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 September 30, 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.
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 November 10, 2023 was 248,830,516.
NEXT BRIDGE HYDROCARBONS, INC.
QUARTERLY REPORT
For the Quarter Ended September 30, 2023
INDEX
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”). These forward-looking statements may be identified by their use of terms such as “anticipate,” “assume,” “believe,” “budget,” “can,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “pending,” “plan,” “potential,” “projected,” “will,” and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this report are 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 expectations regarding the Participation Agreements; 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 (including the ongoing conflicts in Ukraine and the Middle East), 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.
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”, “NBH”, 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.
“Bcf” means one billion cubic feet of natural gas.
“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.
“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.
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | September 30, | | | December 31, | |
| | | 2023 | | | 2022 | |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash | | $ | 4,884,997 | | | $ | 569,298 | |
| Accounts receivable, related party | | | — | | | | 177,519 | |
| Production receivable | | | 4,270 | | | | — | |
| Prepayments - development costs | | | 106,480 | | | | 150,000 | |
| Prepaid expenses | | | 70,908 | | | | 62,300 | |
| Total current assets | | | 5,066,655 | | | | 959,117 | |
| | | | | | | | | |
| Oil and natural gas properties, net | | | 119,538,170 | | | | 79,695,928 | |
| | | | | | | | | |
| Other assets | | | 105,179 | | | | 80,179 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 124,710,004 | | | $ | 80,735,224 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 1,285,641 | | | $ | 3,891,649 | |
| Prepayments, working interest owners | | | 5,611,892 | | | | — | |
| Note Payable - Meta | | | — | | | | 22,573,724 | |
| Note Payable - Related Party | | | 41,589,362 | | | | 2,000,000 | |
| Accrued interest payable | | | 3,191,007 | | | | 1,571,336 | |
| Total current liabilities | | | 51,677,902 | | | | 30,036,709 | |
| | | | | | | | | |
| Asset retirement obligations | | | 264,826 | | | | 246,866 | |
| Total liabilities | | | 51,942,728 | | | | 30,283,575 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, par value $0.0001, 50,000,000 shares authorized; -0- issued and outstanding September 30, 2023 and December 31, 2022 | | | — | | | | — | |
| Common stock, par value $0.0001; 500,000,000 shares authorized; 248,830,516 issued and outstanding at September 30, 2023; 165,472,241 issued and outstanding at December 31, 2022 | | | 24,883 | | | | 16,547 | |
| Additional paid-in capital | | | 80,971,349 | | | | 51,345,640 | |
| Accumulated deficit | | | (8,228,956 | ) | | | (910,538 | ) |
| Total stockholders’ equity | | | 72,767,276 | | | | 50,451,649 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 124,710,004 | | | $ | 80,735,224 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Oil and natural gas sales | | $ | 7,731 | | | $ | 12,810 | | | $ | 23,496 | | | $ | 30,214 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Lease operating expenses | | | 10,302 | | | | 14,880 | | | | 36,812 | | | | 55,701 | |
| Production taxes | | | 557 | | | | 779 | | | | 1,692 | | | | 2,032 | |
| General and administrative | | | 2,472,086 | | | | 1,800,472 | | | | 7,303,411 | | | | 3,789,166 | |
| Total operating expenses | | | 2,482,945 | | | | 1,816,131 | | | | 7,341,915 | | | | 3,846,899 | |
| | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | |
| Interest expense | | | — | | | | (360,877 | ) | | | — | | | | (948,099 | ) |
| Interest income | | | — | | | | 11 | | | | 1 | | | | 491 | |
| Total other income (expense) | | | — | | | | (360,866 | ) | | | 1 | | | | (947,608 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Provision for income taxes | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (2,475,214 | ) | | $ | (2,164,187 | ) | | $ | (7,318,418 | ) | | $ | (4,764,293 | ) |
| | | | | | | | | | | | | | | | | |
| Loss per common share: | | | | | | | | | | | | | | | | |
| Basic and Diluted | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.03 | |
| Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | |
| Basic and Diluted | | | 248,830,516 | | | | 163,673,730 | | | | 185,319,449 | | | | 163,673,730 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | Common
stock
shares | | | Common
stock
amount | | | Additional
paid-in
capital | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (1,764,071 | ) | | | (1,764,071 | ) |
| Prior period adjustment | | | — | | | | — | | | | (1,193 | ) | | | (208,889 | ) | | | (210,082 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2022 | | | 1 | | | $ | — | | | $ | 100,863,195 | | | $ | (70,787,622 | ) | | $ | 30,075,573 | |
| | | | | | | | | | | | | | | | | | | | | |
| Common stock issued | | | 165,523,362 | | | | 16,552 | | | | (16,552 | ) | | | — | | | | — | |
| Net loss | | | — | | | | — | | | | — | | | | (2,164,187 | ) | | | (2,164,187 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2022 | | | 165,523,363 | | | $ | 16,552 | | | $ | 100,846,643 | | | $ | (72,951,809 | ) | | $ | 27,911,386 | |
| | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | 51,490,795 | | | $ | (3,297,989 | ) | | $ | 48,209,353 | |
| | | | | | | | | | | | | | | | | | | | | |
| Common stock issued | | | 83,358,275 | | | | 8,336 | | | | 28,333,478 | | | | — | | | | 28,341,814 | |
| Issuance of stock options | | | — | | | | — | | | | 383,772 | | | | — | | | | 383,772 | |
