NECA New America Energy Corporation (PK)

ITEM 1A. RISK FACTORS

An investment in our securities should be considered highly speculative due to various factors, including the nature of our business and the present stage of our development. An investment in our securities should only be undertaken by persons who have sufficient financial resources to afford the total loss of their investment. In addition to the usual risks associated with investment in a business, the following is a general description of significant risk factors which should be considered. You should carefully consider the following material risk factors and all other information contained in this Annual Report before deciding to invest in our Common Shares. If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected. Additional risks and uncertainties we do not presently know or that we currently deem immaterial may also impair our business, financial condition or operating results.

The risks and uncertainties described below could materially and adversely affect our business, financial condition and results of operations and could cause actual results to differ materially from our expectations and projections. You should read these Risk Factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our consolidated financial statements and related notes in Item 8. There also may be other factors that we cannot anticipate or that are not described in this report generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from our expectations.

Risks Relating to Our Business and Industry

The industry in which we operate is strictly regulated at both the state and federal levels. Changes in applicable laws and regulations governing consumer protection, lending practices and other aspects of our business, or our failure to comply with applicable laws and regulations, could have a significant adverse impact on our business, results of operations, financial condition and ability to service our debt obligations.

Our business and products are subject to extensive regulation by state, federal and local governments that may impose significant costs or limitations on the way we conduct or expand our business. In general, these regulations are intended to protect consumers, not our investors or creditors.

Our business operates under a variety of state statutes and regulations, including those relating to:

·licensing and posting of fees; 

·lending practices, including disclosure requirements such as those contained in state truth in lending laws and related consumer protection laws; 

·interest rates and fees; 

·currency reporting; 

·recording and reporting of certain financial transactions; 

·privacy and data security of personal consumer information; 

·prompt remittance of excess proceeds from the sale of repossessed automobiles in certain states in which we operate; and 

·serving as a credit services organization, or “CSO,” in certain states in which we may expand our operations. 

Most states with laws that specifically regulate our products and services establish allowable fees, interest and other financial terms. In addition, many states regulate the maximum amount, maturity and renewal or extension of terms for the loans we provide. The terms of our products and services vary from state to state in order to comply with the specific laws and regulations of those states. For example, we are prohibited from providing automobile title loans in excess of $2,500 in Mississippi and Tennessee, $3,500 in Florida and $4,000 in Illinois (under certain circumstances). In addition, we may not provide an automobile title loan to a customer under the age of 19 in

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Alabama and under the age of 18 in all other states in which we currently operate. Our business is primarily regulated at the state level, although at the federal level, we are subject to requirements applicable to military personnel and certain federal lending requirements such as Truth in Lending disclosure requirements. Our failure or the failure of any of our employees to comply with applicable state and federal requirements, whether voluntary or involuntary, could require us to discontinue our automobile title lending business in applicable jurisdictions, which could negatively impact our business. Failure to comply with applicable laws or regulations could result in sanctions by regulatory agencies, civil money penalties or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.

The laws and regulations governing our business are subject to change. In recent years, certain consumer advocacy groups and federal and state legislators have asserted that laws and regulations should be tightened to severely limit, if not eliminate, the availability of certain consumer loan products, including title loans.

The Dodd-Frank Act, as well as proposed legislation in various states if adopted, could negatively affect our business and results of operations.

The Dodd-Frank Act that took effect on July 21, 2010 is extensive and significant legislation that, among other things:

·creates a liquidation framework for the resolution of large bank holding companies and systemically significant nonbank financial companies; 

·creates a new framework for the regulation of over-the-counter derivatives activities; 

·strengthens the regulatory oversight of securities and capital markets activities by the SEC; and 

·creates the CFPB, a new federal authority responsible for administering and enforcing the laws and regulations for consumer financial products and services. 

