ITEM  1A.  RISK FACTORS

The Company’s operations and its securities are subject to a number of risks. The Company has described below all the material risks that are known to the Company that could materially impact the Company’s financial results of operations or financial condition. If any of the following risks actually occur, the business, financial condition or operating results of the Company and the trading price or value of its securities could be materially adversely affected.

Risks Related to the Company’s Business

 

The Company’s limited operating history makes it difficult to predict future results and raises substantial doubt as to its ability to successfully develop profitable business operations.

 

The Company’s limited operating history makes it difficult to evaluate its current business and prospects or to accurately predict its future revenue or results of operations, and raises substantial doubt as to its ability to successfully develop profitable business operations beyond the Oyo Field interest rights we acquired in April 2010 (the Oyo Contract Rights) and the Non-Oyo Contract Rights acquired in February 2011. We had no previous operating history in the Africa area. The Company’s revenue and income potential are unproven. As a result of its early stage of operations, and to keep up with the frequent changes in the energy industry, it is necessary for the Company to analyze and revise its business strategy on an ongoing basis. Companies in early stages of operations are generally more vulnerable to risks, uncertainties, expenses and difficulties than more established companies.

 

The Company was a development stage company and may continue to incur losses for a significant period of time.

 

The Company was until recently a development stage company with minimal revenues.  In April 2010, we acquired the Oyo Contract Rights from CEHL Group and, as a result of this acquisition, we ceased reporting as a development stage company and now we are an operating company generating  revenues.  We expect to continue to incur significant expenses relating to our identification of new ventures and investment costs relating to these ventures. Additionally, fixed commitments, including salaries and fees for employees and consultants, rent and other contractual commitments may be substantial and are likely to increase as additional ventures are entered into and personnel are retained. Energy ventures, such as oil well drilling projects, generally require a significant period of time before they produce resources and in turn generate profits. The Oyo  and Non-Oyo Contract Rights may or may not result in net earnings in excess of our losses on other ventures under development or in the start-up phase. We may not achieve or sustain profitability on a quarterly or annual basis, or at all.

The Company’s ability to diversify risks by participating in multiple projects and joint ventures depends upon its ability to raise capital and the availability of suitable prospects, and any failure to raise needed capital and secure suitable projects would negatively affect the Company’s ability to operate.

The Company’s business strategy includes spreading the risk of oil and natural gas exploration, development and drilling, and ownership of interests in oil and natural gas properties, by participating in multiple projects and joint ventures.  If the Company is unable to secure sufficient attractive projects as a result of its inability to raise sufficient capital or otherwise, the average quality of the projects and joint venture opportunities may decline and the risk of the Company’s overall operations could increase.

 

 

The loss of key employees could adversely affect the Company’s ability to operate.

 

The Company believes that its success depends on the continued service of its key employees, as well as the Company’s ability to hire additional key employees, when and as needed. Each of the Company’s Senior Vice Presidents has the right to terminate his employment at any time without penalty under his employment agreement. The unexpected loss of the services of  any of these key employees, or the Company’s failure to find suitable replacements within a reasonable period of time thereafter, could have a material adverse effect on the Company’s ability to execute its business plan and therefore, on its financial condition and results of operations.

 

The Company may not be able to raise the additional capital necessary to execute its business strategy, which could result in the curtailment or cessation of the Company’s operations.

 

The Company will need to raise substantial additional funds to fully fund its existing operations, consummate all of its current asset transfer and acquisition opportunities currently contemplated and for the development, production, trading and expansion of its business. The Company has available a Promissory Note (term credit facility) of up to $25 million from an affiliated company. This facility provides for an annual interest rate based on 30 day Libor plus two percentage points with all amounts due and payable by July 15, 2014. The Company has no other current arrangements with respect to additional sources of financing, if needed. If additional sources of financing are needed it may not be available on commercially reasonable terms on a timely basis, or at all. The inability to obtain additional financing, when needed, would have a negative effect on the Company, including possibly requiring it to curtail or cease operations. If any future financing involves the sale of the Company’s equity securities, the shares of Common Stock held by its stockholders could be substantially diluted. If the Company borrows money or issues debt securities, it will be subject to the risks associated with indebtedness, including the risk that interest rates may fluctuate and the possibility that it may not be able to pay principal and interest on the indebtedness when due.

 

Insufficient funds will prevent the Company from implementing its business plan and will require it to delay, scale back, or eliminate certain of its programs or to license to third parties rights to commercialize rights in fields that it would otherwise seek to develop itself.

Failure by the Company to generate sufficient cash flow from operations could eventually result in the cessation of the Company’s operations and require the Company to seek outside financing or discontinue operations.

