Item 1A. Risk Factors
The following discussion should be
read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on
Form 10-Q, and our audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included
in our Annual Report on Form 10-K filed with the SEC on March 30, 2016. This discussion contains forward-looking statements reflecting
our current expectations that involve risks and uncertainties. See “Note Regarding Forward-Looking Statements” for
a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events
could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set
forth below, under Part II, Item 1A. “Risk Factors” and elsewhere herein, and those identified under Part I,
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 30, 2016.
Risks Relating to Our Company
We intend to become an exploitation and production
stage company
.
We intend to use the proceeds from the
sale of our Series C Preferred Stock to acquire oil fields and intend to become an exploitation and production stage company which
will face a high risk of business failure because of the unique difficulties and uncertainties inherent in oil and gas exploitation
ventures. Potential investors should be aware of the risks and uncertainties normally encountered by oil and gas companies and
the high rate of failure of such companies. The likelihood of our success must be considered in light of the problems, expenses,
difficulties, complications and delays that could be encountered in connection with our planned exploitation and followed drilling.
These potential problems include, but are not limited to, possible problems relating to exploitation and additional costs and expenses
that may reduce our current forecast of income and asset value. Additional expenditures related to exploitation may not result
in the confirmation of anticipated oil and gas reserves. Problems such as unusual or unexpected formations and other conditions
are involved in mineral development and often result in unsuccessful efforts. The acquisition of additional fields will be dependent
upon us possessing capital resources at that time in order to purchase and/or maintain such concessions. If no funding is available,
we may be forced to cease our exploitation activities.
To date, we have not successfully acquired
any fields and have limited funding from which to do so. Our acquisition of a field is dependent upon market conditions and pricing.
The competition for the acquisition of fields is intense. There can be no assurance that we will be able to acquire a suitable
field with our existing resources.
Our business is difficult to evaluate
because we are currently focused on a new line of business and a new business strategy and have very limited operating history
and limited information.
In 2015, we switched our business model
with our entry into a Joint Venture Agreement with Technovita and announced that we were seeking to acquire oil wells and use a
plasma pulse technology on our acquired oil wells. To date we have not acquired any wells and all of our revenue, although minimal,
has been derived from operations under the Joint Venture Agreement. Effective November 1, 2016, we terminated the Joint Venture
Agreement. To date, the joint venture has generated minimal revenue. We are currently servicing customers in Mexico with a plasma
pulse technology and intend to continue to utilize plasma pulse technology on our own assets as well as third party assets. Our
revenue and income potential is unproven and our business model is continually evolving. We are subject to the risks inherent to
the operation of a new business enterprise, and cannot assure you that we will be able to successfully address these risks.
We currently have limited revenues
and may not generate any revenue in the near future, if at all, from the use of our technology.
We currently have not acquired any wells
and therefore we have generated no revenue from the operation of oil wells and we have generated limited revenues from the use
of the Licensed Plasma Pulse Technology. To date, we have derived limited revenue from the joint venture and we have not derived
any revenue from the provision of our services in Mexico . During the first nine months of 2016, the joint venture has treated
four wells using our down-hole tools. The majority of the wells that were treated were treated as sample wells to demonstrate
the ability of plasma pulse technology at no cost to the well owner. Therefore, there can be no assurance that there will be any
revenue form the operation of wells or from future customers of our services that utilize a plasma pulse technology.
We may not be profitable.
We expect to incur operating losses for
the foreseeable future. For the nine months ended September 30, 2016 and for the twelve months ended December 31, 2015, respectively,
we had net revenues of $Nil and $91,000 from our plasma pulse oil recovery business. For the nine months ended September 30, 2016
we have sustained a net loss of $3,100,819 and for the years ended December 31, 2015 and 2014, we sustained a net loss of $4,331,980
and $5,018,483, respectively. To date, we have not acquired any oil wells, we have not generated significant revenue from the Licensed
Plasma Pulse Technology and NENA has not generated any significant revenues from the Licensed Plasma Pulse Technology and we have
not generated revenue from our operations in Mexico. Our ability to become profitable depends on our ability to find acquisition
candidates, to have successful operations and generate and sustain sales, while maintaining reasonable expense levels, all of which
are uncertain in light of our limited operating history in our current line of business and our recent changes in business strategy.
