Big Sky Industrial Inc.: Form 10-Q for the period ended Sep 30, 2024

Introduction

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 26, 2024 (the “Annual Report”).

Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under “Glossary of Oil and Natural Gas Terms” on page 4 of our Annual Report.

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited Condensed Consolidated Financial Statements included above under “Part I - Financial Information” – “Item 1. Financial Statements”.

In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the industries in which we operate in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, we have not independently verified any of it, and we have not commissioned any such information.

See also “Cautionary Statement About “Forward-Looking Statements” above.

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “U.S. Energy”, and “U.S. Energy Corp.” refer specifically to U.S. Energy Corp. and its consolidated subsidiaries.

In addition, unless the context otherwise requires and for the purposes of this report only:

• “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons;
• “BOE” refers to barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of natural gas;
• “Bopd” refers to barrels of oil per day;
• “Mcf” refers to a thousand cubic feet of natural gas;
• “Mcfe” means 1,000 cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids;
• “NGL” refers to natural gas liquids;
• “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
• “SEC” or the “Commission” refers to the United States Securities and Exchange Commission;
• “Securities Act” refers to the Securities Act of 1933, as amended; and
• “WTI” means West Texas Intermediate.

Where You Can Find Other Information

We file annual, quarterly, and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us at https://www.sec.gov (our filings can be found at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000101594) and on the “Investors – SEC Filings” page of our website at https://usnrg.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.

Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

• General Overview. A general overview of the Company and our operations.
• Recent Developments. Discussion of recent developments affecting the Company and our operations.
• Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value.
• Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
• Results of Operations. An analysis of our financial results comparing the three and nine months ended September 30, 2024 and 2023.
• Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows.

General Overview

U.S. Energy Corp. was incorporated in the State of Wyoming on January 26, 1966, and reincorporated to Delaware effective on August 3, 2022. We are an independent energy company focused on the acquisition and development of oil and natural gas producing properties in the continental United States. Our principal properties and operations are in the Rockies region (Montana, Wyoming and North Dakota), the Mid-Continent region (Oklahoma, Kansas, and North and East Texas), and the West Texas, South Texas, and Gulf Coast region.

We have historically explored for and produced oil and natural gas through a non-operator business model, however, during 2020 we acquired operated properties in North Dakota, New Mexico, Wyoming, and the Texas Gulf Coast, and on January 5, 2022, we closed the acquisitions of certain oil and gas properties from three separate sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, South Texas, and Mid-Continent regions. During the fourth quarter of 2023, we sold virtually all of our non-operated properties and as of September 30, 2024, operated 99% of our reserves.

Our business strategy going forward is to enhance the value of our acquired operated assets through evaluation of selected properties with the goal of increasing production and reserves. We plan to deploy our capital in a conservative and strategic manner and pursue value-enhancing transactions. We also continue to evaluate strategic alternative opportunities that we believe will enhance stockholder value.

With our June 2024, acquisition of unproved properties from Wavetech Helium (as discussed below), we have significantly increased our acreage position in Montana with the focus to explore and produce helium and industrial gases in non-hydrocarbon-based reservoirs. During October 2024, we drilled our first helium well on the acreage. For the remainder of 2024, our capital budget will be substantially allocated to the completion of the well. The results of the well and the additional 3-5 wells we expect to drill in 2025 are expected to allow us to assess our next steps in the development of helium acreage and are further expected to allow us to vest the Assigned Rights.

Material Developments

Acquisition of helium properties

On June 26, 2024, the Company entered into and closed the transactions contemplated by a purchase and sale agreement with Wavetech Helium ("Wavetech" and the "Purchase Agreement"). Pursuant to the Purchase Agreement, effective June 1, 2024, the Company acquired 82.5%of Wavetech's rights under a farmout agreement for approximately 144 thousand net acres located across the Kevin Dome Structure in Toole County, Montana (the "Assigned Rights"). The Assigned Rights vest upon the drilling of two wells on the property. In consideration for the Assigned Rights, the Company paid Wavetech $2.0 million in cash and 2.6 million shares of restricted common stock, which were valued at $2.7 million on June 26, 2024. In addition, during the three months ended June 30, 2024, the Company incurred $0.4 million of transaction costs related to the acquisition of the Assigned Rights. Additionally, the Company agreed to be responsible for 100% of capital costs, including costs related to project exploration, appraisal, development drilling and completion until $20 million has been incurred related to Wavetech's 17.5% interest.

On June 25, 2024, the Company entered into a related party, non-binding letter of intent with Synergy Offshore LLC ("Synergy") relating to the proposed acquisition by the Company of 24,000 net operated acres located across the Kevin Dome structure in Toole County, Montana, which are highly contiguous to the property acquired from Wavetech. Synergy is controlled by Mr. Duane H. King, a member of the Board of Directors of the Company, who serves as the Chief Executive Officer and Manager of Synergy, and John A. Weinzierl, the Company’s Chairman, was then an approximate thirty percent beneficial owner of Synergy.

In September 2024, the related party non-binding letter of intent expired with the Company and Synergy unable to reach agreement on the definitive terms of a purchase and sale agreement. Through September 30, 2024 the Company incurred $547 thousand of transaction costs related to the related-party non-binding letter of intent of which $368 thousand were written-off during the period and reflected as acquisition transaction costs on the Condensed Consolidated Statement of Operations. The remaining $179 thousand relates to land and helium reserve evaluation. The Company is continuing negotiations with Synergy for a potential joint venture for the development of their helium acreage.

