##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 0-17204
 
 INFINITY ENERGY RESOURCES, INC.
  Delaware
    
    20-3126427(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 
 (720) 932-7800
 None
 Common Stock
  þ o
  o þ o
  o þ




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##### 



TABLE OF CONTENTS
 PART I Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statement of Changes in Stockholders Equity
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II Other InformationItem 1.Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22Signatures
    
    
    23Exhibits
    
    
    24Certification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906Calculation of the Maximum Notes Balance at March 31, 2006
  2




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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
  March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,118
    
    
    $
    7,942Accounts receivable, less allowance for doubtful accounts
of $70 (2006 and 2005)
    
    
    4,742
    
    
    
    4,748Inventories
    
    
    458
    
    
    
    453Prepaid expenses and other
    
    
    313
    
    
    
    422Total current assets
    
    
    11,631
    
    
    
    13,565Property and equipment, at cost, net of accumulated depreciation
    
    
    10,954
    
    
    
    11,489Oil and gas properties, using full cost accounting, net of
accumulated depreciation, depletion and amortization and ceiling write-down:Proved
    
    
    43,961
    
    
    
    43,699Unproved
    
    
    24,279
    
    
    
    22,849Intangible assets, at cost, net of accumulated amortization
    
    
    2,523
    
    
    
    2,514Other assets, net
    
    
    222
    
    
    
    168Total assets
    
    $
    93,570
    
    
    $
    94,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Note payable and current portion of long-term debt
    
    $
    145
    
    
    $
    288Accounts payable
    
    
    5,657
    
    
    
    5,035Accrued liabilities
    
    
    5,484
    
    
    
    6,314Current portion of asset retirement obligations
    
    
    288
    
    
    
    284Total current liabilities
    
    
    11,574
    
    
    
    11,921Long-term liabilities:Production taxes payable
    
    
    316
    
    
    
    401Asset retirement obligations, less current portion
    
    
    1,163
    
    
    
    1,129Accrued interest
    
    
    1,157
    
    
    
    905Derivative liabilities
    
    
    14,958
    
    
    
    9,837Long-term debt, less current portion
    
    
    42,039
    
    
    
    39,874Total liabilities
    
    
    71,207
    
    
    
    64,067Commitments and contingenciesStockholders equity:Preferred stock, par value $.0001 per share; 10,000,000
authorized shares, -0- shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $.0001 per share; 75,000,000
authorized shares, 14,015,133 (2006) and 13,501,988
(2005) shares issued and outstanding
    
    
    1
    
    
    
    1Additional paid-in-capital
    
    
    61,786
    
    
    
    58,335Accumulated deficit
    
    
    (39,424
    )
    
    
    (28,119
    )Total stockholders equity
    
    
    22,363
    
    
    
    30,217Total liabilities and stockholders equity
    
    $
    93,570
    
    
    $
    94,284
  3




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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
  For the Three MonthsEnded March 31,2006
    
    
    2005Revenue:Oilfield services
    
    $
    8,450
    
    
    $
    4,070Oil and gas
    
    
    2,364
    
    
    
    1,445Total revenue
    
    
    10,814
    
    
    
    5,515Cost of revenue:Oilfield services
    
    
    3,873
    
    
    
    2,004Oil and gas production expenses
    
    
    1,143
    
    
    
    439Oil and gas production taxes
    
    
    201
    
    
    
    169Total cost of revenue
    
    
    5,217
    
    
    
    2,612Gross profit
    
    
    5,597
    
    
    
    2,903General and administrative expenses
    
    
    1,700
    
    
    
    1,280Depreciation, depletion, amortization and accretion
    
    
    1,564
    
    
    
    1,586Ceiling write-down of oil and gas properties
    
    
    9,100
    
    
    
    Operating income (loss)
    
    
    (6,767
    )
    
    
    37Other income (expense):Financing costs:Interest expense
    
    
    (771
    )
    
    
    (517
    )Amortization of loan discount and costs
    
    
    (440
    )
    
