Quarterly report pursuant to Section 13 or 15(d)

Notes and advances payable

v2.4.0.8
Notes and advances payable
9 Months Ended
Sep. 30, 2014
Notes and advances payable

7. Notes and advances payable

Notes payable consist of the following as of December 31, 2013 and September 30, 2014:

 

     2013      2014  

Officers, directors and affiliates:

     

Notes and advances payable, interest at 8.0%, due on demand

   $ 14,984       $ —     

Notes and advances payable, interest at 9.7%, due on demand

     85,000         —     

Note payable, interest at 7.0%, due March 2015

     150,000         150,000   

Notes payable, interest 7.0%, due January 2017

     —           128,019   

Notes payable, interest varies (see explanation below)

     —           792,151   

Collateralized note payable (see below)

     714,488         120,728   
  

 

 

    

 

 

 

Total officers, directors and affiliates

     964,472         1,190,898   

Less: Current portion of officers, directors, and affiliates

     717,833         296,033   
  

 

 

    

 

 

 

Long-term portion of officers, directors, and affiliates

   $ 246,639       $ 894,865   
  

 

 

    

 

 

 

Unrelated parties:

     

Notes payable, interest at 7.5%, due March 2015

     200,000         125,000   

Note payable, interest variable (see below)

     —           549,105   

Note payable, interest at 7.0%, due August 2016

     —           62,000   

Notes payable, interest at 7.0%, due January 2015

     44,000         —     

Notes payable, interest at 7.0%, due January 2015

     506,000         228,000   
  

 

 

    

 

 

 

Total unrelated parties

     750,000         964,105   

Less: Current portion of unrelated parties

     325,000         933,105   
  

 

 

    

 

 

 

Long-term portion of unrelated parties

   $ 425,000       $ 31,000   
  

 

 

    

 

 

 

On April 29, 2013, the Company executed a promissory note under which the Company agreed to pay Apex Financial Services Corp, a Colorado corporation, (“Apex”) the principal sum of $1,000,000, with interest accruing at an annual rate of 7.5%, with principal and interest due on December 31, 2014. The Company also agreed to assign 75% of its operating income from its oil and gas operations and any lease or well sale or any other assets sales to Apex to secure the debt. Apex is 100% owned by the CEO, director, and shareholder of the Company, Nicholas L. Scheidt. The Company borrowed the full amount of principal on the note, and also paid a loan fee of $10,000. In the event of default on the note and failure to cure the default in ten days, Apex may accelerate payment and the annual interest rate on the note will accrue at 18%. Default includes failure to pay the note when due or if the Company borrows any other monies or offers security in the Company or in the collateral securing the note prior to the note being paid in full. The outstanding principal balance as of September 30, 2014 was $120,728.

On January 28, 2014, we entered into a line of credit loan agreement for $1,500,000 due January 15, 2015. The terms of the note are as follows: 1) the accrued interest is payable monthly starting February 28, 2014, 2) the interest rate is variable based on an index calculated based on a prime rate as published by the Wall Street Journal index (currently 3.25%) plus an add on index with the current and minimum rate of 6.5%., the note has draw provisions, with the first draw of $479,701 4) the note is secured by seven wells and leases owned by the Company, a certificate of deposit for $500,000 at CityWide Bank pledged by a related party, and 5) the personal guarantee of the Nicholas Scheidt, Chief Executive Officer. The amount eligible for borrowing on the Credit Facility is limited to the lesser of (i) 65% of the Company’s PV10 value of its carbon reserves based upon the most current engineering reserve report or (ii) 48 month cumulative cash flow based upon the most current engineering reserve report. In addition to the borrowing base limitation, the Company is required to maintain and meet certain affirmative and negative covenants and conditions in order to draw advances on the Credit Facility. The Credit Facility contains certain representations, warranties, and affirmative and negative covenants applicable to the Company, which are customarily applicable to senior secured loan facilities. Key covenants include limitations on indebtedness, restricted payments, creation of liens on oil and gas properties, hedging transactions, mergers and consolidations, sales of assets, use of loan proceeds, change in business, and change in control. The above-referenced promissory notes contain customary default and acceleration provisions and provide for a default interest rate of 21% per annum. In addition, the Credit Facility contains customary events of default, including: (a) failure to pay any obligations when due; (b) failure to comply with certain restrictive covenants; (c) false or misleading representations or warranties; (d) defaults of other indebtedness; (e) specified events of bankruptcy, insolvency or similar proceedings; (f) one or more final, non-appealable judgments in excess of $50,000 that is not covered by insurance; (g) change in control (25% threshold); (h) negative events affecting the Guarantor; and (i) lender in good faith believes itself insecure. In an event of default arising from the specified events, the Credit Facility provides that the commitments thereunder will terminate and the Lender may take such other actions as permitted including, declaring any principal and accrued interest owed on the line of credit to become immediately due and payable. The Credit Facility is secured by a security interest in substantially all of the assets of the Company, pursuant to a Security Agreement, Deed of Trust and Assignment of As-Extracted Collateral entered into between the Company and Citywide Banks. The outstanding principal balance as of September 30, 2014 was $549,105.

