RISK
FACTORS
Investment
in our securities involves a high degree of risk. You should carefully consider the risks described below, as well as those risks
described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” each contained in our most recent Annual Report on Form 10-K for the year ended
March 31, 2016 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, each of which have been
filed with the Securities and Exchange Commission, or SEC, and are incorporated herein by reference in their entirety,
as well as other information in this prospectus or in any other documents incorporated by reference. Each of the risks described
in these sections and documents could adversely affect our business, financial condition, results of operations and prospects,
and could result in a complete loss of your investment. This prospectus and the incorporated documents also contain forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks mentioned above.
Risks
Relating to the Acquisition
The
recent closing of the Acquisition caused
immediate
and substantial dilution to existing stockholders and resulted in a change of control of the Company.
Pursuant to the Asset
Purchase Agreement and in consideration for the Assets, we assumed approximately $31.3 million of commercial bank debt;
issued 552,000 shares of Series B Preferred Stock to one of the Sellers, which is under common
control with the Seller Representative, with a total liquidation value of $13.8 million; issued 13,009,664 shares of common
stock to the Sellers and their assigns; and paid $4,975,000 in cash to certain of the Sellers. The Series B Preferred
Stock has a liquidation preference of $25 per share. The Series B Preferred Stock is convertible into common stock at a rate of
approximately 7.14:1 (issuable into an aggregate of 3,942,857 shares of common stock if fully converted), at the option of the
holder thereof, and is also subject to certain automatic conversion provisions. Each outstanding share of Series B Preferred Stock
is entitled to one vote per share on all stockholder matters. The closing of the Acquisition occurred on August 25, 2016.
As such, the issuance of the common stock consideration and Series B Preferred Stock resulted in immediate and substantial
dilution to the interests of our stockholders and resulted in a change of control of the Company.
Additionally,
pursuant to the Asset Purchase Agreement, the Sellers have exercised their right to designate three individuals
to be appointed as members of our Board of Directors. As of August 26, 2016, their director nominees,
Richard N. Azar II, Alan W. Dreeben and Robert D. Tips, were appointed to our Board of Directors. Mr. Azar, the principal
Seller and manager of the properties, has also been appointed as Executive Chairman. Mr. Azar is a founding partner of
the Seller Representative and received a significant amount of the shares of common stock issued at the closing
of the Acquisition and all of the Series B Preferred Stock issued at the closing, either personally or through entities
which he controls. By the six month anniversary of the closing of the Asset Purchase Agreement, one of the three members of our
Board of Directors as constituted prior to the closing of the Acquisition will be required to resign in order that we will
have five members of our Board of Directors, including three appointed by the Sellers, on such date unless such obligation
is waived by the Sellers.
In
connection with the closing of the Acquisition, we have assumed
significant amounts of debt and our operation and management of the Assets may not be able to generate sufficient cash flows to
meet our debt service obligations, which could reduce our financial flexibility, increase interest expenses and adversely impact
our operations.
As
described above, pursuant to the Asset Purchase Agreement, we assumed approximately $31.3 million of
commercial bank debt and currently have approximately $40 million of commercial bank debt outstanding. Our ability to
make payments on such indebtedness will depend on our ability to generate cash from the Assets. The Assets may not generate
sufficient cash flow from operations to enable us to repay this indebtedness and to fund other liquidity needs, including
capital expenditure requirements. Such indebtedness could affect our operations in several ways, including the
following:
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a significant portion of our cash flows could be required to be used to service such indebtedness;
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a high level of debt could increase our vulnerability to general adverse economic and industry conditions;
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any covenants contained in the agreements governing such outstanding indebtedness could limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments;
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a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, our competitors may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and
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debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry.
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The
indebtedness incurred by us in connection with the Acquisition bears interest at variable rates, and therefore if interest
rates increase, our debt service requirements will increase. In such case, we may need to refinance or restructure all or a portion
of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness, including the assumed indebtedness,
on commercially reasonable terms, or at all.
A
high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient
cash flows to pay the principal or interest on our debt. If we cannot service or refinance our indebtedness, we may have to take
actions such as selling significant assets, seeking additional equity financing (which will result in additional dilution to stockholders)
or reducing or delaying capital expenditures, any of which could have a material adverse effect on our operations and financial
condition. If we do not have sufficient funds and are otherwise unable to arrange financing, our assets may be foreclosed upon
which could have a material adverse effect on our business, financial condition and results of operations.
Our
shares of Series B Preferred Stock are
convertible into shares of Common Stock and, when and if converted, will result in additional dilution to our current stockholders.
Each share of Series B
Preferred Stock is convertible, at the option of the holder, into that number of fully-paid, nonassessable shares of Common
Stock determined by dividing the Original Issue Price for the Series B Preferred Stock ($25.00, as may be adjusted for recapitalizations)
by the Conversion Price ($3.50, as may be adjusted for recapitalizations). Each share of Series B Preferred Stock will automatically
convert into shares of Common Stock under certain conditions set forth in the Certificate of Designations of the Series B Preferred
Stock. Assuming the conversion of all such shares outstanding as of September 9, 2016, this would result in the issuance
of approximately 3,942,857 shares of Common Stock, which is equivalent to approximately 20.3% of our Common Stock outstanding
as of September 9, 2016 (taking into account such conversion).
Concentration
of share ownership by our largest stockholders may prevent other stockholders from influencing significant corporate decisions.
As a result of
the Acquisition, certain Sellers own significant portions of our stock. For example, RAD2 Minerals, Ltd and its affiliates
Segundo Resources, LLC and Richard N. Azar II beneficially own approximately 37.9% of our outstanding shares
of Common Stock, Alan W. Dreeben beneficially owns approximately 11.6% of our outstanding shares of Common
Stock and, collectively, the Sellers beneficially own approximately 87.3% of our outstanding shares of Common Stock. As
a result, certain of the Sellers, and the persons and entities that control such Sellers, have the ability to exert significant
influence over matters requiring approval by our stockholders, including the election and removal of directors, and on the outcome
of corporate actions, including a change of control of the Company, a business combination involving the Company, the incurrence
of indebtedness, the issuance of equity securities and the payment of dividends on our stock. This concentration of ownership
could be disadvantageous to other stockholders with differing interests from such persons.
The Sellers have significant
control over our Board of Directors.
The Sellers have
the right to appoint three members to our Board of Directors, and, as of August 26, 2016, their director nominees, Richard N.
Azar II, Alan W. Dreeben and Robert D. Tips, were appointed to our Board of Directors. As a result of such appointments, the
Sellers have significant control over our Board of Directors and the decisions made by our Board of Directors.
Servicing
debt could limit funds available for other purposes.
We will use cash
from operations to pay the principal and interest on our consolidated debt. These payments limit funds available for other purposes,
including expansion of our operations through acquisitions and funding future capital expenditures.
Misrepresentations
made to us by the Sellers regarding the Assets could cause us to incur substantial financial obligations and harm our business.
If
we were to discover that there were misrepresentations made to us by the Sellers or their representatives regarding the Assets,
we would explore all possible legal remedies to compensate us for any loss, including our rights to indemnification under the
Asset Purchase Agreement. However, there is no assurance that legal remedies would be available or collectible. If such unknown
liabilities exist and we are not fully indemnified for any loss that we incur as a result thereof, we could incur substantial
financial obligations, which could materially adversely affect our financial condition and harm our business.
If
we are not able to integrate the Assets into our operations in a timely manner, the anticipated benefits of the Acquisition may
not be realized in a timely fashion, or at all, and our existing businesses may be materially adversely affected.
The
success of the Acquisition will depend, in part, on our ability to realize the growth opportunities and synergies of combining
the Assets with ours and our ability to effectively utilize the additional resources we will have following the Acquisition. The
integration of the Assets may involve unforeseen difficulties. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses, which could have a material adverse effect on our business, financial
condition and operating results.
The
Acquisition resulted in significant costs to us, which could result in a reduction in our
income and cash flows.
We
were required to pay our costs related to the Acquisition, such as amounts payable to legal and financial advisors and
independent accountants, and such costs were significant. Those costs could result in a reduction in our income and
cash flows.
Because
the valuation of the Assets is based in part on certain financial projections about future results, and projections are subject
to inherent risks and uncertainties, the Sellers have received Acquisition consideration that was greater than the
fair market value of the Assets.
The
Sellers provided financial projections to us in connection with the determination of the consideration that was paid for
the Assets, and we, our Board and our financial advisor relied in part on the Sellers’ projections for purposes of valuing
the Assets and agreeing on the purchase price set forth in the Asset Purchase Agreement. Our valuation is not necessarily indicative
of the actual value of the Assets. Accordingly, if actual financial results in the future are lower than the projections we relied
upon, the Acquisition consideration may have been greater than the fair market value of the Assets.
The financial projections
we relied upon may not be accurate and may not be met in the future because the projections reflect numerous estimates and assumptions
with respect to industry performance, general business, economic, regulatory, market and financial conditions and other matters,
all of which are difficult to predict and many of which are beyond the Sellers’ and our control. As a result, actual results
may differ materially from these projections. It is expected that there will be differences between actual and projected results
because the projections cover multiple years and such information by its nature becomes less reliable with each successive year.
If
the benefits of the Acquisition do not meet the expectations of the marketplace, or financial or industry analysts, the market
price of our Common Stock may decline.
The
market price of our Common Stock may decline as a result of the Acquisition if the Assets do not perform as expected, or we do
not otherwise achieve the perceived benefits of the Acquisition as rapidly as, or to the extent, anticipated by the marketplace,
or financial or industry analysts. Accordingly, investors may experience a loss as a result of a decreasing stock price and we
may not be able to raise future capital, if necessary, in the equity markets.
Transaction-related
accounting impairment and amortization charges may delay and reduce our profitability.
Under
generally accepted accounting principles, the Assets and assumed liabilities of the Sellers have been recorded on
our books at their fair values at the date the Acquisition was completed. Any excess of the value of the consideration
paid by us at the date the Acquisition is completed over the fair value of the identifiable tangible and intangible assets of
the Sellers will be treated as excess of purchase price over the fair value of net assets acquired. Under current accounting standards,
to the extent applicable, intangible assets, other than goodwill, will be amortized to expense over their estimated useful lives,
which will affect our post-Acquisition profitability over several years beginning in the period in which the Acquisition is completed.
The Assets will be tested at a minimum on an annual basis for impairment, which may result in additional accounting impairment
charges.
Any
weakness in internal control over financial reporting or disclosure controls and procedures could result in a loss of investor
confidence in our financial reports and lead to a stock price decline.
We are required to evaluate
our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and report the results in our
annual report on Form 10-K. We are also required to maintain effective disclosure controls and procedures. As a result of
the Acquisition, our internal controls and our disclosure controls and procedures will need to expand to encompass activities
related to the Assets. If material weaknesses arise as a result and they are not remedied, we will be unable to assert that our
internal controls are effective. Any failure to have effective internal control over financial reporting or disclosure controls
and procedures covering the combined business post-Acquisition could cause investors to lose confidence in the accuracy and completeness
of our financial reports, limit our ability to raise financing or lead to regulatory sanctions, any of which could result in a
material adverse effect on our business or decline in the market price of our Common Stock post-Acquisition.
The
loss of key executives could adversely affect our operations.
The
success of the Acquisition will be dependent upon the continued service of a relatively small group of our key executives. While
we expect that our existing executives will remain with us, the unexpected
loss of the services of one or more of our executives or members of our Board could adversely affect our ability to manage
the business going forward and to manage our operations.
Risks
Relating to Our Operations and Industry
We
require financing to execute our business plan and fund capital program requirements.
Our anticipated cash flow
from operations, possible proceeds from sales of properties and funding provided by leveraging our capital structure, may not
be sufficient to meet our working capital and operating needs for approximately the next twelve months. Additionally, in order
to continue growth and to fund our business and expansion plans, we will require additional financing. Moving forward, we hope
to pursue third party capital in the form of debt (subordinated to International Bank of Commerce, or IBC), equity or some combination
of the two for certain funding requirements. We may be unsuccessful in obtaining additional financing on attractive terms, if
at all. We currently require approximately $0.5 to $0.8 million of additional funding in the next few months for
additional drilling and workover activities on existing properties.
Due
to our need for immediate funding, in the event we do not receive the full amount of the proceeds expected under the Securities
Purchase Agreement and Stock Purchase Agreement entered into in April 2016 due to the failure to satisfy any of the conditions
to receive such proceeds, we may be forced to raise capital through the sale of debt (subordinated to IBC) or equity in the near
term. In order to issue additional securities, we must, subject to certain exceptions, obtain the consent of the investor in our
April 2016 financing. If we are unable to obtain the consent of this investor in connection with future financings, we may be
unable to raise additional capital on acceptable terms, or at all. If external financing sources are not available in a timely
manner or at all, or are inadequate to fund our operations, it could materially harm our financial condition and results of operation.
Additionally, we may not have the time or resources available to seek stockholder approval (if required pursuant to applicable
NYSE MKT rules and requirements) for such transactions which may result in the issuance of more than 20% of our outstanding common
stock. As such, we may instead rely on an exemption from the NYSE MKT stockholder approval rules which allows an NYSE MKT listed
company an exemption from such rules when a delay in securing stockholder approval would seriously jeopardize the financial viability
of the company. Consequently, our stockholders may not be offered the ability to approve transactions we may undertake in the
future, including those transactions which would ordinarily require stockholder approval under applicable NYSE MKT rules and regulations,
and/or those transactions which would result in substantial dilution to existing stockholders.
