Exhibit 10.41
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended March 31, 2019
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-32508
CAMBER ENERGY, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 20-2660243 |
| (State of other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 1415 Louisiana, Suite 3500, Houston, Texas | 77002 |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (210) 998-4035
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 par value | CEI | NYSE American |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “ large accelerated filer, ” “ accelerated filer, ” “ smaller reporting company, ” and “ emerging growth company ” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $21,785,966.
There were 46,011,619 shares of the registrant’s common stock outstanding as of June 25, 2019.
Documents incorporated by reference: None.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are generally located in the material set forth under the headings “ Risk Factors ”, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ”, “ Business ”, and “ Properties ” but may be found in other locations as well. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others,
| ● | our ability to integrate and realize the benefits of prior and future acquisitions that we may complete; |
| ● | the availability of funding and the terms of such funding; |
| ● | our growth strategies; |
| ● | anticipated trends in our business; |
| ● | changes in our business focus and management; |
| ● | our liquidity and ability to finance our exploration, acquisition and development strategies; |
| ● | market conditions in the oil and gas industry; |
| ● | the timing, cost and procedure for future acquisitions; |
| ● | the impact of government regulation; |
| ● | estimates regarding future net revenues from oil and natural gas reserves and the present value thereof; |
| ● | legal proceedings and/or the outcome of and/or negative perceptions associated therewith; |
| ● | planned capital expenditures (including the amount and nature thereof); |
| ● | increases in oil and gas production; |
| ● | changes in the market price of oil and gas; |
| ● | changes in the number of drilling rigs available; |
| ● | the number of wells we anticipate drilling in the future; |
| ● | estimates, plans and projections relating to acquired properties; |
| ● | our outstanding convertible securities and dilution or negative perceptions associated therewith; |
| ● | the number of potential drilling locations; and |
| ● | our financial position, business strategy and other plans and objectives for future operations. |
We identify forward-looking statements by use of terms such as “ may, ” “ will, ” “ expect, ” “ anticipate, ” “ estimate, ” “ hope, ” “ plan, ” “ believe, ” “ predict, ” “ envision, ” “ intend, ” “ continue, ” “ potential, ” “ should, ” “ confident, ” “ could ” and similar words and expressions, although some forward-looking statements may be expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements. You should consider carefully the statements under the “ Risk Factors ” section of this report and other sections of this report which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements, and the following factors:
| ● | the possibility that our future acquisitions may involve unexpected costs; |
| ● | the volatility in commodity prices for oil and gas; |
| ● | the accuracy of internally estimated proved reserves; |
| ● | the presence or recoverability of estimated oil and gas reserves; |
| ● | the ability to replace oil and gas reserves; | |
| ● | risks inherent in natural gas and oil drilling and production activities, including risks of fire, explosion, blowouts, pipe failure, casing collapse, unusual or unexpected formation pressures, environmental hazards, and other operating and production risks; |
| ● | delays in receipt of drilling permits; |
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| ● | risks relating to the availability of capital to fund drilling operations that can be adversely affected by adverse drilling results, production declines and declines in natural gas and oil prices; | |
| ● | risks relating to unexpected adverse developments in the status of properties; |
| ● | risks relating to the absence or delay in receipt of government approvals or other third party consents; |
| ● | risks relating to governmental regulations regarding hydraulic fracturing and the disposition/disposal of produced water; |
| ● | environmental risks; |
| ● | exploration and development risks; |
| ● | competition; |
| ● | the inability to realize expected value from acquisitions; |
| ● | the availability and cost of alternative fuel sources; |
| ● | our ability to maintain the listing of our common stock on the NYSE American; |
| ● | our limited market capitalization; |
| ● | the ability of our management team to execute its plans to meet its goals; and |
| ● | other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our businesses, operations and pricing. |
Forward-looking statements speak only as of the date of this report or the date of any document incorporated by reference in this report. Except to the extent required by applicable law or regulation, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“ SEC ”). Our SEC filings are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “ Investors, ” “ SEC Filings ” page of our website at www.camber.energy. Information on our website is not part of this report, and we do not desire to incorporate by reference such information herein. 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. 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. In addition, you can access our proxy statements, our Code of Business Conduct and Ethics, Nominating and Corporate Governance Committee Charter, Audit Committee Charter, and Compensation Committee Charter on our website http://www.camber.energy, at “ Investors ” – “ SEC Filings ” – “ All SEC Filings ” and “ Governance ” - “ Policies ”.
General Information
The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the results of operations and financial condition of the Company. Expectations of future financial condition and results of operations are based upon current business plans and may change. The discussion should be read in conjunction with the audited financial statements and notes thereto.
In this report, we may rely on and refer to information regarding our industry which comes 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, and we have not independently verified any of it.
Unless the context requires otherwise, references to the “ Company, ” “ we, ” “ us, ” “ our, ” “ Camber ” and “ Camber Energy, Inc. ” refer specifically to Camber Energy, Inc., and our consolidated subsidiaries, CATI Operating, LLC, a Texas limited liability company, which was wholly-owned (“ CATI ”) until it was divested on November 9, 2017, CEI Operating LLC, a Texas limited liability company, which was wholly-owned until it was divested on November 1, 2017, Camber Permian LLC, a Texas limited liability company, which is wholly-owned, Camber Permian II LLC, a Texas limited liability company, until it was divested on November 9, 2017, CE Operating, LLC, an Oklahoma limited liability company, which is wholly-owned, and C E Energy LLC, a Texas limited liability company which is wholly-owned.
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Certain abbreviations and oil and gas industry terms used throughout this Annual Report are described and defined in greater detail under “ Glossary of Oil and Natural Gas Terms ” on page 10, and readers are encouraged to review that section.
In addition, unless the context otherwise requires and for the purposes of this report only:
| ● | “ Exchange Act ” refers to the Securities Exchange Act of 1934, as amended; |
| ● | “ 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; |
| ● | “ SEC ” or the “ Commission ” refers to the United States Securities and Exchange Commission; |
| ● | “ Boe ” 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; |
| ● | “ Mcf ” refers to a thousand cubic feet of natural gas; |
| ● | “ SEC ” or the “ Commission ” refers to the United States Securities and Exchange Commission; and |
| ● | “ Securities Act ” refers to the Securities Act of 1933, as amended. |
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Camber Energy, Inc., a Nevada corporation, is based in Houston, Texas. We are currently primarily engaged in the acquisition, development and sale of crude oil, natural gas and natural gas liquids from various known productive geological formations, including from the Hunton formation in Lincoln, Logan, Payne and Okfuskee Counties, in central Oklahoma; the Cline shale and upper Wolfberry shale in Glasscock County, Texas; and Hutchinson County, Texas, in connection with our Panhandle acquisition which closed in March 2018 (described below). Incorporated in Nevada in December 2003 under the name Panorama Investments Corp., the Company changed its name to Lucas Energy, Inc., effective June 9, 2006, and effective January 4, 2017, the Company changed its name to Camber Energy, Inc. After the divestiture of our Oklahoma and South Texas properties during fiscal 2018 and 2019, as discussed in further detail below, we initiated discussions with several potential acquisition and merger candidates to diversify our operations. In May 2019, we entered into a non-binding letter of intent (“ LOI ”) to acquire Lineal Star Holdings, LLC. (“ Lineal ”), a specialty construction and oil and gas services enterprise providing services to the energy industry. Whether or not the Lineal transaction closes, the Company intends to pursue additional acquisitions in the energy services industry sector to diversify operations.
The Lineal transaction, which is an all-stock transaction, is subject to customary closing conditions, confirmation of final transaction documents and transaction terms, including confirmation of the structuring of the transaction to be on a tax free basis, and other conditions, including, but not limited to final documents with our Series C Redeemable Convertible Preferred Stock (“ Series C Preferred Stock ”) holder amending the Series C Preferred Stock to alter the conversion rights thereof, and obtaining the requisite NYSE American approval of the transaction terms and agreements, which conditions may not be satisfied in a timely manner, if at all. The transaction contemplates the issuance of a new series of convertible preferred stock which will be convertible into 67-70% of our fully diluted common stock after stockholder approval, as required under the applicable NYSE American rules and requirements. Upon receipt of shareholder approval, it is contemplated that the shareholders of Lineal will have voting control of the Company.
On December 30, 2015, the Company entered into an Asset Purchase Agreement (as amended from time to time, the “ Asset Purchase Agreement ”) to acquire, from twenty-three different entities and individuals (the “ Sellers ”), working interests in producing properties and undeveloped acreage (the “ Acquisition ”), which acquisition transaction was completed on August 25, 2016. The assets acquired include varied interests in two largely contiguous acreage blocks in the liquids-rich Mid-Continent region. In connection with the closing of the acquisition, we assumed approximately $30.6 million of commercial bank debt, issued 520,387 shares of common stock to certain of the Sellers, issued 552,000 shares of Series B Preferred Stock to one of the Sellers and its affiliate, and paid $4,975,000 in cash to certain of the Sellers. The effective date of the Acquisition was April 1, 2016.
On July 12, 2018, the Company entered into an Asset Purchase Agreement (as amended, the “ Sale Agreement ”), as seller, with N&B Energy, LLC (“ N&B Energy ”) as purchaser, which entity is affiliated with Richard N. Azar II, the Company’s former Chief Executive Officer and former director, and Donnie B. Seay, the Company’s former director. Pursuant to the Sale Agreement, which closed September 26, 2018, effective August 1, 2018, the Company sold to N&B Energy a substantial portion of its assets, including all of the assets acquired pursuant to the Acquisition and certain other assets, other than the production payment and overriding royalty interests discussed below (the “ Disposed Assets ”). In consideration for the Disposed Assets, N&B Energy agreed to pay the Company $100 in cash, to assume the Company’s liabilities and contractual obligations in connection with the Disposed Assets (including lease and bonus payments), to assume all of the Company’s obligations and debt owed under its outstanding loan agreement with International Bank of Commerce (“ IBC Bank ”), which had a then outstanding principal balance of approximately $36.9 million. See also a more detailed description of this transaction under “ Recent Events ” - “ N&B Energy Asset Disposition Agreement ” and “ Assumption Agreement ”, below.
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Our website address is http://www.camber.energy. Our fiscal year ends on the last day of March of each year. The information on, or that may be accessed through, our website is not incorporated by reference into this report and should not be considered a part of this report. We refer to the twelve-month periods ended March 31, 2019 and March 31, 2018 as our 2019 Fiscal Year and 2018 Fiscal Year, respectively.
As of March 31, 2019, the Company had leasehold interests (working interests) covering approximately 221 / 3,500 (net / gross) acres, producing from the Cline and Wolfberry formations. The remaining Texas acreage consists of leasehold covering approximately 555 / 638 (net / gross) acres and wellbores located in the Panhandle in Hutchinson County, Texas, which was acquired by the Company in March 2018.
As of March 31, 2019, Camber was producing an average of approximately 40.8 net barrels of oil equivalent per day (“ Boepd ”) from over 36 active well bores. The ratio between the gross and net production varies due to varied working interests and net revenue interests in each well. Our production sales totaled 113,685 Boe, net to our interest, for the year ended March 31, 2019. At March 31, 2019, Camber’s total estimated proved producing reserves were 155,376 Boe of which 120,590 Bbls were crude oil and NGL reserves, and 208,710 Mcf were natural gas reserves.
The Hutchinson County, Texas acquisition in March 2018 included interests in 48 gross non-producing well bores, 5 saltwater disposal wells, and the required infrastructure and equipment necessary to support future hydrocarbon production as well as approximately 555 net leasehold acres in Hutchinson County, Texas. Camber holds an interest in 25 producing wells in Glascock County and 11 in Hutchinson County.
At March 31, 2019, Camber’s total estimated proved reserves were 203,406 Boe, of which 124,520 Bbls were crude oil reserves, 44,100 Bbls were natural gas liquids and 208,710 Mcf were natural gas reserves. Approximately 76% of the Boe was proved producing.
As of March 31, 2019, Camber had no employees, but utilized independent contractors on an as-needed basis.
October 2017 Purchase Agreement
On October 5, 2017, the Company and an accredited institutional investor with whom the Company had previously entered into equity and debt purchase agreements in 2016 (the “ Investor ”) entered into a Stock Purchase Agreement (as amended to date, the “ October 2017 Purchase Agreement ”).
On October 5, 2017, in connection with the entry into the October 2017 Purchase Agreement, the Investor purchased 212 shares of Series C Preferred Stock for $2 million, and thereafter the Investor purchased 106 shares of Series C Preferred Stock for $1 million on November 21, 2017; 105 shares of Series C Preferred Stock for $1 million on December 27, 2017; 105 shares of Series C Preferred Stock for $1 million on January 31, 2018; 105 shares of Series C Preferred Stock for $1 million on February 22, 2018; 105 shares of Series C Preferred Stock for $1 million on March 9, 2018; 105 shares of Series C Preferred Stock for $1 million on April 10, 2018; and 105 shares of Series C Preferred Stock for $1 million on May 22, 2018, each under the October 2017 Purchase Agreement.
On March 2, 2018, the Company and the Investor entered into an amendment to the October 2017 Purchase Agreement (the “ Amendment ”), pursuant to which the Investor (a) waived any and all Trigger Events (as defined in the certificate of designation of the Series C Preferred Stock (the “ Designation ”)) that had occurred prior to March 2, 2018, (b) agreed that all calculations provided for in the Designation would be made as if no such Trigger Event had occurred, and (c) waived any right to receive any additional shares of common stock based upon any such Trigger Event, with respect to all shares of Series C Preferred Stock, other than any which have already been converted.
The Investor also agreed, pursuant to the Amendment, that the conversion rate of conversion premiums pursuant to the Designation would remain 95% of the average of the lowest 5 individual daily volume weighted average prices during the applicable Measuring Period (as defined in the Designation), not to exceed 100% of the lowest sales prices on the last day of the Measuring Period, less $0.05 per share of common stock, unless a triggering event has occurred, and that such $0.05 per share discount would not be adjusted in connection with the Company’s previously reported 1-for-25 reverse stock split affected on March 5, 2018. Notwithstanding the above, in no event will the value of the common stock pursuant to the foregoing be below the par value per share of the common stock ($0.001).
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October 2018 Stock Purchase Agreement
On October 29, 2018, the Company and the Investor entered into a Stock Purchase Agreement (the “ October 2018 Purchase Agreement ”), whereby the Investor purchased 369 shares of Series C Preferred Stock for $3.5 million. The Series C Preferred Stock sold pursuant to the October 2018 Purchase Agreement have substantially similar terms as those sold pursuant to the October 2017 Purchase Agreement.
November 2018 Stock Purchase Agreement
On November 23, 2018 and effective November 23, 2018, the Company and the Investor entered into a Stock Purchase Agreement (the “ November 2018 Purchase Agreement ”). The Series C Preferred Stock sold pursuant to the November 2018 Purchase Agreement have substantially similar terms as those sold pursuant to the October 2017 Purchase Agreement.
Under the terms of the November 2018 Purchase Agreement, the Investor agreed to purchase up to 2,941 shares of Series C Preferred Stock (the “ Maximum Shares ”) from the Company for an aggregate of $28 million, including agreeing to purchase 106 shares of Series C Preferred Stock within two business days of the satisfaction of the Closing Conditions (defined below), in consideration for $1 million (the “ Initial Closing ”), and additional shares of Series C Preferred Stock, in such amount(s) requested by the Company, from time to time, up to the remaining amount of Series C Preferred Stock available to be sold under the November 2018 Purchase Agreement, until the Maximum Shares are sold, subject in each case to the Closing Conditions.
Closing conditions required to be met in order to require the Investor to purchase the Series C Preferred Stock shares described above at each of the closings include, among other things, that (a) the Company’s common stock is required to be listed for and currently trading on the NYSE American market or a higher trading market; (b) except for the Initial Closing, the Company is required to be in compliance with all requirements to maintain such listing and there cannot be any notice of any suspension or delisting with respect to the trading of the shares of common stock on such trading market; (c) the Company is required to have duly authorized shares of common stock reserved for issuance to Investor in an amount equal to three times the number of shares sufficient to immediately issue all shares of common stock potentially issuable upon conversion of the Series C Preferred Stock sold to Investor (collectively, the “ Conversion Shares ”) and any other agreements with Investor; (d) except with regard to the Initial Closing, (i) an aggregate dollar trading volume of at least $10 million must have traded on NYSE American during regular trading hours, from the trading day after the immediately prior closing until the trading day immediately before the relevant closing, but expressly excluding all volume traded on any days that the Investor is prevented or delayed from reselling shares of common stock (“ Excluded Days ”), for each $1 million of Series C Preferred Stock shares which are sold at any closing after the Initial Closing; and (ii) the Company’s common stock is required to have a volume weighted average price on the NYSE American for the prior trading day of at least $0.10 per share of common stock (the “ Floor Price ”), (e) except with regard to the Initial Closing, the additional listing of all of the Conversion Shares must be approved by the NYSE American; and (f) except with regard to the Initial Closing, the Company must have provided written notice to the Investor of its intent to move forward with the applicable closing at least 10 days prior to the applicable closing date, provided that if any such conditions are not met on the date initially set for such closing, each closing will occur as soon thereafter as they are met, if ever (collectively, the “ Closing Conditions ”). The closing of the sales of Series C Preferred Stock as described above are subject to closing conditions which may not be met timely, if at all, and as such, we may not ever sell any shares of Series C Preferred Stock under the November 2018 Purchase Agreement. In the event a Trigger Event (as defined in the Designation (defined below) occurs, the Investor can terminate its obligation to acquire any additional shares of Series C Preferred Stock under the November 2018 Agreement, and the Company may terminate the Company’s right to sell shares of Series C Preferred Stock at any time.
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On December 3, 2018, the Company entered into a First Amendment to Stock Purchase Agreement with the Investor (the “ First Amendment ”), pursuant to which the parties agreed to (a) amend the Initial Closing to be for a total of $2.5 million and 263 shares of Series C Preferred Stock, and (b) change the terms of the November 2018 Purchase Agreement to require that, notwithstanding the other closing conditions set forth in the November 2018 Purchase Agreement, for each sale of $800,000 of Series C Preferred Stock, in additional closings after the Initial Closing, that an aggregate dollar trading volume of at least $10 million must have traded on NYSE American during regular trading hours, from the trading day after the immediately prior closing until the trading day immediately before the relevant closing, but expressly excluding all volume traded on any days that the Investor is prevented or delayed from reselling shares of common stock.
On December 4, 2018, upon the satisfaction of the applicable closing conditions, the Investor acquired 263 shares of Series C Preferred Stock for a total of $2.5 million.
Consulting Agreements
On November 15, 2018, the Company entered into a consulting agreement with Regal Consulting, an investor relations firm, pursuant to which the firm agreed to provide the Company investor relations and consulting services, for a period of six months, in consideration for $28,000 and 8,000 restricted shares of the Company’s common stock, per month. In January 2019, the Company issued 16,000 shares of restricted common stock to Regal Consulting for the months of November and December 2018, which shares were issued during the year ended March 31, 2019. On February 13, 2019, and effective on January 31, 2019, the Company entered into a First Amendment to the Consulting Agreement previously entered into with Regal Consulting. Pursuant to the First Amendment, the parties agreed to expand the investor relations services required to be provided by Regal Consulting under the agreement in consideration for $50,000 per month and 50,000 restricted shares of common stock per month (the “ Regal Shares ”)(which are fully-earned upon issuance) during the term of the agreement, and agreed to extend the term of the agreement until October 1, 2019 (unless the Company completes an acquisition or combination prior to such date). A total of 150,000 of the Regal Shares have been issued as of the date of this filing for shares due for services between January and March 2019, and 300,000 shares remain to be issued pursuant to the terms of the agreement. As of March 31, 2019, the 104,000 shares had not been issued and a total of $41,800 had been accrued in common stock payable as of March 31, 2019. The shares were issued in May 2019.
On February 13, 2019, the Company entered into a letter agreement with SylvaCap Media (“ SylvaCap ”), pursuant to which SylvaCap agreed to act as the Company’s non-exclusive digital marketing service provider. Pursuant to the terms of the agreement, SylvaCap agreed to provide us public awareness and content creation services in consideration for an aggregate of 600,000 shares of restricted common stock (the “ SylvaCap Shares ”), which are fully-earned upon their issuance, and $50,000 per month during the term of the agreement, which ends on November 12, 2019 (unless the Company completes an acquisition or combination prior to such date) or upon termination by either party for cause. We also agreed to provide SylvaCap piggy-back registration rights in connection with the SylvaCap Shares and to pay SylvaCap $6,250 every three months as an expense reimbursement. The total value of the restricted shares of common stock due of $261,540 has been accrued in common stock payable as of March 31, 2019. The SylvaCap shares were issued in May 2019.
N&B Energy Asset Disposition Agreement
On July 12, 2018, the Company entered into an Asset Purchase Agreement (as amended from time to time, the “ Sale Agreement ”), as seller, with N&B Energy as purchaser, which entity is affiliated with Richard N. Azar II, the Company’s former Chief Executive Officer and former director, and Donnie B. Seay, the Company’s former director. Pursuant to the Sale Agreement, the Company agreed to sell to N&B Energy a substantial portion of its assets, including all of the assets acquired pursuant to the terms of the December 31, 2015 Asset Purchase Agreement and certain other more recent acquisitions, other than the production payment and overriding royalty interests discussed below (the “ Disposed Assets ”). In consideration for the Disposed Assets, N&B Energy agreed to pay the Company $100 in cash, to assume the Company’s liabilities and contractual obligations in connection with the Disposed Assets (including lease and bonus payments), to assume all of the Company’s obligations and debt owed under its outstanding loan agreement with IBC Bank, which had a then outstanding principal balance of approximately $36.9 million and the other parties agreed to enter into the a settlement agreement of certain pending claims, described in greater detail under “ Item 13. Certain Relationships and Related Transactions, and Director Independence ” – “ Related Party Transactions ” - “ Segundo Settlement ”.
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Assumption Agreement
On September 26, 2018, the Company entered into an Assumption Agreement (the “ Assumption Agreement ”) with IBC Bank; CE Operating, LLC, the Company’s wholly-owned subsidiary (“ CE Operating ”), which became a party to the Sale Agreement pursuant to the second amendment thereto; N&B Energy, which entity is affiliated with Richard N. Azar, II, the Company’s former Chief Executive Officer and former director (“ Azar ”), and Donnie B. Seay, the Company’s former director (“ Seay ”); Azar; RAD2 Minerals, Ltd., an entity owned and controlled by Azar (“ RAD2 ”); Seay; and DBS Investments, Ltd., an entity owned and controlled by Seay. Azar, Seay, RAD2, and DBS are collectively referred to as the “ Guarantors ”.
Pursuant to the Assumption Agreement, N&B Energy agreed to assume all of the Company’s liabilities and obligations owed to IBC Bank and IBC Bank approved the transactions contemplated by the Sale Agreement and the assumption by N&B Energy of all of the amounts and liabilities which the Company owed to IBC Bank (the “ IBC Obligations ”). Finally, pursuant to the Assumption Agreement, IBC Bank released and forever discharged the Company and CE Operating and each of their current and former officers, directors, and stockholders, from all covenants, agreements, obligations, claims and demands of any kind, whether in law or at equity, which IBC Bank then had, arising out of or related to the amounts which the Company owed to IBC Bank under the promissory note evidencing amounts owed to IBC Bank (the “ Note ”), Loan Agreement with IBC Bank or mortgages and/or under such documents or agreements, and further agreed to release the lien which IBC Bank then held on certain of the Company’s properties located in west Texas.
N&B Energy Sale Agreement Closing
On September 26, 2018, the transactions contemplated by the Sale Agreement closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid the Company $100 in cash, and the Company transferred ownership of the Disposed Assets to N&B Energy.
Notwithstanding the sale of the Disposed Assets, the Company retained its assets in Glasscock County and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received – of which none has been received as of the filing date); a 3% overriding royalty interest in its existing Okfuskee County, Oklahoma asset; and retained an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignment of Overriding Royalty Interests.
The effective date of the Sale Agreement is August 1, 2018. The Disposed Assets were assigned “ as is ” with all faults.
1-for 25 Reverse Stock Splits of Outstanding Common Stock
On March 1, 2018, we filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to effect a 1-for-25 reverse stock split of all outstanding common stock shares of the Company (the “ Amendment ”). The reverse stock split was effective on March 5, 2018. The effect of the reverse stock split was to combine each 25 shares of outstanding common stock into one new share, with no change in authorized shares or par value per share, and to reduce the number of common stock shares outstanding from approximately 103.5 million shares to approximately 4.1 million shares (prior to rounding). Proportional adjustments were made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants and stock options, and to the number of shares issued and issuable under the Company’s stock incentive plans. The reverse stock split did not affect any stockholder’s ownership percentage of the Company’s common stock, except to the limited extent that the reverse stock split resulted in any stockholder owning a fractional share. Fractional shares of common stock were rounded up to the nearest whole share based on each holder’s aggregate ownership of the Company. The effect of the reverse stock split has been retroactively reflected throughout this report.
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On December 20, 2018, the Company filed a Certificate of Change with the Secretary of State of Nevada to effect a 1-for-25 reverse stock split of the Company’s (a) authorized shares of common stock (from 500,000,000 shares to 20,000,000 shares); and (b) issued and outstanding shares of common stock. The reverse stock split was effective on December 24, 2018. The effect of the reverse stock split was to combine each 25 shares of outstanding common stock into one new share, with a proportionate 1-for-25 reduction in the Company’s authorized shares of common stock, but no change in the par value per share of the common stock. Proportional adjustments were made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock (subject to the terms thereof), warrants and stock options, and to the number of shares issued and issuable under the Company’s stock incentive plans. Fractional shares of common stock were rounded up to the nearest whole share based on each holder’s aggregate ownership of the Company. All issued and outstanding shares of common stock, conversion terms of preferred stock (subject to the terms thereof), options and warrants to purchase common stock and per share amounts contained in the financial statements, have been retroactively adjusted to reflect the reverse split for all periods presented.
Increase in Authorized Shares of Common Stock
Effective on April 10, 2019, we filed, with the Secretary of State of Nevada, a Certificate of Amendment to the Company’s Articles of Incorporation to increase the number of the Company’s authorized shares of common stock, $0.001 per value per share, from 20,000,000 shares to 250,000,000 shares.
Series B Redeemable Convertible Preferred Stock Conversion
On May 15, 2019, the Company entered into an Agreed Conversion Agreement (the “ Conversion Agreement ”) with the then holder of all 44,000 shares of the Company’s then outstanding Series B Redeemable Convertible Preferred Stock (the “ Series B Preferred Stock ”). Pursuant to the Conversion Agreement, all of the Series B Preferred Stock was agreed to be converted into 503 shares of the Company’s common stock pursuant to the stated terms of such Series B Preferred Stock, in consideration for $25,000 in cash. The holder also provided us a release in connection with certain of his rights under the Series B Preferred Stock (including any and all accrued and unpaid dividends) and certain other matters.
As a result of the Conversion Agreement, the Company has no shares of Series B Preferred Stock issued or outstanding, and an aggregate of $1,100,000 of the liquidation preference of the Series B Preferred Stock was terminated and released.
Camber Energy’s operations are all crude oil and natural gas exploration and production related.
Operations and Oil and Gas Properties
We have operated and invested in areas that are known to be productive, with a reasonably established production history, in order to decrease geological and exploratory risk. With the closing of the Acquisition in October 2016, the Company acquired over 13,000 net acres in producing fields located primarily in the Mid-Continent region of Oklahoma including Payne, Lincoln and Logan Counties, along with a small amount of interest in production located in Glasscock County, Texas. The Mid-Continent assets produce from a liquids-rich, gas reservoir known as the Hunton formation. These properties include interests in four different fields, of which one was operated by Camber and the other three are non-operated.
Our Glasscock County, Texas properties produced oil and gas primarily from the Wolfberry, Cline and Fusselman formations and are all non-operated.
In January 2018, the Company acquired approximately 3,000 leasehold acres in Okfuskee County, Oklahoma which includes eight currently producing wells and three salt water disposal wells (as described above).
In March 2018, the Company acquired an interest in 48 gross non-producing well bores, five salt water disposal wells and approximately 555 net leasehold acres in Hutchinson County, Texas (as described above).
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On September 26, 2018, the transactions contemplated by the Sale Agreement (described above) closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid the Company $100 in cash, and the Company transferred ownership of the Disposed Assets (defined above, constituting a substantial portion of its assets) to N&B Energy. Notwithstanding the sale of the Disposed Assets, which included approximately 18,000 net acres, the Company retained its assets in Glasscock County and Hutchinson Counties, Texas, and also retained a 12.5% production payment (effective until a total of $2.5 million has been received – of which none has been received as of the filing date); a 3% overriding royalty interest in its existing Okfuskee County, Oklahoma asset; and retained an overriding royalty interest on certain other undeveloped leasehold interests.
The Company intends to pursue additional acquisition opportunities in the energy services sector whether the Lineal transaction (discussed above) closes or not, as the primary focus of its growth strategy.
As of the date of this filing, we operate exclusively in the onshore United States oil and natural gas industry. Our crude oil and natural gas production sales are to gatherers and marketers with national reputations. Our sales are made on a month-to-month basis, and title transfer occurs when the oil is loaded onto the purchaser’s truck. Crude oil prices realized from production sales are indexed to published posted refinery prices, and to published crude indexes with adjustments on a contract basis.
We generally sell a significant portion of our oil and gas production to a relatively small number of customers. For the year ended March 31, 2019, our consolidated revenues were from the sale of oil, gas and natural gas liquids under marketing contracts primarily with Superior Pipeline Company, Scissortail Energy, LLC and Apache Corporation. We are not dependent upon any one purchaser and have alternative purchasers available at competitive market prices if there is disruption in services or other events that cause us to search for other ways to sell our production.
During the year ended March 31, 2019, three customers accounted for 84% of our total revenues and during the year ended March 31, 2018, two customers accounted for 72% of our total revenues. We do not believe the loss of any customer will have a material effect on the Company because alternative customers are readily available.
We are in direct competition for properties with numerous oil and natural gas companies and partnerships exploring various areas of Texas, Oklahoma and elsewhere. Many competitors are large, well-known oil and natural gas and/or energy companies, although no single entity dominates the industry. Many of our competitors possess greater financial and personnel resources, enabling them to identify and acquire more economically desirable energy producing properties and drilling prospects than us. Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry.
Our operations are subject to various types of regulation at the federal, state and local levels. These regulations include requiring permits for the drilling of wells; maintaining hazard prevention, health and safety plans; submitting notification and receiving permits related to the presence, use and release of certain materials incidental to oil and natural gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface plugging and abandonment of wells and the transporting of production. Our operations are also subject to various conservation matters, including the number of wells which may be drilled in a unit and the unitization or pooling of oil and natural gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally limiting the venting or flaring of natural gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to possibly limit the amounts of oil and natural gas we can produce from our wells and to limit the number of wells or the locations at which we can drill.
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In the United States, legislation affecting the oil and natural gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies issue recommended new and extensive rules and regulations binding on the oil and natural gas industry, some of which carry substantial penalties for failure to comply. These laws and regulations have a significant impact on oil and natural gas drilling, natural gas processing plants and production activities, increasing the cost of doing business and, consequently, affect profitability. Insomuch as new legislation affecting the oil and natural gas industry is common-place and existing laws and regulations are frequently amended or reinterpreted, we may be unable to predict the future cost or impact of complying with these laws and regulations. We consider the cost of environmental protection a necessary and manageable part of our business. We have historically been able to plan for and comply with new environmental initiatives without materially altering our operating strategies.
We maintain insurance coverage which we believe is reasonable per the standards of the oil and natural gas industry. It is common for companies in these industries to not insure fully against all risks associated with their operations either because such insurance is unavailable or because premium costs are considered prohibitive. A material loss not fully covered by insurance could have an adverse effect on our financial position, results of operations or cash flows. We maintain insurance at industry customary levels to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of certain prohibited substances into the environment. Such insurance might not cover the complete amount of such a claim and would not cover fines or penalties for a violation of an environmental law.
Environmental . Our exploration, development, and production of oil and natural gas, including our operation of saltwater injection and disposal wells, are subject to various federal, state and local environmental laws and regulations. Such laws and regulations can increase the costs of planning, designing, installing and operating oil, natural gas, and disposal wells. Our domestic activities are subject to a variety of environmental laws and regulations, including but not limited to, the Oil Pollution Act of 1990 (“ OPA ”), the Clean Water Act (“ CWA ”), the Comprehensive Environmental Response, Compensation and Liability Act (“ CERCLA ”), the Resource Conservation and Recovery Act (“ RCRA ”), the Clean Air Act (“ CAA ”), and the Safe Drinking Water Act (“ SDWA ”), as well as state regulations promulgated under comparable state statutes. We are also subject to regulations governing the handling, transportation, storage, and disposal of naturally occurring radioactive materials that are found in our oil and gas operations. Civil and criminal fines and penalties may be imposed for non-compliance with these environmental laws and regulations. Additionally, these laws and regulations require the acquisition of permits or other governmental authorizations before undertaking certain activities, limit or prohibit other activities because of protected areas or species, and impose substantial liabilities for cleanup of pollution.
Under the OPA, a release of oil into water or other areas designated by the statute could result in us being held responsible for the costs of remediating such a release, certain OPA specified damages, and natural resource damages. The extent of that liability could be extensive, as set forth in the statute, depending on the nature of the release. A release of oil in harmful quantities or other materials into water or other specified areas could also result in us being held responsible under the CWA for the costs of remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as “ Superfund ” laws, can impose joint and several and retroactive liability, without regard to fault or the legality of the original conduct, on certain classes of persons for the release of a “ hazardous substance ” into the environment. In practice, cleanup costs are usually allocated among various responsible parties. Potentially liable parties include site owners or operators, past owners or operators under certain conditions, and entities that arrange for the disposal or treatment of, or transport hazardous substances found at the site. Although CERCLA, as amended, currently exempts petroleum, including but not limited to, crude oil, natural gas and natural gas liquids, from the definition of hazardous substance, our operations may involve the use or handling of other materials that may be classified as hazardous substances under CERCLA. Furthermore, the exemption may not be preserved in future amendments of the act, if any.
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RCRA and comparable state and local requirements impose standards for the management, including treatment, storage, and disposal, of both hazardous and non-hazardous solid wastes. We generate hazardous and non-hazardous solid waste in connection with our routine operations. From time to time, proposals have been made that would reclassify certain oil and natural gas wastes, including wastes generated during drilling and production operations, as “ hazardous wastes ” under RCRA, which would make such solid wastes subject to much more stringent handling, transportation, storage, disposal, and clean-up requirements. This development could have a significant impact on our operating costs. While state laws vary on this issue, state initiatives to further regulate oil and natural gas wastes could have a similar impact. Because oil and natural gas exploration and production, and possibly other activities, have been conducted at some of our properties by previous owners and operators, materials from these operations remain on some of the properties and in some instances, require remediation. In addition, in certain instances, we have agreed to indemnify sellers of producing properties from which we have acquired reserves against certain liabilities for environmental claims associated with such properties. While we do not believe that costs to be incurred by us for compliance and remediating previously or currently owned or operated properties will be material, there can be no guarantee that such costs will not result in material expenditures.
Additionally, in the course of our routine oil and natural gas operations, surface spills and leaks, including casing leaks, of oil or other materials occur, and we incur costs for waste handling and environmental compliance. Moreover, we are able to control directly the operations of only those wells for which we act as the operator. Management believes that we are in substantial compliance with applicable environmental laws and regulations.
In response to liabilities associated with these activities, accruals are established when reasonable estimates are possible. Such accruals would primarily include estimated costs associated with remediation. We have used discounting to present value in determining our accrued liabilities for environmental remediation or well closure, but no material claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in our financial statements. We adjust the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.
We do not anticipate being required in the near future to expend amounts that are material in relation to our total capital expenditures program by reason of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, we are unable to predict the ultimate cost of compliance. More stringent laws and regulations protecting the environment may be adopted in the future and we may incur material expenses in connection with environmental laws and regulations in the future.
Occupational Health and Safety. We are also subject to laws and regulations concerning occupational safety and health. Due to the continued changes in these laws and regulations, and the judicial construction of many of them, we are unable to predict with any reasonable degree of certainty our future costs of complying with these laws and regulations. We consider the cost of safety and health compliance a necessary and manageable part of our business. We have been able to plan for and comply with new initiatives without materially altering our operating strategies.
Hydraulic Fracturing. Vast quantities of natural gas, natural gas liquids and oil deposits exist in deep shale and other unconventional formations. It is customary in our industry to recover these resources through the use of hydraulic fracturing, combined with horizontal drilling. Hydraulic fracturing is the process of creating or expanding cracks, or fractures, in deep underground formations using water, sand and other additives pumped under high pressure into the formation. As with the rest of the industry, we use hydraulic fracturing as a means to increase the productivity of almost every well that we drill and complete. These formations are generally geologically separated and isolated from fresh ground water supplies by thousands of feet of impermeable rock layers. We follow applicable legal requirements for groundwater protection in our operations that are subject to supervision by state and federal regulators (including the Bureau of Land Management (“ BLM ”) on federal acreage). Furthermore, our well construction practices require the installation of multiple layers of protective steel casing surrounded by cement that are specifically designed and installed to protect freshwater aquifers by preventing the migration of fracturing fluids into aquifers.
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Injection rates and pressures are required to be monitored in real time at the surface during our hydraulic fracturing operations. Pressure is required to be monitored on both the injection string and the immediate annulus to the injection string. Hydraulic fracturing operations are required to be shut down if an abrupt change occurs to the injection pressure or annular pressure. These aspects of hydraulic fracturing operations are designed to prevent a pathway for the fracturing fluid to contact any aquifers during the hydraulic fracturing operations.
Hydraulic fracture stimulation requires the use of water. We use fresh water or recycled produced water in our fracturing treatments in accordance with applicable water management plans and laws. Several proposals have previously been presented to the U.S. Congress that, if implemented, would either prohibit or restrict the practice of hydraulic fracturing or subject the process to regulation under the Safe Drinking Water Act. Several states have previously considered, or are currently considering, legislation to regulate hydraulic fracturing practices that could impose more stringent permitting, transparency, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether. Hydraulic fracturing of wells and subsurface water disposal are also under public and governmental scrutiny due to potential environmental and physical impacts, including possible contamination of groundwater and drinking water and possible links to earthquakes. In addition, some municipalities have significantly limited or prohibited drilling activities and/or hydraulic fracturing, or are considering doing so.
Restrictions on hydraulic fracturing could make it prohibitive to conduct our operations, and also reduce the amount of oil, natural gas liquids and natural gas that we are ultimately able to produce in commercial quantities from our properties.
The Endangered Species Act. The Endangered Species Act (“ ESA ”) restricts activities that may affect areas that contain endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in substantial compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity could materially limit or delay our plans.
Global Warming and Climate Change. Various state governments and regional organizations are considering enacting new legislation and promulgating new regulations governing or restricting the emission of greenhouse gases from stationary sources such as our equipment and operations. Legislative and regulatory proposals for restricting greenhouse gas emissions or otherwise addressing climate change could require us to incur additional operating costs and could adversely affect demand for the natural gas and oil that we sell. The potential increase in our operating costs could include new or increased costs to obtain permits, operate and maintain our equipment and facilities, install new emission controls on our equipment and facilities, acquire allowances to authorize our greenhouse gas emissions, pay taxes related to our greenhouse gas emissions and administer and manage a greenhouse gas emissions program.
Taxation. Our operations, as is the case in the petroleum industry generally, are significantly affected by federal tax laws. Federal, as well as state, tax laws have many provisions applicable to corporations which could affect our future tax liabilities.
Commitments and Contingencies. We are liable for future restoration and abandonment costs associated with our oil and gas properties. These costs include future site restoration, post closure and other environmental exit costs. The costs of future restoration and well abandonment have not been determined in detail. State regulations require operators to post bonds that assure that well sites will be properly plugged and abandoned. We currently operate only in Texas, which requires a security bond based on the number of wells we operate. Management views this as a necessary requirement for operations and does not believe that these costs will have a material adverse effect on our financial position as a result of this requirement.
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following is a description of the meanings of some of the oil and natural gas terms used in this Annual Report.
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AFE or Authorization for Expenditures . A document that lays out proposed expenses for a particular project and authorizes an individual or group to spend a certain amount of money for that project.
Bbl . One stock tank barrel, or 42 U.S. gallons liquid volume, used in this Annual Report in reference to crude oil or other liquid hydrocarbons.
Bcf . An abbreviation for billion cubic feet. Unit used to measure large quantities of gas, approximately equal to 1 trillion Btu.
Boe . 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.
Boepd . Barrels of oil equivalent per day.
Bopd . Barrels of oil per day.
Btu or British thermal unit . The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Completion . The operations required to establish production of oil or natural gas from a wellbore, usually involving perforations, stimulation and/or installation of permanent equipment in the well or, in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Condensate . Liquid hydrocarbons associated with the production of a primarily natural gas reserve.
Conventional resources . Natural gas or oil that is produced by a well drilled into a geologic formation in which the reservoir and fluid characteristics permit the natural gas or oil to readily flow to the wellbore.
Developed acreage . The number of acres that are allocated or assignable to productive wells.
Development well . A well drilled into a proved oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Estimated ultimate recovery or EUR . Estimated ultimate recovery is the sum of reserves remaining as of a given date and cumulative production as of that date.
Exploratory well . A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.
Farmin or farmout . An agreement under which the owner of a working interest in an oil or natural gas lease assigns the working interest or a portion of the working interest to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a “ farmin ” while the interest transferred by the assignor is a “ farmout. ”
FERC . Federal Energy Regulatory Commission.
Field . An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Gross acres or gross wells . The total acres or wells in which a working interest is owned.
Henry Hub . A natural gas pipeline located in Erath, Louisiana that serves as the official delivery location for futures contracts on the NYMEX. The settlement prices at the Henry Hub are used as benchmarks for the entire North American natural gas market.
