What changed in this filing

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Item 1A. Risk Factors

2024-04-01 compared with 2023-03-30 · 169 added, 63 removed, 324 unchanged (42% of the section changed)

Financial and Liquidity Risk Factors

Risk Factors Summary

The following is a summary of the principal factors that make an investment in our common stock speculative or risky.

● Failure to complete, and delays in completing, the Merger (as defined below) which could materially and adversely affect our results of operations and our stock price.

● We will continue to incur substantial transaction-related costs in connection with the Merger.

● If the Merger does not close for any reason, it may increase the potential that we elect to “go dark”.

● We and our directors and officers are, and may continue to be, subject to lawsuits relating to the Merger.

● If the merger does not close, we may be unable to either redeem or pay cash dividends on the outstanding shares of our Redeemable Preferred Stock, resulting in increases in the liquidation preference of the Redeemable Preferred Stock and the right of the holders of Redeemable Preferred Stock to receive a greater number of shares of our common stock in the event such holders elect to exercise their conversion rights.

Consequently, the financial and voting interests in our Company of the holders of our common stock may be diluted.

● We are subject to various uncertainties and restrictions on the conduct of our business while the Merger is pending, which could have a material adverse effect on our business, results of operations and financial condition.

● The opinion of the financial advisor delivered to our Board prior to the signing of the Merger Agreement (as defined below) did not reflect changes in circumstances since the date of such opinion.

● Oil and natural gas prices are volatile, and low prices could have a material adverse impact on our business.

Our revenues, profitability, future growth and the carrying value of our properties depend substantially on prevailing oil and natural gas prices.

● We may have difficulty financing our planned capital expenditures which could adversely affect our growth.

● Failure to comply with the covenants in our Amended Term Loan Agreement may limit our ability to borrow, result in an event of default and cause amounts outstanding under our Amended Term Loan Agreement to become immediately due and payable.

● Unless we replace our reserves, our reserves and production will decline, which would adversely affect our financial condition, results of operations and cash flows.

● Historically, we have had substantial indebtedness and we may incur substantially more debt in the future.

Higher levels of indebtedness make us more vulnerable to economic downturns and adverse developments in our business.

● Estimates of proved oil and natural gas reserves involve assumptions and any material inaccuracies in these assumptions will materially affect the quantities and the value of our reserves.

● We are subject to various contractual limitations that affect the discretion of our management in operating our business.

● Federal legislation and rulemaking could have an adverse impact on our ability to use derivative instruments to reduce the effects of commodity prices, interest rates and other risks associated with our business.

● We cannot be certain that the insurance coverage maintained by us will be adequate to cover all losses that may be sustained in connection with all oil and natural gas activities.

● Our ability to use net operating loss carryforwards and realized built in losses to offset future taxable income for United States federal income tax purposes is subject to limitation.

● We may be required to take non-cash asset write-downs.

● Hedging transactions may limit our potential gains and increase our potential losses.

● We are substantially dependent upon our drilling success on our Delaware Basin properties.

● Our exploration and development drilling efforts and the operation of our wells may not be profitable or achieve our targeted rates of return.

● Increasing attention to environmental, social and corporate governance (“ESG”) matters may impact our business.

● We could experience periods of higher costs for various reasons, including due to higher commodity prices, increased drilling activity in the Delaware Basin and trade disputes or inflation that affect the costs of steel and other raw materials that we and our vendors rely upon, which could adversely affect our ability to execute our exploration and development plans on a timely basis and within budget.

● We may not be able to drill wells on a substantial portion of our acreage.

● Certain of our undeveloped leasehold acreage could expire if we are unable to meet continuous development clauses or similar provisions in our leases requiring development of our undeveloped acreage and/or maintaining production on units containing the acreage.

● Our oil and natural gas activities are subject to various risks that are beyond our control.

● Our ability to sell our production and/or receive market prices for our production may be adversely affected by transportation capacity constraints and interruptions.

● Our strategy involves drilling in shale formations, using horizontal drilling and modern completion techniques.

The results of our drilling program using these techniques may be subject to more uncertainties than conventional drilling programs.

These uncertainties could result in an inability to meet our expectations for reserves and production.

● Title to the properties in which we have an interest may be impaired by title defects.

● We depend substantially on the continued presence of key personnel for critical management decisions and industry contacts.

● There may be circumstances in which the interests of our significant stockholders could be in conflict with the interests of our other stockholders.

● Future sales of our common stock in the public market or the issuance of securities senior to our common stock, or the perception that these sales may occur, could adversely affect the trading price of our common stock and our ability to raise funds in stock offerings.

