NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 - GENERAL
History
of the Company.
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.
The
accompanying unaudited interim consolidated financial statements of Lucas Energy, Inc. (“Lucas” or the “Company”)
have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities
and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in
Lucas’s annual report filed with the SEC on Form 10-K for the year ended March 31, 2016. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results
of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are
not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which
would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year 2016
as reported in the Form 10-K have been omitted.
Our
fiscal year ends on the last day of March of each year. We refer to the twelve-month periods ended March 31, 2017 and 2016 as
our 2017 and 2016 fiscal years, respectively.
On
July 15, 2015 the Company effected a 1-for-25 reverse stock split of all of the outstanding shares of the Company’s common
stock. Proportional adjustments were also 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. 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 have been retroactively adjusted to reflect the reverse
split for all periods presented.
NOTE
2 – LIQUIDITY AND GOING CONCERN CONSIDERATIONS
At
June 30, 2016, the Company’s total current liabilities of $11.5 million exceeded its total current assets of $0.6 million,
resulting in a working capital deficit of $10.9 million, while at March 31, 2016, the Company’s total current liabilities
of $11.1 million exceeded its total current assets of $0.6 million, resulting in a working capital deficit of $10.5 million. The
$0.6 million increase in the working capital deficit is primarily related to cash used for operations from the issuance of debt.
On
August 30, 2015, we entered into a Non-Revolving Line of Credit Agreement with Silver Star Oil Company (“Silver Star”).
The line of credit provided us the right to issue up to $2.4 million in convertible promissory notes to Silver Star. Specifically,
the Company had the right to request advances in an amount not to exceed $200,000, each thirty days, and each advance was evidenced
by a convertible note. To date, Lucas has drawn $1,000,000 under the line of credit for the months of October, November, December
2015 and January and February 2016. In February 2016, we received notice that $300,000 of the convertible notes were assigned
by Silver Star to Rockwell Capital Partners (“Rockwell”), and on March 28, 2016, Rockwell converted $206,000 of the
principal and interest due on such convertible notes into shares of our common stock at a conversion price of $1.50 per share,
for an aggregate of 137,333 shares. We also received notice in April 2016, that $500,000 of additional convertible notes were
assigned by Silver Star to Rockwell, and on April 25, 2016, Rockwell partially converted $159,780 of the principal and interest
due on such convertible notes into shares of our common stock at a conversion price of $1.50 per share, for an aggregate of 106,520
shares. Additionally, as discussed below, in April 2016, the Company, Target Alliance London Limited (“TALL”), and
Silver Star, entered into an Assignment, Assumption and Amendment to Line of Credit and Notes Agreement whereby Silver Star assigned
its rights and ownership of a $200,000 Convertible Promissory Note issued by us to Silver Star thereunder dated February 10, 2016
to TALL in consideration for $200,000.
On
December 30, 2015, we entered into an Asset Purchase Agreement to acquire, from twenty-one different entities and individuals,
working interests in producing properties and undeveloped acreage. The assets agreed to be acquired include varied interests in
two largely contiguous acreage blocks in the liquids-rich Mid-Continent region. In exchange for the assets being acquired, Lucas
will assume $31,350,000 in commercial bank debt, issue 552,000 shares of a newly designated form of convertible preferred stock,
issue 13,009,664 shares of common stock, and pay $4,975,000 in cash. At the closing of the transaction, which is subject to various
closing conditions, we will rebrand and change our name to “Camber Energy, Inc.” The Asset Purchase Agreement also
includes customary termination provisions for both the Company and the sellers, subject to the terms of the purchase agreement
and in certain circumstances rights to cure or other prerequisites. The Company also obtained the opinion of Canaccord Genuity
Corporation (“Canaccord”) providing that in the opinion of Canaccord, the acquisition is fair, from a financial point
of view, to the Company, prior to the approval of such purchase agreement by the Board of Directors. The Company agreed to pay
Canaccord $170,000 for the fairness opinion. We currently anticipate the closing of the acquisition, which is subject to various
closing conditions, to occur in August or September 2016, and we will require additional funding of approximately $1.35 million
in legal expenses, investment banking fees and other transaction costs in order to complete the acquisition (the “Acquisition”),
in addition to the cash required to be paid at closing as described above.
On
April 6, 2016, we entered into a Securities Purchase Agreement with an accredited institutional investor, pursuant to which we
issued a redeemable convertible subordinated debenture, with a face amount of $530,000, convertible into 163,077 shares of common
stock at a conversion price equal to $3.25 per share (the “Debenture”) and a warrant to purchase 1,384,616 shares
of common stock at an exercise price equal to $3.25 per share (the “First Warrant”). The accredited institutional
investor purchased the Debenture at a 5.0% original issue discount for the sum of $500,000 and agreed that it will exercise the
First Warrant, upon satisfaction of certain conditions, for the sum of $4.5 million.