Divestment of Properties

In the fourth quarter of 2023, the Company closed on a series of individual divestitures for a total of $7.0 million in net proceeds before transaction costs of $0.4 million. The divestitures included the Company’s non-operated interests in 152 wells across North Dakota, New Mexico, and Texas, and overriding royalty interests in seven wells in Karnes County, Texas. These divestitures did not have a significant impact to reserves volumes or the full cost pool depletion rate. As such, the Company recorded the proceeds, net of transaction costs and purchase price adjustments, to the full cost pool with no gain or loss recognized. Relief of associated asset retirement obligations of $0.5 million were also recorded to the full cost pool. The net proceeds from these divestitures were used to repay a portion of the outstanding balance on our credit facility.

During the nine months ended September 30, 2024, the Company closed several divestment transactions of its oil and gas properties for net proceeds totaling $5.9 million. The divestitures included a total of 245 wells in Karnes County and Archer County, Texas and Lea County, New Mexico. These divestitures did not have a significant impact to reserves volumes or the full cost pool depletion rate. As such, the Company recorded the proceeds, net of transaction costs and purchase price adjustments, to the full cost pool, with no gain or loss recognized in the Condensed Consolidated Statement of Operations. Relief of associated asset retirement obligations of $1.4 million were also recorded to the full cost pool.

On October 31, 2024, the Company closed on the divestment of oil and gas properties in Pratt County and Sumner County, Kansas and Kay County, Oklahoma for net proceeds of $1.2 million.

Derivative Activities

On September 10, 2024, the Company received $1.8 million on the settlement of all of its then outstanding commodity derivative contracts.

Stock Repurchase Program

On March 19, 2024, the Board of Directors authorized and approved an extension of the ongoing share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock originally approved by the Board of Directors on April 26, 2023, and set to expire on June 30, 2024. Subject to any future extension in the discretion of the Board of Directors of the Company, the repurchase program is now scheduled to expire on June 30, 2025, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when such program is discontinued by the Board of Directors.

Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program will be funded using the Company’s working capital.

During the nine months ended September 30, 2024, the Company repurchased 482,500 shares for $525 thousand, at a weighted average price of $1.09 per share. During the nine months ended September 30, 2023 the Company repurchased 163,300 shares for $240 thousand at a weighted average price of $1.48 per share. As of September 30, 2024, a total of $4.0 million remained available under the repurchase program for future repurchases.

Full Cost Method Ceiling Test

The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the ceiling test as of September 30, 2024, the Company used $78.64 per barrel for oil and $2.21 per one million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%.

The Company recorded ceiling test write-downs of its oil and gas properties during the three and nine months ended September 30, 2024 of $1.4 million and $6.8 million respectively due to a reduction in the value of proved oil and natural gas reserves primarily as a result of a decrease in crude oil and natural gas prices, and reduction in oil and natural gas reserves from divestitures, as well as reserves revisions related to wells shut-in during the first quarter of 2024 and updates to the decline curves for certain wells.

We expect to record a further write-down of our oil and gas properties in the fourth quarter of 2024 due to the sale of oil and natural gas properties in Pratt County and Sumner County, Kansas and Kay County, Oklahoma, which closed on October 31, 2024 and lower commodity prices used in the calculation of the ceiling test as higher fourth quarter 2023 commodity prices will be removed from the ceiling test calculation and replaced with what we expect to be lower fourth quarter 2024 commodity prices. Depending on actual commodity prices, estimated price differentials, lease operating costs, revisions to reserve estimates, and the amount and timing of capital expenditures, the write-down could be approximately $3.0 million to $4.0 million in the fourth quarter of 2024.

Plan of Operations and Strategy

Continuing through the end of 2024 and beyond, we intend to develop the recently acquired helium acreage by drilling exploratory wells along with the related helium development activities. The first well was drilled in October. We have plans to drill 3-5 wells over the next twelve months. The costs to drill these wells is estimated to cost an aggregate of between $4.0 million and $6.5 million depending primarily on the number of wells drilled. The results from the completion and testing of these wells will allow us to assess our next steps in the development of our helium acreage. We also plan to actively manage our portfolio of oil and gas assets to maximize their value.

Key elements of our business strategy include:

• Deploy our Capital in a Conservative and Strategic Manner and Review Opportunities to Bolster our Liquidity. In the current industry environment, maintaining liquidity is critical. Therefore, we plan to be highly selective in the projects we evaluate and plan to review opportunities to bolster our liquidity and financial position through various means.
• Evaluate and Pursue Value-Enhancing Transactions. We plan to continue to evaluate strategic alternative opportunities with the goal of enhancing shareholder value.

Critical Accounting Policies and Estimates

The preparation of our unaudited Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is detailed in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2023 Annual Report on Form 10-K filed with the SEC on March 26, 2024.

Results of Operations

Comparison of our Statements of Operations for the Three Months Ended September 30, 2024 and 2023

For the Three Months Ended September 30, 2024, we recorded a net loss of $2.3 million, which was primarily due to lower production resulting in reduced revenue for the period as a result of property sales. In the following sections we discuss our revenue, operating expenses, and other income (expense) for the three months ended September 30, 2024compared to the three months ended September 30, 2023.

Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the three months ended September 30, 2024 and 2023:

(in thousands except average prices and production quantities)

The decrease in our oil and gas revenue of $3.8 million for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to a decrease of 30% in production quantities and a decrease in realized commodity pricing of 18% on a per barrel of oil equivalent (BOE) basis. For the three months ended September 30, 2024, we produced 105,699 BOE, or an average of 1,149 BOE per day, as compared to 152,013 BOE or an average of 1,652 BOE per day during the comparable period in 2023. The decrease in our production quantities relates to the divestiture of substantially all of our non-operated properties in the fourth quarter of 2023, and the divestiture of additional operated properties during 2024 as wells as temporary weather-related events, such as severe storms and flooding and natural production declines. During the three months ended September 30, 2024, our production was 58% oil and 42% natural gas and liquids compared to 66% oil and 34% natural gas and liquids produced during the three months ended September 30, 2023.

Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the three months ended September 30, 2024 and 2023:

(in thousands)

For the three months ended September 30, 2024, lease operating expenses were $3.1 million or $28.95 per BOE, a decrease of $0.9 million when compared to the $4.0 million or $26.31 per BOE for the three months ended September 30, 2023. The decrease in lease operating expense was due to the divestment of substantially all of our non-operated properties and a reduction in well workover activity in 2024 when compared to 2023. The increase on a per BOE basis is the result of lower production volumes being compared to relatively fixed recurring lease operated expenses.

For the three months ended September 30, 2024, gathering, transportation, and treating costs were $43 thousand, a decrease of $124 thousand, or 74%, compared to the comparable period of 2023. This decrease was attributable to the divestiture of substantially all of our non-operated activities in the fourth quarter of 2023.

For the three months ended September 30, 2024, production taxes were $298 thousand, a decrease of $298 thousand, or 50%, compared to the comparable period of 2023. This decrease was attributable to the decrease in revenue of 43% discussed above, as production taxes remained flat at 6% of revenue.

Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) was $2.0 million and $2.9 million for the three months ended September 30, 2024 and 2023, respectively. Depletion expense on our oil and gas properties is the primary driver of DD&A expense. Our depletion rate was $14.94 per BOE and $16.39 per BOE for the three months ended September 30, 2024 and 2023, respectively. Our depletion rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, revisions in asset retirement obligation cost estimates or timing, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated future development costs.

Impairment of oil and natural gas properties. Impairment of $1.4 million for the three months ended September 30, 2024 was driven by a reduction in value of oil and gas reserves. The reduction was primarily due to lower commodity prices used in the full cost pool ceiling test, as well as divestitures of oil and gas properties during the third quarter of 2024.

General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the three months ended September 30, 2024 and 2023:

(in thousands)

General and administrative expenses decreased by $0.9 million for the three months ended September 30, 2024, as compared to the prior year period. The decrease was primarily attributable both to a decrease in both professional fees, insurance, and other due to lower accounting, consulting, and recruitment fees and a decrease in compensation and benefits due to a reduction in headcount. Stock-based compensation was lower due to the value of the restricted stock awards being amortized for the three months ended September 30, 2024 being lower than those being amortized during the three months ended September 30, 2023 due to a decrease in our stock price.

Other Income (Expense). Presented below is a comparison of our other income (expense) for the three months ended September 30, 2024 and 2023:

(in thousands)

Commodity derivative gain (loss), net, is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the three months ended September 30, 2024, we recognized gains on commodity derivative contracts of $2.0 million, primarily as the result of the settlement in September 2024, of all of our remaining commodity derivative contracts for $1.8 million. See Note 7 Commodity Derivatives in the notes to the unaudited Condensed Consolidated Financial Statements.

Interest expense primarily represents the interest on our credit facility with FirstBank Southwest. The increase in interest expense is primarily driven by the decrease in the balance outstanding period-over-period. As of September 30, 2024, we had fully repaid all outstanding amounts borrowed on the credit facility, as compared to $12.0 million borrowed as of September 30, 2023. The average interest rate increased to 9.3% per annum for the three months ended September 30, 2024, as compared to 9.1% per annum for the three months ended September 30, 2023. See Note 6 Debt in the notes to the unaudited Condensed Consolidated Financial Statements.

Comparison of our Statements of Operations for the Nine Months Ended September 30, 2024 and 2023

For the nine months ended September 30, 2024, we recorded a net loss of $13.8 million which was primarily due to lower production resulting in reduced revenue for the period. In addition, the Company recorded impairment of its oil and natural gas properties of $6.8 million from reduced commodity prices used in the full cost pool ceiling test and lower production resulting in reduced revenue for the period. In the following sections we discuss our revenue, operating expenses, and other income (expense) for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.

Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the nine months ended September 30, 2024 and 2023:

(in thousands except average prices and production quantities)

The decrease in our oil and gas revenue of $8.6 million for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to a decrease of 33% in production quantities and a decrease in realized commodity pricing of 2% on a per BOE basis. For the nine months ended September 30, 2024, we produced 326,589 BOE, or an average of 1,192 BOE per day, as compared to 485,633 BOE or an average of 1,779 BOE per day during the comparable period in 2023. The decrease in our production quantities relates to the divestiture of substantially all of our non-operated properties in the fourth quarter of 2023, and the divestiture of additional operated properties during 2024as well as temporary weather-related events, such as severe storms, flooding and winter weather, and natural production declines. During the nine months ended September 30, 2024, our production was 62% oil and 38% natural gas and liquids compared to 63% oil and 37% natural gas and liquids produced during the nine months ended September 30, 2023.

Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the nine months ended September 30, 2024 and 2023:

(in thousands)

For the nine months ended September 30, 2024, lease operating expenses were $9.3 million or $28.54 per BOE, a decrease of $2.8 million when compared to the $12.1 million or $25.01 per BOE for the nine months ended September 30, 2023. The decrease in lease operating expense was due almost entirely to a reduction in well workover activity in 2024, when compared to 2023. The increase in lease operating expense on a per BOE basis is the result of lower production volumes being compared to relatively fixed recurring lease operated expenses.

For the nine months ended September 30, 2024, gathering, transportation, and treating costs were $170 thousand, a decrease of $249 thousand, or 59%, compared to the comparable period of 2023. This decrease was attributable to the divestiture of substantially all of our non-operated activities in the fourth quarter of 2023.

For the nine months ended September 30, 2024, production taxes were $1.0 million, a decrease of $0.6 million, or 39%, compared to the comparable period of 2023. This decrease was attributable to the decrease in revenue of (34)% discussed above, as production taxes remained flat at 6% of revenue.

Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) was $6.4 million and $8.2 million for the nine months ended September 30, 2024 and 2023, respectively. Depletion expense on our oil and gas properties is the primary driver of DD&A expense. Our depletion rate was $15.39 per BOE and $14.74 per BOE for the nine months ended September 30, 2024 and 2023, respectively. Our depletion rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, revisions in asset retirement obligation cost estimates or timing, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated future development costs.

Impairment of oil and natural gas properties. Impairment of $6.8 million for the nine months ended September 30, 2024 was driven by a reduction in value of oil and gas reserves. The reduction was primarily due to lower commodity prices used in the full cost pool ceiling test, divestitures of oil and natural gas properties, as well as reserves revisions related to wells shut-in during the first quarter of 2024 and updates to the decline curves for certain wells.

General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the nine months ended September 30, 2024 and 2023:

(in thousands)

General and administrative expenses decreased by $2.8 million for the nine months ended September 30, 2024, as compared to the prior year period. The decrease was primarily attributable to a decrease in both professional fees, insurance, and other due to lower accounting, consulting, and recruitment fees and compensation and benefits, due to lower headcount. Stock-based compensation was lower due to the value of the restricted stock awards being amortized for the nine months ended September 30, 2024 being lower than those being amortized during the nine months ended September 30, 2023, due to the decline in our stock price.

Other Income (Expense). Presented below is a comparison of our other income (expense) for the nine months ended September 30, 2024 and 2023:

(in thousands)

Commodity derivative gain (loss), net, is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the nine months ended September 30, 2024, we recognized gains on commodity derivative contracts of $0.5 million, primarily as the result of the settlement in September 2024 of all our remaining commodity derivative contracts for $1.8 million. See Note 7 Commodity Derivatives in the notes to the unaudited Condensed Consolidated Financial Statements.

Interest expense primarily represents the interest on our credit facility with FirstBank Southwest. The increase in interest expense is primarily driven by the decrease in the balance outstanding period over period. As of September 30, 2024, we had fully repaid all outstanding amounts borrowed on the credit facility as compared to $12.0 million borrowed as of September 30, 2023. The average interest rate increased to 9.2% per annum for the nine months ended September 30, 2024, as compared to 8.8% per annum for the nine months ended September 30, 2023. See Note 6 Debt in the notes to the unaudited Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

Based on the current commodity price environment, we believe we have sufficient liquidity and capital resources to execute our business plan while continuing to meet our current financial obligations. We continue to manage our commitments in order to maintain flexibility with regard to our activity level and capital expenditures.

For the remainder of 2024 and into 2025, our capital budget will be substantially allocated to the completion of our recent helium discovery. Over the next year, we anticipate drilling 3 – 5 wells along with related helium development activities with costs ranging between $4.0 and $6.5 million depending primarily on the number of wells drilled. In addition, depending on timing, regulatory requirements and weather, we plan to incur costs for plugging and abandonment of approximately $1.0 million, We view much of these capital activities as discretionary for which we can control both the timing and amount of the expenditures. Other activities, such as some repairs and maintenance may be required from time to time by regulatory bodies. We anticipate our expenditures will be funded primarily by operating cash flows, borrowings under our credit facility and proceeds from divestitures of oil and gas properties. In the event that readily available sources of cash flow are insufficient to fund our capital needs, we may utilize equity and credit markets as a funding mechanism.

Sources of Cash

For the nine months ended September 30, 2024, we funded our capital expenditures with cash on hand, cash flows from operating activities, proceeds from the divestiture of oil and gas producing properties and borrowings under our credit facility. In future quarters, if cash flows are not sufficient to fund our capital expenditures and operations, we may also raise funds through new equity offerings or from other sources of financing and re-evaluate our capital spend program as economic conditions warrant. Additionally, we may enter into carrying cost and sharing arrangements with third parties for certain development programs. All of our sources of liquidity can be affected by the changes in economic conditions, rising interest rates, changes in debt and equity markets, force majeure events, fluctuations in commodity prices, operating costs, tax law changes, and volumes produced, all of which would affect us and our industry.

Credit Agreement

On January 5, 2022, we entered into a four-year credit agreement with FirstBank Southwest as administrative agent, which provides for a revolving line of credit with a borrowing base of $20 million, and a maximum credit amount of $100 million (the “Credit Agreement”). Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. The Credit Agreement contains customary indemnification requirements, representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries. In addition, the Credit Agreement contains financial covenants, tested quarterly, that limit our ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require our ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher. We were in compliance with all financial covenants as of September 30, 2024. Please refer to Note 6 - Debt in Part I, Item 1 of this report for additional discussion.

The borrowing base is subject to being redetermined semi-annually, commencing on or about April 1 and October 1 of each year during the four-year term of the Credit agreement. Our borrowing base can be adjusted as a result of changes in commodity prices, acquisitions or divestitures of proved properties, or financing activities, all as provided for in the Credit Agreement.

Cash flows provided by our operating activities, proceeds received from divestitures of properties, capital markets activities, and our capital expenditures, including acquisitions, all impact the amount we borrow under our revolving Credit Agreement. The amount outstanding on the Credit Agreement as of September 30, 2024, was $0.0 million. With the proceeds from the sale of our Karnes County, Texas properties, we repaid $5.0 million on the Credit Agreement, reducing the amount outstanding to $2.0 million as of July 31, 2024. In addition, in September 2024, with the proceeds from the settlement of our outstanding commodity derivative contracts of $1.8 million and cash on hand, we repaid the remaining $2.0 million outstanding on the credit facility.

Uses of Cash

We use cash for the acquisition and development of helium and oil and gas properties, workovers and capital expenditures, operating and general and administrative costs, settlements of commodity derivative contracts, debt obligations including interest, and share repurchases. During the nine months ended September 30, 2024, we spent approximately $3.7 million on the acquisition of helium properties and capital expenditures.

