Attached files
| file | filename |
|---|---|
| EX-32 - INFINITY ENERGY RESOURCES, INC | ex32.htm |
| EX-31.2 - INFINITY ENERGY RESOURCES, INC | ex31-2.htm |
| EX-31.1 - INFINITY ENERGY RESOURCES, INC | ex31-1.htm |
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 March 31, 2013.
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission File Number: 0-17204
INFINITY ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 20-3126427 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
11900 College Blvd, Suite 310, Overland Park, KS 66210
(Address of principal executive offices) (Zip Code)
(913) 948-9512
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Outstanding at May 17, 2013 | |
| Common Stock, $0.0001 par value | 21,256,075 |
TABLE OF CONTENTS
| 2 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
| March 31, 2013 | December 31, 2012 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 27,809 | $ | 32,721 | ||||
| Prepaid expenses | 1,475 | 3,131 | ||||||
| Total current assets | 29,284 | 35,852 | ||||||
| Oil and gas properties, using full cost accounting, net of accumulated depreciation, depletion, amortization and ceiling write-down | ||||||||
| Unproved | 4,465,568 | 4,425,803 | ||||||
| Other asset – deposit | 5,000 | 5,000 | ||||||
| Total assets | $ | 4,499,852 | $ | 4,466,655 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 928,056 | $ | 1,109,915 | ||||
| Accrued liabilities (including $767,407 due to related party at both dates) | 3,420,584 | 3,361,583 | ||||||
| Income tax liability | 150,000 | 150,000 | ||||||
| Accrued interest and fees – bank and other | 174,862 | 167,457 | ||||||
| Officer indemnification | 734,897 | 734,897 | ||||||
| Derivative liabilities | 406,409 | 42,508 | ||||||
| Current portion of asset retirement obligations | 432,027 | 432,027 | ||||||
| Notes payable-short term, net of discounts of $238,891 at March 31, 2013 | 548,509 | - | ||||||
| Note payable to related party, net of discount of $15,686 at December 31, 2012 | - | 234,314 | ||||||
| Total current liabilities | 6,795,344 | 6,232,701 | ||||||
| Long-term liabilities | ||||||||
| Note payable, net of discount of $36,109 | - | 176,291 | ||||||
| Asset retirement obligations, less current portion | 571,153 | 549,079 | ||||||
| Total long-term liabilities | 571,153 | 725,370 | ||||||
| Total liabilities | 7,366,497 | 6,958,071 | ||||||
| Redeemable, convertible preferred stock, par value $.0001, 6% cumulative dividend, authorized 10,000,000 shares: | ||||||||
| Series A, 130,000 shares issued and outstanding at March 31, 2013 and December 31, 2012, liquidation preference $13,000,000 plus undeclared dividends of $754,000 and $559,000 at March 31, 2013 and December 31, 2012 | 12,208,058 | 11,539,734- | ||||||
| Series B (related party), 15,016 shares issued and outstanding at March 31, 2013 and December 31, 2012, liquidation preference $1,501,600 plus undeclared dividends of $87,093 and $64,569 at March 31, 2013 and December 31, 2012 | 1,400,381 | 1,320,488- | ||||||
| Commitments and contingencies (Note 6) | ||||||||
| Stockholders’ deficit | ||||||||
| Common stock, par value $.0001, authorized 75,000,000 shares, issued and outstanding 20,668,575 shares at March 31, 2013 and December 31, 2012 | 2,066 | 2,066 | ||||||
| Additional paid-in capital | 89,119,948 | 88,843,628 | ||||||
| Accumulated deficit | (105,597,098 | ) | (104,197,332 | ) | ||||
| Total stockholders’ deficit | (16,475,084 | ) | (15,351,638 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 4,499,852 | $ | 4,466,655 | ||||
See notes to unaudited consolidated financial statements.
| F-1 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2013 | 2012 | |||||||
| Operating expenses | ||||||||
| General and administrative expenses | $ | 989,102 | $ | 194,313 | ||||
| Accretion expense | 22,074 | 20,194 | ||||||
| Total operating expenses | 1,011,176 | 214,507 | ||||||
| Operating loss | (1,011,176 | ) | (214,507 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense, net of capitalization | (358,297 | ) | (337,672 | ) | ||||
| Change in derivative fair value | (30,293 | ) | 118,685 | |||||
| Total other income (expense) | (388,590 | ) | (218,987 | ) | ||||
| Loss from continuing operations | (1,399,766 | ) | (433,494 | ) | ||||
| Loss of discontinued operation | - | (27,239 | ) | |||||
| Net loss | $ | (1,399,766 | ) | $ | (460,733 | ) | ||
| Accrual of 6% dividend payable on Series A and B redeemable, convertible preferred stock | (217,524 | ) | - | |||||
| Accretion of Series A and B redeemable, convertible preferred stock | (530,692 | ) | - | |||||
| Loss applicable to common shareholders | $ | (2,147,982 | ) | $ | (460,733 | ) | ||
| Basic and diluted net loss per share: | ||||||||
| Loss from continuing operations | $ | (0.10 | ) | $ | (0.02 | ) | ||
| Loss from discontinued operation | - | (0.00 | ) | |||||
| Basic and diluted net loss per share | $ | (0.10 | ) | $ | (0.02 | ) | ||
| Weighted average shares outstanding – basic and diluted | 20,668,575 | 18,668,575 | ||||||
See notes to unaudited consolidated financial statements.
