##### 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 September 30, 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
 
 Common Stock
 None
 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
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II Other InformationItem 1.Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    32Signatures
    
    
    33Exhibits
    
    
    34Certification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification of Principal Executive Officer and Principal Financial OfficerCalculation of the Maximum Notes Balance
  2




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##### Table of Contents



INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    465
    
    
    $
    7,942Accounts receivable, less allowance for doubtful accounts of $154 (2006) and $85 (2005)
    
    
    6,529
    
    
    
    4,748Inventories
    
    
    629
    
    
    
    453Prepaid expenses and other
    
    
    741
    
    
    
    422Total current assets
    
    
    8,364
    
    
    
    13,565Property and equipment, at cost, net of accumulated depreciation
    
    
    12,979
    
    
    
    11,489Oil and gas properties, using full cost accounting, net of accumulated depreciation,
depletion and amortization and ceiling write-down:Proved
    
    
    35,400
    
    
    
    43,699Unproved
    
    
    27,267
    
    
    
    22,849Intangible assets, at cost, net of accumulated amortization
    
    
    213
    
    
    
    2,514Other assets, net
    
    
    1,538
    
    
    
    168Total assets
    
    $
    85,761
    
    
    $
    94,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Note payable and current portion of long-term debt, net of discount
    
    $
    55,301
    
    
    $
    288Accounts payable
    
    
    10,001
    
    
    
    5,035Accrued liabilities
    
    
    3,782
    
    
    
    6,314Current portion of asset retirement obligations
    
    
    412
    
    
    
    284Total current liabilities
    
    
    69,496
    
    
    
    11,921Long-term liabilities:Production taxes payable and other
    
    
    515
    
    
    
    401Asset retirement obligations, less current portion
    
    
    1,112
    
    
    
    1,129Accrued interest
    
    
    
    
    
    
    905Derivative liabilities
    
    
    9,346
    
    
    
    9,837Long-term debt, net of discount, less current portion
    
    
    
    
    
    
    39,874Total liabilities
    
    
    80,469
    
    
    
    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, 15,616,350
(2006) and 13,501,988 (2005) shares issued and outstanding
    
    
    2
    
    
    
    1Additional paid-in-capital
    
    
    70,187
    
    
    
    58,335Accumulated deficit
    
    
    (65,058
    )
    
    
    (28,119
    )Accumulated other comprehensive income
    
    
    161
    
    
    
    Total stockholders equity
    
    
    5,292
    
    
    
    30,217Total liabilities and stockholders equity
    
    $
    85,761
    
    
    $
    94,284
  3




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##### Table of Contents



INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 For the Three Months
    
    
    For the Nine Months EndedEnded September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except share and per share amounts)RevenueOilfield services
    
    $
    11,070
    
    
    $
    5,899
    
    
    $
    28,819
    
    
    $
    15,416Oil and gas
    
    
    3,742
    
    
    
    2,906
    
    
    
    9,462
    
    
    
    6,554Total revenue
    
    
    14,812
    
    
    
    8,805
    
    
    
    38,281
    
    
    
    21,970Cost of revenueOilfield services
    
    
    5,312
    
    
    
    3,029
    
    
    
    13,317
    
    
    
    7,548Oil and gas production expenses
    
    
    990
    
    
    
    1,053
    
    
    
    3,271
    
    
    
    2,503Oil and gas production taxes
    
    
    166
    
    
    
    284
    
    
    
    401
    
    
    
    653Total cost of revenue
    
    
    6,468
    
    
    
    4,366
    
    
    
    16,989
    
    
    
    10,704Gross profit
    
    
    8,344
    
    
    
    4,439
    
    
    
    21,292
    
    
    
    11,266General and administrative expenses
    
    
    2,513
    
    
    
    1,496
    
    
    
    5,852
    
    
    
    4,132Depreciation, depletion, amortization and accretion
    
    
    3,213
    
    
    
    2,184
    
    
    
    7,066
    
    
    
    5,567Ceiling write-down of oil and gas properties
    
    
    15,000
    
    
    
    
    
    
    
    26,600
    
    
    
    Operating income (loss)
    
    
    (12,382
    )
    
    
    759
    
    
    
    (18,226
    )
    
    
    1,567Other income (expense)Financing costs:Interest expense
    
    
    (859
    )
    