The amount and allocation of our future capital expenditures will depend upon a number of factors, including our cash flows from operating, investing, and financing activities, our ability to execute our development program, and the number and size of acquisitions that we complete. In addition, the impact of helium, oil and gas prices on investment opportunities, the availability of capital, tax law changes, and the timing and results of our development activities may lead to changes in funding requirements for future development. We periodically review our capital expenditure budget to assess if changes are necessary based on current and projected cash flows, acquisition and divestiture activities, and other factors. We will continue to monitor the economic environment through the remainder of the year and adjust our activity level as warranted.

Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2024 and 2023:

(in thousands)

Operating Activities. Cash provided by operating activities of $2.9 million for the nine months ended September 30, 2024 remained consistent with cash provided by operating activities of $3.0 million for the comparable period in 2023.

Investing Activities. Cash provided by investing activities for the nine months ended September 30, 2024 was $0.7 million as compared to cash used in investing activities of $3.4 million for the comparable period in 2023. The primary use of cash in our investing activities for the nine months ended September 30, 2024 was the acquisition of helium properties and capital expenditures, which were offset by proceeds received from the divesture of oil and gas properties. For the nine months ended September 30, 2023, the primary use of cash in our investing activities was capital expenditures related to returning idle wells to production and improvements to our gathering system in East Texas.

Financing Activities. Cash used in financing activities for the nine months ended September 30, 2024 was $5.8 million as compared cash used in financing activities of $2.1 million for the comparable period in 2023. Cash used in financing activities during the nine months ended September 30, 2024 was primarily attributable to repayments of $7.0 million on our credit facility, which were partially offset by borrowings under the credit facility of $2.0 million to fund the acquisition of our recently acquired helium properties. In addition, we spent $0.6 million on share repurchases. Cash used in financing activities during the nine months ended September 30, 2023 primarily related to cash dividends paid of $1.2 million, payments on the insurance premium finance note of $0.5 million and share repurchases of $0.2 million

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As of September 30, 2024, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were not effective as of September 30, 2024 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Such determination was made due to a material weakness in our internal control over financial reporting as of December 31, 2023, as discussed below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 26, 2024, in connection with our assessment of the effectiveness of our internal control over financial reporting at the end of our last fiscal year, management identified a material weakness in our internal control over financial reporting as of December 31, 2023. Specifically, our accounting system was not designed appropriately, and reliance could not be placed on some of the control elements of the accounting system. These control elements include a lack of certain functionality related to system-based account reconciliations, missing systematic controls in areas such as segregation of duties enforcement and data input validation, and an absence of independent evaluation of third-party information technology controls ("ITGCs"). The Company's manual review controls partially compensate for the system design limitations, but this material weakness cannot be remediated without the implementation of a system-based solution.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

Except as disclosed below there were no changes in our internal control over financial reporting during the three months ended September 30, 2024, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

As of September 30, 2024, we have evaluated our options and anticipate a new accounting system solution to be operational by mid-2025.

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 26, 2024, under the heading “Item 1A. Risk Factors”, except as discussed below, and investors should review the risks provided in the Annual Report, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Annual Report, under “Item 1A. Risk Factors”, and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.

Our stock repurchases are discretionary and even if effected, they may not achieve the desired objectives.

On March 19, 2024, the Board of Directors authorized and approved an extension of the ongoing share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock originally approved by the Board of Directors on April 26, 2023, and set to expire on June 30, 2024. Subject to any future extension in the discretion of the Board of Directors of the Company, the repurchase program is now scheduled to expire on June 30, 2025, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when such program is discontinued by the Board of Directors. Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. During the nine months ended September 30, 2024, the Company repurchased 482,500 shares for $525 thousand, at a weighted average price of $1.09 per share, in open market transactions. As of September 30, 2024 a total of $4.0 million remains available under the shares repurchase program. The program does not obligate the Company to acquire a minimum amount of shares.

There can be no assurance that any repurchases pursuant to our stock repurchase program will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchase such shares. The amounts and timing of the repurchases may also be influenced by general market conditions, regulatory developments (including recent legislative actions which, subject to certain conditions, may impose an excise tax of 1% on our stock repurchases) and the prevailing price and trading volumes of our common stock. If our financial condition deteriorates or we decide to use our cash for other purposes, we may suspend repurchase activity at any time.

We may enter into strategic transactions in the future which may result in a material change in our operations and/or a change of control.

In the future, we or our majority stockholders, may enter into transactions with, or undertake transactions with, parties seeking to merge and/or acquire us and/or our operations. While neither we, nor our majority stockholders have entered into any such agreements or understandings to date, in the event that we or our majority stockholders do enter into such a transaction or transactions in the future, it could result in a change in our business focus, the acquisition of significant amounts of our outstanding common stock, or a change in our majority stockholders. We and our majority stockholders have not entered into any agreements relating to any strategic transaction involving the Company as of the date of this filing and may never enter into such agreement(s) in the future. Any future strategic transaction involving the Company or its operations may have a material effect on our operations, cash flows, results of operations, prospects, plan of operations, the listing of our common stock on the Nasdaq Capital Market, our officers, directors and majority stockholders, and the value of our securities.

We have written down, and may in the future be forced to further write-down, material portions of our assets due to low oil and natural gas prices.

The full cost method of accounting is used for oil and gas acquisition, exploration, development and production activities. Under the full cost method, all costs associated with the acquisition, exploration, and development of oil and natural gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities, but does not include any costs related to production, general corporate overhead, or similar activities. Proceeds received from disposals are credited against accumulated cost, except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and natural gas reserves. Excluded from amounts subject to depreciation, depletion, and amortization are costs associated with unevaluated properties.

