Our
Business
Frontier
Oilfield Services, Inc. a Texas corporation (and collectively with its subsidiaries, “we”, “our”, “Frontier”,
“FOSI”, or the “Company”), was organized on March 24, 1995. The accompanying consolidated financial statements
include the accounts of the Company as well as:
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Frontier
Acquisition I, Inc., and its direct and indirect subsidiaries Chico Coffman Tank Trucks, Inc. (“CTT”) and Coffman
Disposal, LLC; and
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Frontier Income
and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC.
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Frontier
operates in the oilfield service industry and is currently involved in the disposal of saltwater and other oilfield fluids in
Texas. Frontier owns eight disposal wells in Texas. Six of these disposal wells are located in the Barnett Shale region in north
central Texas and two of these wells are located in east Texas near the Louisiana border.
The
Barnett Shale region is a productive shale formation with a concentration of successful oil and gas wells. These wells have been
completed using hydraulic fracturing and directional drilling techniques. In east Texas, the producing oil and gas wells have
typically been in place for many decades. Production stimulation techniques such as salt-water flood projects are used whereby
salt water is injected into a producing formation to accelerate the migration of hydrocarbons to the well bore. The oil and gas
wells in the Barnett Shale and in east Texas produce commercially viable volumes of hydrocarbons in the form of crude oil and
natural gas. In addition, these wells produce significant volumes of salt water and other fluids as a by-product of the production
of hydrocarbons. The salt water and fluids must be routinely removed from the well site on a daily, semiweekly or weekly basis
depending on the flow rate of the wells.
The
significant quantity of wells in the Barnett Shale and east Texas regions combined with the presence of salt water and other fluids
in the production process creates demand for disposal services such as those services provided by Frontier.
We
had one customer that represented approximately 32% of our revenue for each of the years ended December 31, 2018 and 2017.
Recent
Developments
None.
Development
and Operating Activities
Economic
conditions in the oil and gas industry are subject to volatility. The uncertain nature of these economic conditions combined with
federal and state regulatory uncertainty in the energy industry requires operators to be flexible and adept at adjusting operations
and strategy to achieve profitability. We intend to evaluate all conditions and risks affecting our operating activities and to
respond to those conditions by employing resources in areas we believe to have the most potential for success. Over the past year,
significant declines in the price of crude oil and natural gas have put economic pressure on oil producers, requiring them to
seek expense reductions to offset the decline in their revenues. The oil field service industry has been and will continue to
be affected by the volatility in oil and natural gas prices and may experience lower revenues as oil producers’ pressure
oil field service providers for lower cost service.
The
Company’s business requires capital to fund operations and growth. Management intends to conduct operations to generate
sufficient capital for use in reduction of the Company’s outstanding debt. In order to adequately fund operating activities,
reduce current liabilities, and pay interest and principal on the debt, we may need to secure additional capital from third parties
or other debt or equity financing sources. There can be no assurance that we will be able to enter into additional financing arrangements
on terms that are acceptable. There are also no assurances that we will be able to achieve profitability from our operations in
the current market environment.
General
Regulations
Both
state and federal authorities regulate the transportation and disposal of salt water, produced fluids and drilling fluids. The
executive and legislative branches of government at both the state and federal levels have periodically proposed the establishment
of controls on salt water disposal, environmental protection, as well as various other related programs affecting the salt water
disposal business. If any further legislation is promulgated related to the disposal of salt water, produced fluids or drilling
fluids, such legislation could have a material effect on our operations.
Federal
Regulatory Actions
Federal
legislation has also been introduced which may have an effect on the use of hydraulic fracturing to increase oil and gas production,
primarily in shale formations, due to concerns related to potential contamination of drinking water supplies.
The
U.S. Environmental Protection Agency (“EPA”) has asserted federal regulatory authority pursuant to the federal Safe
Drinking Water Act (“SDWA”) over certain hydraulic fracturing activities involving the use of diesel. In addition,
Congress has considered legislation to provide for federal regulation generally of hydraulic fracturing in the United States under
the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process.
The
Company’s operations are located in areas where hydraulic fracturing is used as the primary method of establishing and developing
oil and gas producing wells. These areas are also where the majority of the Company’s revenues are generated as these producing
wells also generate salt water and other fluids as by-products of the oil and gas producing process. Any regulation inhibiting
or prohibiting the use of hydraulic fracturing may have a material adverse effect on our operations.
State
Regulatory Controls
The
State of Texas (where we operate) regulates the operation and permitting associated with the transport and disposal of salt water
and other produced fluids. Because we are primarily engaged in salt water, produced fluids and drilling fluid disposal activities,
our operations are subject to inspection and permitting by authorities of the State of Texas. There have been recent regulatory
and legislative proposals related to concerns with potential water supply contamination potentially be caused by hydraulic fracturing
operations.
