Talos Energy Inc. Common Stock

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under Part I, Item 1A. Risk Factors included in our 2023 Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. TOthere h than set forth below, there have been no material changes in our risk factors from those described in our 2023 Annual Report or our other SEC filings.

Our Rights Agreement includes terms and conditions that could discourage, delay or prevent a takeover or other transaction that some stockholders may consider favorable. 

On October 1, 2024, the Company entered into the Rights Agreement, pursuant to which the Board declared a dividend of one Right for each share of Common Stock outstanding at the close of business on October 11, 2024. Each Right initially entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a Preferred Share for $62.10, subject to adjustment under certain conditions. In general terms, Rights will become exercisable only if a person or group acquires 25% or more of our outstanding Common Stock. If Rights become exercisable, all holders of Rights (other than the person or group triggering the Rights Agreement, whose rights will become void and will not be exercisable) will have the right, pursuant to the terms of the Rights Agreement, to purchase from the Company for $62.10, subject to certain potential adjustments, shares of our Common Stock having an aggregate market value of twice that amount. The Rights expire at the earlier of (i) October 1, 2027 and (ii) October 1, 2025 if Stockholder Approval (as defined in the Rights Agreement) has not been received prior to such time, unless such date is advanced or extended or unless the Rights are earlier redeemed or exchanged by the Board as permitted in the Rights Agreement. Additional information regarding the Rights Agreement is contained in the Current Report on Form 8-K filed with the SEC on October 1, 2024 and the Rights Agreement is filed at Exhibit 4.11 to this Quarterly Report. 

In general terms, the Rights Agreement will cause substantial dilution to any person or group that acquires beneficial ownership of 25% or more of the Companys outstanding Common Stock without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to discourage any person, entity or group from gaining a control or control-like position in the Company or engaging in other tactics, potentially disadvantaging the interests of the Companys stockholders, without negotiating with the Board and without paying an appropriate control premium to all stockholders. The Rights Agreement is similar to plans adopted by other public companies and is intended to help protect stockholders interests, including protecting stockholders from any efforts at negative control. Further, the Rights Agreement is intended to position the Board to fulfill its duties by providing sufficient time for the Board to make informed judgments and take actions that are in the best interests of the Company and its stockholders. Nevertheless, the Rights Agreement may be considered to have certain anti-takeover effects, including potentially discouraging, delaying or preventing a change of control of the Company or a takeover attempt, even if such actions may be considered beneficial or favorable by some stockholders. Even in the absence of a takeover attempt, the Rights Agreement may adversely affect the prevailing market price of our Common Stock if it is viewed as discouraging takeover attempts in the future.

Actions of activist stockholders or others could materially and adversely affect our business, results of operations and stock price.

We may become subject to actions or proposals from stockholders or others that may not align with our business strategies or the interests of our other stockholders. Responding to such actions can be costly and time-consuming, disrupt our business and operations, and divert the attention of the Board, management, and employees from the pursuit of our business strategies. Such activities could interfere with our ability to execute our strategic plan. Activist stockholders or others may create perceived uncertainties as to the future direction of our business or strategy which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel and potential customers, and may affect our relationships with current customers, vendors, investors and other third parties. In addition, a proxy contest for the election of directors at an annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board. Our stock price could also be subject to significant fluctuations or otherwise be adversely affected by the events, risks and uncertainties of any stockholder activism. 

Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, could adversely affect our business, prospects, financial condition and operating results.

There is currently significant uncertainty about the future relationship between the United States and various other countries, including changes arising as a result of any change in administration due to the upcoming U.S. presidential election with respect to trade policies, treaties, tariffs, taxes, and other limitations on cross-border operations. Changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements could have an adverse effect on our business, prospects, financial condition and operating results, the extent of which cannot be predicted with certainty at this time.

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Recent and pending management changes could disrupt our operations and impair our ability to attract and retain key personnel.

We have experienced recent changes to our senior management team, including the departure of our President and Chief Executive Officer on August 29, 2024. Joseph A. Mills will serve as Interim Chief Executive Officer and President, effective as of August 29, 2024 while our Board conducts a search for a permanent Chief Executive Officer. Changes in our senior management and uncertainty regarding pending changes may disrupt our operations, impact customer and partner relationships, and impair our ability to recruit and retain other needed personnel. Any such disruption or impairment could have an adverse effect on our business.

We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations.

As more fully disclosed in this Form 10-Q under Part I, Item 4. Controls and Procedures, our Audit Committee, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures and internal control over financial reporting as of September 30, 2024. Based on that evaluation, we concluded that our disclosure controls and procedures were not effective as of September 30, 2024 due to material weaknesses identified in our internal control over financial reporting. 

A material weakness (as defined in Rule 12b-2 under the Exchange Act) 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 a companys annual or interim financial statements will not be prevented or detected on a timely basis.

In September 2024, the Company received a notification from a third party suggesting that the subject employee was engaged in inappropriate procurement practices. In response, the Audit Committee conducted a review of such alleged practices by engaging independent external legal counsel to assist in reviewing the matter and determining the extent of such activities. Such review with external legal counsel did not identify nor implicate other current or former employees and the subject employee was separated from the Company. The Audit Committee also did not identify any related material errors in the Companys historical financial statements.

However, in the course of its review, the Company identified two material weaknesses. The first material weakness identified was due to our inability to rely on the review control performed by the subject employee with respect to the estimated decommissioning costs incorporated into the asset retirement obligations recognized in our consolidated financial statements. As such, we could not rely on the subject employees judgment in the operation of the review control, which is performed upon acquisition of oil and gas assets subject to the retirement obligation and when costs are incurred and reassessed. Although the review of such costs was a task unrelated to the reported conduct subject to our review, we nevertheless determined that the concerns raised regarding the subject employees reliability made it inappropriate to have relied on such subject employees judgment in the review function. The second material weakness identified was due to inappropriate segregation of duties without designing and maintaining effective monitoring controls over the timely review of expenditures associated with asset retirement obligation spending, capital expenditures and lease operating expenses. 

While these material weaknesses did not result in a material misstatement of our consolidated financial statements, these internal control deficiencies were not remediated as of September 30, 2024 and there is a reasonable possibility that it could have resulted in a material misstatement in the Company's annual or interim consolidated financial statements that would not have been detected. Accordingly, we have determined that these internal control deficiencies constituted material weaknesses in our internal control over financial reporting. While management, under the oversight of our Audit Committee, has taken steps to implement our remediation plan as described more fully in Part I, Item 4. Controls and Procedures of this Form 10-Q, the material weaknesses described above will not be considered remediated until the enhanced controls operate for a sufficient period of time and management has concluded, through testing, that the related controls are effective. Furthermore, we can give no assurance that the measures we take will remediate the material weaknesses.

We can give no assurance that additional material weaknesses will not arise in the future. Any failure to remediate these material weaknesses, or the development of any new material weaknesses in our internal control over financial reporting, could result in material misstatements in our consolidated financial statements and cause us to fail to meet our reporting and financial obligations, which in turn could have a negative impact on our financial condition, results of operations or cash flows, restrict our ability to access the capital markets, require significant resources to correct the material weaknesses or deficiencies, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in both investor confidence and the market price of our stock.

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