● We may choose to delist our securities from NYSE American and deregister our common stock under the Exchange Act, which could negatively affect the liquidity and trading prices of our common stock and would result in less disclosure about the Company.

● We are subject to complex federal, state, local and other laws and regulations that frequently are amended to impose more stringent requirements that could adversely affect the cost, manner or feasibility of doing business.

● Federal, state and local legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

● Regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and natural gas.

● Our operations substantially depend on the availability of water.

Restrictions on our ability to obtain, dispose of or recycle water may impact our ability to execute our drilling and development plans in a timely or cost-effective manner.

● Events beyond our control, including a global or domestic health crisis, may result in unexpected adverse operating and financial results.

● A financial downturn could negatively affect our business, results of operations, financial condition and liquidity.

● We depend on computer, telecommunications and information technology systems to conduct our business, and failures, disruptions, cyber-attacks or other breaches in data security could significantly disrupt our business operations, create liability and increase our costs.

Risks Related to the Proposed Merger

Failure to complete, and delays in completing, the Merger with could materially and adversely affect our results of operations and our stock price.

On December 14, 2023, we entered into the Merger Agreement with Fury Resources, Inc.

(“Parent”) and San Jacinto Merger Sub, Inc (“Merger Sub”), a direct wholly-owned subsidiary of Parent, pursuant to which Parent will acquire all of the outstanding shares of common stock of the Company.

The consummation of the Merger is subject to a number of conditions, including certain financing conditions, that must be satisfied by Parent and Merger Sub, as well as other conditions, a number of which are not within our control.

Failure to satisfy the conditions to the Merger could prevent, delay or otherwise materially and adversely affect the completion of the Merger.

We can provide no assurance that all closing conditions will be satisfied or as to the terms, conditions and timing or of the completion of the Merger.

We also cannot assure you that we will be able to successfully consummate the Merger as currently contemplated under the Merger Agreement or at all.

Risks related to the failure of the Merger to be consummated include, but are not limited to, the following:

• under some circumstances, we may be required to pay a termination fee of $3.5 million;

• we will remain liable for significant transaction costs, including legal, accounting, financial advisory, and other costs relating to the Merger regardless of whether the Merger is consummated;

• we may experience negative reactions from financial markets or the trading price of our common stock may decline to the extent that the current market price for our common stock reflects a market assumption that the Merger will be completed;

• the attention of our management and employees may have been diverted by the Merger;

• we and our directors and officers could be subject to litigation relating to the Merger, including relating to any failure to complete the Merger;

• the potential loss of key personnel during the pendency of the Merger as employees may experience uncertainty about their future roles with us following completion of the Merger;

• the potential loss of, and negative reactions from business partners or those with whom we are seeking to establish business relationships, due to uncertainties about the Merger, and;

• under the Merger Agreement, we are subject to certain restrictions prior to completing the Merger, which restrictions could adversely affect our ability to conduct our business as we otherwise would have done if we were not subject to these restrictions.

The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and stock price.

If the Merger is not consummated and one or more of these events occur, such as payment of a termination fee or other significant transaction costs in connection with the Merger, our cash balances and other outstanding indebtedness at that time could be materially and adversely impacted and our options for sources of financing or refinancing could be more limited than if we had not pursued the Merger.

If the Merger is not completed, there can be no assurance that these risks will not materialize and will not materially and adversely affect our stock price, business, financial condition, results of operations or cash flows.

We will continue to incur substantial transaction-related costs in connection with the Merger.

We have incurred significant legal, advisory and financial services fees in connection with Merger.

We have incurred, and expect to continue to incur, additional costs in connection with the satisfaction of the various conditions to closing of the Merger, including seeking approval from our stockholders and from applicable regulatory authorities.

Any delays in the consummation of the Merger could increase these costs significantly.

If the Merger does not close for any reason, it may increase the potential that we elect to “go dark”.

As noted elsewhere herein, we have recently considered the advisability of taking steps to delist our securities with the NYSE American and discontinue our obligations to make periodic filings with the SEC by deregistering our

securities with the SEC (i.e., “going dark”) so as to reduce ongoing costs and expenses, while simultaneously pursuing strategic transactions that might render such action unnecessary.

We have incurred substantial additional expenses in connection with the Merger and may find it advisable to follow through on a plan to go dark should the Merger Agreement be terminated or the Merger not close for any reason.

We and our directors and officers are, and may continue to be, subject to lawsuits relating to the Merger.

Litigation is very common in connection with the sale of public companies, regardless of whether the claims have any merit.

One of the conditions to consummating the Merger is that no order enjoining, prohibiting or otherwise making illegal the consummation of the Merger shall have been issued by any governmental authority, including a court.