    
    (790
    )
    
    
    (2,492
    )
    
    
    (1,725
    )Amortization of loan discount and costs
    
    
    (226
    )
    
    
    (265
    )
    
    
    (1,207
    )
    
    
    (714
    )Early extinguishment of debt
    
    
    (26,918
    )
    
    
    
    
    
    
    (27,128
    )
    
    
    (1,276
    )Change in derivative fair value
    
    
    11,889
    
    
    
    1,059
    
    
    
    11,733
    
    
    
    (1,842
    )Other
    
    
    207
    
    
    
    (117
    )
    
    
    381
    
    
    
    (471
    )Total other income (expense )
    
    
    (15,907
    )
    
    
    (113
    )
    
    
    (18,713
    )
    
    
    (6,028
    )Net income (loss)
    
    $
    (28,289
    )
    
    $
    646
    
    
    $
    (36,939
    )
    
    $
    (4,461
    )Net income (loss) per share:Basic
    
    $
    (1.87
    )
    
    $
    0.05
    
    
    $
    (2.55
    )
    
    $
    (0.35
    )Diluted
    
    $
    (1.87
    )
    
    $
    0.00
    
    
    $
    (2.55
    )
    
    $
    (0.35
    )Weighted average shares outstanding:Basic
    
    
    15,136,896
    
    
    
    13,453,246
    
    
    
    14,463,004
    
    
    
    12,745,252Diluted
    
    
    15,136,896
    
    
    
    13,848,656
    
    
    
    14,463,004
    
    
    
    12,745,252
  4




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INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (UNAUDITED)
  AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    EquityBalance, December 31, 2005
    
    
    13,501,988
    
    
    $
    1
    
    
    $
    58,335
    
    
    $
    (28,119
    )
    
    $
    
    
    
    $
    30,217Issuance of common stock
upon conversion of senior
secured notes and
settlement of accrued
interest
    
    
    1,964,612
    
    
    
    1
    
    
    
    10,657
    
    
    
    
    
    
    
    
    
    
    
    10,658Issuance of common stock
upon the exercise of
options
    
    
    144,750
    
    
    
    
    
    
    
    694
    
    
    
    
    
    
    
    
    
    
    
    694Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    471
    
    
    
    
    
    
    
    
    
    
    
    471Other
    
    
    5,000
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,939
    )
    
    
    
    
    
    
    (36,939
    )Unrealized gain on
effective commodity
derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    161Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,778
    )Balance, September 30, 2006
    
    
    15,616,350
    
    
    $
    2
    
    
    $
    70,187
    
    
    $
    (65,058
    )
    
    $
    161
    
    
    $
    5,292
  5




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##### Table of Contents



INFINITY
ENERGY RESOURCES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  For the Nine MonthsEnded September 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (36,939
    )
    
    $
    (4,461
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation, depletion, amortization and accretion
    
    
    7,066
    
    
    
    5,567Ceiling write-down of oil and gas properties
    
    
    26,600
    
    
    
    Amortization of loan discount and costs
    
    
    1,207
    
    
    
    714Non-cash early extinguishment of debt
    
    
    27,128
    
    
    
    1,052Current interest expense settled by stock issuance, net of amounts capitalized
    
    
    1,079
    
    
    
    Interest expense added to principal
    
    
    1,357
    
    
    
    Non-cash stock-based compensation expense
    
    
    501
    
    
    
    Changes in fair value of derivative instruments
    
    
    (11,733
    )
    
    
    1,842Unrealized (gain) loss on commodity derivative instruments
    
    
    (73
    )
    
    
    118Impairment of note receivable
    
    
    
    
    
    
    396(Gain) loss on sales of assets
    
    
    (267
    )
    
    
    88Change in operating assets and liabilities:Increase in accounts receivable
    
    
    (1,781
    )
    
    
    (1,271
    )Increase in inventories
    
    
    (176
    )
    
    
    (238
    )Increase in prepaid expenses and other
    
    
    (695
    )
    
    
    (105
    )Increase (decrease) in accounts payable and accrued liabilities
    
    
    227
    
    
    
    (1,715
    )Net cash provided by operating activities
    
    
    13,501
    
    
    
    1,987Cash flows from investing activities:Capital expenditures  exploration and production
    