| F-2 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders’ Deficit
For
the Three Months Ended March 31, 2013
(Unaudited)
| Common Stock | Additional
Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2012 | 20,668,575 | $ | 2,066 | $ | 88,843,628 | $ | (104,197,332 | ) | $ | (15,351,638 | ) | |||||||||
| Stock based compensation | - | - | 831,932 | - | 831,932 | |||||||||||||||
| Transition of derivative liability to equity | - | - | 192,604 | - | 192,604 | |||||||||||||||
| Accretion of Series A and B redeemable, convertible preferred stock | - | - | (530,692 | ) | - | (530,692 | ) | |||||||||||||
| Accrual of 6% dividend payable on Series A and B redeemable, convertible preferred stock | - | - | (217,524 | ) | - | (217,524 | ) | |||||||||||||
| Net loss | - | - | - | (1,399,766 | ) | (1,399,766 | ) | |||||||||||||
| Balance, March 31, 2013 | 20,668,575 | $ | 2,066 | $ | 89,119,948 | $ | (105,597,098 | ) | $ | (16,475,084 | ) | |||||||||
See notes to unaudited consolidated financial statements.
| F-3 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2013 | 2012 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (1,399,766 | ) | $ | (460,733 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Accretion of asset retirement obligations | 22,074 | 20,772 | ||||||
| Stock-based compensation | 831,932 | 28,965 | ||||||
| Change in fair value of derivative liability | 30,293 | (118,685 | ) | |||||
| Amortization of debt discount, net of capitalized amounts of $62,316 in 2012 | 339,116 | - | ||||||
| Change in operating assets and liabilities | ||||||||
| Decrease in prepaid expenses | 1,656 | 3,750 | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | (127,952 | ) | 488,169 | |||||
| Net cash used in operating activities | (302,647 | ) | (37,762 | ) | ||||
| Cash flows from investing activities | ||||||||
| Investment in oil and gas properties | (27,265 | ) | (234,350 | ) | ||||
| Net cash used in investing activities | (27,265 | ) | (234,350 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from debt and subordinated note payable | 575,000 | 272,070 | ||||||
| Repayment of note payable to related party | (250,000 | ) | - | |||||
| Net cash provided by financing activities | 325,000 | 272,070 | ||||||
| Net decrease in cash and cash equivalents | (4,912 | ) | (42 | ) | ||||
| Cash and cash equivalents | ||||||||
| Beginning | 32,721 | 217 | ||||||
| End | $ | 27,809 | $ | 175 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 11,775 | $ | - | ||||
| Cash paid for taxes | - | - | ||||||
| Supplemental noncash disclosures | ||||||||
| Noncash capitalized overhead and interest | $ | 12,500 | $ | 90,116 | ||||
| Discount from warrant derivative | 526,212 | - | ||||||
| Transition of derivative liability to equity | 192,604 | - | ||||||
| Accretion in fair value of redeemable preferred stock | 530,692 | - | ||||||
| Preferred dividends accrued | 217,524 | - | ||||||
See notes to unaudited consolidated financial statements.
| F-4 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 — Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
Infinity Energy Resources, Inc. and its subsidiaries (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”) has prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2012 due to various factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.
Nature of Operations
We are engaged in the exploration of the Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions”).
Going Concern
As reflected in the accompanying Consolidated Statements of Operations, the Company has had a history of losses. In addition, the Company has a significant working capital deficit and is currently experiencing substantial liquidity issues.
On February 28, 2012, we signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations we owed to them (see Note 3). Although the cash outflow necessary to pay Amegy has been eliminated under terms of the Stock Purchase Agreement, the Company is still in need of additional capital to meet its obligations under the Nicaraguan Concessions, and is searching for sources of additional equity or debt financing. There can be no assurance that the Company will be able to obtain such capital or obtain it on favorable terms.
The Company conducted an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired over its Nicaraguan Concessions. It issued letters of credit totaling $851,550 for this and additional work on the leases. The Company has completed certain activity under the initial work plan.. The Company intends to seek joint venture or working interest partners prior to the commencement of any exploration or drilling operations on the Nicaraguan Concessions.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Fair Value of Financial Instruments
As defined in ASC 820, fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based upon observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement), pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable and are valued using models or other valuation methodologies (level 2 measurement), and the lowest priority to unobservable inputs (level 3 measurement). There were no changes in valuation techniques or reclassifications of fair value measurements between levels 1, 2 or 3 during the quarter ended March 31, 2013.
| F-5 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The carrying values of the Company’s accounts receivable, accounts payable and accrued liabilities represent the estimated fair value due to the short-term nature of the accounts.
The estimated fair value of the Company’s non-current derivative liabilities, all of which related to warrants, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, the probability of both the downward adjustment of the exercise price and the upward adjustment to the number of warrants as provided by the warrant agreement terms (Note 2) and non-performance risk factors, among other items (ASC 820, Fair Value Measurements (“ASC 820”) fair value hierarchy Level 3). A comparison of the assumptions used in calculating estimated fair value of derivative liabilities at the issue date and outstanding at March 31, 2013 is as follows:
| Upon Issuance | At
March 31, 2013 | |||||||
| Volatility – range | 91.67% - 94.5 | % | 90.24 | % | ||||
| Contractual term | 2 years | 2 years | ||||||
| Exercise price | $ | 2.50 | $ | 2.50 | ||||
| Number of warrants in aggregate | 575,000 | 575,000 | ||||||
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:
| Balance at December 31, 2012 | $ | 42,508 | ||
| Fair value of warrant derivative liabilities at issuance | 526,212 | |||
| Unrealized derivative losses included in other expense | 30,293 | |||
| Transition of derivative liability to equity | (192,604 | ) | ||
| Balance at March 31, 2013 | $ | 406,409 |
The estimated initial fair value of the Company’s Series A and B redeemable convertible preferred stock was determined based upon estimates of the expected occurrence and timing of certain future events, such as the date such shares might be redeemed or converted (assumed to be December 31, 2013); an estimate of discount rates to be utilized in determining net present value of the preferred stock, based upon rates observed in similar or analogous, but not identical, market transactions, upon past Company-specific effective borrowing rates, and the assessment of each instrument’s specific rights and obligations. (ASC 820, Fair Value Measurements (“ASC 820”) fair value hierarchy Level 3.