These or any similar securities class action lawsuits and derivative lawsuits, regardless of their merits, may result in substantial costs and divert management time and resources.

An adverse judgment in such cases could have a negative impact on our liquidity and financial condition or could prevent the Merger from being completed.

If the Merger does not close, we may be unable to either redeem or pay cash dividends on the outstanding shares of our Redeemable Preferred Stock, resulting in increases in the liquidation preference of the Redeemable Preferred Stock and the right of the holders of the Redeemable Preferred Stock to receive a greater number of shares of our common stock in the event such holders elect to exercise their conversion rights.

Consequently, the financial and voting interests in our Company of the holders of our common stock may be diluted.

As noted elsewhere herein, the Company has issued shares of Redeemable Preferred Stock with an initial aggregate liquidation value of $98.0 million.

Dividends are payable on the Redeemable Preferred Stock at a rate of 14.5% per annum;

however, in the event the Company does not declare and pay dividends in cash when due, the dividend rate increases to 16.0% per annum and is added to the liquidation value of the Redeemable Preferred Stock.

The Company has heretofore not paid dividends on the Redeemable Preferred Stock in cash and is not expected to in the future.

Accordingly, the liquidation value of the Redeemable Preferred Stock is increasing and would be expected to increase in the future.

In addition to other rights, the holders of the Redeemable Preferred Stock are also entitled generally to convert their shares of Redeemable Preferred Stock into shares of our common stock by dividing a “conversion price” specified in the terms of the Redeemable Preferred Stock into the then current liquidation preference of the Redeemable Preferred Stock, such that increases in the liquidation preference may ordinarily result in an increase in the number of shares of common stock received by such holder upon conversion.

Accordingly, if the Merger does not close and the Company is unable to redeem the Redeemable Preferred Stock or is unable to pay, or elects not to pay, dividends on the Redeemable Preferred Stock in cash, the liquidation preference of the Redeemable Preferred Stock will continue to increase, thereby diluting the financial interests of the holders of our common stock in our Company and diluting the voting interests of the holders of our common stock to the extent holders of the Redeemable Preferred Stock elect to convert such shares into shares of our common stock.

We are subject to various uncertainties and restrictions on the conduct of our business while the Merger is pending, which could have a material adverse effect on our business, results of operations and financial condition.

Uncertainty about the pendency of the Merger and the effect of the Merger on our employees, customers, suppliers and other third parties who deal with us may have a material adverse effect on our business, results of operations and financial condition.

These uncertainties may impair our ability to attract, retain and motivate key personnel pending the consummation of the Merger, as such personnel may experience uncertainty about their future roles following the consummation of the Merger.

Additionally, these uncertainties could cause other business partners who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us, which could have a material adverse effect on our business, results of operations, financial condition and market price of our common stock.

The opinion of the financial advisor delivered to our Board prior to the signing of the Merger Agreement did not reflect changes in circumstances since the date of such opinion.

The opinion of Houlihan Lokey, the financial advisor to the Company in connection with the Merger, was delivered to the our Board on December 14, 2023, and was dated December 14, 2023.

Changes in our operations and prospects, general market and economic conditions and other factors that were beyond our control may have significantly altered

the Company’s value or the price of shares of our common stock by the time the Merger is completed.

The opinion does not speak as of the time the Merger will be completed or as of any date other than the date of such opinion.

Financial and Liquidity Risk Factors

Oil, NGL and natural gas prices are volatile, and low prices could have a material adverse impact on our business.

Our revenues, profitability, future growth and the carrying value of our properties depend substantially on prevailing oil, NGL and natural gas prices.

Prices also affect the amount of cash flow we have available for capital expenditures and our ability to borrow and raise additional capital.

Lower prices may also reduce the amount of oil and natural gas that we can economically produce and have an adverse effect on the value of our properties.

Oil and natural gas prices are volatile.

Oil, NGL and natural gas prices are volatile.

Among the factors that affect volatility are:

● domestic and foreign supplies of oil and natural gas;

● domestic and foreign supplies of oil, NGLs and natural gas;

● the ability of members of the Organization of Petroleum Exporting Countries and other oil exporting countries, including Russia, to agree upon and maintain production quotas;

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● the price and availability of foreign imports and domestic exports;

● worldwide and regional economic and political conditions impacting the global supply and demand for oil and natural gas, which may be driven by many factors, including health epidemics (such as the global COVID-19 coronavirus outbreak).

● worldwide and regional economic and political conditions impacting the global supply and demand for oil and natural gas, which may be driven by many factors, including sanctions, import and export restrictions, climate change initiatives and environmental protection affects, health epidemics (such as the global COVID-19 coronavirus outbreak) and numerous other factors.