Under the full cost method, net capitalized costs are limited to the lower of (a) unamortized cost reduced by the related net deferred tax liability and asset retirement obligations, and (b) the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on unescalated costs, adjusted for contract provisions, any financial derivatives qualifying as accounting hedges and asset retirement obligations, and unescalated oil and natural gas prices during the period, (ii) the cost of properties not being amortized, and (iii) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to tax assets directly attributable to the natural gas and crude oil properties. If the net book value reduced by the related net deferred income tax liability and asset retirement obligations exceeds the cost center ceiling limitation, a non-cash impairment charge is required in the period in which the impairment occurs.

We perform a quarterly ceiling test for our only oil and natural gas cost center, which is the United States. During 2023 we recorded ceiling test write-downs of $26.7 million. The ceiling test incorporates assumptions regarding pricing and discount rates over which we have no influence in the determination of present value. In arriving at the ceiling test for the year ended December 31, 2023, we used an average price applicable to our properties of $78.22 per barrel for oil and $2.64 per Mcfe for natural gas, based on average prices per barrel of oil and per Mcfe of natural gas at the first day of each month of the 12-month period prior to the end of the reporting period, to compute the future cash flows of each of the producing properties at that date.

In the calculation of the ceiling test as of September 30, 2024, the Company used $78.64 per barrel for oil and $2.21 per one million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%. The Company recorded a $6.8 million ceiling test write-down of its oil and gas properties during the nine months ended September 30, 2024, due to a reduction in the value of proved oil and natural gas reserves primarily as a result of a decrease in crude oil and natural gas prices, divestitures of oil and natural gas properties, as well as reserves revisions related to wells shut-in during the first quarter of 2024 and decline curve updates.

Material write-downs or impairments of our oil and gas properties have in the past and may in the future have a material adverse effect on our assets and/or our financial condition, either of which may cause the value of our securities to decline in value.

The Company’s operations have in the past been, and could in the future be, disrupted by natural or human causes beyond its control.

The Company’s operations are subject to disruption from natural or human causes beyond its control, including risks from hurricanes, severe storms, floods, lightning strikes, heat waves, other forms of severe weather, wildfires, ambient temperature increases, sea level rise, war, accidents, civil unrest, political events, fires, earthquakes, system failures, cyber threats, terrorist acts and epidemic or pandemic diseases such as the COVID-19 pandemic, some of which may be impacted by climate change and any of which could result in suspension of operations or harm to people or the natural environment. Any of the above events could have a future material adverse effect on the Company’s results of operations or financial condition.

The future value and reserves associated with our helium development are unknown and the Company may never realize the value of any reserves.

No reserves have been assigned in connection with helium property interests to date, given their early stage of development. The future value of the Company is therefore dependent on the success or otherwise of drilling and development activities, which are principally directed toward the further exploration, appraisal and development of its assets in Montana, and construction of a helium gas processing facility. Exploration, appraisal and development of helium reserves are speculative and involve a significant degree of risk. There is no guarantee that exploration or appraisal of the helium property will lead to a commercial discovery or, if there is a commercial discovery, that the Company will be able to realize the value of such reserves as intended. If at any stage the Company is precluded from pursuing its exploration and development programs, or construction of a processing facility, or such programs are otherwise not continued, the Company’s business, financial condition and/or results of operations and, accordingly, the price of the Company’s shares, is likely to be materially adversely affected. Helium exploration involves a high degree of risk and there is no assurance that expenditures made for future exploration or development activities will result in discoveries reserves that are commercially or economically viable.

The Company’s helium properties are in the exploration stage; such properties may never yield commercial quantities of helium; and the Company may not be able to commercially extract any helium, if present.

The Company’s helium properties are in the exploration stage only. The Company has never had any material interest in helium producing properties. There is no assurance that commercial quantities of helium will be discovered at any of the properties or any future properties, nor is there any assurance that the exploration or development programs of will yield any positive results. Even if commercial quantities of helium are discovered, there can be no assurance that any development will result in profitable helium production. Factors which may limit the Company’s ability to produce helium include, but are not limited to, commodity prices, availability of additional capital and financing and the nature of any helium deposits.

Our helium, oil and natural gas operations are subject to environmental, legislative and regulatory initiatives that can materially adversely affect the timing and cost of operations and the demand for helium, crude oil, natural gas, and NGLs.

Our operations are subject to stringent and complex federal, state and local laws and regulations relating to the protection of human health and safety, the environment and natural resources. These laws and regulations can restrict or impact our business activities in many ways including, but not limited to the following:

• requiring the installation of pollution-control equipment or otherwise restricting the handling or disposal of wastes and other substances associated with operations;
• limiting or prohibiting construction activities in sensitive areas, such as wetlands, coastal regions or areas that contain endangered or threatened species and/or species of special statewide concern or their habitats;
• requiring investigatory and remedial actions to address pollution caused by our operations or attributable to former operations;
• requiring noise, lighting, visual impact, odor and/or dust mitigation, setbacks, landscaping, fencing, and other measures;
• restricting access to certain equipment or areas to a limited set of employees or contractors who have proper certification or permits to conduct work (e.g., confined space entry and process safety maintenance requirements); and
• restricting or even prohibiting water use based upon availability, impacts or other factors.

Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial or restoration obligations, and the issuance of orders enjoining future operations or imposing additional compliance requirements. Certain environmental statutes impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances, hydrocarbons or wastes have been disposed or otherwise released. Moreover, local restrictions, such as state or local moratoria, city ordinances, zoning laws and traffic regulations, may restrict or prohibit the execution of operational plans. In addition, third parties, such as neighboring landowners, may file claims alleging property damage, nuisance or personal injury arising from our operations or from the release of hazardous substances, hydrocarbons or other waste products into the environment.