On
April 6, 2016, we also entered into a stock purchase agreement (the “Preferred Stock Purchase Agreement”) with the
same accredited institutional investor, pursuant to which we agreed, subject to certain conditions, to issue a $5.26 million face
amount newly designated Series C redeemable convertible preferred stock (the “Series C Preferred Stock”) at a 5% original
issue discount, convertible into 1,618,462 shares of common stock at a conversion price of $3.25 per share, and a warrant to purchase
1,111,112 shares of common stock at an exercise price of $4.50 per share (the “Second Warrant”). Under the terms of
the Preferred Stock Purchase Agreement, the Second Warrant and $530,000 of Series C Preferred Stock will be sold and issued for
$500,000 after we close the Acquisition, and, assuming the Acquisition closes, the remaining $4.73 million of Series C Preferred
Stock will be sold and issued for $4.5 million immediately after approval by our stockholders for NYSE MKT purposes of the issuance
of shares of common stock upon conversion of the Series C Preferred Stock and exercise of the Second Warrant, which the Company
is seeking at its special meeting of stockholders to be held on August 23, 2016, and there is an effective registration statement
covering the shares of common stock issuable upon conversion of the Series C Preferred Stock and exercise of the Second Warrant.
On
April 11, 2016, the Company, TALL, and Silver Star, entered into an Assignment, Assumption and Amendment to Line of Credit and
Notes Agreement. Pursuant to the assignment agreement, Silver Star assigned its rights and ownership of a $200,000 convertible
note issued by us to Silver Star thereunder dated February 10, 2016 to TALL in consideration for $200,000. Additionally, Silver
Star provided us a release from any liability in connection with the line of credit and prior convertible notes issued to Silver
Star by us. The assignment agreement also amended the line of credit and terms of any future convertible notes issued thereunder,
to, among other things, to increase the monthly advance limit from $200,000 to $250,000 per month and increase the conversion
price of any future notes issued from $1.50 per share to $3.25 per share. As additional consideration for TALL agreeing to the
terms, we agreed to grant TALL warrants to purchase 51,562 shares of common stock at an exercise price of $3.25 per share, for
each $250,000 loaned pursuant to the terms of the amended line of credit. Subsequently, on June 27, 2016, TALL and Silver Star
attempted to unilaterally rescind the Assignment, Assumption and Amendment to Line of Credit and Notes Agreement and the transactions
undertaken therewith; however, we refused to recognize such rescission due to the fact that we were not party to, and did not
agree to the terms of, such rescission. To date, the Company has submitted four $250,000 advance requests for the months of May
2016, June 2016, July 2016 and August 2016, for which TALL has not provided any funds to date. The Company is currently investigating
potential remedies for TALL’s breach of its funding obligations and may in the future file a complaint against TALL.
On
April 20, 2016, and effective April 1, 2016, the Company entered into a First Amendment to Asset Purchase Agreement (the “First
Amendment”), with twenty-one separate sellers and two other parties who became sellers as a result of the First Amendment
(collectively, the “Sellers”) and Segundo Resources, LLC, as a Seller and as a representative of the Sellers named
therein, amending the Asset Purchase Agreement. Pursuant to the First Amendment, the parties amended the terms of the Asset Purchase
Agreement to among other things: (a) make the effective date of the Asset Purchase April 1, 2016 (including the date that the
Company will be due consideration for the production of hydrocarbons in connection with the assets to be acquired); (b) remove
the requirement that we register the primary issuance of the shares of common stock and preferred stock issuable to the Sellers
pursuant to the Asset Purchase Agreement prior to the closing of the Asset Purchase (the “Closing”); (c) provide for
the issuance of restricted shares of common and preferred stock to the Sellers at Closing; (d) include representations of the
Sellers sufficient to enable us to confirm that an exemption from registration exists for the issuance of the common stock and
preferred stock due to be issued at Closing; (e) require us to register the resale of the common stock shares issuable at Closing,
after Closing (we are required to file the registration statement registering such shares no later than 30 days after Closing
and obtain effectiveness thereof no later than 90 days after closing (135 days in the event the SEC reviews such registration
statement)); (f) adjust the number of shares of common and preferred stock we were allowed to have outstanding immediately prior
to Closing; (g) provide for the anticipated issuance of additional shares of common stock in connection with the debt assumption
contemplated at the Closing; (h) adjust the required timing for our appointment of three director nominees to be nominated by
the Sellers at the Closing to 10 days after the Closing date; (i) require us to indemnify the Sellers against losses caused by
misstatements in the registration statement unless such losses are caused by information supplied by the Sellers, in which case
the Sellers providing such information are required to indemnify us against such losses; (j) confirm that certain recent transactions
undertaken by the Company relating to the sale of securities (as previously disclosed by the Company), are approved by the Sellers
and that such transactions did not cause any breaches of the terms of the Asset Purchase Agreement; (k) allow for certain additional
issuances of common stock from time to time pursuant to the terms of convertible securities sold by the Company prior to Closing;
(l) allow the Sellers to sell certain property in Glasscock County, Texas prior to Closing, subject to the pre-approval of such
sale by the Company, and subject to such sale proceeds being placed in escrow until the earlier of Closing (and thereafter released
to the Company) or as mutually agreed by the Company and the Seller Representative; and (m) remove certain closing conditions
which have already been completed to date from the conditions to Closing described in the Asset Purchase Agreement.