| Net loss | | | — | | | | — | | | | — | | | | (2,455,753 | ) | | | (2,455,753 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2023 | | | 248,830,516 | | | $ | 24,883 | | | $ | 80,208,045 | | | $ | (5,753,742 | ) | | $ | 74,479,186 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of stock options | | | — | | | | — | | | | 763,304 | | | | — | | | | 763,304 | |
| Net loss | | | — | | | | — | | | | — | | | | (2,475,214 | ) | | | (2,475,214 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2023 | | | 248,830,516 | | | $ | 24,883 | | | $ | 80,971,349 | | | $ | (8,228,956 | ) | | $ | 72,767,276 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | |
| | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | |
| Cash Flows From Operating Activities | | | | | | | | |
| Net loss | | $ | (7,318,418 | ) | | $ | (4,764,293 | ) |
| Adjustments to reconcile net loss to net cash from operations: | | | | | | | | |
| Accretion expense | | | 17,961 | | | | — | |
| Interest paid in kind | | | — | | | | 948,099 | |
| Expense related to stock options issued | | | 1,292,231 | | | | — | |
| Change in: | | | | | | | | |
| Accounts receivable | | | (4,271 | ) | | | 23,340 | |
| Accounts receivable, related party | | | — | | | | (1,872 | ) |
| Prepayments - development costs | | | 43,520 | | | | — | |
| Prepaid expenses | | | (8,608 | ) | | | (3,954 | ) |
| Other assets | | | (25,000 | ) | | | — | |
| Accounts payable and accrued expenses | | | (2,590,371 | ) | | | (2,268,335 | ) |
| Net cash from operating activities | | | (8,592,956 | ) | | | (6,067,015 | ) |
| | | | | | | | | |
| Cash Flows From Investing Activities | | | | | | | | |
| Investment in oil and natural gas properties | | | (9,503,892 | ) | | | (1,630,137 | ) |
| Net cash from investing activities | | | (9,503,892 | ) | | | (1,630,137 | ) |
| | | | | | | | | |
| Cash Flows From Financing Activities | | | | | | | | |
| Proceeds from notes payable, related party | | | 18,000,000 | | | | 7,500,000 | |
| Payments on promissory notes | | | (1,000,000 | ) | | | — | |
| Payments on accrued interest | | | (199,345 | ) | | | — | |
| Prepayments, working interest owners | | | 5,611,892 | | | | — | |
| Contributions from parent, net | | | — | | | | 316,599 | |
| Net cash from financing activities | | | 22,412,547 | | | | 7,816,599 | |
| | | | | | | | | |
| Net increase (decrease) in cash | | | 4,315,699 | | | | 119,447 | |
| | | | | | | | | |
| Cash - beginning of period | | | 569,298 | | | | 1,989,419 | |
| | | | | | | | | |
| Cash - end of period | | $ | 4,884,997 | | | $ | 2,108,866 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
| Cash paid for interest | | $ | 199,345 | | | $ | — | |
| | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
| Common stock issued for working interest in oil and natural gas properties | | $ | 28,341,814 | | | $ | — | |
| Account receivable-related party discharged in working interest acquisition | | $ | 177,519 | | | $ | — | |
| Capitalized Interest | | $ | 1,819,016 | | | $ | — | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
NEXT BRIDGE HYDROCARBONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
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 accompanying Financial Statements contain comparative financial disclosures from the Financial Statements of the predecessor Company described above.
The accompanying Statement of Stockholders’ Equity contains a reclassification effective June 30, 2023, between Common Stock and Additional paid-in capital of $75,022 to correct the par value used to account for common stock issued in the Three Months Ended June 30, 2023.
The Company is an energy company engaged in the acquisition, exploration, exploitation and 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 five full-time employees, and the Company employs consultants for various roles as needed.
The Company operates its business through five 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”), Wolfbone Investments, LLC, a Texas limited liability company (“Wolfbone”) 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.
At September 30, 2023, the Company had not yet achieved profitable operations. The Company had a net loss of $7,318,418 for the nine months ended September 30, 2023. The Company expects to incur further losses in the development of its business. The Company had a working capital deficit as of September 30, 2023 of $46,611,246. 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 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, (3) participating in joint venture transactions with third parties, (4) entering into farmout or other participation arrangements with respect to the Orogrande Project or any other prospects acquired by the Company, or (5) acquiring drilling prospects and selling such prospects for a profit, through stock or cash transactions. 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, Wolfbone, 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.
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.
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 creditworthiness 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.
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 September 30, 2023, 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 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 nine months ended September 30, 2023, the Company capitalized $1,819,016 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 did not record an impairment expense for either the nine months ended September 30, 2023 or for the year ended December 31, 2022.
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.
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 nine months ended September 30, 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.
Basic and diluted earnings (loss) per share – Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive. The Company had no dilutive shares for the nine months ended September 30, 2023, or for the year ended December 31, 2022.
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 September 30, 2023 and December 31, 2022.
