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Item
1.
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Description
of B
usine
ss
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Corporate
History
We
were
incorporated in the State of Nevada on February 21, 2006 as Georgia Exploration,
Inc., a Vancouver, Canada based mineral resource exploration company with
interests in 14 non-oil and gas mineral claims in British
Columbia. On January 3, 2007, we consummated a reverse merger with
Wharton Resources Corp. (“Wharton” or “Wharton Corp.”). The merger
resulted in a change in control of us with Wharton’s former stockholders holding
approximately 71.4% of the then issued and outstanding shares of our common
stock. On March 8, 2007, we changed our name to Gulf Western
Petroleum Corporation.
General
Overview
We
are
engaged in the acquisition, exploration and development of oil and natural
gas
reserves in the United States. Upon completion of our reverse merger,
Wharton’s oil and gas interests and reserves became our primary assets and our
core business became the exploration and development of domestic oil and
natural
gas reserves in the United States.
We
currently hold oil and gas lease interests in Texas, Kansas and
Kentucky. We are actively engaged in the drilling of Frio formation
wells in Dewitt and Lavaca County, Texas. We also hold proved
undeveloped reserves in Wharton County, Texas, and we are engaged in a natural
gas supply and gas gathering system development project in Southeast
Kansas. We hold oil and gas lease interests in Kentucky that are
exploratory in nature. We hope to establish commercial levels of production
from
our Texas Shamrock and Brushy Creek Project wells in Dewitt and Lavaca County,
Texas during 2008. We are actively pursuing financing options to
initiate the drilling of our proved undeveloped natural gas and oil reserves
in
our Oakcrest Prospect located in Wharton County, Texas.
Principal
Properties
Oakcrest
Prospect (Wilcox Formation), Wharton County, Texas
Our
Oakcrest Prospect is located in south central Texas, approximately 75 miles
southwest of Houston, Texas. We hold oil and gas lease
interests in approximately 866 acres with a working interest of
95.75%. The main target of hydrocarbon production is the Wilcox
formation, with secondary targets for the Oakcrest Prospect being the Frio
and
Yegua formations that will be traversed while in route to the Wilcox formation
during drilling. The lease acreage is adjacent to and lies immediately to
the
north-east of the existing Southwest Bonus Field. The prospect is located
in the central Gulf Coast Plain on the east side of the San Marcos Arch in
Wharton County, Texas. All Wilcox fields in the Gulf Coast
Plain are fault-bounded and produce from simple, normal fault-bounded
anticlines. The Wilcox formation is Eocene-age and is found at a
depth of approximately 11,000 to 12,500 feet. A combination of
aeromagnetic surveys and well control had originally defined the structure
of
the Oakcrest Prospect. Through 2-D seismic data reprocessing and
reinterpretation, two large normal faults that were previously identified
were
confirmed together with two smaller possible faults.
Initial
production in the Southwest Bonus Field commenced in August 1998 with the
Obenhaus Gas Unit which to date has yielded total production of approximately
4,206 MMcf. We do not hold interests in the Southwest Bonus Field,
however in connection with the reserve evaluation of the Oakcrest Prospect,
we
acquired data for sixty one (61) Wilcox formation producing wells, located
in
the Southwest Bonus Field, that we evaluated to ascertain their estimated
ultimate recoveries. Production data through June 2007 was obtained
and evaluated to develop decline curve analysis for each well in order to
forecast remaining and ultimate reserves for wells that are currently
producing. For wells that were no longer producing, the cumulative
natural gas and oil production were used to develop ultimate
recoveries. Median recovery from the Southwest Bonus Field
offset producing wells is approximately 2,436 MMcf and 73,100 barrels
of oil per well.
Production
forecasts for the Oakcrest Prospect locations was derived based on the
historical behavior of the Wilcox formation offset wells in the Southwest
Bonus
Field. Based on the production behavior of the offset wells, the
initial gas production rate for the Oakcrest wells was plotted to be 15,000
Mcf
per day with an initial decline rate of 90% per year, and a hyperbolic exponent
of 0.8.
We
engaged MHA Petroleum Consultants, Inc. (“MHA”) to make a technical evaluation
our Oakcrest Prospect natural gas and oil reserves, and to formulate estimates
of the proved reserves and income attributable to our interests in the
prospect. In MHA’s evaluation of the Oakcrest Prospect, 17
potential well locations were identified. Two well locations contain
reserves categorized as proved reserves. A summary of the results of
MHA’s technical evaluation of oil and natural gas reserves categorized as
proved as of September 1, 2007, together with the net undiscounted cash flows,
discounted future cash flows at a 10.0% discount rate (“PV10”) on a before and
after tax basis are as follows:
Summary
of Oil and Natural Gas Reserves
(Dated
as of September 1, 2007)
(Prepared
with Constant Prices)
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Oil
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Natural
Gas
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Gross
(MBBL)
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Net
(MBBL)
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Gross
(MMCF)
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Net
(MMCF)
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Total
Proved Reserves
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146.2
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106.7
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4,872
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3,308
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Cash
Flows and PV 10 Proved Reserves
Before
(“BFIT”) and After (“AFIT”) Income Taxes
(Discounted
at 10%)
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Future
net revenue
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$
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28,610
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$
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28,610
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Future
operating costs
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3,256
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3,256
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Future
income taxes
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-
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2,604
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Operating
cash flow
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$
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25,354
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$
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22,750
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Capital
investment
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8,693
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8,693
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Undiscounted
future net cash flow
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$
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16,661
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$
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14,057
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Discounted
PV10 cash flow
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$
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13,066
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$
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11,168
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The
economics and cash flows presented in the above table are based on our 95.75%
working interest and 73.0% net revenue interest in the Oakcrest
Prospect. The constant prices used in calculating the
information provided in the above table were West Texas Intermediate (“WTI”) of
$73.19 per barrel (with a wellhead netback of $68.19 to us) and Henry Hub
natural gas price of $7.00 per million cubic feet (with a wellhead netback
of
$6.45 per Mcf to us).
Estimated
capital expenditures to drill and complete a well is approximately $4.4 million
based on current rig rates, casing prices, sub-surface and surface equipment,
and other ancillary services and materials required to drill and complete
a
Wilcox formation well.
Our
plan
of operation for the Oakcrest Prospect is to construct the required drilling
location, to spud the initial Wilcox formation well in January 2008. A second
well also targeting reserves identified as proved undeveloped is scheduled
to
spud immediately following the completion of the initial well. Upon
the drilling of the first and second Wilcox wells, we will make further
technical evaluations to ascertain whether reserves originally categorized
as
probable have shifted to proved reserves with further data assembled through
the
drilling of these Wilcox wells. If successful, we plan to drill a
third Wilcox formation well during 2008 leveraging off the information acquired
from the first two wells.
