Revolving Credit Agreement

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

Revolving Credit Agreement

Revolving Credit Agreement

On February 20, 2014, Aurora, as borrower, entered a credit agreement (the "Credit Agreement") with Texas Capital Bank (“the Lender”). Guarantors on the Credit Agreement are Victory and Navitus, the two partners of Aurora. Pursuant to the Credit Agreement, the Lender agreed to extend credit to Aurora in the form of (a) one or more revolving credit loans (each such loan, a “Loan”) and (b) the issuance of standby letters of credit, of up to an aggregate principal amount at any one time not to exceed the lesser of (i) $25,000,000 or (ii) the borrowing base in effect from time to time (the “Commitment”). The initial borrowing base on February 20, 2014 was set at $1,450,000. The borrowing base is determined by the Lender, in its sole discretion, based on customary lending practices, review of the oil and natural gas properties included in the borrowing base, financial review of Aurora, the Company and Navitus and such other factors as may be deemed relevant by the Lender. The borrowing base is re-determined (i) on or about June 30 of each year based on the previous December 31 reserve report prepared by an independent reserve engineer, and (ii) on or about August 31 of each year based on the previous June 30 reserve report prepared by Aurora’s internal reserve engineers or an independent reserve engineer and certified by an officer of Aurora. The Credit Agreement will mature on February 20, 2017. Amounts borrowed under the Credit Agreement will bear interest at rates equal to the lesser of (i) the maximum rate of interest which may be charged or received by the Lender in accordance with applicable Texas law and (ii) the interest rate per annum publicly announced from time to time by the Lender as the prime rate in effect at its principal office plus the applicable margin. The applicable margin is, (i) with respect to Loans, one percent (1.00%) per annum, (ii) with respect to letter of credit fees, two percent (2.00%) per annum and (iii) with respect to commitment fees, one-half of one percent (0.50%) per annum. Loans made under the Credit Agreement are secured by (i) a first priority lien in the oil and gas properties of Aurora, the Company and Navitus, and (ii) a first priority security interest in substantially all of the assets of Aurora and its subsidiaries, if any, as well as in 100% of the partnership interests in Aurora held by the Company and Navitus. Loans made under the Credit Agreement to Aurora are fully guaranteed by the Company and Navitus.

The Credit Agreement contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, additional liens and transactions with affiliates. Among the covenants contained in the Credit Agreement are financial covenants that Aurora will maintain a minimum EBITDAX to Cash Interest Ratio of 3.5 to 1.0 and a minimum Current Ratio of not less than 1.0 to 1.0. The Current Ratio is defined under the covenants to include, as a current asset, the revolving credit availability. At December 31, 2014, Aurora's Current Ratio was 0.10 to 1 and it was therefore not in compliance with the aforementioned Current Ratio covenant requiring a ratio of current assets to current liabilities of not less than 1 to 1. As of December 31, 2014, the $800,000 outstanding balance of the Credit Agreement was classified as a current liability in accordance with GAAP.

On April 13, 2015, the Company received the annual Borrowing Base Adjustment called for under the terms of the Credit Agreement, which called for a decrease in the borrowing base of $300,000 payable by May 13, 2015, and an increase in the monthly reduction amount to $10,000 commencing as of June 1, 2015. Additionally, the Lender notified Aurora that, based on the Lender’s redetermination of Aurora’s borrowing base, the monthly reduction amount under the Credit Agreement will be increased, commencing on June 1, 2015, from $0 to $10,000. Pursuant to this increase in the monthly reduction amount, Aurora’s borrowing base will be automatically reduced by $10,000 on the first day of each calendar month beginning on June 2015 until the Lender’s next periodic borrowing base redetermination. The Company has made one payment in the amount of $10,000 in June 2015.

On May 13, 2015, Aurora informed the Lender it would not make the required $300,000 payment but was submitting the newly acquired five Eagle Ford wells as additional collateral to be considered and its willingness to execute mortgages regarding the properties to meet the Deficiency.