Reclassifications
Certain amounts in the prior period were reclassified to conform with the current period’s financial statement presentation. These reclassifications had no effect on previously reported net loss or accumulated deficit.
Note 2 — Debt
Debt consists of the following at March 31, 2013 and December 31, 2012:
| March 31, 2013 | December 31, 2012 | |||||||
| Notes payable- short term, net of discount | $ | 548,509 | $ | - | ||||
| Note payable to related party, net of discount, short-term | $ | - | $ | 234,314 | ||||
| Notes payable, net of discount, long-term | $ | - | $ | 176,291 | ||||
Interest Bearing Liabilities to Vendors
At March 31, 2013 and December 31, 2012, the Company had agreed to pay interest of 8% on certain accrued liabilities aggregating $410,500. The total amount of interest accrued relating to these liabilities for the three months ended March 31, 2013 was $8,277.
| F-6 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes Payable – Short-term
In November 2012 the Company entered into an agreement with its law firm to issue the firm a 3% note payable in satisfaction of $212,400 in fees. The note is due with all accrued interest on March 14, 2014. The note and accrued interest are convertible to shares of the Company’s common stock at $3 per share at any time prior to and including maturity date. The note was discounted to its estimated fair value and the amount of the discount at issue date, $40,435, was recorded as a reduction in legal expense in 2012. Interest expense for the three months ended March 31, 2013 includes interest at the stated rate of 3% in the amount of $1,593 and amortization of discount in the amount of $6,693.
During the three months ended March 31, 2013, the Company borrowed an aggregate of $575,000 from four entities or individuals. Each note is for a term of 60 days and bears interest at 8% per annum. At the date of borrowing, each entity or individual was also issued a warrant for the purchase of shares of common stock at $2.50 per share, for a total of 575,000 shares. The warrants are exercisable for a period of two years from the date of the note. The warrants provide that should the notes and interest not be paid in full by their respective maturity dates (ranging from April 13 to May 29, 2013) the warrants’ exercise prices would be reduced to $0.10 per share and the number of shares issuable under the warrants would be increased to an aggregate of 5,750,000 shares. The ratchet provision in the warrants’ exercise prices required that these be accounted as derivative liabilities. The Company recorded the estimated fair value of the warrants as discounts on note payable in the aggregate amount of $526,212 and as a derivative liability in the same amount, each as of the date of the respective note. The discounts are being amortized on a straight line basis over the terms of the notes and interest expense for the three months ended March 31, 2013 includes discount amortization in the amount of $316,737. The Company used the loan proceeds from these notes to retire short-term promissory notes it had previously issued and to provide working capital. An officer of the Company sold the notes issued in the quarter ended March 31, 2013, and the Company paid no compensation to any party in connection with such sales.
Note Payable to Related Party
On August 28, 2012, the Company borrowed $250,000 from an entity that is 49% owned by a board member of another corporation for which Infinity’s CEO serves as CEO and chairman of the board. The Company issued a short-term note payable to the entity in this amount, bearing interest at 8% per annum, maturing February 28, 2013. At the same time, the Company issued the same entity a warrant exercisable to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, expiring August 2017. The Company has recorded the estimated fair value of the warrant as of August 28, 2012 as a discount on note payable in the amount of $48,654 and a derivative liability in the same amount at that date. The discount of $48,654 is being amortized on a straight line basis over the expected outstanding period of the note (August 28, 2012 through February 28, 2013) and interest expense for the three months ended March 31, 2013 includes discount amortization in the amount of $15,686. The estimated current value of the warrant derivative liability was increased to $192,604 as of the date the note was repaid, February 28, 2013, and at that date the derivative liability was terminated and the balance was recorded as an addition to additional paid-in capital as a transition back to equity.
Note 3 — Cancellation of Debt and Related Obligations and Issuance of Securities in Exchange for Debt
On February 28, 2012, the Company signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations owed them. In accordance with these agreements, on April 13, 2012, the Company issued Amegy 2,000,000 shares of common stock and 130,000 shares of Series A redeemable convertible preferred stock, and issued Off-Shore 15,016 shares of Series B redeemable convertible preferred stock. Amegy also agreed to cancel the Amegy Warrant (that had originally been issued in February 2011), exercisable to purchase 931,561 shares of common stock. In aggregate, the Company cancelled debt, accrued interest and fees and the derivative liability that had been recorded relative to the Amegy Warrant in the aggregate amount of $21,883,393.