Texas
Shamrock and Brushy Creek Projects (Frio Formation), Dewitt and Lavaca Counties,
Texas
Our
Texas
Frio formation wells that comprise our Shamrock and Brushy Creek Projects
are
our first wells to commence commercial production with the first well, the
Pope
No. 1 (Brushy Creek V), going on line in November
2007. In our Frio initiative, we are participating in the
drilling of a minimum of twelve Frio-age natural gas wells located in Dewitt
and
Lavaca Counties, Texas. All twelve wells have been identified
through newly acquired 3-D seismic data. Frio-age sediments lie below
the Anahuac Shale, a detachment zone within the Post Isabel Fold
Belt. The Shamrock Project in Dewitt County consists of five Frio
wells drilled in 2007, and our participation in the Brushy Creek Project
consists of non-operated interests in seven Frio wells located in Lavaca
County,
Texas.
Shamrock
Project
The
Shamrock Project is a five well drilling program located in Dewitt County,
Texas
that is targeting Frio-age natural gas reserves that have been identified
through 3-D seismic. Frio-age wells have proven to be prolific natural gas
producers throughout the Texas Gulf Coast region. Typical Frio wells
produce at approximately 200 to 250 Mcf per day with estimated total recoverable
reserves of approximately 500 MMcf. The target formation is the
Jameson sand with total well depth at approximately 3200
feet. The five wells drilled and completed in the Shamrock
Project are the Polinard-Lee No. 1, the Miller-Thomas No. 1, the Bushmill
No. 1,
the Red Breast No. 1 and the Michael Collins No. 1. All five
wells had flow rates during test of 310 – 325 Mcf per day. We
hold an average 65.0% working interest and 45.5% net revenue interest in
the
wells.
Our
plan
of operation for the Shamrock Project is to finish the interconnection of
the
wells and to effect commercial production creating operating cash flows to
us.
Brushy
Creek Project
The
Brushy Creek Project is a 3-D seismic controlled project situated in the
prolific Oligocene Frio oil and natural gas trend located in the lower Texas
Gulf Coast. The Brushy Creek Project was initiated in 2005, and to
date has been successful in ten out of ten wells. The first ten wells
resulted in six Frio discoveries, three Miocenen discoveries and one Yegua
completion. These ten new wells entail drilling that targets several
high quality amplitude anomalies similar to those that have proven to be
productive in the previous drilling. We currently hold
interests in seven Brushy Creek Project wells, and are evaluating the
participation in three additional Frio wells scheduled for
drilling. Our average working and net revenue interests in the
existing seven drilled wells is 34.4% and 24.9%, respectively.
The
seven
wells drilled and completed during 2007 that we hold interests in are the
Goodrich-Toyah No. 1, Nichol’s No. 1, Pope No. 1, Goodrich-Deleplain No. 1,
Goodrich-Poindexter No. 1, O’Neal Smith No. 1 and the Williams No.
6. These wells are in various stages of testing and
interconnection.
Our
plan
of operation is to complete testing and interconnection of the seven existing
Brushy Creek Frio wells, and to evaluate our further participation in the
Brushy
Creek Project.
Mound
Branch Reserve and Infrastructure Development Project, Elk County,
Kansas
On
January 30, 2007 we purchased Orbit Energy, LLC’s (“Orbit”) working and net
revenue interests in approximately 8,800 gross acres located in Elk County,
Kansas together with its interests in certain drilled wells and associated
equipment (the “Mound Branch Project”). Orbit is owned by CodeAmerica
Investments, LLC, for which Wm. Milton Cox, our Chairman and CEO, is the
Managing Member, and Paragon Capital, LLC for which Bassam Nastat, our President
and a Director, serves as Manager.
The
purchase price totaled $6.8 million, and consideration paid to Orbit was
comprised of: a) $760,947 of funds that we advanced to Orbit for testing
and
evaluation of the existing well bores, reservoir formations and associated
lease
acreage; b) a thirty-six month $2.0 million 10% convertible note with principal
due at maturity; and c) 4,039,053 shares of our common stock with a fair
value
of $1.00 per common share at the time of issuance, subject to a true up upon
receipt of an independent report assessing the fair value of the assets acquired
at no less than the purchase price of $6.8 million. Should the
valuation be less than the $6.8 million purchase price then the number of
shares
released to Orbit on January 30, 2008, the one-year anniversary of the purchase
from Orbit, will be ratably reduced for the lower valuation and shares will
be
returned to treasury.
The
Mound
Branch Project is a natural gas reserve and gathering system development
project
of existing and after acquired oil and gas lease acreage, and existing wellbores
previously drilled by Orbit and its working interest partners. The
Mound Branch Project consists of a three year drilling program to drill fifty
wells per year and for the construction of a 15-mile low pressure gathering
system. The required gathering system would have design capacity of
8,000 Mcf per day, and is necessary for the delivery of existing and expected
prospective well head production into the interstate natural gas pipeline
grid
in Kansas. Orbit serves as the operator of the Mound Branch
Project.
The
Mound
Branch natural gas reserves cover Cherokee Group clastic rocks over
Mississippian limestones. Depth to the Mississippian basement in the Cherokee
Group ranges from 0 feet at outcrops in the extreme southeastern corner of
Kansas to more than 2,500 feet (762 m) in Elk and Chautauqua Counties as
the
Mississippian and Cherokee Group rocks gradually dip to the west and
southwest. The majority of wells are expected to produce from the
Mulky and Summit coals at approximately 1,600 feet depth, with upside potential
in the Mississippi Limestone, and Arbuckle sections at approximately 2,200
–
2,600 feet. Recent testing of the first Mississippi Limestone
well showed absolute open flow at 1,400 Mcf per day. The 72-hour flow tests
indicate that the wells will be produced at approximately 350 to 400 Mcf
per
day.
Test
results for the coal wells tested indicate that the wells, completed in the
Cherokee coal group, will be produced at a rate of approximately 38-40 Mcf
per
day. There are eight existing wells drilled that are expected to
achieve commercial levels of production if a gathering system can be
constructed. Since our acquisition of Orbit’s interests in the Mound Branch
Project we have been funding 100% of the costs incurred by Orbit for the
testing
and evaluation of the of the existing well bores, reservoir formations and
associated lease acreage, including amounts attributable to other working
interest owners in the existing wells. The amounts paid on the
behalf of other working interest owners total $198,106 through August 31,
2007,
and we expect that the amounts will be charged back to the other working
interest owners in the wells ratable to their working interests.