Recent accounting pronouncements adopted – No new accounting pronouncements have been adopted or issued that would impact the financial statements of the Company.
| | 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
| | | September 30, 2023 | | | December 31, 2022 | |
| Evaluated costs subject to amortization | | $ | — | | | $ | — | |
| Unevaluated costs | | | 119,538,170 | | | | 79,695,928 | |
| Total capitalized costs | | | 119,538,170 | | | | 79,695,928 | |
| Less accumulated depreciation, depletion and amortization | | | — | | | | — | |
| Total oil and gas properties | | $ | 119,538,170 | | | $ | 79,695,928 | |
Unevaluated costs as of September 30, 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. There were no remaining cumulative unevaluated costs which had been reclassified within the Company’s full cost pool totals as of September 30, 2023 or December 31, 2022 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 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 Hudspeth County 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 September 30, 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.
Upon the closing of transactions contemplated by the McCabe Contribution Agreement (defined below), the Company will hold a portion of the Back-In Interest (defined below) in the Orogrande Project and a portion of the Bronco Prospect (defined below).
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. Up to 100% of such back-in interest is expected to be contributed to the Company pursuant to the McCabe Contribution Agreement. 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.
Effective March 27, 2017, the Orogrande acreage 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. On or about October 11, 2022, the DDU Agreement was amended to provide that the term of the DDU Agreement expires on December 31, 2024, and the time to drill on the drilling and development unit continues through December 31, 2024. The DDU Agreement, as amended, also grants the right to extend the DDU Agreement through December 31, 2029 if compliance with the DDU Agreement is met and the extension fee associated with the additional time is paid. The Company expects to exercise its option to extend the term under the DDU Agreement prior to its expiration.
Drilling obligations under the DDU Agreement, as amended, include four wells in 2021 and five wells per year in years 2022, 2023 and 2024. The drilling obligations are minimum yearly requirements and may be exceeded if acceleration is desired.
While drilling wells under our 2022 drilling obligation, 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 September 30, 2023, to further capture and document the scientific base in support of demonstrating the production potential of the property. As of September 30, 2023, we have commenced drilling activities under the 2023 drilling program, drilling two of the five wells required for the program, and depending on the results of those drilling activities, we may consider deploying the additional capital necessary to sell oil production from the wells to third parties.
Acquisition of Working Interest
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 became effective on April 25, 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 the 56,297,638 shares of the Company’s common stock to Mr. McCabe.
The Merger was completed in accordance with the Texas Business Organizations Code, whereby (a) the Company formed 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 assumed Hudspeth’s obligations under the Merger Agreement, (b) MergeCo, Wolfbone and MPC merged with each of Wolfbone and MPC as surviving entities, and (c) Wolfbone became a direct and wholly-owned subsidiary of the Company. The closing of the transactions contemplated by the Merger Agreement occurred on May 11, 2023.
On May 11, 2023, the Company and its wholly owned subsidiary, Hudspeth, entered into a contribution and exchange agreement with each of the prior working interest owners in the Orogrande Project named in the table below (each an “Orogrande Owner” and collectively, the “Orogrande Owners”), pursuant to which, the Company issued 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.
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 | % |
The Orogrande Project ownership as of September 30, 2023, is detailed as follows:
Schedule of Orogrande Project Ownership
| | | Revenue | | Working |
| | | Interest | | Interest |
| University Lands – Mineral Owner | | 20.000% | | |
| | | | | |
| ORRI – Magdalena Royalties, LLC, an entity controlled by Gregory McCabe, Chairman of the Board | | 4.500% | | |
| | | | | |
| ORRI – Unrelated Party | | 0.500% | | |
| | | | | |
| Hudspeth Oil Corporation, a subsidiary of Next Bridge Hydrocarbons, Inc. | | 56.250% | | 75.000% |
| Wolfbone Investments, LLC, a subsidiary of Next Bridge Hydrocarbons, Inc. | | 18.750% | | 25.000% |
| Total | | 100.000% | | 100.000% |
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. MHP declined to exercise its option to purchase the entire Hazel Project.
Hunton Play, Central Oklahoma
As of September 30, 2023, the Company was producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove.
The McCabe Contribution Agreement
On July 25, 2023, the Company entered into a Contribution Agreement among the Company, Mr. McCabe, and MPC, an entity exclusively owned and operated by Mr. McCabe (the “McCabe Contribution Agreement”), pursuant to which Mr. McCabe will contribute up to a ten percent (10%) back-in working interest option for the Orogrande Project exercisable following the point in time at which the proceeds of all production from all operations conducted on the Orogrande Project (exclusive of royalty, overriding royalty and taxes chargeable to the working interest) equals the actual cost incurred by NBH and its predecessors in drilling, testing, equipping and the cost of operating the wells located on the Orogrande Prospect, inclusive of overhead charges (the “Back-In Interest”), an option originally granted to Mr. McCabe pursuant to that certain Participation Agreement, dated September 23, 2014 (the “Participation Agreement”), by and among Mr. McCabe, Hudspeth, and MPC, and MPC will contribute up to one hundred percent (100%) of the interest currently held by MPC in the drilling project located on over 1,150 acres in Vermillion Parish, Louisiana (the “Bronco Prospect”). Pursuant to the McCabe Contribution Agreement, and subject to the satisfaction of certain conditions provided therein, including the effectiveness of the Company’s Registration Statement on Form S-1 (File No. 333-273442) filed with the SEC on July 26, 2023 (as amended, the “Registration Statement”), Mr. McCabe will contribute an amount of the Back-In Interest and MPC will contribute an amount of the Bronco Prospect in proportion to the percentage of shares of common stock of NBH that are directly registered in the name of the beneficial owner with the Company’s transfer agent on or prior to the record date (as defined in the Registration Statement) and remain directly registered with the Company’s transfer agent for the holding period (as defined in the Registration Statement).