    
    (23,821
    )
    
    
    (26,256
    )Capital expenditures  oilfield services
    
    
    (4,631
    )
    
    
    (2,960
    )Proceeds from sale of fixed assets  exploration and production
    
    
    149
    
    
    
    133Proceeds from sale of fixed assets  oilfield services
    
    
    5
    
    
    
    20Proceeds from sale of fixed assets  corporate
    
    
    64
    
    
    
    Proceeds from note receivable
    
    
    
    
    
    
    1,204Increase in other assets
    
    
    (788
    )
    
    
    Net cash used in investing activities
    
    
    (29,022
    )
    
    
    (27,859
    )Cash flows from financing activities:Proceeds from notes payable
    
    
    
    
    
    
    434Proceeds from borrowings on long-term debt
    
    
    8,000
    
    
    
    39,500Proceeds from issuance of common stock
    
    
    694
    
    
    
    4,707Debt and equity issuance costs
    
    
    (333
    )
    
    
    (2,540
    )Repayment of notes payable
    
    
    (317
    )
    
    
    (255
    )Repayment of long-term debt
    
    
    
    
    
    
    (9,290
    )Net cash provided by financing activities
    
    
    8,044
    
    
    
    32,556Net (decrease) increase in cash and cash equivalents
    
    
    (7,477
    )
    
    
    6,684Cash and cash equivalents, beginning of period
    
    
    7,942
    
    
    
    3,052Cash and cash equivalents, end of period
    
    $
    465
    
    
    $
    9,736
  6




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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
    Liquidity;
Going Concern
  7




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##### Table of Contents



Oil and Gas Properties
     As ofSeptember 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Proved oil and gas properties
    
    $
    99,726
    
    
    $
    75,484Unproved oil and gas properties
    
    
    27,267
    
    
    
    22,849Total
    
    
    126,993
    
    
    
    98,333Less accumulated depreciation, depletion, amortization and ceiling write-downs
    
    
    (64,326
    )
    
    
    (31,785
    )Net capitalized costs
    
    $
    62,667
    
    
    $
    66,548
   8




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##### Table of Contents



Derivative Instruments
 Accounting for Derivative Instruments
and Hedging Activities
   Income Taxes
  Comprehensive Income (Loss)
  Other Assets, Net
  9




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109
 Fair Value Measurements
 Note 2  Stock Options
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  Options Under Equity Incentive Plans
   10




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##### Table of Contents



Nine Months Ended September 30,2006
    
    2005Expected term (in years)
    
    
    5.5 - 10
    
    
    
    10Expected stock price volatility
    
    
    62
    %
    
    
    60% - 70
    %Expected dividends
    
    
    
    
    
    
    Risk-free rate
    
    
    4.98% - 5.07
    %
    
    
    4.00% - 4.13
    %Forfeiture rate
    
    
    10
    %
    
    
    
  Weighted Average
    
    
    Aggregate
    
    
    Weighted AverageExercise
    
    
    Intrinsic Value
    
    
    RemainingNumber of Options
    
    
    Price Per Share
    
    
    (in thousands)
    
    
    Contractual TermOutstanding at January 1, 2006
    
    
    1,383,250
    
    
    $
    6.52Granted
    
    
    340,000
    
    
    
    6.48Exercised
    
    
    (144,750
    )
    
    
    4.79Forfeited
    
    
    (161,500
    )
    
    
    5.03Outstanding at September 30, 2006
    
    
    1,417,000
    
    
    
    6.86
    
    
    $
    
    
    
    7.5 yearsExercisable at September 30, 2006
    
    
    1,077,000
    
    
    
    6.97
    
    
    $
    
    
    
    6.5 years
    Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005(in thousands, except share amounts)Net income (loss) as reported
    
    $
    646
    
    
    $
    (4,461
    )Deduct: Total stock-based employee
compensation expense, determined under
fair value based method for all awards
    
    
    (1,913
    )
    
    
    (3,122
    )Pro forma net income (loss)
    
    $
    (1,267
    )
    
    $
    (7,583
    )Net income (loss) per share as reported:Basic
    
    $
    0.05
    
    
    $
    (0.35
    )Diluted
    
    $
    0.00
    
    
    $
    (0.35
    )Pro forma net income (loss) per share:Basic
    
    $
    (0.09
    )
    