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Held by production . An oil and natural gas property under lease in which the lease continues to be in force after the primary term of the lease in accordance with its terms as a result of production from the property.
Horizontal drilling or well . A drilling operation in which a portion of the well is drilled horizontally within a productive or potentially productive formation. This operation typically yields a horizontal well that has the ability to produce higher volumes than a vertical well drilled in the same formation. A horizontal well is designed to replace multiple vertical wells, resulting in lower capital expenditures for draining like acreage and limiting surface disruption.
Liquids . Liquids, or natural gas liquids, are marketable liquid products including ethane, propane, butane and pentane resulting from the further processing of liquefiable hydrocarbons separated from raw natural gas by a natural gas processing facility.
LOE or Lease operating expenses . The costs of maintaining and operating property and equipment on a producing oil and gas lease.
MBbl . One thousand barrels of crude oil or other liquid hydrocarbons.
MMBbl/d . One thousand barrels of crude oil or other liquid hydrocarbons per day.
Mcf . One thousand cubic feet of natural gas.
Mcfgpd . Thousands of cubic feet of natural gas per day.
MMcf . One million cubic feet of natural gas.
MMBtu . One million British thermal units.
Net acres or net wells . The sum of the fractional working interest owned in gross acres or wells.
Net revenue interest . The interest that defines the percentage of revenue that an owner of a well receives from the sale of oil, natural gas and/or natural gas liquids that are produced from the well.
NGL . Natural gas liquids.
NYMEX . New York Mercantile Exchange.
Permeability . A reference to the ability of oil and/or natural gas to flow through a reservoir.
Petrophysical analysis . The interpretation of well log measurements, obtained from a string of electronic tools inserted into the borehole, and from core measurements, in which rock samples are retrieved from the subsurface, then combining these measurements with other relevant geological and geophysical information to describe the reservoir rock properties.
Play . A set of known or postulated oil and/or natural gas accumulations sharing similar geologic, geographic and temporal properties, such as source rock, migration pathways, timing, trapping mechanism and hydrocarbon type.
Possible reserves . Additional reserves that are less certain to be recognized than probable reserves.
Probable reserves . Additional reserves that are less certain to be recognized than proved reserves but which, in sum with proved reserves, are as likely as not to be recovered.
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Producing well, production well or productive well . A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the well’s production exceed production-related expenses and taxes.
Properties . Natural gas and oil wells, production and related equipment and facilities and natural gas, oil or other mineral fee, leasehold and related interests.
Prospect . A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is considered to have potential for the discovery of commercial hydrocarbons.
Proved developed reserves . Proved reserves that can be expected to be recovered through existing wells and facilities and by existing operating methods.
Proved reserves . Reserves of oil and natural gas that have been proved to a high degree of certainty by analysis of the producing history of a reservoir and/or by volumetric analysis of adequate geological and engineering data.
Proved undeveloped reserves or PUDs . Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Repeatability . The potential ability to drill multiple wells within a prospect or trend.
Reservoir . A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Royalty interest . An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
2-D seismic . The method by which a cross-section of the earth’s subsurface is created through the interpretation of reflecting seismic data collected along a single source profile.
3-D seismic . The method by which a three-dimensional image of the earth’s subsurface is created through the interpretation of reflection seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do 2-D seismic surveys and contribute significantly to field appraisal, exploitation and production.
Trend . A region of oil and/or natural gas production, the geographic limits of which have not been fully defined, having geological characteristics that have been ascertained through supporting geological, geophysical or other data to contain the potential for oil and/or natural gas reserves in a particular formation or series of formations.
Unconventional resource play . A set of known or postulated oil and or natural gas resources or reserves warranting further exploration which are extracted from (a) low-permeability sandstone and shale formations and (b) coalbed methane. These plays require the application of advanced technology to extract the oil and natural gas resources.
Undeveloped acreage . Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether such acreage contains proved reserves. Undeveloped acreage is usually considered to be all acreage that is not allocated or assignable to productive wells.
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Unproved and unevaluated properties . Refers to properties where no drilling or other actions have been undertaken that permit such property to be classified as proved.
Vertical well . A hole drilled vertically into the earth from which oil, natural gas or water flows are pumped.
Volumetric reserve analysis . A technique used to estimate the amount of recoverable oil and natural gas. It involves calculating the volume of reservoir rock and adjusting that volume for the rock porosity, hydrocarbon saturation, formation volume factor and recovery factor.
Wellbore . The hole made by a well.
WTI or West Texas Intermediate . A grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
Working interest . The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production.
Our business and operations are subject to many risks. The risks described below may not be the only risks we face, as our business and operations may also be subject to risks that we do not yet know of, or that we currently believe are immaterial. If any of the events or circumstances described below actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected and the trading price of our common stock could decline. The following risk factors should be read in conjunction with the other information contained herein, including the financial statements and the related notes. Please read “ Cautionary Note Regarding Forward-Looking Statements ” in this filing, where we describe additional uncertainties associated with our business and the forward-looking statements included or incorporated by reference in this filing.
Our securities should only be purchased by persons who can afford to lose their entire investment in us. You should carefully consider the following risk factors and other information in this filing before deciding to become a holder of our securities. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent.
Risks Relating to our Planned Lineal Acquisition
In the event the Lineal transaction closes, it will cause substantial dilution to existing stockholders and a change of control of the Company.
As described above, in May 2019, we entered into a non-binding letter of intent (“ LOI ”) to acquire Lineal, a specialty construction and oil and gas services enterprise providing services to the energy industry. The transaction contemplates the issuance of new series of convertible preferred stock which will be convertible into 67-70% of our fully diluted common stock after stockholder approval, as required under the applicable NYSE American rules and requirements. Upon receipt of shareholder approval, it is contemplated that the shareholders of Lineal will have voting control of the Company. As such, in the event the contemplated transaction closes, the issuance of the common stock consideration to Lineal’s owners will result in substantial dilution to the interests of our then stockholders and result in a change of control of the Company.
Failure to complete the Lineal transaction could negatively impact our stock price and future business and financial results.
If the Lineal transaction is not completed, our ongoing business may be adversely affected and we would be subject to a number of risks, including the following:
| ● | we will not realize the benefits expected from the Lineal transaction, including a potentially enhanced competitive and financial position, expansion of assets and operations and therefore opportunities, and will instead be subject to all the risks we currently face as an independent company; |
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| ● | we may experience negative reactions from the financial markets and our partners and employees; and |
| ● | matters relating to the Lineal transaction (including negotiation of definitive documents and integration planning) may require substantial commitments of time and resources by our management, which would otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company. |
Termination of the Lineal transaction could negatively impact the Company.
In the event the Lineal transaction is terminated, our business may have been adversely impacted by our failure to pursue other beneficial opportunities due to the focus of management on the Lineal transaction, and the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Lineal transaction will be completed. If the Lineal transaction is terminated and our board of directors seeks another transaction or business combination, our stockholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration provided for by the Lineal transaction.
We will be subject to business uncertainties and contractual restrictions while the Lineal transaction is pending.
Uncertainty about the effect of the Lineal transaction on employees and partners may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Lineal transaction is completed, and could cause partners and others that deal with us to seek to change existing business relationships, cease doing business with us or cause potential new partners to delay doing business with us until the Lineal transaction has been successfully completed. Retention of certain employees may be challenging during the pendency of the Lineal transaction, as certain employees may experience uncertainty about their future roles or compensation structure. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, our business following the Lineal transaction could be negatively impacted.
Completion of the Lineal transaction is subject to a number of conditions and if these conditions are not satisfied or waived, the Lineal transaction will not be completed.
The Lineal transaction is subject to closing conditions, including confirmation of final transaction documents and transaction terms, including confirmation of structuring the transaction to be on a tax free basis, and other conditions, including, but not limited to final documents with our Series C Preferred Stock holder amending the Series C Preferred Stock to alter the conversion rights thereof, and obtaining the requisite NYSE American approval of the transaction terms and agreements, which conditions may not be satisfied in a timely manner, if at all. Failure to fulfill any of such closing conditions could prevent us from completing the Lineal transaction and have a material adverse effect on the Company.
If the benefits of the Lineal transaction do not meet the expectations of the marketplace, or financial or industry analysts, the market price of our common stock may decline.
The market price of our common stock may decline as a result of the Lineal transaction, if we do not otherwise achieve the perceived benefits of the Lineal transaction as rapidly as, or to the extent, anticipated by the marketplace, or financial or industry analysts. Accordingly, investors may experience a loss as a result of a decreasing stock price and we may not be able to raise future capital, if necessary, in the equity markets.
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Risks Relating to Our Oil and Gas Operations and Industry
We are subject to production declines and loss of revenue due to shut-in wells.
The majority of our oil and gas production revenues come from a small number of producing wells. In the event those wells are required to be shut-in (as they were for various periods in the past), our production and revenue could be adversely affected. Our wells are shut-in from time-to-time for maintenance, workovers, upgrades and other matters outside of our control, including repairs, adverse weather (including hurricanes, flooding and tropical storms), inability to dispose of produced water or other regulatory and market conditions. Any significant period where our wells, and especially our top producing wells, are shut-in, would have a material adverse effect on our results of production, oil and gas revenues and net income or loss for the applicable period.
Many of our leases are in areas that have been partially depleted or drained by offset wells.
Many of our leases are in areas that have been partially depleted or drained by offset drilling. Interference from offset drilling may inhibit our ability to find or recover commercial quantities of oil and/or may result in an acceleration in the decline in production of our wells, which may in turn have an adverse effect on our recovered barrels of oil and consequently our results of operations.
Crude oil and natural gas prices are highly volatile in general and low prices will negatively affect our financial results.
Our oil and gas revenues, operating results, profitability, cash flow, future rate of growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our oil and natural gas properties, are substantially dependent upon prevailing prices of crude oil and natural gas. Lower crude oil and natural gas prices also may reduce the amount of crude oil and natural gas that we can produce economically. Historically, the markets for crude oil and natural gas have been very volatile, and such markets are likely to continue to be volatile in the future. Prices for oil and natural gas fluctuate widely in response to a variety of factors beyond our control, such as:
| ● | overall U.S. and global economic conditions; |
| ● | weather conditions and natural disasters; |
| ● | seasonal variations in oil and natural gas prices; |
| ● | price and availability of alternative fuels; |
| ● | technological advances affecting oil and natural gas production and consumption; |
| ● | consumer demand; |
| ● | domestic and foreign supply of oil and natural gas; |
| ● | variations in levels of production; |
| ● | regional price differentials and quality differentials of oil and natural gas; price and quantity of foreign imports of oil, NGLs and natural gas; |
| ● | the completion of large domestic or international exploration and production projects; |
| ● | restrictions on exportation of our oil and natural gas; |
| ● | the availability of refining capacity; |
| ● | the impact of energy conservation efforts; |
| ● | political conditions in or affecting other oil producing and natural gas producing countries, including the current conflicts in the Middle East and conditions in South America and Russia; and |
| ● | domestic and foreign governmental regulations, actions and taxes. |
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Further, oil and natural gas prices do not necessarily fluctuate in direct relation to each other. Our revenue, profitability, and cash flow depend upon the prices of supply and demand for oil and natural gas, and a drop in prices can significantly affect our financial results and impede our growth. In particular, declines in commodity prices may:
| ● | negatively impact the value of our reserves, because declines in oil and natural gas prices would reduce the value and amount of oil and natural gas that we can produce economically; |
| ● | reduce the amount of cash flow available for capital expenditures, repayment of indebtedness, and other corporate purposes; and |
| ● | limit our ability to borrow money or raise additional capital. |
We face intense competition in connection with our oil and gas operations.
We are in direct competition for properties with numerous oil and natural gas companies, drilling and income programs and partnerships exploring various areas of Texas and Oklahoma. Many competitors are large, well-known energy companies, although no single entity dominates the industry. Many of our competitors possess greater financial and personnel resources enabling them to identify and acquire more economically desirable energy producing properties and drilling prospects than us. Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry. Management believes that a viable marketplace exists for smaller producers of natural gas and crude oil.
Our oil and gas competitors may use superior technology and data resources that we may be unable to afford or that would require a costly investment by us in order to compete with them more effectively.
The oil and gas industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors will have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement in the future may become obsolete, and we may be adversely affected.
Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate.
Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. Specifically, applicable laws protecting endangered species prohibit the harming of endangered or threatened species, provide for habitat protection, and impose stringent penalties for noncompliance. The designation of previously unprotected species as threatened or endangered in areas where we operate could cause us to incur increased costs arising from species protection measures or could result in limitations, delays, or prohibitions on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves.
If we do not hedge our exposure to reductions in oil and natural gas prices, we may be subject to significant reductions in prices. Alternatively, we may use oil and natural gas price hedging contracts, which involve credit risk and may limit future revenues from price increases and result in significant fluctuations in our profitability.
In the event that we choose not to hedge our exposure to reductions in oil and natural gas prices by purchasing futures and by using other hedging strategies, we may be subject to significant reduction in prices which could have a material negative impact on our profitability. Alternatively, we may elect to use hedging transactions with respect to a portion of our oil and natural gas production to achieve more predictable cash flow and to reduce our exposure to price fluctuations. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations.
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Our oil and gas operations are substantially dependent on the availability of water. Restrictions on our ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows.
Water is an essential component of deep shale oil and natural gas production during both the drilling and hydraulic fracturing, or fracking processes. Our oil and gas operations and future operations could be adversely impacted if we are unable to locate sufficient amounts of water or dispose of or recycle water used in our exploration and production operations. Currently, the quantity of water required in certain completion operations, such as hydraulic fracturing, and changing regulations governing usage may lead to water constraints and supply concerns (particularly in some parts of the country). As a result, future availability of water from certain sources used in the past may be limited. Moreover, the imposition of new environmental initiatives and conditions could include restrictions on our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development or production of oil and natural gas. The CWA and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants, including produced waters and other oil and natural gas waste, into navigable waters or other regulated federal and state waters. Permits or other approvals must be obtained to discharge pollutants to regulated waters and to conduct construction activities in such waters and wetlands. Uncertainty regarding regulatory jurisdiction over wetlands and other regulated waters has, and will continue to, complicate and increase the cost of obtaining such permits or other approvals. The CWA and analogous state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of pollutants and unauthorized discharges of reportable quantities of oil and other hazardous substances. Many state discharge regulations, and the Federal National Pollutant Discharge Elimination System General permits issued by the United States Environmental Protection Agency (“ EPA ”), prohibit the discharge of produced water and sand, drilling fluids, drill cuttings and certain other substances related to the oil and natural gas industry into coastal waters. While generally exempt under federal programs, many state agencies have also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain permits for storm water discharges. There has been recent nationwide concern over earthquakes associated with Class II underground injection control wells, a predominant storage method for crude oil and gas wastewater. It is likely that new rules and regulations will be developed to address these concerns, possibly eliminating access to Class II wells in certain locations, and increasing the cost of disposal in others. Finally, EPA studies have previously focused on various stages of water use in hydraulic fracturing operations. It is possible that, in the future, the EPA will move to more strictly regulate the use of water in hydraulic fracturing operations. While we cannot predict the impact that these changes may have on our business at this time, they may be material to our business, financial condition, and operations. Compliance with environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells or the disposal or recycling of water will increase our operating costs and may cause delays, interruptions or termination of our operations, the extent of which cannot be predicted. In addition, our inability to meet our water supply needs to conduct our completion operations may impact our business, and any such future laws and regulations could negatively affect our financial condition, results of operations and cash flows.
If we acquire crude oil and natural gas properties in the future, our failure to fully identify existing and potential problems, to accurately estimate reserves, production rates or costs, or to effectively integrate the acquired properties into our operations could materially and adversely affect our business, financial condition and results of operations.
From time to time, we seek to acquire crude oil and natural gas properties. Although we perform reviews of properties to be acquired in a manner that we believe is duly diligent and consistent with industry practices, reviews of records and properties may not necessarily reveal existing or potential problems, and may not permit us to become sufficiently familiar with the properties in order to fully assess their deficiencies and potential. Even when problems with a property are identified, we may assume environmental and other risks and liabilities in connection with acquired properties pursuant to the acquisition agreements. Moreover, there are numerous uncertainties inherent in estimating quantities of crude oil and natural gas reserves (as discussed further below), actual future production rates and associated costs with respect to acquired properties. Actual reserves, production rates and costs may vary substantially from those assumed in our estimates. We may be unable to locate or make suitable acquisitions on acceptable terms and future acquisitions may not be effectively and profitably integrated. Acquisitions involve risks that could divert management resources and/or result in the possible loss of key employees and customers of the acquired operations. For the reasons above, among others, an acquisition may have a material and adverse effect on our business and results of operations, particularly during the periods in which the operations of the acquired properties are being integrated into our ongoing operations or if we are unable to effectively integrate the acquired properties into our ongoing operations.
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If we make any acquisitions or enter into any business combinations in the future, they may disrupt or have a negative impact on our business.
If we make acquisitions or enter into any business combinations in the future, funding permitting, we could have difficulty integrating the acquired companies’ assets, personnel and operations with our own. Additionally, acquisitions, mergers or business combinations we may enter into in the future could result in a change of control of the Company, and a change in the Board of Directors or officers of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition or completing a business combination, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions and business combinations are accompanied by a number of inherent risks, including, without limitation, the following:
| ● | the difficulty of integrating acquired companies, concepts and operations; |
| ● | the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; |
| ● | change in our business focus and/or management; |
| ● | difficulties in maintaining uniform standards, controls, procedures and policies; |
| ● | the potential impairment of relationships with employees and partners as a result of any integration of new management personnel; |
| ● | the potential inability to manage an increased number of locations and employees; |
| ● | our ability to successfully manage the companies and/or concepts acquired; |
| ● | the failure to realize efficiencies, synergies and cost savings; or |
| ● | the effect of any government regulations which relate to the business acquired. |
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition or business combination, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
Any acquisition or business combination transaction we enter into in the future could cause substantial dilution to existing stockholders, result in one party having majority or significant control over the Company or result in a change in business focus of the Company.
Our business is subject to extensive regulation.
As many of our activities are subject to federal, state and local regulation, and as these rules are subject to constant change or amendment, our operations may be adversely affected by new or different government regulations, laws or court decisions applicable to our operations.
Government regulation and liability for environmental matters may adversely affect our business and results of operations.
Crude oil and natural gas operations are subject to extensive federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling 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 crude oil and natural gas wells below actual production capacity in order to conserve supplies of crude oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of crude oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with crude oil and natural gas operations. In addition, we may inherit liability 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. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us.
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The crude oil and natural gas reserves we report in our SEC filings are estimates and may prove to be inaccurate.
There are numerous uncertainties inherent in estimating crude oil and natural gas reserves and their estimated values. The reserves we report in our filings with the SEC now and in the future will only be estimates and such estimates may prove to be inaccurate because of these uncertainties. Reservoir engineering is a subjective and inexact process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable crude oil and natural gas reserves depend upon a number of variable factors, such as historical production from the area compared with production from other producing areas and assumptions concerning effects of regulations by governmental agencies, future crude oil and natural gas prices, future operating costs, severance and excise taxes, development costs and work-over and remedial costs. Some or all of these assumptions may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of crude oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers but at different times may vary substantially. Accordingly, reserve estimates may be subject to downward or upward adjustment. Actual production, revenue and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.
Additionally, “ probable ” and “ possible reserve estimates ” are considered unproved reserves and as such, the SEC views such estimates to be inherently unreliable, may be misunderstood or seen as misleading to investors that are not “ experts ” in the oil or natural gas industry. Unless you have such expertise, you should not place undue reliance on these estimates. Except as required by applicable law, we undertake no duty to update this information and do not intend to update this information.
The calculated present value of future net revenues from our proved reserves will not necessarily be the same as the current market value of our estimated oil and natural gas reserves.
You should not assume that the present value of future net cash flows as included in our public filings is the current market value of our estimated proved oil and natural gas reserves. We generally base the estimated discounted future net cash flows from proved reserves on current costs held constant over time without escalation and on commodity prices using an unweighted arithmetic average of first-day-of-the-month index prices, appropriately adjusted, for the 12-month period immediately preceding the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs used for these estimates and will be affected by factors such as:
| ● | actual prices we receive for oil and natural gas; |
| ● | actual cost and timing of development and production expenditures; |
| ● | the amount and timing of actual production; and |
| ● | changes in governmental regulations or taxation. |
In addition, the 10% discount factor that is required to be used to calculate discounted future net revenues for reporting purposes under generally accepted accounting principles (“ GAAP ”) is not necessarily the most appropriate discount factor based on the cost of capital in effect from time to time and risks associated with our business and the oil and natural gas industry in general.
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Crude oil and natural gas development, re-completion of wells from one reservoir to another reservoir, restoring wells to production and exploration, drilling and completing new wells are speculative activities and involve numerous risks and substantial and uncertain costs.
Our oil and gas operations will be materially dependent upon the success of our future development program. Even considering our business philosophy to avoid wildcat wells, drilling for crude oil and natural gas and reworking existing wells involves numerous risks, including the risk that no commercially productive crude oil or natural gas reservoirs will be encountered. The cost of exploration, drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including: unexpected drilling conditions; pressure or irregularities in formations; equipment failures or accidents; inability to obtain leases on economic terms, where applicable; adverse weather conditions and natural disasters; compliance with governmental requirements; and shortages or delays in the availability of drilling rigs or crews and the delivery of equipment. Furthermore, we cannot provide investors with any assurance that we will be able to obtain rights to additional producing properties in the future and/or that any properties we obtain rights to will contain commercially exploitable quantities of oil and/or gas.
Drilling or reworking is a highly speculative activity. Even when fully and correctly utilized, modern well completion techniques such as hydraulic fracturing and horizontal drilling do not guarantee that we will find crude oil and/or natural gas in our wells. Hydraulic fracturing involves pumping a fluid with or without particulates into a formation at high pressure, thereby creating fractures in the rock and leaving the particulates in the fractures to ensure that the fractures remain open, thereby potentially increasing the ability of the reservoir to produce oil or natural gas. Horizontal drilling involves drilling horizontally out from an existing vertical well bore, thereby potentially increasing the area and reach of the well bore that is in contact with the reservoir. Our future drilling activities may not be successful and, if unsuccessful, such failure would have an adverse effect on our future results of operations and financial condition. Our overall drilling success rate and/or our drilling success rate for activities within a particular geographic area may decline in the future. We may identify and develop prospects through a number of methods, some of which do not include lateral drilling or hydraulic fracturing, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. Our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted prospects will be dependent on a number of factors, including, but not limited to: the results of previous development efforts and the acquisition, review and analysis of data; the availability of sufficient capital resources to us and the other participants, if any, for the drilling of the prospects; the approval of the prospects by other participants, if any, after additional data has been compiled; economic and industry conditions at the time of drilling, including prevailing and anticipated prices for crude oil and natural gas and the availability of drilling rigs and crews; our financial resources and results; the availability of leases and permits on reasonable terms for the prospects; and the success of our drilling technology.
These projects may not be successfully developed and the wells discussed, if drilled, may not encounter reservoirs of commercially productive crude oil or natural gas. There are numerous uncertainties in estimating quantities of proved reserves, including many factors beyond our control. If we are unable to find commercially exploitable quantities of oil and natural gas in any properties we may acquire in the future, and/or we are unable to commercially extract such quantities we may find in any properties we may acquire in the future, the value of our securities may decline in value.
Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, financial condition and results of operations.
The rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing and exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or acquiring additional oil and natural gas properties. In the future, we may have difficulty acquiring new properties. During periods of low oil and/or natural gas prices, it will become more difficult to raise the capital necessary to finance expansion activities. If we are unable to replace our production, our reserves will decrease, and our business, financial condition and results of operations would be adversely affected.
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The unavailability or high cost of drilling rigs, completion equipment and services, supplies and personnel, including hydraulic fracturing equipment and personnel, could adversely affect our ability to establish and execute exploration and development plans within budget and on a timely basis, which could have a material adverse effect on our business, financial condition and results of operations.
Shortages or the high cost of drilling rigs, completion equipment and services, supplies or personnel could delay or adversely affect our operations. When drilling activity in the United States increases, associated costs typically also increase, including those costs related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry. These costs may increase, and necessary equipment and services may become unavailable to us at economical prices. Should this increase in costs occur, we may delay drilling activities, which may limit our ability to establish and replace reserves, or we may incur these higher costs, which may negatively affect our business, financial condition and results of operations.
Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.
Hydraulic fracturing is a common practice that is used to stimulate production of hydrocarbons from tight formations. The process involves the injection of water, sand and chemicals under pressure into rock formations to fracture the surrounding rock and stimulate production. There has been increasing public controversy regarding hydraulic fracturing with regard to the transportation and use of fracturing fluids, impacts on drinking water supplies, use of waters, and the potential for impacts to surface water, groundwater, air quality and the environment generally. A number of lawsuits and enforcement actions have been initiated implicating hydraulic fracturing practices. Additional legislation or regulation could make it more difficult to perform hydraulic fracturing, cause operational delays, increase our operating costs or make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings. New legislation or regulations in the future could have the effect of prohibiting the use of hydraulic fracturing, which would prevent us from completing our wells as planned and would have a material adverse effect on production from our wells. If these legislative and regulatory initiatives cause a material delay or decrease in our drilling or hydraulic fracturing activities, our business and profitability could be materially impacted.
The lack of availability or high cost of drilling rigs, equipment, supplies, insurance, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.
The oil and gas industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies tend to increase, in some cases substantially. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases within a geographic area. If increasing levels of exploration and production result in response to strong prices of oil and natural gas, the demand for oilfield services will likely rise, and the costs of these services will likely increase, while the quality of these services may suffer. The future lack of availability or high cost of drilling rigs, as well as any future lack of availability or high costs of other equipment, supplies, insurance or qualified personnel, in the areas in which we operate could materially and adversely affect our business and results of operations.
Our oil and gas properties are located in Texas, making us vulnerable to risks associated with operating in one major geographic area.
All of our oil and gas properties are located in Texas. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production from wells caused by transportation capacity constraints, curtailment of production, availability of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions, or interruption of transportation of oil or natural gas produced from the wells in this area. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and gas producing areas such as the ones we operate in, which may cause these conditions to occur with greater frequency or magnify the effect of these conditions. Due to the concentrated nature of our portfolio, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results of operations.
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Future acquired properties may not be worth what we pay due to uncertainties in evaluating recoverable reserves and other expected benefits, as well as potential liabilities.
Successful property acquisitions require an assessment of a number of factors beyond our control. These factors include estimates of recoverable reserves, exploration potential, future natural gas and oil prices, operating costs, production taxes and potential environmental and other liabilities. These assessments are complex and inherently imprecise. Our review of the properties we acquire may not reveal all existing or potential problems. In addition, our review may not allow us to fully assess the potential deficiencies of the properties. We do not inspect every well, and even when we inspect a well we may not discover structural, subsurface, or environmental problems that may exist or arise. There may be threatened or contemplated claims against the assets or businesses we acquire related to environmental, title, regulatory, tax, contract, litigation or other matters of which we are unaware, which could materially and adversely affect our production, revenues and results of operations. We may not be entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities, and our contractual indemnification may not be effective. At times, we acquire interests in properties on an “ as is ” basis with limited representations and warranties and limited remedies for breaches of such representations and warranties. In addition, significant acquisitions can change the nature of our operations and business if the acquired properties have substantially different operating and geological characteristics or are in different geographic locations than our existing properties.
We have limited control over activities in properties we do not operate, which could reduce our production and revenues, affect the timing and amounts of capital requirements and potentially result in a dilution of our respective ownership interest in the event we are unable to make any required capital contributions.
We currently operate only 35 of the 81 wells in which we have an interest. As a result, we may have a limited ability to exercise influence over normal operating procedures, expenditures or future development of underlying properties and their associated costs. For all of the properties that are operated by others, we are dependent on their decision-making with respect to day-to-day operations over which we have little control. The failure of an operator of wells in which we have an interest to adequately perform operations, or an operator’s breach of applicable agreements, could reduce production and revenues we receive from that well. The success and timing of our drilling and development activities on properties operated by others depend upon a number of factors outside of our control, including the timing and amount of capital expenditures, the available expertise and financial resources, the inclusion of other participants and the use of technology. Since we do not own the majority interest in many of the wells we do not operate, we may not be in a position to remove the operator in the event of poor performance.
General Business Risks
We may have difficulty managing growth in our business, which could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.
Because of our small size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial, technical, operational and management resources. If we expand our activities, development and production, and increase the number of projects we are evaluating or in which we participate, there will be additional demands on our financial, technical and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the inability to recruit and retain experienced managers, geoscientists, petroleum engineers, landmen, engineers and employees could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.
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We may have difficulty managing growth in our business, which could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.
Because of our small size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial, technical, operational and management resources. If we expand our activities, development and production, and increase the number of projects we are evaluating or in which we participate, there will be additional demands on our financial, technical and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the inability to recruit and retain experienced managers, geoscientists, petroleum engineers, landmen, engineers and employees could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.
We depend significantly upon the continued involvement of our present management.
We depend to a significant degree upon the involvement of our management, specifically, our Interim Chief Executive Officer, Louis G. Schott, who is in charge of our strategic planning and operations, and our Chief Financial Officer, Robert Schleizer. Our performance and success are dependent to a large extent on the efforts and continued employment of Mr. Schott and Mr. Schleizer. We do not believe that Mr. Schott or Mr. Schleizer could be quickly replaced with personnel of equal experience and capabilities, and their successor(s) may not be as effective. If Mr. Schott, Mr. Schleizer, or any of our other key personnel resign or become unable to continue in their present roles and if they are not adequately replaced, our business operations could be adversely affected.
We have an active Board of Directors that meets several times throughout the year and is intimately involved in our business and the determination of our operational strategies. Members of our Board of Directors work closely with management to identify potential prospects, acquisitions and areas for further development. If any of our directors resign or become unable to continue in their present role, it may be difficult to find replacements with the same knowledge and experience and as a result, our operations may be adversely affected.
Future increases in our tax obligations; either due to increases in taxes on energy products, energy service companies and exploration activities or reductions in currently available federal income tax deductions with respect to oil and natural gas exploration and development, may adversely affect our results of operations and increase our operating expenses.
Federal, state and local governments have jurisdiction in areas where we operate and impose taxes on the oil and natural gas products we sell. There are constant discussions by federal, state and local officials concerning a variety of energy tax proposals, some of which, if passed, would add or increase taxes on energy products, service companies and exploration activities. The passage of any legislation or any other changes in U.S. federal income tax laws could impact or increase the taxes that we are required to pay and consequently adversely affect our results of operations and/or increase our operating expenses.
Because of the inherent dangers involved in oil and gas exploration, there is a risk that we may incur liability or damages as we conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.
The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by previous owners of property purchased and leased by us in the future. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for the purchase of properties and/or property interests, exploration, development or acquisitions or result in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. As such, our current insurance or the insurance that we obtain in the future may not be adequate to cover any losses or liabilities. We cannot predict the availability of insurance or the availability of insurance at premium levels that justify our purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations. We may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations, which could lead to any investment in us declining in value or becoming worthless.
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We incur certain costs to comply with government regulations, particularly regulations relating to environmental protection and safety, and could incur even greater costs in the future.
Our operations are regulated extensively at the federal, state and local levels and are subject to interruption or termination by governmental and regulatory authorities based on environmental or other considerations. Moreover, we have incurred and will continue to incur costs in our efforts to comply with the requirements of environmental, safety and other regulations. Further, the regulatory environment in the oil and natural gas industry could change in ways that we cannot predict and that might substantially increase our costs of compliance and, in turn, materially and adversely affect our business, results of operations and financial condition.
Specifically, as an owner or lessee and operator of crude oil and natural gas properties, we are subject to various federal, state, local and foreign regulations relating to the discharge of materials into, and the protection of, the environment. These regulations may, among other things, impose liability on us for the cost of pollution cleanup resulting from operations, subject us to liability for pollution damages and require suspension or cessation of operations in affected areas. Moreover, we are subject to the United States (“ U.S. ”) EPA rule requiring annual reporting of greenhouse gas (“ GHG ”) emissions. Changes in, or additions to, these regulations could lead to increased operating and compliance costs and, in turn, materially and adversely affect our business, results of operations and financial condition.
We are aware of the increasing focus of local, state, national and international regulatory bodies on GHG emissions and climate change issues. In addition to the U.S. EPA’s rule requiring annual reporting of GHG emissions, we are also aware of legislation proposed by U.S. lawmakers to reduce GHG emissions.
Additionally, there have been various proposals to regulate hydraulic fracturing at the federal level, including possible regulations limiting the ability to dispose of produced waters. Currently, the regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements. Any new federal regulations that may be imposed on hydraulic fracturing could result in additional permitting and disclosure requirements (such as the reporting and public disclosure of the chemical additives used in the fracturing process) and in additional operating restrictions. In addition to the possible federal regulation of hydraulic fracturing, some states and local governments have considered imposing various conditions and restrictions on drilling and completion operations, including requirements regarding casing and cementing of wells, testing of nearby water wells, restrictions on the access to and usage of water and restrictions on the type of chemical additives that may be used in hydraulic fracturing operations. Such federal and state permitting and disclosure requirements and operating restrictions and conditions could lead to operational delays and increased operating and compliance costs and, moreover, could delay or effectively prevent the development of crude oil and natural gas from formations which would not be economically viable without the use of hydraulic fracturing.
We will continue to monitor and assess any new policies, legislation, regulations and treaties in the areas where we operate to determine the impact on our operations and take appropriate actions, where necessary. We are unable to predict the timing, scope and effect of any currently proposed or future laws, regulations or treaties, but the direct and indirect costs of such laws, regulations and treaties (if enacted) could materially and adversely affect our business, results of operations and financial condition.
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Possible regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and gas.
Studies over recent years have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere. In response to these studies, governments have begun adopting domestic and international climate change regulations that require reporting and reductions of the emission of greenhouse gases. Methane, a primary component of natural gas, and carbon dioxide, a by-product of the burning of oil, natural gas and refined petroleum products, are considered greenhouse gases. In the United States, at the state level, many states, either individually or through multi-state regional initiatives, have begun implementing legal measures to reduce emissions of greenhouse gases, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs or have begun considering adopting greenhouse gas regulatory programs. At the federal level, Congress has considered legislation that could establish a cap and trade system for restricting greenhouse gas emissions in the United States. The ultimate outcome of this federal legislative initiative remains uncertain. In addition to pending climate legislation, the EPA has issued greenhouse gas monitoring and reporting regulations. Beyond measuring and reporting, the EPA issued an “ Endangerment Finding ” under section 202(a) of the Clean Air Act, concluding that greenhouse gas pollution threatens the public health and welfare of current and future generations. The finding served as a first step to issuing regulations that require permits for and reductions in greenhouse gas emissions for certain facilities. Moreover, the EPA has begun regulating greenhouse gas emission from certain facilities pursuant to the Prevention of Significant Deterioration and Title V provisions of the Clean Air Act. In the courts, several decisions have been issued that may increase the risk of claims being filed by government entities and private parties against companies that have significant greenhouse gas emissions. Such cases may seek to challenge air emissions permits that greenhouse gas emitters apply for and seek to force emitters to reduce their emissions or seek damages for alleged climate change impacts to the environment, people, and property. Any existing or future laws or regulations that restrict or reduce emissions of greenhouse gases could require us to incur increased operating and compliance costs. In addition, such laws and regulations may adversely affect demand for the fossil fuels we produce, including by increasing the cost of combusting fossil fuels and by creating incentives for the use of alternative fuels and energy.
Our officers and directors have limited liability, and we are required in certain instances to indemnify our officers and directors for breaches of their fiduciary duties.
We have adopted provisions in our Articles of Incorporation and Bylaws which limit the liability of our officers and directors and provide for indemnification by us of our officers and directors to the full extent permitted by Nevada corporate law. Our articles generally provide that our officers and directors shall have no personal liability to us or our stockholders for monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit our stockholders’ ability to hold officers and directors liable for breaches of fiduciary duty, and may require us to indemnify our officers and directors.
We currently have outstanding indebtedness and we may incur additional indebtedness which could reduce our financial flexibility, increase interest expense and adversely impact our operations and our unit costs.
We currently have outstanding indebtedness and in the future, we may incur significant amounts of additional indebtedness in order to make acquisitions or to develop our properties. Our level of indebtedness could affect our operations in several ways, including the following:
| ● | a significant portion of our cash flows could be used to service our indebtedness; |
| ● | a high level of debt would increase our vulnerability to general adverse economic and industry conditions; |
| ● | any covenants contained in the agreements governing our outstanding indebtedness could limit our ability to borrow additional funds; |
| ● | dispose of assets, pay dividends and make certain investments; |
| ● | a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and |
| ● | debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry. |
A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flows to pay the principal or interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we do not have sufficient funds and are otherwise unable to arrange financing, we may have to sell significant assets or have a portion of our assets foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.
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Risks Relating To An Investment In Our Securities
If we are unable to maintain compliance with NYSE American continued listing standards, our common stock may be delisted from the NYSE American equities market, which would likely cause the liquidity and market price of our common stock to decline.
Our common stock is currently listed on the NYSE American. The NYSE American will consider suspending dealings in, or delisting, securities of an issuer that does not meet its continued listing standards. If we cannot meet the NYSE American continued listing requirements, the NYSE American may delist our common stock, which could have an adverse impact on us and the liquidity and market price of our stock.
We may be unable to comply with NYSE American continued listing standards. Our business has been and may continue to be affected by worldwide macroeconomic factors, which include uncertainties in the credit and capital markets. External factors that affect our stock price, such as liquidity requirements of our investors, as well as our performance, could impact our market capitalization, revenue and operating results, which, in turn, could affect our ability to comply with the NYSE American’s listing standards. The NYSE American has the ability to suspend trading in our common stock or remove our common stock from listing on the NYSE American if in the opinion of the exchange: (a) the financial condition and/or operating results of the Company appear to be unsatisfactory; or (b) it appears that the extent of public distribution or the aggregate market value of our common stock has become so reduced as to make further dealings on the exchange inadvisable; or (c) we have sold or otherwise disposed of our principal operating assets, or have ceased to be an operating company; or (d) we have failed to comply with our listing agreements with the exchange (which include that we receive additional listing approval from the exchange prior to us issuing any shares of common stock, something we have inadvertently failed to comply with in the past); or (e) any other event shall occur or any condition shall exist which makes further dealings on the exchange unwarranted.
In the past we have been out of compliance with the NYSE American’s continued listing standards which (a) require a listed company to maintain stockholders’ equity of more than $2-$6 million, depending on the prior years of net losses experienced by the listed company; and (b) require a listed company to maintain an average trading price for its securities which exceeds $0.20 per share, for each 30 day rolling period. While we have cured such prior non-compliance described in (a) above, moving forward, if the Company is again determined to be below compliance with any of the continued listing standards within 12 months of February 15, 2019, the NYSE American will examine the relationship between the two incidents of noncompliance and re-evaluate the Company’s method of financial recovery from the first incident. Thereafter the NYSE Regulation will take appropriate action, which depending on the circumstances, may include truncating the standard compliance procedures or immediately initiating delisting procedures. Separately, in connection with (b) above, the NYSE American previously advised us that our continued listing was predicated on the Company demonstrating sustained price improvement of our common stock on the NYSE American through June 3, 2019; which we demonstrated as of June 3, 2019, provided that, if the Company is again determined to be below compliance within 12 months of June 3, 2019, the NYSE American will examine the relationship between the two incidents of noncompliance and may truncate the time period we are provided for re-compliance.
If we are unable to retain compliance with the NYSE American criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock and reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing. In addition, delisting from the NYSE American might negatively impact our reputation and, as a consequence, our business. Additionally, if we were delisted from the NYSE American and we are not able to list our common stock on another national exchange we will no longer be eligible to use Form S-3 registration statements and will instead be required to file a Form S-1 registration statement for any primary or secondary offerings of our common stock, which would delay our ability to raise funds in the future, may limit the type of offerings of common stock we could undertake, and would increase the expenses of any offering, as, among other things, registration statements on Form S-1 are subject to SEC review and comments whereas take downs pursuant to a previously filed Form S-3 are not.
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If we are delisted from the NYSE American, your ability to sell your shares of our common stock would also be limited by the penny stock restrictions, which could further limit the marketability of your shares.
If our common stock is delisted from the NYSE American, it would come within the definition of “ penny stock ” as defined in the Exchange Act and would be covered by Rule 15g-9 of the Exchange Act. That Rule imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future.
We do not intend to pay cash dividends to our stockholders.
We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our Board of Directors. As a result, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.
We currently have an illiquid and volatile market for our common stock, and the market for our common stock is and may remain illiquid and volatile in the future.
We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile in the future. Factors that could affect our stock price or result in fluctuations in the market price or trading volume of our common stock include:
| ● | our actual or anticipated operating and financial performance and drilling locations, including reserve estimates; |
| ● | quarterly variations in the rate of growth of our financial indicators, such as net income/loss per share, net income/loss and cash flows, or those of companies that are perceived to be similar to us; |
| ● | changes in revenue, cash flows or earnings estimates or publication of reports by equity research analysts; |
| ● | speculation in the press or investment community; |
| ● | public reaction to our press releases, announcements and filings with the SEC; |
| ● | sales of our common stock by us or other stockholders, or the perception that such sales may occur; |
| ● | the amount of our freely tradable common stock available in the public marketplace; |
| ● | general financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices; |
| ● | the realization of any of the risk factors that we are subject to; |
| ● | the recruitment or departure of key personnel; |
| ● | commencement of, or involvement in, litigation; |
| ● | the prices of oil and natural gas; |
| ● | the success of our exploration and development operations, and the marketing of any oil and natural gas we produce; |
| ● | changes in market valuations of companies similar to ours; and |
| ● | domestic and international economic, legal and regulatory factors unrelated to our performance. |
Our common stock is listed on the NYSE American under the symbol “ CEI. ” Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Additionally, general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related to our actual value, and not reflect the actual value of our common stock. You should exercise caution before making an investment in us.