Orbit
has
advised us that the testing and evaluation procedures for the Mound Branch
Project were substantially completed during October 2007. Orbit has recently
advised that they recommend performing a test on one well to further evaluate
the Mulberry coal formation that has not been previously tested, but has
been
determined to be productive for other producers in the area.
Our
plan
of operation for Mound Branch is to complete the evaluation of the Mulberry
coal
formation, and to continue progress on the development of the natural gas
supply
and gathering system project.
Other
Prospects
Baxter
Bledsoe Prospect, Clay County, Kentucky
On
February 1, 2006, we purchased the Baxter Bledsoe Prospect oil and gas lease
acreage from CodeAmerica for $330,000 cash. The prospect has approximately
2,200
acres located in Clay County, Kentucky. The Baxter Bledsoe Prospect is
characterized as exploratory acreage, and our plan of operation provides
for the
drilling of an initial exploratory well targeting the Black River Group
formation during 2008.
Bell
Prospect, Bell County, Kentucky
On
October 1, 2006, we acquired from CodeAmerica oil and gas lease interests
located in Bell County, Kentucky. We paid $314,475 to CodeAmerica for
the Bell Prospect which is comprised of approximately 3,400 acres that are
categorized as exploratory. Our plan of operation for the Bell Prospect is
to
assemble and evaluate data with respect to the prospect once the initial
exploratory well on the Baxter Bledsoe prospect is completed and the data
acquired during the drilling process is assembled and
evaluated.
Market
and Competition
Our
long-term success depends on our ability to identify, acquire and develop
oil
and natural gas reserves in quantities and at prices that are physically
and
commercially competitive. The U.S. natural gas, oil and associated
product markets are highly competitive and experience extreme volatility
in
commodity prices, much of which are driven by factors outside our
control. Our experience is that crude oil, condensate and associated
product prices are driven primarily by global geopolitics, while natural
gas
prices in the U.S. are primarily determined by the interaction of consumer
and
industrial demand and available natural gas supply.
A
large
portion of the natural gas, crude oil and associated products production
in the
U.S. has historically been in the states of Texas, Louisiana, Oklahoma, and
in
the offshore areas associated with the Gulf of Mexico. The natural
gas and crude oil production in these areas are interconnected to consuming
markets through a vast network of existing developed infrastructure to move
production through pipelines or via trucks to markets.
Notwithstanding
increased drilling activity in the U.S., domestic natural gas and crude oil
production has not materially increased while consumer demand continues to
grow. The maturation of U.S. supply basins has resulted in declining
well recoveries and higher production decline rates. Although
generally more costly than conventional supply sources, supply from
non-conventional sources of natural gas, such as liquefied natural gas and
coalbed methane, is becoming more prevalent and is attracting significant
capital investment to explore and develop these potential non-conventional
supply opportunities. The development of non-conventional supply
sources will in many instances also require capital investment to develop
the
infrastructure necessary to effect delivery of production into markets.
We
compete with independent oil and natural gas companies for commercial prospect
acquisitions/participation; equipment, drilling rigs and labor required to
evaluate and develop prospects; capital resources to fund capital investments;
and in the sale of production into the oil and natural gas markets in the
U.S. The volatile nature of the U.S. energy markets makes it
difficult to estimate future prices of oil and natural gas, and competition
for
drilling rigs makes it very difficult to forecast the development costs of
our
prospects and the timeframe under which they can be developed. Many
of our competitors have substantially greater financial resources than we
have,
which may allow them to define, evaluate, acquire and develop a greater number
of prospects than we can.
Regulation
In
the
United States, domestic development, production and sale of oil and natural
gas
are extensively regulated at both the federal and state levels. These
regulations include requiring permits for drilling wells; maintaining prevention
plans; submitting notification and receiving permits in relation to the
presence, use and release of certain materials incidental to oil and natural
gas
operations; and regulating the location of wells, the method of drilling
and
casing wells, the use, transportation, storage and disposal of fluids and
materials used in connection with drilling and production activities, surface
plugging and abandoning of wells and the transporting of
production. Legislation affecting the oil and natural gas industry is
under constant review for amendment or expansion, frequently increasing the
regulatory burden. Also, numerous departments and agencies, both
federal and state, have issued rules and regulations binding on the oil and
natural gas industry and its individual members, compliance with which is
often
difficult and costly and some of which carry substantial penalties for failure
to comply. Inasmuch as new legislation affecting the oil and natural
gas industry is commonplace, and existing laws and regulations are frequently
amended or reinterpreted, we are unable to predict the future cost or impact
of
complying with these laws and regulations.
State
statutes and regulations require permits for drilling operations, drilling
bonds
and reports concerning wells. Texas and other states in which we intend to
conduct operations also have statutes and regulations governing conservation
matters, including the unitization or pooling of oil and natural gas properties
and establishment of maximum rates of production from oil and natural gas
wells.
Our
operations are also subject to extensive and developing federal, state and
local
laws and regulations relating to environmental, health and safety matters;
petroleum; chemical products and materials; and waste
management. Permits, registrations or other authorizations are
required for the operation of certain of our facilities and for our oil and
natural gas exploration and future production activities. These permits,
registrations or authorizations are subject to revocation, modification and
renewal. Governmental authorities have the power to enforce
compliance with these regulatory requirements, the provisions of required
permits, registrations or other authorizations, and lease conditions, and
violators are subject to civil and criminal penalties, including fines,
injunctions or both. Failure to obtain or maintain a required permit
may also result in the imposition of civil and criminal penalties. Third
parties
may have the right to sue to enforce compliance.
Our
operations are also subject to various conservation matters, including the
number of wells which may be drilled in a unit and the unitization or pooling
of
oil and natural gas properties. In this regard, some states allow the forced
pooling or integration of tracts to facilitate exploration while other states
rely on voluntary pooling of lands and leases, which may make it more difficult
to develop oil and natural gas properties. In addition, state conservation
laws
establish maximum rates of production oil and natural gas wells, generally
limit
the venting or flaring of natural gas, and impose certain requirements regarding
the ratable purchase of production. The effect of these regulations is to
limit
the amounts of oil and natural gas that we can produce from our wells and
to limit the number of wells or the locations at which we can
drill.
Our
operations, as is the case in the petroleum industry generally, are
significantly affected by federal tax laws. Federal, as well as state, tax
laws
have many provisions applicable to corporations which could affect our future
tax liability.