    
    (243
    )Early extinguishment of debt
    
    
    (122
    )
    
    
    (904
    )Change in derivative fair value
    
    
    (3,460
    )
    
    
    (7,913
    )Gain on sale of assets
    
    
    294
    
    
    
    (1
    )Other
    
    
    (39
    )
    
    
    78Total other income (expense)
    
    
    (4,538
    )
    
    
    (9,500
    )Net loss before income taxes
    
    
    (11,305
    )
    
    
    (9,463
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (11,305
    )
    
    $
    (9,463
    )Basic and diluted net loss per share
    
    $
    (0.82
    )
    
    $
    (0.81
    )Weighted average basic and diluted shares
outstanding
    
    
    13,824
    
    
    
    11,619
  4




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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (UNAUDITED)
  AdditionalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance, December 31, 2005
    
    
    13,501,988
    
    
    $
    1
    
    
    $
    58,335
    
    
    $
    (28,119
    )
    
    $
    30,217Issuance of common stock upon the exercise of options
    
    
    5,000
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22Issuance of common stock as settlement of accrued interest
    
    
    126,083
    
    
    
    
    
    
    
    861
    
    
    
    
    
    
    
    861Issuance of common stock upon conversion of senior
secured notes and settlement of accrued interest
    
    
    382,062
    
    
    
    
    
    
    
    2,568
    
    
    
    
    
    
    
    2,568Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,305
    )
    
    
    (11,305
    )Balance, March 31, 2006
    
    
    14,015,133
    
    
    $
    1
    
    
    $
    61,786
    
    
    $
    (39,424
    )
    
    $
    22,363
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  For the Three MonthsEnded March 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (11,305
    )
    
    $
    (9,463
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation, depletion, amortization and
accretion
    
    
    1,564
    
    
    
    1,586Ceiling
write-down of oil and gas properties
    
    
    9,100
    
    
    
    Amortization of loan discount and costs
    
    
    440
    
    
    
    243Non-cash early extinguishment of debt
    
    
    122
    
    
    
    681Current interest expense settled by stock issuance
    
    
    37
    
    
    
    Changes in fair value of derivative instruments
    
    
    3,460
    
    
    
    7,913Unrealized loss on commodity derivative instruments
    
    
    57
    
    
    
    (Gain) loss on sales of assets
    
    
    (294
    )
    
    
    1Change in operating assets and liabilities:Decrease in accounts receivable
    
    
    6
    
    
    
    72Increase in inventories
    
    
    (5
    )
    
    
    (139
    )Decrease in prepaid expenses and other
    
    
    109
    
    
    
    265Increase in accounts payable
    
    
    622
    
    
    
    60Increase (decrease) in accrued liabilities
    
    
    (266
    )
    
    
    728Net cash provided by operating activities
    
    
    3,647
    
    
    
    1,947Cash flows from investing activities:Capital expenditures  exploration and production
    
    
    (11,204
    )
    
    
    (14,064
    )Capital expenditures  oilfield services
    
    
    (1,816
    )
    
    
    (1,080
    )Proceeds from sale of fixed assets  exploration and
production
    
    
    
    
    
    
    133Proceeds from sale of fixed assets  oilfield
services
    
    
    
    
    
    
    1Proceeds
from sale of fixed assets - corporate
    
    
    62
    
    
    
    Payments on note receivable
    
    
    
    
    
    
    4Increase in other assets
    
    
    (54
    )
    
    
    Net cash used in investing activities
    
    
    (13,012
    )
    
    
    (15,006
    )Cash flows from financing activities:Proceeds from borrowings on long-term debt
    
    
    8,000
    
    
    
    30,000Proceeds from issuance of common stock
    
    
    22
    
    
    
    3,979Debt and equity issuance costs
    
    
    (313
    )
    
    
    (2,124
    )Repayment of notes payable
    
    
    (168
    )
    
    
    (119
    )Repayment of long-term debt
    
    
    
