PINX:IFNY Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2012.
[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the transition period from_________ to __________. 

Commission File Number: 0-17204


INFINITY ENERGY RESOURCES, INC.

(Exact name of registrant as specified in its charter)


 

Delaware   20-3126427
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

11900 College Blvd, Suite 310, Overland Park, KS 66210

(Address of principal executive offices) (Zip Code)

 

(913) 948-9512

(Registrant’s telephone number, including area code)

 

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 [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes[X]    No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[  ]    No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class   Outstanding at September 24, 2012
Preferred Stock, $0.0001 par value    145,016
Common Stock, $0.0001 par value    20,668,575

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I Financial Information    
Item 1. Financial Statements    
Consolidated Balance Sheets: June 30, 2012 (Unaudited) and December 31, 2011   F-1
Consolidated Statements of Operations (Unaudited): Three Months and Six Months Ended June 30, 2012   F-3
Consolidated Statements of Changes in Stockholders’ Equity: Six Months Ended June 30, 2012 (Unaudited) and Year Ended December 31, 2011   F-4
Consolidated Statements of Cash Flows (Unaudited): Six Months Ended June 30, 2012 and 2011   F-5
Notes to Consolidated Financial Statements   F-6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   3
Item 3. Quantitative and Qualitative Disclosures About Market Risk   7
Item 4. Controls and Procedures   8
     
PART II Other Information    
Item 1. Legal Proceedings   8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   8
Item 3. Defaults Upon Senior Securities   8
Item 4. Mine Safety Disclosures   8
Item 5. Other Information   8
Item 6. Exhibits   8
Signatures   9
Exhibits   10

 

2
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

   June 30, 2012   December 31, 2011 
   (Unaudited)     
ASSETS        
Current assets          
Cash and cash equivalents  $133   $217 
Accounts receivable   2,992    2,992 
Prepaid expenses   -    7,500 
Deferred income tax   -    700,000 
Total current assets   3,125    710,709 
          
Oil and gas properties, using full cost accounting, net of accumulated depreciation, depletion, amortization and ceiling write-down          
Unproved   4,231,454    3,844,080 
          
Total assets  $4,234,579   $4,554,789 
           

 

See notes to consolidated financial statements.

 

F-1
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

 

   June 30, 2012   December 31, 2011 
   (Unaudited)     
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
Current liabilities          
Revolving credit facility to bank  $-   $11,407,252 
Note payable to vendor   278,022    278,022 
Current portion, subordinated note payable to related party, net of discount of  $0 at June 30, 2012 and $83,088 at December 31, 2011   -    1,186,353 
Accrued interest on subordinated note   -    232,112 
Accounts payable   3,493,482    3,280,339 
Accrued liabilities   5,162,600    4,904,077 
Accrued interest and fees – bank and other   313,965    8,156,254 
Current portion of asset retirement obligations   432,027    432,027 
Total current liabilities   9,680,096    29,876,436 
          
Long-term liabilities          
Asset retirement obligations, less current portion   913,873    855,292 
Derivative liabilities   -    600,763 
Total long-term liabilities   913,873    1,456,055 
          
Total liabilities   10,593,969    31,332,491 
          
Redeemable, convertible preferred stock, par value $.0001, 6% cumulative
 dividend, authorized 10,000,000 shares:
          
Series A, 130,000 shares issued and outstanding at June 30, 2012, none at December 31, 2011, liquidation preference $13,000,000 plus undeclared dividends of $169,000   10,260,957    - 
Series B (related party), 15,016 shares issued and outstanding at June 30, 2012, none at December 31, 2011, liquidation preference $1,501,600 plus undeclared dividends of $19,521   1,168,112    - 
           
Commitments and contingencies (Note 6)          
           
Stockholders’ deficit          
Common stock, par value $.0001, authorized 75,000,000 shares, issued and    outstanding 20,668,575 shares at June 30, 2012 and 18,668,575 shares at    December 31, 2011   2,066    1,866 
Additional paid-in capital   90,076,846    80,322,722 
Accumulated deficit   (107,867,371)   (107,102,290)
Total stockholders’ deficit   (17,788,459)   (26,777,702)
          
Total liabilities and stockholders’ deficit  $4,234,579   $4,554,789 

 

See notes to consolidated financial statements.

 

F-2
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Operating expenses                    
General and administrative expenses  $246,878   $172,588   $441,191   $521,162 
Accretion expense   29,616    26,719    58,581    52,850 
Total operating expenses   276,494    199,307    499,772    574,012 
                    
Operating loss   (276,494)   (199,307)   (499,772)   (574,012)
                    
Other income (expense)                    
Interest expense, net of capitalization   (27,854)   (808,967)   (383,994)   (1,514,623)
Change in derivative fair value   -    760,048    118,685    37,833 
Other   -    182    -    182 
Total other income (expense)   (27,854)   (48,737)   (265,309)   (1,476,608)
                     
Net (loss)   (304,348)   (248,044)   (765,081)   (2,050,620)
                     
Accrual of 6% dividend payable on Series A and B redeemable, convertible preferred stock   (188,521)   -    (188,521)   - 
                    
Accretion of Series A and B redeemable, convertible preferred stock   (390,713)   -    (390,713)   - 
                     
Loss applicable to common shareholders  $(883,582)  $(248,044)  $(1,344,315)  $(2,050,620)
                     
                     
Basic and diluted net loss per share  $(0.04)  $(0.01)  $(0.07)  $(.11)
                     
Weighted average shares outstanding-basic and diluted   20,382,861    18,668,575    19,530,453    18,668,575 

 

See notes to consolidated financial statements.

 

F-3
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit

For the Six Months Ended June 30, 2012 (Unaudited) and

Year Ended December 31, 2011

  

             Additional         
   Common Stock   Paid-in   Accumulated   Stockholders’ 
    Shares   Amount   Capital   Deficit   Deficit 
                          
Balance, December 31, 2010   18,668,575   $1,866   $80,107,816   $(103,572,691)  $(23,463,009)
                         
Issuance of stock options   -    -    214,906    -    214,906 
                          
Net loss   -    -    -    (3,529,599)   (3,529,599)
                          
Balance, December 31, 2011   18,668,575    1,866    80,322,722    (107,102,290)   (26,777,702)
                          
Issuance of common stock   2,000,000    200    2,979,800    -    2,980,000 
                          
Accretion of Series A and B redeemable, convertible preferred stock   -    -    (390,713)   -    (390,713)
                          
Accrual of 6% dividend payable on Series A and B redeemable, convertible preferred stock   -    -    (188,521)   -    (188,521)
                          
Excess of debt forgiven by creditors over fair value of common and redeemable, convertible preferred Series A and B stock issued in exchange (Note 3) net of tax of $700,000   -    -    7,353,558    -    7,353,558 
                          
Net loss   -    -    -    (765,081)   (765,081)
                          
Balance, June 30, 2012   20,668,575   $2,066   $90,076,846   $(107,867,371)  $(17,788,459)

 

See notes to consolidated financial statements.

 

F-4
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

 

   For the Six Months Ended 
   June 30, 
   2012   2011 
Cash flows from operating activities          
Net loss  $(765,081)  $(2,050,620)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities          
Amortization of debt discount, net of capitalized amounts of $62,316 in 2012 and $91,265 in 2011   20,772    259,976 
Accretion of asset retirement obligations   58,581    52,850 
Stock-based compensation   -    152,353 
Change in fair value of derivative liability   (118,685)   (37,833)
Loan commitment fees paid with debt proceeds   -    (8,850)
Change in operating assets and liabilities          
(Increase) decrease in prepaid expenses and other   7,500    (10,667)
Increase in accounts payable and accrued liabilities   809,517    1,413,477 
Application of debt proceeds to reduce accrued liability   -    (56,086)
Net cash provided by (used in) operating activities   12,604    (285,400)
          
Cash flows from investing activities          
Investment in oil and gas properties   (284,758)   (328,056)
Net cash used in investing activities   (284,758)   (328,056)
          
Cash flows from financing activities          
Proceeds from debt and subordinated note payable   272,070    1,012,401 
Repayment of notes   -    (232,462)
Checks written in excess of cash   -    (166,419)
Net cash provided by financing activities   272,070    613,520 
           
Net increase (decrease) in cash and cash equivalents   (84)   64 
           
Cash and cash equivalents          
Beginning   217    - 
Ending  $133   $64 
           
Supplemental noncash disclosures          
Noncash capitalized overhead and interest  $102,616   $146,865 
           
Noncash transaction: debt, subordinated note payable and related accrued interest and other fees satisfied by issuance of Common and Series A and B Preferred shares  $21,883,393   $- 

 

See notes to consolidated financial statements.