 

The Company’s business activities require substantial capital from outside sources as well as from internally-generated sources. The Company’s ability to finance a portion of its working capital and capital expenditure requirements with cash flow from operations will be subject to a number of variables, such as:

·	the level of production from existing wells;

 

●	prices of oil and natural gas;

 

●	the success and timing of development of proved undeveloped reserves;

 

●	cost overruns;

 

●	remedial work to improve a well’s producing capability;

 

●	direct costs and general and administrative expenses of operations;

 

●	reserves, including a reserve for the estimated costs of eventually plugging and abandoning the wells;

 

●	indemnification obligations of the Company for losses or liabilities incurred in connection with the Company’s activities; and

 

●	general economic, financial, competitive, legislative, regulatory and other factors beyond the Company’s control.

 

The Company might not generate or sustain cash flow at sufficient levels to finance its business activities. When and if the Company generates significant revenues, if such revenues were to decrease due to lower oil and natural gas prices, decreased production or other factors, and if the Company were unable to obtain capital through reasonable financing arrangements, such as a credit line, or otherwise, its ability to execute its business plan would be limited and it could be required to discontinue operations.

 

 

The Company’s failure to capitalize on existing definitive production agreements and/or enter into additional agreements could result in an inability by the Company to generate sufficient revenues and continue operations.

The Company has active interests in definitive production contracts for the Oyo and Non-Oyo Contract Rights. The Company has entered into definitive exploration agreements with Kenya and The Gambia. The Company’s ability to consummate one or more additional ventures is subject to, among other things, (i) the amount of capital the Company raises in the future; (ii) the availability of land for exploration and development in the geographical regions in which the Company’s business is focused; (iii) the nature and number of competitive offers for the same projects on which the Company is bidding; and (iv) approval by government and industry officials. The Company may not be successful in executing definitive agreements in connection with any other ventures, or otherwise be able to secure any additional ventures it pursues in the future. Failure of the Company to capitalize on its existing contracts and/or to secure one or more additional business opportunities would have a material adverse effect on the Company’s business and results of operations, and could result in the cessation of the Company’s business operations.

 

Our estimated proved reserves are based on many assumptions that may turn out to be inaccurate. Any significant inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. A significant percentage of our total estimated proved reserves at December 31, 2012 were proved undeveloped reserves which ultimately may be less than currently estimated.

The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities.  In the case of production sharing contracts, the quantities allocable to a part-interest owner’s share are affected by the assumptions of that owner’s future participation in funding of operating and capital costs. Actual future production, prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will vary from estimates. Any significant variance could materially affect the estimated quantities and present value of reserves disclosed.  In addition, estimates of proved reserves reflect production history, results of exploration and development, prevailing prices and other factors, many of which are beyond our control. Due to the limited production history of our undeveloped acreage, the estimates of future production associated with such properties may be subject to greater variance to actual production than would be the case with properties having a longer production history.

The Company’s oil and gas operations will involve many operating risks that can cause substantial losses.

 

The Company expects to produce, transport and market potentially toxic materials, and purchase, handle and dispose of other potentially toxic materials in the course of its business. The Company’s operations will produce byproducts, which may be considered pollutants. Any of these activities could result in liability, either as a result of an accidental, unlawful discharge or as a result of new findings on the effects the Company’s operations on human health or the environment. Additionally, the Company’s oil and gas operations may also involve one or more of the following risks:

 

●

fires;

 

●	explosions;

 

●	blow-outs;

 

●	uncontrollable flows of oil, gas, formation water, or drilling fluids;

●	natural disasters;

 

●	pipe or cement failures;

 

●	casing collapses;

 

●	embedded oilfield drilling and service tools;

 

●	abnormally pressured formations;

 

●	damages caused by vandalism and terrorist acts; and

 

●	environmental hazards such as oil spills, natural gas leaks, pipeline ruptures and discharges of toxic gases.

 

 

In the event that any of the foregoing events occur, the Company could incur substantial losses as a result of (i) injury or loss of life; (ii) severe damage or destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) investigatory and clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of its operations; or (vii) repairs to resume operations. If the Company experiences any of these problems, its ability to conduct operations could be adversely affected. Additionally, offshore operations are subject to a variety of operating risks, such as capsizing, collisions and damage or loss from typhoons or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production.

The Company may not be able to manage our anticipated growth.

 

Subject to our receipt of additional capital, we plan to significantly expand operations to accommodate additional development projects and other opportunities. This expansion may strain our management, operations, systems and financial resources. We may need to hire additional personnel in certain operational and other areas during 2013 and future years.