The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment. We monitor developments at the federal, state and local levels to keep informed of actions pertaining to future regulatory requirements that might be imposed in order to mitigate the costs of compliance with any such requirements. We also monitor industry groups that help formulate recommendations for addressing existing or future regulations and that share best practices and lessons learned in relation to pollution prevention and incident investigations.

We cannot reasonably predict what applicable laws, regulations or guidance may eventually be adopted with respect to our operations or the ultimate cost to comply with such requirements. It is also possible that such regulations, or our requirement to comply with such regulations, could have a material adverse effect on our operations, negatively affect our margins, and/or force us to curtail certain business operations.

Our helium operations will require us to obtain licenses and permits which may not be obtained, may be delayed, or may limit our ability to undertake exploration and production activities.

The helium operations of the Company will require us to obtain licenses for operating, permits, and in some cases, renewals of existing licenses and permits from government agencies. There can be no assurances that the Company will attain all permits and licenses necessary to achieve profitable production of helium in the future. Further, the ability of the Company to obtain, sustain or renew any such licenses and permits on acceptable terms is subject to changes in regulations and policies and to the discretion of the applicable authorities or other governmental agencies.

Our helium operations are subject to risks and hazards which may not be covered by insurance.

The Company’s helium operations are subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, mechanical failures, labor shortages, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods and earthquakes. Such occurrences could result in damage to our helium properties and/or facilities, personal injury or death, environmental damage to the properties, or delays in exploration, development and production activities, monetary losses and possible legal liability. Although the Company maintains insurance to protect against certain risks in such amounts as it considers reasonable, its insurance will not cover all the potential risks associated with helium operations. The Company may also be unable to maintain insurance to cover these risks at reasonable costs. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. These events and limits to insurability may result in significant costs that could have a material adverse effect upon our financial performance and results of operations.

We face risks associated with our ability to locate and commercially extract helium.

The future value of the Company will depend in part on our ability to find and develop helium resources that are economically recoverable within the Kevin Dome Structure in Toole County, Montana. The circumstances in which a discovered helium accumulation becomes or remains commercially viable depends on a number of factors. These include the particular attributes of the deposit, such as size, depth concentration, development cost and proximity to infrastructure as well as key external factors such as helium supply and demand. This, along with other factors such as maintaining title to licenses, leases and permits, successful design, construction, commissioning and operating of wells and processing facilities may result in projects not being developed, or operations becoming unprofitable. Helium exploration involves exploration activities and drilling operations which may not generate a positive return on investment. This may arise from dry wells, but also from wells that are productive but do not produce sufficient revenues to return a profit after accounting for drilling, operating and other associated costs. The outcome of any drilling program may be dependent on matters which include the reservoir’s composition, the flow rate and the rate of any decrease in pressure as the gas flows to the surface. These matters cannot be known until the Company undertakes initial drilling programs. The production from successful wells may also be impacted by various operating conditions, including insufficient storage or transportation capacity, or other geological and mechanical conditions. In addition, managing drilling hazards or environmental damage and pollution caused by exploration and development operations could greatly increase the associated cost and profitability of individual wells. The future exploration activities of the Company may be affected by a range of factors including geological conditions, limitations on activities due to seasonal weather patterns, unanticipated operational and technical difficulties, industrial and environmental accidents, landholder disputes, changing government regulations and many other factors beyond the control of the Company.

The success of the Company will also depend upon the Company having access to sufficient development capital, being able to maintain title to its projects and obtain all required approvals for its activities. In the event that exploration programs prove to be unsuccessful this could lead to a diminution in the value of the Company’s projects, a reduction in the cash reserves of the Company and possible relinquishment of the Company’s projects.

The exploration costs of the Company are based on certain assumptions with respect to the method and timing of exploration. By their nature, these estimates and assumptions are subject to significant uncertainties and, accordingly, the actual costs may materially differ from these estimates and assumptions. Accordingly, no assurance can be given that the cost estimates and the underlying assumptions will be realized in practice, which may materially and adversely affect the Company’s results of operations. Helium exploration involves significant risk since few properties that are explored contain reserves that would be commercially economic to develop into producing wells. As such, there can be no assurance that existing or future exploration programs will result in discovery of commercially viable reserves. If there are resources located, there is no guarantee they can be commercially produced.

The Company has never had any helium producing properties and such properties may not result in profitable helium production.

The Company’s helium interests are exploration stage only. The Company has never had any material interest in helium producing properties. Even with application of best science, there is no assurance that commercial quantities of helium will be discovered at any of the properties of the Company or any future properties, nor is there any assurance that the exploration or development programs of the Company thereon will yield any positive results. The future development of any properties found to be economically feasible will require the construction and operation of wells and related infrastructure. Even if commercial quantities of helium are discovered, there can be no assurance that any property of the Company will ever be brought to a stage where helium can profitably be produced thereon. Factors which may limit the ability of the Company to produce helium from its properties include, but are not limited to, commodity prices, availability of additional capital and financing and the nature of any helium deposits. It is common in helium operations to experience unexpected costs, problems and delays during construction and development. In addition, delays in the early stages of helium production often occur. Accordingly, there cannot be any assurance that activities will result in profitable helium operations at our operations.

The Company faces helium drilling risks.

The Company’s helium exploration and development activities are dependent on the availability of drilling rigs and related equipment in the Kevin Dome Structure in Toole County, Montana. Increases in oil and gas exploration activities could result in higher demand and limited availability for some types of drilling rigs and equipment in certain areas, which may result in delays to the Company’s planned exploration and development activities.

