UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended June 30, 2014.
[ ] | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from __________ to __________.
Commission
File Number: 0-17204
INFINITY
ENERGY RESOURCES, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
20-3126427 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
11900
College Blvd, Suite 310, Overland Park, KS 66210
(Address
of principal executive offices) (Zip Code)
(913)
948-9512
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ]
No [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of Exchange Act.
Large
accelerated filer [ ] |
|
Accelerated
filer [ ] |
Non-accelerated
filer [ ] (Do not check if a smaller reporting company) |
|
Smaller reporting
company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
Indicate
the number of shares outstanding of each of the issuer’s classes of capital, as of the latest practicable date:
Class |
|
Outstanding
at December 16, 2014 |
Common
Stock, $0.0001 par value |
|
25,559,678 |
TABLE
OF CONTENTS
PART
I - Financial Information
Item
1. Financial Statements
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
June
30, 2014 and December 31, 2013
(Unaudited)
| |
June 30, 2014 | | |
December 31, 2013 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 88,411 | | |
$ | 74 | |
Prepaid expenses | |
| 12,222 | | |
| 12,723 | |
Total current assets | |
| 100,633 | | |
| 12,797 | |
| |
| | | |
| | |
Oil and gas properties, using full cost accounting, net of accumulated depreciation, depletion,
amortization and ceiling write-down | |
| | | |
| | |
Unproved | |
| 10,180,467 | | |
| 10,477,214 | |
| |
| | | |
| | |
Total assets | |
$ | 10,281,100 | | |
$ | 10,490,011 | |
| |
| | | |
| | |
LIABILITIES AND
STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 5,889,023 | | |
$ | 5,705,367 | |
Accrued liabilities (including $767,407 due to related party at both dates) | |
| 2,418,238 | | |
| 2,733,500 | |
Income tax liability | |
| 150,000 | | |
| 150,000 | |
Accrued interest and fees – bank and other | |
| 260,632 | | |
| 194,238 | |
Officer indemnification | |
| 734,897 | | |
| 734,897 | |
Current portion of asset retirement obligations | |
| 432,027 | | |
| 432,027 | |
Derivative liabilities | |
| 1,191,318 | | |
| 853,365 | |
Line-of-credit with related party | |
| 32,802 | | |
| 94,640 | |
Notes payable-short term, net of discounts of $518,239 and $784,096 at June 30,
2014 and December 31, 2013, respectively | |
| 1,006,761 | | |
| 265,904 | |
Total current liabilities | |
| 12,115,698 | | |
| 11,163,938 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Asset retirement obligations, less current portion | |
| 549,079 | | |
| 549,079 | |
Total long-term liabilities | |
| 549,079 | | |
| 549,079 | |
| |
| | | |
| | |
Total liabilities | |
| 12,664,777 | | |
| 11,713,017 | |
| |
| | | |
| | |
Redeemable, convertible preferred stock, par value $.0001, 6% cumulative dividend, authorized
10,000,000 shares: | |
| | | |
| | |
Series A, -0- shares issued and outstanding at June 30, 2014 and December
31, 2013 | |
| — | | |
| — | |
Series B (related party), -0- and 15,016 shares issued and outstanding at
June 30, 2014 and December 31, 2013, liquidation preference of $-0- and $1,501,600 plus undeclared dividends of $-0- and $154,665
at June 30, 2014 and December 31, 2013, respectively | |
| — | | |
| 1,656,265 | |
Total redeemable, convertible preferred stock | |
| — | | |
| 1,656,265 | |
| |
| | | |
| | |
Commitments and contingencies (Note 8) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ deficit: | |
| | | |
| | |
Common stock, par value $.0001, authorized 75,000,000 shares, issued and
outstanding 25,459,678 and 25,039,230 shares at June 30, 2014 and December 31, 2013, respectively | |
| 2,556 | | |
| 2,503 | |
Additional paid-in capital | |
| 106,752,797 | | |
| 103,742,424 | |
Accumulated deficit | |
| (109,139,030 | ) | |
| (106,624,198 | ) |
Total stockholders’ deficit | |
| (2,383,677 | ) | |
| (2,879,271 | ) |
Total liabilities and stockholders’ deficit | |
$ | 10,281,100 | | |
$ | 10,490,011 | |
See
notes to unaudited consolidated financial statements.
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated
Statement of Operations
For the Three and Six Months Ended June 30, 2014 and 2013
(Unaudited)
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Operating expenses (income): | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
$ | 402,314 | | |
$ | 372,776 | | |
$ | 1,103,650 | | |
$ | 1,383,952 | |
Gain on settlement of litigation | |
| (179,877 | ) | |
| - | | |
| (179,877 | ) | |
| - | |
Total operating expenses | |
| 222,437 | | |
| 372,776 | | |
| 923,773 | | |
| 1,383,952 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (222,437 | ) | |
| (372,776 | ) | |
| (923,773 | ) | |
| (1,383,952 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (644,736 | ) | |
| (403,789 | ) | |
| (1,890,871 | ) | |
| (762,086 | ) |
Change in derivative fair value | |
| 242,103 | | |
| 5,883 | | |
| 226,977 | | |
| (24,410 | ) |
Loss on conversion of note payable | |
| - | | |
| (11,085 | ) | |
| - | | |
| (11,085 | ) |
Other income | |
| - | | |
| - | | |
| 72,835 | | |
| - | |
Total other income (expense) | |
| (402,633 | ) | |
| (408,991 | ) | |
| (1,591,059 | ) | |
| (797,581 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss before taxes | |
| (625,070 | ) | |
| (781,767 | ) | |
| (2,514,832 | ) | |
| (2,181,533 | ) |
Income tax expense (benefit) | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (625,070 | ) | |
| (781,767 | ) | |
| (2,514,832 | ) | |
| (2,181,533 | ) |
| |
| | | |
| | | |
| | | |
| | |
Accrual of 6% dividend payable on Series A and B redeemable, convertible preferred stock | |
| - | | |
| (217,524 | ) | |
| (25,527 | ) | |
| (435,048 | ) |
| |
| | | |
| | | |
| | | |
| | |
Accretion of Series A and B redeemable, convertible preferred stock | |
| - | | |
| (553,715 | ) | |
| - | | |
| (1,084,407 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss applicable to common shareholders | |
$ | (625,070 | ) | |
$ | (1,553,006 | ) | |
$ | (2,540,359 | ) | |
$ | (3,700,988 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted net loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.02 | ) | |
$ | (0.07 | ) | |
$ | (0.10 | ) | |
$ | (0.18 | ) |
Diluted | |
$ | (0.02 | ) | |
$ | (0.07 | ) | |
$ | (0.10 | ) | |
$ | (0.18 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding – basic and diluted | |
| 25,497,456 | | |
| 21,179,704 | | |
| 25,343,089 | | |
| 20,925,551 | |
See
notes to unaudited consolidated financial statements.
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated
Statement of Changes in Stockholders’ Equity
For
the Six Months Ended June 30, 2014
(Unaudited)
| |
| | |
| | |
Additional | | |
| | |
| |
| |
Common Stock | | |
Paid-in | | |
Accumulated | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Deficit | |
| |
| | |
| | |
| | |
| | |
| |
Balance, December 31, 2013 | |
| 25,039,230 | | |
$ | 2,503 | | |
$ | 103,742,424 | | |
$ | (106,624,198 | ) | |
$ | (2,879,271 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation | |
| - | | |
| - | | |
| 761,967 | | |
| - | | |
| 761,967 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock purchase warrants issued for debt issuance costs | |
| - | | |
| - | | |
| 477,194 | | |
| - | | |
| 477,194 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued in settlement of litigation | |
| 100,000 | | |
| 10 | | |
| 114,990 | | |
| - | | |
| 115,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Accrual of 6% dividend payable on Series A and B redeemable, convertible
preferred stock | |
| - | | |
| - | | |
| (25,527 | ) | |
| - | | |
| (25,527 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of Series B redeemable, convertible preferred stock to common
stock | |
| 420,448 | | |
| 43 | | |
| 1,681,749 | | |
| - | | |
| 1,681,792 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| | | |
| | | |
| - | | |
| (2,514,832 | ) | |
| (2,514,832 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2014 | |
| 25,459,678 | | |
$ | 2,556 | | |
$ | 106,752,797 | | |
$ | (109,139,030 | ) | |
$ | (2,383,677 | ) |
See
notes to unaudited consolidated financial statements.