We will depend on the Operating Contractor under the OML 120/121 PSC, which may result in operating costs, methods and timing of operations and expenditures beyond our control, and potential delays or the discontinuation of operations and production.

 

The Operating Contractor under the OML 120/121 PSC currently manages all of the physical development and operations under the OML 120/121 PSC, including, but not limited to, the timing of drilling, production and related operations, the timing and amount of operational costs, the technology and service providers employed.  We would be materially adversely affected if the Operating Contractor does not properly and efficiently manage operational and production matters, or becomes unable or unwilling to continue in that capacity under the OML 120/121 PSC.

The Company will be dependent upon others for the storage and transportation of oil and gas, which could result in significant operational costs to the Company and depletion of capital.

 

The Company does not own storage or transportation facilities and, therefore, will depend upon third parties to store and transport all of its oil and gas resources when and if produced. The Company will likely be subject to price changes and termination provisions in any contracts it may enter into with these third-party service providers. The Company may not be able to identify such third-parties for any particular project. Even if such sources are initially identified, the Company may not be able to identify alternative storage and transportation providers in the event of contract price increases or termination. In the event the Company is unable to find acceptable third-party service providers, it would be required to contract for its own storage facilities and employees to transport the Company’s resources. The Company may not have sufficient capital available to assume these obligations, and its inability to do so could result in the cessation of its business.

 

An interruption in the supply of materials, resources and services the Company plans to obtain from third party sources could limit the Company’s operations and cause unprofitability.

 

Once it has identified, financed, and acquired projects, the Company will need to obtain other materials, resources and services, including, but not limited to, specialized chemicals and specialty muds and drilling fluids, pipe, drill-string, geological and geophysical mapping and interruption services. There may be only a limited number of manufacturers and suppliers of these materials, resources and services. These manufacturers and suppliers may experience difficulty in supplying such materials, resources and services to the Company sufficient to meet its needs or may terminate or fail to renew contracts for supplying these materials, resources or services on terms the Company finds acceptable including, without limitation, acceptable pricing terms. Any significant interruption in the supply of any of these materials, resources or services, or significant increases in the amounts the Company is required to pay for these materials, resources or services, could result in a lack of profitability, or the cessation of operations, if unable to replace any material sources in a reasonable period of time.

The Company does not presently carry liability insurance and business interruption insurance policies in Africa and will be at risk of incurring personal injury claims for its employees and subcontractors, and incurring business interruption loss due to theft, accidents or natural disasters.

 

The Company does not presently carry any policies of insurance in Africa to cover the risks discussed above.  In the event that the Company were to incur substantial liabilities or business interruption losses with respect to one or more incidents, this could adversely affect its operations and it may not have the necessary capital to pay its portion of such costs and maintain business operations.

 

Our business partner, CEHL Group, is a related party, and our executive chairman and CEO is a principal owner and one of the directors of CEHL, which may result in real or perceived conflicts of interest.

Our majority shareholder, CAMAC Energy Holdings Limited, is one of the entities constituting our business partner, CEHL Group.  Dr. Kase Lawal, the Company’s Executive Chairman and member of the Board of Directors, and Chief Executive Officer, is a director of each of CEHL, CINL, and Allied, also entities constituting CEHL Group. Dr. Lawal also owns 27.7% of CAMAC International Limited, which indirectly owns 100% of CEHL, and CINL and Allied are each wholly-owned subsidiaries of CEHL.  As a result, Dr. Lawal may be deemed to have an indirect material interest in any transactions with CEHL including the agreements entered into with CEHL in April 2010, the OML 120/121 Transaction and the Promissory Note with Allied of June 6, 2011.  As a result, Dr. Lawal may be deemed to have an indirect material interest in the above agreements.  These relationships may result in conflicts of interest. We may not be able to prove that these agreements are equivalent to arm’s length transactions.  Should our transactions not provide the value equivalent of arm’s length transactions, our results of operations may suffer and we may be subject to costly shareholder litigation.

If we lose our status as an indigenous Nigerian oil and gas operator, we would no longer be eligible for preferential treatment in the acquisition of oil and gas assets and oil and gas licensing rounds in Nigeria.

We are considered an indigenous Nigerian oil and gas operator by virtue of our majority stockholder, CEHL, which is an indigenous Nigerian oil and gas company.  This status makes us eligible for preferential treatment under the Nigerian Content Development Act with respect to the acquisition of oil and gas assets and in oil and gas licensing rounds in Nigeria.  If CEHL were to lose its status as an indigenous Nigerian oil and gas company due to its affiliation with our U.S. based company or otherwise, or if CEHL Limited’s majority interest in us were to be diluted or reduced due to additional issuances of equity by the Company, CEHL sale or transfer of its interest in the Company or otherwise, we may lose our status as an indigenous Nigerian oil and gas operator.  As a result, we would lose one of our key advantages in the Nigerian oil and gas market and our results of operations could materially suffer.

