AMERICAN NOBLE GAS, INC. - Quarter Report: 2006 June (Form 10-Q)

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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 June 30, 2006


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.

(Exact Name of Registrant as Specified in its Charter)


Delaware (State of Incorporation)		20-3126427 (I.R.S. Employer Identification Number)

633 Seventeenth Street, Suite 1800, Denver, Colorado 80202
(Address of Principal Executive Offices, Including Zip Code)

(720) 932-7800
(Registrant’s telephone number, including area code)

950 Seventeenth Street, Suite 800
Denver, Colorado 80202
(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: Common Stock

Securities registered pursuant to Section 12(g) of the Act: None

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 8, 2006, 15,001,850, shares of the Registrant’s $0.0001 par value Common Stock were outstanding.

TABLE OF CONTENTS


PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets			3
Consolidated Statements of Operations			4
Consolidated Statement of Changes in Stockholders’ Equity			5
Consolidated Statements of Cash Flows			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			25
PART II Other Information
Item 1.Legal Proceedings			25
Item 1A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3. Defaults Upon Senior Securities			25
Item 4. Submission of Matters to a Vote of Security Holders			25
Item 5. Other Information			26
Item 6. Exhibits			26
Signatures			27
Exhibits			28
Form of Change in Control Agreement
Change in Control Agreement
Waiver and Amendment dated August 9, 2006 to Senior Secured Notes Facility
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification Pursuant to Section 906
Calculation of the Maximum Notes Balance at June 30, 2006

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)


	June 30,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	1,925		$	7,942
Accounts receivable, less allowance for doubtful accounts of $134 (2006) and $85 (2005)		5,873			4,748
Inventories		592			453
Prepaid expenses and other		309			422

Total current assets		8,699			13,565
Property and equipment, at cost, net of accumulated depreciation		12,270			11,489
Oil and gas properties, using full cost accounting, net of accumulated depreciation, depletion and amortization and ceiling write-down:
Proved		52,430			43,699
Unproved		25,995			22,849
Intangible assets, at cost, net of accumulated amortization		2,217			2,514
Other assets, net		1,402			168

Total assets	$	103,013		$	94,284


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Note payable and current portion of long-term debt, net of discount	$	40,773		$	288
Accounts payable		13,359			5,035
Accrued liabilities		5,120			6,314
Current portion of asset retirement obligations		317			284

Total current liabilities		59,569			11,921
Long-term liabilities:
Production taxes payable and other		343			401
Asset retirement obligations, less current portion		1,183			1,129
Accrued interest		1,346			905
Derivative liabilities		11,596			9,837
Long-term debt, net of discount, less current portion		—			39,874

Total liabilities		74,037			64,067

Commitments and contingencies
Stockholders’ 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, 14,671,261 (2006) and 13,501,988 (2005) shares issued and outstanding		1			1
Additional paid-in-capital		65,744			58,335
Accumulated deficit		(36,769	)		(28,119	)

Total stockholders’ equity		28,976			30,217

Total liabilities and stockholders’ equity	$	103,013		$	94,284

See Notes to Unaudited Consolidated Financial Statements.

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
	(in thousands, except share and per share amounts)
Revenue
Oilfield services	$	9,299		$	5,447		$	17,749		$	9,517
Oil and gas		3,356			2,204			5,720			3,649

Total revenue		12,655			7,651			23,469			13,166

Cost of revenue
Oilfield services		4,132			2,516			8,005			4,520
Oil and gas production expenses		1,138			1,010			2,281			1,449
Oil and gas production taxes		34			201			235			370

Total cost of revenue		5,304			3,727			10,521			6,339


Gross profit		7,351			3,924			12,948			6,827

General and administrative expenses		1,639			1,356			3,339			2,636

Depreciation, depletion, amortization and accretion		2,289			1,797			3,853			3,384

Ceiling write-down of oil and gas properties		2,500			—			11,600			—


Operating income (loss)		923			771			(5,844	)		807


Other income (expense)
Financing costs:
Interest expense		(862	)		(418	)		(1,633	)		(935	)
Amortization of loan discount and costs		(541	)		(206	)		(981	)		(449	)
Early extinguishment of debt		(88	)		(372	)		(210	)		(1,276	)
Change in derivative fair value		3,304			5,012			(156	)		(2,901	)
Gain (loss) on sales of other assets		(27	)		(91	)		267			(91	)
Other		(54	)		(340	)		(93	)		(262	)

Total other income (expense)		1,732			3,585			(2,806	)		(5,914	)


Net income (loss)	$	2,655		$	4,356		$	(8,650	)	$	(5,107	)


Net income (loss) per share:

Basic	$	0.18		$	0.33		$	(0.61	)	$	(0.41	)


Diluted	$	0.18		$	0.31		$	(0.61	)	$	(0.41	)


Weighted average shares outstanding:

Basic		14,415,500			13,159,575			14,121,487			12,385,310


Diluted		14,629,884			13,528,198			14,121,487			12,385,310

See Notes to Unaudited Consolidated Financial Statements.

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share amounts)


					Additional
	Common Stock				Paid-In		Accumulated			Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Balance, December 31, 2005		13,501,988	$	1	$	58,335	$	(28,119	)	$	30,217
Issuance of common stock upon conversion of senior secured notes and settlement of accrued interest		1,058,523		—		6,704		—			6,704
Issuance of common stock upon the exercise of options		105,750		—		525		—			525
Employee stock options granted		—		—		150		—			150
Other		5,000		—		30		—			30
Net loss		—		—		—		(8,650	)		(8,650	)

Balance, June 30, 2006		14,671,261	$	1	$	65,744	$	(36,769	)	$	28,976

See Notes to Unaudited Consolidated Financial Statements.

INFINITY ENERGY RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)


	For the Six Months
	Ended June 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(8,650	)	$	(5,107	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion		3,853			3,384
Ceiling write-down of oil and gas properties		11,600			—
Amortization of loan discount and costs		981			449
Non-cash early extinguishment of debt		210			1,052
Current interest expense settled by stock issuance, net of amounts capitalized		232			—
Non-cash stock-based compensation expense		181			—
Changes in fair value of derivative instruments		156			2,901
Unrealized loss (gain) on commodity derivative instruments		124			(23)
Impairment of note receivable		—			396
(Gain) loss on sales of assets		(267	)		91
Change in operating assets and liabilities:
Increase in accounts receivable		(1,125	)		(1,201	)
Increase in inventories		(139	)		(204	)
(Increase) decrease in prepaid expenses and other		(324	)		186
Increase in accounts payable and accrued liabilities		2,345			143

Net cash provided by operating activities		9,177			2,067


Cash flows from investing activities:
Capital expenditures – exploration and production		(18,952	)		(21,342	)
Capital expenditures – oilfield services		(3,532	)		(1,959	)
Proceeds from sale of fixed assets – exploration and production		113			133
Proceeds from sale of fixed assets – oilfield services		5			12
Proceeds from sale of fixed assets — corporate		62			—
Payments on note receivable		—			4
Increase in other assets		(798	)		—

Net cash used in investing activities		(23,102	)		(23,152	)


Cash flows from financing activities:
Proceeds from borrowings on long-term debt		8,000			30,000
Proceeds from issuance of common stock		525			4,179
Debt and equity issuance costs		(313	)		(2,124	)
Repayment of notes payable		(304	)		(160	)
Repayment of long-term debt		—			(9,289	)

Net cash provided by financing activities		7,908			22,606

Net (decrease) increase in cash and cash equivalents		(6,017	)		1,521
Cash and cash equivalents, beginning of period		7,942			3,052

Cash and cash equivalents, end of period	$	1,925		$	4,573

See Notes to Unaudited Consolidated Financial Statements.

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

Infinity Energy Resources, Inc. and its subsidiaries (collectively, “Infinity” or the “Company”) are engaged in the acquisition, exploration, development and production of natural gas and crude oil in the United States and the acquisition and exploration of oil and gas properties in Nicaragua. In addition, the Company provides oilfield services in the Mid-Continent region and in northern Wyoming.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of Infinity Energy Resources, Inc. and its wholly-owned subsidiaries, including Consolidated Oil Well Services, Inc. (“Consolidated”), Infinity Oil & Gas of Wyoming, Inc., Infinity Oil and Gas of Texas, Inc., Infinity Oil & Gas of Kansas, Inc. and CIS — Oklahoma, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The accompanying unaudited consolidated financial statements should be read in conjunction with Infinity’s audited consolidated financial statements for the year ended December 31, 2005.

The preparation of unaudited consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to the unaudited consolidated financial statements include the estimated carrying value of unproved properties, the estimate of proved oil and gas reserve volumes and the related present value of estimated future net cash flows and the ceiling test applied to capitalized oil and gas properties, the estimated cost and timing related to asset retirement obligations, the estimated fair value of derivative liabilities and stock based awards and the realizability of deferred tax assets.