In
July and August 2016, RAD2 Minerals, Ltd. (“RAD2”), which is one of the Sellers, and controlled by Richard Azar, who
will become the Company’s largest stockholder and will be appointed as Executive Chairman following the closing of the Acquisition,
advanced the Company an aggregate of $350,000. This advance does not accrue interest and has no stated maturity date. The Company
anticipates repaying the amounts advanced by RAD2 at the closing of the Acquisition.
In
August 2016, two other Sellers advanced the Company an aggregate of $200,000 ($100,000 each). These advances do not accrue interest
and have no stated maturity date. The Company anticipates repaying the amounts advanced by the two Sellers following the closing
of the Acquisition and after completion of the transactions contemplated by the Preferred Stock Purchase Agreement.
In
addition to the transactions noted above, Lucas is currently discussing potential financing transactions in order to fulfill our
current capital requirements as well as our planned asset acquisition, which we believe, if finalized and completed, will ensure
the future viability of the Company. However, due to our current capital structure and the nature of oil and gas interests, i.e.,
that rates of production generally decline over time as oil and gas reserves are depleted, if we are unable to obtain the necessary
financing to finalize the asset purchase or drill additional wells and develop our proved undeveloped reserves (PUDs); coupled
with the continued substantial drop in commodity prices over the last twelve months, we believe that our revenues will continue
to decline over time. Therefore, we may be forced to scale back our business plan, sell assets to satisfy outstanding debts or
take other remedial steps which may include seeking bankruptcy protection.
The
realization of the Company’s assets and satisfaction of its liabilities is contingent on the completion of the Asset Purchase
Agreement. The Company anticipates that it will need approximately $15.0 million to execute its current business plan and is currently
in the later stages of seeking shareholder approval and closing of the Asset Purchase Agreement. In the event that the Company
is unable to complete the Asset Purchase Agreement, and is otherwise unable to replace such financing on a timely basis, it would
materially affect the Company’s ability to continue as a going concern. If closing on the Asset Purchase Agreement is not
completed, among other things, the Company expects that it would incur additional impairment of its oil and gas properties of
approximately $12.0 million and the Company’s ability to meet its obligations from existing cash flows would be significantly
affected. If the Company would be required to seek financing from other sources, such financings may not be available or, if available,
may not be on terms acceptable to the Company. Accordingly, the financial statements do not include any adjustments related to
the recoverability of assets or classification of liabilities that might be necessary should the Company be unable to continue
as a going concern. The ability of the Company to continue as a going concern is dependent upon its ability to raise capital to
meet its obligations and develop its oil and gas properties to attain profitable operations.
These
conditions raise substantial doubt about our ability to continue as a going concern for the next twelve months. 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.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company has provided a discussion of significant accounting policies, estimates and judgments in its 2016 Annual Report. There
have been no changes to the Company’s significant accounting policies since March 31, 2016.
NOTE
4 – PROPERTY AND EQUIPMENT
Oil
and Gas Properties
Lucas
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. Properties not subject to amortization consist
of acquisition, 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 and the corresponding costs are
added to the capitalized costs subject to amortization. Costs of oil and gas properties are amortized using the units of production
method. Amortization expense calculated per equivalent physical unit of production amounted to $26.46 per barrel of oil equivalent
(“Boe”) for the three months ended June 30, 2016, and was $31.95 per Boe for the three months ended June 30, 2015.
In
applying the full cost method, Lucas 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-percent
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. The price used in the ceiling
test is the simple average first of the month price for the prior 12 months. If capitalized costs exceed this limit, the excess
is charged as an impairment expense. As of June 30, 2016, no impairment of oil and gas properties was indicated.
