Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
Form 10-KSB.
Yes [ ] No [
x ] Delinquent filers are disclosed herein.
The
Company had $31,000 in revenue in 2007.
The
aggregate market value of the Common Stock held by non-affiliates (as affiliates
are defined in Rule 12b-2 of the Exchange Act) of the registrant, computed by
reference to the average of the high and low sale price on April 14, 2008, was
$1,650,000.
As of
April 14, 2008 there were 100,000,000 shares of issuer’s common stock
outstanding.
FELLOWS ENERGY LTD.
FORM
10-KSB
For
the Fiscal Year Ended December 31, 2007
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FORWARD-LOOKING
INFORMATION
This
Annual Report of Fellows Energy Ltd. on Form 10-KSB contains forward-looking
statements, particularly those identified with the words, "anticipates,"
"believes," "expects," "plans," “intends”, “objectives” and similar expressions.
These statements reflect management's best judgment based on factors known at
the time of such statements. The reader may find discussions containing such
forward-looking statements in the material set forth under "Legal Proceedings"
and "Management's Discussion and Analysis and Plan of Operations," generally,
and specifically therein under the captions "Liquidity and Capital Resources" as
well as elsewhere in this Annual Report on Form 10-KSB. Actual events or results
when compared to these forward-looking statements may differ materially from
those discussed herein.
ITEM
1. DESCRIPTION OF BUSINESS.
Company
History
Fellows
Energy Ltd. was incorporated in Nevada on April 9, 2001 as Fuel Centers,
Inc. In November 2001, the Commission declared effective our
registration statement to register 31,185,150, as adjusted, shares of common
stock held by our stockholders. We were originally formed to offer business
consulting services in the retail automobile fueling industry. During the fourth
quarter of 2003, we changed management, and entered the oil and gas business and
ceased all activity in the automobile refueling industry. On November 12, 2003,
we changed our name to Fellows Energy Ltd. and shifted our focus to exploration
for oil and gas in the Rocky Mountain Region. On January 5, 2004, we acquired
certain interests in certain oil and gas leases and other interests owned by
Diamond Oil & Gas Corporation, a Nevada corporation. Diamond is wholly owned
by George S. Young, our CEO, President, and Director. Our common stock is
publicly traded over-the-counter and quoted on the OTC Bulletin Board under the
symbol “FLWE.OB.”
We are an
early stage oil and gas company led by an experienced management team and
focused on exploration and production of oil and natural gas. Our
strategy is to pursue selected opportunities that are characterized by
reasonable entry costs, favorable economic terms, high reserve potential
relative to capital expenditures and the availability of existing technical data
that may be further developed using current technology. In
2006, we also turned our emphasis away from early stage exploration projects to
focus on advanced-stage and producing properties.
Business
Strategy
We seek
to: (1) achieve attractive returns on capital for the benefit of our
stockholders through investment in exploration and development; (2) maintain a
strong balance sheet to preserve maximum financial and operational flexibility;
and (3) create strong employee incentives through equity ownership.
Disciplined
Acquisition Strategy
We intend
to acquire producing oil and gas properties where we believe significant
additional value can be created. Management is primarily interested in producing
and unconventional play properties with a combination of these factors:
(1) opportunities for long life production with stable production levels;
(2) geological formations with multiple producing horizons;
(3) substantial exploitation potential; and (4) relatively low capital
investment production costs.
Exploitation
of Properties
We intend
to maximize the value of our properties through a combination of successful
exploration, drilling, increasing production, increasing recoverable reserves,
and reducing operating costs. Where we deem appropriate, we will employ
technology to improve recoveries such as directional and horizontal drilling.
Directional and horizontal drilling and completion methods have historically
produced oil and gas at faster rates and with lower operating costs basis than
traditional vertical drilling.
Experienced
and Dedicated Personnel
We intend
to maintain a highly competitive team of experienced and technically proficient
employees and consultants and motivate them through a positive work environment
and stock ownership. We believe that employee ownership, which is encouraged
through our stock option plan, is essential for attracting, retaining and
motivating qualified personnel.