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Additionally, as a result of the illiquidity of our common stock, investors may not be interested in owning our common stock because of the inability to acquire or sell a substantial block of our common stock at one time. Such illiquidity could have an adverse effect on the market price of our common stock. In addition, a stockholder may not be able to borrow funds using our common stock as collateral because lenders may be unwilling to accept the pledge of securities having such a limited market. An active trading market for our common stock may not develop or, if one develops, may not be sustained.
A prolonged decline in the market price of our common stock could affect our ability to obtain additional financing which would adversely affect our operations.
Historically, we have relied on equity and debt financing as primary sources of financing. A prolonged decline in the market price of our common stock or a reduction in our accessibility to the global markets may result in our inability to secure additional financing which would have an adverse effect on our operations.
Nevada law and our Articles of Incorporation authorize us to issue shares of stock which shares may cause substantial dilution to our existing stockholders.
We have authorized capital stock consisting of 250,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share. As of June 25, 2019, we had 46,011,619 shares of common stock outstanding, no shares of Series B Preferred Stock outstanding and 2,305 shares of Series C Preferred Stock outstanding (each as described in greater detail below under “ Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ” - “ Description of Capital Stock ” - “ Preferred Stock ”). As a result, our Board of Directors has the ability to issue a large number of additional shares of common stock without stockholder approval, subject to the requirements of the NYSE American (which generally require stockholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock), which if issued could cause substantial dilution to our then stockholders. Shares of additional preferred stock may also be issued by our Board of Directors without stockholder approval, with voting powers and such preferences and relative, participating, optional or other special rights and powers as determined by our Board of Directors, which may be greater than the shares of common stock currently outstanding. As a result, shares of preferred stock may be issued by our Board of Directors which cause the holders to have majority voting power over our shares, provide the holders of the preferred stock the right to convert the shares of preferred stock they hold into shares of our common stock, which may cause substantial dilution to our then common stock stockholders and/or have other rights and preferences greater than those of our common stock stockholders. Investors should keep in mind that the Board of Directors has the authority to issue additional shares of common stock and preferred stock, which could cause substantial dilution to our existing stockholders. Additionally, the dilutive effect of any preferred stock which we may issue may be exacerbated given the fact that such preferred stock may have super voting rights and/or other rights or preferences which could provide the preferred stockholders with substantial voting control over us subsequent to the date of this filing and/or give those holders the power to prevent or cause a change in control. As a result, the issuance of shares of common stock and/or Preferred Stock may cause the value of our securities to decrease and/or become worthless.
Stockholders may be diluted significantly through our efforts to obtain financing and/or satisfy obligations through the issuance of additional shares of our common stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of shares of our common stock. Subject to certain consent rights of the Investor, our Board of Directors has authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued shares of common stock (subject to NYSE American rules which limit among other things, the number of shares we can issue without stockholder approval to no more than 20% of our outstanding shares of common stock, subject to certain exceptions). These actions will result in dilution of the ownership interests of existing stockholders, and that dilution may be material.
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If persons engage in short sales of our common stock, including sales of shares to be issued upon exercise of our outstanding warrants, convertible debentures and preferred stock, the price of our common stock may decline.
Selling short is a technique used by a stockholder to take advantage of an anticipated decline in the price of a security. In addition, holders of options, warrants and other convertible securities will sometimes sell short knowing they can, in effect, cover through the exercise or conversion of options, warrants and other convertible securities, thus locking in a profit. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. Further sales of common stock issued upon exercise or conversion of options, warrants and other convertible securities could cause even greater declines in the price of our common stock due to the number of additional shares available in the market upon such exercise/conversion, which could encourage short sales that could further undermine the value of our common stock. You could, therefore, experience a decline in the value of your investment as a result of short sales of our common stock.
The market price for our common stock may be volatile, and our stockholders may not be able to sell our stock at a favorable price or at all.
Many factors could cause the market price of our common stock to rise and fall, including: actual or anticipated variations in our quarterly results of operations; changes in market valuations of companies in our industry; changes in expectations of future financial performance; fluctuations in stock market prices and volumes; issuances of dilutive common stock or other securities in the future; the addition or departure of key personnel; announcements by us or our competitors of acquisitions, investments or strategic alliances; and the increase or decline in the price of oil and natural gas.
Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.
We cannot predict whether future issuances of our common stock or resales in the open market will decrease the market price of our common stock. The impact of any such issuances or resales of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options that we have or that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock (including shares previously registered in our registration statements and prospectus supplements, and/or in connection with future registration statements or prospectus supplements) could have an adverse effect on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing stockholders. Any sales of substantial amounts of our common stock in the public market, or the perception that such sales might occur, could lower the market price of our common stock.
We incur significant costs as a result of operating as a fully reporting publicly traded company and our management is required to devote substantial time to compliance initiatives.
We incur significant legal, accounting and other expenses in connection with our status as a fully reporting public company. Specifically, we are required to prepare and file annual, quarterly and current reports, proxy statements and other information with the SEC. Additionally, our officers, directors and significant stockholders are required to file Forms 3, 4 and 5 and Schedules 13D/G with the SEC disclosing their ownership of the Company and changes in such ownership. Furthermore, the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”) and rules subsequently implemented by the SEC have imposed various new requirements on public companies, including requiring changes in corporate governance practices. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. The costs and expenses of compliance with SEC rules and our filing obligations with the SEC, or our identification of deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, could materially adversely affect our results of operations or cause the market price of our stock to decline in value.
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Securities analyst coverage or lack of coverage may have a negative impact on our common stock’s market price.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If securities or industry analysts stop their coverage of us or additional securities and industry analysts fail to cover us in the future, the trading price for our common stock would be negatively impacted. If any analyst or analysts who cover us downgrade our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If any analyst or analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.
Due to the fact that our common stock is listed on the NYSE American, we are subject to financial and other reporting and corporate governance requirements which increase our cost and expenses.
We are currently required to file annual and quarterly information and other reports with the SEC that are specified in Sections 13 and 15(d) of the Exchange Act. Additionally, due to the fact that our common stock is listed on the NYSE American, we are also subject to the requirements to maintain independent directors, comply with other corporate governance requirements and are required to pay annual listing and stock issuance fees. These obligations require a commitment of additional resources including, but not limited, to additional expenses, and may result in the diversion of our senior management’s time and attention from our day-to-day operations. These obligations increase our expenses and may make it more complicated or time consuming for us to undertake certain corporate actions due to the fact that we may require the approval of the NYSE American for such transactions and/or NYSE American rules may require us to obtain stockholder approval for such transactions.
You may experience future dilution as a result of future equity offerings or other equity issuances.
We may in the future issue additional shares of our common stock or other securities convertible into or exchangeable for our common stock.
Risks Related To Our Outstanding Convertible Securities
The full amount of premiums, interest and dividends through the maturity date of each applicable security held by the Investor is due upon the repayment/redemption (where applicable), exercise or conversion, as applicable, of the Series C Preferred Stock.
The Series C Preferred Stock provides that all applicable dividends (due under the terms of the Series C Preferred Stock), which initially accrued in the amount of 6% per annum and which increase or decrease subject to the terms of the applicable securities, based on among other things, the trading price of the Company’s common stock, up to a maximum of 34.95% per annum (which interest rate is currently 34.95% for the outstanding Series C Preferred Stock sold in October 2017 and 34.95% for the outstanding Series C Preferred Stock sold in October 2018 and December 2018), are due upon conversion or redemption thereof, for the full seven year term of such securities.
The requirement that we pay all premiums and dividends through maturity and the adjustable nature of such premium and dividend rates, may force us to issue the Investor significant additional shares of common stock, which may cause significant dilution to existing stockholders. The requirement that we pay all premiums and dividends through maturity may make it too costly for us to redeem the Investor’s securities, prior to conversion thereof, as applicable.
The number of shares of common stock issuable in consideration for premiums, interest and dividends through maturity on the Series C Preferred Stock continue to be adjustable after the conversion of such securities.
Pursuant to the terms of the Series C Preferred Stock, the conversion rate of such securities in connection with the premiums and dividends due on such securities through maturity (7 years, regardless of when converted), continues to be adjustable after the issuance of such securities. Specifically, such securities remain adjustable, based on a discount to the lowest daily volume weighted average price during a measuring period for a period of 60 days after the applicable number of shares stated in the initial conversion notice have actually been received into the Investor’s designated brokerage account in electronic form and fully cleared for trading (subject to certain extensions described in the applicable securities). Because the Investor is limited to holding not more than 9.99% of the Company’s common stock upon exercise/conversion of any security, the Investor will not receive all of the shares due upon any conversion, until it has sold shares and been issued additional shares and as such, the beginning date for the applicable 30 or 60 day period after conversion is impossible to determine and may be a significant additional number of days after the initial conversion by the Investor.
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In the event of a decrease in the Company’s stock price during the applicable measuring periods, the conversion rate of the premiums and dividends due on such applicable securities will adjust downward and the Investor will be due additional shares of common stock, which issuances may cause further significant dilution to existing stockholders and the sale of such shares may cause the value of the Company’s common stock to decline in value. Furthermore, it is likely that the sale by the Investor of the shares of common stock which the Investor receives in connection with any conversion, during the applicable measuring period, will cause the value of the Company’s common stock to decline in value and the conversion rate to decrease and will result in the Investor being due additional shares of common stock during the measuring period, which will trigger additional decreases in the value of the Company’s common stock upon further public sales by the Investor. If this were to occur, the Investor would be entitled to receive an increasing number of shares, upon conversion of the remaining securities, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders and would likely cause the value of our common stock to decline.
The issuance of common stock upon conversion of the Series C Preferred Stock will cause immediate and substantial dilution and the sale of such stock will cause significant downward pressure on our stock price.
The issuance of common stock upon conversion of the Series C Preferred Stock will result in immediate and substantial dilution to the interests of other stockholders. Although the Investor may not receive shares of common stock exceeding 9.99% of our outstanding shares of common stock immediately after affecting such conversion, this restriction does not prevent the Investor from receiving shares up to the 9.99% limit, selling those shares, and then receiving the rest of the shares it is due, in one or more tranches, while still staying below the 9.99% limit. If the Investor chooses to do this, it will cause substantial dilution to the then holders of our common stock. Additionally, the continued sale of shares issuable upon successive conversions will likely create significant downward pressure on the price of our common stock as the Investor sells material amounts of our common stock over time and/or in a short period of time. This could place further downward pressure on the price of our common stock and in turn result in the Investor receiving an ever increasing number of additional shares of common stock upon conversion of its securities, and adjustments thereof, which in turn will likely lead to further dilution, reductions in the exercise/conversion price of the Investor’s securities and even more downward pressure on our common stock, which could lead to our common stock becoming devalued or worthless.
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The Investor holds an approximately $75 million liquidation preference in the Company.
Each share of Series C Preferred Stock held by the Investor includes a liquidation preference, payable to the Investor upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Company, prior to any distribution or payment made to the holders of preferred stock or common stock, by reason of their ownership thereof equal to $10,000 (“ Face Value ”), plus an amount equal to any accrued but unpaid dividends thereon. Because the dividends currently require that interest be paid on the Face Value of between 24.95% and 34.95% per annum, for the entire seven year term of the Series C Preferred Stock (even if payable sooner than seven years after the issuance date), the total liquidation value required to be paid to the Investor upon a liquidation, dissolution or winding up of the Company is approximately $75 million as of March 31, 2019. As referenced above, this liquidation preference would be payable prior to any amount being distributed the holders of our common stock. Because our net assets total significantly less than $75 million, it is likely that our common stockholders would not receive any amount in the event the Company was liquidated, dissolved or wound up, and that the Investor would instead receive the entire amount of available funds after liquidation.
The Investor effectively has the ability to consent to any material transaction involving the Company.
Due to the restrictions placed on the Company as a result of the Investor’s securities (and the outstanding balances thereof), including the Series C Preferred Stock, including, but not limited to the significant liquidation preference discussed above and the fact that, as long as the Investor holds any shares of Series C Preferred Stock, we agreed that we would not issue or enter into or amend an agreement pursuant to which we may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price; or issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock, the Investor has to effectively consent to any material transaction involving the Company. In the event the Investor does not consent to any such transaction, we may be prohibited (either effectively or otherwise) from completing a material transaction in the future, including, but not limited to a combination or acquisition which may be accretive to stockholders. Furthermore, the Investor may condition the approval of a future transaction, which conditions may not be favorable to stockholders.
The Investor, subject to applicable contractual restrictions, and/or a third party, may sell short our common stock, which could have a depressive effect on the price of our common stock.
The Investor is not currently prohibited from selling the Company’s stock short. Additionally, nothing prohibits a third party from selling the Company’s common stock short based on their belief that due to the dilution caused by the conversions/exercises of the securities held by the Investor, that the trading price of the Company’s common stock will decline in value. The significant downward pressure on the price of our common stock as the Investor sells material amounts of our common stock could encourage investors to short sell our common stock. This could place further downward pressure on the price of our common stock and in turn result in the Investor receiving additional shares of common stock upon exercise/conversion of its securities, and adjustments thereof.
Areas of Activities
We operate and invest in areas that are known to be productive, with a reasonably established production history, in order to decrease geological and exploratory risk. In 2016, the Company acquired over 13,000 net acres in producing fields located primarily in the Mid-Continent region of Oklahoma including Payne, Lincoln and Logan Counties, along with a small amount of interest in production located in Glasscock County, Texas. The Mid-Continent assets produce from a liquids-rich, gas reservoir known as the Hunton formation. These properties include interests in four different fields, of which one is operated by Camber and the other three are non-operated. In January 2018, the Company acquired 3,000 net acres in Okfuskee, Oklahoma. Our Glasscock County, Texas properties produce oil and gas primarily from the Wolfberry, Cline and Fusselman formations and are all non-operated. In March 2018, the Company acquired 555 net acres, 48 gross non-producing well bores and five saltwater disposal wells in Hutchinson County, Texas. In November of 2017, the Company sold approximately 2,600 net acres in the Permian Basin in Gaines County, Texas. In September 2018 , the Company sold to N&B Energy, a substantial portion of its assets, including all of the assets acquired pursuant to the terms of the December 31, 2015 Asset Purchase Agreement and certain other more recent acquisitions, other than the production payment and certain overriding royalty interests.
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The following table summarizes our gross and net developed leasehold acreage at March 31, 2019. Developed acreage is the number of acres that are allocated or assignable to producing wells or wells capable of production. The Company holds no undeveloped acreage as of March 31, 2019. Acreage in which our interest is limited to royalty and overriding royalty interests is excluded:
Acreage
| Total | Developed | Undeveloped | ||||||||||||||||||||||
| Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
| Glasscock and Hutchinson County, Texas | 4,138 | 776 | 4,138 | 776 | — | — | ||||||||||||||||||
| Total | 4,138 | 776 | 4,138 | 776 | — | — | ||||||||||||||||||
We believe we have satisfactory title, in all material respects, to substantially all of our producing properties in accordance with standards generally accepted in the oil and natural gas industry.
Production, Sales Price and Production Costs
The Company produced oil, natural gas and NGLs from 36 wells in two Texas counties and 68 wells in four Oklahoma counties in the Mid-Continent regions during the year ended March 31, 2019. The number of operated gross wells was 35 wells and the total number of gross wells was 81, with the active producers being 36, as of the date of this report.
The following tables represent our total production, average sales prices and average production costs for the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Net Operating Revenues: | ||||||||
| Crude Oil | $ | 526,365 | $ | 1,198,514 | ||||
| Natural Gas | 772,105 | 2,051,846 | ||||||
| NGL | 1,443,632 | 3,609,407 | ||||||
| Total Revenues | $ | 2,742,102 | $ | 6,859,767 | ||||
| Production sales: | ||||||||
| Crude oil (Bbls) | 8,846 | 27,704 | ||||||
| Natural gas (Mcf) | 321,423 | 796,384 | ||||||
| NGL (Gallons) | 2,153,280 | 6,177,153 | ||||||
| Total (barrels oil equivalent or Boe) (1) | 113,685 | 307,510 | ||||||
| Average Sales Price: | ||||||||
| Crude Oil ($/Bbl) | $ | 59.51 | $ | 43.26 | ||||
| Natural Gas ($/Mcf) | 2.40 | 2.58 | ||||||
| NGL ($/Gal) | 0.67 | 0.58 | ||||||
| Average Production Cost ($/Boe): | $ | 26.42 | $ | 16.83 | ||||
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As of March 31, 2019, production from the Hutchinson area and Glasscock fields are the only fields that comprise 15% or more of our total proved reserves as of that date. The production volumes for the years ended March 31, 2019 and 2018 are represented in the table below:
| 2019 | 2018 | |||||||
| Hutchinson Area | ||||||||
| Crude oil (Bbls) | 132 | — | ||||||
| Natural gas (Boe) | — | — | ||||||
| NGL (Bbls) | — | — | ||||||
| Glasscock County | ||||||||
| Crude oil (Bbls) | 5,897 | 7,530 | ||||||
| Natural gas (Boe) | 20,241 | 22.030 | ||||||
| NGL (Bbls) | 5,387 | 6,261 | ||||||
Well Summary
The following table presents our ownership in productive crude oil and natural gas wells at March 31, 2019. The gross number represents the number of wells in which we have a working interest. The net number is the sum of our net revenue interest in each well.
| Gross | Net | |||||||
| Hutchinson and Glasscock Counties, Texas: | 36 | 5.37 | ||||||
| Total | 36 | 5.37 | ||||||
Drilling Activity
In the years ended March 31, 2019 and 2018, we had no gross or net wells that were in the process of being drilled nor did we have any delivery commitments.
At March 31, 2019, we had no gross or net wells that were in the process of being drilled nor did we have any delivery commitments.
Oil and Natural Gas Reserves
Reserve Information. For estimates of Camber’s net proved producing reserves of crude oil and natural gas, as well as discussion of Camber’s proved and probable undeveloped reserves, see “ Item 8 Financial Statements and Supplementary Data ” – “ Supplemental Oil and Gas Disclosures (Unaudited) ”. At March 31, 2019, Camber’s total estimated proved reserves were 203,406 Boe of which 124,520 Bbls were crude oil reserves, 44,100 Bbls were NGL reserves and 208,710 Mcfs were natural gas reserves.
Internal Controls. Stephen R. Keene, a consultant, is the technical person primarily responsible for overseeing the preparation of the reserves estimates, which means that he was primarily responsible for the input parameters of our internal reserves estimation process (which are based upon the best available production, engineering and geologic data) and provided a technical review of the veracity of the annual audit of our year end reserves by our independent third party engineers.
Mr. Keene has over 39 years’ experience in oil and gas and has performed oil and gas consulting, supervision and design and analysis services for various entities in the states of Colorado, Texas, New Mexico, Wyoming, Utah and Oklahoma. Mr. Keene graduated from Texas Tech University with a Bachelor’s of Science Degree in Petroleum Engineering in 1976. Mr. Keene has experience with leasing large ranches, assembling small lot tracts, leasing corporate mineral interests, drafting lease terms, managing land teams, negotiating on and offsite drilling locations, pipeline easements, review of title documents, farmout and participation agreements, Texas Rail Road Commission filings, gas contracts and JIB agreements. He also has experience with vertical and horizontal drilling supervision, well design, AFE cost estimations, well log analysis, and control, logistics, urban noise abatement and equipment routing.
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The preparation of our reserve estimates is in accordance with our prescribed procedures that include verification of input data into a reserve forecasting and economic software, as well as management review. Our reserve analysis includes, but is not limited to, the following:
| ● | Research of operators near our lease acreage. Review operating and technological techniques, as well as reserve projections of such wells. |
| ● | The review of internal reserve estimates by well and by area by a qualified petroleum engineer. A variance by well to the previous year-end reserve report is used as a tool in this process. |
| ● | SEC-compliant internal policies to determine and report proved reserves. |
| ● | The discussion of any material reserve variances among management to ensure the best estimate of remaining reserves. |
Qualifications of Third Party Engineers. For the years ended March 31, 2019 and 2018, respectively, the technical person responsible for the audit of our reserve estimates at Graves & Co. Consulting LLC was Allen C. Barron, who meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Graves & CO. Consulting LLC is an independent firm and does not own an interest in our properties and is not employed on a contingent fee basis. Reserve estimates are imprecise and subjective, and may change at any time as additional information becomes available. Furthermore, estimates of oil and gas reserves are projections based on engineering data. There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. A copy of the report issued by Graves & Co. Consulting LLC is filed with this report as Exhibit 99.1.
For more information regarding our oil and gas reserves, please refer to “ Item 8 Financial Statements and Supplementary Data ” – “ Supplemental Oil and Gas Disclosures (Unaudited) ”.
Office Lease
In August 2017, the Company ceased its use of its prior office space at 450 Gears Road, Houston, Harris County, Texas 77067 and moved its headquarters to San Antonio, Texas. The Company was committed to the remaining lease payments for the Houston office space for approximately $346,000 assuming an early termination of the lease on July 31, 2019. The Company recorded monthly rent expense associated with the Houston lease through August 2017. In accordance with the accounting guidance in ASC 420-10-25-13 regarding exit or disposal cost obligations, as of August 2017, the Company recorded rent expense, within general and administrative expense, and accrued a liability of $302,289, which represents the fair value of costs that will continue to be incurred during the remaining term of the Houston lease without economic benefit to the Company. As of March 31, 2019 and March 31, 2018, the carrying amount of the liability of $0 and $302,289, respectively, is included in Current Liabilities in the consolidated balance sheets. In addition, the Company wrote-off $189,533 of mostly fully depreciated property and equipment that was not re-located to the San Antonio headquarters, resulting in a loss of $3,368 which was recognized as a loss during the fiscal year ended March 31, 2018. In October 2018, the Company entered into a settlement with its prior landlord to pay $100,000 and $10,000 per month for each of the next 20 months. In the event that an aggregate of $150,000 is paid by April 15, 2019, in addition to the $100,000 payment made in October 2018, the remaining payments would be forgiven and waived. The Company made the payments prior to March 31, 2019, resulting in no remaining unpaid amounts at March 31, 2019. See also “ Note 8 – Commitments and Contingencies – Legal Proceedings – MidFirst ”.
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Effective October 1, 2017, the Company entered into an agreement to sublease space on a month to month basis in San Antonio, Texas at 4040 Broadway, Suite 425 from RAD2 Minerals, Ltd., an entity owned and controlled by Mr. Azar, the Company’s former Interim Chief Executive Officer. Monthly rent for October through December 2017 was $5,000 per month, increasing to $7,500 per month effective January 2018. The lease agreement was terminated effective June 30, 2018. The Company agreed under a verbal contract to lease the same space on a month-to-month basis for $2,500 per month beginning effective July 1, 2018.
Effective August 1, 2018, the Company terminated its month-to-month lease with RAD2, and entered into a month-to-month lease at 1415 Louisiana, Suite 3500 Houston, Texas 77002. The entity providing use of the space without charge is affiliated with the Company’s Chief Financial Officer.
Camber is periodically named in legal actions arising from normal business activities. Camber evaluates the merits of these actions and, if it determines that an unfavorable outcome is probable and can be reasonably estimated, Camber will establish the necessary reserves. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
MidFirst
In October 2018, the Company entered into a confidential settlement agreement with MidFirst Bank, its prior landlord, and settled all claims relating to the Company’s prior office space lease.
Maranatha Oil Matter
In November 2015, Randy L. Robinson, d/b/a Maranatha Oil Co. sued the Company in Gonzales County, Texas (Cause No. 26160). The plaintiff alleged that it assigned oil and gas leases to the Company in April 2010, retaining a 4% overriding royalty interest and 50% working interest and that the Company failed to pay such overriding royalty interest or royalty interest. The interests relate to certain oil and gas properties which the Company subsequently sold to Nordic Oil USA in April 2013. The petition alleges causes of actions for breach of contract, failure to pay royalties, non-payment of working interest, fraud, fraud in the inducement of contract, money had and received, constructive trust, violation of theft liability act, continuing tort and fraudulent concealment. The suit seeks approximately $100,000 in amounts alleged owed, plus pre-and post-judgment interest. The Company has filed a denial to the claims and intends to vehemently defend itself against the allegations.
Rubenstein Matter
On September 28, 2017, Aaron Rubenstein, a purported stockholder of the Company’s common stock, filed a lawsuit against the Company (as nominal defendant) and Richard N. Azar II, it’s then Chief Executive Officer and director (who has since resigned from both positions), RAD2 Management, LLC, RAD2 Minerals, Ltd. and Segundo Resources, LLC, each an entity owned and controlled by Mr. Azar, in the United States District Court, Western District of Texas (Case No. 5:17-cv-962-FB). The suit sought the recovery (for the benefit of the Company) of alleged short-swing profits from Mr. Azar and his related entities under Section 16(b) of the Exchange Act relating to various transactions involving Series B Preferred Stock of the Company in November 2016 and January 2017. Mr. Azar denied the existence of any short-swing profits and filed a denial with the court. The Company also filed a denial with the court. Subsequently, the parties mediated the dispute in October 2018, and agreed to a confidential settlement of the plaintiffs’ claims in December 2018, which resulted in the dismissal of the claims.
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Petroglobe Energy Holdings, LLC and Signal Drilling, LLC
In March 2019, Petroglobe Energy Holdings, LLC and Signal Drilling, LLC sued the Company in the 316 th Judicial District of Hutchinson County, Texas (Cause No. 43781). The plaintiffs alleged causes of action relating to negligent misrepresentation; fraud and willful misconduct; gross negligence; statutory fraud; breach of contract; and specific performance, in connection with a purchase and sale agreement entered into between the parties in March 2018, relating to the purchase by plaintiffs of certain oil and gas assets from the Company, and a related joint venture agreement. The lawsuit seeks in excess of $600,000 in damages, as well as pre- and post-judgment interest, court costs and attorneys’ fees, and punitive and exemplary damages. The Company denies the plaintiffs’ claims and intends to vehemently defend itself against the allegations and file counter claims against the plaintiffs.
Apache Corporation
In December 2018, Apache Corporation (“ Apache ”) sued the Company, Sezar Energy, L.P., and Texokcan Energy Management Inc., in the 129th Judicial District Court of Harris County, Texas (Cause 2018-89515 ). Apache alleged causes of action for Breach of Contract, Money Had & Received and Conversion, relating to amounts Apache alleged it was owed under a joint operating agreement. Apache is seeking $586,438 in actual damages, exemplary damages, pre- and post-judgment interest, court costs and other amounts which it may be entitled. The Company has filed a general denial to the claims and asserted the affirmative defense of failure to mitigate. The parties are currently moving towards discovery. The Company denies Apache’s claims and intends to vehemently defend itself against the allegations.
N&B Energy
On June 12, 2019, N&B Energy filed a petition in the District Court for the 285 th Judicial District of Bexar County, Texas (Case #2019CI11816). Pursuant to the petition, N&B Energy raises claims for breach of contract, unjust enrichment, money had and received and disgorgement, in connection with $706,000 which it alleges it is owed under the Sale Agreement for true ups and post-closing adjustments associated therewith. The petition seeks amounts owed, pre- and post-judgment interest and attorney’s fees. The Company denies N&B Energy’s claims, believes it is owed approximately $400,000 related to the Sale Agreement and intends to vehemently defend itself against the allegations and claims and seek counterclaims.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted on the NYSE American under the symbol CEI.
Holders
As of June 25, 2019, there were approximately 158 record holders of our common stock, not including holders who hold their shares in street name.
Description of Capital Stock
The total number of shares of all classes of stock that we have authority to issue is 260,000,000, consisting of 250,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. As of June 25, 2019, we had (i) 46,011,619 shares of common stock outstanding, (ii) 2,000 designated shares of Series A Convertible Preferred Stock, none of which were outstanding, (iii) 600,000 designated shares of Series B Redeemable Convertible Preferred Stock, none of which were outstanding, and (iv) 5,000 designated shares of Series C Preferred Stock, 2,305 of which were outstanding.
Common Stock
Holders of our common stock: (i) are entitled to share ratably in all of our assets available for distribution upon liquidation, dissolution or winding up of our affairs; (ii) do not have preemptive, subscription or conversion rights, nor are there any redemption or sinking fund provisions applicable thereto; and (iii) are entitled to one vote per share on all matters on which stockholders may vote at all stockholder meetings. Each stockholder is entitled to receive the dividends as may be declared by our directors out of funds legally available for dividends. Our directors are not obligated to declare a dividend. Any future dividends will be subject to the discretion of our directors and will depend upon, among other things, future earnings, the operating and financial condition of our Company, our capital requirements, general business conditions and other pertinent factors.
The presence of the persons entitled to vote 33% of the outstanding voting shares on a matter before the stockholders shall constitute the quorum necessary for the consideration of the matter at a stockholders meeting.
The vote of the holders of a majority of the votes cast on the matter at a meeting at which a quorum is present shall constitute an act of the stockholders, except for the election of directors, who shall be appointed by a plurality of the shares entitled to vote at a meeting at which a quorum is present. The common stock does not have cumulative voting rights, which means that the holders of a majority of the common stock voting for election of directors can elect 100% of our directors if they choose to do so.
Preferred Stock
Subject to the terms contained in any designation of a series of preferred stock, the Board of Directors is expressly authorized, at any time and from time to time, to fix, by resolution or resolutions, the following provisions for shares of any class or classes of preferred stock:
| 1) | The designation of such class or series, the number of shares to constitute such class or series which may be increased (but not below the number of shares of that class or series then outstanding) by a resolution of the Board of Directors; |
| 2) | Whether the shares of such class or series shall have voting rights, in addition to any voting rights provided by law, and if so, the terms of such voting rights; |
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| 3) | The dividends, if any, payable on such class or series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any share of stock of any other class or any other shares of the same class; |
| 4) | Whether the shares of such class or series shall be subject to redemption by the Company, and, if so, the times, prices and other conditions of such redemption or a formula to determine the times, prices and such other conditions; |
| 5) | The amount or amounts payable upon shares of such series upon, and the rights of the holders of such class or series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Company; |
| 6) | Whether the shares of such class or series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such class or series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; |
| 7) | Whether the shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of the same class or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchanges; |
| 8) | The limitations and restrictions, if any, to be effective while any shares of such class or series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Company of the common stock or shares of stock of any other class or any other series of the same class; |
| 9) | The conditions or restrictions, if any, upon the creation of indebtedness of the Company or upon the issuance of any additional stock, including additional shares of such class or series or of any other series of the same class or of any other class; |
| 10) | The ranking (be it pari passu, junior or senior) of each class or series vis-à-vis any other class or series of any class of preferred stock as to the payment of dividends, the distribution of assets and all other matters; |
| 11) | Facts or events to be ascertained outside the articles of incorporation of the Company, or the resolution establishing the class or series of stock, upon which any rate, condition or time for payment of distributions on any class or series of stock is dependent and the manner by which the fact or event operates upon the rate, condition or time of payment; and |
| 12) | Any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof, insofar as they are not inconsistent with the provisions of our articles of incorporation, as amended, to the full extent permitted by the laws of the State of Nevada. |
The powers, preferences and relative, participating, optional and other special rights of each class or series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
Series A Convertible Preferred Stock
The Series A Preferred Stock has no voting rights, no liquidation rights and no redemption rights, but has conversion rights providing the holder thereof the right to convert each outstanding share of Series A Preferred Stock into 40 shares of common stock. The Series A Preferred Stock contains a provision that limits the shares of common stock that the holder can own at any time upon conversion to an aggregate of 4.99% of our then issued and outstanding shares of common stock.
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Series B Redeemable Convertible Preferred Stock
The Series B Preferred Stock has dividend rights that accrue at an annual rate of 6% until such Series B Preferred is no longer outstanding either due to conversion, redemption or otherwise. The Series B Preferred Stock also has liquidation rights equal to the original issue price of such shares and are payable upon our liquidation, dissolution or winding up, either voluntary or involuntary. Each outstanding share of Series B Preferred Stock is entitled to one vote on all stockholder matters to come before our stockholders and are not entitled to series voting except as required by law.
Each share of Series B Preferred Stock is convertible, at the option of the holder, into that number of fully-paid, nonassessable shares of common stock determined by dividing the Original Issue Price for the Series B Preferred ($25.00, as may be adjusted for recapitalizations) by the Conversion Price ($2,187.50, as may be adjusted for recapitalizations). Each share of Series B Preferred Stock automatically converts into shares of common stock under certain conditions set forth in the certificate of designations for the Series B Preferred Stock.
Subject to the terms of any credit or debt agreements in place which prevent us from redeeming the Series B Preferred Stock for cash, we have the option, exercisable from time to time after the Original Issue Date, to redeem all or any portion of the outstanding shares of Series B Preferred Stock which have not been previously converted into common stock, by paying each applicable holder, an amount equal to (a) the Original Issue Price multiplied by the number of shares of Series B Preferred Stock held by each applicable holder, subject to such redemption; plus (b) the accrued dividends on such shares.
The consent of a majority in interest of the Series B Preferred Stock must also be obtained prior to certain corporate actions.
As of the filing date, no Series B Preferred Stock is outstanding.
Series C Redeemable Convertible Preferred Stock
Holders of the Series C Preferred Stock are entitled to cumulative dividends in the amount of 24.95% per annum (adjustable up to 34.95% if a trigger event, as described in the designation of the Series C Preferred Stock occurs), payable upon redemption, conversion, or maturity, and when, as and if declared by our Board of Directors in its discretion, provided that upon any redemption, conversion, or maturity, seven years of dividends are due and payable on such redeemed, converted or matured stock. The Series C Preferred Stock ranks senior to the common stock and pari passu with respect to our Series B Preferred Stock. The Series C Preferred Stock has no right to vote on any matters, questions or proceedings of the Company including, without limitation, the election of directors except: (a) during a period where a dividend (or part of a dividend) is in arrears; (b) on a proposal to reduce the Company’s share capital; (c) on a resolution to approve the terms of a buy-back agreement; (d) on a proposal to wind up the Company; (e) on a proposal for the disposal of all or substantially all of the Company’s property, business and undertakings; and (f) during the winding-up of the Company.
The Series C Preferred Stock may be converted into shares of common stock (“ Conversion Shares ”) at any time at the option of the holder, or at our option if certain equity conditions (as defined in the certificate of designation for the Series C Preferred Stock), are met. Upon conversion, we will pay the holders of the Series C Preferred Stock being converted an amount, in cash or stock at our sole discretion, equal to the dividends that such shares would have otherwise earned if they had been held through the maturity date (i.e., seven years), and issue to the holders such number of shares of Common stock equal to $10,000 per share of Series C Preferred Stock (the “ Face Value ”) multiplied by the number of such shares of Series C Preferred Stock divided by the applicable Conversion Price $3.25 per share.
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The conversion premium under the Series C Preferred Stock is payable and the dividend rate under the Series C Preferred Stock is adjustable. Specifically, the conversion rate of such premiums and dividends equals 95% of the average of the lowest 5 individual daily volume weighted average prices during the Measuring Period, not to exceed 100% of the lowest sales prices on the last day of the Measuring Period, less $0.05 per share of common stock, unless a trigger event has occurred, in which case the conversion rate equals 85% of the lowest daily volume weighted average price during the Measuring Period, less $0.10 per share of common stock not to exceed 85% of the lowest sales prices on the last day of such the Measuring Period, less $0.10 per share. Notwithstanding the above, in no event will the value of the common stock pursuant to the foregoing be below the par value per share of the common stock ($0.001). The “ Measuring Period ” is the period beginning, if no trigger event has occurred, 30 trading days, and if a trigger event has occurred, 60 trading days, before the applicable notice has been provided regarding the exercise or conversion of the applicable security, and ending, if no trigger event has occurred, 30 trading days, and if a trigger event has occurred, 60 trading days, after the applicable number of shares stated in the initial exercise/conversion notice have actually been received into the Investor’s designated brokerage account in electronic form and fully cleared for trading. Trigger events are described in the designation of the Series C Preferred Stock, but include items which would typically be events of default under a debt security, including filing of reports late with the SEC.
The Series C Preferred Stock has a maturity date that is seven years after the date of issuance and, if the Series C Preferred Stock has not been wholly converted into shares of common stock prior to such date, we may redeem the Series C Preferred Stock on such date by repaying to the investor in cash 100% of the Face Value plus an amount equal to any accrued but unpaid dividends thereon. 100% of the Face Value, plus an amount equal to any accrued but unpaid dividends thereon, automatically becomes payable in the event of a liquidation, dissolution or winding up by us.
We may not issue any other preferred stock (other than the Series B Preferred Stock) that is pari passu or senior to the Series C Preferred Stock with respect to any rights for a period of one year after the earlier of such date (i) a registration statement is effective and available for the resale of all shares of common stock issuable upon conversion of the Series C Preferred Stock, or (ii) Rule 144 under the Securities Act is available for the immediate unrestricted resale of all shares of common stock issuable upon conversion of the Series C Preferred Stock.
The Series C Preferred Stock is subject to a beneficial ownership limitation, which prevents any holder of the Series C Preferred Stock from converting such Series C Preferred Stock into common stock, if upon such conversion, the holder would beneficially own greater than 9.99% of our outstanding common stock.
Dividend Policy
We have not declared or paid cash dividends or made distributions in the past. We do not anticipate that we will pay cash dividends or make distributions in the foreseeable future. We currently intend to retain and reinvest future earnings to finance operations. We may however declare and pay dividends in shares of our common stock in the future (similar to how we have in the past).
Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the year ended March 31, 2019 and from the period from April 1, 2019 to the filing date of this report, which have not previously been disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K, except as set forth below:
As of June 25, 2019, the Investor had converted 537 shares of Series C Preferred Stock into 4,767,950 shares of common stock (when including true ups). Additionally, the 1,674 remaining unconverted shares of Series C Preferred Stock sold pursuant to the terms of the October 2017 Purchase Agreement, the 369 shares of Series C Preferred Stock sold pursuant to the October 2018 Purchase Agreement and the 262 shares of Series C Preferred Stock sold pursuant to the November 2018 Purchase Agreement, can convert, pursuant to their terms, and including conversion premiums thereon, into approximately 1.6 billion shares of common stock, subject to further adjustments pursuant to the terms of the Series C Preferred Stock, including true ups thereon, based on conversion prices of $0.025, which conversion price may actually be significantly less than such estimate and which shares due may be significantly greater, as of the date of this filing.
The sales and issuances of the securities described above have been determined to be exempt from registration under the Securities Act in reliance on Sections 3(a)(9) and 4(a)(2) of the Securities Act, Rule 506 of Regulation D promulgated thereunder and Regulation S promulgated thereunder, as transactions by an issuer not involving a public offering. The warrant holder/preferred stock holder has represented that it is an accredited investor, as that term is defined in Regulation D, it is not a U.S. Person, and that it is acquiring the securities for its own account.
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As of March 31, 2019, the 44,000 outstanding shares of Series B Preferred Stock had accrued $16,500 and $16,500 in dividends, respectively. The Company paid the dividends by way of the issuance of an aggregate of 8 shares of its common stock to the preferred stockholder pursuant to the terms of the designation (which provides that the Shares shall be based on a value of $2,187.50 per share). The beneficial owner of the Series B Preferred Stock is Alan Dreeben, the Company’s former director. Effective on June 17, 2019, Mr. Dreeben converted the 44,000 shares of Series B Preferred Stock into 503 shares of common stock pursuant to a settlement agreement where the Company paid Mr. Dreeben $25,000 in consideration for agreeing to make such conversion.
As the issuance of the common stock in satisfaction of the dividends will not involve a “ sale ” of securities under Section 2(a)(3) of the Securities Act, we believe that no registration of such securities, or exemption from registration for such securities, is required under the Securities Act.
During the year ended March 31, 2019, the Investor converted 404 shares of the Series C Preferred stock with a face value of $4,040,000 into a total of approximately 4.8 million shares of common stock issued (including shares issued for true-ups).
The terms of the October 2017 Purchase Agreement, the rights and preferences of the Series C Preferred Stock (which Series C Preferred Stock sold pursuant to the October 2017 Purchase Agreement currently has a dividend rate of 34.95% per year) and related items are described in greater detail in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on October 5, 2017.
On April 6, 2016, the Company entered into a Securities Purchase Agreement with the Investor, pursuant to which the Company issued a redeemable convertible subordinated debenture, with a face value of $530,000, initially convertible into shares of common stock at a conversion price equal to $2,031.25 per share. The debenture matures in seven years and accrues interest at a rate of 6.0% per annum. Due to the prior 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 34% 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 the last of the shares due), less $62.50 per share of common stock not to exceed 85% of the lowest sales price on the last day of such period less $62.50 per share.
On August 23, 2017, the Investor converted $35,000 of the principal amount of the Debenture into an aggregate of 2,808 shares of common stock, which included 17 shares for conversion of principal and 2,791 shares for premiums.
On April 20, 2018, the Investor was issued 5,679 shares of common stock as a result of true-ups in connection with the August 23, 2017 conversion of the Debenture.
On October 31, 2018, the Investor converted the entire $495,000 of principal owed under the terms of a convertible debenture, into an aggregate of 801,507 shares of common stock, including 6,092 shares of common stock issuable upon conversion of the principal amount thereof (at a conversion price of $81.25 per share), and 795,414 shares in connection with conversion premiums due thereon (at an initial conversion price, as calculated as provided in such debenture, of $1.53 per share). A total of 100,000 of such shares were issued to the Investor in connection with the initial conversion and the remaining shares were held in abeyance subject to the Investor’s 9.99% ownership limitation, to be issued from time to time, at the request of the Investor. Subsequent to the October 31, 2018 conversion date, the Investor was due an additional 47,645,285 shares of common stock in connection with true ups associated with the original issuance, as a result of the conversion price of the conversion premiums falling to $0.025 per share pursuant to the terms of the convertible debenture. Through March 31, 2019, a total of 11,761,418 of the conversion shares had been issued and the remainder of the shares were held in abeyance subject to the Investor’s 9.99% ownership limitation, to be issued from time to time, at the request of the Investor.