 

F-5
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited) 

 

Note 1 — Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies

 

Unaudited Interim Financial Information

 

Infinity Energy Resources, Inc. and its subsidiaries (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”) has prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2012 due to various factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.

 

Nature of Operations

 

We are engaged in the exploration of the Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions”).

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Infinity Energy Resources, Inc. and its wholly-owned subsidiaries, Infinity Oil and Gas of Texas, Inc. (“Infinity-Texas”) and Infinity Oil & Gas of Wyoming, Inc. (“Infinity-Wyoming”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

 

On March 5, 2009 Infinity signed the contracts relating to its Nicaraguan Concessions. Infinity is conducting an environmental study and the development of geological information from reprocessing and additional evaluation of existing 2-D seismic data that was acquired for the Nicaraguan Concessions. Infinity is seeking offers from other industry operators and other third parties for interests in the acreage in exchange for cash and a carried interest in exploration and development operations. The funds raised through the subordinated note transaction described below and Forbearance advances from Amegy Bank, N.A. (“Amegy”) were used to fund these expenditures (see Notes 2 and 3). These funds will not be sufficient to cover our expected operating exploration costs.

 

Going Concern

 

As reflected in the accompanying Consolidated Statements of Operations, the Company has had a history of losses. In addition, the Company has a significant working capital deficit and is currently experiencing substantial liquidity issues. Further, as discussed in Note 2 and below, the Company was at December 31, 2011 operating under the Fifth Forbearance Agreement with Amegy under the Revolving Credit Facility, which agreement expired on that date. After December 31, additional advances of $272,070 were made by Amegy accumulating to a total advance of $1,668,828 as of February 28, 2012.

 

On February 28, 2012, we signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations we owed to them. Under these documents, we agreed to issue to Amegy 130,000 shares of Series A Preferred and 2,000,000 shares of common stock as payment in full of all debt and related obligations owed Amegy; the Company and Amegy also agreed to cancel a warrant held by Amegy exercisable to purchase 968,000 shares of the Company’s common stock that had been issued in February 2011. In addition, we agreed to issue Off-Shore 15,016 shares of Series B Preferred in conversion, exchange and payment in full of all debt and other obligations we owed to Off-Shore. The transactions with Amegy and Off-Shore closed on April 13, 2012 and are described more fully in Note 3.

 

F-6
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Although the cash outflow necessary to pay Amegy has been eliminated under terms of the Stock Purchase Agreement, the Company is still in need of additional cash infusion to meet its obligations under the Nicaraguan Concessions, and is searching for sources of additional equity financing. There is no assurance that the equity funds will be received.

 

The Company has classified the entire balance outstanding under the Revolving Credit Facility at December 31, 2011 as a current liability in the accompanying Consolidated Balance Sheets.

 

The Company conducted an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired over its Nicaraguan Concessions. It issued letters of credit totaling $851,550 for this initial work on the leases. The Company commenced certain activity under the initial work plan and is waiting for governmental approval of the environmental study. The Company intends to seek joint venture or working interest partners prior to the commencement of any exploration or drilling operations on the Nicaraguan Concessions.

 

Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

Management Estimates

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to the consolidated financial statements include the initial fair value of redeemable convertible preferred shares, the estimated carrying value of unproved properties, the estimated cost and timing related to asset retirement obligations, the estimated fair value of derivative liabilities and stock based awards, and the realization of deferred tax assets.

 

Oil and Gas Properties

 

The Company follows the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and seismic costs) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. Overhead related to exploration and development activities is also capitalized. In the quarters ended June 30, 2012 and 2011, the Company capitalized direct costs, overhead costs and interest as follows:

 

   For the Six Months   For the Three Months 
   Ended June 30,   Ended June 30, 
   2012   2011   2012   2011 
                 
Direct costs  $284,758   $328,057   $62,907   $124,577 
Overhead costs   25,000    25,000    12,500    12,500 
Total non-interest costs   309,758    353,057    75,407    137,077 
Interest costs   77,616    121,865    -    63,030 
   $387,374   $474,922   $75,407   $200,107 

 

Costs associated with production and general corporate activities are expensed in the period incurred.

 

F-7
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Depletion of proved oil and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit of measure based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and estimated asset retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties, including capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically (at least annually) to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is added to the costs to be amortized, or is reported as a period expense, as appropriate. All unproved property costs as of June 30, 2012 and December 31, 2011 relate to the Company’s Nicaraguan Concessions that were entered into in March 2009. In assessing the unproved property costs for impairment, the Company takes into consideration the terms of the government concessions, the status of the ongoing environmental study, evaluation of the seismic data and plans to seek industry participation in the future exploration and development.

 

Pursuant to full cost accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the arithmetic mean of the previous 12 months’ first-of-month prices and current costs, including the effects of derivative instruments accounted for as cash flow hedges but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, and a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. If capitalized costs exceed the ceiling, the excess must be charged to expense and may not be reversed in future periods. As of June 30, 2012 and 2011, the Company did not have any proved oil and gas properties, and all unproved property costs relate to the Company’s Nicaraguan Concessions.

 

Proceeds from the sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss would be recognized in the determination of the Company’s net earnings/loss. During 2011 the Company sold its oil and gas properties in Texas, the costs associated with which were entirely written off in prior periods, in return for a non-interest-bearing note with repayment conditional upon net profit from sales of oil and gas from the properties. Due to the uncertainty of when and in what amount payments on the note will be received, the Company has recorded the note net of a 100% valuation reserve and has recognized no gain or loss on this transaction. Any related gains will be recognized when and if payments are received.

 

Concentrations

 

The Company’s significant asset is the Nicaraguan Concessions and it expects to be active in Nicaragua for the foreseeable future, given sufficient capital. The political climate in Nicaragua could become unstable and subject to radical change over a short period of time. In the event of a significant negative change in political and economic stability in the vicinity of the Nicaraguan Concessions, it may be forced to abandon or suspend its efforts.

 

Derivative Instruments

 

The Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities.) ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.

 

F-8
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

The purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. As of June 30, 2012 and December 31, 2011 and during the periods then ended, the Company had no oil and natural gas derivative arrangements outstanding.

 

As a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company but no longer outstanding at June 30, 2012 (see Note 5), those warrants were required to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in earnings. Such derivatives were outstanding at December 31, 2011 and were cancelled effective April 13, 2012 as part of the transaction in which the Company’s debt, subordinated note payable and related accrued interest and other fees, in addition to its derivative liability associated with the warrants, were satisfied by the issuance of common and Series A and B redeemable, convertible preferred stock (Note 4).

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. We routinely assess the realizability of our deferred income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully utilized in future periods. We consider future taxable earnings in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When the Company can project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, the Company will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can be no assurance that facts and circumstances will not materially change and require us to adjust our deferred income tax asset valuation allowance in a future period. We are potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. We recognize certain income tax positions that meet a more-likely-than not recognition threshold. If we ultimately determine that the payment of these liabilities will be unnecessary, we will reverse the liability and recognize an income tax benefit. The Company recognized a deferred tax asset, net of valuation allowance, of $0 at June 30, 2012 and $700,000 at December 31, 2011 related to the anticipated use of net operating losses to offset taxable income triggered by the transaction with Amegy and Off-Shore that closed in April 2012 (see Note 4). As recorded, the Company did not realize any gain in association with the transaction, and the deferred tax asset set up at December 31, 2011 was recorded as a reduction in additional paid-in capital.

Cash and cash equivalents

 

For purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. Although the Company had minimal cash as of June 30, 2012 and December 31, 2011, it is the Company’s policy that all highly liquid investments with a maturity of three months or less when purchased would be cash equivalents and would be included along with cash as cash and equivalents.