We
require significant additional financing to continue as a going concern and pay outstanding liabilities and our lack of available
funding raises questions regarding our ability to continue as a going concern.
Due
to the nature of oil and gas interests, i.e., that rates of production generally decline over time as oil and gas reserves are
depleted, if we are unable to drill additional wells and develop our proved undeveloped reserves (PUDs), either because we are
unable to raise sufficient funding for such development activities, or otherwise, or in the event we are unable to acquire additional
operating properties; we believe that our revenues will continue to decline over time. Furthermore, in the event we are unable
to raise additional funding in the future, we will not be able to complete other drilling and/or workover activities, and may
not be able to make required payments on our outstanding liabilities, including amounts owed on the Letter Loan Agreement with
Louise H. Rogers (as amended and modified to date, the “Rogers Loan”) and the new IBC loan. Therefore, in the
event we do not raise additional funding in the future we will be forced to scale back our business plan, sell or liquidate assets
to satisfy outstanding debts and/or take other steps which may include seeking bankruptcy protection.
These
conditions raise substantial doubt about our ability to continue as a going concern for the next twelve months. The accompanying
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course
of business. Accordingly, the financial statements do not include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The financial
statements incorporated by reference herein also include a going concern footnote from our auditors.
Additionally,
due to our need for immediate funding, in the event we do not receive the full amount of the proceeds expected under the Securities
Purchase Agreement and Stock Purchase Agreement entered into in April 2016 due to the failure to satisfy any of the conditions
to receive such proceeds, we may be forced to raise capital through the sale of debt (subordinated to IBC) or equity in the near
term. In order to issue additional securities, we must, subject to certain exceptions, obtain the consent of the investor in our
April 2016 financing. If we are unable to obtain the consent of this investor in connection with future financings, we may be
unable to raise additional capital on acceptable terms, or at all. If external financing sources are not available in a timely
manner or
at all, or are inadequate to fund our operations, it could materially harm our financial condition and results of operation.
We may not have the time or resources available to seek stockholder approval (if required pursuant to applicable NYSE MKT rules
and requirements) for such transactions which may result in the issuance of more than 20% of our outstanding common stock. As
such, we may instead rely on an exemption from the NYSE MKT stockholder approval rules which allows an NYSE MKT listed company
an exemption from such rules when a delay in securing stockholder approval would seriously jeopardize the financial viability
of the company. Consequently, our stockholders may not be offered the ability to approve transactions we may undertake in the
future, including those transactions which would ordinarily require stockholder approval under applicable NYSE MKT rules and regulations,
and/or those transactions which would result in substantial dilution to existing stockholders.
In
the event we are unable to raise funding in the future or complete a business combination or similar transaction in the near term,
we will not be able to pay our liabilities. In the event we are unable to raise adequate funding in the future for our operations
and to pay our outstanding debt obligations or in the event we fail to enter into a business combination or similar transaction,
we would be forced to liquidate our assets (or our creditors may undertake a foreclosure of such assets in order to satisfy amounts
we owe to such creditors) or may be forced to seek bankruptcy protection, which could result in the value of our outstanding securities
declining in value or becoming worthless.
We
are subject to production declines and loss of revenue due to shut-in wells.
The
majority of our production revenues come from a small number of producing wells. In the event those wells are required to be shut-in
(as they were for various periods in the past), our production and revenue could be adversely effected. Our wells are shut-in
from time-to-time for maintenance, workovers, upgrades and other matters outside of our control, including repairs, adverse weather
(including hurricanes, flooding and tropical storms), inability to dispose of produced water or other regulatory and market conditions.
Any significant period where our wells, and especially our top producing wells, are shut-in, would have a material adverse effect
on our results of production, revenues and net income or loss for the applicable period.
Many
of our leases are in areas that have been partially depleted or drained by offset wells.
Many
of our leases are in areas that have been partially depleted or drained by offset drilling. Interference from offset drilling
may inhibit our ability to find or recover commercial quantities of oil and/or may result in an acceleration in the decline in
production of our wells, which may in turn have an adverse effect on our recovered barrels of oil and consequently our results
of operations.
Crude
oil and natural gas prices are highly volatile in general and low prices will negatively affect our financial results.
Our
revenues, operating results, profitability, cash flow, future rate of growth and ability to borrow funds or obtain additional
capital, as well as the carrying value of our oil and natural gas properties, are substantially dependent upon prevailing prices
of crude oil and natural gas. Lower crude oil and natural gas prices also may reduce the amount of crude oil and natural gas that
we can produce economically. Historically, the markets for crude oil and natural gas have been very volatile, and such markets
are likely to continue to be volatile in the future. Prices for oil and natural gas fluctuate widely in response to a variety
of factors beyond our control, such as:
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overall U.S. and global economic conditions;
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weather conditions and natural disasters;
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seasonal variations in oil and natural gas prices;
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price and availability of alternative fuels;
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technological advances affecting oil and natural gas production and consumption;
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consumer demand;
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domestic and foreign supply of oil and natural gas;
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variations in levels of production;
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regional price differentials and quality differentials of oil and natural gas; price and quantity of foreign imports of oil, NGLs and natural gas;
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the completion of large domestic or international exploration and production projects;
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restrictions on exportation of our oil and natural gas;
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the availability of refining capacity;
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the impact of energy conservation efforts;
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political conditions in or affecting other oil producing and natural gas producing countries, including the current conflicts in the Middle East and conditions in South America and Russia; and
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domestic and foreign governmental regulations, actions and taxes.
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Further,
oil and natural gas prices do not necessarily fluctuate in direct relation to each other. Our revenue, profitability, and cash
flow depend upon the prices of supply and demand for oil and natural gas, and a drop in prices can significantly affect our financial
results and impede our growth. In particular, declines in commodity prices may:
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negatively impact the value of our reserves, because declines in oil and natural gas prices would reduce the value and amount of oil and natural gas that we can produce economically;
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reduce the amount of cash flow available for capital expenditures, repayment of indebtedness, and other corporate purposes; and
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limit our ability to borrow money or raise additional capital.
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We
may have difficulty managing growth in our business, which could have a material adverse effect on our business, financial condition
and results of operations and our ability to execute our business plan in a timely fashion
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Because
of our small size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial,
technical, operational and management resources. If we expand our activities, development and production, and increase the number
of projects we are evaluating or in which we participate, there will be additional demands on our financial, technical and management
resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence
of unexpected expansion difficulties, including the inability to recruit and retain experienced managers, geoscientists, petroleum
engineers and landmen could have a material adverse effect on our business, financial condition and results of operations and
our ability to execute our business plan in a timely fashion.
We
face intense competition.
We are in direct competition
for properties with numerous oil and natural gas companies, drilling and income programs and partnerships exploring various areas
of Texas and will face competition for properties in Oklahoma. Many competitors are large,
well-known energy companies, although no single entity dominates the industry. Many of our competitors possess greater financial
and personnel resources enabling them to identify and acquire more economically desirable energy producing properties and drilling
prospects than us. Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry.
Management believes that a viable marketplace exists for smaller producers of natural gas and crude oil.
Our
competitors may use superior technology and data resources that we may be unable to afford or that would require a costly investment
by us in order to compete with them more effectively.
Our
industry is subject to rapid and significant advancements in technology, including the introduction of new products and services
using new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage,
and competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors
will have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the
future allow them to implement new technologies before we can. We cannot be certain that we will be able to implement technologies
on a timely basis or at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement
in the future may become obsolete, and we may be adversely affected.
Our wholly-owned subsidiary currently
owes significant funds under an outstanding promissory note, the repayment of which is secured by a first priority security interest
in substantially all of our subsidiary’s assets.
Effective on August 13,
2013, we entered into the Rogers Loan, as described in greater detail under “Note 6 – Notes Payable” to our
consolidated financial statements included in “Part II – Item 8. Financial Statements and Supplementary Data”,
in our Annual Report on Form 10-K filed July 13, 2016, which is incorporated herein by reference. The maturity date of the Rogers
Loan is currently October 31, 2016. We have also (i) transferred all of our pre-Acquisition oil and gas interests and equipment
existing as of December 16, 2015 (the “CATI Properties”) to our wholly-owned Texas subsidiary, CATI; (ii) clarified
that following the transfer, Louise H. Rogers (“Rogers”) has no right to foreclose upon us (at the Nevada corporate
parent level) upon the occurrence of an event of default under the Rogers Loan, and that instead Rogers can only take action against
CATI and the CATI Properties; and (iii) required Rogers to release all UCC and other security filings on us (provided that Rogers
is allowed to file the same filings on CATI and its assets). Finally, we have entered into an Assignment, Novation, and Assumption
Agreement (the “Assignment Agreement”). Pursuant to the Assignment Agreement, we assigned our obligations under the
Rogers Loan and related loan documents, to CATI, as if CATI had originally been a party thereto, CATI agreed to assume such obligations
and to take whatever actions requested by Rogers in order for Rogers to secure the amounts owed under the Rogers Note, and Rogers
agreed to release us (at the parent company level) from any obligations under the Rogers Loan and related loan documents, other
than under the amendment above. Notwithstanding the above, we do not have sufficient funds to repay the Rogers Loan. In the event
of the default
in the payment when due of the amounts owed under the Rogers Loan, as amended, Rogers may seek to secure her interest
pursuant to the aforementioned security rights in CATI and the CATI Properties. If CATI is in default of the Rogers Loan, Rogers
can take certain actions under the Rogers Loan, including demanding immediate repayment of all amounts outstanding or initiating
foreclosure proceedings against CATI and the CATI Properties. As the Rogers Loan is secured by substantially all of the CATI Properties,
Rogers (or where applicable, her agent) can foreclose on the CATI Properties which would cause us to significantly curtail operations. Because our ownership interest in CATI currently constitutes significantly all of our pre-Acquisition assets, a foreclosure
on the CATI Properties could cause the value of our securities to decline or become worthless. Additionally, as a result of the
above, CATI may be forced to seek bankruptcy protection.
The
future occurrence or continuance of an event of default under the Rogers Loan or the acceleration of amounts owed thereunder could
have a material adverse effect on us and our financial condition.
The
Rogers Loan and note issued in connection therewith include standard and customary events of default. Upon the occurrence of an
event of default, Rogers may declare the entire unpaid balance (as well as any interest, fees and expenses) immediately due and
payable. Funding to repay such amounts, if required by Rogers, may not be available timely, on favorable terms, if at all, and
if Rogers were to require immediate repayment of the amounts owed, it would likely have a material adverse effect on our results
of operations, financial condition and the value of our common stock.
We
may not timely receive funds under the April 2016 Securities Purchase Agreement and Stock Purchase Agreement and/or may not receive
such funds at all.
Pursuant
to our April 2016 Securities Purchase Agreement and Stock Purchase Agreement, we may not receive up to $14.5 million in proceeds
if certain equity conditions
are not met, or there is not an effective registration statement covering the Common Stock underlying the securities issued or
to be issued to the investor. In the event that we do not timely receive funds under the April 2016 Securities Purchase Agreement
and Stock Purchase Agreement, and/or we do not receive such funds at all, it will have a material adverse effect on our ability
to satisfy our liabilities and could force us to curtail our operations or seek bankruptcy protection, which could result in the
value of our securities declining in value or becoming worthless.
We
have various outstanding Convertible Promissory Notes which are convertible into shares of our common stock at a discount to our
current market price.
Through September
9, 2016, we have issued or agreed to issue $3,000,000 in Convertible Promissory Notes. The Convertible Promissory Notes
are due and payable on various dates between October 1, 2016 and April 26, 2017. The Convertible Promissory Notes accrue
interest at the rate of 6% per annum (15% upon the occurrence of an event of default), and allow the holders thereof the
right to convert the principal and interest due thereunder into our common stock at a conversion price of $1.50 per share or
$3.25 per share, as applicable. Each conversion is subject to a per holder 9.99% ownership limitation upon conversion. We
have the right to prepay the Convertible Promissory Notes. The Convertible Promissory Notes include customary events of
default for facilities of similar nature and size. Upon the conversion of the Convertible Promissory Notes, the notes will be
convertible into a significant number of shares of our common stock at $1.50 per share or $3.25 per share, as applicable,
which is a discount to the trading price of our common stock as of September 9, 2016. As a result, any conversion of
the Convertible Promissory Notes and sale of shares of common stock issuable in connection with the conversion thereof will
likely cause the value of our common stock, if any, to decline in value, as described in greater detail under the Risk
Factors below. Through September 9, 2016, Convertible Promissory Notes in the principal amount of $800,000 have been
converted into common stock.
The
issuance and sale of common stock upon conversion of the Convertible Promissory Notes, the Debenture and the other convertible
securities to be issued, may depress the market price of our common stock.
If
there are sequential conversions of the Convertible Promissory Notes, the Debenture and the other convertible securities to be
issued, and sales of such converted shares take place, the price of our common stock may decline. The shares of common stock issuable
upon conversion of these securities may be sold without restriction after the applicable holding period under Rule 144 has elapsed.
In addition, we have agreed to file resale registration statements for the shares of common stock issuable upon conversion of
the Debenture and related warrant, Series C Preferred Stock and related warrant, and certain of the Convertible Promissory Notes
and related warrants subject to certain conditions, which will make those shares freely tradable when the registration statements
become effective. As a result, the sale of these shares may adversely affect the market price of our common stock.