These external factors and the volatile nature of the energy markets make it difficult to estimate future prices of oil and natural gas.

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It is possible that we will acquire acreage in other areas that we believe are prospective for oil and natural gas production and expend capital to develop such acreage.

We expect to use proceeds from potential future capital markets transactions, if necessary, and which may be difficult or limited to access, to fund capital expenditures that are in excess of our operating cash flow and cash on hand.

Additionally, certain segments of the investor community have negative sentiment towards investing in our industry, with some investors and investment advisors adopting policies negatively impacting investment in the oil and gas sector

based on social and environmental considerations.

We expect to use proceeds from the sales of redeemable convertible preferred stock, if necessary, and which may be difficult or limited to access, to fund capital expenditures that are in excess of our operating cash flow and cash on hand.

Commercial and investment banks have also come under pressure to stop financing oil and gas production and related infrastructure projects.

Such developments, including environmental activism and initiatives aimed at limiting climate change and reducing air pollution, could potentially result in a reduction of available capital funding for development projects, thus impacting future financial results.

If we are unable to raise sufficient capital to fund our capital expenditures, we may be required to curtail our drilling, development, land acquisitions and other activities, which could result in a decrease in our production of oil and natural gas, forfeiture of leasehold interests if we are unable or unwilling to renew them, and the sale of some of our assets on an unfavorable basis, each of which could have a material adverse effect on our results and future operations.

natural gas, forfeiture of leasehold interests if we are unable or unwilling to renew them, and the sale of some of our assets on an unfavorable basis, each of which could have a material adverse effect on our results and future operations.

Failure to comply with the covenants in our Amended Term Loan Agreement may limit our ability to borrow, result in an event of default and cause amounts outstanding under our Amended Term Loan Agreement to become immediately due and payable.

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In November 2022, anticipated non-compliance with our Current Ratio covenant required us to amend our Term Loan Agreement which reduced our Current Ratio requirement through March 31, 2023.

Additionally, in order to provide sufficient liquidity in 2023 to address upcoming debt maturities and covenant compliance while funding our operating and capital programs, we obtained approximately $24.4 million of additional equity funding from certain of our existing equity shareholders in March 2023.

Additionally, in order to provide sufficient liquidity in 2023 to address upcoming debt maturities and covenant compliance while funding our operating and capital programs, we obtained approximately $95.6 million of additional equity funding from certain of our existing equity shareholders during 2023.

For a further discussion of these actions, refer to Item 7 , Management’s Discussion and Analysis, “Capital Resources and Liquidity” and Item 9B.

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Our Amended Term Loan Agreement contains the following financial covenants (as defined), including the maintenance of the following ratios:

● an Asset Coverage Ratio of not less than 1.80 to 1.00 as of December 31, 2022 and each fiscal quarter thereafter

● a Total Net Leverage Ratio of not greater than 3.00 to 1.00 as of December 31, 2022, 2.75 to 1.00 as of March 31, 2023, and 2.50 to 1.00 as of each fiscal quarter thereafter, and

● a Current Ratio of not less than 1.00 to 1.00, each determined as of the last day of any fiscal quarter period, other than as amended in November 2022 to 0.70 to 1.00 as of December 31, 2022, and to 0.75 to 1.00 as of March 31, 2023

As of December 31, 2022, the Company was in compliance with its financial covenants.

● Asset Coverage Ratio of not less than 1.80 to 1.00 as of December 31, 2023 and the last day of each fiscal quarter thereafter;

● Total Net Leverage Ratio of not greater than 2.50 to 1.00 as of December 31, 2023 and each fiscal quarter thereafter, and

● Current Ratio of not less than 1.00 to 1.00, determined as of the last day of any fiscal quarter period, as of December 31, 2023 and for each fiscal quarter thereafter.

As of December 31, 2023, the Company was in compliance with its financial covenants under the Amended Term Loan Agreement.

As described above and in other historical periods, we have periodically sought amendments to the covenants under our revolving credit agreements, including the financial covenants, where we have anticipated difficulty in maintaining compliance.

In the event we have difficulty in the future meeting the covenants under our Amended Term Loan Agreement, we would be required to seek additional relief, and there is no assurance that it would be granted.

comply with the covenants in our Amended Term Loan Agreement may limit our ability to borrow, result in an event of default and cause amounts outstanding under our Amended Term Loan Agreement to become immediately due and payable.

Unless we replace our reserves, our reserves and production will decline, which would adversely affect our financial condition, results of operations and cash flows.

Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors.