Our anticipated future oil drilling
and producing operations will involve various risks.
Once we acquire wells and commence oil exploitation activities,
we will be subject to all the risks normally incident to the operation and development of oil and natural gas properties, including:
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well blowouts, cratering, explosions and human related accidents
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mechanical, equipment and pipe failures
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adverse weather conditions and natural disasters
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civil disturbances and terrorist activities
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oil and natural gas price reductions
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environmental risks stemming from the use, production, handling and disposal of water, waste materials, hydrocarbons and other substances into the air, soil or water title problems
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limited availability of financing
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marketing related infrastructure, transportation and processing limitations
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regulatory compliance issues
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We intend to maintain insurance against many potential losses
or liabilities arising from well operations in accordance with customary industry practices and in amounts believed by management
to be prudent. However, insurance will not protect us against all risks.
Uncertainty of economic conditions,
worldwide and in the United States may have a significant negative effect on operating results, liquidity and financial condition
.
Effects of change in domestic and international
economic conditions could include a decline in demand for oil and natural gas resulting in decreased oil, and natural gas reserves
due to curtailed drilling activity; A decline in reserves would lead to a decline in production, and either a production decline,
or a decrease in oil, and natural gas prices, would have a negative impact on our cash flow, profitability and value.
There is competition in the oil and
gas industry for acquisition of oil wells and we have limited financial and personnel resources with which to compete.
Competition in the oil and gas industry
is extremely intense in all aspects, including but not limited to raising investment capital and obtaining qualified managerial
and technical employees. We are an insignificant participant in the oil and gas industry due to our limited financial and personnel
resources. Our competition includes large established oil and gas companies, with substantial capabilities and with greater financial
and technical resources than we have, as well as the myriad of other small stage companies. These companies are able to pay more
for development prospects and productive oil and natural gas properties and are able to define, evaluate, bid for, purchase and
subsequently drill a greater number of properties and prospects than our financial or human resources permit. As a result of this
competition, we may be unable to attract the necessary funding or qualified personnel. If we are unable to successfully compete
for funding or for qualified personnel, our activities may be slowed, suspended or terminated, any of which would have a material
adverse effect on our ability to continue operations.
Shortages of oil field equipment,
services, qualified personnel and resulting cost increases could adversely affect results of operations.
The demand for qualified and experienced
field personnel, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate
significantly, often in correlation with oil and natural gas prices, resulting in periodic shortages. When demand for rigs and
equipment increases due to an increase in the number of wells being drilled, there have been shortages of drilling rigs, hydraulic
fracturing equipment and personnel and other oilfield equipment. Higher oil and natural gas prices generally stimulate increased
demand for, and result in increased prices of, drilling rigs, crews and associated supplies, equipment and services. These shortages
or price increases could negatively affect the ability to drill wells and conduct ordinary operations by the operators of the Company’s
wells, resulting in an adverse effect on the Company’s financial condition, cash flow and operating results.
Our operations will be subject to permitting requirements.
Oil drilling operations will be subject
to permitting requirements, which could require us to delay, suspend or terminate our operations. Our operations, including but
not limited to any exploitation program, require permits from the U.S. government. We may be unable to obtain these permits in
a timely manner, on reasonable terms, or at all. If we cannot obtain or maintain the necessary permits, or if there is a delay
in receiving these permits, our timetable and business plan for exploration and/or exploitation, may be materially and adversely
affected.
International expansion of our business
exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside
of the United States.
We are currently treating oil wells in
Mexico with a plasma pulse technology. Doing business internationally involves a number of risks, including:
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multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;
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failure by us or NENA to obtain regulatory approvals for the sale or use of our technology in various countries;
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difficulties in managing foreign operations;
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financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;
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reduced protection for intellectual property rights;
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natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and
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failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by maintaining accurate information and control over activities.