Applicable Nigerian income tax rates could adversely affect the value of the OML 120/121 asset, including the Oyo Field.

 

Income derived from the Oyo Contract Rights and Non-Oyo Contract Rights, and CPL, as acquiring subsidiary in these transactions, are subject to the jurisdiction of the Nigerian taxing authorities.  The Nigerian government applies different tax rates upon income derived from Nigerian oil operations ranging from 50% to 85%, based on a number of factors.  The final determination of the tax liabilities with respect to the OML 120/121 PSC involves the interpretation of local tax laws and related authorities. In addition, changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of tax liabilities with respect to the OML 120/121 PSC for a tax year.  While we believe the tax rate applicable to the OML 120/121 PSC is 52%, the actual applicable rate could be higher, which could result in a material decrease in the profits allocable to the Company under the OML 120/121 PSC.

 

The passage into law of the Nigerian Petroleum Industry Bill could create additional fiscal and regulatory burdens on the parties to the OML 120/121 PSC, which could have a material adverse effect on the profitability of the production.

 

A Petroleum Industry Bill (“PIB”) is currently undergoing legislative process at the Nigerian National Assembly. To date, the PIB has failed to pass the Nigerian Senate.  The draft PIB seeks to introduce significant changes to legislation governing the oil and gas sector in Nigeria, including new fiscal regulatory and tax obligations and expanded fiscal and regulatory oversight that may impose additional operational and regulatory burdens on the operating contractor under the OML 120/121 PSC and impact the economic benefits anticipated by the parties to the OML 120/121 PSC.  Any such fiscal and regulatory changes could have a negative impact on the profits allocable to the Company under the OML 120/121 PSC.

 

OML 120/121 is subject to the instability of the Nigerian Government and instability in the country of Nigeria.

 

The government of Nigeria originally granted the rights to OML 120/121 PSC to CEHL. The government and country of Nigeria have historically experienced instability, which is out of management’s control. The Company’s ability to exploit its interests in this area pursuant to the OML 120/121 PSC may be adversely impacted by unanticipated governmental action. In addition, the OML 120/121 PSC’s financial viability may also be negatively affected by changing economic, political and governmental conditions in Nigeria. Moreover, we operate in a sector of the economy that is likely to be adversely impacted by the effects of political instability, terrorist or other attacks, war or international hostilities.

OML 120/121 is located in an area where there are high security risks, which could result in harm to the Oyo Field operations and our interest in the Oyo Field and the remainder of OML 120/121.

 

The Oyo Field is located approximately 75 miles off the Southern Nigerian coast in deep-water.  There are some risks inherent to oil production in Nigeria. Since December 2005, Nigeria has experienced increased pipeline vandalism, kidnappings and militant takeovers of oil facilities in the Niger Delta. The Movement for the Emancipation of the Niger Delta (MEND) is the main group attacking oil infrastructure for political objectives, claiming to seek a redistribution of oil wealth and greater local control of the sector. Additionally, kidnappings of oil workers for ransom are common. Security concerns have led some oil services firms to pull out of the country and oil workers unions to threaten strikes over security issues. The instability in the Niger Delta has caused shut-in production and several companies to declare force majeure on oil shipments.

 

Despite undertaking various security measures and being situated 75 miles offshore the Nigerian coast, the   FPSO vessel  currently being used for storing petroleum production in   the Oyo   Field may become subject to terrorist acts and other acts of hostility like piracy. Such actions could adversely   impact   our overall business, financial condition and operations. Our facilities are subject to these substantial security risks and our financial condition and results of operations may materially suffer as a result.

Maritime disasters and other operational risks may adversely impact our reputation, financial condition and results of operations.

The operation of the FPSO vessel has an inherent risk of maritime disaster, environmental mishaps, cargo and property losses or damage and business interruptions caused by, among others:

●	mechanical failure;

●	damages requiring dry-dock repairs;

●	human error;

●	labor strikes;

●	adverse weather conditions;

●	vessel off hire periods;

●	regulatory delays; and

●	political action, civil conflicts, terrorism and piracy in countries where vessel operations are conducted, vessels are registered or from which spare parts and provisions are sourced and purchased.

 

Any of these circumstances could adversely affect the operation of the FPSO vessel, and result in loss of revenues or increased costs and adversely affect our profitability. Terrorist acts and regional hostilities around the world in recent years have led to increase in insurance premium rates and the implementation of special “war risk” premiums for certain areas. Such increases in insurance rates may adversely affect our profitability with respect to the Oyo Field asset.