Decline rates are typically greatest early in the productive life of a well.

Decline rates are typically greatest early in the productive life

Estimates of the decline rate of an oil or natural gas well are inherently imprecise, and are less precise with respect to new or emerging oil and natural gas formations with limited production histories than for more developed formations with established production histories.

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If we are unable to replace our current and future production, our cash flows and the value of our reserves may decrease, adversely affecting our business, financial condition, results of operations and cash flows.

Historically, we have had substantial indebtedness and we may incur substantially more debt in the future.

We have substantial indebtedness and we may incur substantially more debt in the future.

Higher levels of indebtedness make us more vulnerable to economic downturns and adverse developments in our business.

We have approximately $200.0 million principal amount of debt, including current portions, as of December 31, 2023.

As a result of our indebtedness, we will need to use a portion of our cash flow to pay interest, and outstanding principal beginning in the fiscal quarter ending March 31, 2023, which will reduce the amount of cash flow we will have available to finance our operations and other business activities and could limit our flexibility in planning for or reacting to changes or adverse developments in our business or economic downturns impacting the industry in which we operate.

As a result of our indebtedness, we will need to use a portion of our cash flow to pay interest, and outstanding principal during 2024, which will reduce the amount of cash flow we will have available to finance our operations and other business activities and could limit our flexibility in planning for or reacting to changes or adverse developments in our business or economic downturns impacting the industry in which we operate.

Indebtedness under our Amended Term Loan Agreement is at a variable interest rate, and so a rise in interest rates will generate greater interest expense to the extent we do not have hedging arrangements that are effective in offsetting interest rate fluctuations.

A rise in interest rates could impact on our borrowing costs and could have an adverse effect on our cash flows.

In conjunction with the amendment of our Term Loan Agreement in November 2022, we (i) converted our benchmark interest rate from LIBOR to a Secured Overnight Financing Rate (SOFR) plus 0.15% and (ii) increased the applicable margin on borrowings by 0.50%.

In conjunction with the amendment of our Term Loan Agreement in November 2022, we (i) converted our benchmark interest rate from a London Interbank Offered Rate (“LIBOR”) to a Secured Overnight Financing Rate (“SOFR”) plus 0.15% and (ii) increased the applicable margin on borrowings by 0.50%.

Borrowings under the Amended Term Loan Agreement will now bear interest at a rate per annum equal to the SOFR plus 7.65%.

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Average prices for oil and natural gas for the 12-month period were as follows:

WTI crude oil spot price of $94.14 per Bbl, adjusted by lease or field for quality, transportation fees, and market differentials and a Henry Hub natural gas spot price of $6.36 per MMBtu, adjusted by lease or field for energy content, transportation fees, and market differentials.

WTI crude oil spot price of $78.21 per Bbl, adjusted by lease or field for quality, transportation fees, and market differentials and a Henry Hub natural gas spot price of $2.64 per MMBtu, adjusted by

lease or field for energy content, transportation fees, and market differentials.

Any significant variance in the actual future prices from these assumptions could materially affect the estimated quantity and value of our reserves set forth in this report.

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The counterparties to our derivative instruments may also spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties.

The Dodd-Frank Act and any new regulations could significantly increase the cost of some commodity derivative contracts (including through requirements to post collateral, which could adversely affect our available liquidity), materially alter the terms of some commodity derivative contracts, limit our ability to trade some derivatives to hedge risks, reduce the availability of some derivatives to protect against risks we encounter, and reduce our ability to monetize or restructure our existing commodity derivative contracts.

materially alter the terms of some commodity derivative contracts, limit our ability to trade some derivatives to hedge risks, reduce the availability of some derivatives to protect against risks we encounter, and reduce our ability to monetize or restructure our existing commodity derivative contracts.

If we reduce our use of derivatives as a consequence, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures.

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Limitations imposed on our ability to use NOLs and RBILS to offset future taxable income may cause U.S.

federal income taxes to be paid earlier than otherwise would be paid if such limitations were not

in effect and could cause such NOLs and RBILS to expire unused, in each case reducing or eliminating the benefit of such NOLs and RBILS.

federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect and could cause such NOLs and RBILS to expire unused, in each case reducing or eliminating the benefit of such NOLs and RBILS.

Similar rules and limitations may apply for state income tax purposes.

As of December 31, 2023, no additional ownership change has occurred.

We may be required to take non-cash asset write-downs.

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Under full cost accounting, we are required by SEC regulations to perform a ceiling test each quarter.

