NTQ Ntr Acquisition

Item 1A. Risk Factors.

 

You should consider carefully all of the material risks described below, together with the other information contained in this Annual Report on Form 10-K, before making a decision to invest in our units, stocks or warrants.

 

Risks Associated With Our Business

 

We are a development stage company with no operating history and no revenues, and you have no basis on which to evaluate our ability to achieve our business objective.

 

We are a recently incorporated development stage company with no operating results, and we will not commence operations until we complete the Acquisition or an alternate initial business combination. Because we lack an operating history, you have no basis on which to evaluate our ability to achieve our business objective of completing an initial business combination with one or more target businesses. We will not generate any revenues from operations until, at the earliest, after completing the Acquisition or an alternate initial business combination. We cannot assure you as to when, or if, the Acquisition may be approved by our shareholders, or if an initial business combination will occur. If we expend all of the $500,000 in proceeds from our initial public offering not held in trust and interest income earned of up to $3.25 million on the balance of the Trust Account that was released to us to fund our working capital requirements in negotiating the Acquisition and seeking to close an initial business combination generally, but fail to consummate the Acquisition or complete an alternate initial business combination, we may be forced to liquidate.

 

 

If we do not complete the Acquisition, we may not be able to consummate an initial business combination within the required time frame, in which case we will be forced to liquidate.

 

We must complete an initial business combination with a fair market value of at least 80% of the amount held in our Trust Account at the time of the initial business combination (excluding deferred underwriting discounts and commissions of $7.37 million) by January 30, 2009.  The Acquisition satisfies this criteria, but remains subject to approval by our stockholders at the Special Meeting.  If we fail to consummate the Acquisition or an alternate initial business combination within the required time frame, we will be forced to liquidate the Trust Account.  In addition, if we fail to consummate the Acquisition, our negotiating position and our ability to conduct adequate due diligence on an alternate potential target may be reduced as we approach the deadline for the consummation of an initial business combination.

 

If we liquidate before consummating the Acquisition or concluding an alternate  initial business combination, our public stockholders will receive less than $10.00 per share from the  distribution of Trust Account funds and our warrants will expire worthless.

 

If we are unable to consummate the Acquisition or complete an alternate initial business combination and must therefore liquidate our assets, the per-share liquidation distribution will be less than $10.00 because of the expenses associated with our IPO, our general and administrative expenses and the costs incurred in seeking an initial business combination. Furthermore, our outstanding warrants are not entitled to participate in a liquidation distribution and the warrants will therefore expire worthless if we liquidate before completing an initial business combination. For a more complete discussion of the effects on our stockholders if we are unable to consummate the Acquisition or complete an alternate initial business combination, please see “Business—Dissolution And Liquidation If No Business Combination” above.

 

An effective registration statement must be in place in order for a warrant holder to be able to exercise the warrants.

 

No warrants will be exercisable and we will not be obligated to issue shares of common stock upon exercise of warrants by a holder unless, at the time of such exercise, we have a registration statement under the Securities Act in effect covering the shares of common stock issuable upon exercise of the warrants. Although we have undertaken in the warrant agreement, and therefore have a contractual obligation, to use our best efforts to have a registration statement in effect covering shares of common stock issuable upon exercise of the warrants from the date the warrants become exercisable and to maintain a current prospectus relating to that common stock until the warrants expire or are redeemed, and we intend to comply with our undertaking, we cannot assure you that we will be able to do so. Holders of warrants may not be able to exercise their warrants, the market for the warrants may be limited and the warrants may be deprived of any value if there is no registration statement in effect covering the shares of common stock issuable upon exercise of the warrants or the prospectus relating to the common stock issuable upon the exercise of the warrants is not current. Holders of warrants will not be entitled to a cash settlement for their warrants if we fail to have a registration statement in effect or a current prospectus available relating to the common stock issuable upon exercise of the warrants, and holders’ only remedies in such event will be those available if we are found by a court of law to have breached our contractual obligation to them by failing to do so.

 

So long as the founders’ warrants are held by any of our founders or their permitted transferees, those warrants will be exercisable even if, at the time of exercise, a registration statement relating to the common stock issuable upon exercise of such warrants is not in effect or a related current prospectus is not available. As a result, so long as they are held by any of our founders or their permitted transferees, the restrictions applicable to the exercise of the founders’ warrants will not be the same as those applicable to the exercise of our public warrants. The holders of the warrants issued in our initial public offering will not be able to exercise those warrants unless we have a registration statement covering the shares issuable upon their exercise in effect and a related current prospectus available.

 

You will not be entitled to protections normally afforded to investors in blank check companies.

 

Since the net proceeds of our initial public offering are intended to be used to complete an initial business combination, we may be deemed a “blank check” company under the United States securities laws. However, because upon consummation of our IPO we had net tangible assets in excess of $5,000,000, we are exempt from SEC rules that are designed to protect investors in blank check companies, such as Rule 419 under the Securities Act.  Among other things, this means we will have a longer period of time to complete a business combination in some circumstances than do companies subject to Rule 419. Moreover, offerings subject to Rule 419 would prohibit the release to us of any interest earned on funds held in the Trust Account unless and until the funds in the Trust Account were released to us in connection with the Acquisition or consummation of an alternate initial business combination.

 

 

Under Delaware law, a court could invalidate the requirement that certain provisions of our second amended and restated certificate of incorporation be amended only by unanimous consent of our stockholders; amendment of those provisions could reduce or eliminate the protections they afford to our stockholders.

 

Our second amended and restated certificate of incorporation contains certain requirements and restrictions relating to our IPO that will apply to us until the consummation of our initial business combination, including the Acquisition. Specifically, our second amended and restated certificate of incorporation provides, among other things, that:

 

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upon the consummation of our IPO, $240,124,168 consisting of (i) $234,274,168 of the net proceeds of our initial public offering, including $7.37 million of deferred underwriting discounts and commissions and (ii) $5,850,000 of proceeds from the sale of the founders’ securities, was placed into the Trust Account;

 

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prior to the consummation of our initial business combination, we shall submit the initial business combination to our stockholders for approval;

 

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we may consummate our initial business combination if approved by a majority of the shares of common stock voted by our public stockholders at a duly held stockholders meeting, and public stockholders owning less than 20% of the shares sold or currently issued (excluding founder, officers and directors) in the offering validly exercise their conversion rights;

 

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if a proposed initial business combination is approved and consummated, public stockholders who exercised their conversion rights and voted against the initial business combination may convert their shares into cash at the conversion price;

 

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if our initial business combination is not consummated by January 30, 2009, then our existence will terminate and we will distribute all amounts in the Trust Account on a pro rata basis to all of our public stockholders;

 

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we may not consummate any other business combination, merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar transaction prior to our initial business combination;

 

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we may not consummate our initial business combination with a person or entity affiliated with any of our officers or directors or any of their respective affiliates nor with any of the underwriters or selling group members or their respective affiliates;

 

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prior to our initial business combination, we may not issue stock that participates in any manner in the proceeds of the Trust Account, or that votes as a class with the common stock sold in the initial public offering on a business combination;

 

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our audit committee monitors compliance on a quarterly basis with the terms of our initial public offering and, if any noncompliance is identified, the audit committee is charged with the immediate responsibility to take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of our initial public offering; and

 

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the audit committee shall review and approve all payments made to our officers, directors and our and their affiliates, and any payments made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval.

 

Our second amended and restated certificate of incorporation requires that prior to the consummation of our initial business combination, including the Acquisition, we obtain unanimous consent of our stockholders to amend these provisions. However, the validity of unanimous consent provisions under Delaware law has not been settled. A court could conclude that the unanimous consent requirement constitutes a practical prohibition on amendment in violation of the stockholders’ statutory rights to amend the corporate charter. In that case, these provisions could be amended without unanimous consent, and any such amendment could reduce or eliminate the protection these provisions afford to our stockholders. However, we view all of the foregoing provisions, including the requirement that public stockholders owning less than 20% of the shares sold in our IPO exercise their conversion rights in order for us to consummate the Acquisition or an alternate initial business combination, as obligations to our stockholders, and neither we nor our board of directors will propose any amendment to these provisions, or support, endorse or recommend any proposal that stockholders amend any of these provisions at any time prior to the consummation of the Acquisition or an alternate initial business combination.

 

 

If third parties bring claims against us, or if we go bankrupt, the proceeds held in trust could be reduced.

 

Our placing of funds in the Trust Account may not protect those funds from third-party claims against us. Although prior to the completion of our initial business combination, we will seek to have all third parties (including any vendors or other entities we engage ) and any prospective target businesses enter into valid and enforceable agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account, there is no guarantee that they will execute such agreements.  However, to the extent we have engaged with certain third parties, we have asked for and have obtained such waiver agreements at this time, including from Kern and Casey.  It is also possible that such waiver agreements would be held unenforceable and there is no guarantee that the third parties would not otherwise challenge the agreements and later bring claims against the Trust Account for monies owed them. In the case of such a challenge, we will be responsible for the cost associated with defending the validity of the challenged waiver agreement. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the Trust Account for any reason. Accordingly, the proceeds held in trust could be subject to claims that will take priority over the claims of our public stockholders and, as a result, the per-share liquidation price could be less than the pro rata per share liquidation price.

