of 75%.
Seven test wells have been drilled on the Hazel Project to capture and document the scientific base in support of demonstrating the production potential of the property.
Option Agreement with Masterson Hazel Partners, LP
On August 13, 2020, the Company’s subsidiaries TEI and Torchlight Hazel (collectively, “Torchlight Subs”) entered into an option agreement (the “Option Agreement”) with Masterson Hazel Partners, LP (“MHP”) and MPC. Under the agreement, MHP was obligated to drill and complete, or cause to be drilled and completed, at its sole cost and expense, a new lateral well (the “Well”) on the Hazel Project, sufficient to satisfy Torchlight Subs’s continuous development obligations on the southern half of the prospect no later than September 30, 2020. MHP has satisfied this drilling obligation. MHP paid to Torchlight Subs $1,000 as an option fee at the time of execution of the Option Agreement. MHP is entitled to receive, as its sole recourse for the recoupment of drilling costs, the revenue from production of the Well attributable to Torchlight Subs’s interest until such time as it has recovered its reasonable costs and expenses for drilling, completing, and operating the well.
In exchange for MHP satisfying the above drilling obligations, Torchlight Subs granted to MHP the exclusive right and option to perform operations, at MHP’s sole cost and expense, on the Hazel Project sufficient to satisfy Torchlight Subs’s continuous development obligations on the northern half of the prospect. Because MHP exercised this drilling option and satisfied the continuous development obligations on the northern half of the prospect, under the terms of the Option Agreement (as amended in September 2020) MHP had the option to purchase the entire Hazel Project no later than May 31, 2021. Such purchase would be under the terms of a form of Purchase and Sale Agreement included as an exhibit to the Option Agreement, at an aggregate purchase price of$12,690,704 for approximately 9,762 net mineral acres, and not less than 74% net revenue interest (approximately $1,300 per net mineral acre). MHP declined to exercise the Option in 2021.
Hunton Play, Central Oklahoma
As of March 31, 2023, the Company was producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove.
5. | RELATED PARTY BALANCES |
As of March 31, 2023 and December 31, 2022, the Company had a balance of $177,519 for an account receivable due from MPC, a shareholder of the Company, for amounts advanced related to the Orogrande development cost sharing arrangement agreed to in connection with the acquisition of the Orogrande working interests in 2014.
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On December 22, 2022, the Company issued an unsecured promissory note in the principal amount of up to $20 million in favor of Mr. McCabe (the “2022 Note”). The 2022 Note bears interest at 5% per annum, computed on the basis of a 365-day year, and matures on June 21, 2023 (the “2022 Note Maturity Date”); provided, however, if the Company raises $30 million or more in capital through debt or equity or a combination thereof by the 2022 Note Maturity Date, the 2022 Note Maturity Date will be extended to October 3, 2023. The outstanding principal of the 2022 Note, together with all accrued interest thereon, becomes due on June 21, 2023. The revolving commitment under the 2022 Note expires on 2022 Note Maturity Date. As of March 31, 2023, the Company had $16,875,000 in principal amount outstanding and $3,125,000 of available borrowings under the 2022 Note.
6. | COMMITMENTS AND CONTINGENCIES |
Legal Matters
On April 30, 2020, the Company’s wholly owned subsidiary, Hudspeth, filed suit against Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies (“Cordax”). The suit, Hudspeth and Wolfbone Investments, LLC v. Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies, was filed in the 189th Judicial District Court of Harris County, Texas. The suit seeks the recovery of approximately $1.4 million in costs incurred as a result of a tool failure during drilling activities on the University Founders A25 #2 well that is located in the Orogrande Field. Working interest owner Wolfbone is a co-plaintiff in that action. After the suit was filed, Cordax filed a mineral lien in the amount of $104,500 against the Orogrande Field and has sued the operator and counterclaimed against Hudspeth for breach of contract, seeking the same amount as the lien. Meta, as the Company’s parent at the time, determined to add the manufacturer of one of the tool components that it contends was one of the causes of the tool failure. It was later disclosed that Cordax is the subsidiary of a Canadian parent company, who has also been added to the case. Cordax’s current Chairman of the Board filed a special appearance after being served with a citation, alleging that he was a Canadian citizen with no meaningful ties to Texas. After discovery was conducted on this issue, a nonsuit without prejudice for this defendant was filed, dismissing him from the case. The remaining parties attended mediation on June 15, 2022, that was unsuccessful in resolving the case. Discovery is substantially complete. The case is currently set for trial beginning October 16, 2023.