From the date of the October 31, 2018 conversion of the debenture through June 24, 2019, the Investor has been issued approximately 40.1 million shares of common stock as true-ups on shares issued upon conversion of the debenture. As of June 25, 2019, the Investor was still due 8,226,853 shares in connection with true ups on the conversion of the Debenture, which shares are being held in abeyance until such time, as ever, as such shares can be issued to the Investor without the Investor exceeding the 4.99% ownership limitation set forth in the Debenture.
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The sale and issuance of the securities have been determined to be exempt from registration under the Securities Act in reliance on Sections 3(a)(9) and 4(a)(2) of the Securities Act, Rule 506 of Regulation D promulgated thereunder and Regulation S promulgated thereunder, as transactions by an issuer not involving a public offering. The Investor has represented that it is an accredited investor, as that term is defined in Regulation D. The Investor also has represented that it is acquiring the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
ITEM 6. SELECTED FINANCIAL DATA.
Not required under Regulation S-K for “ smaller reporting companies. ”
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The following is a discussion by management of its view of the Company’s business, financial condition, and corporate performance for the past year. The purpose of this information is to give management’s recap of the past year, and to give an understanding of management’s current outlook for the near future. This section is meant to be read in conjunction with “ Item 8. Financial Statements and Supplementary Data ” of this Annual Report on Form 10-K.
Our fiscal year ends on the last day of March of the calendar year. We refer to the years ended March 31, 2019 and 2018 as our 2019 and 2018 fiscal years, respectively.
Financing
A summary of our financing transactions, funding agreements and other material funding transactions can be found under “ Part I. Financial Information – Item 1. Financial Statements – Note 2 – Liquidity and Going Concern Considerations ”, “ Note 6 – Note Payables and Debenture ”, “ Note 11 – Stockholders’ Equity (Deficit) ” and “ Note 16 – Subsequent Events ”, above.
With the completion of the Sale Agreement and the Assumption Agreement and the additional equity raised, the Company believes it has sufficient liquidity to operate as a going concern for the next twelve months following the issuance of these financial statements. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Operations
Camber’s objective for our current producing wells is to operate as efficiently as possible, look for technological advancements to increase the life of the wells, evaluate the economic viability of these wells and consider adding to or working over our low producing assets. Costs associated with producing oil, natural gas and NGLs are substantial. Some of these costs vary with commodity prices, some trend with the type and volume of production, and others are a function of the number of wells we own and operate. Production expenses are the costs incurred in the operation of productive properties and workover costs. Expenses for utilities, direct labor, water transportation, injection and disposal, materials and supplies comprise the most significant portion of our production expenses. Certain items, such as direct labor and materials and supplies, generally remain relatively fixed across broad production volume ranges, but can fluctuate depending on the activities performed during a given period. We monitor our operations to ensure that we are incurring production expenses at an acceptable level. For example, we monitor our production expenses per Boe to determine if any wells or properties should be shut in, recompleted or sold. This unit rate also allows us to monitor these costs to identify trends and to benchmark against other producers. Although we strive to reduce our production expenses, these expenses can increase or decrease on a per unit basis as a result of various factors as we operate our properties or make acquisitions and dispositions of properties.
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For the year ended March 31, 2019, the Company produced oil, natural gas and NGLs at an average of approximately 311 Boepd from wells in two Texas counties and four Oklahoma counties in the Mid-Continent region. The Company operates 35 gross wells as of the date of this filing. The total number of gross wells is 81, with the active producers being 36. The ratio between the gross and net production differs due to varied working interests and net revenue interests in each well. As we develop our properties, we may see the opportunity to increase our natural gas and natural gas liquids production.
Reserves
Camber’s estimated total net proved and probable reserves as of March 31, 2019 were 168,620 Bbls of crude oil and NGL combined and 208,710 Mcf of natural gas which translates to an equivalent of 203,406 Boe. The total net proved reserves are 168,620 Bbls of crude oil and NGL combined and 208,710 Mcf of natural gas which translates to an equivalent of 203,406 Boe and the total net probable reserves are 0 Bbls of crude oil and NGL combined and 0 Mcf of natural gas. These reserves are based on the Oil and Gas Benchmark Prices to Estimate Year-End Petroleum Reserves and Values Using U.S. Securities and Exchange Commission Guidelines from the Modernization of Oil and Gas Reporting and on the quantities of oil, natural gas and NGLs, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward from known reservoirs under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the rights to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Reserves and economic evaluation of all of our properties are prepared on a well-by-well basis. The accuracy of the reserve estimates is a function of the quality and quantity of available data; interpretation of that data; accuracy of various mandated economic assumptions; and judgement of the independent reserve engineer.
Using the average monthly crude oil price of $63.12 per Bbl and natural gas price of $3.10 per Mcf for the twelve months ended March 31, 2019, our estimated discounted future net cash flow (“ PV-10 ”) before tax expenses for our total proved reserves was approximately $2.08 million. Total reserve value at March 31, 2019 represents a decrease of approximately $5.39 million or 72% from a year earlier using the same SEC pricing and reserves methodology. The decrease is primarily due to the September 2018 closing and natural declines in the production of our oil and gas properties. Oil, natural gas and NGL prices are market driven and have been historically volatile, and we expect that future prices will continue to fluctuate due to supply and demand factors, seasonality, and geopolitical and economic factors, and such volatility can have a significant impact on our estimates of proved reserves and the related PV-10 value.
The reserves as of March 31, 2019 were determined in accordance with standard industry practices and SEC regulations by the licensed independent petroleum engineering firm of Graves & Co. Consulting LLC. Oil, natural gas and NGL reserve estimates require significant judgments in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may change substantially over time as a result of numerous factors including, but not limited to, additional development activity, production history, projected future production, economic assumptions relating to commodity prices, operating expenses, severance and other taxes, capital expenditures and remediation costs and these estimates are inherently uncertain. If estimates of proved reserves decline, our depreciation, depletion and amortization (“ DD&A ”) rate will increase, resulting in a decrease in net income. A decline in estimates of proved reserves could also cause us to perform an impairment analysis to determine if the carrying amount of oil and natural gas properties exceeds fair value and could result in an impairment charge, which would reduce earnings. Although these hydrocarbon quantities have been determined in accordance with industry standards, they are prepared using the subjective judgments of the independent engineers, and may actually be more or less.
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Oil and Gas Revenue
During the year ended March 31, 2019, our net crude oil sales volumes decreased to 8,846 Bbls from 27,704 Bbls, a 68% decrease over the previous fiscal year. The production decrease is primarily related to the effects of the September 2018 closing.
Major Expenditures
The table below sets out the major components of our operating and corporate expenditures for the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Additions to Oil and Gas Properties (Capitalized) | ||||||||
| Acquisitions Using Cash | $ | — | $ | 460,000 | ||||
| Other Capitalized Costs (a) | 2,095,991 | 1,581,655 | ||||||
| Total Additions (Deductions) to Oil and Gas Properties | 2,095,991 | 2,041,655 | ||||||
| Lease Operating Expenditures (Expensed) | 2,870,908 | 4,874,724 | ||||||
| Severance and Property Taxes (Expensed) | 132,993 | 300,314 | ||||||
| $ | 5,099,892 | $ | 7,216,693 | |||||
| General and Administrative Expense (Cash-based) | $ | 4,809,135 | $ | 5,979,586 | ||||
| Share-Based Compensation (Non-Cash) | 343,631 | 1,194,243 | ||||||
| Total General and Administrative Expense | $ | 5,152,766 | $ | 7,173,829 | ||||
| (a) | Other capitalized costs include title related expenses and tangible and intangible drilling costs. |
Market Conditions and Commodity Prices
Our financial results depend on many factors, particularly the price of natural gas and related natural gas liquids, and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our production volumes or revenues. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success. We expect prices to remain volatile for the remainder of the year. For information about the impact of realized commodity prices on our natural gas and crude oil and condensate revenues, refer to “ Results of Operations ” below.
Results of Operations
The following discussion and analysis of the results of operations for each of the two fiscal years in the period ended March 31, 2019 should be read in conjunction with the consolidated financial statements of Camber Energy, Inc. and notes thereto (see “ Item 8. Financial Statements and Supplementary Data ”).
We reported net income for the year ended March 31, 2019 of $16.6 million, or $2.22 per share. For the year ended March 31, 2018, we reported a net loss of $24.8 million, or ($287.86) per share. The decrease in net loss was primarily due to the gain on the sale that closed in September 2018.
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Net Operating Revenues
The following table sets forth the revenue and production data for the years ended March 31, 2019 and 2018.
| % | |||||||||||||||
| 2019 | 2018 |
Increase (Decrease) |
Increase (Decrease) |
||||||||||||
| Sale Volumes: | |||||||||||||||
| Crude Oil (Bbls) | 8,846 | 27,704 | (18,858 | ) | (68%) | ||||||||||
| Natural Gas (Mcf) | 321,423 | 796,384 | (474,961 | ) | (60%) | ||||||||||
| NGL (Gallons) | 2,153,280 | 6,177,153 | (4,023,873 | ) | (65%) | ||||||||||
| Total (Boe) | 113,685 | 307,510 | (193,825 | ) | (63%) | ||||||||||
| Crude Oil (Bbls per day) | 24 | 76 | (52 | ) | (68%) | ||||||||||
| Natural Gas (Mcf per day) | 881 | 2,182 | (1,301 | ) | (60%) | ||||||||||
| NGL (Gallons per day) | 5,899 | 16,924 | (11,025 | ) | (65%) | ||||||||||
| Total (Boe per day) | 311 | 842 | (531 | ) | (63%) | ||||||||||
| Average Sale Price: | |||||||||||||||
| Crude Oil ($/Bbl) | $ | 59.51 | $ | 43.26 | $ | 16.25 | 38% | ||||||||
| Natural Gas($/Mcf) | 2.40 | 2.58 | (0.18 | ) | (7%) | ||||||||||
| NGL ($/Gallon) | 0.67 | 0.58 | 0.09 | 16% | |||||||||||
| Net Operating Revenues: | |||||||||||||||
| Crude Oil | $ | 526,365 | $ | 1,198,514 | $ | (672,149 | ) | (56%) | |||||||
| Natural Gas | 772,105 | 2,051,846 | (1,279,741 | ) | (62%) | ||||||||||
| NGL | 1,443,632 | 3,609,407 | (2,165,775 | ) | (60%) | ||||||||||
| Total Revenues | $ | 2,742,102 | $ | 6,859,767 | $ | (4,117,665 | ) | (60%) | |||||||
Total crude oil and natural gas revenues for the year ended March 31, 2019 decreased $4.1 million, or 60%, to approximately $2.7 million, compared to $6.9 million for the same period a year ago due primarily to the sale that closed in September 2018.
Operating and Other Expenses
The following table sets forth operating and other expenses for the years ended March 31, 2019 and 2018:
| % | |||||||||||||||
| 2019 | 2018 |
Increase
(Decrease) |
Increase
(Decrease) |
||||||||||||
| Direct lease operating expense | $ | 1,942,922 | $ | 4,601,156 | $ | (2,658,234 | ) | (58%) | |||||||
| Workovers expense | 224,827 | 273,568 | (48,741 | ) | (18%) | ||||||||||
| Other | 703,159 | — | 703,159 | 100% | |||||||||||
| Total Lease Operating Expenses | 2,870,908 | 4,874,724 | (2,003,816 | ) | (41%) | ||||||||||
| Severance and Property Taxes | 132,993 | 300,314 | (167,321 | ) | (56%) | ||||||||||
| Depreciation, Depletion, Amortization and Accretion | 478,770 | 1,480,535 | (1,001,765 | ) | (68%) | ||||||||||
| Impairment of Oil and Gas Properties | 1,304,785 | 8,137,987 | (6,833,202 | ) | (84%) | ||||||||||
| (Gain) Loss on Sale of Property and Equipment | (25,808,246 | ) | 3,559,083 | (29,367,329 | ) | (825%) | |||||||||
| General and Administrative (Cash-based) | 4,809,135 | 5,979,586 | (1,170,451 | ) | 20% | ||||||||||
| Share-Based Compensation (Non-Cash) | 343,631 | 1,194,243 | (850,612 | ) | 71% | ||||||||||
| Total General and Administrative Expense | $ | 5,152,766 | $ | 7,173,829 | $ | (2,021,063 | ) | 28% | |||||||
| Interest Expense | $ | 2,438,097 | $ | 6,018,829 | $ | (3,580,732 | ) | (59%) | |||||||
| Other (Income) Expense, Net | $ | (474,124 | ) | $ | 86,054 | $ | (560,178 | ) | (651%) | ||||||
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Lease Operating Expenses. Lease operating expenses can be divided into the following categories: costs to operate and maintain Camber’s crude oil and natural gas wells, the cost of workovers and lease and well administrative expenses. Operating and maintenance expenses include, among other things, pumping services, salt water disposal, equipment repair and maintenance, compression expense, lease upkeep and fuel and power. Workovers are operations to restore or maintain production from existing wells. Each of these categories of costs individually fluctuates from time to time as Camber attempts to maintain and increase production while maintaining efficient, safe and environmentally responsible operations. The costs of services charged to Camber by vendors, fluctuate over time.
In total, the overall lease operating expenses decreased $2.0 million or 41% for the current period, compared to the prior year’s period due primarily to the sale of a significant amount of our assets which closed in September 2018 as described above under “ Part I ” – “ Item 1. Business ” - “ Recent Events ” - “ N&B Energy Asset Disposition Agreement ” and “ Assumption Agreement ”.
Depreciation, Depletion, Amortization and Accretion (“ DD&A ”). DD&A related to proved oil and gas properties is calculated using the unit-of-production method. Under full cost accounting, the amortization base is comprised of the total capitalized costs and total future investment costs associated with all proved reserves.
DD&A decreased for the current year as compared to the prior year period by $1.0 million or 68% primarily related to the decrease in total depreciable assets due to the September 2018 sale.
Costs of oil and natural gas properties are amortized using the units of production method. Amortization expense calculated per equivalent physical unit of production amounted to $4.17 and $5.74 per barrel of oil equivalent for the years ended March 31, 2019 and 2018, respectively.
Impairment of Oil and Gas Properties. During the year ended March 31, 2019, the Company recorded impairments totaling $1.3 million related to unproved properties due to expirations of leaseholds. During the year ended March 31, 2018, the Company recorded impairments totaling $8.1 million primarily related to unproved properties due to expirations of leaseholds.
Gain/(Loss) on Sale of Property and Equipment. During the year ended March 31, 2019, the Company recorded a gain on sale of property and equipment of $25.8. During the year ended March 31, 2018, the Company recorded a loss on sale of property and equipment of ($3.6) million. The 825% change was due to the sale of a significant amount of our assets which closed in September 2018 as described above under “ Part I ” – “ Item 1. Business ” - “ Recent Events ” - “ N&B Energy Asset Disposition Agreement ” and “ Assumption Agreement ”.
General and Administrative Expenses (“ G&A ”) (excluding share-based compensation). G&A expenses for the current period decreased by approximately $1.2 million or 20% primarily due to a reduction in professional fees from our financing transactions and the sale of a significant amount of our assets which closed in September 2018 as described above under “ Part I ” – “ Item 1. Business ” - “ Recent Events ” - “ N&B Energy Asset Disposition Agreement ” and “ Assumption Agreement ”
Share-Based Compensation. Share-based compensation, which is included in General and Administrative expenses in the Statements of Operations decreased approximately $0.9 million or 71% for the year ended March 31, 2019, compared to the prior year primarily due to the reduction in shares granted to consultants as compensation for services performed for the Company. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations.
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Interest Expense. Interest expense for the year ended March 31, 2019 decreased by $3.6 million or 59% when compared to the prior year primarily due to the approximate $2.1 million of default interest related to certain prior indebtedness which was outstanding during the year ended March 31, 2018, which was in default, and later satisfied through the foreclosure of certain of our assets, and the assignment of the IBC Bank loan in connection with the sale of a significant amount of our assets which closed in September 2018 as described above under “ Part I ” – “ Item 1. Business ” - “ Recent Events ” - “ N&B Energy Asset Disposition Agreement ” and “ Assumption Agreement ”.
Other Expense. Other expense for the year ended March 31, 2019 decreased by approximately $0.4 million when compared to the prior period primarily due, in part, to interest earned on overnight investments and more favorable settlements of disputed accounts payable claims.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Our primary sources of cash for the year ended March 31, 2019 were from funds generated from the sale of preferred stock, the sale of natural gas and crude oil production and funds raised through the sale of Series C Preferred Stock. The primary uses of cash were funds used in operations. As of March 31, 2019, the Company had net working capital of approximately $6.1 million, which management believes is sufficient to fund operating costs and planned capital expenditures for the twelve months following the issuance of these financial statements. In the event the Lineal transaction does not occur, management intends to use a portion of its working capital to facilitate other targeted acquisitions and mergers. If additional financing is required to consummate transactions, management intends to seek additional equity and debt financing, as needed.
Plan of Operations
After the divestiture of our Oklahoma and South Texas properties during fiscal 2018 and 2019, as discussed in further detail herein, we initiated discussions with several potential acquisition and merger candidates to diversify our operations. In May 2019, we entered into a non-binding letter of intent to acquire Lineal Star Holdings, LLC., a specialty construction and oil and gas services enterprise providing services to the energy industry. Under the terms of the transaction, the Company anticipates paying amounts for transaction costs, working capital to fund startup operations in Lineal’s Houston operation and to retire short term debt of Lineal. In addition, under the proposed terms of the transaction, the Company anticipates designating a portion of the Company’s cash on hand for targeted acquisitions to complement Lineal’s operations.
The Lineal transaction, which is an all-stock transaction, is subject to customary closing conditions, confirmation of final transaction documents and transaction terms, including confirmation of structuring the transaction to be on a tax free basis, and other conditions, including, but not limited to final documents with our Series C Redeemable Convertible Preferred Stock (“ Series C Preferred Stock ”) holder amending the Series C Preferred Stock to alter the conversion rights thereof, and obtaining the requisite NYSE American approval of the transaction terms and agreements, which conditions may not be satisfied in a timely manner, if at all. The transaction contemplates the issuance of a new series of convertible preferred stock which will be convertible into 67-70% of our fully diluted common stock after stockholder approval, as required under the applicable NYSE American rules and requirements. Upon receipt of shareholder approval, it is contemplated that the shareholders of Lineal will have voting control of the Company.
Whether or not the Lineal transaction closes, the Company intends to pursue additional acquisitions in the energy services industry sector to diversity operations.
Working Capital
At March 31, 2019, the Company's total current assets of $8.2 million exceeded its total current liabilities of approximately $2.1 million, resulting in working capital of $6.1 million, while at March 31, 2018, the Company's total current liabilities of $40.0 million exceeded its total current assets of $1.7 million, resulting in a working capital deficit of $38.3 million. The $44.4 million increase in working capital is primarily related to the settlement of the debt related to the sale closing in September 2018.
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Cash Flows
| Year Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows used in operating activities | $ | (5,773,428 | ) | $ | (5,766,104 | ) | ||
| Cash flows used in investing activities | (2,237,000 | ) | (123,112 | ) | ||||
| Cash flows provided by financing activities | 15,000,000 | 4,288,606 | ||||||
| Net increase (decrease) in cash | $ | 6,989,572 | $ | (1,600,610 | ) | |||
Net cash used in operating activities was $5.8 million for the year ended March 31, 2019, compared to $5.8 million for the same period a year ago. For the year ended March 31, 2019, net cash used in operating activities mainly due to the cash expended for operating expenses in excess of revenues and the payments of accounts payable and accrued expenses.
Net cash used in investing activities was $2.2 million for the year ended March 31, 2019, compared to net cash used in investing activities of $0.1 million for the same period a year ago. The decrease in net cash used in investing activities of $2.1 million was primarily due to a decline in proceeds from the sale of oil and gas properties for the year ended March 31, 2019, compared to the year ended March 31, 2018.
Net cash provided by financing activities was $15.0 million for the year ended March 31, 2019, and $4.3 million for the year ended March 31, 2018. The $10.7 million increase in net cash provided by financing activities was due to the increase in proceeds from the sale of Series C Preferred Stock to the Investor.
Off-Balance Sheet Arrangements
Camber does not participate in financial transactions that generate relationships with unconsolidated entities or financial partnerships. As of March 31, 2019, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Camber prepares its financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. Camber identifies certain accounting policies as critical based on, among other things, their impact on the portrayal of Camber’s financial condition, results of operations or liquidity, and the degree of difficulty, subjectivity and complexity in their deployment. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection and disclosure of each of the critical accounting policies. Following is a discussion of Camber’s most critical accounting policies:
Proved Oil and Natural Gas Reserves
Camber’s independent petroleum consultants estimate proved oil and gas reserves, which directly impact financial accounting estimates, including depreciation, depletion and amortization. Proved reserves represent estimated quantities of crude oil and condensate, natural gas liquids and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. For related discussion, see “ Item 1A. Risk Factors ”.
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Full Cost Accounting Method
Camber uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and gas property costs on a country-by-country basis. Properties not subject to amortization consist of exploration and development costs, which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Camber assesses overall values of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management’s intention with regard to future development of individually significant properties and the ability of Camber to obtain funds to finance their programs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Costs of oil and gas properties are amortized using the units of production method. Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves.
Full Cost Ceiling Test Limitation
In applying the full cost method, Camber performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “ estimated present value, ” of its proved reserves discounted at a 10% interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.
Share-Based Compensation
In accounting for share-based compensation, judgments and estimates are made regarding, among other things, the appropriate valuation methodology to follow in valuing stock compensation awards and the related inputs required by those valuation methodologies. Assumptions regarding expected volatility of Camber’s common stock, the level of risk-free interest rates, expected dividend yields on Camber’s stock, the expected term of the awards and other valuation inputs are subject to change. Any such changes could result in different valuations and thus impact the amount of share-based compensation expense recognized in the Statements of Operations.
Revenue Recognition
The Company’s revenue is comprised entirely of revenue from exploration and production activities. The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.
Contracts with customers have varying terms, including month-to-month contracts, and contracts with a finite term. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs.
Revenues are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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).
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements as of and for the fiscal year ended March 31, 2019 have been audited by Marcum LLP, independent registered public accounting firm. Our consolidated financial statements as of and for the fiscal year ended March 31, 2018 have been audited by GBH CPAs, PC, independent registered public accounting firm, and have been prepared in accordance with generally accepted accounting principles pursuant to Regulation S-X.
52
INDEX TO THE FINANCIAL STATEMENTS
F- 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the board of directors of
Camber Energy, Inc.
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Camber Energy, Inc. (the “Company”) as of March 31, 2019, the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company's auditor since 2015.
Houston, Texas
July 1, 2019
F- 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the board of directors of
Camber Energy, Inc.
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Camber Energy, Inc. (the “Company”) as of March 31, 2018, the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ GBH CPAs, PC
We served as the Company’s auditor from 2015 to 2018.
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
July 2, 2018
F- 3
CAMBER ENERGY, INC.
| As of March 31, | 2019 | 2018 | ||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 7,778,723 | $ | 760,317 | ||||
| Restricted Cash | — | 28,834 | ||||||
| Accounts Receivable, Net of Allowance | 129,037 | 646,891 | ||||||
| Inventories | — | — | ||||||
| Other Current Assets | 263,205 | 228,733 | ||||||
| Total Current Assets | 8,170,965 | 1,664,775 | ||||||
| Property and Equipment | ||||||||
| Oil and Gas Properties - Subject to Amortization | 50,528,953 | 61,082,526 | ||||||
| Oil and Gas Properties - Not Subject to Amortization | 28,016,989 | 28,016,989 | ||||||
| Other Property and Equipment | 1,570 | 1,570 | ||||||
| Total Property and Equipment | 78,547,512 | 89,101,085 | ||||||
| Accumulated Depletion, Depreciation, Amortization and Impairment | (78,334,324 | ) | (76,555,506 | ) | ||||
| Total Property and Equipment, Net | 213,188 | 12,545,579 | ||||||
| Other Assets | 198,519 | 57,510 | ||||||
| Total Assets | $ | 8,582,672 | $ | 14,267,864 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $ | 1,521,329 | $ | 2,972,261 | ||||
| Common Stock Payable | 303,340 | 200,000 | ||||||
| Accrued Expenses | 276,133 | 1,140,730 | ||||||
| Current Income Taxes Payable | 3,000 | — | ||||||
| Current Portion of Long-Term Notes Payable, Net of Discount | — | 35,691,567 | ||||||
| Total Current Liabilities | 2,103,802 | 40,004,558 | ||||||
| Long-term Notes Payable, Net of Discount | — | 247,403 | ||||||
| Asset Retirement Obligation | 303,809 | 979,159 | ||||||
| Derivative Liability | 5 | 5 | ||||||
| Total Liabilities | 2,407,616 | 41,231,125 | ||||||
| Commitments and Contingencies (see Note 8) | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred Stock Series A, 2,000 Shares Authorized of $0.001 Par Value, -0- Shares issued and Outstanding | — | — | ||||||
| Preferred Stock Series B, 600,000 Shares Authorized of $0.001 Par Value, 44,000 and 408,508 Shares issued and Outstanding, respectively, Liquidation Preference of $1,100,000 | 44 | 409 | ||||||
| Preferred Stock Series C, 5,000 Shares Authorized of $0.001 Par Value, 2,305 and 1,132 Shares issued and Outstanding, respectively, Liquidation Preference of $23,050,000 | 2 | 1 | ||||||
| Common Stock, 250,000,000 Shares Authorized of $0.001 Par Value, 16,802,587 and 230,359 Shares Issued and Outstanding, respectively | 16,803 | 230 | ||||||
| Additional Paid-in Capital | 152,234,833 | 141,429,811 | ||||||
| Stock Dividends Distributable | 8,141,843 | 2,467,910 | ||||||
| Accumulated Deficit | (154,218,469 | ) | (170,861,622 | ) | ||||
| Total Stockholders’ Equity (Deficit) | 6,175,056 | (26,963,261 | ) | |||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | 8,582,672 | $ | 14,267,864 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F- 4
| CAMBER ENERGY, INC. |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| For the Year Ended March 31, | 2019 | 2018 | ||||||
| Net Operating Revenues | ||||||||
| Crude Oil | $ | 526,365 | $ | 1,198,514 | ||||
| Natural Gas | 772,105 | 2,051,846 | ||||||
| Natural Gas Liquids | 1,443,632 | 3,609,407 | ||||||
| Total | 2,742,102 | 6,859,767 | ||||||
| Operating Expenses | ||||||||
| Lease Operating Expenses | 2,870,908 | 4,874,724 | ||||||
| Severance and Property Taxes | 132,993 | 300,314 | ||||||
| Depreciation, Depletion, Amortization and Accretion | 478,770 | 1,480,535 | ||||||
| Impairment of Oil and Gas Properties | 1,304,785 | 8,137,987 | ||||||
| (Gain) Loss on Sale of Property and Equipment | (25,808,246 | ) | 3,559,083 | |||||
| General and Administrative | 5,152,766 | 7,173,829 | ||||||
| Total | (15,868,024 | ) | 25,526,472 | |||||
| Operating Income (Loss) | 18,610,126 | (18,666,705 | ) | |||||
| Other Expense (Income) | ||||||||
| Interest Expense | 2,438,097 | 6,018,829 | ||||||
| Other Expense (Income), Net | (474,124 | ) | 86,054 | |||||
| Total Other Expense | 1,963,973 | 6,104,883 | ||||||
| Income (Loss) Before Income Taxes | 16,646,153 | (24,771,588 | ) | |||||
| Income Tax Benefit (Expense) | (3,000 | ) | — | |||||
| Net Income (Loss) | $ | 16,643,153 | $ | (24,771,588 | ) | |||
| Net Income (Loss) Per Common Share | ||||||||
| Basic | $ | 2.22 | $ | (287.86 | ) | |||
| Diluted | $ | 0.21 | $ | (287.86 | ) | |||
| Weighted Average Number of Common Shares Outstanding | ||||||||
| Basic | 4,938,259 | 92,753 | ||||||
| Diluted | 52,256,732 | 92,753 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
|
CAMBER ENERGY, INC. Consolidated Statements of Changes in Stockholders’ Equity (Deficit) For the Years Ended March 31, 2019 and 2018 |
|
Series A Preferred Stock |
Series
B
Preferred Stock |
Series C Preferred Stock |
Common Stock | Additional | Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Paid-In | Divided | Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||
| Of Shares | Amount | Of Shares | Amount | Of Shares | Amount | Of Shares | Amount | Capital | Distributable | Deficit | (Deficit) Equity | |||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2017 | — | $ | — | 552,000 | $ | 552 | 404 | $ | 1 | 43,385 | $ | 43 | $ | 134,921,809 | $ | 598,650 | $ | (146,090,034 | ) | $ | (10,568,979 | ) | ||||||||||||||||||||||||||
| Common Shares issued for: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock | — | — | (143,492 | ) | (143 | ) | — | — | 1,640 | 2 | 141 | — | — | — | ||||||||||||||||||||||||||||||||||
| Conversion of Series C Preferred Stock | — | — | — | — | (10 | ) | — | 16,390 | 16 | (16 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
| Stock Dividends | — | — | — | — | — | — | 305 | — | 58,824 | (58,824 | ) | — | — | |||||||||||||||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | 9,004 | 9 | 1,017.805 | — | — | 1,017,814 | ||||||||||||||||||||||||||||||||||||
| Warrants Abeyance | — | — | — | — | — | — | 156,380 | 156 | (156 | ) | — | — | — | |||||||||||||||||||||||||||||||||||
| Conversion of Debenture | — | — | — | — | — | — | 2,808 | 3 | 34,997 | — | — | 35,000 | ||||||||||||||||||||||||||||||||||||
| Lender Shares | — | — | — | — | — | — | 80 | — | 35,900 | — | — | 35,900 | ||||||||||||||||||||||||||||||||||||
| Issuance of Series C Preferred Stock | — | — | — | — | 738 | — | — | — | 7,000,000 | — | — | 7,000,000 | ||||||||||||||||||||||||||||||||||||
| Rounding Adjustment for Split | — | — | — | — | — | — | 367 | 1 | (1 | ) | — | — | — | |||||||||||||||||||||||||||||||||||
| Warrants - Vantage | — | — | — | — | — | — | — | — | 288,592 | — | — | 288,592 | ||||||||||||||||||||||||||||||||||||
| Stock Dividends to be Issued | — | — | — | — | — | — | — | — | (1,928,084 | ) | 1,928,084 | — | — | |||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | — | — | — | — | — | (24,771,588 | ) | (24,771,588 | ) | ||||||||||||||||||||||||||||||||||
| Balances, March 31, 2018 | — | — | 408,508 | 409 | 1,132 | 1 | 230,359 | 230 | 141,429,811 | 2,467,910 | (170,861,622 | ) | (26,963,261 | ) | ||||||||||||||||||||||||||||||||||
| Common Shares issued for: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock | — | — | (364,508 | ) | (365 | ) | — | — | 3,543 | 4 | 361 | — | — | — | ||||||||||||||||||||||||||||||||||
| Conversion of Series C Preferred Stock | — | — | — | — | (404 | ) | — | 4,741,986 | 4,742 | (4,742 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
| Rounding Adjustment for Split | — | — | — | — | — | — | 29,035 | 30 | (30 | ) | — | — | — | |||||||||||||||||||||||||||||||||||
| Payment of Series B Dividend | — | — | — | — | — | — | 231 | — | 2,782 | (2,782 | ) | — | — | |||||||||||||||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | — | — | 343,631 | — | — | 343,631 | ||||||||||||||||||||||||||||||||||||
| Warrants - Abeyance | — | — | — | — | — | — | 12,336 | 12 | (12 | ) | — | — | — | |||||||||||||||||||||||||||||||||||
| Conversion of Debenture | — | — | — | — | — | — | 11,767,097 | 11,767 | 905,336 | — | — | 917,103 | ||||||||||||||||||||||||||||||||||||
| Issuance of Common Shares for Consulting | — | — | — | — | — | — | 18,000 | 18 | 234,412 | — | — | 234,430 | ||||||||||||||||||||||||||||||||||||
| Issuance of Series C Preferred Shares | — | — | — | — | 1,577 | 1 | — | — | 14,999,999 | — | — | 15,000,000 | ||||||||||||||||||||||||||||||||||||
| Stock Dividends to be Issued | — | — | — | — | — | — | — | — | (5,676,715 | ) | 5,676,715 | — | — | |||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | — | — | — | — | — | — | 16,643,153 | 16,643,153 | ||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2019 | — | $ | — | 44,000 | $ | 44 | 2,305 | $ | 2 | 16,802,587 | $ | 16,803 | $ | 152,234,833 | $ | 8,141,843 | $ | (154,218,469 | ) | $ | 6,175,056 | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
| CAMBER ENERGY, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the Year Ended March 31, | 2019 | 2018 | ||||||
| Cash Flows from Operating Activities | ||||||||
| Net Income (Loss) | $ | 16,643,153 | $ | (24,771,588 | ) | |||
| Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities: | ||||||||
| Depreciation, Depletion, Amortization and Accretion | 478,770 | 1,480,535 | ||||||
| Impairment of Oil and Gas Properties | 1,304,785 | 8,137,987 | ||||||
| Share-Based Compensation | 343,631 | 1,194,243 | ||||||
| Amortization of Discount on Notes | 1,499,647 | 1,124,396 | ||||||
| Bad Debt Expense | 190,365 | 258,594 | ||||||
| Change in Fair Value of Derivative Liability | — | (21,657 | ) | |||||
| (Gain) Loss on Sale of Property and Equipment | (25,808,246 | ) | 3,559,083 | |||||
| Changes in Components of Working Capital and Other Assets: | ||||||||
| Accounts Receivable | 327,489 | 312,766 | ||||||
| Other Current Assets | (34,472 | ) | (108,738 | ) | ||||
| Accounts Payable and Accrued Expenses | (718,550 | ) | 3,068,275 | |||||
| Net Cash Used in Operating Activities | (5,773,428 | ) | (5,766,104 | ) | ||||
| Investing Cash Flows | ||||||||
| Cash paid for Oil and Gas Property Development Costs | (2,095,991 | ) | (2,046,057 | ) | ||||
| Proceeds from Sale of Oil and Gas Properties | — | 1,825,587 | ||||||
| Proceeds from Sale of Other Property and Equipment | — | 10,069 | ||||||
| Cash (Paid for) Proceeds from Deposits | (141,009 | ) | 88,859 | |||||
| Cash Paid for Other Property and Equipment | — | (1,570 | ) | |||||
| Net Cash Used in Investing Activities | (2,237,000 | ) | (123,112 | ) | ||||
| Financing Cash Flows | ||||||||
| Principal Repayments on Long-Term Notes Payable | — | (2,861,394 | ) | |||||
| Proceeds from Issuance of Series C Preferred Stock and Warrants | 15,000,000 | 7,000,000 | ||||||
| Proceeds from Borrowings on Notes Payable | — | 150,000 | ||||||
| Net Cash Provided by Financing Activities | 15,000,000 | 4,288,606 | ||||||
| Increase (Decrease) in Cash | 6,989,572 | (1,600,610 | ) | |||||
| Cash and Restricted Cash at Beginning of the Year | 789,151 | 2,389,761 | ||||||
| Cash and Restricted Cash at End of the Year | $ | 7,778,723 | $ | 789,151 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F- 7
CAMBER ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND OPERATIONS OF THE COMPANY
Camber Energy, Inc. (“ Camber” or the “ Company ”) is an independent oil and gas company engaged in the development and acquisition of onshore properties in Texas. Subsequent to the sale of its assets in Oklahoma to N&B Energy, LLC (“ N&B Energy ”) effective August 1, 2018 (see further discussion in “ Note 2 – Liquidation and Going Concern Considerations ”), Camber retained its assets in Glasscock County and operates in Hutchinson County, Texas. Additionally, as part of the sale of its assets to N&B Energy, the Company also retained a 12.5% production payment (effective until a total of $2.5 million has been received); a 3% overriding royalty interest in its existing Okfuskee County, Oklahoma asset; and an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignments of Overriding Royalty Interests.
Effective August 1, 2018, the Company relocated its corporate headquarters from San Antonio, Texas to Houston, Texas.
On March 1, 2018, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to effect a 1-for-25 reverse stock split of all outstanding common stock shares of the Company (the “ Amendment ”). The reverse stock split was effective on March 5, 2018. The effect of the reverse stock split was to combine each 25 shares of outstanding common stock into one new share, with no change in authorized shares or par value per share, and to reduce the number of common stock shares outstanding from approximately 103.5 million shares to approximately 4.1 million shares (prior to rounding). Proportional adjustments were made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants and stock options, and to the number of shares issued and issuable under the Company’s stock incentive plans. The reverse stock split did not affect any stockholder’s ownership percentage of the Company’s common stock, except to the limited extent that the reverse stock split resulted in any stockholder owning a fractional share. Fractional shares of common stock were rounded up to the nearest whole share based on each holder’s aggregate ownership of the Company. All issued and outstanding shares of common stock, conversion terms of preferred stock, options and warrants to purchase common stock and per share amounts contained in the financial statements, in accordance with SAB TOPIC 4C, have been retroactively adjusted to reflect the reverse split for all periods presented.
On December 20, 2018, the Company filed a Certificate of Change with the Secretary of State of Nevada to effect another 1-for-25 reverse stock split of the Company’s (a) authorized shares of common stock (from 500,000,000 shares to 20,000,000 shares); and (b) issued and outstanding shares of common stock. The reverse stock split was effective on December 24, 2018. The effect of the reverse stock split was to combine each 25 shares of outstanding common stock into one new share, with a proportionate 1-for-25 reduction in the Company’s authorized shares of common stock, but no change in the par value per share of the common stock. Proportional adjustments were made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock (subject to the terms thereof), warrants and stock options, and to the number of shares issued and issuable under the Company’s stock incentive plans. Fractional shares of common stock were rounded up to the nearest whole share based on each holder’s aggregate ownership of the Company. All issued and outstanding shares of common stock, conversion terms of preferred stock (subject to the terms thereof), options and warrants to purchase common stock and per share amounts contained in the financial statements, have been retroactively adjusted to reflect the reverse split for all periods presented.
Effective on April 10, 2019, the Company filed, with the Secretary of State of Nevada, a Certificate of Amendment to the Company’s Articles of Incorporation to increase the number of the Company’s authorized shares of common stock, $0.001 per value per share, from 20,000,000 shares to 250,000,000 shares. The amendment was previously approved by the Company’s stockholders at the 2019 annual meeting of stockholders held on February 19, 2019, as reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2019.
F- 8
NOTE 2 – LIQUIDITY AND GOING CONCERN CONSIDERATIONS
At March 31, 2019, the Company’s total current assets of $8.2 million exceeded its total current liabilities of approximately $2.1 million, resulting in working capital of $6.1 million, while at March 31, 2018, the Company’s total current liabilities of $40.0 million exceeded its total current assets of $1.7 million, resulting in a working capital deficit of $38.3 million. The $44.4 million increase in the working capital is primarily related to the settlement of the debt related to the sale closing in September 2018.
Management believes that with the elimination of its outstanding debt and the funds raised through equity transactions during the current fiscal year, the Company has sufficient capital to fund operating costs and planned capital expenditures on existing wells through the end of June 2020. In May 2019, the Company entered into a non-binding LOI to acquire Lineal Star Holdings, LLC (“ Lineal ”), a specialty construction and oil and gas services enterprise providing services to the energy industry. In the event the Lineal transaction does not occur, management intends to use a portion of its working capital to facilitate other targeted acquisitions and mergers. If additional financing is required to consummate transactions, management intends to seek additional equity and debt financing, as needed, of which no financing arrangements are currently in place.
As discussed in “ Note 6 – Notes Payable and Debenture ”, the Company borrowed $40 million from IBC effective August 25, 2016. The proceeds of the loan were used to repay and refinance approximately $30.6 million of indebtedness owed by certain of the Sellers to IBC as part of the closing of the Acquisition. As of March 31, 2018, the Company was not in compliance with certain covenants of the loan agreement, including requiring the Company to maintain a net worth of $30 million, the Company is in default of the terms of the loan, and the balance of the loan due to IBC of $36.9 million (less unamortized debt issuance costs of approximately $1.3 million), was recognized as a short-term liability on the Company’s balance sheet as of March 31, 2018. The Company also recognized approximately $39,000 in accrued interest as of March 31, 2018 related to this note. In conjunction with the “ Assumption Agreement ”, the Company reduced its liabilities by $37.9 million, including all of the outstanding amounts due to IBC, and its assets by approximately $12.1 million, and currently has no secured debt outstanding.
During the years ended March 31, 2019 and 2018, the Company sold 1,577 and 738 shares of Series C Preferred Stock pursuant to the terms of an October 2017 Stock Purchase Agreement, October 2018 Stock Purchase Agreement and November 2018 Stock Purchase Agreement, for total consideration of $15 million and $7 million, respectively.
In September 2017, a note holder of the Company foreclosed on the assets of CATI Operating, LLC (“ CATI ”), the Company’s then wholly-owned subsidiary, which assets secured the note. On October 3, 2017, the trustee of those assets, for the benefit of the lender, sold these assets in public auction foreclosure sales which took place in Gonzales County and Karnes County, Texas. The proceeds from the foreclosure sales of approximately $3.5 million were applied against the outstanding indebtedness. In December 2017, the remaining indebtedness owed was released by the note holder (approximately $5.8 million in principal and interest). Additionally, the remaining leasehold and ownership of CATI was assigned to Arkose Lease Partners, LLC, a third party (“ Arkose ”), in November 1, 2017, in exchange for Arkose’s assumption of all plugging and abandonment liabilities of CATI of approximately $1.8 million.
Effective January 31, 2017, the Company borrowed $1,000,000 from one of the Company’s then directors. As additional consideration for the director agreeing to make the loan, we issued the director 64 shares of restricted common stock. On November 9, 2017, the Company repaid the director the full amount due on the short-term promissory note of $1,050,000.
