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INFINITY ENERGY RESOURCES, INC
0000822746
10-Q
2012-09-30
false
--12-31
No
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Q3
2012
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><b>Note 1 — Nature of Operations, Basis of Presentation and
Summary of Significant Accounting Policies</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Unaudited Interim
Financial Information</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Infinity Energy Resources,
Inc. and its subsidiaries (collectively, “we,” “ours,” “us,” “Infinity” or the
“Company”) has prepared the accompanying consolidated financial statements pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements
are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for
a fair presentation of our consolidated balance sheets, statements of operations, and cash flows for the periods presented. Operating
results for the periods presented are not necessarily indicative of the results that may be expected for 2012 due to various factors.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of
the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements
and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K,
filed with the SEC.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Nature of Operations</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">We are engaged in the
exploration of the Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions”).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Basis of Presentation</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The consolidated financial
statements include the accounts of Infinity Energy Resources, Inc. and its wholly-owned subsidiaries, Infinity Oil and Gas of Texas,
Inc. (“Infinity-Texas”) and Infinity Oil & Gas of Wyoming, Inc. (“Infinity-Wyoming”). All significant
intercompany balances and transactions have been eliminated in consolidation. As described in Note 8, the Company sold its entire
investment in Infinity-Texas effective July 31, 2012. The assets, liabilities and operations of Infinity-Texas have been segregated
and set forth as relating to discontinued operations on the accompanying consolidated financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On March 5, 2009 Infinity
signed the contracts relating to its Nicaraguan Concessions. Infinity is conducting an environmental study and the development
of geological information from reprocessing and additional evaluation of existing 2-D seismic data that was acquired for the Nicaraguan
Concessions. Infinity is seeking offers from other industry operators and other third parties for interests in the acreage in exchange
for cash and a carried interest in exploration and development operations. The funds raised through the subordinated note transaction
described below and Forbearance advances from Amegy Bank, N.A. (“Amegy”) were used to fund these expenditures (see
Notes 2 and 3). These funds will not be sufficient to cover our expected operating exploration costs.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Going Concern</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As reflected in the accompanying
Consolidated Statements of Operations, the Company has had a history of losses. In addition, the Company has a significant working
capital deficit and is currently experiencing substantial liquidity issues. Further, as discussed in Note 2 and below, the Company
was at December 31, 2011 operating under the Fifth Forbearance Agreement with Amegy under the Revolving Credit Facility, which
agreement expired on that date. After December 31, additional advances of $272,070 were made by Amegy accumulating to a total advance
of $1,668,828 as of February 28, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On February 28, 2012,
we signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations we owed to them. Under
these documents, we agreed to issue to Amegy 130,000 shares of Series A Preferred and 2,000,000 shares of common stock as payment
in full of all debt and related obligations owed Amegy; the Company and Amegy also agreed to cancel a warrant held by Amegy exercisable
to purchase 968,000 shares of the Company’s common stock that had been issued in February 2011. In addition, we agreed to
issue Off-Shore 15,016 shares of Series B Preferred in conversion, exchange and payment in full of all debt and other obligations
we owed to Off-Shore. The transactions with Amegy and Off-Shore closed on April 13, 2012 and are described more fully in Note 3.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Although the cash
outflow necessary to pay Amegy has been eliminated under terms of the Stock Purchase Agreement, the Company is still in need of
additional capital to meet its obligations under the Nicaraguan Concessions, and is searching for sources of additional equity
or debt financing. There can be no assurance that the Company will be able to obtain such capital or obtain it on favorable terms..</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company has
classified the entire balance outstanding under the Revolving Credit Facility at December 31, 2011 as a current liability in the
accompanying Consolidated Balance Sheets.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company conducted
an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic
data acquired over its Nicaraguan Concessions. It issued letters of credit totaling $851,550 for this initial work on the leases.
The Company commenced certain activity under the initial work plan and is waiting for governmental approval of the environmental
study. The Company intends to seek joint venture or working interest partners prior to the commencement of any exploration or drilling
operations on the Nicaraguan Concessions.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Due to the uncertainties
related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern. The
financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Management
Estimates</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The preparation
of 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 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 consolidated
financial statements include the initial fair value of redeemable convertible preferred shares, the estimated carrying value of
unproved properties, the estimated cost and timing related to asset retirement obligations, the estimated fair value of derivative
liabilities and stock based awards, and the realization of deferred tax assets.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Oil and Gas
Properties</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company follows
the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred in the acquisition,
exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes
and seismic costs) 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. In the quarters ended September
30, 2012 and 2011, the Company capitalized direct costs, overhead costs and interest as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Three Months</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Nine Months</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Ended September 30,</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Ended September 30,</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td></tr>
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<td style="width: 48%; line-height: 115%">Direct costs</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">96,462</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">68,131</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">381,219</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">396,188</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Overhead costs</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">12,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">12,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">37,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">37,500</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Total non-interest costs</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">108,962</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">80,631</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">418,719</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">433,688</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Interest costs</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">67,529</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">77,616</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">189,393</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">108,962</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">148,160</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">496,335</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">623,081</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Costs associated with
production and general corporate activities are expensed in the period incurred.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Depletion of proved oil
and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit of measure
based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and estimated asset
retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties, including
capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves. Unproved properties
are assessed periodically (at least annually) to ascertain 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 period
of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net cash flows
from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable
and possible reserves, risk adjusted as appropriate. 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, or is reported as a period expense, as appropriate. All
unproved property costs as of September 30, 2012 and December 31, 2011 relate to the Company’s Nicaraguan Concessions that
were entered into in March 2009. In assessing the unproved property costs for impairment, the Company takes into consideration
the terms of the government concessions, the status of the ongoing environmental study, evaluation of the seismic data and plans
to seek industry participation in the future exploration and development.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Pursuant to full cost
accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that capitalized
costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the
present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the arithmetic
mean of the previous 12 months’ first-of-month prices and current costs, including the effects of derivative instruments
accounted for as cash flow hedges but excluding the future cash outflows associated with settling asset retirement obligations
that have been accrued on the balance sheet, and 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 included in the costs being amortized, 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. As of September 30,
2012 and 2011, the Company did not have any proved oil and gas properties, and all unproved property costs relate to the Company’s
Nicaraguan Concessions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">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 would be recognized in the determination of the Company’s net earnings/loss. During 2011 Infinity-Texas, the Company’s
100%-owned subsidiary, sold its oil and gas properties in Texas, to a single-member LLC, the owner of which purchased 100% of the
stock of Infinity-Texas from the Company in July 2012 (see Note 8). The costs associated with these properties were entirely written
off in prior periods. The properties were sold in return for a non-interest-bearing note with repayment conditional upon net profit
from sales of oil and gas from the properties. Due to the uncertainty of when and in what amount payments on the note will be received,
the Company has recorded the note net of a 100% valuation reserve and has recognized no gain or loss on this transaction. The note
was sold as an asset of Infinity-Texas in the July 2012 sale of such company's stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Concentrations</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company’s only
significant asset is the Nicaraguan Concessions and it expects to be active in Nicaragua for the foreseeable future, given sufficient
capital. The political climate in Nicaragua could become unstable and subject to radical change over a short period of time. In
the event of a significant negative change in political and economic stability in the vicinity of the Nicaraguan Concessions, it
may be forced to abandon or suspend its efforts.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Derivative Instruments</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company accounts for
derivative instruments or hedging activities under the provisions of ASC 815 (formerly Statement of Financial Accounting Standards
(“SFAS”) No. 133, <i>Accounting for Derivative Instruments and Hedging Activities</i>.) ASC 815 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The purpose of hedging
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 September 30, 2012 and December 31, 2011 and during the periods then ended,
the Company had no oil and natural gas derivative arrangements outstanding.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As a result of certain
terms, conditions and features included in certain common stock purchase warrants issued by the Company but no longer outstanding
at September 30, 2012 (see Note 5), those warrants were required to be accounted for as derivatives at estimated fair value, with
changes in fair value recognized in earnings. Such derivatives were outstanding at December 31, 2011 and were cancelled effective
April 13, 2012 as part of the transaction in which the Company’s debt, subordinated note payable and related accrued interest
and other fees, in addition to its derivative liability associated with the warrants, were satisfied by the issuance of common
and Series A and B redeemable, convertible preferred stock (Note 3). Likewise, as the result of certain terms, conditions and features
included in certain common stock purchase warrants issued by the Company in association with a note payable entered into August
28, 2012 with a related party, the warrants issued are also required to be accounted for as derivatives at estimated fair value,
with changes in fair value recognized in earnings.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Income Taxes</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">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. We routinely assess the realizability of our deferred income
tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully utilized
in future periods. We consider future taxable earnings in making such assessments. Numerous judgments and assumptions are inherent
in the determination of future taxable earnings, including such factors as future operating conditions. 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. When the Company can project that a portion of the deferred tax asset can be realized through
application of a portion of tax loss carryforward, the Company will record that utilization as a deferred tax benefit and recognize
a deferred tax asset in the same amount. There can be no assurance that facts and circumstances will not materially change and
require us to adjust our deferred income tax asset valuation allowance in a future period. We are potentially subject to taxation
in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing with uncertainties in the application
of complex income tax laws and regulations in various taxing jurisdictions. We recognize certain income tax positions that meet
a more-likely-than not recognition threshold. If we ultimately determine that the payment of these liabilities will be unnecessary,
we will reverse the liability and recognize an income tax benefit. The Company recognized a deferred tax asset, net of valuation
allowance, of $0 at September 30, 2012 and $700,000 at December 31, 2011 related to the anticipated use of net operating losses
to offset taxable income triggered by the transaction with Amegy and Off-Shore that closed in April 2012 (see Note 3). As recorded,
the Company did not realize any gain in association with the transaction, and the deferred tax asset set up at December 31, 2011
was recorded as a reduction in additional paid-in capital.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Cash and cash equivalents</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">For purposes of reporting
cash flows, cash consists of cash on hand and demand deposits with financial institutions. It is the Company’s policy that
all highly liquid investments with a maturity of three months or less when purchased would be cash equivalents and would be included
along with cash as cash and equivalents.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Asset Retirement
Obligations</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company records
estimated future asset retirement obligations pursuant to the provisions of ASC 410 (formerly SFAS No. 143, <i>Accounting for Asset
Retirement Obligations</i>.) ASC 410 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. 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. Capitalized costs are depleted as a component of the full cost pool using the units of production method.
