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
2013 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 potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua
in the Caribbean Sea (the “Nicaraguan Concessions”). The Company sold its wholly-owned subsidiary, Infinity Oil and
Gas of Texas, Inc. in 2012 and continues to hold its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc., which has
been inactive in recent years.
Going
Concern
As
reflected in the accompanying Consolidated Statements of Operations, the Company has 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 Bank (“Amegy”) and Off-Shore, LLC (“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, we are still in need of additional capital to meet our obligations
under the Nicaraguan Concessions, and are seeking sources of additional equity or debt financing. There can be no assurance that
we 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 as required by the Nicaraguan Concessions. The Company has completed certain activity under
the initial work plan to date, but there remain significant additional activities to comply with certain requirements of the Nicaraguan
Concessions. The Company intends to seek joint venture or working interest partners prior to the commencement of any significant
exploration or drilling operations on the Nicaraguan Concessions. The Company’s commitment to acquire, process and interpret
additional 2-D seismic data must be completed by January 2014 or the Nicaragua Concessions will be at risk of forfeiture. The
Company must successfully contract with a company that has the capabilities to perform, process and interpret the 2-D seismic
activities required by the work plan and consequently the Company must raise the necessary funding to negotiate, close and pay
for the contract necessary to fulfill such requirements. These are substantial operational and financial requirements that the
Company must satisfy prior to January 2014 in order to maintain its Nicaragua Concessions and there can be no assurance that it
will be able to do so.
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 nine months ended September 30, 2013.
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 are related to detachable warrants
issued in connection with notes payable, 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). All notes payable have been paid off as of September 30, 2013, therefore
the derivative liability was adjusted as of the extinguishment date of the notes and the resulting derivative liability was transitioned
from a liability to equity as of such date. A comparison of the assumptions used in calculating estimated fair value of derivative
liabilities at the issue date and as of the date of the transition from liability to equity is as follows:
|
|
Upon
Issuance
|
|
|
As
of date of transition to equity
|
|
|
|
|
|
|
|
|
Volatility – range
|
|
|
89.75%
- 94.5%
|
|
|
|
90.13%
- 90.71%
|
|
Contractual term
|
|
|
2
years
|
|
|
|
2
years
|
|
Exercise price
|
|
|
$2.50
|
|
|
|
$2.50
|
|
Number of warrants in aggregate
|
|
|
825,000
|
|
|
|
825,000
|
|
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
|
|
|
698,064
|
|
Unrealized derivative losses included in other expense
|
|
|
24,410
|
|
Transition of derivative liability to equity
|
|
|
(764,982
|
)
|
Balance at September 30, 2013
|
|
$
|
-
|
|
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 to 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 September 30, 2013 and December 31, 2012:
|
|
September
30, 2013
|
|
|
December
31, 2012
|
|
|
|
|
|
|
|
|
Line-of-credit
with related party
|
|
$
|
21,025
|
|
|
$
|
-
|
|
Note
payable to related party, net of discount, short-term
|
|
$
|
-
|
|
|
$
|
234,314
|
|
Notes
payable, net of discount, long-term
|
|
$
|
-
|
|
|
$
|
176,291
|
|
Line-of-Credit
with Related Party
The
Company entered into a line of credit facility on September 23, 2013 which provides for borrowings on a revolving basis up to
a maximum of $50,000. The entity providing the credit facility is owned by an officer of another corporation for which Infinity’s
CEO serves as CEO and chairman of the board. The facility is unsecured, bears interest at 8% and expires on November 23, 2013.
The Company granted the holder a common stock purchase warrant exercisable to purchase 15,000 shares of common stock at a price
of $3.50 per share. The warrant is immediately exercisable and expires on September 23, 2015. The Company estimated the fair value
of this warrant at $32,734 as of the grant date, which has been recorded as debt issuance costs and classified in prepaid expenses
in the accompanying consolidated balance sheets. The weighted average grant date fair value for these warrants was $2.18 per share
which was calculated using the Black-Scholes option model with the following assumptions: (i) stock market price of 3.38; (ii)
expected volatility of 132%; (iii) discount rate of 0.35%, and (iv) expected term of two years.