Environmental
Matters
Our
exploration, development, and future production of oil and natural gas are
subject to various federal, state and local environmental laws and regulations
discussed below. Such laws and regulations can increase the costs of planning,
designing, installing and operating oil and natural gas wells. We
consider the cost of environmental protection a necessary and manageable
part
of our business. We have been able to plan for and comply with new
environmental initiatives without materially altering our operating
strategies.
Our
activities are subject to a variety of environmental laws and regulations,
including but not limited to, the Oil Pollution Act of 1990 (“OPA”), the Clean
Water Act (“CWA”), the Comprehensive Environmental Response, Compensation and
Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”),
the Clean Air Act, and the Safe Drinking Water Act, as well as state regulations
promulgated under comparable state statutes. We are also subject to regulations
governing the handling, transportation, storage, and disposal of naturally
occurring radioactive materials that are found in our oil and natural gas
operations. Civil and criminal fines and penalties may be imposed for
non-compliance with these environmental laws and regulations. Additionally,
these laws and regulations require the acquisition of permits or other
governmental authorizations before undertaking certain activities, limit
or
prohibit other activities because of protected areas or species, and impose
substantial liabilities for cleanup of pollution.
Under
the
OPA, a release of oil into water or other areas designated by the statute
could
result in us being held responsible for the costs of remediating such a release,
certain OPA specified damages, and natural resource damages. The extent of
that
liability could be extensive, as set out in the statute, depending on the
nature
of the release. A release of oil in harmful quantities or other materials
into
water or other specified areas could also result in us being held responsible
under the CWA for the costs of remediation, and civil and criminal fines
and
penalties.
CERCLA
and comparable state statutes, also known as “Superfund” laws, can impose joint
and several and retroactive liability, without regard to fault or the legality
of the original conduct, on certain classes of persons for the release of
a
“hazardous substance” into the environment. In practice, cleanup costs are
usually allocated among various responsible parties. Potentially liable parties
include site owners or operators, past owners or operators under certain
conditions, and entities that arrange for the disposal or treatment of, or
transport hazardous substances found at the site. Although CERCLA, as amended,
currently exempts petroleum, including but not limited to, crude oil, natural
gas and natural gas liquids from the definition of hazardous substance, our
operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, there can be
no
assurance that the exemption will be preserved in future amendments of the
act,
if any.
RCRA
and
comparable state and local requirements impose standards for the management,
including treatment, storage, and disposal of both hazardous and non-hazardous
solid wastes. We generate hazardous and non-hazardous solid waste in connection
with our routine operations. From time to time, proposals have been made
that
would reclassify certain oil and natural gas wastes, including wastes generated
during drilling, production and pipeline operations, as “hazardous wastes” under
RCRA which would make such solid wastes subject to much more stringent handling,
transportation, storage, disposal, and clean-up requirements. This development
could have a significant impact on our operating costs. While state laws
vary on
this issue, state initiatives to further regulate oil and natural gas wastes
could have a similar impact.
Research
and Development
Our
business plan is focused on the exploration and development of our oil and
natural gas interests. We do not anticipate that we will expend any significant
funds on research and development over the twelve months ending August 31,
2008.
Purchase
of Significant Equipment
We
do not
intend to purchase any significant equipment over the next twelve months.
Employees
We
currently have five full-time and part-time employees. We generally utilize
short term contractors, consultants and professional service providers, as
necessary. Our directors and officers provide services on a month to month
basis
pursuant to oral arrangements, but have not signed employment or consulting
agreements with us. We do not expect any material changes in the number of
employees over the next twelve month period. We may enter formal written
service
agreements with our directors and officers in the future. We expect to utilize
contractors and consultants as needed to meet our staffing needs, and will
continue to periodically evaluate costs and benefits of staffing our resource
requirements externally or internally. We expect that the level of success
of
our exploration and development initiatives will drive the timing and level
of
employees that we may retain in the future.
Going
Concern
Our
financial statements have been prepared assuming we will continue as a going
concern. We are in our development stage and, accordingly, have several capital
initiatives but no revenues. We have raised limited financing and have incurred
operating losses since our inception. These factors raise substantial doubt
about our ability to continue as a going concern, and our ability to achieve
and
maintain profitability and positive cash flows are dependent on our ability
to
secure sufficient financing to fund the acquisition, drilling and development
of
profitable oil and natural gas properties. We are actively pursuing financing
options which we believe would allow us to establish and sustain commercial
production. There are no assurances that we will be able to obtain additional
financing from investors or private lenders and, if available, such financing
may not be on commercial terms acceptable to us or our stockholders. The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty. We intend to raise financing sufficient to fund
our
capital expenditure and working capital requirements for the next twelve
months
principally through private placements and possibly public
offerings.
Risks
Factors
Risks
Related to our Business
Without
additional financing, there is substantial doubt about our ability to continue
as a going concern
.
Our
audited consolidated financial statements as of August 31, 2007 and 2006
and for
each of the two years ended August 31, 2007 and 2006, and from inception
(January 20, 2005) to August 31, 2007 were prepared assuming that we will
continue as a going concern. We are in our development stage and have
had limited operations and no revenues from our inception through August
31, 2007. Our independent accountants in their audit report have
expressed substantial doubt about our ability to continue as a going
concern. Our continued operations are dependent on our ability to
achieve profitability and to generate and maintain positive operating cash
flows. This is driven by our ability to complete equity and debt
financings sufficient to fund the acquisition, drilling and development of
profitable oil and gas properties. Such financings may not be
available to us or may not be on reasonable terms. Our financial
statements do not include any adjustments that may result from the outcome
of
this uncertainty.
We
have a very limited history of operations in oil and natural gas exploration
and
production and accordingly may not be successful in carrying out our business
objectives
.
We
were
incorporated in the State of Nevada on February 21, 2006 as Georgia Exploration,
Inc., a Vancouver based mineral resource exploration company with interests
in
14 non-oil and gas mineral claims in British Columbia. On January 3,
2007, we consummated a merger with Wharton Resources Corp. Upon
completion of the merger, our core business and strategic focus became the
exploration and development of oil and natural gas reserves in the United
States.
We
have
raised limited financing and have incurred operating losses since our inception,
with total losses of approximately $3,817,250 through August 31,
2007. Although our management team has experience in the U.S. oil and
gas industry, we have no track record of successful oil and gas exploration
and
development activities that would allow an investor to assess the likelihood
of
us, or guarantee that we will be successful, as an oil and natural gas
exploration and production company. We may fail to achieve or
maintain successful operations, even in favorable market
conditions. There is a substantial risk that we will not be
successful in our exploration activities, or if initially successful, in
thereafter generating any operating revenues or otherwise achieving sustained
and recurring operating cash flows.