  A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations.

The prices received for Oyo Field production under the OML 120/121 PSC will heavily influence our revenue, profitability, access to capital and future rate of growth. Oil is a commodity and, therefore, its price is subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the market for oil has been volatile. This market will likely continue to be volatile in the future. The prices received for production under the OML 120/121 PSC and the levels of its production depend on numerous factors beyond our and operator’s control. These factors include the following:

●	changes in global supply and demand for oil;

 

●	the actions of the Organization of Petroleum Exporting Countries;

 

●	the price and quantity of imports of foreign oil;

 

●	political and economic conditions, including embargoes, in oil producing countries or affecting other oil-producing activity;

 

●	the level of global oil exploration and production activity;

 

●	the level of global oil inventories;

 

●	weather conditions;

 

●	technological advances affecting energy consumption;

 

●	domestic and foreign governmental regulations;

 

●	proximity and capacity of oil pipelines and other transportation facilities; and

 

●	the price and availability of alternative fuels.

 

 

Lower oil prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil that the operator can produce economically under the OML 120/121 PSC with respect to the Oyo Field. A substantial or extended decline in oil prices may materially and adversely affect our future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures.

Risks Related to the Company’s Industry

 

The Company may not be successful in finding, acquiring, or developing sufficient petroleum reserves, and if it fails to do so, the Company will likely cease operations.

 

The Company will be operating primarily in the petroleum extractive business; therefore, if it is not successful in finding crude oil and natural gas sources with good prospects for future production, and exploiting such sources, its business will not be profitable and it may be forced to terminate its operations. Exploring and exploiting oil and gas or other sources of energy entails significant risks, which risks can only be partially mitigated by technology and experienced personnel. The Company or any ventures it acquires or participates in may not be successful in finding petroleum or other energy sources; or, if it is successful in doing so, the Company may not be successful in developing such resources and producing quantities that will be sufficient to permit the Company to conduct profitable operations. The Company’s future success will depend in large part on the success of its drilling programs and creating and maintaining an inventory of projects. Creating and maintaining an inventory of projects depends on many factors, including, among other things, obtaining rights to explore, develop and produce hydrocarbons in promising areas, drilling success, and ability to bring long lead-time, capital intensive projects to completion on budget and schedule, and efficient and profitable operation of mature properties. The Company’s inability to successfully identify and exploit crude oil and natural gas sources would have a material adverse effect on its business and results of operations and would, in all likelihood, result in the cessation of its business operations.

 

In addition to the numerous operating risks described in more detail in this report, exploring and exploitation of energy sources involve the risk that no commercially productive oil or gas reservoirs will be discovered or, if discovered, that the cost or timing of drilling, completing and producing wells will not result in profitable operations. The Company’s drilling operations may be curtailed, delayed or abandoned as a result of a variety of factors, including:

 

●	adverse weather conditions;

 

●	unexpected drilling conditions;

 

●	pressure or irregularities in formations;

 

●	equipment failures or accidents;

 

●	inability to comply with governmental requirements;

 

●	shortages or delays in the availability of drilling rigs and the delivery of equipment; and

 

●	shortages or unavailability of qualified labor to complete the drilling programs according to the business plan schedule.

 

The energy market in which the Company operates is highly competitive and the Company may not be able to compete successfully against its current and future competitors, which could seriously harm the Company’s business.

 

Competition in the oil and gas industry is intense, particularly with respect to access to drilling rigs and other services, the acquisition of properties and the hiring and retention of technical personnel. The Company expects competition in the market to remain intense because of the increasing global demand for energy, and that competition will increase significantly as new companies enter the market and current competitors continue to seek new sources of energy and leverage existing sources. Many of the Company’s competitors, including large oil companies, have an established presence in the areas we do business and have longer operating histories, significantly greater financial, technical, marketing, development, extraction and other resources and greater name recognition than the Company does. As a result, they may be able to respond more quickly to new or emerging technologies, changes in regulations affecting the industry, newly discovered resources and exploration opportunities, as well as to large swings in oil and natural gas prices. In addition, increased competition could result in lower energy prices, and reduced margins and loss of market share, any of which could harm the Company’s business. Furthermore, increased competition may harm the Company’s ability to secure ventures on terms favorable to it and may lead to higher costs and reduced profitability, which may seriously harm its business.

 

 

The Company’s business depends on the level of activity in the oil and gas industry, which is significantly affected by volatile energy prices, which volatility could adversely affect its ability to operate profitably.