The Series A and Series B redeemable convertible preferred stock have a 6% annual dividend and are convertible into common stock at a price of $6.50 per share. Both series of preferred stock automatically convert into common stock if the average of the closing prices of the common stock for 30 consecutive trading days equals at least $7.50 per share. The Company has the right to redeem both series of preferred stock at any point for an amount equal to their issue price of $100 per share plus all accrued and unpaid dividends; however the Series A preferred stock has a higher liquidation preference and must be redeemed prior to any redemption of Series B preferred stock. Commencing January 1, 2013, the Series A preferred stock will vote with the common stock on all matters presented to the holders of the common stock. Beginning January 1, 2014, the Series A preferred shareholders will have a majority vote on all such matters and the right to elect a majority of the Board of Directors, if the Series A preferred stock has not been redeemed or converted into common stock. Series B preferred stock has no voting privileges. Neither series of preferred stock is transferrable for 180 days after issuance.
| F-7 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The common stock issued to Amegy has been recorded at a value equal to the closing price of the shares of the Company’s common stock on April 13, 2012, the date the agreement was effective, a total of $2,980,000. Taking into consideration the rights and preferences accruing to the preferred stock issued, as summarized above, the Company has classified both Series A and B preferred stock as temporary equity on the accompanying consolidated balance sheet at March 31, 2013 and accordingly has recorded such stock at their estimated fair values. That estimated fair value was $9,743,210 for Series A preferred and $1,106,625 for Series B preferred at the date of issuance, April 13, 2012. The recorded fair value of Series A and B preferred shares increased in calculated present value to $11,454,058 and $1,313,288, respectively, as of March 31, 2013 ($530,692 was accreted in the three months ended March 31, 2013). Both Series A and B preferred are being accreted to their face values over a period commencing April 14, 2012 through December 31, 2013. Accrued dividends payable on the preferred shares in the amount of $841,093 have been recorded as of March 31, 2013 ($217,524 was accrued in the three months ended March 31, 2013).
Note 4 — Stock Options
The Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted, and is estimated in accordance with the provisions of ASC 718.
During the three months ended March 31, 2013, no stock options were granted or forfeited.
The following table summarizes stock option activity for the three months ended March 31, 2013:
| Number
of Options | Weighted
Average Exercise Price Per Share | Weighted
Average Remaining Contractual Term | Aggregate
Intrinsic Value | |||||||||||||
| Outstanding and exercisable at December 31, 2012 | 3,303,500 | $ | 4.17 | 7.3 years | $ | - | ||||||||||
| Outstanding and exercisable at March 31, 2013 | 3,303,500 | $ | 4.17 | 7.0 years | $ | - | ||||||||||
The Company recognized compensation and legal expense in connection with the vesting of options granted in 2012 in the amount of $831,932 during the three months ended March 31, 2013 (none in the three months ended March 31, 2012).
Note 5 — Warrants
The following table summarizes warrant option activity for the three months ended March 31, 2013:
| Number
of Warrants | Weighted
Average Exercise Price Per Share | Weighted
Average Remaining Contractual Term | Aggregate
Intrinsic Value | |||||||||||||
| Outstanding and exercisable at December 31, 2012 | 120,000 | $ | 2.50 | 4.7 years | $ | - | ||||||||||
| Granted | 575,000 | 2.50 | ||||||||||||||
| Outstanding and exercisable at March 31, 2013 | 695,000 | $ | 2.50 | 2.3 years | $ | - | ||||||||||
| F-8 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 6 — Commitments and Contingencies
The Company has no insurance coverage on its U.S domestic oil and gas properties. The Company is not in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits. The ultimate resolution of these compliance issues could have a significant adverse impact on the Company’s financial statements.
Nicaraguan Concessions
The significant terms and work commitments associated with the Nicaraguan Concessions by area (Perlas and Tyra blocks) are summarized below. Within 15 days of entering an exploration sub-period, the Company is required to provide an irrevocable guarantee (“Irrevocable Guarantee”) in favor of the Nicaraguan Ministry of Energy, payable in Nicaragua, in an amount equal to the estimated cost of such exploration sub-period, subject to an accumulated credit carry forward for the excess of work performed in the preceding exploration sub-period, as provided in the agreements relating to the Nicaraguan Concessions.
As of December 31, 2012 and March 31, 2013, the Company was in Sub-Period 1 for both Perlas and Tyra. On April 11, 2013, the Company received its Environmental Permit, permitting it to proceed to Phase II of Sub-Period 1. In accordance with the concession agreements, the Company has provided the Ministry of Energy with the required letters of credit in the amounts of $443,100 for Perlas (expiring March 2014) and $408,450 for Tyra (expiring September 2013). The Company has also made all required expenditures related to the concessions for training programs and as “area fees,” for 2011, 2010 and, in early 2012, for that year. The Company considers it is fully in compliance with the terms of the Nicaraguan Concession agreements.