The Dodd-Frank Act will impact the offering, marketing and regulation of consumer financial products and services offered by financial institutions, which may include the products and services offered by the Company. The CFPB has supervision, examination and enforcement authority over the consumer financial products and services of certain non-depository institutions, which could include the Company. Compliance with the regulations implemented under the Dodd-Frank Act or the oversight of the SEC or CFPB may impose costs on, create operational constraints for or place limits on pricing with respect to finance companies such as the Company. Until implementing regulations are issued, no assurance can be given that these new requirements imposed by the Dodd-Frank Act will not increase our cost of doing business, impose new restrictions on the way in which we conduct our business or add significant operational constraints that might impair our profitability. The CFPB also has the power to define and ban “unfair, deceptive or abusive” practices in connection with consumer products.

We are currently following legislative and regulatory developments in Congress and in individual states where we conduct business. It is difficult to assess the likelihood of the enactment of any unfavorable federal or state legislation, and there can be no assurance that additional legislative or regulatory initiatives will not be enacted which would severely restrict, prohibit or eliminate our ability to offer title loans. Any federal or state legislative or regulatory action that would serve to restrict the types of activities in which the Company is engaged could have a material adverse impact on our business, prospects, results of operations, financial condition and cash flows and could impair our ability to service our debt obligations and to continue current operations. Examples of such actions include, among others, the imposition of limits on APRs on consumer loan transactions or the prohibition of cash advance and similar services. The extent of the impact of any future legislative or regulatory changes will depend on the nature of the legislative or regulatory change, the jurisdictions to which the new or modified laws would apply and the amount of business we do in that jurisdiction. Moreover, similar actions by states in which we do not currently operate could limit our opportunities to pursue our growth strategies.

In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning regulation and permit licensing. Local jurisdictions’ efforts to restrict the business of alternative financial services product providers through the use of local zoning and permitting laws have been on the rise.

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Actions taken in the future by local governing bodies to require special use permits or impose other restrictions on such lenders could have a material adverse effect on us. For example, the Dallas and Austin, Texas City Councils both recently passed ordinances that would restrict extensions of consumer credit by title lenders within city limits by, among other things, linking maximum allowable loan size to 3% of a consumer’s gross annual income, mandating a 25% principal reduction requirement on refinances or renewals and limiting the term of a loan to no more than four months.

Failure to maintain certain criteria required by state and local regulatory bodies could result in fines or the loss of our licenses to conduct business.

Most states in which we operate require licenses to conduct our business. These states or their respective regulatory bodies have established criteria we must meet in order to obtain, maintain and renew those licenses. For example, many of the states in which we operate require us to maintain a minimum amount of net worth or equity. From time to time, we are subject to audits in these states to ensure we are meeting the applicable requirements to maintain these licenses. Failure to meet these requirements could result in the revocation of our existing licenses, the denial of our new licensing requests or the imposition of fines, which could adversely affect our results of operations, cash flows and ability to service our debt obligations. We also cannot guarantee that future license applications or renewals will not be denied. If we were to lose any of our licenses to conduct our business, it could result in the temporary or permanent closure of stores, which could adversely affect our results of operations, cash flows and ability to service our debt obligations.

Media reports and public perception of consumer loans, such as automobile title loans, as being predatory or abusive could materially adversely affect our business.

Certain consumer advocacy groups and federal and state legislators have asserted that laws and regulations should be tightened to severely limit, if not eliminate, the availability of certain loan products, such as automobile title loans, to consumers. The consumer advocacy groups and media reports generally focus on the cost to a consumer for this type of loan, which is often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories. The consumer advocacy groups and media reports characterize these consumer loans as predatory or abusive without discussing the lack of viable alternatives for our customers’ borrowing needs or the comparatively higher cost to the customer when alternatives are not available. If the negative characterization of these types of loans becomes increasingly accepted by consumers, demand for automobile title loans could significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.

Legal proceedings may have a material adverse impact on our results of operations, cash flows, financial condition and ability to service our debt obligations.

