Item 1A. Risk Factors.
Much of the information included in this quarterly report
includes or is based upon estimates, projections or other "forward looking
statements". Such forward looking statements include any projections or
estimates made by us and our management in connection with our business
operations. While these forward-looking statements, and any assumptions upon
which they are based, are made in good faith and reflect our current judgment
regarding the direction of our business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections, assumptions
or other future performance suggested herein.
Such estimates, projections or other "forward looking
statements" involve various risks and uncertainties as outlined below. We
caution the reader that important factors in some cases have affected and, in
the future, could materially affect actual results and cause actual results to differ
materially from the results expressed in any such estimates, projections or
other "forward looking statements".
12
Our common shares are considered speculative during the
development of our new business operations. Prospective investors should
consider carefully the risk factors set out below.
Risks Related to Our Business
Because we may never earn revenues from our operations, our
business may fail and our investors may lose all of their investment in our
company.
We have no history of revenues from operations. We have never
had significant operations and have no significant assets. We have yet to
generate positive earnings and there can be no assurance that we will ever
operate profitably. Our company has a limited operating history. If our business
plan is not successful and we are not able to operate profitably, then our stock
may become worthless and investors may lose all of their investment in our
company.
We expect to incur significant losses into the foreseeable
future. We recognize that if we are unable to generate significant revenues from
future acquisitions, we will not be able to earn profits or continue operations.
There is no history upon which to base any assumption as to the likelihood that
we will prove successful, and we can provide no assurance that we will generate
any revenues or ever achieve profitability. If we are unsuccessful in addressing
these risks, our business will fail and investors may lose all of their
investment in our company.
We have a history of losses and have negative cash flows
from operations, which raises substantial doubt about our ability to continue as
a going concern.
We have not generated any revenues since our incorporation and
we will continue to incur operating expenses without revenues until we are in
commercial deployment. To date we have had negative cash flows from operations
and we have been dependent on sales of our equity securities and debt financing
to meet our cash requirements and have incurred net losses from inception (July
27, 2004) to December 31, 2012, of $8,057,817. Our net cash used in operations
for the six months ended December 31, 2012, was $28,295. As of December 31,
2012, we had a working capital deficit of $1,603,342. We do not expect positive
cash flow from operations in the near term. There is no assurance that actual
cash requirements will not exceed our estimates. In particular, additional
capital may be required in the event that drilling and completion costs increase
beyond our expectations; or we encounter greater costs associated with general
and administrative expenses or offering costs. The occurrence of any of the
aforementioned events could adversely affect our ability to meet our business
plans. We cannot provide assurances that we will be able to successfully execute
our business plan. These circumstances raise substantial doubt about our ability
to continue as a going concern. If we are unable to continue as a going concern,
investors will likely lose all of their investments in our company.
There is no assurance that we will operate profitably or will
generate positive cash flow in the future. In addition, our operating results in
the future may be subject to significant fluctuations due to many factors not
within our control, such as the unpredictability of when customers will purchase
our services, the size of customers’ purchases, the demand for our services, and
the level of competition and general economic conditions. If we cannot generate
positive cash flows in the future, or raise sufficient financing to continue our
normal operations, then we may be forced to scale down or even close our
operations.
We will depend almost exclusively on outside capital to pay for
the continued exploration and development of our properties. Such outside
capital may include the sale of additional stock and/or commercial borrowing.
There is no guarantee that sufficient capital will continue to be available to
meet these continuing development costs or that it will be on terms acceptable
to us. The issuance of additional equity securities by us would result in a
significant dilution in the equity interests of our current stockholders.
Obtaining commercial loans, assuming those loans would be available, will
increase our liabilities and future cash commitments.
If we are unable to obtain financing in the amounts and on
terms deemed acceptable to us, we may be unable to continue our business and as
a result may be required to scale back or cease operations of our business, the
result of which would be that our stockholders would lose some or all of their
investment.
13
A decline in the price of our common stock could affect our
ability to raise further working capital and adversely impact our
operations.