 

The Company’s business depends on the level of activity in the oil and gas exploration, development and production in markets worldwide. Oil and gas prices, market expectations of potential changes in these prices and a variety of political and economic and weather-related factors significantly affect this level of activity. Oil and gas prices are extremely volatile and are affected by numerous factors, including:

 

●	the domestic and foreign supply of oil and natural gas;

 

●	the ability of the Organization of Petroleum Exporting Countries, commonly called “OPEC,” to set and maintain production levels and pricing;

 

●	the price and availability of alternative fuels;

 

●	weather conditions;

 

●	the level of consumer demand;

 

●	global economic conditions;

 

●	political conditions in oil and gas producing regions; and

 

●	government regulations.

 

Within the 12 months ending December 31, 2012, light crude oil futures have ranged from approximately $75 per barrel to over $100 per barrel, and may continue to fluctuate significantly in the future.

If the Company does not hedge its exposure to reductions in oil and gas prices, it may be subject to the risk of significant reductions in prices; alternatively, use by the Company of oil and gas price hedging contracts could limit future revenues from price increases.

 

To date, the Company has not entered into any hedging transactions but may do so in the future.  In the event that the Company chooses not to hedge its exposure to reductions in oil and gas prices by purchasing futures and by using other hedging strategies, it could be subject to significant reduction in prices which could have a material negative impact on its profitability. Alternatively, the Company may elect to use hedging transactions with respect to a portion of its oil and gas production to achieve more predictable cash flow and to reduce its exposure to price fluctuations. The use of hedging transactions could limit future revenues from price increases and could also expose the Company to adverse changes in basis risk, the relationship between the price of the specific oil or gas being hedged and the price of the commodity underlying the futures contracts or other instruments used in the hedging transaction. Hedging transactions also involve the risk that the counterparty does not satisfy its obligations.

The Company may be required to take non-cash asset write-downs if oil and natural gas prices decline or if downward revisions in net proved reserves occur, which could have a negative impact on the Company’s earnings.

 

Under applicable accounting rules, the Company may be required to write down the carrying value of oil and natural gas properties if oil and natural gas prices decline or if there are substantial downward adjustments to its estimated proved reserves, increases in its estimates of development costs or deterioration in its exploration results. Accounting standards require the Company to review its long-lived assets for possible impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable over time. In such cases, if the asset’s estimated undiscounted future cash flows are less than its carrying amount, impairment exists. Any impairment write-down, which would equal the excess of the carrying amount of the assets being written down over their fair value, would have a negative impact on the Company’s earnings, which could be material.

 

Risks Related to International Operations

 

The Company’s international operations will subject it to certain risks inherent in conducting business operations in Nigeria and other foreign countries, including political instability and foreign government regulation, which could significantly impact the Company’s ability to operate in such countries and impact the Company’s results of operations.

 

 

The Company conducts substantially all of its business in Africa.  The Company’s present and future international operations in foreign countries are, and will be, subject to risks generally associated with conducting businesses in foreign countries, such as:

 

●	foreign laws and regulations that may be materially different from those of the United States;

 

●	changes in applicable laws and regulations;

 

●	challenges to, or failure of, title;

 

●	labor and political unrest;

 

●	foreign currency fluctuations;

 

●	changes in foreign economic and political conditions;

 

●	export and import restrictions;

 

●	tariffs, customs, duties and other trade barriers;

 

●	difficulties in staffing and managing foreign operations;

 

●	longer time periods and difficulties in collecting accounts receivable and enforcing agreements;

 

●	possible loss of properties due to nationalization or expropriation; and

 

●	limitations on repatriation of income or capital.

 

Specifically, foreign governments may enact and enforce laws and regulations requiring increased ownership by businesses and/or state agencies in energy producing businesses and the facilities used by these businesses, which could adversely affect the Company’s ownership interests in then existing ventures. The Company’s ownership structure may not be adequate to accomplish the Company’s business objectives in Nigeria or in any other foreign jurisdiction where the Company may operate. Foreign governments also may impose additional taxes and/or royalties on the Company’s business, which would adversely affect the Company’s profitability and value of our foreign assets, including the rights to interests in OML 120/121 PSC.   In certain locations, governments have imposed restrictions, controls and taxes, and in others, political conditions have existed that may threaten the safety of employees and the Company’s continued presence in those countries. Internal unrest, acts of violence or strained relations between a foreign government and the Company or other governments may adversely affect its operations. These developments may, at times, significantly affect the Company’s results of operations, and must be carefully considered by its management when evaluating the level of current and future activity in such countries.