In the past, we and our competitors have been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of alternative financial services. We are currently a defendant in multiple legal proceedings. See “Item 3. Legal Proceedings.” It is likely that in the future, we will be subject to currently unforeseen legal proceedings. The adverse resolution of any current or future legal proceeding could cause us to have to refund fees and interest collected, refund the principal amount of advances, pay damages or other monetary penalties or modify or terminate our operations in certain local, state or federal jurisdictions. The defense of such legal proceedings, even if successful, requires significant time and attention of our senior officers and other management personnel that would otherwise be spent on other aspects of our business and requires the expenditure of substantial amounts for legal fees and other related costs. Settlement of lawsuits may also result in significant cash payouts and modifications to our operations. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual has been provided, we are unable to reasonably estimate the range of loss, if any, at this time in connection with the legal proceedings in which we are currently involved. An adverse judgment or settlement of a legal proceeding may substantially exceed any amount currently accrued and could have a material adverse effect on our business, future results of operations, financial condition and ability to service our debt obligations.

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Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use illegal or unenforceable.

We include pre-dispute arbitration provisions in our loan agreements. These provisions are designed to allow us to resolve any customer disputes through individual arbitration rather than in court. Our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. They do not generally have any impact on regulatory enforcement proceedings.

We take the position that the Federal Arbitration Act requires the enforcement in accordance with the terms of arbitration agreements containing class action waivers of the type we use. While many courts, particularly federal courts, have agreed with this argument in cases involving other parties, an increasing number of courts, including courts in California, Missouri, Washington, New Jersey, and a number of other states, have concluded that arbitration agreements with class action waivers are “unconscionable” and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis.

While the U.S. Supreme Court recently ruled in the AT&T Mobility v. Concepcion case that consumer arbitration agreements meeting certain specifications are enforceable, our arbitration agreements differ in several respects from the agreement at issue in that case, thereby potentially limiting the precedential effect of the decision on our business. In addition, Congress has considered legislation that would generally limit or prohibit mandatory pre-dispute arbitration in consumer contracts and has adopted such a prohibition with respect to certain mortgage loans and also certain consumer loans to members of the military on active duty and their dependents. Further, the Dodd-Frank Act directs the CFPB to study consumer arbitration and report to Congress, and authorizes the CFPB to adopt rules limiting or prohibiting consumer arbitration, consistent with the results of its study. Any such rule would apply to arbitration agreements entered into more than six months after the final rule becomes effective (and not to prior arbitration agreements).

Any judicial decisions, legislation or other rules or regulations that impair our ability to enter into and enforce pre-dispute consumer arbitration agreements could significantly increase our exposure to class action litigation as well as litigation in plaintiff-friendly jurisdictions. Such litigation could have a material adverse effect on our business, results of operations and financial condition.

If our insurance coverage limits are inadequate to cover our liabilities or we suffer losses due to one or more of our insurance carriers defaulting on their obligations, our financial condition and results of operations could be materially adversely affected.

As a result of the liability risks inherent in our line of business, we maintain liability insurance intended to cover various types of property, casualty and other risks. The types and amounts of insurance that we obtain vary from time to time, depending on availability, cost and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. Our insurance policies are subject to annual renewal. The coverage limits of our insurance policies may not be adequate, and we may not be able to obtain liability insurance in the future on acceptable terms or at all. In addition, our insurance premiums may be subject to increases in the future which may be material. Furthermore, the losses that are insured through commercial insurance are subject to the credit risk of those insurance companies. While we believe our commercial insurance providers are currently credit worthy, we cannot assure you that such insurance companies will remain so in the future. Inadequate insurance coverage limits, increases in our insurance costs or losses suffered due to one or more of our insurance carriers defaulting on their obligations, could have a material adverse effect on our financial condition and results of operations.

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If we lose key management or are unable to attract and retain the management talent required to operate and grow our business, our business, results of operations, cash flows, financial condition and ability to service our debt obligations could be negatively affected.

