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”).
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.
On
February 28, 2012, we signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations
we owed to them (see Note 3). 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 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
and additional work on the leases. The Company has completed certain activity under the initial work plan.. 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
.
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 March 31, 2013.
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
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
estimated fair value of the Company’s non-current derivative liabilities, all of which related to warrants, were 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 2) and
non-performance risk factors, among other items (ASC 820,
Fair Value Measurements
(“ASC 820”) fair value hierarchy
Level 3). A comparison of the assumptions used in calculating estimated fair value of derivative liabilities at the issue date
and outstanding at March 31, 2013 is as follows:
|
|
Upon
Issuance
|
|
|
At
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Volatility – range
|
|
|
91.67%
- 94.5
|
%
|
|
|
90.24
|
%
|
Contractual term
|
|
|
2
years
|
|
|
|
2
years
|
Exercise price
|
|
$
|
2.50
|
|
|
$
|
2.50
|
|
Number of warrants in aggregate
|
|
|
575,000
|
|
|
|
575,000
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs:
Balance at December 31, 2012
|
|
$
|
42,508
|
|
Fair value of warrant derivative liabilities at issuance
|
|
|
526,212
|
|
Unrealized derivative losses included in other expense
|
|
|
30,293
|
|
Transition of derivative liability to equity
|
|
|
(192,604
|
)
|
Balance at March 31, 2013
|
|
$
|
406,409
|
|
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. (ASC 820,
Fair Value
Measurements
(“ASC 820”) fair value hierarchy Level 3.
Reclassifications
Certain
amounts in the prior period were reclassified to conform with the current period’s financial statement presentation. These
reclassifications had no effect on previously reported net loss or accumulated deficit.
Note
2 — Debt
Debt
consists of the following at March 31, 2013 and December 31, 2012:
|
|
March
31, 2013
|
|
|
December
31, 2012
|
|
|
|
|
|
|
|
|
Notes payable- short term, net of discount
|
|
$
|
548,509
|
|
|
$
|
-
|
|
Note payable to related party, net of discount, short-term
|
|
$
|
-
|
|
|
$
|
234,314
|
|
Notes payable, net of discount, long-term
|
|
$
|
-
|
|
|
$
|
176,291
|
|
Interest
Bearing Liabilities to Vendors
At
March 31, 2013 and December 31, 2012, 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 ended March 31, 2013 was $8,277.
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Notes
Payable – Short-term
In
November 2012 the Company entered into an agreement with its law firm to issue the firm a 3% note payable in satisfaction of $212,400
in fees. The note is due with all accrued interest on March 14, 2014. The note and accrued interest are convertible to shares
of the Company’s common stock at $3 per share at any time prior to and including maturity date. The note was discounted
to its estimated fair value and the amount of the discount at issue date, $40,435, was recorded as a reduction in legal expense
in 2012. Interest expense for the three months ended March 31, 2013 includes interest at the stated rate of 3% in the amount of
$1,593 and amortization of discount in the amount of $6,693.
During
the three months ended March 31, 2013, the Company borrowed an aggregate of $575,000 from four entities or individuals. Each note
is for a term of 60 days and bears interest at 8% per annum. At the date of borrowing, each entity or individual was also issued
a warrant for the purchase of shares of common stock at $2.50 per share, for a total of 575,000 shares. The warrants are exercisable
for a period of two years from the date of the note. The warrants provide that should the notes and interest not be paid in full
by their respective maturity dates (ranging from April 13 to May 29, 2013) the warrants’ exercise prices would be reduced
to $0.10 per share and the number of shares issuable under the warrants would be increased to an aggregate of 5,750,000 shares.
The ratchet provision in the warrants’ exercise prices required that these be accounted as derivative liabilities. The Company
recorded the estimated fair value of the warrants as discounts on note payable in the aggregate amount of $526,212 and as a derivative
liability in the same amount, each as of the date of the respective note. The discounts are being amortized on a straight line
basis over the terms of the notes and interest expense for the three months ended March 31, 2013 includes discount amortization
in the amount of $316,737.
The Company used the loan proceeds from these notes to retire short-term promissory notes
it had previously issued and to provide working capital. An officer of the Company sold the notes issued in the quarter ended
March 31, 2013, and the Company paid no compensation to any party in connection with such sales.
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 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 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 ended March 31, 2013 includes discount amortization in the amount of $15,686. The estimated current value of
the warrant derivative liability was increased to $192,604 as of the date the note was repaid, February 28, 2013, and at that
date the derivative liability was terminated and the balance was recorded as an addition to additional paid-in capital as a transition
back to equity.
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.
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
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 temporary equity on the accompanying consolidated balance sheet at March 31, 2013 and accordingly has recorded such stock
at their estimated fair values. 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. The recorded fair value of Series A and B preferred shares increased in calculated present
value to $11,454,058 and $1,313,288, respectively, as of March 31, 2013 ($530,692 was accreted in the three months ended March
31, 2013). 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 $841,093 have been recorded as of March
31, 2013 ($217,524 was accrued in the three months ended March 31, 2013).
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 three months ended March 31, 2013, no stock options were granted or forfeited.
The
following table summarizes stock option activity for the three months ended March 31, 2013:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding and exercisable at December 31, 2012
|
|
|
3,303,500
|
|
|
$
|
4.17
|
|
|
|
7.3
years
|
|
|
$
|
-
|
|
Outstanding and exercisable at March 31, 2013
|
|
|
3,303,500
|
|
|
$
|
4.17
|
|
|
|
7.0
years
|
|
|
$
|
-
|
|
The
Company recognized compensation and legal expense in connection with the vesting of options granted in 2012 in the amount of $831,932
during the three months ended March 31, 2013 (none in the three months ended March 31, 2012).
Note
5 — Warrants
The
following table summarizes warrant option activity for the three months ended March 31, 2013:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding and exercisable at December 31, 2012
|
|
|
120,000
|
|
|
$
|
2.50
|
|
|
|
4.7
years
|
|
|
$
|
-
|
|
Granted
|
|
|
575,000
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2013
|
|
|
695,000
|
|
|
$
|
2.50
|
|
|
|
2.3
years
|
|
|
$
|
-
|
|
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, 2012 and March 31, 2013, the Company was in Sub-Period 1 for both Perlas and Tyra. On April 11, 2013, the Company
received its Environmental Permit, permitting it to proceed to Phase II of Sub-Period 1. 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 2014) 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-Period1
|
|
|
2
|
|
-
|
Environmental Impact Study
|
|
26km
2
|
|
$
|
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
|
|
53km
2
|
|
$
|
1,356,227
|
|
Sub-Period 3
Optional
|
|
|
1
|
|
-
|
Drilling of one exploration well to the
Cretaceous or 3,500m,
whichever is shallower
|
|
80km
2
|
|
$
|
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
|
|
$
|
10,397,335
|
|
|
|
|
|
|
-
|
Geochemical analysis
|
|
discoveries
|
|
|
|
|
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
|
|
26km
2
|
|
$
|
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
|
|
40km
2
|
|
$
|
278,450
|
|
Sub-Period 3
Optional
|
|
|
2
|
|
-
|
Acquisition,
processing & interpretation of
250km
2
of new 3D
seismic
|
|
160km
2
|
|
$
|
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
|
|
$
|
10,418,667
|
|
|
|
|
|
|
-
|
Geochemical analysis
|
|
discoveries
|
|
|
|
|
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
|
|
|
Phase
II of Sub Period 1 started April 13, 2013, when the Nicaraguan Government approved the environmental impact study. 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. The Company estimates
that the actual cost of seismic for the acreage will be $4,000,000 over the next 18 month period.
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.
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:
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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
impact
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.
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In
October
2012
the
State
of
Texas
filed
a
lawsuit
naming
Infinity-Texas,
the
Company
and
the
corporate
officers
of
Infinity-Texas,
seeking
$30,000
of
reclamation
costs
associated
with
a
single
well,
in
addition
to
administrative
expenses
and
penalties.
The
Company
has
engaged
in
negotiations
with
the
State
of
Texas
in
late
2012
and
early
2013
and
has
reached
a
settlement
agreement
that
would
reduce
the
aggregate
liability,
in
this
action
and
any
extension
of
this
to
other
Texas
wells,
to
$45,103,
which
amount
has
been
paid.
Certain
performance
obligations
remain
which
must
be
satisfied
before
August
1,
2013
in
order
to
finally
settle
and
dismiss
the
matter.
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Pending
satisfactory
performance
of
the
performance
obligations
and
their
acceptance
by
the
State
of
Texas,
the
officers
retain
potential
liability
on
the
above
matter,
and
the
officers
are
held
personally
harmless
by
indemnification
provisions
of
the
Company.
Therefore
these
liabilities,
to
the
extent
they
might
become
actual,
are
the
obligations
of
the
Company.
The
extent
of
the
liabilities
associated
with
this
matter
was
estimated
by
Management
to
not
exceed
$780,000,
calculated
as
$30,000
for
each
of
the
26
Infinity-Texas
operated
wells.
This
related
liability,
less
the
payment
made
to
the
State
of
Texas
in
2012
in
the
amount
of
$45,103,
is
classified
as
officer
indemnification
liability
on
the
consolidated
balance
sheets.
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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 March 31, 2013 and 2012, the Company was billed $0 and $86,715, respectively. The amount due to the CFO’s
firm for services provided was $767,407 at March 31, 2013 and December 31, 2012, included in accrued liabilities at both dates.
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.
As
of March 31, 2013 and December 31, 2012, the Company had accrued compensation to its officers and directors of $755,208 and $705,208,
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. The note and all accrued interest was repaid on its maturity
date in accordance with the terms of the note. 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.
Note
8 — Subsequent Events
In
April 2013, the Company issued two 60-day 8% notes in the amount of $100,000 each, accompanied by warrants to purchase 200,000
shares of the Company’s common stock at $2.50 per share. The exercise price of the warrants would be reduced to $.10
per share and the number of warrants will increase to 2,000,000 if the notes and related interest thereon are not paid timely
at their maturity dates.
Subsequent
to March 31, 2013 and through May 16, 2013, the Company sold 635,420 units, each consisting of one share of common stock and one
half of a common stock purchase warrant, at $1.60 per unit, for total proceeds of $1,016,672. For every two units purchased the
Company issued one full warrant. Each warrant has an exercise price of $2.50 per share and a term of five years. One holder of
a promissory note issued by the Company in February 2013 in the amount of $125,000, exchanged such note and accrued interest for
units as payment in full. This exchange is included in the total number of units sold and proceeds indicated above.