Minimum Work Program – Perlas
| Block Perlas – Exploration Minimum Work Commitment and Relinquishments | ||||||||||||
| Exploration
Period (6 Years) | Duration
(Years) | Work Commitment | Relinquishment | Irrevocable
Guarantee | ||||||||
| Sub-Period1 | 2 | - | Environmental Impact Study | 26km2 | $ | 443,100 | ||||||
| - | Acquisition & interpretation of 333km of new 2D seismic | |||||||||||
| - | Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent in 3D) | |||||||||||
| Sub-Period 2 Optional | 1 | - | Acquisition, processing & interpretation of 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 | All acreage except areas with | $ | 10,397,335 | ||||||
| - | Geochemical analysis | discoveries | ||||||||||
| F-9 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Minimum Work Program - Tyra
| Block Tyra – Exploration Minimum Work Commitment and Relinquishments | ||||||||||||
| Exploration
Period (6 Years) | Duration
(Years) | Work Commitment | Relinquishment | Irrevocable
Guarantee | ||||||||
| Sub-Period1 | 1.5 | - | Environmental Impact Study | 26km2 | $ | 408,450 | ||||||
| - | Acquisition & interpretation of 667km of existing 2D seismic | |||||||||||
| - | Acquisition of 667km of new 2D seismic (or equivalent in 3D) | |||||||||||
| Sub-Period 2 Optional | 0.5 | - | Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period | 40km2 | $ | 278,450 | ||||||
| Sub-Period 3 Optional | 2 | - | Acquisition, processing & interpretation of 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 | All acreage except areas with | $ | 10,418,667 | ||||||
| - | Geochemical analysis | discoveries | ||||||||||
Contractual and Fiscal Terms
| Training Program | US $50,000 per year, per block | |||
| Area Fee | Yr 1-3 Yr 4-7 Yr 8 fwd | $0.05/hectare $0.10/hectare $0.15/hectare | ||
| Royalties | Recovery Factor 0 – 1.5 1.5 – 3.0 >3.0 | Percentage 5% 10% 15% | ||
| Natural Gas Royalties | Market value at production | 5% | ||
| Corporate Tax | Rate no higher than 30% | |||
| Social Contribution | 3% of the net profit (1.5% for each autonomous region) | |||
| Investment Protection | ICSID arbitration OPIC insurance | |||
Phase II of Sub Period 1 started April 13, 2013, when the Nicaraguan Government approved the environmental impact study. The minimum cash requirements for the next twelve month period will be $1,894,000 of which $1,634,677 is related to seismic and $259,300 is related to the training and area fees under the concession. See Note 1 for discussion of Going Concern. The Company estimates that the actual cost of seismic for the acreage will be $4,000,000 over the next 18 month period.
| F-10 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Revenue Sharing Commitments
On March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Off-Shore, an accredited investor, to issue a subordinated secured promissory note in the aggregate principal amount of up to $1,275,000 and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. As of December 31, 2009, Off-Shore had funded $1,275,000 (the “Funding Amount”).
Under the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Off-Shore. At any time within three (3) years from the date of the Revenue Agreement, Infinity has the right to redeem the RSP by paying Off-Shore an amount as follows: (i) until March 22, 2010, a sum equal to three (3) times the Funding Amount, or $3,825,000; (ii) until March 22, 2011, a sum equal to five (5) times the Funding Amount, $6,375,000; or (iii) until March 22, 2012, a sum equal to ten (10) times the Funding Amount, or $12,750,000. Upon the redemption of the RSP by Infinity, the Revenue Agreement shall terminate. As of March 23, 2012, the Company had not exercised its right to redeem and such redemption right expired.
On June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity assigned to officers and directors a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and directors.
The Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any exploratory drilling operations on these Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Thompson Knight Global Energy Services (“Thompson Knight”) to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity assigned to Thompson Knight a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Thompson Knight by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Thompson Knight.
| F-11 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Lack of Compliance with Law Regarding Domestic Properties
Infinity is not in compliance with existing federal, state and local laws, rules and regulations for its domestic properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of Infinity. For the year ended December 31, 2008 the remaining values of Infinity-Texas and Infinity-Wyoming were written down to zero as the Company focused solely on the development of the Nicaraguan Concessions. Management believes the estimate of the Company’s asset retirement obligations consisting of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties is sufficient to cover any noncompliance liabilities. The Company no longer carries insurance on the domestic properties.
Contingent Fees
In addition to the Revenue Sharing Agreement with Thompson Knight to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout, the Company agreed to compensate Thompson Knight a success fee of 5% of the upfront cash fee paid to Infinity by a third party earning an interest in the Nicaragua asset up to $20 million and 10% of any amount exceeding the $20 million. A 2% success fee would be paid to Thompson Knight of the remaining cash investment in subsequent years.
Litigation
The Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial statements.
The Company is currently involved in litigation as follows:
| ● | Exterran Energy Solutions, L.P., f/k/a Hanover Compression Limited Partnership, who filed an action in the District Court of Erath County, Texas, number CV30512, on March 31, 2010 against Infinity Oil and Gas of Texas, Inc., Infinity Energy Resources, Inc., Longhorn Properties, LLC, and Forest Oil Corporation. Exterran Energy Solutions, L.P. provided certain gas compressor and related equipment pursuant to a Gas Compressor/Production Equipment Master Rental & Servicing Agreement with Infinity dated January 3, 2005 in Erath County, Texas and is claiming breach of contract for failure to pay amounts due. The Company has included the impact of this litigation as liabilities in its accounts payable because it does not dispute the amount owed. In 2009, the Company recorded the amount claimed. The Company will seek to settle the lawsuit when it has the financial resources to do so. The suit is in the discovery stage. |
| ● | In October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas, seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties. The Company has engaged in negotiations with the State of Texas in late 2012 and early 2013 and has reached a settlement agreement that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which amount has been paid. Certain performance obligations remain which must be satisfied before August 1, 2013 in order to finally settle and dismiss the matter. | |
Pending satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers retain potential liability on the above matter, and the officers are held personally harmless by indemnification provisions of the Company. Therefore these liabilities, to the extent they might become actual, are the obligations of the Company. The extent of the liabilities associated with this matter was estimated by Management to not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is classified as officer indemnification liability on the consolidated balance sheets. |
| F-12 |
INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 7 — Related Party Transactions
The corporate office was located in Denver, Colorado until November 2008 when the Denver office was closed. The corporate office moved to the business office of the CFO of the Company. The Company currently does not have any employees and the staff of the CFO provides the office services. These services are billed at the CFO firm’s standard billing rate plus out-of-pocket expenses. For the quarters ended March 31, 2013 and 2012, the Company was billed $0 and $86,715, respectively. The amount due to the CFO’s firm for services provided was $767,407 at March 31, 2013 and December 31, 2012, included in accrued liabilities at both dates.