Oil and Gas Properties

The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with property acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals and dry holes) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. Overhead related to exploration and development activities is also capitalized. The Company capitalized internal costs of $221,000 and $209,000 during the three months ended June 30, 2006 and 2005, respectively, and $469,000 and $371,000 during the six months ended June 30, 2006 and 2005, respectively. Costs associated with production and general corporate activities are expensed in the period incurred.

Pursuant to full cost accounting rules, the Company performs a ceiling test each quarter. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using current prices, including the effects of derivative instruments designated as cash flow hedges but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, using a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. If capitalized costs exceed the ceiling, the excess must be charged to expense and may not be reversed in future periods.

At June 30, 2006, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $16,500,000, based upon a natural gas price of approximately $6.03 per Mcf and an oil price of approximately $73.21 per barrel in effect at that date. However, based on subsequent price increases to approximately $8.37 per Mcf of gas and approximately $74.62 per barrel of oil at the August 2, 2006 measurement date, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $2,500,000. As a result, in the three and six months ended June 30, 2006 the Company recognized ceiling write-downs of $2,500,000 and $11,600,000, respectively. A decline in prices received for oil and gas sales or an increase in operating costs subsequent to the measurement date or reductions in estimated economically recoverable quantities could result in the recognition of an additional ceiling write-down of oil and gas properties in a future period.

Aggregate capitalized costs relating to the Company’s oil and gas producing activities, and related accumulated depreciation, depletion, amortization and ceiling write-downs are as follows:


	As of
	June 30,			December 31,
	2006			2005
	(in thousands)
Proved oil and gas properties	$	98,957		$	75,484
Unproved oil and gas properties		25,995			22,849

Total		124,952			98,333
Less accumulated depreciation, depletion, amortization and ceiling write-downs		(46,527	)		(31,785	)

Net capitalized costs	$	78,425		$	66,548

Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, as adjusted for future development costs, are amortized over total estimated proved reserves. The costs of wells in progress and unevaluated properties, including any related capitalized interest, are not amortized.

Investments in unproved properties are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically to determine whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding periods of the properties, and geographic and geologic data obtained relating to the properties. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is added to the costs to be amortized.

Proceeds from the sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Expenditures for maintenance and repairs are charged to production expense in the period incurred.

Derivative Instruments

The Company accounts for derivative instruments or hedging activities under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.

The Company periodically hedges a portion of its oil and gas production through swap and collar agreements. The purpose of the hedges is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk.

The Company’s senior secured notes (see Note 4) include certain terms, conditions and features that are separately accounted for as embedded derivatives at estimated fair value. In addition, the related warrants issued with the senior secured notes and non-employee options and warrants are also separately accounted for as freestanding derivatives at estimated fair value. The determination of fair value includes significant estimates by management including the remaining contractual term of the instruments, volatility of the price of the Company’s common stock, interest rates and the probability of conversion, redemption or exercise, among other items. The fluctuations in estimated fair value may be significant from period to period, which, in turn, may have a significant impact on the Company’s reported financial condition and results of operations. See Note 5.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. As of June 30, 2006 and December 31, 2005, the Company had recorded a full valuation allowance for its net deferred tax asset.

Comprehensive Income (Loss)

Comprehensive income (loss) is composed of net income (loss) and all changes to stockholders’ equity, except those due to investments by stockholders, changes in additional paid-in capital and distributions to stockholders. There were no components of comprehensive income (loss) during the three and six months ended June 30, 2006 and 2005.

Other Assets, Net

At June 30, 2006, Other assets include approximately $852,000 of cash on deposit at a bank to secure two letters of credit. The letters of credit were issued to the Instituto Nicaraguense de Energia in connection with the Company’s May 2006 execution of exploration and production contracts for two oil and gas concessions in the Caribbean Sea of Nicaragua, and the Company’s requirement under the contracts to incur capital costs of a similar amount during the first year of the contracts.

In addition, at June 30, 2006, Other assets also includes approximately $337,000 related to estimated production tax refunds. The estimated refunds result from the June 2006 designation of the Barnett Shale in Erath County, Texas as a tight gas formation eligible for a reduced production tax rate.

Note 2 — Stock Options

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. SFAS No. 123(R) also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements that are not included in costs applicable to sales (“excess tax benefits”) to be presented as financing cash inflows in the Statement of Cash Flows. Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with APB No. 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.

The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under this method, compensation cost recognized subsequent to December 31, 2005 will be based on the grant-date fair value for all share-based payments granted subsequent to December 31, 2005, estimated in accordance with the provisions of SFAS No. 123(R). All share-based awards outstanding as of the January 1, 2006 adoption date were fully vested. The results for prior periods have not been restated.

Options Under Equity Incentive Plans

In May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of 470,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. Options granted under the 2006 Plan allow for the purchase of common stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also has other equity incentive plans with terms similar to the 2006 Plan. As of June 30, 2006, 270,881 shares were available for future grants under all plans.

The following table summarizes the inputs used in the calculation of fair value of options granted during the six months ended June 30, 2006 and 2005:


	Six Months Ended June 30,
	2006		2005
Expected term (in years)		5.5 -- 10		10
Expected stock price volatility		62%		60% - 70%
Expected dividends		—		—
Risk-free rate		4.98% - 5.07%		4.00% - 4.13%
Forfeiture rate		—		—

The following table summarizes stock option activity as of and for the six months ended June 30, 2006:


				Weighted Average		Aggregate		Weighted Average
				Exercise		Intrinsic Value		Remaining
	Number of Options			Price Per Share		(in thousands)		Contractual Term
Outstanding at January 1, 2006		1,383,250		$	6.52
Granted		340,000			6.48
Exercised		(105,750	)		4.96
Forfeited		(1,500	)		8.70

Outstanding at June 30, 2006		1,616,000			6.61	$	1,419	7.0 years

Exercisable at June 30, 2006		1,276,000			6.65	$	1,260	6.1 years

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $4.14 and $6.64 per share, respectively. During the six months ended June 30, 2006, the Company recognized compensation expense of approximately $150,000 related to stock options. The Company did not capitalize any stock-based compensation expense during the six months ended June 30, 2006 and 2005. The Company did not recognize a tax benefit related to the stock-based compensation recognized during the six months ended June 30, 2006 as the Company has a fully reserved deferred tax asset. Because the exercise price of all options granted under the Company’s stock option plans have been equal to or greater than the market value on the date of grant, no compensation cost was recognized in any period prior to the January 1, 2006 adoption of SFAS No. 123(R). Unrecognized compensation cost of $1,258,000 as of June 30, 2006, related to unvested stock options will be recognized ratably over the next 11 months.

The Company received cash proceeds of $525,000 and $422,000 from the exercise of stock options during the six months ended June 30, 2006 and 2005, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was approximately $211,000 and $1,030,000, respectively.

The following table illustrates the effect on net income (loss) and income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) to options granted under stock option plans in the three and six months ended June 30, 2005:


	Three Months			Six Months
	Ended June 30,			Ended June 30,
	2005			2005
	(in thousands, except share amounts)
Net income (loss) as reported	$	4,356		$	(5,107	)
Deduct: Total stock-based employee compensation expense, determined under fair value based method for all awards		(113	)		(1,209	)

Pro forma net income (loss)	$	4,243		$	(6,316	)

Net income (loss) per share as reported:


	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2005		2005
	(in thousands, except share amounts)
Basic	$	0.33	$	(0.41	)
Diluted	$	0.31	$	(0.41	)
Pro forma net income (loss) per share:
Basic	$	0.32	$	(0.51	)
Diluted	$	0.30	$	(0.51	)

Note 3 — Asset Retirement Obligations

The Company records estimated future asset retirement obligations pursuant to the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period to present value. Capitalized costs are depleted as a component of the full cost pool using the units of production method. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties.

The following table summarizes the activity for the Company’s asset retirement obligations for the six months ended June 30, 2006 and 2005:


	For the Six Months Ended
	June 30,
	2006			2005
	(in thousands)
Asset retirement obligations at beginning of period	$	1,413		$	635
Accretion expense		60			17
Liabilities incurred		30			24
Liabilities Settled		(3)			—

Revisions of estimates		—			844

Asset retirement obligations at end of period		1,500			1,520
Less: current portion of asset retirement obligations		(317	)		(208	)

Asset retirement obligations, less current portion	$	1,183		$	1,312

Note 4 —Debt

Debt consists of the following:


	As of
	June 30,			December 31,
	2006			2005
	(in thousands)
Senior Secured Notes, net of discount of $6,799 at June 30, 2006 and $7,417 at December 31, 2005	$	40,701		$	37,583
Note payable to seller (for a 50% interest in an airplane)		—			2,203
Other, principally capitalized lease obligations		72			376

		40,773			40,162
Less current portion		(40,773	)		(288	)

Long-term debt, net	$	—		$	39,874

Senior Secured Notes Facility

The Company has a senior secured notes facility (the “Senior Secured Notes Facility”) with a group of lenders led by Promethean Asset Management, LLC (collectively, the “Buyers”). Pursuant to the terms of the Senior Secured Notes Facility, on January 13, 2005, September 7, 2005 and December 9, 2005, the Company sold, and the Buyers purchased, $30.0 million, $9.5 million and $5.5 million, respectively, principal amount of senior secured notes (the “Series A Notes,” “Series B Notes” and “Series C Notes,” respectively), and five-year warrants to purchase 924,194 shares, 732,046 shares, 283,051 shares, 224,202 shares, 191,882 shares and 151,988 shares of the Company’s common stock at exercise prices of $9.09 per share, $11.06 per share, $9.40 per share, $11.44 per share, $8.03 per share and $9.77 per share, respectively (the “Series A Warrants,” “Series B Warrants” and “Series C Warrants,” respectively). The Series A Notes have an initial maturity of 48 months subject to extension for an additional twelve months upon the mutual agreement of Infinity and the Buyers. The Series B and Series C Notes have initial maturities of 42 months (54 months if the maturity of the Series A Notes is extended).

Pursuant to a waiver of certain terms of the Senior Secured Notes Facility, on March 17, 2006, the Company sold, and the Buyers purchased, $8.0 million of additional principal amount of senior secured notes (the “Series D Notes” and collectively with the Series A, Series B and Series C Notes, the “Notes”), and five-year warrants to purchase 258,960 shares of the Company’s common stock at an exercise price of $8.65 per share and 205,128 shares of the Company’s common stock at an exercise price of $10.53 per share (collectively, the “Series D Warrants” and together with the Series A, Series B and Series C Warrants, the “Warrants”). The Series D Notes have an initial maturity of 18 months, which will be extended to 42 months (54 months if the maturity of the Series A Notes is extended) if the principal amount of any series of Notes is, in one or a series of transactions, reduced (either through repayment or conversion) by at least $5 million during the period beginning on March 18, 2006 and ending on September 17, 2006.

The Notes bear interest at the 3-month LIBOR (London Interbank Offered Rate) plus 675 basis points, adjusted the first business day of each calendar quarter (11.75% at June 30, 2006). The Notes are secured by essentially all of the assets of Infinity and its subsidiaries and are guaranteed by each of Infinity’s active subsidiaries. The requirement to prepay Notes prior to maturity will depend upon a maximum Notes balance calculated quarterly based generally upon a combination of financial performance of Consolidated and the SEC after-tax PV-10% value of the Company’s proved reserves. The maximum Notes balance at June 30, 2006 exceeded the Notes outstanding on that date.

The Notes are redeemable by Infinity for cash at any time during the first year at 105% of par value, declining by 1% per year thereafter (101% during any extended maturity period), together with any accrued and unpaid interest. Under certain circumstances, Infinity has the option to repay the Notes with direct issuances of shares of registered common stock in lieu of cash at a conversion rate equal to 95% of the weighted average trading price of shares of the Company’s common stock on the trading day preceding the conversion (the “Conversion Option”). In addition, the Company may elect to settle accrued interest due under the Notes with direct issuances of shares of registered common stock in lieu of cash at a conversion rate equal to 95% of the weighted average trading price of shares of the Company’s common stock on the trading day preceding the conversion. In accordance with terms of the Senior Secured Notes Facility, in January and April 2006, the Company elected to settle approximately $861,000 and $1.2 million, respectively, of accrued interest through the issuance of 126,083 shares and 177,212 shares, respectively, of common stock (see Note 8). In addition, also in accordance with terms of the Senior Secured Notes Facility, in the first and second quarters of 2006, the Company converted $3 million principal amount of Series B Notes, along with accrued interest of $37,000, into 382,062 shares of common stock and $2.5 million principal amount of Series C Notes, along with accrued interest of $28,000, into 373,156 shares of common stock. In connection with the conversions, the Company reclassified unamortized discount (see discussion below under Debt Discount) of $481,000 for the three months ended June 30, 2006 and $1,030,000 for the six months ended June 30, 2006, related to the converted Notes to additional paid-in-capital, reclassified Conversion Option derivative liability of $58,000 for the three months ended June 30, 2006 and $138,000 for the six months ended June 30, 2006 (see Note 5) to additional paid-in-capital and wrote off deferred financing costs of $88,000 for the three months ended June 30, 2006 and $210,000 for the six months ended June 30, 2006.

The Notes include terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens, maximum trade payable balances, asset sales, hedging activities, investments, dividends, mergers, and acquisitions. As of June 30, 2006, the Company was in violation of certain of the covenants, including the maximum trade payable balance covenant. As a result, on August 9, 2006 the Company and the Note holders entered into a waiver and amendment to the Senior Secured Notes Facility and the Notes that waives the violations at June 30, 2006 and provides for the following terms:

	•		repayment or conversion of $2.5 million principal amount of Notes (plus prepayment premiums discussed above and accrued interest) with a conversion period to begin or cash payment due immediately;

	•		repayment or conversion of $2.0 million principal amount of Notes (plus prepayment premiums discussed above and accrued interest) per month for nine of the next ten months commencing October 1, 2006, with the conversion period to begin or cash payment due on the first day of the month;

	•		repayment in cash of $9.0 million on each of January 15, 2007, April 15, 2007 and July 15, 2007;

	•		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;

	•		no additional notes or warrants can be sold under the Senior Secured Notes Facility.

If the Company is unable to maintain compliance with the terms of the amended Notes, the Note holders could declare a triggering event, which would entitle the Note holders to a 20% premium on the principal balance of the outstanding Notes, accelerate the due dates of the Notes, and increase the interest rate on the Notes. The Company’s ability to convert the $20.5 million in principal amount is dependent on the Company’s continued compliance with the amended Notes and the maintenance of a minimum weighted-average stock price during any conversion period. If the Company is unable to meet the conditions to convert amounts as scheduled, it will be required to pay such amounts in cash.

As a result of the repayment schedule discussed above, the Company has classified the outstanding Notes balance at June 30, 2006 as current. The Company has engaged a financial advisor to assist in the Company’s efforts to secure new debt financing, the proceeds from which would be used to repay all or a portion of the outstanding Notes. In addition, the Company has engaged a separate financial advisor to assist in the evaluation of indications of interest received by the Company for Consolidated. If the Company were to sell Consolidated, proceeds from such a sale would be used to repay all or a portion of the outstanding Notes. There can be no assurances that the Company will be able secure new debt financing on economical terms or that the Company will sell Consolidated.

Debt Discount

Under the provisions of SFAS No. 133 and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, the Conversion Option and the Warrants issued in connection with the Notes qualify as derivatives. As a result, upon the issuance of each series of Notes, the Company bifurcated the Conversion Option from the Notes and accounted for it and the related Warrants as derivatives (see Note 5). The initial fair values of the Conversion Option and Warrants, which aggregated $461,000 and $10,108,000, respectively, for all four series of Notes issued to date, were recorded as debt discount. The debt discount is being amortized over the initial maturities of the Notes utilizing the effective interest method.

The Company capitalizes amortization of debt discount to oil and gas properties on expenditures made in connection with exploration and development projects that are not subject to current depletion. Amortization of debt discount is capitalized only for the period that activities are in progress to bring these projects to their intended use. Total debt discount amortized during the three months ended June 30, 2006 and 2005 was $743,000 and $322,000, respectively, of which $334,000 and $198,000, respectively, was capitalized to oil and gas properties. Total debt discount amortized during the six months ended June 30, 2006 and 2005 was $1,330,000 and $595,000, respectively, of which $589,000 and $373,000, respectively, was capitalized to oil and gas properties.

Capitalized Interest

The Company capitalizes interest costs to oil and gas properties on expenditures made in connection with exploration and development projects that are not subject to current depletion. Interest is capitalized only for the period that activities are in progress to bring these projects to their intended use. Interest costs (including amortization of deferred financing costs) capitalized in the three months ended June 30, 2006 and 2005 were $612,000 and $440,000, respectively. Interest costs (including amortization of deferred financing costs) capitalized in the six months ended June 30, 2006 and 2005 were $1,134,000 and $820,000, respectively.

Promissory Note to Seller

In connection with the 2003 acquisition of a 50% interest in an aircraft, the Company entered into a promissory note in favor of the seller. The note and accrued interest were settled in full in February 2006 in connection with the sale of the aircraft.

Note 5 — Derivative Instruments and Hedging Activities

The Company accounts for derivative instruments or hedging activities under the provisions of SFAS No. 133, which requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.

Commodity Derivatives

The Company periodically hedges a portion of its oil and gas production through fixed-price physical contracts and commodity derivative contracts. The purpose of the hedges is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. As of June 30, 2006 the Company had the following oil collar derivative arrangements outstanding (all of which have been designated as cash flow hedges):


Term of Arrangements	Bbls per Day		Floor Price		Ceiling Price
October 1, 2005 — December 31, 2006		50	$	52.50	$	74.00
July 1, 2006 — March 31, 2007		50	$	55.00	$	77.00
January 1, 2007 — June 30, 2007		50	$	57.50	$	77.50
April 1, 2007 — September 30, 2007		50	$	60.00	$	85.50
July 1, 2007 — December 31, 2007		50	$	62.50	$	87.00

As of June 30, 2006 the Company had the following natural gas derivative collar arrangements outstanding (only the 2007 collar has been designated as a cash flow hedge):


	MMBtu
Term of Arrangements	per Day		Floor Price		Ceiling Price
May 1, 2006 — July 31, 2006		1,000	$	4.50	$	8.00
January 1, 2007 — March 31, 2007		1,000	$	7.50	$	12.00

As of June 30, 2006 and December 31, 2005, the Company had derivative liabilities of approximately $152,000 and $28,000, respectively, which are included in accrued liabilities on the accompanying Consolidated Balance Sheet. During the three months ended June 30, 2006 and 2005, the Company recognized ineffectiveness of approximately $67,000 and $23,000, respectively, under its collar arrangements, which is reflected in Other expense in the accompanying Consolidated Statements of Operations. During the six months ended June 30, 2006 and 2005, the Company recognized ineffectiveness of approximately $124,000 and $23,000, respectively, under its collar arrangements. The Company paid approximately $21,000 and $0 under its collar arrangements during the six months ended June 30, 2006 and 2005, respectively.

Subsequent to June 30, 2006, the Company entered into the following natural gas collars:


	MMBtu
Term of Arrangements	per Day		Floor Price		Ceiling Price
October 1, 2006 — December 31, 2006		1,000	$	6.00	$	10.55
April 1, 2007 — June 30, 2007		1,000	$	6.00	$	10.55

Other Derivatives

As more fully discussed in Note 4 above, in January 2005, the Company issued Notes and Warrants. Under the provisions of SFAS No. 133 and EITF 00-19 the Company bifurcated the Conversion Option associated with the Notes and accounted for it and the Warrants as derivatives. The initial fair values of the Conversion Option and the Warrants, which totaled $461,000 and $10,108,000, respectively, were recorded as debt discount. Subsequent changes in the fair value of those derivatives have been recorded as Change in derivative fair value in the accompanying Consolidated Statements of Operations. During the three months ended June 30, 2006 and 2005, the Company recognized credits of $2,172,000 and $2,602,000, respectively, related to the change in fair value of the Conversion Option and Warrants. The amount recognized in the three months ended June 30, 2006, includes a charge of $41,000 related to the Conversion Option on the Notes converted during the period. During the six months ended June 30, 2006 and 2005, the Company recognized charges of $241,000 and $1,320,000, respectively, related to the change in fair value of the Conversion Option and Warrants. The charge recognized in the six months ended June 30, 2006, includes a charge of $97,000 related to the Conversion Option on the Notes converted during the period.

In addition, as a result of the issuance of the Notes in January 2005, under the provisions of EITF 00-19, the Company was no longer able to conclude that it has sufficient authorized and unissued shares available to settle its previously issued non-employee options and warrants (the “Non-employee Options and Warrants”) after considering the commitment to potentially issue common stock under terms of the Notes if ever there is an event of default. As such, effective with the issuance of the Notes on January 13, 2005, the Company reclassified the fair value of the Non-employee Options and Warrants out of stockholders’ equity on the accompanying Consolidated Balance Sheet and recognized them as a derivative liability of $6,090,000. Changes in the fair value of the Non-employee Options and Warrants are recorded as Change in derivative fair value in the accompanying Consolidated

Statements of Operations so long as they continue to not qualify for equity classification. Non-employee Options and Warrants that are ultimately settled in common stock will be remeasured based on the intrinsic value prior to settlement and then reclassified back to stockholders’ equity; however, any gains or losses previously recognized on those instruments will remain in earnings. During February and March 2005, in connection with the exercise of 538,850 Non-employee Options and Warrants, the Company reclassified $2,174,000 back to stockholders’ equity. During the three months ended June 30, 2006 and 2005, the Company recognized credits of $1,131,000 and $2,410,000, respectively, related to the change in the fair value of Non-employee Options and Warrants outstanding during those periods. During the six months ended June 30, 2006 and 2005, the Company recognized a credit of $85,000 and a charge of $1,581,000, respectively, related to the change in the fair value of Non-employee Options and Warrants outstanding during those periods.

Note 6 — Fair Value of Financial Instruments

The carrying value of the Company’s cash, accounts receivable, accounts payable and accrued liabilities represents the fair value of the accounts. Debt at June 30, 2006, with a carrying value of approximately $40.8 million is estimated to have a fair value between $42 million and $43 million. See Note 4 for the terms of the Company’s debt obligations.

The fair value of the Company’s non-current derivative liabilities, all of which relate to the Conversion Option, Warrants and Non-employee Options and Warrants, is estimated using various models and assumptions related to the estimated term of the instruments, volatility of the price of the Company’s common stock, interest rates and the probability of conversion, redemption or exercise, among other items.

Note 7 — Earnings Per Share

Basic income (loss) per common share is computed as net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed as net income (loss) divided by the weighted average number of common shares and potential common shares, using the treasury stock method, outstanding during the period.


	For the Three Months Ended June 30,
	2006						2005
	(in thousands, except share and per share amounts)
	Net				Per Share		Net					Per Share
	Income		Shares		Amount		Income			Shares		Amount
Basic EPS:
Net income and share amounts	$	2,655		14,415,500	$	0.18	$	4,356			13,159,575	$	0.33

Dilutive Securities:
Stock Options and Warrants		—		214,384				(133	)		368,623

Diluted EPS:
Net income and share amounts	$	2,655		14,629,884	$	0.18	$	4,223			13,528,198	$	0.31


	For the Six Months Ended June 30,
	2006								2005
	(in thousands, except share and per share amounts)
	Net					Per Share			Net					Per Share
	Loss			Shares		Amount			Loss			Shares		Amount
Basic EPS:
Net loss and share amounts	$	(8,650	)		14,121,487	$	(0.61	)	$	(5,107	)		12,385,310	$	(0.41	)

Dilutive Securities:
Stock Options and Warrants		—			—					—			—

Diluted EPS:
Net loss and share amounts	$	(8,650	)		14,121,487	$	(0.61	)	$	(5,107	)		12,385,310	$	(0.41	)

The calculation of diluted income per share excluded 5,346,000 and 2,859,000 common share equivalents for the three months ended June 30, 2006 and 2005, respectively, and 6,200,000 and 4,477,000 common share equivalents for the six months ended June 30, 2006 and 2005, respectively, as they were anti-dilutive. The number of common stock equivalents excluded from the diluted income (loss) per share calculations does not include any shares that may be issued in the future should the Company elect to repay Notes outstanding under the Senior Secured Notes Facility with direct issuances of shares of registered common stock in lieu of cash at a conversion rate equal to 95% of the weighted average trading price of shares of the Company’s common stock on the trading day preceding conversion.

Note 8 — Subsequent Events

In July 2006, the Company settled approximately $1,407,000 of accrued interest through the issuance of 291,589 shares of common stock. Since the interest was settled with other than current assets, the accrued interest at June 30, 2006 has been classified as long-term.

As of June 30, 2006, the Company was in violation of certain covenants under the Notes. As a result, on August 9, 2006, the Company and the Note holders entered into a waiver and amendment to the Senior Secured Notes Facility and the Notes that waives the violations at June 30, 2006 and provides for the following terms: repayment or conversion of $20.5 million principal amount of Notes (plus prepayment premiums and accrued interest) between September 2006 and July 2007; repayment in cash of $27 million principal amount of Notes (plus prepayment premiums and accrued interest) between January 2007 and July 2007; and 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. See Note 4 for additional discussion of the amendment and waiver.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Effective September 9, 2005, Infinity, Inc. merged with and into its wholly-owned subsidiary Infinity Energy Resources, Inc., a Delaware corporation, for the purpose of changing its domicile from Colorado to Delaware. As a result of the merger, the legal domicile of Infinity, Inc. was changed to Delaware and its name was changed to Infinity Energy Resources, Inc. At the effective time of the merger, shares of Infinity, Inc. were converted into an equal number of shares of common stock of Infinity Energy Resources, Inc. The reincorporation did not result in any change in headquarters, business, jobs, location of any facilities, number of employees, assets, liabilities, or net worth. Management, including all directors and officers, remain the same as prior to the reincorporation.

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 “Nature of Operations and Basis of Presentation,” included in Note 1 to the Unaudited Consolidated Financial Statements. Infinity and its operating subsidiaries (Infinity Oil and Gas of Texas, Inc. (“Infinity-Texas”), Infinity Oil & Gas of Wyoming, Inc. (“Infinity-Wyoming”), and Consolidated Oil Well Services, Inc. (“Consolidated”)) are engaged in identifying and acquiring oil and gas acreage, exploring and developing acquired acreage, oil and gas production, and providing oilfield services. Infinity’s primary focuses are on: (i) the acquisition, exploration and development of and production from its properties in the Fort Worth Basin of north central Texas and the Greater Green River, Sand Wash and Piceance Basins of southwest Wyoming and northwest Colorado; and (ii) providing oilfield services in the Mid-Continent region and the Powder River and Big Horn Basins of northern Wyoming. Infinity has also been awarded a 1.4 million acre concession offshore Nicaragua in the Caribbean Sea which it intends to explore over the next few years subject to the long-term development and production contract governing such activity.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any statements containing the words “anticipate,” “intend,” “believe,” “estimate,” “project,” “expect,” “plan,” “should” or similar expressions are intended to identify such statement. Forward-looking statements include, among other items:

	•		expected capital expenditures and cash flow for the remainder of 2006;

	•		plans to raise external financing to repay debt and 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.

Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the following (and the risks described under “Risk Factors” in our Annual Report on Form 10-K):

	•		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 Consolidated or refinance the senior notes;

	•		possible inability to repay senior notes in cash, if required;

	•		inability to comply with provisions of senior notes in the future;

	•		possible action by lenders on future defaults that could result in increased interest or foreclosure.

Overview of Exploration and Production Activity

Infinity, through Infinity-Texas, continued to expand its exploration and production operations in the Fort Worth Basin of Texas. During the six months ended June 30, 2006, Infinity-Texas:

	•		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 110% as compared to the six months ended December 31, 2005 (and increased production by 64% sequentially over the three months ended March 31, 2006);

	•		Made capital additions of approximately $19.0 million, including costs for leasehold additions, seismic acquisition and interpretation, and the drilling, completing and equipping of wells;

Infinity plans to continue to explore, exploit and develop its Fort Worth Basin acreage and its Rocky Mountain projects and prospects. Infinity expects its Rocky Mountain projects to proceed more slowly, due in part to governmental and environmental restrictions and regulations. Infinity raised incremental debt and equity capital to fund its exploration and production operations from the net proceeds of the Senior Secured Notes Facility and from the proceeds of option and warrant exercises during the first six months of 2006. In addition to expected increases in cash flows from operating activities, Infinity will require external financing during 2006 and beyond to fund its exploration and production operations, although the type, timing, cost and amounts of such financing, if any, will depend upon general energy and capital markets conditions and the success of Infinity’s operations.

The following table provides statistical information for the three and six months ended June 30, 2006 and 2005:


	For the Three				For the Six
	Months Ended				Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Production:
Natural gas (MMcf)		281.9		219.4		488.9		430.9
Crude oil (thousands of barrels)		23.5		19.5		42.2		28.6
Total (MMcfe)		422.8		336.4		742.3		602.5

Financial Data (thousands of dollars):
Total revenue	$	3,356	$	2,204	$	5,720	$	3,649
Production expenses		1,138		1,010		2,281		1,449
Production taxes		34		201		235		370

Financial Data per Unit ($ per Mcfe):
Total revenue	$	7.94	$	6.55	$	7.71	$	6.05
Production expenses		2.69		3.00		3.07		2.40
Production taxes		0.08		0.60		0.32		0.61

Under full cost accounting rules, Infinity reviews, on a quarterly basis, the carrying value of its oil and gas properties. Under these rules, capitalized costs of proved oil and gas properties may not exceed the present value of estimated future revenue at the prices in effect as of the end of each fiscal quarter, and a write-down for accounting purposes is required if the ceiling is exceeded. At June 30, 2006, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $16,500,000 based upon a natural gas price of approximately $6.03 per Mcf and an oil price of approximately $73.21 per barrel in effect at that date. However, based on subsequent price increases to approximately $8.37 per Mcf of gas and approximately $74.62 per barrel of oil at the August 3, 2006 measurement date, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $2,500,000. As a result, in the three and six months ended June 30, 2006 the Company recognized ceiling write-downs of $2,500,000 and $11,600,000. A decline in prices received for oil and gas sales or an increase in operating costs subsequent to the measurement date or reductions in estimated economically recoverable quantities could result in the recognition of an additional ceiling write-down of oil and gas properties in a future period.

Overview of Oilfield Service Operations

Consolidated continued to develop its business as the largest oilfield service provider in eastern Kansas and northeast Oklahoma. The continued strong price of natural gas and crude oil and the focus on development of the coal bed methane potential of the Cherokee basin in eastern Kansas and northeast Oklahoma and the Powder River and Big Horn Basins in northern Wyoming contributed to an overall increase in activity for Consolidated. During the three months ended June 30, 2006, Consolidated achieved several operational milestones:

	•		record quarterly revenue of $9.3 million;

	•		subsidiary level gross profit of approximately $5.2 million;

	•		provided services to 390 customers; and

	•		subsidiary level income before taxes of approximately $3.8 million.

Consolidated has expanded its pressure pumping fleet and expanded its service area through the fabrication and construction of additional equipment.

The following table details the increase in gross revenue, before discounts, for the periods shown, based on the number and type of core service jobs performed:

Oilfield Service Statistics
(dollars in thousands)


	Three Months Ended June 30,
	2006					2005					Change
	Jobs		Revenue			Jobs		Revenue			Jobs		% Chg. In Jobs			Revenue
Job Type
Cementing		1,213	$	3,699			799	$	2,234			414		52	%	$	1,465
Acidizing		630		695			471		482			159		34	%		213
Fracturing		500		5,194			383		2,730			117		31	%		2,464
Other				259					217								42
Discounts				(548	)				(216	)							(332	)

Total			$	9,299				$	5,447							$	3,852


	Six Months Ended June 30,
	2006					2005					Change
	Jobs		Revenue			Jobs		Revenue			Jobs		% Chg. In Jobs			Revenue
Job Type
Cementing		2,183	$	6,854			1,520	$	4,120			663		44	%	$	2,734
Acidizing		1,217		1,479			927		884			290		31	%		595
Fracturing		1,123		9,787			581		4,467			542		93	%		5,320
Other				620					414								206
Discounts				(991	)				(368	)							(623	)

Total			$	17,749				$	9,517							$	8,232

2006 Operational and Financial Objectives

Exploration and Production

Infinity-Texas plans to focus on increasing its production and acreage position in the Fort Worth Basin of northcentral Texas. Infinity-Texas anticipates its remaining 2006 capital expenditures will be approximately $12 million to drill approximately 6 wells, complete one well in progress at June 30, 2006, conduct additional geological and geophysical analysis on its acreage and acquire additional acreage. At June 30, 2006, Infinity-Texas had one horizontal well and one vertical well waiting completion operations. Infinity-Texas may increase its capital expenditures and drilling activity through an additional drilling rig in late 2006 or early in 2007.

The Company’s 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 drilling rigs and completion services (although the Company has one rig under contract); and

	•		The approval by regulatory agencies of applications for permits to drill in a timely manner.

Infinity-Wyoming plans to focus on increasing production through development of acreage. Infinity-Wyoming anticipates remaining 2006 capital expenditures will be less than $1 million to deepen one well, conduct additional geological and geophysical analysis, and increase its acreage position in the Sand Wash Basin of northwestern Colorado.

Oilfield Services

Consolidated plans to increase its oilfield service revenue during 2006 as a result of the expansion of its fleet during 2005 and 2006 and due to the expected increase in the number of wells to be drilled and completed by property owners in its service areas. Consolidated expects capital expenditures to approximate $2 million for the remainder of 2006 related to equipment and facilities. Management expects these capital expenditures to be financed through Consolidated’s cash flow from operations and cash on hand.

Corporate Activities

Infinity has completed negotiations of the final development and production agreement with the Instituto Nicaraguense de Energia for the Perlas and Tyra blocks offshore Nicaragua and has issued letters of credit totaling less than $1 million for the initial work on the leases which will include an environmental study and the development of geological information from reprocessing and additional evaluation of existing 2-D seismic data to be acquired.

Results of operations for the three months ended June 30, 2006 compared to the three months ended June 30, 2005

Net Income

Infinity reported net income of $2.7 million, or $0.18 per diluted share, in the three months ended June 30, 2006 compared to net income of $4.4 million, or $0.31 per diluted share, in the prior year period. The change between periods was the result of the items discussed below.

Revenue

Infinity achieved total revenue of $12.7 million in the three months ended June 30, 2006 compared to $7.7 million in the prior year period. The $5.0 million, or 65%, increase in revenue consisted of a $3.9 million increase in oilfield service revenue and a $1.1 million increase in oil and gas revenue. The increase in oilfield service revenue was attributable to a 42% increase in the number of jobs completed in the 2006 period compared to the 2005 period and a 20% increase in the average revenue per job in the 2006 period compared to the 2005 period. The increase in oil and gas revenue was primarily the result of a 26% increase in equivalent sales volumes combined with improved oil price realizations. The increase in sales volumes was due primarily to successful exploratory drilling in the Fort Worth Basin and developmental drilling in the Sand Wash Basin in northwest Colorado.

Cost of Revenue

Infinity’s cost of revenue increased to $5.3 million for the three months ended June 30, 2006, from $3.7 million in the prior year period. Oilfield service costs increased to $4.1 million during the three months ended June 30, 2006, from $2.5 million in the prior year period. The increase was principally attributable to increased materials, maintenance, fuel and labor costs resulting largely from the increase in the number of jobs performed in the 2006 period compared to the 2005 period. Oil and gas production expenses increased to $1.1 million, or $2.69 per Mcfe, during the three months ended June 30, 2006, from $1.0 million, or $3.00 per Mcfe, in the prior year period. The increase in production expenses was primarily attributable to increased production from the Company’s Fort Worth Basin properties. Oil and gas production taxes for the three months ended June 30, 2006 include a credit of approximately $125,000 recorded in the quarter to reflect estimated refunds of production taxes paid in prior periods. The estimated refunds result from the June 2006 designation of the Barnett Shale in Erath County, Texas as a tight gas formation eligible for a reduced production tax rate.

Gross Profit

Infinity earned a gross profit of $7.4 million during the three months ended June 30, 2006, a $3.4 million or 87% increase from $3.9 million gross profit in the prior year period. Gross profit from oilfield services was $5.2 million, or 56% of oilfield services revenue, during the three months ended June 30, 2006, compared to $2.9 million, or 54% of oilfield services revenue, in the prior year period. The increase in gross profit as a percentage of oilfield service revenue was due principally to an increase in higher margin frac jobs and lower than average down days as a result of better than average weather during the 2006 quarter. Gross profit from oil and gas operations for the three months ended June 30, 2006 and 2005 increased to $2.2 million from $1.0 million primarily as a result of increased revenue and decreased production taxes, both as discussed above.

General and Administrative Expenses

General and administrative expenses increased to $1.6 million for the three months ended June 30, 2006, from $1.4 million in the prior year period. The increase was largely due to an increase in personnel and personnel related costs, stock-based compensation recorded during the 2006 period, costs associated with the Company’s Sarbanes-Oxley compliance efforts, and increased cost of being incorporated in Delaware.

Depreciation, Depletion, Amortization and Accretion

Depreciation, depletion, amortization and accretion (“DD&A”) expense recognized during the three months ended June 30, 2006 increased $0.5 million to $2.3 million from $1.8 million in the prior year period. Increased DD&A in the 2006 period resulted from an increase in Consolidated’s fleet and an increase in the Company’s oil and gas properties subject to depletion as of June 30, 2006, increased production during the quarter and a decrease in proved oil and gas reserve volumes associated with the Company’s exploration and development program.

Ceiling Write-Down

At June 30, 2006, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $16,500,000, based upon a natural gas price of approximately $6.03 per Mcf and an oil price of approximately $73.21 per barrel in effect at that date. However, based on subsequent price increases to approximately $8.37 per Mcf of gas and approximately $74.62 per barrel of oil at the August 2, 2006 measurement date, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $2,500,000. As a result, in the three months ended June 30, 2006 the Company recognized a ceiling write-down of $2,500,000. A decline in prices received for oil and gas sales or an increase in operating costs subsequent to the measurement date or reductions in estimated economically recoverable quantities could result in the recognition of an additional ceiling write-down of oil and gas properties in a future period.

Other Income (Expense)

Other income of $1.7 million in the three months ended June 30, 2006 compared to other income of $3.6 million in the prior year period. The decrease of $1.9 million was principally due to (i) a $1.7 million decrease in the credit recognized in the 2006 period compared to the 2005 period for the change in derivative fair value, (ii) a $0.4 million increase in interest expense due to an increase in average debt outstanding and higher average interest rates during the 2006 period, and (iii) a $0.3 million increase in amortization costs resulting from increased loan costs incurred in connection with the Company’s senior secured notes facility, offset partially by a $0.3 million decrease in early extinguishment of debt expense.

Results of operations for the six months ended June 30, 2006 compared to the six months ended June 30, 2005

Net Loss

Infinity reported net loss of $8.7 million, or $0.61 per diluted share, in the six months ended June 30, 2006 compared to net loss of $5.1 million, or $0.41 per diluted share, in the prior year period. The change between periods was the result of the items discussed below.

Revenue

Infinity achieved total revenue of $23.5 million in the six months ended June 30, 2006 compared to $13.2 million in the prior year period. The $10.3 million, or 78%, increase in revenue consisted of a $8.2 million increase in oilfield service revenue and a $2.1 million increase in oil and gas revenue. The increase in oilfield service revenue was attributable to a 49% increase in the number of jobs completed in the 2006 period compared to the 2005 period and a 25% increase in the average revenue per job in the 2006 period compared to the 2005 period. The increase in oil and gas revenue was primarily the result of a 23% increase in equivalent sales volumes combined with improved oil price realizations. The increase in sales volumes was due primarily to successful exploratory drilling in the Fort Worth Basin and developmental drilling in the Sand Wash Basin in northwest Colorado.

Cost of Revenue

Infinity’s cost of revenue increased to $10.5 million for the six months ended June 30, 2006, from $6.3 million in the prior year period. Oilfield service costs increased to $8.0 million during the six months ended June 30, 2006, from $4.5 million in the prior year period. The increase was principally attributable to increased materials, maintenance, fuel and labor costs resulting largely from the increase in the number of jobs performed in the 2006 period compared to the 2005 period. Oil and gas production expenses increased to $2.3 million, or $3.07 per Mcfe, during the six months ended June 30, 2006, from $1.4 million, or $2.40 per Mcfe, in the prior year period. The increase in production expenses was primarily attributable to increased production from the Company’s Fort Worth Basin properties. Oil and gas production taxes for the six months ended June 30, 2006 include a credit of approximately $125,000 recorded in the period to reflect estimated refunds of production taxes paid in prior periods. The estimated refunds result from the June 2006 designation of the Barnett Shale in Erath County, Texas as an area eligible for a reduced production tax rate.

Gross Profit

Infinity earned a gross profit of $12.9 million during the six months ended June 30, 2006, a $6.1 million or 90% increase from $6.8 million gross profit in the prior year period. Gross profit from oilfield services was $9.7 million, or 55% of oilfield services revenue, during the six months ended June 30, 2006, compared to $5.0 million, or 53% of oilfield services revenue, in the prior year period. The increase in gross profit as a percentage of oilfield service revenue was due principally to an increase in higher margin frac jobs and lower than average down days as a result of better than average weather during the 2006 period. Gross profit from oil and gas operations for the six months ended June 30, 2006 increased to $3.2 million from $1.8 million primarily as a result of increased revenue and decreased production taxes, both as discussed above.

General and Administrative Expenses

General and administrative expenses increased to $3.3 million for the six months ended June 30, 2006, from $2.6 million in the prior year period. The increase was largely due to an increase in personnel and personnel related costs, stock-based compensation expense recorded during the 2006 period, costs associated with the Company’s Sarbanes-Oxley compliance efforts, and increased cost of being incorporated in Delaware.

Depreciation, Depletion, Amortization and Accretion

Depreciation, depletion, amortization and accretion (“DD&A”) expense recognized during the six months ended June 30, 2006 increased $0.5 million to $3.9 million from $3.4 million in the prior year period. Increased DD&A in the 2006 period resulted from an increase in Consolidated’s fleet and an increase in the Company’s oil and gas properties subject to depletion as of June 30, 2006, increased production during the period and a decrease in proved oil and gas reserve volumes associated with the Company’s exploration and development program.

Ceiling Write-Down

At June 30, 2006, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $16,500,000, based upon a natural gas price of approximately $6.03 per Mcf and an oil price of approximately $73.21 per barrel in effect at that date. However, based on subsequent price increases to approximately $8.37 per Mcf of gas and approximately $74.62 per barrel of oil at the August 2, 2006 measurement date, the carrying value of the Company’s oil and gas properties exceeded the full cost ceiling limitation by approximately $2,500,000. As a result, in the six months ended June 30, 2006 the Company recognized a ceiling write-down of $11,600,000, which reflects the effects of a $9,100,000 ceiling write down recorded by the Company at March 31, 2006. A decline in prices received for oil and gas sales or an increase in operating costs subsequent to the measurement date or reductions in estimated economically recoverable quantities could result in the recognition of an additional ceiling write-down of oil and gas properties in a future period.

Other Income (Expense)

Other expense of $2.8 million in the six months ended June 30, 2006 compared to other expense of $5.9 million in the prior year period. The decrease of $3.1 million was principally due to (i) a $2.7 million decrease in the charge recognized in the 2006 period compared to the 2005 period for the change in derivative fair value, (ii) a $1.1 million decrease in early extinguishment of debt expense, and (iii) $0.4 million representing a net increase in gain (loss) on sales of other assets, offset partially by a $0.7 million increase in interest expense due to an increase in average debt outstanding and higher average interest rates during the 2006 period, and a $0.5 million increase in amortization costs resulting from increased loan costs incurred in connection with the Company’s senior secured notes facility.

Liquidity and Capital Resources

Infinity’s primary sources of liquidity are cash provided by operations and debt and equity financing. Infinity’s primary needs for cash are for the operation, development, production, exploration and acquisition of oil and gas properties, for fulfillment of working capital obligations, and for the operation and development of the oilfield service business. As of June 30, 2006, the Company had a working capital deficit of $50.9 million, compared to working capital of $1.6 million at December 31, 2005. The working capital deficit of June 30, 2006, reflects the classification of senior secured notes of $40.7 million (net of $6.8 million discount) as a current liability as a result of the Company’s violation of certain covenants under the senior secured notes, as further discussed below.

During the six months ended June 30, 2006, cash provided by operating activities was $9.2 million, compared to $2.1 million in the prior year period. The increase in cash provided by operating activities of $7.1 million was primarily due to improved gross profit.

During the six months ended June 30, 2006, Infinity used $23.1 million in investing activities, compared to $23.2 million used in the prior year period. The cash used in investing activities in the 2006 period reflects the Company’s decision in May 2006 to defer additional drilling in the Forth Worth Basin to the fourth quarter of 2006 and the timing of the settlement of accounts payable, offset partially by an increase in oilfield services capital expenditures.

During the six months ended June 30, 2006, cash provided by financing activities was $7.9 million, compared to $22.6 million provided by financing activities during the prior year period. The decrease in cash provided by financing activities of $14.7 million was principally due to a decrease in net cash proceeds from the sale of Senior Secured Notes and issuance of common stock, partially offset by a decrease in repayment of long-term debt.

Waiver and Amendment Under Senior Secured Notes Facility

As of June 30, 2006, the Company was in violation of certain covenants under its Senior Secured Notes. As a result, the Company and the Note holders entered into a waiver and amendment to the Notes that waives the violations at June 30, 2006 and provides for the following terms:

	•		repayment or conversion of $2.5 million principal amount of Notes (plus prepayment premiums discussed above and accrued interest) with a conversion period to begin or cash payment due immediately;

	•		repayment or conversion of $2.0 million principal amount of Notes (plus prepayment premiums discussed above and accrued interest) per month for nine of the next ten months commencing October 1, 2006, with the conversion period to begin or cash payment due on the first day of the month;

	•		repayment in cash of $9.0 million on each of January 15, 2007, April 15, 2007 and July 15, 2007;

	•		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;

	•		no additional notes or warrants can be sold under the Senior Secured Notes Facility.

In order to satisfy the repayment obligations under the amendment, it will be necessary for Infinity to sell significant operating assets, seek the forward sale of oil and gas production, complete a public or private equity offering or debt financing. There can be no assurance that the Company will be able to consummate any such efforts on favorable terms, if at all. If the Company is unable to maintain compliance with the terms of the amended Notes, the Note holders could declare a triggering event, which would entitle the Note holders to a 20% premium on the principal balance of the outstanding Notes, accelerate the due dates of the Notes, and increase the interest rate on the Notes.

Outlook for 2006

Infinity has received a number of indications of interest to purchase Consolidated and it has engaged an energy investment banking firm to assist in the evaluation of these and any additional indications for Consolidated. No formal decision has been made and no agreement has been reached at this time with respect to any of the interested parties. There can be no assurances that a sale transaction will be finalized or that any transaction will occur, nor what the terms or the timing of any such transaction may be. If any transaction occurs, the net proceeds will be used to repay debt, including prepayment premiums and accrued interest, and for other general corporate purposes.

Infinity has engaged another energy investment banking firm to explore strategic alternatives with respect to Infinity’s 1.4 million acre concessions in the Caribbean Sea offshore Nicaragua and to advise the Company in exploring various partnering arrangements and other ownership structures for its interests. No formal decision has been made and no agreement has been reached at this time with respect to any particular ownership structure or with any interested party. There can be no assurances that any transaction will occur or be finalized, nor what the terms or the timing of any such transaction may be. If any transaction occurs, the net proceeds, if any, will be used to repay debt, including prepayment premiums and accrued interest, and other general corporate purposes.

Infinity has engaged another energy investment banking firm to explore debt financing alternatives for the Company. No formal decision has been made and no agreement has been reached at this time with respect to any particular debt financing alternative or with any interested party. There can be no assurances that any transaction will occur or be finalized, nor what the terms or the timing of any such transaction may be. If any transaction occurs, the net proceeds, if any, will be used to repay debt, including prepayment premiums and accrued interest, and other general corporate purposes.

Depending on the availability of capital resources, the availability of third party contractors for drilling and completion services, and satisfaction of regulatory activities, Infinity could incur capital expenditures of $14 million during the remainder of 2006. Approximate capital expenditures by operating entity would be $12 million by Infinity-Texas and $2 million by Consolidated. There can be no assurances that Infinity will have sufficient capital resources to fund this level of capital expenditures. Infinity has no contractual drilling obligations or other capital expenditure commitments during the remainder of 2006 that have not already been secured by the posting of bonds or letters of credit.

Depending on the market price for crude oil and natural gas during 2006, stabilized production levels from wells placed on line during 2006, and continued demand for and acceptance of our oilfield service operations in the geographic areas we serve, Infinity would expect to generate cash flow of between $8 million and $10 million from operating activities during the remainder of 2006.

During 2005 and the first six months of 2006, Infinity received approximately $5.0 million and $0.5 million, respectively, in proceeds from the exercise of options and warrants. Management expects to receive proceeds from additional exercises during 2006, but is unable to predict the amount or timing of such proceeds.

In summary, Infinity believes that it may have approximately $12 million available to it in the remainder of 2006 from cash at June 30, 2006 (approximately $2 million), cash from operating activities and proceeds from the exercise of options and warrants, to fund its planned debt retirement and capital expenditures, prior to the sale of any operating assets or proceeds from the public or private offering of common or preferred equity or subordinated debt.

Critical Accounting Policies and Estimates

Infinity’s Annual Report on Form 10-K for the year ended December 31, 2005, described the accounting policies that we believe are critical to the reporting of our financial position and results of operations and that require management’s most difficult, subjective or complex judgments. The most significant judgments and estimates used in the preparation of our consolidated financial statements are:

	•		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

Adoption of SFAS No. 123R, “Share-Based Payment”

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral traits. Expected volatilities used in the valuation model are based on the expected volatility used by an independent market participant in connection with their valuation of certain of the Company’s warrants. The Company believes incorporation of a volatility rate commensurate with that used by an independent market participant provides the best indication of fair value for its employee stock options. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s valuation model assumes no dividends and a zero forfeiture rate. Different assumptions could materially impact the resulting calculated option value. On May 23, 2006, the Company granted options to employees and directors to purchase 340,000 shares of the Company’s common stock at $6.48 per share. The options vest one year from the date of grant. The following table summarizes the inputs used in the calculation of fair value of options granted during the six months ended June 30, 2006 and 2005:


	Six Months Ended June 30,
	2006		2005
Expected term (in years)		5.5 -- 10		10
Expected stock price volatility		62%		60% - 70%
Expected dividends		—		—
Risk-free rate		4.98% - 5.07%		4.00% - 4.13%
Forfeiture rate		—		—

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Commodity Risk

Infinity’s major market risk exposure is in the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing price for crude oil and natural gas spot prices applicable to Infinity’s United States crude oil and natural gas production. Historically, prices received for gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Excluding sales under a fixed price contract of $4.75 per Mcf, gas price realizations ranged from a low of $5.55 to a high of $7.48 per Mcf during the six months ended June 30, 2006. Oil price realizations ranged from a low of $56.44 per barrel to a high of $70.50 per barrel during that period.

Infinity periodically enters into fixed-price physical contracts and commodity derivative contracts on a portion of its projected natural gas and crude oil production in accordance with its Energy Risk Management Policy. These activities are intended to support cash flow at certain levels by reducing the exposure to oil and gas price fluctuations.

Sales under fixed price contracts are accounted for as normal sales agreements under the exemption in SFAS No. 133. The effect of Infinity selling a portion of its gas production under a fixed price contract, compared to if it had sold the gas on the spot market, was a decrease in revenue of approximately $0.3 million and $0.5 million, for the six months ended June 30, 2006 and 2005, respectively. The effect of such sales was a decrease in revenue of approximately $0.5 million, for the three months ended June 30, 2005 (sales under fixed price contracts ended March 31, 2006).

As of June 30, 2006 the Company had the following oil collar derivative arrangements outstanding:


Term of Arrangements	Bbls per Day		Floor Price		Ceiling Price
October 1, 2005 — December 31, 2006		50	$	52.50	$	74.00
July 1, 2006 — March 31, 2007		50	$	55.00	$	77.00
January 1, 2007 — June 30, 2007		50	$	57.50	$	77.50
April 1, 2007 — September 30, 2007		50	$	60.00	$	85.50
July 1, 2007 — December 31, 2007		50	$	62.50	$	87.00

As of June 30, 2006 the Company had the following natural gas derivative collar arrangements outstanding:


	MMBtu
Term of Arrangements	per Day		Floor Price		Ceiling Price
May 1, 2006 — July 31, 2006		1,000	$	4.50	$	8.00
January 1, 2007 — March 31, 2007		1,000	$	7.50	$	12.00

Subsequent to June 30, 2006, the Company entered into the following natural gas collars:


	MMBtu
Term of Arrangements	per Day		Floor Price		Ceiling Price
October 1, 2006 — December 31, 2006		1,000	$	6.00	$	10.55
April 1, 2007 — June 30, 2007		1,000	$	6.00	$	10.55

The Securities Purchase Agreement dated as of January 13, 2005 by and among Infinity and the buyers of the Company’s Senior Secured Notes includes a covenant that at each date that is the end of a quarterly or annual period covered by a quarterly report on Form 10-Q or annual report on Form 10-K (a “Determination Date”), at least 20% of the Company’s estimate of its oil and gas production for the twelve-month period commencing immediately after such Determination Date shall be protected from price fluctuations using derivatives, fixed price agreements and/or volumetric production payments. It is the opinion of management that the Company was in compliance with this hedging requirement as of June 30, 2006.