Our continued growth and future success will depend on our ability to retain the members of our senior management team, who possess valuable knowledge of, and experience with, the legal and regulatory environment of our industry and who have been instrumental in developing our strategic plans and procuring capital to enable the pursuit of those plans. The loss of the services of members of senior management, together with any inability to attract new skilled management, could harm our business and future development.

The interests of our sole member may be different than those of our investors.

Jeff Canouse is our founder, Chairman of the Board, Chief Executive Officer and sole member As a result, Mr. Canouse has the ability to control substantially all matters of significance to the Company, including the strategic direction of our business, the approval or rejection of a sale, merger, consolidation or other business combination, the issuances of additional equity or debt securities, amendments of our organizational documents, the entering into of related party transactions and the dissolution and liquidation of the Company.

As a result of Mr. Canouse’s control of our Company, his interests could conflict with the interests of the Company’s other shareholders and debtholders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Mr. Canouse’s interests owner might conflict with the interests of our other stakeholders. Mr. Canouse might also have an interest in pursuing transactions that, in his judgment, could enhance his equity investment, even though such transactions might involve risks to our other stakeholders. In addition, Mr. Canouse could cause us to make acquisitions that increase the amount of our indebtedness or sell assets, either of which may impair our ability to make payments under the notes.

Economic recession, unemployment and other factors that result in a reduction in demand for our products and services and failure by us to adapt to such a reduction could adversely affect our business and results of operations, as well as our ability to service our debt obligations.

Factors that influence demand for our products and services include macroeconomic conditions such as employment, personal income and consumer sentiment. If consumers become more pessimistic regarding the outlook for the economy and therefore spend less and save more, demand for title loans may decline. In addition, weakened economic conditions may result in an increase in loan defaults and loan losses. We can give no assurance that we will be able to sustain our current bad debt rates or that we will not experience increasing difficulty in collecting defaulted loans. Further, in an economic slowdown, we could be required to tighten our underwriting standards, which likely would reduce our loan balances.

Worldwide pandemic, such as the coronavirus may result in an almost total elimination for the demand for our services.

Should we fail to adapt to significant changes in consumers’ demand for our products or services, our revenues could decrease significantly and our operations could be harmed. Even if we do make changes to existing products or services or introduce new products or services to fulfill consumer demand, consumers may resist or may reject such products or services.

We are subject to liabilities for claims related to repossession of automobiles.

We use approved third-party providers in connection with the repossession of defaulting customers’ automobiles. We typically enter into agreements with these providers in which they indemnify us for all losses related to claims arising from a repossession and warrant that they maintain insurance sufficient to cover such claims and indemnification obligations; however, we do not enter into these agreements with every third-party provider. We are subject to the risk that any third-party provider that we use may not have sufficient insurance to cover such claims or indemnification obligations. In such event, we may be subject to claims of customers related to repossession, which could have an adverse effect on our business.

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Disruptions in the credit and capital markets could negatively impact the availability and cost of borrowing, which could adversely affect our results of operations, cash flows, financial condition and ability to service our debt obligations.

Borrowed funds represent a significant portion of our capital. We rely on borrowed capital, together with cash flows from operations, to fund our working capital needs, including making title loans. Disruptions in the credit and capital markets, such as those experienced in 2008 and 2009, could adversely affect our ability to obtain capital to make title loans and to refinance existing debt obligations. Efficient access to these markets is critical to our ongoing financial success; however, our future access to the credit and debt capital markets could become restricted due to a variety of factors, including a deterioration of our earnings, cash flow, balance sheet quality or overall business or industry prospects, a sustained disruption or further deterioration in the state of the credit or capital markets or a negative bias toward our industry by market participants. The disruptions and volatility in the credit and capital markets in 2008 and 2009 have caused banks and other credit providers to restrict availability of new credit facilities and require higher pricing upon renewal of existing credit facilities. Our ability to obtain additional financing in the future will depend in part upon prevailing credit and capital markets conditions, and the current state of the credit and capital markets may adversely affect our efforts to arrange additional financing on satisfactory terms. If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future title loans, take advantage of acquisitions or other opportunities or respond to competitive challenges.