    
    
    
    (9,252
    )Net cash provided by financing activities
    
    
    7,541
    
    
    
    22,484Net (decrease) increase in cash and cash equivalents
    
    
    (1,824
    )
    
    
    9,425Cash and cash equivalents, beginning of period
    
    
    7,942
    
    
    
    3,052Cash and cash equivalents, end of period
    
    $
    6,118
    
    
    $
    12,477
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INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
 Nature of Operations
   Basis of Presentation
    Oil and Gas Properties
   7




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As ofMarch 31,
    
    
    December 31,2006
    
    
    2005(in thousands)Proved oil and gas properties
    
    $
    86,076
    
    
    $
    75,484Unproved oil and gas properties
    
    
    24,279
    
    
    
    22,849Total
    
    
    110,355
    
    
    
    98,333Less accumulated depreciation, depletion,
amortization and ceiling write-downs
    
    
    (42,115
    )
    
    
    (31,785
    )Net capitalized costs
    
    $
    68,240
    
    
    $
    66,548
    Derivative Instruments
 Accounting for Derivative Instruments
and Hedging Activities
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Income Taxes
  Comprehensive Income (Loss)
  Note 3  Stock Options
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  Options
Under Equity Incentive Plans
    Weighted AverageExerciseNumber of Shares
    
    Price Per ShareOutstanding, January 1, 2006
    
    
    1,383,250
    
    
    $
    6.52Exercised
    
    
    (5,000
    )
    
    
    4.26Outstanding, March 31, 2006
    
    
    1,378,250
    
    
    
    6.53
 9




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NumberOutstanding at
    
    
    Weighted Average
    
    
    
    
    
    
    AggregateRange of
    
    March 31,
    
    
    Remaining
    
    
    Weighted Average
    
    
    IntrinsicExercise Prices
    
    2006
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Value$4.26 - 5.00
    
    
    615,250
    
    
    4.6 years
    
    $
    4.58
    
    
    $
    1,961,200$7.51 - 7.80
    
    
    365,000
    
    
    9.3 years
    
    $
    7.53
    
    
    
    89,700$8.50 - 8.70
    
    
    398,000
    
    
    5.0 years
    
    $
    8.62
    
    
    
    1,378,250
    
    
    
    
    
    
    
    
    
    
    $
    2,050,900
  Three MonthsEnded March 31,2005(in thousands)Net loss as reported
    
    $
    (9,463
    )Deduct: Total stock-based employee compensation
expense, determined under fair value based
method for all awards, net of tax
    
    
    (1,096
    )Pro forma net loss
    
    $
    (10,559
    )Basic and diluted loss per share as reported
    
    $
    (0.81
    )Basic and diluted loss per share-pro forma
    
    $
    (0.91
    )
 Note 4 Debt
  As ofMarch 31,
    
    
    December 31,2006
    
    
    2005(dollars in thousands)Senior Secured Notes, net of discount of $8,024 at
March 31, 2006 and $7,417 at December 31, 2005
    
    $
    41,976
    
    
    $
    37,583Note payable to seller (for a 50% interest in an airplane)
    
    
    
    
    
    
    2,203Other, principally capitalized lease obligations
    
    
    208
    
    
    
    37642,184
    
    
    
    40,162Less current portion
    
    
    (145
    )
    
    
    (288
    )Long-term debt
    
    $
    42,039
    
    
    $
    39,874
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Senior Secured Notes Facility
    Debt Discount
 Debt Discount
 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
 11




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Capitalized Interest
  Promissory Note to Seller
  Note 5  Derivative Instruments and Hedging Activities
  Commodity Derivatives
  Term of Arrangements
    
