NOTE 7—DEBT

Line of credit

On May 13, 2015, the Company entered into a Revolving Line of Credit Facility Agreement ("initial line of credit") with Providence, which provides to the Company a revolving line of credit of up to $5,000,000. As of March 31, 2017 and December 31, 2016, the outstanding balance on the initial line of credit was $5,000,000 plus accrued interest of $401,107 and $302,477, respectively. During the three months ended March 31, 2017 and 2016, the Company recorded interest expense of $98,630 and $21,185 respectively, related to the initial line of credit.

Interest on the outstanding principal balance of the initial line of credit begins accruing on the dates of advancements of principal at an annual rate equal to 8.0% simple interest. The Company is obligated to pay interest monthly after the Company receives its first production payment from any well associated with its Participation Agreement with the lender and/or in which the Company has or has had a working interest and in accordance with the terms of the promissory note. The Company expects to make the first interest payment in June 2017.

Supplemental line of credit

On October 13, 2016, the Company entered into a revolving line of credit facility agreement (the "supplemental line of credit") with Providence Energy Partners III, LP ("PEP III"). PEP III is an affiliate of Providence by virtue of having some common management personnel. The supplemental line of credit permitted the Company to borrow up to $10.0 million to pay costs associated with its acquisition and development of oil and gas properties in the Wattenberg Field. The supplemental line of credit was originally due on April 13, 2017.

As of March 31, 2017 and December 31, 2016, the outstanding balance on the supplemental line of credit was $7,105,000 and $7,088,698, plus accrued interest of $190,575 and $50,422, respectively. During the three months ended March 31, 2017, the Company recorded interest expense of $140,153 related to the supplemental line of credit.

The supplemental line of credit was amended on March 30, 2017, pursuant to which the Company agreed not to borrow additional amounts against the supplemental line of credit and to repay $3,552,500 in outstanding principal not later than April 13, 2017, in exchange for PEP III extending the maturity date of the supplemental line of credit until June 13, 2017. On April 12, 2017, the Company paid $3,552,500 in accordance with the amendment.

Convertible notes

On December 30, 2016, January 20, 2017 and January 30, 2017, the Company completed the private placement of units consisting of convertible promissory notes and common stock purchase warrants. The Company received net proceeds of approximately $9.0 million from the private placement, after placement agent fees and other associated expenses.

Each unit sold in the private placement is comprised of a 10% unsecured convertible promissory note in the face amount of $50,000 and 33,333 common stock purchase warrants (Notes 10 and 12). Each note sold in the private placement is one of a series of similar notes designated the "10% Unsecured Convertible Promissory Notes" with the series totaling $10.0 million. The notes bear interest at the rate of 10% per year and are due and payable on December 31, 2018. Interest is payable semi-annually beginning June 30, 2017 and until the notes are paid in full. At any time after issuance, the principal amount of the notes and any accrued but unpaid interest are convertible into shares of the Company's common stock at the option of the holder at the rate of $1.50 per share. The conversion price will be proportionately adjusted in the event of any stock splits, stock dividends or a capital reorganization.

In connection with the offering, the Company paid $1,000,000 in cash and issued warrants to purchase 666,600 shares of common stock (Note 10) to the placement agent as a commission for the offering. The fair value of the warrants issued to the placement agent of $1,001,471 has been recorded as a charge to paid in capital.

In connection with the offering the Company recorded debt issuance costs of $1,011,000 including $1,000,000 in broker fees and $11,000 in other fees incurred. Debt issuance costs are being amortized to interest expense on a straight-line basis over the term of the notes. As of March 31, 2017 and December 31, 2016, the unamortized portion of debt issuance costs amounted to $910,466 and $204,703, respectively. The Company recorded expense of $99,977 related to the accretion of the discount for the three months ended March 31, 2017.

In accordance with ASC 470, the proceeds from the sale of the convertible notes was allocated between the conversion feature and the warrants based on the fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. The fair value of the beneficial conversion feature of $5,306,456, has been recorded as a reduction of the carrying value of the convertible promissory notes and is being amortized to interest expense using the effective interest method over the term of the notes. The fair value of the warrants of $3,682,544, has been recorded as a reduction to the carrying value of the convertible promissory notes and is being amortized to interest expense using the effective interest method over the term of the notes.

As of March 31, 2017, the Company recorded accrued interest of $192,732 and recognized interest expense of $191,669 related to the convertible notes. The Company recognized interest expense of $883,068 in relation to the accretion of the debt discount costs.

The following table reflects the net amounts recorded as debt at March 31, 2017 and December 31, 2016:

	March 31, 2017			December 31, 2016
				(see Note 3)
Current portion
Supplemental line of credit	$	7,105,000		$	7,105,000
Unamortized original issue discount		—			(16,302	)

Total current portion	$	7,105,000		$	7,088,698
Long term portion
Line of credit	$	5,000,000		$	5,000,000
Face amount of convertible notes		10,000,000			1,942,600
Unamortized original issue discount		(910,466	)		(204,703	)
Unamortized discount related to beneficial conversion feature		(4,782,072	)		(977,497	)
Unamortized discount related to warrants issued		(3,319,110	)		(755,092	)

Net convertible notes payable	$	988,352		$	5,308

Total long term portion	$	5,988,352		$	5,005,308

Total debt, net	$	13,093,352		$	12,094,006