We
may require additional funding, and our failure to raise additional capital
necessary to support and expand our operations could reduce our ability to
compete and could harm our business
.
Over
the
next twelve months, we plan to spend approximately $12.8 million for oil
and
natural gas exploration, drilling and development expenditures, and
approximately $1.6 million for general and administrative, operating and
public
company expenses, and working capital requirements. See “Plan of
Operations” for more information. Based on our plan of operation, our
current available cash and projected operating cash flows arenot sufficient
to
fund our capital and operating requirements over the next twelve month
period. In particular, our current and projected operating cash flows
from our Frio formation oil and gas production in Dewitt and Lavaca Counties,
Texas are not sufficient to repay the total $3.7 million principal balance
due
on September 10, 2008 under the notes issued to certain of our
investors. The first six months of interest on these notes totaling
$277,500 is due on March 10, 2008. We are dependent on external
financing sources to raise funds sufficient to repay the principal balance
due
on these notes at maturity.
To
execute our plans, we will require substantial financing and are actively
working on options to raise equity and/or debt financing through private
placements and public offerings. However, in the event that we are unable
to
raise the financing to meet our needs, or if we are able to obtain sufficient
financing from investors or private lenders but it is on commercial terms
unacceptable to us or our stockholders, we will be required to scale back
or
slow our capital investment program. Should we raise funds through
equity and debt placements, existing equity and ownership in us could be
negatively affected due to the dilution of existing equity ownership of our
shares.
The
notes issued to certain of our investors mature in twelve months and are
secured
by substantially all of our assets, so the failure to repay the notes could
cause us to cease operations
.
As
noted
above, the notes issued to certain of our investors in connection with the
financing that we completed in September 2007 are due on September 10, 2008
and
are secured by a lien on substantially all of our assets, including our oil
and
gas lease interests and our equity interests in our subsidiaries. We
are dependent on external financing sources to raise funds sufficient to
repay
the principal due under these notes at maturity. Alternate external financing
may be comprised of equity and debt, which may or may not be available to
us on
reasonable terms. If we are not successful in or unable to repay the
$3.7 million principal balance on the maturity of the notes, since substantially
all our assets are pledged as security to the lenders, we may be unable to
continue our business and as a result may be required to scale back or cease
operations for our business, the result of which would be that our stockholders
would lose some or all of their investment.
Our
related party transactions may cause conflicts of interests that may adversely
affect our ability to operate our business
.
We
have
entered into and may, in the future, enter into various transactions and
agreements with entities wholly or partially owned by our officer and directors,
including Orbit Energy, LLC, which is owned by CodeAmerica Investments, LLC,
for
which Wm. Milton Cox, our Chairman and CEO, is the Managing Member, and Paragon
Capital, LLC for which Bassam Nastat, our President and a Director, serves
as
Manager. We believe that the transactions and agreements that we have
entered into with related parties are on terms that are at least as favorable
to
us as could reasonably have been obtained at such time from third
parties. However, these relationships could create, or appear to
create, potential conflicts of interest when members of our senior management
are faced with decisions that could have different implications for us and
those
entities or their affiliates.
Potential
conflicts of interest can exist if a related party director or officer has
to
make a decision that has different implications for us and the related party.
No
assurance can be given as to how potentially conflicted
board members or officers will evaluate their fiduciary duties or how such
individuals will act under such circumstances. Furthermore, the appearance
of
conflicts, even if such conflicts do not materialize, might adversely affect
the
public's perception of us, as well as our relationship with other companies
and
our ability to enter into new relationships in the future, which could have
a
material adverse effect on our ability to do business.
Our
exploration and development operations are subject to many risks which may
affect our ability to profitably extract oil and natural gas reserves or
achieve
targeted returns. In addition, continued growth requires that we
acquire and successfully develop additional oil and natural gas
reserves.
Oil
and
natural gas exploration may involve unprofitable efforts, not only from dry
wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery
of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals
or
consents, shut-ins of connected wells resulting from extreme weather conditions,
insufficient storage or transportation capacity or other geological and
mechanical conditions. While diligent well supervision and effective maintenance
operations can contribute to maximizing production rates over time, production
delays and declines from normal field operating conditions cannot be eliminated
and can be expected to adversely affect revenue and cash flow levels to varying
degrees.
Our
commercial success depends on our ability to find, acquire, develop and
commercially produce oil and natural gas reserves. Without the
continual addition of new reserves, any existing reserves and the production
therefrom will decline over time as such existing reserves are depleted.
A
future increase in our reserves will depend not only on our ability to explore
and develop any properties we may have from time to time, but also on our
ability to select and acquire suitable producing properties or
prospects. No assurance can be given that we will be able to continue
to locate satisfactory properties for acquisition or
participation. Moreover, if such acquisitions or participations are
identified, we may determine that current markets, terms of acquisition and
participation or pricing conditions make such acquisitions or participations
economically disadvantageous. There is no assurance that commercial
quantities of oil and natural gas will be discovered or acquired by
us.
Our
oil and natural gas operations are subject to operating hazards that may
increase our operating costs to prevent such hazards, or may materially affect
our operating results if any of such hazards were to
occur.
Oil
and
natural gas exploration, development and production operations are subject
to
all the risks and hazards typically associated with such operations, including
hazards such as fire, explosion, blowouts, cratering, sour gas releases and
spills, each of which could result in substantial damage to oil and natural
gas
wells, production facilities, other property and the environment or in personal
injury. Oil and natural gas production operations are also subject to all
the
risks typically associated with such operations, including encountering
unexpected formations or pressures, premature decline of reservoirs and the
invasion of water into producing formations. Losses resulting from the
occurrence of any of these risks could have a material adverse effect on
our
results of operations, liquidity and financial condition.
To
date,
we have not generated revenues from production of our oil and natural gas
lease
interests. Our oil and natural gas exploration and development
activities will be focused on the exploration and development of our oil
and
natural gas rights which are high-risk ventures with uncertain prospects
for
success. In addition, we will not have earnings to support our
activities should the wells drilled or properties acquired prove not to be
commercially viable. No assurance can be given that commercial
quantities of oil and natural gas will be successfully produced as a result
of
our exploration and development efforts. Further there is no
guarantee that we will generate sufficient revenues from production of our
reserves.