On March 9, 2017, the Company borrowed $250,000 from a non-related individual pursuant to a short-term promissory note. As additional consideration for agreeing to make the loan, the Company agreed to issue the lender 16 restricted shares of common stock. On November 9, 2017, the Company paid the non-related individual the full amount due on the short-term promissory note of $263,158.
On August 2, 2017, and effective June 13, 2017, the Company entered into an agreement with Vantage Fund, LLC (“ Vantage ” and the “ Vantage Agreement ”), pursuant to which Vantage agreed to provide up to $6 million of funding to the Company, in the sole discretion of Vantage. On July 17, 2017, Vantage provided $120,000 to the Company under the agreement and on July 20, 2017, Vantage provided $30,000 to the Company under the agreement. On November 9, 2017, the Company paid Vantage the full amount due to Vantage.
F- 9
N&B Energy Asset Disposition Agreement
On July 12, 2018, the Company entered into an Asset Purchase Agreement (as amended by the First Amendment to the Sale Agreement dated August 3, 2018 and the Second Amendment to Sale Agreement dated September 24, 2018, the “ Sale Agreement ”), as seller, with N&B Energy, LLC as purchaser, which entity is affiliated with Richard N. Azar II, the Company’s former Chief Executive Officer and former director (“ N&B Energy ”), and Donnie B. Seay, the Company’s former director. Pursuant to the Sale Agreement, the Company agreed to sell to N&B Energy a substantial portion of its assets, including all of the assets acquired pursuant to the terms of the December 31, 2015 Asset Purchase Agreement and certain other more recent acquisitions, other than the production payment and overriding royalty interests discussed below (the “ Disposed Assets ”). In consideration for the Disposed Assets, N&B Energy agreed to pay the Company $100 in cash to assume the Company’s liabilities and contractual obligations in connection with the Disposed Assets (including lease and bonus payments), to assume all of the Company’s obligations and debt owed under its outstanding loan agreement with IBC Bank, which had a then outstanding principal balance of approximately $36.9 million and the other parties agreed to enter into the Segundo Settlement as described in “ Note 8 – Commitments and Contingencies ”.
Assumption Agreement
On September 26, 2018, the Company entered into an Assumption Agreement (the “ Assumption Agreement ”) with IBC Bank; CE Operating, LLC, the Company’s wholly-owned subsidiary (“ CE Operating ”), which became a party to the Sale Agreement pursuant to the second amendment thereto; N&B Energy, which entity is affiliated with Richard N. Azar, II, the Company’s former Chief Executive Officer and former director (“ Azar ”), and Donnie B. Seay, the Company’s former director (“ Seay ”); Azar; RAD2 Minerals, Ltd., an entity owned and controlled by Azar (“ RAD2 ”); Seay; and DBS Investments, Ltd., an entity owned and controlled by Seay. Azar, Seay, RAD2, and DBS are collectively referred to as the “ Guarantors ”.
Pursuant to the Assumption Agreement, N&B Energy agreed to assume all of the Company’s liabilities and obligations owed to IBC Bank and IBC Bank approved the transactions contemplated by the Sale Agreement and the assumption by N&B Energy of all of the amounts and liabilities which the Company owed to IBC Bank (the “ IBC Obligations ”). Finally, pursuant to the Assumption Agreement, IBC Bank released and forever discharged the Company and CE Operating and each of their current and former officers, directors, and stockholders, from all covenants, agreements, obligations, claims and demands of any kind, whether in law or at equity, which IBC Bank then had, arising out of or related to the amounts which the Company owed to IBC Bank under the Note, Loan Agreement or mortgages and/or under such documents or agreements, and further agreed to release the lien which IBC Bank then held on certain of the Company’s properties located in west Texas.
N&B Energy Sale Agreement Closing
On September 26, 2018, the transactions contemplated by the Sale Agreement closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid the Company $100 in cash, and the Company transferred ownership of the Assets to N&B Energy.
Notwithstanding the sale of the Assets, the Company retained its assets in Glasscock County and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received); a 3% overriding royalty interest in its existing Okfuskee County, Oklahoma asset; and retained an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignment of Overriding Royalty Interests.
The effective date of the Sale Agreement is August 1, 2018. The Assets were assigned “ as is ” with all faults.
As a result of the Assumption Agreement and the Sale Agreement, the Company reduced its liabilities by $37 .9 million and its assets by approximately $12.1 million.
F- 10
The following table summarizes the net assets sold and gain recognized in connection with the Assumption Agreement and Sale Agreement:
|
Transaction
Summary |
||||
| Assumption of IBC Loan | $ | 36,943,617 | ||
| Assumption of ARO Liability | 699,536 | |||
| Assumption of Capital Lease Obligations and Other | 287,074 | |||
| Cash Received at Closing | 100 | |||
| Oil and Gas Properties Transferred | (12,122,081 | ) | ||
| Total Gain on Sale | $ | 25,808,246 |
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements of Camber Energy include the accounts of its wholly-owned subsidiaries, CATI Operating, LLC, a Texas limited liability company, which was wholly-owned (“ CATI ”) until it was divested on November 9, 2017, CEI Operating LLC, a Texas limited liability company, which was wholly-owned until it was divested on November 1, 2017, Camber Permian LLC, a Texas limited liability company, which is wholly-owned, Camber Permian II LLC, a Texas limited liability company, until it was divested on November 9, 2017, CE Operating, LLC, an Oklahoma limited liability company, which is wholly-owned, and C E Energy LLC, a Texas limited liability company which is wholly-owned.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Camber’s financial statements are based on a number of significant estimates, including oil and natural gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties, and timing and costs associated with its asset retirement obligations, as well as those related to the fair value of stock options, stock warrants and stock issued for services. While the Company believes that its estimates and assumptions used in preparation of the financial statements are appropriate, actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase. The Company maintains cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits of $250,000. At March 31, 2019 and 2018, the Company’s cash in excess of the federally insured limit were $7,463,944 and $490,460, respectively. Historically, the Company has not experienced any losses in such accounts. The Company had no cash equivalents at March 31, 2019 or 2018, respectively.
Accounts Receivable
Accounts receivable consist of uncollateralized oil and natural gas revenues due under normal trade terms. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. At March 31, 2019 and 2018, the Company’s allowance for doubtful accounts was $190,365 and $1,038,015, respectively.
F- 11
Concentration of Credit Risk
The Company generally sells a significant portion of its oil and gas production to a relatively small number of customers. For the year ended March 31, 2019, the Company’s consolidated revenues were from the sale of oil, gas and natural gas liquids under marketing contracts primarily with Superior Pipeline Company, Scissortail Energy, LLC and Apache Corporation. The Company is not dependent upon any one purchaser and has alternative purchasers available at competitive market prices if there is disruption in services or other events that cause the Company to search for other ways to sell the Company’s production.
During the year ended March 31, 2019, three customers accounted for 84% of total revenues. During the year ended March 31, 2018, two customers accounted for 72% of the Company’s total revenues. The Company does not believe the loss of any customer will have a material effect on the Company because alternative customers are readily available.
Oil and Natural Gas Properties, Full Cost Method
Camber uses the full cost method of accounting for oil and natural gas producing activities. Costs to acquire mineral interests in oil and natural gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and natural gas property costs on a country-by-country basis. Costs not subject to amortization consist of unproved properties that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Camber assesses overall values of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management’s intention with regard to future development of individually significant properties and the ability of Camber to obtain funds to finance their programs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.
Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. If it is determined that the relationship is significantly altered, the corresponding gain or loss will be recognized in the statements of operations.
Ceiling Test
In applying the full cost method, Camber performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “ estimated present value ” of its proved reserves discounted at a 10% interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.
During the year ended March 31, 2019, the Company recorded impairments totaling $1.3 million that were primarily related to unproved properties due to expirations of leaseholds. During the year ended March 31, 2018, the Company recorded impairments totaling $8.1 million, which were primarily related to unproved properties due to expirations of leaseholds.
Asset Retirement Obligations
The Company records the fair value of a liability for asset retirement obligations (“ ARO ”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. Camber accrues an abandonment liability associated with its oil and natural gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at Camber’s credit-adjusted risk-free interest rate. No market risk premium has been included in Camber’s calculation of the ARO balance.
F- 12
Other Property and Equipment
Other property and equipment are stated at cost and consist primarily of furniture and computer equipment. Depreciation is computed on a straight-line basis over the estimated useful lives.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating losses and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and accrued tax liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Camber has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of March 31, 2019 and 2018. The Company’s policy is to classify assessments, if any, for tax related interest expense and penalties as interest expense.
Earnings per Common Share
Basic and diluted net income per share calculations are calculated on the basis of the weighted average number of shares of the Company’s common stock outstanding during the year. Purchases of treasury stock reduce the outstanding shares commencing on the date that the stock is purchased. Common stock equivalents are excluded from the calculation when a loss is incurred as their effect would be anti-dilutive.
Fair Value of Financial Instruments
ASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| ● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services. |
| ● | Level 3 – Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort. |
As of March 31, 2019, the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.
F- 13
Share-Based Compensation
Camber measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award over the vesting period.
Revenue and Cost Recognition
The Company’s revenue is comprised entirely of revenue from exploration and production activities. The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.
Contracts with customers have varying terms, including month-to-month contracts, and contracts with a finite term. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs.
Revenues are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation.
Recently Adopted Accounting Pronouncements
ASU 2014-09, “ Revenue from Contracts with Customers (Topic 606) ”, supersedes the revenue recognition requirements and industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 on April 1, 2018, using the modified retrospective method applied to contracts that were not completed as of April 1, 2018. Under the modified retrospective method, prior period financial positions and results will not be adjusted. The cumulative effect adjustment recognized in the opening balances included no significant changes as a result of this adoption. While the Company does not expect 2019 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning April 1, 2018. Refer to Note 9 – Revenue from Contracts with Customers for additional information.
In November 2016, the Financial Accounting Standards Board (“ FASB ”) issued an Accounting Standards Update (“ ASU ”) amending the presentation of restricted cash within the consolidated statements of cash flows. The new guidance requires that restricted cash be added to cash and cash equivalents on the consolidated statements of cash flows. The Company adopted this ASU on April 1, 2018 on a retrospective basis with the following impacts to the Company’s consolidated statements of cash flows for the year ended March 31, 2018:
|
Previously Reported |
Adjustment | As Revised | ||||||||||
| Net cash provided by financing activities | $ | 5,944,299 | $ | (1,655,693 | ) | $ | 4,288,606 | |||||
As of March 31, 2019 and 2018, respectively, the Company had restricted cash of $0 and $26,834 related to the loan agreement with IBC bank.
Following is a summary of cash and cash equivalents and restricted cash:
|
March
31,
2019 |
March 31,
2018 |
|||||||
| Cash | $ | 7,778,723 | $ | 760,317 | ||||
| Restricted cash – current | — | 28,834 | ||||||
| Cash, cash equivalents and restricted cash | $ | 7,778,723 | $ | 789,151 | ||||
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 seeks to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2017. The Company adopted this ASU on April 1, 2018 and the adoption did not have a significant impact to the Company’s consolidated financial statements.
F- 14
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business , which amends the current definition of a business. Under ASU 2017-01, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contributes to the ability to create outputs. ASU 2017-01 further states that when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. The new guidance also narrows the definition of the term “ outputs ” to be consistent with how it is described in Topic 606, Revenue from Contracts with Customers . The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions. The guidance is effective for the annual period beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU on April 1, 2018 and the adoption did not have a significant impact to the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “ Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ”, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company adopted this ASU on April 1, 2018 and the adoption did not have a significant impact to the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, “ Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement, ” which changes the disclosure requirements for fair value measurements by removing, adding, and modifying certain disclosures. ASU 2018-13 is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this ASU on its related disclosures and does not expect it to have a material impact on its consolidated financial statements.
In July 2018, the FASB issued ASU 2018-11, “ Leases (Topic 842): Target Improvements ”. The amendments in this update also clarify which Topic (Topic 842 or Topic 606) applies for the combined component. Specifically, if the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with Topic 606. Otherwise, the entity should account for the combined component as an operating lease in accordance with Topic 842. An entity that elects the lessor practical expedient also should provide certain disclosures. The Company is currently evaluating the adoption of this guidance and does not expect that this guidance will have a material impact on its consolidated financial statements. The Company has not adopted this standard and will do so when specified by the FASB.
In July 2018, the FASB issued ASU 2018-10, “ Codification Improvements to Topic 842, Leases ”. The amendments in this update affect narrow aspects of the guidance issued in the amendments in update 2016-02 as described in the table below. The amendments in this update related to transition do not include amendments from proposed Accounting Standards Update, Leases (Topic 842): Targeted Improvements, specific to a new and optional transition method to adopt the new lease requirements in Update 2016-02. That additional transition method will be issued as part of a forthcoming and separate update that will result in additional amendments to transition paragraphs included in this Update to conform with the additional transition method. The Company is currently evaluating the adoption of this guidance and does not expect that this guidance will have a material impact on its consolidated financial statements. The Company has not adopted this Standard and will do so when specified by the FASB.
The Company does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.
F- 15
Subsequent Events
The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure consideration.
NOTE 4 – PROPERTY AND EQUIPMENT
Oil and Natural Gas Properties
All of Camber’s oil and natural gas properties are located in the United States. Costs being amortized at March 31, 2019 and 2018 are as follows:
| At March 31, | ||||||||
| 2019 | 2018 | |||||||
| Oil and gas properties subject to amortization | $ | 50,352,306 | $ | 60,760,056 | ||||
| Oil and gas properties not subject to amortization | 28,016,989 | 28,016,989 | ||||||
| Capitalized asset retirement costs | 176,649 | 322,470 | ||||||
| Total oil & natural gas properties | 78,545,944 | 89,099,515 | ||||||
| Accumulated depreciation, depletion, and impairment | (78,333,628 | ) | (76,555,320 | ) | ||||
| Net Capitalized Costs | $ | 212,316 | $ | 12,544,195 | ||||
Impairments
During the year ended March 31, 2019, the Company recorded impairments totaling $1.3 million that were primarily related to unproved properties due to expirations of leaseholds. During the year ended March 31, 2018, the Company recorded impairments totaling $8.1 million that were primarily related to unproved properties due to expirations of leaseholds.
Additions and Depletion
During the years ended March 31, 2019 and 2018, the Company incurred costs of approximately, $2.1 million and $2.0 million, respectively, for technical and other capital enhancements to extend the lives of the Company’s wells. Additionally, the Company recorded approximately $0.5 million and $1.5 million for depletion for the years ended March 31, 2019 and 2018, respectively.
Disposition of Oil and Natural Gas Properties
On August 2, 2017, the Company entered into an agreement with Vantage pursuant to which Vantage agreed to provide up to $6 million of funding to the Company. On June 12, 2017, the Company received the initial tranche of $400,000 in consideration for the assignment, by the Company, of its interest in the undeveloped Arrowhead oil and gas property, with a book value of $114,500 and warrants to purchase 2,560 shares of the Company's common stock (see further discussion of these warrants in Note 10). The Company recorded a gain of $1,195 as a result of this assignment that was recorded in loss on sale of property and equipment for the year ended March 31, 2018.
In September 2017, a note holder of the Company foreclosed on the assets of CATI, which assets secured the note. On October 3, 2017, the trustee of those assets, for the benefit of the lender, sold these assets in public auction foreclosure sales which took place in Gonzales County and Karnes County, Texas. The proceeds from the foreclosure sales of approximately $3.5 million were applied against the outstanding indebtedness. In December 2017, the remaining indebtedness owed was released by the note holder (approximately $5.8 million in principal and interest). Additionally, the remaining leasehold and ownership of CATI was assigned to Arkose in November 2017, in exchange for Arkose’s assumption of all plugging and abandonment liabilities of CATI of approximately $1.8 million. The Company recorded an approximate loss on sale of property of approximately $4.1 million in conjunction with the settlement of the approximate $9.4 million of debt and accrued interest and the removal of approximately $1.3 million of remaining ARO. See Note 6 “ Notes Payable and Debenture ” for further details. Effective November 1, 2017, the Company and NFP Energy LLC (“ NFP ”) its joint venture partner, sold its 90% ownership position in oil and gas properties totaling approximately 2,452 acres in Gaines County, Texas, to Fortuna Resources Permian (“ Fortuna ”), for $1,000 per acre or an aggregate of $2,206,718 payable to the Company. The transaction resulted in a $727,732 gain, which is included in Loss on Sale of Property and Equipment on the statement of operations for the year ended March 31, 2018.
F- 16
On July 12, 2018, the Company entered into an Asset Purchase Agreement (as amended by the First Amendment to the Sale Agreement dated August 3, 2018 and the Second Amendment to Sale Agreement dated September 24, 2018, the “ Sale Agreement ”), as seller, with N&B Energy as purchaser, which entity is affiliated with Richard N. Azar II, the Company’s former Chief Executive Officer and former director, and Donnie B. Seay, the Company’s former director. Pursuant to the Sale Agreement, the Company agreed to sell to N&B Energy a substantial portion of its assets, including all of the assets acquired pursuant to the terms of the December 31, 2015 Asset Purchase Agreement and certain other more recent acquisitions, other than the production payment and overriding royalty interests discussed below (the “ Disposed Assets ”). In consideration for the Disposed Assets, N&B Energy agreed to pay the Company $100 in cash, to assume all of the Company’s obligations and debt owed under its outstanding loan agreement with IBC Bank, which had a then outstanding principal balance of approximately $36.9 million and the other parties agreed to enter into the Segundo Settlement as described in “ Note 8 – Commitments and Contingencies ”. The transaction closed in September 2018.
Acquisition of Oil and Natural Gas Properties
On August 25, 2016, the Company completed the Acquisition and acquired working interests in producing properties and undeveloped acreage from the Sellers (see “ Note 2 – Liquidity and Going Concern Considerations ”). The assets acquired include varied interests in two largely contiguous acreage blocks in the liquids-rich Mid-Continent region.
As consideration for the Acquisition of the acquired assets, the Company assumed approximately $30.6 million of commercial bank debt, issued 20,816 shares of common stock to certain of the Sellers valued at the grant date fair value, issued 552,000 shares of Series B Preferred Stock to one of the Sellers and its affiliate (see “ Note 11 – Stockholders’ Equity (Deficit) ”) valued at the grant date fair value, and paid $4,975,000 in cash to certain of the Sellers. The effective date of the Acquisition was April 1, 2016.
In January 2018, the Company acquired approximately 3,000 leasehold acres in Okfuskee County, Oklahoma, including two producing wells and 7 non-producing well bores, in consideration for cash paid of $210,000. The acquisition included three salt water disposal wells, to support existing and potential future hydrocarbon production.
In March 2018, the Company completed an acquisition of working interest in certain leases, wells and equipment located in the Texas panhandle, for a purchase price of $250,000, payable in three tranches. A payment of $85,000 was due at closing; $85,000 was due thirty days after closing and $80,000 was due sixty days after closing these remaining payments have been accrued as of March 31, 2018 and are included in accrued expenses on the balance sheet. Camber earned 25% of the working interest at the closing and earned an additional 25% of the working interest at each of the two subsequent closings. The seller retained a 25% carried working interest in the assets. The acquisition includes interests in 48 gross non-producing well bores, 5 saltwater disposal wells and the required infrastructure and equipment necessary to support future hydrocarbon production, as well as approximately 555 net leasehold acres in Hutchinson County, Texas.
Capital Leases
During March and April 2018, the Company purchased certain equipment pursuant to capital leases. The effective value of the equipment was approximately $575,000, and such amount is included in oil and gas properties and the corresponding current liability of approximately $387,000 which was included in accrued expenses as of June 30, 2018. The effective borrowing rate was approximately 35%, and all obligations were due by December 2018. In conjunction with the assignment of the liabilities owed under the IBC Bank loan agreements to N&B Energy in September 2018, as discussed under “ Note 2 – Liquidity and Going Concern Considerations – Assumption Agreement ” all of the remaining obligations were assumed by the purchaser.
F- 17
Office Lease
In August 2017, the Company ceased its use of its prior office space in Houston, Texas, and moved its headquarters to San Antonio, Texas. The Company was committed to the remaining lease payments for the Houston lease for approximately $346,000 after vacating the property. The Company recorded monthly rent expense through its occupancy date and, in accordance with the accounting guidance in ASC 420-10-25-13 regarding exit or disposal cost obligations, as of August 2017, the Company recorded rent expense, within general and administrative expense, and accrued a liability of $302,289, which represents the fair value of costs that will continue to be incurred during the remaining term of the Houston lease without economic benefit to the Company. As of March 31, 2019 and March 31, 2018, the carrying amount of the liability of $0 and $302,289, respectively, is included in Current Liabilities in the consolidated balance sheets. In addition, the Company wrote-off $189,533 of abandoned property and equipment, recognizing a loss of $3,368 during the fiscal year ended March 31, 2018. In October 2018, the Company entered into a settlement with its prior landlord to pay $100,000 plus $10,000 per month for each of the next 20 months. In the event that an aggregate of $150,000 is paid by April 15, 2019, in addition to the $100,000 payment made in October 2018, the remaining $50,000 of payments would be forgiven and waived. The Company made the payments prior to March 31, 2019, resulting in no remaining unpaid amounts at March 31, 2019. See also “ Note 8 – Commitments and Contingencies – Legal Proceedings – MidFirst ”.
Effective October 1, 2017, the Company entered into an agreement to sublease space on a month-to-month basis in San Antonio, Texas from RAD2 Minerals, Ltd., an entity owned and controlled by Mr. Azar, the Company’s former Interim Chief Executive Officer and former Director. Monthly rent through December 2017 was $5,000 per month, increasing to $7,500 per month effective January 2018. The lease agreement was terminated effective June 30, 2018. The Company agreed under a verbal contract to lease the same space on a month-to-month basis for $2,500 per month beginning effective July 1, 2018, which was terminated July 31, 2018.
Effective August 1, 2018 entered into a month-to-month lease at 1415 Louisiana, Suite 3500 Houston, Texas 77002. The entity providing use of the space without charge is affiliated with the Company’s Chief Financial Officer.
NOTE 5 – ASSET RETIREMENT OBLIGATIONS
The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of long-term legal obligations associated with the future retirement of oil and natural gas properties for the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Carrying amount at beginning of year | $ | 979,159 | $ | 2,045,847 | ||||
| Acquisition of oil and gas properties | — | 437,071 | ||||||
| Accretion | 4,725 | 92,620 | ||||||
| Dispositions | (699,536 | ) | (1,328,260 | ) | ||||
| Revisions of previous estimates | 19,461 | (268,119 | ) | |||||
| Carrying amount at end of year | $ | 303,809 | $ | 979,159 | ||||
NOTE 6 – NOTES PAYABLE AND DEBENTURE
The Company’s notes payable and debenture consisted of the following:
|
March 31, 2019 |
March 31, 2018 |
|||||||
| Debenture | $ | — | 495,000 | |||||
| Note Payable - IBC | — | 36,943,617 | ||||||
| — | 37,438,617 | |||||||
| Unamortized debt discount | — | (1,499,647 | ) | |||||
| Total Notes Payable and Debenture | — | 35,938,970 | ||||||
| Less current portion | — | (35,691,567 | ) | |||||
| Long-term portion | $ | — | $ | 247,403 | ||||
F- 18
Rogers Loan and Promissory Note
Letter Loan Agreement
At March 31, 2017, the Company had $6,883,697 due under a letter loan agreement, which amount was settled in December 2017 as discussed above under Note 2 “ Liquidity and Going Concern Considerations .”
Dreeben Note
Effective January 31, 2017, the Company borrowed $1,000,000 from Alan Dreeben, then one of the Company’s directors. As additional consideration for Mr. Dreeben agreeing to make the loan, the Company issued Mr. Dreeben 64 shares of restricted common stock. On November 9, 2017, the Company repaid Mr. Dreeben the full amount due on the short-term promissory note of $1,050,000.
Non-Related Individual Note
On March 9, 2017, the Company borrowed $250,000 from a non-related individual pursuant to a short-term promissory note. As additional consideration for agreeing to make the loan, the Company agreed to issue the lender 16 restricted shares of common stock. On November 9, 2017, the Company paid the non-related individual the full amount due on the short-term promissory note of $263,158.
Debenture
On August 23, 2017, the Investor converted $35,000 of the principal amount of a convertible Debenture with a face value of $530,000, into an aggregate of 2,808 shares of common stock, which included 17 shares for conversion of principal (at $2,031.25 per share) and 2,791 shares for premiums and on April 20, 2018, the Investor was issued 5,679 shares of common stock as a result of true-ups in connection with the August 23, 2017 conversion of the Debenture.
As of March 31, 2018, the convertible subordinated debenture, with a face value of $495,000 and a balance of $247,403, respectively (net of unamortized discount $247,597, respectively), which was recognized as a short-term liability on the Company’s balance sheet at March 31, 2018. The Company had accrued interest of $388,183 related to the obligation outstanding at March 31, 2018.
On October 31, 2018, the Investor converted the entire $495,000 of principal and accrued interest of $422,103 owed under the terms of the debenture, into an aggregate of 801,507 shares of common stock, including 6,092 shares of common stock issuable upon conversion of the principal amount thereof (at a conversion price of $81.25 per share), and 795,414 shares in connection with conversion premiums due thereon (at an initial conversion price, as calculated as provided in such debenture, of $1.53 per share). A total of 100,000 of such shares were issued to the Investor in connection with the initial conversion and the remaining shares were held in abeyance subject to the Investor’s 9.99% ownership limitation, to be issued from time to time, at the request of the Investor. Subsequent to the October 31, 2018 conversion date, the Investor was due an additional 47,645,285 shares of common stock in connection with true ups associated with the original issuance, as a result of the conversion price of the conversion premiums falling to $0.025 per share pursuant to the terms of the convertible debenture. Through March 31, 2019, a total of 11,761,418 of the conversion shares had been issued and the remainder of the shares were held in abeyance subject to the Investor’s 9.99% ownership limitation, to be issued from time to time, at the request of the Investor.
Loan Agreement with International Bank of Commerce (“IBC”)
As of March 31, 2018, the Company was not in compliance with certain covenants of its $40 million loan agreement with IBC. Since the Company was in default of the terms of the loan, the balance of the loan due to IBC of $36.9 million (less unamortized debt issuance costs of approximately $1.3 million), was recognized as a short-term liability on the Company’s balance sheet as of March 31, 2018. The Company also recognized approximately $39,000 in accrued interest as of March 31, 2018 related to this note.
F- 19
On September 26, 2018, the Company entered into an Assumption Agreement (the “ Assumption Agreement ”) with IBC; CE Operating, LLC, the Company’s wholly-owned subsidiary (“ CE Operating ”), which became a party to the Sale Agreement pursuant to the second amendment thereto; N&B Energy, which entity is affiliated with Richard N. Azar, II, the Company’s former Chief Executive Officer and former director (“ Azar ”), and Donnie B. Seay, the Company’s former director (“ Seay ”); Azar; RAD2 Minerals, Ltd., an entity owned and controlled by Azar (“ RAD2 ”); Seay; and DBS Investments, Ltd., an entity owned and controlled by Seay.
Pursuant to the Assumption Agreement, N&B Energy agreed to assume all of the Company’s liabilities and obligations owed to IBC Bank and IBC Bank approved the transactions contemplated by the Sale Agreement and the assumption by N&B Energy of all of the amounts and liabilities which the Company owed to IBC Bank (the “ IBC Obligations ”). Finally, pursuant to the Assumption Agreement, IBC Bank released and forever discharged the Company and CE Operating and each of their current and former officers, directors, and stockholders, from all covenants, agreements, obligations, claims and demands of any kind, whether in law or at equity, which IBC Bank then had, arising out of or related to the amounts which the Company owed to IBC Bank under the Note, Loan Agreement or mortgages and/or under such documents or agreements, and further agreed to release the lien which IBC Bank then held on certain of the Company’s properties located in west Texas.
On September 26, 2018, the transactions contemplated by the Sale Agreement closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid the Company $100 in cash, and the Company transferred ownership of the Assets to N&B Energy.
NOTE 7 – DERIVATIVE LIABILITIES
The Company has determined that certain warrants the Company has issued contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these provisions could result in modification of the warrants’ exercise price based on a variable that is not an input to the fair value of a “ fixed-for-fixed ” option as defined under FASB ASC Topic No. 815 - 40. The warrants granted to Ironman PI Fund II, LP contain anti-dilution provisions that provide for a reduction in the exercise price of such warrants in the event that future common stock (or securities convertible into or exercisable for common stock) is issued (or becomes contractually issuable) at a price per share (a “ Lower Price ”) that is less than the exercise price of such warrant at the time. The amount of any such adjustment is determined in accordance with the provisions of the warrant agreement and depends upon the number of shares of common stock issued (or deemed issued) at the Lower Price and the extent to which the Lower Price is less than the exercise price of the warrant at the time.
Activities for derivative warrant instruments during the years ended March 31, 2019 and 2018 were as follows:
| Fair Value | ||||
| Balance, March 31, 2017 | $ | 21,662 | ||
| Change in fair value | (21,657 | ) | ||
| Balance, March 31, 2018 | 5 | |||
| Change in fair value | — | |||
| Balance, March 31, 2019 | $ | 5 | ||
The fair value of the derivative warrants was calculated using the Black-Scholes pricing model. Variables used in the Black-Scholes pricing model as of March 31, 2019 include (1) discount rate of 2.2%, (2) expected term of 0.1 year, (3) expected volatility of 253.77%, and (4) zero expected dividends. Variables used in the Black-Scholes pricing model as of March 31, 2018 include (1) discount rate of 2.09, (2) expected term of 1 year, (3) expected volatility of 145.70%, and (4) zero expected dividends.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Office Lease. Information regarding the Company’s office space is disclosed in greater detail above under Note 4 “ Property and Equipment ” – “ Office Lease ”, above.
F- 20
Legal Proceedings. From time to time suits and claims against Camber arise in the ordinary course of Camber’s business, including contract disputes and title disputes. Camber records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
Maranatha Oil Matter
In November 2015, Randy L. Robinson, d/b/a Maranatha Oil Co. sued the Company in Gonzales County, Texas (Cause No. 26160). The plaintiff alleged that it assigned oil and gas leases to the Company in April 2010, retaining a 4% overriding royalty interest and 50% working interest and that the Company failed to pay such overriding royalty interest or royalty interest. The interests relate to certain oil and gas properties which the Company subsequently sold to Nordic Oil USA in April 2013. The petition alleges causes of actions for breach of contract, failure to pay royalties, non-payment of working interest, fraud, fraud in the inducement of contract, money had and received, constructive trust, violation of theft liability act, continuing tort and fraudulent concealment. The suit seeks approximately $100,000 in amounts alleged owed, plus pre-and post-judgment interest. The Company has filed a denial to the claims.
Rubenstein Matter
On September 28, 2017, Aaron Rubenstein, a purported stockholder of the Company’s common stock, filed a lawsuit against the Company (as nominal defendant) and Richard N. Azar II, it’s then Chief Executive Officer and director (who has since resigned from both positions), RAD2 Management, LLC, RAD2 Minerals, Ltd. and Segundo Resources, LLC, each an entity owned and controlled by Mr. Azar, in the United States District Court, Western District of Texas (Case No. 5:17-cv-962-FB). The suit seeks the recovery (for the benefit of the Company) of alleged short-swing profits from Mr. Azar and his related entities under Section 16(b) of the Exchange Act relating to various transactions involving Series B Preferred Stock of the Company in November 2016 and January 2017. Mr. Azar denies the existence of any short-swing profits and filed a denial with the court. The Company also filed a denial with the court. Subsequently, the parties mediated the dispute in October 2018, and agreed to a confidential settlement of the plaintiff’s claims in December 2018, which resulted in the dismissal of the claims.
Petroflow Matter
In October 2017, the Company agreed to pay directly and reimburse entities owned in part by Alan Dreeben, a former director of the Company, for legal fees and settlement payments expended in connection with the defense of Petroflow Energy Corporation v. Sezar Energy, L.P. and Brittany Energy, LLC , Case No. 16-CV-700-TCK;TLW, In the United States District Court – N.D. OK. The Company was the beneficiary through the release of interest in disputed lease interests from Petroflow to the Company that provides the Company with complete control over those properties to renew expired leases and to have 100% of the drilling rights related to those properties. Sezar Energy and Brittany Energy have assigned any interests they may have had in conjunction with litigation in exchange for the Company making the agreed settlement payments of $475,000 plus direct payments and reimbursement of the legal costs paid on behalf of the defendants by Mr. Dreeben. Total legal fees expended by such entities totaled $392,043, and the Company reimbursed such fees by issuing Mr. Dreeben 3,137 shares of common stock with a value of $0.20 per share in November 2017. In addition, the Company directly paid legal fees and settlement payments totaling $567,633. The total expense related to the Petroflow matter of $959,676 is included in General and Administrative expense on the statement of operations for the year ended March 31, 2018.
Segundo Settlement Agreement
Also on July 12, 2018, the Company entered into a Compromise Settlement Agreement and Mutual Release with Segundo (the “ Segundo Settlement ”). Pursuant to the agreement, Segundo surrendered 25 shares of common stock valued at $1,906.25 per share as of the effective date of the closing of the Acquisition, and released the Company from any and all claims which Segundo previously alleged were owed under the terms of the December 31, 2015 Asset Purchase Agreement. The Company and Segundo also provided each other full releases in connection with the December 31, 2015 Asset Purchase Agreement and Segundo agreed to indemnify the Company and hold it harmless against any claims made by the other sellers under the December 31, 2015 Asset Purchase Agreement.
F- 21
Petroglobe Energy Holdings, LLC and Signal Drilling, LLC
In March 2019, Petroglobe Energy Holdings, LLC and Signal Drilling, LLC sued the Company in the 316 th Judicial District of Hutchinson County, Texas (Cause No. 43781). The plaintiffs alleged causes of action relating to negligent misrepresentation; fraud and willful misconduct; gross negligence; statutory fraud; breach of contract; and specific performance, in connection with a purchase and sale agreement entered into between the parties in March 2018, relating to the purchase by plaintiffs of certain oil and gas assets from the Company, and a related joint venture agreement. The lawsuit seeks in excess of $600,000 in damages, as well as pre- and post-judgment interest, court costs and attorneys’ fees, and punitive and exemplary damages. The Company denies the plaintiffs’ claims and intends to vehemently defend itself against the allegations and file counter claims against the plaintiffs.
Apache Corporation
In December 2018, Apache Corporation (“ Apache ”) sued the Company, Sezar Energy, L.P., and Texokcan Energy Management Inc., in the 129th Judicial District Court of Harris County, Texas (Cause 2018-89515). Apache alleged causes of action for Breach of Contract, Money Had & Received and Conversion, relating to amounts Apache alleged it was owed under a joint operating agreement. Apache is seeking $586,438 in actual damages, exemplary damages, pre- and post-judgment interest, court costs and other amounts which it may be entitled. The Company has filed a general denial to the claims and asserted the affirmative defense of failure to mitigate. The parties are currently moving towards discovery. The Company denies Apache’s claims and intends to vehemently defend itself against the allegations.
N&B Energy
On June 12, 2019, N&B Energy filed a petition in the District Court for the 285 th Judicial District of Bexar County, Texas (Case #2019CI11816). Pursuant to the petition, N&B Energy raises claims for breach of contract, unjust enrichment, money had and received and disgorgement, in connection with $706,000 which it alleges it is owed under the Sale Agreement for true ups and post-closing adjustments associated therewith. The petition seeks amounts owed, pre- and post-judgment interest and attorney’s fees. The Company denies N&B Energy’s claims, believes it is owed approximately $400,000 related to the Sale Agreement and intends to vehemently defend itself against the allegations and claims and seek counterclaims.
Settlement with Prior Chief Executive Officer. Effective on June 2, 2017, Mr. Anthony C. Schnur’s employment as Chief Executive Officer of the Company was terminated. In connection with such termination, the Company entered into a severance agreement with Mr. Schnur, which provided (as amended) for Mr. Schnur to be issued 192 shares of common stock and the payment of $168,000 in total compensation (payable over time). The payments owed as of March 31, 2018 of $79,025 were accrued and included in Accrued Expenses on the balance sheet. The settlement shares were issued in February 2018. During the year ended March 31, 2019, the Company paid all remaining amounts to Mr. Schnur pursuant to the original settlement. The Company and Mr. Schnur entered into an amendment to the severance agreement on April 8, 2019, pursuant to which the Company paid Mr. Schnur $10,000 in lieu of the payment of payroll taxes on amounts previously paid to Mr. Schnur under the original settlement.
NOTE 9 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Change in Accounting for Revenue from Oil and Gas Operations
The Company adopted ASU 2014-09, “ Revenue from Contracts with Customers (Topic 606) ” , on April 1, 2018, using the modified retrospective method applied to contracts that were not completed as of April 1, 2018. Refer to “ Note 3 – Summary of Significant Accounting Policies ” for additional information.
Exploration and Production
There were no significant changes to the timing or valuation of revenue recognized for sales of production from exploration and production activities.
F- 22
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates revenue by significant product type for the years ended March 31, 2019 and 2018, respectively:
|
March 31, 2019 |
March 31, 2018 |
|||||||
| Oil sales | $ | 526,365 | $ | 1,198,514 | ||||
| Natural gas sales | 772,105 | 2,051,846 | ||||||
| Natural gas liquids sales | 1,443,632 | 3,609,407 | ||||||
| Total revenue from customers | $ | 2,742,102 | $ | 6,859,767 | ||||
NOTE 10 – INCOME TAXES
The Company recorded a provision for income taxes of approximately $3,000 and $0 for the years ended March 31, 2019 and March 31, 2018, respectively.
| 2019 | 2018 | |||||||
| Current taxes: | ||||||||
| Federal | $ | — | $ | — | ||||
| State | 3,000 | — | ||||||
| 3,000 | — | |||||||
| Deferred taxes: | ||||||||
| Federal | — | — | ||||||
| State | — | — | ||||||
| — | — | |||||||
| Total | $ | 3,000 | $ | — | ||||
The following is a reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate 21% for 2019 and 31.5% for 2018) to income from continuing operations before income taxes for the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Computed at expected tax rates | $ | 3,495,692 | $ | (7,805,048 | ) | |||
| Nondeductible expenses | 77,473 | 91,439 | ||||||
| State Taxes net of FIT benefit | 2,370 | — | ||||||
| Return to accrual true-up | 1,490,624 | — | ||||||
| Change in effective tax rates | — | (11,470,220 | ) | |||||
| Change in valuation allowance | (5,063,159 | ) | 19,183,829 | |||||
| Total | $ | 3,000 | $ | — | ||||
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Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:
| At March 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating tax loss carryforwards | $ | 9,396,605 | $ | 12,310,895 | ||||
| Depreciation, depletion and amortization | 643,497 | 2,522,833 | ||||||
| Unrealized loss in investments | — | — | ||||||
| Share-based compensation | 302,916 | 245,944 | ||||||
| Accrued compensation | — | 37,998 | ||||||
| Bad Debt reserve | 39,977 | 217,983 | ||||||
| Other | 1 | 110,502 | ||||||
| Total deferred tax assets (liabilities) | 10,382,996 | 15,446,155 | ||||||
| Less: valuation allowance | (10,382,996 | ) | (15,446,155 | ) | ||||
| Total | $ | — | $ | — | ||||
The above estimates are based on management’s decisions concerning certain elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly.
The Company experienced an " ownership change " within the meaning of IRC Section 382 during the year ended March 31, 2017. As a result, certain limitations apply to the annual amount of net operating losses that can be used to offset post ownership change taxable income. The Company has estimated that $44.5 million of its pre-ownership change net operating loss could potentially be lost due to the IRC Section 382 limitation for the year ending March 31, 2017. This amount may increase if the Company experiences another ownership change(s) since the last ownership change. However, the income tax effect of those ownership change(s) should be nil as the Company had recorded a full valuation allowance against its deferred assets.
At March 31, 2019, the Company had estimated net operating loss carryforwards for federal income tax purposes of approximately $44.8 million, adjusted for the ownership change limitation discussed above, which will begin to expire, if not previously used, beginning in the fiscal year 2028. A valuation allowance has been established for the entire amount of the deferred tax assets for years ended March 31, 2019 and March 31, 2018.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the 2017 Tax Cuts and Jobs Act (" 2017 Tax Reform "). The 2017 Tax Reform significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. The Company has reasonably estimated the effects of the 2017 Tax Reform and recorded provisional amounts in the consolidated financial statements as of March 31, 2018. This amount is primarily comprised of the re-measurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21%, from 34%. The Company will continue to monitor additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, so we may make adjustments to the provisional amounts (if any). However, management's opinion is that future adjustments due to the 2017 Tax Reform should not have a material impact on the Company's provision for income taxes.
The Company files income tax returns for federal and state purposes. Management believes that with few exceptions, the Company is not subject to examination by United States tax authorities for periods prior to 2015.
F- 24
NOTE 11 – STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
On April 4, 2017, the Company paid the required quarterly dividend on the Series B Preferred Stock by way of the issuance of 95 shares of common stock to the preferred stockholders at a fair market value of $34,896, based on the closing price of the Company’s common stock ($368.75 per share) on March 31, 2017.
On June 19, 2017, a holder of the Company’s Series B Convertible Preferred Stock converted 143,492 shares of Series B Convertible Preferred Stock into 1,640 shares of common stock of the Company.
On August 23, 2017, the Investor converted $35,000 of the principal amount of the Debenture into an aggregate of 2,808 shares of common stock, which included 17 shares for conversion of principal and 2,791 shares for premiums.
On October 4, 2017, the Company entered into an agreement with a digital marketing advisor pursuant to which the advisor agreed to create original content with the goal of increasing public awareness about the Company and the Company agreed to pay the advisor (a) $20,000 per month beginning in October 2017 and ending on February 28, 2018, (b) $50,000 per month thereafter through October 4, 2018, the end of the term of the agreement, and (c) 6,000 shares of restricted common stock, with 4,000 shares payable within 15 days of the parties’ entry into the agreement and the remainder due on May 1, 2018.