Although the Company has recognized full impairment of the value of all remaining domestic oil and gas properties in prior periods,
the Company may retain title to certain abandoned non-producing domestic leasehold properties. Management believes the Company
has been relieved from asset retirement obligation related to Infinity-Texas because of the sale of its Texas oil and gas properties
in 2011 and its sale of 100% of the stock in Infinity-Texas in 2012 (see Note 8), but may retain some asset retirement obligation
related to properties of Infinity-Wyoming. Therefore, the Company has continued to maintain the asset retirement obligation as
a liability in its financial statements and, in accordance with ASC 410, to accrete such obligation regularly. The following table
summarizes the activity for the Company’s asset retirement obligations for the period ended September 30, 2012:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 82%; line-height: 115%">Asset retirement obligations at beginning of period (net of $389,759 attributed to Infinity-Texas set forth as liabilities of discontinued operation on the accompanying consolidated balance sheets)</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 14%; line-height: 115%; text-align: right">897,560</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Accretion expense, nine months ended September 30, 2012 (net of $17,736 attributed to Infinity-Texas and included within loss of discontinued operation on accompanying consolidated statement of operations)</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">61,958</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Asset retirement obligations at end of period</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">959,518</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Less: current portion of asset retirement obligations</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(432,027</td>
<td style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Asset retirement obligations, less current portion</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">527,491</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"><b><i> </i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Capitalized
Interest and Debt Discount Amortization</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company capitalizes
interest costs and debt discount amortization to oil and gas properties on expenditures made in connection with exploration and
development projects that are not subject to current depletion. Such costs are capitalized only for the period that activities
are in progress to bring these projects to their intended use. Interest costs and debt discount amortization capitalized for the
quarters ended September 30, 2012 and 2011 were $0 and $67,529, respectively, and for the nine months ended September 30, 2012
and 2011 were $77,616 and $189,393, respectively.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Fair Value
of Financial Instruments</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><i> </i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As defined in ASC
820, fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances
based upon observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurement), pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable
and are valued using models or other valuation methodologies (level 2 measurement), and the lowest priority to unobservable inputs
(level 3 measurement). There were no changes in valuation techniques or reclassifications of fair value measurements between levels
1, 2 or 3 during the quarter ended September 30, 2012 or year ended December 31, 2011.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The carrying values
of the Company’s accounts receivable, accounts payable and accrued liabilities represent the estimated fair value due to
the short-term nature of the accounts.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The carrying value
of the Company’s debt under its Revolving Credit Facility represented its estimated fair value due to its short-term nature,
its adjustable rate of interest, associated fees and expenses and initially recorded discount.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The estimated fair
value of the Company’s non-current derivative liabilities, all of which related to warrants, was estimated using a closed-ended
option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price
of the Company’s common stock, interest rates, the probability of both the downward adjustment of the exercise price and
the upward adjustment to the number of warrants as provided by the warrant agreement terms (Note 5) and non-performance risk factors,
among other items (ASC 820, <i>Fair Value Measurements</i> ("ASC 820") fair value hierarchy Level 2). A comparison of
the assumptions used in calculating estimated fair value at the issue date and at September 30, 2012 is as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">Upon Issuance, August 29, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">At <br /> September 30, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 60%; line-height: 115%">Volatility</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 16%; line-height: 115%; text-align: right">52.5</td>
<td style="width: 1%; line-height: 115%">%</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 16%; line-height: 115%; text-align: right">52.2</td>
<td style="width: 1%; line-height: 115%">%</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Contractual term</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5 years</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5 years</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Exercise price</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2.50</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2.50</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Number of warrants per contract</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">120,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">120,000</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The estimated
initial fair value of the Company’s Series A and B redeemable convertible preferred stock was determined based upon estimates
of the expected occurrence and timing of certain future events, such as the date such shares might be redeemed or converted (assumed
to be December 31, 2013); an estimate of discount rates to be utilized in determining net present value of the preferred stock,
based upon rates observed in similar or analogous, but not identical, market transactions, upon past Company-specific effective
borrowing rates, and the assessment of each instrument’s specific rights and obligations.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Net Income
(Loss) Per Common Share </i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Pursuant to FASB
ASC Topic 260, <i>Earnings Per Share,</i> basic net income (loss) per share is computed by dividing the net income (loss) attributable
to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common
and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent
shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method.
For periods in which net losses from continuing operations are incurred, weighted average shares outstanding is the same for basic
and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">During the nine
months and the three months ended September 30, 2012 the Company had outstanding an additional 2,000,000 shares of common stock
for the period April 13 through September 30, 2012. Weighted average common shares outstanding for both the quarter and nine months
ended September 30, 2012 reflect the effects of the shares outstanding for this period. The calculation of income (loss) per common
share for the quarter and nine months ended September 30, 2012 reflects these amounts which are attributable to the preferred shareholders
as increases in the net income (loss) for those periods allocable to common shareholders.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Foreign Currency</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The United States
dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and exploration
activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities are denominated
in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures in the
foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included in the
consolidated results of operations in the period in which they occur. The Company does not have any cash accounts denominated in
foreign currencies.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Recent Accounting
Pronouncements</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Effective January
1, 2011, the Company adopted ASC 820 guidance that requires enhanced disclosure in the level 3 reconciliation for fair value measurements.
The adoption had no impact on the consolidated financial position, results of operations or cash flows of the Company. Refer to
the discussion elsewhere in this note as to other information concerning our assets and liabilities measured at fair value.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In December 2011,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 which requires that an entity
disclose both gross and net information about instruments and transactions that are either eligible for offset in the balance
sheet or subject to an agreement similar to a master netting agreement, including derivative instruments. ASU 2011-11 was issued
in order to facilitate comparison between GAAP and IFRS financial statements by requiring enhanced disclosures, but does not change
existing GAAP that permits balance sheet offsetting. This authoritative guidance is effective for annual reporting periods beginning
on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the provisions
of ASU 2011-11 and assessing the impact, if any, it may have on the Company's financial position or results of operations.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Basis of Presentation</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The consolidated financial
statements include the accounts of Infinity Energy Resources, Inc. and its wholly-owned subsidiaries, Infinity Oil and Gas of Texas,
Inc. (“Infinity-Texas”) and Infinity Oil & Gas of Wyoming, Inc. (“Infinity-Wyoming”). All significant
intercompany balances and transactions have been eliminated in consolidation. As described in Note 8, the Company sold its entire
investment in Infinity-Texas effective July 31, 2012. The assets, liabilities and operations of Infinity-Texas have been segregated
and set forth as relating to discontinued operations on the accompanying consolidated financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On March 5, 2009 Infinity
signed the contracts relating to its Nicaraguan Concessions. Infinity is conducting an environmental study and the development
of geological information from reprocessing and additional evaluation of existing 2-D seismic data that was acquired for the Nicaraguan
Concessions. Infinity is seeking offers from other industry operators and other third parties for interests in the acreage in
exchange for cash and a carried interest in exploration and development operations. The funds raised through the subordinated
note transaction described below and Forbearance advances from Amegy Bank, N.A. (“Amegy”) were used to fund these
expenditures (see Notes 2 and 3). These funds will not be sufficient to cover our expected operating exploration costs.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Going Concern</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As reflected in the accompanying
Consolidated Statements of Operations, the Company has had a history of losses. In addition, the Company has a significant working
capital deficit and is currently experiencing substantial liquidity issues. Further, as discussed in Note 2 and below, the Company
was at December 31, 2011 operating under the Fifth Forbearance Agreement with Amegy under the Revolving Credit Facility, which
agreement expired on that date. After December 31, additional advances of $272,070 were made by Amegy accumulating to a total advance
of $1,668,828 as of February 28, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On February 28, 2012,
we signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations we owed to them. Under
these documents, we agreed to issue to Amegy 130,000 shares of Series A Preferred and 2,000,000 shares of common stock as payment
in full of all debt and related obligations owed Amegy; the Company and Amegy also agreed to cancel a warrant held by Amegy exercisable
to purchase 968,000 shares of the Company’s common stock that had been issued in February 2011. In addition, we agreed to
issue Off-Shore 15,016 shares of Series B Preferred in conversion, exchange and payment in full of all debt and other obligations
we owed to Off-Shore. The transactions with Amegy and Off-Shore closed on April 13, 2012 and are described more fully in Note 3.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Although the cash
outflow necessary to pay Amegy has been eliminated under terms of the Stock Purchase Agreement, the Company is still in need of
additional capital to meet its obligations under the Nicaraguan Concessions, and is searching for sources of additional equity
or debt financing. There can be no assurance that the Company will be able to obtain such capital or obtain it on favorable terms..</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company has
classified the entire balance outstanding under the Revolving Credit Facility at December 31, 2011 as a current liability in the
accompanying Consolidated Balance Sheets.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company conducted
an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic
data acquired over its Nicaraguan Concessions. It issued letters of credit totaling $851,550 for this initial work on the leases.
The Company commenced certain activity under the initial work plan and is waiting for governmental approval of the environmental
study. The Company intends to seek joint venture or working interest partners prior to the commencement of any exploration or drilling
operations on the Nicaraguan Concessions.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Due to the uncertainties
related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern. The
financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Management
Estimates</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The preparation
of 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 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 consolidated
financial statements include the initial fair value of redeemable convertible preferred shares, the estimated carrying value of
unproved properties, the estimated cost and timing related to asset retirement obligations, the estimated fair value of derivative
liabilities and stock based awards, and the realization of deferred tax assets.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Oil and Gas
Properties</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company follows
the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred in the acquisition,
exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes
and seismic costs) 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. In the quarters ended September
30, 2012 and 2011, the Company capitalized direct costs, overhead costs and interest as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Three Months</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Nine Months</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Ended September 30,</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Ended September 30,</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 48%; line-height: 115%">Direct costs</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">96,462</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">68,131</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">381,219</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">396,188</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Overhead costs</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">12,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">12,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">37,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">37,500</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Total non-interest costs</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">108,962</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">80,631</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">418,719</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">433,688</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Interest costs</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">67,529</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">77,616</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">189,393</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">108,962</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">148,160</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">496,335</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">623,081</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Costs associated with
production and general corporate activities are expensed in the period incurred.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Depletion of proved oil
and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit of measure
based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and estimated asset
retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties, including
capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves. Unproved properties
are assessed periodically (at least annually) to ascertain 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 period
of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net cash flows
from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable
and possible reserves, risk adjusted as appropriate. 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, or is reported as a period expense, as appropriate. All
unproved property costs as of September 30, 2012 and December 31, 2011 relate to the Company’s Nicaraguan Concessions that
were entered into in March 2009. In assessing the unproved property costs for impairment, the Company takes into consideration
the terms of the government concessions, the status of the ongoing environmental study, evaluation of the seismic data and plans
to seek industry participation in the future exploration and development.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Pursuant to full cost
accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that capitalized
costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the
present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the arithmetic
mean of the previous 12 months’ first-of-month prices and current costs, including the effects of derivative instruments
accounted for as cash flow hedges but excluding the future cash outflows associated with settling asset retirement obligations
that have been accrued on the balance sheet, and 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 included in the costs being amortized, 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. As of September 30,
2012 and 2011, the Company did not have any proved oil and gas properties, and all unproved property costs relate to the Company’s
Nicaraguan Concessions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">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 would be recognized in the determination of the Company’s net earnings/loss. During 2011 Infinity-Texas, the Company’s
100%-owned subsidiary, sold its oil and gas properties in Texas, to a single-member LLC, the owner of which purchased 100% of
the stock of Infinity-Texas from the Company in July 2012 (see Note 8). The costs associated with these properties were entirely
written off in prior periods. The properties were sold in return for a non-interest-bearing note with repayment conditional upon
net profit from sales of oil and gas from the properties. Due to the uncertainty of when and in what amount payments on the note
will be received, the Company has recorded the note net of a 100% valuation reserve and has recognized no gain or loss on this
transaction. The note was sold as an asset of Infinity-Texas in the July 2012 sale of such company's stock.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Concentrations</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company’s only
significant asset is the Nicaraguan Concessions and it expects to be active in Nicaragua for the foreseeable future, given sufficient
capital. The political climate in Nicaragua could become unstable and subject to radical change over a short period of time. In
the event of a significant negative change in political and economic stability in the vicinity of the Nicaraguan Concessions,
it may be forced to abandon or suspend its efforts.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Derivative Instruments</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company accounts for
derivative instruments or hedging activities under the provisions of ASC 815 (formerly Statement of Financial Accounting Standards
(“SFAS”) No. 133, <i>Accounting for Derivative Instruments and Hedging Activities</i>.) ASC 815 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The purpose of hedging
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 September 30, 2012 and December 31, 2011 and during the periods then ended,
the Company had no oil and natural gas derivative arrangements outstanding.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As a result of certain
terms, conditions and features included in certain common stock purchase warrants issued by the Company but no longer outstanding
at September 30, 2012 (see Note 5), those warrants were required to be accounted for as derivatives at estimated fair value, with
changes in fair value recognized in earnings. Such derivatives were outstanding at December 31, 2011 and were cancelled effective
April 13, 2012 as part of the transaction in which the Company’s debt, subordinated note payable and related accrued interest
and other fees, in addition to its derivative liability associated with the warrants, were satisfied by the issuance of common
and Series A and B redeemable, convertible preferred stock (Note 3). Likewise, as the result of certain terms, conditions and
features included in certain common stock purchase warrants issued by the Company in association with a note payable entered into
August 28, 2012 with a related party, the warrants issued are also required to be accounted for as derivatives at estimated fair
value, with changes in fair value recognized in earnings.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Income Taxes</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">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. We routinely assess the realizability of our deferred
income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully
utilized in future periods. We consider future taxable earnings in making such assessments. Numerous judgments and assumptions
are inherent in the determination of future taxable earnings, including such factors as future operating conditions. 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. When the Company can project that a portion of the deferred tax asset can
be realized through application of a portion of tax loss carryforward, the Company will record that utilization as a deferred
tax benefit and recognize a deferred tax asset in the same amount. There can be no assurance that facts and circumstances will
not materially change and require us to adjust our deferred income tax asset valuation allowance in a future period. We are potentially
subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing with uncertainties
in the application of complex income tax laws and regulations in various taxing jurisdictions. We recognize certain income tax
positions that meet a more-likely-than not recognition threshold. If we ultimately determine that the payment of these liabilities
will be unnecessary, we will reverse the liability and recognize an income tax benefit. The Company recognized a deferred tax
asset, net of valuation allowance, of $0 at September 30, 2012 and $700,000 at December 31, 2011 related to the anticipated use
of net operating losses to offset taxable income triggered by the transaction with Amegy and Off-Shore that closed in April 2012
(see Note 3). As recorded, the Company did not realize any gain in association with the transaction, and the deferred tax asset
set up at December 31, 2011 was recorded as a reduction in additional paid-in capital.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Cash and cash equivalents</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">For purposes of reporting
cash flows, cash consists of cash on hand and demand deposits with financial institutions. It is the Company’s policy that
all highly liquid investments with a maturity of three months or less when purchased would be cash equivalents and would be included
along with cash as cash and equivalents.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Asset Retirement
Obligations</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company records
estimated future asset retirement obligations pursuant to the provisions of ASC 410 (formerly SFAS No. 143, <i>Accounting for Asset
Retirement Obligations</i>.) ASC 410 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. 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. Capitalized costs are depleted as a component of the full cost pool using the units of production method.