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Any of these risks, if encountered, could
significantly harm our future international expansion and operations and, consequently, have a material adverse effect on our financial
condition, results of operations and cash flows.
We will have limited control over
the activities on properties for which we own an interest but we do not operate.
We may acquire interests in oil wells that
will be operated by other companies. We will have limited ability to influence or control the operation or future development of
these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them. Our dependence
on the operator and other working interest owners for these projects and our limited ability to influence or control the operation
and future development of these properties could materially adversely affect the realization of our targeted returns on capital
and lead to unexpected future costs.
The loss of key personnel and an
inability to attract and retain additional personnel could affect our ability to successfully grow our business.
We are highly dependent upon the continued
service and performance of our senior management. The loss of any key employees may significantly delay or prevent the achievement
of our business objectives. We believe that our future success will also depend in part on our and their continued ability to
identify, hire, train and motivate qualified personnel. We face intense competition for qualified individuals. We may not be able
to attract and retain suitably qualified individuals who are capable of meeting our growing operational and managerial requirements,
or we may be required to pay increased compensation in order to do so. Our failure to attract and retain qualified personnel could
impair our ability to implement our business plan.
We may be adversely affected by actions
of our competitors.
The market in the oil and gas recovery
industry is highly competitive. Many of our competitors have substantially greater financial, technical and other resources than
we have. We face competition from owners of oil wells as well as large oil and gas companies. Our ability to compete effectively
depends in part on market acceptance of our technology, the environmental impact of our technology and our ability to service customers
in a timely manner. There can be no assurance that we will be able to compete effectively or that we will respond appropriately
to industry trends or to activities of competitors.
Although we believe the Licensor
does not have the right to terminate the License Agreement, if the Licensor is successful in its claims, the result could have
material adverse outcomes.
On July 19, 2016, we received a notice from Licensor purporting to effectively terminate the License Agreement
for non-payment of required royalties, asserting, among other things, that as of June 30, 2016, Novas owed Licensor a
pro
rata
amount of $1,458,333 for the Licensed Plasma Pulse Technology for the United States and Mexico, of which $1,000,000
was alleged to be in arrears. Licensor has since reiterated its demands, particularly as to its demands related to Mexico. We and
Novas believe that there is no legal basis for Licensor to terminate the License Agreement and intend to vigorously defend against
any attempt by Licensor to enforce a termination of the License Agreement. Further, we believe that Licensor has failed to materially
perform its obligations under the License Agreement, and that such failures on Licensor’s part may impact what, if any, payments
are due under the License Agreement by Novas to Licensor.
Although we and Novas believe that it
is evident from the plain language of the Sublicense Agreement, and the fact that we transferred to NENA substantially all of
its rights for the use of the Licensed Plasma Pulse Technology in the United States of America, that the Sublicense Agreement
replaced and superseded the royalty fees due under the License Agreement for the use of the Licensed Plasma Pulse Technology in
the Licensed Territory, our termination of the Sublicense Agreement, effective November 1, 2016, will impact our ability to maintain
this license from and thereafter, If minimum royalties are found to be due and not otherwise waived or deferred, any failure to
make the required payments would permit the Licensor to terminate the license. Although we believe that no payment is due with
respect to the territory of the United States and that other payments have been waived or excused, there can be no assurance that
a court would agree with our position. If we were to lose or otherwise be unable to maintain this license, it would halt our ability
to market the Licensed Plasma Pulse Technology, which could have an immediate material adverse effect on our business, operating
results and financial condition. In this regard, although we believe that we have developed our own plasma-pulse technology not
based on or otherwise an infringement to, the Licensed Plasma Pulse Technology, the Licensor has not accepted our claim and no
assurance can be given that we will be successful in deploying our own plasma-pulse technology in lieu of the Licensed Plasma
Pulse Technology.
