| DEBT | The following table presents account balances
and activity for our various debt instruments as of December 31:
Initial Supplemental Convertible Convertible Secured
Line of Line of Notes Notes Credit
Credit Credit 10% Series B Facility
December 31, 2016 Principal Balance $ (5,000,000 ) $ (7,105,000 ) $ (1,942,600 ) $ - $ -
December 31, 2016, Total, net $ (5,000,000 ) $ (7,105,000 ) $ (5,308 ) $ - $ -
Principal
Borrowings - - (8,057,400 ) (4,724,900 ) (5,000,000 )
Repayments - 3,552,500 - - -
Conversions - - 5,166,800 - -
Beginning Balance - Unamortized Debt Issuance Costs - Original Issuer Discount - - 204,703 - -
Additions - - 804,750 205,211 104,871
Accretion - - (742,944 ) (36,887 ) (1,436 )
Ending - Unamortized Debt Issuance Costs - Original Issuer Discount - - 266,509 168,324 103,435
Beginning Balance - Unamortized Debt Issuance Costs - Beneficial Conversion Feature - - 1,030,762 - -
Additions - - 4,272,867 56,500 -
Accretion - - (3,978,881 ) (11,959 ) -
Ending - Unamortized Debt Issuance Costs - Beneficial Conversion Feature - - 1,324,748 44,541 -
Beginning Balance - Unamortized Debt Issuance Costs - Warrant Discount - - 701,827 - -
Additions - - 2,978,791 - -
Accretion - - (2,758,537 ) - -
Ending - Unamortized Debt Issuance Costs - Warrant Discount - - 922,081 - -
December 31, 2017, Principal Balance $ (5,000,000 ) $ (3,552,500 ) $ (4,833,200 ) $ (4,724,900 ) $ (5,000,000 )
December 31, 2017, Total, net $ (5,000,000 ) $ (3,552,500 ) $ (2,319,862 ) $ (4,512,035 ) $ (4,896,565 )
Principal
Borrowings - - - - (20,000,000 )
Repayments 5,000,000 3,552,500 - - -
Conversions - - 200,000 - -
Beginning Balance - Unamortized Debt Issuance Costs - Original Issuer Discount - - 266,509 168,324 103,435
Additions - - - - 4,284,416
Accretion - - (266,509 ) (168,324 ) (1,789,664 )
Ending - Unamortized Debt Issuance Costs - Original Issuer Discount - - - - 2,598,187
Beginning Balance - Unamortized Debt Issuance Costs - Beneficial Conversion Feature - - 1,324,748 44,541 -
Additions - - - - 2,272,775
Accretion - - (1,324,748 ) (44,541 ) (949,372 )
Ending - Unamortized Debt Issuance Costs - Beneficial Conversion Feature - - - - 1,323,403
Beginning Balance - Unamortized Debt Issuance Costs - Warrant Discount - - 922,081 - -
Additions - - - - 1,538,943
Accretion - - (922,081 ) - (642,797 )
Ending - Unamortized Debt Issuance Costs - Warrant Discount - - - - 896,046
December 31, 2018, Principal Balance $ - $ - $ (4,633,200 ) $ (4,724,900 ) $ (25,000,000 )
December 31, 2018, Total, net $ - $ - $ (4,633,200 ) $ (4,724,900 ) $ (20,182,264 ) Line of credit On
May 13, 2015, the Company entered into a Revolving Line of Credit Facility Agreement (“initial line of credit”, “Line
of credit”) with PEO, a related party, which provided the Company with a revolving line of credit of up to $5.0 million. As
of December 31, 2018, and 2017, the outstanding balance on the Line of credit was $0.0 and $5.0 million respectively. The Company
had accrued interest was $0.0 and $0.5 million respectively. During the years ended December 31, 2018 and 2017, the Company recorded
interest expense of $0.3 million and $0.4 million respectively, related to the initial line of credit. Supplemental line of credit On October 13, 2016,
the Company entered into a revolving line of credit facility agreement (the “supplemental line of credit”) with PEP
III. PEP III is an affiliate of PEO. The supplemental line of credit permitted the Company to borrow up to $10.0 million to pay
costs associated with its acquisition and development of oil and gas properties in the Wattenberg Field. Interest on the supplemental
line initially accrued at the rate of 8% per year. The supplemental line
of credit was amended on March 30, 2017, pursuant to which the Company agreed not to borrow additional amounts against the supplemental
line of credit and to repay $3.6 million. On June 8, 2017, the
Company entered into a letter agreement (“PEP III Agreement”) with PEP III and PEO, pursuant to which PEP III agreed
to modify the Company’s supplemental line of credit. The PEP III Agreement extended the maturity date of the supplemental