In
addition, the common stock issuable upon conversion of these convertible securities may represent overhang that may also adversely
affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the
market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional
shares which shareholders attempt to sell in the market will only further decrease the share price. The Convertible Promissory
Notes are currently convertible into shares of our common stock at a discount to the current market price of our common stock
as described above, and such discount to market provides the holders with the ability to sell their common stock at or below market
and still make a profit. In the event of such overhang, the note holders will have an incentive to sell their common stock as
quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common
stock will likely decrease.
The
issuance of common stock upon conversion of the Convertible Promissory Notes and other convertible securities will cause
immediate and substantial dilution.
The
issuance of common stock upon conversion of the Convertible Promissory Notes and other convertible securities will result
in immediate and substantial dilution to the interests of other stockholders.
Due
to the occurrence of a trigger event we no longer have a right to early redeem
or cause an early conversion of such securities without the Selling Stockholder's approval, and the resulting increase in the
interest rate, premium rate and conversion discount applicable to such securities could become material to us if the market price
of our common stock were to decline significantly.
A trigger event
occurred on June 30, 2016 and as a result, we no longer have a right to early redeem or cause an early conversion of the
Debenture, First Warrant and Series C Preferred Stock without the Selling Stockholder's approval, and the interest
rate, premium rate and conversion discount applicable to such securities have increased. Therefore, if the Selling
Stockholder decides not to convert such securities prior to maturity, they will continue to accrue interest and conversion
premiums at a higher interest rate and premium rate until maturity. The increases in interest rate, premium rate and
conversion discount may go up or down as the market price of our common stock declines below or rises above certain levels.
Accordingly, increases in the interest rate, premium rate and conversion discount applicable to such securities could become
material to us if the market price of our common stock were to decline significantly, and this could cause substantial
additional dilution to the interests of other stockholders. The occurrence of a trigger event under the Second Warrant would
have a similar effect under the terms of those securities.
Restrictions
on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities
in some of the areas where we operate.
Oil
and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling
activities designed to protect various wildlife. Seasonal restrictions may limit our ability to operate in protected areas and
can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to
periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations
and materially increase our operating and capital costs. Permanent restrictions imposed to protect endangered species could prohibit
drilling in certain areas or require the implementation of expensive mitigation measures. Specifically, applicable laws protecting
endangered species prohibit the harming of endangered or threatened species, provide for habitat protection, and impose stringent
penalties for noncompliance. The designation of previously unprotected species as threatened or endangered in areas where we operate
could cause us to incur increased costs arising from species protection measures or could result in limitations, delays, or prohibitions
on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves.
The
derivatives legislation adopted by Congress, and implementation of that legislation by federal agencies, could have an adverse
impact on our ability to hedge risks associated with our business.
On
July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Dodd-Frank Act,
which, among other things, sets forth the new framework for regulating certain derivative products including the commodity hedges
of the type that we may elect to use, but many aspects of this law are subject to further rulemaking and will take effect over
several years. As a result, it is difficult to anticipate the overall impact of the Dodd-Frank Act on our ability or willingness
to enter into and maintain such commodity hedges and the terms of such hedges. There is a possibility that the Dodd-Frank Act
could have a substantial and adverse impact on our ability to enter into and maintain these commodity hedges. In particular, the
Dodd-Frank Act could result in the implementation of position limits and additional regulatory requirements on derivative arrangements,
which could include new margin, reporting and clearing requirements. In addition, this legislation could have a substantial impact
on our counterparties and may increase the cost of our derivative arrangements in the future. If these types of commodity hedges
become unavailable or uneconomic, our commodity price risk could increase, which would increase the volatility of revenues and
may decrease the amount of credit available to us. Any limitations or changes in our use of derivative arrangements could also
materially affect our future ability to conduct acquisitions.
If
we do not hedge our exposure to reductions in oil and natural gas prices, we may be subject to significant reductions in prices.
Alternatively, we may use oil and natural gas price hedging contracts, which involve credit risk and may limit future revenues
from price increases and result in significant fluctuations in our profitability.
In
the event that we choose not to hedge our exposure to reductions in oil and natural gas prices by purchasing futures and by using
other hedging strategies, we may be subject to significant reduction in prices which could have a material negative impact on
our profitability. Alternatively, we may elect to use hedging transactions with respect to a portion of our oil and natural gas
production to achieve more predictable cash flow and to reduce our exposure to price fluctuations. While the use of hedging
transactions
limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions
also involve the risk that the counterparty may be unable to satisfy its obligations.
Our
operations are substantially dependent on the availability of water. Restrictions on our ability to obtain water may have an adverse
effect on our financial condition, results of operations and cash flows.
Water is an essential
component of deep shale oil and natural gas production during both the drilling and hydraulic fracturing, or fracking processes.
Our operations in West Texas and Oklahoma and future operations in other areas could be adversely impacted if we are unable
to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations. Currently,
the quantity of water required in certain completion operations, such as hydraulic fracturing, and changing regulations governing
usage may lead to water constraints and supply concerns (particularly in some parts of the country). As a result, future availability
of water from certain sources used in the past may be limited. Moreover, the imposition of new environmental initiatives and conditions
could include restrictions on our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including,
but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development or production
of oil and natural gas. The federal Clean Water Act, or CWA and analogous state laws impose restrictions and strict controls regarding
the discharge of pollutants, including produced waters and other oil and natural gas waste, into navigable waters or other regulated
federal and state waters. Permits or other approvals must be obtained to discharge pollutants to regulated waters and to conduct
construction activities in such waters and wetlands. Uncertainty regarding regulatory jurisdiction over wetlands and other regulated
waters has, and will continue to, complicate and increase the cost of obtaining such permits or other approvals. The CWA and analogous
state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of pollutants and unauthorized
discharges of reportable quantities of oil and other hazardous substances. Many state discharge regulations, and the Federal National
Pollutant Discharge Elimination System General permits issued by the EPA, prohibit the discharge of produced water and sand, drilling
fluids, drill cuttings and certain other substances related to the oil and natural gas industry into coastal waters. While generally
exempt under federal programs, many state agencies have also adopted regulations requiring certain oil and natural gas exploration
and production facilities to obtain permits for storm water discharges. In October 2011, the EPA announced its intention to develop
federal pretreatment standards for wastewater discharges associated with hydraulic fracturing activities. If adopted, the pretreatment
rules will require coalbed methane and shale gas operations to pretreat wastewater before transferring it to treatment facilities
Some states have banned the treatment of fracturing wastewater at publicly owned treatment facilities. There has been recent nationwide
concern over earthquakes associated with Class II underground injection control wells, a predominant storage method for crude
oil and gas wastewater. It is likely that new rules and regulations will be developed to address these concerns, possibly eliminating
access to Class II wells in certain locations, and increasing the cost of disposal in others. Finally, the EPA study noted above
has focused and will continue to focus on various stages of water use in hydraulic fracturing operations. It is possible that,
following the conclusion of the EPA’s study, the agency will move to more strictly regulate the use of water in hydraulic
fracturing operations. While we cannot predict the impact that these changes may have on our business at this time, they may be
material to our business, financial condition, and operations. Compliance with environmental regulations and permit requirements
governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells or the disposal
or recycling of water will increase our operating costs and may cause delays, interruptions or termination of our operations,
the extent of which cannot be predicted. In addition, our inability to meet our water supply needs to conduct our completion operations
may impact our business, and any such future laws and regulations could negatively affect our financial condition, results of
operations and cash flows.
If
we acquire crude oil and natural gas properties in the future, our failure to fully identify existing and potential problems,
to accurately estimate reserves, production rates or costs, or to effectively integrate the acquired properties into our operations
could materially and adversely affect our business, financial condition and results of operations.
From
time to time, we seek to acquire crude oil and natural gas properties. Although we perform reviews of properties to be acquired
in a manner that we believe is duly diligent and consistent with industry practices, reviews of records and properties may not
necessarily reveal existing or potential problems, and may not permit us to become sufficiently familiar with the properties in
order to fully assess their deficiencies and potential. Even when problems with a property are identified, we may assume environmental
and other risks and liabilities in connection with acquired properties pursuant to the acquisition agreements. Moreover, there
are numerous uncertainties inherent in estimating quantities of crude oil and natural gas reserves (as discussed further below),
actual future production rates and associated costs with respect to acquired properties. Actual reserves, production rates and
costs may vary substantially from those assumed in our estimates. We may be unable to locate or make suitable acquisitions on
acceptable terms and future acquisitions may not be effectively and profitably integrated. Acquisitions involve risks that could
divert management resources and/or result in the possible loss of key employees and customers of the acquired operations. For
the reasons above, among others, an acquisition may have a material and adverse effect on our business and results of operations,
particularly during the periods in which the operations of the acquired properties are being integrated into our ongoing operations
or if we are unable to effectively integrate the acquired properties into our ongoing operations.
If
we make any acquisitions or enter into any business combinations in the future, they may disrupt or have a negative impact on
our business.
If
we make acquisitions or enter into any business combinations in the future, funding permitting, we could have difficulty integrating
the acquired companies’ assets, personnel and operations with our own. Additionally, acquisitions, mergers or business combinations
we may enter into in the future could result in a change of control of the Company, and a change in the Board of Directors or
officers of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot
predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition or
completing a business combination, the negotiations could disrupt our ongoing business, distract our management and employees
and increase our expenses. In addition to the risks described above, acquisitions and business combinations are accompanied by
a number of inherent risks, including, without limitation, the following:
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the difficulty of integrating acquired companies, concepts and operations;
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the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
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difficulties in maintaining uniform standards, controls, procedures and policies;
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the potential impairment of relationships with employees and partners as a result of any integration of new management personnel;
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the potential inability to manage an increased number of locations and employees;
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our ability to successfully manage the companies and/or concepts acquired;
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the failure to realize efficiencies, synergies and cost savings; or
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the effect of any government regulations which relate to the business acquired.
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Our
business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other
problems encountered in connection with an acquisition or business combination, many of which cannot be presently identified.
These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and
adversely affect our results of operations.
Any
acquisition or business combination transaction we enter into in the future could cause substantial dilution to existing stockholders,
result in one party having majority or significant control over the Company or result in a change in business focus of the Company.
We
depend significantly upon the continued involvement of our present management.
We
depend to a significant degree upon the involvement of our management, specifically, our Chief Executive Officer and director,
Anthony C. Schnur, who is in charge of our strategic planning and operations. Our performance and success are dependent to a large
extent on the efforts and continued employment of Mr. Schnur. We do not believe that Mr. Schnur could be quickly replaced with
personnel of equal experience and capabilities, and his successor(s) may not be as effective. If Mr. Schnur or any of our other
key personnel resign or become unable to continue in their present roles and if they are not adequately replaced, our business
operations could be adversely affected.
We
have an active Board of Directors that meets several times throughout the year and is intimately involved in our business and
the determination of our operational strategies. Members of our Board of Directors work closely with management to identify potential
prospects, acquisitions and areas for further development. If any of our directors resign or become unable to continue in their
present role, it may be difficult to find replacements with the same knowledge and experience and as a result, our operations
may be adversely affected.
Certain
of our undeveloped leasehold assets are subject to leases that will expire over the next several years unless production is established
on units containing the acreage.
Leases
on natural gas and oil properties typically have a term of three to five years, after which they expire unless, prior to expiration,
a well is drilled and production of hydrocarbons in paying quantities is established. If our leases expire and we are unable to
renew the leases, we will lose our right to develop the related properties. Although we seek to actively manage our undeveloped
properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, natural
gas and oil prices, the availability and cost of capital, drilling and production costs, availability of drilling services and
equipment, gathering system and pipeline transportation constraints and regulatory approvals.
Our
business is subject to extensive regulation.
As
many of our activities are subject to federal, state and local regulation, and as these rules are subject to constant change or
amendment, our operations may be adversely affected by new or different government regulations, laws or court decisions applicable
to our operations.
Government
regulation and liability for environmental matters may adversely affect our business and results of operations.
Crude
oil and natural gas operations are subject to extensive federal, state and local government regulations, which may be changed
from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning
operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have
imposed price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below
actual production capacity in order to conserve supplies of crude oil and natural gas. There are federal, state and local laws
and regulations primarily relating to protection of human health and the environment applicable to the development, production,
handling, storage, transportation and disposal of crude oil and natural gas, byproducts thereof and other substances and materials
produced or used in connection with crude oil and natural gas operations. In addition, we may inherit liability for environmental
damages caused by previous owners of property we purchase or lease. As a result, we may incur substantial liabilities to third
parties or governmental entities. The implementation of new, or the modification of existing, laws or regulations could have a
material adverse effect on us.
Future
increases in our tax obligations; either due to increases in taxes on energy products, energy service companies and exploration
activities or reductions in currently available federal income tax deductions with respect to oil and natural gas exploration
and development, may adversely affect our results of operations and increase our operating expenses.