Our
exploration and development activities will depend in part on the evaluation
of
data obtained through geophysical testing and geological analysis, as well
as
test drilling activity. The results of such studies and tests are
subjective, and no assurances can be given that exploration and development
activities based on positive analysis will produce oil or natural gas in
commercial quantities or costs. As developmental and exploratory
activities are performed, further data required for evaluation of our oil
and
natural gas interests will become available. The exploration and
development activities that will be undertaken by us are subject to greater
risks than those associated with the acquisition and ownership of producing
properties. The drilling of development wells, although generally
consisting of drilling to reservoirs believed to be productive, may result
in
dry holes or a failure to produce oil and natural gas in commercial
quantities. Moreover, any drilling of exploratory wells is subject to
significant risk of dry holes.
Sales
of any production of oil or natural gas from our present or future reserves
are
subject to numerous factors beyond our control which could make it difficult
to
market and sell any oil and natural gas at price and cost levels that are
acceptable or profitable to us.
The
marketability of any oil or natural gas that may be discovered by us will
be
affected by numerous factors beyond our control, including market fluctuations,
the supply and demand for natural gas, the proximity and capacity of natural
gas
pipelines, oil transportation, and processing equipment, as well as by
government regulations, including regulations relating to the prices, taxes,
royalties, land tenure, allowable production, the import and export of natural
gas and environmental protection. These factors cannot be
predicted. Given the development stage of our operations, we are in
the initial stage of negotiating contracts for the delivery and sale of oil
or
natural gas production from our properties. There is no guarantee
that any such contracts will be obtained or, if obtained, will be on terms
which
are economically viable to us.
If
we are unable to successfully compete with the large number of oil and natural
gas producers in our industry, we may not be able to achieve profitable
operations.
Oil
and
natural gas exploration is intensely competitive in all its phases and involves
a high degree of risk. We compete with numerous other participants in
the search for and the acquisition of oil and natural gas properties and
in the
marketing of oil and natural gas. Our competitors include oil and
natural gas companies that have substantially greater financial resources,
staff
and facilities than us. Our ability to increase reserves in the
future will depend not only on our ability to explore and develop our existing
properties, but also on our ability to select and acquire suitable producing
properties or prospects for exploratory drilling. Competitive factors
in the distribution and marketing of oil and natural gas include price and
methods and reliability of delivery. Competition may also be
presented by alternate fuel sources.
We
are subject to various regulatory requirements, including environmental
regulations, and may incur substantial costs to comply and remain in compliance
with those requirements.
Our
operations in the United States are subject to regulation at the federal,
state
and local levels, including regulation relating to matters such as the
exploration for and the development, production, marketing, pricing,
transmission and storage of oil and natural gas, as well as environmental
and
safety matters. Failure to comply with applicable regulations could
result in fines or penalties being owed to third parties or governmental
entities, the payment of which could have a material adverse effect on our
financial condition or results of operations. Our operations are
subject to significant laws and regulations, which may adversely affect our
ability to conduct business or increase our costs. Extensive federal,
state and local laws and regulations relating to health and environmental
quality in the United States affect nearly all of our
operations. These laws and regulations set various standards
regulating various aspects of health and environmental quality, provide for
penalties and other liabilities for the violation of these standards, and
in
some circumstances, establish obligations to remediate current and former
facilities and off-site locations.
Environmental
legislation provides for, among other things, restrictions and prohibitions
on
spills, releases or emissions of various substances produced in association
with
oil and natural gas operations. The legislation also requires that wells
and
facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of the applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result
in the
imposition of fines and penalties, some of which may be material. Environmental
legislation is evolving in a manner expected to result in stricter standards
and
enforcement, larger fines and liability and potentially increased capital
expenditures and operating costs. The discharge of oil, natural gas or other
pollutants into the air, soil or water may give rise to liabilities to
governments and third parties and may require us to incur costs to remedy
such
discharge. No assurance can be given that environmental laws will not result
in
a curtailment of production or a material increase in the costs of production,
development or exploration activities or otherwise adversely affect our
financial condition, results of operations or prospects. We could
incur significant liability for damages, clean-up costs and/or penalties
in the
event of discharges into the environment, environmental damage caused by
us or
previous owners of our property or non-compliance with environmental laws
or regulations. In addition to actions brought by governmental agencies,
we
could face actions brought by private parties or citizens groups. Any
of the foregoing could have a material adverse effect on our financial
results.
Moreover,
we cannot predict what legislation or regulations will be enacted in the
future
or how existing or future laws or regulations will be administered, enforced
or
made more stringent. Compliance with more stringent laws or regulations,
or more
vigorous enforcement policies of the regulatory agencies, could require us
to
make material expenditures for the installation and operation of systems
and
equipment for remedial measures, all of which could have a material adverse
effect on our financial condition or results of operations.
Our
ability to successfully market and sell oil and natural gas is subject to
a
number of factors that are beyond our control, and that may adversely impact
our
ability to produce and sell oil and natural gas, or to achieve
profitability.
The
marketability and price of oil and natural gas that may be acquired or
discovered by us will be affected by numerous factors beyond our
control. Our ability to market our natural gas may depend upon our
ability to acquire space on pipelines that deliver natural gas to commercial
markets. We may also be affected by deliverability uncertainties related
to the
proximity of our reserves to pipelines and processing facilities, by operational
problems with such pipelines and facilities, and by government regulation
relating to price, taxes, royalties, land tenure, allowable production, the
export of oil and natural gas and by many other aspects of the oil and natural
gas business.
Our
revenues, profitability and future growth and the carrying value of our oil
and
natural gas properties are substantially dependent on prevailing prices of
oil
and natural gas. Our ability to borrow and to obtain additional capital on
attractive terms is also substantially dependent upon oil and natural gas
prices. Prices for oil and natural gas are subject to large fluctuations
in
response to relatively minor changes in the supply of and demand for oil
and
natural gas, market uncertainty and a variety of additional factors beyond
our
control. These factors include economic conditions, in the United States
and
Canada, the actions of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and natural gas, the price of foreign imports and
the
availability of alternative fuel sources. Any substantial and extended decline
in the price of oil and natural gas would have an adverse effect on the carrying
value of our proved reserves, borrowing capacity, revenues, profitability
and
cash flows from operations.
Volatile
oil and natural gas prices make it difficult to estimate the value of producing
properties for acquisition and often cause disruption in the market for oil
and
natural gas producing properties, as buyers and sellers have difficulty agreeing
on such value. Price volatility also makes it difficult to budget for and
project the return on acquisitions and development and exploitation
projects.
We
cannot guarantee that title to our properties does not contain a defect that
may
materially affect our interest in those properties.