Environmental
Regulations
Our
salt water and other fluids disposal operations are subject to environmental protection regulations established by federal, state,
and local agencies. We believe we are in compliance with the applicable environmental regulations established by these agencies
with jurisdiction over our operations. Certain environmental regulations currently in effect could have a material adverse effect
on our earnings or prospects for profitability if we received a determination from one of these agencies that our operations are
not in compliance. The Texas Legislature has mandated a regulatory program for the management of hazardous wastes generated during
crude oil and natural gas exploration and production, gas processing, oil and gas waste reclamation, salt water disposal and transportation
operations. The disposal of these wastes, as governed by the Railroad Commission of Texas, is subject to the supervision of state
of Texas authorities. Our disposal operations are also subject to inspection and regulation by state and federal environmental
authorities.
Employees
Currently,
we have nine full-time employees, with two full-time employees at our corporate office and seven full-time employees in operations.
Business
Risks
Our
business volume has declined, and our operations have lost a significant amount of money during the last two fiscal years.
Due
to reductions in the volume of business and the decision to no longer provide transportation services to our customers combined
with significant debt, the Company’s operations have not been profitable. We have made substantial changes in our operations
including significant reductions in operating expenses and employees, the closing of our salt water disposal operations in east
Texas, and sales of transportation assets to raise cash to reduce debt. There can be no assurance we will be successful in returning
to profitability. If we are unable to return to profitability, we may be required to seek the protection of the United States
Bankruptcy Court and liquidate or reorganize.
Our
independent auditors have issued a report which raises the question about our ability to continue as a going concern. This report
may impair our ability to raise additional financing and adversely affect the price of our common stock.
The
report of our independent auditors contained in our financial statements for the year ended December 31, 2018 includes a paragraph
that explains that we have been experiencing financial and liquidity concerns. Per the report, these conditions raise substantial
doubt about our ability to continue as a going concern. Reports of independent auditors questioning a company’s ability
to continue as a going concern are generally viewed unfavorably by analysts and investors. This report, along with our recent
financial results, may make it difficult for us to raise additional debt or equity financing necessary to conduct our operations.
We
have a significant amount of debt and our operational losses may prevent the payment of our debt when due.
We
currently have a significant amount of debt outstanding which requires us to meet certain operating and financial covenants and
on which we are required to pay interest and repay principal. We have failed to meet the operational or financial covenants and
have failed to pay interest and principal on our debt in a timely matter and are therefore in breach of certain of our loan agreements.
Our secured creditors could foreclose on their collateral, which constitutes all of our assets. Due to our reduced business volume
and operating losses, we have been dependent upon two of our significant shareholders who have purchased our equity and provided
funds to make our debt payments. If we are unable to increase business volumes or otherwise return to profitability and we are
unable to raise additional debt or equity capital, we may default on our debt and our creditors could foreclose on our assets.
We would then cease operating as a going concern and you could potentially lose all of your investment in the Company.
Our
future success depends upon our ability to adapt to changes in the oil services industry and successfully implement our business
strategy.
Due
to lower market prices for crude oil and other changes occurring in the oil industry, many of our customers are seeking to reducing
their costs and to reduce their operations. We have begun implementing a business plan with an emphasis on increasing the volumes
of salt water, produced fluids and drilling fluids we dispose of. The planned increase in business volume may require that we
reduce prices for the services we perform for our customers due to the current economic environment in the oil and gas industry.
We currently have limited financial resources and there can be no assurance we will be successful in gaining additional salt water
disposal business from new and existing customers at prices and terms that would allow us to make a profit.
Federal
legislation and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs
and additional operating restrictions or delays as well as adversely affect our services.
Hydraulic
fracturing is an important and commonly used process for the completion of oil and natural gas wells in formations with low permeability,
such as shale formations. Hydraulic fracturing involves the pressurized injection of water, sand and chemicals into rock formations
to stimulate production. Due to concerns surrounding the potential impacts of hydraulic fracturing activities on groundwater quality,
certain legislative and regulatory proposals have been initiated in the United States to make permitting, public disclosure and
construction and operational compliance requirements more stringent for hydraulic fracturing. While hydraulic fracturing typically
is regulated in the United States by state oil and natural gas commissions, there have been developments indicating that more
federal regulatory involvement may occur.