Although the Company has recognized full impairment of the value of all remaining domestic oil and gas properties in prior periods,
the Company may retain title to certain abandoned non-producing domestic leasehold properties. Management believes the Company
has been relieved from asset retirement obligation related to Infinity-Texas because of the sale of its Texas oil and gas properties
in 2011 and its sale of 100% of the stock in Infinity-Texas in 2012 (see Note 8), but may retain some asset retirement obligation
related to properties of Infinity-Wyoming. Therefore, the Company has continued to maintain the asset retirement obligation as
a liability in its financial statements and, in accordance with ASC 410, to accrete such obligation regularly. The following table
summarizes the activity for the Company’s asset retirement obligations for the period ended September 30, 2012:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 82%; line-height: 115%">Asset retirement obligations at beginning of period (net of $389,759 attributed to Infinity-Texas set forth as liabilities of discontinued operation on the accompanying consolidated balance sheets)</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 14%; line-height: 115%; text-align: right">897,560</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Accretion expense, nine months ended September 30, 2012 (net of $17,736 attributed to Infinity-Texas and included within loss of discontinued operation on accompanying consolidated statement of operations)</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">61,958</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Asset retirement obligations at end of period</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">959,518</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Less: current portion of asset retirement obligations</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(432,027</td>
<td style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Asset retirement obligations, less current portion</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">527,491</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Capitalized
Interest and Debt Discount Amortization</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company capitalizes
interest costs and debt discount amortization to oil and gas properties on expenditures made in connection with exploration and
development projects that are not subject to current depletion. Such costs are capitalized only for the period that activities
are in progress to bring these projects to their intended use. Interest costs and debt discount amortization capitalized for the
quarters ended September 30, 2012 and 2011 were $0 and $67,529, respectively, and for the nine months ended September 30, 2012
and 2011 were $77,616 and $189,393, respectively.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Fair Value
of Financial Instruments</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><i> </i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As defined in ASC
820, fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances
based upon observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurement), pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable
and are valued using models or other valuation methodologies (level 2 measurement), and the lowest priority to unobservable inputs
(level 3 measurement). There were no changes in valuation techniques or reclassifications of fair value measurements between levels
1, 2 or 3 during the quarter ended September 30, 2012 or year ended December 31, 2011.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The carrying values
of the Company’s accounts receivable, accounts payable and accrued liabilities represent the estimated fair value due to
the short-term nature of the accounts.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The carrying value
of the Company’s debt under its Revolving Credit Facility represented its estimated fair value due to its short-term nature,
its adjustable rate of interest, associated fees and expenses and initially recorded discount.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The estimated fair
value of the Company’s non-current derivative liabilities, all of which related to warrants, was estimated using a closed-ended
option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price
of the Company’s common stock, interest rates, the probability of both the downward adjustment of the exercise price and
the upward adjustment to the number of warrants as provided by the warrant agreement terms (Note 5) and non-performance risk factors,
among other items (ASC 820, <i>Fair Value Measurements</i> ("ASC 820") fair value hierarchy Level 2). A comparison of
the assumptions used in calculating estimated fair value at the issue date and at September 30, 2012 is as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">Upon Issuance, August 29, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">At <br /> September 30, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 60%; line-height: 115%">Volatility</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 16%; line-height: 115%; text-align: right">52.5</td>
<td style="width: 1%; line-height: 115%">%</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 16%; line-height: 115%; text-align: right">52.2</td>
<td style="width: 1%; line-height: 115%">%</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Contractual term</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5 years</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5 years</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Exercise price</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2.50</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2.50</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Number of warrants per contract</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">120,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">120,000</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The estimated
initial fair value of the Company’s Series A and B redeemable convertible preferred stock was determined based upon estimates
of the expected occurrence and timing of certain future events, such as the date such shares might be redeemed or converted (assumed
to be December 31, 2013); an estimate of discount rates to be utilized in determining net present value of the preferred stock,
based upon rates observed in similar or analogous, but not identical, market transactions, upon past Company-specific effective
borrowing rates, and the assessment of each instrument’s specific rights and obligations.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Net Income
(Loss) Per Common Share </i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Pursuant to FASB
ASC Topic 260, <i>Earnings Per Share,</i> basic net income (loss) per share is computed by dividing the net income (loss) attributable
to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common
and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent
shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method.
For periods in which net losses from continuing operations are incurred, weighted average shares outstanding is the same for basic
and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">During the nine
months and the three months ended September 30, 2012 the Company had outstanding an additional 2,000,000 shares of common stock
for the period April 13 through September 30, 2012. Weighted average common shares outstanding for both the quarter and nine months
ended September 30, 2012 reflect the effects of the shares outstanding for this period. The calculation of income (loss) per common
share for the quarter and nine months ended September 30, 2012 reflects these amounts which are attributable to the preferred
shareholders as increases in the net income (loss) for those periods allocable to common shareholders.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Foreign Currency</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The United States
dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and exploration
activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities are denominated
in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures in the
foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included in the
consolidated results of operations in the period in which they occur. The Company does not have any cash accounts denominated
in foreign currencies.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The following table
summarizes the activity for the Company’s asset retirement obligations for the period ended September 30, 2012:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 82%; line-height: 115%">Asset retirement obligations at beginning of period (net of $389,759 attributed to Infinity-Texas set forth as liabilities of discontinued operation on the accompanying consolidated balance sheets)</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 14%; line-height: 115%; text-align: right">897,560</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Accretion expense, nine months ended September 30, 2012 (net of $17,736 attributed to Infinity-Texas and included within loss of discontinued operation on accompanying consolidated statement of operations)</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">61,958</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Asset retirement obligations at end of period</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">959,518</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Less: current portion of asset retirement obligations</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(432,027</td>
<td style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Asset retirement obligations, less current portion</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">527,491</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 7 — Related Party Transactions</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The corporate office was
located in Denver, Colorado until November 2008 when the Denver office was closed. The corporate office moved to the business office
of the CFO of the Company. The Company currently does not have any employees and the staff of the CFO provides the office services.
These services are billed at the CFO firm’s standard billing rate plus out-of-pocket expenses. For the quarters ended September
30, 2012 and 2011, the Company was billed $59,745 and $41,221, respectively, and for the nine months ended September 30, 2012 and
2011, the Company was billed $203,328 and $152,456, respectively. The amount due to the CFO’s firm for services provided
was $708,214 at September 30, 2012 and $514,885 at December 31, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company entered into
a subordinated loan with Off-Shore in the aggregate amount of $1,275,000 for funds for the Nicaraguan Concessions. This note was
satisfied by the Company’s issuance of shares of Series B redeemable convertible preferred stock effective April 13, 2012
to Off-Shore (see Note 3). The managing partner of Off-Shore and the CFO are partners in the accounting firm which the Company
uses for its corporate office. The Series B preferred stock continues to be held by Off-Shore.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">While the relationship
with Amegy Bank was ongoing and debt was outstanding (through April 13, 2012), the Company’s CEO personally guaranteed up
to $500,000 of the Forbearance advances. His guarantee obligation was never called upon and he was not compensated by the Company
for such guarantee.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As of September 30, 2012
and December 31, 2011, the Company had accrued compensation to its officers and directors of $891,708 and $744,708, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As discussed in Note
2, on August 28, 2012, the Company borrowed $250,000 from an entity that is 49% owned by a board member of another corporation
for which Infinity’s CEO serves as CEO and chairman of the board. The Company issued a short-term note to bearing interest
at 8% per annum and maturing February 28, 2013 to such party. In connection with the transaction, the Company issued the lender
a warrant exercisable to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, expiring August
2017. The warrant contains a penalty provision under which the number of shares that may be purchased will increase to 1,200,000
and the exercise price will be reduced to $0.10 per share if the Company fails to pay the note when due on February 28, 2013.</p>
708214
514885
1275000
1275000
891708
744708
381219
96462
68131
396188
37500
12500
12500
37500
61958
56162
17736
959518
89756
389759
272070
0
700000
700000
1668828
15016
15016
130000
2000000
130000
2000000
15016
968000
851550
408450
443100
1.00
.10
77616
0
67529
189393
2000000
418719
108962
80631
433688
77616
67529
189393
496335
108962
148160
623081
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 3 - Cancellation of Debt and Related
Obligations and Issuance of Securities in Exchange for Debt</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On February 28, 2012,
the Company signed definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations owed them.
In accordance with these agreements, on April 13, 2012, the Company issued Amegy 2,000,000 shares of common stock and 130,000 shares
of Series A redeemable convertible preferred stock, and issued Off-Shore 15,016 shares of Series B redeemable convertible preferred
stock. Amegy also agreed to cancel the Amegy Warrant (that had originally been issued in February 2011), exercisable to purchase
931,561 shares of common stock. In aggregate, the Company cancelled debt, accrued interest and fees and the derivative liability
that had been recorded relative to the Amegy Warrant in the aggregate amount of $21,883,393.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Series A and Series
B redeemable convertible preferred stock have a 6% annual dividend and are convertible into common stock at a price of $6.50 per
share. Both series of preferred stock automatically convert into common stock if the average of the closing prices of the common
stock for 30 consecutive trading days equals at least $7.50 per share. The Company has the right to redeem both series of preferred
stock at any point for an amount equal to their issue price of $100 per share plus all accrued and unpaid dividends; however the
Series A preferred stock has a higher liquidation preference and must be redeemed prior to any redemption of Series B preferred
stock. Commencing January 1, 2013, the Series A preferred stock will vote with the common stock on all matters presented to the
holders of the common stock. Beginning January 1, 2014, the Series A preferred shareholders will have a majority vote on all such
matters and the right to elect a majority of the Board of Directors, if the Series A preferred stock has not been redeemed or converted
into common stock. Series B preferred stock has no voting privileges. Neither series of preferred stock is transferrable for 180
days after issuance.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The common stock issued
to Amegy has been recorded at a value equal to the closing price of the shares of the Company’s common stock on April 13,
2012, the date the agreement was effective, a total of $2,980,000. Taking into consideration the rights and preferences accruing
to the preferred stock issued, as summarized above, the Company has classified both Series A and B preferred stock as mezzanine
securities on the accompanying consolidated balance sheet at September 30, 2012 and accordingly has recorded such stock at their
estimated fair value. That estimated fair value was $9,743,210 for Series A preferred and $1,106,625 for Series B preferred at
the date of issuance, April 13, 2012. During the period April 13 through September 30, 2012, the recorded fair value of Series
A and B preferred shares accreted (increased in calculated present value) by $783,760 and $94,432, respectively ($435,013 and $52,466,
respectively, during the three months ended September 30, 2012), to $10,890,970 and $1,243,102, respectively, at the latter date.
Both Series A and B preferred are being accreted to their face values over a period commencing April 14, 2012 through December
31, 2013. Accrued dividends payable on the preferred shares in the amount of $406,045 have been recorded as of September 30, 2012
($217,524 in the three months ended September 30, 2012). In addition, a $700,000 deferred tax benefit recorded at December 31,
2011 in anticipation that the Company would recognize a gain from the above transaction during 2012 has been applied in this transaction.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The aggregate amount of
debt, warrant derivative and other related liabilities cancelled in the transaction exceeded the recorded amounts for common stock
and Series A and B preferred stock, and the deferred tax benefit application, in the amount of $7,353,558. Management believes
that the appropriate accounting for this excess is to regard it as an addition to additional paid-in capital, because of the extent
and exclusivity of the financing provided by Amegy and Off-Shore to the Company since 2009, the continued willingness of Amegy
to forbear from existing remedies allowed it under its 2007 agreement as it continued to provide the Company advances necessary
to satisfy funding requirements of the Nicaraguan Concessions, and the voting privileges accorded the Series A preferred stockholders
commencing in 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Following tabular
presentation summarizes the transaction as recorded by the Company as of April 13, 2012:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Debt and related liabilities at April 13, 2012:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 64%; padding-left: 12pt; line-height: 115%">Note and line of credit borrowing, Amegy Bank</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 14%; line-height: 115%; text-align: right">11,679,322</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 14%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Subordinated note payable, Off-Shore</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">1,269,441</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Accrued interest and other fees due Amegy</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">8,201,314</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Accrued interest due Off-Shore</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">251,238</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Derivative liability related to Amegy warrant</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">482,078</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">21,883,393</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Equities issued in exchange for above, at estimated fair value on<br /> April 13, 2012:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Common stock</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">2,980,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Redeemable, convertible preferred stock, Series A</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">9,743,210</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Redeemable, convertible preferred stock, Series B</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">1,106,625</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">13,829,835</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">8,053,558</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Deferred income tax asset applied in recording transaction</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">700,000</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Excess of debt forgiven by creditors over fair value of common and Series A and B redeemable, convertible preferred stock issued in exchange, recorded as an addition to additional paid-in capital</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">7,353,558</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Following tabular
presentation summarizes the transaction as recorded by the Company as of April 13, 2012:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Debt and related liabilities at April 13, 2012:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 64%; padding-left: 12pt; line-height: 115%">Note and line of credit borrowing, Amegy Bank</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 14%; line-height: 115%; text-align: right">11,679,322</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 14%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Subordinated note payable, Off-Shore</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">1,269,441</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Accrued interest and other fees due Amegy</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">8,201,314</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Accrued interest due Off-Shore</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">251,238</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Derivative liability related to Amegy warrant</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">482,078</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">21,883,393</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Equities issued in exchange for above, at estimated fair value on<br /> April 13, 2012:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Common stock</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">2,980,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Redeemable, convertible preferred stock, Series A</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">9,743,210</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Redeemable, convertible preferred stock, Series B</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">1,106,625</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">13,829,835</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">8,053,558</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Deferred income tax asset applied in recording transaction</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">700,000</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Excess of debt forgiven by creditors over fair value of common and Series A and B redeemable, convertible preferred stock issued in exchange, recorded as an addition to additional paid-in capital</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">7,353,558</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
11679322
8201314
251238
482078
1186353
1269441
-1275000
21883393
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b>Note 6 —
Commitments and Contingencies</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company has
no insurance coverage on its U.S domestic oil and gas properties. The Company is not in compliance with Federal and State laws
regarding the U.S. domestic oil and gas properties. The Company’s known compliance issues relate to the Texas Railroad Commission
regarding administrative filings and renewal permits. The ultimate resolution of these compliance issues could have a significant
adverse impact on the Company’s financial statements.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Nicaraguan
Concessions</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The significant
terms and work commitments associated with the Nicaraguan Concessions by area (Perlas and Tyra blocks) are summarized below. Within
15 days of entering an exploration sub-period, the Company is required to provide an irrevocable guarantee (“Irrevocable
Guarantee”) in favor of the Nicaraguan Ministry of Energy, payable in Nicaragua, in an amount equal to the estimated cost
of such exploration sub-period, subject to an accumulated credit carry forward for the excess of work performed in the preceding
exploration sub-period, as provided in the agreements relating to the Nicaraguan Concessions.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As of December
31, 2011 and September 30, 2012, the Company is in Sub-Period 1 for both Perlas and Tyra. The Company has provided Environmental
Impact Studies to the Nicaraguan Ministry of Energy effective April 2011 and is awaiting approval of these studies before proceeding
to Sub-Period 2. In accordance with the concession agreements, the Company has provided the Ministry of Energy with the required
letters of credit in the amounts of $443,100 for Perlas (expiring March 2013) and $408,450 for Tyra (expiring September 2013).
The Company has also made all required expenditures related to the concessions for training programs and as “area fees,”
for 2011, 2010 and, in early 2012, for that year. The Company considers it is fully in compliance with the terms of the Nicaraguan
Concession agreements.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b>Minimum Work
Program – Perlas</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.15in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: white">
<td colspan="18" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Block Perlas – Exploration Minimum Work Commitment and Relinquishments</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Exploration Period</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">(6 Years)</p></td>
<td style="line-height: 115%; text-align: center"> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Duration</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">(Years)</p></td>
<td style="line-height: 115%; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Work Commitment</td>
<td style="line-height: 115%; text-align: center"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Relinquishment</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Irrevocable</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Guarantee</p></td>
<td style="padding-bottom: 1.5pt"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; width: 16%; line-height: 115%">Sub-Period 1</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 7%; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 0%; line-height: 115%">-</td>
<td style="vertical-align: bottom; width: 43%; line-height: 115%">Environmental Impact Study</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 18%; line-height: 115%">26km2</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%">$</td>
<td style="vertical-align: top; width: 9%; line-height: 115%; text-align: right">443,100</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="vertical-align: top; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">-</td>
<td style="line-height: 115%">Acquisition & interpretation of 333km of  new 2D seismic</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="vertical-align: top; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">-</td>
<td style="line-height: 115%">Acquisition, processing & interpretation  of  667km of new 2D seismic (or equivalent  in 3D)</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Sub-Period 2</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Optional</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">1</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: bottom; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Acquisition, processing & interpretation of 200km<sup>2 </sup>of 3D seismic </font></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">53km2</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">1,356,227</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Sub-Period 3</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Optional</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">1</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: bottom; line-height: 115%">Drilling of one exploration well to the  Cretaceous or 3,500m, whichever is  shallower</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">80km2</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">10,220,168</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Sub-Period 4</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Optional</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower</td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: top; line-height: 115%">All acreage except areas with discoveries</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">10,397,335</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Geochemical analysis</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Minimum Work Program - Tyra</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td colspan="19" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Block Tyra – Exploration Minimum Work Commitment and Relinquishments</td></tr>
<tr style="vertical-align: bottom">
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Exploration Period <br /> (6 Years)</td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Duration <br /> (Years)</td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Work Commitment</td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Relinquishment</td>
<td style="line-height: 115%"> </td>
<td colspan="3" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Irrevocable <br /> Guarantee</td>
<td style="line-height: 115%"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; width: 16%; line-height: 115%">Sub-Period 1</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 12%; line-height: 115%; text-align: center">1.5</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%">-</td>
<td style="vertical-align: top; width: 36%; line-height: 115%">Environmental Impact Study</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 10%; line-height: 115%">26km2</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%">$</td>
<td style="vertical-align: top; width: 12%; line-height: 115%; text-align: right">408,450</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Acquisition & interpretation of 667km of existing  2D seismic</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Acquisition of 667km of new 2D seismic (or equivalent in 3D)</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%">Sub-Period 2 <br /> Optional</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">0.5</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">40km2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">278,450</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%">Sub-Period 3 <br /> Optional</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Acquisition, processing & interpretation of 250km<sup>2 </sup>of new 3D seismic</font></td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">160km2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">1,818,667</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%">Sub-Period 4 <br /> Optional</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td colspan="6" style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">All acreage except</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">areas with discoveries</p></td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">10,418,667</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Geochemical analysis</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td colspan="6" style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Contractual and Fiscal Terms</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Training Program</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">US $50,000 per year, per block</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Area Fee</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">Yr 1-3 <br /> Yr 4-7 <br /> Yr 8 fwd</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">$0.05/hectare</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">$0.10/hectare</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">$0.15/hectare</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Royalties</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-decoration: underline">Recovery Factor <br /> 0 – 1.5 <br /> 1.5 – 3.0 <br /> >3.0</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; padding-bottom: 1.5pt">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><u>Percentage</u></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">5%</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">10%</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">15%</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; width: 34%; line-height: 115%; font-weight: bold">Natural Gas Royalties</td>
<td style="vertical-align: bottom; width: 2%; line-height: 115%"> </td>
<td style="vertical-align: bottom; width: 32%; line-height: 115%">Market value at production</td>
<td style="vertical-align: bottom; width: 2%; line-height: 115%"> </td>
<td style="vertical-align: bottom; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 28%; line-height: 115%">5%</td>
<td style="vertical-align: bottom; width: 1%"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Corporate Tax</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">Rate no higher than 30%</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Social Contribution</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td colspan="5" style="vertical-align: bottom; line-height: 115%">3% of the net profit (1.5% for each autonomous region)</td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Investment Protection</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">ICSID arbitration <br /> OPIC insurance</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The minimum cash
commitment budgeted for the Nicaraguan Concessions for 2012 is approximately $256,800, of which approximately $303,500 has been
incurred and paid through November 26, 2012. The Sub Period 2 starts when the Nicaraguan Government approves the environmental
impact study. The approval is currently pending. Once the approval is received the minimum cash requirements for the next twelve
month period will be $1,894,000 of which $1,634,677 is related to seismic and $259,300 is related to the training and area fees
under the concession. See Note 1 for discussion of Going Concern.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Delivery
Commitments</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In June 2005, Infinity-Texas
entered into a long-term gas gathering contract for natural gas production from its properties in Erath County, Texas, under which
Infinity-Texas was to pay a gathering fee of $0.35 per Mcf gathered to LDH Gas Development, L.P (LDH). The contract contains
minimum delivery volume commitments through December 31, 2011 associated with firm transportation rights. The aggregate amount
owing related to the shortfalls was $2,845,458 (which had been entirely accrued prior to 2011). In July 2012, the Company sold
100% of the common stock of Infinity-Texas for $1 and the assumption of all the Infinity - Texas liabilities by the purchaser (see
Note 8). In accordance with the results of this transaction, the LDH liability is no longer a Company obligation after that date.
