NOTE 6 – DEBT

The following table presents account balances and activity for our various debt instruments as of December 31:


	Initial		Supplemental		Convertible		Convertible
	Line of		Line of		Notes		Notes		Credit
	Credit		Credit		Series A		Series B		Facility
December 31, 2015 Principal Balance	$	(1,062,185)	$	-	$	-	$	-	$	-
Principal
Borrowings		(3,937,815)		(7,105,000)		(1,942,600)		-		-
Repayments		-		-		-		-		-
Conversions		-		-		-		-		-

Beginning Balance - Unamortized Debt Issuance Costs - Original Issuer Discount		-		-		-		-		-
Additions		-		-		205,260		-		-
Accretion		-		-		(557)		-		-
Ending - Unamortized Debt Issuance Costs - Original Issuer Discount		-		-		204,703		-		-

Beginning Balance - Unamortized Debt Issuance Costs - Beneficial Conversion Feature		-		-		-		-		-
Additions		-		-		1,033,585		-		-
Accretion		-		-		(2,823)		-		-
Ending - Unamortized Debt Issuance Costs - Beneficial Conversion Feature		-		-		1,030,762		-		-

Beginning Balance - Unamortized Debt Issuance Costs - Warrant Discount		-		-		-		-		-
Additions		-		-		703,753		-		-
Accretion		-		-		(1,926)		-		-
Ending - Unamortized Debt Issuance Costs - Warrant Discount		-		-		701,827		-		-

December 31, 2016 Principal Balance	$	(5,000,000)	$	(7,105,000)	$	(1,942,600)	$	-	$	-
December 31, 2016, Total, net	$	(5,000,000)	$	(7,105,000)	$	(5,308)	$	-	$	-
Principal
Borrowings		-		-		(8,057,400)		(4,724,900)		(5,000,000)
Repayments		-		(3,552,500)		-		-		-
Conversions		-		-		5,166,800		-		-

Beginning Balance - Unamortized Debt Issuance Costs - Original Issuer Discount		-		-		204,703		-		-
Additions		-		-		804,750		205,211		104,871
Accretion		-		-		(742,944)		(36,887)		(1,436)
Ending - Unamortized Debt Issuance Costs - Original Issuer Discount		-		-		266,509		168,324		103,435

Beginning Balance - Unamortized Debt Issuance Costs - Beneficial Conversion Feature		-		-		1,030,762		-		-
Additions		-		-		4,272,867		56,500		-
Accretion		-		-		(3,978,881)		(11,959)		-
Ending - Unamortized Debt Issuance Costs - Beneficial Conversion Feature		-		-		1,324,748		44,541		-

Beginning Balance - Unamortized Debt Issuance Costs - Warrant Discount		-		-		701,827		-		-
Additions		-		-		2,978,791		-		-
Accretion		-		-		(2,758,537)		-		-
Ending - Unamortized Debt Issuance Costs - Warrant Discount		-		-		922,081		-		-


December 31, 2017, Principal Balance	$	(5,000,000)	$	(3,552,500)	$	(4,833,200)	$	(4,724,900)	$	(5,000,000)
December 31, 2017, Total, net	$	(5,000,000)	$	(3,552,500)	$	(2,319,862)	$	(4,512,035)	$	(4,896,565)

Initial Line of Credit

On May 13, 2015, the Company entered into a revolving line of credit facility agreement (“Initial Line of Credit”) with PEO which provided the Company with a revolving line of credit of up to $5.0 million, maturing June 30, 2018.

PEO is the beneficial owner of approximately 11.7% of the Company’s outstanding common stock. The initial interest rate of 8% per year on the initial line of credit was increased twice in connection with other transactions involving the parties, the first time in September 2017 to 10% per year and the second time in December 2017 to 15% per year. The initial line of credit was repaid in full in February 2018, together with accrued interest of $0.6 million, as part of another financing.

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”) under which the Company was originally entitled to borrow up to $10.0 million. PEP III is an affiliate of PEO by virtue of having some common management personnel. Interest on the Supplemental Line of Credit initially accrued at the rate of 8% per year and the line matured on April 13, 2017.

The Supplemental Line of Credit was amended on March 30, 2017, pursuant to which the Company agreed not to borrow additional amounts against the line and to repay $3.6 million 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 $3.6 million in accordance with the amendment.