On March 18, 2021, Cordax filed a lawsuit in Hudspeth County, Texas seeking to foreclose its mineral lien against the Orogrande Field in the amount of $104,500.01 and recover related attorney’s fees. The foreclosure action, Datalog LWT Inc. d/b/a Cordax Evaluation Technologies v. Torchlight Energy Resources, Inc., was filed in the 205th Judicial District Court of Hudspeth County, Texas. The Company is contesting the lien in good faith and filed a Plea in Abatement on May 10, 2021, seeking a stay in the Hudspeth County lien foreclosure case pending final disposition of the related case currently pending in Harris County, Texas. The Company is required to indemnify Meta in connection with this matter pursuant to the terms of the Distribution Agreement with Meta.
On January 14, 2022, a shareholder derivative action was filed in the U.S. District Court for the Eastern District of New York captioned Hines v. Palikaras, et al., No. 1:22-cv-00248. The complaint names as defendants certain of Meta’s current officers and directors, certain former Torchlight officers and directors, and Meta (as nominal defendant). The complaint, purportedly brought on behalf of Meta, asserts claims under Section 14(a) of the Exchange Act, contribution claims under Sections 10(b) and 21D of the Exchange Act, and various state law claims such as breach of fiduciary duties and unjust enrichment. The complaint seeks, among other things, unspecified compensatory damages in favor of Meta, certain corporate governance related actions, and an award of costs and expenses to the derivative plaintiff, including attorneys’ fees. On March 9, 2022, the Court entered a stipulated order staying this action until there is a ruling on a motion to dismiss in the Securities Class Action.
Environmental Matters
The Company is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time. As of March 31, 2023, and December 31, 2022, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts.
7. | STOCKHOLDERS’ EQUITY |
The Company has authorized shares of common stock, par value of $ per share and authorized shares of preferred stock, par value of $ per share. As of March 31, 2023 and December 31, 2022, the Company has issued shares of common stock and - - shares of preferred stock.
Stock Based Compensation
In 2022, the Company's board of directors adopted, and the stockholders approved, the 2022 Equity Incentive Plan (the "2022 Plan"). The 2022 Plan permits the Company to grant stock options, restricted stock, restricted stock units, performance shares awards and any one or more of the foregoing, for up to a maximum of 58,273,612 shares following an automatic increase to the number of shares reserved under the 2022 Plan on January 1, 2023. During the three months ended March 31, 2023, the Company granted 24,403,612 stock options as authorized under the 2022 Plan on the Company's form Performance Stock Option Agreement adopted by each of the Company's board of directors and compensation committee on March 6, 2023. Vesting is subject to continued service with the Company for up to one year with provisions for earlier vesting subject to the attainment of events outlined in the Plan.
Options granted were valued using the Black-Scholes Option Pricing Model resulting in a total value of $145,155.
. Option expense for the three months ended March 31, 2023, was $
A summary of stock options outstanding as of March 31, 2023, by exercise price and year of expiration is presented below:
Schedule of Stock Options Outstanding
Exercise | ||||||||||
Price | 2033 | Total | ||||||||
$ | 1.2056 | 24,403,612 | 24,403,612 | |||||||
24,403,612 | 24,403,612 |
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8. | INCOME TAXES |
The Company recorded no income tax provision at March 31, 2023 and December 31, 2022 because of anticipated losses for the 2023 fiscal year and actual losses incurred in 2022.
The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the three months ended March 31, 2023 because the Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the year ended December 31, 2022.
The Company had a Gross deferred tax asset related to federal net operating loss carryforwards of $81,330,836 and $74,081,761 at March 31, 2023 and December 31, 2022, respectively. The federal net operating loss carryforward will begin to expire in 2034. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.