As of September 30, 2023 and December 31, 2022, the Company had a balance of $-0- and $177,519, respectively, for an account receivable due from MPC, an entity controlled by the largest shareholder and the chairman of the Company’s Board of Directors, 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. In connection with the closing of the Merger, the account receivable due from MPC was deemed fully satisfied and discharged.
The 2021 Note and Loan Agreement
On October 1, 2021, the Company entered into a note payable with Meta, its former parent, to borrow up to $15 million which bears interest at 8% per annum, computed on the basis of a 360-day year (the “2021 Note”). The 2021 Note was initially to mature on March 31, 2023 (the “2021 Note Maturity Date”); provided, however, if the Company raised $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 would be extended to September 30, 2023, and the outstanding principal of the 2021 Note would 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 Meta’s stockholders, Mr. McCabe, and by a lien on a 25% interest in the Orogrande Project owned by Wolfbone, a subsidiary of the Company.
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 raised $30 million or more in capital through debt or equity, or a combination thereof by the Maturity Date, the Maturity Date would 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 Note 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 Note 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 $2.59 million which was added to the principal amount of the Loan Agreement for a principal balance outstanding of $7.59 million 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 $6.59 million.
On August 7, 2023, Mr. McCabe and Meta entered into a Loan Sale Agreement whereby Mr. McCabe purchased from Meta (i) the 2021 Note and (ii) all outstanding loans made to the Company by Meta pursuant to the Loan Agreement (the “Loan Purchase”). As a result of the Loan Purchase, Mr. McCabe replaced Meta as the lender and secured party under the 2021 Note and the Loan Agreement. Additionally, as part of the Loan Purchase, Meta assigned to Mr. McCabe its lien on 25% of the Orogrande Prospect. The Company’s obligations and responsibilities under the 2021 Note and the Loan Agreement remain unchanged.
The combined balance on the 2021 Note and the Loan Agreement as of September 30, 2023 was $21.59 million. As of September 30, 2023, the combined total accrued and unpaid interest under the 2021 Note and the Loan Agreement was $2.63 million.
On October 1, 2023, the Company and Mr. McCabe entered into an amendment to the 2021 Note and an amendment to Loan Agreement in order to extend each of the 2021 Note Maturity Date and the Maturity Date respectively from October 3, 2023 to January 3, 2024.
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”), which bears interest at 5% per annum, computed on the basis of a 365-day year.
On June 16, 2023, the Company entered into an amendment to the 2022 Note in order to extend the maturity date of the 2022 Note (the “2022 Note Maturity Date”) from June 21, 2023 to October 3, 2023. Such amendment also removed the provisions allowing for extensions of the 2022 Note 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. The revolving commitment under the 2022 Note expires on the 2022 Note Maturity Date. As of September 30, 2023, the Company had $20 million in principal amount outstanding under the 2022 Note. As of September 30, 2023, the Company had $0.56 million in accrued but unpaid interest on the 2022 Note.
On October 1, 2023, the Company and Mr. McCabe entered into an amendment to the 2022 Note in order to extend the 2022 Note Maturity Date from October 3, 2023 to January 3, 2024.
| | 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. Wolfbone, a subsidiary of the Company, 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. Cordax filed a motion for summary judgment, attempting to dismiss Hudspeth and Wolfbone’s claims. The Court denied Cordax’s motion. Discovery is substantially complete. The case is currently set for trial beginning in February 2024. The parties are in settlement negotiations. The Company is required to indemnify Meta in connection with this matter pursuant to the terms of the Distribution Agreement with Meta entered into in connection with the consummation of the Spin-Off.
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 September 30, 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.
The Company has 500,000,000 authorized shares of common stock, par value of $0.0001 per share and 50,000,000 authorized shares of preferred stock, par value of $0.0001 per share. As of December 31, 2022, the Company had outstanding 165,472,241 shares of common stock and no shares of preferred stock outstanding. As of September 30, 2023, the Company had outstanding 248,830,516 shares of common stock and no shares of preferred stock outstanding.
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 nine months ended September 30, 2023, the Company granted 35,856,521 stock options as authorized under the 2022 Plan. 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. Upon the resignations by certain of the Company’s employees, 6,618,889 of the options granted to those employees during the nine months ended September 30, 2023 were forfeited, canceled and returned to the option pool available under the 2022 Plan.
Options granted were valued using the Black-Scholes Option Pricing Model resulting in a total value of $2,558,252. Option expense for the nine months ended September 30, 2023, net of forfeitures, was $1,292,231.
Schedule of Stock Options Outstanding
| Exercise | | | Expiration | | | | |
| Price | | | 2033 | | | Total | |
| $ | 1.2056 | | | | 29,237,632 | | | | 29,237,632 | |
| | | | | | 29,237,632 | | | | 29,237,632 | |
The Company recorded no income tax provision at September 30, 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 nine months ended September 30, 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 $66,028,393 and $55,153,554 at September 30, 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 |
On October 1, 2021, we issued a secured, revolving promissory note in an original principal amount of up to $15 million, which was subsequently increased to $20 million, in favor of Meta (as amended to date, the “2021 Note”). 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. 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. On August 7, 2023, following the Loan Purchase, Mr. McCabe replaced Meta as the lender and secured party under the 2021 Note but the Company’s obligations under the 2021 Note remain unchanged. Following an amendment entered into as of October 1, 2023, the 2021 Note matures on January 3, 2024.