As our sole source of income at this time
during the prior year has been through NENA, and the majority of NENA’s revenue has been derived from the Sublicense Agreement
with Novas, the termination of the License Agreement or loss of the United States as a Licensed Territory could have a material
adverse effect on our business.
We rely on a license to use the Licensed
Plasma Pulse Technology that during the prior year has been the sole source of our revenue and if the agreement were to be terminated,
it could have an immediate material adverse effect on our business, operating results and financial condition.
We have a License Agreement with the Licensor
granting us the right to use certain critical intellectual property, which we had sub-licensed to NENA, pursuant to the terms of
the Sublicense Agreement that we terminated effective November 1, 2016. If we breach the terms of this agreement, including any
failure to make minimum royalty payments required thereunder, the Licensor has the right to terminate the license. If we were to
lose or otherwise be unable to maintain this license on acceptable terms, or find that it is necessary or appropriate to secure
new licenses from other third parties, it would halt our ability to market the Licensed Plasma Pulse Technology, which could have
an immediate material adverse effect on our business, operating results and financial condition.
We may be unable to generate sufficient
revenues to meet the minimum royalties under our license agreement.
The License Agreement with the Licensor
requires us to pay aggregate minimum royalty payments of $1,000,000 per year. To date, we have not generated enough revenue to
pay minimum royalty payments and the Licensor has threatened to terminate the License Agreement for our failure to pay the royalty
that the Licensor claims is due. No assurance can be given that we will generate sufficient revenue to make these minimum royalty
payments.
Our future plans and operations may
require that we raise additional capital.
To date, we have not generated enough
revenue from operations to pay all of our expenses. During the year ended December 31, 2015 and the year ended December 31, 2014
we raised a total of $14,750,000 from our private placement of Series C Preferred stock to Ervington consummated during February
and June 2015. We have used the funds raised in our financings for working capital purposes and intend to acquire an oil
well with the funds that were recently raised. However, there can be no assurance that we will be able to achieve our goals with
the cash on hand or the cash generated from operations.
We may not be able to service customers
with the tools that are available to us.
Although not our primary focus, we are
continuing to treat oil wells with our seven down-hole tools If the tools should require repair we may be unable to service customers.
In addition, with only seven tools, we can only treat a limited number of wells at a time and are unable to treat wells on days
when the tools are in transit from one customer’s well to another well.
There is uncertainty as to market
acceptance of the plasma pulse technology and products.
Plasma pulse technology has been utilized
in the United States on a limited basis. Neither us nor NENA was able to generate any significant revenue from the application
of plasma pulse technology and there can be no assurance that any plasma pulse technology will be accepted in the market or that
our commercialization efforts will be successful.
The results of the application of
the Licensed Plasma Pulse Technology for initial well treatments may not support future well treatments and are not necessarily
predictive of future long-term results on the wells for which the initial data is favorable.
To date, we have applied the Licensed Plasma Pulse Technology to treat over forty wells in the USA and
an additional twelve wells in Canada, and we do not have long terms results on the wells that were treated. Of such wells, we
have seen improvement results in many wells. Favorable results in our early treatments may not last and may not be repeated in
later treatments of other wells. Success in early treatments does not ensure that wells treated at a later date will be successful.
Additionally, collecting treatment data results is not always possible as operators that pay for the service are not required
to deliver data or we are required to work under non-disclosure agreements.
The
beneficial ownership of a significant
percentage of our common stock gives Ervington effective control of us, and limits the influence of other shareholders on important
policy and management issues.
Ervington currently beneficially owns approximately
50.9% of our voting shares on a fully diluted basis (including outstanding options, warrants and convertible instruments). In addition,
Ervington currently has the right to three votes on our board of directors and has appointed two members with an aggregate of three
votes, which constitutes a majority of the votes on our board of directors. As a result of these appointment rights and its voting
control of our company, Ervington has the power to control the outcome of all matters submitted to our shareholders for approval,
including the election of our directors, our business strategy, our day-to-day operations and any proposed merger, consolidation
or sale of all or substantially all of our assets. Ervington’s control of our company could discourage the acquisition of
our common stock by potential investors and could have an anti-takeover effect, preventing a change in control of our company that
might be otherwise beneficial to our shareholders, and possibly depress the trading price of our common stock. There can be no
assurance that conflicts of interest will not arise with respect to Ervington’s ownership and control of our company or that
any conflicts will be resolved in a manner favorable to the other shareholders of our company.