Company
and Industry Highlights
According
to the report Facing the Hard
Truths about Energy (July 17, 2007), released in the summer of 2007 by
the National Petroleum Council:
The
Council found that total global demand for energy is projected to grow by 50-60
percent by 2030, driven by increasing population and the pursuit of improving
living standards. At the same time, there are accumulating risks to the supply
of reliable, affordable energy to meet this growth, including political hurdles,
infrastructure requirements, and availability of a trained work force. We will
need all economic, environmentally responsible energy sources to assure
adequate, reliable supply.
A few
highlights of their report to the Secretary of Energy include:
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“Coal,
oil, and natural gas will remain indispensable to meeting total projected
energy demand growth.”
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“The
world is not running out of energy resources, but there are accumulating
risks to continuing expansion of oil and natural gas production from the
conventional sources relied upon historically. These risks create
significant challenges to meeting projected total energy
demand.”
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·
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“To
mitigate these risks, expansion of all economic energy sources will be
required, including coal, nuclear, biomass, other renewables, and
unconventional oil and natural gas. Each of these sources faces
significant challenges including safety, environmental, political, or
economic hurdles, and imposes infrastructure requirements for development
and delivery.”
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The
United States must:
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·
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“Expand
and diversify production from clean coal, nuclear, biomass, other
renewables, and unconventional oil and gas; moderate the decline of
conventional domestic oil and gas production; and increase access for
development of new resources.”
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“Enhance
science and engineering capabilities and create long-term opportunities
for research and development in all phases of the energy supply and demand
system.”
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Focus
on Producing and Unconventional Plays
In
building our inventory of oil and gas projects, we have concentrated on
unconventional plays as well as conventional oil and gas projects.
Compared
to conventional plays, unconventional plays present different advantages and
risks. Typically, unconventional plays involve less geologic risk than
conventional plays with respect to locating gas because hydrocarbons are known
to exist and because unconventional plays are typically larger in size.
Similarly, due to the greater size of typical unconventional plays, they
inherently have greater reserve potential than conventional plays. In general,
unconventional plays have not been developed to the extent of conventional plays
and therefore greater opportunities exist for acquiring additional
unconventional plays and increasing reserves.
However,
development of typical unconventional plays may involve greater extraction and
retrieval costs than are involved in development of typical conventional plays.
In the typical unconventional play, the existence of gas is known but the
quantity of such gas, and commercial viability, is unknown. The process of
developing an unconventional play requires significant costs before the
commercial viability can be ascertained. Therefore, there is a greater risk of
cost overrun and the risk of inadequate gas recoveries is not
avoided.
It is
important to recognize that unconventional plays offer attractive potential for
large reserve additions. This is because the large conventional traps have
largely been found and developed, and because unconventional plays inherently
have much greater size and therefore greater reserve potential. All of the top
five onshore “gas giant” fields discovered and developed in the 1990s (including
Powder River Basin coal bed methane, Jonah, Pinedale, Madden Deep and
Ferron coal bed methane) were in the Rocky Mountain Region.
Strategic
Land Position
Through
our direct ownership of mineral rights in the Powder River Basin and
Uinta Basin, we have a strategic land position in the oil and gas producing
basins of the Rocky Mountains. Known hydrocarbon resources in reservoirs in
unconventional plays such as coal seams, thick oil-bearing shales, and extensive
bodies of tight gas-bearing sands throughout the properties create the potential
for a large inventory of drilling locations should initial exploration efforts
prove successful. Although there are no assurances, this inventory could support
future net reserve additions and production growth over the next several
years.
Strong
Underlying Industry Fundamentals
According
to the National Petroleum Council Gas Report, the domestic natural gas
fundamentals will continue to be attractive, for the foreseeable future. The
U.S. faces a significant natural gas supply problem due to the maturing of its
traditional producing basins, the increase in exploration and development costs,
and demand increases coupled with production decline rates. The U.S. has several
ways to combat this supply problem through measures including increased
development and importation of Canadian and Alaskan gas and delivery of
liquefied natural gas. However, the impact of these efforts is expected to only
mitigate the supply decline or at best increase supply marginally.
Proven
Management Expertise
Our CEO
and President George S. Young and our Vice President Steve Prince have
experience in operating and growing an oil and gas public company. Mr. Young
brings strong leadership and business qualifications, an understanding from
having been trained as both an attorney and engineer and 25 years of natural
resource industry experience. Mr. Prince brings 22 years of oil and gas industry
experience as a petroleum engineer and as a significant contributor to the
development of major producing fields in areas of interest to us.