    Bbls per Day
    
    Floor Price
    
    Ceiling PriceJanuary 1, 2006  June 30, 2006
    
    
    50
    
    
    $
    50.00
    
    
    $
    64.40October 1, 2005  December 31, 2006
    
    
    50
    
    
    $
    52.50
    
    
    $
    74.00July 1, 2006  March 31, 2007
    
    
    50
    
    
    $
    55.00
    
    
    $
    77.00January 1, 2007  June 30, 2007
    
    
    50
    
    
    $
    57.50
    
    
    $
    77.50
   Term of Arrangement
    
    MMBtu per Day
    
    Floor Price
    
    Ceiling PriceMay 1, 2006  July 31, 2006
    
    
    1,000
    
    
    $
    4.50
    
    
    $
    8.00
 Other Derivatives
  12




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Note 6  Fair Value of Financial Instruments
   Note 7  Earnings Per Share
   Note 8  Subsequent Event
  13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   FORWARD-LOOKING STATEMENTS
  
    
    potential expansion of the oilfield services business through acquisitions;
    
    expected capital expenditures and cash flow for the remainder of 2006;
    
    plans to raise external financing to finance a portion of 2006 activities;
    
    increased activity in the oilfield services business;
    
    planned increases in acreage position;
    
    Infinitys business strategy and anticipated trends in Infinitys business and its future results of operations;
    
    the ability of Infinity to make and integrate acquisitions;
    
    planned exploration, drilling and completion activities;
    
    the costs and results of dewatering operations, including drilling water disposal wells;
    
    demand for oilfield services;
    
    the availability of financing on acceptable terms;
    
    the impact of governmental regulation; and
    
    the timing of engineering and environmental impact studies and permitting.
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
    
    fluctuations in oil and natural gas prices and production;
    
    availability of drilling rigs, completion services and other support equipment;
    
    incorrect estimations of required capital expenditures;
    
    uncertainties inherent in estimating quantities of oil and gas reserves and projecting
future rates of production and timing thereof;
    
    delays or difficulties in exploration, exploitation and development activities;
    
    increases in the cost of oil and gas drilling, completion and production and in materials, fuel and labor costs;
    
    the availability, conditions and timing of required government approvals and third party
financing, including failure to satisfy the maximum notes balance requirements under the
senior secured notes facility;
    
    a decline in demand for Infinitys oil and gas production or oilfield services;
    
    delays in environmental and permitting factors; and
    
    changes in general economic conditions.
 Overview of Exploration and Production Activity
  
    
    Drilled five horizontal wells and one vertical well targeting the Barnett Shale
formation;
    
    Increased production from the Fort Worth Basin in north central Texas by approximately
80% as compared to the three months ended December 31, 2005;
    
    Made capital additions of approximately $11 million, including costs for leasehold
additions, seismic acquisition and interpretation, and the drilling, completing and
equipping of wells;
   15




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For the ThreeMonths EndedMarch 31,2006
    
    2005Production:Natural gas (MMcf)
    
    
    207.0
    
    
    
    211.5Crude oil (thousands of barrels)
    
    
    18.8
    
    
    
    9.1Total (MMcfe)
    
    
    319.5
    
    
    
    266.1Financial Data (thousands of dollars):Total revenue
    
    $
    2,364
    
    
    $
    1,445Production expenses
    
    
    1,143
    
    
    
    439Production taxes
    
    
    201
    
    
    
    169Financial Data per Unit ($  per Mcfe):Total revenue
    
    $
    7.40
    
    
    $
    5.43Production expenses
    
    
    3.58
    
    
    
    1.65Production taxes
    
    
    0.63
    
    
    
    0.64
  Overview of Oilfield Service Operations
  
    
    record quarterly revenue of $8.5 million;
    
    subsidiary level gross profit of approximately $4.6 million;
    
    provided services to more than 270 customers; and
    
    subsidiary level income before taxes of approximately $3.4 million.
  16




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($ in thousands)
 Three Months Ended March 31,2006
    
    
    2005
    
    
    ChangeJobs
    
    
    Revenue
    
    
    Jobs
    
    
    Revenue
    
    
    Jobs
    
    
    % Chg. In Jobs
    
    
    RevenueJob TypeCementing
    
    
    970
    
    
    $
    3,156
    
    
    