Trends in oil and natural gas prices
affect the level of exploration, development, and production activity of our customers and the demand for our services and products,
which could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
Demand for our services and products or
oil derived from wells we acquire is particularly sensitive to the level of exploration, development, and production activity
of, and the corresponding capital spending by, oil and natural gas companies, including national oil companies. The level of exploration,
development, and production activity is directly affected by trends in oil and natural gas prices, which historically have been
volatile and are likely to continue to be volatile.
Prices for oil and natural gas are subject
to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty,
and a variety of other economic factors that are beyond our control. The recent decline in oil prices from $80 per barrel in December
2014 to $40 per barrel in December 2015 has resulted in a decline in oil drilling which has depressed the immediate level of exploration,
development, and production activity, which could have a material adverse effect on our business, consolidated results of operations,
and consolidated financial condition. Even the perception of longer-term lower oil and natural gas prices by oil and natural gas
companies can similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects.
Factors affecting the prices of oil and natural gas include:
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the level of supply
and demand for oil and natural gas, especially demand for natural gas in the United States;
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governmental regulations,
including the policies of governments regarding the exploration for and production and development of their oil and natural gas
reserves;
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weather conditions and
natural disasters;
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worldwide political,
military, and economic conditions;
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the level of oil production by non-OPEC countries and the available excess production capacity within OPEC;
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oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
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the cost of producing and delivering oil and natural gas; and
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potential acceleration of development of alternative fuels.
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Legislative and regulatory changes
affecting the environment and the oil industry could adversely affect our business
Political, economic and regulatory influences
are subjecting oil recovery efforts to potential fundamental changes that could substantially affect our results of operations.
State and local governments, for example, continue to propose and pass legislation designed to reduce the impact of oil recovery
efforts on the environment. We cannot predict the effect any legislation may have on our business and we can offer no assurances
they will not have a material adverse effect on our business.
Various federal legislative and regulatory
initiatives have been undertaken which could result in additional requirements or restrictions being imposed on hydraulic fracturing
operations and possibly our operations. For example, the Department of Interior has issued proposed regulations that would apply
to hydraulic fracturing operations on wells that are subject to federal oil and gas leases and that would impose requirements regarding
the disclosure of chemicals used in the hydraulic fracturing process as well as requirements to obtain certain federal approvals
before proceeding with hydraulic fracturing at a well site. These regulations, if adopted, could also be applicable to our operations
and would establish additional levels of regulation at the federal level that could lead to operational delays and increased operating
costs. At the same time, legislation and/or regulations have been adopted in several states that require additional disclosure
regarding chemicals used in the hydraulic fracturing process but that include protections for proprietary information. Legislation
and/or regulations are being considered at the state and local level that could impose further chemical disclosure or other regulatory
requirements (such as restrictions on the use of certain types of chemicals or prohibitions on hydraulic fracturing operations
and competitive operations in certain areas) that could affect our operations.
The adoption of any future federal, state,
local, or foreign laws or implementing regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing
process if applicable to competitive processes such as ours, could make it more difficult to complete natural gas and oil wells
and could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
Liability for cleanup costs, natural
resource damages, and other damages arising as a result of environmental laws could be substantial and could have a material adverse
effect on our liquidity, consolidated results of operations, and consolidated financial condition.
