ITEM 1A. RISK FACTORS
Much of the information included in this annual report includes
or is based upon estimates, projections or other forward looking statements.
Such forward looking statements include any projections and 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.
Risks Relating to our Business and the Oil and Gas
Industry
We have a history of losses and this trend may continue and
may negatively affect our ability to achieve our business objectives.
We have experienced net losses since inception, and expect to
continue to incur substantial losses for the foreseeable future. Our accumulated
deficit was $36,198,739 as at June 30, 2016. We may not be able to generate
significant revenues in the future and our company has incurred increased
operating expenses following the recent commencement of production. As a result,
our management expects our business to continue to experience negative cash flow
for the foreseeable future and cannot predict when, if ever, our business might
become profitable. We will need to raise additional funds, and such funds may
not be available on commercially acceptable terms, if at all. If we are unable
to raise funds on acceptable terms, we may not be able to execute our business
plan, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements. This may seriously harm our business,
financial condition and results of operations.
We have a relatively limited operating history, which may
hinder our ability to successfully meet our objectives.
We have a relatively limited operating history upon which to
base an evaluation of our current business and future prospects. We have
commenced production in the year ended September 30, 2008 and we do not have an
established history of operating producing properties or locating and developing
properties that have oil and gas reserves. As a result, the revenue and income
potential of our business is unproven. In addition, because of our relatively
limited operating history, we have limited insight into trends that may emerge
and affect our business. Errors may be made in predicting and reacting to
relevant business trends and we will be subject to the risks, uncertainties and
difficulties frequently encountered by early-stage companies in evolving
markets. We may not be able to successfully address any or all of these risks
and uncertainties. Failure to adequately do so could cause our business, results
of operations and financial condition to suffer.
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Our operations and proposed exploration activities will
require significant capital expenditures for which we may not have sufficient
funding and if we do obtain additional financing, our existing shareholders may
suffer substantial dilution.
We intend to make capital expenditures far in excess of our
existing capital resources to develop, acquire and explore oil and gas
properties. We intend to rely on funds from operations and external sources of
financing to meet our capital requirements to continue acquiring, exploring and
developing oil and gas properties and to otherwise implement our business plan.
We plan to obtain additional funding through the debt and equity markets, but we
can offer no assurance that we will be able to obtain additional funding when it
is required or that it will be available to us on commercially acceptable terms,
if at all. In addition, any additional equity financing may involve substantial
dilution to our then existing shareholders.
The successful implementation of our business plan is
subject to risks inherent in the oil and gas business, which if not adequately
managed could result in additional losses.
Our oil and gas operations are subject to the economic risks
typically associated with exploration and development activities, including the
necessity of making significant expenditures to locate and acquire properties
and to drill exploratory wells. In addition, the availability of drilling rigs
and the cost and timing of drilling, completing and, if warranted, operating
wells is often uncertain. In conducting exploration and development activities,
the presence of unanticipated pressure or irregularities in formations,
miscalculations or accidents may cause our exploration, development and, if
warranted, production activities to be unsuccessful. This could result in a
total loss of our investment in a particular well. If exploration efforts are
unsuccessful in establishing proved reserves and exploration activities cease,
the amounts accumulated as unproved costs will be charged against earnings as
impairments.
In addition, market conditions or the unavailability of
satisfactory oil and gas transportation arrangements may hinder our access to
oil and gas markets and delay our production. The availability of a ready market
for our prospective oil and gas production depends on a number of factors,
including the demand for and supply of oil and gas and the proximity of reserves
to pipelines and other facilities. Our ability to market such production depends
in substantial part on the availability and capacity of gathering systems,
pipelines and processing facilities, in most cases owned and operated by third
parties. Our failure to obtain such services on acceptable terms could
materially harm our business. We may be required to shut in wells for lack of a
market or a significant reduction in the price of oil or gas or because of
inadequacy or unavailability of pipelines or gathering system capacity. If that
occurs, we would be unable to realize revenue from those wells until
arrangements are made to deliver such production to market.
Our future performance is dependent upon our ability to
identify, acquire and develop oil and gas properties, the failure of which could
result in under use of capital and losses.