9. | NOTES PAYABLE, RELATED PARTIES |
In 2021, the Company entered into a note payable with Meta, its former parent to borrow up to $15 million. On October 1, 2021, the Company issued the 2021 Note (defined below), which bears interest at 8% per annum, computed on the basis of a 360-day year, which was initially to mature on March 31, 2023 (the “2021 Note Maturity Date”); provided, however, if the Company raises $30 million or more in capital through debt or equity or a combination thereof by the 2021 Note Maturity Date, the 2021 Note Maturity Date will be extended to September 30, 2023, and the outstanding principal of the 2021 Note will amortize in six equal, monthly installments. If an event of default has occurred and is continuing, interest on the 2021 Note may accrue at the default rate of 12% per annum. The outstanding principal of the 2021 Note, together with all accrued interest thereon, becomes due on the 2021 Note Maturity Date. The 2021 Note includes a restrictive covenant that, subject to certain exceptions and qualifications, restricts the Company’s ability to merge or consolidate with another person or entity, or sell or transfer all or substantially all of its assets, unless the Company is the surviving entity or the successor entity assumes all of obligations under the 2021 Note. The 2021 Note is collateralized by certain shares of common stock in Meta held by one of its stockholders, Mr. McCabe, and by a lien on a 25% interest in the Orogrande Project owned by Wolfbone, an affiliate of Mr. McCabe.
The balance on the 2021 Note as of March 31, 2023 was $15 million. As of March 31, 2023, the total accrued and unpaid interest under the 2021 Note was $1,689,444.
On September 2, 2022, the Company entered into a loan agreement with Meta, as lender (the “Loan Agreement”) that would govern prior loan amounts advanced to the Company from Meta. As of August 11, 2022, and August 29, 2022, the Company borrowed an additional $1.2 million and $1.46 million, respectively, representing the remaining amount available for borrowing under the Loan Agreement and resulting in a total of $5 million principal amount outstanding related to the Loan Agreement, the proceeds of which were used for working capital and general corporate purposes. The term loans under the Loan Agreement bear interest at a per annum rate equal to 8% and were to mature on March 31, 2023 (the “Maturity Date”); provided, however, if the Company raises $30 million or more in capital through debt or equity, or a combination thereof by the Maturity Date, the Maturity Date will be extended to October 3, 2023 and the term loan would be amortized in six equal monthly installments. The Loan Agreement includes customary representations and covenants that, subject to exceptions and qualifications, restrict our ability to do certain things, such as: engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; incur additional indebtedness; incur liens; make loans and investments; declare dividends or redeem or repurchase equity interests; and enter into certain restrictive agreements. In addition, the Loan Agreement contains customary events of default, mandatory prepayment events and affirmative covenants, including, without limitation, covenants regarding the payment of taxes and other obligations, maintenance of insurance, maintenance of our material properties, reporting requirements, compliance with applicable laws and regulations, and formation or acquisition of new subsidiaries.
On March 31, 2023, the Company entered into an amendment to the 2021 Note and an amendment to Loan Agreement in order to extend each of the 2021 Maturity Date and the Maturity Date respectively from March 31, 2023 to October 3, 2023. Such amendments also removed the provisions allowing for extensions of the 2021 Maturity Date and the Maturity Date in the event the Company raised $30 million or more in capital through debt or equity or a combination thereof by March 31, 2023.
Under the terms of the Arrangement Agreement that governed the merger transaction between Torchlight and Meta in June 2021 the oil and natural gas assets were to be sold or spun out from Meta and the costs of any sale or spin-off incurred by Meta were to be borne the then-existing shareholders of Torchlight. The amount of the reimbursement payable to Meta in connection with the Spin-Off is $2,589,000 which was added to the principal amount of the Loan Agreement for a principal balance outstanding of $7,589,000 as of March 31, 2023. Concurrently with the amendment to the Loan Agreement, the Company made a prepayment of $1 million to reduce the principal balance to $6,589,362. As of March 31, 2023, the loans under the Loan Agreement had accrued and unpaid interest of $273,002.
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On December 21, 2022, the Company entered into that certain Agreement and Plan of Merger (the “Merger Agreement”) with Hudspeth, Wolfbone, MPC and Mr. McCabe, pursuant to which in a series of transactions the oil and natural gas leases, the lands covered by such leases, pooling and communitization agreements, rights-of-way, the surface estate of the lands and all wells located in Orogrande Project will be transferred, conveyed and assigned to Hudspeth (or its designated assignee) in consideration of (1) treating the Orogrande Obligations (as defined in the Merger Agreement) as having been irrevocably satisfied and discharged in full with respect to MPC and (2) an issuance of 56,297,638 shares of Company common stock to Mr. McCabe (such series of transactions collectively, the “Merger”).