All
of Lucas’s oil and gas properties are located in the United States. Below are the components of Lucas’s oil and gas
properties recorded at:
|
|
June
30,
|
|
|
March
31,
|
|
|
|
2016
|
|
|
2016
|
|
Proved
leasehold costs
|
|
$
|
10,266,550
|
|
|
$
|
10,266,551
|
|
Costs
of wells and development
|
|
|
37,537,092
|
|
|
|
37,534,624
|
|
Capitalized
asset retirement costs
|
|
|
717,337
|
|
|
|
717,337
|
|
Total
oil and gas properties
|
|
|
48,520,979
|
|
|
|
48,518,512
|
|
Accumulated
depreciation, depletion and impairment
|
|
|
(34,512,129
|
)
|
|
|
(34,416,407
|
)
|
Net
capitalized costs
|
|
$
|
14,008,850
|
|
|
$
|
14,102,105
|
|
Office
Lease
In
June 2016, we moved our corporate headquarters from Suite 780 to Suite 860 at our same physical address location of 450 Gears
Road, Houston, Texas 77067. The new office space is approximately 4,400 square feet and has a base monthly rent of approximately
$7,700 for the first year and approximately $7,900, $8,000, $8,200 and $8,400 for subsequent years. We also paid an $8,400 deposit
and received proceeds from our prior security deposit of $5,000.
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 retirement of oil and gas property and equipment for the three-month period ended June 30, 2016. Lucas does
not have short-term asset retirement obligations as of June 30, 2016.
Carrying
amount at beginning of period - March 31, 2016
|
|
|
$
|
1,179,170
|
|
Accretion
|
|
|
|
27,664
|
|
Carrying
amount at end of period - June 30, 2016
|
|
|
$
|
1,206,834
|
|
NOTE
6 – NOTES PAYABLE, DEBENTURE
Rogers
Loan
At
June 30, 2016, the Company had $7,114,734 due under the $7.5 million Letter Loan Agreement (as amended, modified, restated and
revised to date, the “Rogers Loan”) originally entered into with Louise H. Rogers (“Rogers”) on August
13, 2013. Amortization of debt discount of $21,323 was recorded during the year ended March 31, 2016 while no unamortized discount
remained as of June 30, 2016.
Currently,
the Rogers Loan has a maturity date of October 31, 2016, and we have agreed to pay all professional fees incurred by Rogers and
to pay Rogers $39,000 in lieu of interest on the Rogers Loan as well as all operating income of collateralized assets (beginning
October 1, 2015). Also, we agreed to make principal payments to Rogers from certain insurance proceeds to be received, which we
have not received to date. For the months of January, February, March, June and July 2016, the Company did not make the required
monthly principal payments due pursuant to the terms of the Rogers loan as amended. Instead, the Company and the loan administrator
agreed to settle any outstanding administration and legal fees in lieu of the principal payments. The Company paid approximately
$98,000 related to the fees and effective July 5, 2016, the Company obtained a waiver for the nonpayment of the principal amounts.
Additionally,
per a prior amendment, we transferred all of our oil and gas interests and equipment to our then newly formed wholly-owned Texas
subsidiary, CATI Operating LLC, which clarified that following the transfer, Rogers had no right to foreclose upon the Company
(at the Nevada corporate parent level) upon the occurrence of an event of default under the Rogers Loan, and that instead Rogers
would only take action against CATI and its assets and required Rogers to release all UCC and other security filings on the Company
(provided that Rogers is allowed to file the same filings on CATI and its assets). Subsequently, we formally assigned all of our
oil and gas interests and equipment to CATI pursuant to an Assignment and Bill of Sale dated December 16, 2015.
Silver
Star Line of Credit
On
August 30, 2015, we entered into a Non-Revolving Line of Credit Agreement with Silver Star Oil Company. The line of credit provided
us the right to issue up to $2.4 million in convertible promissory notes to Silver Star. To date, Lucas has drawn $1,000,000 under
the line of credit for the months of October, November, December 2015 and January and February 2016. The convertible notes contained
a beneficial conversion feature with a combined intrinsic value of $687,987 for the five notes, which is recognized as a discount
and is being amortized through interest expense using the effective interest method over the term of the notes.
As
of June 30, 2016, $800,000 of convertible notes have been assigned by Silver Star to Rockwell Capital Partners (“Rockwell”),
of which Rockwell has converted a total of $365,780 of the principal and interest due on such convertible notes into shares of
our common stock at a conversion price of $1.50 per share, for an aggregate of 243,853 shares.
On
April 11, 2016, the Company, Target Alliance London Limited, and Silver Star, entered into an Assignment, Assumption and Amendment
to Line of Credit and Notes Agreement whereby Silver Star assigned its rights and ownership of a $200,000 convertible promissory
note issued by us to Silver Star thereunder dated February 10, 2016 to TALL in consideration for $200,000. The Assignment Agreement
also extended the due date of the February Note and all future notes issued under the Line of Credit to April 11, 2017. As additional
consideration for TALL agreeing to the terms of the Assignment Agreement, we agreed, subject to NYSE MKT listing approval and
where applicable stockholder approval under applicable NYSE MKT rules and regulations, to grant TALL warrants to purchase 51,562
shares of common stock at an exercise price of $3.25 per share, for each $250,000 loaned pursuant to the terms of the amended
Line of Credit.