Asset Retirement Obligations

 

The Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410 (formerly SFAS No. 143, Accounting for Asset Retirement Obligations.) ASC 410 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted as a component of the full cost pool using the units of production method. Although the Company has recognized full impairment of the value of all remaining domestic oil and gas properties in prior periods, and has sold all of its Texas oil and gas properties in 2011, the Company may retain title to certain abandoned non-producing domestic leasehold properties. Management believes the Company may retain some asset retirement obligation related to properties sold and properties retained, although it believes a significant portion of such obligation may be relieved upon the sale of its ownership of Infinity-Texas in July 2012 (see Note 8). As such, it has continued to maintain the asset retirement obligation as a liability in its financial statements and, in accordance with ASC 410, to accrete such obligation regularly. The following table summarizes the activity for the Company’s asset retirement obligations for the period ended June 30, 2012:

 

F-9
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Asset retirement obligations at beginning of period  $1,287,319 
Accretion expense, six months ended June 30, 2012   58,581 
Asset retirement obligations at end of period   1,345,900 
Less: current portion of asset retirement obligations   (432,027)
Asset retirement obligations, less current portion  $913,873 

 

Capitalized Interest and Debt Discount Amortization

 

The Company capitalizes interest costs and debt discount amortization to oil and gas properties on expenditures made in connection with exploration and development projects that are not subject to current depletion. Such costs are capitalized only for the period that activities are in progress to bring these projects to their intended use. Interest costs and debt discount amortization capitalized for the quarters ended June 30, 2012 and 2011 were $0 and $63,030, respectively, and for the six months ended June 30, 2012 and 2011 were $77,616 and $121,865, respectively.

 

Fair Value of Financial Instruments

 

As defined in ASC 820, fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based upon observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement), pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable and are valued using models or other valuation methodologies (level 2 measurement), and the lowest priority to unobservable inputs (level 3 measurement). There were no changes in valuation techniques or reclassifications of fair value measurements between levels 1, 2 or 3 during the quarter ended June 30, 2012 or year ended December 31, 2011.

 

The carrying values of the Company’s accounts receivable, accounts payable and accrued liabilities represent the estimated fair value due to the short-term nature of the accounts.

 

The carrying value of the Company’s debt under its Revolving Credit Facility represented its estimated fair value due to its short-term nature, its adjustable rate of interest, associated fees and expenses and initially recorded discount.

 

The estimated fair value of the Company’s non-current derivative liabilities, all of which related to warrants, was estimated using a “Black-Scholes” model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, and non-performance risk factors, among other items (ASC 820, Fair Value Measurements ("ASC 820") fair value hierarchy Level 2).

 

The estimated fair value of the Company’s Series A and B redeemable convertible preferred stock was determined based upon estimates of the expected occurrence and timing of certain future events, such as the date such shares might be redeemed or converted (assumed to be December 31, 2013); an estimate of discount rates to be utilized in determining net present value of the preferred stock, based upon rates observed in similar or analogous, but not identical, market transactions, upon past Company-specific effective borrowing rates, and the assessment of each instrument’s specific rights and obligations. (ASC 820, Fair Value Measurements ("ASC 820") fair value hierarchy Level 3).

 

F-10
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Net Income (Loss) Per Common Share

 

Pursuant to FASB ASC Topic 260, Earnings Per Share, basic net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.

 

For the six month and three month periods ended June 30, 2012 and 2011, all options, warrants, and the shares issuable upon conversion of the redeemable convertible preferred stock outstanding were excluded from the calculation of diluted net loss per share because they were anti-dilutive.

 

During the six months and the quarter ending June 30, 2012 the Company had outstanding an additional 2,000,000 shares of common stock for the period April 13 through June 30, 2012. Weighted average common shares outstanding for both the quarter and six months ended June 30, 2012 reflect the effects of the shares outstanding for this period. The calculation of loss per common share for the quarter and six months ended June 30, 2012 reflects these amounts which are attributable to the preferred shareholders as increases in the net loss for those periods allocable to common shareholders.

 

Foreign Currency

 

The United States dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and exploration activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities are denominated in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures in the foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included in the consolidated results of operations in the period in which they occur. The Company does not have any cash accounts denominated in foreign currencies.

 

Recent Accounting Pronouncements

 

Effective January 1, 2011, the Company adopted ASC 820 guidance that requires enhanced disclosure in the level 3 reconciliation for fair value measurements. The adoption had no impact on the consolidated financial position, results of operations or cash flows of the Company. Refer to the discussion elsewhere in this note as to other information concerning our assets and liabilities measured at fair value.

 

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 which requires that an entity disclose both gross and net information about instruments and transactions that are either eligible for offset in the balance sheet or subject to an agreement similar to a master netting agreement, including derivative instruments. ASU 2011-11 was issued in order to facilitate comparison between GAAP and IFRS financial statements by requiring enhanced disclosures, but does not change existing GAAP that permits balance sheet offsetting. This authoritative guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the provisions of ASU 2011-11 and assessing the impact, if any, it may have on the Company’s financial position or results of operations.

  

F-11
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 2 — Debt

 

Debt consists of the following at December 31, 2011 (no debt was outstanding at June 30, 2012):

 

   December 31, 2011 
     
Revolving credit facility to bank, current  $11,407,252 
      
Subordinated note payable, related party, net of discount  $1,186,353 
Less current portion   (1,186,353)
Long-term portion, subordinated note payable  $- 

 

Revolving Credit Facility

 

On January 10, 2007, the Company entered into a reserve-based revolving credit facility (the “Revolving Credit Facility”) with Amegy. Under the related loan agreement (the “Loan Agreement”) between Infinity, Infinity-Texas and Infinity-Wyoming (each wholly-owned subsidiaries of the Company and together, the “Guarantors”) and Amegy, Infinity could borrow, repay and re-borrow on a revolving basis up to the aggregate sums permitted under the then current borrowing base. Amounts borrowed under the Revolving Credit Facility are collateralized by substantially all of the assets of Infinity and its subsidiaries and are guaranteed by Infinity’s subsidiaries. The Revolving Credit Facility contains certain standard continuing covenants and agreements and requires the Company to maintain certain financial ratios and thresholds. Per the terms of the loan agreement, amounts borrowed bear interest at 5.5%, or at 11.0% if the loan is in default. The Company accrued interest at 11.0% on the balance of the loan during the three months ended March 31, 2012 and 2011 and during the six months ended June 30, 2011. No interest was accrued on the loan balance after March 31, 2012 and the loans were satisfied with the distribution of common and redeemable convertible preferred stock effective April 13, 2012.

 

The Company entered into four separate forbearance agreements resulting from its breach of certain covenants in the Loan Agreement during the period 2007 through 2010.

 

Effective as of February 16, 2011 the Company entered into a Fifth Forbearance Agreement under the Loan Agreement. This agreement relates to the breach by the Company and Guarantors of (i) substantially all financial covenants set forth in Section 8 of the Loan Agreement and (ii) certain covenants set forth in Section 7 of the Loan Agreement (the “Existing Defaults”). Under this Agreement, Amegy agreed to forbear from exercising any remedies under the Loan Agreement and related loan documents and to waive the Existing Defaults for the forbearance period commencing as of January 31, 2011 and continuing through December 31, 2011, unless otherwise extended or earlier terminated by Amegy due to a further default under the Agreement. In connection with the Fifth Forbearance Agreement, the term of the Loan Agreement and related note was extended until December 31, 2011.

 

Amegy initially approved additional Forbearance Period advances of $1,050,000, which was increased to $1,260,000 on September 12, 2011, with an interest rate of prime plus 2% and the personal guarantee of the Company’s President and CEO for up to $500,000 of the advances. At December 31, 2011, $500,000 of the advances was personally guaranteed by the Company’s CEO. No additional compensation was granted for the personal guarantee. As of December 31, 2011 advances of $1,396,758 had been made, with $232,464 used to reduce prior obligations to Amegy, $56,084 used to repay hedge termination fees, and $21,000 used to pay current commitment fees in accordance with the Fifth Forbearance Agreement. As of December 31, 2011, Amegy had advanced a total amount of $1,396,758, which was $136,758 in excess of the approved maximum for advances. From January 1, 2012 through February 28, 2012, Amegy made additional advances of $272,070 for a total advance of $1,668,828.

On February 28, 2012, we signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations we owed to them. The transactions contemplated under these agreements became effective April 13, 2012. These transactions are more fully discussed in Note 3.