line of credit, including approximately $3.8 million in outstanding principal and accrued interest, from June 13, 2017 until December
27, 2017, and increased the interest rate on the supplemental line from 8% to 10%, effective June 8, 2017. The Company and PEO
also agreed to amend the participation agreement between the Company and PEO, dated May 13, 2015 (“Participation Agreement”),
in order to expand the area of mutual interest (“AMI”) established and granted PEP III an option to participate under
the Participation Agreement. PEP’s option under the Participation Agreement expired when the line of credit was extinguished
in June 2018. On December 21, 2017
in connection with the execution of a Letter Agreement (as described more fully below) the interest rate on the supplemental line
of credit was increased to 15% and the maturity date was extended until June 30, 2018. On February 1, 2018,
concurrent with the closing of the Secured Credit Facility (as described more fully below), $1.5 million of principal plus accrued
interest was repaid on the supplemental line of credit. Effective June 1, 2018,
the Company and PEP III closed on a transaction to exchange the Company’s interest in the Ocho Assets (Note 5) in full satisfaction
of the remaining $2.1 million of outstanding principal balance on the supplemental line of credit. The Company accounted for this
transaction as a retirement in accordance with ASC 932-360-40-3. As the retirement did not impact the unit-of-production amortization
rate no gain or loss was recognized on the transaction. As
of December 31, 2018, and 2017, the outstanding balance on the supplemental line of credit was $0.0 and $2.1 million respectively.
The Company had accrued interest of $nil and $0.5 million respectively. During the years ended December 31, 2018 and 2017, the
Company recorded interest expense of $0.1 million and $0.4 million respectively, related to the supplemental line of credit. 10% Convertible Notes On January 30, 2017, the Company completed
the private placement of units consisting of convertible promissory notes (“Convertible Notes”) with an aggregate face
value of $10.0 million and common stock purchase warrants. The Convertible Notes are unsecured, bear interest at 10% per year and
were due and payable on December 31, 2018. At the option of the holders of the Convertible Notes, the principal amount and any
accrued but unpaid interest are convertible into shares of the Company’s common stock at a conversion price of $1.50 per
share. The Company received net proceeds of approximately
$9.0 million from the private placement, after placement agent fees and other associated expenses. In accordance with ASC 470, “Debt”,
the proceeds from the sale of the Convertible Notes was allocated between the conversion feature embedded in the Convertible Notes
and the warrants attached to the notes based on the fair values of the debt instrument without the warrants, and of the warrants
themselves, at the time of issuance. The fair value of the beneficial conversion feature (BCF) was $5.3 million and the fair value
of the warrants was $3.7 million. Each of the fair value amounts were recorded as a reduction of the carrying value of the Convertible
Notes and were amortized to interest expense using the effective interest method over the term of the Convertible Notes. In addition,
warrants with an estimated fair value of $1.0 million were issued to the placement agent in connection with the offering. The placement
agent warrants were recorded as a charge to additional paid-in capital. On October 16, 2017, in connection with the
sales of Series B Unsecured Convertible Promissory Notes (“Series B Convertible Notes”) as described more fully below,
$5.2 million in principal of the Convertible Notes and $0.1 million in accrued interest was converted into 4,814,265 shares of
common stock at a conversion rate of $1.10 per share. The Company has recorded a loss on conversion of $1.8 million in connection
with the reduction of the initial contractual conversion rate. As of December 31, 2018, and 2017, the Convertible
Notes had an outstanding principal balance of $4.6 million and $4.8 million and accrued interest of $nil and $0.3 million respectively.