The
EPA has asserted federal regulatory authority pursuant to the federal Safe Drinking Water Act, or SDWA, over certain hydraulic
fracturing activities involving the use of diesel. In addition, the United States Congress has considered legislation to provide
for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic
fracturing process. At the state level, several states have adopted or are considering adopting legal requirements that could
impose more stringent requirements on hydraulic fracturing activities. In the event new or more stringent federal or state legal
restrictions relating to use of the hydraulic fracturing process in the United States are adopted in areas where our oil and natural
gas exploration and production customers operate, those customers could incur potentially significant added costs to comply with
requirements relating to permitting, construction, financial assurance, monitoring, recordkeeping, and/or plugging and abandonment,
as well as could experience delays or curtailment in the pursuit of production or development activities, which could reduce demand
for our water disposal services.
Other
governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, are evaluating various
other aspects of hydraulic fracturing. These ongoing or proposed studies, depending on their degree of pursuit and any meaningful
results obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory mechanisms,
which events could delay or curtail production of oil and natural gas by exploration and production operations, some of which
are our customers, and thus reduce or eliminate demand for our services.
We
are subject to extensive and costly environmental laws and regulations that may require actions that could adversely affect our
results of operations.
Our
operations are affected by stringent and complex federal, state and local laws and regulations governing the discharge of substances
into the environment or otherwise relating to environmental protection. We could be exposed to liability for cleanup costs, natural
resource damages and other damages because of our operating activities that were lawful at the time it occurred or the conduct
of, or conditions caused by, prior operators or other third parties.
Environmental
laws and regulations are subject to change in the future, possibly resulting in requirements that are more stringent. If existing
regulatory requirements or enforcement policies change or are more stringently enforced, we may be required to make significant
unanticipated capital and operating expenditures. Any failure to comply with applicable environmental laws and regulations may
result in governmental authorities taking actions that could adversely affect our operations and financial condition, including
the:
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issuance
of administrative, civil and criminal penalties;
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denial or revocation
of permits or other authorizations;
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reduction or cessation
in operations; and
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performance of site
investigatory, remedial or other corrective actions.
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There
are risks inherent in reworking, completing and operating disposal wells.
Reworking
and completing saltwater disposal wells involves a degree of risk, and sometimes results in unsuccessful efforts, for a variety
of reasons. We cannot control the outcome of operations entirely, and there can be no assurance that any operation will be successful.
Even though a disposal well is permitted to accept a certain amount of water, there is no assurance that the disposal well or
any specific zone in the well will be capable in fact of absorbing any specific amount of water. Disposal wells may also be ruined
or rendered unusable during operations due to technical or mechanical difficulties. Should a well be successfully completed or
perforated, there is still no assurance that the zone in which the well is completed or perforated will be able to absorb saltwater
at a rate that will support profitable operations. Disposal wells can encounter problems that render the well unusable, even after
a period of successful operation. There can be no assurance we will be able to successfully rework, complete or operate any specific
well, or will be able to operate sufficient wells to achieve a consistent positive cash flow or to achieve profitability.
Our
success will likely depend on the continuing availability of certain disposal wells
.
We
believe there will be available a number of existing disposal wells and sources of locations for the drilling of new wells necessary
to provide us with sufficient disposal capacity at a reasonable cost. However, there can be no assurance that disposal wells or
disposal well locations will always be available or available at a reasonable cost. There can be no assurance we will have the
resources to drill and/or complete additional wells. If we are not able to obtain disposal wells or disposal well drilling locations
or the wells or locations are available, but their cost is no longer reasonable, our finances would be directly impacted and we
might not have the ability to continue as a going concern.
We
may not be sufficiently insured or insured against all potential liabilities.
We
could incur substantial liabilities in connection with reworking or operating disposal wells. We may not be able to insure against
all such liabilities, may carry insurance in amounts not sufficient to cover all such liabilities or may elect to self-insure
against such liabilities due to the premium costs involved or due to lack of available insurance coverage. Other parties with
whom we contract for operations may carry liability insurance, but there is no assurance that the insured risks or the level of
insurance coverage obtained by such parties will be sufficient to cover all potential liability we or such parties incur. Further,
there may be occurrences resulting in expenses or liabilities to third parties that are of a nature that cannot now or may not
in the future be insured. Uninsured liabilities to third parties could reduce the funds available to us, could exceed the value
of our assets, and could result in the complete loss of property we own.
We
may not be able obtain the necessary permits.
We
are required to obtain certain permits, approvals or licenses in connection with our disposal well operations. We may not be able
to obtain new or transferred permits, approvals or licenses on a timely basis or at all, which would result in material adverse
consequences to our business and financial condition.
Our
salt water disposal operations may be subject to liability or claims of environmental damages.