The Merger is to be completed in accordance with the Texas Business Organizations Code, whereby (a) the Company will form NBH MergeCo, LLC with the State of Texas (“MergeCo”) in order to cause Hudspeth to assign all of its rights under the Merger Agreement to MergeCo and MergeCo will assume Hudspeth’s obligations under the Merger Agreement, (b) Hudspeth (or MergeCo, as its assignee), Wolfbone and MPC shall merge with each of Wolfbone and MPC as surviving entities, and (c) Wolfbone shall become a direct and wholly-owned subsidiary of the Company. The closing of the transactions contemplated by the Merger Agreement are subject to the satisfaction of certain customary closing conditions, including filing and acceptance of the certificate of merger by the Secretary of State of the State of Texas.
In connection with the Merger, on December 22, 2022, the Company entered into the 2022 Note in the principal amount of up to $20 million in favor of Mr. McCabe. The Company is entitled to request advances under the 2022 Note in a minimum principal amount of $100,000 each. Mr. McCabe is the largest shareholder of the Company’s common stock. As of March 31, 2023 the Company had drawn $16,875,000 on the 2022 Note.
10. | ASSET RETIREMENT OBLIGATIONS |
The following is a reconciliation of the asset retirement obligations liability through March 31, 2023:
Schedule of Asset Retirement Obligations Liability
Asset Retirement Obligations – January 1, 2022 | $ | 21,937 | ||
Accretion Expense | 1,092 | |||
Estimated liabilities recorded | 223,837 | |||
Asset Retirement Obligations – December 31, 2022 | $ | 246,866 |
Accretion Expense | 5,865 | |||
Estimated liabilities recorded | — | |||
Asset retirement obligations – March 31, 2023 | $ | 252,731 |
11. | SUBSEQUENT EVENTS |
The Wolfbone Merger Closing
The Merger became effective on April 25, 2023 and the closing of the Merger occurred on May 11, 2023. As a result of the Merger, the Company acquired Wolfbone’s 22.6249% remaining rights to working interest in the Orogrande Project in consideration of the issuance by the Company of 56,297,638 shares of the Company’s common stock to McCabe.
Working Interest Contributions
On May 11, 2023, the Company and its wholly owned subsidiary Hudspeth, entered into a contribution and exchange agreement with each of the Orogrande Owners named in the table below, pursuant to which and upon the completion of the Merger, the Company offered to the Orogrande Owners the number of shares of the Company’s common stock set forth opposite such Orogrande Owner’s name below in exchange for and in order to acquire such Orogrande Owner’s rights to working interest in the Orogrande Project.
The Company will issue the number of shares of common stock to each of the Orogrande Owners as follows:
Schedule of Common Stock to be issued to Orogrande Owners
Shares of Common Stock | Working Interest Contribution | |||
Dingus Investments, Inc. | 7,050,382 | 2.8334% | ||
Pandora Energy, LP | 6,220,779 | 2.5000% | ||
Kennedy Minerals, Ltd | 6,220,779 | 2.5000% | ||
The de Compiegne Property Company No. 20, Ltd | 6,220,779 | 2.5000% | ||
Loma Hombre Energy, LLC | 622,078 | 0.2500% | ||
Sero Capital, LLC | 725,840 | 0.2917% | ||
TOTAL | 27,060,637 | 10.8751% |
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that are included elsewhere in this report and the audited consolidated financial statements and related noes included in our Annual Report on Form 10-K for the year ended December 31, 2022, as supplemented by our amendment on Form 10-K/A filed with the SEC on May 1, 2023. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly under the section titled “Cautionary Statement Concerning Forward-Looking Statements.”
References to “Predecessor” relate to the results of operations of the Company as a subsidiary of our former parent Meta prior to the separation of the Company in December 2022 as reported in the consolidated financial statements for the three months ended March 31, 2022, and references to “Successor” relate to the results of operations of the Company as an independent public reporting company as reported in our consolidated financial statements for the three month period ended March 31, 2023, in each case, in accordance with GAAP.
