Viking Global Technologies, Inc 10-K/A, filed Jun 8, 2022
Viking Global Technologies, Inc. (VGTK)
About this 10-K/A
Viking Global Technologies, Inc filed this 10-K/A on June 8, 2022, covering the fiscal year ended March 31, 2020.
Headline figures
Fiscal year ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $397.12K
- down 85.5% from $2.74M a year earlier
- Net loss
- $27.96M
- compared with a net loss of $42.04M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 3)
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended March 31, 2020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-32508
| CAMBER ENERGY, INC. |
| (Exact name of registrant as specified in its charter) |
| Nevada |
| 20-2660243 |
| (State of other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
| 15915 Katy Freeway, Suite 450, Houston, Texas |
| 77094 |
| (Address of principal executive offices) |
| (Zip code) |
Registrant’s telephone number, including area code: (210) 998-4035
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 par value | CEI | NYSE American |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $8,388,256.
There were 414,290,116 shares of the registrant’s common stock outstanding as of May 16, 2022.
Documents incorporated by reference: None.
Explanatory Note – This Filing
This Amendment No. 3 on Form 10-K/A amends the registrant’s Amended Annual Report on Form 10-K/A for the year ended March 31, 2020 as filed with the Securities and Exchange Commission by the registrant on May 18, 2022. This Amendment is being filed to include the XBRL Interactive Data File exhibits required by Item 601(b)(101) of Regulation S-K. No other items are being amended, and this Amendment does not reflect any events occurring after the filing of the original Amended Annual Report on Form 10-K/A for the year ended March 31, 2020.
Explanatory Note - Previous Filing
Camber Energy, Inc (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 with the Securities and Exchange Commission (the “SEC”) on June 29,2020 (the “Original 10-K”). We then amended the Original 10-K by filing Amendment No. 1 on Form 10-K/A (the “First Amendment”) with the SEC on November 22, 2021 which amended the Original 10-K. This Amendment No. 2 on Form 10-K/A (the “Second Amendment”) further amends the First Amendment.
Restatement Background
First Amendment
On October 31, 2020, the Company received a comment letter from the SEC (“SEC Comment Letter”) with respect to Amendment No. 2 to the Registration Statement on Form S-4 filed on October 14, 2020. Among other things, the SEC Comment Letter questioned the Company’s historical accounting treatment regarding the sale of our Series C Redeemable Convertible Preferred Stock (the “Series C Stock”). The Company recorded such sales as “permanent equity” and the SEC Comment Letter suggested the appropriate accounting classification was something other than permanent equity given certain provisions within the Certificate of Designation for the Series C Stock (“COD”). After considering the SEC Comment Letter and reviewing the COD, the Company and the holder of the Series C Stock determined there were several errors made in the drafting of the COD that could result in unintended consequences. Both parties agreed to subsequently correct the Certificate of Designation, and Certificates of Correction to the COD were filed on December 9, 2020 and on April 20, 2021 to correct the errors. Both parties agreed the corrections would be applied retroactive to the original filing date of the COD, being August 25, 2016; however, US GAAP requires a transaction to be accounted for in accordance with the terms of an agreement in effect during the period of the financial statements and, consequently, the Company determined that in accordance with the terms of the original COD, the Series C Stock should have been recorded as temporary equity instead of permanent equity. In addition, certain provisions of the original COD required the Company to recognize a derivative liability for certain conversions of the Series C Stock into common stock. After consultations with the SEC staff and the Company’s accounting advisors, the Company determined: (i) the impact of the error(s) is material for the fiscal years ended March 31, 2019 and 2020; and (ii) to restate its Annual Report on Form 10-K for the year ended March 31, 2020, inclusive of comparative financial statements for the year ended March 31, 2019, the previously filed quarterly report on From 10-Q for the three months ended June 30, 2020, and the previously filed quarterly report on Form 10-Q for the three and six month periods ended September 30, 2020. The Company filed the First Amendment to correct the Accounting for the Series C Stock.
Second Amendment
After filing the First Amendment, we had additional consultations with the SEC staff and determined that the accounting for the Series C Stock in the First Amendment required further adjustment from our previously determined accounting treatment.
The Series C Stock are temporary equity and include an embedded derivative due to the potential conversion into a variable number of common shares. The Series C Stock are redeemable or convertible, at the company’s option, upon issuance. The face value of the Series C Stock is convertible into common shares at a fixed rate. As a result, upon issuance a portion of the Series C Stock is recorded as temporary equity with a corresponding amount recorded as a deemed dividend. The carrying value of the portion of the Series C Stock recorded in temporary equity is required to be adjusted based on the fair value of the Company’s common shares required to satisfy a conversion with a corresponding recognition of an additional deemed dividend or an equity contribution. If the Series C Stock are redeemed or converted prior to the stated term, the dividends are required to be paid as if the shares were held to maturity.
As a result, the Company should have recorded a deemed dividend upon issuance and a derivative liability. Any differences between the consideration paid for the Series C Stock and the value of the derivative liability less the portion allocated to temporary equity should have been recorded as a loss on derivative liability at issuance. If the shares are converted into common shares with a value in excess of the recorded value of the derivative liability, an additional loss on the derivative is recognized. The Company did not properly apply the accounting requirements and miscalculated the derivative liability, temporary equity, deemed dividends and gain/loss on derivatives relating to the Series C Preferred stock in the First Amendment.
After consultations with the SEC staff and the Company’s accounting advisors, the Company determined that the impact of the errors in the First Amendment: (i) was material for the fiscal years ended March 31, 2019 and 2020; and (ii) to restate the First Amendment, inclusive of comparative financial statements for the year ended March 31, 2019, the previously filed quarterly report on Form 10-Q/A for the three months ended June 30, 2020, and the previously filed quarterly report on Form 10-Q/A for the three and six month periods ended September 30, 2020. See Note 4 to the Consolidated Financial Statements included in Item 8 for additional information and a reconciliation of the previously reported amounts to the restated amounts.
The Company’s management has concluded that in light of the errors described above and other factors, material weaknesses exist in the Company’s internal control over financial reporting and that the Company’s disclosure controls were not effective. See Item 9A Controls and Procedures.
Items Amended in this Form 10-K/A
This Form 10-K/A presents the First Amendment in its entirety, amended and restated with modifications as necessary to reflect the restatements. The following items have been amended to reflect the restatements:
Part I, Item1A. Risk Factors
Part II, Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II, Item8. Financial Statements
Part II, Item 9A Controls and Procedures
In addition, the Company’s Chief Executive Officer and Principal Accounting Officer have provided new certifications dated as of the date of this filing in connection with this Form
10-K/A (Exhibits 31.1, 31.2, 32.1 and 32.2).
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| Table of Contents |
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms used in this Report, which are commonly used in the oil and natural industry.
AFE or Authorization for Expenditures. A document that lays out proposed expenses for a particular project and authorizes an individual or group to spend a certain amount of money for that project.
ARO. Asset retirement obligation, a legal obligation associated with the retirement of an asset, which in the Company’s case is generally associated with the pugging of oil wells.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in this Annual Report in reference to crude oil or other liquid hydrocarbons.
Bcf. An abbreviation for billion cubic feet. Unit used to measure large quantities of gas, approximately equal to 1 trillion Btu.
Boe. Barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of natural gas.
Boepd. Barrels of oil equivalent per day.
Bopd. Barrels of oil per day.
Btu or British thermal unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Completion. The operations required to establish production of oil or natural gas from a wellbore, usually involving perforations, stimulation and/or installation of permanent equipment in the well or, in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Condensate. Liquid hydrocarbons associated with the production of a primarily natural gas reserve.
Conventional resources. Natural gas or oil that is produced by a well drilled into a geologic formation in which the reservoir and fluid characteristics permit the natural gas or oil to readily flow to the wellbore.
Developed acreage. The number of acres that are allocated or assignable to productive wells.
Development well. A well drilled into a proved oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Estimated ultimate recovery or EUR. Estimated ultimate recovery is the sum of reserves remaining as of a given date and cumulative production as of that date.
Exploratory well. A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.
Farmin or farmout. An agreement under which the owner of a working interest in an oil or natural gas lease assigns the working interest or a portion of the working interest to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a “farmin” while the interest transferred by the assignor is a “farmout.”
FERC. Federal Energy Regulatory Commission.
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Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells in which a working interest is owned.
Henry Hub. A natural gas pipeline located in Erath, Louisiana that serves as the official delivery location for futures contracts on the NYMEX. The settlement prices at the Henry Hub are used as benchmarks for the entire North American natural gas market.
Held by production. An oil and natural gas property under lease in which the lease continues to be in force after the primary term of the lease in accordance with its terms as a result of production from the property.
Horizontal drilling or well. A drilling operation in which a portion of the well is drilled horizontally within a productive or potentially productive formation. This operation typically yields a horizontal well that has the ability to produce higher volumes than a vertical well drilled in the same formation. A horizontal well is designed to replace multiple vertical wells, resulting in lower capital expenditures for draining like acreage and limiting surface disruption.
Liquids. Liquids, or natural gas liquids, are marketable liquid products including ethane, propane, butane and pentane resulting from the further processing of liquefiable hydrocarbons separated from raw natural gas by a natural gas processing facility.
LOE or Lease operating expenses. The costs of maintaining and operating property and equipment on a producing oil and gas lease.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MMBbl/d. One thousand barrels of crude oil or other liquid hydrocarbons per day.
Mcf. One thousand cubic feet of natural gas.
Mcfgpd. Thousands of cubic feet of natural gas per day.
MMcf. One million cubic feet of natural gas.
MMBtu. One million British thermal units.
Net acres or net wells. The sum of the fractional working interest owned in gross acres or wells.
Net revenue interest. The interest that defines the percentage of revenue that an owner of a well receives from the sale of oil, natural gas and/or natural gas liquids that are produced from the well.
NGL. Natural gas liquids.
NYMEX. New York Mercantile Exchange.
Permeability. A reference to the ability of oil and/or natural gas to flow through a reservoir.
Petrophysical analysis. The interpretation of well log measurements, obtained from a string of electronic tools inserted into the borehole, and from core measurements, in which rock samples are retrieved from the subsurface, then combining these measurements with other relevant geological and geophysical information to describe the reservoir rock properties.
Play. A set of known or postulated oil and/or natural gas accumulations sharing similar geologic, geographic and temporal properties, such as source rock, migration pathways, timing, trapping mechanism and hydrocarbon type.
Possible reserves. Additional reserves that are less certain to be recognized than probable reserves.
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Probable reserves. Additional reserves that are less certain to be recognized than proved reserves but which, in sum with proved reserves, are as likely as not to be recovered.
Producing well, production well or productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the well’s production exceed production-related expenses and taxes.
Properties. Natural gas and oil wells, production and related equipment and facilities and natural gas, oil or other mineral fee, leasehold and related interests.
Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is considered to have potential for the discovery of commercial hydrocarbons.
Proved developed reserves. Proved reserves that can be expected to be recovered through existing wells and facilities and by existing operating methods.
Proved reserves. Reserves of oil and natural gas that have been proved to a high degree of certainty by analysis of the producing history of a reservoir and/or by volumetric analysis of adequate geological and engineering data.
Proved undeveloped reserves or PUDs. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Repeatability. The potential ability to drill multiple wells within a prospect or trend.
Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Royalty interest. An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
Shut in. To shut in a well is to close off the well so that it stops producing.
2-D seismic. The method by which a cross-section of the earth’s subsurface is created through the interpretation of reflecting seismic data collected along a single source profile.
3-D seismic. The method by which a three-dimensional image of the earth’s subsurface is created through the interpretation of reflection seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do 2-D seismic surveys and contribute significantly to field appraisal, exploitation and production.
Trend. A region of oil and/or natural gas production, the geographic limits of which have not been fully defined, having geological characteristics that have been ascertained through supporting geological, geophysical or other data to contain the potential for oil and/or natural gas reserves in a particular formation or series of formations.
Unconventional resource play. A set of known or postulated oil and or natural gas resources or reserves warranting further exploration which are extracted from (a) low-permeability sandstone and shale formations and (b) coalbed methane. These plays require the application of advanced technology to extract the oil and natural gas resources.
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Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether such acreage contains proved reserves. Undeveloped acreage is usually considered to be all acreage that is not allocated or assignable to productive wells.
Unproved and unevaluated properties. Refers to properties where no drilling or other actions have been undertaken that permit such property to be classified as proved.
Vertical well. A hole drilled vertically into the earth from which oil, natural gas or water flows are pumped.
Volumetric reserve analysis. A technique used to estimate the amount of recoverable oil and natural gas. It involves calculating the volume of reservoir rock and adjusting that volume for the rock porosity, hydrocarbon saturation, formation volume factor and recovery factor.
Wellbore. The hole made by a well.
WTI or West Texas Intermediate. A grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K/A (this “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally located in the material set forth under the headings “Risk Factors“, “Management’s Discussion and Analysis of Financial Condition and Results of Operations“, “Business“, and “Properties“ but may be found in other locations as well. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others:
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| ● | the availability of funding and the terms of such funding; |
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| ● | our ability to integrate and realize the benefits from future acquisitions that we may complete, including our pending merger with Viking Energy Group, Inc. (“Viking”) and the costs of such integrations; |
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| ● | our ability to close the announced merger with Viking on the terms disclosed, if at all; |
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| ● | consideration we may be required to pay under certain circumstances upon termination of the merger with Viking; |
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| ● | our ability to timely collect amounts owed to us under secured and unsecured notes payable; |
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| ● | costs associated with the Viking merger; |
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| ● | significant dilution caused by the conversion of Series C Preferred Stock into common stock, as well as downward pressure on our stock price as a result of the sale of such shares; |
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| ● | our growth strategies; |
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| ● | our ability to repay outstanding loans and satisfy our outstanding liabilities; |
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| ● | market conditions in the oil and gas and pipeline services industries; |
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| ● | our ability to maintain our NYSE listing; |
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We identify forward-looking statements by use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “hope,” “plan,” “believe,” “predict,” “envision,” “intend,” “continue,” “potential,” “should,” “confident,” “could” and similar words and expressions, although some forward-looking statements may be expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements. You should consider carefully the statements under the “Risk Factors“ section of this Report and other sections of this Report which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements, including those described above.
Forward-looking statements speak only as of the date of this Report or the date of any document incorporated by reference in this Report. Except to the extent required by applicable law or regulation, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “Investors,” “SEC Filings” page of our website at www.camber.energy. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report. In addition, you can access our proxy statements, our Code of Business Conduct and Ethics, Nominating and Corporate Governance Committee Charter, Audit Committee Charter, and Compensation Committee Charter on our website http://www.camber.energy, at “Investors” – “SEC Filings” – “All SEC Filings” and “Governance” - “Policies”.
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The following discussion and analysis provide information which management believes is relevant for an assessment and understanding of the results of operations and financial condition of the Company. Expectations of future financial condition and results of operations are based upon current business plans and may change. The discussion should be read in conjunction with the audited financial statements and notes thereto.
In this Report, we may rely on and refer to information regarding our industry which comes from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Camber” and “Camber Energy, Inc.” refer specifically to Camber Energy, Inc., and our consolidated subsidiaries: CE Operating, LLC, an Oklahoma limited liability company, which is wholly-owned, C E Energy LLC, a Texas limited liability company which is wholly-owned (“CE”) and Elysium Energy, LLC, a Nevada limited liability which is 30% owned (25% acquired February 3, 2020 and 5% acquired June 25, 2020).
Certain abbreviations and oil and gas industry terms used throughout this Annual Report are described and defined in greater detail above under “Glossary of Oil and Natural Gas Terms“ on page 1 of this Report, and readers are encouraged to review that section.
In addition, unless the context otherwise requires and for the purposes of this Report only:
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| ● | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; |
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| ● | “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and |
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| ● | “Securities Act” refers to the Securities Act of 1933, as amended. |
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Camber Energy, Inc., a Nevada corporation, is based in Houston, Texas. We are currently primarily engaged in the acquisition, development and sale of crude oil, natural gas and natural gas liquids from various known productive geological formations, including the Cline shale and upper Wolfberry shale in Glasscock County, Texas. Incorporated in Nevada in December 2003 under the name Panorama Investments Corp., the Company changed its name to Lucas Energy, Inc., effective June 9, 2006, and effective January 4, 2017, the Company changed its name to Camber Energy, Inc. After the divestiture of our South Texas properties during fiscal 2019, as discussed in further detail below under “Mid-Continent Acquisition and Divestiture“, we initiated discussions with several potential acquisition and merger candidates to diversify our operations.