Federal,
state and local governments have jurisdiction in areas where we operate and impose taxes on the oil and natural gas products we
sell. There are constant discussions by federal, state and local officials concerning a variety of energy tax proposals, some
of which, if passed, would add or increase taxes on energy products, service companies and exploration activities. Additionally,
the current administration has proposed legislation which would make significant changes to federal tax laws, including the elimination
of certain key United States federal income tax incentives currently available to oil and natural gas exploration and production
companies. These proposed changes include, but are not limited to: (1) the repeal of the percentage depletion allowance for oil
and natural gas properties, (2) the elimination of current deductions for intangible drilling and development costs, (3) the elimination
of the deduction for certain domestic production activities, and (4) an extension of the amortization period for certain geological
and geophysical expenditures. It is unclear whether any such changes will be enacted into law or how soon any such changes could
become effective in the event they were enacted into law. The passage of any legislation as a result of these proposals or any
other changes in U.S. federal income tax laws could impact or increase the taxes that we are required to pay and consequently
adversely affect our results of operations and/or increase our operating expenses.
The
crude oil and natural gas reserves we report in our SEC filings are estimates and may prove to be inaccurate.
There
are numerous uncertainties inherent in estimating crude oil and natural gas reserves and their estimated values. The reserves
we report in our filings with the SEC now and in the future will only be estimates and such estimates may prove to be inaccurate
because of these uncertainties. Reservoir engineering is a subjective and inexact process of estimating underground accumulations
of crude oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable crude oil and natural
gas reserves depend upon a number of variable factors, such as historical production from the area compared with production from
other producing areas and assumptions concerning effects of regulations by governmental agencies, future crude oil and natural
gas prices, future operating costs, severance and excise taxes, development costs and work-over and remedial costs. Some or all
of these assumptions may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable
quantities of crude oil and natural gas attributable to any particular group of properties, classifications of such reserves based
on risk of recovery, and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same
engineers but at different times may vary substantially. Accordingly, reserve estimates may be subject to downward or upward adjustment.
Actual production, revenue and expenditures with respect to our reserves will likely vary from estimates, and such variances may
be material.
Additionally, “probable”
and “possible reserve estimates” are considered unproved reserves and as such, the SEC views such estimates to be
inherently unreliable, may be misunderstood or seen as misleading to investors that are not “experts” in the oil or
natural gas industry. Unless you have such expertise, you should not place undue reliance on these estimates. Except as required
by applicable law, we undertake no duty to update this information and do not intend to update this information.
The
calculated present value of future net revenues from our proved reserves will not necessarily be the same as the current market
value of our estimated oil and natural gas reserves.
You
should not assume that the present value of future net cash flows as included in our public filings is the current market value
of our estimated proved oil and natural gas reserves. We generally base the estimated discounted future net cash flows from proved
reserves on current costs held constant over time without escalation and on commodity prices using an unweighted arithmetic average
of first-day-of-the-month index prices, appropriately adjusted, for the 12-month period immediately preceding the date of the
estimate. Actual future prices and costs may be materially higher or lower than the prices and costs used for these estimates
and will be affected by factors such as:
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actual prices we receive for oil and natural gas;
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actual cost and timing of development and production expenditures;
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the amount and timing of actual production; and
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changes in governmental regulations or taxation.
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addition, the 10% discount factor that is required to be used to calculate discounted future net revenues for reporting purposes
under GAAP is not necessarily the most appropriate discount factor based on the cost of capital in effect from time to time and
risks associated with our business and the oil and natural gas industry in general.
Crude
oil and natural gas development, re-completion of wells from one reservoir to another reservoir, restoring wells to production
and exploration, drilling and completing new wells are speculative activities and involve numerous risks and substantial and uncertain
costs.
Our
growth will be materially dependent upon the success of our future development program. Even considering our business philosophy
to avoid wildcat wells, drilling for crude oil and natural gas and reworking existing wells involves numerous risks, including
the risk that no commercially productive crude oil or natural gas reservoirs will be encountered. The cost of exploration, drilling,
completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as
a result of a variety of factors beyond our control, including: unexpected drilling conditions; pressure or irregularities in
formations; equipment failures or accidents; inability to obtain leases on economic terms, where applicable; adverse weather conditions
and natural disasters; compliance with governmental requirements; and shortages or delays in the availability of drilling rigs
or crews and the delivery of equipment. Furthermore, we cannot provide investors with any assurance that we will be able to obtain
rights to additional producing properties in the future and/or that any properties we obtain rights to will contain commercially
exploitable quantities of oil and/or gas.
Drilling
or reworking is a highly speculative activity. Even when fully and correctly utilized, modern well completion techniques such
as hydraulic fracturing and horizontal drilling do not guarantee that we will find crude oil and/or natural gas in our wells.
Hydraulic fracturing involves pumping a fluid with or without particulates into a formation at high pressure, thereby creating
fractures in the rock and leaving the particulates in the fractures to ensure that the fractures remain open, thereby potentially
increasing the ability of the reservoir to produce oil or natural gas. Horizontal drilling involves drilling horizontally out
from an existing vertical well bore, thereby potentially increasing the area and reach of the well bore that is in contact with
the reservoir. Our future drilling activities may not be successful and, if unsuccessful, such failure would have an adverse effect
on our future results of operations and financial condition. Our overall drilling success rate and/or our drilling success rate
for activities within a particular geographic area may decline in the future. We may identify and develop prospects through a
number of methods, some of which do not include lateral drilling or hydraulic fracturing, and some of which may be unproven. The
drilling and results for these prospects may be particularly uncertain. Our drilling schedule may vary from our capital budget.
The final determination with respect to the drilling of any scheduled or budgeted prospects will be dependent on a number of factors,
including, but not limited to: the results of previous development efforts and the acquisition, review and analysis of data; the
availability of sufficient capital resources to us and the other participants, if any, for the drilling of the prospects; the
approval of the prospects by other participants, if any, after additional data has been compiled; economic and industry conditions
at the time of drilling, including prevailing and anticipated prices for crude oil and natural gas and the availability of drilling
rigs and crews; our financial resources and results; the availability of leases and permits on reasonable terms for the prospects;
and the success of our drilling technology.
These
projects may not be successfully developed and the wells discussed, if drilled, may not encounter reservoirs of commercially productive
crude oil or natural gas. There are numerous uncertainties in estimating quantities of proved reserves, including many factors
beyond our control. If we are unable to find commercially exploitable quantities of oil and natural gas in any properties we may
acquire in the future, and/or we are unable to commercially extract such quantities we may find in any properties we may acquire
in the future, the value of our securities may decline in value.
Recent commodity price declines have
resulted in impairment of our oil and gas properties, and future natural gas and oil price declines may result in additional write-downs
of the carrying amount of our assets, which could materially and adversely affect our results of operations.
The
value of our assets depends on prices of natural gas and oil. Declines in these prices as well as increases in development costs,
changes in well performance, delays in asset development or deterioration of drilling results may result in our having to make
material downward adjustments to our estimated proved reserves, and could result in an impairment charge and a corresponding write-down
of the carrying amount of our oil and natural gas properties. For example, in March 2016, we recorded an impairment of approximately
$21.4 million associated with oil and gas properties in certain non-core fields in south Texas. The impairment of these fields
was due to a significant decline in commodity prices during the 2016 fiscal year.
We evaluate our oil
and gas properties for impairment using the full cost method whereby the carrying value of property and equipment is compared
to the “estimated present value” of its proved reserves discounted at a 10-percent interest rate of future net revenues,
based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized,
plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects
related to book and tax basis differences. In the event that commodity prices decline further, there could be a significant revision
in the future.
Because
of the inherent dangers involved in oil and gas exploration, there is a risk that we may incur liability or damages as we conduct
our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.
The
oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury
or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be
liable for environmental damages caused by previous owners of property purchased and leased by us in the future. As a result,
substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate
the funds available for the purchase of properties and/or property interests, exploration, development or acquisitions or result
in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. As such,
our current insurance or the insurance that we obtain in the future may not be adequate to cover any losses or liabilities. We
cannot predict the availability of insurance or the availability of insurance at premium levels that justify our purchase. The
occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial
condition and operations. We may elect to self-insure if management believes that the cost of insurance, although available, is
excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The
occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results
of operations, which could lead to any investment in us declining in value or becoming worthless.
Unless
we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business,
financial condition and results of operations.
The
rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural
gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing
and exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or
acquiring additional oil and natural gas properties. In the future, we may have difficulty acquiring new properties. During periods
of low oil and/or natural gas prices, it will become more difficult to raise the capital necessary to finance expansion activities.
If we are unable to replace our production, our reserves will decrease, and our business, financial condition and results of operations
would be adversely affected.
The
unavailability or high cost of drilling rigs, completion equipment and services, supplies and personnel, including hydraulic fracturing
equipment and personnel, could adversely affect our ability to establish and execute exploration and development plans within
budget and on a timely basis, which could have a material adverse effect on our business, financial condition and results of operations.
Shortages
or the high cost of drilling rigs, completion equipment and services, supplies or personnel could delay or adversely affect our
operations. When drilling activity in the United States increases, associated costs typically also increase, including those costs
related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry. These
costs may increase, and necessary equipment and services may become unavailable to us at economical prices. Should this increase
in costs occur, we may delay drilling activities, which may limit our ability to establish and replace reserves, or we may incur
these higher costs, which may negatively affect our business, financial condition and results of operations.
We
incur certain costs to comply with government regulations, particularly regulations relating to environmental protection and safety,
and could incur even greater costs in the future.
Our
exploration, production and marketing operations are regulated extensively at the federal, state and local levels and are subject
to interruption or termination by governmental and regulatory authorities based on environmental or other considerations. Moreover,
we have incurred and will continue to incur costs in our efforts to comply with the requirements of environmental, safety and
other regulations. Further, the regulatory environment in the oil and natural gas industry could change in ways that we cannot
predict and that might substantially increase our costs of compliance and, in turn, materially and adversely affect our business,
results of operations and financial condition.
Specifically,
as an owner or lessee and operator of crude oil and natural gas properties, we are subject to various federal, state, local and
foreign regulations relating to the discharge of materials into, and the protection of, the environment. These regulations may,
among other things, impose liability on us for the cost of pollution cleanup resulting from operations, subject us to liability
for pollution damages and require suspension or cessation of operations in affected areas. Moreover, we are subject to the United
States (U.S.) Environmental Protection Agency’s (U.S. EPA) rule requiring annual reporting of greenhouse gas (GHG)
emissions.
Changes in, or additions to, these regulations could lead to increased operating and compliance costs and, in turn, materially
and adversely affect our business, results of operations and financial condition.
We
are aware of the increasing focus of local, state, national and international regulatory bodies on GHG emissions and climate change
issues. In addition to the U.S. EPA’s rule requiring annual reporting of GHG emissions, we are also aware of legislation
proposed by U.S. lawmakers to reduce GHG emissions.
Additionally,
there have been various proposals to regulate hydraulic fracturing at the federal level, including possible regulations limiting
the ability to dispose of produced waters. Currently, the regulation of hydraulic fracturing is primarily conducted at the state
level through permitting and other compliance requirements. Any new federal regulations that may be imposed on hydraulic fracturing
could result in additional permitting and disclosure requirements (such as the reporting and public disclosure of the chemical
additives used in the fracturing process) and in additional operating restrictions. In addition to the possible federal regulation
of hydraulic fracturing, some states and local governments have considered imposing various conditions and restrictions on drilling
and completion operations, including requirements regarding casing and cementing of wells, testing of nearby water wells, restrictions
on the access to and usage of water and restrictions on the type of chemical additives that may be used in hydraulic fracturing
operations. Such federal and state permitting and disclosure requirements and operating restrictions and conditions could lead
to operational delays and increased operating and compliance costs and, moreover, could delay or effectively prevent the development
of crude oil and natural gas from formations which would not be economically viable without the use of hydraulic fracturing.
We
will continue to monitor and assess any new policies, legislation, regulations and treaties in the areas where we operate to determine
the impact on our operations and take appropriate actions, where necessary. We are unable to predict the timing, scope and effect
of any currently proposed or future laws, regulations or treaties, but the direct and indirect costs of such laws, regulations
and treaties (if enacted) could materially and adversely affect our business, results of operations and financial condition.
Federal
and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional
operating restrictions or delays.
Hydraulic
fracturing is a common practice that is used to stimulate production of hydrocarbons from tight formations. The process involves
the injection of water, sand and chemicals under pressure into rock formations to fracture the surrounding rock and stimulate
production. There has been increasing public controversy regarding hydraulic fracturing with regard to the transportation and
use of fracturing fluids, impacts on drinking water supplies, use of waters, and the potential for impacts to surface water, groundwater,
air quality and the environment generally. A number of lawsuits and enforcement actions have been initiated implicating hydraulic
fracturing practices. Additional legislation or regulation could make it more difficult to perform hydraulic fracturing, cause
operational delays, increase our operating costs or make it easier for third parties opposing the hydraulic fracturing process
to initiate legal proceedings. New legislation or regulations in the future could have the effect of prohibiting the use of hydraulic
fracturing, which would prevent us from completing our wells as planned and would have a material adverse effect on production
from our wells. If these legislative and regulatory initiatives cause a material delay or decrease in our drilling or hydraulic
fracturing activities, our business and profitability could be materially impacted.
Possible
regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and
gas.
Studies
over recent years have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere.