The Company entered into a subordinated loan with Off-Shore in the aggregate amount of $1,275,000 for funds for the Nicaraguan Concessions. This note was satisfied by the Company’s issuance of shares of Series B redeemable convertible preferred stock effective April 13, 2012 to Off-Shore (see Note 3). The managing partner of Off-Shore and the CFO are partners in the accounting firm which the Company uses for its corporate office. The Series B preferred stock continues to be held by Off-Shore.
As of March 31, 2013 and December 31, 2012, the Company had accrued compensation to its officers and directors of $755,208 and $705,208, respectively.
As discussed in Note 2, on August 28, 2012, the Company borrowed $250,000 from an entity that is 49% owned by a board member of another corporation for which Infinity’s CEO serves as CEO and chairman of the board. The Company issued a short-term note to bearing interest at 8% per annum and maturing February 28, 2013 to such party. The note and all accrued interest was repaid on its maturity date in accordance with the terms of the note. In connection with the transaction, the Company issued the lender a warrant exercisable to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, expiring August 2017.
Note 8 — Subsequent Events
In April 2013, the Company issued two 60-day 8% notes in the amount of $100,000 each, accompanied by warrants to purchase 200,000 shares of the Company’s common stock at $2.50 per share. The exercise price of the warrants would be reduced to $.10 per share and the number of warrants will increase to 2,000,000 if the notes and related interest thereon are not paid timely at their maturity dates.
Subsequent to March 31, 2013 and through May 16, 2013, the Company sold 635,420 units, each consisting of one share of common stock and one half of a common stock purchase warrant, at $1.60 per unit, for total proceeds of $1,016,672. For every two units purchased the Company issued one full warrant. Each warrant has an exercise price of $2.50 per share and a term of five years. One holder of a promissory note issued by the Company in February 2013 in the amount of $125,000, exchanged such note and accrued interest for units as payment in full. This exchange is included in the total number of units sold and proceeds indicated above.
| F-13 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes presented elsewhere in this Quarterly Report on Form 10-Q. Infinity follows the full-cost method of accounting for oil and gas properties. See “Summary of Significant Accounting Policies,” included in Note 1 to the Consolidated Financial Statements for the Three Months Ended March 31, 2013 and the Year Ended December 31, 2012.
Infinity Energy Resources, Inc. and its subsidiaries, (collectively, “Infinity,” “Company,” “we,” “us” and “our”) are engaged in the acquisition and exploration of oil and gas properties offshore Nicaragua in the Caribbean Sea.
On March 5, 2009 Infinity signed the contracts relating to its Nicaraguan Concessions. Infinity has submitted an environmental study and the development of geological information from reprocessing and additional evaluation of existing 2-D seismic data that was acquired over the Nicaraguan Concessions located offshore. Infinity is currently seeking offers from other industry operators for interests in the acreage in exchange for cash and a carried interest in exploration and development operations. The funds raised through the subordinated note transaction and Forbearance advances from the bank were used to fund these expenses. No assurance can be given that these funds will be sufficient to cover the exploration and development cost until a partner is found.
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q for the three months ended March 31, 2013, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.
The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the Risk Factors described in Item 1A of our Registration Statement on Form 10 filed on May 13, 2011, as amended on July 1, 2011and April 4, 2012.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity problems; (ii) we have been unable to satisfy most of our current liabilities; (iii) we require working capital for our operations for the next 12 months and capital to continue our exploration and development efforts on the Nicaraguan Concessions and there can be no assurances we will be able to obtain it or do so on terms favorable to us; (iv) we and our independent registered public accounting firm have concluded that there exists substantial doubt about our ability to continue as a going concern; (v) our Nicaraguan Concessions and planned future exploration activities are in a country with a developing economy and are subject to the risks of political and economic instability associated with such economies; (vi) exploration and development of our Nicaraguan Concessions will require large amounts of capital or a commercial relationship with an industry operator which we may not be able to obtain; (vii) we may not have sufficient resources to conduct seismic mapping on our Nicaraguan Concessions; (viii) the oil and gas exploration business involves a high degree of business and financial risk; (ix) we will be subject to regulations affecting our activities with the Nicaraguan Concessions; (x) our operations may be adversely affected by changes in the fiscal regime of Nicaragua; (xi) we are continuing to negotiate with our creditors and may face additional claims in the future; (xii) oil prices may be affected by regional factors; (xiii) any future production will be contingent on successful exploration, development and acquisitions to establish reserves and revenue in the future; (xiv) the oil and gas industry is highly competitive; (xv) exploratory drilling is an uncertain process with many risks; (xvi) oil and gas prices are volatile, and declines in prices would hurt our revenues and ability to achieve profitable operations; (xvii) our common stock is traded on the Over the Counter QB Tier Market (OTCQB); (xviii) we depend on key personnel; (xix) sufficient voting power by coalitions of a few of our larger stockholders to make corporate governance decisions that could have significant effect on us and the other stockholders; (xx) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock; (xxi) our issuance of common and Series A redeemable convertible preferred stock to Amegy and Series B redeemable convertible preferred stock to Off-Shore diluted the ownership interests of our existing stockholders and the possible issuance of additional common stock subject to options and warrants that may dilute the interest of stockholders; (xxii) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404; (xxiii) our nonpayment of dividends and lack of plans to pay dividends in the future; (xxiv) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xxv) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xxvi) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; and (xxvii) indemnification of our officers and directors.
| 3 |
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law in the normal course of our public disclosure practices.