Such
costs are amortized ratably over the term of the credit facility which totaled $3,818 for the three and nine months ended September
30, 2013 and the remaining unamortized balance was $28,916 as of September 30, 2013.
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 was 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 $3.00 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 and nine months ended September 30, 2013 aggregated $5,071 and $22,304, respectively,
which includes interest at the stated rate of 3% and amortization of discount. On August 23, 2013, the holder exercised its right
to convert the note payable to common stock at the contractual conversion price of $3.00 per share and was issued 72,464 common
shares in full satisfaction of the promissory note and accrued interest which totaled $217,392. The unamortized discount at the
date of conversion of $17,735 was charged to additional paid in capital.
During
the nine months ended September 30, 2013, the Company borrowed an aggregate of $825,000 from six entities or individuals. The
term of each note was for a period of 60 days and bore interest at 8% per annum. At the date of borrowing, each entity or individual
was also issued a warrant for the purchase of common shares of stock at $2.50 per share, in aggregate, for 825,000 shares, valid
for a period of two years from the date of the note. The warrants provided that if the related notes and interest were not paid
in full by their respective maturity dates (ranging from April 13 to June 15, 2013) the warrants’ exercise prices would
be reduced to $0.10 per share and the number of shares under the warrants would be increased to an aggregate of 8,250,000 shares.
The ratchet provision in the warrant’s exercise price required that these be accounted as derivative liabilities. The Company
recorded the estimated fair value of the warrants as discounts on note payable and as a derivative liability in the same amount,
each as of the date of the respective note.
The
Company paid all of notes or their holders converted them to equity on or prior to their maturity dates, causing the ratchet provisions
on the warrants to terminate. The discounts were amortized on a straight line basis (substantially equivalent to the effective-interest
basis) over the terms of the notes. Interest expense for the three and nine months ended September 30, 2013 includes discount
amortization in the amount of $381,327 and $698,064, respectively.
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 was amortized on a straight line
basis over the expected term of the note (August 28, 2012 through February 28, 2013) and interest expense for the three and nine
months ended September 30, 2013 includes discount amortization 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.
Interest
Bearing Liabilities to Vendors
At
September 30, 2013 and December 31, 2012, the Company had agreed to pay interest of 8% per annum on certain accrued liabilities
aggregating $410,500. The total amount of interest accrued relating to these liabilities for the three and nine months ended September
30, 2013 was $8,277 and $24,652, respectively and $8,277 and $24,652 for the three and nine months ended September 30, 2012.
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, for 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 September 30, 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 stock increased in calculated
present value to $12,462,792 and $1,436,005, respectively, as of September 30, 2013 ($577,737 and $1,662,144 was accreted in the
three and nine months ended September 30, 2013, respectively). Both Series A and B preferred stock are being accreted to their
face values over a period commencing April 14, 2012 through December 31, 2013. Accrued dividends payable on the Series A and B
preferred stock in the amount of $1,276,141 have been recorded as of September 30, 2013 ($217,524 and $652,572 was accrued in
the three and nine months ended September 30, 2013, respectively).
Note
4 — Common Stock
During
the nine months ended September 30, 2013, the Company conducted a private placement of its common stock in which it sold 556,250
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 $890,000. One holder of a promissory note issued by the Company in February 2013 participated in the private placement
and converted the principal amount $125,000 plus accrued interest to 79,170 units. As a result of the conversion, the Company
recognized a loss on conversion of $11,085 during the nine months ended September 30, 2013. The common stock purchase warrants
provide for an exercise price of $2.50 per share, are immediately exercisable and have a term of five years.
During
the nine months ended September 30, 2013, the Company issued 25,000 shares to a consultant for services rendered which were valued
at $39,750 based on the Company’s share price at the grant date.
Note
5 — 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.