Changes in credit ratings issued by statistical rating organizations could adversely affect our costs of financing.

Credit rating agencies rate our indebtedness based on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing us on a watch list for possible future downgrading. Downgrading the credit rating of our indebtedness or placing us on a watch list for possible future downgrading could limit our ability to access the capital markets to meet liquidity needs and refinance maturing liabilities or increase the interest rates and our cost of financing.

Competition in the financial services industry could cause us to lose market share and revenues.

The industry in which we operate has low barriers to entry and is highly fragmented and very competitive. We encounter significant competition from other automobile title lending companies, pawnshops, installment lending companies, online lenders, consumer finance companies and providers of other forms of alternative financial services, many of which have significantly greater financial resources than we do. Significant increases in the number or size of competitors or other changes in competitive influences could cause us to lose market share and experience slowing or declining revenues, thereby affecting our ability to generate sufficient cash flow to fund our operations and service our indebtedness. We cannot assure you that we will be able to compete successfully with our competitors.

Competition for market share will likely intensify. Increased competition could lead to consolidation within the industry. If our competitors get stronger through consolidation and we are unable to identify attractive consolidation opportunities, we could be at a competitive disadvantage and experience declining market share and revenue. If these events materialize, they could negatively affect our ability to generate sufficient cash flow to fund our operations and service our indebtedness.

In addition to increasing competition among traditional providers of alternative financial services to consumers, there is a risk of losing market share to new market entrants such as banks and credit unions. Several large financial institutions have introduced payday-like products in the last few years. Broad consumer adoption of these alternatives could reduce the number of loans we make and adversely affect our cash flows.

Our growth strategy calls for opening additional stores, both in states in which we currently operate and states into which we are looking to expand. If our competitors aggressively pursue store expansion, competition for store sites could result in a failure to open the planned number of stores and could result in increased costs to procure desired locations, both of which could impair our results of operations.

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External factors and other circumstances over which we have limited control or that are beyond our control could adversely affect our ability to grow through the opening of new stores.

Our expansion strategy includes opening new stores. The success of this strategy is subject to numerous external factors, including, but not limited to:

·the availability of sites with acceptable restrictions and suitable terms; 

·our ability to attract, train and retain qualified store management personnel; 

·our ability to access capital; 

·our ability to obtain required government permits and licenses; 

·the prevailing laws and regulatory environment of each state or jurisdiction in which we operate or seek to operate, which are subject to change at any time; and 

·the degree of competition in new markets and its effect on our ability to attract new customers and our ability to adapt our infrastructure and systems to accommodate our growth. 

Some of these factors are outside of our control. The failure to execute our expansion strategy would adversely affect our ability to expand our business and could materially adversely affect our business, prospects, results of operations and financial condition.

If our estimates of allowance for loan losses and accrual for losses on loans we process and guarantee for an unconsolidated third-party lender are not adequate to absorb losses, our results of operations and financial condition may be negatively affected.

We maintain an allowance for loan losses for estimated probable losses on our title loans.. These reserves, however, are estimates, and if actual losses are greater than our reserves, our results of operations and financial condition could be adversely affected.

Our business and results of operations may be adversely affected if we are unable to manage our growth effectively.

There can be no assurance that we will be able to continue to grow our business or that our current business, results of operations and financial condition will not suffer if we fail to prudently manage our growth. Failure to grow the business and generate estimated future levels of cash flow could inhibit our ability to service our debt obligations. Our expansion strategy, which contemplates growing our title loans receivable in existing stores, opening new stores in existing markets and opening new stores in new markets, is subject to significant risks. Our current business and results of operations and any future growth depend upon a number of factors, including the ability to obtain and maintain financing to support these opportunities, the ability to hire, train and retain an adequate number of qualified employees, the ability to obtain and maintain any required government permits and licenses, the ability to successfully integrate any acquired operations as well as other factors, some of which are outside of our control, such as the continuation of favorable regulatory and legislative environments. Further, expansion into additional states will increase our regulatory and legal risks. Regulatory and legal actions could divert management’s attention away from executing our growth strategy. The profitability of our current operations could suffer as management’s attention is diverted toward our expansion plans.

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We may not be successful at entering new businesses or broadening the scope of our existing product and service offerings.

We may enter into new businesses that are adjacent or complementary to our existing businesses and that broaden the scope of our existing product and service offerings. We may not achieve our expected growth if we are not successful in these efforts. In addition, entering into new businesses and broadening the scope of our existing product and service offerings may require significant upfront expenditures that we may not be able to recoup in the future. These efforts may also divert management’s attention and expose us to new risks and regulations which may have a material adverse effect on our business, results of operations and financial condition.

In certain states, we rely on third parties to make loans to our customers, and the loss of access to any of these third parties could significantly increase our costs and change the way we operate in these jurisdictions.

In certain states, we operate as a CSO and therefore arrange for an unrelated third party to make loans to our customers. There are a limited number of third parties that make these types of loans, and there is significant demand and competition for the services of these third parties. These third parties rely on borrowed funds in order to make consumer loans. If these third parties lose their ability to make loans or become unwilling to make loans and we are unable to find another lending partner, our cost of arranging these loans may increase significantly and we could be forced to change the way we operate in these jurisdictions, which may have a material adverse effect on our financial results, make it difficult to operate profitably in these locations and negatively affect our ability to service our debt obligations.

We depend on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including minimum wage laws.

Our workforce is comprised primarily of employees who work on an hourly basis. In certain areas where we operate, there is significant competition for employees. The lack of availability of an adequate number of hourly employees or an increase in wages and benefits to current employees could adversely affect our business, results of operations, cash flows, financial condition and ability to service our debt obligations. We are subject to applicable rules and regulations relating to our relationship with our employees, including minimum wage and break requirements, health benefits, unemployment and sales taxes, overtime and working conditions and immigration status. Accordingly, legislated increases in the federal minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates and compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

Any disruption in the availability or security of our information systems could adversely affect our business operations.

We rely heavily upon our information systems to process customer loan transactions, account for our business activities and generate the reporting used by management for analytical and decision-making purposes. Each of our stores is part of an integrated data network designed to facilitate underwriting decisions, reconcile cash balances and report revenue and expense transaction data. Our back-up systems and security measures could fail to prevent a disruption in the availability or performance of our information systems. Any disruption in the availability or performance of our information systems could significantly disrupt our operations and cause us to lose customers and revenue. Further, a security breach of our information systems could also interrupt or damage our operations or harm our reputation. We could be subject to liability if confidential customer information is misappropriated from our information systems. Despite the implementation of significant security measures, our information systems may still be vulnerable to physical break-ins, computer viruses, programming errors, employee misappropriation and attacks by third parties or similar disruptive problems, which could require us to incur significant expense to eliminate these problems and address related data security concerns.

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We may be unable to protect our proprietary technology or keep up with that of our competitors.

The success of our business depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. In addition, competitors could, without violating our proprietary rights, develop technologies that are as good as or better than our technology. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as strong as our competitors’ could put us at a disadvantage to our competitors. Any such failures could have a material adverse effect on our business, prospects, results of operations and financial condition.

Adverse real estate market fluctuations could affect our profits.

We currently lease all of our locations. A significant rise in real estate prices or real property taxes could result in an increase in store lease costs as we open new locations and renew leases for existing locations. Any such increase, especially in Georgia could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our business is seasonal, which causes our revenues to fluctuate and may adversely affect our ability to service our debt.