    721
    
    
    $
    1,887
    
    
    
    249
    
    
    
    35
    %
    
    $
    1,269Acidizing
    
    
    587
    
    
    
    1,776
    
    
    
    456
    
    
    
    877
    
    
    
    131
    
    
    
    29
    %
    
    
    899Fracturing
    
    
    623
    
    
    
    3,601
    
    
    
    198
    
    
    
    1,103
    
    
    
    425
    
    
    
    215
    %
    
    
    2,498Other
    
    
    
    
    
    
    361
    
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    6Discounts
    
    
    
    
    
    
    (444
    )
    
    
    
    
    
    
    (152
    )
    
    
    
    
    
    
    
    
    
    
    (292
    )Total
    
    
    
    
    
    $
    8,450
    
    
    
    
    
    
    $
    4,070
    
    
    
    
    
    
    
    
    
    
    $
    4,380
 2006 Operational and Financial Objectives
 Exploration and Production
   
    
    The availability of the capital resources required to fund the activity;
    
    The availability of third party contractors for drilling rigs and completion
services (although the Company has one rig under contract and operating in Erath County,
Texas); and
    
    The approval by regulatory agencies of applications for permits to drill in a
timely manner.
  Oilfield Services
  
    
    expand the services that are provided;
    
    expand the area that is serviced; and
    
    gain market share by providing complementary services to Consolidateds existing services.
  17




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Corporate Activities
  Results of operations for the three months ended March 31, 2006 compared to the three months ended
March 31, 2005
 Net Loss
  Revenue
  Cost of Revenue
  Gross Profit
  General and Administrative Expenses
  18




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Depreciation, Depletion, Amortization and Accretion
  Ceiling Write-Down
  Other Income (Expense)
  Liquidity and Capital Resources
     Senior Secured Notes Facility
   19




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Outlook for 2006
       Critical Accounting Policies and Estimates
  
    
    Remaining proved oil and gas reserves (reserve estimates),
    
    Timing of our future drilling activities,
    
    Accruals of operating costs, capital expenditures in progress, and revenue,
    
    Estimated useful life of equipment utilized in the oilfield service business,
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
    
    Estimated timing and cost related to asset retirement obligations,
    
    Estimated realizability of deferred tax assets,
    
    Estimated fair value of derivative instruments.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Commodity Risk
     Term of Arrangements
    
    Bbls per Day
    
    Floor Price
    
    Ceiling PriceJanuary 1, 2006  June 30, 2006
    
    
    50
    
    
    $
    50.00
    
    
    $
    64.40October 1, 2005  December 31, 2006
    
    
    50
    
    
    $
    52.50
    
    
    $
    74.00July 1, 2006  March 31, 2007
    
    
    50
    
    
    $
    55.00
    
    
    $
    77.00January 1, 2007  June 30, 2007
    
    
    50
    
    
    $
    57.50
    
    
    $
    77.50
  Term of Arrangement
    
    MMBtu per Day
    
    Floor Price
    
    Ceiling PriceMay 1, 2006  July 31, 2006
    
    
    1,000
    
    
    $
    4.50
    
    
    $
    8.00
  Interest Rate Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
  21




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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  31.1
    
    Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200232
    
    Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley
Act)99.1
    
    Calculation of the Maximum Notes Balance at March 31, 2006 under the
Senior Secured Notes Facility dated January 13, 2005
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##### Table of Contents



SIGNATURES
  Signature
    
    Capacity
    
    Date/s/ James A. Tuell

James A. Tuell
    
    President and Chief Executive Officer
(Principal Executive Officer)
    
    May 10, 2006/s/ Timothy A. Ficker

Timothy A. Ficker
    
    Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    May 10, 2006
 23




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##### Table of Contents



Index of Exhibits
 31.1
    
    Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200232
    
    Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley
Act)99.1
    
    Calculation of the Maximum Notes Balance at March 31, 2006