 

The future success of the Company’s operations may also be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, risk of war, expropriation, repatriation, termination, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries) and changes in the value of the U.S. dollar versus the local currencies in which future oil and gas producing activities may be denominated in certain cases. Changes in exchange rates may also adversely affect the Company’s future results of operations and financial condition.  Realization of any of these factors could materially and adversely affect our financial position, results of operations and cash flows.

 

Compliance and enforcement of environmental laws and regulations, including those related to climate change, may cause the Company to incur significant expenditures and require resources, which it may not have.

 

Extensive national, regional and local environmental laws and regulations in Africa are expected to have a significant impact on the Company’s operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality, which provide for user fees, penalties and other liabilities for the violation of these standards. As new environmental laws and regulations are enacted and existing laws are repealed, interpretation, application and enforcement of the laws may become inconsistent. Compliance with applicable local laws in the future could require significant expenditures, which may adversely affect the Company’s operations. The enactment of any such laws, rules or regulations in the future may have a negative impact on the Company’s projected growth, which could in turn decrease its projected revenues or increase its cost of doing business.

 

 

A foreign government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of the Company’s investment in that country.

 

The Company’s business is subject to significant political and economic uncertainties and may be adversely affected by political, economic and social developments in Africa or in any other foreign jurisdiction in which it operates.

 

Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could even result in the loss of all or substantially all of the Company’s assets and in the total loss of your investment in the Company.

 

The continued existence of official corruption and bribery in Africa, and the inability or unwillingness of Nigerian authorities to combat such corruption, may negatively impact our ability to fairly and effectively compete in the Nigerian oil and gas  market.

 

Official corruption and bribery remain a serious concern in Nigeria.  The 2012 Transparency International report ranks Nigeria 139 out of 174 countries in terms of corruption perceptions.  In an attempt to combat corruption in the oil and gas sector, the National Assembly passed the Nigeria Extractive Industries Transparency Initiative Act 2007.  This action permitted Nigeria to become a candidate country under the Extractive Industries Transparency Initiative (“EITI”), the first step in bringing transparency to all material oil, gas an d mining payments to the Government of Nigeria.  In addition, Nigeria has amended its banking laws to permit the government to bring corrupt bank officials to justice.  Several notable cases have been brought, but, to date, few significant cases have been successful and bank regulatory oversight remains a concern.  Thus, increased diligence may be required in working with or through Nigerian banks or with Nigerian governmental authorities, and interactions with government officials may need to be monitored.  To the extent that such efforts to increase transparency are unsuccessful, and any competitors utilize the existence of corruptive practices in order to secure an unfair advantage, our financial condition and results of operations may suffer.

If relations between the United States and Africa were to deteriorate, investors might be unwilling to hold or buy the Company’s stock and its stock price may decrease.

 

At various times during recent years, the United States has had significant disagreements over political, economic and security issues with Nigeria.  Additional controversies may arise in the future between the United States and these two countries. Any political or trade controversies between the United States and these two countries, whether or not directly related to the Company’s business, could adversely affect the market price of the Company’s Common Stock.

 

The Company’s stockholders may not be able to enforce United States civil liabilities claims.

Many of the Company’s assets are, and are expected to continue to be, located outside the U.S. and held through one or more wholly-owned and majority-owned subsidiaries incorporated under the laws of foreign jurisdictions.  A substantial part of the Company’s operations are, and are expected to continue to be, conducted in Africa.  In addition, some of the Company’s directors and officers, including directors and officers of its subsidiaries, may be residents of countries other than the U.S. All or a substantial portion of the assets of these persons may be located outside the U.S. As a result, it may be difficult for shareholders to effect service of process within the U.S. upon these persons. In addition, there is uncertainty as to whether the courts of Africa would recognize or enforce judgments of U.S. courts obtained against the Company or such persons predicated upon the civil liability provisions of the securities laws of the U.S. or any state thereof, or be competent to hear original actions brought in these countries against the Company or such persons predicated upon the securities laws of the U.S. or any state thereof.

Risks Related to the Company’s Stock

CAMAC Energy Holdings Limited is our controlling stockholder, and it may take actions that conflict with the interests of the other stockholders.

 

Following our acquisition of the Oyo Contract Rights, CEHL beneficially owned approximately 62.74% of our outstanding shares of Common Stock and continues to own a majority interest at present.  CEHL controls the power to elect our directors, to appoint members of management and to approve all actions requiring the approval of the holders of our Common Stock, including adopting amendments to our Certificate of Incorporation and approving mergers, acquisitions or sales of all or substantially all of our assets, subject to certain restrictive covenants. The interests of CEHL as our controlling stockholder could conflict with your interests as a holder of Company Common Stock. For example, CEHL as our controlling stockholder may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investment, even though such transactions might involve risks to you, as minority holders of the Company.