Interest Rate Risk

Infinity’s exposure to changes in interest rates results from our $47.5 million in floating rate debt. The result of a 10% fluctuation in the 3 month LIBOR would impact our interest expense, before capitalization, by approximately $0.2 million per year.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports under the Securities Exchange Act of 1934, as amended (“Exchange Act”) are communicated, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. At the end of the Company’s second quarter of 2006, as required by Rules 13a-15 and 15d-15 of the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of that date. No changes in internal controls over financial reporting identified in connection with its evaluation (as required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act) occurred during the second quarter of 2006 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There are currently no pending material legal proceedings to which we are a party.

ITEM 1A. RISK FACTORS

Except as set forth below, there have been no material changes to our risk factors compared to those provided in our Form 10-K for the year ended December 31, 2005.

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.

We have violated certain provisions and covenants of our Senior Secured Notes Facility and as a result have entered into a Waiver and Amendment with the holders of the Notes. In addition to changing certain covenants with respect to the Notes, the Waiver and Amendment provides for an accelerated payment schedule. Under the terms of the Waiver and Amendment, we will be required to (i) repay or convert $20.5 million principal amount of the Notes (plus prepayment premiums and accrued interest) at monthly intervals between September 2006 and July 2007 and (ii) repay in cash $27 million principal amount of the Notes (plus prepayment premiums and accrued interest) in three equal installments between January 2007 and July 2007. Our ability to convert the $20.5 million principal amount into common shares is dependent on our continued compliance with the amended Notes and the maintenance of a minimum weighted-average stock price during any conversion period. If we are unable to meet the conditions to convert amounts as scheduled, we will be required to pay such amounts in cash.

There is no assurance that we will be able to convert the Notes or repay the Notes on the accelerated schedule described above. We are exploring debt refinancing alternatives, but a refinancing may not be possible in the timeframe we require or on acceptable terms. If we are unable to meet the accelerated repayment schedule or maintain compliance with the amended terms of the Notes, the holders of the Notes would be entitled to declare an event of default, which would entitle the Note holders to a 20% premium on the principal balance of the outstanding Notes, to accelerate the repayment dates of the Notes, and to increase the interest rate on the Notes. In addition, because substantially all of our assets are secured as collateral for the Notes, if the holders declare an event of default, they may be entitled to foreclose on and take possession of our assets or cause us to enter into bankruptcy proceedings.

Exploration and development of our oil and gas projects will require large amounts of capital which we may not be able to obtain.

Full exploration and development of our properties could require drilling in excess of 1,000 production wells, 100 disposal wells to handle produced water, and the construction of 100 production facilities. This could require capital expenditures over time of in excess of $1 billion. Currently, our potential sources of financing for these activities are limited to cash generated by operations and future sales of operating assets, equity or debt securities. Because we currently have $47.5 million principal amount of Notes outstanding under our existing Senior Secured Notes Facility which we are required to repay by July 2007, any proceeds from future sales of assets, equity or debt securities will first be used to make these repayments and will not be available for increased capital expenditures. In addition, no further amounts can be borrowed under our Senior Secured Notes Facility to finance capital expenditures or otherwise.

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.

Under the terms of an August 2006 Waiver and Amendment to our Senior Secured Notes Facility, we have agreed to repay the outstanding principal amount of the Notes ($47.5 million plus prepayment premiums and accrued interest) by July 2007. The Senior Secured Notes are secured by a pledge of substantially all of our natural gas and oil properties and oilfield services business assets, are guaranteed by our subsidiaries and contain covenants that limit additional borrowings, dividends to stockholders, the incurrence of liens, investments, sales or pledges of assets, changes in control and other matters. The Senior Secured Notes Facility also requires that specified financial ratios be maintained.

The restrictions of our Senior Secured Notes Facility, including the restrictions imposed by the August 2006 Waiver and Amendment and the requirement that we prepay the full amount of the outstanding Notes, may have adverse consequences on our operations and financial results including:

	•		additional covenant violations, if any, or violations of the terms of the Waiver and Amendment could further accelerate our obligation to repay the existing Notes;

	•		the amount of our 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;

	•		we will potentially need to use a significant portion of our cash flow to pay principal and interest on our debt which will reduce the amount of cash we have to finance our operations and other business activities; and

	•		substantially all of our properties are pledged as collateral to lenders and failure to fulfill our obligations under the Notes Facility could result in foreclosure or the implementation of bankruptcy proceedings.

We may not be able to refinance our debt or obtain additional financing on favorable terms or at all. Any amount we obtain from future financing will be used first to repay the amounts outstanding under the Notes Facility. Our overall level of long-term debt and any difficulty in obtaining additional debt financing may have adverse consequences on our operations and financial results including:

	•		we may have a higher level of debt than many of our competitors, which may place us at a competitive disadvantage;

	•		we may issue equity securities to repay indebtedness, causing additional dilution to our stockholders;

	•		we may be more vulnerable to economic downturns and adverse developments in our industry; and

	•		our debt level could limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Senior Secured Notes Facility include terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens, maximum trade payable balances, asset sales, hedging activities, investments, dividends, mergers, and acquisitions. As of June 30, 2006, the Company was in violation of certain of the covenants, including the maximum trade payable balance covenant. As a result, on August 9, 2006, the Company and the Note holders entered into a waiver and amendment to the Senior Secured Notes Facility and the Notes that waives the violations at June 30, 2006 and provides for certain revised terms. See ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Waiver and Amendment Under Senior Secured Notes Facility.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 23, 2006, Infinity held its Annual Meeting of Stockholders (“Annual Meeting”) at the office of Davis Graham & Stubbs LLP, in Denver, Colorado. The matters voted upon at the Annual Meeting consisted of three proposals set forth in Infinity’s Proxy Statement dated May 1, 2006. The three proposals submitted to a vote of Stockholders are set forth below:

(a)

The election of five Directors of the Company to serve until the next Annual Meeting and until their successors have been duly elected and qualified;

	(b)		The approval of the Company’s 2006 Equity Incentive Plan;

	(c)		The ratification of the selection of Ehrhardt Keefe Steiner & Hottman PC, as Infinity’s independent registered public accounting firm.

The following sets forth the votes cast for, against or withheld, as well as the number of abstentions, as to each of the proposals presented at the meeting:

Election of Directors:


Nominee	For		Withheld
Stanton E. Ross		10,807,611		649,312
James A. Tuell		10,985,775		471,148
Elliot M. Kaplan		10,920,807		536,116
Robert O. Lorenz		10,920,682		536,241
Leroy C. Richie		10,920,107		536,816

Approval of the Company’s 2006 Equity Incentive Plan:


For	Against		Abstain
3,880,878		1,005,553		153,474

Ratification of the selection of Ehrhardt Keefe Steiner & Hottman PC, as Infinity’s independent registered public accounting firm:


For	Against		Abstain
11,368,739		22,608		65,576

Each of the proposals presented at the Annual Meeting was approved.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits.

10.1		Form of Change in Control Agreement dated June 9, 2006 between Infinity and certain executive officers.

10.2		Change in Control Agreement dated June 9, 2006 between Infinity, Consolidated and Stephen D. Stanfield.

10.3		Waiver and Amendment dated August 9, 2006 to Senior Secured Notes Facility

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)

99.1		Calculation of the Maximum Notes Balance at June 30, 2006 under the Senior Secured Notes Facility dated January 13, 2005

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Signature	Capacity	Date
/s/ James A. Tuell	President and Chief Executive Officer	August 10, 2006
James A. Tuell	(Principal Executive Officer)

/s/ Timothy A. Ficker	Vice President, Chief Financial Officer	August 10, 2006
Timothy A. Ficker	(Principal Financial and Accounting Officer)

Index of Exhibits

10.1		Form of Change in Control Agreement dated June 9, 2006 between Infinity and certain executive officers.

10.2		Change in Control Agreement dated June 9, 2006 between Infinity, Consolidated and Stephen D. Stanfield.

10.3		Waiver and Amendment dated August 9, 2006 to Senior Secured Notes Facility

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)

99.1		Calculation of the Maximum Notes Balance at June 30, 2006

AMERICAN NOBLE GAS, INC. - Quarter Report: 2006 June (Form 10-Q)

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