Pursuant to those discussions on July 8, 2019, we acquired Lineal Star Holdings, LLC (“Lineal”) pursuant to the terms of an Agreement and Plan of Merger dated as of the same date (the “Lineal Plan of Merger” and the merger contemplated therein, the “Lineal Merger” or the “Lineal Acquisition”), by and between Lineal, Camber, Camber Energy Merger Sub 2, Inc., Camber’s wholly-owned subsidiary (“Merger Sub”), and the Members of Lineal (the “Lineal Members”). Lineal is a specialty construction and oil and gas services enterprise providing services to the energy industry. Pursuant to the Lineal Plan of Merger, Camber acquired 100% of the ownership of Lineal from the Lineal Members in consideration for newly issued shares of Series E Redeemable Convertible Preferred Stock (“Series E Preferred Stock”) and Series F Redeemable Preferred Stock (“Series F Preferred Stock”), as discussed in greater detail below under “Lineal Acquisition and Divestiture“.
On December 31, 2019, the Company entered into, and closed the transactions contemplated by a Preferred Stock Redemption Agreement, by and between the Company, Lineal and the holders of the Company’s Series E Preferred Stock and Series F Preferred Stock (the “Preferred Holders”). Pursuant to the Redemption Agreement, effective as of December 31, 2019, each holder of Series E Preferred Stock transferred such Series E Preferred Stock to Camber in consideration for their pro rata share (except as discussed below in connection with the Series F Preferred Stock holder, who was also a holder of Series E Preferred Stock) of 100% of the Common Shares of Lineal and the holder of the Series F Preferred Stock transferred such Series F Preferred Stock (and such Series E Preferred Stock shares held by such holder) to Camber in consideration for 100% of the Preferred Shares of Lineal and as a result, ownership of 100% of Lineal was transferred back to the Preferred Holders, the original owners of Lineal prior to the Lineal Merger. Additionally, all of the Series E Preferred Stock and Series F Preferred Stock of the Company were automatically cancelled and deemed redeemed by the Company and the Series F Holder waived and forgave any and all accrued dividends on the Series F Preferred Stock. See also “Lineal Acquisition and Divestiture“ below.
On February 3, 2020, the Company entered into an Agreement and Plan of Merger (as amended to date, the “Merger Agreement”) with Viking Energy Group, Inc. (“Viking”). The Merger Agreement provides that a newly-formed wholly-owned subsidiary of the Company (“Merger Sub”) will merge with and into Viking (the “Merger”), with Viking surviving the Merger as a wholly-owned subsidiary of the Company, as described in greater detail below under “Viking Plan of Merger“.
Moving forward, the Company plans to complete the Merger with Viking and then focus on growing through the development of Viking’s properties while also seeking new acquisitions to grow its oil and gas production and revenues through the combined entity. The Company anticipates raising additional financing to complete acquisitions following the closing of the Merger, which may be through the sale of debt or equity. As described below, the Merger is subject to various closing conditions which may not be met pursuant to the contemplated timeline, if at all.
Mid-Continent Acquisition and Divestiture
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, we assumed approximately $30.6 million of commercial bank debt, issued 417 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.
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On July 12, 2018, the Company entered into an Asset Purchase Agreement (as amended, the “Sale Agreement”), as seller, with N&B Energy, LLC (“N&B Energy”) 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 (each of which were Sellers). Pursuant to the Sale Agreement, which closed September 26, 2018, effective August 1, 2018, the Company sold to N&B Energy a substantial portion of its assets, including all of the assets acquired pursuant to the Acquisition and certain other assets, other than the production payment and overriding royalty interests discussed below (the “Disposed Assets”). In consideration for the Disposed Assets, N&B Energy agreed to pay the Company $100 in cash, to assume the Company’s liabilities and contractual obligations in connection with the Disposed Assets (including lease and bonus payments), to assume all of the Company’s obligations and debt owed under its outstanding loan agreement with International Bank of Commerce (“IBC Bank”), which had a then outstanding principal balance of approximately $36.9 million and the other parties agreed to enter into a settlement agreement.
On September 26, 2018, the Company entered into an Assumption Agreement (the “Assumption Agreement”) with IBC Bank; CE Operating, LLC, the Company’s wholly-owned subsidiary (“CE Operating”), which became a party to the Sale Agreement pursuant to the second amendment thereto; N&B Energy; Mr. Azar; RAD2 Minerals, Ltd., an entity owned and controlled by Mr. Azar (“RAD2”); Mr. Seay; and DBS Investments, Ltd., an entity owned and controlled by Mr. Seay (“DBS”). Azar, Seay, RAD2, and DBS are collectively referred to as the “Guarantors”.
Pursuant to the Assumption Agreement, N&B Energy agreed to assume all of the Company’s liabilities and obligations owed to IBC Bank and IBC Bank approved the transactions contemplated by the Sale Agreement and the assumption by N&B Energy of all of the amounts and liabilities which the Company owed to IBC Bank (collectively, the “IBC Obligations”). Finally, pursuant to the Assumption Agreement, IBC Bank released and forever discharged the Company and CE Operating and each of their current and former officers, directors, and stockholders, from all covenants, agreements, obligations, claims and demands of any kind, whether in law or at equity, which IBC Bank then had, arising out of or related to the amounts which the Company owed to IBC Bank under the Loan Agreement or mortgages and/or under such documents or agreements, and further agreed to release the lien which IBC Bank then held on certain of the Company’s properties located in west Texas.
On September 26, 2018, the transactions contemplated by the Sale Agreement closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement) and paid the Company $100 in cash, and the Company transferred ownership of the Disposed Assets to N&B Energy.
Notwithstanding the sale of the Disposed Assets, the Company retained its assets in Glasscock and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received, of which no funds have been received to date) and a 3% overriding royalty interest, in its then existing Okfuskee County, Oklahoma asset; and retained an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignment of Overriding Royalty Interests.
The effective date of the Sale Agreement was August 1, 2018. The Assets were assigned “as is” with all faults.
As a result of the Assumption Agreement and the Sale Agreement, the Company reduced its liabilities by $37.9 million and its assets by approximately $12.1 million.
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Lineal Acquisition and Divestiture
In connection with the Lineal Plan of Merger, the Company entered into several other agreements, including (a) a Security Exchange Agreement dated July 8, 2019 (the “Exchange Agreement”), by and between the Company and an accredited institutional investor, Discover Growth Fund LLC, who has funded the Company over the past several years (“Discover”); (b) a Termination Agreement dated July 8, 2019, by and between the Company and Discover Growth Fund, which purchased shares of Series C Preferred Stock from us in December 2018 (“Discover Growth”, which subsequently transferred all of its shares of Series C Preferred Stock to Discover); and (c) a Funding and Loan Agreement dated July 8, 2019, by and among the Company, Lineal, and certain of the Lineal Members who also acquired shares of the Company’s preferred stock as a result of the Lineal Merger (the “Funding Agreement”), which provided for the Company to loan $1,050,000 to Lineal, which loan was evidenced by a Promissory Note entered into by Lineal, as borrower, in favor of the Company, as lender, dated July 8, 2019 (the “July 2019 Lineal Note”).
Also as part of the Lineal Merger, the Company designated three new series of preferred stock, (1) Series D Convertible Preferred Stock (the “Series D Preferred Stock” and the certificate of designations setting forth the rights thereof, the “Series D Designation”); (2) Series E Redeemable Convertible Preferred Stock (the “Series E Preferred Stock” and the certificate of designation setting forth the rights thereof (the “Series E Designation”); and (3) Series F Redeemable Preferred Stock (the “Series F Preferred Stock” and the certificate of designation setting forth the rights thereof, the “Series F Designation”, and the Series E Preferred Stock and the Series F Preferred Stock, collectively, the “Series E and F Preferred Stock”). Additionally, with the approval of the holders thereof, the Company amended and restated the designation of its Series C Redeemable Convertible Preferred Stock (the “Series C Preferred Stock” and the amended and restated designation setting forth the rights thereof, the “Series C Designation”).
The Lineal Plan of Merger, Series D Designation and Series E Designation, provided that, effective upon the date that the stockholders of the Company had approved the Lineal Plan of Merger and issuance of shares in connection therewith (the “Stockholder Approval” and such date of Stockholder Approval, the “Stockholder Approval Date”), and subject to certain closing conditions, (a) the common stock holders of the Company were to hold between 6% and 6.67% of the Company’s fully-diluted capitalization (depending on certain factors); (b) Discover was to hold Series D Preferred Stock convertible into 26.67% of the Company’s fully-diluted capitalization, subject to the terms of the Series D Preferred Stock; and (c) the Lineal Members, who held the Series E Preferred Stock, were to have the right to convert such Series E Preferred Stock, subject to the terms thereof, as discussed above, into 66.67% of the Company’s fully-diluted capitalization, or 70%, subject to certain factors.
Pursuant to the Lineal Plan of Merger, Merger Sub merged with and into Lineal, with Lineal continuing as the surviving entity in the Lineal Merger and as a wholly-owned subsidiary of the Company.
On October 8, 2019, Lineal acquired an 80% interest in Evercon Energy LLC (“Evercon”). The acquisition required Lineal to assume certain liabilities and provide working capital for a period of six months in an amount of $50,000 per month to Evercon. As part of the Lineal Divestiture, described below, Evercon was divested effective December 31, 2019.
The Funding Agreement required the Company to fund $1,050,000 in immediately available funds to Lineal (the “Loan”). The Loan was documented by the July 2019 Lineal Note and the Loan was made on July 9, 2019.
Subsequent to the closing date of the Lineal Plan of Merger, for various reasons, the parties to such Lineal Plan of Merger were unable to complete a further acquisition or combination which would allow the post-Merger combined company to meet the initial listing standards of the NYSE American. This was a requirement to the Company having to seek shareholder approval for the terms of the Series E Preferred Stock (including the voting rights (i.e., the right, together with the Series F Preferred Stock, to vote 80% of the Company’s voting shares) and conversion rights (i.e., the right to convert into between 67-70% of the Company’s post-shareholder approval capitalization) associated therewith). Consequently, and because no definitive timeline was able to be established for when the Company believed it would meet the NYSE American initial listing standards and consequently, when shareholder approval would be sought or received for the terms of the Series E Preferred Stock and Series F Preferred Stock, the Preferred Holders and the Company determined it was in their mutual best interests to unwind the Lineal Merger.
In order to affect such unwinding, on December 31, 2019, we, Lineal (and its subsidiaries) and the Preferred Holders entered into, and closed the transactions contemplated by, a Preferred Stock Redemption Agreement (the “Redemption Agreement” and the redemption contemplated thereby, the “Redemption” or the “Lineal Divestiture”).
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Pursuant to the Redemption Agreement, the parties thereto mutually agreed to unwind the Lineal Merger and allow for the redemption in full of Lineal by the Preferred Holders. In connection therewith, the Company redeemed the Company’s Series E and F Preferred Stock issued in connection with the Lineal Merger and ownership of 100% of Lineal was transferred back to the Preferred Holders, and all of the Series E Preferred Stock and Series F Preferred Stock of the Company outstanding were cancelled through the redemption.
The Redemption Agreement also provided for (a) the entry by Lineal and the Company into a new unsecured promissory note in the amount of $1,539,719, the outstanding amount of the July 2019 Lineal Note together with additional amounts loaned by Camber to Lineal through December 31, 2019 (the “December 2019 Lineal Note”); (b) the unsecured loan by the Company to Lineal on December 31, 2019 of an additional $800,000, entered into by Lineal in favor of the Company on December 31, 2019 (“Lineal Note No. 2”); and (c) the termination of the prior Lineal Plan of Merger and Funding Agreement entered into in connection therewith (pursuant to which all funds previously held in a segregated account for future Lineal acquisitions, less amounts loaned pursuant to Lineal Note No. 2, were released back to the Company). The December 2019 Lineal Note and Lineal Note No. 2, accrue interest, payable quarterly in arrears, beginning on March 31, 2020 and continuing until December 31, 2021, when all interest and principal is due, at 8% and 10% per annum (18% upon the occurrence of an event of default), respectively.
The divestiture resulting from the Redemption Agreement qualifies as a discontinued operation in accordance with U.S. generally accepted accounting principles (“GAAP”). As a result, operating results and cash flows related to the Lineal operations have been reflected as discontinued operations in the Company’s consolidated statements of operations and consolidated statements of cash flows for the periods presented.
Viking Plan of Merger
On February 3, 2020, the Company and Viking entered into the Merger Agreement. Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock of Viking (the “Viking Common Stock”) issued and outstanding, other than certain shares owned by the Company, Viking and Merger Sub, will be converted into the right to receive the pro rata share of 80% of the Company’s post-closing capitalization, subject to certain adjustment mechanisms discussed in the Merger Agreement (and excluding shares issuable upon conversion of the Series C Preferred Stock of the Company). Holders of Viking Common Stock will have any fractional shares of Company common stock after the Merger rounded up to the nearest whole share. The completion of the Merger is subject to certain closing conditions. Specifically, the percentage of shares retained by Camber shareholders (initially 80%, the “Camber Percentage”) is adjusted as follows: (i) for each (A) $500,000 in Camber unencumbered cash (without any associated debt) available for use by the combined company (the “Combined Company”) after the Effective Time, with a permitted use being to, among other things, pay debt obligations of Viking outside of Viking’s Ichor division or Elysium division, which comes from equity sold by Camber for cash from February 3, 2020, through the Effective Time, which is not contingent or conditional upon the closing of the Merger (the “Camber Surplus Cash”), or (B) $500,000 in other unencumbered assets acquired by Camber after February 3, 2020 and prior to closing without increasing Camber’s liabilities (the “Other Camber Surplus Assets”), the Camber Percentage will increase by an incremental 0.5% (a “Camber Percentage Increase”); and (ii) for each additional $500,000 in Viking unencumbered cash (without any associated debt) for use by the Combined Company after the Effective Time which is not contingent or conditional upon the closing of the Plan of Merger, with a permitted use being to, among other things, pay debt obligations of Viking outside of Viking’s Ichor division or Elysium division in excess of $500,000 at Closing, which comes from equity sold by Viking for cash from February 3, 2020 through the Effective Time, the Camber Percentage will decrease by an incremental 0.5% (a “Camber Percentage Decrease”). The aggregate Camber Percentage Increase or Camber Percentage Decrease shall not exceed 5% pursuant to this particular section of the Merger Agreement, and neither party will raise capital from the other party’s existing shareholders without the prior written consent of such other party.
The Merger Agreement can be terminated (i) at any time with the mutual consent of the parties; (ii) by either the Company or Viking if any governmental consent or approval required for closing is not obtained, or any governmental entity issues a final non-appealable order or similar decree preventing the Merger; (iii) by either Viking or the Company if the Merger shall not have been consummated on or before September 30, 2020, provided that the Company or Viking shall have the right to extend such date from time to time, until up to December 31, 2020, in the event that the Company has not fully resolved SEC comments on the Form S-4 (a preliminary draft of which has previously been filed) or other SEC filings related to the Merger, and Camber is responding to such comments in a reasonable fashion, subject to certain exceptions; (iv) by the Company or Viking, upon the breach by the other of a term of the Merger, which is not cured within 30 days of the date of written notice thereof by the other; (v) by the Company if Viking is unable to obtain the affirmative vote of its stockholders for approval of the Merger; (vi) by Viking if the Company is unable to obtain the affirmative vote of its stockholders required pursuant to the terms of the Merger Agreement; and (vii) by Viking or the Company if the other party’s directors change their recommendation to their stockholders to approve the Merger, subject to certain exceptions set forth in the Merger Agreement, or if there is a willful breach of the Merger Agreement by the other party thereto.
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A further requirement to the closing of the Merger was that the Company was required to have acquired 25% of Viking’s subsidiary Elysium Energy, LLC (“Elysium”) as part of a $5,000,000 investment in Viking’s Rule 506(c) offering, which transaction was completed on February 3, 2020, as discussed below and have acquired an additional 5% of Elysium as part of a subsequent $4,200,000 investment in Viking’s Rule 506(c) offering, which transaction was completed on June 25, 2020, as discussed below.