The Company may encounter hazards inherent in drilling activities. Examples of such hazards include unusual or unexpected formations, abnormal pressures or rock properties, adverse weather conditions, mechanical difficulties, conditions which could result in damage to plant or equipment or shortages or delays in the delivery of rigs and/or other equipment. Drilling may result in wells that, or which encounter resources, that may not achieve economically viable results.

While the Company intends to take adequate precautions to minimize risks associated with drilling activities, there can be no guarantee that the Company will not experience one or more material incidents during drilling activities that may have an adverse impact on the operating and financial performances of the Company, including costs associated with control of well operation, recovery of plant and equipment, environmental rectification and compensation along with delays and other impacts on anticipated results.

The Company may be unable or unwilling to develop commercially viable helium operations.

On a long-term basis, in order for the Company’s helium operations to be successful, the Company must explore, develop and produce, or acquire interests in producing helium properties. The success depends on the ability to locate, identify, and acquire prospective helium exploration lands and productive helium property interests, find markets for any helium developed on such properties, and effectively distribute the helium into those markets. The helium development activities may not be economically viable because of unproductive helium properties, as well as helium properties that are productive but do not generate sufficient revenue to return a profit. Investing in a property does not ensure that the investment will be profitable since profitability depends on the cost of drilling and operating any wells on the property may exceed the amount of helium extracted from such wells. In addition, drilling hazards or environmental damage could increase the cost of operating any property. If the developmental costs exceed the Company’s estimate or if the development efforts of the Company do not produce results which meet our expectations, such efforts may not be commercially viable.

There are numerous risk associated with estimating helium reserves.

No reserves have been assigned in connection with the Company’s helium property interests to date, given their early stage of development. The future value of the Company’s helium reserves, if any, is therefore dependent on the success or otherwise of its activities, which are principally directed toward the future exploration, appraisal and development of its helium assets, and potential acquisition of property interests in the future. Estimating helium volumes is subject to significant uncertainties associated with technical data and the interpretation of that data, future commodity prices, and development and operating costs. There can be no guarantee that the Company will successfully convert any helium located on its properties to reserves and produce such estimated volume, if any. Estimates may alter significantly or become more uncertain when new information becomes available due to for example, additional drilling or production tests over the life of the field. As estimates change, development and production plans may also vary. Downward revision of helium volume estimates may adversely affect the Company’s operational or financial performance.

Helium volume estimates are expressions of judgment based on knowledge, experience and industry practice. These estimates are imprecise and depend to some extent on interpretations, which may ultimately prove to be inaccurate and require adjustment or, even if valid when originally calculated, may alter significantly when new information or techniques become available. As further information becomes available through additional drilling and analysis the estimates are likely to change. Any adjustments to volume could affect the Company’s exploration and development plans which may, in turn, affect the Company’s performance. The process of estimating helium resources is complex and requires significant decisions and assumptions to be made in evaluating the reliability of available geological, geophysical, engineering, and economic data for each property. Different engineers may make different estimates of resources, cash flows, or other variables based on the same available data.

Estimates include numerous assumptions relating to operating conditions and economic factors, including price at which recovered helium can be sold, future operating costs, costs associated with operations on producing wells to restore or increase production, and prevailing environment conditions associated with drilling.

The Company faces risks associated with its current lack of distribution agreements.

While the Company intends to partner with or sell to major industrial gas companies, the Company’s strategy is to become a fully integrated helium developer and processor and to sell directly to a limited number of major distributors and end-users in order to capture higher margins on its products. The Company currently does not have any formal agreements in place for accomplishing these strategic objectives, and the associated costs of and estimated timeline for the completion of these strategic objectives will not be able to be determined until such time that appraisal wells have been drilled and feasibility studies have been completed. Although the Company intends to enter into such formal agreements in the future, they may never be entered into. The absence of formal agreements could adversely affect the oversight and operations of any arrangement with these major industrial gas companies, major distributors and end-users, and the lack of clarity and specifically defined roles could lead to a strain on, or breakdown of, the working relationships between the Company and any of these major industrial gas companies, major distributors or end-users. Furthermore, in the event of a dispute prior to entry into formal agreements, it will not be immediately clear what recourse each party has against the other, if any.

The Company’s helium production and margins thereon, if any, will be subject to changing helium prices.

The Company’s possible future helium operation revenues may be derived from helium or from royalties gained from potential joint ventures or other arrangements. Consequently, the Company’s potential future earnings will likely be closely related to the price of helium. Helium prices fluctuate and are affected by numerous industry factors including demand for the resource, forward selling by producers, production cost levels in major producing regions and macroeconomic factors, such as inflation, interest rates, currency exchange rates and global and regional demand for, and supply of, helium. If the Company is producing helium and the market price of helium were to fall below the costs of production and remain at such a level for any sustained period, the Company would experience losses and could have to curtail or suspend some or all of its proposed activities. In such circumstances, the Company would also have to assess the economic impact of any sustained lower commodity prices on recoverability.

The Company’s helium operations will be subject to transportation costs and risks.

Disruption in or increased costs of transportation services could make helium a less competitive product or could make the Company’s future helium production, if any, less competitive than other sources. The industry depends on trucking, ocean-going vessels, pipeline facilities, and barge transportation to deliver shipment, and transportation costs are a significant component of the total cost of supplying helium. Disruptions of these transportation services due to weather problems, strikes, delays, lockouts, or other events could temporarily impair the ability to supply helium to customers and may result in lost sales. In addition, increases in transportation costs could adversely affect profitability.

The Company’s helium exploration and production activities will be subject to technological risks.

The helium industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technology. Other companies may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and may in future allow them to implement new technologies before the Company does. There can be no assurance that the Company will be able to respond to such competitive pressures and implement such technologies on a timely basis or at an acceptable cost. If the Company is unable to use the most advanced commercially available technology its business, financial condition and results of operations could be materially adversely affected.