Our business typically declines slightly in the first quarter as a result of customers’ receipt of tax refund checks. Demand for our services is generally greatest during the fourth quarter. This seasonality requires us to manage our cash flows over the course of the year. If the state or federal government were to pursue economic stimulus actions or issue additional tax refunds or tax credits at other times during the year, such actions could have a material adverse effect on our business, prospects, results of operations and financial condition during those periods. If our revenues were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted and our ability to service our debt may also be adversely affected.

We have incurred increased costs as a result of becoming subject to the reporting requirements of the Exchange Act, and such reporting requirements may divert management’s attention from our business.

Upon registration of our senior secured notes under the Securities Act of 1933, as amended, we became subject to a number of additional requirements, including certain requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act.” These requirements caused us to incur increased costs and might place a strain on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting, and also requires that our internal controls be assessed by management beginning with our fiscal year ending December 31, 2012. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. As a result, our management’s attention might be diverted from other business concerns, which could have a material adverse effect on our business, prospects, financial condition and results of operations. Further, we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. We will be testing our internal controls in connection with the Section 404 requirements and could, as part of that documentation and testing, identify material weaknesses, significant deficiencies or other areas for further attention or improvement. Implementing any appropriate changes to our internal controls may require specific compliance training for our managers, officers and employees, require the hiring of additional finance, accounting and other personnel, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business.

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Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the senior secured notes.

We have substantial indebtedness. As of December 31, 2011, we had approximately $346.1 million of total debt outstanding. Subject to restrictions in the Indenture, we may incur additional indebtedness.

Our substantial level of indebtedness could have important consequences to our bondholders and significant effects on our business, including the following:

·it may be more difficult for us to satisfy our financial obligations, including with respect to the notes; 

·our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions or general corporate purposes may be impaired; 

·we must use a substantial portion of our cash flow from operations to pay interest on the notes and our other indebtedness as well as to fund excess cash flow offers on the notes, which will reduce the funds available to use for operations and other purposes; 

·our ability to fund a change of control offer may be limited; 

·our substantial level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; 

·our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and 

·our substantial level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business. 

We expect to obtain the funds to pay our expenses and repay our indebtedness primarily from our operations and, in the case of our indebtedness, from a refinancing thereof. Our ability to meet our expenses and make these payments therefore depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, and our currently anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness, including the notes, or to fund other liquidity needs. If we do not have enough funds, we may be required to refinance all or part of our then existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.

Despite our current indebtedness level, we and any of our existing or future subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.

We and any of our existing and future subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of the Indenture contain limitations on our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions. If we incur any additional indebtedness that ranks equally with the notes, the holders of that additional debt will be entitled to share ratably with the holders of the notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of the Company, subject to any collateral securing the notes. If new debt is added to our or any of our existing and future subsidiaries’ current debt levels, the related risks that we now face could be exacerbated.

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RISKS RELATING TO OUR COMPANY

We currently have no source of operating cash flow and we have a history of operating losses.

We will not receive revenues from operations at any time in the near future, and we have no prior year’s history of earnings or cash flow. We have incurred losses. There can be no assurance that our operations will ever generate sufficient revenues to fund our continuing operations or that we will ever generate positive cash flow from our operations. Further, we can give no assurance that we will attain or sustain profitability in any future period.

We depend on our officers and directors and the loss of these individuals could adversely affect our business.

Our Company is completely dependent on our sole officer and director, Jeffrey M. Canouse.  We currently have no employees and the loss of either or both of these individuals could significantly and adversely affect our business.  We do not carry any life insurance on our directors and officers.

RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES

Our Common Stock Price May be Volatile

The trading price of our common stock may fluctuate substantially. The price of our common stock, at any given time, may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following: (i) price and volume fluctuations in the overall stock market from time to time; (ii) volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity anticipation securities, or leaps, or short trading positions; (iii)actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts; (iv) general economic conditions and trends; (v) loss of a major funding source; or (vi) departures of key personnel.