Our future performance depends upon our ability to identify,
acquire and develop additional oil and gas reserves that are economically
recoverable. Our success will depend upon our ability to acquire working and
revenue interests in properties upon which oil and gas reserves are ultimately
discovered in commercial quantities, and our ability to develop prospects that
contain proven oil and gas reserves to the point of production. Without
successful acquisition and exploration activities, we will not be able to
develop additional oil and gas reserves or generate additional revenues. We
cannot provide you with any assurance that we will be able to identify and
acquire additional oil and gas reserves on acceptable terms, or that oil and gas
deposits will be discovered in sufficient quantities to enable us to recover our
exploration and development costs or sustain our business.
The successful acquisition and development of oil and gas
properties requires an assessment of recoverable reserves, future oil and gas
prices and operating costs, potential environmental and other liabilities, and
other factors. Such assessments are necessarily inexact and their accuracy
inherently uncertain. In addition, no assurance can be given that our
exploration and development activities will result in the discovery of
additional reserves. Our operations may be curtailed, delayed or canceled as a
result of lack of adequate capital and other factors, such as lack of availability of rigs and other
equipment, title problems, weather, compliance with governmental regulations or
price controls, mechanical difficulties, or unusual or unexpected formations,
pressures and or work interruptions. In addition, the costs of exploitation and
development may materially exceed our initial estimates.
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We have a very small management team and the loss of any
member of our team may prevent us from implementing our business plan in a
timely manner.
We have two executive officers and a limited number of
additional consultants upon whom our success largely depends. We maintain a key
person life insurance policy on our president and CEO, but not on anyone else,
nor any consultants, the loss of which could seriously harm our business,
financial condition and results of operations. In such an event, we may not be
able to recruit personnel to replace our executive officers or consultants in a
timely manner, or at all, on acceptable terms.
Future growth could strain our personnel and infrastructure
resources, and if we are unable to implement appropriate controls and procedures
to manage our growth, we may not be able to successfully implement our business
plan.
We expect to experience growth in our operations, which will
place a significant strain on our management, administrative, operational and
financial infrastructure. Our future success will depend in part upon the
ability of our management to manage growth effectively. This may require us to
hire and train additional personnel to manage our expanding operations. In
addition, we must continue to improve our operational, financial and management
controls and our reporting systems and procedures. If we fail to successfully
manage our growth, we may be unable to execute upon our business plan.
Market conditions or operation impediments may hinder our
access to natural gas and oil markets or delay our production.
The marketability of production from our properties depends in
part upon the availability, proximity and capacity of pipelines, natural gas
gathering systems and processing facilities. This dependence is heightened where
this infrastructure is less developed. Therefore, if drilling results are
positive in certain areas of our oil and gas properties, a new gathering system
would need to be built to handle the potential volume of oil and gas produced.
We might be required to shut in wells, at least temporarily, for lack of a
market or because of the inadequacy or unavailability of transportation
facilities. If that were to occur, we would be unable to realize revenue from
those wells until arrangements were made to deliver production to market.
Our ability to produce and market natural gas and oil is
affected and also may be harmed by:
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the lack of pipeline transmission facilities or
carrying capacity;
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government regulation of natural gas and oil
production;
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government transportation, tax and energy
policies;
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changes in supply and demand; and
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general economic conditions.
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We might incur additional debt in order to fund our
exploration and development activities, which would continue to reduce our
financial flexibility and could have a material adverse effect on our business,
financial condition or results of operations.
When we incur indebtedness, the ability to meet our debt
obligations and reduce our level of indebtedness depends on future performance.
General economic conditions, oil and gas prices and financial, business and
other factors affect our operations and future performance. Many of these
factors are beyond our control. We cannot assure you that we will be able to
generate sufficient cash flow to pay the interest on our current or future debt
or that future working capital, borrowings or equity financing will be available
to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering
of our capital stock or a refinancing of our debt include financial market
conditions, the value of our assets and performance at the time we need capital.
We cannot assure you that we will have sufficient funds to make such payments.
If we do not have sufficient funds and are otherwise unable to negotiate
renewals of our borrowings or arrange new financing, we might have to sell
significant assets. Any such sale could have a material adverse effect on our
business and financial results.
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Our properties in Montana and/or future properties might not
produce, and we might not be able to determine reserve potential, identify
liabilities associated with the properties or obtain protection from sellers
against them, which could cause us to incur losses.
Although we have reviewed and evaluated our properties in
Montana in a manner consistent with industry practices, such review and
evaluation might not necessarily reveal all existing or potential liabilities.