 

Mr. Gilliam, Mr. Hantke, Mrs. Hendricks, Mr. Ortale and Mr. Rodriguez have agreed that they will be personally liable on a joint and several basis to the Company if and to the extent claims by third parties reduce the amounts in the Trust Account available for payment to our stockholders in the event of a liquidation and the claims are made by a vendor for services rendered, or products sold, to us or by a prospective business target. However, the agreements entered into by each of Mr. Gilliam, Mr. Hantke, Mrs. Hendricks, Mr. Ortale and Mr. Rodriguez specifically provide for two exceptions to the personal indemnity each has given: none will have any personal liability (1) as to any claimed amounts owed to a third party who executed a legally enforceable waiver, or (2) as to any claims under our indemnity of the underwriters of our initial public offering against certain liabilities, including liabilities under the Securities Act. These individuals’ personal liability does not extend to claims of third parties who executed a legally enforceable waiver because we believe that acceptance by a company’s officers and directors of personal liability for claims against that company is an extraordinary measure and that it would be unfair to these officers and directors if they remained personally liable despite having taken such steps as are available to them, such as obtaining legally enforceable waivers, to prevent such claims from arising against that company. Based on the information in the director and officer questionnaires provided to us in connection with our initial public offering as well as representations as to their accredited investor status (as such term is defined in Regulation D under the Securities Act), we currently believe that each of Mr. Gilliam, Mr. Hantke, Mrs. Hendricks, Mr. Ortale and Mr. Rodriguez is of substantial means and capable of funding his or her indemnity obligations, even though we have not asked any of them to reserve for such an eventuality. We cannot assure you, however, that they would be able to satisfy those obligations.

 

In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the Trust Account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the Trust Account, we cannot assure you that we will be able to return the full pro rata distribution to our public stockholders.

 

Our stockholders may be held liable for third parties’ claims against us to the extent of distributions received by them following our dissolution.

 

Our second amended and restated certificate of incorporation provides that we will continue in existence only until January 30, 2009. If we consummate the Acquisition or an alternate initial business combination prior to that date, we will amend this provision to permit our continued existence. If we have not completed the Acquisition or an alternate initial business combination by that date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating pursuant to Section 278 of the Delaware General Corporation Law. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by those stockholders in a dissolution. However, if the corporation complies with certain procedures intended to ensure that it makes reasonable provision for all claims against it, the liability of stockholders with respect to any claim against the corporation is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder. In addition, if the corporation undertakes additional specified procedures, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidation distributions are made to stockholders, any liability of stockholders would be barred after the third anniversary of the dissolution. While we intend to adopt a plan of dissolution and distribution making reasonable provision for claims against the company in compliance with the Delaware General Corporation Law, we do not intend to comply with these additional procedures, as we instead intend to distribute the balance in the Trust Account to our public stockholders as promptly as practicable following termination of our corporate existence. Accordingly, any liability our stockholders may have could extend beyond the third anniversary of our dissolution. We cannot assure you that any reserves for claims and liabilities that we believe to be reasonably adequate when we adopt our plan of dissolution and distribution will suffice. If such reserves are insufficient, stockholders who receive liquidation distributions may subsequently be held liable for claims by creditors of the Company to the extent of such distributions.

 

 

We will depend on the limited funds available outside of the Trust Account and a portion of the interest earned on the Trust Account balance to fund (i) the completion of the Acquisition or (ii) our search for an alternate target business or businesses if we fail to consummate the Acquisition.

 

Of the net proceeds of our initial public offering, $500,000 was available to us initially outside the Trust Account to fund our working capital requirements.  As of December 31, 2007, there was $1,658,019 available to us outside the Trust Account. We may also access funds under the Occidental Investment.  See “Occidental Investment” above.

 

Because of our limited resources and the significant competition for business combination opportunities, we may not be able to consummate an attractive alternate  initial business combination if we fail to consummate the Acquisition.

 

If we do not consummate the Acquisition, we will encounter intense competition from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds, other blank check companies and operating businesses in the energy or other industries competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire should we fail to consummate the Acquisition, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Further:

 

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our obligation to seek stockholder approval of a business combination may materially delay the consummation of a transaction;

 

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our obligation to convert into cash up to 20% of the shares of common stock held by public stockholders less one share in certain instances may materially reduce the resources available for a business combination; and

 

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our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses.

 

Any of these obligations may place us at a competitive disadvantage in successfully negotiating an alternate initial business combination. If the Acquisition is not consummated, we cannot assure you that we will be able to successfully compete for an attractive alternate initial business combination. Additionally, because of these factors, we cannot assure you that we will be able to effectuate an alternate initial business combination within the required time period. If we are unable to find a suitable alternate target business within the required time periods, we will be forced to liquidate.

 

We face significant competition from numerous companies with a business plan similar to ours seeking to effectuate a business combination.

 

There are numerous other blank check companies like ours that have recently completed initial public offerings and numerous others that have filed registration statements with the SEC seeking to go public. On the basis of publicly available information, we believe that, of these companies, only a limited number have consummated a business combination. Accordingly, there are a significant number of blank check companies similar to ours that are seeking to carry out a business plan similar to our business plan. While, like us, some of those companies have specific industries that they must complete a business combination in, a number of them may consummate a business combination in any industry they choose. We may therefore be subject to competition from these and other companies seeking to consummate a business plan similar to ours, which will, as a result, increase demand for privately held companies to combine with companies such as ours. Further, the fact that only a limited number of such companies have completed a business combination may be an indication that there are only a limited number of attractive target businesses available to such entities or that many privately held target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. If the Acquisition is not consummated, we cannot assure you that we will be able to successfully compete for an attractive alternate initial business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination by January 30, 2009. If we are unable to consummate the Acquisition and unable to find a suitable alternate target business by that date, we will be forced to liquidate.

 

 

We may be unable to obtain additional financing if necessary to complete our initial business combination or to fund the operations and growth of a target business, which could compel us to restructure or abandon a particular business combination.

 

We believe that the funds available to us, including through the IPO, the Occidental Investment and other sources of financing, are sufficient to allow us to consummate the Acquisition or, if necessary, locate an alternate initial business combination. However, we cannot assure you that we will be able to complete the Acquisition or an alternate initial business combination or that we will have sufficient capital with which to complete the Acquisition or combination with an alternate  target business.  We will be required to seek additional financing if the net proceeds of our initial public offering and the funds available to us under the Occidental Investment are not sufficient to close the Acquisition or facilitate an alternate initial business combination because:

 

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of the size of the target business;

 

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the initial public offering proceeds not in trust and funds available to us from interest earned on the Trust Account balance are insufficient to fund our search for and negotiations with a target business; or

 

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we must convert into cash a significant number of shares of common stock owned by public stockholders who elect to exercise their conversion rights and vote against the proposed business combination.

 

In addition, we cannot assure you that such financing will be available on acceptable terms, if at all. If additional financing is unavailable to consummate a particular business combination, we will be compelled to restructure or abandon it and seek an alternative target business.

 

In addition, it is possible that we could use a portion of the funds not in the Trust Account (including amounts we borrow, if any) to make a deposit (as in the case of the proposed Acquisition), down payment or fund a “no-shop” provision with respect to a particular proposed business combination. In the event that we are ultimately required to forfeit such funds, and we had already used up the funds allocated to due diligence and related expenses in connection with the aborted transaction, we could be left with insufficient funds to continue searching for, or conduct due diligence with respect to, other potential target businesses.

 

Even if we do not need additional financing to consummate an initial business combination, including the Acquisition, we may require additional capital—in the form of debt, equity, or a combination of both—to operate, grow or complete an upgrade of any potential refinery we may acquire. There can be no assurance that we will be able to obtain such additional capital if it is required. If we fail to secure such financing, this failure could have a material adverse effect on the operations or growth of the target business. None of our officers or directors or any other party is required to provide any financing to us in connection with, or following, our initial business combination.

 

We may issue capital stock or convertible debt securities to complete our initial business combination, which would reduce the equity interest of our stockholders and may cause a change in control of our ownership.

 

Our second amended and restated certificate of incorporation authorizes the issuance of up to 200,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share.  As of December 31, 2007, there are 163,192,795 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants, including the founders’ warrants), and all of the shares of preferred stock available for issuance.  We were formed to acquire a business through merger, capital stock exchange, or a combination of both, including through convertible debt securities, to complete a business combination. Our issuance of additional shares of common stock or any preferred stock:

 

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may significantly reduce the equity interest of our current stockholders;

 

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may subordinate the rights of holders of common stock if we issue preferred stock with rights senior to those afforded to our common stock;

 

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will likely cause a change in control if a substantial number of our shares of common stock are issued, which may among other things limit our ability to use any net operating loss carry forwards we have, and may result in the resignation or removal of our officers and directors; and

 

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may adversely affect the then-prevailing market price for our common stock.

 

Upon closing of the Acquisition, pursuant to the Series A Purchase Agreement, we are committed to issue to Occidental shares of our Convertible Stock for aggregate consideration of $35 million, plus the amount of any advances  to us of up to $3 million under a promissory note.  As of January 3, 2008, Occidental had advanced us a total of $1,625,000.  See “Occidental Investment” for additional information.

 

 

If we issue debt securities to acquire or finance a target business, our liquidity may be adversely affected and the combined business may face significant interest expense.

 

As discussed above in connection with the potential debt financing of the Acquisition, we may elect to enter into an initial business combination that requires us to issue debt securities as part of the purchase price for the target business. In addition, the energy industry is capital intensive, traditionally using substantial amounts of indebtedness to finance acquisitions, capital expenditures and working capital. If we issue debt securities, such issuances may result in an increase in interest expense for the post-combination business and may adversely affect our liquidity in the event of:

 

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a default and foreclosure on our assets if our operating cash flow after an initial business combination were insufficient to pay principal and interest obligations on our debt;

 

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an acceleration of our obligations to repay the indebtedness, which could occur even if we are then current in our debt service obligations if the debt securities have covenants that require us to meet certain financial ratios or maintain designated reserves, and such covenants are breached without waiver or renegotiation;

 

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a required immediate payment of all principal and accrued interest, if any, if the debt securities are payable on demand; or

 

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our inability to obtain any additional financing, if necessary, if the debt securities contain covenants restricting our ability to incur indebtedness.