Executive Summary
We were incorporated in Nevada on August 31, 2021, as OilCo Holdings, Inc. and changed our name to Next Bridge Hydrocarbons, Inc. pursuant to our Amended and Restated Articles of Incorporation filed on June 30, 2022. We are an energy company engaged in the acquisition, exploration, exploitation and development of oil and natural gas properties in the United States. Our primary focus has been the development of interests in an oil and natural gas project we hold in the Orogrande Basin in West Texas in Hudspeth County, Texas (the “Orogrande Project”). In addition, we have minor interests in the Eastern edge of the Midland Basin in Sterling, Tom Green and Irion Counties, Texas (the “Hazel Project”), and two minor well interests located in Oklahoma (the “Oklahoma Properties”).
We operate our business through four wholly owned subsidiaries: TEI, Hudspeth Oil Corporation, Torchlight Hazel, and Hudspeth Operating.
The Orogrande Project is subject to the University Lands D&D Unit Agreement (the “DDU Agreement”) which allows for all 192 existing leases covering approximately 134,000 gross acres leased from University Lands to be combined into one drilling and development unit for development purposes. The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues through December 31, 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 31, 2028 if we are in compliance with the DDU Agreement and the extension fee associated with the additional time is paid. As of March 31, 2023, leases covering approximately 134,000 acres remain in effect. Our drilling obligations under the DDU Agreement include five wells for 2023. While drilling our 2022 obligation wells, our operations team deployed a new mist drilling solution that increased hole stability, which we believe will result in meaningful cost savings for additional wells drilled in the Orogrande Project. While these wells may have potential to produce hydrocarbons to sell commercially in the future, we have no immediate plans to deploy the additional capital necessary to sell production from these wells to third parties. Instead, we plan to use the results from these wells to determine our drilling plans for future wells, including reservoir locations, target depths and designated acreage, in the Orogrande Project.
On March 31, 2023, we entered into an amendment to the secured, revolving promissory note issued to Meta on October 1, 2021 in an original principal amount of up to $15 million (the “2021 Note”) and an amendment to the Loan Agreement in order to extend the applicable maturity dates from March 31, 2023 to October 3, 2023. Such amendments also removed the provisions allowing for extensions of the respective maturity dates under the 2021 Note or the Loan Agreement in the event the Company raised $30 million or more in capital through debt or equity or a combination thereof by March 31, 2023.
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Results of Operations
Results for three month period ending March 31, 2022 and 2023
Revenue and Gross Profit
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Product Sales BOE | 232 | 0 | ||||||
Total Revenue | $ | 10,924 | $ | 0 | ||||
Cost of revenue | $ | (16,602 | ) | $ | (10,621 | ) | ||
Gross Profit (Loss) | $ | (5,678 | ) | $ | (10,621 | ) | ||
Gross profit percentage | (51.98 | )% | 0.00 | % |
Production Revenues and Cost of Revenue
For the three months ended March 31, 2023, we had production revenue of $10,924 compared to $-0- of production revenue for the prior year period. The change in revenue was primarily due to revenue from production sold from the Oklahoma wells. Our cost of revenue, consisting of lease operating expenses and production taxes, was $16,602 for the three months ended March 31, 2023 compared to $10,621 for the prior year period. Refer to the table of production and revenue included below for changes in revenue:
Oil | Gas | |||||||||||||||||||||||
Production | Production | Oil | Gas | Total | ||||||||||||||||||||
Property | Quarter | {BBLS} | {MCF} | Revenue | Revenue | Revenue | ||||||||||||||||||
Oklahoma | Q1 - 2022 | 0 | 0 | $ | — | $ | — | $ | — | |||||||||||||||
Hazel (TX) | Q1 - 2022 | 0 | 0 | — | — | — | ||||||||||||||||||
Total Q1-2022 | 0 | 0 | $ | — | $ | — | $ | — | ||||||||||||||||
Oklahoma | Q2 - 2022 | 97 | 1,267 | $ | 9,688 | $ | 7,716 | $ | 17,404 | |||||||||||||||
Hazel (TX) | Q2 - 2022 | 0 | 0 | — | — | — | ||||||||||||||||||
Total Q2-2022 | 97 | 1,267 | $ | 9,688 | $ | 7,716 | $ | 17,404 | ||||||||||||||||
Oklahoma | Q3 - 2022 | 43 | 887 | $ | 4,635 | $ | 8,329 | $ | 12,964 | |||||||||||||||
Hazel (TX) | Q3 - 2022 | 0 | 0 | — | — | — | ||||||||||||||||||
Total Q3-2022 | 43 | 887 | $ | 4,635 | $ | 8,329 | $ | 12,964 | ||||||||||||||||
Oklahoma | Q4 - 2022 | |||||||||||||||||||||||