On
June 27, 2016, TALL and Silver Star attempted to unilaterally rescind the Assignment, Assumption and Amendment to Line of Credit
and Notes Agreement and the transactions undertaken therewith; however, we refused to recognize such rescission due to the fact
that we were not party to, and did not agree to the terms of, such rescission. To date, the Company has submitted four $250,000
advance requests to TALL for the months of May 2016, June 2016, July 2016 and August 2016, for which TALL has not provided any
funds to date. The Company is currently evaluating potential remedies for TALL’s breach of its funding obligations and may
in the future file a complaint against TALL.
As
of June 30, 2016, we had total convertible notes due to Rockwell and TALL of $636,732 (net of the unamortized discount of $9,563)
which is recognized as a short-term liability on the Company’s balance sheet as of June 30, 2016. The Company has also recognized
approximately $18,700 in accrued interest as of June 30, 2016.
HFT
Convertible Promissory Note Purchase Agreement and Convertible Promissory Notes
On
March 29, 2016, Lucas entered into a Convertible Promissory Note Purchase Agreement with HFT Enterprises, LLC (“HFT”).
Pursuant to the Note Purchase Agreement, we agreed to issue an aggregate of $600,000 in convertible notes, including $300,000
in convertible notes purchased on the date of the parties’ entry into the agreement, and $150,000 in convertible notes purchased
by Debra Herman, the wife of Michael Herman, the principal of HFT, on April 26, 2016. We also granted Mrs. Herman warrants to
purchase 124,285 shares of common stock with an exercise price of $1.50 per share on April 26, 2016, when the final loan was made
pursuant to the terms of the agreement.
Each
of the convertible notes are due and payable twelve months from their issuance date, accrue interest at the rate of 6% per annum
(15% upon the occurrence of an event of default), and allow the holder thereof the right to convert the principal and interest
due thereunder into common stock of the Company at a conversion price of $1.50 per share, provided that the total number of shares
of common stock issuable upon conversion of the convertible notes cannot exceed 19.9% of our outstanding shares of common stock
on March 29, 2016. The convertible notes contained a beneficial conversion feature with a combined intrinsic value of $600,000
for the three notes, which is recognized as a discount and is being amortized through interest expense using the effective interest
method over the term of the notes.
As
of June 30, 2016, we had total convertible notes due to HFT of $165,458 (net of the unamortized discount of $434,542) which is
recognized as a short-term liability on the Company’s balance sheet as of June 30, 2016. The Company has also recognized
approximately $8,000 in accrued interest as of June 30, 2016.
Dreeben
Note
On
March 28, 2016, we borrowed $250,000 from Alan Dreeben, who is one of the sellers of the assets we plan to acquire pursuant to
the Asset Purchase Agreement, pursuant to a short-term promissory note. The short-term promissory note has a principal balance
of $275,000 (the $250,000 borrowed plus a $25,000 original issue discount), does not accrue interest unless an event of default
occurs thereunder, at which time the note accrues interest at 15% per annum, has a maturity date of June 28, 2016 and contains
standard and customary events of default. The short-term promissory note may be prepaid at any time without penalty. As additional
consideration for Mr. Dreeben agreeing to make the loan, we agreed to issue Mr. Dreeben 15,000 restricted shares of common stock,
which to date, have not been issued. Therefore, as of March 31, 2016, we accrued $48,000 in stock payable, which is based on the
closing price of the Company’s common stock ($3.20 per share) on March 28, 2016. We also recognized the value of the $48,000
stock payable as a discount to the short-term promissory note in addition to the original discount of $25,000, for a total discount
of $73,000.
On
June 27, 2016, we entered into an amended and restated short-term promissory note, amending and restating the note originally
entered into with Alan Dreeben on March 28, 2016
; evidencing an additional $100,000 borrowed on June
13, 2016, plus a $10,000 original issue discount on such loan amount and extending the maturity date of the note to August 31,
2016. Mr. Dreeben is one of the Sellers.
As
of June 30, 2016, we had a short-term promissory due to Alan Dreeben of $375,000 (net of the unamortized discount of $10,000),
which is recognized as a short-term liability on the Company’s balance sheet as of June 30, 2016.
Debenture
On
April 6, 2016, we entered into a Securities Purchase Agreement with an accredited institutional investor, pursuant to which we
issued a redeemable convertible subordinated debenture, with a face amount of $530,000, convertible into 163,077 shares of common
stock at a conversion price equal to $3.25 per share and a warrant to purchase 1,384,616 shares of common stock (subject to adjustment
thereunder) at an exercise price equal to $3.25 per share (the “First Warrant”). The accredited institutional investor
purchased the debenture at a $30,000 original issue discount for the sum of $500,000 and agreed that it will exercise the First
Warrant, upon satisfaction of certain conditions, for the sum of $4.5 million. The debenture matures in seven years and accrues
interest at a rate of 6.0% per annum, subject to adjustment as provided in the debenture.