 

Our founders may influence certain actions requiring a stockholder vote.

 

Our officers and directors collectively own 19.6% of our issued and outstanding shares of common stock. Each of our founders has agreed, in connection with the stockholder vote required to approve our initial business combination, to vote any initial founders’ shares such founder holds in accordance with a majority of the shares of common stock voted by the public stockholders, and each has agreed that for additional shares of common stock acquired during or following our initial public offering, it will vote all such acquired shares in favor of our initial business combination. Accordingly, shares of common stock owned by our founders will not have the same voting or conversion rights as those held by our public stockholders with respect to a potential business combination, and none of our founders will be eligible to exercise conversion rights for those shares if our initial business combination is approved by a majority of our public stockholders who vote in connection with our initial business combination.

 

In addition, our board of directors is and will be divided into three classes, each of which will generally serve for a term of three years, with only one class of directors being elected in each year. We do not plan to hold an annual meeting of stockholders to elect new directors until consummation of our initial business combination.  Therefore, all of the current directors will continue in office at least until after the consummation of our initial business combination. If there is an annual meeting of stockholders, as a consequence of our “staggered” board of directors, only a minority of the board of directors will be considered for election and our founders will have considerable influence on the outcome of that election. Accordingly, our founders will continue to exert control at least until the consummation of the initial business combination. None of our founders is prohibited from purchasing our common stock in the aftermarket. If they do so, they will have a greater influence on the vote taken in connection with our initial business combination.

 

Some of our current officers and directors may resign upon consummation the Acquisition or an alternate initial business combination.

 

Our ability to consummate the Acquisition or to effect an alternate initial business combination successfully will be largely dependent upon the efforts of our officers and directors. However, while it is possible that some of our officers and directors will remain associated with us in various capacities following our initial business combination, some of them may resign and some or all of the management of the target business may remain in place.

 

If we fail to consummate the Acquisition, we may have only limited ability to evaluate the management of an alternate target business.

 

If the Acquisition is not effected, we may have only limited ability to evaluate the management of an alternate target business. Although we intend to closely scrutinize the management, and we believe we have done so for the Acquisition, of an alternate target business in connection with evaluating the desirability of effecting an alternate initial business combination, we cannot assure you that our assessment of management will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company and the securities laws, which could increase the time and resources we must expend to assist them in becoming familiar with the complex disclosure and financial reporting requirements imposed on U.S. public companies. This could be expensive and time-consuming and could lead to various regulatory issues that may adversely affect the price of our stock.

 

 

If we fail to consummate the Acquisition, we may seek to effect an alternate initial business combination with one or more privately held companies, as in the case of the Acquisition, which may present certain challenges to us, including the lack of available information about these companies.

 

In pursuing an alternate target business, if necessary, we may seek to effect our initial business combination with one or more privately held companies. By definition, very little public information exists about these companies, and we could be required to make our decision on whether to pursue a potential initial business combination on the basis of limited information.

 

Our officers and directors are or may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us, and may have conflicts of interest in allocating their time and business opportunities.

 

Although our officers and directors have entered into non-compete agreements with us, they may in the future become affiliated with entities, including other “blank check” companies, engaged in business activities similar to those intended to be conducted by us. None of our officers or directors are obligated to expend a specific number of hours per week or month on our affairs. Additionally, our officers and directors may become aware of business opportunities that may be appropriate for us as well as the other entities with which they are or may be affiliated. Due to these existing or future affiliations, our officers and directors may have fiduciary obligations to present potential business opportunities to those entities prior to presenting them to us, which could cause additional conflicts of interest. Accordingly, our officers or directors may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a complete discussion of our officers and directors’ business affiliations and the potential conflicts of interest that you should be aware of, please see “Management—Directors and Executive Officers” below.   We cannot assure you that these conflicts will be resolved in our favor.

 

We have expended considerable resources in researching the viability of the Acquisition, which may not be consummated, and this could materially and adversely affect subsequent attempts to effect our initial business combination.

 

As discussed above, the investigation of each specific target business, including Kern, and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments including, but not limited to the Stock Purchase Agreement and the Occidental Investment, required substantial management time and attention and substantial costs for accountants, attorneys, and others. If a decision is made not to complete a specific business combination, including the Acquisition, the costs incurred up to that point for the proposed transaction likely will not be recoverable. Furthermore, we may fail to consummate the Acquisition for any number of reasons, including reasons beyond our control, such as that 20% or more of our public stockholders vote against it at the Special Meeting and opt to convert their stock into a pro rata share of the Trust Account even if a majority of our stockholders approve the Acquisition. Any such event will result in a loss to us of the related costs incurred, which could materially and adversely affect subsequent attempts to consummate an alternate initial business combination.

 

Because the shares of common stock owned by our founders will not participate in liquidation distributions by us, our founders may have a conflict of interest in deciding if a particular target business is a good candidate for a business combination.

 

Each holder of initial founders’ shares has waived the right to receive distributions with respect to the shares they acquired before the initial public offering upon our liquidation if we fail to complete a business combination. Those shares of common stock and all of the founders’ warrants will therefore be worthless if we do not consummate the Acquisition or an alternate initial business combination. Because our directors directly or indirectly have an ownership interest in all of the outstanding founders’ securities, their personal and financial interests may influence the identification and selection of an alternate target business should we fail to consummate the Acquisition, and may affect how or when we complete an alternate initial business combination. Should we fail to consummate the Acquisition, the exercise of discretion by our officers and directors in identifying and selecting one or more suitable alternate target businesses may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders’ best interest.

 

 

Our officers’ and directors’ interests in obtaining reimbursement for any out-of-pocket expenses incurred by them may lead to a conflict of interest in determining whether a particular target business is appropriate for a business combination and in the public stockholders’ best interest.

 

Unless we consummate the Acquisition or an alternate initial business combination, our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the Trust Account and the amount of interest income from the Trust Account up to a maximum of $3.25 million that was released to us as working capital. These amounts are based on management’s estimates of the funds needed to finance our operations until January 30, 2009 and consummate our initial business combination. Those estimates may prove to be inaccurate, especially if a portion of the available proceeds is used to make a down payment in connection with our initial business combination or pay exclusivity or similar fees or if we expend a significant portion in pursuit of an initial business combination that is not consummated. Our officers and directors may, as part of any business combination, negotiate the repayment of some or all of any such expenses.  If the target business’s owners do not agree to such repayment, this could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. The financial interest of our officers and directors could influence their motivation in selecting a target business and therefore there may be a conflict of interest when determining whether a particular business combination is in the stockholders’ best interest.

 

We will most likely complete only one business combination with the proceeds of our initial public offering, meaning our operations will depend solely on a single business.

 

Our initial business combination must involve a target business or businesses with a fair market value of at least 80% of the amount held in our Trust Account at the time of such business combination (excluding deferred underwriting discounts and commissions).  Our board of directors determined that the Acquisition satisfies this criteria.  We will most likely initially not be able to acquire a target business in addition to Kern because of various factors, including the existence of complex issues, including the requirement that we prepare and file pro forma financial statements with the SEC that present operating results and the financial condition of several target businesses as if they had been operated on a combined basis. Additionally, we may encounter numerous logistical issues if we pursue multiple target businesses, including the difficulty of coordinating the timing of negotiations, proxy statement disclosure and closings. We may also be exposed to the risk that our inability to satisfy conditions to closing with one or more target businesses would reduce the fair market value of the remaining target businesses in the combination below the required threshold of 80% of the amount held in our Trust Account (excluding deferred underwriting discounts and commissions).  Accordingly, the prospects for our success may depend solely on the performance of a single business.  If this occurs, our operations will be highly concentrated and we will be exposed to higher risk than other entities that have the resources to complete several business combinations, or that operate in diversified industries or industry segments.

 

If we do not conduct an adequate due diligence investigation of Kern, or an alternate target business in the event the Acquisition fails to be consummated, we may be required subsequently to take write-downs or write-offs, restructuring, and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our stock price, which could cause you to lose some or all of your investment.

 

In order to meet our disclosure and financial reporting obligations under the federal securities laws, and in order to develop and seek to execute strategic plans for how we can increase the profitability of a target business, realize operating synergies or capitalize on market opportunities, we must conduct a due diligence investigation of possible target businesses. We performed such due diligence in connection with the Acquisition.  However, if our due diligence of Kern failed to uncover certain matters, or if the Acquisition is not consummated, then further intensive due diligence of an alternate target business will be time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process. Even if we are required to conduct extensive due diligence on an alternate target business in the event the Acquisition does not close, we cannot assure you that this diligence will uncover all material issues relating to a particular alternate target business, or that factors outside of the alternate target business and outside of our control will not later arise. If our diligence fails to identify issues specific to an alternate target business or the environment in which the alternate target business operates, we may be forced to write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our common stock. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming pre-existing debt held by an alternate target business or by virtue of our obtaining post-combination debt financing.

 

 

Our outstanding warrants may adversely affect the market price of our common stock and make it more difficult to effect our initial business combination.

 

We have issued warrants to purchase 24,557,205 shares of common stock as part of the units offered in our initial public offering (including the over allotment) and the founders’ warrants to purchase 5,850,000 shares of common stock.  If we issue common stock to complete our initial business combination, the potential issuance of additional shares of common stock on exercise of these warrants could make us a less attractive acquisition vehicle to some target businesses. This is because exercise of any warrants will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete our initial business combination. Our warrants may make it more difficult to complete our initial business combination or increase the purchase price sought by one or more target businesses. Additionally, the sale or possibility of the sale of the shares underlying the warrants could have an adverse effect on the market price for our common stock or our units, or on our ability to obtain other financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings.

 

The grant of registration rights to the holders of the founders’ securities may make it more difficult to complete our initial business combination, and the future exercise of such rights may adversely affect the market price of our common stock.