Additionally, we have an aggregate principal balance of $6.59 million outstanding under the Loan Agreement with Mr. McCabe as successor-in-interest to Meta, 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. Pursuant to an amendment to the Loan Agreement dated as of October 1, 2023, the loans under the Loan Agreement mature on January 3, 2024.
The combined balance on the 2021 Note and the Loan Agreement as of September 30, 2023 was $21.59 million. As of September 30, 2023, the combined total accrued and unpaid interest under the 2021 Note and the Loan Agreement was $2.63 million.
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 and the chairman of the board of directors of the Company. Pursuant to an amendment to the 2022 Note dated October 1, 2023, the 2022 Note matures on January 3, 2024.
As of September 30, 2023, the Company had a balance of $20 million and accrued and unpaid interest of $0.56 million under the 2022 Note.
| | 10. | ASSET RETIREMENT OBLIGATIONS |
The following is a reconciliation of the asset retirement obligations liability through September 30, 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 | |
| | | | | |
| Accretion expense | | | 6,071 | |
| Estimated liabilities recorded | | | — | |
| Asset retirement obligations – June 30, 2023 | | $ | 258,802 | |
| | | | | |
| Accretion expense | | | 6,024 | |
| Estimated liabilities recorded | | | — | |
| Asset retirement obligations – September 30, 2023 | | $ | 264,826 | |
Maturity Date Extension
On October 1, 2023, the Company and Mr. McCabe as successor in interest to Meta entered into an amendment to the 2021 Note and an amendment to the Loan Agreement extending the 2021 Note Maturity Date and the Maturity Date, respectively from October 3, 2023 to January 3, 2024. Additionally, on October 1, 2023, the Company and Mr. McCabe entered into an amendment to the 2022 Note extending the 2022 Note Maturity Date from October 3, 2023 to January 3, 2024.
Participation Agreements
Effective as of October 6, 2023, we and certain investor participants (each a “Participant” and collectively the “Participants”) entered into twenty-five separate Participation Agreements (the “Participation Agreements”) to conduct drilling of wells in our approximately 17,000 acre Johnson Prospect in Hudspeth County, Texas, which is a portion of our Orogrande Project.
Pursuant to the Participation Agreements, the Participants collectively funded $7,000,000, which will be used to (i) acquire the rights to drill on the Johnson Prospect and (ii) finance the drilling of five (5) vertical wells in the Johnson Prospect in connection with our 2023 drilling program requirements under its University Lands Drilling and Development Unit Agreement. Each Participant will have the right to participate in the drilling of additional wells on the Johnson Prospect in the future, including an additional five (5) vertical wells in locations determined by Hudspeth Operating, in its sole discretion, in 2024. The Participation Agreements provide for an initial allocation of the working interests and net revenue interests among each Participant and us and then a re-allocation upon payout or payment to such Participant of drilling and completion costs for each well drilled. Following payout, we will own 25% of working interest as described below and 18.75% net revenue interest in each well. Hudspeth Operating will be the operator of the Johnson Prospect pursuant to a joint operating agreement (the “Operating Agreement”) entered into in connection with the Participation Agreements. The Participation Agreements and the Operating Agreement require, among other things, that we and Hudspeth Operating drill and complete at least five (5) vertical wells by December 31, 2023, unless the term of the Participation Agreements is extended.
As of September 30, 2023, a total of $5,611,892 of the funding had been advanced to us by the Participants.
We reserved a twenty-five percent (25%) back-in interest, which shall automatically revert to us following the date that each Participant first recovers 100% of the costs attributable to the drilling and development of the wells in which such Participant has participated.
Further, within a specified period following drilling of the initial five (5) wells, pursuant to the Participation Agreement each Participant may elect to transfer and assign all of its interests to us in exchange for the issuance of shares of common stock of the Company at a value of $1.20 per share.
One of the Participants is McCabe Petroleum Corporation, an entity controlled by Mr. McCabe, the Chairman of our Board of Directors, our largest shareholder and a lender of the Company. As such, entry into such Participation Agreement and the related transactions pursuant thereto constitute related party transactions, which have been duly approved by the our Board of Directors and Audit Committee.
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 notes 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.”
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 five wholly owned subsidiaries: TEI, Hudspeth Oil Corporation, Torchlight Hazel, Wolfbone, 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. On or about October 11, 2022, the DDU Agreement was amended to provide that the term of the DDU Agreement expires on December 31, 2024, and the time to drill on the drilling and development unit continues through December 31, 2024. The DDU Agreement, as amended, also grants the right to extend the DDU Agreement through December 31, 2029 if we are in compliance with the DDU Agreement and the extension fee associated with the additional time is paid. We expect to exercise the option to extend prior to the expiration of the DDU Agreement. As of September 30, 2023, leases covering approximately 134,000 acres remain in effect. Our drilling obligations under the DDU Agreement include five wells for 2023 and five wells for 2024. As of September 30, 2023, we have commenced drilling activities under the 2023 drilling program.
