On April 6,
2016, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the Selling Stockholder,
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”) and a warrant
to purchase 1,384,616 shares of Common Stock (subject to adjustment thereunder) at an exercise price equal to $3.25 per share (the
“First Warrant”). The Selling Stockholder purchased the Debenture at a 5.0% original issue discount for the sum of
$500,000 and has exercised the First Warrant for the sum of $4.5 million.
Also on April
6, 2016, we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with the Selling Stockholder,
pursuant to which we agreed, subject to certain conditions, to issue 527 shares of Series C redeemable convertible preferred stock
(the “Series C Preferred Stock”) at a 5% original issue discount, convertible into 1,618,462 shares of Common Stock
at a conversion price of $3.25 per share, and a warrant to purchase 1,111,112 shares of Common Stock at an exercise price of $4.50
per share (the “Second Warrant”). Under the terms of the Stock Purchase Agreement, the Second Warrant and 53 shares
of Series C Preferred Stock were sold and issued for $500,000 on September 2, 2016, and the remaining 474 shares of Series C Preferred
Stock will be sold and issued for $4.5 million immediately after there is an effective registration statement covering the shares
of Common Stock issuable upon conversion of the Series C Preferred Stock.
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 may be converted into shares of Common Stock at $3.25 per share in the sole and absolute discretion of the Selling Stockholder
at any time or times after issuance. 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. A trigger event occurred on June 30, 2016 as
a result of the delay in filing our Annual Report on Form 10-K for the year ended March 31, 2016.
The interest
rate on the Debenture will adjust upward by 100 basis points for each $0.10 that the volume weighted average price of 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 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 been 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).
The First Warrant
entitled the Selling Stockholder, upon exercise thereof, to purchase 1,384,616 shares of Common Stock at a purchase price of $3.25
per share. The First Warrant was 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 First Warrant accrued a premium at a rate equal to 6.0% per annum, subject to adjustment as provided in
the First Warrant, payable upon redemption or exercise. Upon exercise of the First Warrant, we paid the conversion premium that
would have otherwise been due if the First Warrant had been held through the maturity date, with respect to the portion of the
First Warrant being exercised. In connection with the exercise of the First Warrant on October 7, 2016, we issued 810,000 shares
of Common Stock, and the remaining 3,117,351 shares of Common Stock for the exercise and payment of conversion premium under the
First Warrant are being held in abeyance until such time as it would not result in the investor exceeding its beneficial ownership
limitation.
The conversion
premium under the First Warrant was payable and adjustable on the same terms and conditions as accrued interest is payable and
adjustable under the Debenture. The First Warrant had a maturity date that is seven years after the date of issuance and, if the
First Warrant had not been wholly exercised into shares of Common Stock prior to such date, we could redeem the First Warrant on
such date by repaying to the Selling Stockholder in cash the purchase price paid under the First Warrant. The purchase price paid
under the First Warrant, together with the conversion premium, automatically would have become payable with respect to the unexercised
portion of the First Warrant in the event of a liquidation, dissolution or winding up by us.
The holder
of the Series C Preferred Stock will be 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 Redeemable Convertible Preferred Stock (the “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 holder of the Series
C Preferred Stock being converted and amount, in cash or stock at our sole discretion, equal to the dividends that such shares
would have otherwise earned if they had been held through the maturity date, and issue to the holder 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 above. 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 Selling Stockholder 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.
The Second
Warrant entitles the Selling Stockholder, upon exercise thereof, to purchase 1,111,112 shares of Common Stock at a purchase price
of $4.50 per share. The Second Warrant has the same terms and conditions as the First Warrant described above, except that (i)
it may be exercised before March 31, 2017 by mutual agreement of us and the Selling Stockholder upon delivery of notice from us
or the Selling Stockholder, (ii) the exercise price is $4.50 per share and (iii) the conversion premium adjustment thresholds are
set at $4.00 and $5.00, respectively. 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.
Notwithstanding
the foregoing, we may not issue shares of Common Stock upon conversion of the Debenture, conversion of the Series C Preferred Stock
or exercise of the First Warrant and Second Warrant to the extent such conversion or exercise would result in the Selling Stockholder
owning more than 4.99% of all Common Stock outstanding immediately after giving effect to such issuance, as determined in accordance
with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder; provided, however, that the Selling
Stockholder may increase such amount to 9.99% upon not less than 61 days’ prior notice to us.