We will be exposed to claims under environmental
requirements for wells we acquire and treat and the joint venture will be exposed to claims under environmental requirements for
wells it treats. In the United States, environmental requirements and regulations typically impose strict liability. Strict liability
means that in some situations we or the joint venture could be exposed to liability for cleanup costs, natural resource damages,
and other damages as a result of our or the joint ventures conduct that was lawful at the time it occurred or the conduct of prior
operators or other third parties. Liability for damages arising as a result of environmental laws could be substantial and could
have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
Existing or future laws, regulations,
related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance
obligations with respect to the release, capture, and use of carbon dioxide that could have a material adverse effect on our liquidity,
consolidated results of operations, and consolidated financial condition.
Changes in environmental requirements
related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas
exploration and production may decline as a result of environmental requirements (including land use policies responsive to environmental
concerns). State, national, and international governments and agencies have been evaluating climate-related legislation and other
regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business
depends on the level of activity in the oil and natural gas industry, existing or future laws, regulations, treaties, or international
agreements related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources,
could have a negative impact on our business if such laws, regulations, treaties, or international agreements reduce the worldwide
demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the
release, capture, sequestration, and use of carbon dioxide that could have a material adverse effect on our liquidity, consolidated
results of operations, and consolidated financial condition.
Our failure to protect our proprietary
information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely
affect our competitive position.
We rely on a variety of intellectual property
rights that we use in our services and products. We may not be able to successfully preserve these intellectual property rights
in the future, and these rights could be invalidated, circumvented, or challenged. In this regard, while we believe that we have
developed our own plasma-pulse technology not based on or otherwise an infringement to, the Licensed Plasma Pulse Technology,
the Licensor has not accepted our claim. If our claim were to be invalidated or challenged, we will not be able to deploy our
own plasma-pulse technology in lieu of the Licensed Plasma Pulse Technology. In addition, the laws of some foreign countries in
which our services and products may be sold do not protect intellectual property rights to the same extent as the laws of the
United States. Our failure to protect our proprietary information and any successful intellectual property challenges or infringement
proceedings against us could materially and adversely affect our competitive position.
Any future recompletion activities engaged upon by us
on wells that we acquire may not be productive.
We may acquire properties upon which we
believe recompletion activity will be successful. Recompletion or workovers on oil and natural gas wells involves numerous risks,
including the risk that we will not encounter commercially productive oil or natural-gas reservoirs. The costs of recompleting,
and operating wells are often uncertain, and operations may be curtailed, delayed, or canceled as a result of a variety of factors,
including the following unexpected drilling conditions:
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pressure or irregularities
in formations;
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equipment failures or
accidents;
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fires, explosions, blowouts,
and surface cratering;
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difficulty identifying
and retaining qualified personnel;
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other adverse weather
conditions; and
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shortages or delays
in the delivery of equipment
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Certain of our future activities may not
be successful and, if unsuccessful, this failure could have an adverse effect on our future results of operations and financial
condition.
We have no separate independent audit
committee. Our full Board of Directors functions as our audit committee and is composed of four directors, none of whom are considered
to be independent. This may hinder our Board of Directors’ effectiveness in fulfilling the functions of the audit committee.
Currently, we have no separate audit committee.
Our full Board of Directors functions as our audit committee and is comprised of four directors, one of whom has two votes and
none of whom are considered to be "independent" in accordance with the requirements of Rule 10A-3 under the Exchange
Act. An independent audit committee plays a crucial role in the corporate governance process, assessing the Company's processes
relating to its risks and control environment, overseeing financial reporting, and evaluating internal and independent audit processes.
The lack of an independent audit committee may prevent the Board of Directors from being independent from management in its judgments
and decisions and its ability to pursue the committee's responsibilities without undue influence. We may have difficulty attracting
and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified, independent directors,
the management of our business could be compromised.
Our Board of Directors, which does
not have a majority of independent directors, acts as our compensation committee, which presents the risk that compensation and
benefits paid to these executive officers that are board members and other officers may not be commensurate with our financial
performance.
A compensation committee consisting of
independent directors is a safeguard against self-dealing by company executives. Our Board of Directors acts as the compensation
committee and determines the compensation and benefits of our executive officers, administers our employee stock and benefit plans,
and reviews policies relating to the compensation and benefits of our employees. Although all board members have fiduciary obligations
in connection with compensation matters, our lack of an independent compensation committee presents the risk that our executive
officers on the board may have influence over their personal compensation and benefits levels that may not be commensurate with
our financial performance.