Market Conditions, Commodity Prices and Interest Rates
U.S. and global markets have experienced heightened volatility following impactful geopolitical events, consistent evidence of widespread inflation, as well as increased fears of an economic recession. Recent measures have been taken by the U.S. Federal Reserve to combat persistent inflation by increasing interest rates throughout 2022 and 2023. The global banking sector has experienced material disruptions which has also contributed to market volatility. Further, the full-scale military invasion of Ukraine by Russian troops has continued unabated since February 2022 coupled with related economic sanctions imposed on Russia further exacerbating supply shortages, leading to disruptions in the credit and capital markets, including significant uncertainty in commodity prices, during 2022 and into 2023. Prices for oil and natural gas are determined primarily by prevailing market conditions, which have been and could continue to be volatile.
The combination of geopolitical events, inflation and the rising rate environment has led to increasing forecasts of a U.S. or global recession. Any such recession could prolong market volatility or cause a decline in commodity prices, among other potential impacts.
We cannot estimate the length or gravity of the future impact these events will have on our results of operations, financial position, liquidity and the value of oil and natural gas reserves.
Recent Developments
Effective as of October 6, 2023, we and certain investor participants (each a “Participant” and collectively the “Participants”) entered into twenty-five separate Participation Agreements (the “Participation Agreements”) to conduct drilling of wells in our approximately 17,000 acre Johnson Prospect in Hudspeth County, Texas, which is a portion of our Orogrande Project.
Pursuant to the Participation Agreements, the Participants collectively funded $7,000,000, which will be used to (i) acquire the rights to drill on the Johnson Prospect and (ii) finance the drilling of five (5) vertical wells in the Johnson Prospect in connection with our 2023 drilling program requirements under its University Lands Drilling and Development Unit Agreement. Each Participant will have the right to participate in the drilling of additional wells on the Johnson Prospect in the future, including an additional five (5) vertical wells in locations determined by Hudspeth Operating, in its sole discretion, in 2024. The Participation Agreements provide for an initial allocation of the working interests and net revenue interests among each Participant and us and then a re-allocation upon payout or payment to such Participant of drilling and completion costs for each well drilled. Following payout, we will own 25% of working interest as described below and 18.75% net revenue interest in each well. Hudspeth Operating will be the operator of the Johnson Prospect pursuant to a joint operating agreement (the “Operating Agreement”) entered into in connection with the Participation Agreements. The Participation Agreements and the Operating Agreement require, among other things, that we and Hudspeth Operating drill and complete at least five (5) vertical wells by December 31, 2023, unless the term of the Participation Agreements is extended.
We reserved a twenty-five percent (25%) back-in interest, which shall automatically revert to us following the date that each Participant first recovers 100% of the costs attributable to the drilling and development of the wells in which such Participant has participated.
Further, within a specified period following drilling of the initial five (5) wells, pursuant to the Participation Agreement each Participant may elect to transfer and assign all of its interests to us in exchange for the issuance of shares of common stock of the Company at a value of $1.20 per share.
One of the Participants is McCabe Petroleum Corporation, an entity controlled by Mr. McCabe, the Chairman of our Board of Directors, our largest shareholder and a lender of the Company. As such, entry into such Participation Agreement and the related transactions pursuant thereto constitute related party transactions, which have been duly approved by the our Board of Directors and Audit Committee.
Results of Operations
Results for three and nine month periods ending September 30, 2023 and 2022
Revenue and Gross Profit
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Product Sales BOE | | | 276 | | | | 191 | | | | 695 | | | | 499 | |
| | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 7,731 | | | $ | 12,810 | | | $ | 23,496 | | | $ | 30,214 | |
| Cost of revenue | | $ | (10,859 | ) | | $ | (15,659 | ) | | $ | (38,504 | ) | | $ | (57,733 | ) |
| Gross Profit (Loss) | | $ | (3,128 | ) | | $ | (2,849 | ) | | $ | (15,008 | ) | | $ | (27,519 | ) |
| | | | | | | | | | | | | | | | | |
| Gross profit percentage | | | (40.46 | )% | | | (22.24 | )% | | | (63.87 | )% | | | (91.08 | )% |
Production Revenues and Cost of Revenue
For the nine months ended September 30, 2023, we had production revenue of $23,496 compared to $30,214 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 $10,859 and $38,504 for the three and nine months ended September 30, 2023, respectively, compared to $15,659 and $57,733 for the same periods during the prior year. 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 | | | $ | 8,175 | | | $ | 12,810 | |
| Hazel (TX) | | Q3 - 2022 | | | 0 | | | | 0 | | | | — | | | | — | | | | — | |
| Total Q3-2022 | | | | | 43 | | | | 887 | | | $ | 4,635 | | | $ | 8,175 | | | $ | 12,810 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total 2022 To Date | | | | | 140 | | | | 2,154 | | | $ | 14,323 | | | $ | 15,891 | | | $ | 30,214 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Average Commodity Price | | | | | | | | | | | | $ | 102.31 | | | $ | 7.38 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Oklahoma | | Q2 - 2023 | | | 43 | | | | 867 | | | $ | 3,195 | | | $ | 1,646 | | | $ | 4,841 | |
| Hazel (TX) | | Q2 - 2023 | | | 0 | | | | 0 | | | | — | | | | — | | | | — | |
| Total Q2-2023 | | | | | 43 | | | | 867 | | | $ | 3,195 | | | $ | 1,646 | | | $ | 4,841 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Oklahoma | | Q3 – 2023 | | | 79 | | | | 1,183 | | | $ | 6,184 | | | $ | 1,547 | | | $ | 7,731 | |
| Hazel (TX) | | Q3 – 2023 | | | 0 | | | | 0 | | | | — | | | | — | | | | — | |
| Total Q3-2023 | | | | | 79 | | | | 1,183 | | | $ | 6,184 | | | $ | 1,547 | | | $ | 7,731 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total 2023 To Date | | | | | 229 | | | | 2,798 | | | $ | 17,520 | | | $ | 5,976 | | | $ | 23,496 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Average Commodity Price | | | | | | | | | | | | $ | 76.51 | | | $ | 2.14 | | | | | |
Expenses for the three and nine months ended September 30, 2023 and 2022
We did not record any depreciation, depletion and amortization expense for either of the three and nine months ended September 30, 2023 or 2022.