It
is our
practice in acquiring significant oil and natural gas leases or interest
in oil
and natural gas leases to retain lawyers to fully examine the title to the
interest under the lease. In the case of minor acquisitions, we rely
upon the judgment of oil and natural gas lease brokers or landmen who do
the
field work in examining records in the appropriate governmental office before
attempting to place under lease a specific interest. We believe that this
practice is widely followed in the oil and natural gas industry. Nevertheless,
there may be title defects which affect lands comprising a portion of our
properties which may adversely affect us.
Our
business may be harmed if we are unable to retain our interests in
leases
.
All
of
our properties are held under interests in oil and gas mineral leases, some
of
which expire within the next twelve months. If we fail to meet the specific
requirements of each lease, especially future drilling and production
requirements, the lease may be terminated or otherwise expire. We cannot
assure
you that we will be able to meet our obligations under each lease. The
termination or expiration of our working interest relating to any lease would
harm our business, financial condition and results of operations.
Our
reserve estimates are subject to numerous uncertainties and may be
inaccurate.
There
are
numerous uncertainties inherent in estimating quantities of oil or natural
gas
reserves and cash flows to be derived therefrom, including many factors beyond
our control. The reserve and associated cash flow information set forth herein
represents estimates only. In general, estimates of economically recoverable
oil
and natural gas reserves and the future net cash flows therefrom are based
upon
a number of variable factors and assumptions, such as historical production
from
the properties, production rates, ultimate reserve recovery, timing and amount
of capital expenditures, marketability of oil and natural gas, royalty rates,
the assumed effects of regulation by governmental agencies and future operating
costs, all of which may vary from actual results. All such estimates are
to some
degree speculative, and classifications of reserves are only attempts to
define
the degree of speculation involved. For those reasons, estimates of the
economically recoverable oil and natural gas reserves attributable to any
particular group of properties, classification of such reserves based on
risk of
recovery and estimates of future net revenues expected therefrom prepared
by
different engineers, or by the same engineers at different times, may vary.
Our
actual production, revenues, taxes and development and operating expenditures
with respect to our reserves will vary from estimates thereof and such
variations could be material.
Estimates
of proved reserves that may be developed and produced in the future are often
based upon volumetric calculations and upon analogy to similar types of reserves
rather than actual production history. Estimates based on these methods are
generally less reliable than those based on actual production history.
Subsequent evaluation of the same reserves based upon production history
and
production practices will result in variations in the estimated reserves
and
such variations could be material.
The
reserve quantities included herein were prepared by an independent reserve
engineer, MHA Petroleum Consultants, Inc. (“MHA”), and were prepared based on
constant price forecasts and cost estimates as of September 1,
2007. Actual future net revenue will be affected by other factors
such as actual production levels, supply and demand for oil and natural gas,
curtailments or increases in consumption by oil and natural gas purchasers,
changes in governmental regulation or taxation and the impact of inflation
on
costs. The MHA reserve quantities and other calculations are based in part
on
the assumed success of activities we intend to undertake in future periods,
including obtaining the financing required to fund the capital expenditures
necessary to effect the drilling and completion of the reserves identified
in
the MHA reserve evaluation. The reserves and estimated cash flows to
be derived from the production of the reserves will be reduced if we are
not
successful in undertaking the activities required in future
periods.
Although
we are covered as an additional insured under certain insurance policies
of our
lease operators, we presently do not carry our own insurance, and
because of the limitations of any future insurance coverage, we may be exposed
to significant liability should any claims arise for which we are not
insured.
Our
involvement in the exploration for and development of oil and natural gas
properties may result in our becoming subject to liability for pollution,
blowouts, property damage, personal injury or other hazards. We are covered
as
an additional insured under the insurance policies of our
lease operators, but do not presently maintain our own insurance
covering liabilities arising from our operations. Although prior to drilling
we
will obtain insurance in accordance with industry standards to address certain
of these risks, such insurance has limitations on liability that may not
be
sufficient to cover the full extent of such liabilities. In addition, such
risks
may not in all circumstances be insurable or, in certain circumstances, we may
elect not to obtain insurance to deal with specific risks due to the high
premiums associated with such insurance or other reasons. The payment of
such
uninsured liabilities would reduce the funds available to us. The occurrence
of
a significant event that we are not fully insured against, or the insolvency
of
the insurer of such event, could have a material adverse effect on our financial
position, results of operations or prospects.
Some
of our oil and natural gas properties are held in the form of licenses and
leases. If we default on those licenses or leases, we may lose our
interest in those properties.
Our
properties are held in the form of licenses and leases and working interests
in
licenses and leases. If we or the holder of the license or lease fail to
meet
the specific requirement of a license or lease, the license or lease may
terminate or expire. There can be no assurance that any of the obligations
required to maintain each license or lease will be met, although we exercise
our
commercially reasonable efforts to do so. The termination or expiration of
our
licenses or leases or the working interests relating to a license or lease
may
have a material adverse effect on our results of operations and
business.
The
loss or unavailability of our key personnel for an extended period of time
could
adversely affect our business operations and
prospects.
Our
success depends in large measure on certain key personnel, including our
President, Chief Executive Officer and Chief Financial Officer. The loss
of the
services of such key personnel could have a material adverse effect on
us. Although we are looking into acquiring key person insurance, we
do not currently have such insurance in effect for these key individuals.
In
addition, the competition for qualified personnel in the oil and natural
gas
industry is intense and there can be no assurance that we will be able to
continue to attract and retain all personnel necessary for the development
and
operation of our business.
We
depend on the services of third parties for material aspects of our operations,
including drilling operators, and accordingly if we cannot obtain certain
third
party services, we may not be able to operate.
We
may
rely on third parties to operate some of the assets in which we possess an
interest. Assuming the presence of commercial quantities of oil and natural
gas
on our properties, the success of the oil and natural gas operations, whether
considered on the basis of drilling operations or production operations,
will
depend largely on whether the operator of the property properly fulfils our
obligations. As a result, our ability to exercise influence over the
operation of these assets or their associated costs may be limited, adversely
affecting our financial performance. Our performance will therefore
depend upon a number of factors that may be outside of our full control,
including the timing and amount of capital expenditures, the operator’s
expertise and financial resources, the approval of other participants, the
selection of technology, and risk management practices. The failure
of third party operators and their contractors to perform their services
in a
proper manner could adversely affect our operations.
We
will be subject to the requirements of Section 404 of the Sarbanes-Oxley
Act. If we are unable to timely comply with Section 404 or if the
costs related to compliance are significant, our profitability, stock price
and
results of operations and financial condition could be materially adversely
affected.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our annual
report on Form 10-KSB for the fiscal year ending August 31, 2008, we will
be
required to furnish a report by management on our internal control over
financial reporting. This report will contain, among other matters,
an assessment of the effectiveness of our internal control over financial
reporting, including a statement as to whether or not our internal control
over
financial reporting is effective. This assessment must include
disclosure of any material weaknesses in our internal control over financial
reporting identified by our management. Beginning for the fiscal year
ending August 31, 2009, this report must also contain a statement that our
auditors have issued an attestation report on management’s assessment of
internal control.