Trading on the OTCQB may be sporadic
because it is not a stock exchange, and stockholders may have difficulty reselling their shares.
Trading in stock quoted on the OTCQB is
often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations
or business prospects. Moreover, the OTCQB is not a stock exchange, and trading of securities on the OTCQB is often more sporadic
than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like NYSE. Accordingly, you may have
difficulty reselling any of the shares you purchase from the selling stockholders.
We cannot guarantee that an active
trading market will develop for our common stock.
There currently is not an active public
market for our common stock and there can be no assurance that a regular trading market for our common stock will ever develop
or that, if developed, it will be sustained. Therefore, purchasers of our common stock should have long-term investment intent
and should recognize that it may be difficult to sell the shares, notwithstanding the fact that they are not restricted securities.
We cannot predict the extent to which a trading market will develop or how liquid a market might become.
There may be future dilution of our
common stock.
If we sell additional equity or convertible
debt securities, those sales could result in additional dilution to our stockholders. Holders of our Series A-1 Preferred Stock
have the right to convert their shares into 31,375,000 shares of common stock and; the holder of the Series B Preferred Stock has
the right to convert his shares into 4,000,000 common shares and Ervington, the sole holder of the Series C Preferred Stock has
the right to convert its shares of Series C Preferred Stock into 120,000,000 shares of common stock. We also have warrants outstanding
that are convertible into 6,339,498 shares of our common stock.
Recent accounting changes may make
it more difficult for us to sustain profitability.
We are a publicly traded company, and are
therefore subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which requires that our internal controls
and procedures comply with Section 404 of the Sarbanes-Oxley Act. We expect compliance to be costly and it could impact our results
of operations in future periods. In addition, the Financial Accounting Standards Board now requires us to follow the accounting
standards on share based payments. Under this rule, companies must calculate and record in their statement of operations the cost
of equity instruments, such as stock options or restricted stock, awarded to employees for services. We expect that we will use
stock options to attract, incentivize and retain our employees and will therefore incur the resulting stock-based compensation
expense. This will continue to adversely affect our operating results in future periods.
Maintaining and improving our financial
controls and the requirements of being a public company may strain our resources, divert management’s attention and affect
our ability to attract and retain qualified board members.
As a public company, we are subject to
the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of an exchange or the OTCQB.
The requirements of these rules and regulations will likely continue to increase our legal, accounting and financial compliance
costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems
and resources.
The Sarbanes-Oxley Act requires, among
other things, that we maintain effective disclosure controls and procedures and effective internal control over financial reporting.
Significant resources and management oversight are required to design, document, test, implement and monitor internal control over
relevant processes and to, remediate any deficiencies. As a result, management’s attention may be diverted from other business
concerns, which could harm our business, financial condition and results of operations. These efforts also involve substantial
accounting related costs.
We have identified material weaknesses
in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional
material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and
procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic
reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to
a decline in our stock price.
Our management is responsible for establishing
and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. We
have identified material weaknesses in our internal controls with respect to our financial statement for the year ended December
31, 2014. Our management discovered insufficient controls over review and accounting for certain complex transactions and a lack
of segregation of duties.
The design of monitoring controls used
to assess the design and operating effectiveness of our internal controls is inadequate.
We have begun to take actions that we believe
will substantially remediate the material weaknesses identified. In response to the identification of our material weaknesses,
we are in the process of expanding our finance and accounting staff. However, we cannot assure you that our internal control over
financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
We have never paid dividends and
have no plans to pay dividends on our common stock in the future.