On June 8, 2017, the Company entered into a letter agreement (“PEP III Agreement”) with PEP III and PEO, pursuant to which PEP III again agreed to modify the Supplemental Line of Credit. The PEP III Agreement further extended the maturity date of the Supplemental Line of Credit from June 13, 2017 until December 27, 2017 and increased the interest rate on the supplemental line from 8% to 10%, effective June 8, 2017. The Company and PEO also agreed to amend the participation agreement between the Company and PEO, in order to expand the area of mutual interest (“AMI”) and to grant PEP III an option to participate under the Participation Agreement. As amended, the Participation Agreement provides PEO the option to acquire up to a 45% interest and, so long as the Supplemental Line of Credit remained outstanding, PEP III the option to acquire up to a 10% interest in, and participate in, any oil and gas development on acreage acquired by the Company within the expanded AMI.

As described more fully below, on December 21, 2017, the interest rate on the Supplemental Line of Credit was increased from 10% to 15%, and on February 1, 2018, concurrent with the closing of another credit facility, a principal payment in the amount of $1.5 million plus accrued interest of $0.5 million was made on the Supplemental Line of Credit.

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 (“Convertible Notes”) with an aggregate face value of $10.0 million and common stock purchase warrants. The Convertible Notes are unsecured, bear interest at 10% per year and are due and payable on December 31, 2018. At the option of the holders of the Convertible Notes, the principal amount of the Convertible Notes, and any accrued but unpaid interest, are convertible into shares of the Company's common stock at a conversion price of $1.50 per share.

The Company received net proceeds of approximately $9.0 million from the private placement, after placement agent fees and other associated expenses.

On October 16, 2017, in connection with the sales of Series B Unsecured Convertible Promissory Notes (“Series B Notes”) as described more fully below, $5.2 million in principal of the Convertible Notes and $0.1 million in accrued interest was converted into 4,814,265 shares of common stock at a conversion rate of $1.10 per share. The Company has recorded a loss on conversion of $1.8 million in connection with the reduction of the initial contractual conversion rate.

In accordance with ASC 470, Debt, the proceeds from the sale of the Convertible Notes was allocated between the conversion feature embedded in the Convertible Notes and the warrants attached to the notes 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 has been recorded as a reduction of the carrying value of the Convertible Notes and is being amortized to interest expense using the effective interest method over the term of the Convertible Notes. The fair value of the warrants has been recorded as a reduction to the carrying value of the Convertible Notes and is being amortized to interest expense using the effective interest method over the term of the Convertible Notes. The fair value of the warrants issued to the placement agent in connection with the offering of $1.0 million has been recorded as a charge to additional paid-in capital.

Series B Convertible Notes

In September and October 2017, the Company sold Series B Notes in the principal amount of $4.7 million. The Series B Notes are unsecured, bear interest at 15% per year, and are due and payable on December 31, 2018. At the option of the holders, the principal amount of the Series B Notes and any accrued but unpaid interest are convertible into shares of the Company's common stock at a conversion price of $1.50 per share. The Company netted $4.5 million from the sale of the Series B Notes after expenses.

In accordance with ASC 470, the fair value of the beneficial conversion feature of $56,500 has been recorded as a reduction of the carrying value of the Series B Notes and is being amortized to interest expense using the effective interest method over the term of the Series B Notes.

Secured Credit Facility

On December 21, 2017, the Company entered into a letter agreement (“Letter Agreement”) with Providence Energy Ltd. (“PEC”), and Fifth Partners, LLC (“Fifth,” and together with PEC, the “Lenders”) pursuant to which the Company borrowed $5.0 million from PEC (“Initial Funding”). PEC is an affiliate of PEO by virtue of common management. In connection with the Initial Funding, the Company and the Lenders agreed to negotiate a second credit facility of $20.0 million (“Second Funding”), which was completed on February 1, 2018.

Interest on the outstanding principal balance of the Initial Funding accrued at the three-month LIBOR plus 14%, or 15.7%. As of December 31, 2017, accrued interest payable related to the Initial Funding amounted $21,801. In connection with the Initial Funding, the Company recorded debt issuance costs in the amount of $0.1 million and incurred interest expense in the amount of $1,437 related to the accretion of these costs.