On October 4, 2017, the Company entered into a consulting agreement with a third party consultant which consultant agreed to provide investor relations and public relations services to the Company. As consideration pursuant to the agreement, the Company agreed to issue the consultant 1,600 shares of restricted common stock, with piggy-back registration rights.
In November 2017, the Company reimbursed entities owned in part by Alan Dreeben, a former director of the Company, for legal fees expended by such entities. Total legal fees expended by such entities totaled $392,043, and the Company reimbursed such fees by issuing Mr. Dreeben 3,137 shares of common stock with an agreed value of $125 per share in November 2017.
As of December 31, 2017, the 408,508 outstanding shares of Series B Preferred Stock had accrued an aggregate of $453,573 in quarterly dividends ($153,191 each for the quarters ended June 30, 2017, September 30, 2017 and December 30, 2017). The Company paid the accrued dividends on February 5, 2018, by way of the issuance of an aggregate of 210 shares of the Company’s common stock to the preferred stockholders pursuant to the terms of the designation (which provides that the shares shall be based on a value of $2,187.50 per share).
In June 2017, the Company entered into a settlement agreement with Mr. Anthony C. Schnur, its former Chief Executive Officer and director as described in greater detail above under Note 8 “ Commitments and Contingencies ” - “ Settlement with Prior Chief Executive Officer ”.
During the year ended March 31, 2018, the Investor received 156,380 shares of common stock in connection with the exercise of a warrant and adjustments thereon.
On April 20, 2018, the Investor was issued 5,679 shares of common stock as a result of true-ups in connection with the August 23, 2017 conversion of the Debenture.
During the year ended March 31, 2019, the outstanding shares of Series B Preferred Stock accrued quarterly dividends in the aggregate of $522,813. The Company paid the accrued dividends by way of the issuance of an aggregate of 231 shares of the Company’s common stock to the preferred stockholders pursuant to the terms of the designation (which provides that the shares shall be based on a value of $2,187.50 per share), including 8 shares issued after March 31, 2019. Also during the year ended March 31, 2019, a total of 364,508 shares of Series B Preferred Stock were converted into an aggregate of 4,153 shares of common stock, of which 497 of such shares, along with 113 shares of common stock originally owned by one of the converting holders, were cancelled pursuant to the terms of a settlement agreement.
F- 25
On November 15, 2018, the Company entered into a consulting agreement with Regal Consulting, an investor relations firm, pursuant to which the firm agreed to provide the Company investor relations and consulting services for a period of six months, for monthly consideration of $28,000 and 8,000 restricted shares of the Company’s common stock. In January 2019, the Company issued 16,000 shares of restricted common stock to Regal Consulting for the months of November and December 2018, which shares were issued during the year ended March 31, 2019. On February 13, 2019, and effective on January 31, 2019, the Company entered into a First Amendment to the Consulting Agreement previously entered into with Regal Consulting. Pursuant to the First Amendment, the parties agreed to expand the investor relations services required to be provided by Regal Consulting under the agreement in consideration for $50,000 per month and 50,000 restricted shares of common stock per month (the “ Regal Shares ”)(which are fully-earned upon issuance) during the term of the agreement, and agreed to extend the term of the agreement until October 1, 2019 (unless the Company completes an acquisition or combination prior to such date). A total of 150,000 of the Regal Shares have been issued as of the date of this filing for shares due for services between January and March 2019, and 300,000 shares remain to be issued pursuant to the terms of the agreement. As of March 31, 2019, the 104,000 shares had not been issued and a total of $41,800 had been accrued in common stock payable as of March 31, 2019. The shares were issued in May 2019.
On February 13, 2019, the Company entered into a letter agreement with SylvaCap Media (“ SylvaCap ”), pursuant to which SylvaCap agreed to act as the Company’s non-exclusive digital marketing service provider in consideration for an aggregate of 600,000 shares of restricted common stock (the “ SylvaCap Shares ”), which are fully-earned upon their issuance, and $50,000 per month during the term of the agreement, which ends on November 12, 2019 (unless the Company completes an acquisition or combination prior to such date) or upon termination by either party for cause. The Company also agreed to provide SylvaCap piggy-back registration rights in connection with the SylvaCap Shares and to pay SylvaCap $6,250 every three months as an expense reimbursement. The total value of the restricted shares of common stock due of $261,540 has been accrued in common stock payable as of March 31, 2019. The SylvaCap shares were issued in May 2019.
Series A Convertible Preferred Stock
As of March 31, 2019 and 2018, respectively, the Company had no Series A Convertible Preferred Stock issued or outstanding.
Series B Redeemable Convertible Preferred Stock
On September 1, 2016, as consideration for the closing of the Acquisition, the Company issued an aggregate of 552,000 shares of Redeemable Convertible Preferred Stock, which had a total value of $13,800,000 based on the $25 per Series B Preferred Stock share par value. The preferred shares were issued to RAD2 (200,000 shares) and Segundo Resources, LLC (an affiliate of RAD2)(352,000 shares) on behalf of and for the benefit of RAD2.
As of March 31, 2019 and 2018, there were 44,000 and 408,508 shares of Series B Preferred Stock outstanding, respectively, which have the following features:
| ● | a liquidation preference senior to all of the Company’s common stock; |
| ● | a dividend, payable quarterly, at an annual rate of six percent (6%) of the original issue price until such Series B Preferred Stock is no longer outstanding either due to conversion, redemption or otherwise; and |
| ● | voting rights on all matters, with each share having 1 vote. |
During the year ended March 31, 2018, the Company issued a stock dividend on the Series B Preferred Stock consisting of 210 shares of the Company’s common stock. Due to the fact that the Company is in a retained deficit position, the Company recognized a charge to additional paid in-capital of $143, based on the par value of the common stock issued. As of March 31, 2018, the Company recognized additional stock dividends on the Series B Preferred Stock consisting of 24 shares of our common stock, which was recognized as a charge to additional paid in-capital and stock dividends distributable but not issued of $449, based on the closing price of the Company’s common stock of $19.25 per share on March 31, 2018.
F- 26
During the year ended March 31, 2019, the Company issued a stock dividend on the Series B Preferred Stock consisting of 231 shares of the Company’s common stock. Due to the fact that the Company is in a retained deficit position, the Company recognized a charge to additional paid in-capital of $2,782, based on the par value of the common stock issued paid in-capital and stock dividends distributable but not issued of $3, based on the closing price of the Company’s common stock of $0.3822 per share on March 31, 2019. In April 2019, the Company issued 8 shares of common stock in lieu of cash dividends which had accrued on the Series B Preferred Stock for the quarter ended March 31, 2019.
Also during the year ended March 31, 2019, a total of 364,508 shares of Series B Preferred Stock were converted into an aggregate of 4,166 shares of common stock, of which 497 of such shares, along with 113 shares of common stock originally owned by one of the converting holders, were cancelled pursuant to the terms of a settlement agreement.
Series C Redeemable Convertible Preferred Stock
During the year ended March 31, 2019, the Company sold and issued 1,577 shares of Series C Preferred Stock pursuant to the terms of a October 2017 Stock Purchase Agreement, October 2018 Stock Purchase Agreement and November 2018 Stock Purchase Agreement, for total consideration of $15 million. During the year ended March 31, 2018, the Company sold and issued 738 shares of Series C Preferred Stock pursuant to the terms of a October 2017 Stock Purchase Agreement, for total consideration of $7 million. As of March 31, 2019 and 2018, there were 2,305 and 1,132 shares of Series C Preferred Stock outstanding, respectively.
During the year ended March 31, 2019, the Investor converted 404 shares of the Series C Preferred Stock with a face value of $4.04 million into a total of 49,724 shares of common stock and was issued an additional 4,741,986 shares for conversion premiums and true ups in connection with those conversions. During the year ended March 31, 2018, the Investor converted 10 shares of Series C Preferred Stock with a face value of $100,000 into a total of 49 shares of common stock and was issued an additional 16,341 shares for true ups in connection with that conversion.
As of March 31, 2019 and 2018, the Company accrued common stock dividends on the Series C Preferred Stock based on the then 34.95% premium dividend rate described above. The Company recognized a total charge to additional paid-in capital and stock dividends distributable but not issued of $5,676,715 and $1,928,084 related to the stock dividend declared but not issued for the years ended March 31, 2019 and 2018, respectively.
F- 27
Warrants
The following summarizes Camber’s warrant activity for each of the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Number of | Exercise | |||||||||||||
| Warrants | Price | Warrants | Price | |||||||||||||
| Outstanding at Beginning of Year | 2,904 | $ | 453.75 | 410 | $ | 8,025.25 | ||||||||||
| Issued | 40,000 | 9.75 | 2,560 | 156.25 | ||||||||||||
| Expired | (37 | ) | 13,150.61 | (66 | ) | 35,937.50 | ||||||||||
| Exercised | — | — | — | — | ||||||||||||
| Outstanding at End of Year | 42,867 | $ | 26.74 | 2,904 | $ | 453.75 | ||||||||||
In June 2017, the Company granted 2,560 warrants to purchase shares of the Company’s common stock which were valued at the grant date under the Black-Scholes Option pricing model at $288,592. The exercise price of the warrants is $156.25 per share of common stock. The warrants expire five years from the grant date. The volatility utilized in the model was 135.42%. The discount rate was 1.78%.
In May 2018, the Company granted 40,000 warrants to purchase shares of the Company’s common stock which were valued at the grant date under the Black-Scholes Option pricing model at $343,631 which is included in the March 31, 2019 consolidated financial statements as share-based compensation. The exercise price of the warrants is $9.75 per share of common stock. The warrants expire five years from the grant date. The volatility utilized in the model was 145.36%. The discount rate was 2.76%.
The following is a summary of the Company’s outstanding warrants at March 31, 2019:
| Warrants | Exercise | Expiration | Intrinsic Value at | |||||||||||
| Outstanding | Price ($) | Date | March 31, 2019 | |||||||||||
| 108 | (1) | 1,572.44 | April 21, 2019 | $ | — | |||||||||
| 199 | (2) | 937.50 | April 26, 2021 | — | ||||||||||
| 2,560 | (3) | 156.25 | June 12, 2022 | — | ||||||||||
| 40,000 | (4) | 9.75 | May 24, 2023 | — | ||||||||||
| 42,867 | $ | — | ||||||||||||
| (1) | Warrants issued in connection with the sale of units in the Company’s unit offering in April 2014. The warrants became exercisable on April 21, 2014 and will remain exercisable thereafter until April 21, 2019. These warrants expired unexercised. |
| (2) | Warrants issued in connection with the sale of convertible notes. The warrants were exercisable on the grant date (April 26, 2016) and remain exercisable until April 26, 2021. |
| (3) | Warrants issued in connection with the Initial Tranche of the funding from Vantage. The warrants were exercisable on the grant date (June 12, 2017) and remain exercisable until June 12, 2022. |
| (4) | Warrants issued in connection with the Severance Agreement with Richard Azar. The warrants were exercisable on the grant date (May 25, 2018) and remain exercisable until May 24, 2023. |
NOTE 12 – SHARE-BASED COMPENSATION
Common Stock
The Company stockholders approved the 2014 Stock Incentive Plan (as amended to date, the “ 2014 Plan ”) at the annual stockholder meeting held on February 13, 2014. The 2014 Plan provides the Company with the ability to offer up to 2.5 million (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; or (vi) any combination of the foregoing, to employees, consultants and contractors as provided in the 2014 Plan.
F- 28
The Company stockholders approved the Lucas Energy, Inc. 2012 Stock Incentive Plan (“ 2012 Incentive Plan ”) at the annual stockholder meeting held on December 16, 2011. The 2012 Incentive Plan provides the Company with the ability to offer (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; or (vi) any combination of the foregoing, to employees, consultants and contractors as provided in the 2012 Incentive Plan.
The Company stockholders approved the Lucas Energy, Inc. 2010 Long Term Incentive Plan (“ 2010 Incentive Plan ” or “ 2010 Plan ”) at the annual stockholder meeting held on March 30, 2010. The 2010 Incentive Plan provides the Company with the ability to offer (1) incentive stock options, (2) non-qualified stock options, and (3) restricted shares (i.e., shares subject to such restrictions, if any, as determined by the Compensation Committee or the Board) to employees, consultants and contractors as performance incentives.
Under the 2010 Incentive Plan, 58 shares of the Company’s common stock are authorized for initial issuance or grant, under the 2012 Incentive Plan, 96 shares of the Company’s common stock are authorized for initial issuance or grant, and under the 2014 Incentive Plan, as amended, 2,500,000 shares of the Company’s common stock are authorized for issuance or grant. As of March 31, 2019, there was an aggregate of 1 share available for issuance or grant under the 2010 Incentive Plan, 5 shares were available for issuance or grant under the 2012 Incentive Plan and an aggregate of approximately 2,499,996 securities were available for issuance or grant under the 2014 Incentive Plan as amended for future issuances and grants, respectively. The number of securities available under the 2010, 2012 and 2014 Plans is reduced one for one for each security delivered pursuant to an award under the Plans. Any issued or granted security that becomes available due to expiration, forfeiture, surrender, cancellation, termination or settlement in cash of an award under the Incentive Plans may be requested and used as part of a new award under the Plans.
The Plans are administered by the Compensation Committee and/or the Board in its discretion (the “ Committee ”). The Committee interprets the Plans and has broad discretion to select the eligible persons to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the exercise price of stock options, the number of shares subject to awards, the expiration date of awards, and the vesting schedule or other restrictions applicable to awards.
For the year ended March 31, 2018, Camber issued 268 shares of its common stock with an aggregate grant date fair value of $54,533, which were valued based on the trading value of Camber’s common stock on the date of grant. The shares were awarded according to the employment agreement with an officer and as additional compensation for other officers and managerial personnel.
On October 4, 2017, the Company entered into an agreement with a digital marketing and a consulting agreement with a third party consultant pursuant to which shares of common stock were issued. See Note 11 “ Stockholders’ Equity (Deficit) ” – “ Common Stock ”, above.
In May 2018, the Company granted 40,000 warrants to purchase shares of the Company’s common stock which were valued at the grant date under the Black-Scholes Option pricing model at $343,631 which is included in the March 31, 2019 consolidated financial statements as share-based compensation.
On November 15, 2018, the Company entered into a consulting agreement with Regal Consulting, an investor relations firm (as amended on February 13, 2019) and on February 13, 2019, the Company entered into a letter agreement with SylvaCap, pursuant to which SylvaCap agreed to act as the Company’s non-exclusive digital marketing service provider pursuant to which shares of common stock were issued and agreed to be issued. See Note 11 “ Stockholders’ Equity (Deficit) ” – “ Common Stock ”, above.
Stock Options
The following summarizes Camber’s stock option activity for each of the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||||||||||
|
Number
of Stock
Options |
Weighted
Average
Exercise Price |
Number
of Stock
Options |
Weighted
Average Exercise Price |
|||||||||||||
| Outstanding at Beginning of Year | 4 | $ | 32,343.75 | 32 | $ | 21,130.75 | ||||||||||
| Expired/Cancelled | — | — | (28 | ) | 21,002.50 | |||||||||||
| Outstanding at End of Year | 4 | $ | 32,343.75 | 4 | $ | 32,343.75 | ||||||||||
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During the year ended March 31, 2019, the Company granted no stock options, and of the Company’s outstanding options, no options were exercised, expired or forfeited.
During the year ended March 31, 2018, the Company granted no stock options, and of the Company’s outstanding options, no options were exercised or forfeited, while options to purchase 28 shares of common stock expired.
Share-based compensation expense related to stock options during the years ended March 31, 2019 and 2018 was $0 and $11,238, respectively.
Options outstanding and exercisable at March 31, 2019 and 2018 had no intrinsic value. The intrinsic value is based upon the difference between the market price of Camber’s common stock on the date of exercise and the grant price of the stock options.
At March 31, 2019 and 2018, there was no unrecognized compensation expense related to non-vested stock options.
Options outstanding and exercisable as of March 31, 2019:
| Exercise | Remaining | Options | Options | |||||||||||
| Price ($) | Life (Yrs.) | Outstanding | Exercisable | |||||||||||
| 32,343.75 | 1.5 | 4 | 4 | |||||||||||
| Total | 4 | 4 | ||||||||||||
F- 30
NOTE 13 – INCOME (LOSS) PER COMMON SHARE
The calculation of earnings (loss) per share for the years ended March 31, 2019 and 2018 was as follows:
| Year Ended | ||||||||
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Numerator: | ||||||||
| Net Income (Loss) | $ | 16,643,153 | $ | (24,771,588 | ) | |||
| Less Preferred Dividends | (5,676,715 | ) | (1,928,084 | ) | ||||
| Net Income (Loss) Attributable to Common Stockholders | $ | 10,966,438 | $ | (26,699,672 | ) | |||
| Denominator | ||||||||
| Weighted Average Share – Basic | 4,938,259 | 92,753 | ||||||
| Income (Loss) per Share – Basic | $ | 2.22 | $ | (287.86 | ) | |||
| Dilutive Effect of Common Stock Equivalents | ||||||||
| Options and Warrants | — | — | ||||||
| Series C Preferred Shares | 47,318,473 | — | ||||||
| Denominator | ||||||||
| Total Weighted average shares – diluted | 52,256,732 | 92,753 | ||||||
| Income (loss) per share – diluted | $ | 0.21 | $ | (287.86 | ) | |||
For the years ended March 31, 2019 and 2018, the following share equivalents related to convertible debt and warrants to purchase shares of common stock were excluded from the computation of diluted net income (loss) per share as the inclusion of such shares would be anti-dilutive.
| Year Ended | ||||||||
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Common Shares Issuable for: | ||||||||
| Convertible Debt | — | 45,386 | ||||||
| Options and Warrants | 42,871 | 2,907 | ||||||
| Series B and C Preferred Shares | — | 632,839 | ||||||
| Total | 42,871 | 681,132 | ||||||
NOTE 14 – POSTRETIREMENT BENEFITS
Camber maintained a matched defined contribution savings plan for its employees. During the years ended March 31, 2019 and 2018, Camber’s total costs recognized for the savings plan were $0 and $7,234, respectively. The plan was terminated during the year ended March 31, 2018.
F- 31
NOTE 15 – SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for interest and income taxes was as follows for the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Interest | $ | 842,520 | $ | 2,489,990 | ||||
| Income taxes | $ | — | $ | — | ||||
Non-cash investing and financing activities for the years ended March 31, 2019 and 2018 included the following:
| 2019 | 2018 | |||||||
| Reduction in Accounts Payable for Payments Made on Previously Accrued Capital Expenditures | $ | 547,033 | $ | 4,402 | ||||
| Cancellation of Debt and Interest on Rogers Foreclosure | $ | — | $ | 11,018,385 | ||||
| Issuance of Common Stock for Payment of Consulting Fees | $ | 234,430 | $ | — | ||||
| Additions to Asset Retirement Obligation | $ | — | $ | 437,071 | ||||
| Change in Estimate for Asset Retirement Obligations | $ | 19,461 | $ | 268,119 | ||||
| Conversion of Preferred B Shares to Common Stock | $ | 365 | $ | — | ||||
| Stock Dividends Distributable but not Issued | $ | 5,676,715 | $ | 1,928,084 | ||||
| Conversion of Notes and Accrued Interest to Common Stock | $ | 917,103 | $ | 35,000 | ||||
| Conversion of Preferred Stock to Common Stock | $ | 4,742 | $ | 553 | ||||
| Issuance of Lender Shares | $ | — | $ | 35,900 | ||||
| Warrants Issued in Abeyance | $ | 12 | $ | 3,910 | ||||
| Issuance of Common Stock for Dividends | $ | 2,782 | $ | 58,824 | ||||
NOTE 16 – SUBSEQUENT EVENTS
On April 22, 2019, the Company issued 8 shares of common stock in lieu of cash dividends which had accrued on the Series B Preferred Stock for the quarter ended March 31, 2019.
On May 15, 2019, the Company entered into an Agreed Conversion Agreement with the then holder of all 44,000 shares of the Company’s then outstanding Series B Preferred Stock. Pursuant to the Conversion Agreement, all of the Series B Preferred Stock was agreed to be converted into 503 shares of the Company’s common stock pursuant to the stated terms of such Series B Preferred Stock, in consideration for $25,000 in cash. The holder also provided the Company a release in connection with certain of his rights under the Series B Preferred Stock (including any and all accrued and unpaid dividends) and certain other matters.
On May 22, 2019, the 150,000 shares due to Regal Consulting and the 600,000 shares due to SylvaCap (as described in greater detail under Note 11 “ Stockholders’ Equity (Deficit) ” – “ Common Stock ”) were issued.
Subsequent to March 31, 2019, and through June 25, 2019, the Investor has been issued an aggregate of 28,458,521 shares of common stock in connection with true-ups associated with the October 2018 conversion, by the Investor, of the Debenture. As of June 25, 2019, the Investor was still due 24,133,311 shares in connection with true ups on the conversion of the Debenture, which shares are being held in abeyance until such time, as ever, as such shares can be issued to the Investor without the Investor exceeding the 4.99% ownership limitation set forth in the Debenture.
Supplemental Oil and Gas Disclosures (Unaudited)
The following disclosures for the Company are made in accordance with authoritative guidance regarding disclosures about oil and natural gas producing activities. Users of this information should be aware that the process of estimating quantities of “ proved, ” “ proved developed, ” and “ proved undeveloped ” crude oil, natural gas liquids and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures.
F- 32
Proved reserves represent estimated quantities of crude oil, natural gas liquids and natural gas that geoscience and engineering data can estimate, with reasonable certainty, to be economically producible from a given day forward from known reservoirs under economic conditions, operating methods and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.
Proved developed reserves are proved reserves expected to be recovered under operating methods being utilized at the time the estimates were made, through wells and equipment in place or if the cost of any required equipment is relatively minor compared to the cost of a new well.
Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
PROVED RESERVE SUMMARY
All of the Company’s reserves are located in the United States. The following tables sets forth the changes in Camber’s net proved reserves (including developed and undeveloped reserves) for the years ended March 31, 2019 and 2018. Reserves estimates as of March 31, 2019 and 2018, respectively, were estimated by the independent petroleum consulting firm Graves & Co. Consulting LLC:
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Crude Oil (Bbls) | ||||||||
| Net proved reserves at beginning of year | 129,573 | 1,586,750 | ||||||
| Revisions of previous estimates | 3,868 | (1,430,073 | ) | |||||
| Purchases in place | — | 2,010 | ||||||
| Extensions, discoveries and other additions | — | — | ||||||
| Sales in place | (75 | ) | (1,410 | ) | ||||
| Production | (8,846 | ) | (27,704 | ) | ||||
| Net proved reserves at end of year | 124,520 | 129,573 | ||||||
| Natural Gas (Mcf) | ||||||||
| Net proved reserves at beginning of year | 8,147,168 | 9,804,010 | ||||||
| Revisions of previous estimates | (7,609,052 | ) | (1,134,687 | ) | ||||
| Purchases in place | — | 274,810 | ||||||
| Extensions, discoveries and other additions | — | — | ||||||
| Sales in place | (7,983 | ) | (581 | ) | ||||
| Production | (321,423 | ) | (796,384 | ) | ||||
| Net proved reserves at end of year | 208,710 | 8,147,168 | ||||||
| NGL (Bbls) | ||||||||
| Net proved reserves at beginning of year | 1,435,703 | 2,420,110 | ||||||
| Revisions of previous estimates | (1,338,916 | ) | (885,224 | ) | ||||
| Purchases in place | — | 47,980 | ||||||
| Extensions, discoveries and other additions | — | — | ||||||
| Sales in place | (1,418 | ) | (87 | ) | ||||
| Production | (51,269 | ) | (147,076 | ) | ||||
| Net proved reserves at end of year | 44,100 | 1,435,703 | ||||||
| Oil Equivalents (Boe) | ||||||||
| Net proved reserves at beginning of year | 2,923,138 | 5,640,862 | ||||||
| Revisions of previous estimates | (2,603,224 | ) | (2,504,412 | ) | ||||
| Purchases in place | — | 95,792 | ||||||
| Extensions, discoveries and other additions | — | — | ||||||
| Sales in place | (2,823 | ) | (1,594 | ) | ||||
| Production | (113,685 | ) | (307,510 | ) | ||||
| Net proved reserves at end of year | 203,406 | 2,923,138 | ||||||
F- 33
The following table sets forth Camber’s proved developed and undeveloped reserves at March 31, 2019 and 2018:
| At March 31, | ||||||||
| 2019 | 2018 | |||||||
| Proved Developed Producing Reserves | ||||||||
| Crude Oil (Bbls) | 76,490 | 129,573 | ||||||
| Natural Gas (Mcf) | 208,710 | 8,147,168 | ||||||
| NGL (Bbls) | 44,100 | 1,435,703 | ||||||
| Oil Equivalents (Boe) | 155,376 | 2,923,138 | ||||||
| Proved Developed Non-Producing Reserves | ||||||||
| Crude Oil (Bbls) | 48,030 | — | ||||||
| Natural Gas (Mcf) | — | — | ||||||
| NGL (Bbls) | — | — | ||||||
| Oil Equivalents (Boe) | 48,030 | — | ||||||
| Proved Undeveloped Reserves | ||||||||
| Crude Oil (Bbls) | — | |||||||
| Natural Gas (Mcf) | — | — | ||||||
| NGL (Bbls) | — | — | ||||||
| Oil Equivalents (Boe) | — | |||||||
| Proved Reserves | ||||||||
| Crude Oil (Bbls) | 124,520 | 129,573 | ||||||
| Natural Gas (Mcf) | 208,710 | 8,147,168 | ||||||
| NGL (Bbls) | 44,100 | 1,435,703 | ||||||
| Oil Equivalents (Boe) | 203,406 | 2,923,138 | ||||||
*The Company engaged Graves & Co Consulting, LLC, an independent reserve engineering firm, to provide a reserve report on the Company’s properties as of March 31, 2019.
Proved Developed Not Producing Reserves
At March 31, 2019, the Company had proved developed not producing reserves of 48,030 Bbls of crude oil and 0 proved developed not producing reserves at March 31, 2018.
Proved Undeveloped Reserves
At March 31, 2019, the Company had no proved undeveloped reserves. During the year ended March 31, 2018, total proved undeveloped reserves decreased by 2.3 million Boe to 0 Boe, due to expiring leases. The Company’s proved reserves at March 31, 2018 were concentrated mainly in the Hunton formation and totaled 2.8 million Boe, or 96% of the total proved developed reserves. These reserves were sold as part of the N&B Energy transaction discussed earlier. As of March 31, 2019, our proved reserves totaled 203,406 Boe and are concentrated mainly in the Trend and Hutchinson areas.
F- 34
The following table sets forth Camber’s net reserves in Boe by reserve category and by formation at March 31, 2019 and 2018:
|
Proved
Developed |
Proved Non-Producing |
Proved
Undeveloped |
Total
Proved |
|||||||||||||
| Hunton Area | ||||||||||||||||
| At March 31, 2019 | — | — | — | — | ||||||||||||
| At March 31, 2018 | 2,803,670 | — | — | 2,803,670 | ||||||||||||
| Hutchinson Area | ||||||||||||||||
| At March 31, 2019 | 18,200 | 48,030 | — | 66,230 | ||||||||||||
| At March 31, 2018 | — | — | — | — | ||||||||||||
| Trend Area | ||||||||||||||||
| At March 31, 2019 | 132,361 | — | — | 132,361 | ||||||||||||
| At March 31, 2018 | 119,468 | — | — | 119,468 | ||||||||||||
| Other | ||||||||||||||||
| At March 31, 2019 | 4,815 | — | — | 4,815 | ||||||||||||
| At March 31, 2018 | — | — | — | — | ||||||||||||
| Total | ||||||||||||||||
| At March 31, 2019 | 155,376 | 48,030 | — | 203,406 | ||||||||||||
| At March 31, 2018 | 2,923,138 | 48,030 | — | 5,640,862 | ||||||||||||
Capitalized Costs Relating to Oil and Natural Gas Producing Activities . The following table sets forth the capitalized costs relating to Camber’s crude oil and natural gas producing activities at March 31, 2019 and 2018:
| At March 31, | ||||||||
| 2019 | 2018 | |||||||
| Oil and gas properties subject to amortization | $ | 50,352,306 | $ | 60,760,056 | ||||
| Oil and gas properties not subject to amortization | 28,016,989 | 28,016,989 | ||||||
| Capitalized asset retirement costs | 176,649 | 322,470 | ||||||
| Total oil & natural gas properties | 78,545,944 | 89,099,515 | ||||||
| Accumulated depreciation, depletion, and impairment | (78,333,628 | ) | (76,555,320 | ) | ||||
| Net Capitalized Costs | $ | 212,316 | $ | 12,544,195 | ||||
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities . The following table sets forth the costs incurred in Camber’s oil and natural gas property acquisition, exploration and development activities for the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Acquisition of properties | ||||||||
| Proved | $ | — | $ | 460,000 | ||||
| Unproved | — | — | ||||||
| Exploration costs | — | — | ||||||
| Development costs | 1,548,958 | 1,586,057 | ||||||
| Total | $ | 1,548,958 | $ | 2,046,057 | ||||
F- 35
Results of Operations for Oil and Natural Gas Producing Activities . The following table sets forth the results of operations for oil and natural gas producing activities for the years ended March 31, 2019 and 2018: :
| 2019 | 2018 | |||||||
| Crude oil and natural gas revenues | $ | 2,742,102 | $ | 6,859,767 | ||||
| Production costs | (3,003,901 | ) | (5,175,038 | ) | ||||
| Depreciation and depletion | (473,521 | ) | (1,380,418 | ) | ||||
| Results of operations for producing activities, excluding corporate overhead and interest costs | $ | (735,320 | ) | $ | 304,311 | |||
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves. The following information has been developed utilizing procedures prescribed by ASC Topic 932 and based on crude oil and natural gas reserves and production volumes estimated by the independent petroleum consultants of Camber. The estimates were based on a 12-month average of first-of-the-month commodity prices for the years ended March 31, 2019 and 2018. The following information may be useful for certain comparison purposes, but should not be solely relied upon in evaluating Camber or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of Camber.
The future cash flows presented below are based on cost rates and statutory income tax rates in existence as of the date of the projections and average prices over the preceding twelve months. It is expected that material revisions to some estimates of crude oil and natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used.
Management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable and possible as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated.
The following table sets forth the standardized measure of discounted future net cash flows from projected production of Camber’s oil, NGL, and natural gas reserves as of March 31, 2019 and 2018:
| At March 31, | ||||||||
| 2019 | 2018 | |||||||
| Future cash inflows | $ | 9,223,561 | $ | 54,991,829 | ||||
| Future production costs | (4,073,084 | ) | (35,232,113 | ) | ||||
| Future development costs | (595,000 | ) | — | |||||
| Future income taxes | (956,650 | ) | (6,915,899 | ) | ||||
| Future net cash flows | 3,598,827 | 12,843,817 | ||||||
| Discount to present value at 10% annual rate | (1,520,346 | ) | (5,375,702 | ) | ||||
| Standardized measure of discounted future net cash flows relating to proved oil and gas reserves | $ | 2,078,481 | $ | 7,468,115 | ||||
F- 36
Changes in Standardized Measure of Discounted Future Net Cash Flows. The following table sets forth the changes in the standardized measure of discounted future net cash flows for each of the years ended March 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Standardized measure, beginning of year | $ | 7,468,115 | $ | 16,012,422 | ||||
| Crude oil and natural gas sales, net of production costs | 260,928 | (1,684,075 | ) | |||||
| Net changes in prices and production costs | 1,842,171 | (4,509,864 | ) | |||||
| Changes in estimated future development costs | 344,759 | — | ||||||
| Revisions of previous quantity estimates | 17,112,424 | (3,689,687 | ) | |||||
| Accretion of discount | 263,955 | 1,148,940 | ||||||
| Net change in income taxes | 3,460,184 | 5,391,659 | ||||||
| Purchases of reserves in place | — | 680,200 | ||||||
| Sales of reserves in place | (10,083 | ) | (9,500 | ) | ||||
| Change in timing of estimated future production | (28,663,972 | ) | (5,871,980 | ) | ||||
| Standardized measure, end of year | $ | 2,078,481 | $ | 7,468,115 | ||||
F- 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 27, 2018, the Company engaged Marcum LLP (“ Marcum ”) as its independent registered public accountants. This engagement occurred in connection with the Company’s prior independent public accountants, GBH CPAs, PC (“ GBH ”) resigning, effective as of the same date, July 27, 2018, as a result of combining its practice with Marcum. The engagement of Marcum was approved by the Audit Committee of the Company’s Board of Directors.
Pursuant to applicable rules, the Company makes the following additional disclosures:
(a) GBH’s reports on the consolidated financial statements of the Company as at and for the fiscal years ended March 31, 2018 and 2017 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that such reports contained explanatory paragraphs in respect to uncertainty as to the Company’s ability to continue as a going concern.
(b) During the fiscal years ended March 31, 2018 and 2017 and through July 27, 2018, there were no disagreements with GBH on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which if not resolved to GBH’s satisfaction would have caused it to make reference thereto in connection with its reports on the financial statements for such years. During the fiscal years ended March 31, 2018 and 2017 and through July 27, 2018, there were no events of the type described in Item 304(a)(1)(v) of Regulation S-K.
(c) During the fiscal years ended March 31, 2018 and 2017 and through July 27, 2018, the Company did not consult with Marcum with respect to any matter whatsoever including without limitation with respect to any of (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company’s financial statements; or (iii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or an event of the type described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, our management, with the participation of our Interim Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2019, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our management, including our interim principal executive officer and principal financial officer, have concluded that, as of March 31, 2019, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of our Interim Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2019 based on the criteria framework established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“ COSO ”). Based on the assessment, our management has concluded that our internal control over financial reporting were not effective as of March 31, 2019.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Limitations on the Effectiveness of Controls
The Company’s disclosure controls and procedures are designed to provide the Company’s Interim Chief Executive Officer and Chief Financial Officer with reasonable assurances that the Company’s disclosure controls and procedures will achieve their objectives. However, the Company’s management does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and such design may not succeed in achieving its stated objectives under all potential future conditions.
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Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table and accompanying descriptions indicate the name of each officer and director, including their age, principal occupation or employment, and the year in which each person first became a director.
Information Concerning the Board of Directors and its Committees.
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We have historically compensated our directors for service on the Board and committees thereof through the issuance of shares of common stock, stock options and cash compensation for meeting fees. Additionally, we reimburse directors for expenses incurred by them in connection with the attendance at meetings of the Board and any committee thereof (as described below). The Board appoints annually the executive officers of the Company and the executive officers serve at the discretion of the Board.
The business experience of each of the persons listed above during the past five years is as follows:
Louis G. Schott, Interim Chief Executive Officer
Mr. Schott has served as the Interim Chief Executive Officer of the Company since May 25, 2018. Mr. Schott has over 24 years of legal and business experience with 20 years in the oil and gas industry, including a strong background in restructuring, mergers and acquisitions, public company regulations and requirements, title, energy finance, business development, general negotiations and land. Mr. Schott’s recent restructuring experience includes restructurings within and outside of bankruptcy and both public, traded on the TSX and NYSE American, and private entities.
Prior to being engaged as Interim Chief Executive Officer of the Company, Mr. Schott served as an advisor to the Company (a position he held between December 2017 and the date he was appointed as Interim Chief Executive Officer, May 25, 2018) and is also an advisor to other companies in various stages of growth.
Mr. Schott was recently the Interim Chief Executive Officer of EnerJex Resources, Inc., a Nevada corporation listed on the NYSE American (“ EnerJex ”), a position which he held from February 2017 to March 2018. As CEO, he led restructuring efforts, cost reductions and the successful completion of a merger between EnerJex and a privately held company (AgEagle Aerial Systems, Inc.).
Mr. Schott was previously General Counsel and Treasurer of TexOak Petro Holdings LLC (“ TexOak ”) and its subsidiaries including Equal Energy (“ Equal ”), from 2009 through August 2016, where he actively performed all legal functions, including corporate structure and governance, negotiation of oil and gas acquisitions and divestitures, drafting review and certification of all corporate and financial documents, legal and land due diligence, corporate finance, litigation management, risk management, insurance, corporate policies, and human resource management. At TexOak, Mr. Schott successfully managed two mergers including the merger with Equal, a Canadian public company dually listed on the New York Stock Exchange and the Toronto Stock Exchange and Equal’s subsequent privatization and redomestication. Mr. Schott was also instrumental in working with the CEO and the Board in guiding Petroflow’s predecessor through restructuring and bankruptcy emerging as a private company with no debt and capital to grow.
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Prior to joining TexOak’s subsidiary, Petroflow, in 2005, Mr. Schott served in various senior roles with TDC Energy (“ TDC ”) from 1996 through 2005. Prior to TDC, Mr. Schott was an oil and gas attorney with Liskow & Lewis in New Orleans.
Mr. Schott is a graduate of Tulane University with an MBA and a Juris Doctorate. Mr. Schott is also a non-practicing unlicensed Certified Public Accountant.
Robert Schleizer, Chief Financial Officer and Director
Mr. Schleizer has served as Chief Financial Officer (beginning as Interim Chief Financial Officer) since June 2, 2017, as a member of the Board of Directors since October 6, 2017, and as Treasurer of the Company since, January 9, 2018. Mr. Schleizer, has over 30 years of financial and operational experience serving private and public companies in financial and organization restructuring, crisis management, acquisitions and divestitures, and equity and debt financings across multiple industries. He is a co-founder of BlackBriar Advisors LLC, a business renewal and acceleration firm, where he has served as Managing Partner since 2010. Prior to BlackBriar, Mr. Schleizer served as Chief Financial Officer and Director for Xponential, Inc., a public holding company that owned 34 specialty finance and retail stores, from 2001 to 2013, and as a Managing Director for BBK, an international financial advisory, where he provided restructuring and refinancing financial advisory services. Mr. Schleizer holds a Bachelor of Science in Accounting from Arizona State University and is a Certified Insolvency Restructuring Advisor (“ CIRA ”) and Certified Turnaround Professional. Effective August 17, 2017, Mr. Schleizer was appointed as Interim Chief Financial Officer and principal accounting/financial officer of Enerjex Resources, Inc., a position he held until March 26, 2018.
Director Qualifications:
Mr. Schleizer has served as a director of many private and public companies in the past and his industry financial expertise makes him an asset to the Company and qualified to serve as director of the Company.
Fred S. Zeidman, Director
In December 2014, Mr. Zeidman was appointed as Chairman of Gordian Group LLC, a U.S. investment bank specializing in board level advice in complex, distressed or “ story ” financial matters. Mr. Zeidman currently serves as Director of External Affairs of MCNA Dental, lead Director of Straight Path Communications, Inc., Director REMA and Director Prosperity Bank in Houston. He was formerly Restructuring Officer of TransMeridian Exploration Inc. and Chief Bankruptcy Trustee of AremisSoft Corp.
Mr. Zeidman, Chairman Emeritus of the United States Holocaust Memorial Council was appointed by President George W. Bush in March 2002 and served in that position from 2002-2010. A prominent Houston based business and civic leader, Mr. Zeidman also is Chairman Emeritus of the University of Texas Health Science System Houston and Director and Chief Financial Officer of the Texas Heart Institute. He is on the board of the Development Corp of Israel (Israel Bonds) and served on the Board of the National World War II Museum.
Over the course of his distinguished 50 year career, Mr. Zeidman has been involved in numerous high-profile workouts, restructurings and reorganizations. He was the former CEO, President and Chairman of Seitel, Inc., a Houston-based onshore seismic data provider where he was instrumental in the successful turnaround of the Company. He held the post of Chairman of the Board and CEO of Unibar Corporation, the largest domestic independent drilling fluids company, until its sale to Anchor Drilling Fluids in 1992.
Mr. Zeidman holds a Bachelor’s degree from Washington University in St. Louis and a Master’s in Business Administration from New York University.
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Director Qualifications:
The Board of Directors believes that Mr. Zeidman is highly qualified to serve as a member of the Board due to his significant experience serving as a director of public and private companies and institutions and his substantial understanding of the oil and gas industry in general.
James G. Miller, Director
Mr. Miller is a retired corporate executive, having served as president and CEO of several energy companies. He has previously served on the Board of Directors of companies listed on NYSE, NASDAQ and the Australian Stock Exchange. From 2009 until 2016, Mr. Miller served as a Director of Guardian 8 Holdings. From December 31, 2010 through March 2018, he was a Director of Enerjex Resources, In. (NYSE American), an oil and gas exploration and production company, and chaired the Audit Committee. In March 2018, Enerjex executed a merger which concluded his Board service.
He also served on the Board of Trustees of The Nature Conservancy, Missouri Chapter, for 16 years and is a past Board Chair.
Mr. Miller holds a BS in Electrical Engineering and an MBA in management from the University of Wisconsin-Madison.
Director Qualifications:
The Board of Directors believes that Mr. Miller is highly qualified to serve as a member of the Board due to his experience having served as president and CEO of several energy companies and serving on the Board of Directors of several publicly-traded companies.
Family Relationships
There are no family relationships among our directors or executive officers.
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of our directors or executive officers were involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, (5) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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Information Concerning the Board and its Committees
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We have historically compensated our directors for service on the Board and committees thereof through the issuance of shares of common stock, stock options and cash compensation for meeting fees. Additionally, we reimburse directors for expenses incurred by them in connection with the attendance at meetings of the Board and any committee thereof (as described below). The Board appoints annually the executive officers of the Company and the executive officers serve at the discretion of the Board.
Executive Sessions of the Board
The independent members of the Board of the Company meet in executive session (with no management directors or management present) from time to time, but at least once annually. The executive sessions include whatever topics the independent directors deem appropriate.