Operating Expenses
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Operating Expenses | | | | | | | | | | | | | | | | |
| General & Administrative | | $ | 2,472,086 | | | $ | 1,800,472 | | | $ | 7,303,411 | | | $ | 3,789,166 | |
| Total operating expenses | | $ | 2,472,086 | | | $ | 1,800,472 | | | $ | 7,303,411 | | | $ | 3,789,166 | |
General and Administrative Expenses
Our general and administrative expense for the three and nine month period ended September 30, 2023, was $2,472,086 and $7,303,411, respectively, compared with $1,800,472 and $3,789,166 for the same periods from the prior year. 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
The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, like all upstream operators, we must make capital investments to grow and even sustain production. Our principal liquidity requirements are to finance operations, fund capital expenditures and acquisitions and satisfy any indebtedness obligations. Cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and the significant capital expenditures required to more fully develop our oil and natural gas properties. Historically, our primary sources of capital funding and liquidity have been from borrowings. At times and as needed, we may also issue debt or equity securities. We estimate the combination of the sources of capital discussed above will continue to be adequate to meet our short and long-term liquidity needs but there can be no assurances that any such sources will be available if needed.
Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control. Our ability to issue equity and obtain credit on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations.
We issued an unsecured promissory note in the principal amount of up to $20 million in favor of Mr. McCabe (the “2022 Note”), which bears interest at 5% per annum, computed on the basis of a 365-day year. On June 16, 2023, we entered into an amendment to the 2022 Note in order to extend the maturity date of the 2022 Note (the “2022 Note Maturity Date”) from June 21, 2023 to October 3, 2023. Such amendment also removed the provision allowing for extensions of the 2022 Note Maturity Date in the event we raised $30 million or more in capital through debt or equity or a combination thereof by March 31, 2023. On October 1, 2023, we entered into an amendment to the 2022 Note with Mr. McCabe extending the 2022 Note Maturity Date from to January 3, 2024. The outstanding principal of the 2022 Note, together with all accrued interest thereon, becomes due on January 3, 2024. As of September 30, 2023, we had $20.0 million principal amount outstanding under the 2022 Note. The total amount of accrued and unpaid interest under the 2022 Note was $0.56 million.
As of September 30, 2023, we had $4,884,997 of liquidity, comprised 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.
On August 7, 2023, Mr. McCabe and Meta entered into a Loan Sale Agreement whereby Mr. McCabe purchased from Meta (i) the 2021 Note and (ii) all outstanding loans made to the Company by Meta pursuant to the Loan Agreement (the “Loan Purchase”). As a result of the Loan Purchase, Mr. McCabe replaced Meta as the lender and secured party under the 2021 Note and the Loan Agreement. Additionally, as part of the Loan Purchase, Meta assigned to Mr. McCabe its lien on 25% of the Orogrande Prospect. The Company’s obligations and responsibilities under the 2021 Note and the Loan Agreement remain unchanged.
On October 1, 2023, we entered into an amendment to the 2021 Note and an amendment to the Loan Agreement with Mr. McCabe extending the 2021 Note Maturity Date and the Maturity Date respectively from October 3, 2023 to January 3, 2024.
The 2021 Note is fully drawn with a principal balance outstanding of $15 million, bears interest at 8% per annum, computed on the basis of a 360-day year, and matures on January 3, 2024. If an event of default occurred and is continuing, interest on the 2021 Note may accrue at the default rate of 12% per annum. Additionally, we have an aggregate principal balance of $6.59 million 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 January 3, 2024. The total combined amount of accrued and unpaid interest under the 2021 Note and the Loan Agreement was $2.62 million as of September 30, 2023.
As of September 30, 2023, we had aggregate interest accrued on the 2022 Note, the 2021 Note and under the Loan Agreement of $3.2 million.
At September 30, 2023, we had working capital deficit of $46,611,246 and total assets of $124,710,004. Stockholders’ equity was $72,767,276. The negative working capital is principally due to notes payable which will be payable within one year.
Management believes that our 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.