In the event of termination of the Merger Agreement, we are required, under certain circumstances described below, to return a portion of the Elysium interests to Viking:
| Reason for Termination
| Percentage of Elysium Retained by Camber |
| The reasonable likelihood that the combined company will not meet the initial listing requirements of the NYSE American, required regulatory approvals will not be obtained, or the registration statement on Form S-4 will not be declared effective, through no fault of Camber or Viking | 20%* |
| Termination of the Merger Agreement by either party, through no fault of Camber | 25%* |
| Termination of the Merger Agreement due to a material breach of the Merger Agreement by Camber or its disclosure schedules | 0%* |
| Termination of the Merger Agreement for any reason and in the event the Secured Notes (defined below) are not repaid within 90 days of the date of termination and the Additional Payment (defined below) is not made. | 30% |
*Assumes the payment of Secured Notes within 90 days of the date of termination of the Merger Agreement and the Additional Payment (defined below) is made.
The Merger Agreement provides that the Secured Notes (defined below) will be forgiven in the event the Merger closes, and the Secured Notes will be due 90 days after the date that the Merger Agreement is terminated by any party for any reason, at which time an additional payment equal to (i) 115.5% of the original principal amount of the Secured Notes, minus (ii) the amount due to the Company pursuant to the terms of the Secured Notes upon repayment thereof (the “Additional Payment”) is due.
A required condition to the entry into the Merger was that the Company loan Viking $5 million, pursuant to the terms of a Securities Purchase Agreement, which was entered into on February 3, 2020 (the “SPA”). On February 3, 2020, the Company and Discover entered into a Stock Purchase Agreement pursuant to which Discover purchased 525 shares of Series C Preferred Stock (described in greater detail below under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Description of Capital Stock- Preferred Stock - Series C Redeemable Convertible Preferred Stock“), for $5 million, at a 5% original issue discount to the $10,000 face value of such preferred stock. Pursuant to the SPA, the Company made a $5 million loan to Viking (using funds raised from the sale of the Series C Preferred Stock shares to Discover), which was evidenced by a 10.5% Secured Promissory Note (the “February 2020 Secured Note”). The February 2020 Secured Note is secured by a security interest, para passu with the other investors in Viking’s Secured Note offering (subject to certain pre-requisites) in Viking’s 70% ownership of Elysium and 100% of Ichor Energy Holdings, LLC, Viking’s 100% subsidiary. Additionally, pursuant to a separate Security and Pledge Agreement entered into on February 3, 2020, Viking provided the Company a security interest in the membership, common stock and/or ownership interests of all of Viking’s existing and future, directly owned or majority owned subsidiaries, to secure the repayment of the February 2020 Secured Note.
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The February 2020 Secured Note is convertible into common shares of Viking at a conversion price of $0.24 per share at any time after March 4, 2020, and before the 15th day after Viking’s common stock has traded at an average daily price of at least $0.55 for 15 consecutive business days (at which point the February 2020 Secured Note is no longer convertible), provided that the Company is restricted from converting any portion of the February 2020 Secured Note into Viking’s common stock if upon such conversion the Company would beneficially own more than 4.99% of Viking’s common stock (which percentage may be increased or decreased, with 61 days prior written notice to Viking, provided that such percentage cannot under any circumstances be increased to greater than 9.99%).
As additional consideration for the Company making the loan to Viking, Viking assigned the Company a 25% interest in Elysium pursuant to the terms of an Assignment of Membership Interests dated February 3, 2020.
Elysium holds certain working interests and over-riding royalty interests in oil and gas properties in Texas (approximately 71 wells in 11 counties) and Louisiana (approximately 52 wells in 6 parishes), along with associated wells and equipment, and was producing an average of approximately 2,700 Boe per day in March 2020.
The Merger Agreement was amended by:
(1) a First Amendment thereto entered into by the parties on May 27, 2020, which (i) modified the Camber Percentage adjustment mechanism to cap the aggregate Camber Percentage Increase or Camber Percentage Decrease at 5%; (ii) modify the events resulting in such adjustments; (iii) correct a prior error with such calculation which discussed Camber being required to have $4 million in cash at closing; and (iv) provided that neither party will raise capital from the other party’s existing shareholders without the prior written consent of the other party;
(2) a Second Amendment thereto entered into by the parties on June 15, 2020, which extended the date after which the Merger Agreement can be cancelled by either the Company or Viking, if not completed thereby, from June 30, 2020 to September 30, 2020, provided that either the Company or Viking have the right to further extend such date from time to time, until up to December 31, 2020, in the event that the Company has not fully resolved SEC comments on Registration Statement on Form S-4 which the Company filed in connection with the Merger, or other SEC filings related to the Merger, and the Company is responding to such comments in a reasonable fashion, subject to certain exceptions; and
(3) a Third Amendment thereto entered into by the parties on June 25, 2020, which (i) provided for the entry into the June 2020 SPA and the loan of the $4.2 million evidenced by the June 2020 Secured Note (discussed below); (ii) provided for the requirement to pay the Additional Payment as a break-up fee, in the event the Merger is terminated prior to closing; (iii) updated the percentages of Elysium which are required to be returned to Viking upon termination of the Merger (as updated in the table above); (iv) confirm that none of the funds loaned by the Company to Viking will affect the merger ratios set forth in the Merger Agreement; and (v) allow for the Company’s Board of Directors to authorize the payment to the officers and directors of the Company, of consideration of up to $150,000 each ($600,000 in aggregate), for past services rendered and services to be rendered by such individuals through the closing date of the Merger, which compensation has not been formally authorized by the Board of Directors to date, but which is expected to be authorized and documented in the coming weeks.
The discussion of the Merger Agreement included throughout this Report (including under this “Viking Plan of Merger” section) has been updated to take into effect the amendments affected by the First Amendment, Second Amendment and Third Amendment.
On June 25, 2020, the Company loaned Viking an additional $4.2 million, pursuant to the terms of a Securities Purchase Agreement, which was entered into on the same date. The $4.2 million loan was evidenced by a 10.5% Secured Promissory Note (the “June 2020 Secured Note” and together with the February 2020 Secured Note, the “Secured Notes”), the repayment of which was secured by the terms of a Security and Pledge Agreement. The June 2020 Secured Note has substantially similar terms as the February 3, 2020 10.5% Secured Note discussed above, and substantially similar security rights in Viking in connection therewith.
As additional consideration for the Company making the loan to Viking, Viking assigned the Company an additional 5% of Elysium pursuant to the terms of an Assignment of Membership Interests dated June 25, 2020, which brings the Company’s current total ownership of Elysium up to 30%.
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June 2020 Stock Purchase Agreement
On and effective June 22, 2020, the Company and Discover entered into a Stock Purchase Agreement (the “June 2020 Purchase Agreement”), pursuant to which Discover purchased 630 shares of Series C Preferred Stock for $6 million, at a 5% original issue discount to the $10,000 face value of such preferred stock (the “Face Value”). Pursuant to the June 2020 Purchase Agreement, as long as Discover holds any shares of Series C Preferred Stock, the Company agreed that, except as contemplated in connection with the Merger, the Company would not issue or enter into or amend an agreement pursuant to which the Company may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price. The Company also agreed that it would not issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock.
Additionally, provided that the Company has not materially breached the terms of the June 2020 Purchase Agreement, the Company may at any time, in its sole and absolute discretion, repurchase from Discover all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Discover 110% of the aggregate face value of all such shares.
The Company also agreed to provide Discover a right of first offer to match any offer for financing the Company receives from any person while the shares of Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, the Company agreed that if it issues any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then the Company would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover.
The Company agreed pursuant to the June 2020 Purchase Agreement that if the Merger does not close by the required date approved by the parties thereto (as such may be extended from time to time), the Company is required, at Discover’s option, in its sole and absolute discretion, to immediately repurchase from Discover all then outstanding Series C Preferred Stock shares acquired by Discover pursuant to the June 2020 Purchase Agreement, by paying to Discover 110% of the aggregate Face Value of all such shares (the “Repurchase Requirement”), which totals $6,930,000.
Finally, the Company agreed to include proposals relating to the approval of the June 2020 Purchase Agreement and the issuance of the shares of common stock upon conversion of the Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement, as well as an increase in authorized common stock to fulfill the Company’s obligations to issue such shares, at the meeting held to approve the Merger or a separate meeting in the event the Merger is terminated prior to shareholder approval, and to use commercially reasonable best efforts to obtain such approvals as soon as possible and in any event prior to December 31, 2020.
Due to the certain redemption provisions of the Series C Preferred Stock that were deemed to be outside the control of the Company, the Series C Redeemable Preferred stock was recorded as temporary equity.
The Company loaned $4.2 million of the funds provided by the June 2020 Purchase Agreement to Viking in connection with the purchase of the June 2020 Secured Note.
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Amendment to February 2020 Stock Purchase Agreement
On June 22, 2020, the Company and Discover entered into an Amendment to Stock Purchase Agreement (the “SPA Amendment”), pursuant to which Discover agreed to terminate the obligation set forth in the Stock Purchase Agreement previously entered into between the Company and Discover on February 3, 2020, which contained a Repurchase Requirement substantially similar to the one contained in the June 2020 Purchase Agreement (as to the 525 shares of Series C Preferred Stock sold to Discover on February 3, 2020), which would have required that the Company pay Discover an aggregate of $5,775,000 in connection with the redemption of the 525 shares of Series C Preferred Stock the Company sold to Discover in the event the Merger was terminated.
Current Operations and Business Information
Our website address is http://www.camber.energy. Our fiscal year ends on the last day of March of each year. The information on, or that may be accessed through, our website is not incorporated by reference into this Report and should not be considered a part of this Report. We refer to the twelve-month periods ended March 31, 2020 and March 31, 2019 as our 2020 Fiscal Year and 2019 Fiscal Year, respectively.
As of March 31, 2020, the Company had leasehold interests (working interests) covering approximately 221 / 3,500 (net / gross) acres, producing from the Cline and Wolfberry formations. The remaining Texas acreage consists of leasehold covering approximately 555 / 638 (net / gross) acres and wellbores located in the Panhandle in Hutchinson County, Texas, which was acquired by the Company in March 2018, and which will be transferred as part of the PetroGlobe settlement discussed below. On May 30, 2019, the Company received a Severance Order from the Texas Railroad Commission (the “TRC”) for noncompliance with TRC rules, suspending the Company’s ability to produce or sell oil and gas from its Panhandle leases in Hutchinson County, Texas, until certain well performance criteria are met. Since that time, the Company followed TRC procedures in order to regain TRC compliance for the Panhandle wells. Additionally, as a result of a notice from its working interest partner, PetroGlobe Energy Holdings, LLC (“PetroGlobe”), and related litigation, all prior production on the Panhandle wells was held in suspense. The Company cured its prior issues with the TRC and plans to close the transactions contemplated by its Settlement Agreement with PetroGlobe shortly after the filing of this Report, as discussed below under “Item 3. Legal Proceedings“; which will provide for among other things, the Company’s transfer of its ownership of its Hutchinson County, Texas properties and wells to PetroGlobe, which transaction and transfer is anticipated to close shortly after the filing of this Report.
As of March 31, 2020, Camber was producing an average of approximately 35.8 net barrels of oil equivalent per day (“Boepd”) from 25 active well bores. The ratio between the gross and net production varies due to varied working interests and net revenue interests in each well. Our production sales totaled 13,084 Boe, net to our interest, for the year ended March 31, 2020. At March 31, 2020, Camber’s total estimated proved producing reserves were 133,442 Boe, of which 98,600 Bbls were crude oil and NGL reserves, and 207,823 Mcf were natural gas reserves. None of these reserves relate to the Company’s Panhandle properties.
The Hutchinson County, Texas, acquisition in March 2018 included interests in 48 gross non-producing well bores, 5 saltwater disposal wells, and the required infrastructure and equipment necessary to support future hydrocarbon production as well as approximately 555 net leasehold acres in Hutchinson County, Texas. Camber holds an interest in 25 producing wells in Glascock County and the Company previously restored 11 wells in Hutchinson County to production, which are not currently producing and are plugged.
As of March 31, 2020 and through the date of this Report was filed; Camber had curtailed the majority of its production from its wells in Hutchinson County, Texas, because of the Severance Order issued by 2019 as discussed above. As part of the settlement discussed below under “Item 3. Legal Proceedings“, the Hutchinson County, Texas wells were plugged and such wells will be transferred to PetroGlobe shortly after the filing of this Report.
At March 31, 2019, Camber’s total estimated proved reserves were 203,406 Boe, of which 124,520 Bbls were crude oil reserves, 44,100 Bbls were natural gas liquids and 208,710 Mcf were natural gas reserves. Approximately 76% of the Boe was proved producing.
As of March 31, 2020, Camber had no employees, and utilized independent contractors on an as-needed basis.
Moving forward, the Company plans to complete the Merger with Viking and then focus on growing through the development of Viking’s properties while also seeking new acquisitions to grow its oil and gas production and revenues through the combined entity. The Company anticipates raising additional financing to complete acquisitions following the closing of the Merger, which may be accomplished through the sale of debt or equity. As described above, the Merger is subject to various closing conditions which may not be met pursuant to the contemplated timeline, if at all.
Recent Reverse Stock Splits and Amendments to Articles
On March 1, 2018, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to affect a 1-for-25 reverse stock split of all outstanding common stock shares of the Company which was effective on March 5, 2018. On December 20, 2018, the Company filed a Certificate of Change with the Secretary of State of Nevada to affect another 1-for-25 reverse stock split of the Company’s (a) authorized shares of common stock (from 500,000,000 shares to 20,000,000 shares); and (b) issued and outstanding shares of common stock, which was effective on December 24, 2018. Effective on April 10, 2019, the Company amended its Articles of Incorporation to increase the number of the Company’s authorized shares of common stock, $0.001 per value per share, from 20,000,000 shares to 250,000,000 shares. On July 3, 2019, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to affect another 1-for-25 reverse stock split of all outstanding common stock shares of the Company, which was effective on July 8, 2019. On October 28, 2019, the Company filed a Certificate of Change with the Secretary of State of Nevada to affect a 1-for-50 reverse stock split of the Company’s (a) authorized shares of common stock (from 250,000,000 shares to 5,000,000 shares); and (b) issued and outstanding shares of common stock. The reverse stock split was effective on October 29, 2019. The effect of the reverse stock split was to combine every 50 shares of outstanding common stock into one new share, with a proportionate 1-for-50 reduction in the Company’s authorized shares of common stock, but with no change in the par value per share of the common stock. The result of the reverse stock split was to reduce the number of common stock shares outstanding on the effective date of the reverse, from approximately 74.5 million shares to approximately 1.5 million shares (prior to rounding). Effective on April 16, 2020, with the approval of the Company’s stockholders at its April 16, 2020 special meeting of stockholders, the Company filed a Certificate of Amendment to its Articles of Incorporation to increase its authorized shares of common stock to 25 million shares of common stock, which filing was effective the same date.
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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 herein have been retroactively adjusted to reflect the reverse splits for all periods presented.
Our operations during the year ended March 31, 2019 were all crude oil and natural gas exploration and production related. For the year ended March 31, 2020, our operations were all crude oil and natural gas exploration and production related, except that from July 8, 2019 to December 31, 2019, we also owned and operated Lineal, which operated as an oil and gas service company and generated oil and gas service revenues. As described above under “Lineal Acquisition and Divestiture“, on December 31, 2019, we divested our entire interest in Lineal. In conjunction with the Lineal Divestiture, all contract revenue (oil and gas service revenue) has been included in “Loss from Discontinued Operations” for the year ended March 31, 2020, on the statement of operations.
Operations and Oil and Gas Properties
We operate and invest in areas that are known to be productive, with a reasonably established production history, in order to decrease geological and exploratory risk. The Company has certain interests in wells producing from the Wolfberry and Cline formations in Glasscock County, Texas.
In March 2018, we completed the acquisition of working interests in certain leases, wells and equipment located in the Texas panhandle and a 37.5% interest in one partnership that owned certain leases, wells and equipment in the same fields, for a total purchase price of $250,000, payable in three tranches, from an entity which is controlled by Ian Acrey, who served as the operating manager of our operations through a different entity. The acquisition included 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 555 net leasehold acres in Hutchinson County, Texas. As a result of the May 30, 2019 Severance Order from the TRC discussed above, the Company was effectively blocked from selling oil and gas from its 11 Panhandle wells located in Hutchinson County, Texas, and as a result of the PetroGlobe lawsuit discussed below under “Item 3. Legal Proceedings“, a total of approximately 1,000 barrels of oil were held in suspension pending the outcome of the lawsuit. As discussed below under “Item 3. Legal Proceedings“; on January 27, 2020, the Company entered into a Compromise Settlement Agreement (the “Settlement Agreement”) with PetroGlobe, Signal Drilling, LLC (“Signal”), Petrolia Oil, LLC (“Petrolia”), Prairie Gas Company of Oklahoma, LLC (“PGCO”), and Canadian River Trading Company, LLC (“CRTC”). Pursuant to the Settlement Agreement, the Company agreed to pay PetroGlobe $250,000, of which $100,000 was due upon execution of the Settlement Agreement, which payment has been made, and $150,000 was paid to an escrow account, which payment will be released in connection with the successful transfer of all wells and partnership interests of the Company’s prior wholly-owned subsidiary C E Energy, LLC (“CE”) to PetroGlobe, which is anticipated to occur shortly after the filing of this Report. CE operates all of our former producing wells and leases located in Hutchinson County, Texas, which as discussed above are being transferred to PetroGlobe.