 

Each holder of founders’ securities is entitled to make a demand that we register the resale of the initial founders’ shares, the founders’ warrants and the shares of common stock issuable upon exercise of the founders’ warrants, as applicable. The registration rights will be exercisable with respect to the initial founders’ shares at any time after the date on which the relevant securities are no longer subject to transfer restrictions, and with respect to the warrants and the underlying shares of common stock after the warrants become exercisable by their terms. We will bear the cost of registering these securities. If these registration rights are exercised in full, there will be an additional 6,000,000 shares of common stock and up to 5,850,000 shares of common stock issuable on exercise of the warrants eligible for trading in the public market. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of the registration rights may make our initial business combination more costly or difficult to conclude. This is because the stockholders of the target business may increase the equity stake they seek in the combined entity or ask for more cash consideration to offset the negative impact on the market price of our common stock that is expected when the founders’ securities are registered.

 

A market for our securities may not develop, which would adversely affect the liquidity and price of our securities.

 

The price of our securities may vary significantly due to our reports of operating losses, one or more potential business combinations, the filing of periodic reports with the SEC, and general market or economic conditions. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless a market can be developed and sustained.

 

If we are deemed to be an investment company, we must meet burdensome compliance requirements and restrictions on our activities, which may increase the difficulty of completing a business combination.

 

If we are deemed to be an investment company under the Investment Company Act of 1940 (the “Investment Company Act”), the nature of our investments and the issuance of our securities may be subject to various restrictions. These restrictions may make it difficult for us to complete our initial business combination. In addition, we may be subject to burdensome compliance requirements and may have to:

 

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register as an investment company;

 

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adopt a specific form of corporate structure; and

 

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report, maintain records and adhere to voting, proxy, disclosure and other requirements.

 

We do not believe that our planned principal activities will subject us to the Investment Company Act. In this regard, our agreement with the Trustee states that proceeds in the Trust Account will be invested only in “government securities” and one or more money market funds, selected by us, which invest principally in either short-term securities issued or guaranteed by the United States having a rating in the highest investment category granted thereby by a recognized credit rating agency at the time of acquisition or tax exempt municipal bonds issued by governmental entities located within the United States. This investment restriction is intended to facilitate our not being considered an investment company under the Investment Company Act. If we are deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would increase our operating expenses and could make our initial business combination more difficult to complete.

 

 

The loss of key officers could adversely affect us.

 

We are dependent upon a relatively small group of key officers and, in particular, upon our chief executive officer, our principal financial officer and our chief operating officer. We believe that our success depends on the continued service of our key officers, at least until we have consummated the Acquisition or an alternate initial business combination. We cannot assure you that such individuals will remain with us for the immediate or foreseeable future. We do not have employment agreements with any of our current officers. The unexpected loss of the services of one or more of these officers could have a detrimental effect on us.

 

The American Stock Exchange may delist our securities, which could limit investors’ ability to transact in our securities and subject us to additional trading restrictions.

 

Our securities are listed on the American Stock Exchange. We cannot assure you that our securities will continue to be listed on the American Stock Exchange. Additionally, the American Stock Exchange may require us to file a new initial listing application and meet its initial listing requirements, as opposed to its more lenient continued listing requirements, at the time of our initial business combination, depending on the nature of the transaction.  We cannot assure you that we would be able to meet those initial listing requirements at that time.  If the American Stock Exchange delists our securities from trading, we could face significant consequences, including:

 

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a limited availability for market quotations for our securities;

 

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reduced liquidity with respect to our securities;

 

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a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock;

 

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limited amount of news and analyst coverage for our company; and

 

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a decreased ability to issue additional securities or obtain additional financing in the future.

 

In addition, we would no longer be subject to American Stock Exchange rules, including rules requiring us to have a certain number of independent directors and to meet other corporate governance standards.

 

The determination of the offering price of our units was arbitrary.

 

Prior to the initial public offering, there was no public market for any of our securities. Accordingly, the public offering price of the units, the terms of the warrants, the aggregate proceeds we raised and the amount placed in the Trust Account were the results of a negotiation between the underwriters and us.  In addition, if we fail to consummate the Acquisition, management’s assessment of the financial requirements necessary to complete an alternate initial business combination may prove to be inaccurate, in which case we may not have sufficient funds to consummate an alternate initial business combination and we would be forced to either find additional financing or liquidate, or we may have too great an amount in the Trust Account to identify a prospect having a fair market value of at least 80% of the amount held in our Trust Account.

 

If we acquire a target business with operations located outside the Unites States, we may encounter risks specific to other countries in which such target business operates.

 

If we do not consummate the Acquisition and if we subsequently acquire a company that has operations outside the United States, we will be exposed to risks that could negatively impact our future results of operations following our initial business combination. The additional risks we may be exposed to in these cases include, but are not limited to:

 

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tariffs and trade barriers;

 

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regulations related to customs and import/export matters;

 

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tax issues, such as tax law changes and variations in tax laws as compared to the United States;

 

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cultural and language differences;

 

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foreign exchange controls;

 

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crime, strikes, riots, civil disturbances, terrorist attacks and wars;

 

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deterioration of political relations with the United States; and

 

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new or more extensive environmental regulation.

 

 

Risks Relating to Our Business and Operations Following the Acquisition of Kern

 

As described above, on November 2, 2007 we signed the Stock Purchase Agreement for the acquisition of Kern.  The following Risk Factors are applicable if the Acquisition is consummated and may apply to other alternate target businesses if we do not complete the Acquisition.

 

The price volatility of crude oil, other feedstocks and refined products depends upon many factors that are beyond our control and could adversely affect our profitability.

 

Kern’s earnings, profitability and cash flows depend primarily on the margin above fixed and variable expenses (including the cost of refinery feedstocks, such as crude oil) at which it is able to sell refined products. In recent years, the prices of crude oil, other feedstocks and refined products have fluctuated substantially and refining margins historically have been volatile, and are likely to continue to be volatile, as a result of a variety of factors, including fluctuations in the prices of crude oil. Prices of crude oil, other feedstocks and refined products depend on numerous factors beyond our control, including:

 

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changes in global and local economic conditions;

 

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the demand for fuel products, especially in the United States, China and India;

 

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the ability of the members of the Organization of Petroleum Exporting Countries, or OPEC, to agree to and maintain oil price and production controls;

 

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worldwide political conditions, armed conflicts or terrorist attacks, particularly in significant oil-producing regions such as the Middle East, West Africa and Venezuela;

 

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the level of foreign and domestic production of crude oil and refined products, as well as the level of operations at refineries in Kern’s service areas;

 

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the volume of crude oil, feedstocks and refined products imported into the U.S., which can be affected by accidents, interruptions in transportation, inclement weather, government regulations or other events affecting producers and suppliers;

 

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government regulations, including changes in fuel specifications required by environmental and other laws, particularly with respect to oxygenates and sulfur content;

 

•

utilization rates at U.S. refineries;

 

•

pricing and other actions taken by competitors that impact the market;

 

•

availability of crude oil, feedstock and product pipeline capacity or alternative means of transportation;

 

•

local factors, including market conditions, weather conditions, accidents or other events that can cause unscheduled shutdowns or otherwise adversely affect our facilities or those of our suppliers or customers; and

 

•

the development, pricing and availability of alternative and competing fuel.

 

Furthermore, although an increase or decrease in the price for crude oil generally results in a similar increase or decrease in prices for refined products, there is normally a time lag in the realization of the similar increase or decrease in prices for refined products. The effect of changes in crude oil prices on Kern’s results of operations therefore depends in part on how quickly and how fully refined product prices adjust to reflect these changes. A substantial or prolonged increase in crude oil prices without a corresponding increase in refined product prices, or a substantial or prolonged decrease in refined product prices without a corresponding decrease in crude oil prices, could have a significant negative impact on Kern’s earnings, results of operations and cash flows.

 

These factors and the volatility of the energy markets may have a negative effect on Kern’s results of operations and financial condition to the extent that the margin between refined product prices and feedstock prices narrows.

 

The price volatility of natural gas may have a negative effect on our earnings, profitability and cash flows.

 

The volatility in the cost of natural gas used by Kern’s refinery, including the cogeneration unit, affects Kern’s net income and cash flows. Natural gas prices have been, and will continue to be, affected by factors outside our control, such as supply and demand for fuel and utility services in both local and regional markets. For example, Kern’s cost of natural gas ranged between $3.98 and $11.54 per million British thermal units, or MMBTU, in fiscal years 2006 and 2005, respectively. Future increases in natural gas prices may have a negative effect on our earnings, profitability and cash flows.

 

 

Completion of the Acquisition could result in disruptions in Kern’s business, loss of customers or contracts or other adverse effects.

 

The completion of the Acquisition may cause disruptions in Kern’s business, including potential loss of customers, suppliers and other business partners, particularly those whose contracts with Kern permit them to terminate the agreements in connection with a change of control or with little notice. Any such partners could also seek to renegotiate the terms of their contracts with Kern in a manner adverse to us. The loss of customers, suppliers and other business partners or adverse changes in the terms of our agreements with them could have a material adverse effect on our post-Acquisition business, operations and consolidated financial results.

 

We may not be able to implement our capital improvement projects at Kern in accordance with our expectations, and these facilities may not provide the anticipated benefits.

 

We expect to expand and upgrade Kern’s facilities following the Acquisition, including through the addition of a transmix splitter, an isomerization unit, a hydrocracker and a coker. The installation of significant units such as these involves significant time and expense, and involves significant risks and uncertainties, including:

 

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the new units may not perform at expected levels;

 

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the yield and product quality may differ from design;

 

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any redesign or modification of the equipment required to correct performance of the units could require facility shutdowns until the equipment has been redesigned or modified; and

 

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we may not be able to obtain permits with conditions acceptable to us that enable us to pursue the projects based on our anticipated scope and budget.