 

The market price of the Company’s stock may be adversely affected by a number of factors related to the Company’s performance, the performance of other energy-related companies and the stock market in general.

 

The market prices of securities of energy companies are extremely volatile and sometimes reach unsustainable levels that bear no relationship to the past or present operating performance of such companies.

 

Factors that may contribute to the volatility of the trading price of the Company’s Common Stock include, among others:

 

●	the Company’s quarterly results of operations;

 

●	the variance between the Company’s actual quarterly results of operations and predictions by stock analysts;

 

●	financial predictions and recommendations by stock analysts concerning energy companies and companies competing in the Company’s market in general, and concerning the Company in particular;

 

●	public announcements of regulatory changes or new ventures relating to the Company’s business, new products or services by the Company or its competitors, or acquisitions, joint ventures or strategic alliances by the Company or its competitors;

 

●	public reports concerning the Company’s services or those of its competitors;

 

●	the operating and stock price performance of other companies that investors or stock analysts may deem comparable to the Company;

 

●	large purchases or sales of the Company’s Common Stock;

 

●	investor perception of the Company’s business prospects or the oil and gas industry in general; and

 

●	general economic and financial conditions.

 

In addition to the foregoing factors, the trading prices for equity securities in the stock market in general, and of energy-related companies in particular, have been subject to wide fluctuations that may be unrelated to the operating performance of the particular company affected by such fluctuations. Consequently, broad market fluctuations may have an adverse effect on the trading price of the Common Stock, regardless of the Company’s results of operations.

The limited market for the Company’s Common Stock may adversely affect trading prices or the ability of a shareholder to sell the Company’s shares in the public market at or near ask prices or at all if a shareholder needs to liquidate its shares.

 

The market price for shares of the Company’s Common Stock has been, and is expected to continue to be, very volatile.  Numerous factors beyond the Company’s control may have a significant effect on the market price for shares of the Company’s Common Stock, including the fact that the Company is a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume.  Even if we came to the attention of such persons, they tend to be risk-averse and may be reluctant to follow an unproven, early stage company such as the Company or purchase or recommend the purchase of its shares until such time as the Company becomes more seasoned and viable. There may be periods of several days or more when trading activity in the Company’s shares is minimal as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Due to these conditions, investors may not be able to sell their shares at or near ask prices or at all if investors need money or otherwise desire to liquidate their shares.

 

The Company’s issuance of Preferred Stock could adversely affect the value of the Company’s Common Stock.

 

The Company’s Amended and Restated Certificate of Incorporation authorizes the issuance of up to 50 million shares of Preferred Stock, which shares constitute what is commonly referred to as “blank check” Preferred Stock.  This Preferred Stock may be issued by the Board of Directors from time to time on any number of occasions, without stockholder approval, as one or more separate series of shares comprised of any number of the authorized but unissued shares of Preferred Stock, designated by resolution of the Board of Directors, stating the name and number of shares of each series and setting forth separately for such series the relative rights, privileges and preferences thereof, including, if any, the: (i) rate of dividends payable thereon; (ii) price, terms and conditions of redemption; (iii) voluntary and involuntary liquidation preferences; (iv) provisions of a sinking fund for redemption or repurchase; (v) terms of conversion to Common Stock, including conversion price; and (vi) voting rights. The designation of such shares could be dilutive of the interest of the holders of our Common Stock. The ability to issue such Preferred Stock could also give the Company’s Board of Directors the ability to hinder or discourage any attempt to gain control of the Company by a merger, tender offer at a control premium price, proxy contest or otherwise.

 

The Common Stock may be deemed “penny stock” and therefore subject to special requirements that could make the trading of the Company’s Common Stock more difficult than for stock of a company that is not “penny stock”.

 

The Company’s Common Stock may be deemed to be a “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stocks (i) with a price of less than five dollars per share; (ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of issuers with net tangible assets of less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average revenues of less than $6,000,000 for the last three years.

 

Section 15(g) of the Exchange Act, and Rule 15g-2 promulgated thereunder, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 promulgated under the Exchange Act requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in the Common Stock to resell their shares to third parties or to otherwise dispose of them.

 

The Company’s executive officers, directors and major stockholders, including CAMAC Energy Holdings Limited, hold a controlling interest in the Company’s Common Stock and may be able to prevent other stockholders from influencing significant corporate decisions.

The executive officers, directors and holders of 5% or more of the outstanding Common Stock, if they were to act together, would be able to control all matters requiring approval by stockholders, including the election of Directors and the approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control and may make some transactions more difficult or impossible to complete without the support of these stockholders.