We
cannot
be certain that we will be able to complete our assessment, testing and any
required remediation in a timely fashion. These reporting and
assessment obligations will place significant demands on our management,
administrative, operational, internal audit and accounting resources. We
anticipate that we will need to upgrade our reporting systems and procedures,
implement additional financial and management controls, and hire additional
accounting and finance staff. If we are unable to accomplish these objectives
in
a timely and effective fashion, our ability to comply with our financial
reporting requirements and other rules that apply to reporting companies
could
be impaired. In addition, during the evaluation and testing process,
if we identify one or more material weaknesses in our internal control over
financial reporting, we will be unable to assert that our system of internal
control is effective. If we are unable to assert that our internal control
over
financial reporting is effective (or if our auditors are unable to attest
that
management’s report is fairly stated or they are unable to express an opinion on
the effectiveness of our internal controls), we could lose investor confidence
in the accuracy and completeness of our financial reports, which could have
a
material adverse effect on our stock price.
Any
failure to maintain effective internal controls could have a material adverse
effect on our business, operating results and stock price. In addition, expenses
related to services rendered by our accountants, legal counsel and consultants
will increase in order to ensure compliance with these laws and regulations.
Failure to comply with Section 404 may make it more difficult for us to obtain
certain types of insurance, including director and officer liability
insurance. We may be forced to accept reduced policy limits and
coverage and/or to incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our
board
of directors, on committees of our board of directors, or as executive
officers.
Risks
Related to our Common Stock
Shares
of our common stock may continue to be subject to price volatility and
illiquidity because our shares may continue to be thinly traded and may never
become eligible for trading on a national securities
exchange
.
Although
a trading market for our common stock exists, the trading volume has
historically been insignificant, and an active trading market for our common
stock may never develop. There currently is limited analyst coverage of our
business. We do not have very many shares of common stock outstanding and
the
amount of shares in our public “float” will continue to be limited due to the
fact that significant portions of our outstanding shares are held by our
officers and directors and their affiliates. As a result of the thin trading
market for our common stock, and the lack of analyst coverage, the market
price
for our shares may continue to fluctuate significantly, and will likely be
more
volatile than the stock market as a whole. There may be a limited demand
for
shares of our common stock due to the reluctance or inability of certain
investors to buy stocks quoted for trading on the Over-The-Counter Bulletin
Board (“OTCBB”), limited analyst coverage of our common stock, and a negative
perception by investors of stocks traded on the OTCBB. As a result,
even if prices appear favorable, there may not be sufficient demand in order
to
complete a shareholder’s sell order. Without an active public trading market or
broader public ownership, shares of our common stock are likely to be less
liquid than the stock of most public companies, and any of our shareholders
who
attempt to sell their shares in any significant volumes may not be able to
do so
at all, or without depressing the publicly quoted bid prices for their
shares.
In
addition, while we may at some point be able to meet the requirements necessary
for our common stock to be listed on a national securities exchange, we cannot
assure you that we will ever achieve a listing of our common stock on a national
securities exchange. Initial listing on a national securities exchange is
subject to a variety of requirements, including minimum trading price and
minimum public “float” requirements, and could also be affected by the general
skepticism of such markets concerning companies that are the result of mergers
with inactive publicly-held companies. There are also continuing eligibility
requirements for companies listed on public trading markets. If we are unable
to
satisfy the initial or continuing eligibility requirements of any such market,
then our stock may not be listed or could be delisted. This could result
in a
lower trading price for our common stock and may limit your ability to sell
your
shares, any of which could result in you losing some or all of your
investments.
Our
common stock is subject to the “penny stock” rules of the Securities and
Exchange Commission and the trading market in our securities is limited,
which
makes transactions in our stock cumbersome and may reduce the value of an
investment in our stock
.
The
Securities and Exchange Commission (the “SEC”) has adopted Rule 3a51-1 which
establishes the definition of a “penny stock,” for the purposes relevant to us,
as any equity security that (i) has a market price of less than $5.00 per
share
or with an exercise price of less than $5.00 per share, or (ii) is not
registered on a national securities exchange or listed on an automated quotation
system sponsored by a national securities exchange. For any transaction
involving a penny stock, unless exempt, Rule 15g-9 of the Securities and
Exchange Act of 1934, as amended, requires:
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that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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the
broker or dealer receives from the investor a written agreement
to the
transaction, setting forth the identity and quantity of the penny
stock to
be purchased.
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In
order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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obtain
financial information and investment experience objectives of the
person;
and
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make
a reasonable determination that the transactions in penny stocks
are
suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the
risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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attests
that the broker or dealer received a signed, written agreement
from the
investor prior to the transaction.
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Disclosure
also has to be made about the risks of investing in penny stocks in both
public
offerings and in secondary trading, and about the commissions payable to
both
the broker-dealer and the registered representative. Current
quotations for the securities and the rights and remedies and to be available
to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny
stocks. Generally, brokers may be less willing to execute
transactions in securities subject to the “penny stock” rules. This
may make it more difficult for investors to dispose of our common stock and
cause a decline in the market value of our stock.
The
market valuation of our business may fluctuate due to factors beyond our
control
and the value of your investment may fluctuate
correspondingly.
The
market valuation of energy companies, such as us, frequently fluctuate due
to
factors unrelated to the past or present operating performance of such
companies. Our market valuation may fluctuate significantly in
response to a number of factors, many of which are beyond our control,
including:
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changes
in securities analysts’ estimates of our financial performance, although
there are currently no analysts covering our
stock;
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fluctuations
in stock market prices and volumes, particularly among securities
of
energy companies;
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changes
in market valuations of similar
companies;
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announcements
by us or our competitors of significant contracts, new technologies,
acquisitions, commercial relationships, joint ventures or capital
commitments;
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variations
in our quarterly operating results;
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fluctuations
in oil and natural gas prices; and
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additions
or departures of key personnel.
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As
a
result, the value of your investment in us may fluctuate.
Investors
should not look to dividends as a source of income
.
In
the
interest of reinvesting initial profits back into our business, we do not
intend
to pay cash dividends in the foreseeable future. Consequently, any
economic return will initially be derived, if at all, from appreciation in
the
fair market value of our stock, and not as a result of dividend
payments.