    $
    (0.59
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.59
    )
 11




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##### Table of Contents



Note 3  Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
  For the Nine Months EndedSeptember 30,2006
    
    
    2005(in thousands)Asset retirement obligations at beginning of period
    
    $
    1,413
    
    
    $
    635Accretion expense
    
    
    81
    
    
    
    43Liabilities incurred
    
    
    30
    
    
    
    30Liabilities settled
    
    
    
    
    
    
    (199
    )Revisions of estimates
    
    
    
    
    
    
    839Asset retirement obligations at end of period
    
    
    1,524
    
    
    
    1,348Less: current portion of asset retirement obligations
    
    
    (412
    )
    
    
    (279
    )Asset retirement obligations, less current portion
    
    $
    1,112
    
    
    $
    1,069
 Note 4 Debt
  As ofSeptember 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Senior secured notes, net of discount of $116 at
September 30, 2006 and $7,417 at December 31, 2005
    
    $
    55,241
    
    
    $
    37,583Note payable to seller (for a 50% interest in an airplane)
    
    
    
    
    
    
    2,203Other, principally capitalized lease obligations
    
    
    60
    
    
    
    37655,301
    
    
    
    40,162Less current portion
    
    
    (55,301
    )
    
    
    (288
    )Long-term debt, net
    
    $
    
    
    
    $
    39,874
 Senior Secured Notes Facility
  12




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##### Table of Contents



Debt Discount
  Ø
    
    repayment or conversion of $2.5 million principal amount of Notes by September 15,
2006 (a total of $2,547,000 of principal and interest was converted into 614,500 shares
of common stock by September 15, 2006);Ø
    
    repayment or conversion of $2.0 million principal amount of Notes per month for the
next nine months commencing October 2, 2006;Ø
    
    repayment in cash of $9.0 million principal amount of Notes on each of January 15,
2007, April 15, 2007 and July 15, 2007;Ø
    
    re-pricing of the exercise price of the outstanding Warrants from a weighted-average
exercise price of $9.81 per share to $5.00 per share and increasing the number of
Warrants from approximately 3.0 million to approximately 5.8 million;Ø
    
    elimination of the Companys ability to sell additional notes or warrants under the
Senior Secured Notes Facility.
  Ø
    
    increase in the outstanding principal Notes balance by 20%, or $9 million, plus an
additional $1.4 million equal to the interest that would have been due on October 2,
2006, to arrive at a new principal Notes balance of $55.4 million;Ø
    
    a final maturity date for all remaining Notes, less the aggregate balance of any
converted Notes (see below), plus accrued interest, due in cash on January 15, 2007;Ø
    
    deferral of the January 2, 2007 interest payment to the final maturity of the Notes
on January 15, 2007;Ø
    
    limitation on exploration and production related trade payables in excess of 90 days
beyond invoice due date not to exceed $7.5 million and a requirement to reduce
exploration and production related trade payables to a maximum not exceeding $6.0
million by January 1, 2007 or at any time thereafter;Ø
    
    removal of the mandatory prepayment or conversion of $2.0 million of principal on the
first business day of each month beginning October 2, 2006, as set forth in the August
waiver;Ø
    
    conversion prior to January 15, 2007 (unless the Notes are repaid prior in full by
the Company), at the election of the Note holders, in the following amounts (the
Companys option to repay principal and interest with direct issuances of common stock
has been eliminated):
 
    
    up to approximately $3.4 million plus accrued interest commencing October 3, 2006
    
    up to an additional $2.0 million plus accrued interest commencing November 1, 2006
    
    up to an additional $2.0 million plus accrued interest commencing December 1, 2006
 Ø
    
    Warrant holders may require the Company to redeem their Warrants in connection with a
sale of all or substantially all of Infinity to a non-public buyer
 13




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Debtors Accounting for a Modification or Exchange of Debt
Instruments
 Change in fair value of Warrants upon repricing
    
    $
    9,812Increase in principal resulting from default
    
    
    9,000Write off of debt discount
    
    
    6,467Write off of debt issuance costs and other
    
    
    1,639$
    26,918
 Debt Discount
 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
  Capitalized Interest
  Promissory Note to Seller
  Note 5  Derivative Instruments and Hedging Activities
  14




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##### Table of Contents



Commodity Derivatives
  NYMEX
    
    NYMEXTerm of Arrangements
    
    Bbls per Day
    
    Floor Price
    
    Ceiling PriceOctober 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
    
    
    $
    77.50April 1, 2007  September 30, 2007
    
    
    50
    
    
    $
    60.00
    
    
    $
    85.50July 1, 2007  December 31, 2007
    
    
    50
    
    
    $
    62.50
    
    
    $
    87.00October 1, 2007  March 31, 2008
    
    
    50
    
    
    $
    62.00
    
    
    $
    85.60
  MMBtu
    
    WAHA
    
    WAHATerm of Arrangements
    
    per Day
    

    Floor Price
    

    Ceiling PriceOctober 1, 2006  December 31, 2006
    
    
    1,000
    
    
    $
    6.00
    
    
    $
    10.55January 1, 2007  March 31, 2007
    
    
    1,000
    
    
    $
    7.50
    
    
    $
    12.00April 1, 2007  June 30, 2007
    
    
    1,000
    
    
    $
    6.00
    
    
    $
    10.55July 1, 2007  September 30, 2007
    
    
    1,000
    
    
    $
    6.50
    
    
    $
    10.20
  Other Derivatives
   15




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##### Table of Contents



Note 6  Fair Value of Financial Instruments
   Note 7  Earnings Per Share
  For the Three Months Ended September 30,2006
    
    
    2005(in thousands, except share and per share amounts)Net
    
    
    
    
    
    
    Per Share
    
    
    Net
    
    
    
    
    
    
    Per ShareIncome
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    AmountBasic EPS:Net income (loss) and share amounts
    
    $
    (28,289
    )
    
    
    15,136,896
    
    
    $
    (1.87
    )
    
    $
    646
    
    
    
    13,453,246
    
    
    $
    0.05Dilutive Securities:Stock Options and Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (606
    )
    
    
    395,410Diluted EPS:Net income (loss) and share amounts
    
    $
    (28,289
    )
    
    
    15,136,896
    
    
    $
    (1.87
    )
    
    $
    40
    
    
    
    13,848,656
    
    
    $
    0.00
 For the Nine Months Ended September 30,2006
    
    
    2005(in thousands, except share and per share amounts)Net
    
    
    
    
    
    
    Per Share
    
    
    Net
    
    
    
    
    
    
    Per ShareIncome
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    AmountBasic EPS:Net loss and share amounts
    
    $
    (36,939
    )
    
    
    14,463,004
    
    
    $
    (2.55
    )
    
    $
    (4,461
    )
    
    
    12,745,252
    
    
    $
    (0.35
    )Dilutive Securities:Stock Options and Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS:Net loss and share amounts
    
    $
    (36,939
    )
    
    
    14,463,004
    
    
    $
    (2.55
    )
    
    $
    (4,461
    )
    
    
    12,745,252
    
    
    $
    (0.35
    )
  16




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##### Table of Contents



Note 8  Subsequent Events
 Letter of Intent to Sell Oilfield Services Subsidiaries
  Conversions of Notes
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   FORWARD-LOOKING STATEMENTS
  
    
    expected capital expenditures and cash flow for the remainder of 2006;
    
    increased activity in the oilfield services business;
    
    our efforts to refinance the Notes and to evaluate and pursue strategic alternatives;
    
    our ability to negotiate a definitive sales agreement with respect to the oilfield
services subsidiaries on the schedule anticipated or at all and the timing of the closing of
such a transaction;
    
    planned increases in acreage position;
    
    Infinitys business strategy and anticipated trends in Infinitys business and its future results of operations;
    
    planned exploration, drilling and completion activities;
 17




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##### Table of Contents




    
    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.
  
    
    fluctuations in oil and natural gas prices and production;
    
    availability of drilling rigs, completion services and other support equipment;
    
    incorrect estimates 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;
    
    inability to sell our oilfield services subsidiaries, refinance the senior notes or
consummate other suitable strategic transactions;
    
    possible inability to repay senior notes in cash;
    
    inability to comply with provisions of Senior Secured Notes Facility and Notes, as amended, in the future;
    
    possible action by lenders on future defaults that could result in increased interest,
accelerated maturity, foreclosure or bankruptcy.
 Exploration of Strategic Alternatives
   18