2012 Operational and Financial Objectives
Corporate Activities
On April 14, 2011, we announced that we had completed and filed with the Nicaraguan government the Environmental Impact Assessment (“EIA”) covering proposed seismic activities on the 1.4 million-acres in our Nicaraguan Concessions. The filing of the EIA will be followed by a “comment period” during which there will be interaction among Infinity; the Ministerio del Ambiente y los Recursos Naturales de Nicaragua, an agency of the Nicaraguan government; and the autonomous regions of Nicaragua that are nearest the Nicaraguan Concessions. During this process, we will continue to maintain our relationship with the autonomous regions. After the EIA has been formally approved, Infinity expects to be cleared to commence 3-D seismic mapping activities in the area, although no assurances can be offered in this regard. See Liquidity and Capital Resources below.
Subject to obtaining sufficient capital, we plan to commence our seismic mapping activities. The 3-D seismic program will seek to further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone. Our geological consultants have estimated that these Eocene structures may contain recoverable oil in place. In addition, 3-D seismic should provide our first look at the potential for oil resources in the Cretaceous Zone, which we could not evaluate using less precise 2-D seismic mapping.
We intend to finance our business strategy through external financing, which may include debt and equity capital raised in public and private offerings, joint ventures, sale of working or other interests, employment of working capital and cash flow from operations, if any, net proceeds from the sales of assets.
Our ability to complete these activities is dependent on a number of factors, including, but not limited to:
| ● | The availability of the capital resources required to fund the activity; | |
| ● | The availability of third party contractors for completion services; and |
Results of operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2012
Infinity incurred a net loss applicable to common shareholders of $(2,147,982), or $(0.10) per diluted share, for the three months ended March 31, 2013 compared to a net loss of $(460,733), or $(0.02) per diluted share, for the three months ended March 31, 2012. The Company’s Series A and Series B redeemable convertible preferred stock, issued April 13, 2012, were therefore not outstanding for the entire three months ended March 31, 2012, but were outstanding for the entire three months ended March 31, 2013. In 2013, the 6% cumulative dividend accrued relative to the period, as well as the accretion in the value ascribed to the preferred shares between those dates (which represent value attributable to holders of the preferred rather than common shares) increase the Company’s actual net loss of $(1,399,766) to arrive at the loss applicable to common shareholders in the determination of basic and diluted net loss per share.
| 4 |
The Company’s consolidated statement of operations for the three months ended March 31, 2012 segregate the operating expenses of the company’s formerly 100% owned subsidiary, Infinity-Texas, which was sold in its entirety effective July 31, 2012, as “Loss of discontinued operation.”
Revenue
The Company had no revenues in either the three months ending March 31, 2013 or 2012. The Company focused solely on the exploration, development and financing of the Nicaraguan Concessions.
General and Administrative Expenses
General and administrative expenses in the three months ended March 31, 2013 were $989,102 as compared with $194,313 for the same period in 2012. This increase is substantially attributable to stock-based compensation cost reflected in the three months ended March 31, 2013 in the aggregate amount of $831,932, which results from the adjustment of the fair value of, and recognition of progressive vesting of, certain stock options awarded in November 2012 to Company officers and the Company’s legal counsel. This additional cost is reflected in the three months ended March 31, 2013 as compensation ($766,157) and legal ($65,775) expense.
Other income (expense)
Interest expense net of amounts capitalized to oil and gas properties decreased from $337,672 for the three months ended March 31, 2012 to $358,297 for the three months ended March 31, 2013. Although the increase is relatively small at some 6%, the nature of the interest expense is entirely different in 2013 as compared with 2012. The interest in the 2012 period was related to the debt to Amegy and Off-Shore which was outstanding for the entire period in 2012 and was satisfied April 13, 212 by the issuance of Series A and B redeemable convertible preferred stock (see Note 3). The interest expense in 2013 is largely attributable to interest accrued on, and amortization of debt discount related to, borrowings on various short-term notes payable, which aggregated $348,507 for the period.
The change in derivative fair value, which can be either an “other expense” or an “other income” item, varied significantly from the three months ended March 31, 2012, when it was income of $118,685, to the same period in 2013, when it was an expense of $(30,293). The 2012 income effect resulted from a decrease during the period in the fair value of the derivative liability related to the Amegy Warrant (see Note 3), which warrant was cancelled in April 2012 and thus was not outstanding during the three months ended March 31, 2013. During the three months ended March 31, 2013, the Company had warrants and related derivative liabilities recorded related to short-term notes payable. The combined impact of the changes in fair value of the various derivative liabilities outstanding during the 2013 period was an increase in such value (an expense item) of $(30,293). The derivative liability associated with warrants on notes that remained outstanding at March 31, 2013 actually decreased in fair value, but the liability related to warrants on the note repaid in the three months ended March 31, 2013 increased in fair value, in a larger amount, before the related note was repaid, at which date derivative liability, in accordance with generally accepted accounting principles, was effectively terminated and its balance became a contribution to additional paid-in capital. These derivative values, which are required to be presented in accordance with generally accepted accounting principles, primarily reflect the liability associated with remaining life of the related warrants with changes in fair value being principally impacted by the volatility of the Company’s stock price.