Risk Oversight
The Board exercises direct oversight of strategic risks to the Company. The Audit Committee reviews and assesses the Company’s processes to manage business and financial risk and financial reporting risk. It also reviews the Company’s policies for risk assessment and assesses steps management has taken to control significant risks. The Compensation Committee oversees risks relating to compensation programs and policies. In each case management periodically reports to our Board or relevant committee, which provides the relevant oversight on risk assessment and mitigation.
Communicating with our Board
Stockholders may contact the Board about bona fide issues or questions about the Company by writing the Secretary at the following address: Attn: Secretary, Camber Energy, Inc., 1415 Louisiana, Suite 3500, Houston, Texas 77002.
Our Secretary, upon receipt of any communication other than one that is clearly marked “ Confidential, ” will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “ Confidential, ” our Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication to the director(s) to whom it is addressed. If the correspondence is not addressed to any particular Board member or members, the communication will be forwarded to a Board member to bring to the attention of the Board.
Board and Committee Activity and Compensation
For the fiscal year ending March 31, 2019, the Board held nine meetings and took various other actions via the unanimous written consent of the Board and the various committees described below. All directors attended at least 75% of the Board of Directors meetings and committee meetings relating to the committees on which each director served. All of the then current directors attended our fiscal year 2019 Annual Stockholder meeting held on February 19, 2019. The Company encourages, but does not require all directors to be present at annual meetings of stockholders.
The Board has a standing Audit Committee, Compensation Committee, and Nominating and Governance Committee. Mr. Fred Zeidman and Mr. James G. Miller are “ independent ” members of the Board, as defined in Section 803(A) of the NYSE American Company Guide. Committee membership and the functions of those committees are described below.
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Board of Directors Committee Membership
| Audit Committee |
Compensation
Committee |
Nominating
and
Governance Committee |
|
| Robert Schleizer | |||
| Fred Zeidman | M | C | C |
| James G. Miller | C | M | M |
C - Chairman of Committee.
M – Member.
Audit Committee
The Board has selected the members of the Audit Committee based on the Board’s determination that the members are financially literate and qualified to monitor the performance of management and the independent auditors and to monitor our disclosures so that our disclosures fairly present our business, financial condition and results of operations.
The Audit Committee’s function is to provide assistance to the Board in fulfilling the Board’s oversight functions relating to the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of the Company’s independent auditors, and perform such other activities consistent with its charter and our Bylaws as the Committee or the Board deems appropriate. The Audit Committee produces an annual report for inclusion in our proxy statement. The Audit Committee is directly responsible for the appointment, retention, compensation, oversight and evaluation of the work of the independent registered public accounting firm (including resolution of disagreements between our management and the independent registered public accounting firm regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The Audit Committee shall review and pre-approve all audit services, and non-audit services that exceed a de minimis standard, to be provided to us by our independent registered public accounting firm. The Audit Committee carries out all functions required by the NYSE American, the SEC and the federal securities laws.
The Audit Committee has the sole authority, at its discretion and at our expense, to retain, compensate, evaluate and terminate our independent auditors and to review, as it deems appropriate, the scope of our annual audits, our accounting policies and reporting practices, our system of internal controls, our compliance with policies regarding business conduct and other matters. In addition, the Audit Committee has the authority, at its discretion and at our expense, to retain special legal, accounting or other advisors to advise the Audit Committee.
The Board has determined that Mr. Fred Zeidman and Mr. James G. Miller are “ independent, ” and that Mr. Miller is an “ audit committee financial expert ” (as defined in the SEC rules) because he has the following attributes: (i) an understanding of generally accepted accounting principles in the United States of America (“ GAAP ”) and financial statements; (ii) the ability to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (iii) experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements; (iv) an understanding of internal control over financial reporting; and (v) an understanding of audit committee functions. Mr. Miller has acquired these attributes by means of having held various positions that provided relevant experience, as described in his biographical information above.
For the fiscal year ending March 31, 2019, the Audit Committee held no formal meetings, but took various actions via a unanimous written consent of the committee. The Audit Committee’s charter is available on our website at www.camber.energy at “ Governance ” - “ Policies ” and was filed as Exhibit 14.3 to our Annual Report on Form 10-K/A for the year ended March 31, 2009, filed with the Commission on July 29, 2009.
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Compensation Committee
The Compensation Committee is responsible for the administration of our stock compensation plans, approval, review and evaluation of the compensation arrangements for our executive officers and directors and oversees and advises the Board on the adoption of policies that govern the Company’s compensation and benefit programs. In addition, the Compensation Committee has the authority, at its discretion and at our expense, to retain advisors to advise the Compensation Committee. The Compensation Committee may delegate its authority to subcommittees of independent directors, as it deems appropriate.
For the fiscal year ending March 31, 2019, the Compensation Committee held no formal meetings. The Compensation Committee’s charter is available on our website at www.camber.energy at “ Governance ” - “ Policies ” and was filed as Exhibit 14.5 to our Annual Report on Form 10-K/A for the year ended March 31, 2009, filed with the Commission on July 29, 2009.
Nominating and Governance Committee
The Nominating and Governance Committee is responsible for (1) assisting the Board by identifying individuals qualified to become Board members; (2) recommending individuals to the Board for nomination as members of the Board and its committees; (3) leading the Board in its annual review of the Board’s performance; (4) monitoring the attendance, preparation and participation of individual directors and to conduct a performance evaluation of each director prior to the time he or she is considered for re-nomination to the Board; (5) reviewing and recommending to the Board responses to shareowner proposals; (6) monitoring and evaluating corporate governance issues and trends; (7) providing oversight of the corporate governance affairs of the Board and the Company, including consideration of the risk oversight responsibilities of the full Board and its committees; (8) assisting the Board in organizing itself to discharge its duties and responsibilities properly and effectively; and (9) assisting the Board in ensuring proper attention and effective response to stockholder concerns regarding corporate governance. We have not paid any third party a fee to assist in the process of identifying and evaluating candidates for director.
The Nominating and Governance Committee uses a variety of methods for identifying and evaluating director nominees. The Nominating and Governance Committee also regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or other circumstances. In addition, the Nominating and Governance Committee considers, from time to time, various potential candidates for directorships. Candidates may come to the attention of the Nominating and Governance Committee through current Board members, professional search firms, stockholders or other persons. These candidates may be evaluated at regular or special meetings of the Nominating and Governance Committee and may be considered at any point during the year.
The Nominating and Governance Committee evaluates director nominees at regular or special Committee meetings pursuant to the criteria described above and reviews qualified director nominees with the Board. The Committee selects nominees that best suit the Board’s current needs and recommends one or more of such individuals for election to the Board.
The Nominating and Governance Committee will consider candidates recommended by stockholders, provided the names of such persons, accompanied by relevant biographical information, are properly submitted in writing to the Secretary of the Company in accordance with the manner described below. The Secretary will send properly submitted stockholder recommendations to the Committee. Individuals recommended by stockholders in accordance with these procedures will receive the same consideration received by individuals identified to the Committee through other means. The Committee also may, in its discretion, consider candidates otherwise recommended by stockholders without accompanying biographical information, if submitted in writing to the Secretary.
In addition, the Company’s Bylaws permit stockholders to nominate directors at an annual meeting of stockholders or at a special meeting at which directors are to be elected in accordance with the notice of meeting pursuant to the requirements of the Company’s Bylaws and applicable NYSE American and SEC rules and regulations.
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For the fiscal year ending March 31, 2019, the Nominating and Governance Committee held no formal meetings, but did take various actions via an unanimous written consent of the committee. The Nominating and Governance Committee’s charter is available on our website at www.camber.energy at “ Governance ” - “ Policies ” and was filed as Exhibit 99.2 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, filed with the Commission on June 28, 2013.
Director Nominations Process . As described above, the Nominating and Governance Committee will consider qualified director candidates recommended in good faith by stockholders, provided those nominees meet the requirements of NYSE American and applicable federal securities law. The Nominating and Governance Committee’s evaluation of candidates recommended by stockholders does not differ materially from its evaluation of candidates recommended from other sources. Any stockholder wishing to recommend a nominee should submit the candidate’s name, credentials, contact information and his or her written consent to be considered as a candidate. These recommendations should be submitted in writing to the Company, Attn: Secretary, Camber Energy, Inc., 1415 Louisiana, Suite 3500, Houston, Texas 77002. The proposing stockholder should also include his or her contact information and a statement of his or her share ownership. The Committee may request further information about stockholder recommended nominees in order to comply with any applicable laws, rules, the Company’s Bylaws or regulations or to the extent such information is required to be provided by such stockholder pursuant to any applicable laws, rules or regulations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the SEC. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely upon our review of the Section 16(a) filings that have been furnished to us and representations by our directors and executive officers (where applicable), we believe that all filings required to be made under Section 16(a) during fiscal 2019 and through the date of this filing, were timely made.
Pursuant to SEC rules, we are not required to disclose in this filing any failure to timely file a Section 16(a) report that has been disclosed by us in a prior annual report or proxy statement.
CODE OF BUSINESS AND ETHICAL CONDUCT
On November 29, 2016, the Board of Directors approved and adopted an amended and restated Code of Business and Ethical Conduct (the “ Revised Code ”), which applies to all officers, directors and employees. The Revised Code replaced the Company’s prior Code of Ethics adopted in June 2009 and reflects, among other matters, clarifications and revisions relating to conflicts of interest, confidentiality, compliance with laws, reporting and enforcement, and other matters intended to update the Company’s Code of Ethics.
You can access the Revised Code on our website at www.camber.energy, and any stockholder who so requests may obtain a free copy of our Revised Code by submitting a written request to our Corporate Secretary. Additionally, the Revised Code was filed as an exhibit to the Company’s Form 8-K dated November 29, 2016, filed with the SEC on December 5, 2016, as Exhibit 14.1 thereto.
We intend to disclose any amendments or future amendments to our Revised Code and any waivers with respect to our Revised Code granted to our principal executive officer, our principal financial officer, or any of our other employees performing similar functions on our website at www.camber.energy within four business days after the amendment or waiver. In such case, the disclosure regarding the amendment or waiver will remain available on our website for at least 12 months after the initial disclosure. There have been no waivers granted with respect to our Revised Code to any such officers or employees.
The Revised Code includes a policy on reporting illegal or unethical business or workplace conduct by employees, officers or members of the Board, which replaced our prior Whistleblower Protection Policy adopted in 2009.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation of our Chief Executive Officer (“ CEO ”), Chief Financial Officer (“ CFO ”) and the most highly compensated executive officer other than the CEO and CFO who was serving as an executive officer of the Company at the end of March 31, 2019 and 2018 (the Company did not have any executive officers other than its CEO and CFO as of March 31, 2019), and up to two additional individuals for whom disclosure would have been required had they been serving as an executive officer at the end of the last completed fiscal year (collectively, the “ Named Executive Officers ”).
| Name and Principal Position | Fiscal Year | Consulting Fees/Salary | Bonus | Stock Awards | All Other Compensation | Total | ||||||||||||||||||
| Louis G. Schott | 2019 | $ | 300,000 | (d) | $ | 25,000 | $ | — | $ | 33,120 | $ | 358,120 | ||||||||||||
| Interim Chief Executive Officer (1) | ||||||||||||||||||||||||
| Richard N. Azar II | 2019 | $ | 90,000 | (a) | $ | — | $ | — | $ | 214,000 | $ | 304,000 | ||||||||||||
| Former Chief Executive Officer (2) | 2018 | $ | 175,000 | (a) | $ | — | $ | — | $ | — | $ | 175,000 | ||||||||||||
| Robert Schleizer | 2019 | $ | 200,000 | (b) | $ | — | $ | — | $ | 26,666 | (b) | $ | 226,666 | |||||||||||
| Chief Financial Officer (3) | 2018 | $ | 100,000 | (b) | $ | — | $ | — | $ | — | $ | 100,000 | ||||||||||||
| Anthony C. Schnur (4) | 2019 | $ | — | $ | — | $ | — | $ | 79,000 | $ | 79,000 | |||||||||||||
| Former Chief Executive Officer | 2018 | $ | 78,653 | $ | — | $ | 11,000 | $ | 93,000 | (c) | $ | 182,653 | ||||||||||||
| Paul A. Pinkston (5) | 2018 | $ | 21,135 | $ | — | $ | 6,250 | $ | — | $ | 27,385 | |||||||||||||
| Former Chief Accounting Officer |
* Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000. No executive officer earned any non-equity incentive plan compensation or nonqualified deferred compensation during the periods reported above. The value of the Stock Awards in the table above was calculated based on the fair value of such securities calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718.
(a) Includes $90,000 paid to McClowd Dynamics, Ltd. (an entity which Mr. Azar owns and controls) in 2019 and $105,000 of fees paid to McClowd Dynamics, Ltd. in 2018.
(b) Mr. Schleizer is the Managing Partner of BlackBriar Advisors, LLC (“ BlackBriar ”). In addition to financial management, BlackBriar provides accounting, treasury, administrative and financial reporting services to the Company. Total fees paid by the Company to BlackBriar during the years ended March 31, 2019 and 2018 were $713,000 and $721,000, respectively, of which Mr. Schleizer attributed $200,000 to his services as Chief Financial Officer. Mr. Schleizer also received director’s fees for the year ended March 31, 2019 of $26,666.
(c) Represents payments made under the settlement, described below, including stock consideration.
(d) Mr. Schott works on a consulting basis through Fides Energy LLC.
(1) Mr. Schott has served as the Interim Chief Executive Officer of the Company since May 25, 2018.
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(2) From June 2, 2017 to May 25, 2018, Mr. Richard N. Azar II served as first Interim Chief Executive Officer (through January 9, 2018) and then Chief Executive Officer of the Company. On December 28, 2017, the Board approved compensation of $10,000 per month to Mr. Azar for services which he rendered over the last seven months of calendar 2017, and compensation of $35,000 per month beginning in January 2018, for future services as CEO, which services as CEO were terminated in May 2018. Effective on June 21, 2018, Mr. Azar resigned as a member of the Board of Directors.
(3) Mr. Schleizer has served as Chief Financial Officer (beginning as Interim Chief Financial Officer) since June 2, 2017, as a member of the Board of Directors since October 6, 2017, and as Treasurer of the Company since, January 9, 2018.
(4) Effective on June 2, 2017, Anthony C. Schnur resigned as Chief Executive Officer and as a member of the Board of Directors of the Company.
(5) During the year ended March 31, 2018, Mr. Pinkston was issued a net of 663 shares of common stock after the payment of taxes under the Company’s 2014 Stock Incentive Plan (the “ 2014 Plan ”). The Company recorded $25,000 for shares issued to Mr. Pinkston. Mr. Pinkston, tendered his resignation as the Company’s Chief Accounting Officer and principal financial officer and principal accounting officer on May 23, 2017, to be effective as of June 8, 2017.
Severance Agreement
Anthony C. Schnur
Effective on June 2, 2017, Mr. Anthony C. Schnur’s employment as Chief Executive Officer of the Company was terminated. In connection with such termination, the Company entered into a severance agreement with Mr. Schnur, which provided (as amended), for Mr. Schnur to be issued 192 shares of common stock and the payment of $168,000 in total compensation (payable over time). The payments owed as of March 31, 2018 of $79,025 were accrued and included in Accrued Expenses on the balance sheet. The Settlement Shares were issued in February 2018. During the year ended March 31, 2019, the Company paid all remaining amounts to Mr. Schnur pursuant to the original settlement. The Company and Mr. Schnur entered into an amendment to the severance agreement on April 8, 2019, pursuant to which the Company paid Mr. Schnur $10,000 in lieu of the payment of payroll taxes on amounts previously paid to Mr. Schnur under the original settlement.
Service Agreement
On April 27, 2017, we entered into a service agreement (the “ Service Agreement ”), effective on May 1, 2017, with Enerjex Resources (“ Enerjex ”), whose CEO at the time was Louis G. Schott, our current Interim Chief Executive Officer and director, to outsource the management of our back-office functions for a fixed monthly fee. Under the terms of the Service Agreement, Enerjex was responsible for performing all back-office services for the Company, including all data entry and bookkeeping, financial reporting, management reporting, reserve reporting, SEC compliance, audits, filings, and any other services required to maintain the Company’s good standing with all local, state, and federal laws. Enerjex was not responsible for any field operations, including drilling, operating or maintaining any wells or leases, of the Company under the terms of the Service Agreement. Enerjex received a fee of $150,000 per month for services rendered, plus any pre-approved out-of-pocket travel expenses. The monthly fee could be reduced to the extent the Company retained employees to perform certain of the functions contemplated to be performed by Enerjex. Effective December 4, 2017, Enerjex and the Company mutually agreed to terminate the Service Agreement. Robert Schleizer, who was appointed as the Interim Chief Financial Officer and principal accounting officer of the Company on June 2, 2017, was compensated through the fees paid by the Company under the Services Agreement. Mr. Schott was personally paid $192,500 under the service agreement.
Separation and Release Agreement
Effective on May 25, 2018, Richard N. Azar II resigned as Chief Executive Officer of the Company. Pursuant to a Separation Agreement entered into with Mr. Azar, he released the Company from claims in connection with various employment related statutes and laws and the Company agreed to pay him a severance payment of $150,000 and to grant him warrants to purchase 40,000 shares of the Company’s common stock at an exercise price of $9.75 per share.
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Engagement Agreement
Effective upon Mr. Azar’s resignation, the Board of Directors of the Company appointed Mr. Louis G. Schott as Interim Chief Executive Officer of the Company. In connection with Mr. Schott’s appointment as Interim Chief Executive Officer of the Company, the Company entered into an engagement letter with Fides Energy LLC (“ Fides ”). Pursuant to the letter, Fides agreed to supply Mr. Schott’s services to the Company as Interim Chief Executive Officer and we agreed to pay Fides $25,000 per month for the use of Mr. Schott’s services. The agreement can be terminated by either party with 90 days’ notice and terminates automatically upon the death of Mr. Schott. Pursuant to the agreement, Mr. Schott is also eligible to receive bonus compensation at the discretion of the Board of Directors.
Letter Agreement
Effective on December 1, 2017, the Company entered into a letter agreement with BlackBriar Advisors LLC, pursuant to which BlackBriar agreed to provide advisory and accounting services to the Company and to make Mr. Robert Schleizer available to the Company as the Company’s Chief Financial Officer. In consideration for such services, the Company agreed to pay BlackBriar a fee of $40,000 per month, and to reimburse BlackBriar for reasonable customary and necessary expenses including for travel and related costs. BlackBriar is also eligible for a bonuses in the discretion of the Compensation Committee of the Company. The letter agreement includes customary indemnification obligations and can be terminated at any time upon written notice of either party.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
None of our Named Executive Officers had any stock options or stock awards outstanding as of March 31, 2019.
DIRECTOR COMPENSATION
The following table sets forth compensation information with respect to our non-executive directors during our fiscal year ended March 31, 2019.
| Name |
Fees Earned or Paid in Cash ($)* |
Option Awards ($) |
All Other Compensation ($) |
|
Total ($) | |||||||||||
| Richard N. Azar II (1) | $ | — | $ | — | $ | — | $ | — | ||||||||
| Fred S. Zeidman (2) | $ | 37,666 | $ | — | $ | — | $ | 37,666 | ||||||||
| Donnie B. Seay (3) | $ | — | $ | — | $ | — | $ | — | ||||||||
| James G. Miller (4) | $ | 26,666 | $ | — | $ | — | $ | 26,666 |
The table above does not include the amount of any expense reimbursements paid to the above directors. No directors received any Stock Awards, Non-Equity Incentive Plan Compensation, or Nonqualified Deferred Compensation Earnings during the period presented. Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000.
(1) Mr. Azar did not receive any additional compensation for his services on the Board of Directors separate than the amount he was paid for services as an officer of the Company during the periods that he served as both a director and officer of the Company, as disclosed above. Effective on June 21, 2018, Mr. Azar resigned as a member of the Board of Directors.
(2) Mr. Zeidman resigned as a member of the Board of Directors on August 7, 2017 and was re-appointed as a member of the Board of Directors on January 11, 2018.
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(3) Effective October 6, 2017, Robert Schleizer was appointed as a member of the Board of Directors. On July 10, 2018, Donnie B. Seay resigned as a member of the Board of Directors.
(4) Effective July 10, 2018, James G. Miller was appointed as a member of the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table presents certain information as of June 25, 2019, as to:
| ● | each stockholder known by us to be the beneficial owner of more than five percent of our outstanding shares of common stock, |
| ● | each director, | |
| ● | each Named Executive Officer, and |
| ● | all directors and executive officers as a group. |
The percentages shown in the table under the column “ Percent ” are based on 46,011,619 shares of common stock outstanding as of June 25, 2019.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of the applicable date of determination, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to applicable community property laws. Unless otherwise indicated, the address for each of the officers or directors listed in the table below is 1415 Louisiana, Suite 3500, Houston, Texas 77002.
| Stockholder |
Number of Shares of Common Stock |
Percent of Common Stock(#) | ||||||
| Executive Officers and Directors | ||||||||
| Louis G. Schott | — | — | % | |||||
| Robert Schleizer | — | — | % | |||||
| Fred S. Zeidman | — | — | % | |||||
| James G. Miller | — | — | % | |||||
| Anthony C. Schnur (+)(1) | 224 | * | % | |||||
| Richard N. Azar II (+)(2) | 5,702 | * | % | |||||
| Paul A. Pinkston (+)(3) | — | — | % | |||||
| All Executive Officers and Directors as a Group (Four Persons) | — | — | % | |||||
| Greater than 5% Stockholders | ||||||||
| Discover Growth Fund (4) | 4,555,150 | 9.99 | % | |||||
* Indicates beneficial ownership of less than 1% of the outstanding common stock.
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(#) Each share of Series B Convertible Preferred Stock converts into common stock on approximately a 0.01143-to-1 basis. Each share of Series B Convertible Preferred Stock votes 1/25 th of one vote on all stockholder matters.
(+) Named Executive Officer who no longer has any affiliation or contact with the Company. Information disclosed is based solely on our review of our record stockholders’ list, without independent verification, and including for purposes of the table above, ownership only in the name of the applicable holder and those entities which the holder is listed as a contact person for. The applicable stockholder may actually beneficially own more or less shares than as disclosed above.
(1) Address: 9 Silverstrand Place, the Woodlands, Texas 77381.
(2) Address: P.O. Box 6172 San Antonio, Texas 78209.
(3) Address: 8407 Hatton Street, Houston, Texas 77025.
(4) 103 South Church Street, 4 th Floor, Grand Cayman KYI-002, Cayman Islands. The holder holds 2,305 shares of Series C Redeemable Convertible Preferred Stock; provided that the Company may not issue shares which, when aggregated with all other shares of common stock then deemed beneficially owned by the holder, would result in the reporting person holding at any one time more than 9.99% of all common stock outstanding immediately after giving effect to such issuance. To the best of the Company’s knowledge, David Sims has voting and dispositive control over the securities held by Discover Growth Fund.
Camber Incentive Compensation Plans
The Company stockholders approved the 2014 Stock Incentive Plan (as amended to date, the “ 2014 Plan ”) at the annual stockholder meeting held on February 13, 2014. The 2014 Plan provides the Company with the ability to offer (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; or (vi) any combination of the foregoing, to employees, consultants and contractors as provided in the 2014 Plan.
On February 8, 2016, the Board of Directors adopted an amended 2014 Plan, to (a) increase by 88 shares (i.e., to 152 shares from 64 shares pursuant to the terms of the original plan), the number of awards available for issuance under the plan, and (b) amend the definition of “ Eligible Person ” under the plan to exclude “ instances where services are in connection with the offer or sale of securities in a capital-raising transaction, or they directly or indirectly promote or maintain a market for the Company’s securities ”, which amendments were approved by the stockholders of the Company at the 2016 annual meeting of stockholders held on March 29, 2016.
On January 27, 2017, the Board adopted the Stock Plan Amendment to increase the number of awards available for issuance under the 2014 Plan from 152 to 1,600, which amendment the stockholders approved at the 2017 annual meeting held on March 22, 2017.
On December 17, 2018, the Board adopted the Stock Plan Amendment to increase the number of awards available for issuance under the 2014 Plan from 1,600 to 2,500,000, which amendment the stockholders approved at the 2019 annual meeting held on February 19, 2019.
The Company stockholders approved the Lucas Energy, Inc. 2012 Stock Incentive Plan (“ 2012 Incentive Plan ”) at the annual stockholder meeting held on December 16, 2011. The 2012 Incentive Plan provides the Company with the ability to offer (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; or (vi) any combination of the foregoing, to employees, consultants and contractors as provided in the 2012 Incentive Plan.
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The Company stockholders approved the Lucas Energy, Inc. 2010 Long Term Incentive Plan (“ 2010 Incentive Plan ” or “ 2010 Plan ”) at the annual stockholder meeting held on March 30, 2010. The 2010 Incentive Plan provides the Company with the ability to offer (1) incentive stock options, (2) non-qualified stock options, and (3) restricted shares (i.e., shares subject to such restrictions, if any, as determined by the Compensation Committee or the Board) to employees, consultants and contractors as performance incentives.
Under the 2010 Incentive Plan, 58 shares of the Company’s common stock are authorized for initial issuance or grant, under the 2012 Incentive Plan, 96 shares of the Company’s common stock are authorized for initial issuance or grant, and under the 2014 Incentive Plan, as amended, 2,500,000 shares of the Company’s common stock are authorized for issuance or grant. As of March 31, 2019, there was an aggregate of 1 share available for issuance or grant under the 2010 Incentive Plan, 5 shares were available for issuance or grant under the 2012 Incentive Plan and an aggregate of approximately 2,499,858 securities were available for issuance or grant under the 2014 Incentive Plan as amended for future issuances and grants, respectively. The number of securities available under the 2010, 2012 and 2014 Plans is reduced one for one for each security delivered pursuant to an award under the Plans. Any issued or granted security that becomes available due to expiration, forfeiture, surrender, cancellation, termination or settlement in cash of an award under the Incentive Plans may be requested and used as part of a new award under the Plans.
The Plans are administered by the Compensation Committee and/or the Board in its discretion (the “ Committee ”). The Committee interprets the Plans and has broad discretion to select the eligible persons to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the exercise price of stock options, the number of shares subject to awards, the expiration date of awards, and the vesting schedule or other restrictions applicable to awards.
Equity Compensation Plan Information
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities available for future issuance under equity compensation plans (excluding those in column (a)) | |||||||||
| Equity compensation plans approved by the security holders | 4 | $ | 32,343.75 | 2,499,996 | ||||||||
| Equity compensation plans not approved by the security holders | — | — | — | |||||||||
| Total | 4 | $ | 32,343.75 | 2,499,996 | ||||||||
| (a) | Includes any compensation plan and individual compensation arrangement of the Company under which equity securities of the Company are authorized for issuance to employees, or non-employees including directors, consultants, advisors, vendors, customers, suppliers or lenders in exchange for consideration in the form of goods or services, as of March 31, 2019. |
| (b) | Includes the weighted average exercise price of outstanding options, warrants, and rights identified in (a). |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
There have been no other transactions between us and any officer, director, or any stockholder owning greater than five percent (5%) of our outstanding voting shares, or any member of the above referenced individual’s immediate family, since the beginning of the Company’s last fiscal year, and there is not currently any proposed transaction, in which the Company was or is to be a participant, where the amount involved exceeds $120,000, and in which we had or will have a direct or indirect material interest, except as set forth below or otherwise disclosed above under “ Item 11. Executive Compensation ” and “ Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ” - “ Recent Sales of Unregistered Securities ”, which information, as applicable, is incorporated by reference into this “ Item 13. Certain Relationships and Related Transactions, and Director Independence ”.
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On August 25, 2016, the Company, as borrower, and Richard N. Azar II, our former Chief Executive Officer and former director (“ Azar ”), Donnie B. Seay, our former director, 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 pursuant to the terms of the December 31, 2015 Asset Purchase Agreement (the “ Sellers ”)), and International Bank of Commerce (“ IBC ” or “ IBC Bank ”), as Lender (“ Lender ”), entered into a Loan Agreement.
Pursuant to the Loan Agreement, the Lender loaned the Company $40 million, evidenced by a Real Estate Lien Note in the amount of $40 million. The Company was 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 accrued annual interest at 2% above the prime rate then in effect, subject to a minimum interest rate of 5.5% per annum. The note was due and payable on August 25, 2019. Payments under the note were subject to change as the interest rate changes in order to sufficiently amortize the note in 120 monthly installments. The Company had the right, from time to time and without penalty to prepay the note in whole or in part, subject to the terms thereof.
As of March 31, 2017, the Company was not in compliance with certain covenants of the loan agreement, including requiring the Company to maintain a net worth of $30 million, and the balance of the loan due to IBC of $38.3 million (less unamortized debt issuance costs of approximately $2.2 million), was recognized as a short-term liability on the Company’s balance sheet as of March 31, 2017. The Company has also recognized approximately $30,000 in accrued interest as of March 31, 2017.
On September 8, 2017, the Company received a Notice of Default and Opportunity to Cure (the “ Notice ”) from IBC, stating that the Company was in default under its loan due to failing to make a required $425,000 loan payment on August 25, 2017 (the “ Payment Default ”). The Notice was also sent to the guarantors under the Loan Agreement. The Notice also cited the Company for several covenant defaults including exceeding a cap on monthly general and administrative expenses; falling below $30 million of net worth; failing to comply with certain post-closing covenants regarding the assignment of certain oil and gas interests, the execution of certain supplemental mortgages and the completion of certain curative title requirements; failing to pay costs and expenses required pursuant to the terms of the Loan Agreement; failing to meet the requirements of a cash flow test as described in greater detail in the Loan Agreement; and exceeding the loan to value determination provided for in the Loan Agreement. In order to cure the Payment Default described in the Notice, the Company was required to pay $425,000, as well as any attorney’s fees and/or late fees as determined by IBC, on or before September 18, 2017, which amount was not paid and to cure the covenant defaults, which covenant defaults were not cured.
Pursuant to extension agreements entered into with IBC, in or around December 2017 and January 2018, (a) IBC agreed to waive the Company’s obligation to make the August 30, 2017, $425,000 monthly principal payment originally due under the IBC loan; (b) the Company confirmed the amount outstanding under the IBC loan ($37,443,308 as of each extension); (c) IBC agreed that interest only payments would be due on September 30, 2017, October 30, 2017, November 30, 2017 and December 31, 2017, with principal payments of $425,000 per month to begin thereafter, which principal payments were not made; (d) the parties agreed that the amounts owed to IBC were payable on demand, provided that if no demand was made, such amounts would be payable by way of monthly payments of $425,000 of principal, plus accrued interest, with the remaining amount owed to IBC due at maturity (August 25, 2019); (e) that the amount owed to IBC will accrue interest at the rate of 2% per annum above the prime rate, subject to a floor of 5.5% (currently 6.25% per annum); (f) if the Company fails to make any payment due to IBC within 10 days of its due date, IBC is due a late payment of 5% of the amount past due (subject to a minimum of $10 and a maximum of $1,500 per late payment); and (g) the Company and the guarantors of the IBC loan released IBC from any claims against IBC as of the date of each of such extensions.
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N&B Energy Asset Disposition Agreement
On July 12, 2018, the Company entered into an Asset Purchase Agreement (the “ Sale Agreement ”), as seller, with N&B Energy, LLC (“ N&B Energy ”) as purchaser, which entity is affiliated with Richard N. Azar II, the Company’s former Chief Executive Officer and former director, and Donnie B. Seay, the Company’s former director. Pursuant to the Sale Agreement, the Company agreed to sell to N&B Energy a substantial portion of its assets, including all of the assets acquired pursuant to the terms of the December 31, 2015 Asset Purchase Agreement with Segundo Resources, LLC (“ Segundo ”, which entity is controlled by Mr. Azar) and certain other more recent acquisitions, other than the production payment and overriding royalty interests discussed below (the “ Disposed Assets ”). In consideration for the Disposed Assets, N&B Energy agreed to pay the Company $100 in cash, to assume all of the Company’s obligations and debt owed under its outstanding loan agreement with IBC, which had a then outstanding principal balance of approximately $36.9 million and Segundo agreed to enter into the Segundo Settlement, described below.
Segundo Settlement
On July 12, 2018, the Company entered into a Compromise Settlement Agreement and Mutual Release with Segundo, which is owned and controlled by Mr. Azar, in partial consideration for N&B Energy agreeing to enter into the Sale Agreement (discussed below). Pursuant to the Segundo Settlement, Segundo surrendered 610 shares of common stock valued at $1,907 per share as of the effective date of the closing of the acquisition contemplated by the December 31, 2015 Asset Purchase Agreement (which closing effective date was April 1, 2016) for cancellation (which cancellation occurred in October 2018), and released the Company from any and all claims which Segundo previously alleged were owed under the terms of the December 31, 2015 Asset Purchase Agreement. The Company and Segundo also provided each other full releases in connection with the December 31, 2015 Asset Purchase Agreement and Segundo agreed to indemnify the Company and hold it harmless against any claims made by the other sellers under the December 31, 2015 Asset Purchase Agreement.
First Amendment to Sale Agreement
Also on August 3, 2018, the Company and N&B Energy entered into a First Amendment to Asset Purchase Agreement (the “ First Amendment ”), which amended the terms of the Sale Agreement to (a) modify, clarify and replace certain of the exhibits to the original Sale Agreement, including the terms of the overriding royalty interests and production payment agreed to be granted to the Company as part of such Sale Agreement; (b) amend the Sale Agreement to remove the requirement that the Company obtain stockholder approval prior to the closing of such Sale Agreement; and (c) include a deadline of August 31, 2018 for N&B Energy’s due diligence under the Sale Agreement.
Additionally, in order to avoid the significant time required to file a proxy statement with the Securities and Exchange Commission, clear comments with the Securities and Exchange Commission, hold a meeting and obtain stockholder approval, and because such stockholder approval was not required pursuant to applicable law or the rules of the NYSE American, the Company’s management determined to not seek stockholder approval, but to instead seek a third-party opinion as to the fairness of the transaction to the Company’s stockholders.
Second Amendment to Sale Agreement
On September 24, 2018, the Company, N&B Energy and CE Operating, LLC, the Company’s wholly-owned subsidiary (“ CE Operating ”), entered into a Second Amendment to Asset Purchase Agreement (the “ Second Amendment ”), which amended the terms of the Sale Agreement. Pursuant to the Second Amendment, the Company, N&B Energy and CE Operating agreed (a) to clarify that all of the representations of the Company made in the Sale Agreement relating to portions of the Disposed Assets held in the name of CE Operating shall be deemed made by CE Operating and not the Company and that CE Operating shall be deemed a party to the Sale Agreement, solely in order to make such representations; and (b) to extend the deadline for closing the transactions contemplated by the Sale Agreement to September 26, 2018, or such other date as the Company and N&B shall agree upon in writing.
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Assumption Agreement
On September 26, 2018, the Company entered into an Assumption Agreement (the “ Assumption Agreement ”) with IBC Bank; CE Operating; N&B Energy, which entity is affiliated with Richard N. Azar, II, the Company’s former Chief Executive Officer and former director (“ Azar ”), and Donnie B. Seay, the Company’s former director (“ Seay ”); Azar; RAD2 Minerals, Ltd., an entity owned and controlled by Azar (“ RAD2 ”); Seay; and DBS Investments, Ltd., an entity owned and controlled by Seay. Azar, Seay, RAD2, and DBS are collectively referred to as the “ Guarantors ”.
Pursuant to the Assumption Agreement, N&B Energy agreed to assume all of the Company’s liabilities and obligations owed to IBC Bank under the Company’s prior note, loan agreement and related documents with IBC Bank (the “ Loan Documents ”), the amount due under and in connection which was secured by (a) an Oil and Gas Mortgage, Security Agreement, Financing Statement and Assignment of Production (Oklahoma) dated August 25, 2016, covering all of the Company’s right, title and interest in and to certain oil, gas and mineral leases and/or minerals, mineral interests and estates located in Lincoln, Payne, and Logan Counties, Oklahoma; (b) an Oil and Gas Mortgage, Security Agreement, Financing Statement and Assignment of Production (Oklahoma) dated August 1, 2018, covering all of the Company’s right, title, and interest in and to certain oil, gas, and mineral leases and/or mineral interests and estates located in Okfuskee County, Oklahoma (collectively, the “ Orion Interests ”); and (c) the Mortgage, Deed of Trust, Assignment, Security Agreement and Financing Statement dated as of August 25, 2016, covering the Company’s mineral interests located in Glasscock County, Texas (collectively, the “ West Texas Properties ”).
Additionally, pursuant to the Assumption Agreement, IBC Bank approved the transactions contemplated by the Sale Agreement and the assumption by N&B Energy of all of the amounts and liabilities which the Company owed to IBC Bank (the “ IBC Obligations ”) and N&B Energy agreed to assume all of the IBC Obligations. Finally, pursuant to the Assumption Agreement, IBC Bank released and forever discharged the Company and CE Operating and each of their current and former officers, directors, and stockholders, from all covenants, agreements, obligations, claims and demands of any kind, whether in law or at equity, which IBC Bank then had, arising out of or related to the amounts which the Company owed to IBC Bank under the Note, Loan Agreement or mortgages and/or under such documents or agreements, and further agreed to release the lien which IBC Bank then held on the West Texas Properties.
N&B Energy Sale Agreement Closing
On September 26, 2018, the transactions contemplated by the Sale Agreement closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid the Company $100 in cash, and the Company transferred ownership of the Disposed Assets to N&B Energy.
Notwithstanding the sale of the Disposed Assets, the Company retained its assets in Glasscock County and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received); a 3% overriding royalty interest in its existing Okfuskee County, Oklahoma asset; and retained an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignment of Overriding Royalty Interests.
The effective date of the Sale Agreement was August 1, 2018. The Assets were assigned “ as is ” with all faults.
As a result of the Assumption Agreement and the Sale Agreement, the Company reduced its liabilities by $37.9 million and its assets by approximately $12.1 million.
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Discover Transactions
On October 5, 2017, the Company and the Investor, a greater than 5% stockholder of the Company, entered into a Stock Purchase Agreement, amended on March 2, 2018 (as amended, the “ October 2017 Purchase Agreement ”) pursuant to which the Company agreed to sell, pursuant to the terms thereof, 1,683 shares of our Series C Redeemable Convertible Preferred Stock (the “ Series C Preferred Stock ”) for $16 million (a 5% original issue discount to the face value of such shares), subject to certain conditions set forth therein.
During the year ended March 31, 2018, the Company sold the Investor an aggregate of 633 shares of Series C Preferred Stock for $6 million under the terms of the October 2017 Purchase Agreement.
During the years ended March 31, 2019 and 2018, the Company sold 1,577 and 738 shares of Series C Preferred Stock pursuant to the terms of the October 2017 Purchaser Agreement, October 2018 Purchase Agreement and November 2018 Purchase Agreement, for total consideration of $7 million and $15 million, respectively. As of March 31, 2018 and 2019, there were 1,132 and 2,305 shares of Series C Preferred Stock outstanding, respectively.
During the years ended March 31, 2019 and 2018, the Investor converted 404 and 10 shares of the Series C Preferred stock with a face value of $4.04 million and $0.1 million and was issued shares of common stock and additional shares of common stock in dividend premium shares totaling 16,390 and 4.4 million, respectively, during such periods.
On October 31, 2018, the Investor converted the entire $495,000 of principal owed under the terms of a convertible debenture, into an aggregate of 801,507 shares of common stock, including 6,092 shares of common stock issuable upon conversion of the principal amount thereof (at a conversion price of $81.25 per share), and 795,414 shares in connection with conversion premiums due thereon (at an initial conversion price, as calculated as provided in such debenture, of $1.53 per share). A total of 100,000 of such shares were issued to the Investor in connection with the initial conversion and the remaining shares were held in abeyance subject to the Investor’s 9.99% ownership limitation, to be issued from time to time, at the request of the Investor. Subsequent to the October 31, 2018 conversion date, the Investor was due an additional 47,645,285 shares of common stock in connection with true ups associated with the original issuance, as a result of the conversion price of the conversion premiums falling to $0.025 per share pursuant to the terms of the convertible debenture. Through March 31, 2019, a total of 11,761,418 of the conversion shares had been issued and the remainder of the shares were held in abeyance subject to the Investor’s 9.99% ownership limitation, to be issued from time to time, at the request of the Investor.
From the date of the October 31, 2018 conversion of the debenture through June 24, 2019, the Investor has been issued approximately 40.3 million shares of common stock as true-ups on shares issued upon conversion of the debenture. As of June 25, 2019, the Investor was still due 7,883,310 shares in connection with true ups on the conversion of the Debenture, which shares are being held in abeyance until such time, as ever, as such shares can be issued to the Investor without the Investor exceeding the 4.99% ownership limitation set forth in the Debenture.
October 2018 Purchase Agreement
On October 29, 2018 and effective October 26, 2018, we and the Investor, entered into a Stock Purchase Agreement (as amended from time to time, the “ October 2018 Purchase Agreement ”).
Under the terms of the October 2018 Purchase Agreement, the Investor purchased 369 shares of Series C Preferred Stock on the closing date of the agreement, October 29, 2018, for $3.5 million.
Pursuant to the October 2018 Purchase Agreement, as long as the Investor holds any shares of Series C Preferred Stock, we agreed that we would not issue or enter into or amend an agreement pursuant to which we may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price; or issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock.
Additionally, provided that we have not materially breached the terms of the October 2018 Purchase Agreement, we may at any time, in our sole and absolute discretion, repurchase from Investor all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Investor 110% of the aggregate face value of all such shares.
We also agreed to provide the Investor a right of first offer to match any offer for financing we receive from any person while the shares of Series C Preferred Stock sold pursuant to the October 2018 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
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Finally, we agreed that if we issue any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Investor, then we would notify Investor of such additional or more favorable term and such term, at Investor’s option, may become a part of the transaction documents with Investor.
The October 2018 Purchase Agreement includes customary provisions requiring that the Company indemnify the Investor against certain losses; representations and warranties and covenants.