---



##### Table of Contents



Overview of Exploration and Production Activity
  
    
    Drilled ten horizontal wells and four vertical wells targeting the Barnett Shale
formation;
    
    Increased production from the Fort Worth Basin in north central Texas by approximately
215% as compared to the nine months ended December 31, 2005;
    
    Made capital additions of approximately $26.2 million, including costs for leasehold
additions, seismic acquisition and interpretation, and the drilling, completing and
equipping of wells.
   For the Three
    
    For the NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Production:Natural gas (MMcf)
    
    
    357.7
    
    
    
    249.3
    
    
    
    846.6
    
    
    
    680.2Crude oil (thousands of barrels)
    
    
    23.7
    
    
    
    19.1
    
    
    
    66.0
    
    
    
    47.7Total (MMcfe)
    
    
    500.2
    
    
    
    364.1
    
    
    
    1,242.5
    
    
    
    966.6Financial Data (thousands of dollars):Total revenue
    
    $
    3,742
    
    
    $
    2,906
    
    
    $
    9,462
    
    
    $
    6,554Production expenses
    
    
    990
    
    
    
    1,053
    
    
    
    3,271
    
    
    
    2,503Production taxes
    
    
    166
    
    
    
    284
    
    
    
    401
    
    
    
    653Financial Data per Unit ($  per Mcfe):Total revenue
    
    $
    7.48
    
    
    $
    7.98
    
    
    $
    7.62
    
    
    $
    6.78Production expenses
    
    
    1.98
    
    
    
    2.89
    
    
    
    2.63
    
    
    
    2.59Production taxes
    
    
    0.33
    
    
    
    0.78
    
    
    
    0.32
    
    
    
    0.68
  19




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##### Table of Contents



Overview of Oilfield Service Operations
  
    
    record quarterly revenue of $11.1 million;
    
    subsidiary level gross profit of approximately $5.7 million;
    
    provided services to 310 customers; and
    
    subsidiary level income before taxes of approximately $4.3 million.
    (dollars in thousands)
 Three Months Ended September 30,2006
    
    
    2005
    
    
    ChangeJobs
    
    
    Revenue
    
    
    Jobs
    
    
    Revenue
    
    
    Jobs
    
    
    % Chg. In Jobs
    
    
    RevenueJob TypeCementing
    
    
    1,395
    
    
    $
    5,383
    
    
    
    983
    
    
    $
    2,958
    
    
    
    412
    
    
    
    42
    %
    
    $
    2,425Acidizing
    
    
    705
    
    
    
    1,165
    
    
    
    487
    
    
    
    513
    
    
    
    218
    
    
    
    45
    %
    
    
    652Fracturing
    
    
    635
    
    
    
    4,722
    
    
    
    338
    
    
    
    2,406
    
    
    
    297
    
    
    
    88
    %
    
    
    2,316Other
    
    
    
    
    
    
    425
    
    
    
    
    
    
    
    220
    
    
    
    
    
    
    
    
    
    
    
    205Discounts
    
    
    
    
    
    
    (625
    )
    
    
    
    
    
    
    (198
    )
    
    
    
    
    
    
    
    
    
    
    (427
    )Total
    
    
    
    
    
    $
    11,070
    
    
    
    
    
    
    $
    5,899
    
    
    
    
    
    
    
    
    
    
    $
    5,171
 Nine Months Ended September 30,2006
    
    
    2005
    
    
    ChangeJobs
    
    
    Revenue
    
    
    Jobs
    
    
    Revenue
    
    
    Jobs
    
    
    % Chg. In Jobs
    
    
    RevenueJob TypeCementing
    
    
    3,578
    
    
    $
    12,237
    
    
    
    2,503
    
    
    $
    7,078
    
    
    
    1,075
    
    
    
    43
    %
    
    $
    5,159Acidizing
    
    
    1,922
    
    
    
    2,645
    
    
    
    1,414
    
    
    
    1,396
    
    
    
    508
    
    
    
    36
    %
    
    
    1,249Fracturing
    
    
    1,866
    
    
    
    14,512
    
    
    
    919
    
    
    
    6,875
    
    
    
    947
    
    
    
    103
    %
    
    
    7,637Other
    
    
    
    
    
    
    1,042
    
    
    
    
    
    
    
    632
    
    
    
    
    
    
    
    
    
    
    
    410Discounts
    
    
    
    
    
    
    (1,617
    )
    
    
    
    
    
    
    (565
    )
    
    
    
    
    
    
    
    
    
    
    (1,052
    )Total
    
    
    
    
    
    $
    28,819
    
    
    
    
    
    
    $
    15,416
    
    
    
    
    
    
    
    
    
    
    $
    13,403
 20




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##### Table of Contents



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 that is expected to be available in 2007);
and
    
    The approval by regulatory agencies of applications for permits to drill in a timely
manner.
  Oilfield Services
  Corporate Activities
  Results of operations for the three months ended September 30, 2006 compared to the three months
ended September 30, 2005
 Net Income (Loss)
  Revenue
  21




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##### Table of Contents



Cost of Revenue
  Gross Profit
  General and Administrative Expenses
  Depreciation, Depletion, Amortization and Accretion
  Ceiling Write-Down
  Other Income (Expense)
  22




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##### Table of Contents



Results of operations for the nine months ended September 30, 2006 compared to the nine months
ended September 30, 2005
 Net Loss
  Revenue
  Cost of Revenue
  Gross Profit
  General and Administrative Expenses
  Depreciation, Depletion, Amortization and Accretion
  23




---



##### Table of Contents



Ceiling Write-Down
  Other Income (Expense)
  Liquidity and Capital Resources
     24




---



##### Table of Contents



Waivers and Amendments Under Senior Secured Notes Facility
  Ø
    
    repayment or conversion of $2.5 million principal amount of Notes by September 15,
2006 (a total of $2,547,000 of principal and interest was converted into 614,500 shares
of common stock by September 15, 2006);Ø
    
    repayment or conversion of $2.0 million principal amount of Notes per month for the
next nine months commencing October 2, 2006;Ø
    
    repayment in cash of $9.0 million principal amount of Notes on each of January 15,
2007, April 15, 2007 and July 15, 2007;Ø
    
    re-pricing of the exercise price of the outstanding Warrants from a weighted-average
exercise price of $9.81 per share to $5.00 per share and increasing the number of
Warrants from approximately 3.0 million to approximately 5.8 million;Ø
    
    removal of the Companys ability to sell additional notes or warrants under the
Senior Secured Notes Facility.
  Ø
    
    increase in the outstanding principal Notes balance by 20%, or $9 million, plus an
additional $1.4 million equal to the interest that would have been due on October 2,
2006, to arrive at a new principal Notes balance of $55.4 million;Ø
    
    a final maturity date for all remaining Notes, less the aggregate balance of any
converted Notes (see below), plus accrued interest, due in cash on January 15, 2007;Ø
    
    deferral of the January 2, 2007 interest payment to the final maturity of the Notes
on January 15, 2007;Ø
    
    limitation on exploration and production related trade payables in excess of 90 days
beyond invoice due date not to exceed $7.5 million and a requirement to reduce
exploration and production related trade payables to a maximum not exceeding $6.0
million by January 1, 2007 or at any time thereafter;Ø
    
    removal of the mandatory prepayment or conversion of $2.0 million of principal on the
first business day of each month beginning October 2, 2006, as set forth in the August
waiver;Ø
    
    conversion prior to January 15, 2007 (unless the Notes are repaid prior in full by
the Company), at the election of the Note holders, in the following amounts (the
Companys option to repay principal and interest with direct issuances of common stock
has been eliminated):
 
    
    up to approximately $3.4 million plus accrued interest commencing October 3, 2006
    
    up to an additional $2.0 million plus accrued interest commencing November 1, 2006
    
    up to an additional $2.0 million plus accrued interest commencing December 1, 2006
 Ø
    
    Warrant holders may require the Company to redeem their Warrants in connection with a
sale of all or substantially all of Infinity to a non-public buyer
   25




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##### Table of Contents



Outlook for 2006
         Critical Accounting Policies and Estimates
  26




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##### Table of Contents




    
    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,
    
    Estimated timing and cost related to asset retirement obligations,
    
    Estimated realizability of deferred tax assets,
    
    Estimated fair value of stock based awards,
    
    Estimated fair value of derivative instruments.
 Recent Accounting Pronouncements
 Share-Based Payments
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  Nine Months Ended September 30,2006
    