The ceiling test is an impairment test and generally establishes a maximum, or “ceiling,” of the book value of oil and natural gas properties that is equal to the expected after tax present value (discounted at 10%) of the future net cash flows from proved reserves, including the effect of cash flow hedges when hedge accounting is applied, calculated using the unweighted arithmetic average of the first day of each month for the 12-month period ending at the balance sheet date.

first day of each month for the 12-month period ending at the balance sheet date.

If the net book value of oil and natural gas properties (reduced by any related net deferred income tax liability and asset retirement obligation) exceeds the ceiling limitation, SEC regulations require us to impair or “write-down” the book value of our oil and natural gas properties.

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In addition, wells that are profitable may not achieve our targeted rate of return.

Our ability to achieve our target results is dependent upon current and future market prices for our oil and natural gas, costs associated with producing oil and natural gas and our ability to add reserves at an acceptable cost.

acceptable cost.

The costs of drilling and completing a well are often uncertain, and are affected by many factors, including:

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If we are unable to accurately predict and control the costs of drilling and completing a well, we may be forced to limit, delay or cancel drilling operations.

Increasing attention to environmental, social and corporate governance (ESG) matters may impact our business.

Increasing attention to ESG matters may impact our business.

Companies conducting oil and natural gas activities, like many firms in other industries, are facing increased scrutiny from stakeholders related to their ESG policies and practices.

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Cost increases may also result from a variety of factors beyond our control, such as increases in the cost of electricity, steel and other materials that we and our vendors rely upon and increases in the cost of services to process, treat and transport our production.

Any escalation or expansion of tariffs could result in higher costs and affect a greater range of materials we rely upon in

our business.

Any escalation or expansion of tariffs could result in higher costs and affect a greater range of materials we rely upon in our business.

The unavailability or high cost of drilling rigs, pressure pumping equipment, tubulars and other supplies, and of qualified personnel can materially and adversely affect our operations and profitability.

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Commodities pricing may also make drilling some acreage uneconomic.

Our actual drilling activities and future drilling budget will depend on drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, lease expirations, gathering system and pipeline transportation constraints, regulatory approvals and other factors.

equipment, lease expirations, gathering system and pipeline transportation constraints, regulatory approvals and other factors.

In addition, any drilling activities we conduct may not be successful or result in additional proved reserves, which could have a material adverse effect on our future business, financial condition and results of operations.

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● blowouts, fires, adverse weather events, pollution and equipment failures that may result in damage to or destruction of wells, producing formations, production facilities and equipment;

● accidental leaks of natural gas, including gas with high levels of hydrogen sulfide (H2S), and other hydrocarbons or toxic or hazardous materials in the environment as a result of human error or the malfunction of equipment or facilities, which can result in personal injury and loss of life, pollution, damage to equipment and suspension of operations;

● accidental releases of natural gas, including gas with high levels of hydrogen sulfide (H2S), and other hydrocarbons or toxic or hazardous materials in the environment as a result of human error or the malfunction of equipment or facilities, which can result in personal injury and loss of life, pollution, damage to equipment and suspension of operations;

● well-on-well interference that may reduce recoveries;

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Additionally, if we are unable to successfully operate our specialized treating facilities or secure adequate sour gas takeaway capacity from third parties when and if necessary, our ability to effectively manage the H2S levels we see in our natural gas production may be adversely impacted.

As a result, our production, revenues, operating costs and liabilities and expenses may be materially and adversely affected and may differ materially from those anticipated by us.

As a result, our production, revenues, operating costs and liabilities and expenses may be materially and adversely affected and may differ materially from those anticipated by us and availability of certain facilities may impact our processing costs.

Our ability to sell our production and/or receive market prices for our production may be adversely affected by transportation capacity constraints and interruptions.

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Such risks include, but are not limited to, landing the horizontal wellbore in the desired drilling zone, maintaining the desired drilling zone while drilling horizontally through the wellbore formation, running casing through the full span of the wellbore, and being able to run tools and other necessary equipment consistently throughout the horizontal wellbore.

Additionally, horizontal drilling and completion techniques may result in faster production decline rates relative to

conventional drilling methods.

Additionally, horizontal drilling and completion techniques may result in faster production decline rates relative to conventional drilling methods.

The ultimate success of our drilling and completion strategies and techniques will be better evaluated over time as more wells are drilled and production profiles are better established.

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However, there is no assurance that we will not suffer a monetary loss from title defects or title failure.

Additionally, undeveloped acreage has greater risk of title defects than developed acreage.

Additionally, undeveloped acreage has greater

risk of title defects than developed acreage.

Generally, under the terms of the operating agreements affecting our properties, any monetary loss is to be borne by all parties to any such agreement in proportion to their interests in such property.