On September 26, 2018, the transactions contemplated by the Sale Agreement (described above under “Mid-Continent Acquisition and Divestiture“) closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid the Company $100 in cash, and the Company transferred ownership of the Disposed Assets (defined above, constituting a substantial portion of its assets) to N&B Energy. Notwithstanding the sale of the Disposed Assets which included approximately 18,000 net acres, the Company retained its assets in Glasscock County and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received – of which none has been received as of the filing date) and a 3% overriding royalty interest, in its then existing Okfuskee County, Oklahoma assets; and retained an overriding royalty interest on certain other undeveloped leasehold interests.
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As of the date of this filing, we operate exclusively in the onshore United States oil and natural gas industry. Our crude oil and natural gas production sales are to gatherers and marketers with national reputations. Our sales are made on a month-to-month basis, and title transfer occurs when the oil is loaded onto the purchaser’s truck. Crude oil prices realized from production sales are indexed to published posted refinery prices, and to published crude indexes with adjustments on a contract basis.
We generally sell a significant portion of our oil and gas production to a relatively small number of customers. For the year ended March 31, 2020, our consolidated revenues were from the sale of oil, gas and natural gas liquids under marketing contracts primarily with Apache Corporation. We are not dependent upon any one purchaser and have alternative purchasers available at competitive market prices if there is disruption in services or other events that cause us to search for other ways to sell our production.
During the year ended March 31, 2020, one customer accounted for 92% of our total revenues and during the year ended March 31, 2019, three customers accounted for 84% of our total revenues. We do not believe the loss of any customer will have a material effect on the Company because alternative customers are readily available.
We are in direct competition for properties with numerous oil and natural gas companies and partnerships exploring various areas of Texas, Oklahoma and elsewhere. Many competitors are large, well-known oil and natural gas and/or energy companies, although no single entity dominates the industry. Many of our competitors possess greater financial and personnel resources, enabling them to identify and acquire more economically desirable energy producing properties and drilling prospects than us. Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry.
Our operations are subject to various types of regulation at the federal, state and local levels. These regulations include requiring permits for the drilling of wells; maintaining hazard prevention, health and safety plans; submitting notification and receiving permits related to the presence, use and release of certain materials incidental to oil and natural gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface plugging and abandonment of wells and the transporting of production. Our operations are also subject to various conservation matters, including the number of wells which may be drilled in a unit and the unitization or pooling of oil and natural gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally limiting the venting or flaring of natural gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to possibly limit the amounts of oil and natural gas we can produce from our wells and to limit the number of wells or the locations at which we can drill.
In the United States, legislation affecting the oil and natural gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies issue recommended new and extensive rules and regulations binding on the oil and natural gas industry, some of which carry substantial penalties for failure to comply. These laws and regulations have a significant impact on oil and natural gas drilling, natural gas processing plants and production activities, increasing the cost of doing business and, consequently, affect profitability. Insomuch as new legislation affecting the oil and natural gas industry is common-place and existing laws and regulations are frequently amended or reinterpreted, we may be unable to predict the future cost or impact of complying with these laws and regulations. We consider the cost of environmental protection a necessary and manageable part of our business. We have historically been able to plan for and comply with new environmental initiatives without materially altering our operating strategies.
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We maintain insurance coverage which we believe is reasonable per the standards of the oil and natural gas industry. It is common for companies in these industries to not insure fully against all risks associated with their operations either because such insurance is unavailable or because premium costs are considered prohibitive. A material loss not fully covered by insurance could have an adverse effect on our financial position, results of operations or cash flows. We maintain insurance at industry customary levels to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of certain prohibited substances into the environment. Such insurance might not cover the complete amount of such a claim and would not cover fines or penalties for a violation of an environmental law.
Environmental. Our exploration, development, and production of oil and natural gas, including our operation of saltwater injection and disposal wells, are subject to various federal, state and local environmental laws and regulations. Such laws and regulations can increase the costs of planning, designing, installing and operating oil, natural gas, and disposal wells. Our domestic activities are subject to a variety of environmental laws and regulations, including but not limited to, the Oil Pollution Act of 1990 (“OPA”), the Clean Water Act (“CWA”), the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”), the Clean Air Act (“CAA”), and the Safe Drinking Water Act (“SDWA”), as well as state regulations promulgated under comparable state statutes. We are also subject to regulations governing the handling, transportation, storage, and disposal of naturally occurring radioactive materials that are found in our oil and gas operations. Civil and criminal fines and penalties may be imposed for non-compliance with these environmental laws and regulations. Additionally, these laws and regulations require the acquisition of permits or other governmental authorizations before undertaking certain activities, limit or prohibit other activities because of protected areas or species, and impose substantial liabilities for cleanup of pollution.
Under the OPA, a release of oil into water or other areas designated by the statute could result in us being held responsible for the costs of remediating such a release, certain OPA specified damages, and natural resource damages. The extent of that liability could be extensive, as set forth in the statute, depending on the nature of the release. A release of oil in harmful quantities or other materials into water or other specified areas could also result in us being held responsible under the CWA for the costs of remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as “Superfund” laws, can impose joint and several and retroactive liability, without regard to fault or the legality of the original conduct, on certain classes of persons for the release of a “hazardous substance” into the environment. In practice, cleanup costs are usually allocated among various responsible parties. Potentially liable parties include site owners or operators, past owners or operators under certain conditions, and entities that arrange for the disposal or treatment of, or transport hazardous substances found at the site. Although CERCLA, as amended, currently exempts petroleum, including but not limited to, crude oil, natural gas and natural gas liquids, from the definition of hazardous substance, our operations may involve the use or handling of other materials that may be classified as hazardous substances under CERCLA. Furthermore, the exemption may not be preserved in future amendments of the act, if any.
RCRA and comparable state and local requirements impose standards for the management, including treatment, storage, and disposal, of both hazardous and non-hazardous solid wastes. We generate hazardous and non-hazardous solid waste in connection with our routine operations. From time to time, proposals have been made that would reclassify certain oil and natural gas wastes, including wastes generated during drilling, production and pipeline operations, as “hazardous wastes” under RCRA, which would make such solid wastes subject to much more stringent handling, transportation, storage, disposal, and clean-up requirements. This development could have a significant impact on our operating costs. While state laws vary on this issue, state initiatives to further regulate oil and natural gas wastes could have a similar impact. Because oil and natural gas exploration and production, and possibly other activities, have been conducted at some of our properties by previous owners and operators, materials from these operations remain on some of the properties and in some instances, require remediation. In addition, in certain instances, we have agreed to indemnify sellers of producing properties from which we have acquired reserves against certain liabilities for environmental claims associated with such properties. While we do not believe that costs to be incurred by us for compliance and remediating previously or currently owned or operated properties will be material, there can be no guarantee that such costs will not result in material expenditures.
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Additionally, in the course of our routine oil and natural gas operations, surface spills and leaks, including casing leaks, of oil or other materials occur, and we incur costs for waste handling and environmental compliance. Moreover, we are able to control directly the operations of only those wells for which we act as the operator. Management believes that we are in substantial compliance with applicable environmental laws and regulations.
In response to liabilities associated with these activities, accruals are established when reasonable estimates are possible. Such accruals would primarily include estimated costs associated with remediation. We have used discounting to present value in determining our accrued liabilities for environmental remediation or well closure, but no material claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in our financial statements. We adjust the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.
We do not anticipate being required in the near future to expend amounts that are material in relation to our total capital expenditures program by reason of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, we are unable to predict the ultimate cost of compliance. More stringent laws and regulations protecting the environment may be adopted in the future and we may incur material expenses in connection with environmental laws and regulations in the future.
Occupational Health and Safety. We are also subject to laws and regulations concerning occupational safety and health. Due to the continued changes in these laws and regulations, and the judicial construction of many of them, we are unable to predict with any reasonable degree of certainty our future costs of complying with these laws and regulations. We consider the cost of safety and health compliance a necessary and manageable part of our business. We have been able to plan for and comply with new initiatives without materially altering our operating strategies.
Hydraulic Fracturing. Vast quantities of natural gas, natural gas liquids and oil deposits exist in deep shale and other unconventional formations. It is customary in our industry to recover these resources through the use of hydraulic fracturing, combined with horizontal drilling. Hydraulic fracturing is the process of creating or expanding cracks, or fractures, in deep underground formations using water, sand and other additives pumped under high pressure into the formation. As with the rest of the industry, we use hydraulic fracturing as a means to increase the productivity of almost every well that we drill and complete. These formations are generally geologically separated and isolated from fresh ground water supplies by thousands of feet of impermeable rock layers. We follow applicable legal requirements for groundwater protection in our operations that are subject to supervision by state and federal regulators (including the Bureau of Land Management (“BLM”) on federal acreage). Furthermore, our well construction practices require the installation of multiple layers of protective steel casing surrounded by cement that are specifically designed and installed to protect freshwater aquifers by preventing the migration of fracturing fluids into aquifers.
Injection rates and pressures are required to be monitored in real time at the surface during our hydraulic fracturing operations. Pressure is required to be monitored on both the injection string and the immediate annulus to the injection string. Hydraulic fracturing operations are required to be shut down if an abrupt change occurs to the injection pressure or annular pressure. These aspects of hydraulic fracturing operations are designed to prevent a pathway for the fracturing fluid to contact any aquifers during the hydraulic fracturing operations.
Hydraulic fracture stimulation requires the use of water. We use fresh water or recycled produced water in our fracturing treatments in accordance with applicable water management plans and laws. Several proposals have previously been presented to the U.S. Congress that, if implemented, would either prohibit or restrict the practice of hydraulic fracturing or subject the process to regulation under the Safe Drinking Water Act. Several states have previously considered, or are currently considering, legislation to regulate hydraulic fracturing practices that could impose more stringent permitting, transparency, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether. Hydraulic fracturing of wells and subsurface water disposal are also under public and governmental scrutiny due to potential environmental and physical impacts, including possible contamination of groundwater and drinking water and possible links to earthquakes. In addition, some municipalities have significantly limited or prohibited drilling activities and/or hydraulic fracturing, or are considering doing so.
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Restrictions on hydraulic fracturing could make it prohibitive to conduct our operations, and also reduce the amount of oil, natural gas liquids and natural gas that we are ultimately able to produce in commercial quantities from our properties.
The Endangered Species Act. The Endangered Species Act (“ESA”) restricts activities that may affect areas that contain endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in substantial compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity could materially limit or delay our plans.
Global Warming and Climate Change. Various state governments and regional organizations are considering enacting new legislation and promulgating new regulations governing or restricting the emission of greenhouse gases from stationary sources such as our equipment and operations. Legislative and regulatory proposals for restricting greenhouse gas emissions or otherwise addressing climate change could require us to incur additional operating costs and could adversely affect demand for the natural gas and oil that we sell. The potential increase in our operating costs could include new or increased costs to obtain permits, operate and maintain our equipment and facilities, install new emission controls on our equipment and facilities, acquire allowances to authorize our greenhouse gas emissions, pay taxes related to our greenhouse gas emissions and administer and manage a greenhouse gas emissions program.
Taxation. Our operations, as is the case in the petroleum industry generally, are significantly affected by federal tax laws. Federal, as well as state, tax laws have many provisions applicable to corporations which could affect our future tax liabilities.
Commitments and Contingencies. We are liable for future restoration and abandonment costs associated with our oil and gas properties. These costs include future site restoration, post closure and other environmental exit costs. The costs of future restoration and well abandonment have not been determined in detail. State regulations require operators to post bonds that assure that well sites will be properly plugged and abandoned. We currently operate only in Texas, which requires a security bond based on the number of wells we operate. Management views this as a necessary requirement for operations and does not believe that these costs will have a material adverse effect on our financial position as a result of this requirement.
Our business and operations are subject to many risks. The risks described below may not be the only risks we face, as our business and operations may also be subject to risks that we do not yet know of, or that we currently believe are immaterial. If any of the events or circumstances described below actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected and the trading price of our common stock could decline. The following risk factors should be read in conjunction with the other information contained herein, including the financial statements and the related notes. Please read “Cautionary Note Regarding Forward-Looking Statements“ in this filing, where we describe additional uncertainties associated with our business and the forward-looking statements included or incorporated by reference in this filing.
Our securities should only be purchased by persons who can afford to lose their entire investment in us. You should carefully consider the following risk factors and other information in this filing before deciding to become a holder of our securities. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent.
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Risks Relating to the Merger
Because the exchange ratio in the Merger will be set based on a number of factors immediately prior to closing the Merger that cannot be determined now, stockholders cannot be certain how many shares of common stock will be issued to the Viking stockholders, in the Merger.
At the effective time of the Merger (the “effective time”), each share of Viking common stock issued and outstanding immediately prior to the effective time (other than Viking shares owned by Camber, Viking and Merger Sub) will be converted into the right to receive the pro rata share of an adjustable percentage (initially 80% prior to adjustment) of our post-effective time capitalization (our 20% share is referred to as the “Camber Percentage”), taking into account the number of shares of common stock of the Company outstanding on a fully-diluted basis, but without taking into account any shares of common stock which the holder of our Series C Preferred Stock can receive upon conversion of the Series C Preferred Stock (which as of June 16, 2020, are convertible into approximately 66.8 million shares of common stock, not including an additional approximately 2.7 million shares of common stock which remain to be issued upon the prior conversion of shares of Series C Preferred Stock and are held in abeyance, subject to their 9.99% ownership limitation), subject to adjustment as provided in the designation of such Series C Preferred Stock). Holders of Viking common stock will have any fractional shares of Company common stock after the Merger rounded up to the nearest whole share.
The Camber Percentage is to be adjusted as follows: (i) for each additional $500,000 (a) of unencumbered cash (without any associated debt) available for use by the combined company after the closing of the Merger, which comes from equity sold by Camber for cash from February 3, 2020 through the closing of the Merger, or (b) in other unencumbered assets acquired by Camber after the date of the Merger Agreement and prior to closing without increasing Camber’s liabilities, which is not contingent or conditional upon the closing of the Merger, the Camber Percentage will increase by an incremental 0.5%; and (ii) for each additional $500,000 in Viking unencumbered cash (without any associated debt) available for use by the combined company after the closing of the Merger, outside of Viking’s Ichor division or Elysium division in excess of $500,000, which comes from equity sold by Viking for cash from February 3, 2020 through the closing of the Merger, which is not contingent or conditional upon the closing of the Merger, the Camber Percentage will decrease by an incremental 0.5%. Notwithstanding the above, the Camber Percentage will not be decreased to lower than 15% or increased to more than 25%.
These factors and certain other factors which will adjust the percentages described above and the shares issuable to Viking are currently unknown as such number of shares of common stock issuable to Viking stockholders pursuant to the Merger is currently unknown.
Combining Camber and Viking may be more difficult, costly or time-consuming than expected and Camber and Viking may fail to realize the anticipated benefits of the Merger, including expected financial and operating performance of the combined company.
The success of the Merger will depend, in part, on the combined company’s ability to realize anticipated cost savings from combining the businesses of Camber and Viking. To realize the anticipated benefits and cost savings from the Merger, Camber and Viking must successfully integrate and combine their businesses in a manner that permits those cost savings to be realized. If Camber and Viking are not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings of the Merger could be less than anticipated.
Camber and Viking have operated and, until the completion of the Merger, must continue to operate independently. It is possible that the integration process could result in the loss of key employees, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with leaseholders, customers, suppliers and employees or to achieve the anticipated benefits and cost savings of the Merger. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on each of Camber and Viking during this transition period and for an undetermined period after completion of the Merger on the combined company.
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The combined company may be unable to retain Camber and/or Viking personnel successfully after the Merger is completed.