As of June 30, 2015, the Company was out of compliance with the Current Ratio, and out of compliance with the EBITDAX to Cash Interest Ratio due to its reduced revenue streams from price and production declines and continued high general and administrative expenses for the quarter ended June 30, 2015.

On August 21, 2015, the Company executed a Forbearance Agreement whereby the Lender would forbear all existing events of default which includes all payments under the previously mentioned Borrowing Base Deficiency payments not yet paid under the April 13, 2015 Redetermination Date notification, as well as the late interest payments for June, July and August 2015, violations of Aurora financial covenants for the three months ended March 31, 2015, and June 30, 2015, and default notice for the late filing of March 31, 2015 financial reports. On August 26, 2015, the Company paid the Lender $76,081 to cover a portion of the deficiency payment, as well as a Forbearance document fee and Lender's legal expenses, as required by the Forbearance Agreement, and the aforementioned Forbearance Agreement went into effect for the $260,000 remaining borrowing base deficiency payment. On August 31, 2015, the Forbearance Agreement terminated pursuant to its terms. The Company did not make the above payment and has been in continuous contact with its lender regarding its plan of payment of the $260,000 as well as the remaining credit facility balance. The Company made a $50,000 principle payment to the lender on October 14, 2015 as part of that plan.

Although the Company is in technical default of the Credit Agreement and related agreements, the Company’s lender continues to cooperate with the Company in working out a payment plan and has not advised the Company of any additional actions it plans to take.

Amortization of debt financing costs and interest expense on this debt for the nine months ended September 30, 2015 and 2014 was $30,617 and $24,380, respectively.

Pursuant to the aforementioned merger termination, the Company had recorded a Promissory Note in the amount of $250,000 payable to Louise H. Rogers, Lucas’ senior lender in conjunction with the Pre Merger Collaboration Agreement, which accrues interest at the rate of 18% per annum. On May 11, 2015, the Company terminated the LOI with Lucas, pursuant to its terms, which permitted either the Company or Lucas to terminate the LOI by written notification to the other party. The Promissory Note was due and payable prior to August 17, 2015 in accordance with the Pre Merger Collaboration Agreement. In connection with the issuance of the Promissory Note, Louise H. Rogers had released the Well Rights from its security interest in order to accommodate the transactions contemplated by the Collaboration Agreement and Loan Agreement as of February 27, 2015. In connection to this note $250,000 has been charged to general and administrative expense as a cost of the terminated merger transaction through June 30, 2015 the interest was accrued at $125 per day for a total of $6,250. The September 30, 2015 balance of $290,433 is included in the Company’s Accrued Expenses in the June 30, 2015 Consolidated Financial Statements.

As of July 16, 2015, Victory entered into the Rogers Amendment. Pursuant to the Rogers Amendment, the Company and Rogers agreed to terminate the Promissory Noe and re-establish the amount to be paid by the Company as an obligation to Rogers under the Rogers Settlement Agreement is $258,125, instead of $253,750. The Rogers Amendment further specified that if the Company failed to make the obligation payment of $258,125 on or before July 15, 2015, the Company would be in default under the Rogers Settlement Agreement and default interest on the amount due would begin to accrue at a per diem rate of $129.0625. Additionally, the Company acknowledged in the Amendment its obligation to pay Rogers’ attorney’s fees in the amount of $22,500. This amount was included in the Company’s accrued expenses as of September 30, 2015. As of the date of this Quarterly Report on Form 10-Q, the Company has not made any payments to Rogers pursuant to the Rogers Settlement Agreement.

As described above, Rogers’ legal counsel held the assignment to the Company of Lucas's rights to additional Penn Virginia Property and the Settlement Shares in escrow pending the Company’s payment of all amounts due under the Rogers Settlement Agreement. The Company failed to make the required payment to Roger’s by August 27, 2015, and has still not made all the required payments. As a result, the additional Penn Virginia Property was returned to Lucas Energy, Inc. The full amount due under the Roger’s obligation including accrued interest at September 30, 2015 totals $288,559.