The amount of the liability is presented in the accompanying consolidated balance sheets as an element of “current liabilities
of discontinued operation” at December 31, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Revenue Sharing
Commitments</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On March 23, 2009, the
Company <font style="color: black">entered into a Securities Purchase Agreement, dated effective as of </font>March 23, 2009, with
<font style="color: black">Off-Shore, </font>an accredited investor, to issue a subordinated secured promissory note in the aggregate
principal amount of up to $1,275,000 and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. As of December
31, 2009, Off-Shore had funded $1,275,000 (the “Funding Amount”).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Under the Revenue Sharing
Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”) equal
to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan
Concessions. The RSP shall bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale
to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The
RSP shall be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser of the
production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for
Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Off-Shore.
<font style="color: black">At any time within three (3) years from the date of the Revenue Agreement, Infinity has the right to
redeem the RSP by paying Off-Shore an amount as follows: (i) until March 22, 2010, a sum equal to three (3) times the Funding Amount,
or $3,825,000; (ii) until March 22, 2011, a sum equal to five (5) times the Funding Amount, $6,375,000; or (iii) until March 22,
2012, a sum equal to ten (10) times the Funding Amount, or $12,750,000. Upon the redemption of the RSP by Infinity, the Revenue
Agreement shall terminate. As of March 23, 2012, the Company had not exercised its right to redeem and such redemption right expired.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><font style="color: black">On
June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. </font>Infinity
assigned to officers and directors a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%)
of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its
proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including
its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each
month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan
Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions,
and does not create any rights in the Nicaraguan Concessions for officers and directors.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company intends to
seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any exploratory drilling
operations on these Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Jeff
Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the
Farmout. Infinity assigned to Jeff Roberts a monthly payment (the “RSP”) equal to the revenue derived from one percent
(1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear
its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including
its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the
last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month
from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan
Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On September 8, 2009 the
Company entered into a Revenue Sharing Agreement with Thompson Knight Global Energy Services (“Thompson Knight”) to
assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity
assigned to Thompson Knight a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s
share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP shall bear its proportionate share
of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs. The RSP shall be paid to Thompson Knight by the last day of each month
based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions.
The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not
create any rights in the Nicaraguan Concessions for Thompson Knight.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Lack of Compliance
with Law Regarding Domestic Properties</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Infinity is not in compliance
with existing federal, state and local laws, rules and regulations for its domestic properties and this could have a material or
significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of Infinity. For the year
ended December 31, 2008 the remaining values of Infinity-Texas and Infinity-Wyoming were written down to zero as the Company focused
solely on the development of the Nicaraguan Concessions. Management believes the estimate of the Company’s asset retirement
obligations consisting of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration
on oil and gas properties is sufficient to cover any noncompliance liabilities. The Company no longer carries insurance on the
domestic properties.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Contingent Fees</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In addition to the Revenue
Sharing Agreement with Thompson Knight to assist the Company with its technical studies of gas and oil holdings in Nicaragua and
managing and assisting in the Farmout, the Company agreed to compensate Thompson Knight a success fee of 5% of the upfront cash
fee paid to Infinity by a third party earning an interest in the Nicaragua asset up to $20 million and 10% of any amount exceeding
the $20 million. A 2% success fee would be paid to Thompson Knight of the remaining cash investment in subsequent years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Prior to action taken
in December 2012, there was an agreement that at such time the Company entered into an agreement with a partner on the Nicaragua
Concession and the Company received and collected up to $20,000,000 in upfront fees, Messrs. Ross and Hutchins would receive a bonus
of 5% of the first $20,000,000 and 10% of any amount over $20,000,000, which amount was to be divided 50% to each officer. In December
2012, the parties terminated this agreement. As of September 30, 2012 and December 31, 2011, no amounts had been accrued under
these contingent fee arrangements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 9pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.25in"><b><i>Litigation</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company is subject
to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s failure to pay
amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company is currently
involved in litigation as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.5in">Exterran Energy Solutions, L.P., f/k/a Hanover Compression
Limited Partnership, who filed an action in the District Court of Erath County, Texas, number CV30512, on March 31, 2010 against
Infinity Oil and Gas of Texas, Inc., Infinity Energy Resources, Inc., Longhorn Properties, LLC, and Forest Oil Corporation. Exterran
Energy Solutions, L.P. provided certain gas compressor and related equipment pursuant to a Gas Compressor/Production Equipment
Master Rental & Servicing Agreement with Infinity dated January 3, 2005 in Erath County, Texas and is claiming breach of contract
for failure to pay amounts due. The Company has included the impacts of this litigation as liabilities in its accounts payable
because it does not dispute the amount owed. In 2009 the Company recorded the amount claimed. The Company will seek to settle the
lawsuit when it has the financial resources to do so. The suit is in the discovery stage.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.5in">Certain litigation had been filed against Infinity Oil
and Gas of Texas (Infinity – Texas) by LDH Gas Development, L.P. In connection with this matter, Infinity - Texas had recorded
accounts payable and accrued expense in the aggregate amount of $2,845,458 in 2009. These liabilities have been reflected since
2009 in the Company’s consolidated financial statements and were included in “current liabilities of discontinued
operation” in the Company’s consolidated balance sheet at December 31, 2011. In July 2012, the Company sold 100% of
the common stock of Infinity-Texas for $1 and the assumption of all the Infinity – Texas liabilities by the purchaser. In
accordance with the results of this transaction, the LDH liability is no longer a Company obligation after that date. The amount
of the liability is presented in the accompanying consolidated balance sheets as an element of “current liabilities of discontinued
operations” at December 31, 2011.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company considers
it is fully in compliance with the terms of the Nicaraguan Concession agreements.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b>Minimum Work
Program – Perlas</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.15in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: white">
<td colspan="18" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Block Perlas – Exploration Minimum Work Commitment and Relinquishments</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Exploration Period</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">(6 Years)</p></td>
<td style="line-height: 115%; text-align: center"> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Duration</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">(Years)</p></td>
<td style="line-height: 115%; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Work Commitment</td>
<td style="line-height: 115%; text-align: center"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Relinquishment</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Irrevocable</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center">Guarantee</p></td>
<td style="padding-bottom: 1.5pt"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; width: 16%; line-height: 115%">Sub-Period 1</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 7%; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 0%; line-height: 115%">-</td>
<td style="vertical-align: bottom; width: 43%; line-height: 115%">Environmental Impact Study</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 18%; line-height: 115%">26km2</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%">$</td>
<td style="vertical-align: top; width: 9%; line-height: 115%; text-align: right">443,100</td>
<td style="vertical-align: bottom; width: 0%; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="vertical-align: top; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">-</td>
<td style="line-height: 115%">Acquisition & interpretation of 333km of  new 2D seismic</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="vertical-align: top; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">-</td>
<td style="line-height: 115%">Acquisition, processing & interpretation  of  667km of new 2D seismic (or equivalent  in 3D)</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Sub-Period 2</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Optional</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">1</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: bottom; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Acquisition, processing & interpretation of 200km<sup>2 </sup>of 3D seismic </font></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">53km2</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">1,356,227</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Sub-Period 3</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Optional</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">1</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: bottom; line-height: 115%">Drilling of one exploration well to the  Cretaceous or 3,500m, whichever is  shallower</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">80km2</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">10,220,168</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Sub-Period 4</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">Optional</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower</td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: top; line-height: 115%">All acreage except areas with discoveries</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">10,397,335</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Geochemical analysis</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td>
<td style="vertical-align: bottom"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Minimum Work Program - Tyra</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td colspan="19" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Block Tyra – Exploration Minimum Work Commitment and Relinquishments</td></tr>
<tr style="vertical-align: bottom">
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Exploration Period <br /> (6 Years)</td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Duration <br /> (Years)</td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Work Commitment</td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Relinquishment</td>
<td style="line-height: 115%"> </td>
<td colspan="3" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Irrevocable <br /> Guarantee</td>
<td style="line-height: 115%"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; width: 16%; line-height: 115%">Sub-Period 1</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 12%; line-height: 115%; text-align: center">1.5</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%">-</td>
<td style="vertical-align: top; width: 36%; line-height: 115%">Environmental Impact Study</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 10%; line-height: 115%">26km2</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 1%; line-height: 115%">$</td>
<td style="vertical-align: top; width: 12%; line-height: 115%; text-align: right">408,450</td>
<td style="vertical-align: top; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Acquisition & interpretation of 667km of existing  2D seismic</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Acquisition of 667km of new 2D seismic (or equivalent in 3D)</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%">Sub-Period 2 <br /> Optional</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">0.5</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">40km2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">278,450</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%">Sub-Period 3 <br /> Optional</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Acquisition, processing & interpretation of 250km<sup>2 </sup>of new 3D seismic</font></td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">160km2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">1,818,667</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%">Sub-Period 4 <br /> Optional</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center">2</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td colspan="6" style="vertical-align: top">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">All acreage except</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">areas with discoveries</p></td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">$</td>
<td style="vertical-align: top; line-height: 115%; text-align: right">10,418,667</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%">-</td>
<td style="vertical-align: top; line-height: 115%">Geochemical analysis</td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td colspan="6" style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: top; line-height: 115%"> </td>
<td style="vertical-align: bottom"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Contractual and Fiscal Terms</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Training Program</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">US $50,000 per year, per block</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Area Fee</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">Yr 1-3 <br /> Yr 4-7 <br /> Yr 8 fwd</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">$0.05/hectare</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">$0.10/hectare</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">$0.15/hectare</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Royalties</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-decoration: underline">Recovery Factor <br /> 0 – 1.5 <br /> 1.5 – 3.0 <br /> >3.0</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; padding-bottom: 1.5pt">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><u>Percentage</u></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">5%</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">10%</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">15%</p></td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; width: 34%; line-height: 115%; font-weight: bold">Natural Gas Royalties</td>
<td style="vertical-align: bottom; width: 2%; line-height: 115%"> </td>
<td style="vertical-align: bottom; width: 32%; line-height: 115%">Market value at production</td>
<td style="vertical-align: bottom; width: 2%; line-height: 115%"> </td>
<td style="vertical-align: bottom; width: 1%; line-height: 115%"> </td>
<td style="vertical-align: top; width: 28%; line-height: 115%">5%</td>
