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. As described in Note 8, the Company
sold its entire investment in Infinity-Texas effective July 31, 2012. The assets, liabilities and operations of Infinity-Texas
have been segregated and set forth as relating to discontinued operations on the accompanying consolidated financial statements.
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.
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 capital to meet its obligations under the Nicaraguan Concessions, and is searching for sources of additional
equity or debt financing. There can be no assurance that the Company will be able to obtain such capital or obtain it on favorable
terms..
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 September 30, 2012 and 2011, the Company capitalized direct costs, overhead costs and interest as follows:
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
$
|
96,462
|
|
|
$
|
68,131
|
|
|
$
|
381,219
|
|
|
$
|
396,188
|
|
Overhead costs
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
37,500
|
|
|
|
37,500
|
|
Total non-interest costs
|
|
|
108,962
|
|
|
|
80,631
|
|
|
|
418,719
|
|
|
|
433,688
|
|
Interest costs
|
|
|
-
|
|
|
|
67,529
|
|
|
|
77,616
|
|
|
|
189,393
|
|
|
|
$
|
108,962
|
|
|
$
|
148,160
|
|
|
$
|
496,335
|
|
|
$
|
623,081
|
|
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Costs
associated with production and general corporate activities are expensed in the period incurred.
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 September 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
September 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
Infinity-Texas, the Company’s 100%-owned subsidiary, sold its oil and gas properties in Texas, to a single-member LLC, the
owner of which purchased 100% of the stock of Infinity-Texas from the Company in July 2012 (see Note 8). The costs associated
with these properties were entirely written off in prior periods. The properties were sold 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. The note was sold as an asset of Infinity-Texas in the July 2012 sale of such
company’s stock.
Concentrations
The
Company’s only 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.
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 September 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 September 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 3). Likewise, as the result of certain
terms, conditions and features included in certain common stock purchase warrants issued by the Company in association with a
note payable entered into August 28, 2012 with a related party, the warrants issued are also required to be accounted for as derivatives
at estimated fair value, with changes in fair value recognized in earnings.
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 September 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 3). 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. 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.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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, the Company may retain title to certain abandoned non-producing domestic leasehold properties. Management believes
the Company has been relieved from asset retirement obligation related to Infinity-Texas because of the sale of its Texas oil
and gas properties in 2011 and its sale of 100% of the stock in Infinity-Texas in 2012 (see Note 8), but may retain some asset
retirement obligation related to properties of Infinity-Wyoming. Therefore, the Company 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 September 30,
2012:
Asset retirement obligations at beginning of period (net of $389,759 attributed to Infinity-Texas set forth as liabilities of discontinued operation on the accompanying consolidated balance sheets)
|
|
$
|
897,560
|
|
Accretion expense, nine months ended September 30, 2012 (net of $17,736 attributed to Infinity-Texas and included within loss of discontinued operation on accompanying consolidated statement of operations)
|
|
|
61,958
|
|
Asset retirement obligations at end of period
|
|
|
959,518
|
|
Less: current portion of asset retirement obligations
|
|
|
(432,027
|
)
|
Asset retirement obligations, less current portion
|
|
$
|
527,491
|
|
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 September 30, 2012 and 2011 were $0 and $67,529, respectively, and for the nine months ended September
30, 2012 and 2011 were $77,616 and $189,393, 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 September 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.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The
estimated fair value of the Company’s non-current derivative liabilities, all of which related to warrants, was estimated
using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated
volatility of the price of the Company’s common stock, interest rates, the probability of both the downward adjustment of
the exercise price and the upward adjustment to the number of warrants as provided by the warrant agreement terms (Note 5) and
non-performance risk factors, among other items (ASC 820,
Fair Value Measurements
(“ASC 820”) fair value hierarchy
Level 2). A comparison of the assumptions used in calculating estimated fair value at the issue date and at September 30, 2012
is as follows:
|
|
Upon Issuance, August 29, 2012
|
|
|
At
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
52.5
|
%
|
|
|
52.2
|
%
|
Contractual term
|
|
|
5 years
|
|
|
|
5 years
|
|
Exercise price
|
|
$
|
2.50
|
|
|
$
|
2.50
|
|
Number of warrants per contract
|
|
|
120,000
|
|
|
|
120,000
|
|
The
estimated initial 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.
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 from continuing operations 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.