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For
the Six Months Ended June 30, 2014 and 2013
(Unaudited)
| |
For the Six Months Ended | |
| |
June 30, | |
| |
2014 | | |
2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (2,514,832 | ) | |
$ | (2,181,533 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Accretion of asset retirement obligations | |
| - | | |
| 44,645 | |
Stock-based compensation | |
| 761,967 | | |
| 1,122,653 | |
Change in fair value of derivative liability | |
| (242,103 | ) | |
| 24,410 | |
Amortization of debt discount | |
| 1,795,977 | | |
| 727,797 | |
Gain on settlement of litigation | |
| (179,877 | ) | |
| - | |
Common stock issued for services | |
| - | | |
| 39,750 | |
Loss on conversion of note payable | |
| - | | |
| 11,085 | |
Change in operating assets and liabilities: | |
| | | |
| | |
Decrease in prepaid expenses | |
| - | | |
| (7,344 | ) |
Increase (decrease) in accounts payable and accrued liabilities | |
| 239,665 | | |
| (217,884 | ) |
Net cash used in operating activities | |
| (139,203 | ) | |
| (436,421 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Investment in oil and gas properties | |
| (185,622 | ) | |
| (217,420 | ) |
Net cash used in investing activities | |
| (185,622 | ) | |
| (217,420 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from debt and subordinated note payable | |
| 485,000 | | |
| 825,000 | |
Repayment of notes payable | |
| - | | |
| (700,000 | ) |
Repayment of notes payable to related party | |
| (10,000 | ) | |
| (250,000 | ) |
Proceeds from private placement of common stock and warrants | |
| - | | |
| 890,000 | |
Net change in line-of-credit | |
| (61,838 | ) | |
| - | |
Net cash provided by financing activities | |
| 413,162 | | |
| 765,000 | |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| 88,337 | | |
| 111,159 | |
| |
| | | |
| | |
Cash and cash equivalents: | |
| | | |
| | |
Beginning | |
| 74 | | |
| 32,721 | |
End | |
$ | 88,411 | | |
$ | 143,880 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | - | | |
$ | 16,410 | |
Cash paid for taxes | |
| - | | |
| - | |
| |
| | | |
| | |
Supplemental noncash disclosures: | |
| | | |
| | |
Noncash capitalized overhead and interest | |
$ | - | | |
$ | 12,500 | |
Discount from warrant derivative issued in connection with notes payable | |
| 580,056 | | |
| 698,064 | |
Issuance of common stock purchase warrants for debt issuance costs | |
| 477,194 | | |
| - | |
Issuance of common stock in settlement of litigation | |
| 115,000 | | |
| - | |
Series B Preferred shares and related accrued dividends satisfied by issuance
of common shares | |
| 1,681,749 | | |
| - | |
Issuance of Revenue Sharing Interest In Nicaraguan concession to Note holder | |
| 482,369 | | |
| - | |
Conversion of note and accrued interest to common stock | |
| - | | |
| 126,673 | |
Transition of derivative liability to equity | |
| - | | |
| 764,982 | |
Accretion in fair value of redeemable preferred stock | |
| - | | |
| 1,084,407 | |
Preferred dividends accrued | |
| 25,527 | | |
| 435,048 | |
See
notes to unaudited consolidated financial statements.
INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Note
1 — Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
Infinity
Energy Resources, Inc. and its subsidiaries (collectively, “we,” “ours,” “us,” “Infinity”
or the “Company”) has prepared the accompanying consolidated financial statements pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial
statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals
necessary for a fair presentation of our consolidated balance sheets, statements of operations, and cash flows for the periods
presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for
2014 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
Infinity
Energy Resources, Inc. (the “Company”, “we”, “our”) is 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.
On
March 5, 2009 Infinity signed the contracts relating to its Nicaraguan Concessions. Infinity is conducting activities to develop
geological information from the processing and evaluation of newly acquired and existing 2-D and 3-D seismic data that was acquired
for the Nicaraguan Concessions. Infinity is seeking capital to continue its geological activities and offers from other industry
operators and other third parties for interests in the acreage in the Nicaraguan Concession in exchange for cash and a carried
interest in exploration and development operations.
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 Bank (“Amegy”) and Off-Shore Finance, LLC (“Off-Shore”)
relating to outstanding debt and other obligations we owed to them (see Note 3). On December 30, 2013, we completed the exchange
of all 130,000 shares of Series A Preferred Stock and accrued dividends that Amegy owned for a total of 3,591,250 shares of our
common stock. Although the cash outflow necessary to pay Amegy has been eliminated under terms of the agreements, 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, which letters of credit have now expired. The Company
is in negotiations with the Nicaraguan Government and its lenders to renew the letters of credit, although there is no assurance
that it will be successful in that regard. The Company has completed certain activity under the initial work plan to date, but
there remains significant additional activities to comply with 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 satisfied its commitment under the Nicaraguan Concessions to acquire, process and interpret additional
2-D/3-D seismic data. The Company is evaluating the newly acquired seismic data and is in process of selecting potential exploratory
drill sites in accordance with the Nicaragua Concessions. The Company must gain approval of the drill sites upon submission of
an updated environmental impact assessment before commencing with exploration activities. The Company currently does not have
the working capital to complete the activities required by the work plan and consequently it must raise the necessary funding
to fulfil such requirements. There are substantial operational and financial issues that must be successfully mitigated during
2014 and 2015 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions will be
in significant doubt.
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
The
carrying values of the Company’s accounts receivable, accounts payable and accrued liabilities and short term notes represent
the estimated fair value due to the short-term nature of the accounts.
The
carrying value of the Company’s debt under its line-of credit with related party represents its estimated fair value due
to its short-term nature, its adjustable rate of interest, associated fees and expenses and initially recorded discount.
The
estimated fair value of the Company’s 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 and non-performance risk factors, among other items. The fair values for the warrant derivatives as of June 30,
2014 and December 31, 2013 were classified under the fair value hierarchy as Level 3
There
were no changes in valuation techniques or reclassifications of fair value measurements between levels 1, 2 or 3 during the six
months ended June 30, 2014 and 2013.
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 June 30, 2014 and December 31, 2013:
| |
June
30, 2014 | | |
December
31, 2013 | |
| |
| | |
| |
Line-of-credit with related party | |
$ | 32,802 | | |
$ | 94,640 | |
Notes payable, short term: | |
| | | |
| | |
Note payable, net of unamortized discount of $217,940 and $784,096, of June
30, 2014 and December 31, 2013, respectively | |
$ | 832,060 | | |
$ | 265,904 | |
Note payable, net of unamortized discount of $13,151 and $-0-, as of June
30, 2014 and December 31, 2013, respectively | |
$ | 11,849 | | |
$ | - | |
Note payable, net of unamortized discount of $50,273 and $-0-, as of June
30, 2014 and December 31, 2013, respectively | |
$ | 49,727 | | |
$ | - | |
Notes payable, net of unamortized discount of $178,952 and $-0-, as of June
30, 2014 and December 31, 2013, respectively | |
$ | 71,048 | | |
| | |
Note payable, net of unamortized discount of $57,923
and $-0-, as of June 30, 2014 and December 31, 2013, respectively | |
$ | 42,077 | | |
| | |
Total notes payable, short-term | |
$ | 1,006,761 | | |
$ | 265,904 | |
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 (maximum increased to $100,000 at December 31, 2013) with an initial maturity of November 23, 2013. The entity
providing the credit facility is owned by an officer of another corporation for which Infinity’s president and chairman
of the board serves as president and chairman of the board. The facility is unsecured, bears interest at 8%, and was renewed at
its maturity on November 23, 2013 for an additional two months or until January 23, 2014. On such date the parties renewed the
credit facility until April 23, 2014 and on April 23, 2014 they renewed the facility to July 23, 2014. On such date they again
renewed the facility to February 28, 2015). The Company granted the lender of the facility common stock purchase warrants exercisable
to purchase 250,000 shares of common stock at an exercise price of $1.50 per share, which are immediately exercisable and expire
from September 23, 2018 to April 23, 2019 (as amended on January 23, 2014). The parties agreed as a condition to the renewal of
the line-of-credit in January 2014 that all warrants would be extended to a five-year term and the exercise price reduced to $1.50
per share. The Company estimated the fair value of these warrants at $60,290 as of the original grant date in 2013, which has
been recorded as debt issuance costs and classified in prepaid expenses in the accompanying consolidated balance sheets. The Company
estimated the fair value of these new warrants and the increased value of the amended warrants to be $477,194 as of the respective
renewal date in 2014, which has been recorded as debt issuance costs and classified in prepaid expenses in the accompanying consolidated
balance sheets.
Such
costs are amortized ratably over the term of the credit facility which totaled $47,568 for the year ended December 31, 2013 and
the remaining unamortized balance was $12,723 as of December 31, 2013. During the six months ended June 30, 2014, a total of $477,695
of debt issuance costs were amortized to interest expense and the remaining unamortized balance was $12,222 as of June 30, 2014.
Note
Payable – Short-term
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The loan
is represented by a promissory note (the “Note”), bears interest at the rate of 8% per annum and is payable, interest
and principal in full on December 7, 2014 after several extensions, including one in May 2014. It may be prepaid without penalty
at any time. The Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the Note.
In
connection with its loan, the Company granted the lender a common stock purchase warrant exercisable to purchase 1,000,000 shares
of its common stock at an exercise price of $1.50 per share for a period commencing March 14, 2014 and expiring on the third anniversary
of such date. If the Company fails to pay the Note on its maturity date, the number of shares issuable under the warrant increases
to 13,333,333 and the exercise price drops to $0.075 per share.
Other
than the $1,050,000 short-term note described above, during the six months ended June 30, 2014, the Company borrowed a total of
$485,000 from entities or individuals as follows:
|
● |
On
January 7, 2014 it borrowed a total of $25,000 from an individual under a convertible note payable with a conversion price
of $1.50 per share. The term of the note was for one year and it bore interest at 8% per annum. In connection with the loan,
the Company issued the lender a warrant exercisable to purchase 25,000 shares of common stock at $1.50 per share for a term
of five years from the date of the note. The terms of the note and warrant provide that if the note and interest are not paid
in full by its maturity date, the conversion price of the note and exercise price of the warrant automatically reduce to $0.50
per share. The ratchet provision in the note conversion and warrant exercise price required that these be accounted for as
derivative liabilities. The Company recorded the estimated fair value of the conversion feature and warrants totaling $37,323
as discounts on note payable and as a derivative liability in the same amount, as of the date of the note. Interest expense
for the six months ended June 30, 2014 includes discount amortization in the amount of $24,172 and as of June 30, 2014, the
unamortized discount amounted to $13,151. |
|
|
|
|
● |
On
March 31, 2014 it borrowed a total of $100,000 from an entity under a convertible note payable with a conversion price of
$1.50 per share. The term of the note was for a period of 180 days and it bore interest at 8% per annum. In connection with
the loan, the Company issued the lender a warrant exercisable to purchase of 100,000 shares of common stock at $1.50 per share
for a term of five years from the date of the note. The terms of the note and warrant provide that if the note and interest
are not be paid in full by its maturity date, the conversion price of the note and the exercise price of the warrant automatically
reduce to $0.50 per share. The ratchet provision in the note conversion and warrant exercise price required that these be
accounted for as derivative liabilities. The Company recorded the estimated fair value of the conversion feature and warrants
totaling $143,502 as a discount on note payable and as a derivative liability in the same amount, as of the date of the note.