In response to these studies, governments have begun adopting domestic and international climate change regulations that require
reporting and reductions of the emission of greenhouse gases. Methane, a primary component of natural gas, and carbon dioxide,
a by-product of the burning of oil, natural gas and refined petroleum products, are considered greenhouse gases. In the United
States, at the state level, many states, either individually or through multi-state regional initiatives, have begun implementing
legal measures to reduce emissions of greenhouse gases, primarily through the planned development of emission inventories or regional
greenhouse gas cap and trade programs or have begun considering adopting greenhouse gas regulatory programs. At the federal level,
Congress has considered legislation that could establish a cap and trade system for restricting greenhouse gas emissions in the
United States. The ultimate outcome of this federal legislative initiative remains uncertain. In addition to pending climate legislation,
the EPA has issued greenhouse gas monitoring and reporting regulations. Beyond measuring and reporting, the EPA issued an “Endangerment
Finding” under section 202(a) of the Clean Air Act, concluding that greenhouse gas pollution threatens the public health
and welfare of current and future generations. The finding served as a first step to issuing regulations that require permits
for and reductions in greenhouse gas emissions for certain facilities. Moreover, the EPA has begun regulating greenhouse gas emission
from certain facilities pursuant to the Prevention of Significant Deterioration and Title V provisions of the Clean Air Act. In
the courts, several decisions have been issued that may increase the risk of claims being filed by government entities and private
parties against companies that have significant greenhouse gas emissions. Such cases may seek to challenge air emissions
permits
that greenhouse gas emitters apply for and seek to force emitters to reduce their emissions or seek damages for alleged climate
change impacts to the environment, people, and property. Any existing or future laws or regulations that restrict or reduce emissions
of greenhouse gases could require us to incur increased operating and compliance costs. In addition, such laws and regulations
may adversely affect demand for the fossil fuels we produce, including by increasing the cost of combusting fossil fuels and by
creating incentives for the use of alternative fuels and energy.
The
lack of availability or high cost of drilling rigs, equipment, supplies, insurance, personnel and oilfield services could adversely
affect our ability to execute our exploration and development plans on a timely basis and within our budget.
Our
industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel.
During these periods, the costs and delivery times of rigs, equipment and supplies tend to increase, in some cases substantially.
In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases
within a geographic area. If increasing levels of exploration and production result in response to strong prices of oil and natural
gas, the demand for oilfield services will likely rise, and the costs of these services will likely increase, while the quality
of these services may suffer. The future lack of availability or high cost of drilling rigs, as well as any future lack of availability
or high costs of other equipment, supplies, insurance or qualified personnel, in the areas in which we operate could materially
and adversely affect our business and results of operations.
Our
officers and directors have limited liability, and we are required in certain instances to indemnify our officers and directors
for breaches of their fiduciary duties.
We
have adopted provisions in our Articles of Incorporation and Bylaws which limit the liability of our officers and directors and
provide for indemnification by us of our officers and directors to the full extent permitted by Nevada corporate law. Our articles
generally provide that our officers and directors shall have no personal liability to us or our stockholders for monetary damages
for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or
unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions
substantially limit our stockholders’ ability to hold officers and directors liable for breaches of fiduciary duty, and
may require us to indemnify our officers and directors.
We
currently have outstanding indebtedness and we may incur additional indebtedness which could reduce our financial flexibility,
increase interest expense and adversely impact our operations and our unit costs.
We currently have outstanding
indebtedness and in the future, we may incur significant amounts of additional indebtedness in order to make acquisitions or to
develop our properties. Our level of indebtedness could affect
our operations in several ways, including the following:
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a significant portion of our cash flows could be used to service our indebtedness;
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a high level of debt would increase our vulnerability to general adverse economic and industry conditions;
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any covenants contained in the agreements governing our outstanding indebtedness could limit our ability to borrow additional funds,
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dispose of assets, pay dividends and make certain investments;
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a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and
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debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry.
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high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient
cash flows to pay the principal or interest on our debt, and future working capital, borrowings or equity financing may not be
available to pay or refinance such debt. If we do not have sufficient funds and are otherwise unable to arrange financing, we
may have to sell significant assets or have a portion of our assets foreclosed upon which could have a material adverse effect
on our business, financial condition and results of operations.
Our
CATI Properties are located in the Austin Chalk and Eagle Ford trends, making us vulnerable to risks associated with operating
in one major geographic area.
Our
CATI Properties are located in the Austin Chalk and Eagle Ford trends south, and southeast of San Antonio, Texas. As a result,
we may be disproportionately exposed to the impact of delays or interruptions of production from wells caused by
transportation
capacity constraints, curtailment of production, availability of equipment, facilities, personnel or services, significant governmental
regulation, natural disasters, adverse weather conditions, or interruption of transportation of oil or natural gas produced from
the wells in this area. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific
geographic oil and gas producing areas such as the ones we operate in, which may cause these conditions to occur with greater
frequency or magnify the effect of these conditions. Due to the concentrated nature of our portfolio of CATI Properties, a number
of our CATI Properties could experience any of the same conditions at the same time, resulting in a relatively greater impact
on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such
delays or interruptions could have a material adverse effect on our financial condition and results of operations.
Servicing
our debt requires a significant amount of cash, which we may not have available when payments are due.
Our
ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, will depend upon
our future operating performance, which is subject to general economic and competitive conditions and to financial, business and
other factors, many of which we cannot control. In the future, we may incur additional indebtedness in order to make future acquisitions
or to develop our properties, including under our current liabilities. If we do not have sufficient funds on hand to pay our debt,
we may be required to seek a waiver or amendment from our lenders, refinance our indebtedness, sell assets or sell additional
securities. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time.
We may not be able obtain such financing or complete such transactions on terms acceptable to us, or at all. In addition, we may
not be able to consummate an asset sale to raise capital or sell assets at prices that we believe are fair, and proceeds that
we do receive may not be adequate to meet any debt service obligations then due. Our failure to generate sufficient funds to pay
our debts or to undertake any of these actions successfully could result in a default on our debt obligations, which would materially
adversely affect our business, results of operations and financial condition.
Future
acquired properties may not be worth what we pay due to uncertainties in evaluating recoverable reserves and other expected benefits,
as well as potential liabilities.
Successful
property acquisitions require an assessment of a number of factors beyond our control. These factors include estimates of recoverable
reserves, exploration potential, future natural gas and oil prices, operating costs, production taxes and potential environmental
and other liabilities. These assessments are complex and inherently imprecise. Our review of the properties we acquire may not
reveal all existing or potential problems. In addition, our review may not allow us to fully assess the potential deficiencies
of the properties. We do not inspect every well, and even when we inspect a well we may not discover structural, subsurface, or
environmental problems that may exist or arise. There may be threatened or contemplated claims against the assets or businesses
we acquire related to environmental, title, regulatory, tax, contract, litigation or other matters of which we are unaware, which
could materially and adversely affect our production, revenues and results of operations. We may not be entitled to contractual
indemnification for pre-closing liabilities, including environmental liabilities, and our contractual indemnification may not
be effective. At times, we acquire interests in properties on an “as is” basis with limited representations and warranties
and limited remedies for breaches of such representations and warranties. In addition, significant acquisitions can change the
nature of our operations and business if the acquired properties have substantially different operating and geological characteristics
or are in different geographic locations than our existing properties.
We
have limited control over activities in properties we do not operate, which could reduce our production and revenues, affect the
timing and amounts of capital requirements and potentially result in a dilution of our respective ownership interest in the event
we are unable to make any required capital contributions.
We
do not operate all of the properties in which we have an interest. As a result, we may have a limited ability to exercise influence
over normal operating procedures, expenditures or future development of underlying properties and their associated costs. For
all of the properties that are operated by others, we are dependent on their decision-making with respect to day-to-day operations
over which we have little control. The failure of an operator of wells in which we have an interest to adequately perform operations,
or an operator’s breach of applicable agreements, could reduce production and revenues we receive from that well. The success
and timing of our drilling and development activities on properties operated by others depend upon a number of factors outside
of our control, including the timing and amount of capital expenditures, the available expertise and financial resources, the
inclusion of other participants and the use of technology. Since we do not own the majority interest in many of the wells we do
not operate, we may not be in a position to remove the operator in the event of poor performance.
The
employment agreement of our Chief Executive Officer includes certain provisions which may prevent or delay a change of control.
Effective
November 1, 2012, we entered into an Employment Agreement with Anthony C. Schnur, our Chief Executive Officer, which
agreement was amended and restated effective December 12, 2012. The agreement had a term of two years, expiring on October
31, 2014, provided that the agreement is automatically extended for additional one year terms, unless either party provides
notice of their intent not to renew within the 30 day period prior to any automatic renewal date and because neither party
has provided notice, the agreement has been automatically extended until October 31, 2016. The Company agreed to pay Mr.
Schnur a base annual salary of $310,000 during the term of the agreement, of which $290,000 is payable in cash and $20,000 is
payable in shares of the Company’s common stock. In the event the agreement is terminated by the Company for a reason
other than cause (as described in the agreement) or by Mr. Schnur for good reason (as described in the agreement), Mr. Schnur
is due in the form of a lump sum payment, the product of the base salary and bonus he was paid under the agreement for the
prior 12 month period, provided that if such termination occurs six months before or 24 months following the occurrence of a
Change of Control (as described in the agreement), Mr. Schnur is due 200% of the amount described above upon such
termination. The requirement to pay severance fees under the Employment Agreement may prevent or delay a change of control of
the Company.
Risks Relating To Investment In Our Securities
We are currently not in compliance with NYSE
MKT continued listing standards and if we are unable to regain compliance, our common stock may be delisted from the NYSE MKT equities
market, which would likely cause the liquidity and market price of our common stock to decline.
Our common stock currently is listed
on the NYSE MKT (the “Exchange”). The Exchange will consider suspending dealings in, or delisting, securities of an
issuer that does not meet its continued listing standards.
On July 21, 2016, we received notice
from the Exchange that we were not in compliance with certain of the Exchange’s continued listing standards as set forth
in Part 10 of the NYSE MKT Company Guide (the “Company Guide”). Specifically, we were not in compliance with Sections
1003(a)(ii) and (iii) of the Company Guide because we did not have stockholders’ equity over $4 million (required if an Exchange
listed company has had losses from continuing operations and/or net losses in three of its last four fiscal years, as we did) or
over $6 million (required if an Exchange listed company has had losses from continuing operations and/or net losses in its five
most recent fiscal years, as we did), as of March 31, 2016 (we reported stockholders’ equity of only $2.4 million as of March
31, 2016 and had reported losses from operations in our five most recent fiscal years).
In order to maintain our listing
on the Exchange, the Exchange requested that we submit a plan of compliance (the “Plan”) addressing
how we intend to regain compliance with Sections 1003(a)(ii) and (iii) of the Company Guide by January 21, 2018.
We submitted a Plan to
the Exchange. If the Exchange accepts the plan, we will be able to continue our listing during
the plan period and will be subject to continued periodic review by the Exchange staff. If the Plan is not accepted or is accepted
but we do not make progress consistent with the Plan during the plan period, we will be subject to delisting procedures as set
forth in the Company Guide. There can be no assurance that we will be able to achieve compliance with the Exchange’s continued
listing standards within the required time frame.
We have been operating under a
going concern opinion since December 31, 2014, which corresponded with the collapse in crude oil prices that began in June 2014.
We closed the Acquisition on August 25, 2016 and in consideration for the Acquisition, we issued
approximately 13 million shares of common stock, in addition to preferred stock, and also undertook various preferred
stock and debt transactions in connection therewith. These financings and transactions are expected to return us to compliance
with the requirements of Sections 1003(a)(ii) and (iii) of the Company Guide. Additionally, the oil and gas reserves acquired are currently producing approximately 1,000 barrels of oil equivalent per day from 25 wells, which, together with
the transactions above, should generate sufficient revenues and cash flows to mitigate the doubt about our ability to continue
as a going concern.
Notwithstanding the above, we may
be unable to regain compliance with the Exchange’s continued listing standards described above or may be deemed to be out
of compliance with other of the Exchange’s continued listing standards. Our business has been and may continue to be affected
by worldwide macroeconomic factors, which include uncertainties in the credit and capital markets. External factors that affect
our stock price, such as liquidity requirements of our investors, as well as our performance, could impact our market capitalization,
revenue and operating results, which, in turn, affect our ability to comply with the Exchange’s listing standards. The Exchange
has the ability to suspend trading in our common stock or remove our common stock from listing on the Exchange if in the opinion
of the Exchange: (a) the financial condition and/or operating results of the Company appear to be unsatisfactory; or (b) it appears
that the extent of public distribution or the aggregate market value of our common stock has become so reduced as to make further
dealings on the Exchange inadvisable; or (c) we have sold or otherwise disposed of our principal operating assets, or have ceased
to be an operating company; or (d) we have failed to comply with our listing agreements with the Exchange (including those described
above); or (e) any other event shall occur or any condition shall exist which makes further dealings on the Exchange unwarranted.
If we are unable to satisfy the
Exchange’s criteria for continued listing and are unable to regain compliance during any applicable cure periods, our common
stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing
the liquidity and market price of our common stock and reducing the number of investors willing to hold or acquire our common stock,
which could negatively impact our ability to raise equity financing. In addition, delisting from the Exchange might negatively
impact our reputation and, as a consequence, our business. Additionally, if we were delisted from the Exchange and are not able
to list our common stock on another national exchange we will no longer be eligible to use Form S-3 registration statements and
will instead be required to file a Form S-1 registration statement for any primary or secondary offerings of our common stock,
which would delay our ability to raise funds in the future, may limit the type of offerings of common stock we could undertake,
and would increase the expenses of any offering, as, among other things, registration statements on Form S-1 are subject to SEC
review and comments whereas take downs pursuant to a previously filed Form S-3 are not.