 

The occurrence of any of these events could lead to lower revenues or higher costs or otherwise have a negative impact on Kern’s future results of operations and financial condition following the Acquisition.

 

Our profitability may be limited if we experience cost overruns on our planned capital improvement projects.

 

We believe that the capital investments we will need to make in order to implement our business plan regarding Kern will be approximately $540 million. However, the actual cost may be higher depending on various factors, including construction costs, changes in prices of raw material inputs and availability of qualified construction personnel. If we have underestimated the capital investments that will be required to expand and upgrade Kern’s facilities in accordance with our plans, or otherwise experience cost overruns on any construction project we undertake in connection with Kern, our indebtedness levels, cash flows and results of operations could be negatively affected.

 

Following the completion of the planned capital projects at Kern, our profitability will depend, in part, on light/heavy crude oil price differentials. A decrease in these spreads could negatively affect our profitability.

 

After we complete the capital projects described under “Business of Kern—Post-Acquisition Business Plans,” such description which can be found in our revised preliminary proxy statement on Schedule 14A filed with the SEC on February 12, 2008 (File No. 001-33279), our business plan for Kern will be based primarily on capturing the cost advantages of heavy crude oil, which is generally cheaper relative to light crude oil as a raw material to manufacture refined products because of the greater complexity of the processes required to refine heavy crude. A tightening of these spreads could make these capital projects less economic and negatively affect our expected profitability following their completion.

 

Significant declines in the price of crude oil may disrupt the supply of heavy crude oil and cause a narrowing of the price differentials between heavy crude oil and light crude oil.

 

Heavy crude oil is generally costlier to extract and process than light crude oil. Significant declines in the overall price of crude oil could disrupt the supply of certain heavy crude oils should the price declines be large enough that continuing to produce those heavy crude oils becomes unprofitable. In addition, any resulting scarcity of supply of certain types of heavy crudes could cause light/heavy differentials to narrow. Following implementation of our planned capital projects for Kern, such a disruption could negatively affect our business.

 

 

Our ability to grow Kern’s business may be limited if we cannot secure an engineering, procurement and construction (“EPC”) contractor to perform the planned projects.

 

Our ability to grow Kern’s business will be linked to our ability to successfully implement the capital projects described under “Business of Kern—Post-Acquisition Business Plans,” such description which can be found in our revised preliminary proxy statement on Schedule 14A filed with the SEC on February 12, 2008 (File No. 001-33279). In order to implement these projects, we expect to hire an EPC contractor. We have engaged Foster Wheeler USA Corporation for early stage engineering work but have not yet engaged them as an EPC contractor. Due to a recent surge in construction projects across the energy industry, we may experience difficulties in securing Foster Wheeler USA Corporation or another EPC contractor in a timely fashion to execute our proposed projects. If we are unable to contract an EPC contractor to effect the projects in a timely fashion, Kern’s profitability could be negatively affected.

 

Our profitability may be limited if we cannot obtain necessary permits and authorizations to modify Kern’s facilities.

 

We intend to upgrade and add new units to Kern’s refinery, among other things to process a heavier crude oil and to yield lighter, higher-margin products in order to increase Kern’s profitability. If we are unable to obtain the necessary permits and authorizations to effect these upgrades and additions, or if the costs of making changes to or obtaining these permits or authorizations exceed our estimates, our ability to increase Kern’s profitability could be negatively affected.

 

Because Kern purchases a significant quantity of its crude oil from a single supplier, our inability to maintain this supply relationship following the Acquisition, or maintain it on favorable terms, could have a material adverse effect on our business and operations.

 

Kern currently purchases approximately 50% of its crude oil from a single supplier under a 10-year purchase contract expiring in 2011. Terms of the purchase contract provide for purchases at market related prices, with annual renegotiation of specific price provisions. Our inability to maintain the purchase contract on favorable terms following the Acquisition could have a material adverse effect on our business and operations. Furthermore, if this supplier were unable to or unwilling to deliver a significant portion of the crude oil for which we have contracted, we would have to find alternate suppliers. We cannot assure you that we would be able to do so on favorable terms, if at all.

 

Kern’s operations are concentrated in a single location; if access to the pipelines on which Kern relies for the supply of feedstock is interrupted, our costs may increase, and our profitability may be adversely affected.

 

All of Kern’s refinery activities are conducted at its facility in Bakersfield, California. In addition, Kern obtains a substantial portion of its crude oil supply through its owned 18-mile crude receipt pipeline. Any prolonged disruption to the operations of Kern’s refinery or the 18-mile pipeline, whether due to labor difficulties, destruction of or damage to such facilities, severe weather conditions, interruption of utilities service or other reasons, would have a material adverse effect on our business, results of operations or financial condition. If this or one of the feeder pipelines on which Kern relies for supply of crude oil becomes temporarily or permanently inoperative because of accidents, natural disasters, governmental regulation, terrorism, other third-party action or other events beyond our control, we would be required to obtain crude oil for our refinery through an alternative pipeline, if any, or from additional tanker trucks, which could increase our costs and result in lower production levels and profitability.

 

Intense competition in the refining and marketing industry may lead to lower profitability than we expect to achieve following the Acquisition.

 

There is intense competition in the energy industry, including in the petroleum refining, distribution, marketing and related industries. Refiners face competition in obtaining crude oil and other feedstocks and in selling the refined products they produce. Kern’s competitors include large and fully integrated companies operating on a national and international basis that, among other things, can produce their own feedstocks, have their own retail systems and have a larger capitalization and greater financial and other resources. These factors may allow these competitors to better withstand volatile market conditions, compete more effectively on the basis of price and obtain crude oil and other feedstocks more readily in times of shortage.

 

In addition, Kern competes with companies in other industries that provide alternative sources of energy and fuel. There are significant governmental and consumer pressures to increase the use of alternative fuels in the United States. The more successful these alternatives become as a result of governmental regulations, technological advances, consumer demand, improved pricing or otherwise, the greater the impact on pricing and demand for Kern’s products and its profitability will be.

 

 

Changes in our or Kern’s credit profile may affect Kern’s relationship with its suppliers, which could have a material adverse effect on Kern’s liquidity.

 

Changes in Kern’s or our credit profile may affect the way crude oil suppliers view Kern’s ability to make payments and may induce them to shorten the payment terms of their invoices. Given the large dollar amounts and volume of Kern’s feedstock purchases, a change in payment terms may have a material adverse effect on Kern’s liquidity and Kern’s ability to make payments to its suppliers.

 

Since Kern’s refinery currently consists of only one crude distillation unit and other processing units, unscheduled maintenance at Kern’s refinery could reduce revenues.

 

Kern’s refinery currently consists of one crude distillation unit and other processing units. If Kern’s sole crude processing facility or one or more of the other units require unscheduled downtime for unanticipated maintenance or repairs, Kern’s ability to produce refined products could be materially reduced, which would reduce revenues during the period of time that any of the units is not operating.

 

Following the Acquisition, we will be a holding company and depend upon Kern for our cash flow.

 

Following the Acquisition, Kern will be our subsidiary and Kern will conduct all of its operations and own substantially all of our assets. Consequently, our cash flow and our ability to meet our obligations or to pay dividends or make other distributions in the future will depend upon the cash flow of Kern and the payment of funds by Kern to us in the form of dividends, tax sharing payments or otherwise. The ability of Kern to make any payments to us will depend on its earnings, the terms of its indebtedness, tax considerations and legal restrictions. Furthermore, we expect that distributions that we receive from Kern will be primarily reinvested in our business rather than distributed to our stockholders.

 

We intend to continue to pursue acquisition opportunities, which may subject us to considerable business and financial risk.

 

We anticipate that we will continue to grow in part through acquisitions of businesses or assets in the energy industry. We continue to assess potential acquisitions on an ongoing basis and expect to pursue acquisition opportunities in the future, some of which could be significant. We may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities or in consummating acquisitions on acceptable terms. Also, we may not be able to generate sufficient cash flow, issue additional equity, or borrow sufficient funds to finance acquisitions we wish to make. The pursuit of additional acquisitions may expose us to business and financial risks that include, but are not limited to:

 

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diversion of our management’s attention, as pursuing opportunities and integrating the operations, assets and employees of any acquired businesses may require a substantial amount of our management’s time;

 

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failing to retain or integrate personnel or customers of any acquired businesses;

 

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incurring costs associated with pursuing opportunities that may not be consummated, and incurring expenses associated with any successful acquisition, including transaction costs and other non-recurring acquisition-related charges, integration costs and subsequent capital expenditures;

 

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incurring significant indebtedness to finance any acquisitions;

 

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the inability to achieve operating and financial synergies anticipated to result from the acquisitions; and

 

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depreciation of any acquired tangible assets and the amortization or write-off of acquired goodwill and other intangible assets, which would negatively affect reported earnings following any acquisition.

 

We cannot assure you that we will be successful in finding and effecting additional acquisitions or in integrating acquired businesses or assets into our business following closing of the Acquisition. The failure to find and effect new acquisitions or to successfully integrate any acquired businesses could have a material adverse effect on our growth potential and future earnings.

 

We may experience difficulties in marketing some of our refined products if we encounter difficulties in financing, producing, delivering or finding customers for our refined products.

 

Our ability to market the refined products Kern produces may depend on:

 

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obtaining the financing necessary to process our feedstock, such as crude oil, to the point where production is suitable for sale;

 

 

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any negative development regarding the availability, adequacy or cost-effectiveness of Kern’s facilities for the delivery of refined products to its customers;

 

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the quantity and quality of the refined products we produce; and

 

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the continued availability of viable purchasers willing to buy our refined products.

 

We may have environmental liabilities as a result of our ownership or operation of contaminated properties or relating to exposure to hazardous or toxic materials.

 

We could be subject to claims and may incur costs arising out of human exposure to hazardous or toxic substances relating to our operations, our properties, our buildings or to the sale, distribution or disposal of any products containing any hazardous or toxic substances and produced in connection with our business. Kern currently has outstanding certain lawsuits of this nature as described in “Business of Kern—Legal Proceedings,” such description which can be found in our revised preliminary proxy statement on Schedule 14A filed with the SEC on February 12, 2008 (File No. 001-33279).

 

Properties or facilities owned, leased or operated in conjunction with the refining industry may be contaminated due to energy or other historical industrial uses at or near the property. Regulators may impose clean-up obligations if contamination is identified on a property, and third parties or regulators may make claims against owners or operators of properties for personal injuries, property damage or natural resource damage associated with releases of hazardous or toxic substances. Certain environmental laws hold current and previous owners or operators of real property liable for the costs of cleaning up contamination regardless of whether they knew of or were responsible for the contamination. These environmental laws also may impose liability on any person who arranges for the disposal or treatment of hazardous substances, regardless of whether the affected site is or was ever owned or operated by such person. Kern is currently subject to a Cleanup and Abatement Order from the California Regional Water Quality Control Board for soil and groundwater contamination. We expect Kern to continue work under this order for the foreseeable future. See “Business of Kern—Environmental Matters,” such description which can be found in our revised preliminary proxy statement on Schedule 14A filed with the SEC on February 12, 2008 (File No. 001-33279).

 

Finally, it is possible that Kern may have historical liabilities relating to previous operations or the previous ownership of real property. As a result, we may ultimately have liability for environmental matters that do not relate to our business.

 

We will be subject to environmental and employee safety and health laws and regulations that could cause us to incur significant compliance expenditures and liabilities.

 

Our operations will be subject to federal, state and local laws and regulations pertaining to the environment, including air emissions, potential releases into soil and groundwater, wastewater discharges, waste disposal and compliance with fuel specifications. Under various environmental laws, an owner or operator of real property may be liable for contamination resulting from the release or threatened release of hazardous or toxic substances or petroleum at that property. Such laws often impose liability on the owner or operator without regard to fault and the costs of any required investigation or cleanup can be substantial.

 

Our operations will also be subject to various employee safety and health laws and regulations, including those pertaining to occupational injury and illness, employee exposure to hazardous materials and employee complaints. Environmental and employee safety and health laws tend to be complex, comprehensive and frequently changing. As a result, we may be involved from time to time in administrative and judicial proceedings and investigations related to environmental and employee safety and health issues.

 

These proceedings and investigations could result in substantial costs to us, divert our management’s attention and adversely affect our ability to sell, lease or develop our real property. Furthermore, if it is determined that we are not in compliance with applicable laws and regulations, or if our properties are contaminated, it could result in significant liabilities, fines or the suspension or interruption of the operations of specific operating facilities. Future events, such as changes in existing laws and regulations, new laws or regulations or the discovery of conditions not currently known to us, may give rise to additional compliance or remedial costs that could be material.

 

 

Furthermore, Kern’s facilities operate under a number of federal, state and local permits, licenses and approvals with limits, terms and conditions containing a significant number of prescriptive and performance standards in order to operate. Kern’s facilities are also required to meet compliance with prescriptive and performance standards specific to refining and chemical facilities as well as to general manufacturing facilities. All of these permits, licenses and standards require a significant amount of monitoring, record keeping and reporting requirements in order to demonstrate compliance with the underlying permit, license or standard. Inspections by federal and state governmental agencies may uncover incomplete or unknown documentation of compliance status that may result in the imposition of fines, penalties and injunctive relief that could have a material adverse effect on our ability to operate Kern’s facilities following the Acquisition. Additionally, due to the nature of our manufacturing processes there may be times when Kern is unable to meet the standards and terms and conditions of these permits, licenses and standards that may not receive enforcement discretion from the governmental agencies, which may lead to the imposition of fines and penalties or operating restrictions that may have a material adverse effect on Kern’s ability to operate its facilities and accordingly its financial performance.

 

Operating hazards inherent in refining oil may expose us to potentially significant losses, costs or liabilities.

 

Kern’s operations are subject to all of the hazards and operating risks inherent in refining oil and in transporting and storing crude oil, intermediate products and refined products. These significant hazards and risks include, but are not limited to, the following:

 

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fires, explosions;

 

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natural disasters;

 

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environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases;

 

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third-party interference;

 

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disruptions of natural gas deliveries; and

 

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mechanical failure of equipment at our refinery or third-party facilities.

 

The occurrence of any of the foregoing could result in production and distribution difficulties and disruptions, severe damage to or destruction of property, natural resources and equipment, personal injury or wrongful death claims, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations, and other damage to our property and the property of others. There is also risk of mechanical failure and equipment shutdowns both in the ordinary course of operations and following unforeseen events.

 

If we experience a catastrophic loss and our insurance is not adequate to cover such loss or if our insurers fail to pay significant claims, it could have a material adverse effect on our profitability and operations.

 

Kern’s refining and other facilities could be affected by a number of risks, including mechanical failure, personal injury, loss or damage, business interruption due to disruption of supply, hostilities, labor strikes, adverse weather conditions and catastrophic disasters, including environmental accidents. All of these risks could result in liability, loss of revenues, increased costs and loss of reputation. In accordance with customary industry practice, Kern maintains insurance against some, but not all, of these risks and we intend to maintain Kern’s current insurance policies following the Acquisition. However, we cannot assure you that any particular claim will be paid out of our insurance or that any insurance will be adequate to cover any losses or liabilities. Our insurers will also require us to pay certain deductible amounts before they will pay claims and insurance policies will contain limitations and exclusions, which may increase our costs and lower our profitability.

 

Furthermore, the refining industry is generally highly capital intensive, and the entire or partial loss of individual facilities can result in significant costs to both industry participants and their insurance carriers. In recent years, several large energy industry claims have resulted in significant increases in the level of premium costs and deductible periods for participants in the energy industry. For example, during 2005, hurricanes Katrina and Rita caused significant damage to several refineries along the U.S. Gulf Coast, in addition to numerous oil and gas production facilities and pipelines in that region. As a result of large claims, insurance companies that have historically participated in underwriting energy related facilities could discontinue that practice, or demand significantly higher premiums or deductibles to cover these facilities. Due to such industry-wide reasons beyond our control, we cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase. If Kern is unable to obtain and maintain adequate insurance at reasonable cost, it may need to significantly increase its retained exposures.

 

Additionally, any changes to environmental and other regulations or changes in the insurance market may also result in increased costs for, or decreased availability of, insurance we would currently anticipate purchasing against the risks of environmental damage, pollution and other claims for damages that may be asserted against us.

 

Terrorist attacks and threats or actual war may negatively impact our business.

 

Kern’s business is affected by global economic conditions and fluctuations in consumer confidence and spending, which can decline as a result of numerous factors outside of our control, such as actual or threatened terrorist attacks and acts of war. Terrorist attacks, as well as events occurring in response to or in connection with them, including future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions impacting Kern’s suppliers or its customers or energy markets in general, may adversely impact our operations. As a result, there could be delays or losses in the delivery of supplies and raw materials to Kern, delays in Kern’s delivery of refined products, decreased sales of its refined products and extension of time for payment of accounts receivable from its customers. Strategic targets such as energy-related assets (which could include refineries such as Kern’s) may be at greater risk of future terrorist attacks than other targets in the United States. These occurrences could significantly impact energy prices, including prices for Kern’s crude oil supply and its refined products, and have a material adverse impact on the margins from our refining and wholesale marketing operations. In addition, disruption or significant increases in energy prices could result in government-imposed price controls.

 

Any one of, or a combination of, these occurrences could have a material adverse effect on our business, financial condition and results of operations.

 

If we lose any of our key management or operating personnel, we may be unable to effectively manage our business or continue our growth.

 

Our future performance may depend to a significant degree upon the continued contributions of key members of our senior management team and key management and operating personnel at Kern’s refinery. The loss or unavailability to us of any of these senior managers or employees could negatively affect our ability to operate Kern and pursue our business strategy. We are facing increasing competition for these professionals from competitors, customers and other companies operating in our industry. If the services of any of these senior managers and key operating personnel become unavailable to us for any reason, we would be required to hire other personnel to manage, operate and grow our business. We may not be able to locate or employ such qualified personnel.

 

Kern has historically engaged in hedging transactions in an attempt to mitigate exposure to price fluctuations in crude oil and refined products, but we do not intend to do so following closing of the Acquisition.

 

Kern has historically entered periodically into futures contracts to manage its exposure to crude oil and refined product price fluctuations through the use of NYMEX futures contracts. The contracts are marked to market value and gains and losses are recognized currently in cost of products sold.

 

Following the proposed Acquisition, we do not expect to continue to hedge our exposure to these fluctuations and any resulting volatility in our earnings and cash flows may have a negative effect on our revenues, profitability and overall financial performance, especially in times of high price fluctuations in crude oil and refined products.

 

Risks Related to the Acquisition

 

We will require additional financing to consummate the Acquisition and to finance working capital after the Acquisition, including because of the potential exercise of conversion rights by our public stockholders.