The success of the Merger will depend in part on the combined company’s ability to retain the talents and dedication of key employees currently employed by Camber and Viking. It is possible that these employees may decide not to remain with Camber or Viking, as applicable, while the Merger is pending, or with the combined company after the Merger is consummated. If key employees terminate their employment, the combined company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating Camber and Viking to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, Camber and Viking may not be able to locate or retain suitable replacements for any key employees who leave either company.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.
Before the Merger may be completed, applicable waiting periods must expire or terminate, and applicable approvals may need to be obtained under certain antitrust and competition laws and regulations. In deciding whether to grant regulatory clearances and approvals, the relevant governmental entities may consider, among other things, the effect of the Merger on competition within their relevant jurisdiction. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs or place restrictions on the conduct of the combined company’s business. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Merger or imposing additional material costs on or materially limiting the revenues of the combined company following the Merger. In addition, any such conditions, terms, obligations or restrictions may result in the delay or abandonment of the Merger.
We will be subject to business uncertainties and contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger on employees and partners may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed, and could cause partners and others that deal with us to seek to change existing business relationships, cease doing business with us or cause potential new partners to delay doing business with us until the Merger has been successfully completed. Retention of certain employees may be challenging during the pendency of the Merger, as certain employees may experience uncertainty about their future roles or compensation structure. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, our business following the Merger could be negatively impacted. In addition, the Merger Agreement restricts us from making certain acquisitions and taking other specified actions until the Merger is completed without the consent of Viking. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Merger.
The Merger Agreement limits our ability to pursue alternatives to the Merger.
The Merger Agreement contains provisions that could adversely impact competing proposals to acquire us. These provisions include the prohibition on us generally from soliciting any acquisition proposal or offer for a competing transaction and the requirement that transfer back to Viking up to the entire 30% interest in Elysium which we acquired on February 3, 2020 (25%) and June 25, 2020 (5%) if the Merger Agreement is terminated in specified circumstances (as discussed above under “Item 1. Business – General – Viking Plan of Merger“) and requiring us, upon termination of the Merger, to redeem 630 shares of Series C Preferred Stock held by Discover at a price of $6,930,000. These provisions might discourage a third party that might have an interest in acquiring all or a significant part of our company from considering or proposing an acquisition, even if that party were prepared to pay consideration with a higher value than the current proposed Merger consideration. Furthermore, the termination fee may result in a potential competing acquirer proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay.
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Stockholder litigation could prevent or delay the closing of the Merger or otherwise negatively impact the business and operations of Camber.
Camber may incur costs in connection with the defense or settlement of any stockholder lawsuits filed in connection with the Merger. Such litigation could have an adverse effect on the financial condition and results of operations of Camber and could prevent or delay the consummation of the Merger.
In the event the Merger closes, it will cause immediate and substantial dilution to existing stockholders and a change of control of Camber.
Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of common stock of Viking issued and outstanding immediately prior to the effective time, other than certain shares owned by Camber, Viking and Merger Sub, will be converted into the right to receive the pro rata share of 80% of Camber’s post-effective time capitalization, taking into account the number of shares of common stock of Camber outstanding on a fully-diluted basis and without taking into account any shares of common stock which the holder of Camber’s Series C Preferred Stock can receive upon conversion of the Series C Preferred Stock, subject to certain adjustment mechanisms discussed in the Merger Agreement. As such, in the event the contemplated Merger closes, the issuance of the common stock consideration to Viking will result in immediate and substantial dilution to the interests of Camber’s then stockholders and result in a change of control of Camber.
The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed.
The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. These conditions to the closing of the Merger may not be fulfilled and, accordingly, the Merger may not be completed. In addition, if the Merger is not completed by September 30, 2020 (or up to December 31, 2020, if the required closing date is extended by the parties, which is allowed under certain circumstances), either Camber or Viking may choose not to proceed with the Merger, and the parties can mutually decide to terminate the Merger Agreement at any time, before or after stockholder approval. In addition, Camber or Viking may elect to terminate the Merger Agreement in certain other circumstances.
Certain of Viking’s convertible note holders will need to approve the merger, or be repaid, prior to the merger closing.
Certain holders of convertible notes in Viking will have to approve the Merger, or their notes will need to be repaid in full at closing of the Merger. Any failure of those note holders to approve the Merger, or Viking to repay those note holders prior to closing, may prevent the Merger from closing. Viking may raise funding through the sale of debt or equity prior to the closing of the Merger to repay those note holders.
Certain of Viking’s warrant holders will need to approve the merger prior to the merger closing.
If Viking is unable to obtain the consent of certain of its outstanding warrant holders to the Merger, the closing of the Merger may not occur.
Termination of the Merger Agreement could negatively impact Camber.
In the event the Merger Agreement is terminated, our business may have been adversely impacted by our failure to pursue other beneficial opportunities due to the focus of management on the Merger, and the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. If the Merger Agreement is terminated and our board of directors seeks another merger or business combination, our stockholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration provided for by the Merger. If the Merger Agreement is terminated under certain circumstances, Camber may be required to transfer Viking back the 30% interest in Elysium and will be required to redeem 630 shares of Series C Preferred Stock held by Discover at a price of $6,930,000. Although Viking has agreed to repay the Secured Notes upon the termination of the Merger Agreement and to pay Camber an additional amount as a break-up fee upon termination of the Merger, which if paid will be sufficient for Camber to pay the amount it owes to Discover in connection with the redemption of 630 shares of Series C Preferred Stock ($6,930,000), Viking may be unable to pay such amounts when due and Camber may be unable to pay any difference in amounts owed. If Camber is unable to timely pay Discover amounts due in connection with the required redemption of the Series C Preferred Stock it could have a material adverse effect on Camber’s cash flows, operations, and its ability to continue as a going concern, all of which could cause the value of Camber’s common stock to decline in value or become worthless.
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The combined company will be required to re-meet the initial listing standards of the NYSE American in order to close the Merger.
The Merger Agreement provides that in the event the NYSE American determines that the Merger constitutes, or will constitute, a “back-door listing”/”reverse merger”, Camber (and its common stock) is required to qualify for initial listing on the NYSE American, pursuant to the applicable guidance and requirements of the NYSE as of the date of the Merger and the NYSE American has expressed their initial opinion that the merger will constitute, a “back-door listing”/”reverse merger”. The NYSE American initial listing standards include more stringent requirements than the NYSE American continued listing standards, which as discussed in the risk factors below, Camber is not currently in compliance with; provided that Camber believes it will be in compliance with the continued listing standards through the closing of the merger.
The NYSE American initial listing standards require that issuers meeting one of the following tests: (1) $750,000 of pre-tax income (in either the last fiscal year or two of the three most recent years), $3 million of public float, $4 million of stockholders’ equity and a minimum share price of $3 per share; (2) $15 million of public float, $4 million of stockholders’ equity, a $3 per share price and 2 years of operating history; (3) a $50 million market cap; $15 million of public float, $4 million of stockholders’ equity, and a $2 per share price; (4) a $75 million market cap; $20 million of public float and a $3 per share price; or (5) $75 million in total assets and total revenue (in either the last fiscal year or two of the three most recent years); $20 million of public float and a $3 per share price, plus in each case either (a) 800 public stockholders and 500,000 shares of total public float; (b) 400 public stockholders and 1,000,000 shares of total public float; or (c) 400 public stockholders, 500,000 shares of total public float and a 2,000 share daily trading volume (over the past six months).
Camber as a stand-alone company does not currently meet the initial listing standards described above and the combined company may similarly not meet such requirements.
The Merger Agreement contains provisions that may discourage other companies from trying to combine with us on more favorable terms while the Merger is pending.
The Merger Agreement contains provisions that may discourage a third party from submitting a business combination proposal to us that might result in greater value to our stockholders than the Merger. These provisions include a general prohibition on us from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions.
Failure to complete the Merger could negatively impact our stock price and future business and financial results.
If the Merger is not completed, our ongoing business may be adversely affected and we would be subject to a number of risks, including the following:
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| · | we will not realize the benefits expected from the Merger, including a potentially enhanced competitive and financial position, expansion of assets and therefore opportunities, and will instead be subject to all the risks we currently face as an independent company; |
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| · | we may experience negative reactions from the financial markets and our partners and employees; |
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| · | under the Merger Agreement, we may be required to transfer back to Viking the 30% interest in Elysium which we have acquired to date, and will be required to redeem 630 shares of Series C Preferred Stock held by Discover at a price of $6,930,000 if the Merger is terminated. If such termination fee is payable, the payment of this fee could have material and adverse consequences to our financial condition and operations. Furthermore, although Viking has agreed to pay us a break-up fee in the event the Merger is terminated, which will allow us to redeem the 630 shares of Series C Preferred Stock required to be redeemed from Discover, Viking may be unable to pay such amount when due; |
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| · | the Merger Agreement places certain restrictions on the conduct of our business prior to the completion of the Merger or the termination of the Merger Agreement. Such restrictions, the waiver of which is subject to the consent of Viking, may prevent us from making certain acquisitions, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Merger; and |
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| · | matters relating to the Merger (including integration planning) may require substantial commitments of time and resources by our management, which would otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company. |
Significant costs are expected to be incurred in connection with the consummation of the Viking Merger and integration of the Company and Viking into a single business, including legal, accounting, financial advisory and other costs.
If the Viking Merger is consummated, the Company and Viking expect to incur significant costs in connection with integrating their operations and personnel. These costs may include costs for:
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| · | employee redeployment, relocation or severance; |
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| · | integration of information systems; and |
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| · | reorganization or closures of facilities. |
In addition, the Company and Viking expect to incur a number of non-recurring costs associated with combining the operations of the two companies, which cannot be estimated accurately at this time. The Company and Viking will also incur transaction fees and other costs related to the Viking Merger. Additional unanticipated costs may be incurred in the integration of the businesses of the Company and Viking. Although the Company and Viking expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. There can be no assurance that the Company and Viking will be successful in these integration efforts.
General Business and Other Risks Relating to the Company
We currently have only limited oil and gas operations.
Our Hutchinson County, Texas leases make up approximately 30% of our historical total producing properties. We were notified by the Texas Railroad Commission that our P 4 Certificate of Compliance was cancelled because our Hutchinson County, Texas wells had been inactive for more than one year and had not yet been granted a plugging extension. As part of the settlement agreement entered into with PetroGlobe, as discussed below under “Item 3. Legal Proceedings“, we agreed to remedy the issues with the Texas Rail Road Commission and transfer ownership of our Hutchinson County, Texas properties to PetroGlobe or its designees, which transfer is in process and is anticipated to be completed shortly after the filing of this Report. As such, following such transfer, we will no longer have ownership of, or generate any revenues from, such Hutchinson County, Texas leases. As a result of such transfer, the Company will have limited oil and gas operations.
Lineal and Viking owe us a substantial amount of money which may not be timely repaid, if at all.
Pursuant to a December 31, 2019 Redemption Agreement entered into between us and the prior owners of Lineal, we entered into a new unsecured promissory note in the amount of $1,539,719 with Lineal, evidencing the outstanding amount of a prior July 2019 promissory note, together with additional amounts loaned by us to Lineal through December 31, 2019 (the “December 2019 Lineal Note”); and loaned Lineal an additional $800,000, which was evidenced by an unsecured promissory note in the amount of $800,000, entered into by Lineal in favor of Camber on December 31, 2019 (“Lineal Note No. 2”). The December 2019 Lineal Note and Lineal Note No. 2, accrue interest, payable quarterly in arrears, beginning on March 31, 2020 and continuing until December 31, 2021, when all interest and principal is due, at 8% and 10% per annum (18% upon the occurrence of an event of default), respectively. The December 2019 Lineal Note and Lineal Note No. 2 are unsecured.
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On February 3, 2020 and June 25, 2020, we advanced $5 million and $4.2 million, respectively, to Viking and Viking provided us, among other things, the Secured Notes. The Secured Notes accrue interest at the rate of 10.5% per annum, payable quarterly and are due and payable on February 3, 2022. The notes include standard events of default, including certain defaults relating to the trading status of Viking’s common stock and change of control transactions involving Viking. The Secured Notes can be prepaid at any time with prior notice as provided therein, and together with a pre-payment penalty equal to 10.5% of the original amount of the Secured Notes. The Secured Notes are secured by a security interest, para passu with the other investors in Viking’s Secured Note offering (subject to certain pre-requisites) in Viking’s 70% ownership of Elysium and 100% of Ichor Energy Holdings, LLC. Additionally, pursuant to a separate Security and Pledge Agreement, Viking provided Camber a security interest in the membership, common stock and/or ownership interests of all of Viking’s existing and future, directly owned or majority owned subsidiaries, to secure the repayment of the Secured Notes. The Secured Notes will be forgiven upon the closing of the Merger.
In the event the Lineal notes or the Secured Notes are not paid when due and/or the interest thereon is not timely paid, we may have to take legal action to enforce the repayment of such notes. Furthermore, Lineal and/or Viking may not have sufficient cash to repay such notes when due, including, but not limited to interest due thereon. The Lineal notes are unsecured and as such, secured credits of Lineal may have priority rights to Lineal’s assets in connection with any liquidation or bankruptcy. Although the Secured Notes are secured by Viking, such security interest may not be sufficient to repay the note and other creditors may have priority rights to such collateral. In the event the notes payable to us are not timely paid and/or not paid in full, it could have a material adverse effect on our cash flows and our ability to pay our debts as they become due. Any failure by Viking or Lineal to timely repay their debt obligations to us could cause the value of our securities to decline in value or become worthless.
Our Business and operations may be adversely affected by the recent COVID-19 pandemic or other similar outbreaks.
As a result of the recent COVID-19 outbreak or other adverse public health developments, including voluntary and mandatory quarantines, travel restrictions and other restrictions, our operations, and those of our subcontractors, customers and suppliers, have and may continue to experience delays or disruptions and temporary suspensions of operations. In addition, our financial condition and results of operations have been and may continue to be adversely affected by the coronavirus outbreak.
The timeline and potential magnitude of the COVID-19 outbreak is currently unknown. The continuation or amplification of this virus could continue to more broadly affect the United States and global economy, including our business and operations, and the demand for oil and gas (as it has already). For example, a significant outbreak of coronavirus or other contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect our operating results. In addition, the effects of COVID-19 and concerns regarding its global spread have recently negatively impacted the domestic and international demand for crude oil and natural gas, which has contributed to price volatility, impacted the price we receive for oil and natural gas and materially and adversely affected the demand for and marketability of our production. As the potential impact from COVID-19 is difficult to predict, the extent to which it may negatively affect our operating results or the duration of any potential business disruption is uncertain. Any impact will depend on future developments and new information that may emerge regarding the severity and duration of COVID-19 and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results, notwithstanding the fact that the impact of COVID-19 has already negatively affected our first quarter and second quarter results of operations.
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Furthermore, Covid-19 and the measures being taken to address and limit the spread of the virus have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that has negatively impacted, and may continue to negatively impact, global demand and prices for crude oil and NGLs. If the COVID-19 outbreak should continue or worsen, we may also experience disruptions to commodities markets, equipment supply chains and the availability of personnel, which could adversely affect our ability to conduct our business and operations. There are still too many variables and uncertainties regarding the COVID-19 pandemic - including the ultimate geographic spread of the virus, the duration and severity of the outbreak and the extent of travel restrictions and business closures imposed in affected countries - to fully assess the potential impact on our business and operations.
We may have difficulty managing growth in our business, which could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.
Because of our small size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial, technical, operational and management resources. If we expand our activities, developments and production, and increases in the number of projects we are evaluating or in which we participate, there will be additional demands on our financial, technical and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the inability to recruit and retain experienced managers, geoscientists, petroleum engineers, landmen, engineers and employees could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.
We depend significantly upon the continued involvement of our present management.
We depend to a significant degree upon the involvement of our management, specifically, our Interim Chief Executive Officer, Louis G. Schott, who is in charge of our strategic planning and operations, and our Chief Financial Officer, Robert Schleizer. Our performance and success are dependent to a large extent on the efforts and continued employment of Mr. Schott and Mr. Schleizer. We do not believe that Mr. Schott or Mr. Schleizer could be quickly replaced with personnel of equal experience and capabilities, and their successor(s) may not be as effective. If Mr. Schott, Mr. Schleizer, or any of our other key personnel resign or become unable to continue in their present roles and if they are not adequately replaced, our business operations could be adversely affected.