The
following table summarizes stock option activity for the nine months ended September 30, 2013:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2012
|
|
|
3,303,500
|
|
|
$
|
4.17
|
|
|
|
7.3
years
|
|
|
$
|
-
|
|
Granted
|
|
|
96,000
|
|
|
|
3.00
|
|
|
|
5.8
years
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2013
|
|
|
3,399,500
|
|
|
$
|
4.14
|
|
|
|
6.6
years
|
|
|
$
|
-
|
|
Outstanding and exercisable at September 30, 2013
|
|
|
2,526,167
|
|
|
$
|
4.53
|
|
|
|
6.2
years
|
|
|
$
|
-
|
|
During
the nine months ended September 30, 2013, the Company granted 96,000 options which have an exercise price of $3.00 per share and
original terms ranging from five to ten years. A total of 36,000 options vested immediately while the remaining 60,000 options
vest at a rate of 30,000 for each of the two years thereafter. The weighted average grant date fair value for these options was
$1.93 per share which was calculated using the Black-Scholes option model with the following assumptions: (i) stock market price
of $2.14 - $2.75; (ii) expected volatility of 131% - 132%; (iii) discount rate of 0.13% - 0.60% and (iv) expected terms ranging
from 2.5 to 10 years.
The
Company recognized compensation and legal expense in connection with the vesting of options granted above and in 2012 in the amount
of $353,730 and $1,476,383 during the three and nine months ended September 30, 2013, respectively. The intrinsic value of all
outstanding stock options aggregated $1,625,885 and the intrinsic value of all vested options totaled $1,337,685 as of September
30, 2013.
Note
6 — Warrants
The
following table summarizes warrant option activity for the nine months ended September 30, 2013:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding and exercisable at December 31, 2012
|
|
|
120,000
|
|
|
$
|
2.50
|
|
|
|
4.7
years
|
|
Issued in conjunction with notes payable (Note 2)
|
|
|
825,000
|
|
|
|
2.50
|
|
|
|
1.5
years
|
|
Issued in private placement of common stock (Note 4)
|
|
|
317,710
|
|
|
|
2.50
|
|
|
|
4.7
years
|
|
Issued in conjunction with line-of-credit (Note 2)
|
|
|
15,000
|
|
|
|
3.00
|
|
|
|
2.0
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at September 30, 2013
|
|
|
1,277,710
|
|
|
$
|
2.50
|
|
|
|
2.5
years
|
|
The
intrinsic value of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase
warrants totaled $1,048,049 as of September 30, 2013.
Note
7 — 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 material 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 September 30, 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 Nicaraguan
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 2014). The Company has also made all required expenditures
related to the Nicaraguan Concessions for training programs and as “area fees,” for each respective year for 2010
through 2013. The Company considers it is fully in compliance with the terms of the Nicaraguan Concession agreements and is in
year four of the 30 year concessions.
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
-
Acquisition & interpretation of
333km
of new 2D seismic
-
Acquisition, processing & interpretation of
333km
of new 2D seismic (or equivalent in 3D)
|
|
26km
2
|
|
$
|
443,100
|
|
Sub-Period
2
Optional
|
|
1
|
|
-
Acquisition, processing & interpretation
of
200km
of new 2D seismic (or equivalent in 3D)
|
|
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
-
Geochemical analysis
|
|
All
acreage except
areas
with discoveries
|
|
$
|
10,397,335
|
|
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
-
Acquisition & interpretation of
667km
of existing 2D seismic
-
Acquisition of 667km of new 2D seismic (or
equivalent
in 3D)
|
|
26km
2
|
|
$
|
408,450
|
|
Sub-Period
2
Optional
|
|
0.5
|
|
-
Processing & interpretation of the 667km 2D
seismic
(or equivalent in 3D) acquired in the
previous
sub-period
|
|
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
-
Geochemical analysis
|
|
All
acreage except
areas
with discoveries
|
|
$
|
10,418,667
|
|
Contractual
and Fiscal Terms
Training
Program
|
US
$50,000 per year, per block
|
|
Area
Fee
|
Yr
1-3
Yr
4-7
Yr
8 fwd
|
$0.05/hectare
$0.10/hectare
$0.15/hectare
|
Royalties
|
Recovery
Factor
0
– 1.5
1.5
– 3.0
>3.0
|
Percentage
5%
10%
15%
|
Natural
Gas Royalties
|
Market
value at production
|
5%
|
Corporate
Tax
|
Rate
no higher than 30%
|
|
Social
Contribution
|
3%
of the net profit (1.5% for each autonomous region)
|
|
Investment
Protection
|
ICSID
arbitration
OPIC
insurance
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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 $1,968,000 of which $1,635,000 is related to seismic and $333,000 is
related to the training fees, area fees and other direct costs under the Nicaraguan Concessions. The Company estimates that the
actual cost of seismic activities for the acreage will range between $4 million and $8 million depending upon the amount
and combination of 2D and 3D seismic performed over the next approximate 12 month period. The Company estimates that its minimum
working capital requirements for the next twelve-month period will be $600,000 to maintain corporate operations, exclusive of
the Nicaraguan Concessions and payment of existing third party obligations.