A prolonged decline in the price of our common stock could
result in a reduction in the liquidity of our common stock and a reduction in
our ability to raise capital. Because our operations have been and will be
primarily financed through the sale of equity securities, a decline in the price
of our common stock could be especially detrimental to our liquidity and our
continued operations. Any reduction in our ability to raise equity capital in
the future would force us to reallocate funds from other planned uses and would
have a significant negative effect on our business plans and operations,
including our ability to develop new products and continue our current
operations. If our stock price declines, we may not be able to raise additional
capital or generate funds from operations sufficient to meet our
obligations.
We have a limited operating history and if we are not
successful in continuing to grow our business, then we may have to scale back or
even cease our ongoing business operations.
We have no history of revenues from operations and have yet to
generate positive earnings from operations and there can be no assurance that we
will ever operate profitably. The success of our company is significantly
dependent on a successful acquisition, drilling, completion and production
program. Our company’s operations will be subject to all the risks inherent in
the establishment of a developing enterprise and the uncertainties arising from
the absence of a significant operating history. We may be unable to locate
recoverable reserves or operate on a profitable basis. We are in the development
stage and potential investors should be aware of the difficulties normally
encountered by enterprises in the development stage. If our business plan is not
successful, and we are not able to operate profitably, investors may lose some
or all of their investment in our company.
Because of the early stage of development and the nature of
our business, our securities are considered highly speculative.
Our securities must be considered highly speculative, generally
because of the nature of our business and the early stage of our development. We
are engaged in the business of exploring and, if warranted, developing
commercial reserves of oil and gas. Our properties are in the exploration stage.
Accordingly, we have not generated any revenues nor have we realized a profit
from our operations to date and there is little likelihood that we will generate
any revenues or realize any profits in the short term. Any profitability in the
future from our business will be dependent upon locating and developing economic
reserves of oil and gas, which itself is subject to numerous risk factors as set
forth herein. Since we have not generated any revenues, we will have to raise
additional monies through the sale of our equity securities or debt in order to
continue our business operations.
The nature of oil and gas exploration and development
involves many risks that we may not be able to overcome.
Oil and gas exploration and development is very competitive and
involves many risks that even a combination of experience, knowledge and careful
evaluation may not be able to overcome. As with any petroleum property, there
can be no assurance that oil or gas will be extracted from any of the properties
subject to our exploration and production contracts. Furthermore, the
marketability of any discovered resource will be affected by numerous factors
beyond our control. These factors include, but are not limited to, market
fluctuations of prices, proximity and capacity of pipelines and processing
equipment, equipment availability and government regulations (including, without
limitation, regulations relating to prices, taxes, royalties, land tenure,
allowable production, importing and exporting of oil and gas and environmental
protection). The extent of these factors cannot be accurately predicted, but the
combination of these factors may result in us not receiving an adequate return
on invested capital.
The marketability of natural resources will be affected by
numerous factors beyond our control which may result in us not receiving an
adequate return on invested capital to be profitable or viable.
The marketability of natural resources which may be acquired or
discovered by us will be affected by numerous factors beyond our control. These
factors include market fluctuations in oil and gas pricing and demand, the
proximity and capacity of natural resource markets and processing equipment,
governmental regulations, land tenure, land use, regulation concerning the
importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be
accurately predicted, but the combination of these factors may result in us not
receiving an adequate return on invested capital to be profitable or viable.
14
Oil and gas operations are subject to comprehensive
regulation which may cause substantial delays or require capital outlays in
excess of those anticipated causing an adverse effect on our company.
Oil and gas operations are subject to federal, state, and local
laws relating to the protection of the environment, including laws regulating
removal of natural resources from the ground and the discharge of materials into
the environment. Oil and gas operations are also subject to federal, state, and
local laws and regulations which seek to maintain health and safety standards by
regulating the design and use of drilling methods and equipment. Various permits
from government bodies are required for drilling operations to be conducted; no
assurance can be given that such permits will be received. Environmental
standards imposed by federal, provincial, or local authorities may be changed
and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require
capital outlays in excess of those anticipated, thus causing an adverse effect
on us. Additionally, we may be subject to liability for pollution or other
environmental damages which we may elect not to insure against due to
prohibitive premium costs and other reasons. To date we have not been required
to spend any material amount on compliance with environmental regulations.
However, we may be required to do so in the future and this may affect our
ability to expand or maintain our operations.
Exploratory drilling involves many risks and we may become
liable for pollution or other liabilities which may have an adverse effect on
our financial position.
Drilling operations generally involve a high degree of risk.
Hazards such as unusual or unexpected geological formations, power outages,
labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain
suitable or adequate machinery, equipment or labor, and other risks are
involved. We may become subject to liability for pollution or hazards against
which we cannot adequately insure or which we may elect not to insure. Incurring
any such liability may have a material adverse effect on our financial position
and operations.
Any change to government regulation/administrative practices
may have a negative impact on our ability to operate and our
profitability.
The business of resource exploration and development is subject
to regulation relating to the exploration for, and the development, upgrading,
marketing, pricing, taxation, and transportation of oil and gas and related
products and other matters. Amendments to current laws and regulations governing
operations and activities of oil and gas exploration and development operations
could have a material adverse impact on our business. In addition, there can be
no assurance that income tax laws, royalty regulations and government incentive
programs related to the properties subject to our exploration and production
contracts and the oil and gas industry generally, will not be changed in a
manner which may adversely affect our progress and cause delays, inability to
explore and develop or abandonment of these interests.
Permits, leases, licenses, and approvals are required from a
variety of regulatory authorities at various stages of exploration and
development. There can be no assurance that the various government permits,
leases, licenses and approvals sought will be granted in respect of our
activities or, if granted, will not be cancelled or will be renewed upon expiry.
There is no assurance that such permits, leases, licenses, and approvals will
not contain terms and provisions which may adversely affect our exploration and
development activities.
All or a portion of our interest in our properties may be
lost if we are unable to obtain significant additional financing, as we are
required to make significant expenditures on the exploration and development of
our properties.
Our ability to continue exploration and, if warranted,
development of our properties will be dependent upon our ability to raise
significant additional financing. If we are unable to obtain such financing, a
portion of our interest in our properties may be lost or our properties may be
lost entirely and, in the case of our Colombian assets, revert back to the
government of Colombia. We have limited financial resources and no material cash
flow from operations and we are dependent for funds on our ability to sell our
common shares, primarily on a private placement basis. There can be no assurance that we will be able
to obtain financing on that basis in light of factors such as the market demand
for our securities, the state of financial markets generally and other relevant
factors.
15
We anticipate that we may need to obtain additional bank
financing or sell additional debt or equity securities in future public or
private offerings. There can be no assurance that additional funding will be
available to us for exploration and development of our projects or to fulfill
our obligations under the applicable petroleum prospecting licenses. Although
historically we have announced additional financings to proceed with the
development of some of our properties, there can be no assurance that we will be
able to obtain adequate financing in the future or that the terms of such
financing will be favorable. Failure to obtain such additional financing could
result in delay or indefinite postponement of further exploration and
development of our projects with the possible loss of our petroleum prospecting
licenses.
We will require substantial funds to enable us to decide
whether our non-producing properties contain commercial oil and gas deposits and
whether they should be brought into production, and if we cannot raise the
necessary funds we may never be able to realize the potential of these
properties.
Our decision as to whether our unproved properties contain
commercial oil and gas deposits and should be brought into production will
require substantial funds and depend upon the results of exploration programs
and feasibility studies and the recommendations of duly qualified engineers,
geologists, or both. This decision will involve consideration and evaluation of
several significant factors including but not limited to: (1) costs of bringing
a property into production, including exploration and development work,
preparation of production feasibility studies, and construction of production
facilities; (2) availability and costs of financing; (3) ongoing costs of
production; (4) market prices for the oil and gas to be produced; (5)
environmental compliance regulations and restraints; and (6) political climate,
governmental regulation and control. If we are unable to raise the funds
necessary to properly evaluate our unproved properties, then we may not be able
to realize any potential of these properties.
We have licenses in respect of our properties, but our
properties may be subject to prior unregistered agreements, or transfers which
have not been recorded or detected through title searches, and are subject to a
governmental right of participation, resulting in a possible claim against any
future revenues generated by such properties.
We have licenses with respect to our oil and gas property in
Colombia and we believe our interests are valid and enforceable given that they
have been granted directly by the government of Colombia, although we have not
obtained an opinion of counsel or any similar form of title opinion to that
effect. However, these licenses do not guarantee title against all possible
claims. The property may be subject to prior unregistered agreements, or
transfers which have not been recorded or detected through title research. If
the interests in our property are challenged, we may have to expend funds
defending any such claims and may ultimately lose some or all of any revenues
generated from the property if we lose our interest in such property.
We understand that the operatorship of the sole asset
comprising our oil and gas properties may have subsequently changed, although we
have not been advised of such under the terms of the operating agreement. The
current operator, UTO, has been unresponsive in terms of providing us with an
updated status of the block, drilling programs, production levels and our
production share. The Exploration and Production Contract associated with the
block was originally signed on November 8, 2004, providing for a six year
exploration period and a 28 year production period. Due to the unresponsiveness
of the operator, we are uncertain as to the current status of the permit,
however we believe the Exploration and Production Contract remains in good
standing.
Our most significant project is located in Colombia where
oil and gas exploration activities may be affected in varying degrees by
political and government regulations which could have a negative impact on our
ability to continue our operations.
Our most significant project in which we have a participation
stake is located in Colombia. Exploration activities in Colombia may be affected
in varying degrees by political instabilities and government regulations
relating to the oil and gas industry. Any changes in regulations or shifts in
political conditions are beyond our control and may adversely affect our
business. Operations may be affected in varying degrees by government
regulations with respect to restrictions on production, price controls, export
controls, income taxes, expropriations of property, environmental legislation
and safety. The status of Colombia as a developing country may make it more
difficult for us to obtain any required financing for our project. The effect
of all these factors cannot be accurately predicted. Notwithstanding the
progress achieved in restructuring Colombia political institutions and
revitalizing its economy, the present administration, or any successor
government, may not be able to sustain the progress achieved. While the Colombia
economy has experienced growth in recent years, such growth may not continue in
the future at similar rates or at all. If the economy of Colombia fails to
continue its growth or suffers a recession, we may not be able to continue our
operations in that country. We do not carry political risk insurance.
16
The potential profitability of oil and gas ventures depends
upon factors beyond the control of our company.
The potential profitability of oil and gas properties is
dependent upon many factors beyond our control. For instance, world prices and
markets for oil and gas are unpredictable, highly volatile, potentially subject
to governmental fixing, pegging, controls, or any combination of these and other
factors, and respond to changes in domestic, international, political, social,
and economic environments. Additionally, due to world-wide economic uncertainty,
the availability and cost of funds for production and other expenses have become
increasingly difficult, if not impossible, to project. These changes and events
may materially affect our financial performance.
Adverse weather conditions can also hinder drilling operations.
A productive well may become uneconomic in the event water or other deleterious
substances are encountered which impair or prevent the production of oil and/or
gas from the well. In addition, production from any well may be unmarketable if
it is impregnated with water or other deleterious substances. The marketability
of oil and gas which may be acquired or discovered will be affected by numerous
factors beyond our control. These factors include the proximity and capacity of
oil and gas pipelines and processing equipment, market fluctuations of prices,
taxes, royalties, land tenure, allowable production and environmental
protection. The extent of these factors cannot be accurately predicted but the
combination of these factors may result in our company not receiving an adequate
return on invested capital.
Competition in the oil and gas industry is highly
competitive and there is no assurance that we will be successful in acquiring
the licenses.
The oil and gas industry is intensely competitive. We compete
with numerous individuals and companies, including many major oil and gas
companies, which have substantially greater technical, financial and operational
resources and staffs. Accordingly, there is a high degree of competition for
desirable oil and gas properties for drilling operations and necessary drilling
equipment, as well as for access to funds. There can be no assurance that the
necessary funds can be raised or that any projected work will be completed.
There are other competitors that have operations in the properties in Colombia
and the presence of these competitors could adversely affect our ability to
acquire additional property interests.
Risks Related to Our Common Stock
Trading of our stock may be restricted by the SEC’s “Penny
Stock” regulations which may limit a stockholder's ability to buy and sell our
stock
.
The U.S. Securities and Exchange Commission has adopted
regulations which generally define “penny stock” to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. Our securities are
covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and “accredited investors.” The term “accredited investor” refers
generally to institutions with assets in excess of $5,000,000 or individuals
with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for the stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the ability of
broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of, our common
stock.
17
Financial Industry Regulatory Authority (“FINRA”) sales
practice requirements may also limit a stockholder’s ability to buy and sell our
stock.
In addition to the “penny stock” rules described above, FINRA
has adopted rules that require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for at least some customers. FINRA
requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy and sell our
stock and have an adverse effect on the market for our shares.
Trading in our common stock on the OTC Bulletin Board is
limited and sporadic making it difficult for our shareholders to sell their
shares or liquidate their investments
.
Shares of our common stock are currently quoted on the OTC
Bulletin Board. The trading price of our common stock has been subject to wide
fluctuations. Trading prices of our common stock may fluctuate in response to a
number of factors, many of which will be beyond our control. The stock market
has generally experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of companies
with no current business operation. There can be no assurance that trading
prices and price earnings ratios previously experienced by our common stock will
be matched or maintained. These broad market and industry factors may adversely
affect the market price of our common stock, regardless of our operating
performance.
In the past, following periods of volatility in the market
price of a company's securities, securities class-action litigation has often
been instituted. Such litigation, if instituted, could result in substantial
costs for us and a diversion of Management's attention and resources.
Because of the early stage of development and the nature of
our business, our securities are considered highly speculative.
Our securities must be considered highly speculative, generally
because of the nature of our business and the early stage of its development. We
are engaged in the business of exploring and, if warranted, developing
commercial reserves of oil and gas. Our properties are primarily in the
exploration stage only. Accordingly, we have not generated any revenues nor have
we realized a profit from our operations to date and there is little likelihood
that we will generate any revenues or realize any profits in the short term. Any
profitability in the future from our business will be dependent upon locating
and developing economic reserves of oil and gas, which itself is subject to
numerous risk factors as set forth herein. Since we have not generated any
revenues, we will have to raise additional monies through the sale of our equity
securities or debt in order to continue our business operations.
We do not intend to pay dividends on any investment in the
shares of stock of our company.
We have never paid any cash dividends and currently do not
intend to pay any dividends for the foreseeable future. To the extent that we
require additional funding currently not provided for in our financing plan, our
funding sources may prohibit the payment of a dividend. Because we do not intend
to declare dividends, any gain on an investment in our company will need to come
through an increase in the stock’s price. This may never happen and investors
may lose all of their investment in our company.
18
Risks Related to Our Company
Our By-laws contain provisions indemnifying our officers and
directors against all costs, charges and expenses incurred by them
.
Our By-laws contain provisions with respect to the
indemnification of our officers and directors against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
actually and reasonably incurred by him, including an amount paid to settle an
action or satisfy a judgment in a civil, criminal or administrative action or
proceeding to which he is made a party by reason of his being or having been one
of our directors or officers.
Investors' interests in our company will be diluted and
investors may suffer dilution in their net book value per share if we issue
additional shares or raise funds through the sale of equity securities
.
Our constating documents authorize the issuance of 150,000,000
shares of common stock with a par value of $0.001. In the event that we are
required to issue any additional shares or enter into private placements to
raise financing through the sale of equity securities, investors' interests in
our company will be diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities are sold. If we
issue any such additional shares, such issuances also will cause a reduction in
the proportionate ownership and voting power of all other shareholders. Further,
any such issuance may result in a change in our control.
Our By-laws do not contain anti-takeover provisions which
could result in a change of our Management and directors if there is a take-over
of our company
.
We do not currently have a shareholder rights plan or any
anti-takeover provisions in our By-laws. Without any anti-takeover provisions,
there is no deterrent for a take-over of our company, which may result in a
change in our Management and Directors.