This is also true for any future acquisitions made by us. Inspections may not
always be performed on every well, and environmental problems, such as
groundwater contamination, are not necessarily observable even when an
inspection is undertaken. Even when problems are identified, a seller may be
unwilling or unable to provide effective contractual protection against all or
part of those problems, and we may assume environmental and other risks and
liabilities in connection with the acquired properties.
If we or our operators fail to maintain adequate insurance,
our business could be materially and adversely affected.
Our operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution, earthquakes and other environmental risks.
These risks could result in substantial losses due to injury and loss of life,
severe damage to and destruction of property and equipment, pollution and other
environmental damage, and suspension of operations. We could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could have a material adverse effect on our
financial condition and results of operations.
Any prospective drilling contractor or operator that we hire
will be required to maintain insurance of various types to cover our operations
with policy limits and retention liability customary in the industry. We also
have acquired our own insurance coverage for such prospects. The occurrence of a
significant adverse event on such prospects that is not fully covered by
insurance could result in the loss of all or part of our investment in a
particular prospect which could have a material adverse effect on our financial
condition and results of operations.
The oil and gas industry is highly competitive, and we may
not have sufficient resources to compete effectively.
The oil and gas industry is highly competitive. We compete with
oil and natural gas companies and other individual producers and operators, many
of which have longer operating histories and substantially greater financial and
other resources than we do, as well as companies in other industries supplying
energy, fuel and other needs to consumers. Our larger competitors, by reason of
their size and relative financial strength, can more easily access capital
markets than we can and may enjoy a competitive advantage in the recruitment of
qualified personnel. They may be able to absorb the burden of any changes in
laws and regulation in the jurisdictions in which we do business and handle
longer periods of reduced prices for oil and gas more easily than we can. Our
competitors may be able to pay more for oil and gas leases and properties and
may be able to define, evaluate, bid for and purchase a greater number of leases
and properties than we can. Further, these companies may enjoy technological
advantages and may be able to implement new technologies more rapidly than we
can. Our ability to acquire additional properties in the future will depend upon
our ability to conduct efficient operations, evaluate and select suitable
properties, implement advanced technologies and consummate transactions in a
highly competitive environment.
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Complying with environmental and other government
regulations could be costly and could negatively impact our production.
Our business is governed by numerous laws and regulations at
various levels of government. These laws and regulations govern the operation
and maintenance of our facilities, the discharge of materials into the
environment and other environmental protection issues. Such laws and regulations
may, among other potential consequences, require that we acquire permits before
commencing drilling and restrict the substances that can be released into the
environment with drilling and production activities.
Under these laws and regulations, we could be liable for
personal injury, clean-up costs and other environmental and property damages, as
well as administrative, civil and criminal penalties. Prior to commencement of
drilling operations, we may secure limited insurance coverage for sudden and
accidental environmental damages as well as environmental damage that occurs
over time. However, we do not believe that insurance coverage for the full
potential liability of environmental damages is available at a reasonable cost.
Accordingly, we could be liable, or could be required to cease production on
properties, if environmental damage occurs.
The costs of complying with environmental laws and regulations
in the future may harm our business. Furthermore, future changes in
environmental laws and regulations could result in stricter standards and
enforcement, larger fines and liability, and increased capital expenditures and
operating costs, any of which could have a material adverse effect on our
financial condition or results of operations.
Shortages of rigs, equipment, supplies and personnel could
delay or otherwise adversely affect our cost of operations or our ability to
operate according to our business plans.
If drilling activity increases in Montana or the southern
United States generally, a shortage of drilling and completion rigs, field
equipment and qualified personnel could develop. The demand for and wage rates
of qualified drilling rig crews generally rise in response to the increasing
number of active rigs in service and could increase sharply in the event of a
shortage. Shortages of drilling and completion rigs, field equipment or
qualified personnel could delay, restrict or curtail our exploration and
development operations, which could in turn harm our operating results.
We will be required to replace, maintain or expand our
reserves in order to prevent our reserves and production from declining, which
would adversely affect cash flows and income.
In general, production from natural gas and oil properties
declines over time as reserves are depleted, with the rate of decline depending
on reservoir characteristics. If we are not successful in our exploration and
development activities, our proved reserves will decline as reserves are
produced. Our future natural gas and oil production is highly dependent upon our
ability to economically find, develop or acquire reserves in commercial
quantities.