Holders of shares of our common stock
are entitled to receive such dividends as may be declared by our Board of Directors. To date, we have paid no cash dividends on
our shares of our preferred or common stock and we do not expect to pay cash dividends in the foreseeable future on our common
stock. Our Series C Preferred Stock accrues dividends at the rate of 4% per annum of the stated price, which initially is $3.277777778
payable annually in arrears on December 31 of each year. In addition, our Series B Preferred Stock accrues dividends at the rate
of 8% per annum of the stated price, which initially is $10.00 payable annually in arrears on December 31 of each year. Other
than dividend payments on the preferred stock we intend to retain future earnings, if any, to provide funds for operations of
our business. Therefore, any return investors in our preferred or common stock may have will be in the form of appreciation, if
any, in the market value of their shares of common stock.
Our stock price may be volatile
or may decline regardless of our operating performance.
The market price of our common stock may
fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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price and volume fluctuations in the overall stock market;
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changes in operating
performance and stock market valuations of other technology companies generally, or those in our industry in particular;
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the public’s response
to our press releases or other public announcements, including our filings with the SEC;
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announcements by us
or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
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introduction of technologies
or product enhancements that reduce the need for our products;
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market conditions or
trends in our industry or the economy as a whole;
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the loss of key personnel;
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lawsuits threatened
or filed against us;
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future sales of our
common stock by our executive officers, directors and significant stockholders; and
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other events or factors,
including those resulting from war, incidents of terrorism or responses to these events.
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We may issue preferred stock with
greater rights than our common stock.
Our Certificate of Incorporation authorizes
the Board of Directors to issue up to 10 million shares of preferred stock, par value $.001 per share. The preferred stock may
be issued in one or more series, the terms of which may be determined by the Board of Directors at the time of issuance without
further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. Any preferred stock
that is issued may rank ahead of our common stock, in terms of dividends, liquidation rights and voting rights that could adversely
affect the voting power or other rights of the holders of our common stock. In the event of such an issuance, the Preferred Stock
could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change of control of our
company. Any delay or prevention of a change of control transaction or changes in our Board of Directors or management could deter
potential acquirers or prevent the completion of a transaction in which our stockholders could require substantial premium over
the then current market price per share. We currently have 3,137,500 Series A-1 Preferred Stock outstanding, 40,000 Series B Preferred
Stock outstanding and have 4,500,000 Series C Preferred Stock outstanding. The Series C Preferred Stock has the right to annual
dividends in preference to all other preferred stock and the common stock and the Series B Preferred Stock is also entitled to
an annual dividend. The Series A-1, B and C Preferred Stock all have liquidation preferences over the common stock. In addition
the vote of a majority of the Series C Preferred Stock will be required for the (i) merger, sale of substantially all of our assets
or our recapitalization, reorganization, liquidation, dissolution or winding up, (ii) redemption or acquisition of shares of our
common stock other than in limited circumstances, (iii) declaration or payment of a dividend or distribution with respect to our
capital stock, (iv) making any loan or advance, (v) amending our Certificate of Incorporation or Bylaws, (vi) authorizing or creating
any new class or series of equity security, (vii) increasing the number of authorized shares for issuance under any existing stock
or option plan, (viii) materially changing the nature of the business, (ix) incurring any indebtedness, (x) engaging in or making
investments not authorized by the Board of Directors, (xi) acquiring or divesting a material amount of assets (xii) selling, assigning,
licensing, pledging or encumbering our material technology or intellectual property, and (xiii) entering into any corporate strategic
relationship involving payment, contribution or assignment by us or to us of any assets. The vote of two-thirds of the Series A-1
Preferred Stock is also required to take certain actions similar to those set forth above.
If we fail to meet the new eligibility
requirements of the OTC Market Group, we will no longer be eligible to have our common stock quoted on the OTCQB.
If we fail to maintain a minimum bid price
of $.01 per share one day per each thirty consecutive days, our stock will no longer be eligible to be traded on the OTCQB and
will be traded on the pink sheets. Effective May 1, 2014, the OTC Market Group implemented new eligibility standards for companies
traded on the OTCQB that include enhanced disclosure requirements. Investors of companies that do not meet the eligibility requirements
will not have the benefit of the additional disclosure