We have agreed
to register for resale the shares of Common Stock issuable upon conversion of the Debenture, conversion of the Series C Preferred
Stock and exercise of the First Warrant and Second Warrant.
We also agreed
that, subject to certain customary exceptions, (i) until 60 days after the respective registration statements described above
are declared effective, we will not issue or enter into an agreement to issue any shares of Common Stock and (ii) until 6 months
after the entire Debenture, Series C Preferred Stock, First Warrant and Second Warrant have been converted, redeemed or exercised,
we will not (1) enter into any agreement that in any way restricts our ability to enter into any agreement, amendment or waiver
with the Selling Stockholder, including without limitation any agreement to offer, sell or issue to the Selling Stockholder any
preferred stock, common stock or other securities or (2) enter into any equity or convertible financing pursuant to which shares
of Common Stock or Common Stock equivalents may effectively be issued (i) at a discount, (ii) at a variable price, or (iii) where
the price or number of shares are subject to any type of variability or reset feature.
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, both 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 October 11, 2016, this would result in the issuance
of approximately 3,942,857 shares of Common Stock, which is equivalent to approximately 19.1% of our Common Stock outstanding
as of October 11, 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 35.6% of our outstanding shares of Common Stock, Alan
W. Dreeben beneficially owns approximately 10.7% of our outstanding shares of Common Stock and, collectively, the Sellers
beneficially own approximately 82.1% 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 within 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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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.
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 meet the closing conditions to receive funds under the April 2016 Securities Purchase Agreement
and Stock Purchase Agreement, timely or at all.
Pursuant to our April 2016 Securities Purchase Agreement and Stock Purchase Agreement, we may not receive
up to $10 million in proceeds if closing conditions are not met, including 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, and are
unable to obtain replacement financing, 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 October
11, 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 October 11, 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 October 11, 2016, Convertible Promissory
Notes in the principal amount of $1.45 million 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 the Debenture and Series C Preferred Stock 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 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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In 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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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, 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 which has been
accepted by the Exchange, and 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 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 October 11, 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; 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 16,736,927
shares of common stock issued and outstanding as of October 11, 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 October 11, 2016, we have 16,736,927 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 October 11, 2016, we have (i) 16,736,927
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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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 October 11,
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 an amount, in cash or stock at our sole discretion, equal to the 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 October 11,
2016, 53 shares of Series C Convertible Preferred Stock are issued and outstanding.
Warrants
As of October 11,
2016, we have a total of 1,367,560 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 October 11, 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 October
11, 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 October 11, 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 October 11, 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 October 11,
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
October 11, 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 the Second Warrant, in connection with the Stock Purchase Agreement entered into on April 6,
2016, which 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 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.
The Second Warrant accrues a premium at a rate equal to 6.0% per annum, subject to adjustment as provided
in the Second Warrant, payable upon redemption or exercise. Upon exercise of the Second Warrant, we will pay the conversion premium
that would have otherwise been due if the Second Warrant had been held through the maturity date, with respect to the portion of
Second Warrant being exercised. The Second Warrant may not be exercised on a cashless basis.
The conversion premium under the Second Warrant 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 Second Warrant has a maturity date that is seven
years after the date of issuance and, if the Second Warrant has not been wholly exercised into shares of Common Stock prior to
such date, we may redeem the Second Warrant on such date by repaying to the investor in cash the purchase price paid under the
Second Warrant. The purchase price paid under the Second Warrant, together with the conversion premium, automatically becomes payable
with respect to the unexercised portion of the Second Warrant 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.
In connection with the exercise of the First Warrant on October 7, 2016, we issued 810,000 shares of Common
Stock, and the remaining 3,117,351 shares of Common Stock for the exercise and payment of conversion premium under the First Warrant
are being held in abeyance until such time as it would not result in the investor exceeding its beneficial ownership limitation.
Stock Options
As of October 11,
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 may be converted into shares of common stock at $3.25 per share in the sole and absolute discretion
of investor at any time or times after issuance. 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 been 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).