November 2018 Purchase Agreement
On November 23, 2018 and effective November 23, 2018, we and the Investor entered into a Stock Purchase Agreement, which was amended on December 3, 2018 (as amended to date, and from time to time, the “ November 2018 Purchase Agreement ”).
Under the terms of the November 2018 Purchase Agreement, the Investor agreed to purchase up to 2,941 shares of Series C Redeemable Convertible Preferred Stock (“ Series C Preferred Stock ” and the “ Maximum Shares ”) from the Company for an aggregate of $28 million, including purchasing 263 shares of Series C Preferred Stock, in consideration for $2.5 million on December 4, 2018 (the “ Initial Closing ”), and additional shares of Series C Preferred Stock, in such amount(s) requested by the Company, from time to time, up to the remaining amount of Series C Preferred Stock available to be sold under the November 2018 Purchase Agreement, until the Maximum Shares are sold, subject in each case to the Closing Conditions.
Closing conditions required to be met in order to require the Investor to purchase the Series C Preferred Stock shares described above at each of the closings include, among other things, that (a) the Company’s common stock is required to be listed for and currently trading on the NYSE American market or a higher trading market; (b) except for the Initial Closing, the Company is required to be in compliance with all requirements to maintain such listing and there cannot be any notice of any suspension or delisting with respect to the trading of the shares of common stock on such trading market; (c) the Company is required to have duly authorized shares of common stock reserved for issuance to Investor in an amount equal to three times the number of shares sufficient to immediately issue all shares of common stock potentially issuable upon conversion of the Series C Preferred Stock sold to Investor (collectively, the “ Conversion Shares ”) and any other agreements with Investor; (d) except with regard to the Initial Closing, (i) requiring that for each sale of $800,000 of Series C Preferred Stock, in additional closings after the Initial Closing, that an aggregate dollar trading volume of at least $10 million must have traded on NYSE American during regular trading hours, from the trading day after the immediately prior closing until the trading day immediately before the relevant closing, but expressly excluding all volume traded on any days that the Investor is prevented or delayed from reselling shares of common stock (“ Excluded Days ”); and (ii) the Company’s common stock is required to have a volume weighted average price on the NYSE American for the prior trading day of at least $0.10 per share of common stock (the “ Floor Price ”), (e) except with regard to the Initial Closing, the additional listing of all of the Conversion Shares must be approved by the NYSE American; and (f) except with regard to the Initial Closing, the Company must have provided written notice to the Investor of its intent to move forward with the applicable closing at least 10 days prior to the applicable closing date, provided that if any such conditions are not met on the date initially set for such closing, each closing will occur as soon thereafter as they are met, if ever (collectively, the “ Closing Conditions ”). The closing of the sales of Series C Preferred Stock as described above are subject to closing conditions which may not be met timely, if at all, and as such, we may not ever sell any shares of Series C Preferred Stock under the November 2018 Purchase Agreement. In the event a Trigger Event occurs under the Series C Preferred Stock designation (as defined therein), the Investor can terminate its obligation to acquire any additional shares of Series C Preferred Stock under the November 2018 Agreement, and the Company may terminate the Company’s right to sell shares of Series C Preferred Stock at any time.
Pursuant to the November 2018 Purchase Agreement, as long as the Investor holds any shares of Series C Preferred Stock, we agreed that we would not issue or enter into or amend an agreement pursuant to which we may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price; or issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security, or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock.
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Additionally, provided that we have not materially breached the terms of the November 2018 Purchase Agreement, we may at any time, in our sole and absolute discretion, repurchase from Investor all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Investor 110% of the aggregate face value of all such shares.
We also agreed to provide the Investor a right of first offer to match any offer for financing we receive from any person while the shares of Series C Preferred Stock sold pursuant to the November 2018 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, we agreed that if we issue any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Investor, then we would notify Investor of such additional or more favorable term and such term, at Investor’s option, may become a part of the transaction documents with Investor.
The November 2018 Purchase Agreement includes customary provisions requiring that the Company indemnify the Investor against certain losses; representations and warranties and covenants.
Related Party Office Space Use
The entity which has provided the use of the Company’s Chief Financial Officer is providing our office space without charge to the Company.
Director Independence
During the year ended March 31, 2019, the Board determined that 67% of the Board is independent under the definition of independence and in compliance with the listing standards of the NYSE American listing requirements. Based upon these standards, the Board has determined that Mr. Miller and Mr. Zeidman are “ independent ” members of the Board of Directors as defined in Section 803(A) of the NYSE American Company Guide, and Mr. Schleizer is not “ independent ” due to his status as an officer of the Company (see “ Item 10. Directors, Executive Officers and Corporate Governance ”).
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Our Audit Committee of the Board of Directors approves in advance the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services.
Audit Fees
The aggregate fees billed by our independent auditors, GBH, CPAs, PC (“ GBH ”), which combined its practice with Marcum, LLP (“ Marcum ”) effective July 1, 2018, and Marcum LLP, for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K for the years ended March 31, 2019 and 2018, and for the review of quarterly financial statements included in our Quarterly Reports on Form 10-Q for the quarters ending June 30, September 30, and December 31, 2018 and 2017, were:
| 2019 | 2018 | |||||||
| Marcum | $ | 104,500 | $ | — | ||||
| GBH CPAs, PC | $ | 93,500 | $ | 140,500 | ||||
Audit fees incurred by the Company were pre-approved by the Audit Committee.
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Audit Related Fees: None.
Tax Fees: None.
All Other Fees : None .
We do not use the auditors for financial information system design and implementation. Such services, which include designing or implementing a system that aggregates source data underlying the financial statements or that generates information that is significant to our financial statements, are provided internally or by other service providers. We do not engage the auditors to provide compliance outsourcing services.
The Audit Committee of the Board of Directors has considered the nature and amount of fees billed by GBH/Marcum and believes that the provision of services for activities unrelated to the audit is compatible with maintaining GBH/Marcum’s independence.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | Documents filed as part of this report |
| (2) | Financial Statement Schedules |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto included in this Form 10-K.
| (3) | Exhibits required by Item 601 of Regulation S-K |
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
None.
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In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CAMBER ENERGY, INC. | ||
| BY: | /s/ Louis G. Schott | |
| Louis G. Schott | ||
| Interim Chief Executive Officer | ||
| (Principal Executive Officer) | ||
Dated: July 1, 2019
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
|
/s/ Louis G. Schott |
Interim Chief Executive Officer |
July 1, 2019 |
||
| Louis G. Schott | (Principal Executive Officer) | |||
|
/s/ Robert Schleizer |
Chief Financial Officer (Principal Financial |
July 1, 2019 |
||
| Robert Schleizer | and Accounting Officer) and Director | |||
|
/s/ Fred S. Zeidman
|
Director |
July 1, 2019 |
||
| Fred S. Zeidman | ||||
|
/s/ James Miller
|
Director |
July 1, 2019 |
||
| James Miller |
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EXHIBIT INDEX
|
Exhibit
No. |
Description |
| 2.1 | Asset Purchase Agreement by and between Lucas Energy, Inc., as purchaser, Segundo Resources, LLC, as seller representative to the various sellers named therein, and the sellers named therein dated December 30, 2015+ (incorporated by reference to Exhibit 2.1 of the Form 8-K filed by the Company with the SEC on December 31, 2015) |
| 2.2 | First Amendment to Asset Purchase Agreement by and between Lucas Energy, Inc., as purchaser, Segundo Resources, LLC, as seller representative to the various sellers named therein, and the sellers named therein dated April 20, 2016 and effective April 1, 2016 (Filed as Exhibit 2.2 to the Company’s Report on Form 8-K, filed with the Commission on April 25, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 2.3 | Second Amendment to Asset Purchase Agreement by and between Lucas Energy, Inc., as purchaser, Segundo Resources, LLC, as seller representative to the various sellers named therein, and the sellers named therein dated August 25, 2016 (Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Commission on August 31, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 2.4 | Third Amendment to Asset Purchase Agreement by and among the Company, as purchaser, Segundo Resources, LLC, as seller representative to the various sellers named therein, and the sellers named therein dated August 25, 2016 (Filed as Exhibit 2.4 to the Company’s Current Report on Form 8-K, filed with the Commission on January 27, 2017, and incorporated herein by reference)(File No. 001-32508) |
| 2.5 | Assignment of Membership Interest dated November 1, 2017, by and between Camber Energy, Inc. and Arkose Lease Partners, L.L.C. (Filed as Exhibit 2.1 to the Company’s Report on Form 8-K, filed with the Commission on January 24, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 2.6 | Asset Purchase Agreement by and Between N&B Energy, LLC, as Purchaser and Camber Energy, Inc., as Seller, dated July 12, 2018 (Filed as Exhibit 2.1 to the Company’s Report on Form 8-K, filed with the Commission on July 13, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 2.7 | First Amendment to Asset Purchase Agreement by and Between N&B Energy, LLC, as Purchaser and Camber Energy, Inc., as Seller, dated August 2, 2018 (Filed as Exhibit 2.2 to the Company’s Report on Form 8-K, filed with the Commission on August 7, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 2.8 | Second Amendment to Asset Purchase Agreement by and Between N&B Energy, LLC, as Purchaser, Camber Energy, Inc., as Seller and CE Operating, LLC, dated September 24, 2018 (Filed as Exhibit 2.3 to the Company’s Report on Form 8-K, filed with the Commission on September 25, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 3.1 | Amended and Restated Certificate of Designation of Lucas Energy, Inc. Establishing the Designation, Preferences, Limitations and Relative Rights of Its Series B Redeemable Convertible Preferred Stock as filed with the Secretary of State of Nevada on August 25, 2016 (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Commission on August 31, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 3.2 | Certificate of Designations of Preferences, Powers, Rights and Limitations of Series C Redeemable Convertible Preferred Stock as filed with the Secretary of State of Nevada on August 25, 2016 (Filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed with the Commission on August 31, 2016, and incorporated herein by reference)(File No. 001-32508) |
78
| 3.3 | Amendment to Certificate of Designations of Preferences, Powers, Rights and Limitations of Series C Redeemable Convertible Preferred Stock as filed with the Secretary of State of Nevada on July 25, 2018 (Filed as Exhibit 3.2 to the Company’s Report on Form 8-K, filed with the Commission on July 27, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 3.4 | Certificate of Amendment to the Company’s Articles of Incorporation to increase the number of our authorized shares of common stock from 200,000,000 to 500,000,000, as filed with the Secretary of State of Nevada on January 10, 2018 (Filed as Exhibit 3.1 to the Company’s Report on Form 8-K, filed with the Commission on January 12, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 3.5 | Certificate of Amendment to Articles of Incorporation (1-for-25 Reverse Stock Split of Common Stock) filed with the Nevada Secretary of State on March 1, 2018, and effective March 5, 2018 (Filed as Exhibit 3.1 to the Company’s Report on Form 8-K, filed with the Commission on March 2, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 3.6 | Certificate of Change Pursuant to Nevada Revised Statutes Section 78.209, as filed by Camber Energy, Inc. with the Secretary of State of the State of Nevada on December 20, 2018 (Filed as Exhibit 3.1 to the Company’s Report on Form 8-K, filed with the Commission on December 26, 2018 and incorporated herein by reference)(File No. 001-32508) |
| 3.7 | Certificate of Amendment to the Company’s Articles of Incorporation to increase the number of our authorized shares of common stock from 20,000,000 to 250,000,000, as filed with the Secretary of State of Nevada on April 10, 2019 (Filed as Exhibit 3.1 to the Company’s Report on Form 8-K, filed with the Commission on April 11, 2019, and incorporated herein by reference)(File No. 001-32508) |
| 3.8 | Amended and Restated Bylaws (effective March 29, 2016) (Filed as Exhibit 3.1 to the Company’s Report on Form 8-K, filed with the Commission on April 1, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 4.1 | Form of Redeemable Convertible Subordinated Debenture (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 7, 2016)(File No. 001-32508) |
| 4.2 | Form of Common Stock Purchase First Warrant (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 7, 2016)(File No. 001-32508) |
| 10.1 | Form of Preferred Stock Purchase Agreement (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on April 7, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 10. 2 | Form of First Amendment to Stock Purchase Agreement (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on May 2, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 10.3*** | Loan Agreement dated August 25, 2016, between Lucas Energy, Inc., as borrower, Richard N. Azar, II, Donnie B. Seay, Richard E. Menchaca, RAD2 Minerals, Ltd., DBS Investments, Ltd., and Saxum Energy, LLC, as guarantors, and International Bank of Commerce, as lender (Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the Commission on August 31, 2016, and incorporated herein by reference)(File No. 001-32508) |
79
| 10.4 | Real Estate Lien Note dated August 25, 2016, by Lucas Energy, Inc., as borrower in favor of International Bank of Commerce, as lender (Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed with the Commission on August 31, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 10.5 | Security Agreements dated August 25, 2016 by Lucas Energy, Inc. in favor of International Bank of Commerce (Filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed with the Commission on August 31, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 10.6 | Form of Limited Guaranty Agreement in favor of International Bank of Commerce dated August 25, 2016 (Filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, filed with the Commission on August 31, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 10.7 | Second Amendment to Stock Purchase Agreement dated September 29, 2016 (Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Commission on October 3, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 10.8 | Form of Third Amendment to Stock Purchase Agreement dated November 17, 2016 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on November 21, 2016, and incorporated herein by reference)(File No. 001-32508) |
| 10.9*** | Service Agreement, dated as of April 27, 2017 and effective May 1, 2017, by and between Camber Energy, Inc. and Enerjex Resources (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on May 1, 2017 and incorporated herein by reference)(File No. 001-32508) |
| 10.10*** | Severance Agreement and Release between Anthony C. Schnur and the Company dated June 2, 2017 (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on June 6, 2017 and incorporated herein by reference)(File No. 001-32508) |
| 10.11*** | Termination Agreement dated May 23, 2017, between Camber Energy, Inc. and Richard N. Azar, II (Filed as Exhibit 10.52 to the Company’s Annual Report on Form 8-K for the year ended March 31, 2017, filed with the Commission on July 14, 2017 and incorporated herein by reference)(File No. 001-32508) |
| 10.12 | Funding Agreement with Vantage Fund, LLC dated June 7, 2017 and effective August 2, 2017 (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on August 11, 2017 and incorporated herein by reference)(File No. 001-32508) |
| 10.13 | Assignment dated August 2, 2017 to Vantage Fund, LLC (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on August 11, 2017 and incorporated herein by reference)(File No. 001-32508) |
| 10.14 | Warrant to Purchase 64,000 Shares of Common Stock granted to Vantage Fund, LLC, dated August 2, 2017 (Filed as Exhibit 10.3 to the Company’s Report on Form 8-K, filed with the Commission on August 11, 2017 and incorporated herein by reference)(File No. 001-32508) |
| 10.15 | Form of Stock Purchase Agreement relating to the purchase of $16 million in shares of Series C Redeemable Convertible Preferred Stock dated October 5, 2017 (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on October 5, 2017 and incorporated herein by reference)(File No. 001-32508) |
| 10.16 | Letter Agreement dated November 9, 2017, between Camber Permian LLC, NFP Energy LLC and Fortuna Resources Permian, LLC (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on November 15, 2017 and incorporated herein by reference) (File No. 001-32508) |
80
| 10.17 | Assignment, Bill of Sale and Conveyance to Fortuna Resources Permian, LLC dated November 9, 2017 (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on November 15, 2017 and incorporated herein by reference) (File No. 001-32508) |
| 10.18 | Assignment of Overriding Royalty Interest from CATI Operating, LLC, as assignor, to Louise Herrington Ornelas Trust, as assignee, effective December 13, 2017 (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on January 24, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10. 19 | Extension Agreement between Camber Energy, Inc. and International Bank of Commerce relating to the August 30, 2017 payment (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on January 30, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.20 | Extension and/or Modification and Release Agreement Commercial Indebtedness effective September 30, 2017, by Camber Energy, Inc., as borrower, Richard N. Azar, II, Donnie B. Seay, Richard E. Menchaca, RAD2 Minerals, Ltd., DBS Investments, Ltd., and Saxum Energy, LLC, as pledgors, and International Bank of Commerce, as lender (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on January 30, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.21 | Extension and/or Modification and Release Agreement Commercial Indebtedness effective October 30, 2017, by Camber Energy, Inc., as borrower, Richard N. Azar, II, Donnie B. Seay, Richard E. Menchaca, RAD2 Minerals, Ltd., DBS Investments, Ltd., and Saxum Energy, LLC, as pledgors, and International Bank of Commerce, as lender (Filed as Exhibit 10.3 to the Company’s Report on Form 8-K, filed with the Commission on January 30, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.22 | Extension and/or Modification and Release Agreement Commercial Indebtedness effective November 30, 2017, by Camber Energy, Inc., as borrower, Richard N. Azar, II, Donnie B. Seay, Richard E. Menchaca, RAD2 Minerals, Ltd., DBS Investments, Ltd., and Saxum Energy, LLC, as pledgors, and International Bank of Commerce, as lender (Filed as Exhibit 10.4 to the Company’s Report on Form 8-K, filed with the Commission on January 30, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.23 | Extension and/or Modification and Release Agreement Commercial Indebtedness effective December 30, 2017, by Camber Energy, Inc., as borrower, Richard N. Azar, II, Donnie B. Seay, Richard E. Menchaca, RAD2 Minerals, Ltd., DBS Investments, Ltd., and Saxum Energy, LLC, as pledgors, and International Bank of Commerce, as lender (Filed as Exhibit 10.47 to the Company’s Quarterly Report on Form 10-Q, for the quarter ended December 31, 2017, filed with the Commission on February 14, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.24 | Form of Amendment to Stock Purchase Agreement dated March 2, 2018 (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on March 5, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.25*** | Separation and Release Agreement between Camber Energy, Inc. and Richard N. Azar II dated May 25, 2018 (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on May 25, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.26*** | Common Stock Purchase Warrant granted to Richard N. Azar II dated May 25, 2018 (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on May 25, 2018 and incorporated herein by reference) (File No. 001-32508) |
81
| 10.27*** | Engagement Letter with Fides Energy LLC/Louis G. Schott dated May 25, 2018 (Filed as Exhibit 10.3 to the Company’s Report on Form 8-K, filed with the Commission on May 25, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.28 | Agreement in Connection with the Loan by and Between Camber Energy, Inc. and International Bank of Commerce (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on August 7, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.29 | Assumption Agreement dated September 26, 2018, by and between International Bank of Commerce, Camber Energy, Inc., CE Operating, LLC, N&B Energy, LLC, Richard N. Azar, II, RAD2 Minerals, Ltd., Donnie B. Seay, and DBS Investments, Ltd. (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on September 27, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.30 | Assignment of Production Payment, effective August 1, 2018, by and among N&B Energy, LLC and CE Operating, LLC (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on September 27, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.31 | Assignment of Overriding Royalty Interest, effective August 1, 2018, by CE Operating, LLC in favor of Camber Royalties, LLC (Orion Properties) (Filed as Exhibit 10.3 to the Company’s Report on Form 8-K, filed with the Commission on September 27, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.32 | Assignment of Overriding Royalty Interest, effective August 1, 2018, by N&B Energy, LLC in favor of Camber Royalties, LLC (TAW Leases) (Filed as Exhibit 10.4 to the Company’s Report on Form 8-K, filed with the Commission on September 27, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.33 | Form of Stock Purchase Agreement relating to the purchase of $3.5 million in shares of Series C Redeemable Convertible Preferred Stock dated October 26, 2018 (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on November 1, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.34 | Consulting Agreement dated November 15, 2018, by and between Camber Energy, Inc. and Regal Consulting (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on November 20, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.35 | Form of Stock Purchase Agreement relating to the purchase of $28 million in shares of Series C Redeemable Convertible Preferred Stock dated November 23, 2018 (Filed as Exhibit 10.1 to the Company’s Report on Form 8-K, filed with the Commission on November 23, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.36 | Form of First Amendment to Stock Purchase Agreement relating to the purchase of $28 million in shares of Series C Redeemable Convertible Preferred Stock dated December 3, 2018 (Filed as Exhibit 10.2 to the Company’s Report on Form 8-K, filed with the Commission on December 7, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 10.37 | Digital Marketing Agreement dated February 13, 2019 by and between Camber Energy, Inc. and SylvaCap Media (Filed as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2018, filed with the Commission on February 14, 2019, and incorporated herein by reference)(File No. 001-32508) |
| 10.38 | First Amendment to Consulting Agreement dated February 13, 2019 by and between Camber Energy, Inc. and Regal Consulting (Filed as Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2018, filed with the Commission on February 14, 2019, and incorporated herein by reference)(File No. 001-32508) |
82
| 10.39 *** | Camber Energy, Inc. Amended and Restated 2014 Stock Incentive Plan (Filed as Exhibit 4.1 to the Company’s Report on Form 8-K, filed with the Commission on February 22, 2019, and incorporated herein by reference)(File No. 001-32508) |
| 10.40 |
Agreed
Conversion Agreement dated May 15, 2019, by and between Camber Energy, Inc. and Alan Dreeben
(Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on May 21, 2019, and incorporated herein by reference)(File No. 001-32508) |
| 10.41*** | December 1, 2017 Letter Agreement between Camber Energy, Inc. and BlackBriar Advisors LLC |
| 16.1 | Letter dated August 2, 2018 from GBH CPAs, PC to the Securities and Exchange Commission (Filed as Exhibit 16.1 to the Company’s Report on Form 8-K, filed with the Commission on August 2, 2018 and incorporated herein by reference) (File No. 001-32508) |
| 21.1* | Subsidiaries |
| 23.1* | Consent of Marcum LLP |
| 23.2* | Consent of GBH CPAs, PC |
| 23.3* | Consent of Graves & Co. Consulting LLC |
| 31.1* | Section 302 Certification of Periodic Report of Principal Executive Officer |
| 31.2* | Section 302 Certification of Periodic Report of Principal Financial Officer |
| 32.1** | Section 906 Certification of Periodic Report of Principal Executive Officer |
| 32.2** | Section 906 Certification of Periodic Report of Principal Financial Officer |
| 99.1* | Report of Graves & Co. Consulting LLC |
| 99.2 | Charter of the Audit and Ethics Committee (Filed as Exhibit 14.3 to our Annual Report on Form 10-K/A for the year ended March 31, 2009, filed with the Commission on July 29, 2009 and incorporated herein by reference) |
| 99.3 | Charter of the Compensation Committee (Filed as Exhibit 14.5 to our Annual Report on Form 10-K/A for the year ended March 31, 2009, filed with the Commission on July 29, 2009 and incorporated herein by reference) |
| 99.4 | Charter Of The Nominating And Corporate Governance Committee (Filed as Exhibit 99.2 to the Company’s Annual Report on Form 10-K for the period ended March 31, 2013, filed with the Commission on June 28, 2013, and incorporated herein by reference) |
| *101.INS | XBRL Instance Document. |
| *101.SCH | XBRL Schema Document. |
| *101.CAL | XBRL Calculation Linkbase Document. |
| *101.LAB | XBRL Label Linkbase Document. |
| *101.PRE | XBRL Presentation Linkbase Document. |
| *101.DEF | XBRL Definition Linkbase Document. |
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* Exhibits filed herewith.
** Exhibits furnished herewith.
*** Management contract or compensatory plan.
+ Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Commission upon request; provided, however that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act, for any schedule or exhibit so furnished.
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Exhibit 10.41
Exhibit 21.1
Subsidiaries
CE Operating, LLC, an Oklahoma limited liability company, which is wholly-owned.
C E Energy LLC, a Texas limited liability company, which is wholly-owned.
85
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in Registration Statements of Camber Energy, Inc. on Form S-3 (File No. 333-173825, 333-216231, 333-214085, 333-213713, and 333-211066) and on Form S-8 (File No. 333-166257, 333-179220, 333-195959, 333-210732 and 333-217014) of our report dated July 1, 2019, with respect to our audit of the consolidated financial statements of Camber Energy, Inc. as of March 31, 2019 and the year ended March 31, 2019, which report is included in this Annual Report on Form 10-K of Camber Energy, Inc. for the year ended March 31, 2019.
/s/ Marcum LLP
Marcum LLP
Houston, Texas
July 1, 2019
86
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements on Form S-3 (File No. 333-173825, 333-216231, 333-214085, 333-213713, and 333-211066), and Form S-8 (File No. 333-166257, 333-179220, 333-195959, 333-210732 and 333-217014) of Camber Energy, Inc. of our report dated July 2, 2018, relating to our audit of the consolidated financial statements, which appear in this Annual Report on Form 10-K of Camber Energy, Inc. for the year ended March 31, 2018.
/s/ GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
July 1, 2019
87
Exhibit 23.3
Graves & Co. Consulting LLC
Oil and Gas Reserves and Valuations
As independent oil and gas consultants Graves & Company Consulting LLC. hereby consents to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-166257, 333-179220, 333-195959, 333-210732 and 333-217014) and Form S-3 (File No. 333-173825, 333-216231, 333-214085, 333-213713, and 333-211066) of Camber Energy, Inc. of all references to our firm and information from our summary reserve report letter dated May 27, 2019, entitled “ Estimated Reserves And Future Net Revenue As Of March 31, 2019 ”, included in or made a part of the Camber Energy, Inc. Annual Report on Form 10-K for the year ended March 31, 2019 (including the notes to the financial statements included therein), to be filed with the Securities and Exchange Commission on or about July 1, 2019, and our report attached as Exhibit 99.1 to such Annual Report on Form 10-K.
Graves & Co. Consulting LLC
/s/ Allen C. Barron
Allen C. Barron, P.E.
Executive Vice-President
July 1, 2019
Graves & Co. Consulting LLC ■ 2777 Allen Parkway, Suite 1200, Houston, Texas 77019
713/650-0811 ■ info@gravesconsulting.us ■ www.gravesconsulting.us
88
Exhibit 31.1
CERTIFICATION
I, Louis G. Schott, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K for the year ended March 31, 2019, of Camber Energy, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Quarterly Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 1, 2019
| /s/ Louis G. Schott | |
| Louis G. Schott | |
| Interim Chief Executive Officer | |
| (Principal Executive Officer) | |
89
Exhibit 31.2
CERTIFICATION
I, Robert Schleizer, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K for the year ended March 31, 2019, of Camber Energy, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Quarterly Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 1, 2019
| /s/ Robert Schleizer | |
| Robert Schleizer | |
| Chief Financial Officer | |
| (Principal Financial/Accounting Officer) | |
90
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Camber Energy, Inc. on Form 10-K for the year ended March 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, Louis G. Schott, Interim Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
July 1, 2019
| /s/ Louis G. Schott | |
| Louis G. Schott | |
| Interim Chief Executive Officer | |
| (Principal Executive Officer) | |
The foregoing certification is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“ Exchange Act ”), and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
91
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Camber Energy, Inc. on Form 10-K for the year ended March 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, Robert Schleizer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
July 1, 2019
| /s/ Robert Schleizer | |
| Robert Schleizer | |
| Chief Financial Officer | |
| (Principal Financial/Accounting Officer) | |
The foregoing certification is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“ Exchange Act ”), and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
92
Exhibit 99.1
Graves & Co. Consulting LLC
Oil and Gas Reserves and Valuations
May 27, 2019
Camber Energy, Inc.
1415 Louisiana, Suite 3500
Houston, TX 77002
|
Re:
Estimated Proved Reserves and Future
Net Revenue, Remaining As of March 31, 2019 Securities and Exchange Commission Case |
Gentlemen:
At your request Graves & Co. Consulting LLC of Houston, Texas (“Graves”) has prepared an estimate of the proved oil, natural gas and NGL reserves in which Camber Energy, Inc. (“Camber”) has certain interests.
Graves has reviewed 100% of Camber’s proved developed producing, proved developed non- producing and proved shut-in reserves located in Glasscock and Hutchinson counties, Texas. This report presents our assessment of those reserves as of the effective date of this report, March 31, 2019, having completed the evaluation of said estimate of reserves based upon the information presented within this report on May 27, 2019. This report is provided for inclusion in future filings with the Securities and Exchange Commission.
The reserves associated with this review have been classified in accordance with the definitions of the Securities and Exchange Commission as found in Part 210—Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Investment Company Act of 1940, Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975, under Rules of General Application § 210.4-10 Financial Accounting and Reporting for Oil and Gas Producing Activities pursuant to the Federal securities laws and the Energy Policy and Conservation Act of 1975. A summary of these definitions is included, it follows as an attachment to this letter.
We have also estimated the future net revenue and discounted present value associated with these reserves as of March 31, 2019 utilizing SEC guidelines in effect at March 31, 2019. After these product prices were applied, the product prices were not escalated. The costs of operations, i.e. prices and costs, were not escalated above current values as detailed later in this report. The present value of the cash flow is discounted at 10% and is presented for your information and should not be construed as an estimate of the fair market value.
The results of our study related to our estimate of the total proved reserves attributable to Camber and remaining to be produced as of March 31, 2019 are as follows:
Graves
& Co. Consulting LLC ■ 2777 Allen Parkway, Suite 1200, Houston, Texas 77019
713/650-0811 ■
info@gravesconsulting.us
■ www.gravesconsulting.us
|
Estimated Reserves and Future Net Revenue |
Graves & Co. Consulting LLC |
| Camber Energy, Inc. Interests | May 27, 2019 |
| As of March 31, 2019 – SEC Report | Page 2 |
SEC Case
Non-Escalated
Pricing Scenario
Estimated Reserves and Future Net Income
Net
to Camber Energy, Inc. Interests
As of March 31, 2019
| Proved | ||||||||||||||||
| Producing | Non-Producing | Shut-In | Total Proved | |||||||||||||
| Net Reserves | ||||||||||||||||
| Oil/Condensate-MBbls | 76.5 | 48.0 | — | 124.5 | ||||||||||||
| Gas-MMcf | 208.7 | — | — | 208.7 | ||||||||||||
| NGL-MBbls | 44.1 | — | — | 44.1 | ||||||||||||
| Income Data (M$) | ||||||||||||||||
| Future Gross Revenue | $ | 6,191.7 | $ | 3,031.8 | $ | — | $ | 9,223.5 | ||||||||
| AdVal Tax | $ | 151.6 | $ | 75.8 | $ | — | $ | 227.4 | ||||||||
| Severance Tax | $ | 246.1 | $ | 139.5 | $ | — | $ | 385.6 | ||||||||
| Operating Costs | $ | 2,418.0 | $ | 1,042.1 | $ | — | $ | 3,460.1 | ||||||||
| Capital Costs | $ | — | $ | 595.0 | $ | — | $ | 595.0 | ||||||||
| Future Net Income (FNI) | $ | 3,376.0 | $ | 1,179.5 | $ | — | $ | 4,555.5 | ||||||||
| FNI @ 10% | $ | 1,977.4 | $ | 662.2 | $ | — | $ | 2,639.6 | ||||||||
Note: There may be differences in the addition as a result of computer program rounding of numbers.
Liquid volumes are expressed in thousands of barrels (MBbls) of stock tank oil. Gas volumes are expressed in millions of standard cubic feet (MMSCF) at the official temperature and pressure base of the areas wherein the gas reserves are located.
Discussion
The scope of this study was to prepare an estimate of the proved reserves attributable to Camber’s ownership position in the subject properties. Reserve estimates were prepared by Graves using acceptable evaluation principles for each source and were based in large part on the basic information supplied by Camber.
The quantities presented herein are estimated reserves of oil, natural gas and natural gas liquid volumes that geologic and engineering data demonstrate can be recovered from known reservoirs under specific economic conditions with reasonable certainty.
Certain properties have been drilled, completed, and previously produced. All proved develop non-producing properties are considered to have recoverable reserves and are scheduled to be placed on production at a future time. The proved shut-in properties are considered to not have additional reserves.
Texas Registered Engineering Firm No. F - 19125
|
Estimated Reserves and Future Net Revenue |
Graves & Co. Consulting LLC |
| Camber Energy, Inc. Interests | May 27, 2019 |
| As of March 31, 2019 – SEC Report | Page 3 |
Certain properties which have been producing are currently shut-in. The properties are considered to have recoverable reserves and are scheduled to be placed on production at a future time, once various issues have been corrected. These properties may require remedial action before they can be restored to production.
The estimated future net revenue and discounted present value associated with the reserves as of March 31, 2019 were prepared utilizing a pricing scenario that is detailed later in this report. Costs of operations were provided by Camber, some of these costs were reported to have been obtained from Apache, who is the operator of the properties in Glasscock County. Properties in Hutchinson County were purchased as non-producing properties and are currently being worked on to return the wells to production. Capital cost estimates for returning the wells to production have been applied. These costs were reviewed by Graves and are considered to be reasonable.
This evaluation has been prepared in accordance with the “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information” as proclaimed by the Society of Petroleum Engineers, the SPE Standards.
Spraberry Unit
Camber owns a non-working interest in twenty-eight (28) wells located in Glasscock County. Apache Corporation is the operator of these wells. Current production is approximately 18.6 BOPD, 63 MCFPD and 16.7 BPD of NGL liquids.
Hutchinson County Fields
Camber recently acquired leasehold interests in Hutchinson County consisting of 53 non- producing wells and 5 SWD wells. The acquisition is of approximately 637.5 / 555 (gross / net) acres. These non-producing wells are currently in the process of being returned to production. Since acquiring this asset eleven wells have been returned to production.
Data Source
Basic well and field data used in the preparation of this report were furnished by Camber or were obtained from commercial sources. Records as they pertain to factual matters such as acreage controlled, the number and depths of wells, reservoir pressure and/or production history, the existence of contractual obligations to others and similar matters were accepted as presented.
Additionally, the analyses of these properties utilized not only the basic data on the subject wells but also data on analogous properties as provided. Ownership interest, revenues received from the sale of products and operating costs were furnished by Camber. No physical inspection of the properties was made nor any well tests conducted at this time.
Ownership
Ownership interests in the subject properties have been furnished by Camber and accepted by Graves without independent verification.
Texas Registered Engineering Firm No. F - 19125
|
Estimated Reserves and Future Net Revenue |
Graves & Co. Consulting LLC |
| Camber Energy, Inc. Interests | May 27, 2019 |
| As of March 31, 2019 – SEC Report | Page 4 |
Reserve Estimates
The estimate of reserves included in this report is based primarily upon production history or analogy with wells in the area producing from the same or similar formations. In addition to individual well production history, well test information, when available, was utilized in the evaluation. Geologic data was reviewed with Camber personnel to establish reasonableness to the interpretations and a consistent basis for the volumetric estimates of hydrocarbons originally in place in each of the respective field areas. Individual well production histories were analyzed and forecast until a calculated economic limit.
Estimates of reserves to be recovered from developed non-producing wells are based upon the typical production and reserve potential of existing Camber or offset wells with consideration to any recently completed wells and their production histories.
The accuracy of reserve estimates is dependent upon the quality of available data and upon the independent geological and engineering interpretation of that data. Reserve volumes presented in this report are based upon the available data and are calculated using all methods and procedures as we considered necessary under the circumstances to prepare this report and are believed to be reasonable; however, future reservoir performance may justify revision of these estimates. The various methods and procedures used in the evaluation of the subject properties are considered appropriate for this review.
It should be noted that all reserve estimates involve an assessment of the uncertainty relating to the likelihood that the actual remaining quantities recovered will be greater or less than the estimated quantities determined as of the date the estimate is made. The uncertainty depends primarily on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of these data. These reserves have been determined using methods and procedures widely accepted within the industry and are believed to be appropriate for the purposes of this report. In our opinion, we used all methods and procedures necessary under the circumstances to prepare this report.
Regulations in the Oil and Gas industry are constantly changing to meet new safety and environmental concerns. In addition, there is the possibility of market regulations which have occasionally occurred in the past. State, Local or Federal Regulations, such as upon hydraulic fracturing, or drill/production site security and safety, environmental regulations of spills, noxious emissions, greenhouse gases, drill site location, wildlife protections and extensive permitting processes (sometimes with multiple agencies or governments) may in future adversely affect the ability of Camber to recover the estimated reserves, as well as have the potential to render the reserves uneconomic, in certain as yet undetermined circumstances. To the best of the engineers belief, none of the reserves described in this report are negatively impacted as of the date of this report by any such current regulations.
Producing Rates
For the purpose of this report, estimated reserves are scheduled for Camber primarily on the basis of actual producing rates or appropriate well test information. They were prepared giving consideration to engineering and geological data such as reservoir pressure, anticipated producing mechanisms, the number and types of completions, as well as past performance of analogous reservoirs.
Texas Registered Engineering Firm No. F - 19125
|
Estimated Reserves and Future Net Revenue |
Graves & Co. Consulting LLC |
| Camber Energy, Inc. Interests | May 27, 2019 |
| As of March 31, 2019 – SEC Report | Page 5 |
These and other future rates may be subject to regulation by various agencies, changes in market demand or other factors; consequently, reserves recovered and the actual rates of recovery may vary from the estimates included herein. Scheduled dates of future well completions may vary from that provided by Camber due to changes in market demand or the availability of materials and/or capital; however, the timing of the wells and their estimated rates of production are reasonable and consistent with established performance to date.
Pricing Provisions and Differentials
Prices utilized in the evaluation results presented in the letter portion of this report and summarized in the various tables included in this evaluation were furnished by Camber. Prices received for products sold, adjustments due to the BTU content of the gas, shrinkage, transportation, measuring or the removal of liquids, and the liquid yield from gas processed, etc., were accepted as presented.
Crude Oil and Condensate - The unit price used throughout this report for crude oil and natural gas is based upon SEC guidelines, which are the average of prices for the first day of each month (FDOM) for the prior twelve months ending March 31, 2019. An average crude price of sixty- three dollars and twelve cents ($63.12) USD per barrel represents the effective average FDOM crude oil price utilized in the evaluation. This respective price for 2019 was held flat throughout the remaining producing life of the properties. For the Apache Operated Spraberry Unit properties there is a pricing adjustment applied to account for quality, location and gravity. This amount is a negative six dollars and ninety-five cents (-$6.95 USD). Prices for liquid reserves scheduled for initial production at some future date were estimated using this same price. The average price realized for liquid reserves, crude oil and condensate, over the producing life of the Spraberry Unit properties, was $56.17 per barrel, and represents the combined effect due to the adjustments for location and quality differentials such as transportation, quality and gravity. Regarding the Hutchinson County properties recently acquired, due to the short time since production has started, negotiations are still underway in regards to long term purchasing contracts, and as such, for now, there is not a differential currently applied to the Hutchinson County oil sales.
Natural Gas and Natural Gas Liquids – The unit price used throughout this report for natural gas is based upon the average First Day of Month (FDOM) of prices for the prior twelve (12) months ending March 31, 2019. The average FDOM gas price is three dollars and sixteen cents ($3.16) per MMBTU. An average gas price of $3.10 per MMBTU represents the effective average natural gas price utilized in the evaluation after deductions. The scheduled price for 2019 was held flat throughout the remaining producing life of the properties. Prices for natural gas reserves scheduled for initial production at some future date were estimated using this same price. Gas prices were adjusted by a negative six cents (-$0.06) per MMbtu for location, BTU content and quality. These respective adjustments were held constant thereafter to the economic limit of the properties. Natural Gas Liquids (NGL) pricing was held constant at twenty-five dollars and forty-three cents per barrel ($25.43/bbl) USD, which represented 45.27 % of the received oil price. This price for NGL reserves was held constant for the life of the properties.
Texas Registered Engineering Firm No. F - 19125
|
Estimated Reserves and Future Net Revenue |
Graves & Co. Consulting LLC |
| Camber Energy, Inc. Interests | May 27, 2019 |
| As of March 31, 2019 – SEC Report | Page 6 |
Prices for gas and NGL reserves scheduled for initial production at some future date were estimated using this same price. The average price realized for natural gas reserves over the producing life of the properties was $3.10 per MMBTU, and represents the combined effect due to the adjustments for location and quality differentials such as transportation and the BTU (heating value) of the gas. NGL received price for future reserves was also $25.43/bbl and was held constant for the life of the properties.
Future Net Income
Future net income is based upon gross income from future production, less direct operating expenses and taxes (production, severance, ad valorem or other). Estimated future capital for development and work-over costs was also deducted from gross income at the time it will be expended. No allowance was made for depletion, depreciation, income taxes or administrative expense.
Direct lease operating expense includes direct cost of operations of each lease or an estimated value for future operations based upon analogous properties. Lease operating expense and/or capital costs for drilling and/or major work-over expense were not escalated throughout the remaining producing life of the properties. Neither the cost to abandon properties nor the salvage value of equipment was considered in this report.
Future net income has been discounted for present worth at values ranging from 0 to 20 percent. In this report the future net income is discounted at a primary rate of ten percent (10.0%).
General
Camber Energy, Inc. has provided access to all of its accounts, records, geological and engineering data, reports and other information as required for this evaluation. The ownership interests, product classifications relating to prices and other factual data were accepted as furnished without verification.
No consideration was given in this report to potential environmental liabilities which may exist, nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices.
Neither Graves & Co. Consulting LLC nor any of its officers, directors, employees, or independent contractors have any interest in Camber Energy, Inc., or any other related company or the properties reported upon herein. The employment and compensation to make this study are not contingent on our estimate of reserves.
The technical persons responsible for preparing the estimates presented herein meet the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the SPE standards.
Texas Registered Engineering Firm No. F - 19125
|
Estimated Reserves and Future Net Revenue |
Graves & Co. Consulting LLC |
| Camber Energy, Inc. Interests | May 27, 2019 |
| As of March 31, 2019 – SEC Report | Page 7 |
The data and work papers used in the preparation of this report are available for examination by authorized parties in our offices. Please feel free to contact us if we can be of further service.
We appreciate the opportunity to be of service to you in the matter of this report and will be glad to address any questions or inquiries you may have.
| Very truly yours, | |
| GRAVES & CO. CONSULTING LLC | |
|
|
| Allen C. Barron, P.E. | |
| Executive Vice-President | |
|
|
| David G. Cole, | |
| Senior Petroleum Engineer, |
Texas Registered Engineering Firm No. F - 19125