We also have an active Board of Directors that meets several times throughout the year and is intimately involved in its business and the determination of our operational strategies. Members of our Board of Directors work closely with management to identify potential prospects, acquisitions and areas for further development. If any of our directors resign or become unable to continue in their present role, it may be difficult to find replacements with the same knowledge and experience and as a result, our operations may be adversely affected.
Future increases in our tax obligations; either due to increases in taxes on energy products, energy service companies and exploration activities or reductions in currently available federal income tax deductions with respect to oil and natural gas exploration and development, may adversely affect our results of operations and increase our operating expenses.
Federal, state and local governments have jurisdiction in areas where we operate and impose taxes on the oil and natural gas products we sell. There are constant discussions by federal, state and local officials concerning a variety of energy tax proposals, some of which, if passed, would add or increase taxes on energy products, service companies and exploration activities. The passage of any legislation or any other changes in U.S. federal income tax laws could impact or increase the taxes that we are required to pay and consequently adversely affect our results of operations and/or increase our operating expenses.
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Because of the inherent dangers involved in oil and gas exploration, there is a risk that we may incur liability or damages for our conduct or our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.
The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by previous owners of property purchased and leased by us in the future. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for the purchase of properties and/or property interests, exploration, development or acquisitions or result in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. As such, our current insurance or the insurance that we may obtain in the future may not be adequate to cover any losses or liabilities. We cannot predict the availability of insurance or the availability of insurance at premium levels that justify its purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations. We may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations, which could lead to any investment in us declining in value or becoming worthless.
We incur certain costs to comply with government regulations, particularly regulations relating to environmental protection and safety, and could incur even greater costs in the future.
Our operations are regulated extensively at the federal, state and local levels and are subject to interruption or termination by governmental and regulatory authorities based on environmental or other considerations. Moreover, we have incurred and will continue to incur costs in our efforts to comply with the requirements of environmental, safety and other regulations. Further, the regulatory environment in the oil and natural gas industry could change in ways that we cannot predict and that might substantially increase our costs of compliance and, in turn, materially and adversely affect our business, results of operations and financial condition.
Specifically, as an owner or lessee and operator of crude oil and natural gas properties, we are subject to various federal, state, local and foreign regulations relating to the discharge of materials into, and the protection of, the environment. These regulations may, among other things, impose liability on us for the cost of pollution cleanup resulting from operations, subject us to liability for pollution damages and require suspension or cessation of operations in affected areas. Moreover, we are subject to the United States (“U.S.”) EPA rule requiring annual reporting of greenhouse gas (“GHG”) emissions. Changes in, or additions to, these regulations could lead to increased operating and compliance costs and, in turn, materially and adversely affect our business, results of operations and financial condition.
We are aware of the increasing focus of local, state, national and international regulatory bodies on GHG emissions and climate change issues. In addition to the U.S. EPA’s rule requiring annual reporting of GHG emissions, we are also aware of legislation proposed by U.S. lawmakers to reduce GHG emissions.
Additionally, there have been various proposals to regulate hydraulic fracturing at the federal level, including possible regulations limiting the ability to dispose of produced waters. Currently, the regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements. Any new federal regulations that may be imposed on hydraulic fracturing could result in additional permitting and disclosure requirements (such as the reporting and public disclosure of the chemical additives used in the fracturing process) and in additional operating restrictions. In addition to the possible federal regulation of hydraulic fracturing, some states and local governments have considered imposing various conditions and restrictions on drilling and completion operations, including requirements regarding casing and cementing of wells, testing of nearby water wells, restrictions on the access to and usage of water and restrictions on the type of chemical additives that may be used in hydraulic fracturing operations. Such federal and state permitting and disclosure requirements and operating restrictions and conditions could lead to operational delays and increased operating and compliance costs and, moreover, could delay or effectively prevent the development of crude oil and natural gas from formations which would not be economically viable without the use of hydraulic fracturing.
We will continue to monitor and assess any new policies, legislation, regulations and treaties in the areas where we operate to determine the impact on our operations and take appropriate actions, where necessary. We are unable to predict the timing, scope and effect of any currently proposed or future laws, regulations or treaties, but the direct and indirect costs of such laws, regulations and treaties (if enacted) could materially and adversely affect our business, results of operations and financial condition.
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Possible regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and gas.
Studies over recent years have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere. In response to these studies, governments have begun adopting domestic and international climate change regulations that require reporting and reductions of the emission of greenhouse gases. Methane, a primary component of natural gas, and carbon dioxide, a by-product of the burning of oil, natural gas and refined petroleum products, are considered greenhouse gases. In the United States, at the state level, many states, either individually or through multi-state regional initiatives, have begun implementing legal measures to reduce emissions of greenhouse gases, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs or have begun considering adopting greenhouse gas regulatory programs. At the federal level, Congress has considered legislation that could establish a cap and trade system for restricting greenhouse gas emissions in the United States. The ultimate outcome of this federal legislative initiative remains uncertain. In addition to pending climate legislation, the EPA has issued greenhouse gas monitoring and reporting regulations. Beyond measuring and reporting, the EPA issued an “Endangerment Finding” under section 202(a) of the Clean Air Act, concluding that greenhouse gas pollution threatens the public health and welfare of current and future generations. The finding served as a first step to issuing regulations that require permits for and reductions in greenhouse gas emissions for certain facilities. Moreover, the EPA has begun regulating greenhouse gas emission from certain facilities pursuant to the Prevention of Significant Deterioration and Title V provisions of the Clean Air Act. In the courts, several decisions have been issued that may increase the risk of claims being filed by government entities and private parties against companies that have significant greenhouse gas emissions. Such cases may seek to challenge air emissions permits that greenhouse gas emitters apply for and seek to force emitters to reduce their emissions or seek damages for alleged climate change impacts to the environment, people, and property. Any existing or future laws or regulations that restrict or reduce emissions of greenhouse gases could require us to incur increased operating and compliance costs. In addition, such laws and regulations may adversely affect demand for the fossil fuels we produce, including by increasing the cost of combusting fossil fuels and by creating incentives for the use of alternative fuels and energy.
Our officers and directors have limited liability, and we are required in certain instances to indemnify our officers and directors for breaches of their fiduciary duties.
We have adopted provisions in our articles of incorporation and bylaws which limit the liability of our officers and directors and provide for indemnification by us of our officers and directors to the full extent permitted by Nevada corporate law. Our articles generally provide that our officers and directors shall have no personal liability to us or our stockholders for monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit our stockholders’ ability to hold officers and directors liable for breaches of fiduciary duty, and may require us to indemnify our officers and directors.
We currently have outstanding indebtedness and we may incur additional indebtedness which could reduce our financial flexibility, increase interest expense and adversely impact our operations in the future.
We currently have outstanding indebtedness and, in the future, may incur significant amounts of additional indebtedness in order to make acquisitions or to develop properties. Our level of indebtedness could affect our operations in several ways, including the following:
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| ● | a significant portion of our cash flows could be used to service our indebtedness; |
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| ● | a high level of debt would increase our vulnerability to general adverse economic and industry conditions; |
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| ● | any covenants contained in the agreements governing our outstanding indebtedness could limit our ability to borrow additional funds; |
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| ● | dispose of assets, pay dividends and make certain investments; |
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| ● | a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, they may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and |
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| ● | debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in its industry. |
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A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flows to pay the principal or interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we do not have sufficient funds and are otherwise unable to arrange financing, we may have to sell significant assets or have a portion of our assets foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.
We may experience adverse impacts on our reported results of operations as a result of adopting new accounting standards or interpretations.
Our implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect our reported financial position or operating results or cause unanticipated fluctuations in our reported operating results in future periods.
We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. As reported under “Part II - Item 9A. Controls and Procedures“, as of March 31, 2020, our Interim CEO and CFO have determined that our disclosure controls and procedures were not effective, and such disclosure controls and procedures have not been deemed effective since approximately September 30, 2017. Separately, management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020 and determined that such internal control over financial reporting was not effective as a result of such assessment.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
Maintaining effective disclosure controls and procedures and effective internal control over financial reporting are necessary for us to produce reliable financial statements and the Company is committed to remediating its material weaknesses in such controls as promptly as possible. However, there can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations, which in turn could have a material adverse effect on our financial condition and the trading price of our common stock, and/or result in litigation against us or our management. In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements or our periodic reports filed with the SEC.
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Risks Relating to Our Oil and Gas Operations and Industry
We are subject to production declines and loss of revenue due to shut-in wells.
The majority of our oil and gas production revenues come from a small number of producing wells. In the event those wells are required to be shut-in (as they were for various periods in the past), our production and revenue could be adversely affected. Our wells are shut-in from time-to-time for maintenance, workovers, upgrades and other matters outside of our control, including repairs, adverse weather (including hurricanes, flooding and tropical storms), inability to dispose of produced water or other regulatory and market conditions. Any significant period where our wells, and especially our top producing wells, are shut-in, would have a material adverse effect on our results of production, oil and gas revenues and net income or loss for the applicable period. However, notwithstanding the above, Camber’s management believes that Camber’s non-operated properties will be immaterial to the combined company following the merger and following the merger the combined company’s management will determine what course to take regarding such combined company assets, including Camber’s non-operated properties.
Many of our leases are in areas that have been partially depleted or drained by offset wells.
Many of our leases are in areas that have been partially depleted or drained by offset drilling. Interference from offset drilling may inhibit our ability to find or recover commercial quantities of oil and/or may result in an acceleration in the decline in production of our wells, which may in turn have an adverse effect on our recovered barrels of oil and consequently our results of operations.
Crude oil and natural gas prices are highly volatile in general and low prices will negatively affect our financial results.
Our oil and gas revenues, operating results, profitability, cash flow, future rate of growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our oil and natural gas properties, are substantially dependent upon prevailing prices of crude oil and natural gas. Lower crude oil and natural gas prices also may reduce the amount of crude oil and natural gas that we can produce economically. Historically, the markets for crude oil and natural gas have been very volatile, and such markets are likely to continue to be volatile in the future. Prices for oil and natural gas fluctuate widely in response to a variety of factors beyond our control, such as:
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| ● | overall U.S. and global economic conditions; |
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| ● | weather conditions and natural disasters; |
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| ● | seasonal variations in oil and natural gas prices; |
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| ● | price and availability of alternative fuels; |
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| ● | technological advances affecting oil and natural gas production and consumption; |
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| ● | consumer demand; |
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| ● | domestic and foreign supply of oil and natural gas; |
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| ● | variations in levels of production; |
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| ● | regional price differentials and quality differentials of oil and natural gas; price and quantity of foreign imports of oil, NGLs, and natural gas; |
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| ● | global pandemics and epidemics, such as COVID-19; |
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| ● | the completion of large domestic or international exploration and production projects; |
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| ● | restrictions on exportation of oil and natural gas; |
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| ● | the availability of refining capacity; |
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| ● | the impact of energy conservation efforts; |
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| ● | political conditions in or affecting other oil producing and natural gas producing countries, including the current conflicts in the Middle East and conditions in South America and Russia; and |
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| ● | domestic and foreign governmental regulations, actions and taxes. |
Further, oil and natural gas prices do not necessarily fluctuate in direct relation to each other. Our revenue, profitability, and cash flow depend upon the prices of supply and demand for oil and natural gas, and a drop in prices can significantly affect our financial results and impede our growth. In particular, declines in commodity prices may:
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| ● | negatively impact the value of our reserves, because declines in oil and natural gas prices would reduce the value and amount of oil and natural gas that we can produce economically; |
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| ● | reduce the amount of cash flow available for capital expenditures, repayment of indebtedness, and other corporate purposes; and |
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| ● | limit Camber’s ability to borrow money or raise additional capital. |
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Downturns and volatility in global economies and commodity and credit markets have materially adversely affected our business, results of operations and financial condition.
Our results of operations are materially adversely affected by the conditions of the global economies and the credit, commodities and stock markets. Among other things, we have recently been adversely impacted, and anticipate to continue to be adversely impacted, due to a global reduction in consumer demand for oil and gas, and consumer lack of access to sufficient capital to continue to operate their businesses or to operate them at prior levels. In addition, a decline in consumer confidence or changing patterns in the availability and use of disposable income by consumers can negatively affect the demand for oil and gas and as a result our results of operations.
We may be forced to write-down material portions of our assets if low oil prices continue.
The recent COVID-19 outbreak has led to low oil prices. A continued period of low prices may force us to incur material write-downs of our oil and natural gas properties, which could have a material effect on the value of our properties, and cause the value of our securities to decline in value.
We face intense competition in connection with our oil and gas operations.
We are in direct competition for properties with numerous oil and natural gas companies, drilling and income programs and partnerships exploring various areas of Texas and Oklahoma. Many competitors are large, well-known energy companies, although no single entity dominates the industry. Many of our competitors possess greater financial and personnel resources enabling them to identify and acquire more economically desirable energy producing properties and drilling prospects than us. Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry. Management believes that a viable marketplace exists for smaller producers of natural gas and crude oil.
Our oil and gas competitors may use superior technology and data resources that we may be unable to afford or that would require a costly investment by us in order to compete with them more effectively.
The oil and gas industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors will have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement in the future may become obsolete, and we may be adversely affected.
Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate.
Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. Specifically, applicable laws protecting endangered species prohibit the harming of endangered or threatened species, provide for habitat protection, and impose stringent penalties for noncompliance. The designation of previously unprotected species as threatened or endangered in areas where we operate could cause us to incur increased costs arising from species protection measures or could result in limitations, delays, or prohibitions on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves.
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If we do not hedge our exposure to reductions in oil and natural gas prices, we may be subject to significant reductions in prices. Alternatively, we may use oil and natural gas price hedging contracts, which involve credit risk and may limit future revenues from price increases and result in significant fluctuations in our profitability.
In the event that we choose not to hedge our exposure to reductions in oil and natural gas prices by purchasing futures and by using other hedging strategies, we may be subject to significant reduction in prices which could have a material negative impact on our profitability. Alternatively, we may elect to use hedging transactions with respect to a portion of our oil and natural gas production to achieve more predictable cash flow and to reduce our exposure to price fluctuations. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations.
Declines in oil and, to a lesser extent, NGL and natural gas prices, have in the past, and will continue in the future to, adversely affect our business, financial condition and results of operations may adversely affect our ability to meet our capital expenditure obligations or targets and financial commitments.
The price we receive for oil and, to a lesser extent, natural gas and NGLs, heavily influences our revenue, profitability, cash flows, liquidity, access to capital, present value and quality of reserves, the nature and scale of our operations and future rate of growth. Oil, NGL and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. In recent years, the markets for oil and natural gas have been volatile. These markets will likely continue to be volatile in the future. Further, oil prices and natural gas prices do not necessarily fluctuate in direct relation to each other. In general, our financial results are more sensitive to movements in oil prices. The price of crude oil has experienced significant volatility over the last five years, with the price per barrel of West Texas Intermediate (“WTI”) crude rising from a low of $27 in February 2016 to a high of $76 in October 2018, then, in 2020, dropping below $20 per barrel due in part to reduced global demand stemming from the recent global COVID-19 outbreak, provided that pricing has since increased to over $30 per barrel prior to the filing of this Report. A prolonged period of low market prices for oil and natural gas, or further declines in the market prices for oil and natural gas, will likely result in capital expenditures being further curtailed and will adversely affect our business, financial condition and liquidity and our ability to meet obligations, targets or financial commitments and could ultimately lead to restructuring or filing for bankruptcy, which would have a material adverse effect on our stock price and indebtedness. Additionally, lower oil and natural gas prices have, and may in the future, cause, a decline in our stock price. During the year ended March 31, 2020, the daily NYMEX WTI oil spot price ranged from a high of $66.24 per Bbl to a low of $14.1 per Bbl and the NYMEX natural gas Henry Hub spot price ranged from a high of $4.70 per MMBtu to a low of $2.54 per MMBtu.
Our oil and gas operations are substantially dependent on the availability of water. Restrictions on our ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows.
Water is an essential component of deep shale oil and natural gas production during both the drilling and hydraulic fracturing, or fracking processes. Our oil and gas operations and future operations could be adversely impacted if we are unable to locate sufficient amounts of water or dispose of or recycle water used in our exploration and production operations. Currently, the quantity of water required in certain completion operations, such as hydraulic fracturing, and changing regulations governing usage may lead to water constraints and supply concerns (particularly in some parts of the country). As a result, future availability of water from certain sources used in the past may be limited. Moreover, the imposition of new environmental initiatives and conditions could include restrictions on our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development or production of oil and natural gas. The CWA and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants, including produced waters and other oil and natural gas waste, into navigable waters or other regulated federal and state waters. Permits or other approvals must be obtained to discharge pollutants to regulated waters and to conduct construction activities in such waters and wetlands. Uncertainty regarding regulatory jurisdiction over wetlands and other regulated waters has, and will continue to, complicate and increase the cost of obtaining such permits or other approvals. The CWA and analogous state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of pollutants and unauthorized discharges of reportable quantities of oil and other hazardous substances. Many state discharge regulations, and the Federal National Pollutant Discharge Elimination System General permits issued by the United States Environmental Protection Agency (“EPA”), prohibit the discharge of produced water and sand, drilling fluids, drill cuttings and certain other substances related to the oil and natural gas industry into coastal waters. While generally exempt under federal programs, many state agencies have also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain permits for storm water discharges. There has been recent nationwide concern over earthquakes associated with Class II underground injection control wells, a predominant storage method for crude oil and gas wastewater. It is likely that new rules and regulations will be developed to address these concerns, possibly eliminating access to Class II wells in certain locations, and increasing the cost of disposal in others. Finally, EPA studies have previously focused on various stages of water use in hydraulic fracturing operations. It is possible that, in the future, the EPA will move to more strictly regulate the use of water in hydraulic fracturing operations. While we cannot predict the impact that these changes may have on our business at this time, they may be material to our business, financial condition, and operations. Compliance with environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells or the disposal or recycling of water will increase our operating costs and may cause delays, interruptions or termination of our operations, the extent of which cannot be predicted. In addition, our inability to meet our water supply needs to conduct our completion operations may impact our business, and any such future laws and regulations could negatively affect our financial condition, results of operations and cash flows.
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If we acquire crude oil and natural gas properties in the future, our failure to fully identify existing and potential problems, to accurately estimate reserves, production rates or costs, or to effectively integrate the acquired properties into our operations could materially and adversely affect our business, financial condition and results of operations.
From time to time, we seek to acquire crude oil and natural gas properties. Although we perform reviews of properties to be acquired in a manner that we believe is duly diligent and consistent with industry practices, reviews of records and properties may not necessarily reveal existing or potential problems, and may not permit us to become sufficiently familiar with the properties in order to fully assess their deficiencies and potential. Even when problems with a property are identified, we may assume environmental and other risks and liabilities in connection with acquired properties pursuant to the acquisition agreements. Moreover, there are numerous uncertainties inherent in estimating quantities of crude oil and natural gas reserves (as discussed further below), actual future production rates and associated costs with respect to acquired properties. Actual reserves, production rates and costs may vary substantially from those assumed in our estimates. We may be unable to locate or make suitable acquisitions on acceptable terms and future acquisitions may not be effectively and profitably integrated. Acquisitions involve risks that could divert management resources and/or result in the possible loss of key employees and customers of the acquired operations. For the reasons above, among others, an acquisition may have a material and adverse effect on our business and results of operations, particularly during the periods in which the operations of the acquired properties are being integrated into our ongoing operations or if we are unable to effectively integrate the acquired properties into our ongoing operations.
If we make any acquisitions or enter into any business combinations in the future, they may disrupt or have a negative impact on our business.
If we make acquisitions or enter into any business combinations in the future, funding permitting, we could have difficulty integrating the acquired companies’ assets, personnel and operations with our own. Additionally, acquisitions, mergers or business combinations we may enter into in the future (other than the Merger) could result in a change of control of the Company, and a change in the Board of Directors or officers of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition or completing a business combination, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions and business combinations are accompanied by a number of inherent risks, including, without limitation, the following:
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| ● | the difficulty of integrating acquired companies, concepts and operations; |
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| ● | the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; |
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| ● | change in our business focus and/or management; |
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| ● | difficulties in maintaining uniform standards, controls, procedures and policies; |
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| ● | the potential impairment of relationships with employees and partners as a result of any integration of new management personnel; |
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| ● | the potential inability to manage an increased number of locations and employees; |
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| ● | our ability to successfully manage the companies and/or concepts acquired; |
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| ● | the failure to realize efficiencies, synergies and cost savings; or |
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| ● | the effect of any government regulations which relate to the business acquired. |
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition or business combination, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
Any acquisition or business combination transaction we enter into in the future could cause substantial dilution to existing stockholders, result in one party having majority or significant control over the Company or result in a change in business focus of the Company.
Our business is subject to extensive regulation.
As many of our activities are subject to federal, state and local regulation, and as these rules are subject to constant change or amendment, our operations may be adversely affected by new or different government regulations, laws or court decisions applicable to our operations.
Government regulation and liability for environmental matters may adversely affect our business and results of operations.
Crude oil and natural gas operations are subject to extensive federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below actual production capacity in order to conserve supplies of crude oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of crude oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with crude oil and natural gas operations. In addition, we may inherit liability for environmental damages caused by previous owners of property we purchase or lease. As a result, we may incur substantial liabilities to third parties or governmental entities. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us.
The crude oil and natural gas reserves we report in our SEC filings are estimates and may prove to be inaccurate.
There are numerous uncertainties inherent in estimating crude oil and natural gas reserves and their estimated values. The reserves we report in our filings with the SEC now and in the future will only be estimates and such estimates may prove to be inaccurate because of these uncertainties. Reservoir engineering is a subjective and inexact process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable crude oil and natural gas reserves depend upon a number of variable factors, such as historical production from the area compared with production from other producing areas and assumptions concerning effects of regulations by governmental agencies, future crude oil and natural gas prices, future operating costs, severance and excise taxes, development costs and work-over and remedial costs. Some or all of these assumptions may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of crude oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers but at different times may vary substantially. Accordingly, reserve estimates may be subject to downward or upward adjustment. Actual production, revenue and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.
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Additionally, “probable” and “possible reserve estimates” are considered unproved reserves and as such, the SEC views such estimates to be inherently unreliable, may be misunderstood or seen as misleading to investors that are not “experts” in the oil or natural gas industry. Unless you have such expertise, you should not place undue reliance on these estimates. Except as required by applicable law, we undertake no duty to update this information and do not intend to update this information.
The calculated present value of future net revenues from our proved reserves will not necessarily be the same as the current market value of our estimated oil and natural gas reserves.
You should not assume that the present value of future net cash flows as included in our public filings is the current market value of our estimated proved oil and natural gas reserves. We generally base the estimated discounted future net cash flows from proved reserves on current costs held constant over time without escalation and on commodity prices using an unweighted arithmetic average of first-day-of-the-month index prices, appropriately adjusted, for the 12-month period immediately preceding the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs used for these estimates and will be affected by factors such as:
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| ● | actual prices we receive for oil and natural gas; |
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| ● | actual cost and timing of development and production expenditures; |
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| ● | the amount and timing of actual production; and |
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| ● | changes in governmental regulations or taxation. |
In addition, the 10% discount factor that is required to be used to calculate discounted future net revenues for reporting purposes under GAAP is not necessarily the most appropriate discount factor based on the cost of capital in effect from time to time and risks associated with our business and the oil and natural gas industry in general.
Crude oil and natural gas development, re-completion of wells from one reservoir to another reservoir, restoring wells to production and exploration, drilling and completing new wells are speculative activities and involve numerous risks and substantial and uncertain costs.
Our oil and gas operations will be materially dependent upon the success of our future development program. Even considering our business philosophy to avoid wildcat wells, drilling for crude oil and natural gas and reworking existing wells involves numerous risks, including the risk that no commercially productive crude oil or natural gas reservoirs will be encountered. The cost of exploration, drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including: unexpected drilling conditions; pressure or irregularities in formations; equipment failures or accidents; inability to obtain leases on economic terms, where applicable; adverse weather conditions and natural disasters; compliance with governmental requirements; and shortages or delays in the availability of drilling rigs or crews and the delivery of equipment. Furthermore, we cannot provide investors with any assurance that we will be able to obtain rights to additional producing properties in the future and/or that any properties we obtain rights to will contain commercially exploitable quantities of oil and/or gas.
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Drilling or reworking is a highly speculative activity. Even when fully and correctly utilized, modern well completion techniques such as hydraulic fracturing and horizontal drilling do not guarantee that we will find crude oil and/or natural gas in our wells. Hydraulic fracturing involves pumping a fluid with or without particulates into a formation at high pressure, thereby creating fractures in the rock and leaving the particulates in the fractures to ensure that the fractures remain open, thereby potentially increasing the ability of the reservoir to produce oil or natural gas. Horizontal drilling involves drilling horizontally out from an existing vertical well bore, thereby potentially increasing the area and reach of the well bore that is in contact with the reservoir. Our future drilling activities may not be successful and, if unsuccessful, such failure would have an adverse effect on our future results of operations and financial condition. Our overall drilling success rate and/or our drilling success rate for activities within a particular geographic area may decline in the future. We may identify and develop prospects through a number of methods, some of which do not include lateral drilling or hydraulic fracturing, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. Our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted prospects will be dependent on a number of factors, including, but not limited to: the results of previous development efforts and the acquisition, review and analysis of data; the availability of sufficient capital resources to us and the other participants, if any, for the drilling of the prospects; the approval of the prospects by other participants, if any, after additional data has been compiled; economic and industry conditions at the time of drilling, including prevailing and anticipated prices for crude oil and natural gas and the availability of drilling rigs and crews; our financial resources and results; the availability of leases and permits on reasonable terms for the prospects; and the success of our drilling technology.
These projects may not be successfully developed and the wells discussed, if drilled, may not encounter reservoirs of commercially productive crude oil or natural gas. There are numerous uncertainties in estimating quantities of proved reserves, including many factors beyond our control. If we are unable to find commercially exploitable quantities of oil and natural gas in any properties we may acquire in the future, and/or we are unable to commercially extract such quantities we may find in any properties we may acquire in the future, the value of our securities may decline in value.
Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, financial condition and results of operations.
The rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing and exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or acquiring additional oil and natural gas properties. In the future, we may have difficulty acquiring new properties. During periods of low oil and/or natural gas prices, it will become more difficult to raise the capital necessary to finance expansion activities. If we are unable to replace our production, our reserves will decrease, and our business, financial condition and results of operations would be adversely affected.
The unavailability or high cost of drilling rigs, completion equipment and services, supplies and personnel, including hydraulic fracturing equipment and personnel, could adversely affect our ability to establish and execute exploration and development plans within budget and on a timely basis, which could have a material adverse effect on our business, financial condition and results of operations.
Shortages or the high cost of drilling rigs, completion equipment and services, supplies or personnel could delay or adversely affect our operations. When drilling activity in the United States increases, associated costs typically also increase, including those costs related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry. These costs may increase, and necessary equipment and services may become unavailable to us at economical prices. Should this increase in costs occur, we may delay drilling activities, which may limit our ability to establish and replace reserves, or we may incur these higher costs, which may negatively affect our business, financial condition and results of operations.
Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.
Hydraulic fracturing is a common practice that is used to stimulate production of hydrocarbons from tight formations. The process involves the injection of water, sand and chemicals under pressure into rock formations to fracture the surrounding rock and stimulate production. There has been increasing public controversy regarding hydraulic fracturing with regard to the transportation and use of fracturing fluids, impacts on drinking water supplies, use of waters, and the potential for impacts to surface water, groundwater, air quality and the environment generally. A number of lawsuits and enforcement actions have been initiated implicating hydraulic fracturing practices. Additional legislation or regulation could make it more difficult to perform hydraulic fracturing, cause operational delays, increase our operating costs or make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings. New legislation or regulations in the future could have the effect of prohibiting the use of hydraulic fracturing, which would prevent us from completing our wells as planned and would have a material adverse effect on production from our wells. If these legislative and regulatory initiatives cause a material delay or decrease in our drilling or hydraulic fracturing activities, our business and profitability could be materially impacted.
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The lack of availability or high cost of drilling rigs, equipment, supplies, insurance, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.
The oil and gas industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies tend to increase, in some cases substantially. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases within a geographic area. If increasing levels of exploration and production result in response to strong prices of oil and natural gas, the demand for oilfield services will likely rise, and the costs of these services will likely increase, while the quality of these services may suffer. The future lack of availability or high cost of drilling rigs, as well as any future lack of availability or high costs of other equipment, supplies, insurance or qualified personnel, in the areas in which we operate could materially and adversely affect our business and results of operations.
Our oil and gas properties are located in Texas, making us vulnerable to risks associated with operating in one major geographic area.
All of our oil and gas properties are located in Texas. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production from wells caused by transportation capacity constraints, curtailment of production, availability of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions, interruption of transportation of oil or natural gas produced from the wells in this area, governmental restrictions, stay-at-home orders and local outbreaks of communicable diseases, including COVID-19. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and gas producing areas such as the ones we operate in, which may cause these conditions to occur with greater frequency or magnify the effect of these conditions. Due to the concentrated nature of our portfolio, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results of operations.
Future acquired properties may not be worth what we pay due to uncertainties in evaluating recoverable reserves and other expected benefits, as well as potential liabilities.
Successful property acquisitions require an assessment of a number of factors beyond our control. These factors include estimates of recoverable reserves, exploration potential, future natural gas and oil prices, operating costs, production taxes and potential environmental and other liabilities. These assessments are complex and inherently imprecise. Our review of the properties we acquire may not reveal all existing or potential problems. In addition, our review may not allow us to fully assess the potential deficiencies of the properties. We do not inspect every well, and even when we inspect a well, we may not discover structural, subsurface, or environmental problems that may exist or arise. There may be threatened or contemplated claims against the assets or businesses we acquire related to environmental, title, regulatory, tax, contract, litigation or other matters of which we are unaware, which could materially and adversely affect our production, revenues and results of operations. We may not be entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities, and our contractual indemnification may not be effective. At times, we acquire interests in properties on an “as is” basis with limited representations and warranties and limited remedies for breaches of such representations and warranties. In addition, significant acquisitions can change the nature of our operations and business if the acquired properties have substantially different operating and geological characteristics or are in different geographic locations than our existing properties.
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We have limited control over activities in properties we do not operate, which could reduce our production and revenues, affect the timing and amounts of capital requirements and potentially result in a dilution of our respective ownership interest in the event we are unable to make any required capital contributions.
We currently serve as the operator of 35 shut-in wells which are located in the Texas Panhandle, provided that, shortly after the filing of this Report, subject to the Settlement Agreement discussed below under “Item 3. Legal Proceedings“, we plan to transfer ownership of such wells to PetroGlobe. After such transfer, we will not operate any of our wells. As a result, we may have a limited ability to exercise influence over normal operating procedures, expenditures or future development of underlying properties and their associated costs. For all of the properties that are operated by others, we are dependent on their decision-making with respect to day-to-day operations over which we have little control. The failure of an operator of wells in which we have an interest to adequately perform operations, or an operator’s breach of applicable agreements, could reduce production and revenues we receive from that well. The success and timing of our drilling and development activities on properties operated by others depend upon a number of factors outside of our control, including the timing and amount of capital expenditures, the available expertise and financial resources, the inclusion of other participants and the use of technology. Since we do not own the majority interest in many of the wells we do not operate, we may not be in a position to remove the operator in the event of poor performance.
A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flows to pay the principal or interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we do not have sufficient funds and are otherwise unable to arrange financing, we may have to sell significant assets or have a portion of our assets foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.
We are limited in our ability to undertake subsequent financings.
On and effective June 22, 2020, we and Discover entered into a Stock Purchase Agreement (the “June 2020 Purchase Agreement”). Pursuant to the June 2020 Purchase Agreement, as long as Discover holds any shares of Series C Preferred Stock, we agreed that, except as contemplated in connection with the Merger, we would not issue or enter into or amend an agreement pursuant to which we may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price; or issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock. These restrictions may make it more costly for us to raise funding in the future or may limit our ability to raise funding, which could force us to curtail our business plan or prohibit us from taking advantage of an attractive investment, acquisition or drilling activities, all of which could have a negative effect on the value of our common stock and our near-term or long-term prospects.
Risks Relating To An Investment In Our Securities
If we are unable to maintain compliance with NYSE American continued listing standards, our common stock may be delisted from the NYSE American equities market, which would likely cause the liquidity and market price of our common stock to decline.
Our common stock is currently listed on the NYSE American. The NYSE American will consider suspending dealings in, or delisting, securities of an issuer that does not meet its continued listing standards. If we cannot meet the NYSE American continued listing requirements, the NYSE American may delist our common stock, which could have an adverse impact on us and the liquidity and market price of our stock.