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As of March 25, 2024, we had approximately 16.5 million shares of common stock outstanding and options and restricted stock units to purchase or receive an aggregate of 0.4 million shares of our common stock.

As of March 27, 2023, we have also

reserved an additional 0.3 million shares for future issuance to our directors, officers and employees under our 2020 Long-Term Incentive Plan.

As of March 25, 2024, we have also reserved an additional $1.1 million shares for future issuance to our directors, officers and employees under our 2020 Long-Term Incentive Plan.

The potential issuance of such additional shares of common stock may create downward pressure on the trading price of our common stock.

Additionally, on March 28, 2023, we sold an aggregate of 25,000 shares of Series A Convertible Preferred Stock (the “preferred stock”) that is convertible into shares of our common stock, as further described in Item 9B.

Other Information .

We may issue common stock or other equity securities senior to our common stock in the future for a number of reasons, including to finance acquisitions, to adjust our leverage ratio, and to satisfy our obligations upon the exercise of warrants and options, or for other reasons.

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Such laws may impose strict as well as joint and several liability for environmental contamination, which could subject us to liability for the conduct of others or for our own actions that were in compliance with all applicable laws at the time such actions were taken.

Environmental and other governmental laws and regulations also increase the costs to plan, design, drill, install, operate and abandon oil and natural gas wells.

Environmental and other governmental laws and regulations also

increase the costs to plan, design, drill, install, operate and abandon oil and natural gas wells.

Moreover, public interest in environmental protection has increased in recent years, and environmental organizations have opposed, with some success, certain drilling and pipeline projects.

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Regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and natural gas.

Studies over recent years have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere.

Various studies have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere.

In response, governments increasingly have been adopting domestic and international climate change regulations that require reporting and reductions of the emission of such greenhouse gases.

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The Trump Administration tried to roll back many of the Obama-era climate change policies and rules.

But shortly after his inauguration, President Biden accepted the Paris Agreement on behalf of the United States, declared climate considerations an essential part of the United States’ foreign policy, limited new oil and gas leases on federal lands, and directed federal agencies to incorporate climate change considerations in their operation.

But shortly after his inauguration, President Biden accepted the Paris Agreement on behalf of the United States, declared climate considerations an essential part of the United States’ foreign policy, limited new oil and natural gas leases on federal lands, and directed federal agencies to incorporate climate change considerations in their operations.

New federal programs relating to climate change appear to be likely through at least 2024.

For example, EPA has proposed to update, strengthen and revise the greenhouse gas and volatile organic compound emission standards for the oil and natural gas industries, while BLM has proposed new rules to reduce venting, flaring and leaks from oil and gas production on public lands.

Aside from new controls, the 2022 Inflation Reduction Act creates incentives meant to promote use of electric cars and fuels other than oil and natural gas.

For example, the EPA announced new final regulations in December 2023 that impose more comprehensive restrictions on emissions of methane (a greenhouse gas) and volatile organic compounds from new, existing, and modified facilities in the oil and gas sector (such as wells and storage tank batteries).

Among other things, the rule sets new emissions standards for certain equipment;

requires routine monitoring for and repair of leaks at well sites, centralized production facilities, and compressor stations;

limits flaring from existing oil wells;

and prohibits flaring from new oil wells.

In addition, BLM has proposed new rules to reduce venting, flaring and leaks from oil and gas production on public lands.

Aside from new controls, the 2022 Inflation Reduction Act creates incentives designed to increase use of electric cars and fuels other than oil and natural gas.

That statute imposes a fee on certain excess methane emissions from oil and gas facilities of $900 per metric ton of methane for 2024, $1,200 per metric ton for 2025, and $1,500 per metric ton each year thereafter.

In the courts, several decisions have been issued that may increase the risk of claims being filed by governments and private parties against companies that cause or contribute to significant greenhouse gas emissions.

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Some studies have linked earthquakes in certain areas to underground injection, which is leading to greater public scrutiny and regulation of disposal wells.

Any new environmental initiatives or regulations that restrict injection of fluids, including, but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development or production of oil and gas, or that limit the withdrawal, storage or use of surface water or ground water necessary for hydraulic fracturing of our wells, could increase our operating costs and cause delays, interruptions or cessation of our operations, the extent of which cannot be predicted, and all of which would have an adverse effect on our business, financial condition, results of operations and cash flows.

COVID-19 Risk Factors

Events beyond our control, including a global or domestic health crisis, may result in unexpected adverse operating and financial results.

In 2020, in response to the novel coronavirus (COVID-19) pandemic governments around the world, including U.S.

federal and state governments, imposed restrictions intended to limit the extent and spread of the virus, including travel restrictions, quarantines and business closures.