 

F-12
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

In 2011, Infinity had granted Amegy a warrant to purchase 931,561 shares of the Company’s common stock (the “Amegy Warrant”) at an exercise price of $5.01 per share during a ten-year period following the issuance of the warrant (Note 5). The Amegy Warrant was cancelled as part of the agreement the Company and Amegy entered into on February 28, 2012 and which became effective April 13, 2012 (see Note 3). The Company recorded a debt discount equal to the estimated fair value of the Amegy Warrant on the date of issuance in the amount of $535,626, and expensed $311,985 in forbearance fees associated with the Fifth Forbearance Agreement (see below) during the three months ended June 30, 2011 ($619,274 during the six months ended June 30, 2011), which amounts are included in the accompanying consolidated statements of operations as interest expense for those periods. Because the Fifth Forbearance Agreement ceased its effectiveness after December 31, 2011, and the Company and Amegy were in the process of negotiating and signing an agreement to exchange equity securities in full payment of the Company’s obligations to Amegy, no further forbearance fees were accrued after that date. Interest expense recognized during the quarter and the six months ended June 30, 2011 related to the accretion of the debt discount was $153,036 and $229,554, respectively (none during the quarter and six months ended June 30, 2012).

 

The Company’s intention has been to market and sell all remaining assets of Infinity-Wyoming and Infinity-Texas and to apply the net sales proceeds, if any, to payment of the revolving note, and in December 2011 the Company sold its Texas assets; no proceeds have yet been received.

 

The following information relates to the Fifth Forbearance Agreement, which was in effect as of December 31, 2011, but which was cancelled effective with the closing of the agreement between the Company and Amegy effective on April 13, 2012:

 

Under the Fifth Forbearance Agreement, any cash receipts of the Company were deposited in a lockbox held by Amegy as restricted cash. All cash disbursements had to be approved by Amegy.

 

The Company also agreed to pay Amegy a monthly forbearance/waiver fee of 1.0% of the average daily outstanding principal balance of the revolving note through December 31, 2011. If any cash equity contributions to the Company are used to pay monthly interest due under the agreement, Amegy agreed to credit the Company 300% of the amount of the equity contributions as a reduction in interest cost.

 

If Infinity failed to comply with the terms of the Fifth Forbearance Agreement, Amegy would be entitled to impose a default interest rate (prime plus 6.5%) or to declare an event of default, at which point the entire unpaid principal balance of the loan, together with all accrued and unpaid interest and other amounts then owing to Amegy would become immediately due and payable. Amegy or other creditors may take action to enforce their rights with respect to outstanding obligations, and Infinity may be forced to liquidate. Because substantially all of the Company’s assets were pledged as collateral under the Revolving Credit Facility, if Amegy declared an event of default, it would be entitled to foreclose on and take possession of the Company’s assets, including its rights under the Nicaraguan Concessions.

Infinity has accrued interest, forbearance and additional fees due in connection with the Forbearance Agreements of $0 and $7,896,442 as of June 30, 2012 and December 31, 2011, respectively.

 

Subordinated Note Payable to Related Party

 

Effective March 5, 2009, the Company entered into two contracts relating to its Nicaraguan Concessions, as awarded by the Republic of Nicaragua in 2003. In addition, the Company entered into a subordinated loan with Off-Shore Finance, LLC, a Nevada limited liability company (“Off-Shore”), and a related party (see Note 7) in an aggregate amount of $1,275,000, which was released as the Company needed funds for the Nicaraguan Concessions. Amegy allowed the subordinated loans to be secured by the assets of the Company, subject to Amegy’s security interest. The note bore interest at 6% and would have been due March 23, 2012. This note has been retired under the agreement between the Company and Off-Shore dated February 28, 2012, under which Off-Shore accepted 15,016 shares of the Company’s Class B Preferred Stock in full payment of the note and its related accrued interest at such date (see also Note 4).

 

F-13
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Further, Amegy allowed the Company to grant a one percent revenue sharing interest with respect to the Nicaraguan Concessions to Off-Shore to obtain the subordinated loan.

 

In connection with the issuance of the Subordinated Note Payable discussed above, the Company recorded a debt discount, through a reduction to unproved properties, of $637,620, which was amortized over the maturity of the Note utilizing the effective interest method and was fully amortized as of the date the debt was effectively satisfied (April 13, 2012) by issuance of Series B preferred shares. During the period amortization of the discount was occurring, the Company capitalized a portion of the amortization of debt discount to oil and gas properties on expenditures made in connection with exploration and development projects that are not subject to current depletion. By policy, amortization of debt discount was capitalized only for the period that activities are in progress to bring these projects to their intended use. Total subordinated note payable debt discount amortized during the quarters ended June 30, 2012 and 2011 were $0 and $63,640, respectively, of which $0 and $47,730, respectively, were capitalized to oil and gas properties. Such amortization for the six months ended June 30, 2012 and 2011 was $83,088 and $121,867, respectively, of which $62,316 and $91,265, respectively, were capitalized.

 

Interest Bearing Liabilities to Vendors

 

At June 30, 2012 and December 31, 2011, the Company had a note payable to a vendor of $278,022 bearing interest at 18% and had also agreed to pay interest at 8% on certain accrued liabilities aggregating $410,500. The total amount of interest expense accrued relating to these liabilities for the quarters ending June 30, 2012 and 2011 was $27,496 and $24,565, respectively, and for the six months ended June 30, 2012 and 2011 was $54,153 and $48,519, respectively. The interest accrued on these liabilities is included in accrued interest and fees - bank and other.

  

Note 3 — Cancellation of Debt and Related Obligations and Issuance of Securities in Exchange for Debt

 

On February 28, 2012, the Company signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations owed them. In accordance with these agreements, on April 13, 2012, the Company issued Amegy 2,000,000 shares of common stock and 130,000 shares of Series A redeemable convertible preferred stock, and issued Off-Shore 15,016 shares of Series B redeemable convertible preferred stock. Amegy also agreed to cancel the Amegy Warrant (that had originally been issued in February 2011), exercisable to purchase 931,561 shares of common stock. In aggregate, the Company cancelled debt, accrued interest and fees and the derivative liability that had been recorded relative to the Amegy Warrant in the aggregate amount of $21,883,393.

 

The Series A and Series B redeemable convertible preferred stock have a 6% annual dividend and are convertible into common stock at a price of $6.50 per share. Both series of preferred stock automatically convert into common stock if the average of the closing prices of the common stock for 30 consecutive trading days equals at least $7.50 per share. The Company has the right to redeem both series of preferred stock at any point for an amount equal to their issue price of $100 per share plus all accrued and unpaid dividends; however the Series A preferred stock has a higher liquidation preference and must be redeemed prior to any redemption of Series B preferred stock. Commencing January 1, 2013, the Series A preferred stock will vote with the common stock on all matters presented to the holders of the common stock. Beginning January 1, 2014, the Series A preferred shareholders will have a majority vote on all such matters and the right to elect a majority of the Board of Directors, if the Series A preferred stock has not been redeemed or converted into common stock. Series B preferred stock has no voting privileges. Neither series of preferred stock is transferrable for 180 days after issuance.

 

The common stock issued to Amegy has been recorded at a value equal to the closing price of the shares of the Company’s common stock on April 13, 2012, the date the agreement was effective, a total of $2,980,000. Taking into consideration the rights and preferences accruing to the preferred stock issued, as summarized above, the Company has classified both Series A and B preferred stock as mezzanine securities on the accompanying consolidated balance sheet at June 30, 2012 and accordingly has recorded such stock at their estimated fair value. That estimated fair value was $9,743,210 for Series A preferred and $1,106,625 for Series B preferred at the date of issuance, April 13, 2012. During the period April 13 through June 30, 2012, the recorded fair value of Series A and B preferred shares accreted (increased in calculated present value) by $348,747 and $41,966, respectively, to $10,091,957 and $1,148,591, respectively, at the latter date. Both Series A and B preferred are being accreted to their face values over a period commencing April 14, 2012 through December 31, 2013. Accrued dividends payable on the preferred shares in the amount of $188,521 have been recorded as of June 30, 2012. In addition, a $700,000 deferred tax benefit recorded at December 31, 2011 in anticipation that the Company would recognize a gain from the above transaction during 2012 has been applied in this transaction.

 

F-14
 

  

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

The aggregate amount of debt, warrant derivative and other related liabilities cancelled in the transaction exceeded the recorded amounts for common stock and Series A and B preferred stock, and the deferred tax benefit application, in the amount of $7,353,558. Management believes that, because of the extent and exclusivity of the financing provided by Amegy and Off-Shore to the Company since 2009, the continued willingness of Amegy to forbear from existing remedies allowed it under its 2007 agreement, while continuing to provide the Company advances necessary to satisfy funding requirements of the Nicaraguan Concessions, in addition to voting privileges accorded the Series A preferred stockholders commencing in 2013, the appropriate accounting for this excess is to regard it as an addition to additional paid-in capital.

 

Following tabular presentation summarizes the transaction as recorded by the Company as of April 13, 2012:

 

Debt and related liabilities at April 13, 2012:          
Note and line of credit borrowing, Amegy Bank  $11,679,322      
Subordinated note payable, Off-Shore   1,269,441      
Accrued interest and other fees due Amegy   8,201,314      
Accrued interest due Off-Shore   251,238      
Derivative liability related to Amegy warrant   482,078   $21,883,393 
           
Equities issued in exchange for above, at estimated fair value on April 13, 2012:          
Common stock   2,980,000      
Redeemable, convertible preferred stock, Series A   9,743,210      
Redeemable, convertible preferred stock, Series B   1,106,625    13,829,835 
         8,053,558 
Deferred income tax asset applied in recording transaction        700,000 
           
Excess of debt forgiven by creditors over fair value of common and Series A and B redeemable, convertible preferred stock issued in exchange, recorded as an addition to additional paid-in capital       $7,353,558 

 

Note 4 — Stock Options

 

The Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted, and is estimated in accordance with the provisions of ASC 718.

 

During the six months ended June 30, 2012, no stock options were granted or forfeited. During the six months ended June 30, 2011 (in February 2011), the Company granted options to purchases 550,000 shares of common stock at $5.25/share, expiring ten years after issuance.

 

F-15
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes stock option activity as of and for the periods ended June 30, 2012 and December 31, 2011:

 

  

 

 

 

Number of
Options

  

Weighted
Average
Exercise
Price Per
Share

  

Weighted
Average
Remaining
Contractual
Term

  

 

 

Aggregate
Intrinsic
Value

 
Outstanding and exercisable at January 1, 2011   903,500   $2.92    5.8 years   $- 
Granted in February 2011   550,000   $5.25           
Granted in August 2011   600,000   $7.50           
Outstanding and exercisable at December 31, 2011   2,053,500   $4.88    7.3 years   $- 
Granted in 2012   -                
Outstanding and exercisable at June 30, 2012   2,053,500   $4.88    6.8 years   $- 

  

The Company recognized expense in connection with options granted of $0 and $152,353 during the six months ended June 30, 2012 and 2011, respectively, and no such expense was recognized in either of the quarters ended June 30, 2012 or 2011. The weighted average grant date fair value of the February 2011 options granted was $0.28. There was no unrecognized compensation cost as of June 30, 2012 or December 31, 2011 related to unvested stock and stock options, as all options granted vested immediately and are currently exercisable.

 

Note 5 — Derivative Instruments and Warrants

 

Commodity Derivatives

 

As of June 30, 2012 and December 31, 2011, the Company had no oil and natural gas derivative arrangements outstanding.

 

Derivatives – Amegy Fifth Forbearance Warrant

 

On February 16, 2011, in connection with the signing of the Fifth Forbearance Agreement (see Note 2) the Company granted Amegy the Amegy Warrant exercisable to purchase 931,561 shares of the Company’s common stock at an exercise price of $5.01 per share during a ten-year period following the issuance of the Warrant. The Amegy Warrant was cancelled under the agreements between the Company and Amegy dated February 28, 2012 (effective April 13, 2012). See Note 3.

 

The Amegy Warrant was subject to a registration rights agreement under which the Company has 120 days after the notification by Amegy to have such underlying shares registered. The Amegy Warrant was cancelled under the agreements between the Company and Amegy dated February 28, 2012 (effective April 13, 2012). See Notes 2 and 3.

 

In addition, the Amegy Warrant contained provisions upon which Amegy had the right, upon certain conditions, to put the Warrant to the Company at fair value. It also contained a provision under which the $5.01 per share exercise price is to be re-priced upon the issuance by the Company of equity instruments at a price less than $5.01. Further, the Company was required, during the period the Warrant could be exercised, to have authorized and reserved 110% of the number of shares of common stock required for the exercise of the shares to be issued under the Amegy Warrant. As a result of Amegy’s conditional ability to put the Warrant back to the Company, it has classified the estimated fair of the Amegy Warrant (derivative liability) as a noncurrent liability in the accompanying consolidated balance sheet as of December 31, 2011. Prospective changes in the fair value of the Amegy Warrant were recorded in the consolidated statement of operations until it was cancelled. During the six months ended June 30, 2012 the Company recorded an income item of $118,685 representing the net decrease in fair value of the Amegy Warrant for the period, but no amount was recorded as income or expense during the quarter ended that same date. For the six months ended June 30, 2011 the Company recorded income of $37,833 representing the net decrease in fair value of the Amegy Warrant for the period from its issuance to June 30, 2011, and during the quarter then ended, the Company recorded $760,048 representing the decrease in fair value of the Amegy Warrant for the period April 1, 2011 through June 30, 2011.

 

F-16
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 — Commitments and Contingencies

 

The Company has no insurance coverage on its U.S domestic oil and gas properties. The Company is not in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits. The ultimate resolution of these compliance issues could have a significant adverse impact on the Company’s financial statements.

 

Nicaraguan Concessions

 

The significant terms and work commitments associated with the Nicaraguan Concessions by area (Perlas and Tyra blocks) are summarized below. Within 15 days of entering an exploration sub-period, the Company is required to provide an irrevocable guarantee (“Irrevocable Guarantee”) in favor of the Nicaraguan Ministry of Energy, payable in Nicaragua, in an amount equal to the estimated cost of such exploration sub-period, subject to an accumulated credit carry forward for the excess of work performed in the preceding exploration sub-period, as provided in the agreements relating to the Nicaraguan Concessions.

 

As of December 31, 2011 and September 14, 2012, the Company is in Sub-Period 1 for both Perlas and Tyra. The Company has provided Environmental Impact Studies to the Nicaraguan Ministry of Energy effective April 2011 and is awaiting approval of these studies before proceeding to Sub-Period 2. In accordance with the concession agreements, the Company has provided the Ministry of Energy with the required letters of credit in the amounts of $443,100 for Perlas (expiring March 2013) and $408,450 for Tyra (expiring September 2012). The Company has also made all required expenditures related to the concessions for training programs and as “area fees,” for 2011, 2010 and, in early 2012, for that year. The Company considers it is fully in compliance with the terms of the Nicaraguan Concession agreements.

 

Minimum Work Program – Perlas

 

Block Perlas – Exploration Minimum Work Commitment and Relinquishments 
Exploration Period
(6 Years)
   Duration
(Years)
   Work Commitment  Relinquishment   Irrevocable
Guarantee
 
Sub-Period1   2   - Environmental Impact Study
- Acquisition & interpretation of 333km of new 2D seismic
- Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent in 3D)
   26km2  $443,100 

Sub-Period 2 Optional

    1  

- Acquisition, processing & interpretation of 200km2 of 3D seismic

   53km2  $1,356,227 

Sub-Period 3 Optional

    1   - Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower   80km2  $10,220,168 

Sub-Period 4 Optional

    2   - Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower
- Geochemical analysis
   

All acreage except areas with discoveries

   $10,397,335 

 

F-17
 

  

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Minimum Work Program - Tyra

 

Block Tyra – Exploration Minimum Work Commitment and Relinquishments 
Exploration Period
(6 Years)
   Duration
(Years)
   Work Commitment  Relinquishment   Irrevocable
Guarantee
 
Sub-Period1   1.5   - Environmental Impact Study
- Acquisition & interpretation of 667km of existing 2D seismic
- Acquisition of 667km of new 2D seismic (or equivalent in 3D)
   26km2  $408,450 

Sub-Period 2 Optional

    0.5   - Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period   40km2  $278,450 

Sub-Period 3 Optional

    2  

- Acquisition, processing & interpretation of 250km2 of new 3D seismic

   160km2  $1,818,667 

Sub-Period 4 Optional

    2   - Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower
- Geochemical analysis
   

All acreage except

areas with discoveries

   $10,418,667 

 

Contractual and Fiscal Terms

  

Training Program   US $50,000 per year, per block
Area Fee   Yr 1-3
Yr 4-7
Yr 8 fwd
   

$0.05/hectare
$0.10/hectare
$0.15/hectare

Royalties  

Recovery Factor
0 – 1.5
1.5 – 3.0
>3.0

   

Percentage
5%
10%
15%

Natural Gas Royalties   Market value at production   5%
Corporate Tax   Rate no higher than 30%    
Social Contribution   3% of the net profit (1.5% for each autonomous region)    
Investment Protection   ICSID arbitration
OPIC insurance
    

 

 

The minimum cash commitment budgeted for the Nicaraguan Concessions for 2012 is approximately $1,590,300, of which approximately $298,967 has been incurred and paid through September 24, 2012. See Note 1 for discussion of Going Concern.

Delivery Commitments

 

In June 2005, the Company entered into a long-term gas gathering contract for natural gas production from the Company’s properties in Erath County, Texas, under which the Company was to pay a gathering fee of $0.35 per Mcf gathered. The contract contains minimum delivery volume commitments through December 31, 2011 associated with firm transportation rights. The aggregate amount owing related to the shortfalls, $2,845,458 (which had been entirely accrued prior to 2011), was included within current liabilities in the accompanying consolidated balance sheets at June 30, 2012 and December 31, 2011.

 

Revenue Sharing Commitments

 

On March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Off-Shore, an accredited investor, to issue a subordinated secured promissory note in the aggregate principal amount of up to $1,275,000 and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. As of December 31, 2009, Off-Shore had funded $1,275,000 (the “Funding Amount”).

 

F-18
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Under the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Off-Shore. At any time within three (3) years from the date of the Revenue Agreement, Infinity has the right to redeem the RSP by paying Off-Shore an amount as follows: (i) until March 22, 2010, a sum equal to three (3) times the Funding Amount, or $3,825,000; (ii) until March 22, 2011, a sum equal to five (5) times the Funding Amount, $6,375,000; or (iii) until March 22, 2012, a sum equal to ten (10) times the Funding Amount, or $12,750,000. Upon the redemption of the RSP by Infinity, the Revenue Agreement shall terminate. As of March 23, 2012, the Company had not exercised its right to redeem and such redemption right expired.

 

On June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity assigned to officers and directors a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and directors.

 

The Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any exploratory drilling operations on these Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.

 

On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Thompson Knight Global Energy Services (“Thompson Knight”) to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity assigned to Thompson Knight a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Thompson Knight by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Thompson Knight.

 

Lack of Compliance with Law Regarding Domestic Properties

 

Infinity is not in compliance with existing federal, state and local laws, rules and regulations for its domestic properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of Infinity. For the year ended December 31, 2008 the remaining values of Infinity-Texas and Infinity-Wyoming were written down to zero as the Company focused solely on the development of the Nicaraguan Concessions. Management believes the estimate of the Company’s asset retirement obligations consisting of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties is sufficient to cover any noncompliance liabilities. The Company no longer carries insurance on the domestic properties.

 

F-19
 

  

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Contingent Fees

 

In addition to the Revenue Sharing Agreement with Thompson Knight to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout, the Company agreed to compensate Thompson Knight a success fee of 5% of the upfront cash fee paid to Infinity by a third party earning an interest in the Nicaragua asset up to $20 million and 10% of any amount exceeding the $20 million. A 2% success fee would be paid to Thompson Knight of the remaining cash investment in subsequent years. At such time the Company enters into an agreement with a partner on the Nicaragua Concession and the Company receives and collects up to $20,000,000 in upfront fees, Messrs. Ross and Hutchins shall receive a bonus of 5% of the first $20,000,000 and 10% of any amount over $20,000,000, which amount is to be divided 50% to each officer. As of June 30, 2012 and December 31, 2011, no amounts had been accrued under these contingent fee arrangements.

 

Litigation

 

The Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying balance sheets.

 

The Company is currently involved in the following material litigation:

 

(i) Exterran Energy Solutions, L.P., f/k/a Hanover Compression Limited Partnership, filed an action in the District Court of Erath County, Texas, number CV30512, on March 31, 2010 against Infinity Oil and Gas of Texas, Inc., Infinity Energy Resources, Inc., Longhorn Properties, LLC, and Forest Oil Corporation. Exterran Energy Solutions, L.P. provided certain gas compressor and related equipment pursuant to a Gas Compressor/Production Equipment Master Rental & Servicing Agreement with Infinity dated January 3, 2005 in Erath County, Texas and is claiming breach of contract for failure to pay amounts due.

 

(ii) LDH Gas Development, L.P. filed an action in the District Court of Harris County, Texas, number 201030709, on May 14, 2010 against Infinity Oil and Gas of Texas, Inc. In May 2005 LDH Gas Development, L.P. entered into a Gas Purchase Agreement with Infinity Oil and Gas of Texas, Inc. In the agreement, LDH agreed to purchase specified quantities of gas from leasehold interests held by Infinity that are located close to LDH’s Gathering System, and is claiming breach of gas purchase agreement for failure to meet minimum quantities of gas.

 

The Company has included the impacts of the foregoing litigation as liabilities in its accounts payable and accrued liabilities because it does not dispute the amounts owed. In 2009 the Company recorded the amounts claimed in the foregoing lawsuits, which are $445,521 in the Exterran Energy Solutions action and $929,208 in the LDH Gas Development action. In 2010 it recorded $1,916,250 in the LDH Gas Development action. The aggregate amount owing LDH related to the shortfalls, $2,845,458 was included within current liabilities in the accompanying consolidated balance sheets at June 30, 2012 and December 31, 2011. The Company will seek to settle the lawsuits when it has the financial resources to do so. Both suits are in the discovery stage.

 

Note 7 — Related Party Transactions

 

The corporate office was located in Denver, Colorado until November 2008 when the Denver office was closed. The corporate office moved to the business office of the CFO of the Company. The Company currently does not have any employees and the staff of the CFO provides the office services. These services are billed at the CFO firm’s standard billing rate plus out-of-pocket expenses. For the quarters ended June 30, 2012 and 2011, the Company was billed $56,868 and $54,897, respectively, and for the six months ended June 30, 2012 and 2011, the Company was billed $143,583 and $111,235, respectively. The amount due to the CFO’s firm for services provided was $648,468 at June 30, 2012 and $514,885 at December 31, 2011.

 

F-20
 

 

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company entered into a subordinated loan with Off-Shore in the aggregate amount of $1,275,000 for funds for the Nicaraguan Concessions. This note was satisfied by the Company’s issuance of shares of Series B redeemable convertible preferred stock effective April 13, 2012 to Off-Shore (see Note 3). The managing partner of Off-Shore and the CFO are business partners in the firm which the Company uses for its corporate office. The Series B preferred stock continues to be held by Off-Shore.

 

While the relationship with Amegy Bank was ongoing and debt was outstanding (through April 13, 2012), the Company’s CEO personally guaranteed up to $500,000 of the Forbearance advances. His guarantee obligation was never called upon and he was not compensated by the Company for such guarantee.

 

As of June 30, 2012 and December 31, 2011, the Company had accrued compensation to its officers and directors of $862,708 and $744,708, respectively.

  

Note 8 — Subsequent Events

 

Sale of Stock of Infinity Oil and Gas of Texas

 

Effective July 31, 2012, the Company sold its 100% interest in its consolidated subsidiary, Infinity Oil and Gas of Texas (IOG-Texas). The Company will record this transaction in the third quarter of 2012.

 

Funds Advanced by Third Party

On August 28, 2012, the Company borrowed $250,000 from an unrelated third party entity. The Company issued a short-term note to such party. The note bears an annual interest rate of 8%, and matures February 28, 2013. The Company also issued the creditor a warrant exercisable to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, and expiring in August 2017. The warrant contains a penalty provision to the effect that, should the note not be paid at maturity date, the exercise price per share will be reduced to $0.10 and the number of shares that may be purchased under the warrant shall increase to 1,200,000. The transaction recording this borrowing and warrant provision will be recorded in the third quarter.

 

F-21
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following information should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes presented elsewhere in this Quarterly Report on Form 10-Q. Infinity follows the full-cost method of accounting for oil and gas properties. See “Summary of Significant Accounting Policies,” included in Note 1 to the Consolidated Financial Statements for the Six Months Ended June 30, 2012 and the Year Ended December 31, 2011.

 

Infinity Energy Resources, Inc. and its subsidiaries, (collectively, “Infinity,” "Company," “we,” “us” and “our”) are engaged in the acquisition and exploration of oil and gas properties offshore Nicaragua in the Caribbean Sea.

 

On March 5, 2009 Infinity signed the contracts relating to its Nicaraguan Concessions. Infinity has submitted an environmental study and the development of geological information from reprocessing and additional evaluation of existing 2-D seismic data that was acquired over the Nicaraguan Concessions located offshore. Infinity is currently seeking offers from other industry operators for interests in the acreage in exchange for cash and a carried interest in exploration and development operations. The funds raised through the subordinated note transaction and Forbearance advances from the bank were used to fund these expenses. No assurance can be given that these funds will be sufficient to cover the exploration and development cost until a partner is found.

 

We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.

 

FORWARD-LOOKING STATEMENTS

 

This Report on Form 10-Q for the six months ended June 30, 2012, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

 

The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the Risk Factors described in Item 1A of our Registration Statement on Form 10 filed on May 13, 2011, as amended on July 1, 2011.

 

Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity problems; (ii) we have been unable to satisfy most of our current liabilities; (iii) we require working capital for our operations for the next 12 months and capital to continue our exploration and development efforts on the Nicaraguan Concessions and there can be no assurances we will be able to obtain it or do so on terms favorable to us; (iv) we and our independent registered public accounting firm have concluded that there exists substantial doubt about our ability to continue as a going concern; (v) our Nicaraguan Concessions and planned future exploration activities are in a country with a developing economy and are subject to the risks of political and economic instability associated with such economies; (vi) exploration and development of our Nicaraguan Concessions will require large amounts of capital or a commercial relationship with an industry operator which we may not be able to obtain; (vii) we may not have sufficient resources to conduct seismic mapping on our Nicaraguan Concessions; (viii) the oil and gas exploration business involves a high degree of business and financial risk; (ix) we will be subject to regulations affecting our activities with the Nicaraguan Concessions; (x) our operations may be adversely affected by changes in the fiscal regime of Nicaragua; (xi) we are continuing to negotiate with our creditors and may face additional claims in the future; (xii) oil prices may be affected by regional factors; (xiii) any future production will be contingent on successful exploration, development and acquisitions to establish reserves and revenue in the future; (xiv) the oil and gas industry is highly competitive; (xv) exploratory drilling is an uncertain process with many risks; (xvi) oil and gas prices are volatile, and declines in prices would hurt our revenues and ability to achieve profitable operations; (xvii) our common stock is traded on the Over the Counter QB Tier Market (OTCQB); (xviii) we depend on key personnel; (xix) sufficient voting power by coalitions of a few of our larger stockholders to make corporate governance decisions that could have significant

 

3
 

 

effect on us and the other stockholders; (xx) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock; (xxi) our issuance of common and Series A redeemable convertible preferred stock to Amegy and Series B redeemable convertible preferred stock to Off-Shore diluted the ownership interests of our existing stockholders and the possible issuance of additional common stock subject to options and warrants that may dilute the interest of stockholders; (xxii) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404; (xxiii) our nonpayment of dividends and lack of plans to pay dividends in the future; (xxiv) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xxv) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xxvi) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; and (xxvii) indemnification of our officers and directors.

 

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law in the normal course of our public disclosure practices.

 

2012 Operational and Financial Objectives

 

Corporate Activities

 

On April 14, 2011, we announced that we had completed and filed with the Nicaraguan government the Environmental Impact Assessment (“EIA”) covering proposed seismic activities on the 1.4 million-acres in our Nicaraguan Concessions. The filing of the EIA will be followed by a “comment period” during which there will be interaction among Infinity; the Ministerio del Ambiente y los Recursos Naturales de Nicaragua, an agency of the Nicaraguan government; and the autonomous regions of Nicaragua that are nearest the Nicaraguan Concessions. During this process, we will continue to maintain our relationship with the autonomous regions. After the EIA has been formally approved, Infinity expects to be cleared to commence 3-D seismic mapping activities in the area, although no assurances can be offered in this regard.

 

Subject to obtaining sufficient capital, we plan to commence our seismic mapping activities. The 3-D seismic program will seek to further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone. Our geological consultants have estimated that these Eocene structures may contain recoverable oil in place. In addition, 3-D seismic should provide our first look at the potential for oil resources in the Cretaceous Zone, which we could not evaluate using less precise 2-D seismic mapping.

We intend to finance our business strategy through external financing, which may include debt and equity capital raised in public and private offerings, joint ventures, sale of working or other interests, employment of working capital and cash flow from operations, if any, net proceeds from the sales of assets.

Our ability to complete these activities is dependent on a number of factors, including, but not limited to:

The availability of the capital resources required to fund the activity;
The availability of third party contractors for completion services; and
The approval by regulatory agencies of applications for permits to conduct exploration activities in a timely manner.

 

Results of operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011

 

Infinity incurred a net loss applicable to common shareholders of $1,252,911, or $0.06 per diluted share, for the six months ended June 30, 2012 compared to a net loss of $2,050,620, or $0.11 per diluted share, for the six months ended June 30, 2011. In 2012, the Company's Series A and Series B redeemable convertible preferred stock was outstanding from April 13 until June 30. The 6% cumulative dividend accrued relative to the period, as well as the accretion in the value ascribed to the preferred shares between those dates (which represent value attributable to holders of the preferred rather than common shares) increase the Company's net loss of $765,081 to arrive at net loss applicable to common shareholders in the determination of basic and diluted net loss per share.

 

4
 

 

Revenue

 

The Company had no revenues in either the six months ending June 30, 2012 or 2011. The Company focused solely on the exploration, development and financing of the Nicaraguan Concessions.

 

General and Administrative Expenses

 

General and administrative expenses in the six months ended June 30, 2012 were $79,971 less than for the six months ended June 30, 2011. This decrease was attributable to the decrease in officer compensation expense of $138,504 due to the cost of stock options granted in 2011, with no such options granted in 2012, offset by increases in legal and professional expenses in the 2012 period over 2011 of approximately $74,000.

 

Other income (expense)

 

Interest expense net of amounts capitalized to oil and gas properties decreased from $1,514,623 for the six months ended June 30, 2011 to $383,994 for the six months ended June 30, 2012. This significant decrease was entirely attributable to the fact that all debt due Amegy and Off-Shore outstanding for the entire period in 2011 was satisfied effective April 13, 2012 by the issuance of common and Series A and B redeemable convertible preferred stock (see Note 3). Also, the 2011 period reflected the accrual of forbearance fees due Amegy for the entire period and the accrual of such fees ceased effective December 31, 2011. No forbearance fees were reflected within the comparative 2012 period.

 

The fair value of the Company’s derivative liability, related to the Amegy Warrant (cancelled effective April 13, 2012 -- see Note 3), decreased in the six months ended June 30, 2012, resulting in an other income item in the amount of $118,685. During the same period in 2011 the fair value of the derivative liability decreased by a lesser amount, $37,833. The derivative value, which is required to be presented in accordance with generally accepted accounting principles, primarily reflects the liability associated with remaining life of the Amegy Warrant with changes in fair value being principally impacted by the volatility of the Company’s stock price.

 

Income Tax

 

Infinity reflected no net tax benefit or expense in the six month periods ended June 30 in either 2012 or 2011. The net operating losses generated in those periods increased Infinity’s gross deferred tax asset related to future ability to utilize net operating losses to reduce future income tax outlays. For the most part, due to uncertainty as to the ultimate ability of the Company to utilize its net deferred tax asset, the Company has recognized no net deferred tax benefit, and has, as a result, offset its gross deferred tax benefit with a 100% valuation allowance. A deferred tax benefit (asset) had been created at December 31, 2011 in anticipation of the recognition of a taxable gain from the exchange of common and preferred shares for all outstanding Amegy and Off-Shore debt and accrued related interest and other fees, as well as the Amegy warrant (Note 3). The Company determined in the six months ended June 30, 2012, when the exchange occurred, that no gain recognition would be appropriate, and the deferred tax asset was applied against additional paid-in capital recognized as the result of the exchange.

 

Results of operations for the three months ended June 30, 2012 compared to the three months ended June 30, 2011

 

Infinity incurred a net loss applicable to common shareholders of $792,178, or $0.04 per diluted share, for the three months ended June 30, 2012 compared to a net loss of $248,044, or $0.01 per diluted share, for the three months ended June 30, 2011. In 2012, the Company's Series A and Series B redeemable convertible preferred stock was outstanding from April 13 until June 30. The 6% cumulative dividend accrued relative to the period, as well as the accretion in the value ascribed to the preferred shares between those dates (which represent value attributable to holders of the preferred rather than common shares) increased the Company's actual net loss of $304,438 to arrive at net loss applicable to common shareholders in the determination of basic and diluted net loss per share.

 

Revenue

 

The Company had no revenues in either the three months ending June 30, 2012 or 2011. The Company focused solely on the exploration, development and financing of the Nicaraguan Concessions.

 

5
 

 

General and Administrative Expenses

 

General and administrative expenses in the three months ended June 30, 2012 were $74,290 more than for the three months ended June 30, 2011. This increase was almost entirely attributable to increases in legal and professional expenses in the 2012 period over 2011 of nearly $74,000.

 

Other income (expense)

 

Interest expense net of amounts capitalized to oil and gas properties decreased from $808,967 for the three months ended June 30, 2011 to $27,854 for the three months ended June 30, 2012. This significant decrease is entirely attributable to the fact that all debt due Amegy and Off-Shore outstanding for the entire period in 2011 was satisfied effective April 13, 2012 by the issuance of common stock and Series A and Series B redeemable convertible preferred stock (see Note 3). The interest expensed in the three months ended June 30, 2012 related to a note and open account due certain vendors.

 

The fair value of the Company’s derivative liability, related to the Amegy Warrant (cancelled effective April 13, 2012 -- see Note 3), fluctuated significantly during the first six months of 2011 and decreased in value by some $760,000, presented as other income, in the three months ended June 30, 2011. The derivative liability was cancelled in the transactions recorded April 13, 2012 and no change in the value of the liability from April 1 to April 13, 2012 was recorded. The derivative value, which is required to be presented in accordance with generally accepted accounting principles, primarily reflects the liability associated with remaining life of the warrants with changes in fair value being principally impacted by the volatility of the Company’s stock price.

 

Income Tax

 

Infinity reflected no net tax benefit or expense in the three month periods ended June 30 in either 2012 or 2011. The net operating losses generated in those periods increased Infinity’s gross deferred tax asset related to future ability to utilize net operating losses to reduce future income tax outlays. For the most part, due to uncertainty as to the ultimate ability of the Company to utilize its net deferred tax asset, the Company recognized no net deferred tax benefit, and, as a result, offset its gross deferred tax benefit with a 100% valuation allowance. A deferred tax benefit (asset) had been created at December 31, 2011 in anticipation of the recognition of a taxable gain from the exchange of common and preferred shares for all outstanding Amegy and Off-Shore debt and accrued related interest and other fees, as well as the Amegy Warrant (Note 3). The Company determined in the three months ended June 30, 2012, when the exchange occurred, that no gain recognition would be appropriate, and the deferred tax asset was applied against additional paid-in capital recognized as the result of the exchange.

 

Liquidity and Capital Resources; Going Concern

 

We have had a history of losses. In addition, we have a significant working capital deficit and are currently experiencing substantial liquidity issues. As also discussed in Note 2 of the Financial Statements, as of December 31, 2011 we were operating under the Fifth Forbearance Agreement with Amegy under the Revolving Credit Facility. We had entered into the Fifth Forbearance under the Revolving Credit Facility as a result of our failure to meet substantially all financial and certain other covenants during 2007, 2008, 2009 and 2010. Under this Agreement, Amegy agreed to forebear from exercising any remedies under the Revolving Credit Facility, the revolving note and the related loan documents and to temporarily waive the covered events of default through December 31, 2011.

 

We continued to operate under the Fifth Forbearance Agreement through February 28, 2012, when definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations we owed to them were signed. Effective April 13, 2012, the transactions contemplated under these agreements closed and the Company exchanged common stock and Series A and Series B redeemable convertible preferred stock shares in satisfaction of all the outstanding Amegy and Off-Shore debt, related accrued interest and other fees, and the Amegy Warrant. At December 31, 2011 the entirety of the debt and related accruals was classified as current liability on the accompanying consolidated balance sheet and the derivative liability related to the Amegy Warrant was classified as a long-term liability; these balances were no longer outstanding at June 30, 2012.

 

We estimate that we will require approximately $2,800,000 in working capital for the next 12 months, but not including annual salaries of $200,000 to our officers, which we will continue to defer if we do not have sufficient capital, and not including obligations that we owe to third parties. The foregoing includes $1,590,300 for expenditures projected to be required under the Nicaraguan Concessions, which would occur after our receipt of approved EIA and other approvals. We can offer no assurances regarding the receipt of such approvals or, if received, their timing.

 

6
 

 

We conducted an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired over our Nicaraguan Concessions. We issued letters of credit totaling $851,550 and entered into a subordinated loan with Off-Shore, in an aggregate amount of $1,275,000, which was released as the Company needed funds for the initial work on the Nicaraguan Concessions. We commenced significant activity under the initial work plan and are waiting for governmental approval of the environmental study.

 

We plan to raise capital to satisfy the foregoing needs through an offering of our equity or debt securities and/or through a commercial relationship with other industry operators, which may involve the granting of revenue or other interests in the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or the creation of a joint venture or other strategic partnership. There can be no assurance that we will obtain such funding or obtain it on terms acceptable to us. Further, if we cannot meet our obligations respecting the Nicaraguan Concessions, we will lose our rights to them.

 

Due to the uncertainties related to these matters, there exists substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Our significant accounting policies are summarized in the notes to our consolidated financial statements included in Item 1, “Financial Statements”, of this quarterly report.

 

The application of our accounting policies regarding income taxes and full cost accounting for oil and gas properties and the sale of oil and gas properties are critical to two accounting estimates made in 2011.

 

As noted above, the Company reflected a $700,000 deferred income tax benefit for the year ended December 31, 2011 in conformity with the Company’s policy for accounting for income taxes. The deferred tax benefit recorded in 2011 reflected anticipated 2012 net earnings as the result of recording of the effects of the agreements signed in February 2012 (effective April 13, 2012) with Amegy and Off-Shore (see Note 3), net of projected 2012 operating expenses, which at the time were interpreted as an estimate that it was more likely than not that the Company would utilize a portion of its deferred tax asset in 2012. When the transactions recording the aforementioned were re-evaluated and recorded in the six months ended June 30, 2012, it was determined that the recognition of a gain on the exchange of common and preferred shares for the debt and related accruals would not be appropriate. Thus, the deferred tax benefit recognized and reflected in 2011 was applied as a reduction in the amount of additional paid-in capital recorded in the exchange transaction. The remainder of the deferred tax asset at December 31, 2011 and all such deferred tax asset at June 30, 2012 has been reduced to $0 by valuation allowances.

 

Also, as noted above, in 2011 the Company sold its oil and gas properties in Texas, the cost associated with which were entirely written off in prior periods, in return for a non-interest-bearing note with repayment conditional upon net profit from sales of oil and gas from the properties. Due to the uncertainty of when and in what amount payments on the note will be received, the Company has recorded the note net of a 100% valuation reserve and has recognized no gain or loss on this transaction. Any related gains will be recognized when and if payments are received. The treatment of this Texas sale transaction conforms to the Company’s policy regarding sale of oil and gas properties.

 

At June 30, 2012, and as of December 31, 2011, there have been no material changes or updates to our critical accounting policies.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

(Not Applicable)

 

7
 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer, Stanton Ross and Chief Financial Officer, Daniel F. Hutchins evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on the evaluation, Messrs. Ross and Hutchins have concluded that the Company’s disclosure controls and procedures are effective in timely assuring that financial statement presentation and disclosure are in conformity with those which are required to be included in our periodic SEC filings.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

There were no material developments in the material litigation in which the Company is currently involved as set forth in our Registration Statement on Form 10 filed on May 13, 2011 and Amendment No.1 filed on July 1, 2011.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(c)Exhibits.

 

31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act)

 

8
 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Signature   Capacity   Date
         
/s/ Stanton E. Ross   Chief Executive Officer    
Stanton E. Ross   (Principal Executive Officer)   September 27, 2012
         
/s/ Daniel F. Hutchins   Chief Financial Officer    
Daniel F. Hutchins   (Principal Financial and Accounting Officer)   September 27, 2012

 

9
 

 

Index of Exhibits

 

31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act)

 

10
 

 

PINX:IFNY Quarterly Report 10-Q Filling

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PINX:IFNY Quarterly Report 10-Q Filing - 6/30/2012
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