On January 1, 2014, we memorialized our short-term liabilities into formal promissory notes. These certain outstanding advances and other notes payable are now included in single promissory notes, all have been reported previously in our financial statements. Information concerning these promissory notes is set forth in the table below.

 

Name of Holder

   Position    Principal
Amount
     Interest
Rate
    Monthly P&I
Payment
Amount
     Number
of
Monthly
Payments
 

Donald W. Prosser

   CFO & Director    $ 28,500         7.00   $ 564.33         60   

Charles B. Davis

   COO & Director    $ 66,500         7.00   $ 1,316.78         60   

William Stewart

   Director    $ 49,500         7.00   $ 980.16         36   

The above-referenced promissory notes contain customary default and acceleration provisions and provide for a default interest rate of 18% per annum. The outstanding principal balances as of September 30, 2014 was $128,019.

In addition, we also issued an unsecured promissory note in the amount of $792,151 on January 1, 2014 to DNR Oil & Gas, Inc. (“DNR”). DNR is a company controlled by one of our directors, Charles B. Davis. The DNR note accrues interest at the rate of 2.50% for the calendar years 2014 and 2015, 4.00% for the calendar year 2016, 6.00% for the calendar year 2017 and 8.00% for the remainder of the term of the DNR note. The DNR note matures on January 1, 2019. The DNR note requires payments as follows:

 

    One payment of $250,000 in 2016;

 

    One payment of $250,000 in 2017;

 

    One payment of $250,000 in 2018; and

 

    The balance of principal and accrued interest on or before January 1, 2019.

The DNR note contains customary default and acceleration provisions and provides for a default interest rate of 18% per annum. The outstanding principal balance as of September 30, 2014 was $792,151.

In June 2013, in connection with the conversions of Series A1 Preferred Stock by Burlingame Equity Investors II, LP and Burlingame Equity Investors Master Fund, LP, the Company issued unsecured promissory notes in the original principal amounts of $48,000 and $552,000, respectively, with interest at 7% per annum payable quarterly and all unpaid interest and principal due on July 23, 2014. In connection with our new line of credit, we have agreed with the holders of these two existing notes to make a partial prepayment on the principal balance of the Notes in exchange for an extension of the maturity date to January 27, 2015. Information concerning the principal pay down and new maturity date is set forth in the following table.

 

Name of Holder

   Principal Balance
Before Pay down
     Principal
Pay down
     Remaining
Principal Balance
 

Burlingame Equity Investors II, LP

   $ 44,000       $ 36,000       $ 8,000   

Burlingame Equity Investors Master Fund, LP

   $ 506,000       $ 286,000       $ 220,000   

 

On August 15, 2014 the Company executed a Promissory Note to an individual for the redemption of 10 shares of Series A-1 Preferred Stock. The terms of the Promissory Note are as follows: $62,000 with an interest rate of 7% payable in two payments of $31,000 each plus interest, due August 15, 2015 and August 15, 2016 respectively.

All of the notes payable shown above are unsecured, except the Apex note. Accrued interest on notes and advances payable amounted to $52,242 as of December 31, 2013 and $20,507 as of September 30, 2014.