Interest expense for the six months ended June 30, 2014 includes discount amortization in the amount of $93,229 and as of
June 30, 2014, the unamortized discount amounted to $50,273. |
|
● |
On
April 4, 2014 and June 7, 2014 it borrowed a total of $250,000 from an entity under two convertible notes payable with the
conversion rate of $1.50 per share. The term of the notes was for a period of 180 days and bore interest at 8% per annum.
In connection with the loan the Company issued the entity a warrant excisable to purchase 250,000 shares of common stock at
$1.50 per share for a term of five years from the date of the notes. The terms of the notes and warrants provide that if the
notes and interest are not be paid in full by their respective maturity dates, the conversion price of the notes and the exercise
price of the warrants automatically reduce to $0.50 per share. The ratchet provision in the note conversion and warrant exercise
price required that these be accounted for as derivative liabilities. The Company recorded the estimated fair value of the
conversion feature and warrants totaling $278,585 as a discount on note payable and as a derivative liability in the same
amount, as of the date of the respective note. Interest expense for the six months ended June 30, 2014 includes discount amortization
in the amount of $99,633 and as of June 30, 2014, the unamortized discount amounted to $178,952. |
|
|
|
|
● |
On
April 14, 2014 it borrowed a total of $100,000 from an entity under a convertible note payable with the conversion rate of
$1.50 per share. The term of the note was for a period of 180 days and bore interest at 8% per annum. In connection with the
loan, the Company issued the entity a warrant for the purchase of 100,000 shares of common stock at $1.50 per share for a
period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the conversion price of the note and exercise price of the warrants automatically
reduce to $0.50 per share. The ratchet provision in the note conversion and warrant exercise price required that these be
accounted for as derivative liabilities. The Company recorded the estimated fair value of the conversion feature and warrants
totaling $105,520 as a discount on note payable and as a derivative liability in the same amount, as of the date of the note.
Interest expense for the six months ended June 30, 2014 includes discount amortization in the amount of $47,597 and as of
June 30, 2014, the unamortized discount amounted to $57,923. |
|
|
|
|
● |
On
March 7, 2014 it borrowed a total of $10,000 from an individual who is related to Infinity’s Chairman and President.
The note was due on demand and bore interest at 8% per annum. This demand note was repaid in full in April 2014. |
Conversion
of note payable to common stock
During
the year ended December 31, 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 a price of $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 of $125,000 plus accrued interest into 79,170 units. As a result of the conversion,
the Company recognized a loss on conversion of $11,085 during the year ended December 31, 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.
Interest
Bearing Liabilities to Vendors
At
June 30, 2014 and December 31, 2013, the Company had agreed to pay interest of 8% on certain accrued liabilities aggregating $410,500.
Interest expense totaled $8,187 for each of the three months ended June 30, 2014 and 2013 and $16,285 for each of the six months
ended June 30, 2014 and 2013. Total accrued interest related to this agreement was $163,300 and $147,015 as of June 30, 2014 and
December 31, 2013, respectively.
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.
On
December 30, 2013, the Company completed all transactions contemplated by a Stock Exchange Agreement (the “Agreement”)
between it and Amegy Bank, N.A. (“Amegy”). Under the Agreement Amegy exchanged all of its 130,000 shares of Series
A preferred stock for 3,250,000 shares of common stock of the Company. Each share of Series A preferred stock had a price of $100.
Amegy also agreed to receive an additional 341,250 shares of common stock for $1,365,000, the amount of the accrued and unpaid
dividends on the Series A preferred stock as of the date of the transaction. As a result, the Company issued a total of 3,591,250
shares of common stock valued at $4.00 per share. Accordingly, the transactions were valued at $14,365,000, which has been reflected
as common stock and additional paid in capital in the accompanying consolidated balance sheets.
Effective
February 28, 2014, the Company received Conversion Notices from Offshore that effected the conversion of all Series B preferred
stock outstanding, including accrued and unpaid dividends thereon, into shares of common stock. In the transaction, Offshore exchanged
all of its 15,016 shares of Series B preferred stock that it owned for 375,400 shares of common stock of the Company. Each share
of Series B preferred stock had a price of $100. The Company also issued Offshore an additional 45,048 shares of common stock
for $180,192, the amount of the accrued and unpaid dividends on the Series B preferred stock as of the effective date of the transaction.
As a result, the Company issued a total of 420,448 new shares of Common Stock valued at $4.00 per share. Accordingly, the transactions
were valued at $1,681,792, which has been reflected as common stock and additional paid in capital in the accompanying consolidated
balance sheets.
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.
In
May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which
both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants.
An aggregate of 470,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. Options granted
under the 2006 Plan allow for the purchase of common stock at prices not less than the fair market value of such stock at the
date of grant, become exercisable immediately or as directed by the Company’s Board of Directors and generally expire ten
years after the date of grant. The Company also has other equity incentive plans with terms similar to the 2006 Plan. As of June
30, 2014 and December 31, 2013, 148,463 shares were available for future grants under all plans.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires
the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected
dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating
the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral
traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent
market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption
used in determining its stock-based compensation expense is estimated based on historical data for the years ended December 31,
2013. The actual forfeiture rate could differ from these estimates. The following table summarizes the inputs used in the calculation
of fair value of options granted during the six months ended June 30, 2014:
| |
Six
months Ended | |
| |
June
30, 2014 | |
Expected term (in years) | |
| 6.0 | |
Expected stock price volatility | |
| 136 | % |
Expected dividends | |
| - | |
Risk-free rate | |
| 1.955 | % |
The
following table summarizes stock option activity for the six months ended June 30, 2014:
| |
Number
of Options | | |
Weighted
Average Exercise
Price Per Share | | |
Weighted
Average Remaining
Contractual Term | | |
Aggregate
Intrinsic Value | |
Outstanding at December 31, 2013 | |
| 3,399,500 | | |
$ | 4.14 | | |
| 6.4
years | | |
$ | 389,815 | |
Granted | |
| 900,000 | | |
| 3.00 | | |
| 10.0
years | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Forfeited | |
| (95,000 | ) | |
| 4.16 | | |
| | | |
| | |
Outstanding at June 30, 2014 | |
| 4,204,500 | | |
$ | 3.89 | | |
| 6.8
years | | |
$ | 303,910 | |
Outstanding and exercisable at June 30, 2014 | |
| 3,167,833 | | |
$ | 4.18 | | |
| 6.2
years | | |
$ | 303,910 | |
The
Company stock-based compensation expense in connection with the vesting of options granted above in the amount of $761,967 and
$1,122,653 during the six months ended June 30, 2014 and 2013, respectively.
During
the six months ended June 30, 2014, the Company granted 900,000 options which have an exercise price of $3.00 and a term of ten
years. A total of 300,000 options vested immediately while the remaining 600,000 options vest at a rate of one half for each of
the two years thereafter. The weighted average grant date fair value for these options was $1.22 per share that was calculated
using the Black-Scholes option model.
The
unrecognized compensation cost as of June 30, 2014 related to the unvested stock options as of that date was $529,953.
Note
5 — Derivatives – Warrants Issued Relative to Note Payables
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the conversion features and 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 note payable and 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). When the note payable is extinguished,
the derivative liability will be adjusted to fair value and the resulting derivative liability will be transitioned from a liability
to equity as of such date. None of the notes payable were extinguished during the six months ended June 30, 2014. 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 during the six months ended June 30, 2014 is as follows:
| |
Upon
Issuance | | |
As
of date of transition to equity | | |
As
of June 30, 2014 | |
| |
| | |
| | |
| |
Volatility – range | |
| 91%
- 156% | | |
| n/a | | |
| 102%
- 123% | |
Contractual term | |
| 0.5
- 5 years | | |
| n/a | | |
| 0.5
- 5 years | |
Exercise price | |
| $1.50 | | |
| n/a | | |
| $1.50 | |
Number of warrants in aggregate | |
| 675,000 | | |
| n/a | | |
| 1,675,000 | |
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 for both open and closed derivatives:
| |
Amount | |
Balance at December 31, 2013 | |
$ | 853,365 | |
Fair value of warrant derivative at issuance date | |
| 580,056 | |
Unrealized derivative gains included in other expense | |
| (242,103 | ) |
Transition of derivative liability to equity | |
| - | |
Balance at June 30, 2014 | |
$ | 1,191,318 | |
Note
6 —Warrants
The
following table summarizes warrant activity for the six months ended June 30, 2014:
| |
Number
of Warrants | | |
Weighted
Average Exercise
Price Per Share | |
Outstanding and exercisable at December 31, 2013 | |
| 2,137,710 | | |
$ | 2.03 | |
Issued in conjunction with notes payable (Note 2) | |
| 475,000 | | |
| 1.50 | |
Issued in conjunction with line-of-credit (Note 2) | |
| 200,000 | | |
| 1.50 | |
Exercised | |
| - | | |
| - | |
Outstanding and exercisable at June 30, 2014 | |
| 2,812,710 | | |
$ | 1.76 | |
The
weighted average term of all outstanding common stock purchase warrants was 3.54 and 2.68 years as of June 30, 2014 and December
31, 2013, respectively. The intrinsic value of all outstanding common stock purchase warrants and the intrinsic value of all vested
common stock purchase warrants was zero as of June 30, 2014 and December 31, 2013.