    2005Expected term (in years)
    
    
    5.5 - 10
    
    
    
    10Expected stock price volatility
    
    
    62
    %
    
    
    60% - 70
    %Expected dividends
    
    
    
    
    
    
    Risk-free rate
    
    
    4.98% - 5.07
    %
    
    
    4.00% - 4.13
    %Forfeiture rate
    
    
    10
    %
    
    
    
 27




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##### Table of Contents



Uncertain Tax Positions
  Fair Value Measurements
 Fair Value Measurements
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Commodity Risk
     NYMEX
    
    NYMEXTerm of Arrangements
    
    Bbls per Day
    
    Floor Price
    
    Ceiling PriceOctober 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
    
    
    $
    77.50April 1, 2007  September 30, 2007
    
    
    50
    
    
    $
    60.00
    
    
    $
    85.50July 1, 2007  December 31, 2007
    
    
    50
    
    
    $
    62.50
    
    
    $
    87.00October 1, 2007  March 31, 2008
    
    
    50
    
    
    $
    62.00
    
    
    $
    85.60
 28




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##### Table of Contents



MMBtu
    
    WAHA
    
    WAHATerm of Arrangements
    
    per Day
    
    Floor Price
    
    Ceiling PriceOctober 1, 2006  December 31, 2006
    
    
    1,000
    
    
    $
    6.00
    
    
    $
    10.55January 1, 2007  March 31, 2007
    
    
    1,000
    
    
    $
    7.50
    
    
    $
    12.00April 1, 2007  June 30, 2007
    
    
    1,000
    
    
    $
    6.00
    
    
    $
    10.55July 1, 2007  September 30, 2007
    
    
    1,000
    
    
    $
    6.50
    
    
    $
    10.20
  Interest Rate Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
  
 PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  We have been unable to comply with certain requirements of our Senior Secured Notes Facility and
may not be able to meet our obligations under the Facility in the future or repay the Notes.
  29




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##### Table of Contents



The covenants and debt service obligations of our Senior Secured Note Facility may adversely affect
our cash flow and our ability to raise additional capital.
   Ø
    
    Additional covenant violations, if any, or violations of the terms of the August
Waiver , as amended by the October Waiver, could increase the principal amount of Notes
and further accelerate our obligation to repay the Notes.Ø
    
    We will need to use a portion of our cash flow to reduce trade payables, which will
reduce the amount of cash we have available to use in our ongoing operations and to
devote to capital projects. As a result of such cash flow constraints, we have released
a drilling rig that had been scheduled to resume drilling for us in the Fort Worth Basin
of Texas, which will negatively affect oil and natural gas production and earnings in
the short run.Ø
    
    Failure to fulfill our obligations under the Senior Secured Notes Facility could
result in foreclosure on our assets or the initiation of bankruptcy proceedings.
 30




---



##### Table of Contents



Ø
    
    The amount of our accrued interest expense may increase because our borrowings are at
a variable rate of interest, which, if interest rates increase, would result in higher
interest expense.
  Ø
    
    We may have a higher level of debt than many of our competitors, which may place us
at a competitive disadvantage.Ø
    
    We may issue equity securities to repay indebtedness, which issuance could be at a
discount to the market price, causing additional dilution to our
stockholders.Ø
    
    We may be more vulnerable to economic downturns and adverse developments in our
industry.Ø
    
    Our flexibility in planning for, or reacting to, changes in our business and the
industries in which we operate may be limited.
 Exploration and development of our oil and gas projects will require large amounts of capital which
we may not be able to obtain.
  
 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
  31




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##### Table of Contents



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 September 30, 2006 under the Senior Secured Notes Facility
dated January 13, 2005
 32




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##### Table of Contents



SIGNATURES
  Signature
    
    Capacity
    
    Date/s/ Stanton E. Ross
    
    Chief Executive Officer
    
    November 9, 2006Stanton E. Ross
    
    (Principal
Executive Officer)/s/ Timothy A. Ficker
    
    Vice President, Chief Financial Officer
    
    November 9, 2006Timothy A. Ficker
    
    (Principal
Financial and Accounting Officer)
 33




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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 September 30, 2006
 34