Because of the early stage of development and the nature of our business, our securities are considered highly speculative.

Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of its development. We are engaged in the business of exploring and, if warranted and feasible, developing natural resource properties. Our mining claims are in the exploration stage only and are without proven reserves of natural resources. Accordingly, we have not generated any revenues nor have we realized a profit from our -operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of natural resources, which itself is subject to numerous risk factors as set forth herein. Since we have not generated any revenues, we will have to raise additional monies through the sale of our equity securities or debt in order to continue our business operations.

We may, in the future, issue additional common shares that would reduce investors’ percent of ownership and may dilute our share value.

The future issuance of common shares may result in substantial dilution in the percentage of our common shares held by our then existing stockholders. We may value any common shares issued in the future on an arbitrary basis. The issuance of common shares for future services or acquisitions or other corporate actions may have the effect of diluting the value of the common shares held by our investors, and might have an adverse effect on any trading market for our common shares.

Market for Penny Stock has suffered in recent years from patterns of fraud and abuse.

Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include: (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices

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through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and, (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequential investor losses.

Our common shares are subject to the “Penny Stock” Rules of the SEC, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.

The SEC has adopted regulations that generally define a “penny stock” to be any equity security other than a security excluded from such definition by Rule 3a51-1 under the Securities Exchange Act of 1934, as amended. For the purposes relevant to our Company, it is any equity security that has a market price of less than $5.00 per share, subject to certain exceptions.

Our common shares are currently regarded as a “penny stock”, since our shares are not listed on a national stock exchange or quoted on the NASDAQ Market within the United States, to the extent the market price for its shares is less than $5.00 per share. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide a customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser's written agreement to the transaction.

To the extent these requirements may be applicable; they will reduce the level of trading activity in the secondary market for the common shares and may severely and adversely affect the ability of broker-dealers to sell the common shares.

FINRA sales practice requirements may also limit a stockholders ability to buy and sell our stock.

In addition to the penny stock rules promulgated by the SEC, which are discussed in the immediately preceding risk factor, FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.

Our common stock may experience extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.

Our common stock may be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including (but not necessarily limited to): (i) the trading volume of our shares; (ii) the number of securities analysts, market-makers and brokers following our common stock; (iii) changes in, or failure to achieve, financial estimates by securities analysts; (iv) actual or anticipated variations in quarterly operating results; (v) conditions or trends in our business industries; (vi) announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; (vii) additions or departures of key personnel; (viii) sales of our common stock; and (ix) general stock market price and volume fluctuations of publicly-trading and particularly , microcap companies.

Investors may have difficulty reselling shares of our common stock, either at or above the price they paid for our stock, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common

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stock to decline regardless of how well we perform as a company. In addition, there is a history of securities class action litigation following periods of volatility in the market price of a company’s securities. Although there is no such shareholder litigation currently pending or threatened against the Company, such a suit against us could result in the incursion of substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business. Moreover, and as noted below, our shares are currently traded on the OTCBB and, further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.

We have not and do not intend to pay any cash dividends on our common shares and, consequently, our stockholders will not be able to receive a return on their shares unless they sell them.

We intend to retain any future earnings to finance the development and expansion of our business. We have not, and do not, anticipate paying any cash dividends on our common shares in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.

A decline in the price of our common stock could affect our ability to raise further working capital, it may adversely impact our ability to continue operations and we may go out of business.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct our planned operations through the sale of equity securities, or convertible debt instruments, a decline in the price of our common stock could be detrimental to our liquidity and our operations because the decline may cause investors to not choose to invest in our stock. If we are unable to raise the funds we require for all our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As result, our business may suffer, and not be successful and we may go out of business. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced to go out of business.