To the extent cash flow from operations is reduced, either by a
decrease in prevailing prices for natural gas and oil or an increase in
exploration and development costs, and external sources of capital become
limited or unavailable, our ability to make the necessary capital investment to
maintain or expand our asset base of natural gas and oil reserves would be
impaired. Even with sufficient available capital, our future exploration and
development activities may not result in additional proved reserves, and we
might not be able to drill productive wells at acceptable costs.
The geographic concentration of all of our other properties
in Montana subjects us to an increased risk of loss of revenue or curtailment of
production from factors affecting those areas.
The geographic concentration of all of our leasehold interests
in Pondera and Glacier Counties, Montana means that our properties could be
affected by the same event should the region experience:
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severe weather;
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delays or decreases in production, the availability of
equipment, facilities or services;
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delays or decreases in the availability of capacity to
transport, gather or process production; or
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changes in the regulatory environment.
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The oil and gas exploration and production industry
historically is a cyclical industry and market fluctuations in the prices of oil
and gas could adversely affect our business.
Prices for oil and gas tend to fluctuate significantly in
response to factors beyond our control. These factors include:
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weather conditions in the United States and wherever our
property interests are located;
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economic conditions, including demand for petroleum-based
products, in the United States wherever our property interests are
located;
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actions by OPEC, the Organization of Petroleum Exporting
Countries;
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political instability in the Middle East and other major
oil and gas producing regions;
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governmental regulations, both domestic and foreign;
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domestic and foreign tax policy;
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the pace adopted by foreign governments for the
exploration, development, and production of their national reserves;
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the price of foreign imports of oil and gas;
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the cost of exploring for, producing and delivering oil
and gas;
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the discovery rate of new oil and gas reserves;
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the rate of decline of existing and new oil and gas
reserves;
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available pipeline and other oil and gas transportation
capacity;
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the ability of oil and gas companies to raise capital;
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the overall supply and demand for oil and gas; and
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the availability of alternate fuel sources.
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Changes in commodity prices may significantly affect our
capital resources, liquidity and expected operating results. Price changes will
directly affect revenues and can indirectly impact expected production by
changing the amount of funds available to reinvest in exploration and
development activities. Reductions in oil and gas prices not only reduce
revenues and profits, but could also reduce the quantities of reserves that are
commercially recoverable. Significant declines in prices could result in
non-cash charges to earnings due to impairment.
Changes in commodity prices may also significantly affect our
ability to estimate the value of producing properties for acquisition and
divestiture and often cause disruption in the market for oil and gas producing
properties, as buyers and sellers have difficulty agreeing on the value of the
properties. Price volatility also makes it difficult to budget for and project
the return on acquisitions and the exploration and development of projects. We
expect that commodity prices will continue to fluctuate significantly in the
future.
Our ability to produce oil and gas from our properties may
be adversely affected by a number of factors outside of our control, which may
result in a material adverse effect on our business, financial condition or
results of operations.
The business of exploring for and producing oil and gas
involves a substantial risk of investment loss. Drilling oil and gas wells
involves the risk that the wells may be unproductive or that, although
productive, the wells may not produce oil or gas in economic quantities. Other
hazards, such as unusual or unexpected geological formations, pressures, fires,
blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well. Adverse weather
conditions can also hinder drilling operations. A productive well may become
uneconomic if water or other deleterious substances are encountered that impair
or prevent the production of oil or gas from the well. In addition, production
from any well may be unmarketable if it is impregnated with water or other deleterious substances. There
can be no assurance that oil and gas will be produced from the properties in
which we have interests. In addition, the marketability of oil and gas that may
be acquired or discovered may be influenced by numerous factors beyond our
control. These factors include the proximity and capacity of oil and gas,
gathering systems, pipelines and processing equipment, market fluctuations in
oil and gas prices, taxes, royalties, land tenure, allowable production and
environmental protection. We cannot predict how these factors may affect our
business.
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We may be unable to retain our leases and working interests
in our leases, which would result in significant financial losses to our
company.
Our properties are held under oil and gas leases. If we fail to
meet the specific requirements of each lease, such lease may terminate or
expire. We cannot assure you that any of the obligations required to maintain
each lease will be met. The termination or expiration of our leases may harm our
business. Our property interests will terminate unless we fulfill certain
obligations under the terms of our leases and other agreements related to such
properties. If we are unable to satisfy these conditions on a timely basis, we
may lose our rights in these properties. The termination of our interests in
these properties may harm our business. In addition, we will need significant
funds to meet capital requirements for the exploration activities that we intend
to conduct on our properties.
