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of December 31, 2005, we had material weaknesses in our internal control, and
our internal control over financial reporting was not effective as of that date.
If we fail to maintain an effective system of internal controls, we may not be
able to provide timely and accurate financial statements. As
more fully described under Item 9A, Controls and Procedures, our management identified
three material weaknesses over the effectiveness of our internal controls. These
material weaknesses also resulted in us not being able to file our annual report
during the time allowed by the Securities and Exchange Commission. As a result
of the material weaknesses, management concluded that, as of December 31, 2005,
we did not maintain effective internal control over financial reporting. The
Public Company Accounting Oversight Board has defined a material weakness as a
control deficiency, or combination of control deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim
statements will not be prevented or detected. Accordingly, a material weakness
increases the risk that the financial information we report contains material
errors. As more fully described in our annual report on Form 10-K/A for the year
ended December 31, 2004, management concluded during 2004 that we did not maintain
effective internal control over financial reporting. We
have implemented initiatives to remediate the material weaknesses in our internal
controls. The steps we have taken and are taking to address the material weaknesses
may not be effective. However, any failure to effectively address a material weakness
or other control deficiency or implement required new or improved controls, or
difficulties encountered in their implementation, could limit our ability to obtain
financing, harm our reputation, disrupt our ability to process key components
of our result of operations and financial condition timely and accurately and
cause us to fail to meet our reporting obligations under rules of the SEC and
Nasdaq and our various debt arrangements. Any failure to remediate the material
weaknesses identified in our evaluation of our internal controls could preclude
our management from determining our internal control over financial reporting
is effective or otherwise from issuing in a timely manner our management report
in 2007. We could face adverse consequences as a result
of our late Form 10-K filing. Our inability to
timely file our Form 10-K for the year ended December, 31, 2005, which was related
to our restatement, may have an adverse impact on us. In particular, we expect
that we will not be eligible to use a registration statement on Form S-3 for a
period of 12 months after becoming current with our filings. The inability to
use Form S-3 may impair our ability or increase our costs and the complexity of
our efforts to raise funds in the public markets. We
are subject to various governmental regulations and environmental risks. Natural
gas and oil operations are subject to various federal, state and local government
regulations that may change from time to time. Matters subject to regulation include
discharge permits for drilling operations, plug and abandonment bonds, reports
concerning operations, the spacing of wells, unitization and pooling of properties
and taxation. From time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of natural gas and
oil wells below actual production capacity in order to conserve supplies of natural
gas and oil. Other federal, state and local laws and regulations relating primarily
to the protection of human health and the environment apply to the development,
production, handling, storage, transportation and disposal of natural gas and
oil, by-products thereof and other substances and materials produced or used in
connection with natural gas and oil operations. In addition, we may be liable
for environmental damages caused by previous owners of property we purchase or
lease. As a result, we may incur substantial liabilities to third parties or governmental
entities and may be required to incur substantial remediation costs. Further,
we or our affiliates hold certain mineral leases in the State of Montana that
require coalbed methane drilling permits, the issuance of which has been challenged
in pending litigation. We may not be able to obtain new permits in an optimal
time period or at all. We also are subject to changing and extensive tax laws,
the effects of which cannot be predicted. Compliance with existing, new or modified
laws and regulations could have a material adverse effect on our business, financial
condition and results of operations. We are subject to
various operating and other casualty risks that could result in liability exposure
or the loss of production and revenues. The natural
gas and oil business involves operating hazards such as: -
well blowouts;
- mechanical failures;
- explosions;
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