 

We do not expect the amounts in the Trust Account and any other cash or cash equivalents we have on hand plus the up to $38 million in proceeds from the Occidental Investment to be sufficient to pay the $286.5 million purchase price due at closing of the Acquisition, together with any amounts payable concurrently to Casey for working capital and inventory adjustments, which Casey has estimated at $35 million. Assets held in the Trust Account will be available to fund the purchase price after deduction of any amounts to be paid at closing to public stockholders who validly exercise their conversion rights and of the $7.4 million in deferred underwriting discounts in commissions to be paid to the underwriter of our IPO. Based on the approximately $243.8 million of assets held in the Trust Account as of December 31, 2007, without taking into account any interest accrued or taxes that may be payable after that date, if public stockholders holding the maximum amount of 4,911,440 public shares that may be voted against the transaction and converted into cash duly exercise their conversion rights, we would have only $194.5 million left in the Trust Account with which to fund the Acquisition purchase price. We therefore expect to require a measure of additional financing to pay the full purchase price for Kern, including the working capital and inventory adjustments.  If we are unable to obtain such additional financing, we may be unable to consummate the Acquisition.

 

 

We have not yet reached agreement with potential lenders to obtain the additional financing we require to consummate the Acquisition.  If we are unable to obtain financing, we may be unable to fund the full purchase price for the Acquisition or our working capital requirements following the Acquisition.

 

We have received a proposal from Citigroup and are pursuing discussions with it regarding credit and working capital facilities to be put in place at closing of the Acquisition sufficient to fund the balance of the purchase price and working capital on an ongoing basis. This proposed credit facility would replace Kern’s existing secured credit facility from Wells Fargo Bank, National Association, all of the outstanding amounts under which are required to be repaid at or prior to the closing of the proposed Acquisition under the terms of the Stock Purchase Agreement. We are also discussing with Wells Fargo the possibility of obtaining a credit facility or amending and retaining Kern’s existing credit facility (while still requiring any amounts outstanding under the facility to be repaid at or prior to closing). We would use amounts available thereunder for the same purposes we would use the proposed facility from Citigroup or any similar facility we obtain. However, there can be no assurance that we will be able to agree to definitive terms, or definitive terms that are favorable to us with any lender, that we will be able to fulfill the conditions under the terms of any definitive financing agreement, or that we will be able to assume or otherwise retain Kern’s existing credit facility to be able to receive the funds thereunder upon closing. Without sufficient financing available at the closing of the Acquisition to fund the full purchase price, including all adjustments thereto, we would be in breach of our obligations to Casey to close the Acquisition, which are not contingent upon our receipt of financing.   Even if we obtain financing sufficient to fund the full purchase price, there can be no assurance that any credit facility we obtain will also be sufficient to fund our working capital requirements following the Acquisition.

 

If the conditions to the Occidental agreements are not met, we may not have sufficient funds available to pay the Acquisition consideration.

 

The sale of the Convertible Stock to Occidental for up to $38 million is subject to the satisfaction of certain conditions. If these conditions are not met, or the sale of the Convertible Stock is not otherwise consummated, we would not have sufficient financing to pay the Acquisition consideration. As a result, we would need to find another equity investor or otherwise obtain additional financing to complete the Acquisition. We cannot guarantee that we would be able to find such an investor or otherwise obtain financing on satisfactory terms, if at all.

 

Upon the issuance of the Convertible Stock to Occidental, your equity interest in us will be reduced.

 

Upon the consummation of the Acquisition, we will issue to Occidental shares of new Series A Senior Convertible Preferred Stock, which will be convertible into shares of our common stock under specified circumstances. We will reserve a sufficient number of shares of common stock from our authorized share capital for issuance to Occidental if and when Occidental converts its Convertible Stock. Our issuance of the Convertible Stock:

 

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will reduce your equity interest in us on a fully diluted basis; and

 

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may adversely affect the market price for shares of our common stock and other securities, especially after any conversion by Occidental of its Convertible Stock into our common shares.

 

Based on the average closing price for the 30 trading days immediately preceding announcement of the proposed Acquisition of $9.52, and assuming the investment by Occidental totals the maximum of $38 million, the Convertible Stock would be convertible into 3,991,596 shares of our common stock as of the closing date. See “Occidental Investment.”

 

Holders of our Convertible Stock have preferential rights with respect to dividends and distributions upon our liquidation, which may cause our other stockholders not to receive dividends or payment upon liquidation.

 

Holders of our Convertible Stock will have preferential rights with respect to dividends and distributions upon any liquidation of the Company following the Acquisition (although these rights do not affect the rights of the holders of the public shares to receive liquidation distributions from our Trust Account if we are unable to complete an initial business combination by January 30, 2009). Under the terms of the Convertible Stock, we will not pay any dividends (other than those payable solely in our common stock or in any right to acquire our common stock for no consideration) on any of our common stock for any fiscal quarter until we have paid cash dividends in the total amount of at least $14.375 per share (as adjusted for any applicable stock dividends, combinations or splits) on the Convertible Stock for that fiscal quarter and any prior quarter in which dividends accumulated but remain unpaid. We will also not pay any dividends (other than those payable solely in our common stock or in any right to acquire common stock for no consideration) on any share of our common stock unless we have paid dividends with respect to all outstanding shares of Convertible Stock in an amount for each such share of Convertible Stock (excluding any accumulated dividend amounts) equal to or greater than the aggregate amount of such dividends for all shares of our common stock into which each such share of Convertible Stock could then be converted.

 

 

Holders of our Convertible Stock will have substantial rights that could allow them to significantly influence our management and corporate direction.

 

The terms of our Convertible Stock provide the holders with certain preferential rights. So long as any shares of Convertible Stock remain outstanding, we will not, without the approval of the holders of a majority of the outstanding shares of Convertible Stock:

 

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Redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose) any shares of Convertible Stock other than by redemption or by conversion as described above;

 

•

Redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any of our Common Stock (other than pursuant to the exercise by holders of our common stock of any conversion rights pursuant to Article Sixth of our certificate of incorporation);

 

•

Authorize or issue, or obligate ourselves to issue, any other equity security (including any security convertible into or exercisable for any equity security) senior to or on a parity with the Convertible Stock as to dividend rights or redemption rights or liquidation preferences;

 

•

Permit any of our wholly-owned subsidiaries to issue or sell, or obligate itself to issue or sell, except to us or any of our wholly-owned subsidiaries, any stock of such subsidiary; or

 

•

Increase or decrease (other than by redemption or conversion) the total number of authorized shares of preferred stock or Convertible Stock.

 

The specific rights granted to the holders of the Convertible Stock could have the effect of delaying, deterring or preventing us from making acquisitions, raising additional capital, or effecting other strategic corporate transactions. The preferential rights could also be used to deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. These rights may also limit the ability of our other stockholders to approve transactions that they deem to be in their best interests.

 

Any credit facility we obtain in connection with or following the Acquisition may adversely affect our liquidity and we may face significant interest expense.

 

We will require financing not only to fund the purchase price for the Acquisition but also to provide working capital financing on an ongoing basis. We may also incur debt to finance some or all of our planned capital improvement projects. Any financing we obtain may result in an increase in interest expense and may adversely affect our operations if the terms of the credit facilities include restrictive covenants limiting our ability to engage in certain transactions, such as the incurrence of additional indebtedness or liens, asset acquisitions or disposals or to make payments of dividends to our shareholders. In addition, the terms of any financing may provide for foreclosure on our assets if our operating cash flow is insufficient to pay principal and interest when due or mandatory prepayments of all or a portion of the principal and accrued interest upon the occurrence of specified events, which could further limit our operational flexibility.

 

Our indebtedness following the Acquisition and the Convertible Stock terms could limit our flexibility in planning for and reacting to changes in the industry and economic conditions generally.

 

Our ability to pay interest and principal on our indebtedness following the Acquisition will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond our control. If we are unable to generate sufficient cash flow to service our indebtedness and fund our capital expenditures, we will be forced to adopt an alternative strategy that may include reducing or delaying capital expenditures planned for Kern’s refinery, restructuring or refinancing our indebtedness or seeking additional equity capital. If the Convertible Stock has not been converted, it will be subject to mandatory redemption by us on the fifth anniversary of the date of the first issuance of Convertible Stock. Our need to complete the redemption may impact our ability to fund capital expenditures or cause us to seek additional capital. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all.

 

 

Kern will have significantly less cash, cash equivalents and marketable securities on hand subsequent to the closing of the Acquisition than its historical financial statements show.

 

Prior to the closing of the Acquisition, Kern expects to make distributions to Casey in the amount of approximately $45 million, of which $15 million was declared as a dividend on November 30, 2007. Therefore, Kern will have significantly less holdings in the form of cash, cash equivalents and marketable securities than its historical financial statements show (See revised preliminary proxy statement on Schedule 14A filed with the SEC on February 12, 2008 (File No. 001-33279)). This reduction in liquidity could adversely affect our ability to implement our business plan and have a material adverse effect on our business, financial condition and results of operations.

 

If our stockholders fail to vote or abstain from voting on the Acquisition proposal, they may not exercise their conversion rights to convert their shares of our common stock into a pro rata portion of the Trust Account.

 

Only holders of public shares who affirmatively vote against the Acquisition proposal may demand that we convert their shares into a pro rata portion of the Trust Account. Any stockholder who fails to vote or who abstains from voting on the Acquisition proposal may not exercise its conversion rights and will not receive a pro rata portion of the Trust Account for conversion of its shares.

 

Our current directors and executive officers have certain interests in the Acquisition that are different from yours.

 

All of our current officers and directors own, directly or indirectly, shares of our common stock and warrants that they purchased in private placements prior to our IPO. Our officers and directors are not entitled to receive any liquidation distributions from the Trust Account for these initial founders’ shares, or, like our public warrant holders, for their founders’ warrants. Therefore, if the proposed Acquisition is not approved and we are subsequently forced to liquidate, the founders’ securities held by our officers and directors, which cannot be sold by them prior to the consummation of the Acquisition (except to permitted transferees), will be worthless.