Financing
Strategy
We intend
to access debt and equity markets for private and public financings from time to
time based on our needs on terms in the market then available to us. Initially,
we expect that the bulk of capital formation will be in the form of convertible
debt to equity capital to support the initial phases of exploration and
exploitation work required on our projects. To the extent the plays mature into
“Proven” status as determined by independent third-party engineers, we plan to
utilize debt sources for a large percentage of our capital requirements so as to
maximize the return on equity that these projects generate. This debt may be in
the form of senior bank debt, junior or subordinated bank debt, and/or mezzanine
debt. We cannot provide any assurance that we will be able to raise additional
debt or equity to fund future operational and exploration needs or terms
acceptable to us. Additionally, we may generate funds through (1) a joint
venture, sale or farm out on an interest in one or more of its properties and/or
(2) divesting one or more of our properties that are determined not to fit with
our strategic core holdings.
Property
Summary
In our
short operating history in the oil and gas industry, we have positioned our
company to control and exploit potential reserves from a number of oil and gas
projects covering approximately 27,000 acres. These projects focus on coal bed
methane, tight sands gas and oil from fractured shales. Such projects are
characterized by their widespread occurrence, large reserve potential, low
finding and development costs, high drilling success rates, and low geologic and
operating risks. Such projects are also subject to certain risks and development
of such projects requires substantial capital. Please see Item 2: Description of
Property for more discussion related to the properties.
Competition
Oil and
gas exploration and acquisition of undeveloped properties is a highly
competitive and speculative business. We compete with a number of other
companies, including major oil companies and other independent operators which
are more experienced and which have greater financial resources. Such companies
may be able to pay more for prospective oil and gas properties. Additionally,
such companies may be able to evaluate, bid for and purchase a greater number of
properties and prospects than our financial and human resources
permit.
We will also compete with other junior
oil and gas exploration companies for financing from a limited number of
investors that are prepared to make investments in junior oil and gas
exploration companies. The presence of competing junior oil and gas exploration
companies may have an adverse impact on our ability to raise additional capital
in order to fund our exploration programs if investors are of the view that
investments in competitors are more attractive based on the merit of the oil and
gas properties under investigation and the price of the investment offered to
investors. We
do not hold a significant competitive position in the oil and gas
industry.
Patents
and Trademarks
We do not
own, either legally or beneficially, any patent or trademark.
Governmental
Regulations
Our
operations are or will be subject to various types of regulation at the federal,
state and local levels. Such regulation includes requiring permits for the
drilling of wells; maintaining bonding requirements in order to drill or operate
wells; implementing spill prevention plans; submitting notification and
receiving permits relating to the presence, use and release of certain materials
incidental to oil and 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 usage and the restoration of properties upon which wells
have been drilled, the plugging and abandoning of wells and the transporting of
production. Our operations are or will be also subject to various conservation
matters, including the regulation of the size of drilling and spacing units or
proration units, the number of wells which may be drilled in a unit, and the
unitization or pooling of oil and 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 gas properties. In addition, state
conservation laws establish maximum rates of production from oil and gas wells,
generally limit the venting or flaring of gas, and impose certain requirements
regarding the ratable purchase of production. The effect of these regulations is
to limit the amounts of oil and gas we may be able to produce from our wells and
to limit the number of wells or the locations at which we may be able to
drill.
Our
business is affected by numerous laws and regulations, including energy,
environmental, conservation, tax and other laws and regulations relating to the
oil and gas industry. We plan to develop internal procedures and policies to
ensure that our operations are conducted in full and substantial environmental
regulatory compliance.
Failure
to comply with any laws and regulations may result in the assessment of
administrative, civil and criminal penalties, the imposition of injunctive
relief or both. Moreover, changes in any of these laws and regulations could
have a material adverse effect on business. In view of the many uncertainties
with respect to current and future laws and regulations, including their
applicability to us, we cannot predict the overall effect of such laws and
regulations on our future operations.
We
believe that our operations comply in all material respects with applicable laws
and regulations and that the existence and enforcement of such laws and
regulations have no more restrictive an effect on our operations than on other
similar companies in the energy industry. We do not anticipate any material
capital expenditures to comply with federal and state environmental
requirements.