<td style="vertical-align: bottom; width: 1%"> </td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Corporate Tax</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">Rate no higher than 30%</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
<tr style="background-color: white">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Social Contribution</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td colspan="5" style="vertical-align: bottom; line-height: 115%">3% of the net profit (1.5% for each autonomous region)</td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: top; line-height: 115%; font-weight: bold">Investment Protection</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%">ICSID arbitration <br /> OPIC insurance</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"></p>
-2980000
-9743210
-783760
-10890970
-1106625
-94432
-1243102
-13829835
7353558
7353558
8053558
931561
931561
.06
6.50
7.50
406045
700000
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 5 — Derivative Instruments and
Warrants</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Commodity Derivatives</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">As of September 30, 2012
and December 31, 2011, the Company had no oil and natural gas derivative arrangements outstanding.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Derivatives –
Amegy Fifth Forbearance Warrant</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On February 16, 2011,
in connection with the signing of the Fifth Forbearance Agreement (see Note 2) the Company granted Amegy the Amegy Warrant exercisable
to purchase 931,561 shares of the Company’s common stock at an exercise price of $5.01 per share during a ten-year period
following the issuance of the Warrant. The Amegy Warrant was cancelled under the agreements between the Company and Amegy dated
February 28, 2012 (effective April 13, 2012). See Note 3.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Amegy Warrant was
subject to a registration rights agreement under which the Company has 120 days after the notification by Amegy to have such underlying
shares registered. Such agreement was cancelled under the agreements between the Company and Amegy dated February 28, 2012 (effective
April 13, 2012) that also cancelled the Amegy Warrant. See Notes 2 and 3.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In addition, the Amegy
Warrant contained provisions upon which Amegy has the right, upon certain conditions, to put the Warrant to the Company at fair
value. It also contained a provision under which the $5.01 per share exercise price is to be re-priced upon the issuance by the
Company of equity instruments at a price less than $5.01. Further, the Company was required, during the period the Warrant could
be exercised, to have authorized and reserved 110% of the number of shares of common stock required for the exercise of the shares
to be issued under the Amegy Warrant. As a result of Amegy’s conditional ability to put the Warrant back to the Company,
it has classified the estimated fair of the Amegy Warrant (derivative liability) as a noncurrent liability in the accompanying
consolidated balance sheet as of December 31, 2011. Prospective changes in the fair value of the Amegy Warrant were recorded in
the consolidated statement of operations until the Warrant was cancelled. During the nine months ended September 30, 2012 the Company
recorded an income item of $118,685 representing the net decrease in fair value of the Amegy Warrant for the period, but no amount
was recorded as income or expense during the quarter ended that same date. During the three months ended September 30, 2011 the
Company recorded income of $307,542 representing the net decrease in fair value of the Amegy Warrant. For the nine months ended
September 30, 2011, the Company recorded income of $345,375 representing the net decrease in the fair value of the Amegy Warrant
for the period from its issuance through September 30, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Derivatives –
Warrant Issued Relative to Note Payable to Related Party</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In connection with the
short-term note payable entered into with a related party (see Note 2) the Company issued the same entity a warrant exercisable
to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, expiring August 2017. The warrant
contains a penalty provision under which the number of shares that may be purchased will increase to 1,200,000 and the exercise
price will be reduced to $0.10 per share if the Company fails to pay the note when due on February 28, 2013. The Company has recorded
the estimated fair value of the warrant as of August 28, 2012, on the assumption that the note payable will be entirely repaid
on its due date, as a discount on note payable in the amount of $48,654 and a non-current derivative liability in the same amount
at that date. The estimated current value of the warrant derivative liability was increased to $67,783 at September 30, 2012 and
such increase in derivative liability is included as an other expense in the amount of $19,129 for the three and nine months ended
September 30, 2012.</p>
P10Y
1.10
118685
307542
345375
September 2013
March 2013
256800
2845458
2845458
1275000
.01
(i) until March 22, 2010, a sum equal to three (3) times the Funding Amount
(ii) until March 22, 2011, a sum equal to five (5) times the Funding Amount
(iii) until March 22, 2012, a sum equal to ten (10) times the Funding Amount
3825000
6375000
12750000
.01
0.01
.01
.01
P2Y
P1Y
P1Y
P2Y
P1Y6M
P6M
P2Y
P2Y
<p style="margin: 0pt"> - Environmental Impact Study<br />
- Acquisition & interpretation of 333km of new 2D seismic<br />
- Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent in 3D)</p>
<p style="margin: 0">- Acquisition, processing & interpretation of 200km<sup>2 </sup>of 3D seismic</p>
<p style="margin: 0">- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower</p>
<p style="margin: 0pt"> - Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower<br />
- Geochemical analysis</p>
<p style="margin: 0pt"> - Environmental Impact Study<br />
- Acquisition & interpretation of 667km of existing 2D seismic<br />
- Acquisition of 667km of new 2D seismic (or equivalent in 3D)</p>
<p style="margin: 0">- Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous
sub-period</p>
<p style="margin: 0">- Acquisition, processing & interpretation of 250km<sup>2</sup> of new 3D seismic</p>
<p style="margin: 0">- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower<br />
- Geochemical analysis</p>
443100
1356227
10220168
10397335
408450
278450
1818667
10418667
<p style="margin: 0">26km<sup>2</sup></p>
<p style="margin: 0">53km<sup>2</sup></p>
<p style="margin: 0">80km<sup>2</sup></p>
<p style="margin: 0">All acreage except areas with discoveries</p>
<p style="margin: 0">26km<sup>2</sup></p>
<p style="margin: 0">40km<sup>2</sup></p>
<p style="margin: 0">160km<sup>2</sup></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">All acreage except</p>
<p style="margin: 0">areas with discoveries</p>
2845458
<p style="margin: 0">In addition to the Revenue Sharing Agreement with Thompson Knight to assist the Company with its technical
studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout, the Company agreed to compensate Thompson
Knight a success fee of 5% of the upfront cash fee paid to Infinity by a third party earning an interest in the Nicaragua asset
up to $20 million and 10% of any amount exceeding the $20 million. A 2% success fee would be paid to Thompson Knight of the remaining
cash investment in subsequent years.</p>
20000000
0.05
0.05
.05
0.10
0.10
0.02
0.50
0.50
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 2 — Debt</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Debt consists of
the following at September 30, 2012 and December 31, 2011:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2011</td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="6" style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 56%; line-height: 115%">Note payable to related party, net of discount</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="width: 18%; border-bottom: black 2.25pt double; line-height: 115%; text-align: right">209,854</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="width: 18%; border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Revolving credit facility to bank, current</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">11,407,252</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Subordinated note payable, related party, net of discount</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">1,186,353</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Less current portion</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(1,186,353</td>
<td style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Long-term portion, subordinated note payable</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"><i> </i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Revolving
Credit Facility</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On January 10,
2007, the Company entered into a reserve-based revolving credit facility (the “Revolving Credit Facility”) with Amegy.
Under the related loan agreement (the “Loan Agreement”) between Infinity, Infinity-Texas and Infinity-Wyoming (each
wholly-owned subsidiaries of the Company and together, the “Guarantors”) and Amegy, Infinity could borrow, repay and
re-borrow on a revolving basis up to the aggregate sums permitted under the then current borrowing base. Amounts borrowed under
the Revolving Credit Facility are collateralized by substantially all of the assets of Infinity and its subsidiaries and are guaranteed
by Infinity’s subsidiaries. The Revolving Credit Facility contained certain standard continuing covenants and agreements
and requires the Company to maintain certain financial ratios and thresholds. Per the terms of the loan agreement, amounts borrowed
bear interest at 5.5%, or at 11.0% if the loan is in default. The Company accrued interest at 11.0% on the balance of the loan
during the three months ended March 31, 2012 and 2011 and during the nine months ended September 30, 2011. No interest was accrued
on the loan balance after March 31, 2012 and the loans were satisfied with the distribution of common and redeemable convertible
preferred stock effective April 13, 2012.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company entered
into four separate forbearance agreements resulting from its breach of certain covenants in the Loan Agreement during the period
2007 through 2010.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Effective as of
February 16, 2011 the Company entered into a Fifth Forbearance Agreement under the Loan Agreement. This agreement relates to the
breach by the Company and Guarantors of (i) substantially all financial covenants set forth in Section 8 of the Loan
Agreement and (ii) certain covenants set forth in Section 7 of the Loan Agreement (the “Existing Defaults”).
Under this Agreement, Amegy agreed to forbear from exercising any remedies under the Loan Agreement and related loan documents
and to waive the Existing Defaults for the forbearance period commencing as of January 31, 2011 and continuing through December
31, 2011, unless otherwise extended or earlier terminated by Amegy due to a further default under the Agreement. In connection
with the Fifth Forbearance Agreement, the term of the Loan Agreement and related note was extended until December 31, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Amegy initially approved
additional Forbearance Period advances of $1,050,000, which was increased to $1,260,000 on September 12, 2011, with an interest
rate of prime plus 2% and the personal guarantee of the Company’s President and CEO for up to $500,000 of the advances. At
December 31, 2011, $500,000 of the advances was personally guaranteed by the Company’s CEO. No additional compensation was
granted for the personal guarantee. As of December 31, 2011 advances of $1,396,758 had been made, with $232,464 used to reduce
prior obligations to Amegy, $56,084 used to repay hedge termination fees, and $21,000 used to pay current commitment fees in accordance
with the Fifth Forbearance Agreement. As of December 31, 2011, Amegy had advanced a total amount of $1,396,758, which was $136,758
in excess of the approved maximum for advances. From January 1, 2012 through February 28, 2012, Amegy made additional advances
of $272,070 for a total advance of $1,668,828.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On February 28, 2012,
the Company signed definitive agreements with Amegy and Off-Shore Finance, LLC, a Nevada limited liability company (“Off-Shore”)
relating to outstanding debt and other obligations we owed to them. The transactions contemplated under these agreements closed
April 13, 2012. These transactions are more fully discussed in Note 3.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In 2011, Infinity had
granted Amegy a warrant to purchase 931,561 shares of the Company’s common stock (the “Amegy Warrant”) at an
exercise price of $5.01 per share during a ten-year period following the issuance of the warrant (Note 5). The Amegy Warrant was
cancelled as part of the agreement the Company and Amegy entered into on February 28, 2012 and which became effective April 13,
2012 (see Note 3). The Company recorded a debt discount equal to the estimated fair value of the Amegy Warrant on the date of issuance
in the amount of $535,626, and expensed $311,985 in forbearance fees associated with the Fifth Forbearance Agreement (see below)
during the three months ended September 30, 2011 ($619,274 during the nine months ended September 30, 2011), which amounts are
included in the accompanying consolidated statements of operations as interest expense for those periods. Because the Fifth Forbearance
Agreement ceased its effectiveness after December 31, 2011, and the Company and Amegy were in the process of negotiating and signing
an agreement to exchange equity securities in full payment of the Company’s obligations to Amegy, no further forbearance
fees were accrued after that date. Interest expense recognized during the quarter and the nine months ended September 30, 2011
related to the accretion of the debt discount was $153,036 and $229,554, respectively (none during the quarter and nine months
ended September 30, 2012).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company’s intention
had been to market and sell all remaining assets of Infinity-Wyoming and Infinity-Texas and to apply the net sales proceeds, if
any, to payment of the revolving note, and in December 2011 the Company sold its Texas assets; no proceeds will be received as
such note receivable, which was fully allowed for, was sold in connection with the sale by the Company of 100% of the common stock
of Infinity-Texas in July 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The following information
relates to the Fifth Forbearance Agreement, which was in effect as of December 31, 2011, but which was cancelled effective with
the closing of the agreement between the Company and Amegy effective on April 13, 2012:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in">Under the Fifth Forbearance Agreement,
any cash receipts of the Company were deposited in a lockbox held by Amegy as restricted cash. All cash disbursements had to be
approved by Amegy.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in">The Company also agreed to pay Amegy
a monthly forbearance/waiver fee of 1.0% of the average daily outstanding principal balance of the revolving note through December
31, 2011. If any cash equity contributions to the Company are used to pay monthly interest due under the agreement, Amegy agreed
to credit the Company 300% of the amount of the equity contributions as a reduction in interest cost.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in">If Infinity failed to comply with
the terms of the Fifth Forbearance Agreement, Amegy would be entitled to impose a default interest rate (prime plus 6.5%) or to
declare an event of default, at which point the entire unpaid principal balance of the loan, together with all accrued and unpaid
interest and other amounts then owing to Amegy would become immediately due and payable. Amegy or other creditors may take action
to enforce their rights with respect to outstanding obligations, and Infinity may be forced to liquidate. Because substantially
all of the Company’s assets were pledged as collateral under the Revolving Credit Facility, if Amegy declared an event of
default, it would be entitled to foreclose on and take possession of the Company’s assets, including its rights under the
Nicaraguan Concessions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in">Infinity has accrued interest, forbearance
and additional fees due in connection with the Forbearance Agreements of $0 and $7,896,442 as of September 30, 2012 and December
31, 2011, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 40pt; text-indent: 0.25in"> <b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Subordinated Note
Payable to Related Party</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Effective March 5, 2009,
the Company entered into two contracts relating to its Nicaraguan Concessions, as awarded by the Republic of Nicaragua in 2003.