 

In addition, if we fail to consummate the proposed Acquisition or another business combination by January 30, 2009 and we are subsequently forced to liquidate, Mr. Gilliam, Mr. Hantke, Mrs. Hendricks, Mr. Ortale and Mr. Rodriguez have agreed, subject to certain exceptions, that they will be personally liable on a joint and several basis to us if and to the extent claims by third parties reduce the amounts in the Trust Account available for payment to our stockholders in the event of such liquidation, and the claims are made by a vendor for services rendered, or products sold, to us or by a prospective business target.

 

These personal and financial interests of our directors and officers may have influenced their decision to approve the Acquisition. In considering the recommendations of our board of directors to vote for the Acquisition proposal and the other proposals, you should consider these interests.

 

If the Acquisition proposal is not adopted by our stockholders or the Acquisition is otherwise not completed, we may have insufficient time or funds to complete an alternate business combination.

 

Pursuant to our certificate of incorporation, we must liquidate and dissolve if we do not complete the proposed Acquisition or another business combination by January 30, 2009. If we fail to consummate the proposed Acquisition, we may have insufficient time or insufficient operating funds (including expenses incurred in connection with this Acquisition that are not funded by the advances we receive from Occidental) to consummate an alternate business combination. In addition, our negotiating position may be weaker and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of an initial business combination. Further, we face significant competition from other entities, including buyout funds and strategic investors, seeking to acquire attractive assets in the energy industry, and we may be at a competitive disadvantage to these other bidders because of the restrictions on our operations as a blank check company imposed by our certificate of incorporation, including the requirement that we obtain shareholder approval for our initial business combination. If we fail to consummate a business combination within the required time frame, we will be required to commence proceedings to dissolve and liquidate our assets. If we dissolve and liquidate before we consummate a business combination and distribute the Trust Account, our public stockholders may receive less than the unit offering price in the IPO of $10.00 and our warrants will expire worthless.

 

 

If we are unable to complete the Acquisition or another business combination and are forced to dissolve and liquidate, third parties may bring claims against us and as a result, the proceeds held in trust could be reduced.

 

If we are unable to complete the Acquisition or another business combination by January 30, 2009 and are forced to dissolve and liquidate, third parties may bring claims against us. Although we have obtained waivers from the vendors and service providers we have engaged and owe money to, whereby such parties have waived any right, title, interest or claim of any kind they may have in or to any monies held in our Trust Account, there is no guarantee that such waiver agreements would be held enforceable and there is no guarantee that the third parties would not otherwise challenge the agreements and later bring claims against the Trust Account for monies owed them.

 

Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the Trust Account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders.

 

If we are unable to complete the Acquisition or another business combination and are forced to dissolve and liquidate, Occidental may bring claims against us and as a result, the proceeds held in trust could be reduced.

 

We have issued a promissory note to Occidental for the full amount of any advances they make to us in connection with the proposed Acquisition, plus interest to accrue at an annual rate of 9%. The promissory note will mature on the earlier of (i) November 1, 2008, and (ii) closing of the sale to Occidental of the Convertible Stock. Thus, the promissory note will mature regardless of whether we consummate the proposed transaction or an alternate business combination. If we are unable to consummate the proposed transaction or an alternate business combination, we may not have sufficient funds outside of our Trust Account to repay the promissory note. Although Occidental has waived any claims against amounts in our Trust Account held for the benefit of our public stockholders, there is no guarantee that this waiver would be held enforceable or that Occidental would not otherwise challenge the waiver and later bring a claim against the Trust Account for amounts we owe under the promissory note. Accordingly, the proceeds held in trust could be subject to claims by Occidental, which could take priority over those of our public stockholders.

 

We may not be able to realize the expected benefits of the proposed Acquisition.

 

We expect to incur significant costs associated with the Acquisition, whether or not the Acquisition is completed. These costs will reduce the amount of cash otherwise available for other corporate purposes. In addition, we may incur additional material charges reflecting additional costs associated with the Acquisition in fiscal quarters subsequent to the quarter in which the Acquisition is completed. There is no assurance that the significant costs associated with the Acquisition will prove to be justified in light of the benefits ultimately realized.

 

We do not have any operations and Kern has never operated as a public company. Fulfilling our obligations as a public operating company after the Acquisition may be expensive and time consuming.

 

Kern, as a private company, has not been required to document and assess the effectiveness of its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Kern does not currently have an internal audit group. Beginning with the fiscal year ending December 31, 2008, Section 404 of the Sarbanes-Oxley Act will require us to document and test the effectiveness of our internal controls over financial reporting in accordance with an established control framework and to report on our management’s conclusion as to the effectiveness of these internal controls over financial reporting. We will also be required to have an independent registered public accounting firm test the internal controls over financial reporting and report on the effectiveness of such controls for the fiscal year ending December 31, 2008 and subsequent years. In addition, an independent registered public accounting firm will be required to test, evaluate and report on the completeness of management’s assessment. Fulfilling these obligations following the Acquisition will require significant time and resources from our management and our finance and accounting staff and can be expected to significantly increase our legal, insurance and financial compliance costs. As a result of the increased costs associated with being owned by a public company after the Acquisition, on a consolidated basis, our operating income as a percentage of revenue is likely to be lower than Kern’s prior to the Acquisition. Furthermore, any delays or difficulty in satisfying these requirements could adversely affect future results of operations and our stock price.

 

We may in the future discover areas of internal controls over financial reporting that need improvement, particularly with respect to any businesses acquired in the future. There can be no assurance that remedial measures will result in adequate internal controls over financial reporting in the future. Any failure to implement the required new or improved controls, or difficulties encountered in their implementation, could materially adversely affect our results of operations or could cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our auditors are unable to provide an unqualified report regarding the effectiveness of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act, investors may lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities. In addition, failure to comply with Section 404 of the Sarbanes-Oxley Act could potentially subject the company to sanctions or investigation by the SEC or other regulatory authorities.

 

 

Kern’s financial statements and the pro forma financial statements are not an indication of Kern’s or our financial condition or results of operations following the Acquisition.

 

Due to the various factors described herein, including the fact that we do not plan to continue some of Kern’s crude oil trading activities and Kern’s spin-off of its additive business on July 1, 2007 (See revised preliminary proxy statement on Schedule 14A filed with the SEC on February 12, 2008 (File No. 001-33279)), Kern’s revenues and profitability in the past may not be indicative of its future results of operations. Similarly, the pro forma financial statements contained in our revised preliminary proxy statement are not an indication of our financial condition or results of operations following the Acquisition. The pro forma financial statements have been derived from our historical financial statements and those of Kern and adjustments and assumptions have been made regarding us after giving effect to the Acquisition. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy.

 

Additionally, before the Acquisition, Kern was treated for U.S. federal income tax purposes as a qualified subchapter S subsidiary of Casey, with the result that Casey’s shareholders paid U.S. federal income taxes with respect to income, gains, and losses generated by Kern. After the Acquisition, Kern will be a subchapter C corporation and a member of the consolidated group of which we will be the common parent. After the Acquisition, any income, gains, and losses resulting from Kern’s operations generally will be subject to U.S. federal income tax as part of our consolidated group. As a result, Kern’s and our actual financial condition and results of operations following the Acquisition may not be consistent with, or evident from, these pro forma financial statements.

 

Further, our actual earnings per share, or EPS, following the Acquisition may decrease below that reflected in the pro forma financial information for several reasons. The assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect our actual EPS following the Acquisition. See the section entitled “Unaudited Pro Forma Condensed Consolidated Financial Information” in our revised preliminary proxy statement filed on Schedule 14A as filed with the SEC on February 12, 2008 (File No. 001-33279).

 

The price of our common stock after the Acquisition may be volatile and less than what you originally paid for your shares of common stock prior to the Acquisition.

 

The price of the common stock after the Acquisition may be volatile, and may fluctuate due to factors such as:

 

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actual or anticipated fluctuations in our consolidated quarterly and annual results;

 

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market conditions in the petroleum refining industry;

 

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our earnings estimates and those of our publicly held competitors; and

 

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the general state of the stock markets.

 

The petroleum refining industry has been highly unpredictable and volatile. The market for common shares of companies in this industry may be equally volatile. Our common stock after the Acquisition may trade at prices lower than what you originally paid for your corresponding shares of our common stock prior to the Acquisition.

 

Our outstanding warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of the common stock.

 

Outstanding redeemable warrants to purchase an aggregate of 30,407,205 shares of our common stock will become exercisable upon the later of 13 months from the date of closing of our IPO, or March 5, 2008, and the consummation of the Acquisition or an alternate initial business combination. These warrants will likely be exercised only if the $7.50 per share exercise price is below the market price of our common stock. To the extent they are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of such shares.

 

 

If we are unable to maintain a current registration statement relating to the common stock underlying our warrants, our warrants may have little or no value and the market for our warrants may be limited.

 

No warrants will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a registration statement is in effect covering the shares of common stock issuable upon exercise of the warrants. Under the terms of the warrant agreement between American Stock Transfer & Trust Company, as warrant agent, and us, we have agreed to use our best efforts to have a registration statement in effect covering the common stock issuable upon exercise of our warrants from the date the warrants become exercisable and to maintain a current prospectus relating to those shares of common stock until the warrants expire or are redeemed. However, we cannot assure you that we will be able to do so. If the prospectus relating to the common stock issuable upon exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, our warrants may not be exercisable before they expire and we will not net-cash settle the warrants. Thus, the market for our warrants may be limited, our warrants may be deprived of any value and they may expire worthless. Even if warrant holders are not able to exercise their warrants because there is no registration statement in effect or a current prospectus or the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, we can exercise our redemption rights discussed below.

 

We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders.

 

We may redeem our warrants at any time after the warrants become exercisable in whole and not in part, at a price of $0.01 per warrant, upon a minimum of 30 days’ prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price therefor at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants.