| NOTES PAYABLE AND DEBENTURE | NOTE 6 – NOTES PAYABLE AND DEBENTURE The Company’s notes payable and debenture
consisted of the following:
September 30, March 31,
2016 2016
Note Payable - Rogers $ 7,114,734 $ 7,153,734
Promissory Note - Rogers 1,000,000 —
Note Payable - Dreeben — 275,000
Convertible Notes Payable - Silver Star — 800,000
Note Payable - RAD2 1,500,000 —
Convertible Notes Payable - HFT 600,000 450,000
Debenture 530,000 —
Note Payable - IBC 39,764,444 —
50,509,178 8,678,734
Unamortized
debt discount (3,516,547 ) (583,183 )
Total Notes Payable and Debenture (1) $ 46,992,631 $ 8,095,551
(1) Includes $3.0 million of current portion of long-term debt at September 30, 2016. Rogers Loan and Promissory Note Letter Loan Agreement At September 30, 2016,
the Company had $7,114,734 due under the $7.5 million Letter Loan Agreement (as amended, modified, restated and revised to date,
the “Rogers Loan”) originally entered into with Louise H. Rogers (“Rogers”) on August 13, 2013. Amortization
of debt discount of $21,323 was recorded during the year ended March 31, 2016 while no unamortized discount remained as of September
30, 2016. Currently, the
Rogers Loan has a maturity date of January 31, 2017, and we have agreed to pay all professional fees incurred by Rogers and
to pay Rogers $39,000 in lieu of interest on the Rogers Loan as well as all operating income of collateralized assets
(beginning October 1, 2015). Also, we agreed to make principal payments to Rogers from certain insurance proceeds to be
received, which we have not received to date. For the months of January, February, March, June and July 2016, the Company did
not make the required monthly principal payments due pursuant to the terms of the Rogers loan as amended. Instead, the
Company and the loan administrator agreed to settle any outstanding administration and legal fees in lieu of the principal
payments. The Company paid approximately $98,000 related to the fees and effective July 5, 2016, the Company obtained a
waiver for the nonpayment of the principal amounts through July 2016. The Company has also not made the required monthly
principal payments due pursuant to the terms of the Rogers loan as amended for the months of August and September 2016,
and we plan to request a waiver for the months of August through November 2016. Additionally, per a
prior amendment, we transferred all of our oil and gas interests and equipment to our then newly formed wholly-owned Texas subsidiary,
CATI Operating LLC, which clarified that following the transfer, Rogers had no right to foreclose upon the Company (at the Nevada
corporate parent level) upon the occurrence of an event of default under the Rogers Loan, and that instead Rogers would only take
action against CATI and its assets and required Rogers to release all UCC and other security filings on the Company (provided that
Rogers is allowed to file the same filings on CATI and its assets). Subsequently, we formally assigned all of our oil and gas interests
and equipment to CATI pursuant to an Assignment and Bill of Sale dated December 16, 2015. On October 31, 2016,
we entered into an amendment dated October 31, 2016, to the Second Amended Letter Loan Agreement and the Second Amended Promissory
Note, both dated November 13, 2014, with Louise H. Rogers, our senior lender. Pursuant to the amendment, the parties agreed to
amend the (a) November 13, 2014 Second Amended Letter Loan Agreement and (b) November 13, 2014 Second Amended Promissory Note,
by extending the maturity date thereunder from October 31, 2016 to January 31, 2017. We also agreed to pay $9,000 to Ms. Rogers
and $9,000 to Robertson Global Credit, LLC, the servicer of the Amended Note, in connection with our entry into the amendment. Promissory Note On August 25, 2016,
and effective on August 15, 2016, our wholly-owned subsidiary, CATI borrowed $1 million from the Company’s senior lender,
Rogers. The amount borrowed accrues interest at the rate of 12% per annum (18% upon the occurrence of an event of default) and
is due and payable on or before November 9, 2016. Pursuant to the terms
of the note, a total of 80% of all cash flow generated by CATI is required to first be paid to satisfy amounts owed under the August
2016 Note, and then to amounts owed under the Letter Loan, with the remaining 20% of such cash flow used by CATI for lease and
other operating expenses and capital expenditures approved by Rogers’ designated representatives. In connection with our
entry into the August 2016 note, we agreed to pay a loan origination fee of $50,000 and to pay all fees of Rogers’ counsel
in connection with the preparation and negotiation of the note. The $50,000 loan origination fee has been recorded as a discount
and is being amortized through interest expense using the effective interest method over the term of the note. As additional consideration
in connection with the loan, CATI issued Robertson Global Credit, LLC, the administrator of the Rogers Loan, a 2% overriding royalty
interest in the wellbores of the Cyclone #9H and Cyclone #10H wells, pursuant to an Assignment of Overriding Royalty. We used the funds raised
in connection with the August 2016 note for drilling and completion of certain Eagle Ford wells under a joint operating agreement
with Lonestar Resources, Inc. and maintenance capital expenditures on the existing assets of CATI. As of September 30,
2016, the August 2016 note had a balance of $966,667 (net of the unamortized discount of $33,333) which is recognized as a short-term
liability on the Company’s balance sheet as of September 30, 2016. The Company has also recognized $12,000 in accrued interest
as of September 30, 2016. The August 2016 note was paid in full on October 11, 2016. Silver Star Line of Credit On August 30, 2015,
we entered into a Non-Revolving Line of Credit Agreement with Silver Star Oil Company (“Silver Star”). The line of
credit provided us the right to issue up to $2.4 million in convertible promissory notes to Silver Star. To date, Lucas has drawn
$1,000,000 under the line of credit for the months of October, November, December 2015 and January and February 2016. The convertible
notes contained a beneficial conversion feature with a combined intrinsic value of $687,987 for the five notes, which is recognized
as a discount and is being amortized through interest expense using the effective interest method over the term of the notes. As of September 30,
2016, $800,000 of convertible notes had been assigned by Silver Star to Rockwell Capital Partners (“Rockwell”), of
which Rockwell has fully converted a total of $830,562 of the principal and interest due on such convertible notes outstanding
into shares of our common stock at a conversion price of $1.50 per share, for an aggregate of 553,708 shares. On July 15, 2016, pursuant
to an assignment of convertible promissory note agreement, the Company was advised that the last $200,000 convertible promissory
note sold to Silver Star on February 20, 2016 was assigned by Silver Star to Texas Capital & Assets LLC. On September 28, 2016,
Texas Capital & Assets LLC converted $207,566 of principal and interest due on such convertible note into shares of our common
stock at a conversion price of $1.50 per share, for an aggregate of 138,377 shares. As of September 30,
2016, the Company had no remaining Silver Star convertible notes outstanding and does not recognize any corresponding liability
on the Company’s balance sheet as all outstanding notes had been converted into shares of the Company’s common stock. HFT Convertible Promissory Note Purchase
Agreement and Convertible Promissory Notes On March 29, 2016,
Lucas entered into a Convertible Promissory Note Purchase Agreement with HFT Enterprises, LLC (“HFT”). Pursuant to
the Note Purchase Agreement, we agreed to issue an aggregate of $600,000 in convertible notes, including $450,000 in convertible
notes purchased on the date of the parties’ entry into the agreement, and $150,000 in convertible notes purchased by Debra
Herman, the wife of Michael Herman, the principal of HFT, on April 26, 2016. We also granted Mrs. Herman warrants to purchase 124,285
shares of common stock with an exercise price of $1.50 per share on April 26, 2016, when the final loan was made pursuant to the
terms of the agreement. Each of the convertible
notes are due and payable twelve months from their issuance date, accrue interest at the rate of 6% per annum (15% upon the occurrence
of an event of default), and allow the holder thereof the right to convert the principal and interest due thereunder into common
stock of the Company at a conversion price of $1.50 per share, provided that the total number of shares of common stock issuable
upon conversion of the convertible notes could not exceed 19.9% of our outstanding shares of common stock on March 29, 2016, until
shareholder approval for such issuances was received, which approval was received on August 23, 2016. The convertible notes contained
a beneficial conversion feature with a combined intrinsic value of $600,000 for the three notes, which is recognized as a discount
and is being amortized through interest expense using the effective interest method over the term of the notes. As of September 30,
2016, we had total convertible notes due to HFT of $318,416 (net of the unamortized discount of $281,584) which is recognized as
a short-term liability on the Company’s balance sheet as of September 30, 2016. The Company has also recognized approximately
$18,000 in accrued interest as of September 30, 2016. Dreeben Note On
March 28, 2016, we borrowed $250,000 from Alan Dreeben, who is one of the sellers of the assets we acquired pursuant to the Asset
Purchase Agreement and since August 26, 2016, has been one of our directors, pursuant to a short-term promissory note. The short-term
promissory note has a principal balance of $275,000 (the $250,000 borrowed plus a $25,000 original issue discount). As additional
consideration for Mr. Dreeben agreeing to make the loan, we agreed to issue Mr. Dreeben 15,000 restricted shares of common stock
which were issued in September 2016. The Company recognized a $48,000 discount to the short-term promissory note which was based
on the closing price of the Company’s common stock ($3.20 per share) on March 28, 2016 in addition to the original discount
of $25,000, for a total discount of $73,000. On June 27, 2016, we
entered into an amended and restated short-term promissory note, amending and restating the note originally entered into with Mr.
Dreeben on March 28, 2016 ; evidencing an additional $100,000 borrowed on June 13, 2016, plus a $10,000
original issue discount on such loan amount and extending the maturity date of the note to August 31, 2016. On August 31, 2016,
the Company paid Mr. Dreeben the full amount due on the short-term promissory note of $385,000. Debenture On April 6, 2016, we
entered into a Securities Purchase Agreement with the Investor, pursuant to which we issued a redeemable convertible subordinated
debenture, with a face amount of $530,000, initially convertible into 163,077 shares of common stock at a conversion price equal
to $3.25 per share and a warrant to initially purchase 1,384,616 shares of common stock (subject to adjustment thereunder) at an
exercise price equal to $3.25 per share (the “First Warrant”). The Investor purchased the debenture at a $30,000 original
issue discount for the sum of $500,000 and agreed that it will exercise the First Warrant, upon satisfaction of certain conditions,
for the sum of $4.5 million. The debenture matures in seven years and accrues interest at a rate of 6.0% per annum. Due to the
recent decline in the price of our common stock and that a trigger event occurred on June 30, 2016 as a result of the delay in
filing our Annual Report on Form 10-K for the year ended March 31, 2016, the premium rate on the debenture increased from 6% to
17% and the conversion discount became 85% of the lowest daily volume weighted average price during the measuring period (60 days
prior to and 60 days after the last date that the Investor receives shares), less $0.10 per share of common stock not to exceed
85% of the lowest sales price on the last day of such period less $0.10 per share. As the fair value of
the warrants issued in connection with the debenture exceeds the $530,000 value of the debenture, we fully discounted the entire
debenture and will amortize the discount over the term of the debenture. The discount is being amortized through interest expense
using the effective interest method over the term of the debenture. As of September 30,
2016, we had a convertible subordinated debenture of $37,857 (net of the unamortized discount of $492,143) which is recognized
as a long-term liability on the Company’s balance sheet as of September 30, 2016. The Company has also recognized $34,000
in accrued interest as of September 30, 2016. Loan Agreement with RAD2 Effective on August
25, 2016, RAD2, which was one of the Sellers and which is owned and controlled by Richard N. Azar II, who was appointed as our
Chairman on August 26, 2016, loaned us $1.5 million pursuant to a promissory note. The promissory note does not accrue interest
for the first month it is outstanding and accrues interest at the rate of 5% per annum thereafter until paid in full. As of September 30,
2016, we had a promissory note due RAD2 of $1.5 million, which is recognized as a short-term liability on the Company’s balance
sheet as of September 30, 2016. The Company recognized no accrued interest as of September 30, 2016. Loan Agreement with International
Bank of Commerce (“IBC”) Effective August 25,
2016, we, as borrower, and Richard N. Azar II, who was appointed as our Chairman on August 26, 2016 and who also received the largest
number of securities and cash in connection with the closing of the Acquisition (“Azar”), Donnie B. Seay, Richard E.
Menchaca, RAD2, DBS Investments, Ltd. (“DBS”, controlled by Mr. Seay) and Saxum Energy, LLC (“Saxum”, which
is controlled by Mr. Menchaca), as guarantors (collectively, the “Guarantors”, all of which were directly or indirectly
Sellers), and International Bank of Commerce, as Lender (“Lender”), entered into a Loan Agreement. Pursuant to the Loan
Agreement, the Lender loaned us $40 million, evidenced by a Real Estate Lien Note in the amount of $40 million. We are required
to make monthly payments under the note equal to the greater of (i) $425,000; and (ii) fifty percent (50%) of our monthly net
income. The note accrues annual interest at 2% above the prime rate then in effect, subject to a minimum interest rate of 5.5%
per annum. The note is due and payable on August 25, 2019. Payments under the Note are subject to change as the interest rate
changes in order to sufficiently amortize the note in 120 monthly installments. We have the right, from time to time and without
penalty to prepay the note in whole or in part, subject to the terms thereof. The proceeds of the
loan were used to repay and refinance approximately $30.6 million of indebtedness owed by certain of the Sellers, to the Lender
(including an aggregate of $18.3 million owed by RAD2 and another entity controlled by Mr. Azar, $9.8 million owed by DBS, and
$2.1 million owed by Mr. Menchaca), as well as to pay the $4.975 million due to the Sellers at closing. Another $3.36 million was
used to fund a sinking fund required by the Lender, as discussed below, to pay principal on the Note. The amount owed under
the note is secured by a Security Interest in substantially all of our assets and properties, pursuant to three Security Agreements.
Also, each of the Guarantors guaranteed the repayment of a portion of the Loan Agreement pursuant to a Limited Guaranty Agreement.
Additionally, in connection with the parties’ entry into the Loan Agreement and to further secure amounts due thereunder,
certain of the Guarantors pledged shares of common stock which they received at the closing to the Lender, with RAD2 pledging 3,120,606
shares of common stock; DBS pledging 935,934 shares of common stock; and Saxum pledging 673,392 shares of common stock. The Loan Agreement
also provides that with respect to the properties located in Glasscock County, Texas, which we obtained ownership of at the closing
of the Acquisition (collectively, the “West Texas Properties”), we have the right to sell the West Texas Properties
after (i) the Lender approves the purchase and sale agreement in its sole discretion, (ii) the Lender receives as a prepayment
of the Loan, 50% of the sales proceeds of the West Texas Properties, but in no event less than $2,000,000, and (iii) the balance
of the sales proceeds of the West Texas Properties are deposited in the bank account that we are required to maintain with the
Lender, to be used to pay certain principal payments of the note as approved by Lender in its sole discretion. We agreed to pay the
Lender a loan finance charge of $400,000 in connection with our entry into the Loan Agreement, with half due on the date we entered
into the Loan Agreement and half due on or before the 180th day following the date of the Loan Agreement. As further consideration
for agreeing to the terms of the Loan, we agreed to issue the Lender 390,290 shares of common stock. We recognized a $2.8 million
note discount related to these transactions and other debt issuance costs and will amortize the discount and debt issuance costs
over the term of the note. As of September 30,
2016, we had a loan due to IBC of $39.8 million, of which $3.0 million is recognized as short-term liability and $34.1 million
(less debt issuance costs of approximately $2.7 million) is recognized as a long-term liability on the Company’s balance
sheet as of September 30, 2016. The Company has also recognized approximately $30,000 in accrued interest as of September 30, 2016. |