In addition, the Company entered into a subordinated loan with Off-Shore, a related party (see Note 7) in an aggregate amount of
$1,275,000, which was released as the Company needed funds for the Nicaraguan Concessions. Amegy allowed the subordinated loans
to be secured by the assets of the Company, subject to Amegy’s security interest. The note bore interest at 6% and would
have been due March 23, 2012. This note was retired under the agreement between the Company and Off-Shore dated February 28, 2012,
under which Off-Shore accepted 15,016 shares of the Company’s Series B Preferred Stock in full payment of the note and its
related accrued interest at such date (see also Note 4).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Further, Amegy allowed
the Company to grant a one percent revenue sharing interest with respect to the Nicaraguan Concessions to Off-Shore to obtain the
subordinated loan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In connection with the
issuance of the Subordinated Note Payable discussed above, the Company recorded a debt discount, through a reduction to unproved
properties, of $637,620, which was amortized over the maturity of the Note utilizing the effective interest method and was fully
amortized as of the date the debt was effectively satisfied (April 13, 2012) by issuance of Series B preferred stock. During the
period amortization of the discount was occurring, the Company capitalized a portion of the 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. By policy, amortization of debt discount was capitalized only for the period that activities are in progress to bring
these projects to their intended use. Total subordinated note payable debt discount amortized during the quarters ended September
30, 2012 and 2011 were $0 and $69,638, respectively, of which $0 and $52,229, respectively, were capitalized to oil and gas properties.
Such amortization for the nine months ended September 30, 2012 and 2011 was $83,088 and $191,324, respectively, of which $62,316
and $143,493, respectively, were capitalized.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.25in"><b><i>Interest Bearing Liabilities to Vendors</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">At September 30, 2012
and December 31, 2011, the Company had agreed to pay interest of 8% on certain accrued liabilities aggregating $410,500. The total
amount of interest accrued relating to these liabilities for the three months ending September 30, 2012 and 2011 was $8,277 and
$8,277 respectively, and for the nine months ending September 30, 2012 and 2011 was $24,652 and $24,652, respectively. Included
in assets of discontinued operations at December 31, 2011 was a note payable to vendor of $278,002 bearing interest at 18%; this
note was assumed by the purchaser of Infinity-Texas as of July 31, 2012. Interest accrued relating to this note for the three months
ending September 30, 2012 and 2011 was $6,776 and $17,315, respectively, and for the nine months ended September 30, 2012 and 2011
was $44,553 and $49,188, respectively. All of such interest expense related to the note is included in loss from discontinued operations
on the accompanying consolidated statements of operations for the respective periods, and the note payable and accrued interest,
amounting to $411,164 at December 31, 2011, is included within liabilities of discontinued operations.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Note Payable to
Related Party</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On August 28, 2012, the
Company borrowed $250,000 from an entity that is 49% owned by a board member of another corporation for which Infinity’s
CEO serves as CEO and chairman of the board. The Company issued a short-term note payable to the entity in this amount, bearing
interest at 8% per annum, maturing February 28, 2013. At the same time, the Company issued the same entity a warrant exercisable
to purchase 120,000 shares of the Company’s common stock at a price of $2.50 per share, expiring August 2017. The note contains
a penalty provision such that if the note is not repaid on its due date, the warrant exercise price will be reduced to $0.10 per
share and the number of shares that may be purchased under the warrant shall increase to 1,200,000. Management believes that the
note will be repaid on or before February 28, 2013 and therefore has calculated the estimated fair value of the warrant on that
assumption. If the note is not repaid timely, the warrant liability would be considerably higher. Therefore, on the assumption
of timely repayment of the note the Company has recorded the estimated fair value of the warrant as of August 28, 2012 as a discount
on note payable in the amount of $48,654 and a non-current derivative liability in the same amount at that date. The discount
of $48,654 is being amortized on a straight line basis over the expected outstanding period of the note (August 28, 2012 through
February 28, 2013) and interest expense for the three months and nine months ended September 30, 2012 includes discount amortization
in the amount of $8,508.The estimated current value of the warrant derivative liability was increased to $67,783 at September
30, 2012 and such increase in derivative liability is included as an other expense in the amount of $19,129 for the three and
nine months ended September 30, 2012.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 4 — Stock Options</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company applies
ASC 718, <i>Stock Compensation</i>, which requires companies to recognize compensation expense for share-based payments based on
the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value
of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement
of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted, and is
estimated in accordance with the provisions of ASC 718.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">During the nine
months ended September 30, 2012, no stock options were granted or forfeited. During the nine months ended September 30, 2011, the
Company granted options to purchase 550,000 shares of common stock at $5.25/share, expiring ten years after issuance (February
2011), and 600,000 shares of common stock at $7.50/share, also expiring ten years after issuance (August 2011).</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The following table
summarizes stock option activity as of and for the periods ended September 30, 2012 and December 31, 2011:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Number of</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Options</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted Average</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Price Per</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Share</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted Average</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Remaining</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Contractual</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Term</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Aggregate</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Intrinsic</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Value</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 44%; line-height: 115%">Outstanding and exercisable at January 1, 2011</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 10%; line-height: 115%; text-align: right">903,500</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">2.92</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 10%; line-height: 115%; text-align: right">5.8 years</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Granted in February 2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">550,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">5.25</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Granted in August 2011</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">600,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">7.50</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Outstanding and exercisable at December 31, 2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">2,053,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">4.88</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">7.3 years</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Granted in 2012</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Outstanding and exercisable at September 30, 2012</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">2,053,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">4.88</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">6.6 years</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The Company recognized
expense in connection with options granted of $0 and $214,906 during the nine months ended September 30, 2012 and 2011, respectively,
and $0 and $62,553 in the three months ended September 30, 2012 and 2011, respectively. The weighted average grant date fair value
of the February 2011 options granted was $0.28 and for the August 2011 options was $0.10. There was no unrecognized compensation
cost as of September 30, 2012 or December 31, 2011 related to unvested stock and stock options, as all options granted vested
immediately and are currently exercisable.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Debt consists of
the following at September 30, 2012 and December 31, 2011:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2011</td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="6" style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 56%; line-height: 115%">Note payable to related party, net of discount</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="width: 18%; border-bottom: black 2.25pt double; line-height: 115%; text-align: right">209,854</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="width: 18%; border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Revolving credit facility to bank, current</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">11,407,252</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Subordinated note payable, related party, net of discount</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">1,186,353</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Less current portion</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(1,186,353</td>
<td style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Long-term portion, subordinated note payable</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The following table
summarizes stock option activity as of and for the periods ended September 30, 2012 and December 31, 2011:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Number of</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Options</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted Average</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Price Per</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Share</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted Average</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Remaining</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Contractual</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Term</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.15in"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Aggregate</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Intrinsic</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Value</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 44%; line-height: 115%">Outstanding and exercisable at January 1, 2011</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 10%; line-height: 115%; text-align: right">903,500</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">2.92</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 10%; line-height: 115%; text-align: right">5.8 years</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Granted in February 2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">550,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">5.25</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Granted in August 2011</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">600,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">7.50</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Outstanding and exercisable at December 31, 2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">2,053,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">4.88</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">7.3 years</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Granted in 2012</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Outstanding and exercisable at September 30, 2012</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">2,053,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">4.88</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">6.6 years</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.15in"></p>
-1186353
0.11
0.11
0.11
0.18
0.18
0.08
1050000
1260000
0.065
0.02
500000
1396758
1668828
21000
136758
272070
535626
48654
311985
619274
0.01
0
7896442
0.06
62316
0
52229
143493
278022
278022
410500
278002
250000
2053500
2053500
903500
1150000
12.75
95111
217
174
10890970
1243102
-14306375
-26777702
-23463009
1866
1866
2066
80107816
80322722
89371843
-103572691
-107102290
-103680284
0.0001
0.0001
10000000
10000000
130000
0
15016
0
130000
0
15016
0
13000000
1501600
364000
42045
0.0001
0.0001
2.50
75000000
75000000
20668575
18668575
20668575
18668575
0
83088
3422006
4187086
-871420
-2922041
-3529599
3422006
-3529599
878192
217524
878192
406045
487479
406045
381219
433687
-386219
-433687
522070
1240646
232462
-166419
522070
826840
94894
174
115116
226893
21883393
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 9 — Subsequent Event –
Issuance of Stock Options, Termination of Contingent Fee Agreement and Issuance of Convertible Note</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In November 2012, the Company
awarded stock options exercisable to purchase 1,250,000 shares to officers, directors and third parties at an exercise price of
$3.00 per share. The options vest in equal amounts, one-third immediately upon issuance, one-third on the first anniversary in
November 2013, and the final third in November 2014. The financial effect of the stock option issuance will be recorded as of the
issuance date in the final quarter of the year. In December 2012, a contingent fee arrangement that had been in effect between
certain officers and the Company was terminated by mutual agreement of all parties; see Note 6, “Contingent Fees.”</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Also in November 2012
the Company issued a convertible promissory note to Quarles & Brady LLP, its outside legal counsel, in the principal amount
of $212,400 for outstanding invoices for services rendered. Such note bears interest at the rate of 3% per annum, is due and payable
on March 31, 2014 and convertible into common stock at a price of $3.00 per share.</p>
50000
<p style="margin: 0pt"> ICSID arbitration<br />
OPIC insurance</p>
Market value at production
.30
.03
.015
0
1.5
1.5
3.0
3.0
.5
.10
.15
.05
P1Y
P4Y
P3Y
P7Y
P8Y
.05
.10
.15
77616
143493
20668575
145016
0.06
0.06
0.06
0.06
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Unaudited Interim
Financial Information</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Infinity Energy Resources,
Inc. and its subsidiaries (collectively, “we,” “ours,” “us,” “Infinity” or the
“Company”) has prepared the accompanying consolidated financial statements pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements
are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for
a fair presentation of our consolidated balance sheets, statements of operations, and cash flows for the periods presented. Operating
results for the periods presented are not necessarily indicative of the results that may be expected for 2012 due to various factors.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations
of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements
and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K,
filed with the SEC.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Nature of Operations</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">We are engaged in the
exploration of the Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions”).</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><i>Recent Accounting
Pronouncements</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Effective January
1, 2011, the Company adopted ASC 820 guidance that requires enhanced disclosure in the level 3 reconciliation for fair value measurements.