We
operate existing salt water disposal wells and locations, which have received the necessary governmental permits for drilling
a disposal well. Although the disposal wells have received certain governmental regulatory licenses, permits or approvals this
does not shield us from potential claims from third parties claiming contamination of their water supply or other environmental
damages. Remediation of environmental contamination or damages can be extremely costly and such costs, if we are found liable,
could be of such a magnitude as to cause us to cease operating as a going concern.
Our
business may fail.
There
is limited operating history upon which to base an assumption that we will be able to achieve our revised business plans. Our
salt water disposal operations are subject to all of the risks inherent in the establishment of a new business enterprise, including
the lack of significant operating history and potential undercapitalization. There can be no assurance that future operations
will be profitable. Revenues and profits, if any, will depend upon various factors, including our ability to acquire suitable
assets and to maintain our existing customer base and attract new customers. There can be no assurance we will achieve our projected
goals or accomplish our business plans; and such failure could have a material adverse effect on our operations and our stockholders.
If we are not able to achieve and maintain operating revenues, we could fail and you could lose your entire investment.
We
will require additional funding to implement our business plan.
Our
estimates of the amounts required to fund our future operations are based upon assumptions that may not prove accurate. If we
do not have adequate funds to cover operating expenses and working capital requirements, we will require debt and/or equity financing
sources for additional working capital. We may further leverage our assets and may use the assets as collateral to secure financing.
There is no assurance that we will be able to obtain additional debt or equity funding if necessary.
Our
business depends on domestic spending by the oil and gas industry.
Industry
conditions are influenced by numerous factors over which we have no control, such as the supply of and demand for oil and gas,
domestic and worldwide economic conditions, political instability in oil and gas producing countries and merger and divestiture
activity among oil and gas producers. The volatility of the oil and gas industry and the consequent impact on exploration and
production activity could adversely affect the level of drilling and workover activity. This reduction may cause a decline in
the demand for our services or adversely affect the price of our services. In addition, reduced discovery rates of new oil and
gas reserves in our market areas also may have a negative long-term impact on our business, even in an environment of stronger
oil and gas prices, to the extent existing production is not replaced and the number of producing wells for us to service declines.
Competition
may adversely affect us.
The
salt water and production fluids disposal services industry is highly competitive and fragmented and includes numerous small companies
capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially
greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors
to compete more effectively than we can.
Our operations
are subject to inherent risks, some of which are beyond our control
.
Our operations
are subject to hazards inherent in the oil and gas industry, including, but not limited to, accidents, blowouts, explosions, craterings,
fires and oil spills. These conditions can cause:
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personal injury or loss of life;
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damage to or destruction of property and equipment and the environment; and
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suspension of operations.
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The occurrence
of a significant event or adverse claim in excess of any insurance coverage that we maintain or that is not covered by insurance
could have a material adverse effect on our financial condition and results of operations. Litigation arising from a catastrophic
occurrence at a location where our equipment or services are being used may result in our being named as a defendant in lawsuits
asserting substantial claims.
We may
be exposed to certain regulatory and financial risks related to climate change.
Climate change is receiving increasing
attention from scientists and legislators alike. The debate is ongoing as to the extent to which our climate is changing, the potential
causes of this change and its potential impacts. Some attribute global warming to increased levels of greenhouse gases, including
carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. A significant
focus is being made on companies that are active producers of depleting natural resources.
There are a number of legislative and regulatory
proposals to address greenhouse gas emissions, which are in various phases of discussion or implementation. The outcome of foreign,
U.S. federal, regional, provincial and state actions to address global climate change could result in a variety of regulatory programs
including potential new regulations, additional charges to fund energy efficiency activities, or other regulatory actions. These
actions could:
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result in increased costs associated with our operations and our customers’ operations;
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increase other costs to our business;
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adversely impact overall drilling activity in the areas in which we plan to operate;
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reduce the demand for carbon-based fuels; and
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reduce the demand for our services.
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Any adoption of these or similar proposals
by foreign, U.S. federal, regional or state governments mandating a substantial reduction in greenhouse gas emissions and implementation
of the Kyoto Protocol (the Copenhagen Accord,) or other foreign, U.S. federal, regional or state requirements or other efforts
to regulate greenhouse gas emissions, could have far-reaching and significant impacts on the energy industry. Although it is not
possible at this time to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would
impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions
and could have a material adverse effect on our business or demand for our services.
Currently proposed legislative changes,
including changes to tax laws and regulations, could materially, negatively affect our operations and financial results, increase
the costs of doing business and decrease the demand for our products.