During
the nine months and the three months ended September 30, 2012 the Company had outstanding an additional 2,000,000 shares of common
stock for the period April 13 through September 30, 2012. Weighted average common shares outstanding for both the quarter and
nine months ended September 30, 2012 reflect the effects of the shares outstanding for this period. The calculation of income
(loss) per common share for the quarter and nine months ended September 30, 2012 reflects these amounts which are attributable
to the preferred shareholders as increases in the net income (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.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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.
Note
2 — Debt
Debt
consists of the following at September 30, 2012 and December 31, 2011:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
Note payable to related party, net of discount
|
|
$
|
209,854
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
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 contained 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 nine months ended September 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.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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, the Company signed definitive agreements with Amegy and Off-Shore Finance, LLC, a Nevada limited liability
company (“Off-Shore”) relating to outstanding debt and other obligations we owed to them. The transactions contemplated
under these agreements closed April 13, 2012. These transactions are more fully discussed in Note 3.
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 September 30, 2011 ($619,274 during the nine months ended September 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 nine months ended
September 30, 2011 related to the accretion of the debt discount was $153,036 and $229,554, respectively (none during the quarter
and nine months ended September 30, 2012).
The
Company’s intention had 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
will be received as such note receivable, which was fully allowed for, was sold in connection with the sale by the Company of
100% of the common stock of Infinity-Texas in July 2012.
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 September 30, 2012 and December 31, 2011, respectively.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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, 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 was 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 Series B Preferred Stock in full payment of the
note and its related accrued interest at such date (see also Note 4).
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
stock. 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 September 30, 2012 and 2011 were $0 and $69,638, respectively, of which $0 and $52,229, respectively, were
capitalized to oil and gas properties. Such amortization for the nine months ended September 30, 2012 and 2011 was $83,088 and
$191,324, respectively, of which $62,316 and $143,493, respectively, were capitalized.
Interest
Bearing Liabilities to Vendors
At
September 30, 2012 and December 31, 2011, the Company had agreed to pay interest of 8% on certain accrued liabilities aggregating
$410,500. The total amount of interest accrued relating to these liabilities for the three months ending September 30, 2012 and
2011 was $8,277 and $8,277 respectively, and for the nine months ending September 30, 2012 and 2011 was $24,652 and $24,652, respectively.
Included in assets of discontinued operations at December 31, 2011 was a note payable to vendor of $278,002 bearing interest at
18%; this note was assumed by the purchaser of Infinity-Texas as of July 31, 2012. Interest accrued relating to this note for
the three months ending September 30, 2012 and 2011 was $6,776 and $17,315, respectively, and for the nine months ended September
30, 2012 and 2011 was $44,553 and $49,188, respectively. All of such interest expense related to the note is included in loss
from discontinued operations on the accompanying consolidated statements of operations for the respective periods, and the note
payable and accrued interest, amounting to $411,164 at December 31, 2011, is included within liabilities of discontinued operations.
Note
Payable to Related Party
On
August 28, 2012, the Company borrowed $250,000 from an entity that is 49% owned by a board member of another corporation for which
Infinity’s CEO serves as CEO and chairman of the board. The Company issued a short-term note payable to the entity in this
amount, bearing interest at 8% per annum, maturing February 28, 2013. At the same time, the Company issued the same entity a warrant
exercisable to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, expiring August 2017.
The note contains a penalty provision such that if the note is not repaid on its due date, the warrant exercise price will be
reduced to $0.10 per share and the number of shares that may be purchased under the warrant shall increase to 1,200,000. Management
believes that the note will be repaid on or before February 28, 2013 and therefore has calculated the estimated fair value of
the warrant on that assumption. If the note is not repaid timely, the warrant liability would be considerably higher. Therefore,
on the assumption of timely repayment of the note the Company has recorded the estimated fair value of the warrant as of August
28, 2012 as a discount on note payable in the amount of $48,654 and a non-current derivative liability in the same amount at that
date. The discount of $48,654 is being amortized on a straight line basis over the expected outstanding period of the note (August
28, 2012 through February 28, 2013) and interest expense for the three months and nine months ended September 30, 2012 includes
discount amortization in the amount of $8,508.The estimated current value of the warrant derivative liability was increased to
$67,783 at September 30, 2012 and such increase in derivative liability is included as an other expense in the amount of $19,129
for the three and nine months ended September 30, 2012.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 September 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 September 30, 2012, the recorded fair
value of Series A and B preferred shares accreted (increased in calculated present value) by $783,760 and $94,432, respectively
($435,013 and $52,466, respectively, during the three months ended September 30, 2012), to $10,890,970 and $1,243,102, 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 $406,045 have been recorded as of
September 30, 2012 ($217,524 in the three months ended September 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.
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 the appropriate accounting for this excess is to regard it as an addition to additional paid-in capital,
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 as it continued to provide the Company
advances necessary to satisfy funding requirements of the Nicaraguan Concessions, and the voting privileges accorded the Series
A preferred stockholders commencing in 2013.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 nine months ended September 30, 2012, no stock options were granted or forfeited. During the nine months ended September 30,
2011, the Company granted options to purchase 550,000 shares of common stock at $5.25/share, expiring ten years after issuance
(February 2011), and 600,000 shares of common stock at $7.50/share, also expiring ten years after issuance (August 2011).
The
following table summarizes stock option activity as of and for the periods ended September 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 September 30, 2012
|
|
|
2,053,500
|
|
|
$
|
4.88
|
|
|
|
6.6 years
|
|
|
$
|
-
|
|
The
Company recognized expense in connection with options granted of $0 and $214,906 during the nine months ended September 30, 2012
and 2011, respectively, and $0 and $62,553 in the three months ended September 30, 2012 and 2011, respectively. The weighted average
grant date fair value of the February 2011 options granted was $0.28 and for the August 2011 options was $0.10. There was no unrecognized
compensation cost as of September 30, 2012 or December 31, 2011 related to unvested stock and stock options, as all options granted
vested immediately and are currently exercisable.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note
5 — Derivative Instruments and Warrants
Commodity
Derivatives
As
of September 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. Such agreement was cancelled under the agreements between the Company and Amegy dated
February 28, 2012 (effective April 13, 2012) that also cancelled the Amegy Warrant. See Notes 2 and 3.
In
addition, the Amegy Warrant contained provisions upon which Amegy has 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 the Warrant was cancelled. During the nine months ended September
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. During the three months ended
September 30, 2011 the Company recorded income of $307,542 representing the net decrease in fair value of the Amegy Warrant. For
the nine months ended September 30, 2011, the Company recorded income of $345,375 representing the net decrease in the fair value
of the Amegy Warrant for the period from its issuance through September 30, 2011.
Derivatives
– Warrant Issued Relative to Note Payable to Related Party
In
connection with the short-term note payable entered into with a related party (see Note 2) the Company issued the same entity
a warrant exercisable to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, expiring August
2017. The warrant contains a penalty provision under which the number of shares that may be purchased will increase to 1,200,000
and the exercise price will be reduced to $0.10 per share if the Company fails to pay the note when due on February 28, 2013.
The Company has recorded the estimated fair value of the warrant as of August 28, 2012, on the assumption that the note payable
will be entirely repaid on its due date, as a discount on note payable in the amount of $48,654 and a non-current derivative liability
in the same amount at that date. The estimated current value of the warrant derivative liability was increased to $67,783 at September
30, 2012 and such increase in derivative liability is included as an other expense in the amount of $19,129 for the three and
nine months ended September 30, 2012.
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 30, 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 2013). 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-Period 1
|
|
2
|
|
-
|
Environmental Impact Study
|
|
26km2
|
|
$
|
443,100
|
|
|
|
|
|
-
|
Acquisition & interpretation of 333km of
new 2D seismic
|
|
|
|
|
|
|
|
|
|
|
-
|
Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent
in 3D)
|
|
|
|
|
|
|
Sub-Period 2
Optional
|
|
1
|
|
-
|
Acquisition, processing & interpretation of 200km
2
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
|
|
All acreage except areas with discoveries
|
|
$
|
10,397,335
|
|
|
|
|
|
-
|
Geochemical analysis
|
|
|
|
|
|
|
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-Period 1
|
|
1.5
|
|
-
|
Environmental Impact Study
|
|
|
26km2
|
|
|
|
|
|
|
$
|
408,450
|
|
|
|
|
|
-
|
Acquisition & interpretation of 667km of existing 2D seismic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
Acquisition of 667km of new 2D seismic (or equivalent in 3D)
|
|
|
|
|
|
|
|
|
|
|
|
|
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 250km
2
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
|
|
|
All acreage except
areas with discoveries
|
|
$
|
10,418,667
|
|
|
|
|
|
-
|
Geochemical analysis
|
|
|
|
|
|
|
|
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 $256,800, of which approximately $303,500
has been incurred and paid through November 26, 2012. The Sub Period 2 starts when the Nicaraguan Government approves the environmental
impact study. The approval is currently pending. Once the approval is received the minimum cash requirements for the next twelve
month period will be $1,894,000 of which $1,634,677 is related to seismic and $259,300 is related to the training and area fees
under the concession. See Note 1 for discussion of Going Concern.
Delivery
Commitments
In
June 2005, Infinity-Texas entered into a long-term gas gathering contract for natural gas production from its properties in Erath
County, Texas, under which Infinity-Texas was to pay a gathering fee of $0.35 per Mcf gathered to LDH Gas Development, L.P
(LDH). The contract contains minimum delivery volume commitments through December 31, 2011 associated with firm transportation
rights. The aggregate amount owing related to the shortfalls was $2,845,458 (which had been entirely accrued prior to 2011). In
July 2012, the Company sold 100% of the common stock of Infinity-Texas for $1 and the assumption of all the Infinity - Texas liabilities
by the purchaser (see Note 8). In accordance with the results of this transaction, the LDH liability is no longer a Company obligation
after that date. The amount of the liability is presented in the accompanying consolidated balance sheets as an element of “current
liabilities of discontinued operation” at December 31, 2011
.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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”).
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.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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.
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.
Prior
to action taken in December 2012, there was an agreement that at such time the Company entered into an agreement with a partner
on the Nicaragua Concession and the Company received and collected up to $20,000,000 in upfront fees, Messrs. Ross and Hutchins
would receive a bonus of 5% of the first $20,000,000 and 10% of any amount over $20,000,000, which amount was to be divided 50%
to each officer. In December 2012, the parties terminated this agreement. As of September 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 financial
statements.
The
Company is currently involved in litigation as follows:
Exterran
Energy Solutions, L.P., f/k/a Hanover Compression Limited Partnership, who 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. The Company has included the impacts
of this litigation as liabilities in its accounts payable because it does not dispute the amount owed. In 2009 the Company recorded
the amount claimed. The Company will seek to settle the lawsuit when it has the financial resources to do so. The suit is in the
discovery stage.
Certain litigation had been filed against Infinity Oil and Gas of Texas (Infinity – Texas) by LDH Gas Development,
L.P. In connection with this matter, Infinity - Texas had recorded accounts payable and accrued expense in the aggregate amount
of $2,845,458 in 2009. These liabilities have been reflected since 2009 in the Company’s consolidated financial statements
and were included in “current liabilities of discontinued operation” in the Company’s consolidated balance sheet
at December 31, 2011. In July 2012, the Company sold 100% of the common stock of Infinity-Texas for $1 and the assumption of all
the Infinity – Texas liabilities by the purchaser. In accordance with the results of this transaction, the LDH liability
is no longer a Company obligation after that date. The amount of the liability is presented in the accompanying consolidated balance
sheets as an element of “current liabilities of discontinued operations” at December 31, 2011.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 September 30, 2012 and 2011, the Company was billed $59,745 and $41,221, respectively, and for the nine months
ended September 30, 2012 and 2011, the Company was billed $203,328 and $152,456, respectively. The amount due to the CFO’s
firm for services provided was $708,214 at September 30, 2012 and $514,885 at December 31, 2011.
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 partners in the accounting 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 September 30, 2012 and December 31, 2011, the Company had accrued compensation to its officers and directors of $891,708 and
$744,708, respectively.
As
discussed in Note 2, on August 28, 2012, the Company borrowed $250,000 from an entity that is 49% owned by a board member of
another corporation for which Infinity’s CEO serves as CEO and chairman of the board. The Company issued a short-term
note to bearing interest at 8% per annum and maturing February 28, 2013 to such party. In connection with the transaction,
the Company issued the lender a warrant exercisable to purchase 120,000 shares of the Company’s common stock at a price
of $2.50 per share, expiring August 2017. The warrant contains a penalty provision under which the number of shares that may
be purchased will increase to 1,200,000 and the exercise price will be reduced to $0.10 per share if the Company fails to pay
the note when due on February 28, 2013.
Note
8 — Sale of Infinity-Texas, and Discontinued Operations Reporting
On
July 31, 2012, the Company sold 100% of the stock of its wholly-owned subsidiary, Infinity Oil and Gas of Texas (Infinity-Texas)
to an individual, the single member of an LLC which purchased the oil and gas properties of Infinity-Texas in 2011 (see “Oil
and Gas Properties” in Note 1). The terms of the Stock Purchase Agreement with the purchaser are that purchaser would acquire
100% of the stock of Infinity-Texas for $1 and thereby assume all of it liabilities. At the date of the sale, Infinity-Texas had
net liabilities of $5,152,111. Management believes that there are certain contingent liabilities related to Texas properties for
which the Company, the parent entity, may retain financial responsibility. The liabilities are related to the reclamation of oil
and gas properties and include the cost of plugging inactive wells and removal and recovery of any remaining production equipment.
Infinity-Texas is primarily responsible for such obligations, but the officers of Infinity-Texas at the time such wells were in
production, in their capacities as signators of certain regulatory filings, could be personally responsible. The State of Texas
filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas, and seeking $30,000 of reclamation
costs associated with a single well, in addition to administrative expenses and penalties. The Company is in the process of proposing
a solution to this and other potential such actions and is in discussion with regulatory authorities in Texas and the current
owner of Infinity-Texas toward such a resolution. The officers are held harmless by indemnification provisions of the Company,
therefore these liabilities, to the extent they may become actual, are the obligations of the Company. The extent of these liabilities
is estimated by Management to not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This
related liability is classified as the noncurrent officer indemnification liability at September 30, 2012.
The
assets, liabilities and operations of Infinity-Texas are reported on the accompanying consolidated financial statements as those
of a discontinued operation for the current and prior periods and dates presented. Because Infinity-Texas has not been actively
operating during any of the periods presented, no overhead costs have been allocated to the discontinued operations during such
periods.
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The
analysis below sets forth the major classes of the assets and liabilities of Infinity-Texas, which are presented separately in
the accompanying consolidated balance sheet at December 31, 2011. Infinity-Texas also had title at December 31, 2011 to a note
receivable from the single member LLC which purchased its oil and gas properties in December 2011, which was carried at December
31, 2011 net of a 100% valuation allowance and is therefore not reflected as an asset in the analysis below..
|
|
December 31, 2011
|
|
ASSETS
|
|
|
|
|
Current asset:
|
|
|
|
|
Accounts receivable
|
|
$
|
2,992
|
|
Total assets
|
|
$
|
2,992
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
2,213,029
|
|
Accrued liabilities
|
|
|
2,212,004
|
|
Note payable to vendor
|
|
|
278,022
|
|
Total current liabilities
|
|
|
4,703,055
|
|
Long-term liability:
|
|
|
|
|
Asset retirement obligation
|
|
|
389,759
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
5,092,814
|
|
The
following analysis relates the assets and liabilities set forth in the table above to the gain recognized in sale of Infinity-Texas:
Total liabilities of Infinity-Texas at December 31, 2011
|
|
$
|
5,092,814
|
|
Total assets of Infinity-Texas at December 31, 2011
|
|
|
2,992
|
|
Net liabilities of Infinity-Texas at December 31, 2011
|
|
|
5,089,822
|
|
|
|
|
|
|
Additions to Infinity-Texas liabilities, January 1 through July 31, 2012 (equal to loss of discontinued operations for same period)
|
|
|
62,289
|
|
Potential liabilities related to indemnification of officers by the Company
|
|
|
(780,000
|
)
|
|
|
|
|
|
Gain on sale of discontinued operation, July 31, 2012
|
|
$
|
4,372,111
|
|
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The
operating expenses of Infinity-Texas for the three months ended September 30, 2012 and 2011 and the nine months ended those same
dates follows:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
-
|
|
|
$
|
10,654
|
|
|
$
|
-
|
|
|
$
|
12,382
|
|
Accretion expense
|
|
|
-
|
|
|
|
8,389
|
|
|
|
17,736
|
|
|
|
24,392
|
|
Interest expense
|
|
|
6,776
|
|
|
|
17,314
|
|
|
|
44,553
|
|
|
|
49,188
|
|
Total expenses
|
|
$
|
6,776
|
|
|
$
|
36,357
|
|
|
$
|
62,289
|
|
|
$
|
85,962
|
|
Note
9 — Subsequent Event – Issuance of Stock Options,Termination of Contingent Fee Agreement and Issuance of Convertible
Note
In
November 2012, the Company awarded stock options exercisable to purchase 1,250,000 shares to officers, directors and third
parties at an exercise price of $3.00 per share. The options vest in equal amounts, one-third immediately upon issuance,
one-third on the first anniversary in November 2013, and the final third in November 2014. The financial effect of the stock
option issuance will be recorded as of the issuance date in the final quarter of the year. In December 2012, a contingent fee
arrangement that had been in effect between certain officers and the Company was terminated by mutual agreement of all
parties; see Note 6, “Contingent Fees.”
Also
in November 2012 the Company issued a convertible promissory note to Quarles & Brady LLP, its outside legal counsel, in the
principal amount of $212,400 for outstanding invoices for services rendered. Such note bears interest at the rate of 3% per annum,
is due and payable on March 31, 2014 and convertible into common stock at a price of $3.00 per share.