If we are delisted from the NYSE MKT,
your ability to sell your shares of our common stock would also be limited by the penny stock restrictions, which could further
limit the marketability of your shares.
If our common stock is
delisted from the NYSE MKT, it would come within the definition of “penny stock” as defined in the Exchange Act and
would be covered by Rule 15g-9 of the Exchange Act. That Rule imposes additional sales practice requirements on broker-dealers
who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9,
the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement
to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would affect the ability or willingness
of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in
the public market. These additional procedures could also limit our ability to raise additional capital in the future.
We do not intend to pay cash dividends
to our stockholders.
We currently anticipate
that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay
cash dividends in the foreseeable future. Any payment of cash dividends will depend upon our financial
condition, capital requirements,
earnings and other factors deemed relevant by our Board of Directors. As a result, only appreciation of the price of our common
stock, which may not occur, will provide a return to our stockholders.
We currently have an illiquid and volatile
market for our common stock, and the market for our common stock is and may remain illiquid and volatile in the future.
We currently have a highly
sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile
in the future. Factors that could affect our stock price or result in fluctuations in the market price or trading volume of our
common stock include:
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our actual or anticipated operating and financial performance and drilling locations, including reserve estimates;
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quarterly variations in the rate of growth of our financial indicators, such as net income/loss per share, net income/loss and cash flows, or those of companies that are perceived to be similar to us;
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changes in revenue, cash flows or earnings estimates or publication of reports by equity research analysts;
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speculation in the press or investment community;
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public reaction to our press releases, announcements and filings with the SEC;
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sales of our common stock by us or other stockholders, or the perception that such sales may occur;
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the amount of our freely tradable common stock available in the public marketplace;
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general financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices;
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the realization of any of the risk factors that we are subject to;
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the recruitment or departure of key personnel;
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commencement of, or involvement in, litigation;
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the prices of oil and natural gas;
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the success of our exploration and development operations, and the marketing of any oil and natural gas we produce;
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changes in market valuations of companies similar to ours; and
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domestic and international economic, legal and regulatory factors unrelated to our performance.
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Our common stock is listed
on the NYSE MKT under the symbol “LEI.” Our stock price may be impacted by factors that are unrelated or disproportionate
to our operating performance. The stock markets in general have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock. Additionally, general economic, political and market conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price of our common stock. Due to the limited volume of our shares which
trade, we believe that our stock prices (bid, ask and closing prices) may not be related to our actual value, and not reflect the
actual value of our common stock. You should exercise caution before making an investment in us.
Additionally, as a result
of the illiquidity of our common stock, investors may not be interested in owning our common stock because of the inability to
acquire or sell a substantial block of our common stock at one time. Such illiquidity could have an adverse effect on the market
price of our common stock. In addition, a stockholder may not be able to borrow funds using our common stock as collateral because
lenders may be unwilling to accept the pledge of securities having such a limited market. An active trading market for our common
stock may not develop or, if one develops, may not be sustained.
A prolonged decline in the market price
of our common stock could affect our ability to obtain additional financing which would adversely affect our operations.
Historically, we have relied
on equity and debt financing as primary sources of financing. A prolonged decline in the market price of our common stock or a
reduction in our accessibility to the global markets may result in our inability to secure additional financing which would have
an adverse effect on our operations.
If the holders of our outstanding convertible
securities and warrants sell a large number of shares all at once or in blocks after converting such convertible securities and
exercising such warrants, or the holders of our registered shares sell a large number of shares, the trading value of our shares
could decline in value.
As of September 9,
2016, we have outstanding warrants to purchase 41,300 shares of common stock sold in April 2012, which have an exercise price
of $57.50 per share; outstanding warrants to purchase 13,000 shares of our common stock at an exercise price of $37.50 per share,
which were issued in
connection with our April and May 2013 loan
agreements; outstanding warrants to purchase 11,195 shares of our common stock at an exercise price of $0.01 per share, which
were issued in connection with our August 2013 Rogers Loan; outstanding warrants to purchase 66,668 shares of our common stock
at a current exercise price of approximately $9.75 per share, which were issued in connection with our April 2014 offering;
outstanding convertible promissory notes convertible into 433,334 shares of our common stock at $1.50 per share; an outstanding
Debenture convertible into 163,077 shares of our common stock at a conversion price of $3.25 per share; outstanding warrants to
purchase 1,384,616 shares of our common stock at an exercise price of $3.25 per share, which were issued in connection with the
sale of the Debenture; 53 shares of outstanding Series C Preferred Stock convertible into 163,077 shares of our common stock
at a conversion price of $3.25 per share; and outstanding warrants to purchase 1,111,112 shares of our common stock at an exercise
price of $4.50 per share, which were issued in connection with the sale of the Series C Preferred Stock. The trading price
of our common stock has fluctuated significantly during the last 52 weeks.
We have 15,470,491
shares of common stock issued and outstanding as of September 9, 2016. The exercise of outstanding warrants,
or conversion of outstanding convertible promissory notes or Debenture, and the subsequent resale of such shares of common stock
(which shares of common stock issuable upon exercise of the warrants sold in our April and September 2012 offerings and the warrants
sold in our April 2014 offering, will be eligible for immediate resale, and which shares of common stock issuable upon conversion
of the convertible promissory notes and Debenture and exercise of the warrants issued in April, May and August 2013, will be eligible
for immediate resale subject to the terms and conditions of Rule 144) may cause dilution to existing stockholders and cause the
market price of our securities to decline in value. Additionally, the common stock issuable upon exercise of the warrants or conversion
of the convertible promissory notes or Debenture may represent overhang that may also adversely affect the market price of our
common stock. Overhang occurs when there is a greater supply of a Company’s stock in the market than there is demand for
that stock. When this happens the price of the Company’s stock will decrease, and any additional shares which stockholders
attempt to sell in the market will only further decrease the share price. Finally, the offer or sale of large numbers of shares
of common stock in the future, including those shares previously registered in our registration statements and prospectus supplements,
and/or in connection with future registration statements or prospectus supplements may cause the market price of our securities
to decline in value.
The warrants sold in our April 2014 offering
and the warrants issuable pursuant to our March 2016 Note Purchase Agreement have anti-dilution rights which could cause their
exercise price to be reduced.
The warrants sold in our
April 2014 offering include anti-dilution rights, which provide that if at any time the warrants are outstanding, we issue or are
deemed to have issued (which includes shares issuable upon exercise of warrants and options and conversion of convertible securities)
for consideration less than the then current exercise price of the warrants, the exercise price of such warrants is automatically
reduced (a) to the lowest price per share of consideration provided or deemed to have been provided for such securities, not to
be deemed less than $0.01 per share, during the one year period following the closing date of the offering (April 21, 2014), which
date has passed without any required adjustments; and thereafter (b) to the product of (x) the exercise price then in effect, and
(y) a fraction, the numerator of which is the number of shares of common stock outstanding immediately prior to such issuance plus
the number of shares of common stock which the aggregate consideration received by us would purchase at the exercise price in effect
immediately prior to such issuance, and the denominator of which is the number of shares of common stock outstanding immediately
prior to such issuance plus the number of such additional shares of common stock issued. Notwithstanding the above, no adjustment
of the exercise price is required in connection with any issuances or deemed issuance of shares of common stock (1) to our officers,
directors, consultants or employees pursuant to stock option or stock purchase plans or agreements on terms approved by our Board
of Directors, subject to adjustment for all subdivisions and combinations; and (2) in connection with the re-negotiation, modification,
extension or re-pricing of debt of the Company outstanding on the closing date, subject to the prior written approval of the holders
of the warrants. Additionally, in the event we acquire ownership of another entity or a significant amount of assets from another
person or entity by way of an asset purchase agreement, merger (pursuant to which we are the surviving entity and our common stock
is not converted or exchanged), business combination or share exchange pursuant to which shares of our common stock or convertible
securities (including options or warrants) are issued or granted by us as partial or sole consideration to the counterparty or
counterparties in such transaction or series of transactions (a “Company Combination”), then and in such event, the
exercise price of the warrants is automatically reduced, to the average of the highest bid and lowest asked prices of our common
stock averaged over the thirty (30) business days after the closing of the Company Combination if such exercise price as adjusted
is less than the exercise price in effect on the date such Company Combination Price is determined.
The warrants issuable pursuant
to our March 2016 Note Purchase Agreement include anti-dilution rights, for the first 12 months following the issuance date of
such warrants, which automatically reduce the exercise price of the warrants to any lower priced security sold, granted or issued
by us during such anti-dilution period, subject to certain exceptions, including officer and director grants and the transactions
contemplated by the Acquisition.
We may be forced to expend significant
resources and pay significant costs and expenses associated with outstanding registration rights.
In connection with
our entry into the April 2014 Securities Purchase Agreement, we provided the investors in the offering registration rights pursuant
to a Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the purchasers in the April 2014 Securities
Purchase Agreement have demand and piggy-back registration rights. We also agreed to register certain securities in connection
with the April 2016 Stock Purchase Agreement and Securities Purchase Agreement. We also have agreed to register for resale
the shares of common
stock issuable in connection with the Acquisition. We will have to expend significant resources and pay significant costs and expenses,
including filing fees, legal fees and accounting fees, in connection with such registration statements.
Nevada law and our Articles of Incorporation
authorize us to issue shares of stock which shares may cause substantial dilution to our existing stockholders.
We have authorized
capital stock consisting of 100,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred
stock, $0.001 par value per share. As of September 9, 2016, we have 15,470,491 shares of common stock
outstanding, 552,000 shares of Series B Preferred Stock outstanding, with each share of Series B Preferred
Stock convertible into approximately 7.14 shares of our common stock, and 53 shares of Series C Preferred Stock
outstanding, with each share of Series C Preferred Stock convertible into approximately 3,077 shares of our common stock.
As a result, our Board of Directors has the ability to issue a large number of additional shares of common stock without
stockholder approval, subject to the requirements of the NYSE MKT (which generally require stockholder approval for any
transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting
rights representing over 20% of our then outstanding shares of stock), which if issued could cause substantial dilution to
our then stockholders. Shares of additional preferred stock may also be issued by our Board of Directors without stockholder
approval, with voting powers and such preferences and relative, participating, optional or other special rights and powers as
determined by our Board of Directors, which may be greater than the shares of common stock currently outstanding. As a
result, shares of preferred stock may be issued by our Board of Directors which cause the holders to have majority voting
power over our shares, provide the holders of the preferred stock the right to convert the shares of preferred stock they
hold into shares of our common stock, which may cause substantial dilution to our then common stock stockholders and/or have
other rights and preferences greater than those of our common stock stockholders. Investors should keep in mind that
the Board of Directors has the authority to issue additional shares of common stock and preferred stock, which could cause
substantial dilution to our existing stockholders. Additionally, the dilutive effect of any preferred stock which we may
issue may be exacerbated given the fact that such preferred stock may have super voting rights and/or other rights or
preferences which could provide the preferred stockholders with substantial voting control over us subsequent to the date of
this prospectus and/or give those holders the power to prevent or cause a change in control. As a result, the issuance of
shares of common stock and/or Preferred Stock may cause the value of our securities to decrease and/or become worthless.
Stockholders may be diluted significantly
through our efforts to obtain financing and/or satisfy obligations through the issuance of additional shares of our common stock.
Wherever possible, our
Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash
consideration will consist of shares of our common stock. Subject to certain consent rights of the investor in our April 2016 financing,
our Board of Directors has authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued
shares of common stock (subject to NYSE MKT rules which limit among other things, the number of shares we can issue without stockholder
approval to no more than 20% of our outstanding shares of common stock). These actions will result in dilution of the ownership
interests of existing stockholders, and that dilution may be material.
If persons engage in short sales of our
common stock, including sales of shares to be issued upon exercise of our outstanding warrants, the price of our common stock may
decline.
Selling short is a technique
used by a stockholder to take advantage of an anticipated decline in the price of a security. In addition, holders of options and
warrants will sometimes sell short knowing they can, in effect, cover through the exercise of an option or warrant, thus locking
in a profit. A significant number of short sales or a large volume of other sales within a relatively short period of time can
create downward pressure on the market price of a security. Further sales of common stock issued upon
exercise of our outstanding
warrants could cause even greater declines in the price of our common stock due to the number of additional shares available in
the market upon such exercise, which could encourage short sales that could further undermine the value of our common stock. You
could, therefore, experience a decline in the value of your investment as a result of short sales of our common stock.
The market price for our common stock
may be volatile, and our stockholders may not be able to sell our stock at a favorable price or at all.
Many factors could cause
the market price of our common stock to rise and fall, including: actual or anticipated variations in our quarterly results of
operations; changes in market valuations of companies in our industry; changes in expectations of future financial performance;
fluctuations in stock market prices and volumes; issuances of dilutive common stock or other securities in the future; the addition
or departure of key personnel; announcements by us or our competitors of acquisitions, investments or strategic alliances; and
the increase or decline in the price of oil and natural gas.
Substantial sales of our common stock,
or the perception that such sales might occur, could depress the market price of our common stock.
We cannot predict whether
future issuances of our common stock or resales in the open market will decrease the market price of our common stock. The impact
of any such issuances or resales of our common stock on our market price may be increased as a result of the fact that our common
stock is thinly, or infrequently, traded. The exercise of any options that we have or that we may grant to directors, executive
officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of
our common stock (including shares previously registered in our registration statements and prospectus supplements, and/or in connection
with future registration statements or prospectus supplements) could have an adverse effect on the market price of our common stock.