Interest expense related to the notes for the years ended December 31, 2018 and 2017 was $0.5 million and $0.8 million. The 10% Convertible Notes were not paid as
of December 31, 2018, and they remain outstanding and in default. Series B Convertible Notes In September and October 2017, the Company
sold Series B Convertible Notes in the principal amount of $4.7 million. The Series B Convertible Notes are unsecured, bear interest
at 15% per year, and were due and payable on December 31, 2018. At the option of the holders, the principal amount of the Series
B Convertible Notes and any accrued but unpaid interest are convertible into shares of the Company’s common stock at a conversion
price of $1.50 per share. The Company netted $4.5 million from the sale of the Series B Convertible Notes after expenses. In accordance with ASC 470, the fair value
of the beneficial conversion feature of $56,500 has been recorded as a reduction of the carrying value of the Series B Notes and
was amortized to interest expense using the effective interest method over the term of the Series B Notes. As of December 31, 2018, and 2017, the Series
B Convertible notes had and outstanding balance of $4.7 million and $4.7 million and accrued interest of $nil and $0.2 million
respectively. Interest expense related to the notes for the years ended December 31, 2018 and 2017 was $0.7 million and $0.2 million. The Series B Convertible Notes were not paid
as of December 31, 2018, and they remain outstanding and in default. Secured Credit Facility On February 1, 2018,
the Company closed on a $25.0 million Secured Credit Facility with Providence Wattenberg, LP and 5NR Wattenberg, LLC (“Secured
Lenders”). Each of Providence and 5NR are affiliates of the Lenders under a Letter Agreement entered into by the Company
on December 21, 2017, under which the Company borrowed $5.0 million. The obligation under the Secured Credit Facility includes
the $5 million borrowed under the Letter Agreement and includes additional borrowings of $20.0 million. The following are the material terms of the Secured Credit Facility:
● Interest on the outstanding principal balance accrues at the base rate of 14% per year plus the greater of either 1% or US Dollar LIBOR (three-month tenor), but in no event greater than 17%, plus, in the event of default, penalty interest of 5%. Interest payments are due and payable each month commencing March 1, 2018.
● The Company paid a $1.25 million origination fee at the time of the closing and agreed to pay a $1.25 million underwriting fee on February 1, 2019.
●
The borrowing is secured by a lien on all
of the Company’s assets.
● All principal is due February 1, 2020 (“Maturity Date”).
● At any time, each Secured Lender may convert 20% of the outstanding principal balance into common stock of the Company at a conversion rate of $1.15 per share and 80% of the outstanding principal balance at a conversion rate of $1.55 per share.
● The Secured Lenders received warrants to purchase 1,500,000 shares of common stock of the Company at a price of $0.01 per share (Note 8).
● The Secured Lenders were granted the right to participate in any public or private securities offering by the Company, limited to 50% of securities offered until December 31, 2018, and 25% of any securities offered thereafter.
● Beginning on the maturity date and continuing until February 2021, the Secured Lenders were granted an option to purchase up to $25 million of the Company’s common stock at a 10% discount from the 30-day volume-weighted average trading price (“VWAP”) of the common stock at the time the option is exercised, but in no event shall the exercise price be less than $1.85 per share; and registration rights in connection with the common stock that may be issued upon exercise of the foregoing rights.
● The Borrower has the right to make an optional prepayment prior to the maturity date. Upon prepayment of the loan or upon certain events of default, the Company is subject to a “Make-Whole Premium” in the amount of 40% multiplied by the then-outstanding balance, less amounts paid for interest and certain fees paid by the Borrower under the Secured Credit Facility
The Secured Credit Facility
is subject to certain financial and restrictive covenants under which the Company’s failure to comply results in an event
of default. The covenants include:
● The Company has agreed not to issue any equity securities or securities convertible into or exercisable for equity securities without the consent of Lenders, except for common stock issuable under the Company’s equity incentive plan, certain registered public offerings, common stock issuable in connection with certain convertible promissory notes and certain outstanding warrants; and
● Maintenance of a Total Leverage Ratio and a Present Value of Proved Developed Producing Reserves Coverage Ratio, as defined in the borrowing documents. The following table
summarizes the use of the $20.0 million in additional borrowings under the terms of the Secured Credit Facility:
Gross Proceeds $ 20,000,000
Payment of origination fee (1,250,000 )
Principal repayment on Initial Line of Credit (5,000,000 )
Principal repayment on Supplemental Line of Credit (1,500,000 )
Payment of accrued interest costs (1,086,808 )
Net Cash Proceeds $ 11,163,192 The Secured Credit Facility
is considered a hybrid debt instrument with several elements that required identification and valuation. As the fair value of the
embedded derivatives is not readily determinable through an active marketplace of identical instruments, the Company employed the
Monte Carlo simulation valuation model to determine the fair value of the embedded derivative liabilities. It was determined that
the rights to convert the debt into common shares contained a beneficial conversion feature that could be detached from the debt
and valued as a component of equity. It was likewise determined that the warrants could be detached from the debt and valued as
a component of equity. It was determined that the option to purchase shares at a 10% discount from VWAP represented a derivative
liability that should be remeasured at fair value for each reporting period. The Company further determined that certain provisions
of the agreement which provide for additional interest payments under certain conditions represent an additional compound derivative
liability that should also be remeasured at fair value for each reporting period. The compound derivative liability included the
Make-Whole Premium, Default Interest Penalty, and Registration Rights Penalty. For both the share purchase option and the additional
interest provisions, a Monte Carlo simulation model was used to calculate estimates of fair value. The model was used as of February
1, 2018 to determine the initial valuation. In each interim reporting period subsequent to February 1, 2018, the model was updated
to determine changes in the estimated values. The values allocated
to each component of the debt instrument are set forth below;
Secured Credit Facility, net of all discounts $ 16,786,981
Make whole premium derivative liability 14,698
Default interest penalty derivative liability 243,794
Registration rights penalty derivative liability 63,672
Share purchase option derivative liability 1,347,853
Stock purchase warrants 1,538,943
Beneficial conversion feature 2,272,775
Legal fees and other 231,284
Subtotal 22,500,000
Origination fee and Underwriting fee 2,500,000
Secured Credit Facility, face value $ 25,000,000 Defaults As of December 31, 2018,
the Company was in default under certain provisions of the Secured Credit Facility including the inability of the Company to pay
its debts or other obligations as they become due, a mechanic’s lien filed against the Company in Adams, County Colorado
and for accounts payable outstanding for greater than 90 days. On February 1, 2019, the Company incurred another event of default
by failing to pay the Secured Lenders a $1.3 million underwriting fee incurred in connection with the origination of the Secured
Credit Facility. As a result of the defaults,
the Company has accrued additional default penalty interest of $0.3 million at the penalty interest rate of an additional 5%, from
the date of the first reported default on October 1, 2018 through December 31, 2018. The Company has accrued $3.4 million related
to the embedded make-whole premium.
As of December 31, 2018, $29.9 million in principal, penalty interest and amounts accrued for the make-whole premium are due and
payable. On April 2, 2019, the Secured Lenders delivered their formal Notice of Default under the terms of the Secured Credit
Facility. The Notice declared that all amounts outstanding were immediately due and payable. The Company is currently
in negotiation with the Secured Lenders as to the impact and resolution of the defaults. |