The COVID-19 outbreak and governmental restrictions significantly impacted economic activity and markets and dramatically reduced demand for oil and natural gas, adversely impacting the prices we receive for our production, resulting in us temporarily shutting in producing wells.

During 2021, widespread availability of COVID-19 vaccines in the United States and elsewhere combined with accommodative governmental monetary and fiscal policies and other factors, led to a rebound in demand for oil and natural gas and increases in oil and natural gas prices.

However, there remains the potential for demand for oil and natural gas to be adversely impacted by the economic effects of the COVID-19 pandemic, including as a consequence of the circulation of more infectious “variants” of the disease, vaccine hesitancy, waning vaccine effectiveness or other factors.

As a consequence, we are unable to predict the impact of these factors which may negatively impact our business in numerous ways, including, but not limited to, the following:

● reducing our revenues if the outbreak results in a substantial or prolonged decrease in demand for oil and natural gas due to an economic downturn or recession;

● disrupting our operations if our employees or contractors are unable to work due to illness or if our field operations are suspended or temporarily shut-down or restricted due to measures designed to contain the outbreak;

● disrupting the operations of our midstream service providers, on whom we rely for the gathering, processing and transportation of our production, due to measures designed to contain the outbreak, and/or the difficult economic environment may lead to capital spending constraints, bankruptcy, the closing of facilities or inability to maintain infrastructure, which may adversely affect our ability to market our production, increase our costs, lower the prices we receive, or result in the shut-in of our producing wells or a delay or discontinuation of our development plans;

● the disruption and instability in the financial markets and the uncertainty in the general business environment may affect our ability to access capital, monetize assets and successfully execute our plans.

The COVID-19 pandemic may also have the effect of heightening many of the other risks set forth below.

Any of these factors could have a material adverse effect on our business, operations, financial results and liquidity.

In 2020, oil and natural gas prices declined to historically low levels and we reduced our planned capital expenditures, delayed our drilling and completion plans and temporarily shut-in some of our producing wells, among other responses.

We are unable to predict the ultimate adverse impact of the COVID-19 on our business, which will continue to depend on numerous evolving factors and future developments, including the length of time that the pandemic continues, its effect

on the demand for oil and natural gas and the response of the overall economy and the financial markets after governmental restrictions are eased.

fracturing of our wells, could increase our operating costs and cause delays, interruptions or cessation of our operations, the extent of which cannot be predicted, and all of which would have an adverse effect on our business, financial condition, results of operations and cash flows.

Macroeconomic Risk Factors

Our business could be adversely impacted by events beyond our control, including economic downturns, inflation, increases in interest rates, natural disasters, public health crises such as pandemics, political crises, geopolitical events such as the conflict in Ukraine and the Middle East, or other macroeconomic conditions, which have in the past and may in the future result in adverse operating and financial results.

The global economy, including credit and financial markets, has experienced extreme volatility and disruptions,

including, among other things, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, supply chain shortages, increases in inflation rates, higher interest rates and uncertainty about economic stability.

A widespread public health crisis such as a pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity.

In addition, a recession or market correction resulting from the effects of public health crises could materially affect our business and the value of our common stock.

It may have further negative impacts, such as (a) a global or U.S.

recession or other economic crisis;

(b) credit and capital markets volatility (and access to these markets, including by our suppliers and customers);

and (d) disruptions services and supplies.

The ultimate impact of a public health crisis is highly uncertain.

The Federal Reserve recently raised interest rates multiple times in response to concerns about inflation and it may raise them again.

Higher interest rates, coupled with reduced government spending and volatility in financial markets may increase economic uncertainty and affect consumer spending.

If the equity and credit markets deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive.

Increased inflation rates can adversely affect us by increasing our costs, including labor and employee benefit costs.

A financial downturn could negatively affect our business, results of operations, financial condition and liquidity.

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We have agreements with third parties for hardware, software, telecommunications and other information technology services necessary to our business and have developed proprietary software systems, management techniques and other information technologies incorporating software licensed from third parties.

We use these systems and data to, among other things, estimate quantities of oil, natural gas liquids and natural gas reserves, process and record financial data and communicate with our employees and third parties.

We use these systems and data to, among other things, estimate

quantities of oil, natural gas liquids and natural gas reserves, process and record financial data and communicate with our employees and third parties.

Failures in these systems due to hardware or software malfunctions, computer viruses, natural disasters, fire, human error or other causes could significantly affect our ability to conduct our business.

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We generally do not maintain insurance coverage for the costs associated with cyber-security events.

UNRESOLVED STAFF COMMENTS

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors