The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
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 and Oklahoma. The Company’s main operations are primarily located in the Hunton formation in Lincoln, Logan and
Payne and Okfuskee Counties, in central Oklahoma, the Cline shale and upper Wolfberry shale in Glasscock County, Texas; and Hutchinson
County, Texas.
The accompanying unaudited
interim consolidated financial statements of Camber Energy, Inc. (“Camber” 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 Camber’s
annual report filed with the SEC on Form 10-K for the year ended March 31, 2018. 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 2018 as reported in the
Form 10-K have been omitted.
Effective on January
10, 2018, 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
200,000,000 shares to 500,000,000 shares (the “Amendment”). The Amendment was previously approved by the Company’s
stockholders at the 2018 annual meeting of stockholders held on January 9, 2018.
On March 1, 2018, the
Company filed a Certificate of Amendment to its 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 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 shareholder’s ownership percentage of the Company’s common stock, except to the limited extent that
the reverse stock split resulted in any shareholder 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 Staff Accounting Bulletin (SAB) TOPIC 4C, have been retroactively adjusted to reflect
the reverse split for all periods presented.
NOTE 2 – LIQUIDITY AND GOING
CONCERN CONSIDERATIONS
At June 30, 2018, the
Company’s total current liabilities of $41.9 million exceeded its total current assets of $1.3 million, resulting in a working
capital deficit of $40.6 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 $38.6 million. The $2.0 million increase in
the working capital deficit is primarily due to its loss from operations.
The Company has entered
into the following transactions to address liquidity and going concern issues:
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, the Company 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.
Pursuant to a Letter
Agreement the Company entered into, at the closing of the Acquisition, with RAD2 Minerals, Ltd. (“RAD2”), one of the
Sellers, which is owned and controlled by Richard N. Azar II, the Company’s former Chief Executive Officer and former director.
RAD2 agreed to accept full financial liability for any and all deficiencies between the “Agreed Assets Value” set forth
in the Asset Purchase Agreement of $80,697,710, and the mutually agreed upon value of the assets delivered by the Sellers at the
closing of the Acquisition, up to an aggregate of $1,030,941 (as applicable, the “Deficiency”). The Company accepted
additional oil and gas producing properties and two salt water disposal facilities from the Sellers with an approximate value of
$1.0 million to resolve this Deficiency.
The Asset Purchase Agreement
between the Sellers and the Company relating to the Acquisition included the requirement that, following the closing, the parties
undertake an accounting/true-up of expenses attributable to the assets acquired by the Company and revenue generated from such
assets. A dispute arose between the Sellers and the Company as to the time period which the Company was to be responsible for the
payment of expenses and was to receive the revenue from such assets prior to the closing of the transaction. Specifically, the
Company believed that the agreements provided for it to be responsible for all expenses associated with the assets, and to receive
all revenue generated from the assets, from April 1, 2016, the effective date of the Asset Purchase Agreement, through the closing
date, August 25, 2016. The Sellers on the other hand, which include entities owned by Richard N. Azar, II, the Company’s
then interim Chief Executive Officer, argued that the Company was only responsible for expenses, and was only due to receive revenue
from the assets, beginning on the closing date, August 25, 2016. The difference in the amounts claimed due to the Company from
the parties varied from a high of $1,121,718, which the Company alleged was due, to a low of $342,298, which the Sellers alleged
was due. On July 12, 2018, The Company entered into a Compromise Settlement Agreement and Mutual Release with Segundo (the “Segundo
Settlement”), in partial consideration for N&B Energy agreeing to enter into the Sale Agreement (discussed below). Pursuant
to the Segundo Settlement, Segundo agreed to surrender 15,237 shares of common stock valued at $76.25 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), and to release the Company from any and all claims which Segundo previously alleged was 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. The shares have not been cancelled as of
the date of this Report.
As discussed in
“Note 6 – Notes Payable and Debenture”, the Company borrowed $40 million from International Bank of Commerce
(“IBC” or “IBC Bank”) 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 June 30, 2018 and 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 June 30, 2018 and March 31, 2018. The Company also recognized
approximately $460,000 and $39,000 in accrued interest as of June 30, 2018 and March 31, 2018, respectively related to this note.
On April 6, 2016, the
Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited institutional
investor (the “Investor”), pursuant to which the Company sold and issued a redeemable convertible subordinated debenture,
with a face amount of $530,000, initially convertible into 6,523 shares of common stock (subject to certain conversion premiums)
at a conversion price equal to $81.25 per share and a warrant to initially purchase 55,385 shares of common stock (subject to adjustment
thereunder) at an exercise price equal to $81.25 per share (the “First Warrant”). The Investor purchased the debenture
at a 5.0% original issue discount in the amount of $500,000 and has exercised the First Warrant in full as described below for
the sum of $4.5 million.
Also on April 6, 2016,
the Company entered into a Stock Purchase Agreement with the Investor, pursuant to which the Company agreed, subject to certain
conditions, to issue up to 527 shares of Series C redeemable convertible preferred stock (the “Series C Preferred Stock”)
at a 5% original issue discount, convertible into 64,738 shares of common stock (subject to certain conversion premiums) at a conversion
price of $81.25 per share, and a warrant to initially purchase 44,444 shares of common stock at an exercise price of $112.50 per
share (the “Second Warrant”). Under the terms of the Stock Purchase Agreement, the Second Warrant and 53 shares of
Series C Preferred Stock were sold and issued for $500,000 on September 2, 2016, and the remaining 474 shares of Series C Preferred
Stock were sold and issued for $4.5 million on November 17, 2016.
In July and August 2016,
RAD2 advanced the Company an aggregate of $350,000. Also, in August 2016, two other Sellers advanced the Company an aggregate of
$200,000 ($100,000 each). These advances did not accrue interest and had no stated maturity date. Additionally, in August 2016,
RAD2 loaned the Company $1.5 million pursuant to a promissory note. The promissory note did not accrue interest for the first month
it was outstanding and accrued interest at the rate of 5% per annum thereafter until paid in full. The Company repaid the promissory
note in full and all amounts advanced by RAD2 and the two other Sellers in October 2016.
On October 7, 2016,
the Investor exercised the First Warrant in full and was due 55,385 shares of common stock upon exercise thereof and an additional
101,709 shares of common stock in consideration for the conversion premium due thereon. A total of 32,400 shares were issued to
the Investor on October 7, 2016, with the remaining shares being held in abeyance until such time as it would not result in the
Investor exceeding its beneficial ownership limitation (4.99% of the Company’s outstanding common stock). The Company received
gross proceeds of $4,500,000 from the exercise of the First Warrant and paid placement agent fees of $427,500 for services rendered
in connection with the First Warrant. Pursuant to the terms of the First Warrant, the number of shares due in consideration for
the conversion premium increases as the annual rate of return under the First Warrant increases, including by 10% upon the occurrence
of certain triggering events (which had occurred by the October 7, 2016 date of exercise), to 17% per annum upon the exercise of
the First Warrant.
An aggregate of 4,417,911
shares of common stock were issued to the Investor in connection with the exercise of the Warrant during fiscal 2017 (200,000),
2018 (3,909,500), and 308,411 shares were issued in April 2018. The First Warrant has been fully-exercised and extinguished to
date.
On August 13, 2013,
the Company entered into a $7.5 million Letter Loan Agreement with Louise H. Rogers (“Rogers” and such loan, as amended
from time to time, the “Rogers Loan”). As a result of various extensions and amendments thereto the Rogers Loan was
due and payable on July 31, 2017. The loan was not paid when due and the cure period on the Rogers Loan expired on September 11,
2017. On such date, all principal, interest and unpaid costs thereunder were immediately due and payable (which totaled approximately
$9.4 million as of the date of acceleration which amount included $2.1 million of default interest). Prior to the default, CATI
Operating, LLC (“CATI”), the Company’s wholly-owned subsidiary and obligor under the loan, had not recorded interest
due on the note based on its earlier agreements. As a result of the default, demand and acceleration, CATI recorded the default
interest demand of $2.1 million in the three month period ended December 31, 2017. In September 2017, Rogers foreclosed on the
assets of CATI which 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.
On December 15, 2017,
CATI entered into a Release of Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and Fixture Filing
(the “Release”) with Rogers. Pursuant to the Release, the Company completed a transaction in which CATI provided Rogers,
pursuant to an Assignment of Overriding Royalty Interest (the “Royalty Assignment”), with an overriding royalty (equal
to 0.01 of 8/8ths of all oil and gas) on CATI’s remaining leasehold and Rogers released CATI from all remaining indebtedness
owed. The Release, which was filed in various counties in Texas on January 22, 2018 and January 23, 2018, discharged approximately
$5.8 million in principal and interest outstanding and owed to Rogers, according to Rogers. The effective date of the Release was
December 15, 2017. Additionally, the remaining leasehold and ownership of CATI was assigned to Arkose Lease Partners, LLC, a third
party (“Arkose”), pursuant to an Assignment of Membership Interest (the “Assignment”), dated 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 Alan Dreeben, then one of the Company’s directors, pursuant to a short-term promissory
note. The short-term promissory note had a principal balance of $1,050,000 (the $1,000,000 principal amount borrowed plus a $50,000
original issue discount), accrues interest at 6% per annum and a maturity date of January 31, 2018, with standard and customary
events of default. As additional consideration for Mr. Dreeben agreeing to make the loan, the Company agreed to issue Mr. Dreeben
1,600 shares of restricted common stock. On November 9, 2017, in connection with the sale of oil and gas properties totaling approximately
2,452 acres in Gaines County, Texas (part of the Company’s the Jackrabbit Acreage), the Company repaid Mr. Dreeben the full
amount due on the short-term promissory note of $1,050,000. See Note 4 “Property and Equipment” for further details.
On March 9, 2017, the
Company borrowed $250,000 from a non-related individual pursuant to a short-term promissory note. The short-term promissory note
had a principal balance of $263,158 (the $250,000 principal amount borrowed plus a $13,158 original issue discount), accrued interest
at 6% per annum, had a maturity date of March 9, 2018 and contained standard and customary events of default. As additional consideration
for agreeing to make the loan, the Company agreed to issue the lender 400 restricted shares of common stock. On November 9, 2017,
in connection with the sale of the Jackrabbit Acreage, the Company paid the non-related individual the full amount due on the short-term
promissory note of $263,158. See Note 4 “Property and Equipment” for further details.
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, with $400,000 provided in the initial tranche (the “Initial Tranche”). The consideration for the Initial
Tranche of funding was the assignment to Vantage of all of the Company’s rights and ownership in its then wholly-owned subsidiary
Camber Permian II, LLC (“Camber Permian”), which included leaseholds and potential participation rights in undeveloped
oil and gas property known as Arrowhead. The Vantage Agreement contained customary indemnification requirements. On July 17, 2017,
Vantage provided $120,000 to the Company under the Vantage Note and on July 20, 2017, Vantage provided $30,000 to the Company under
the Vantage Note. Vantage was granted a second lien on the Jackrabbit property in connection with the financing. On November 9,
2017, in connection with the sale of the Jackrabbit Acreage, the Company paid Vantage the full amount due on the Vantage Note of
$150,000.
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, 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 (“N&B Energy”). 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 is owned and controlled
by Mr. Azar, and other sellers, and certain other more recent acquisitions, other than the production payment and overriding royalty
interests discussed below (the “Assets”). In consideration for the 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 has an outstanding principal balance of approximately $36.9 million as of the filing of these financial statements and Segundo
agreed to enter into the Segundo Settlement, described below.
Per the agreement terms,
the Company will retain its assets in Glasscock County and Hutchinson Counties, Texas, and will also retain 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 will retain
an overriding royalty interest on certain other undeveloped
leasehold interests
.
The parties currently
anticipate the closing of the acquisition, which is subject to various closing conditions, including those described below, to
occur in September 2018, and to be effective as of the first day of the month preceding the month of closing. The Assets will
be assigned “as is” with all faults.
The Board of Directors
of the Company has (i) adopted and declared advisable the Sale Agreement and the transactions contemplated by the Sale Agreement,
upon the terms and subject to the conditions set forth in the Sale Agreement; and (ii) determined that the Sale Agreement and the
transactions contemplated by the Sale Agreement are fair to, and in the best interests of, the Company and its stockholders.
The sale is subject
to customary closing conditions, including (1) the approval of IBC and entry into assumption agreements between IBC, the Company,
N&B Energy and the guarantors of the Company’s IBC debt to provide for among other things, the release of the Company
from any and all obligations owed under such debt and related releases; (2) receipt of required regulatory approvals; (3) the absence
of any law or order prohibiting the consummation of the acquisition; and (4) satisfaction of due diligence by N&B Energy. Each
party’s obligation to complete the acquisition is also subject to certain additional customary conditions, including (a)
subject to certain exceptions, the accuracy of the representations and warranties of the other parties, and (b) performance in
all material respects by the other parties of its obligations under the Sale Agreement.
Segundo Settlement Agreement
On
July 12, 2018, the Company entered into a Compromise Settlement Agreement and Mutual Release with Segundo (the “Segundo Settlement”),
in partial consideration for N&B Energy agreeing to enter into the Sale Agreement. Pursuant to the Segundo Settlement, Segundo
agreed to surrender to
t
he Company 15,237 shares of common stock
valued at $76.25 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), and to release
t
he
Company from any and all claims which Segundo previously alleged were owed under the terms of the December 31, 2015 Asset Purchase
Agreement.
t
he Company and Segundo also provided each other full
releases in connection with the December 31, 2015 Asset Purchase Agreement, and Segundo agreed to indemnify
t
he
Company and hold it harmless against any claims made by the other sellers under the December 31, 2015 Asset Purchase Agreement.
The shares have not been cancelled as of the filing of these financial statements.
IBC Bank Standstill Agreement
On August 3, 2018, the
Company entered into an agreement in connection with the loan (the “Standstill Agreement”) with IBC Bank, which was
effective August 1, 2018. The Company is a party to the loan from IBC Bank (the “Loan”) as evidenced by a Real Estate
Lien Note dated August 25, 2016 (the “Note”) in the original principal amount of $40,000,000 (which has an outstanding
principal balance of approximately $36.9 million as of the filing of these financial statements), entered into pursuant to the
Loan Agreement dated August 25, 2016 (the “Loan Agreement” and together with the Note, and the other documents entered
into evidencing, documenting and securing the Loan, the “Loan Documents”), by and among IBC Bank and the Company.
Among other terms, described
below, the Standstill Agreement was entered into to provide the Company sufficient time to close the transactions contemplated
by the Sale Agreement. Pursuant to the Standstill Agreement:
|
(a)
|
The Company confirmed that certain defaults had occurred under the terms of the Loan Documents;
|
|
(b)
|
The Company, on behalf of it and its representatives, provided IBC Bank a release of all claims
which it and such parties may have had as of the date of the Standstill Agreement;
|
|
(c)
|
The Company agreed to certain venue requirements in connection with any bankruptcy proceeding the
Company may file or have filed against it in the future, agreed to waive certain automatic stays provided under applicable bankruptcy
law and confirmed IBC Bank’s security interests;
|
|
(d)
|
IBC Bank agreed to stand still and not take any action to collect the indebtedness evidenced by
the Loan Documents, prior to the earlier of (i) September 30, 2018, unless the closing date of the Sale Agreement is required to
be extended due to no fault of the Company, due to the regulatory requirements of the Securities and Exchange Commission and/or
NYSE American, in which case such date shall be automatically extended to no later than October 31, 2018, unless extended by both
parties; or (ii) a default of the conditions of the stand still as set forth in the Standstill Agreement (collectively, the “Standstill
Date”);
|
|
(e)
|
The Company agreed to certain conditions to the standstill (all of which have been completed as of the date of this filing), including:
|
|
(i)
|
Depositing all funds in excess of $5,000 with IBC Bank by 5:00 p.m. on Tuesday, August 7,
2018 (the “Deadline”);
|
|
(ii)
|
The Company pledging to IBC Bank prior to the Deadline, 87.5% of all of the Company’s right,
title and interest to its assets located in Okfuskee County, Oklahoma and all wells, leasehold, mineral and surface interest, personal
property, and all other property or assets located on or associated with said field owned by the Company that were recently purchased
from Orion Energy (with the remaining 12.5% to be pledged to IBC Bank prior to the closing date of the Sale Agreement);
|
|
(iii)
|
Paying all of IBC Bank’s expenses and reasonable attorney fees in connection with the Note
prior to the Deadline;
|
|
(iv)
|
Paying the June 2018 interest on the Note prior to the Deadline;
|
|
(v)
|
Paying the July 2018 interest on the Note prior to the Deadline;
|
|
(vi)
|
Agreeing to certain covenants and restrictions regarding the assets securing the Loan Documents
during the stand still period; and
|
|
(vii)
|
Confirming that during the stand still period, the per annum interest rate of the Note will be
3% above the New York Prime Rate, subject to a floor of 5.5% per annum, with a beginning interest rate of 8% per annum.
|
|
(f)
|
IBC Bank agreed to allow the Company to undertake the transactions contemplated by the Sale Agreement,
subject to the terms of the Standstill Agreement;
|
|
(g)
|
IBC Bank agreed, that if the Company is ready, willing and able to close the transactions contemplated
by the Sale Agreement, but N&B Energy is not ready to close such transaction, on or before the Standstill Date (as extended),
that it could surrender the assets planned to be sold pursuant to the Sale Agreement to IBC Bank (which may be undertaken pursuant
to a foreclosure of such assets); and
|
|
(h)
|
That upon the closing of the transactions contemplated by the Sale Agreement or the surrender of
such assets proposed to be sold pursuant to such Sale Agreement to IBC Bank (as discussed in (g) above), IBC Bank would pursue
only the assets sold/surrendered, N&B Energy (if applicable) and the guarantors of the debt; enter into a novation and release
in favor of the Company; and not pursue the Company for any deficiency in the amounts due under the Loan Documents, in each case
subject to the terms and conditions of the Standstill Agreement.
|
Pursuant to both the
Sale Agreement and the Standstill Agreement, upon the closing of the sale (as to the Sale Agreement) or assignment (pursuant to
the Standstill Agreement), the Company will retain its assets in Glasscock and Hutchinson Counties, Texas, and will also retain
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 will retain
an overriding royalty interest on certain
other undeveloped leasehold interests
.
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 shareholder 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.
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 shareholder approval, and because such shareholder approval is not required
pursuant to applicable law or the rules of the NYSE American, the Company’s management has determined to not seek shareholder
approval, but to instead seek a third-party opinion as to the fairness of the transaction to the Company’s shareholders,
which has not been obtained as of the filing of this report.
In addition to the transactions
noted above, the Company is currently discussing potential financing transactions in order to fulfill its current capital requirements
as well as its planned asset disposition, which the Company believe, if finalized and completed, will ensure the future viability
of the Company. However, due to its 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 the Company is unable to obtain the necessary financing to
develop its proved undeveloped reserves (“PUDs”); and acquire additional assets; the Company believes that its revenues
will continue to decline over time. Therefore, the Company may be forced to scale back its business plan, sell assets to satisfy
outstanding debts or take other remedial steps which may include seeking bankruptcy protection.
These conditions raise
substantial doubt about the Company’s ability to continue 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.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Company has provided
a discussion of significant accounting policies, estimates and judgments in its March 31, 2018 Annual Report on Form 10-K. There
have been no changes to the Company’s significant accounting policies since March 31, 2018 which are expected to have a material
impact on the Company’s financial position, operations or cash flows.
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 our consolidated statements of cash flows for the three months ended
June 30, 2017:
|
|
Previously Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Net cash provided by (used in) financing activities
|
|
$
|
(17,266
|
)
|
|
$
|
(690,588
|
)
|
|
$
|
(707,854
|
)
|
As of June 30, 2018
and March 31, 2018, the Company had restricted cash of $217,914 and $26,834 related to the loan agreement with IBC bank.
Following is a summary
of cash and cash equivalent and restricted cash at June 30, 2018 and March 31, 2018:
|
|
June 30,
2018
|
|
|
March 31,
2018
|
|
Cash
|
|
$
|
420,665
|
|
|
$
|
760,317
|
|
Restricted cash – current
|
|
|
217,914
|
|
|
|
26,834
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
638,579
|
|
|
$
|
787,151
|
|
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.
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
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.
NOTE 4 – PROPERTY AND EQUIPMENT
Oil and Gas Properties
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.
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 $4.36 and $5.74 per barrel of oil equivalent for the three months ended June 30, 2018 and 2017, respectively.
All of Camber’s
oil and gas properties are located in the United States. Below are the components of Camber’s oil and gas properties recorded
at:
|
|
June 30,
2018
|
|
|
March 31,
2018
|
|
Oil and gas properties subject to amortization
|
|
$
|
62,271,748
|
|
|
$
|
60,760,056
|
|
Oil and gas properties not subject to amortization
|
|
|
28,013,365
|
|
|
|
28,016,989
|
|
Capitalized asset retirement costs
|
|
|
326,412
|
|
|
|
322,470
|
|
Total oil and gas properties
|
|
|
90,611,525
|
|
|
|
89.099,515
|
|
Accumulated depreciation, depletion and amortization
|
|
|
(77,411,683
|
)
|
|
|
(76,555,320
|
)
|
Net capitalized costs
|
|
$
|
13,199,842
|
|
|
$
|
12,544,195
|
|
Impairment
For the three months
ended June 30, 2018, the Company recorded impairments totaling $531,657 which were due to lease expirations. For the three months
ended June 30, 2017, the Company recorded impairments totaling $775,374, which represented $675,000 due to lease expirations and
$100,374 related to an impairment of proved properties based on the quarterly ceiling test.
Disposition of Oil and Natural
Gas Properties
On August 2, 2017, the
Company entered into an agreement with Vantage (as discussed above), pursuant to which among other things, the Company assigned
its interest in the undeveloped Arrowhead oil and gas property, with a book value of $114,500, to Vantage (see further discussion
of these warrants in Note 11).
In September 2017, Rogers
foreclosed on the assets of CATI which secured the Rogers Loan. 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. 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 asset retirement obligation
(“ARO”).
On December 15, 2017,
CATI provided Rogers with an overriding royalty (equal to 0.01 of 8/8ths of all oil and gas) on CATI’s remaining leasehold
and Rogers released CATI from all remaining indebtedness owed. The release discharged approximately $5.8 million in principal and
interest outstanding and owed to Rogers. Additionally, the remaining leasehold and ownership of CATI was assigned to Arkose Lease
Partners, LLC, a third party (“Arkose”), pursuant to an Assignment of Membership Interest (the “Assignment”),
dated November 1, 2017, in exchange for Arkose’s assumption of all plugging and abandonment liabilities of CATI. 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 Company paid NFP $662,072 to terminate the joint
venture agreement and the property sold had a net book value of $817,110. The transaction resulted in a $727,732 gain which was
included in Loss on Sale of Property and Equipment on the statement of operations. This acreage, part of the Company’s “Jackrabbit”
acreage, targeted the San Andres formation in the Permian Basin. Additionally, the Company and NFP jointly terminated their
venture. With the proceeds from the sale, the Company paid the first lien holders including Alan Dreeben (a former director
of the Company) and second lien holder Vantage. The Company maintains a 90% ownership position in the remaining approximately 1,200
acres in the area.
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 520,387
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”) 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.
The following tables
summarize the purchase price and allocation of the purchase price to the net assets acquired in connection with the Acquisition:
Purchase Price on August 25, 2016:
|
|
Consideration Given
|
|
Fair value of common stock issued
|
|
$
|
49,176,530
|
|
Fair value of Series B Preferred Stock issued
|
|
|
14,898,038
|
|
Assumption of debt
|
|
|
30,595,256
|
|
Cash at Closing
|
|
|
4,975,000
|
|
Total purchase price
|
|
$
|
99,644,824
|
|
|
|
Net
Assets Acquired
|
|
Accounts
receivable
|
|
$
|
635,482
|
|
Total
current assets acquired
|
|
|
635,482
|
|
|
|
|
|
|
Oil
and gas properties
|
|
|
50,774,684
|
|
Total
assets acquired
|
|
|
51,410,166
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
|
(755,862
|
)
|
Total
liabilities acquired
|
|
|
(755,862
|
)
|
|
|
|
|
|
Net
assets acquired
|
|
|
50,654,304
|
|
|
|
|
|
|
Impairment
of oil and gas properties
|
|
|
48,990,520
|
|
|
|
|
|
|
Total
Purchase Price
|
|
$
|
99,644,824
|
|
The proceeds from the $40 million loan
from IBC were as follows:
|
|
Use of Proceeds
|
|
Assumption of debt
|
|
$
|
30,595,256
|
|
Cash funding (paid at closing)
|
|
|
4,975,000
|
|
Loan Commitment fee (paid at closing)
|
|
|
200,000
|
|
Lien Payoff (paid at closing)
|
|
|
72,657
|
|
Restricted cash (received at closing)
|
|
|
3,360,000
|
|
Cash (received at closing)
|
|
|
797,087
|
|
Debt payable after closing
|
|
$
|
40,000,000
|
|
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 interests 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, the last two 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 49 non-producing well bores, 5 saltwater disposal wells and the required infrastructure and equipment
necessary to support future hydrocarbon production, as well as approximately 500 net leasehold acres in Hutchinson County, Texas.
N&B Energy Asset Disposition
Agreement
On July 12, 2018, the
Company entered into an Asset Purchase Agreement described in greater detail above under “Note 2 – Liquidity and Going
Concern Considerations” – “N&B Energy Asset Disposition Agreement”.
Segundo Settlement Agreement
Also on July 12, 2018,
the Company entered into a Compromise Settlement Agreement and Mutual Release with Segundo described in greater detail above under
“Note 2 – Liquidity and Going Concern Considerations” – “Segundo Settlement Agreement”.
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
is included in accrued expenses as of June 30, 2018. The effective borrowing rate is approximately 35%, and all obligations are
due by December 2018.
Other Property and Equipment
In February 2014, the
Company purchased a field office for approximately $50,000 which is used to provide local operational support for its properties
in the Eagleford and Austin Chalk areas. The land upon which the field office resides was initially leased by the Company over
a three-year term beginning in January 2014 through December 2016, for yearly lease amounts of $7,200 and $7,800, and $8,400 over
the three-year term, respectively. In January 2017, the Company renewed the lease on a year-to-year basis for $7,200. The field
office was transferred as a part of the Release with Rogers. See Note 6 “Notes Payable and Debenture” for further details.
Office Lease
On
April 1, 2016, the Company entered into a lease agreement pursuant to which the Company agreed to lease 4,439 square feet of office
space at 450 Gears Road, Houston, Harris County, Texas 77067 (Suite 860, versus Suite 780 as was leased previously). The lease
had a 65-month term (through August 2021), and commenced on April 1, 2016. The monthly rental cost under the lease was -$0- for
the month of April 2016, and $7,676 for the months of May 2016 through April 2017, plus as applicable, its pro rata share of operating
expenses and taxes which exceed the total operating expenses and taxes of the property for the first year of the lease. On March
31, 2017, the Company amended its lease at 450 Gears Road to expand to a total of 6,839 square feet, commencing on May 1, 2017.
The amendment extended the lease period to November 2021.
In
August 2017, the Company ceased its use of this office space and moved its headquarters to San Antonio, Texas. The Company is 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 June 30, 2018 and March 31, 2018, the remaining carrying amount of the liability of $214,862 and $226,972, respectively,
was included in accrued expenses on the Company’s balance sheet. 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.
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, who resigned as Interim CEO effective May 25, 2018 and resigned as a member of the Board of
Directors on June 21, 2018. Monthly rent for October through December 2017 was $5,000 per month, increasing to $7,500 per
month effective January 2018. The agreement was subsequently modified to have a month-to-month term at $2,500 per month,
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.
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 periods ended June 30, 2018 and 2017, respectively.
|
|
2018
|
|
|
2017
|
|
Carrying amount at beginning of period
|
|
$
|
979,159
|
|
|
$
|
2.045,847
|
|
Accretion
|
|
|
2,264
|
|
|
|
35,100
|
|
Change in estimate
|
|
|
3,942
|
|
|
|
(9,945
|
)
|
Carrying amount at end of period
|
|
$
|
985,365
|
|
|
$
|
2,071,002
|
|
Camber does not have any short-term asset
retirement obligations as of June 30, 2018 and March 31, 2018.
NOTE 6 – NOTES PAYABLE AND DEBENTURE
The Company’s notes payable and debenture
consisted of the following:
|
|
June 30,
2018
|
|
|
March 31,
2018
|
|
Debenture
|
|
$
|
495,000
|
|
|
$
|
495,000
|
|
Note Payable - IBC
|
|
|
36,943,617
|
|
|
|
36,943,617
|
|
|
|
|
37,438,617
|
|
|
|
37,438,617
|
|
Unamortized debt discount
|
|
|
(1,246,938
|
)
|
|
|
(1,499,647
|
)
|
Total Notes Payable and Debenture
|
|
|
36,191,679
|
|
|
|
35,938,970
|
|
Less current portion
|
|
|
(36,191,679
|
)
|
|
|
(35,938,970
|
)
|
Long-term portion
|
|
$
|
—
|
|
|
$
|
—
|
|
Debenture
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 6,523 shares of
common stock at a conversion price equal to $81.25 per share and warrants to initially purchase 55,385 shares of common stock
(subject to adjustment thereunder) at an exercise price equal to $81.25 per share (the “First Warrant”). The
Investor purchased the debenture at a $30,000 original issue discount for the sum of $500,000 and agreed that it would
exercise the First Warrant, upon satisfaction of certain conditions, for the sum of $4.5 million, which warrant was exercised
in October 2016. The debenture matures in seven years and accrues interest at a rate of 6.0% per annum. Due to the decline in
the price of the Company’s common stock and that a trigger event occurred on June 30, 2016 as a result of the delay in
filing of its 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 $0.10
per share of common stock not to exceed 85% of the lowest sales price on the last day of such period less $0.10 per
share.
As the fair value of
the warrants issued in connection with the debenture exceeded the $530,000 value of the debenture, the Company 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.
On August 23, 2017,
the Investor converted $35,000 of the principal amount of the Debenture into an aggregate of 70,189 shares of common stock, which
included 431 shares for conversion of principal (at $81.25 per share) and 69,758 shares for premiums.
On April 20, 2018, the
Investor was issued 141,982 as a result of true-ups in connection with the August 23, 2017 conversion of the Debenture.
As of June 30, 2018
and March 31, 2018, the Company had a convertible subordinated debenture with a balance of $271,153 and $247,403, respectively
(net of unamortized discount of $223,847 and $247,597, respectively), which is recognized as a short-term liability on the Company’s
balance sheets as of June 30, 2018 and March 31, 2018, respectively. The Company also recognized $380,143 and $388,183 in accrued
interest as of June 30, 2018 and March 31, 2018, respectively.
Loan Agreement with International Bank
of Commerce (“IBC” or “IBC Bank”)
On August 25, 2016,
the Company, as borrower, and Richard N. Azar II, our former Chief Executive Officer and former director, and who also received
the largest number of securities and cash in connection with the closing of the Acquisition (“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), and IBC, 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 is required to make monthly payments under the note equal to the greater of (i) $425,000; and (ii) fifty
percent (50%) of the Company’s monthly net income. The note accrues annual interest at 2% above the prime rate then in
effect, subject to a minimum interest rate of 5.5% per annum. The note is due and payable on August 25, 2019. Payments under
the note are subject to change as the interest rate changes in order to sufficiently amortize the note in 120 monthly
installments. The Company has the right, from time to time and without penalty to prepay the note in whole or in part,
subject to the terms thereof.
The proceeds of the
loan were used to repay and refinance approximately $30.6 million of indebtedness owed by certain of the Sellers, to the Lender
(including an aggregate of $18.3 million owed by RAD2 and another entity controlled by Mr. Azar, $9.8 million owed by DBS, and
$2.1 million owed by Mr. Menchaca), as well as to pay the $4.975 million due to the Sellers at closing. Another $3.36 million was
used to fund a sinking fund required by the Lender, as discussed below, to pay principal on the note.
The amount owed under
the note is secured by a Security Interest in substantially all of the Company’s assets and properties, pursuant to three Security Agreements.
Also, each of the Guarantors guaranteed the repayment of a portion of the Loan Agreement pursuant to a Limited Guaranty Agreement.
Additionally, in connection with the parties’ entry into the Loan Agreement and to further secure amounts due thereunder,
certain of the Guarantors pledged shares of common stock which they received at the closing to the Lender, with RAD2 pledging 124,824
shares of common stock; DBS pledging 37,437 shares of common stock; and Saxum pledging 26,936 shares of common stock.
The Company agreed to
pay the Lender a loan finance charge of $400,000 in connection with its entry into the Loan Agreement, with half due on the date
the Company entered into the Loan Agreement and half due on or before the 180th day following the date of the Loan Agreement. As
further consideration for agreeing to the terms of the Loan, the Company agreed to issue the Lender 15,612 shares of common stock.
The Company recognized a $2.8 million note discount related to these transactions and other debt issuance costs and will amortize
the discount and debt issuance costs over the term of the note.
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.
The IBC loan is secured
by substantially all of the Company’s assets and if IBC were to foreclose on the Company’s assets it would have a material adverse
effect on its operations and may force the Company to seek bankruptcy protection.
As of June 30,
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 $1.0 million and $1.3 million at June 30, 2018 and March 31, 2018,
respectively), was recognized as a short-term liability on the Company’s balance sheets as of June 30, 2018 and March 31,
2018. The Company also recognized approximately $460,000 and $39,000 in accrued interest as of June 30, 2018 and March 31, 2018,
respectively, related to this note.
NOTE 7 – DERIVATIVES
The Company has determined
that certain warrants the Company has granted 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 in April 2014 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 three months ended June 30, 2018 and 2017 were as follows:
|
|
2018
|
|
|
2017
|
|
Carrying amount at beginning of period
|
|
$
|
5
|
|
|
$
|
21,662
|
|
Change in fair value
|
|
|
—
|
|
|
|
(15,171
|
)
|
Carrying amount at end of period
|
|
$
|
5
|
|
|
$
|
6,491
|
|
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 June 30, 2018 include (1) discount rate of 1.91%, (2) expected term of .81 years, (3) expected volatility of 145.70%, and (4)
zero expected dividends. Variables used in the Black-Scholes pricing model as of June 30, 2017 include (1) discount rate of 1.24%,
(2) expected term of 2 years, (3) expected volatility of 179.15%, and (4) zero expected dividends.
As of June 30, 2018,
the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company entered into multiple office lease agreements, see detail under “Note 4 - Property and Equipment” - “Office
Leases”.
The Company’s
oil and gas lease acreage is subject to expiration if the Company does not drill and hold such acreage by production or exercise
options to extend such leases. At March 31, 2018, the Company had 423 acres of unproved lease acreage that is set to expire during
fiscal year 2019 unless drilled or otherwise extended by the Company. During the quarter ended June 30, 2018, leases for 191 unproved
acres expired and a resulting impairment of approximately $532,000 was recognized, leaving 251 acres remaining.
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 shareholder 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.
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 78,409 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 during the year ended March 31, 2018.
Employment
Agreement.
Effective November 1, 2012, the Company entered into an Employment Agreement with Anthony C. Schnur to serve as
the Chief Financial Officer of the Company, which agreement was amended and restated effective December 12, 2012, in connection
with his appointment as Chief Executive Officer. The agreement had a term of two years, expiring on October 31, 2014, provided
that the agreement was automatically extended for additional one year terms, unless either party provided notice of their intent
not to renew within the 30-day period prior to any automatic renewal date, and as neither party provided notice of their intent
to terminate in fiscal 2015 or 2016, the agreement automatically extended for an additional one year term until October 31, 2016
and October 31, 2017, respectively, notwithstanding the termination of the agreement in connection with Mr. Schnur’s resignation
on June 2, 2017, as discussed below. The Company agreed to pay Mr. Schnur a base annual salary of $310,000 during the term of the
agreement, of which $290,000 is payable in cash and $20,000 is payable in shares of the Company’s common stock. The stock
consideration due under the agreement is payable in quarterly installments at the end of each quarter, based on the stock price
on the last day of each quarter. Mr. Schnur is also eligible for an annual bonus of up to 30% of his base salary in cash or stock.
The
Employment Agreement was terminated in connection with Mr. Schnur’s resignation as Chief Executive Officer and director
of the Company effective on June 2, 2017. In connection with the departure of Mr. Anthony C. Schnur as Chief Executive
Officer and director of the Company effective June 2, 2017, the Company entered into a Severance Agreement and Release with
Mr. Schnur (the “Release”), whereby (i) his employment agreement with the Company was terminated, (ii) he entered
into a mutual release with the Company; (iii) the Company agreed to issue him 4,800 shares of unregistered common stock (to
be issued in installments of 400 per month) (the “Settlement Shares”) and a monthly cash payment of $14,000 for
twelve months; and (iv) he was granted reimbursement of the payment of his COBRA premiums through (a) the one year
anniversary of the termination or (b) until he is eligible to participate in the health insurance plan of another employer,
whichever is sooner, and provided that the amount of such health benefits shall reduce his monthly cash payment. On January
11, 2018, and effective as of the original date of the Release, the Company and Mr. Schnur entered into the First Amendment
to the Severance Agreement and Release (the “Release Amendment”), whereby the terms of the Release were changed
to provide for among other things, the payment of $49,000 on or before January 12, 2018; $15,000 on or before the 15th of
each month from February 2018 to July 2018; and $19,000 on or before August 15, 2018, and further provided for the issuance
of the entire amount of the Settlement Shares within five days of the later of the date the Company’s
stockholders approved the issuance of the Settlement Shares and the date the NYSE American approved the issuance of such
shares. The payments owed as of June 30, 2018 and March 31, 2018 of $34,025 and $79,025, respectively, have been accrued and
included in accrued expenses on the balance sheet. The Settlement Shares were issued in February 2018.
Severance Agreement
Effective on May
25, 2018, Richard N. Azar II resigned as Chief Executive Officer of the Company. Effective on the same date, the Company
entered into a Separation and Release Agreement (the “Separation Agreement”) with Mr. Azar, the Company’s
former Chief Executive Officer. Pursuant to the Separation Agreement, Mr. Azar agreed to resign from the Company as Chief
Executive Officer effective May 25, 2018, and to release 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, payable in three installments of
$50,000 for a period of five years each, on June 1, 2018, July 2, 2018 and August 1, 2018, and to grant him warrants to purchase
1,000,000 shares of the Company’s common stock, at an exercise price of $0.39 per share,
equal to the closing stock price of the Company’s common stock on the date the Severance Agreement was agreed to by the
parties, the exercise of which warrants are subject to approval by the NYSE American of the additional listing of the shares
of common stock issuable upon exercise thereof, and to the extent required by the rules of the NYSE American, the approval of
the shareholders of the Company of the issuance of the shares of common stock issuable upon exercise thereof.
Segundo Settlement Agreement
Also on July 12, 2018,
the Company entered into a Compromise Settlement Agreement and Mutual Release with Segundo described in greater detail above under
“Note 2 - Liquidity and Going Concern Considerations” - “Segundo Settlement Agreement”.
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.
Disaggregation of Revenue from Contracts
with Customers
The
following table disaggregates revenue by significant product type for the three months ended June 30, 2018:
Oil sales
|
|
$
|
200,069
|
|
Natural gas sales
|
|
|
473,513
|
|
Natural gas liquids sales
|
|
|
1,021,114
|
|
Total revenue from customers
|
|
$
|
1,694,696
|
|
There
were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of June
30, 2018 or March 31, 2018.
NOTE 10 – INCOME TAXES
The
Company has estimated that its effective tax rate for U.S. purposes will be zero for the 2019 and 2018 fiscal years as a result of net losses and a full valuation allowance against the net deferred tax assets. Consequently, the Company
has recorded no provision or benefit for income taxes for the three months ended June 30, 2018 and 2017.
NOTE 11 – STOCKHOLDERS’ DEFICIT
Common Stock
On January 10, 2018,
the Company amended its Articles of Incorporation to increase the number of authorized shares of common stock from 200,000,000
shares to 500,000,000 shares.
On April 4, 2017,
the Company paid the required quarterly dividend on the Series B Preferred Stock by way of the issuance of 2,366 shares of
the Company’s common stock to the preferred shareholders at a fair market value of $34,896, based on the closing price of the
Company’s common stock ($14.75 per share) on March 31, 2017. The beneficial owners of the Series B Preferred Stock were
Richard N. Azar, II, the Company’s former Interim Chief Executive Officer and director, and Alan Dreeben, the
Company’s former director.
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 40,998 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 70,189 shares of common stock, which
included 431 shares for conversion of principal (at $81.25 per share) and 69,758 shares for premiums.
On April 20, 2018, the
Investor was issued 141,982 as a result of true-ups in connection with the August 23, 2017 conversion of the Debenture.
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) 150,000 shares of restricted common stock, with 100,000 shares payable within 15 days
of the parties’ entry into the agreement and the remainder due on May 1, 2018. As of
June 30, 2018, the remaining shares have not been issued and an accrual of $200,000 has been accrued based on the May 2018 due
date.
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
40,000 shares of restricted common stock, with piggy-back registration rights.
In October 2017, the
Company agreed to reimburse entities owned in part by Alan Dreeben, a former director of the Company, for legal fees expended by
such entities 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 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 78,409
shares of common stock with an agreed value of $5.00 per share in November 2017.
As of March 31,
2018, the 408,508 outstanding shares of Series B Preferred Stock had accrued an aggregate of $606,764 in dividends.
The beneficial owners of the Series B Preferred Stock are Richard N. Azar, II, the Company’s former Chief Executive
Officer and former director, and Alan Dreeben, the Company’s former director.
As of June
30, 2018, the 408,508 outstanding shares of Series B Preferred Stock had accrued $877 in dividends. The Company plans to
pay the dividends by way of the issuance of an aggregate of 1,753 shares of its common stock to the preferred
shareholders pursuant to the terms of the designation (which provides that the Shares shall be based on a value of $87.50 per
share). The beneficial owners of the Series B Preferred Stock are Richard N. Azar, II, the Company’s former Chief
Executive Officer and former director, and Alan Dreeben, the Company’s former director. To date the accrued dividend
outstanding as of June 30, 2018 has not been paid.
In connection with the
departure of Mr. Anthony C. Schnur as Chief Executive Officer and director of the Company effective June 2, 2017, the Company entered
into a Severance Agreement and Release with Mr. Schnur, whereby (i) his employment agreement with the
Company was terminated, (ii) he entered into a mutual release with the Company; (iii) the Company agreed to issue him 4,800 shares
of unregistered common stock (to be issued in installments of 480 per month) and a monthly
cash payment of $14,000 for twelve months; and (iv) he was granted reimbursement of the payment of his COBRA premiums through (a)
the one year anniversary of the termination or (b) until he is eligible to participate in the health insurance plan of another
employer, whichever is sooner, and provided that the amount of such health benefits shall reduce his monthly cash payment. On January
11, 2018, and effective as of the original date of the Release, the Company and Mr. Schnur entered into the First Amendment to
the Severance Agreement and Release, whereby the terms of the Release were changed to provide
for among other things, the payment of $49,000 on or before January 12, 2018; $15,000 on or before the 15th of each month from
February 2018 to July 2018; and $19,000 on or before August 15, 2018, and further provided for the issuance of the entire amount
of the Settlement Shares within five days of the later of the date the Company’s stockholders approved the issuance of the
Settlement Shares and the date the NYSE American approved the issuance of such shares. The Settlement Shares were issued in February
2018.
On October 7,
2016, the Investor exercised the First Warrant in full and was due 55,385 shares of common stock upon exercise thereof and an
additional 101,710 shares of common stock in consideration for the conversion premium due thereon. A total of 32,400 shares
were issued to the Investor on October 7, 2016, with the remaining shares being held in abeyance until such time as it would
not result in the Investor exceeding its beneficial ownership limitation (4.99% of the Company’s outstanding common
stock). The Company received gross proceeds of $4,500,000 from the exercise of the First Warrant and paid placement agent
fees of $427,500 for services rendered in connection with the First Warrant. Pursuant to the terms of the First Warrant, the
number of shares due in consideration for the conversion premium increases as the annual rate of return under the First
Warrant increases, including by 10% upon the occurrence of certain triggering events (which had occurred by the October 7,
2016 date of exercise), to 17% per annum upon the exercise of the First Warrant. Additionally, as the conversion rate for the
conversion premium is currently 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 period less $0.10 per share,
the number of shares issuable in connection with the conversion premium increases as the trading price of the
Company’s common stock decreases, and the trading price of the Company’s common stock has decreased since the date the First
Warrant was exercised, triggering a further reduction in the conversion price of the conversion premium and an increase in
the number of shares due to the Investor in connection with the conversion of the amount owed in connection with the
conversion premium. An aggregate of 4,417,911 shares of common stock were issued to the Investor in connection with the
exercise of the Warrant during fiscal 2017 (200,000), 2018 (3,909,500), and 308,411 shares were issued in April 2018. The
First Warrant has been fully-exercised and extinguished to date.
The following summarizes
the Company’s common stock activity during the three-month period ended June 30, 2018:
|
|
|
|
|
Common Shares
|
|
|
|
Amount (a)
|
|
|
Per Share
|
|
|
Issued and Outstanding Shares
|
|
Balance at March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
5,758,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Series C Conversion (b)
|
|
|
—
|
|
|
|
—
|
|
|
|
10,141,725
|
|
Preferred Stock Series B Dividends
|
|
|
1,350
|
|
|
|
0.77
|
|
|
|
1,751
|
|
Warrants – Abeyance (b)
|
|
|
—
|
|
|
|
—
|
|
|
|
308,411
|
|
Issuance of Common Stock of Prior Conversion of Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
141,982
|
|
Balance at June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
16,352,839
|
|
|
(a)
|
Net
proceeds or fair value on grant date, as applicable.
|
|
(b)
|
Shares
previously held in abeyance until such time as it would not result in the investor exceeding its beneficial ownership limitation
(4.99% of the Company’s outstanding common stock).
|
Series A Convertible Preferred Stock
On April 19, 2016, the
holder of the Company’s Series A Convertible Preferred Stock, agreed to convert all 500 shares of their outstanding Series
A Convertible Preferred Stock into 800 shares of the Company’s common stock (a conversion ratio of 1.6:1 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 and the Company’s 1:25 reverse stock split effective March 5, 2018), which conversion was completed on April
25, 2016. The Company paid the holder $20,000 in connection with such conversion in order to comply with the terms of the Asset
Purchase Agreement that required that no shares of Series A Convertible Preferred Stock be outstanding at the closing. As of June
30, 2018 and March 31, 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.
The
Company’s Series B Preferred Stock has a liquidation preference of $25 per share. The Series B Preferred Stock is
convertible, at the option of the holder at any time following the original issuance date, into common stock at a rate of
approximately 0.2857:1 (originally issuable into an aggregate of 157,714 shares of common stock if fully converted), at the
option of the holder thereof, or automatically as to 25% of the Series B Preferred Stock shares if the Company’s
common stock trades above $153.13 per share for at least 20 consecutive trading days, and trades with at least 3,000 shares
of average volume per day during such period; an additional 50% of the Series B Preferred Stock shares if the
Company’s common stock trades above $175.00 per share for at least 20 consecutive trading days, and trades with at
least 3,000 shares of average volume per day during such period; and as to the remaining Series B Preferred Stock shares, if
the Company’s common stock trades above $196.88 per share for at least 20 consecutive trading days, and trades with at least 3,000
shares of average volume per day during such period. Each outstanding share of Series B Preferred Stock will be entitled to
one vote per share on all stockholder matters. The Series B Preferred Stock is redeemable at any time by the Company upon the
payment by the Company of the face amount of the Series B Preferred Stock ($25 per share) plus any and all accrued and unpaid
dividends thereon.
The Company has 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 by paying each applicable holder, an amount equal to the original issue price multiplied by the number
of Series B Preferred shares held by each applicable holder plus the accrued dividends.
As of June 30, 2018,
there were 408,508 shares of Series B Preferred Stock outstanding, 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 1/25
th
of one vote.
|
As the Series B Preferred
Stock is convertible at any time following the original issuance date into common stock at a rate of approximately 0.2857:1, the
Company recognized a fair value measurement of $14,898,038 for the Series B Preferred Stock, which is based on the 552,000 preferred
shares originally issued times the conversion rate of approximately 0.2857, times the price of the Company’s common stock
of $94.50 per share at the date of the closing of the Acquisition on August 25, 2016.
During the quarter ended
June 30, 2018, the Company issued a stock dividend on the Series B Preferred Stock consisting of 1,753 shares (with fair value
$877 based on a share price of $0.50 per share at June 30, 2018) 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 $877 and stock dividends
distributable but not issued based on the par value of the common stock issued. During the quarter ended June 30, 2018, the Company
issued 1,751 shares to settle a stock dividend accrued on Series B Preferred Stock.
Series C Redeemable Convertible Preferred Stock
On April 6, 2016, the
Company entered into a Stock Purchase Agreement with the Investor, pursuant to which it agreed, subject to certain conditions,
to sell 527 shares of Series C redeemable convertible preferred stock (with a face value of $5.26 million) at a 5% original issue
discount of $263,000, convertible into 64,738 shares of common stock at a conversion price of $81.25 per share, and a warrant to
purchase 44,444 shares of common stock at an exercise price of $112.50 per share (the “Second Warrant”).
On September 2, 2016,
the Second Warrant and 53 shares of Series C Preferred Stock were issued for $526,450 ($500,000, net cash proceeds to Camber) after
the Acquisition (as defined and described in “Note 2 – Liquidity and Going Concern Considerations”) closed. The
prorated share of the $263,000 discount ($26,450) was recorded as reduction to additional paid in capital. On November 17, 2016,
the remaining 474 shares of Series C Preferred Stock were issued for $4,736,550 ($4,500,000, net cash proceeds to Camber) and the
Company paid placement agent and legal fees of $514,000 for services rendered in connection with the issuance. The Company also
recognized $236,550 of the remaining 5% original issue discount, which was recorded as reduction to additional paid in capital.
On October 5, 2017,
the Company and the Investor entered into the October 2017 Purchase Agreement, pursuant to which (1) the Investor purchased 212
shares of Series C Preferred Stock on the closing date of the agreement, October 4, 2017 (the “Initial Closing”), for
$2 million, and agreed, subject to certain closing conditions set forth in the agreement, agreed to purchase (2) 106 shares of
Series C Preferred Stock for $1,000,000, 10 days after the Initial Closing (which closing occurred on November 21, 2017); (3) 105
shares of Series C Preferred Stock for $1,000,000, 10 days after the second closing (which closing occurred on December 27, 2017);
(4) 105 shares of Series C Preferred Stock for $1,000,000, 10 days after the third closing (which closing occurred on January 30,
2018); (5) 105 shares of Series C Preferred Stock for $1,000,000, 10 days after the fourth closing; (6) 525 shares of Series C
Preferred Stock for $5,000,000, 30 days after the fifth closing; and (7) 525 shares of Series C Preferred Stock for $5,000,000,
30 days after the sixth Closing.
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; on November 21, 2017, pursuant to the terms of the October 2017 Purchase
Agreement, we sold the Investor an additional 106 shares of Series C Preferred Stock for $1 million (the “Second Closing”);
on December 27, 2017, pursuant to the terms of the October 2017 Purchase Agreement, we sold the Investor an additional 105 shares
of Series C Preferred Stock for $1 million (the “Third Closing”); on January 31, 2018, pursuant to the terms of the
October 2017 Purchase Agreement, we sold the Investor an additional 105 shares of Series C Preferred Stock for $1 million (the
“Fourth Closing”); on February 22, 2018, pursuant to the terms of the October 2017 Purchase Agreement, we sold the
Investor an additional 105 shares of Series C Preferred Stock for $1 million (the “Fifth Closing”); on March 9, 2018,
the Company sold the Investor an additional 105 shares of Series C Preferred Stock for $1 million (the “Sixth Closing”);
on April 10, 2018, the Company sold the Investor an additional 105 shares of Series C Preferred Stock for $1 million (the “Seventh
Closing”); on May 22, 2018, the Company sold the Investor an additional 105 shares of Series C Preferred Stock for $1 million
(the “Eighth Closing”); and on July 9, 2018, the Company sold the Investor an additional 210 shares of Series C Preferred
Stock for $2 million (the “Ninth Closing”).
The Sixth Closing, Seventh
Closing, Eighth Closing, and Ninth Closing occurred notwithstanding the terms of the October 2017 Purchase Agreement which required
the sixth closing to be for a total of $5 million (the “$5 Million Closing”), as the parties mutually agreed to the
sales of only $1 million of Series C Preferred Stock to be sold pursuant to the $5 Million Closing, at the Sixth Closing, Seventh
Closing and Eighth Closing, and for $2 million of Series C Preferred Stock to be sold at the Ninth Closing.
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.
The holder of the Series
C Preferred Stock is entitled to cumulative dividends through maturity, which initially totaled 6% per annum, and are adjustable
to up to 34.95% per annum, based on certain triggering events and the trading price of the Company’s common stock, and which currently total
34.95% per annum, payable in full through maturity upon redemption, conversion, or maturity, and when, as and if declared by the Company’s
Board of Directors in its discretion. The Series C Preferred Stock ranks senior to the common stock and pari passu with respect
to the Company’s Series B Redeemable Convertible Preferred Stock.
The Series C
Preferred Stock may be converted into shares of common stock at any time at the option of the holder, or at the Company’s option if certain
equity conditions (as defined in the Certificate of Designation) are met. Upon conversion, we will pay the holder of the Series
C Preferred Stock being converted an amount, in cash or stock at the Company’s sole discretion, equal to the dividends that such shares
would have otherwise earned if they had been held through the maturity date (7 years), and issue to the holder 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 conversion rate ($81.25 per share).
The conversion premium
under the Series C Preferred Stock is payable and the dividend rate under the Series C Preferred Stock is adjustable on the same
terms and conditions as accrued interest is payable and adjustable under the Debenture. 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 holder 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.
During the three-month
period ended June 30, 2018, the Company issued 210 shares of Series C Preferred Stock pursuant to the terms of the October 2017
Purchaser Agreement, for total consideration of $2 million. As of June 30, 2018 and March 31, 2018, there were 1,091 and 1,132
shares of Series C Preferred Stock outstanding, respectively.
During the three-month
period ended June 30, 2018, the Investor converted 251 shares of the Series C Preferred stock with a face value of $2.51 million
and issued 772,323 shares of common stock and additional shares of common stock in dividend premium shares of 9,369,402 for an
aggregate of a total of 10,141,725 shares issued.
As of June 30 2018 and
March 31, 2018, the Company accrued common stock dividends on the Series C Preferred Stock based on the then 34.95% and 24.95%
premium dividend rate per the 2016 and 2017 Stock Purchase Agreement, respectively, as described above. The Company recognized
a total charge to additional paid-in capital and stock dividends distributable but not issued of $698,122 and $1,928,084 related
to the stock dividend declared but not issued for the three month period ended June 30, 2018 and the year ended March 31, 2018,
respectively.
On October 5,
2017, the Company and the Investor entered into a Stock Purchase Agreement (the “October 2017 Purchase Agreement”),
pursuant to which the Company may receive aggregate consideration of $16 million, subject to certain conditions set forth therein.
See “Note 2 – Liquidity and Going Concern Considerations – “Stock and Securities Purchase Agreements with
Institutional Investor” for a description of the Series C Preferred Stock purchased or to be purchased by the Investor.
See discussion of the
October 2017 Purchase Agreement with the Investor in Note 2.
Warrants
On August 2, 2017,
and effective June 13, 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, at the sole discretion of Vantage. The initial tranche consisted of $400,000 received
on June 12, 2017, in exchange for the assignment to Vantage of all of the Company’s rights and ownership in its wholly-owned
subsidiary Camber Permian II, LLC (“Camber Permian”) which included leaseholds and potential participation rights
and warrants to purchase 64,000 shares of the Company’s common stock. The fair value of the warrants was determined to be
$284,305 as of the grant date using the Black-Scholes Option Pricing model. Variables used in the Black Scholes model as of June
12, 2017 include (1) discount rate of 1.78% (2) expected term of 5 years, (3) expected volatility of 135.42%, and (4) zero expected
dividends.
In June 2017, the Company
granted warrants to purchase 64,000 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 $6.25 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%.
On October 7, 2016,
the Investor exercised the First Warrant in full and was due 55,385 shares of common stock upon exercise thereof and an additional
101,709 shares of common stock in consideration for the conversion premium due thereon. A total of 32,400 shares were issued to
the Investor on October 7, 2016, with the remaining shares being held in abeyance until such time as it would not result in the
Investor exceeding its beneficial ownership limitation (4.99% of the Company’s outstanding common stock). The Company received
gross proceeds of $4,500,000 from the exercise of the First Warrant and paid placement agent fees of $427,500 for services rendered
in connection with the First Warrant. Pursuant to the terms of the First Warrant, the number of shares due in consideration for
the conversion premium increases as the annual rate of return under the First Warrant increases, including by 10% upon the occurrence
of certain triggering events (which had occurred by the October 7, 2016 date of exercise), to 17% per annum upon the exercise of
the First Warrant. Additionally, as the conversion rate for the conversion premium is currently 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 period less $0.10 per share, the number of shares issuable in connection with the conversion premium
increases as the trading price of the Company’s common stock decreases, and the trading price of the Company’s common stock has decreased since the
date the First Warrant was exercised, triggering a further reduction in the conversion price of the conversion premium and an increase
in the number of shares due to the Investor in connection with the conversion of the amount owed in connection with the conversion
premium. Additionally, pursuant to the interpretation of the Investor, the measurement period for the calculation of the lowest
daily volume weighted average price currently continues indefinitely.
An aggregate of 4,417,911
shares of common stock were issued to the Investor in connection with the exercise of the Warrant during fiscal 2017 (200,000),
2018 (3,909,500), and 308,411 shares were issued in April 2018. The First Warrant has been fully-exercised and extinguished to
date.
Additionally, warrants
to purchase 2,667 shares of common stock granted 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 to $69.82 per share,
in connection with an automatic adjustment to the exercise price due to the Acquisition. As of June 30, 2017 and March 31, 2017,
the fair value of the derivative liability associated with the 2,667 warrants was $5. Therefore, there was no change in the derivative
liability fair value for the three months ended June 30, 2018.
At June 30, 2018 and
March 31, 2018, outstanding warrants had an intrinsic value of $114,014 and $232, respectively. The intrinsic value is based upon
the difference between the market price of Camber’s common stock on the date of exercise and the grant price of the stock
options.
The following is a summary of the Company’s
outstanding warrants at June 30, 2018:
Warrants
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Intrinsic Value at
|
|
Outstanding
|
|
|
Price ($)
|
|
|
Date
|
|
|
June 30, 2018
|
|
448
|
(1)
|
|
|
0.25
|
|
|
|
August
13, 2018
|
|
|
|
114
|
|
2,667
|
(2)
|
|
|
69.82
|
|
|
|
April 21, 2019
|
|
|
|
—
|
|
4,972
|
(3)
|
|
|
37.50
|
|
|
|
April 21, 2021
|
|
|
|
—
|
|
64,000
|
(4)
|
|
|
6.25
|
|
|
|
June 12, 2022
|
|
|
|
—
|
|
1,000,000
|
(5)
|
|
|
0.39
|
|
|
|
May 24, 2023
|
|
|
|
113,900
|
|
1,072,088
|
|
|
|
|
|
|
|
|
|
|
$
|
114,014
|
|
|
(1)
|
Warrants
issued in connection with the Rogers Loan. The warrants were exercisable on the grant date (August 13, 2013) and remain exercisable
until August 13, 2018. The exercise price was lowered to $0.01 per share on August 12, 2015.
|
|
(2)
|
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.
|
|
(3)
|
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.
|
|
(4)
|
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.
|
|
(5)
|
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
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.
Stock Options
As of June 30, 2018
and 2017, the Company had 78 and 798 stock options outstanding with a weighted average exercise price of $1,294 and $885, respectively.
Of the Company’s
outstanding options, no options were exercised or forfeited during the three months ended June 30, 2018. Additionally, no stock
options were granted during the three months ended June 30, 2018. Compensation expense related to stock options during the three-month
period ended June 30, 2018 and 2017 was $0 and $4,816, respectively.
Options outstanding
and exercisable at June 30, 2018 and 2017 had no intrinsic value, respectively. The intrinsic value is based upon the difference
between the market price of Camber’s common stock on the date of exercise and the grant price of the stock options.
As of June 30, 2018,
there was no remaining unrecognized share-based compensation expense related to all non-vested stock options.
The following tabulation
summarizes the remaining ter
ms of the options outstanding:
Exercise
|
|
|
Remaining
|
|
|
Options
|
|
|
Options
|
|
Price
($)
|
|
|
Life
(Yrs.)
|
|
|
Outstanding
|
|
|
Exercisable
|
|
1,294
|
|
|
|
2.3
|
|
|
|
78
|
|
|
|
78
|
|
|
|
|
|
Total
|
|
|
|
78
|
|
|
|
78
|
|
NOTE
13 – LOSS PER COMMON SHARE
For the periods ended June 30, 2018 and 2017, all stock options
and warrants are considered antidilutive.
Supplemental disclosures for loss per share are as follows:
|
|
Three
Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,512,097
|
)
|
|
$
|
(3,048,978
|
)
|
Less
preferred dividends
|
|
|
(700,344
|
)
|
|
|
(359,294
|
)
|
Net
loss attributable to common stockholders
|
|
$
|
(4,212,441
|
)
|
|
$
|
(3,408,272
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - basic and diluted
|
|
|
9,501,394
|
|
|
|
1,217,043
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(2.80
|
)
|
NOTE
14 – SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for interest and income taxes
was as follows:
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Interest
|
|
$
|
220,881
|
|
|
$
|
584,472
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-cash investing and financing activities
included the following:
|
|
Three
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Increase in Accounts Payable for Accrued Capital Expenditures
|
|
$
|
744,803
|
|
|
$
|
4,395
|
|
Issuance
of Common Stock of Prior Conversion of Convertible Notes
|
|
$
|
142
|
|
|
$
|
—
|
|
Change
in Estimate for Asset Retirement Obligations
|
|
$
|
3,942
|
|
|
$
|
9,945
|
|
Debt
Discounts on Notes Payable
|
|
$
|
—
|
|
|
$
|
36,712
|
|
Issuance
of Common Stock for Common Stock Payable
|
|
$
|
—
|
|
|
$
|
23,573
|
|
Stock
Dividends Distributable but not Issued
|
|
$
|
698,996
|
|
|
$
|
359,235
|
|
Issuance
of Stock Dividends
|
|
$
|
1,348
|
|
|
$
|
59
|
|
Conversion
of Preferred Stock B to Common Stock
|
|
$
|
—
|
|
|
$
|
1,025
|
|
Conversion
of Preferred Stock C to Common Stock
|
|
$
|
10,142
|
|
|
$
|
1,275
|
|
Warrants
Issued in Abeyance
|
|
$
|
308
|
|
|
$
|
—
|
|
NOTE 15 – SUBSEQUENT EVENTS
Amendment to Series C Redeemable
Convertible Preferred Stock
On July 25, 2018, the
Board of Directors of the Company and the sole holder of its Series C Redeemable Convertible Preferred Stock (“Series C Preferred
Stock”) approved an amendment to the Certificate of Designations of its Series C Preferred Stock. The amendment modified
the beneficial ownership limitation, which previously prevented the 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 4.99% of the Company’s
outstanding common stock, to increase such ownership limitation to 9.99% of the Company’s outstanding common stock. On July 25, 2018, the
Company filed the amendment to the Certificate of Designations with the Secretary of State of Nevada, which became effective on
the same date.
From July 1, 2018
to August 13, 2018, the Investor converted 143 shares of Series C Preferred Stock into 9,091,083 shares of common stock; was issued
an aggregate of an additional 14,603,000 shares of common stock in connection with true ups associated with prior conversions of
Series C Preferred Stock; and as of August 13, 2018, was due an additional 15,335,524 shares in connection with true ups associated
with prior conversions of Series C Preferred Stock, which shares were held in abeyance as of such date.
On July 9, 2018,
the Company sold the Investor 210 shares of Series C Preferred Stock for $2 million.
N&B Energy Asset Disposition Agreement
On
July 12, 2018, the Company entered into an Asset Purchase Agreement described in greater detail above under “Note 2 - Liquidity
and Going Concern Considerations” - “N&B Energy Asset Disposition Agreement”.
Segundo Settlement Agreement
Also on July
12, 2018, the Company entered into a Compromise Settlement Agreement and Mutual Release with Segundo described in greater detail
above under “Note 2 - Liquidity and Going Concern Considerations” - “Segundo Settlement Agreement”.
IBC Bank Standstill Agreement
On August 3,
2018, the Company entered into the Standstill Agreement with IBC Bank described in greater detail above under “Note 2 -
Liquidity and Going Concern Considerations” - “IBC Bank Standstill Agreement”.
First Amendment to Sale Agreement
Also on
August 3, 2018, the Company entered into the First Amendment to the Sale Agreement described in greater detail above under “Note
2 - Liquidity and Going Concern Considerations” - “First Amendment to Sale Agreement”.