Income Tax
Infinity reflected no net income tax benefit or expense in the three month periods ended March 31 in either 2013 or 2012. The net operating losses generated both periods increased Infinity’s gross deferred tax asset related to future ability to utilize net operating losses to reduce future income tax outlays. Due to uncertainty as to the ultimate ability of the Company to utilize its net deferred tax asset, the Company has recognized no net deferred tax benefit, and has, as a result, offset its gross deferred tax benefit with a 100% valuation allowance.
Liquidity and Capital Resources; Going Concern
The Company has had a history of losses. The Company continues to have a significant working capital deficit and continues to experience substantial liquidity issues.
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. We issued letters of credit totaling $851,550 for this and additional work on the leases. The Company has completed certain activity under the initial work plan. The Company intends to seek joint venture or working interest partners prior to the commencement of any exploration or drilling operations on the Nicaraguan Concessions.
| 5 |
Phase II of Sub Period 1 started April 13, 2013, when the Nicaraguan Government approved the environmental impact study. The minimum cash requirements for the next twelve month period will be $1,894,000 of which $1,634,677 is related to seismic and $259,300 is related to the training and area fees under the concession. See Note 1 for discussion of Going Concern. The Company estimates that the actual cost of seismic for the acreage will be $4,000,000 over the next 18 month period.
We plan to raise capital to satisfy the foregoing needs through an offering of our equity or debt securities and/or through a commercial relationship with other industry operators, which may involve the granting of revenue or other interests in the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or the creation of a joint venture or other strategic partnership. There can be no assurance that we will obtain such funding or obtain it on terms acceptable to us. Further, if we cannot meet our obligations respecting the Nicaraguan Concessions, we will lose our rights to them.
Due to the uncertainties related to these matters, there exists substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Not Applicable)
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer, Stanton Ross and Chief Financial Officer, Daniel F. Hutchins evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on the evaluation, Messrs. Ross and Hutchins have concluded that the Company’s disclosure controls and procedures are not effective 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.
| 6 |
The Company is currently involved in litigation as follows:
| ● | Exterran Energy Solutions, L.P., f/k/a Hanover Compression Limited Partnership, who filed an action in the District Court of Erath County, Texas, number CV30512, on March 31, 2010 against Infinity Oil and Gas of Texas, Inc., Infinity Energy Resources, Inc., Longhorn Properties, LLC, and Forest Oil Corporation. Exterran Energy Solutions, L.P. provided certain gas compressor and related equipment pursuant to a Gas Compressor/Production Equipment Master Rental & Servicing Agreement with Infinity dated January 3, 2005 in Erath County, Texas and is claiming breach of contract for failure to pay amounts due. The Company has included the impacts of this litigation as liabilities in its accounts payable because it does not dispute the amount owed. In 2009 the Company recorded the amount claimed. The Company will seek to settle the lawsuit when it has the financial resources to do so. The suit is in the discovery stage. |
| ● | In October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas, seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties. The Company has engaged in negotiations with the State of Texas in late 2012 and early 2013 and has reached a settlement agreement that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which amount has been paid. Certain performance obligations remain which must be satisfied before August 1, 2013 in order to finally settle and dismiss the matter. | |
Pending satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers retain potential liability on the above matter, and the officers are held personally harmless by indemnification provisions of the Company. Therefore these liabilities, to the extent they might become actual, are the obligations of the Company. The extent of the liabilities associated with this matter was estimated by Management to not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is classified as officer indemnification liability on the consolidated balance sheet dated March 31, 2013. |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2013, the Company borrowed an aggregate of $575,000 from four entities or individuals. Each note is for a term of 60 days and bears interest at 8% per annum. At the date of borrowing, each entity or individual was also issued a warrant for the purchase of shares of common stock at $2.50 per share, for a total of 575,000 shares. The warrants are for a period of two years from the date of the note. The warrants provide that should the notes and interest not be paid in full by their respective maturity dates (ranging from April 13 to May 29, 2013) the warrants’ exercise prices would be reduced to $0.10 per share and the number of shares issuable under the warrants would be increased to an aggregate of 5,750,000 shares. The ratchet provision in the warrants’ exercise prices required that these be accounted as derivative liabilities. The Company recorded the estimated fair value of the warrants as discounts on note payable in the aggregate amount of $526,212 and as a derivative liability in the same amount, each as of the date of the respective note. The discounts are being amortized on a straight line basis over the terms of the notes and interest expense for the three months ended March 31, 2013 includes discount amortization in the amount of $316,737. The Company used the loan proceeds from these notes to retire short-term promissory notes it had previously issued and to provide working capital. An officer of the Company sold the notes issued in the quarter ended March 31, 2013, and the Company paid no compensation to any party in connection with such sales.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
(c) Exhibits.
| 31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32* | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act) |
| * | Filed herewith. |
| 7 |
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 | May 20, 2013 | ||
| Stanton E. Ross | (Principal Executive Officer) | |||
| /s/ Daniel F. Hutchins | Chief Financial Officer | May 20, 2013 | ||
| Daniel F. Hutchins | (Principal Financial and Accounting Officer) |
| 8 |