Note
7 — Supplemental Oil and Gas Information
Estimated
Proved Oil and Gas Reserves (Unaudited)
As
of June 30, 2014 and December 31, 2013, the Company had no proved reserves. As such, there are no estimates of proved reserves
to disclose, nor standardized measure of discounted future net cash flows relating to proved reserves.
Costs
Incurred in Oil and Gas Activities
Costs
incurred during the six months ended June 30, 2014 in connection with the Company’s oil and gas acquisition, exploration
and development activities are shown below.
| |
Six months ended
June 30, 2014 | |
Property acquisition costs: | |
| | |
Proved | |
$ | - | |
Unproved | |
| - | |
Total property acquisition costs | |
| - | |
Development costs | |
| - | |
Exploration costs | |
| 185,622 | |
Total costs | |
$ | 185,622 | |
Aggregate
capitalized costs relating to the Company’s oil and gas producing activities, and related accumulated depreciation, depletion,
amortization and ceiling write-downs are as follows:
| |
June
30, 2014 | | |
December
31, 2013 | |
| |
| | | |
| | |
Proved oil and gas properties | |
$ | - | | |
$ | - | |
Unproved oil and gas properties | |
| 10,662,836 | | |
| 10,477,214 | |
Total | |
| 10,662,836 | | |
| 10,477,214 | |
Less accumulated depreciation, depletion, amortization and ceiling write-downs | |
| - | | |
| - | |
Less amount allocated to revenue sharing interest granted to Note holder
for extension of maturity date (See Note 2) | |
| (482,369 | ) | |
| - | |
Net capitalized costs | |
$ | 10,180,467 | | |
$ | 10,477,214 | |
Costs
Not Being Amortized
Oil
and gas property costs not being amortized at June 30, 2014, by year that the costs were incurred, are as follows:
Year Ended December
31, | | |
| |
2014
(through June 30, 2014) | | |
$ | 185,622 | |
2013 | | |
| 6,051,411 | |
2012 | | |
| 581,723 | |
2011 | | |
| 731,347 | |
Prior | | |
| 3,112,733 | |
Total
costs not being amortized | | |
$ | 10,662,836 | |
The
above unevaluated costs relate to the Company’s approximate 1,400,000 acre Nicaraguan Concessions.
The
Company anticipates that these unproved costs in the table above will be reclassified to proved costs within the next five years.
Note
8 — Commitments and Contingencies
The
Company has held no insurance coverage on its U.S domestic oil and gas properties for a number of years. 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
Company received notification of final approval of the EIA by the Nicaraguan government on April
13, 2013, which began Sub-Period 2. Therefore, the Company has progressed to Sub-Period 2 of the exploration phase of the
30-year concession for both Perlas and Tyra as of June 30, 2014. 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 (expired
March 2014) and $408,450 for Tyra (expired 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 is currently negotiating the renewal of the required letters of credit with the Nicaraguan Government and its lenders;
however, there can be no assurance that the Company will be successful in that regard. The Company considers it is fully in compliance
with the terms of the Nicaraguan Concessions agreements, subject to renewal of the expired letters of credit and is in year three
of the exploration phase of the 30-year Nicaraguan 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 667km of new 2D seismic (or equivalent in 3D) | |
| 26km2 | | |
$ | 443,100 | |
| | |
| | | |
| |
| | | |
| | |
Sub-Period
2 Optional | | |
| 1 | | |
- Acquisition, processing &
interpretation of 200km2 of 3D seismic | |
| 53km2 | | |
$ | 1,356,227 | |
| | |
| | | |
| |
| | | |
| | |
Sub-Period
3 Optional | | |
| 1 | | |
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower | |
| 80km2 | | |
$ | 10,220,168 | |
| | |
| | | |
| |
| | | |
| | |
Sub-Period
4 Optional | | |
| 2 | | |
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever
is shallower - Geochemical analysis | |
| All
acreage except areas
with discoveries | | |
$ | 10,397,335 | |
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) | |
| 26km2 | | |
$ | 408,450 | |
| | |
| | | |
| |
| | | |
| | |
Sub-Period
2 Optional | | |
| 0.5 | | |
- Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired
in the previous sub-period | |
| 40km2 | | |
$ | 278,450 | |
| | |
| | | |
| |
| | | |
| | |
Sub-Period
3 Optional | | |
| 2 | | |
- Acquisition, processing & interpretation of 250km2
of new 3D seismic | |
| 160km2 | | |
$ | 1,818,667 | |
| | |
| | | |
| |
| | | |
| | |
Sub-Period
4 Optional | | |
| 2 | | |
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever
is shallower - Geochemical analysis | |
| All
acreage except areas
with discoveries | | |
$ | 10,418,667 | |
Contractual
and Fiscal Terms
Training
Program | |
US $50,000 per year, per block | |
| | |
| |
| |
| | |
Area
Fee | |
Yr 1-3 Yr 4-7 Yr 8 fwd | |
| $0.05/hectare $0.10/hectare $0.15/hectare | |
| |
| |
| | |
Royalties | |
Recovery Factor 0 – 1.5 1.5 – 3.0 >3.0 | |
| Percentage 5% 10% 15% | |
| |
| |
| | |
Natural
Gas Royalties | |
Market value at production | |
| 5% | |
| |
| |
| | |
Corporate
Tax | |
Rate no higher than 30% | |
| | |
| |
| |
| | |
Social
Contribution | |
3% of the net profit (1.5% for each autonomous region) | |
| | |
| |
| |
| | |
Investment
Protection | |
ICSID arbitration OPIC insurance | |
| | |
Sub-Period
2 of the exploration phase began April 13, 2013, when the Nicaraguan Government approved the environmental impact study. The minimum
cash requirements related to the Nicaraguan Concessions for the next twelve month period will be approximately $5,415,000, of
which $4,945,000 is related to seismic activities and $470,000 is related to the training fees, area fees and other expenditures
under the Nicaraguan Concession. The Company estimates that the total actual cost of 2D and 3D seismic activities for the acreage
will be a minimum of $8,000,000 (including $5,937,013 already expended for seismic activities) over the next 18-24 month period.
In addition to the minimum cash requirements related to the Nicaraguan Concessions, the Company estimates that it will require
approximately $315,000 of working capital to maintain corporate operations for the next 12 months, but not including debt obligations
owed to third parties.
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. In connection with its dissolution Off-Shore assigned its RSP to its members.
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 the 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. This
Revenue Sharing Agreement is expected to expire as a result of the Letter of Intent entered into with Granada Exploration, LLC
(See Note 10).
In
connection with the extension of the Note payable with a $1,050,000 principal balance issued in December 2013, the Company entered
into a Revenue Sharing Agreement effective May 2014. Infinity assigned to the note holder a monthly payment (the “RSP”)
equal to the revenue derived from one percent (1%) of 8/8ths 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.
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. In addition, Infinity-Texas was disposed
of in July 2012; however, the Company may remain liable for certain asset retirement costs should the new owner not complete their
obligations. Management believes the estimate of asset retirement obligations which includes the Company’s officer indemnification
liabilities consisting of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration
on oil and gas properties for its former Texas oil 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. This success fee agreement is expected to expire as a result of the Letter of Intent entered into with Granada
Exploration, LLC (See Note 10).
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 has claiming breach of contract for failure to pay amounts due. On October
13, 2011, a default judgment was entered against the Company in the amount of $445,521 plus interest and attorney fees. The
Company has included the impacts of this litigation as liabilities in its accounts payable. The Company will seek to settle
the default judgment when it has the financial resources to do so. |
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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 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. 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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Timothy
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 the Company 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. On May 27, 2014 the Company settled this litigation by the issuance of 100,000 shares of common
stock and the payment of $10,000 cash. The Company had previously established a provision of $304,878 related to this litigation
as an accrued liability in the accompanying balance sheet. The value of the 100,000 shares of common stock and $10,000 cash
paid in settlement of this litigation totaled $125,000 resulting in a gain of $179,878, which was recorded in the statement
of operations. |
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Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Company’s offshore
Nicaraguan concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity dated November
20, 2013, and is claiming breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered
against the Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impacts of this
litigation as liabilities in its accounts payable. The Company will seek to settle the default judgment when it has the financial
resources to do so. |
Note
9 — Related Party Transactions
The
Company currently does not have any employees other than the CEO and CFO. Certain general and administrative services (for which
payment is deferred) has been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket expenses
and consist primarily of accounting, tax and other administrative fees. For the three and six months ended June 30, 2014 and 2013,
the Company was billed $0 for such services. The amount due to the CFO’s firm for services provided was $767,407 at June
30, 2014 and December 31, 2013, and 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) and the conversion of the Series B redeemable convertible preferred stock to common stock
effective February 28, 2014. The managing partner of Off-Shore and the CFO are partners in the accounting firm which the Company
uses for its general corporate purposes. In the transaction, Offshore exchanged all of its 15,016 shares of Series B preferred
stock of the Company that it owned for 375,400 shares of Common Stock of the Company. Each share of Series B preferred had a liquidation
and par value of $100. The Company also issued Offshore an additional 45,048 shares of common stock for $180,192, the amount of
the accrued and unpaid dividends on the Series B preferred stock as of the effective date of the transaction. As a result, the
Company issued a total of 420,448 new shares of Common Stock which was valued at $4.00 per share for a total of $1,681,792 which
has been reflected as common stock and additional paid in capital in the accompanying consolidated balance sheets.
As
of June 30, 2014 and December 31, 2013, the Company had accrued compensation to its officers and directors of $1,115,208 and $1,034,708,
respectively.
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 the entity bearing interest
at 8% per annum and maturing February 28, 2013. The note was repaid February 27, 2013. 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
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 (maximum increased to $100,000 at December 31, 2013) with an initial maturity of November 23, 2013. The entity
providing the credit facility is owned by an officer of another corporation for which Infinity’s president and chairman
of the board serves as president and chairman of the board. The facility is unsecured, bears interest at 8%, and was renewed at
its maturity on November 23, 2013 for an additional two months or until January 23, 2014. On January 23, 2014 the parties renewed
the credit facility until April 23, 2014 and on April 23, 2014 they renewed it to July 23, 2014. They subsequently renewed the
facility to February 28, 2015. The Company granted the lender common stock purchase warrants exercisable to purchase 250,000 shares
of common stock at a price of $1.50 per share, which warrants are immediately exercisable and expire from September 23, 2018 to
January 23, 2019. The parties agreed as a condition to the renewal of the line-of-credit in January 2014 that all warrants would
be extended to a five-year term and the exercise price reduced to $1.50 per share. The Company estimated the fair value of these
warrants at $60,290 as of the original grant date in 2013, which has been recorded as debt issuance costs and classified in prepaid
expenses in the accompanying consolidated balance sheets. The Company estimated the fair value of these new warrants and the increased
value of the amended warrants, to be $477,194 as of the respective renewal date in 2014, which has been recorded as debt issuance
costs and classified in prepaid expenses in the accompanying consolidated balance sheets.
On
March 7, 2014 the Company borrowed $10,000 from an individual who is related to Infinity’s Chairman and President. The note
was due on demand and bore interest at 8% per annum. This demand note was repaid in full in April 2014.
Note
10 — Subsequent Events
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility
is represented by a promissory note (the “Note”) with an original due date of March 12, 2014. On March 7, 2014 the
Company and the lender agreed to extend the maturity date of the Note to May 9, 2014 and on such date the parties agreed to extend
the maturity date of the Note from May 9, 2014 to December 7, 2014. On November 19, 2014 the parties agreed to extend the maturity
date of the Note to April 7, 2015 (the “New Maturity Date”). All other terms of the Note remain the same.
In
connection with a previous extension of the Note, the Company entered into a definitive revenue sharing agreement with the lender
to grant it an irrevocable right to receive a monthly payment equal to one half of one percent (1/2%) of the gross revenue derived
from the share of all hydrocarbons produced at the wellhead from the Nicaraguan Concessions and any other oil and gas concessions
that the Company and its affiliates may acquire. This percent increased to one percent (1%) when the Company did not pay the Note
in full by August 7, 2014. Therefore, the revenue sharing agreement is fixed at 1%. The Company paid no other consideration in
connection with the extension of the Note, but paid the legal expenses of the lender related to the extensions of $25,000. The
Note may be prepaid without penalty at any time. The Note is subordinated to all existing and future senior indebtedness, as such
terms are defined in the Note.
In
connection with its loan, the Company granted the lender a Warrant exercisable to purchase 1,000,000 shares of its common stock
at an exercise price of $1.50 per share. In connection with the extension of the maturity date of the Note to the New Maturity
Date, the parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third
anniversary of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note
to the New Maturity Date. If the Company fails to pay the note on or before its New Maturity Date, the number of shares issuable
under the Warrant increases to 13,333,333 and the exercise price drops to $0.075 per share. All other terms of the Warrant remain
the same.
Subsequent
to June 30, 2014, the Company has issued two new promissory notes for total cash proceeds of $100,000. The promissory notes have
maturity dates, as amended, of February 28, 2015. In connection with these loans the Company granted new warrants exercisable
to purchase a total of 150,000 shares of common stock at an exercise price of $1.00 per share. All of such warrants are immediately
exercisable and terminate five years from the date of issuance.
Subsequent
to June 30, 2014, the Company was unable to pay the outstanding principal due on promissory notes representing $450,000 in debt
on their respective maturity dates. The Company negotiated extensions of their maturity dates to February 28, 2015 by granting
new warrants to purchase 450,000 shares of common stock at an exercise price of $1.00 each with a five-year term, modifying existing
warrant agreements covering 450,000 shares providing for an increase in the term of warrants to five years and reducing the exercise
price to $1.00 per share.
Subsequent
to June 30, 2014, the Company was unable to pay balances due on its line-of-credit with a related party with an outstanding balance
of $32,802 as of June 30, 2014. The Company and such party agreed to extend the maturity date to February 28, 2015 and the Company
granted new warrants to purchase 200,000 shares of common stock at an exercise price of $1.00 to $1.50 per share with a five-year
term.
On
October 13, 2014 the Company announced that it had entered into a Letter of Intent (“LOI”) with Granada Exploration,
LLC, which has agreed to join with the Company to explore for potential hydrocarbons beneath Infinity’s 1.4 million-acre
oil and gas concessions in the Caribbean Sea offshore Nicaragua. Under the terms of the LOI, Granada Exploration will provide
its services in exchange for a working interest in the Nicaraguan Concessions. The scope of such services will be more specifically
described in a mutually acceptable Exploration Services Agreement (“ESA”), which is currently being negotiated and
finalized. The ESA is anticipated to provide that Granada will earn an assignment from Infinity of an undivided 30% working interest
in the Concessions, based on an 80% net revenue interest. Granada and Infinity are also anticipated to enter into a Joint Operating
Agreement. Granada may, at its discretion, participate in an initial exploratory well for up to an additional undivided 20% working
interest, on a prospect-by-prospect basis, with such additional interest to be based on an 80% net revenue interest.
The
LOI is subject to Granada’s normal and customary due diligence including the evaluation of the Company’s Form 10-K
and 10-Q filings, concession documents showing that the Company is in good standing with the Nicaraguan government, negotiation
and approval of mutually acceptable formal agreements, and final approval by a majority of the partners that comprise Granada
Exploration, LLC.
The
Company has not resolved the contingency related to the expired letters of credit for its Nicaraguan Concessions (See Note 8).
The Company continues to negotiate the renewal of the letters of credit with the Nicaraguan Government and its lenders; however,
there can be no assurance that the Company will be successful in that regard.
Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Company’s offshore Nicaraguan
concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity dated November 20, 2013,
and is claiming breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against
the Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impacts of this litigation
as liabilities in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources
to do so.
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ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
quarterly report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered
by the safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” “intends,” and other variations of these
words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events,
circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there
are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ
materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual
results or events to differ from those anticipated in the forward-looking statements included herein include the risk factors
described below.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking
statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers
are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. We believe the information contained in this report to be accurate as of the date hereof. Changes may occur after that
date, and we will not update that information except as required by law.
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity
problems; (ii) while we have retired our debt obligations to Amegy and Off-Shore, we still have substantial obligations to a number
of third parties, including a substantial short-term promissory note due in February and April 2015, and there can be no assurance
that we will be able to meet them; (iii) we require working capital for our operations and obligations for the next 12 months
and capital to continue our exploration and development efforts on the Nicaraguan Concessions and there can be no assurances we
will be able to obtain it or do so on terms favorable to us; (iv) we and our independent registered public accounting firm have
concluded that there exists substantial doubt about our ability to continue as a going concern; (v) our Nicaraguan Concessions
and planned future exploration activities are in a country with a developing economy and are subject to the risks of political
and economic instability associated with such economies; (vi) exploration and development of our Nicaraguan Concessions will require
large amounts of capital or a commercial relationship with an industry operator which we may not be able to obtain; (vii) we may
not have sufficient resources to conduct required seismic mapping on our Nicaraguan Concessions; (viii) the oil and gas exploration
business involves a high degree of business and financial risk; (ix) we will be subject to regulations affecting our activities
with the Nicaraguan Concessions; (x) our operations may be adversely affected by changes in the fiscal regime of Nicaragua; (xi)
we are continuing to negotiate with our creditors and may face additional claims in the future; (xii) oil prices may be affected
by regional factors; (xiii) any future production will be contingent on successful exploration, development and acquisitions to
establish reserves and revenue in the future; (xv) the oil and gas industry is highly competitive; (xvi) exploratory drilling
is an uncertain process with many risks; (xvii) oil and gas prices are volatile, and declines in prices would hurt our revenues
and ability to achieve profitable operations; (xviii) our common stock is traded on the OTCQB, which may not have the visibility
or liquidity that we seek for our common stock; (xix) we depend on key personnel; (xx) sufficient voting power by coalitions of
a few of our larger stockholders to make corporate governance decisions that could have significant effect on us and the other
stockholders, including Amegy; (xxi) sale of substantial amounts of our common stock that may have a depressive effect on the
market price of the outstanding shares of our common stock; (xxii) we require additional funds to remain in compliance with the
requirements of our Nicaraguan Concessions, including our letters of credit with the Nicaraguan government; (xxiii) our ability
to comply with Sarbanes-Oxley Act of 2002 Section 404 as it may be required; (xxiv) our nonpayment of dividends and lack of plans
to pay dividends in the future; (xxv) future sale or issuance of a substantial number of shares of our common stock that could
depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xxvi) our
additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common
stock; (xxvii) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public
float; (xxviii) indemnification of our officers and directors; and (xxix) whether we will be able to find an industry or other
financial partner to enable us to explore and develop our Nicaraguan Concessions, including entering into definitive agreements
with Granada Exploration, LLC.
The
following information should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in
this quarterly report on Form 10-Q.
2014
Operational and Financial Objectives
Corporate
Activities
We
hold a 100% interest in the Perlas Block (560,000 acres/2,268 km) and Tyra Block (826,000 acres/3,342 km) located in shallow waters
offshore Nicaragua. As of December 31, 2012, the Company was in Sub-Period 1 of the exploration phase of the 30-year concession
for both Perlas and Tyra. The Company received notification of final approval of the EIA by the Nicaraguan government on April
13, 2013, which began Sub-Period 2. Therefore, the Company has progressed to Sub-Period 2 of the exploration phase of the
30-year concession for both Perlas and Tyra as of June 30, 2014. In accordance with the Nicaraguan Concession agreements, we have
provided the Ministry of Energy with the required letters of credit in the amounts of $443,100 for Perlas (expired March 2014)
and $408,450 for Tyra (expired 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
is currently negotiating the renewal of the required letters of credit with the Nicaraguan Government and its lenders, although
no assurance can be given that the Company will be successful in this regard. The Company considers it is fully in compliance
with the terms of the Nicaraguan Concession agreements, subject to renewal of the letters of credit and is in year three of the
exploration phase of the 30-year term of the Nicaraguan Concessions.
During
December 2013 and January 2014, we completed the 2-D and 3-D seismic survey activities in the area as required under both of the
Nicaraguan Concessions at this point. We believe that the newly acquired 2-D and 3-D seismic data, together with the previously
acquired reprocessed 2-D seismic, will help us to further evaluate the structures that were previously identified with 2-D seismic
in the Eocene Zone. Our geological consultants have estimated that these Eocene structures may contain recoverable oil in place.
In addition, the 3-D seismic should provide our first look at the potential for oil resources in the Cretaceous Zone, which we
could not evaluate using less precise 2-D seismic mapping. The evaluation of the newly acquired seismic data is ongoing in order
to determine the scope our exploration program.
We
intend to finance our business strategy through external financing, which may include debt and equity capital raised in public
and private offerings, joint ventures, sale of working or other interests, employment of working capital and cash flow from operations,
if any, net proceeds from the sales of assets.
Our
ability to complete these activities is dependent on a number of factors, including, but not limited to:
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The
availability of the capital resources required to fund the activities; |
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The
availability of third party contractors for completion services; and |
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The
approval by regulatory agencies of applications for permits to conduct exploration activities in a timely manner. |
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial
conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses.
Results
of operations for the three months ended June 30, 2014 compared to the three months ended June 30, 2013
Overview
Infinity
incurred a net loss applicable to common shareholders of $625,070, or $0.02 per share, for the three months ended June 30, 2014
compared to a net loss applicable to common shareholders of $1,553,006, or $0.07 per share, for the three months ended June 30,
2013. The Company issued Series A Preferred and Series B Preferred redeemable convertible stock effective April 13, 2012. The
6% cumulative dividend accrued as well as the accretion in the value ascribed to the Series A Preferred and Series B Preferred
stock (which represents value attributable to holders of the Series A Preferred and Series B Preferred stock rather than common
stock) affects the Company’s net income (loss) by $-0- and $(771,239) to arrive at net loss applicable to common shareholders
for the three months ended June 30, 2014 and 2013, respectively.
Revenue
The
Company had no revenues in either 2014 or 2013. It focused solely on the exploration, development and financing of the Nicaraguan
Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2014 or 2013. The Company sold its investment in Infinity-Texas
in July 2012, which held its only producing properties at that time. The Company believes, however, that it may continue to have
obligations relative to reclamation costs for its Texas properties through the date of the sale of Infinity-Texas. It continues
to record a potential liability related to Texas reclamation costs of $734,897 as of June 30, 2014.
The
Company has no domestic exploration and development activities. It is not actively working on any domestic property.
General
and administrative expenses
Stock
based compensation expenses of $202,005 for the three months ended June 30, 2014 decreased 31% from those in 2013, which were
$290,721. The Company has had minimal resources to pay employees, consultants and other service providers. Therefore, it has issued
stock options to compensate and motivate its officers, directors and other service providers. On January 17, 2014, the Company
granted 900,000 options that have an exercise price of $3.00 per share and terms of ten years. A total of 300,000 options vested
immediately while the remaining 600,000 options vest at a rate of one half for each of the two years thereafter. The grant date
fair value of the stock options issued in January 2014 was reduced because of the drop in the Company’s stock price in relation
to the exercise price of $3.00 per share. The issuance of stock options with exercise prices well above the market price at the
date of grant caused the reduced amount of stock based compensation during the three months ended June 30, 2014 compared to 2013.
General
and administrative expenses of $200,309 for the three months ended June 30, 2014 increased 144% from those in 2013, which were
$82,005. The increase in general and administrative expenses is attributable to an increase of $53,494 in legal fees expended
in 2014 as the Company negotiated and settled the Timothy Berge lawsuit, incurred $24,600 in additional auditing fees due to the
change in auditors. In addition, the Company incurred $26,215 related to expenses during 2014 related to its activities relating
to its Nicaraguan Concessions progressed to the exploration phase and 2D and 3D seismic mapping activities commenced after the
Environmental Impact Assessment was accepted by the Nicaraguan government.
Gain
on settlement of litigation
Timothy
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 the Company 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. On May 27, 2014 the Company settled this litigation by the issuance of 100,000 shares of common stock and the payment
of $10,000 cash. The Company had previously established a provision of $304,878 related to this litigation as an accrued liability
in the accompanying balance sheet. The value of the 100,000 shares of common stock and $10,000 cash paid in settlement of this
litigation totaled $125,000 resulting in a gain of $179,878 which was recorded in the statement of operations.
Other
income (expense)
Interest
expense increased from $403,789 for the three months ended June 30, 2013 to $644,736 in 2014. This significant increase was attributable
to the fact that during December 2013 and early in 2014 the Company borrowed approximately $1,535,000 on a short-term basis by
issuing subordinated promissory notes with detachable warrants to purchase common shares. The fair value of the warrants resulted
in a substantial increase in the overall effective borrowing costs. The non-cash amortization of debt discount aggregated $593,461
and $388,681 during the three months ended June 30, 2014 and 2013, respectively, which reflects the use of short-term notes with
detachable purchase warrants by the Company to attract new capital. The Company’s current financial condition has made traditional
bank loans and customary financing terms unattainable; therefore the Company may find it necessary to continue with these types
of short-term borrowings with high effective interest rates.
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the conversion features and detachable
warrants issued in connection with notes payable as of June 30, 2014 and recorded the change in the valuation of derivative liabilities
as income or loss in the statement of operations, resulted in a gain of $242,103 and $5,883 for the three months ended June 30,
2014 and 2013, respectively. The derivative liabilities valuation gain reflects the decrease in the market value of the Company’s
common stock as of June 30, 2014 compared to the conversion price of the notes payable and the exercise price on the common stock
purchase warrants.
Income
Tax
For
income tax purposes, the Company has estimated its net operating loss carry-forwards as of June 30, 2014 to approximate $57,275,000,
which expire from 2025 through 2029. The Company has provided a 100% valuation allowance due to the uncertainty of realizing the
tax benefits from its net deferred tax asset.
Net
loss
As
a result of the above, we reported a net loss of $625,070 and $781,767 for the three months ended June 30, 2014 and 2013, respectively,
an improvement of $156,697 (20%).
Loss
applicable to common shareholders
The
Company classified both Series A Preferred and Series B Preferred stock as mezzanine securities in the consolidated balance sheet.
Both Series A Preferred and Series B Preferred stock were accreted to their face values over a period commencing April 14, 2012
through December 31, 2013. During the three months ended June 30, 2014 and 2013, the recorded fair value of Series A Preferred
and Series B Preferred stock accreted (increased in calculated present value) by $-0- and $553,715, respectively. Accrued dividends
payable on the Series A Preferred and Series B Preferred stock in the amount of $-0- and $217,524 were recorded during the three
months ended June 30, 2014 and 2013, respectively. The holders of the Series A Preferred stock converted their stock into shares
of common stock on December 30, 2013 and the holders of the Series B Preferred stock converted their stock into shares of common
stock on February 28, 2014.
The
Series A Preferred and Series B Preferred stock had a preference over common shareholders and therefore such amounts have been
deducted from net loss to report loss applicable to common shareholders of $625,070 and $1,553,006 for the three months ended
June 30, 2014 and 2013, respectively.
Basic
and Diluted Loss per Share
Basic
net income (loss) per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number
of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net 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.
The
basic and diluted net loss per share was $0.02 and $0.07 for the three months ended June 30, 2014 and 2013, respectively, for
the reasons previously noted. All outstanding stock options were considered antidilutive and therefore excluded from the calculation
of diluted loss per share for the three months ended June 30, 2014 and 2013 because of the net loss reported for each period.
Potential shares of common stock as of June 30, 2014 that have been excluded from the computation of diluted net loss per share
amounted to 7,017,210 shares, which included 2,812,710 outstanding warrants and 4,204,500 outstanding stock options.
Results
of operations for the six months ended June 30, 2014 compared to the six months ended June 30, 2013
Overview
Infinity
incurred a net loss applicable to common shareholders of $2,540,359, or $0.10 per share, for the six months ended June 30, 2014
compared to a net loss applicable to common shareholders of $3,700,988, or $0.18 per share, for the six months ended June 30,
2013. The Company issued Series A Preferred and Series B Preferred redeemable convertible stock effective April 13, 2012. The
6% cumulative dividend accrued as well as the accretion in the value ascribed to the Series A Preferred and Series B Preferred
stock (which represents value attributable to holders of the Series A Preferred and Series B Preferred stock rather than common
stock) affects the Company’s net income (loss) by $(25,527) and $(1,519,455) to arrive at net loss applicable to common
shareholders for the six months ended June 30, 2014 and 2013, respectively.
Revenue
The
Company had no revenues in either 2014 or 2013. It focused solely on the exploration, development and financing of the Nicaraguan
Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2014 or 2013. The Company sold its investment in Infinity-Texas
in July 2012, which held its only producing properties at that time. The Company believes, however, that it may continue to have
obligations relative to reclamation costs for its Texas properties through the date of the sale of Infinity-Texas. It continues
to record a potential liability related to Texas reclamation costs of $734,897 as of June 30, 2014.
The
Company has no domestic exploration and development activities in order to conserve cash. It is not actively working on any domestic
property.
General
and administrative expenses
Stock
based compensation expenses of $761,967 for the six months ended June 30, 2014 decreased 32% from those in 2013, which were $1,122,653.
The Company has had minimal resources to pay employees, consultants and other service providers. Therefore, it has issued stock
options to compensate and motivate its officers, directors and other service providers. On January 17, 2014, the Company granted
900,000 options that have an exercise price of $3.00 per share and terms of ten years. A total of 300,000 options vested immediately
while the remaining 600,000 options vest at a rate of one half for each of the two years thereafter. The grant date fair value
of the stock options issued in January 2014 was reduced because of the drop in the Company’s stock price in relation to
the exercise price of $3.00 per share. The issuance of stock options with exercise prices well above the market price at the date
of grant caused the reduced amount of stock based compensation during the six months ended June 30, 2014 compared to 2013.
General
and administrative expenses of $341,683 for the six months ended June 30, 2014 increased 31% from those in 2013, which were $261,299.
The increase in general and administrative expenses is attributable to an increase of $30,000 incurred in additional auditing
fees due to the change in auditors and an increase of $57,835 related to expenses during 2014 related to its activities in Nicaragua
as the Nicaraguan Concessions progressed to the exploration phase and 2D and 3D seismic mapping activities commenced after the
Environmental Impact Assessment was accepted by the Nicaraguan government.
Gain
on settlement of litigation
Timothy
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 the Company 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. On May 27, 2014 the Company settled this litigation by the issuance of 100,000 shares of common stock and the payment
of $10,000 cash. The Company had previously established a provision of $304,878 related to this litigation as an accrued liability
in the accompanying balance sheet. The value of the 100,000 shares of common stock and $10,000 cash paid in settlement of this
litigation totaled $125,000 resulting in a gain of $179,878 which was recorded in the statement of operations.
Other
income (expense)
Interest
expense increased from $762,086 for the six months ended June 30, 2013 to $1,890,871 in 2014. This significant increase was attributable
to the fact that during December 2013 and early in 2014 the Company borrowed approximately $1,535,000 on a short-term basis by
issuing subordinated promissory notes with detachable warrants to purchase common shares. The fair value of the warrants resulted
in a substantial increase in the overall effective borrowing costs. The non-cash amortization of debt discount aggregated $1,795,977
and $727,797 during the six months ended June 30, 2014 and 2013, respectively, which reflects the use of short-term notes with
detachable purchase warrants by the Company to attract new capital. The Company’s current financial condition has made traditional
bank loans and customary financing terms unattainable; therefore the Company may find it necessary to continue with these types
of short-term borrowings with high effective interest rates.
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the conversion features and detachable
warrants issued in connection with notes payable as of June 30, 2014 and recorded the change in the valuation of derivative liabilities
as income or loss in the statement of operations, resulted in a gain of $242,103 and a loss of $24,410 for the six months ended
June 30, 2014 and 2013, respectively. The derivative liabilities valuation gain reflects the decrease in the market value of the
Company’s common stock as of June 30, 2014 compared to the conversion price of the notes payable and the exercise price
on the common stock purchase warrants.
Income
Tax
For
income tax purposes, the Company has estimated its net operating loss carry-forwards as of June 30, 2014 to approximate $57,275,000,
which expire from 2025 through 2029. The Company has provided a 100% valuation allowance due to the uncertainty of realizing the
tax benefits from its net deferred tax asset.
Net
loss
As
a result of the above, we reported a net loss of $2,514,832 and $2,181,533 for the six months ended June 30, 2014 and 2013, respectively,
a deterioration of $333,299 (15%).
Loss
applicable to common shareholders
The
Company classified both Series A Preferred and Series B Preferred stock as mezzanine securities in the consolidated balance sheet.
Both Series A Preferred and Series B Preferred stock were accreted to their face values over a period commencing April 14, 2012
through December 31, 2013. During the six months ended June 30, 2014 and 2013, the recorded fair value of Series A Preferred and
Series B Preferred stock accreted (increased in calculated present value) by $-0- and $1,084,407, respectively. Accrued dividends
payable on the Series A Preferred and Series B Preferred stock in the amount of $25,527 and $435,048 were recorded during the
six months ended June 30, 2014 and 2013, respectively. The holders of the Series A Preferred stock converted their stock into
shares of common stock on December 30, 2013 and the holders of the Series B Preferred stock converted their stock into shares
of common stock on February 28, 2014.
The
Series A Preferred and Series B Preferred stock had a preference over common shareholders and therefore such amounts have been
deducted from net loss to report loss applicable to common shareholders of $2,540,359 and $3,700,988 for the six months ended
June 30, 2014 and 2013, respectively.
Basic
and Diluted Loss per Share
Basic
net income (loss) per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number
of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net 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.
The
basic and diluted net loss per share was $0.10 and $0.18 for the six months ended June 30, 2014 and 2013, respectively, for the
reasons previously noted. All outstanding stock options were considered antidilutive and therefore excluded from the calculation
of diluted loss per share for the six months ended June 30, 2014 and 2013 because of the net loss reported for each period. Potential
shares of common stock as of June 30, 2014 that have been excluded from the computation of diluted net loss per share amounted
to 7,017,210 shares which included 2,812,710 outstanding warrants, and 4,204,500 outstanding stock options.
Liquidity
and Capital Resources; Going Concern
We
have had a history of losses. We financed our operations primarily through a line of credit with Amegy Bank and Offshore through
February 28, 2012, when we entered into definitive agreements with Amegy and Off-Shore relating to outstanding debt and other
obligations we owed to them. Effective April 13, 2012, the transactions contemplated under these agreements closed and we issued
shares of common stock and Series A Preferred and Series B Preferred stock in satisfaction of all the outstanding Amegy and Off-Shore
debt, related accrued interest and other fees, and the Amegy Warrant. Although the conversion of Amegy and Offshore debt to equity
in 2012 and the sale of Infinity-Texas in 2012 relieved us of a considerable portion of our current liabilities, we continue to
have a significant working capital deficit and we continue to experience substantial liquidity issues. Amegy exchanged all of
its shares of Series A Preferred stock, including accrued and unpaid dividends, for shares of common stock as of December 30,
2013 and Offshore converted all of its shares of Series B Preferred stock, including accrued and unpaid dividends, into shares
of common stock on February 28, 2014.
During
2012 we borrowed $250,000 under a short-term credit facility with a related party. We issued an interest-bearing note and common
stock purchase warrants in connection with the facility. During 2013 we borrowed approximately $1,825,000 on a short-term basis
by issuing various subordinated promissory notes with detachable warrants to purchase shares of common stock. The fair value of
the warrants resulted in a substantial increase in the overall effective borrowing costs. We used the proceeds of these notes
to repay previously issued notes, including the foregoing related party note, meet obligations and conduct seismic mapping related
to our Nicaraguan Concessions and provide working capital.
As
of June 30, 2014 we owed a net of $1,525,000 plus accrued interest on six promissory notes, all of which have been extended to
various dates from January 2015 through February 28, 2015.
In
April 2013, we conducted a private placement of units composed of common stock and warrants under which we raised $890,000 in
proceeds and exchanged $125,000 principal amount of an outstanding note plus accrued interest for units. We used part of these
proceeds to retire notes issued earlier in 2013.
Subsequent
to June 30, 2014, we issued two new promissory notes for total cash proceeds of $100,000. The promissory notes have maturity dates,
as amended, of February 28, 2015. In connection with the loans we granted new warrants to purchase a total of 150,000 shares of
common stock at an exercise price of $1.00 per share, all of which warrants are immediately exercisable and terminate five years
from the date of issuance.
Subsequent
to June 30, 2014, we were unable to pay the outstanding principal due on promissory notes representing $450,000 in debt on their
respective maturity dates. We negotiated extensions of their maturity dates to February 28, 2015 by granting new warrants to purchase
450,000 shares of common stock at an exercise price of $1.00 per share with a five-year term, modifying existing warrant agreements
covering 450,000 shares to provide for an increase in the term of warrants to five years and reducing the exercise price to $1.00
per share.
Subsequent
to June 30, 2014, we were unable to pay balances due on our line-of-credit with a related party with an outstanding balance of
$32,802 as of June 30, 2014. The parties agreed to extend the maturity date to February 28, 2015 and we granted new warrants to
purchase 200,000 shares of common stock at an exercise price of $1.00 to $1.50 per share with a five-year term.
The
Company has not resolved the contingency related to the expired letters of credit for its Nicaraguan concessions (See Note 8).
The Company continues to negotiate the renewal of the letters of credit with the Nicaraguan Government and its lenders; however,
there can be no assurance that the Company will be successful in that regard.
Our
current financial condition has made traditional bank loans and normal financing terms unattainable therefore we may find it necessary
to continue with these types of short-term borrowings with high effective interest rates. We believe these short-term borrowings
with high effective interest rate will continue to be the primary source of our working capital during 2014.