Predecessor | 28 | 635 | $ | 2,473 | $ | 5,432 | $ | 7,905 | ||||||||||||||||
Successor | 15 | 242 | 1,276 | 1,285 | 2,561 | |||||||||||||||||||
Hazel (TX) | Q4 - 2022 | 0 | 0 | — | — | — | ||||||||||||||||||
Total Q4-2022 | 43 | 877 | $ | 3,749 | $ | 6,717 | $ | 10,466 | ||||||||||||||||
Total 2022 | 183 | 3,031 | $ | 18,072 | $ | 22,762 | $ | 40,834 | ||||||||||||||||
Average Commodity Price | $ | 98.75 | $ | 7.51 | ||||||||||||||||||||
Oklahoma | Q1 - 2023 | 107 | 748 | $ | 8,141 | $ | 2,783 | $ | 10,924 | |||||||||||||||
Hazel (TX) | Q1 - 2023 | 0 | 0 | — | — | — | ||||||||||||||||||
Total Q1-2023 | 107 | 748 | $ | 8,141 | $ | 2,783 | $ | 10,924 | ||||||||||||||||
Average Commodity Price | $ | 76.08 | $ | 3.72 |
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Expenses for the three months ended March 31, 2023 and 2022
We recorded depreciation, depletion and amortization expense of $-0- for the three months ended March 31, 2023, which was the same as the prior year period.
Operating Expenses
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Operating Expenses | ||||||||
General & Administrative | $ | 2,381,774 | $ | 825,737 | ||||
Total operating expenses | $ | 2,381,774 | $ | 825,737 |
General and Administrative Expenses
Our general and administrative expense for the three-month period ended March 31, 2023, was $2,381,774 compared with $825,737 for the prior year period. Our general and administrative expenses consisted of employee compensation expense, accounting and administrative costs, legal and other professional consulting fees, and other general corporate expenses. The change in general and administrative expenses in 2023, compared to 2022, is primarily due to increased employee compensation and an increase in consulting fees, filing fees, legal fees, director and officer liability insurance, and expense recorded relative to the issuance of employee stock options.
Liquidity and Capital Resources
At March 31, 2023, we had cash and cash equivalents of $5,301,647 compared to $829,145 as of March 31, 2022. At March 31, 2023, we had working capital deficit of $40,244,765 and total assets of $94,237,199. Stockholders’ equity was $48,209,353. The negative working capital is principally due to notes payable which will be payable within one year.
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The following table summarizes sources and uses of cash and cash equivalents:
Three Months Ended March 31 | ||||||||
2023 | 2022 | |||||||
Cash Flows From Operating Activities | ||||||||
Net loss | $ | (2,387,451 | ) | $ | (836,035 | ) | ||
Adjustments to reconcile net loss to net cash from operations: | ||||||||
Accretion expense | 5,865 | — | ||||||
Expense related to stock options issued | 145,155 | — | ||||||
Change in: | ||||||||
Accounts receivable | — | 21,468 | ||||||
Prepayments – development costs | 150,000 | — | ||||||
Prepaid expenses | 11,117 | 2,310 | ||||||
Accounts payable and accrued expenses | 1,499,658 | (2,081,524 | ) | |||||
Related party payables | — | 2,500,000 | ||||||
Net cash provided by (used in) operating activities | (575,656 | ) | (393,781 | ) | ||||
Cash Flows From Investing Activities | ||||||||
Investment in oil and natural gas properties | (8,437,883 | ) | (1,084,285 | ) | ||||
Net cash used in investing activities | (8,437,883 | ) | (1,084,285 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Contributions from parent | — | 317,792 | ||||||
Proceeds from notes payable, related party | 14,875,000 | — | ||||||
Payments on promissory notes | (1,129,112 | ) | — | |||||
Net cash provided by financing activities | 13,745,888 | 317,792 | ||||||
Net increase (decrease) in cash | 4,732,349 | (1,160,274 | ) | |||||
Cash—beginning of period | 569,298 | 1,989,419 | ||||||
Cash—end of period | $ | 5,301,647 | $ | 829,145 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 129,112 | $ | — | ||||
Cash paid for state franchise tax | $ | — | $ | — | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Capitalized Interest | $ | 492,860 | $ | — |
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Cash Flow Used in Operating Activities
Cash flow used in operating activities for the three months ended March 31, 2023 was $575,656 compared to $393,781 for the three months ended March 31, 2022. Cash flows used in operating activities for the three months ended March 31, 2023 can be primarily attributed to the net loss from operations offset by an increase in accounts payable. Cash flows used in operating activities for the three months ended March 31, 2022 can be primarily attributed to the net loss from operations offset by a net increase in related party payables and a decrease in accounts payable. We expect to continue to use cash flow in operating activities until such time as we achieve sufficient commercial oil and gas production to cover all of our cash costs.