Environmental
Matters
Operations
on properties in which we have an interest are subject to extensive federal,
state and local environmental laws that regulate the discharge or disposal of
materials or substances into the environment and otherwise are intended to
protect the environment. Numerous governmental agencies issue rules and
regulations to implement and enforce such laws, which are often difficult and
costly to comply with and which carry substantial administrative, civil and
criminal penalties and in some cases injunctive relief for failure to
comply.
Some
laws, rules and regulations relating to the protection of the environment may,
in certain circumstances, impose “strict liability” for environmental
contamination. These laws render a person or company liable for environmental
and natural resource damages, cleanup costs and, in the case of oil spills in
certain states, consequential damages without regard to negligence or fault.
Other laws, rules and regulations may require the rate of oil and gas production
to be below the economically optimal rate or may even prohibit exploration or
production activities in environmentally sensitive areas. In addition, state
laws often require some form of remedial action, such as closure of inactive
pits and plugging of abandoned wells, to prevent pollution from former or
suspended operations.
Legislation
has been proposed in the past and continues to be evaluated in Congress from
time to time that would reclassify certain oil and gas exploration and
production wastes as “hazardous wastes.” This reclassification would make these
wastes subject to much more stringent storage, treatment, disposal and clean-up
requirements, which could have a significant adverse impact on operating costs.
Initiatives to further regulate the disposal of oil and gas wastes are also
proposed in certain states from time to time and may include initiatives at the
county, municipal and local government levels. These various initiatives could
have a similar adverse impact on operating costs.
The
regulatory burden of environmental laws and regulations increases our cost and
risk of doing business and consequently affects our profitability. The federal
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
also known as the “Superfund” law, imposes liability, without regard to fault,
on certain classes of persons with respect to the release of a “hazardous
substance” into the environment. These persons include the current or prior
owner or operator of the disposal site or sites where the release occurred and
companies that transported, disposed or arranged for the transport or disposal
of the hazardous substances found at the site. Persons who are or were
responsible for releases of hazardous substances under CERCLA may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for the federal or state government to
pursue such claims.
It is
also not uncommon for neighboring landowners and other third parties to file
claims for personal injury or property or natural resource damages allegedly
caused by the hazardous substances released into the environment. Under CERCLA,
certain oil and gas materials and products are, by definition, excluded from the
term “hazardous substances.” At least two federal courts have held that certain
wastes associated with the production of crude oil may be classified as
hazardous substances under CERCLA. Similarly, under the federal Resource,
Conservation and Recovery Act, or RCRA, which governs the generation, treatment,
storage and disposal of “solid wastes” and “hazardous wastes,” certain oil and
gas materials and wastes are exempt from the definition of “hazardous wastes.”
This exemption continues to be subject to judicial interpretation and
increasingly stringent state interpretation. During the normal course of
operations on properties in which we have an interest, exempt and non-exempt
wastes, including hazardous wastes, that are subject to RCRA and comparable
state statutes and implementing regulations are generated or have been generated
in the past. The federal Environmental Protection Agency and various state
agencies continue to promulgate regulations that limit the disposal and
permitting options for certain hazardous and non-hazardous
wastes.
We
believe that the operator of the properties in which we have an interest is in
substantial compliance with applicable laws, rules and regulations relating to
the control of air emissions at all facilities on those properties. Although we
maintain insurance against some, but not all, of the risks described above,
including insuring the costs of clean-up operations, public liability and
physical damage, there is no assurance that our insurance will be adequate to
cover all such costs, that the insurance will continue to be available in the
future or that the insurance will be available at premium levels that justify
our purchase. The occurrence of a significant event not fully insured or
indemnified against could have a material adverse effect on our financial
condition and operations. Compliance with environmental requirements, including
financial assurance requirements and the costs associated with the cleanup of
any spill, could have a material adverse effect on our capital expenditures,
earnings or competitive position. We do believe, however, that our operators are
in substantial compliance with current applicable environmental laws and
regulations. Nevertheless, changes in environmental laws have the potential to
adversely affect operations. At this time, we have no plans to make any material
capital expenditures for environmental control facilities.
Employees
As of
April 14, 2008, we have two full-time employees. The majority of development
services have been provided to us by the officers and outside, third-party
vendors. Currently, there exist no organized labor agreements or union
agreements between us and our employees. We do not have employment agreements
with any of our employees. We believe that our relations with our employees are
good.
Reports
to Security Holders
We file
our quarterly and audited annual reports with the Securities and Exchange
Commission (SEC), which the public may read and copy at the Public Reference
Room at 450 Fifth Street, N.W., Washington D.C. 20459. SEC filings,
including supplemental schedules and exhibits, can also be accessed free of
charge through the SEC website at www.sec.gov. Our website is located
at www.fellowsenergy.com, and can be used to access recent news releases and
Securities and Exchange Commission (SEC) filings, including our quarterly and
audited annual reports, and other items of interest. Our website, and the
information on our website, including other links contained on our website, are
not incorporated into this Report.
Risks
Related to Our Business
You
should carefully consider the following risk factors and all other information
contained herein as well as the information included in this Annual Report in
evaluating our business and prospects. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties, other
than those we describe below, that are not presently known to us or that we
currently believe are immaterial may also impair our business operations. If any
of the following risks occur, our business and financial results could be
harmed. You should refer to the other information contained in this Annual
Report, including our consolidated financial statements and the related
notes.
We
Have a History Of Losses Which May Continue, and May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We
incurred net losses of $9,315,952 and $8,587,286 for the years ended December
31, 2007 and 2006, respectively. We cannot assure that we can achieve or sustain
profitability on a quarterly or annual basis in the future. Our operations are
subject to the risks and competition inherent in the establishment of a business
enterprise. There can be no assurance that future operations will be profitable.
Revenues and profits, if any, will depend upon various factors, including
whether we will be able to continue expansion of our revenue. We may not achieve
our business objectives and the failure to achieve such goals would have an
adverse impact on us.
If
We Are Unable to Obtain Additional Funding, Our Business Operations Will be
Harmed and If We Do Obtain Additional Financing, Our Then Existing Shareholders
May Suffer Substantial Dilution.
We will
require additional funds to sustain and expand our acquisition, exploration and
production of natural gas from coal bed methane. We anticipate that we will
require up to approximately $1,000,000 to fund our continued operations for
the next twelve months from the date of this prospectus, depending on revenues
from operations. Additional capital will be required to effectively support the
operations and to otherwise implement our overall business strategy. There can
be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain additional capital will
restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our marketing and development plans and possibly
cease our operations. Any additional equity financing may involve substantial
dilution to our then existing shareholders.
Our
Independent Registered Public Accounting Firm Has Stated There is Substantial
Doubt About Our Ability to Continue As a Going Concern, Which May Hinder Our
Ability to Obtain Future Financing
In their
report dated April 14, 2008 on our financial statements as of and for the year
ended December 31, 2007, our independent registered public accounting firm
stated that our significant losses from operations and our limited financial
resources raised substantial doubt about our ability to continue as a going
concern. Since December 31, 2007, we have continued to experience losses from
operations. Our ability to continue as a going concern is subject to our ability
to generate a profit and/or obtain necessary debt or equity funding from outside
sources, including the sale of our securities, and/or loans and grants from
various financial institutions where possible.
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 a
limited history of revenues from operations and have no individually significant
tangible assets. We have yet to generate positive earnings and there
can be no assurance that we will ever operate profitably. Our success is
significantly dependent on a successful acquisition, drilling, completion and
production program. Our 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. 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.
If
We Are Unable to Retain the Services of Mr. Young or If We Are Unable to
Successfully Recruit Qualified Managerial and Field Personnel Having Experience
in Oil and Gas Exploration, We May Not Be Able to Continue Our
Operations.
Our
success depends to a significant extent upon the continued service of Mr. George
S. Young, our President, Chief Executive Officer and a director. Loss of the
services of Mr. Young could have a material adverse effect on our growth,
revenues, and prospective business. We do not maintain key-man insurance on the
life of Mr. Young. In addition, in order to successfully implement and manage
our business plan, we will be dependent upon, among other things, successfully
recruiting qualified managerial and field personnel having experience in the oil
and gas exploration business. Competition for qualified individuals is intense.
There can be no assurance that we will be able to find, attract and retain
existing employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
As
Most of Our Properties are in the Exploration and Development Stage, There Can
be no Assurance That We Will Establish Commercial Discoveries on Our
Properties.
Exploration
for economic reserves of oil and gas is subject to a number of risk factors. Few
properties that are explored are ultimately developed into producing oil and/or
gas wells. Most of our properties are in the exploration and development stage
only and are without proven reserves of oil and gas. We may not establish
commercial discoveries on any of our properties beyond that already discovered
and developed at our Carbon County project.
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 worldwide economic uncertainty, the
availability and cost of funds for production and other expenses have become
increasingly difficult, if not impossible, to project. In addition, adverse
weather conditions can also hinder drilling operations. These changes and events
may materially affect our financial performance.
Even
if We are Able to Discover and Generate a Gas Well, There Can be no Assurance
the Well Will Become Profitable
Even if
we are able to discover coalbed methane gas or drill a gas well to capture any
gas, 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. In
addition, the marketability of oil and gas which may be acquired or discovered
will be affected by numerous factors, including 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, all of which could result in greater expenses than revenue generated
by the well.
Competition
In The Oil And Gas Industry Is Highly Competitive And There Is No Assurance That
We Will Be Successful In Acquiring The Leases.
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
leases, suitable properties for drilling operations and necessary drilling
equipment, as well as for access to funds. We cannot predict if the necessary
funds can be raised or that any projected work will be completed. While we may
seek additional oil and gas acreage, it may not become available, or if it is
available for leasing, we may not be successful in acquiring the
leases.
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.
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. 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 future and this may affect our ability to expand or maintain our
operations.
Exploration
and Production Activities are Subject to Certain Environmental Regulations Which
May Prevent or Delay the Commencement or Continuance of Our
Operations.
In
general, our exploration and production activities are subject to certain
federal, state and local laws and regulations relating to environmental quality
and pollution control. Such laws and regulations increase the costs of these
activities and may prevent or delay the commencement or continuance of a given
operation. Compliance with these laws and regulations has not had a material
effect on our operations or financial condition to date. Specifically, we are
subject to legislation regarding emissions into the environment, water
discharges and storage and disposition of hazardous wastes. In addition,
legislation has been enacted which requires well and facility sites to be
abandoned and reclaimed to the satisfaction of state authorities. However, such
laws and regulations are frequently changed and we are unable to predict the
ultimate cost of compliance. Generally, environmental requirements do not appear
to affect us any differently or to any greater or lesser extent than other
companies in the industry. Our operating partners maintain insurance
coverage customary to the industry; however, we are not fully insured against
all possible environmental risks.
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 it cannot adequately insure or
which it may elect not to insure. Incurring any such liability may have a
material adverse effect on our financial position and operations.
Risks Relating to Our
Current Financing Arrangements:
There
Are a Large Number of Shares Underlying Our Convertible Debentures and Warrants
That May be Available for Future Sale and the Sale of These Shares May Depress
the Market Price of Our Common Stock.
As of
April 14, 2008, we had 100,000,000 shares of common stock issued and
outstanding, convertible debentures issued in June 2005, September 2005 and
February 2007 outstanding that may be converted into an estimated 8,743,942
shares of common stock and outstanding warrants issued in June and September
2005, and February 2007 to purchase 1,766,667 shares of common stock. To the
extent registered pursuant to our registration statements, all of these shares
are issuable upon conversion of the June and September 2005, and February 2007
debentures and upon exercise of our June and September 2005 and February 2007
warrants, may be sold without restriction. The sale of these shares may
adversely affect the market price of our common stock.
The
Issuance of Shares Upon Conversion of the Convertible Debentures and
Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to
Our Existing Stockholders.
The
issuance of shares upon conversion of the convertible debentures and exercise of
warrants may result in substantial dilution to the interests of other
stockholders since the selling stockholders may ultimately convert and sell the
full amount issuable on conversion. Although the selling stockholders may not
convert their convertible debentures and/or exercise their warrants if such
conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
If
We Are Required for any Reason to Repay Our Outstanding Secured Convertible
Debentures, We Would Be Required to Deplete Our Working Capital, If Available,
Or Raise Additional Funds. Our Failure to Repay the Secured
Convertible Debentures, If Required, Could Result in Legal Action Against Us,
Which Could Require the Sale of Substantial Assets.
Between
2005 and 2007, we entered into Securities Purchase Agreements for the sale of an
aggregate of $9,323,700 principal face amount of secured convertible debentures,
of which $1,253,139 remains outstanding. The secured convertible debentures are
due and payable, with interest, as of December 31, 2007, and have not been
converted into shares of our common stock. In addition, any event of default
such as our failure to repay the principal when due, our failure to issue shares
of common stock upon conversion by the holder, our failure to timely file a
registration statement or have such registration statement declared effective,
breach of any covenant, representation or warranty in the Securities Purchase
Agreement or related convertible debentures, the assignment or appointment of a
receiver to control a substantial part of our property or business, the filing
of a money judgment, writ or similar process against our company in excess of
$50,000, the commencement of a bankruptcy, insolvency, reorganization or
liquidation proceeding against our company and the delisting of our common stock
could require the early repayment of the convertible debentures, including
default interest on the outstanding principal balance of the convertible
debentures if the default is not cured with the specified grace period. We
anticipate that the full amount of the convertible debentures will be converted
into shares of our common stock, in accordance with the terms of the convertible
debentures. If we are required to repay the convertible debentures, we would be
required to use our limited working capital and raise additional funds. If we
were unable to repay the convertible debentures when required, the debenture
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
Risks Relating to Our Common
Stock:
If
We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary
market.
Our
Common Stock is Subject to the "Penny Stock" Rules of the SEC 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 has adopted Rule 15g-9 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:
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that
a broker or dealer approve a person's account for transactions in penny
stocks; and
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that
broker or dealer receive 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 Commission 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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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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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.
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 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.
ITEM 2. DESCRIPTION OF PROPERTY.
Our
principal executive offices are located at 1369 Forest Park Circle, Suite 202,
Lafayette, Colorado 80026, and our telephone number is (303) 926-4415. In
exchange for administrative services, we pay no rent for the 300 square foot
suite we now occupy. We believe that our current office space and facilities are
sufficient to meet our present needs and do not anticipate any difficulty
securing alternative or additional space, as needed, on terms acceptable to us.
In addition, we have the following oil and gas properties in connection with our
principal business activities:
Carbon
County Project, Utah
On
September 12, 2005, we entered into an option agreement to purchase a gas field
in Carbon County, Utah that was producing approximately 30 million cubic feet of
natural gas per month. The field comprised of 5,953 gross acres
(2,440 net acres), with four producing gas wells, and an additional four shut-in
wells. The production was derived from the Ferron Sandstone formation, and the
gas marketed into the adjacent gas pipeline operated by Questar Gas
Resources. The acquisition included an associated gas gathering
system and a 6 mile pipeline and compression facility servicing the project and
adjacent production. The field yielded potential for 20 additional well sites on
160 acre spacing on the undeveloped acreage. The property is adjacent
to our Gordon Creek project and to the very successful Drunkards Wash field
originally developed by River Gas Corp.
The
purchase option called for an acquisition price of $3 million, and we closed the
purchase of the acquisition on March 13, 2006 with an industry partner,
Thunderbird Energy Corporation (“Thunderbird”) formerly MBA Resource Corp. of
Canada. Thunderbird paid $1.5 million and arranged third party
financing of $750,000 for part of our share of the $3 million purchase price, in
exchange for a 50% interest in the project. We previously paid a
deposit toward the purchase price. We acquired a 50% interest in the
project with only an additional payment of $241,000. Together with
Thunderbird we formed Gordon Creek, LLC a joint operating company, which was
incorporated in the state of Utah to carry out gas production and drilling
operations as well as gas gathering activities for both the project gas and
adjacent third party production.
After
several months of production and workover efforts, as of June 2007, we
decided it was in the best interest of the Company to sell our ownership in
the Carbon County project. The decision was made to sell this project
after considering our required outstanding debenture obligations, the prospect
of paying off a significant portion of our debt, as well as record a
gain on the sale. Subsequently, on August 6, 2007, we entered into a
purchase and sale agreement pursuant to which we sold our
interests in the Carbon County project for total consideration of $3.0 million
The purchase was consummated via the assumption of and payment on various debts
owed by the Company amounting to $2,763,000, with the remainder held as a note
receivable in the amount of $202,220 as of December 31, 2007