In addition, future issuances of our common stock may be dilutive to existing stockholders. Any sales of substantial amounts of
our common stock in the public market, or the perception that such sales might occur, could lower the market price of our common
stock.
We incur significant costs as a result
of operating as a fully reporting publicly traded company and our management is required to devote substantial time to compliance
initiatives.
We incur significant
legal, accounting and other expenses in connection with our status as a fully reporting public company. Specifically, we are
required to prepare and file annual, quarterly and current reports, proxy statements and other information with the SEC.
Additionally, our officers, directors and significant stockholders are required to file Form 3, 4 and 5’s and Schedule
13D/G’s with the SEC disclosing their ownership of the Company and changes in such ownership. Furthermore, the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and rules subsequently implemented by the SEC have imposed
various new requirements on public companies, including requiring changes in corporate governance practices. In addition, the
Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and
disclosure of controls and procedures. The costs and expenses of compliance with SEC rules and our filing obligations with
the SEC, or our identification of deficiencies in our internal controls over financial reporting that are deemed to be
material weaknesses, could materially adversely affect our results of operations or cause the market price of our stock to
decline in value.
Securities analyst coverage or lack of
coverage may have a negative impact on our common stock’s market price.
The trading market for
our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our
business. We do not have any control over these analysts. If securities or industry analysts stop their coverage of us or additional
securities and industry analysts fail to cover us in the future, the trading price for our common stock would be negatively impacted.
If any analyst or analysts who cover us downgrade our common stock, changes their opinion of our shares or publishes inaccurate
or unfavorable research about our business, our stock price would likely decline. If any analyst or analysts cease coverage of
us or fail to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial
markets, which could cause our stock price and trading volume to decline.
Due to the fact that our common stock
is listed on the NYSE MKT, we are subject to financial and other reporting and corporate governance requirements which increase
our cost and expenses.
We are currently required
to file annual and quarterly information and other reports with the SEC that are specified in Sections 13 and 15(d) of the Exchange
Act. Additionally, due to the fact that our common stock is listed on the NYSE MKT, we are also subject to the requirements to
maintain independent directors, comply with other corporate governance requirements and are required to pay annual listing and
stock issuance fees. These obligations require a commitment of additional resources including, but not limited, to additional expenses,
and may result in the diversion of our senior management’s time and attention from our day-to-day operations. These obligations
increase our expenses and may make it more complicated or time consuming for us to undertake certain corporate actions due to the
fact that we may require the approval of the NYSE MKT for such transactions and/or NYSE MKT rules may require us to obtain stockholder
approval for such transactions.
You may experience future dilution as
a result of future equity offerings or other equity issuances.
We may in the future
issue additional shares of our common stock or other securities convertible into or exchangeable for our common stock.
Additional Risks Related to our Business,
Industry and an Investment in our common stock
For a discussion of additional
risks associated with our business, our industry and an investment in our common stock, see the section entitled “Risk Factors”
in our most recent Annual Report on Form 10-K, as filed with the SEC on July 13, 2016, and our Quarterly Report on Form
10-Q, as filed with the SEC on August 12, 2016, as well as the disclosures contained in documents filed by us thereafter pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, which are incorporated by reference into, and
deemed to be a part of, this prospectus.
DESCRIPTION OF CAPITAL STOCK
The following is a brief
description of our capital stock. This summary does not purport to be complete in all respects. This description is subject to
and qualified entirely by the terms of our articles of incorporation, as amended, or our articles of incorporation, and our bylaws,
as amended, or our bylaws, copies of which have been filed with the SEC and are also available upon request from us, and by the
Nevada Revised Statutes.
Capital Stock
We have authorized capital
stock consisting of 100,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred stock, $0.001
par value per share (“Preferred Stock”). As of September 9, 2016, we have (i) 15,470,491 shares of common
stock outstanding, (ii) 2,000 designated shares of Series A Convertible Preferred Stock, none of which are outstanding,
(iii) 600,000 designated shares of Series B Convertible Preferred Stock, 552,000 of which are outstanding,
and (iv) 5,000 designated shares of Series C Preferred Stock, 53 of which are outstanding.
The following description
of our capital stock is a summary only and is subject to applicable provisions of the Nevada Revised Statutes, and our Articles
of Incorporation and Bylaws, each as amended and restated, from time to time. You should refer to, and read this summary together
with, our Articles of Incorporation and Bylaws, each as amended and restated from time to time, to review all of the terms of our
capital stock. Our Articles of Incorporation and amendments thereto are incorporated by reference as exhibits to the registration
statement of which this prospectus is a part and other reports incorporated by reference herein.
Common Stock
Holders of our Common Stock:
(i) are entitled to share ratably in all of our assets available for distribution upon liquidation, dissolution or winding up of
our affairs; (ii) do not have preemptive, subscription or conversion rights, nor are there any redemption or sinking fund provisions
applicable thereto; and (iii) are entitled to one vote per share on all matters on which stockholders may vote at all stockholder
meetings. Each stockholder is entitled to receive the dividends as may be declared by our directors out of funds legally available
for dividends. Our directors are not obligated to declare a dividend. Any future dividends will be subject to the discretion of
our directors and will depend upon, among other things, future earnings, the operating and financial condition of our Company,
our capital requirements, general business conditions and other pertinent factors.
The presence of the persons
entitled to vote 33% of the outstanding voting shares on a matter before the stockholders shall constitute the quorum necessary
for the consideration of the matter at a stockholders’ meeting.
The vote of the holders
of a majority of the votes cast on the matter at a meeting at which a quorum is present shall constitute an act of the stockholders,
except for the election of directors, who shall be appointed by a plurality of the shares entitled to vote at a meeting at which
a quorum is present. The common stock does not have cumulative voting rights, which means that the holders of 51% of the common
stock voting for election of directors can elect 100% of our directors if they choose to do so.
Preferred Stock
Subject to the terms contained
in any designation of a series of Preferred Stock, the Board of Directors is expressly authorized, at any time and from time to
time, to fix, by resolution or resolutions, the following provisions for shares of any class or classes of Preferred Stock of the
Company:
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1)
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The designation of such class or series, the number of shares to constitute such class or series which may be increased (but not below the number of shares of that class or series then outstanding) by a resolution of the Board of Directors;
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2)
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Whether the shares of such class or series shall have voting rights, in addition to any voting rights provided by law, and if so, the terms of such voting rights;
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3)
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The dividends, if any, payable on such class or series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any share of stock of any other class or any other shares of the same class;
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4)
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Whether the shares of such class or series shall be subject to redemption by the Company, and,
if so, the times, prices and other conditions of such redemption or a formula to determine the times, prices and such other conditions;
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5)
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The amount or amounts payable upon shares of such series upon, and the rights of the holders of
such class or series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets,
of the Company;
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6)
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Whether the shares of such class or series shall be subject to the operation of a retirement or
sinking fund, and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase
or redemption of the shares of such class or series for retirement or other corporate purposes and the terms and provisions relative
to the operation thereof;
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7)
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Whether the shares of such class or series shall be convertible into, or exchangeable for, shares
of stock of any other class or any other series of the same class or any other securities and, if so, the price or prices or the
rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion
or exchanges;
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8)
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The limitations and restrictions, if any, to be effective while any shares of such class or series
are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other
acquisition by the Company of the common stock or shares of stock of any other class or any other series of the same class;
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9)
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The conditions or restrictions, if any, upon the creation of indebtedness of the Company or upon
the issuance of any additional stock, including additional shares of such class or series or of any other series of the same class
or of any other class;
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10)
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The ranking (be it pari passu, junior or senior) of each class or series vis-à-vis any other
class or series of any class of Preferred Stock as to the payment of dividends, the distribution of assets and all other matters;
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11)
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Facts or events to be ascertained outside the Articles of Incorporation of the Company, or the
resolution establishing the class or series of stock, upon which any rate, condition or time for payment of distributions on any
class or series of stock is dependent and the manner by which the fact or event operates upon the rate, condition or time of payment;
and
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12)
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Any other powers, preferences and relative, participating, optional and other special rights, and
any qualifications, limitations and restrictions thereof, insofar as they are not inconsistent with the provisions of the Articles
of Incorporation of the Company, as amended, to the full extent permitted by the laws of the State of Nevada.
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The powers, preferences
and relative, participating, optional and other special rights of each class or series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
Series A Convertible
Preferred Stock
The Series A Convertible
Preferred Stock has no voting rights, no liquidation rights and no redemption rights, but has conversion rights providing the holder
thereof the right to convert each outstanding share of Series A Convertible Preferred Stock into 40 shares of Common Stock. The
Series A Convertible Preferred Stock contains a provision that limits the amount of common shares that the holder can own at any
time upon conversion to an aggregate of 4.99% of our then issued and outstanding shares of Common Stock. As of the date of this
prospectus, no shares of Series A Convertible Preferred Stock are issued or outstanding.
Series B Redeemable
Convertible Preferred Stock
The Series B Preferred
Stock has dividend rights that accrue at an annual rate of 6% until such Series B Preferred is no longer outstanding either due
to conversion, redemption or otherwise. The Series B Preferred Stock also has liquidation rights equal to the original issue price
of such shares and are payable upon our liquidation, dissolution or winding up, either voluntary or involuntary. Each outstanding
share of Series B Preferred Stock is entitled to one vote on all stockholder matters to come before our stockholders and are not
entitled to series voting except as required by law.
Each share of Series B
Preferred Stock is convertible, at the option of the holder, into that number of fully-paid, nonassessable shares of Common Stock
determined by dividing the Original Issue Price for the Series B Preferred ($25.00, as may be adjusted for recapitalizations) by
the Conversion Price ($3.50, as may be adjusted for recapitalizations). Each share of Series B Preferred Stock automatically converts
into shares of Common Stock under certain conditions set forth in the Certificate of Designations.
Subject to the terms of
any credit or debt agreements in place which prevent us from redeeming the Series B Preferred Stock for cash, we have the option,
exercisable from time to time after the Original Issue Date, to redeem all or any portion of the outstanding shares of Series B
Preferred Stock which have not been previously converted into Common Stock, by paying each applicable holder, an amount equal to
(a) the Original Issue Price multiplied by the number of shares of Series B Preferred Stock held by each applicable Holder, subject
to such redemption; plus (b) the accrued dividends on such shares.
The consent of a majority
in interest of the Series B Preferred Stock must also be obtained prior to certain corporate actions.
As of September 9,
2016, 552,000 shares of Series B Convertible Preferred Stock are issued and outstanding.
Series C Redeemable
Convertible Preferred Stock
Holders of the Series C
Preferred Stock are entitled to cumulative dividends in the amount of 6.0% per annum, payable upon redemption, conversion, or maturity,
and when, as and if declared by our Board of Directors in its discretion. The Series C Preferred Stock ranks senior to the Common
Stock and pari passu with respect to our Series B Preferred Stock.
The Series C Preferred
Stock may be converted into shares of Common Stock at any time at the option of the holder, or at our option if certain equity
conditions (as defined in the Certificate of Designation), are met. Upon conversion, we will pay the holders of the Series C Preferred
Stock being converted a conversion premium equal to the amount of dividends that such shares would have otherwise earned if they
had been held through the maturity date, and issue to the holders such number of shares of Common stock equal to $10,000 per share
of Series C Preferred Stock (the “Face Value”) multiplied by the number of such shares of Series C Preferred Stock
divided by the conversion rate.
The conversion
premium under the Series C Preferred Stock is payable and the dividend rate under the Series C Preferred Stock is adjustable
on the same terms and conditions as accrued interest is payable and adjustable under the Debenture described below. The
Series C Preferred Stock has a maturity date that is seven years after the date of issuance and, if the Series C Preferred
Stock has not been wholly converted into shares of Common Stock prior to such date, we may redeem the Series C Preferred
Stock on such date by repaying to the investor in cash 100% of the Face Value plus an amount equal to any accrued but unpaid
dividends thereon. 100% of the Face Value, plus an amount equal to any accrued but unpaid dividends
thereon, automatically becomes payable in the event of a liquidation, dissolution or winding up by us.
We may not issue any other
Preferred Stock (other than the Series B Preferred Stock) that is pari passu or senior to the Series C Preferred Stock with respect
to any rights for a period of one year after the earlier of such date (i) a registration statement is effective and available for
the resale of all shares of Common Stock issuable upon conversion of the Series C Preferred Stock, or (ii) Securities Act Rule
144 is available for the immediate unrestricted resale of all shares of Common Stock issuable upon conversion of the Series C Preferred
Stock.
As of September 9,
2016, 53 shares of Series C Convertible Preferred Stock are issued and outstanding.
Warrants
As of September 9,
2016, we have a total of 2,752,176 warrants outstanding, which have various exercise prices between $0.01 and $57.50
per share and various expiration dates between October 18, 2017 and April 21, 2019, as described in greater detail below.