As
the fair value of the warrants issued in connection with the debenture exceeds the $530,000 value of the debenture, we fully discounted
the entire debenture and will amortize the discount over the term of the debenture. The discount is being amortized through interest
expense using the effective interest method over the term of the debenture.
As
of June 30, 2016, we had a convertible subordinated debenture of $18,929 (net of the unamortized discount of $511,071) which is
recognized as a long-term liability on the Company’s balance sheet as of June 30, 2016. The Company has also recognized
approximately $8,000 in accrued interest as of June 30, 2016.
NOTE
7 – STOCK PURCHASE AGREEMENT
On
April 6, 2016, we entered into a Stock Purchase Agreement with the same accredited institutional investor (noted above in “Note
6 – Notes Payable, Debenture”), pursuant to which we agreed, subject to certain conditions, to sell 527 shares of
Series C redeemable convertible preferred stock (the “Series C Preferred Stock”)(with a face value of $5.26 million)
at a 5% original issue discount, convertible into 1,618,462 shares of common stock at a conversion price of $3.25 per share, and
a warrant to purchase 1,111,112 shares of common stock at an exercise price of $4.50 per share (the “Second Warrant”).
Under the terms of the Stock Purchase Agreement, the Second Warrant and 53 shares of Series C Preferred Stock will be sold and
issued for $500,000 after the Acquisition (as defined and described in “Note 2 – Liquidity and Going Concern Considerations”)
closes, and, assuming the Acquisition closes, the remaining 474 shares of Series C Preferred Stock will be sold and issued for
$4.5 million immediately after approval by our stockholders for NYSE MKT purposes, of the issuance of shares of common stock issuable
upon conversion/exercise thereof, which the Company is seeking at its special meeting of stockholders to be held on August 23,
2016, and at such time as there is an effective registration statement in place covering the shares of common stock issuable upon
conversion of the Series C Preferred Stock and exercise of the Second Warrant.
NOTE
8 – STOCKHOLDERS’ EQUITY
Preferred
Stock
On
April 19, 2016, the holder of our Series A Convertible Preferred Stock, agreed to convert all 500 shares of our outstanding Series
A Convertible Preferred Stock into 20,000 shares of our common stock (a conversion ratio of 40:1 as provided in the original designation
of the Series A Convertible Preferred Stock adjusted for the Company’s 1:25 reverse stock split effective on July 25, 2015),
which conversion was completed on April 25, 2016. We paid the holder $20,000 in connection with and effective upon such conversion
in order to comply with the terms of the Asset Purchase Agreement that no shares of Series A Convertible Preferred Stock are outstanding
at the closing. As of June 30, 2016, we have no preferred stock issued or outstanding.
Common
Stock
The
following summarizes Lucas’s common stock activity during the three-month period ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
|
Amount
(a)
|
|
|
Per
Share
|
|
|
Issued
and
Outstanding
Shares
|
|
Balance
at March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
1,605,224
|
|
Conversion
of Debt
|
|
$
|
159,780
|
|
|
$
|
1.50
|
|
|
|
106,520
|
|
Preferred
Stock Series A Conversion
|
|
|
773,900
|
|
|
|
38.70
|
|
|
|
20,000
|
|
Share-Based
Compensation
|
|
|
23,572
|
|
|
|
3.08
|
|
|
|
7,653
|
|
Balance at June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
1,739,397
|
|
(a)
Net proceeds or fair market value on grant date, as applicable.
See
“Note 10 – Share-Based Compensation” for information on common stock activity related to Share-Based Compensation,
including shares granted to the board of directors, officers, employees and consultants.
Warrants
During
the three months ended June 30, 2016, warrants to purchase 1,384,616 shares of common stock were granted in connection with our
sale of the debenture noted in “Note 6 – Note Payables, Debenture”, above. We also granted warrants to purchase
124,285 shares of common stock in connection with the HFT Convertible Promissory Notes (see “Note 6 – Note Payables,
Debenture”, above). No warrants were exercised, expired or cancelled during the three months ended June 30, 2016. However,
warrants to purchase 66,668 shares of common stock issued in connection with an equity raise completed in April 2014, contained
a weighted average anti-dilutive provision in which the exercise price of the warrants are adjusted downward based on any subsequent
issuance or deemed issuance of common stock or convertible securities by the Company for consideration less than the then exercise
price of such warrants. As a result of the anti-dilution rights, the exercise price of the warrants was adjusted from $15.56
per share as of March 31, 2016 to $9.75 per share as of June 30, 2016, in connection with our issuance of common stock and convertible
securities for consideration less than the then exercise price of the warrants during the period. As of June 30, 2016, the fair
value of the derivative liability associated with the 66,668 warrants was $182,333 compared to $126,960 at March 31, 2016. Therefore,
the $55,373 change in the derivative liability fair value was recorded as other expense on the consolidated statement of operations.