Cash Flow Used in Investing Activities
Cash flow used in investing activities for the three months ended March 31, 2023 was $8,437,883 compared to $1,084,285 for the three months ended March 31, 2022. Cash flow used in investing activities principally consists of investment in oil and natural gas properties in Texas.
Cash Flows from Financing Activities
Cash flows from financing activities for the three months ended March 31, 2023 was $13,745,888 compared to $317,792 for the three months ended March 31, 2022. Cash flows from financing activities consists of proceeds from additional borrowings under the 2022 Note, which had a principal balance of $16,875,000 outstanding as of March 31, 2023. For the three months ended March 31, 2023, we incurred aggregate interest on the 2022 Note, the 2021 Note and under the Loan Agreement of $92,860.
Capital Expenditures
Our capital expenditures are summarized in the following table:
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Acquisitions: | ||||||||
Proved property | $ | — | $ | — | ||||
Unproved property | — | — | ||||||
Exploration and development: | ||||||||
Developmental leasehold costs | — | — | ||||||
Exploratory drilling and completion costs | — | — | ||||||
Development drilling and completion costs | 8,437,883 | 1,084,285 | ||||||
Other development costs | — | — | ||||||
Capitalized interest | 492,860 | — | ||||||
Asset retirement obligations | — | — | ||||||
Total exploration and development | 8,930,743 | 1,084,285 | ||||||
Other property | — | — | ||||||
Total capital expenditures | $ | 8,930,743 | $ | 1,084,285 | ||||
Change in accrued capital expenditures and other | (3,580,231 | ) | 1,178,282 | |||||
Prepaid drilling costs | (150,000 | ) | — | |||||
Capitalized interest | (492,860 | ) | — | |||||
Asset retirement obligations | — | — | ||||||
Total cash capital expenditures | $ | 4,707,652 | $ | 2,262,567 |
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Liquidity and Capital Resources
As of March 31, 2023, we had $8.4 million of liquidity, comprised of $3.1 million unused borrowing capacity under the 2022 Note and $5.3 million of cash and cash equivalents on hand. Our short and long-term capital requirements consist primarily of funding our development and drilling activities, payment of contractual obligations and debt service. The 2022 Note bears interest at 5% per annum, computed on the basis of a 365-day year, and matures on June 21, 2023. The outstanding principal of the 2022 Note, together with all accrued interest thereon, becomes due on June 21, 2023. The revolving commitment under the 2022 Note expires on 2022 Note Maturity Date. As of March 31, 2023, we had $16.9 million principal amount outstanding and $3.1 million of available borrowings under the 2022 Note. The total amount of accrued and unpaid interest under the 2022 Note was $22,885.27.
The 2021 Note is fully drawn with a principal balance outstanding of $20 million, bears interest at 8% per annum, computed on the basis of a 360-day year, and matures on October 3, 2023. If an event of default occurred and is continuing, interest on the 2021 Note may accrue at the default rate of 12% per annum. The total amount of accrued and unpaid interest under the 2021 Note was $1,689,444.44 as of March 31, 2023. Additionally, we have an aggregate principal balance of $6,589,361.77 outstanding under the Loan Agreement which bears interest at a fixed rate of 8% per annum if no event of default exists, and at a fixed rate of 12% per annum if an event of default exists. The loans under the Loan Agreement mature on October 3, 2023. The total amount of accrued and unpaid interest under the Loan Agreement was $273,002.44 as of March 31, 2023.
As of March 31, 2023, we had aggregate interest accrued on the 2022 Note, the 2021 Note and under the Loan Agreement of $1,985,332.15.
Management believes that currently available resources may not provide sufficient funds to enable us to meet our financing and drilling obligations for the 2023 fiscal year. We anticipate that we will continue to incur operating losses and generate negative cash flows from operations for the foreseeable future. As a result, we will need additional capital resources to fund our operations both in the short term and in the long term, prior to achieving break even or positive operating cash flow. While we do not have any committed sources of capital, we expect to continue to opportunistically seek access to additional funds through public or private equity offerings or debt financings, through partnering or other strategic arrangements, including credit application arrangements with our third party servicers, or a combination of the foregoing. Despite our efforts, we may face obstacles in continuing to attract new financing due to industry conditions and our history and current record of net losses. We can provide no assurance that we will be able to obtain the financing required to meet our stated objectives or even to continue as a going concern.
We do not expect to pay cash dividends on our common stock in the foreseeable future.
Critical Accounting Estimates
See Note 3—Significant Accounting Policies to the unaudited financial statements included elsewhere in this report for a description of the material changes to the Company’s critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022, as supplemented by the amendment on Form 10-K/A filed with the SEC on May 1, 2023.
Recent Accounting Pronouncements
Our unaudited financial statements and the accompanying notes thereto found elsewhere in this report contain a description of recent accounting pronouncements.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Commodity Price Risk
Our financial condition, results of operations and capital resources are highly dependent upon the prevailing market prices of oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors, some of which are beyond our control. Factors influencing oil and natural gas prices include the level of global demand for oil, the foreign supply of natural gas and oil, the effect of the war in Ukraine and the geopolitical response to Russia’s invasion, the establishment of and compliance with production quotas by oil exporting countries, weather conditions that determine the demand for natural gas, the price and availability of alternative fuels and overall economic conditions. It is impossible to predict future oil and natural gas prices with any degree of certainty. Sustained weakness in oil and natural gas prices may adversely affect our financial condition and results of operations, and may also reduce the amount of oil and natural gas reserves that we can produce economically. Any reduction in our oil and natural gas reserves, including reductions due to price fluctuations, can have an adverse effect on our ability to obtain capital for our exploration and development activities. Similarly, any improvements in oil and natural gas prices can have a favorable impact on our financial condition, results of operations and capital resources.
Interest Rate Sensitivity
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk is minimized through management’s decision to primarily obtain fixed rate or interest-free debt. The Company is not exposed to material cash flow interest rate risk.
Inflation
Inflation has not had a material impact on results of operations for the three months ended March 31, 2023. However, inflation on wages, commodity prices and other costs has the potential to adversely affect our results of operations, cash flows and financial position by increasing our overall costs. In addition, the existence of inflation in the global economy has the potential to result in higher borrowing costs, increased labor costs, supply shortages and other similar effects.
ITEM 4: CONTROLS AND PROCEDURES
As of March 31, 2023, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2023 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by us is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II — OTHER INFORMATION
ITEM 6: EXHIBITS
Exhibit No. | Description | |
10.1* | Form Performance Stock Option Agreement. | |
31.1* | Certifications (pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act) by the Principal Executive Officer. | |
31.2* | Certifications (pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act) by the Principal Financial Officer. | |
32.1† | Section 1350 Certification (pursuant to Sarbanes-Oxley Section 906) by Principle Executive Officer and Principle Financial Officer. | |
101.INS* | Inline XBRL Instance Document | |
101.SCH* | Inline XBRL Schema Document | |
�� | ||
101.CAL* | Inline XBRL Calculation Linkbase Document | |
101.LAB* | Inline XBRL Labels Linkbase Document | |
101.PRE* | Inline XBRL Presentation Linkbase Document | |
101.DEF* | Inline XBRL Definition Linkbase Document | |
104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
_____________________________ |
* | Filed herewith. |
† | Furnished herewith. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEXT BRIDGE HYDROCARBONS, INC. | |
Date: May 15, 2023 | /s/ Clifton DuBose, Jr. |
Clifton DuBose, Jr., Chairman and Chief Executive Officer | |
(Principal Executive Officer) | |
Date: May 15, 2023 | /s/ Lucas T. Hawkins |
Lucas T. Hawkins, Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
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