Title deficiencies could render our leases worthless, which
could have adverse effects on our financial condition or results of operations.
The existence of a material title deficiency can render a lease
worthless and can result in a large expense to our business. It is our practice
in acquiring oil and gas leases or undivided interests in oil and gas leases to
forego the expense of retaining lawyers to examine the title to the oil or gas
interest to be placed under lease or already placed under lease. Instead, we
rely upon the judgment of oil and gas landmen who perform the fieldwork in
examining records in the appropriate governmental office before attempting to
place under lease a specific oil or gas interest. This is customary practice in
the oil and gas industry. However, we do not anticipate that we, or the person
or company acting as operator of the wells located on the properties that we
currently lease or may lease in the future, will obtain counsel to examine title
to the lease until the well is about to be drilled. As a result, we may be
unaware of deficiencies in the marketability of the title to the lease. Such
deficiencies may render the lease worthless.
Our disclosure controls and procedures and internal control
over financial reporting were not effective, which may cause our financial
reporting to be unreliable and lead to misinformation being disseminated to the
public.
Our management evaluated our disclosure controls and procedures
as of June 30, 2016 and concluded that as of that date, our disclosure controls
and procedures were not effective. In addition, our management evaluated our
internal control over financial reporting as of June 30, 2016 and concluded that
that there were material weaknesses in our internal control over financial
reporting as of that date and that our internal control over financial reporting
was not effective as of that date. A material weakness is a control deficiency,
or combination of control deficiencies, such that there is a reasonable
possibility that a material misstatement of the financial statements will not be
prevented or detected on a timely basis.
We have not yet remediated this material weakness and we
believe that our disclosure controls and procedures and internal control over
financial reporting continue to be ineffective. Until these issues are
corrected, our ability to report financial results or other information required
to be disclosed on a timely and accurate basis may be adversely affected and our
financial reporting may continue to be unreliable, which could result in
additional misinformation being disseminated to the public. Investors relying
upon this misinformation may make an uninformed investment decision.
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Risks Relating to our Common Stock
A decline in the price of our common stock could affect our
ability to raise further working capital and adversely impact our ability to
continue 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 a significant portion of our operations
have been and will be 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 operations. Such reductions may force us to reallocate funds
from other planned uses and may have a significant negative effect on our
business plan and operations, including our ability to develop new properties
and continue our current operations. If our stock price declines, we can offer
no assurance that we will be able to raise additional capital or generate funds
from operations sufficient to meet our obligations. If we are unable to raise
sufficient capital in the future, we may not be able to have the resources to
continue our normal operations.
The market price for our common stock may also be affected by
our ability to meet or exceed expectations of analysts or investors. Any failure
to meet these expectations, even if minor, may have a material adverse effect on
the market price of our common stock.
If we issue additional shares in the future, it will result
in the dilution of our existing shareholders.
Our articles of incorporation, as amended, authorizes the
issuance of up to 1,000,000,000 shares of common stock with a par value of
$0.001. Our board of directors may choose to issue some or all of such shares to
acquire one or more businesses or to provide additional financing in the future.
The issuance of any such shares will result in a reduction of the book value and
market price of the outstanding shares of our common stock. If we issue any such
additional shares, such issuance will cause a reduction in the proportionate
ownership and voting power of all current shareholders. Further, such issuance
may result in a change of control of our corporation.
Trading of our stock may be restricted by the Securities
Exchange Commission’s penny stock regulations, which may limit a stockholder’s
ability to buy and sell our stock.
The 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 Securities and
Exchange Commission, 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.
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The Financial Industry Regulatory Authority, or FINRA, has
adopted sales practice requirements which 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.
Our common stock is illiquid and the price of our common
stock may be negatively impacted by factors which are unrelated to our
operations.
Our common stock currently trades on a limited basis on OTCQB
operated by the OTC Markets Group. Trading of our stock through OTCQB is
frequently thin and highly volatile. There is no assurance that a sufficient
market will develop in our stock, in which case it could be difficult for
shareholders to sell their stock. The market price of our common stock could
fluctuate substantially due to a variety of factors, including market perception
of our ability to achieve our planned growth, quarterly operating results of our
competitors, trading volume in our common stock, changes in general conditions
in the economy and the financial markets or other developments affecting our
competitors or us. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on our common stock.