Phase
II of Sub Period 1 started April 13, 2013, when the Nicaraguan Government approved the environmental impact study. The minimum
cash requirements related to the Nicaraguan Concessions for the next twelve month period will be approximately $5,415,000, of
which $4,945,000 is related to seismic activities and $470,000 is related to the training fees, area fees and other expenditures
under the Nicaraguan Concessions. We estimate that the total actual cost of 2D and 3D seismic activities for the acreage will
be a minimum of $8,000,000 (which includes $5,937,013 already expended for seismic activities) over the next 18-24 month period.
In addition to the minimum cash requirements related to the Nicaraguan Concessions, we estimate that we will require approximately
$315,000 of working capital to maintain corporate operations for the next 12 months, but not including debt obligations owed to
third parties.
On
October 13, 2014 we announced that we had entered into a Letter of Intent (“LOI”) with Granada Exploration, LLC, which
has agreed to join with us to explore for potential hydrocarbons beneath our 1.4 million-acre Nicaraguan Concessions. Under the
terms of the LOI, Granada Exploration will provide its services in exchange for a working interest in the Nicaraguan Concessions.
The scope of such services will be more specifically described in a mutually acceptable Exploration Services Agreement (“ESA”),
which is currently being negotiated and finalized. The ESA is anticipated to provide that Granada will earn an assignment from
us of an undivided 30% working interest in the Nicaraguan Concessions, based on an 80% net revenue interest. Granada and we are
also anticipated to enter into a Joint Operating Agreement. Granada may, at its discretion, participate in an initial exploratory
well for up to an additional undivided 20% working interest, on a prospect-by-prospect basis, with such additional interest to
be based on an 80% net revenue interest.
The
LOI is subject to Granada’s normal and customary due diligence including the evaluation of our Form 10-K and 10-Q filings,
concession documents showing that we are in good standing with the Nicaraguan government, negotiation and approval of mutually
acceptable formal agreements, and final approval by a majority of the partners that comprise Granada Exploration, LLC.
We
plan to raise long-term capital to satisfy the foregoing needs through an offering of our equity or debt securities and/or through
a commercial relationship with other industry operators, which may involve the granting of revenue or other interests in the Nicaraguan
Concessions in exchange for cash and a carried interest in exploration and development operations or the creation of a joint venture
or other strategic partnership. There can be no assurance that we will obtain such funding or obtain it on terms acceptable to
us. Further, if we cannot meet our obligations respecting the Nicaraguan Concessions, we will lose our rights to them.
Due
to the uncertainties related to these matters, there exists substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Not Applicable)
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based on their evaluation as of June 30, 2014, the end of the period covered by this quarterly report on
Form 10-Q, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls
and procedures are effective but not timely in assuring that financial statement presentation and disclosure are in conformity
with those which are required to be included in our periodic SEC filings. The lack of timeliness is a material weakness which
management believes could be relieved with sufficient working capital to allow full-time accounting staff or the equivalent.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Internal
control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined
to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal
controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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 has claiming breach of contract for failure to pay amounts due. On October
13, 2011, a default judgment was entered against the Company in the amount of $445,521 plus interest and attorney fees. The
Company has included the impacts of this litigation as liabilities in its accounts payable. The Company will seek to settle
the default judgment when it has the financial resources to do so. |
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|
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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 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. 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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● |
Timothy
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 the Company 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. On May 27, 2014 the Company settled this litigation by the issuance of 100,000 shares of common
stock and the payment of $10,000 cash. The Company had previously established a provision of $304,878 related to this litigation
as an accrued liability in the accompanying balance sheet. The value of the 100,000 shares of common stock and $10,000 cash
paid in settlement of this litigation totaled $125,000 resulting in a gain of $179,878, which was recorded in the statement
of operations. |
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● |
Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Company’s offshore
Nicaraguan concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity dated November
20, 2013, and is claiming breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered
against the Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impacts of this
litigation as liabilities in its accounts payable. The Company will seek to settle the default judgment when it has the financial
resources to do so. |
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following sets forth information regarding the issuance of unregistered securities by the Company during the six months ended
June 30, 2014.
On
April 4, 2014 and June 7, 2014 the Company borrowed a total of $250,000 from an entity under two convertible notes payable agreements
with the conversion rate of $1.50 per share. The term of the notes was for a period of 180 days and bore interest at 8% per annum.
In connection with the loan the Company issued the entity a warrant excisable to purchase 250,000 shares of common stock at $1.50
per share for a term of five years from the date of the notes. The terms of the notes and warrants provide that if the notes and
interest are not be paid in full by their respective maturity dates, the conversion price of the notes and the exercise price
of the warrants automatically reduce to $0.50 per share. The ratchet provision in the note conversion and warrant exercise price
required that these be accounted for as derivative liabilities. The Company recorded the estimated fair value of the conversion
feature and warrants totaling $278,585 as a discount on note payable and as a derivative liability in the same amount, as of the
date of the respective note.
On
April 14, 2014 the Company borrowed a total of $100,000 from an entity under a convertible note payable with a conversion rate
of $1.50 per share. The term of the note was for a period of 180 days and bore interest at 8% per annum. In connection with the
loan, the Company issued the entity a warrant for the purchase of 100,000 shares of common stock at $1.50 per share for a period
of five years from the date of the note. The terms of the note and warrant provide that should the note and interest not be paid
in full by its maturity date, the conversion price of the note and exercise price of the warrants automatically reduce to $0.50
per share. The ratchet provision in the note conversion and warrant exercise price required that these be accounted for as derivative
liabilities. The Company recorded the estimated fair value of the conversion feature and warrants totaling $105,520 as a discount
on note payable and as a derivative liability in the same amount, as of the date of the note.
In
connection with its new loans, the Company relied on the exemption from registration set forth in Section 4(2) of the Securities
Act for issuance of the notes and warrants. It paid no compensation in connection with the issuance of the notes and warrants.
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 (maximum increased to $100,000 at December 31, 2013) with an initial maturity of November 23, 2013. The entity
providing the credit facility is owned by an officer of another corporation for which Infinity’s president and chairman
of the board serves as president and chairman of the board. The facility is unsecured, bears interest at 8%, and was renewed at
its maturity on November 23, 2013 for an additional two months or until January 23, 2014. On such date the parties renewed the
credit facility until April 23, 2014 and on April 23, 2014 the facility was renewed to July 23, 2014. The parties subsequently
renewed the facility to February 28, 2015. The Company granted the lender common stock purchase warrants exercisable to purchase
250,000 shares of common stock at an exercise price of $1.50 per share (as amended on January 23, 2014), which warrants are immediately
exercisable and expire from September 23, 2018 to January 23, 2019 (as amended on January 23, 2014). The parties agreed as a condition
to the renewal of the line-of-credit in January 2014 and that all warrants would be extended to a five-year term and the exercise
price reduced to $1.50 per share. The Company used the loan proceeds for working capital and paid no compensation to any party
in connection with the establishment credit facility and issuance of the warrants. It relied on the exemption from registration
set forth in Section 4(2) of the Securities Act for issuance of the credit facility and warrants
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
31.1 |
Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
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31.2 |
Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
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32 |
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley
Act)* |
|
|
101.INS |
XBRL
Instance Document**
|
101.SCH |
XBRL
Taxonomy Extension Schema Document**
|
101.CAL |
XBRL
Taxonomy Extension Calculation Linkbase Document**
|
101.DEF |
XBRL
Taxonomy Extension Definition Linkbase Document**
|
101.LAB |
XBRL
Taxonomy Extension Label Linkbase Document**
|
101.PRE |
XBRL
Taxonomy Extension Presentation Linkbase Document** |
* Filed herewith.
** In accordance with Regulation S-T, the
XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished”
and not “filed”.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Signature |
|
Capacity |
|
Date |
|
|
|
|
|
/s/
Stanton E. Ross |
|
Chief
Executive Officer |
|
December
19, 2014 |
Stanton E. Ross |
|
(Principal Executive
Officer) |
|
|
|
|
|
|
|
/s/
Daniel F. Hutchins |
|
Chief
Financial Officer |
|
December
19, 2014 |
Daniel F. Hutchins |
|
(Principal Financial
and Accounting Officer) |
|
|
Index
of Exhibits
31.1 |
Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
31.2 |
Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
32 |
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley
Act)* |
101.INS |
XBRL
Instance Document**
|
101.SCH |
XBRL
Taxonomy Extension Schema Document**
|
101.CAL |
XBRL
Taxonomy Extension Calculation Linkbase Document**
|
101.DEF |
XBRL
Taxonomy Extension Definition Linkbase Document**
|
101.LAB |
XBRL
Taxonomy Extension Label Linkbase Document**
|
101.PRE |
XBRL
Taxonomy Extension Presentation Linkbase Document** |
* Filed herewith.
** In accordance with Regulation S-T, the
XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished”
and not “filed”.
EXHIBIT
31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I,
Stanton E. Ross, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Infinity Energy Resources, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period(s) in which this quarterly report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent function):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting
/s/
Stanton E. Ross |
|
Stanton E. Ross |
|
Chief Executive
Officer |
|
December 19, 2014 |
|
EXHIBIT
31.2
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I,
Daniel F. Hutchins, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Infinity Energy Resources, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period(s) in which this quarterly report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent function):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting
/s/
Daniel F. Hutchins |
|
Daniel F. Hutchins |
|
Chief Financial
Officer |
|
December 19, 2014 |
|
EXHIBIT
32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Infinity Energy Resources, Inc. (the “Company”) on Form 10-Q for the period
ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each
of the undersigned hereby certifies to the best of his knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
/s/
Stanton E. Ross |
|
Stanton E. Ross |
|
Chief Executive
Officer |
|
December 19, 2014 |
|
|
|
/s/
Daniel F. Hutchins |
|
Daniel F. Hutchins |
|
Chief Financial
Officer |
|
December 19, 2014 |
|
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