In April 2012, the
Company sold an aggregate of 2,950,000 units at $2.00 each, with each unit consisting of one share of Company common stock and
0.35 of a warrant to purchase one share of the Company’s common stock at an exercise price of $2.30 per share in a registered
direct offering. A total of 2,950,000 shares and 1,032,500 warrants were sold in connection with the offering (one of the investors
in the offering was an entity controlled by our former director, Joshua D. Young). The Company received an
aggregate of $5,900,000 (or $2.00 per unit)
in gross funding and approximately $5,500,000 (or $1.87 per unit) in net proceeds after paying commissions and other expenses
associated with the offering. The Company used the net proceeds to pay down expenses related to drilling, lease operating and
workover activities; and for general corporate purposes, including general and administrative expenses. The warrants became exercisable
on October 18, 2012, and will remain exercisable thereafter until October 18, 2017. If the registration statement pursuant to
which the warrants were issued is not effective and available for use at the time of any proposed exercise, the warrants have
cashless exercise rights. The warrants also include a provision whereby the investors are not eligible to exercise any portion
of the warrants that would result in them becoming the beneficial owner of more than 4.99% of the Company’s common stock,
subject to the holder’s right to increase such amount to up to 9.99% of the Company’s common stock with at least 61
days prior written notice to the Company. As a result of our 25:1 reverse stock split, which was effective on July 15, 2015, the
outstanding warrants were adjusted such that 41,300 are outstanding as of September 9, 2016 at an exercise price of $57.50
per share.
Effective April 4,
2013, we entered into a Loan Agreement with various lenders (the “Loan Agreement”) pursuant to which such lenders
loaned the Company an aggregate of $2,750,000 to be used for general working capital. The lenders included entities
beneficially owned by our then directors, Ken Daraie (which entity loaned us $2,000,000) and W. Andrew Krusen, Jr. (which
entities loaned us $250,000), as well as an unrelated third party which loaned the Company $500,000. The outstanding
principal and interest was paid in full on August 16, 2013. The Note holders were each paid their pro rata portion of a
$55,000 commitment fee in connection with the Company’s entry into the Notes and were each granted their pro rata
portion of warrants to purchase 275,000 shares of the Company’s common stock which were evidenced by Common Stock
Purchase Warrants. These warrants were originally issued with an exercise price of $1.50 per share, a term of five years and
cashless exercise rights in the event the shares issuable upon exercise of the warrants are not registered with the
Securities and Exchange Commission. As a result of our 25:1 reverse stock split, which was effective on July 15, 2015, the warrants were adjusted such that 11,000 are outstanding as of September 9, 2016 at an exercise price
of $37.50 per share.
In May 2013, we issued
warrants in connection with the issuance of certain May 2013 Notes, for which the outstanding principal and interest was paid
in full on August 16, 2013. The warrants were exercisable on the grant date (May 31, 2013) and remain exercisable until May 31,
2018. As a result of our 25:1 reverse stock split, which was effective on July 15, 2015, the warrants were adjusted such that
2,000 are outstanding as of September 9, 2016 at an exercise price of $37.50 per share.
Effective on August
13, 2013, Lucas entered into a Letter Loan Agreement with Louise H. Rogers (as amended and modified to date, the “Rogers
Loan”). In connection with the Rogers Loan and a Promissory Note entered into in connection therewith, the Company issued
certain warrants. Such warrants were exercisable on the grant date (August 13, 2013) and remain exercisable until the earlier
of (a) August 13, 2018; and (b) three years after the payment in full of the loan. The exercise price of such warrants was lowered
to $0.01 per share on August 12, 2015, and the Company recorded approximately $15,000 in one-time amortization expenses related
to the price reduction. As a result of our 25:1 reverse stock split, which was effective on July 15, 2015, the warrants were adjusted
such that 11,195 are outstanding as of September 9, 2016.
Warrants were also issued
by the Company in connection with the sale of units in the Company’s unit offering in April 2014. The Warrants became exercisable
on April 21, 2014 and will remain exercisable thereafter until April 21, 2019. As a result of our 25:1 reverse stock split, which
was effective on July 15, 2015, the warrants were adjusted such that 66,668 are outstanding as of September 9, 2016 at
an exercise price of $25.00 per share. As a result of the issuance of the Debenture and related warrant, the exercise price of
these warrants was adjusted to $10.17 per share. As a result of the issuance of the convertible promissory notes through September
9, 2016, the exercise price of these warrants was adjusted to approximately $9.75 per share. In the event that all
of the specific securities pursuant to all the approved proposals in our proxy statement filed July 29, 2016 are issued,
we estimate the exercise price of these warrants would be further adjusted to approximately $6.38 (not taking into account
securities issued in the Acquisition). As a result of the closing of the Acquisition, the exercise price of these
warrants will be reduced, if applicable, to the fair market value of our Common Stock on the date 30 business days
after the closing of the Acquisition.
In connection with the
Note Purchase Agreement entered into on March 29, 2016, and effective March 11, 2016, we agreed to issue HFT warrants to purchase
124,285 shares of common stock with an exercise price of $1.50 per share, at such time as an aggregate of $600,000 in convertible
promissory notes have been sold under the Note Purchase Agreement. In connection with the Line of Credit Amendment entered into
on April 11, 2016, we agreed to issue warrants to purchase 51,562 shares of common stock at an exercise price of $3.25 per share
for each $250,000 in convertible promissory notes that are issued to Target Alliance London Limited. When issued, the warrants
will allow for cashless exercise rights, to the extent that such shares of common stock issuable upon exercise thereof are not
registered under the Securities Act of 1933, as amended, and will include anti-dilutive rights, for the first 12 months following
the issuance date of such warrants, which will automatically reduce the exercise price of the warrants to any lower priced security
sold, granted or issued by us during such anti-dilutive period, subject to certain exceptions, including officer and director grants
and the transactions contemplated by the Acquisition.
We also issued warrants
in connection with the Securities Purchase Agreement entered into on April 6, 2016 and the Stock Purchase Agreement entered into on April 6,
2016. The First Warrant entitles the
investor, upon exercise thereof, to purchase 1,384,616 shares of Common Stock at a purchase price of $3.25 per share. The Second
Warrant entitles the investor, upon exercise thereof, to purchase 1,111,112 shares of Common Stock at a purchase price of $4.50
per share.
The First Warrant
will be automatically exercised upon the registration statement for the resale of the shares of Common Stock issuable upon
conversion of the Debenture and exercise of the First Warrant being declared effective by the Securities and Exchange
Commission. The Second Warrant will be exercisable before March 31, 2017 by mutual agreement of us and the investor upon
delivery of notice from us or investor.
Both warrants accrue a
premium at a rate equal to 6.0% per annum, subject to adjustment as provided in the warrants, payable upon redemption or exercise.
Upon exercise of the warrants, we will pay the conversion premium that would have otherwise been due if the warrants had been held
through the maturity date, with respect to the portion of warrants being exercised. The warrants may not be exercised on a cashless
basis.
The conversion premium
under the warrants is payable and adjustable on the same terms and conditions as accrued interest is payable and adjustable under
the Debenture described below, except that the conversion premium adjustment thresholds for the second warrant are set at $4.00
and $5.00, respectively. The warrants have a maturity date that is seven years after the date of issuance and, if the warrants
have not been wholly exercised into shares of Common Stock prior to such date, we may redeem the warrants on such date by repaying
to the investor in cash the purchase price paid under the warrants. The purchase price paid under the warrants, together with
the conversion premium, automatically becomes payable with respect to the unexercised portion of the warrants in the event of
a liquidation, dissolution or winding up by us. Prior to the maturity date, provided that no trigger event has occurred (as
defined in the Second Warrant), we have the right at any time upon 30 trading days' prior written notice to redeem all or any
portion of the Second Warrant then unexercised by paying the Selling Stockholder in cash an amount per portion of unexercised
warrant equal to the purchase price paid under the Second Warrant, plus the conversion premium payable as if such portion was
unexercised until the maturity date, minus any conversion premium already paid for such portion.
Stock Options
As of September 9,
2016, we had issued and outstanding stock options to purchase an aggregate of 22,920 shares of common stock (net of forfeitures,
expirations and cancellations) pursuant to our 2010 Long-Term Incentive Plan, 2012 Stock Incentive Plan and 2014
Amended and Restated Stock Incentive Plan (the “Plans”). The stock options have a weighted average exercise price
of $33.96 per share.
Convertible Promissory
Notes
On August 30, 2015, we
entered into a Non-Revolving Line of Credit Agreement (as amended, the “Line of Credit”) with Silver Star Oil Company
(“Silver Star”). The Line of Credit, which had an effective date of August 28, 2015, provided us the right, from time
to time, subject to the terms of the Line of Credit, to sell up to $2.4 million in convertible promissory notes. Under the terms
of the Line of Credit, we issued $1 million in convertible promissory notes to Silver Star pursuant to notes effective on September
28, 2015, October 21, 2015, November 23, 2015, December 31, 2015 and February 8, 2016 (collectively, the “Silver Star Notes”).
All of the Silver Star Notes have been assigned to other parties.
To date, we have had difficulty
in obtaining the remaining funding required from Silver Star under the Line of Credit. In an effort to raise funding for ongoing
expenses and as a replacement for the amounts previously sought from Silver Star, on March 29, 2016, and effective March 11, 2016,
we entered into a Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with HFT Enterprises,
LLC (“HFT”). Pursuant to the Note Purchase Agreement, we agreed to sell and HFT agreed to purchase, an aggregate of
$600,000 in convertible promissory notes, including $300,000 in convertible promissory notes purchased on March 29, 2016, to be
effective on March 11, 2016, $150,000 in convertible promissory notes purchased on March 29, 2016, to be effective on March 25,
2016, and $150,000 in convertible promissory notes required to be purchased by HFT or its assigns on or prior to April 30, 2016.
We also agreed to issue HFT warrants to purchase 124,285 shares of common stock with an exercise price of $1.50 per share, at such
time as an aggregate of $600,000 in convertible promissory notes have been sold.
On April 11, 2016, we entered
into an Assignment, Assumption and Amendment to Line of Credit and Notes Agreement (the “Line of Credit Amendment”)
with Target Alliance London Limited, pursuant to which we agreed to issue the remaining $1.4 million in convertible promissory
notes under the Line of Credit at a conversion price of $3.25 per share to Target Alliance London Limited and to issue warrants
to purchase 51,562 shares of common stock at an exercise price of $3.25 per share for each $250,000 in convertible promissory notes
that are issued to Target Alliance London Limited.
The Silver Star Notes are
due and payable on October 1, 2016. The HFT convertible promissory notes are due and payable on the anniversary of their respective
issuance dates. The Target Alliance London Limited convertible promissory notes are due and payable on April 11, 2017 unless otherwise
agreed between the parties. All the convertible promissory notes accrue interest at the rate of 6% per annum (15% upon the occurrence
of an event of default), and allow the holder thereof the right to convert the principal and interest due thereunder into Common
Stock at a conversion price of $1.50 per share with respect to the Silver Star Notes and HFT convertible promissory notes and at
a conversion price of $3.25 per share with respect to the Target Alliance London Limited convertible promissory notes. We have the right to prepay the convertible promissory notes.
The convertible promissory notes include customary events of default for facilities of similar nature and size.
Convertible Redeemable
Subordinated Debenture
On April 6, 2016, we entered
into a Securities Purchase Agreement with an accredited institutional investor, pursuant to which we sold and issued a redeemable
convertible subordinated debenture, with a face amount of $530,000, convertible into 163,077 shares of Common Stock at a conversion
price equal to $3.25 per share (the “Debenture”). The investor purchased the Debenture at a 5.0% original issue discount
for the sum of $500,000.
The Debenture matures in
seven years and accrues interest at a rate of 6.0% per annum, subject to adjustment as provided in the Debenture. The Debenture
converts into shares of common stock at $3.25 per share automatically upon the earlier of (i) the maturity date or (ii) the last
to occur of the closing of the Acquisition or the date on which certain equity conditions (as defined in the Debenture) have been
met. The Debenture also may be converted into shares of common stock at $3.25 per share (i) in the sole and absolute discretion
of investor at any time or times after issuance, or (ii) at our option if certain equity conditions are met. Upon conversion of
the Debenture, we will pay a conversion premium equal to the amount of unpaid interest that would have otherwise been due if the
Debenture had been held through the maturity date, with respect to the portion of Debenture being converted.
Accrued interest under
the Debenture is payable upon conversion, redemption or maturity of the Debenture, in cash or, at our discretion, shares of common
stock calculated by using 95% of the average of the lowest 5 individual daily volume weighted average prices during the measuring
period, not to exceed 100% of the lowest sales prices on the last day of such period, less $0.05 per share of common stock. Following
a trigger event (as defined in the Debenture), the number of shares to be issued will be calculated by using 85% of the lowest daily volume weighted average price during the measuring period, less $0.10 per share of Common
Stock not to exceed 85% of the lowest sales prices on the last day of such period less $0.10 per share.
The interest rate on the
Debenture will adjust upward by 100 basis points for each $0.10 that the volume weighted average price of our Common Stock on
any trading day as of which the interest rate is determined and calculated is below $2.75, subject to a maximum interest rate
of 24.95%. The interest rate also will adjust upward by 10.0% following the occurrence of any trigger event. The interest rate on the Debenture will adjust downward by 100 basis points for each $0.10 that the volume weighted
average price of our Common Stock on any trading day as of which the interest rate is determined and calculated is above $3.75,
subject to a minimum interest rate of 0%.
To the extent the Debenture
has not automatically converted in full into shares of common stock prior to the maturity date, the face value of the outstanding
Debenture, together with all interest accrued thereunder, is payable in cash by us on the maturity date. The outstanding Debenture, together with accrued and unpaid
interest, automatically becomes payable in the event of a deemed liquidation event (as defined in the Debenture).