The following table summarizes sources and uses of cash and cash equivalents:
| | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | |
| Net loss | | $ | 7,318,418 | | | $ | 4,764,293 | |
| Net cash provided by (used in) operating activities | | | (8,592,956 | ) | | | (6,067,015 | ) |
| | | | | | | | | |
| Net cash used in investing activities | | | (9,503,892 | ) | | | (1,630,137 | ) |
| | | | | | | | | |
| Net cash provided by financing activities | | | 22,412,547 | | | | 7,816,599 | |
| | | | | | | | | |
| Net increase (decrease) in cash | | | 4,315,699 | | | | 119,447 | |
| | | | | | | | | |
| Cash—beginning of period | | | 569,298 | | | | 1,989,419 | |
| Cash—end of period | | $ | 4,884,997 | | | $ | 2,108,866 | |
Cash Flow Used in Operating Activities
Cash flow used in operating activities for the nine months ended September 30, 2023 was $8,592,956 compared to $6,067,015 for the nine months ended September 30, 2022. Cash flows used in operating activities for the nine months ended September 30, 2023 can be primarily attributed to the net loss from operations and a decrease in accounts payable. Cash flows used in operating activities for the nine months ended September 30, 2022, can be primarily attributed to the net loss from operations 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 nine months ended September 30, 2023 was $9,503,892 compared to $1,630,137 for the nine months ended September 30, 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 nine months ended September 30, 2023 was $22,412,547 compared to $7,816,599 for the nine months ended September 30, 2022. Cash flows from financing activities consists of proceeds from additional borrowings from a related party, which had a principal balance of $20,000,000 outstanding as of September 30, 2023. For the nine months ended September 30, 2023, we incurred aggregate interest on the 2022 Note, the 2021 Note and under the Loan Agreement of $1,646,301.
Capital Expenditures
Our capital expenditures are summarized in the following table:
| | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | |
| Acquisitions: | | | | | | | | |
| Proved property | | $ | — | | | $ | — | |
| Unproved property | | | 28,341,814 | | | | — | |
| Exploration and development: | | | | | | | | |
| Developmental leasehold costs | | | — | | | | — | |
| Exploratory drilling and completion costs | | | — | | | | — | |
| Development drilling and completion costs | | | 9,503,892 | | | | 1,630,137 | |
| Other development costs | | | — | | | | — | |
| Capitalized interest | | | 1,819,016 | | | | — | |
| Asset retirement obligations | | | — | | | | — | |
| Total exploration and development | | | 39,664,722 | | | | 1,630,137 | |
| Other property | | | — | | | | — | |
| Total capital expenditures | | $ | 39,664,722 | | | $ | 1,630,137 | |
| Change in accrued capital expenditures and other | | | 2,590,371 | | | | 2,268,335 | |
| Prepaid drilling costs | | | (150,000 | ) | | | — | |
| Capitalized interest | | | (1,819,016 | ) | | | — | |
| Common stock issued in working interest acquisition | | | (28,341,814 | ) | | | — | |
| Asset retirement obligations | | | — | | | | — | |
| Total cash capital expenditures | | $ | 11,944,263 | | | $ | 3,898,472 | |
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
No new accounting pronouncements have been adopted or issued during the quarter ended September 30, 2023 that would impact the financial statements of the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 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 September 30, 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.
Changes in Internal Control Over Financial Reporting
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 quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
See Note 6. “Commitments and Contingencies” to the unaudited financial statements included elsewhere in this report for information regarding our legal proceedings.
A description of the risk factors associated with our business is contained in the “Risk Factors” section of 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. There have been no material changes to our risk factors as previously reported.
| | ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES |
None.
| | ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
| | ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
None.
| Exhibit No. | | Description |
| 3.1 | | First Amended and Restated Articles of Incorporation of Next Bridge Hydrocarbons, Inc. (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1, as amended, effective as of November 18, 2022 (File No. 333-266143)). |
| | | |
| 3.2 | | Amended and Restated By-laws of Next Bridge Hydrocarbons, Inc. (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1, as amended, effective as of November 18, 2022 (File No. 333-266143)). |
| | | |
| 10.1 | | Second Amendment to Unsecured Promissory Note, between Next Bridge Hydrocarbons, Inc., as debtor, and Gregory McCabe, as holder, dated October 1, 2023 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed October 4, 2023). |
| | | |
| 10.2 | | Third Amendment to Secured Promissory Note, between Next Bridge Hydrocarbons, Inc., as debtor, and Gregory McCabe, as holder, dated October 1, 2023 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed October 4, 2023). |
| | | |
| 10.3 | | Third Amendment to Loan Agreement, between Next Bridge Hydrocarbons, Inc. and Gregory McCabe, dated October 1, 2023 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed October 4, 2023). |
| | | |
| 10.4** | | Form of Participation Agreement between each Participant and Next Bridge Hydrocarbons, Inc., dated as of October 6, 2023 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed October 13, 2023). |
| | | |
| 10.5* | | Drilling and Development Unit Agreement 2837 between the Commissioner of the General Land Office on behalf of the State of Texas and the Lessees, effective as of March 27, 2017. |
| | | |
| 10.6* | | Amendment to Development Unit Agreement 2837 between the Commission of the General Land Office on behalf of the State of Texas and the Lessees, effective as of January 1, 2020. |
| | | |
| 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) |
| ** | Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request. |
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: November 14, 2023 | /s/ Clifton DuBose, Jr. |
| | Clifton DuBose, Jr., Chief Executive Officer and President |
| | (Principal Executive Officer) |
| | |
| Date: November 14, 2023 | /s/ Lucas T. Hawkins |
| | Lucas T. Hawkins, Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