The current U.S. administration and Congress
have proposed several new articles of legislation or legislative and administration changes, including changes to tax laws and
regulations, which could have a material negative effect on our operations and financial results. Some of the proposed changes
that could negatively affect us are:
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cap and trade system for emissions;
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increase environmental limits on exploration and production activities;
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repeal of expensing of intangible drilling costs;
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increase of the amortization period for geological and geophysical costs to seven years;
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repeal of percentage depletion;
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limits on hydraulic fracturing or disposal of hydraulic fracturing fluids;
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repeal of the domestic manufacturing deduction for oil and natural gas production;
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repeal of the passive loss exception for working interests in oil and natural gas properties;
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repeal of the credits for enhanced oil recovery projects and production from marginal wells;
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repeal of the deduction for tertiary injectants;
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changes to the foreign tax credit limitation calculation; and
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changes to healthcare rules and regulations.
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We are subject to litigation risks
that may not be covered by insurance.
In the ordinary course of business, we
become the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our
commercial operations, employees and other matters, including potential claims from individuals due to accidents or other mishaps
involving our operations. We maintain insurance to cover many of our potential losses, and we are subject to various self-retentions
and deductibles under our insurance policies. It is possible, however, that a judgment could be rendered against us in cases in
which we could be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for such matters.
Our concentration of customers in
a single industry may affect our overall exposure to credit risk.
All of our customers operate in the energy
industry. This concentration of operations and customers in a single industry may affect our overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions.
Oil and natural gas prices are volatile.
A substantial decrease in oil prices could adversely affect our financial results
.
Our future financial condition may be impacted
by the level of oil and natural gas market prices. Oil and natural gas prices historically have been volatile and likely will continue
to be volatile in the future, especially given world geopolitical conditions. In addition, our cash flow from operations is somewhat
dependent on the prices that we receive for oil sold from our disposal operations. The price volatility in the oil and natural
gas market also affects the cash flow and operations of our customers and their ability to purchase our services. The prices for
oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:
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the level of consumer demand for oil and natural gas;
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the domestic and foreign supply of oil and natural gas;
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the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil and natural gas price and production controls;
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the price of foreign oil and natural gas;
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domestic governmental regulations and taxes;
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the price and availability of alternative fuel sources;
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These factors and the volatility of the
energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty.
Declines in oil and natural gas prices would reduce revenue and, as a result, could have a material adverse effect upon our financial
condition, results of operations, and the carrying values of our properties. If the oil industry experiences significant price
declines, we may, among other things, be unable to meet our financial obligations or make planned expenditures.
Loss of key employees and sponsors
could adversely affect our business.
Our success is dependent upon the continued
services and skills of our key employees and certain large stockholders. The loss of services or participation of any of these
key individuals could have a negative impact on our business because of their skills and industry experience and the difficulty
of promptly finding qualified replacements.
Risks Related to Our Common Stock
Our common stock is thinly traded
which is likely to result in volatile swings in our stock price.
Our stock is thinly traded as much of our
issued and outstanding stock is held by our officers and a small number of stockholders. Consequently, until our common stock is
more widely held and actively traded small sales or purchases will likely cause the price of our common stock to fluctuate dramatically
up or down without regard to our financial health, net worth or business prospects.
We may issue additional shares of
preferred stock.
Pursuant to our certificate of incorporation,
our board of directors has the authority to issue additional series of preferred stock and to determine the rights and restrictions
of shares of those series without the approval of our stockholders. The rights of the holders of the current series of common stock
may be junior to the rights of common stock that may be issued in the future. In addition, any future series of preferred stock
could be convertible into shares of our common stock, which could result in dilution to your investment.
There may be future dilution of
our common stock.
We may pursue an acquisition strategy,
which is likely to require the issuance of common shares as a component of the purchase price for the acquisitions. Any such issuance
will result in dilution of our common stock. In addition, to the extent options to purchase common stock under employee and director
stock option plans are exercised, holders of our common stock will be diluted. If available funds and cash generated from our operations
are insufficient to satisfy our needs, we may be compelled to sell additional equity or convertible debt securities. The sale of
additional equity or convertible debt securities could result in additional dilution to our stockholders.
Sales of substantial amounts of
our common stock may adversely affect our stock price and make future offerings to raise more capital difficult.
Sales of a large number of shares of our
common stock in the market or the perception that sales may occur could adversely affect the trading price of our common stock.
We may issue restricted securities or register additional shares of common stock in the future for our use in connection with future
acquisitions. Except for volume limitations and certain other regulatory requirements applicable to affiliates, such shares may
be freely tradable unless we contractually restrict their resale. The availability for sale, or sale, of the shares of common stock
eligible for future sale could adversely affect the market price of our common stock.