See Note 1 for discussion of Going Concern.
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 will 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 will 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. Off-Shore has assigned its RSP to its members in connection with its dissolution.
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 will 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 will 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 will 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 will 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
will 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 will be paid to Thompson
Knight by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the
previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain
or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Thompson Knight.
Lack
of Compliance with Law Regarding Domestic Properties
Infinity
is not in compliance with existing federal, state and local laws, rules and regulations for its domestic properties and this could
have a material or significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of
Infinity. For the year ended December 31, 2008 the remaining values of Infinity-Texas and Infinity-Wyoming were written down to
zero as the Company focused solely on the development of the Nicaraguan Concessions. Management believes the estimate of the Company’s
asset retirement obligations consisting of costs related to the plugging of wells, the removal of facilities and equipment, and
site restoration on oil and gas properties is sufficient to cover any noncompliance liabilities. The Company no longer carries
insurance on the domestic properties.
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
in
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
Company
has
indemnified
the
officers
for
this
potential
liability.
Therefore
these
liabilities,
to
the
extent
they
might
become
actual,
are
the
obligations
of
the
Company.
Management
estimates
that
the
liabilities
associated
with
this
matter
will
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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Tim
Berge,
who
filed
an
action
in
the
District
Court,
City
and
County
of
Denver
Colorado
number
09CV9566,
was
granted
a
default
judgment
on
November
8,
2010
against
Infinity
Energy
Resources,
Inc.
in
the
amount
of
$304,921
plus
costs.
Mr.
Berge
provided
certain
geological
services
to
Infinity
Oil
and
Gas
of
Texas,
Inc.
and
claimed
breach
of
contract
for
failure
to
pay
amounts
he
alleged
were
due.
The
Company
was
unable
to
defend
itself
in
this
matter
due
to
limited
financial
resources
even
though
it
believes
that
it
had
meritorious
defenses.
The
Company
has
included
the
impact
of
this
litigation
as
an
accrued
liability
in
the
accompanying
balance
sheet.
On
October
17,
2013,
the
Company
filed
a
motion
in
the
District
Court
of
Johnson
County,
Kansas
seeking
to
set
aside
the
default
judgment.
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Note
8 — Income Taxes
The
Company appealed an assessment of Kansas corporate income tax that had been issued by the Department of Revenue for the tax year
ended December 31, 2006 in the amount of approximately $653,000, which was accrued for and was reported under accrued liabilities
in the consolidated balance sheet at December 31, 2012. On July 30, 2013, the Kansas Department of Revenue issued a letter to
the Company advising it that it no longer owed any corporate income tax to the State of Kansas and has released the Company from
the payment of such taxes. Consequently, the related accrual was reversed and an income tax benefit of $653,000 was recorded for
the three and nine months ended September 30, 2013.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $82,285,000 as of January 1, 2013, which
are expected to expire from 2025 through 2028. The Company has provided for a valuation allowance due to the uncertainty of realizing
the tax benefits from its net deferred tax asset.
Note
9 — Sale of Infinity-Texas, Related Potential Litigation, 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 a limited liability company which purchased the oil and gas properties of Infinity-Texas
in 2011. The terms of the Stock Purchase Agreement with the purchaser are that purchaser would acquire 100% of the stock of Infinity-Texas
for $1.00 and thereby assume all of it liabilities. At the date of the sale, Infinity-Texas had net liabilities of $5,152,111.
Management believes that there are certain contingent liabilities related to Texas properties for which the Company, the parent
entity, may retain financial responsibility. The liabilities are related to the reclamation of oil and gas properties and include
the cost of plugging inactive wells and removal and recovery of any remaining production equipment. Infinity-Texas, as an independent
entity following its sale, is primarily responsible for such obligations, but the officers of Infinity-Texas at the time such
wells were in production, in their capacities as signatories of certain regulatory filings, could be personally responsible.
The
assets, liabilities and operations of Infinity-Texas are reported on the accompanying consolidated financial statements as those
of a discontinued operation for the current and prior periods and dates presented. Because Infinity-Texas was not actively operating
during any of the periods presented, no overhead costs have been allocated to the discontinued operations during such periods.
The
analysis below sets forth the total assets and liabilities of Infinity-Texas as of the date of sale (July 31, 2012) and the determination
of the gain recognized on sale of discontinued operation of Infinity-Texas:
Total liabilities of Infinity-Texas
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$
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5,155,103
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Total assets of Infinity-Texas
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2,992
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Net liabilities of Infinity-Texas
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5,155,103
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Potential liabilities related to indemnification of officers
by the Company
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(780,000
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)
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Gain
on sale of discontinued operation, during the three and nine
months ended September 30, 2012
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$
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$
4,372,111
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The operating
expenses of Infinity-Texas for the nine months ended September 30, 2012
:
General and administrative expenses
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$
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-
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Accretion expense
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17,736
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Interest expense
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44,553
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Total expenses
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$
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62,289
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Note
10 — 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 in Overland Park, Kansas. The Company currently does not have any employees and
the staff of the CFO provided the office services until May 2013. These services were billed at the CFO firm’s standard
billing rate plus out-of-pocket expenses. For the quarters ended September 30, 2013 and 2012, the Company was billed $0 and $59,745,
respectively and $0 and $203,328 for the nine months ended September 30, 2013 and 2012, respectively. The amount due to the CFO’s
firm for services provided was $767,407 at September 30, 2013 and $767,407 at December 31, 2012, is 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. Off-Shore has assigned all of its shares of the Series B preferred stock to its members
in connection with its dissolution.
As
of September 30, 2013 and December 31, 2012, the Company had accrued compensation to its officers and directors of $770,208 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 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.
As
discussed in Note 2, the Company entered into a line-of-credit facility on September 23, 2013 that provides for borrowings on
a revolving basis up to a maximum of $50,000. The entity providing the credit facility is owned by an officer of another corporation
for which Infinity’s CEO serves as CEO and chairman of the board. The facility is unsecured, bears interest at 8% per annum
and expires on November 23, 2013. The Company granted the holder a common stock purchase warrant exercisable to acquire 15,000
shares of common stock at a price of $3.50 per share. The warrant is immediately exercisable and terminates on September 23, 2015.
The Company estimated the fair value of these warrants at $32,734 of the date, which amount has been recorded as debt issuance
costs, classified in prepaid expenses and amortized ratably over the term of the credit facility. Amortization of the debt issuance
cost totaled $3,818 for the three and nine months ended September 30, 2013 and the remaining unamortized balance was $28,916 as
of September 30, 2013.
Note
11 — Subsequent Events
On
October 10, 2013, the Company issued 31,521 shares of common stock pursuant to the cashless exercise of 125,000 warrants to purchase
common stock.
On
October 21, 2013, the Company entered into a consulting agreement with an entity to provide investor relations services. The agreement
has an initial 90-day term with automatic extensions unless terminated by either party with 30-day written notice. The Company
will compensate the consultant with a monthly payment of $7,000 (plus out-of-pocket expenses) and a one-time issuance of 15,000
shares of common stock.
On November 4, 2013, the
Company granted the entity providing the line of credit facility set forth in Note 9 - Related Party Transactions a warrant exercisable
to purchase an additional 10,000 shares on the same terms as the original warrant in consideration for the entity increasing the
facility to $75,000.