The
Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. For
further information regarding the fair value hierarchy, refer to Note 3 of the Notes to the Consolidated Financial Statements
in the Form 10-K.
The
following is a summary of the Company’s outstanding warrants at June 30, 2016:
Warrants
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Intrinsic
Value
|
|
Outstanding
|
|
|
Price
($)
|
|
|
Date
|
|
|
at
June 30, 2016
|
|
|
100,422
|
*
(1)
|
|
|
71.50
|
|
|
|
July
4, 2016
|
|
|
|
—
|
|
|
41,300
|
(2)
|
|
|
57.50
|
|
|
|
October
18, 2017
|
|
|
|
—
|
|
|
11,000
|
(3)
|
|
|
37.50
|
|
|
|
April
4, 2018
|
|
|
|
—
|
|
|
2,000
|
(4)
|
|
|
37.50
|
|
|
|
May
31, 2018
|
|
|
|
—
|
|
|
11,195
|
(5)
|
|
|
0.01
|
|
|
|
August
13, 2018
|
|
|
|
42,429
|
|
|
66,668
|
(6)
|
|
|
9.75
|
|
|
|
April
21, 2019
|
|
|
|
—
|
|
|
1,384,616
|
(7)
|
|
|
3.25
|
|
|
|
April
6, 2023
|
|
|
|
—
|
|
|
124,285
|
(8)
|
|
|
1.50
|
|
|
|
April
26, 2021
|
|
|
|
—
|
|
|
1,741,486
|
|
|
|
|
|
|
|
|
|
|
$
|
42,429
|
|
*Warrants
expired on July 4, 2016 and are no longer outstanding as of the date of this report
|
(1)
|
Series
B Warrants issued in connection with the sale of units in the Company’s unit offering
in December 2010. The Series B Warrants became exercisable on July 4, 2011 and will remain
exercisable thereafter until July 4, 2016.
|
|
(2)
|
Warrants
issued in connection with the sale of units in the Company’s unit offering in April
2012. The warrants became exercisable on October 18, 2012, and will remain exercisable
thereafter until October 18, 2017.
|
|
(3)
|
Warrants
issued in connection with the issuance of certain notes in April 2013, or which the outstanding
principal and interest was paid in full on August 16, 2013. The warrants were exercisable
on the grant date (April 4, 2013) and remain exercisable until April 4, 2018.
|
|
(4)
|
Warrants
issued in connection with the issuance of certain notes in May 2013, for which the outstanding
principal and interest was paid in full on August 16, 2013. The warrants were exercisable
on the grant date (May 31, 2013) and remain exercisable until May 31, 2018.
|
|
(5)
|
Warrants
issued in connection with the Letter Loan. The warrants were exercisable on the grant
date (August 13, 2013) and remain exercisable until the earlier of (a) August 13, 2018;
and (b) three years after the payment in full of the Loan. The exercise price was lowered
to $0.01 per share on August 12, 2015.
|
|
(6)
|
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.
|
|
(7)
|
Warrants
issued in connection with the Debenture, which accrues a premium at a rate equal to 6.0%
per annum. The warrants were exercisable on the grant date (April 6, 2016) and remain
exercisable until April 6, 2023.
|
|
(8)
|
Warrants
issued in connection with the HFT Convertible Promissory Notes. The warrants were exercisable
on the grant date (April 26, 2016) and remain exercisable until April 26, 2021.
|
NOTE
9 – INCOME TAXES
The
Company has estimated that its effective tax rate for U.S. purposes will be zero for the 2017 fiscal year and consequently, recorded
no provision or benefit for income taxes for the three months ended June 30, 2016.
NOTE
10 – SHARE-BASED COMPENSATION
Lucas
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.
Common
Stock
Lucas
issued 7,653 shares of its common stock with an aggregate grant date fair value of $23,572 during the three-month period ended
June 30, 2016, which were valued based on the trading value of Lucas’s common stock on the date of grant. Also, on June
30, 2016, the Company agreed to award an additional 6,285 shares of its common stock with an aggregate grant fair value of $23,882,
which were valued based on the trading value of Lucas’s common stock on the date of grant. Those common stock awards had
yet to be physically issued as of June 30, 2016, and therefore, were recognized as accrued common stock payable on the balance
sheet. The shares were awarded according to the employment agreement with an officer and as additional compensation for other
managerial personnel.
Stock
Options
As
of June 30, 2016, the Company had 22,920 stock options outstanding with a weighted average exercise price of $33.96 and as of
June 30, 2015, the Company 24,920 stock options outstanding with a weighted average exercise price of $33.80.