The adoption had no impact on the consolidated financial position, results of operations or cash flows of the Company. Refer to
the discussion elsewhere in this note as to other information concerning our assets and liabilities measured at fair value.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">In December 2011,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 which requires that an entity
disclose both gross and net information about instruments and transactions that are either eligible for offset in the balance
sheet or subject to an agreement similar to a master netting agreement, including derivative instruments. ASU 2011-11 was issued
in order to facilitate comparison between GAAP and IFRS financial statements by requiring enhanced disclosures, but does not change
existing GAAP that permits balance sheet offsetting. This authoritative guidance is effective for annual reporting periods beginning
on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the provisions
of ASU 2011-11 and assessing the impact, if any, it may have on the Company's financial position or results of operations.</p>
2014-03-31
2013-02-28
120000
0.10
1200000
0.08
0.11
0.055
5000
-14925
21883393
435013
52466
217524
100
1200000
0.10
48654
67783
303500
1894000
1634677
259300
40146
18668575
18668575
20668575
214906
214906
2980000
200
2979800
2000000
7353558
7353558
.06
.06
0.06
0.06
0.06
0.06
0.06
0.06
700000
.522
.525
P5Y
P5Y
2.50
2.50
120000
120000
229554
153036
.065
83088
0
69638
191324
637620
8277
8277
24652
24652
44553
6776
17315
49188
232464
56084
931561
3
411164
120000
120000
67783
19129
19129
8508
8508
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">A comparison of
the assumptions used in calculating estimated fair value at the issue date and at September 30, 2012 is as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">Upon Issuance, August 29, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">At <br /> September 30, 2012</td>
<td style="line-height: 115%; font-weight: bold"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 60%; line-height: 115%">Volatility</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 16%; line-height: 115%; text-align: right">52.5</td>
<td style="width: 1%; line-height: 115%">%</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 16%; line-height: 115%; text-align: right">52.2</td>
<td style="width: 1%; line-height: 115%">%</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Contractual term</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5 years</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5 years</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Exercise price</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2.50</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2.50</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Number of warrants per contract</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">120,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">120,000</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%; line-height: 115%">Total liabilities of Infinity-Texas at December 31, 2011</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 19%; line-height: 115%; text-align: right">5,092,814</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Total assets of Infinity-Texas at December 31, 2011</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">2,992</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Net liabilities of Infinity-Texas at December 31, 2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5,089,822</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Additions to Infinity-Texas liabilities, January 1 through July 31, 2012 (equal to loss of discontinued operations for same period)</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">62,289</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Potential liabilities related to indemnification of officers by the Company</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(780,000</td>
<td style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Gain on sale of discontinued operation, July 31, 2012</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">4,372,111</td>
<td style="line-height: 115%"> </td></tr>
</table>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Three Months Ended</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Nine Months Ended</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">September 30,</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">September 30,</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 36%; line-height: 115%">General and administrative expenses</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">10,654</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">12,382</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Accretion expense</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">8,389</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">17,736</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">24,392</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Interest expense</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">6,776</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">17,314</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">44,553</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">49,188</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Total expenses</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">6,776</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">36,357</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">62,289</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">85,962</td>
<td style="line-height: 115%"> </td></tr>
</table>
2992
2992
2213029
2212004
278022
-389759
5092814
5152111
5089822
62289
-780000
10654
12382
17736
8389
24392
44553
6776
17314
49188
62289
6776
36357
85962
30000
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 8 — Sale of Infinity-Texas, and
Discontinued Operations Reporting</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">On July 31, 2012, the
Company sold 100% of the stock of its wholly-owned subsidiary, Infinity Oil and Gas of Texas (Infinity-Texas) to an individual,
the single member of an LLC which purchased the oil and gas properties of Infinity-Texas in 2011 (see “Oil and Gas Properties”
in Note 1). The terms of the Stock Purchase Agreement with the purchaser are that purchaser would acquire 100% of the stock of
Infinity-Texas for $1 and thereby assume all of it liabilities. At the date of the sale, Infinity-Texas had net liabilities of
$5,152,111. Management believes that there are certain contingent liabilities related to Texas properties for which the Company,
the parent entity, may retain financial responsibility. The liabilities are related to the reclamation of oil and gas properties
and include the cost of plugging inactive wells and removal and recovery of any remaining production equipment. Infinity-Texas
is primarily responsible for such obligations, but the officers of Infinity-Texas at the time such wells were in production, in
their capacities as signators of certain regulatory filings, could be personally responsible. The State of Texas filed a lawsuit
naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas, and seeking $30,000 of reclamation costs associated
with a single well, in addition to administrative expenses and penalties. The Company is in the process of proposing a solution
to this and other potential such actions and is in discussion with regulatory authorities in Texas and the current owner of Infinity-Texas
toward such a resolution. The officers are held harmless by indemnification provisions of the Company, therefore these liabilities,
to the extent they may become actual, are the obligations of the Company. The extent of these liabilities is estimated by Management
to not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This related liability is classified
as the noncurrent officer indemnification liability at September 30, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The assets, liabilities
and operations of Infinity-Texas are reported on the accompanying consolidated financial statements as those of a discontinued
operation for the current and prior periods and dates presented. Because Infinity-Texas has not been actively operating during
any of the periods presented, no overhead costs have been allocated to the discontinued operations during such periods.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">The analysis below
sets forth the major classes of the assets and liabilities of Infinity-Texas, which are presented separately in the accompanying
consolidated balance sheet at December 31, 2011. Infinity-Texas also had title at December 31, 2011 to a note receivable from the
single member LLC which purchased its oil and gas properties in December 2011, which was carried at December 31, 2011 net of a
100% valuation allowance and is therefore not reflected as an asset in the analysis below..</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">December 31, 2011</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%; font-weight: bold">ASSETS</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Current asset:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; padding-left: 12pt; line-height: 115%">Accounts receivable</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="width: 20%; border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">2,992</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 24pt; line-height: 115%">Total assets</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">2,992</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; font-weight: bold">LIABILITIES</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Current liabilities:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Accounts payable</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2,213,029</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Accrued liabilities</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">2,212,004</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Note payable to vendor</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">278,022</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 24pt; line-height: 115%">Total current liabilities</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">4,703,055</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Long-term liability:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Asset retirement obligation</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">389,759</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 24pt; line-height: 115%">Total liabilities</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">5,092,814</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.25in">The following analysis relates the assets
and liabilities set forth in the table above to the gain recognized in sale of Infinity-Texas:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%; line-height: 115%">Total liabilities of Infinity-Texas at December 31, 2011</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 19%; line-height: 115%; text-align: right">5,092,814</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Total assets of Infinity-Texas at December 31, 2011</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">2,992</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Net liabilities of Infinity-Texas at December 31, 2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">5,089,822</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Additions to Infinity-Texas liabilities, January 1 through July 31, 2012 (equal to loss of discontinued operations for same period)</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">62,289</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Potential liabilities related to indemnification of officers by the Company</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(780,000</td>
<td style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Gain on sale of discontinued operation, July 31, 2012</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">4,372,111</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">The operating expenses of Infinity-Texas for the three months
ended September 30, 2012 and 2011 and the nine months ended those same dates follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><b><i> </i></b></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Three Months Ended</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Nine Months Ended</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">September 30,</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">September 30,</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 36%; line-height: 115%">General and administrative expenses</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">10,654</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">-</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 12%; line-height: 115%; text-align: right">12,382</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Accretion expense</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">8,389</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">17,736</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">24,392</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Interest expense</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">6,776</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">17,314</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">44,553</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">49,188</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Total expenses</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">6,776</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">36,357</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">62,289</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">85,962</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
780000
30000
0.28
0.10
2.50
5.01
5.01
4440526
4554789
5000
4340415
3844080
95111
710709
700000
7500
2992
5237555
29876436
209854
250000
432027
432027
4703055
153076
8156254
3243390
2692073
1199208
1067310
232112
11407252
6612829
31332491
1375274
1456055
67783
600763
389759
527491
465533
780000
4440526
4554789
-103680284
-107102290
89371843
80322722
2066
1866
-655672
-173636
-322370
-878652
655672
173636
322370
878652
61958
21113
19302
56162
593714
152523
303068
822490
-62289
-6776
-36357
-85962
-887816
-178249
-835063
-2836079
-232144
-4613
-512693
-1957427
-33058
-33058
-65
-247
99556
-19129
307542
345375
364758
18542
820300
2303049
2137769
3482083
-871420
-2922041
4372111
4372111
0.11
0.17
-0.05
-0.16
0.22
0.21
0
0
0
0
0
0
-0.11
-0.04
-0.05
-0.16
19913996
20668575
18668575
18668575
-40957
-392979
-56086
44553
61570
847677
2149989
7500
-6917
29280
430421
0
0
62553
214906
17736
24392
1150000
12.75
P10Y
4.88
4.88
2.92
P6Y7M6D
P7Y3M18D
P5Y9M18D
500000
0.49
2017-08-31
152456
59745
41221
203328
1250000
3.00
212400
0.03
3.00
0.35
1.00
1
1
1
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in">Overhead related
to exploration and development activities is also capitalized. In the quarters ended September 30, 2012 and 2011, the Company capitalized
direct costs, overhead costs and interest as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Three Months</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="line-height: 115%; text-align: center">For the Nine Months</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Ended September 30,</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Ended September 30,</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 48%; line-height: 115%">Direct costs</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">96,462</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">68,131</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">381,219</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 10%; line-height: 115%; text-align: right">396,188</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Overhead costs</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">12,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">12,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">37,500</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">37,500</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Total non-interest costs</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">108,962</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">80,631</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">418,719</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">433,688</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Interest costs</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">67,529</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">77,616</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">189,393</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">108,962</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">148,160</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">496,335</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">623,081</td>
<td style="line-height: 115%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">December 31, 2011</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%; font-weight: bold">ASSETS</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Current asset:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; padding-left: 12pt; line-height: 115%">Accounts receivable</td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="width: 20%; border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">2,992</td>
<td style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 24pt; line-height: 115%">Total assets</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">2,992</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; font-weight: bold">LIABILITIES</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Current liabilities:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Accounts payable</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">2,213,029</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Accrued liabilities</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">2,212,004</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 12pt; line-height: 115%">Note payable to vendor</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">278,022</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 24pt; line-height: 115%">Total current liabilities</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">4,703,055</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Long-term liability:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 12pt; line-height: 115%">Asset retirement obligation</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">389,759</td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 24pt; line-height: 115%">Total liabilities</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">5,092,814</td>
<td style="line-height: 115%"> </td></tr>
</table>
1
0.10
1200000