Of
the Company’s outstanding options, no options expired, were exercised or forfeited during the three months ended June 30,
2016. Additionally, no stock options were granted during the three months ended June 30, 2016. Compensation expense related to
stock options during the three-month periods ended June 30, 2016 was $4,816.
Options
outstanding and exercisable at June 30, 2016 and June 30, 2015 had no intrinsic value, respectively. The intrinsic value is based
upon the difference between the market price of Lucas’s common stock on the date of exercise and the grant price of the
stock options.
The
following tabulation summarizes the remaining terms of the options outstanding:
Exercise
|
|
Remaining
|
|
Options
|
|
Options
|
Price
($)
|
|
Life
(Yrs.)
|
|
Outstanding
|
|
Exercisable
|
24.50
|
|
0.5
|
|
3,000
|
|
3,000
|
40.75
|
|
1.3
|
|
4,000
|
|
3,000
|
43.50
|
|
1.3
|
|
6,000
|
|
6,000
|
40.25
|
|
1.5
|
|
2,000
|
|
2,000
|
39.50
|
|
1.3
|
|
2,000
|
|
2,000
|
5.50
|
|
1.7
|
|
4,000
|
|
4,000
|
51.75
|
|
4.3
|
|
1,920
|
|
1,920
|
|
|
Total
|
|
22,920
|
|
21,920
|
As
of June 30, 2016, total unrecognized stock-based compensation expense related to all non-vested stock options was $25,688, which
is being recognized over a remaining weighted average period of approximately 1.2 years.
In
prior periods, the shareholders of the Company approved the Company’s 2014 (as amended), 2012 and 2010 Stock Incentive Plans
(“the Plans”). The Plans are intended to secure for the Company the benefits arising from ownership of the Company’s
common stock by the employees, officers, directors and consultants of the Company, all of whom are and will be responsible for
the Company’s future growth. The Plans provide an opportunity for any employee, officer, director or consultant of the Company
to receive incentive stock options (to eligible employees only), nonqualified stock options, restricted stock, stock awards and
shares in performance of services. There are 81,190 shares available for issuance under the Plans as of June 30, 2016.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Office
Lease.
In June 2016, we moved our corporate headquarters from Suite 780 to Suite 860 at our same physical address location
of 450 Gears Road, Houston, Texas 77067. The new office space is approximately 4,400 square feet and has a base monthly rent of
approximately $7,700 for the first year and approximately $7,900, $8,000, $8,200 and $8,400 for subsequent years. We also paid
an $8,400 deposit and received proceeds from our prior security deposit of $5,000.
Legal
Proceedings
. From time to time, we may become party to litigation or other legal proceedings that we consider to be a part
of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe 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.
NOTE
12 – SUPPLEMENTAL CASH FLOW INFORMATION
Net
cash paid for interest and income taxes was as follows for the three-month periods ended June 30, 2016 and 2015:
|
|
Three
Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Interest
|
|
$
|
3,538
|
|
|
$
|
73,465
|
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities for the three-month periods ended June 30, 2016 and 2015 included the following:
|
|
Three
Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Reduction
in Accounts Payable for Payments Made on Previously Accrued Capital Expenditures
|
|
$
|
41,979
|
|
|
$
|
610,627
|
|
Discounts
on Debenture and Convertible Note
|
|
$
|
601,750
|
|
|
$
|
—
|
|
Conversion
of Convertible Notes in Common Stock
|
|
$
|
159,780
|
|
|
$
|
—
|
|
Conversion
of Preferred Stock to Common Stock
|
|
$
|
733,900
|
|
|
$
|
—
|
|
Extinguishment
of Note Payable in Exchange of Common Stock
|
|
$
|
—
|
|
|
$
|
212,764
|
|
Extinguishment
of Note Payable in Exchange of Certain Oil and Gas Properties
|
|
$
|
—
|
|
|
$
|
387,236
|
|
NOTE
13 – SUBSEQUENT EVENTS
In
July and August 2016, RAD2 Minerals, Ltd. (“RAD2”), which is one of the Sellers, and controlled by Richard Azar, who
will become the Company’s largest stockholder and will be appointed as Executive Chairman following the closing of the Acquisition,
advanced the Company an aggregate of $350,000. This advance does not accrue interest and has no stated maturity date. The Company
anticipates repaying the amounts advanced by RAD2 at the closing of the Acquisition.
In
August 2016, two other Sellers advanced the Company an aggregate of $200,000 ($100,000 each). These advances do not accrue interest
and have no stated maturity date. The Company anticipates repaying the amounts advanced by the two Sellers following the closing
of the Acquisition and after completion of the transactions contemplated by the Preferred Stock Purchase Agreement.