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On February 24, 2020, we received notice from the NYSE American (the “Exchange”) that we were not in compliance with certain of the Exchange’s continued listing standards as set forth in Part 10 of the NYSE American Company Guide (the “Company Guide”). Specifically, because we reported stockholders’ equity of $3.1 million as of December 31, 2019 and net losses in three of our four most recent fiscal years then ended, we did not comply with Section 1003(a)(ii) of the Company Guide because we had stockholders’ equity of less than $4,000,000 and reported losses from continuing operations and/or net losses in three of our four most recent fiscal years. In order to maintain our listing on the Exchange, the Exchange requested we submit a plan of compliance (the “Plan”) by March 25, 2020 addressing how we intended to regain compliance with Section 1003(a)(ii) of the Company Guide by August 24, 2021, which plan was submitted and accepted. During the plan period, we are able to continue our listing and will be subject to continued periodic review by the Exchange staff. If we do not make progress consistent with the Plan during the plan period, we will be subject to delisting procedures as set forth in the Company Guide.
It is a required condition to the closing of the Merger that in the event the Exchange determines that the Merger constitutes, or will constitute, a “back-door listing”/”reverse merger”, which we expect that it will, we (and our common stock) will be required to qualify for initial listing on the NYSE American, pursuant to the applicable guidance and requirements of the Exchange.
We may be unable to comply with NYSE American continued listing standards. Our business has been and may continue to be affected by worldwide macroeconomic factors, which include uncertainties in the credit and capital markets. External factors that affect our stock price, such as liquidity requirements of our investors, as well as our performance, could impact our market capitalization, revenue and operating results, which, in turn, could affect our ability to comply with the NYSE American’s listing standards. The NYSE American has the ability to suspend trading in our common stock or remove our common stock from listing on the NYSE American if in the opinion of the exchange: (a) the financial condition and/or operating results of the Company appear to be unsatisfactory; or (b) it appears that the extent of public distribution or the aggregate market value of our common stock has become so reduced as to make further dealings on the exchange inadvisable; or (c) we have sold or otherwise disposed of our principal operating assets, or have ceased to be an operating company; or (d) we have failed to comply with our listing agreements with the exchange (which include that we receive additional listing approval from the exchange prior to us issuing any shares of common stock, something we have inadvertently failed to comply with in the past); or (e) any other event shall occur or any condition shall exist which makes further dealings on the exchange unwarranted.
In the past we have been out of compliance with the NYSE American’s continued listing standards which (a) require a listed company to maintain stockholders’ equity of more than $2-$6 million, depending on the prior years of net losses experienced by the listed company; and (b) require a listed company to maintain an average trading price for its securities which exceeds $0.20 per share, for each 30 day rolling period. While we have cured such prior non-compliance, as discussed above, we are currently not in compliance with the Exchange’s continued listing rules. Notwithstanding that, we expect that upon completion of the Merger we will once again regain compliance with the NYSE American listing standards and the parties to the Merger anticipate us being able to meet the initial listing standards of the Exchange prior to the closing of the Merger, which is a condition to closing the Merger.
If we are unable to retain compliance with the NYSE American criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock and reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing. In addition, delisting from the NYSE American might negatively impact our reputation and, as a consequence, our business. Additionally, if we were delisted from the NYSE American and we are not able to list our common stock on another national exchange we will no longer be eligible to use Form S-3 registration statements (we are currently not eligible to use Form S-3 until approximately October 2020 due to a late Form 8-K which was due in September 2019) and will instead be required to file a Form S-1 registration statement for any primary or secondary offerings of our common stock, which would delay our ability to raise funds in the future, may limit the type of offerings of common stock we could undertake, and would increase the expenses of any offering, as, among other things, registration statements on Form S-1 are subject to SEC review and comments whereas take downs pursuant to a previously filed Form S-3 are not.
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If we are delisted from the NYSE American, your ability to sell your shares of our common stock would also be limited by the penny stock restrictions, which could further limit the marketability of your shares.
If our common stock is delisted from the NYSE American, it would come within the definition of “penny stock” as defined in the Exchange Act and would be covered by Rule 15g-9 of the Exchange Act. That Rule imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future.
We do not intend to pay cash dividends to our stockholders.
We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our Board of Directors. As a result, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.
We currently have a volatile market for our common stock, and the market for our common stock is and may remain volatile in the future.
We currently have a highly volatile market for our common stock, which market is anticipated to remain volatile in the future. Factors that could affect our stock price or result in fluctuations in the market price or trading volume of our common stock include:
|
| ● | our actual or anticipated operating and financial performance and drilling locations, including reserve estimates; |
|
| ● | quarterly variations in the rate of growth of our financial indicators, such as net income/loss per share, net income/loss and cash flows, or those of companies that are perceived to be similar to us; |
|
| ● | changes in revenue, cash flows or earnings estimates or publication of reports by equity research analysts; |
|
| ● | speculation in the press or investment community; |
|
| ● | public reaction to our press releases, announcements and filings with the SEC; |
|
| ● | sales of our common stock by us or other stockholders, or the perception that such sales may occur; |
|
| ● | the amount of our freely tradable common stock available in the public marketplace; |
|
| ● | general financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices; |
|
| ● | the realization of any of the risk factors that we are subject to; |
|
| ● | the recruitment or departure of key personnel; |
|
| ● | commencement of, or involvement in, litigation; |
|
| ● | the prices of oil and natural gas; |
|
| ● | the success of our exploration and development operations, and the marketing of any oil and natural gas we produce; |
|
| ● | changes in market valuations of companies similar to the Company; and |
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| ● | domestic and international economic, public health, legal and regulatory factors unrelated to our performance. |
Our common stock is listed on the NYSE American under the symbol “CEI.” Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Additionally, general economic, political, public health and market conditions, such as recessions, interest rates or international currency fluctuations, or global virus outbreaks may adversely affect the market price of our common stock. You should exercise caution before making an investment in us.
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A prolonged decline in the market price of our common stock could affect our ability to obtain additional financing which would adversely affect our operations.
Historically, we have relied on equity and debt financing as primary sources of financing. A prolonged decline in the market price of our common stock or a reduction in our accessibility to the global markets may result in our inability to secure additional financing which would have an adverse effect on our operations.
Nevada law and our Articles of Incorporation authorize us to issue shares of stock which shares may cause substantial dilution to our existing stockholders.
We have authorized capital stock consisting of 25,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share. As of June 24, 2020, we had 12,455,929 shares of common stock outstanding and 2,951 shares of Series C Preferred Stock outstanding (each as described in greater detail below under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Description of Capital Stock“). As a result, our Board of Directors has the ability to issue a large number of additional shares of common stock without stockholder approval, subject to the requirements of the NYSE American (which generally require stockholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock), which if issued could cause substantial dilution to our then stockholders. Shares of additional preferred stock may also be issued by our Board of Directors without stockholder approval, with voting powers and such preferences and relative, participating, optional or other special rights and powers as determined by our Board of Directors, which may be greater than the shares of common stock currently outstanding. As a result, shares of preferred stock may be issued by our Board of Directors which cause the holders to have majority voting power over our shares, provide the holders of the preferred stock the right to convert the shares of preferred stock they hold into shares of our common stock, which may cause substantial dilution to our then common stock stockholders and/or have other rights and preferences greater than those of our common stock stockholders. Investors should keep in mind that the Board of Directors has the authority to issue additional shares of common stock and preferred stock, which could cause substantial dilution to our existing stockholders. Additionally, the dilutive effect of any preferred stock which we may issue may be exacerbated given the fact that such preferred stock may have super voting rights and/or other rights or preferences which could provide the preferred stockholders with substantial voting control over us subsequent to the date of this filing and/or give those holders the power to prevent or cause a change in control. As a result, the issuance of shares of common stock and/or Preferred Stock may cause the value of our securities to decrease and/or become worthless.
Stockholders may be diluted significantly through our efforts to obtain financing and/or satisfy obligations through the issuance of additional shares of our common stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of shares of our common stock. Subject to certain consent rights of the holder of our Series C Preferred Stock, our Board of Directors has authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued shares of common stock (subject to NYSE American rules which limit among other things, the number of shares we can issue without stockholder approval to no more than 20% of our outstanding shares of common stock, subject to certain exceptions). These actions will result in dilution of the ownership interests of existing stockholders, and that dilution may be material.
If persons engage in short sales of our common stock, including sales of shares to be issued upon exercise of our outstanding warrants, convertible debentures and preferred stock, the price of our common stock may decline.
Selling short is a technique used by a stockholder to take advantage of an anticipated decline in the price of a security. In addition, holders of options, warrants and other convertible securities will sometimes sell short knowing they can, in effect, cover through the exercise or conversion of options, warrants and other convertible securities, thus locking in a profit. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. Further sales of common stock issued upon exercise or conversion of options, warrants and other convertible securities could cause even greater declines in the price of our common stock due to the number of additional shares available in the market upon such exercise/conversion, which could encourage short sales that could further undermine the value of our common stock. You could, therefore, experience a decline in the value of your investment as a result of short sales of our common stock.
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The market price for our common stock may be volatile, and our stockholders may not be able to sell our stock at a favorable price or at all.
Many factors could cause the market price of our common stock to rise and fall, including: actual or anticipated variations in our quarterly results of operations; changes in market valuations of companies in our industry; changes in expectations of future financial performance; fluctuations in stock market prices and volumes; issuances of dilutive common stock or other securities in the future; the addition or departure of key personnel; announcements by us or our competitors of acquisitions, investments or strategic alliances; and the increase or decline in the price of oil and natural gas.
Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.
We cannot predict whether future issuances of our common stock or resales in the open market will decrease the market price of our common stock. The impact of any such issuances or resales of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options that we have or that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock (including shares previously registered in our registration statements and prospectus supplements, and/or in connection with future registration statements or prospectus supplements) could have an adverse effect on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing stockholders. Any sales of substantial amounts of our common stock in the public market, or the perception that such sales might occur, could lower the market price of our common stock.
We incur significant costs as a result of operating as a fully reporting publicly traded company and our management is required to devote substantial time to compliance initiatives.
We incur significant legal, accounting and other expenses in connection with our status as a fully reporting public company. Specifically, we are required to prepare and file annual, quarterly and current reports, proxy statements and other information with the SEC. Additionally, our officers, directors and significant stockholders are required to file Forms 3, 4 and 5 and Schedules 13D/G with the SEC disclosing their ownership of the Company and changes in such ownership. Furthermore, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and rules subsequently implemented by the SEC have imposed various new requirements on public companies, including requiring changes in corporate governance practices. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. The costs and expenses of compliance with SEC rules and our filing obligations with the SEC, or our identification of deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, could materially adversely affect our results of operations or cause the market price of our stock to decline in value.
Securities analyst coverage or lack of coverage may have a negative impact on our common stock’s market price.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If securities or industry analysts stop their coverage of us or additional securities and industry analysts fail to cover us in the future, the trading price for our common stock would be negatively impacted. If any analyst or analysts who cover us downgrade our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If any analyst or analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.
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Due to the fact that our common stock is listed on the NYSE American, we are subject to financial and other reporting and corporate governance requirements which increase our cost and expenses.
We are currently required to file annual and quarterly information and other reports with the SEC that are specified in Sections 13 and 15(d) of the Exchange Act. Additionally, due to the fact that our common stock is listed on the NYSE American, we are also subject to the requirements to maintain independent directors, comply with other corporate governance requirements and are required to pay annual listing and stock issuance fees. These obligations require a commitment of additional resources including, but not limited, to additional expenses, and may result in the diversion of our senior management’s time and attention from our day-to-day operations. These obligations increase our expenses and may make it more complicated or time consuming for us to undertake certain corporate actions due to the fact that we may require the approval of the NYSE American for such transactions and/or NYSE American rules may require us to obtain stockholder approval for such transactions.
You may experience future dilution as a result of future equity offerings or other equity issuances.
We may in the future issue additional shares of our common stock or other securities convertible into or exchangeable for our common stock.
Risks Relating to Our Series C Preferred Stock
The full amount of premiums, interest and dividends through the maturity date of our Series C Preferred Stock is due upon the repayment/redemption or conversion, as applicable, of the Series C Preferred Stock.
The Series C Preferred Stock provides that all applicable dividends, which initially accrued in the amount of 24.95% per annum and which increase or decrease subject to the terms of the Series C Preferred Stock, based on among other things, the trading price of the Company’s common stock, up to a maximum of 34.95% per annum, are due upon conversion or repayment/redemption (where applicable) thereof, for the full seven year term of such securities.
The requirement that we pay all premiums and dividends through maturity and the adjustable nature of such premium and dividend rates, may force us to issue the holders significant additional shares of common stock, which may cause significant dilution to existing stockholders. The requirement that we pay all premiums and dividends through maturity may make it too costly for us to redeem the Series C Preferred Stock, prior to conversion thereof, as applicable.
The number of shares of common stock issuable in consideration for premiums, interest and dividends through maturity on the Series C Preferred Stock continue to be adjustable after the conversion of such securities.
Pursuant to the terms of the Series C Preferred Stock, the conversion rate of such securities in connection with the premiums and dividends due on such securities through maturity (7 years, regardless of when converted), continues to be adjustable after the issuance of such securities. Specifically, such securities remain adjustable, based on a discount to the lowest daily volume weighted average price during a measuring period for a period of 30 or 60 days (depending on whether or not a Triggering Event has occurred) after the applicable number of shares stated in the initial conversion notice have actually been received into the holder’s designated brokerage account in electronic form and fully cleared for trading (subject to certain extensions described in the applicable securities). Because Discover (the holder of the Series C Preferred Stock) is limited to holding not more than 9.99% of the Company’s common stock upon exercise/conversion of any security, Discover will not receive all of the shares due upon any conversion, until it has sold shares and been issued additional shares and as such, the beginning date for the applicable 30 or 60 day period after conversion is impossible to determine and may be a significant additional number of days after the initial conversion by Discover.
In the event of a decrease in the Company’s stock price during the applicable measuring periods, the conversion rate of the premiums and dividends due on such applicable securities will adjust downward and Discover will be due additional shares of common stock, which issuances may cause further significant dilution to existing stockholders and the sale of such shares may cause the value of the Company’s common stock to decline in value. Furthermore, it is likely that the sale by Discover of the shares of common stock which Discover receives in connection with any conversion, during the applicable measuring period, will cause the value of the Company’s common stock to decline in value and the conversion rate to decrease and will result in Discover being due additional shares of common stock during the measuring period, which will trigger additional decreases in the value of the Company’s common stock upon further public sales by Discover. If this were to occur, Discover would be entitled to receive an increasing number of shares, upon conversion of the remaining securities, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders and would likely cause the value of our common stock to decline.
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The issuance of common stock upon conversion of the Series C Preferred Stock will cause immediate and substantial dilution and the sale of such stock will cause significant downward pressure on our stock price.
The issuance of common stock upon conversion of the Series C Preferred Stock will result in immediate and substantial dilution to the interests of other stockholders. Although Discover may not receive shares of common stock exceeding 9.99% of our outstanding shares of common stock immediately after affecting such conversion, this restriction does not prevent Discover from receiving shares up to the 9.99% limit, selling those shares, and then receiving the rest of the shares it is due, in one or more tranches, while still staying below the 9.99% limit. If Discover chooses to do this, it will cause substantial dilution to the then holders of our common stock. Additionally, the continued sale of shares issuable upon successive conversions will likely create significant downward pressure on the price of our common stock as Discover sells material amounts of our common stock over time and/or in a short period of time. This could place further downward pressure on the price of our common stock and in turn result in Discover receiving an ever increasing number of additional shares of common stock upon conversion of its securities, and adjustments thereof, which in turn will likely lead to further dilution, reductions in the exercise/conversion price of Discover’s securities and even more downward pressure on our common stock, which could lead to our common stock becoming devalued or worthless.
Discover holds an approximately $97.2 million liquidation preference in the Company.
Each share of Series C Preferred Stock held by Discover includes a liquidation preference, payable to Discover upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Company, prior to any distribution or payment made to the holders of preferred stock or common stock, by reason of their ownership thereof equal to $10,000, plus an amount equal to any accrued but unpaid dividends thereon. Because the dividends currently require that interest be paid on the Face Value of between 24.95% and 34.95% per annum, for the entire seven year term of the Series C Preferred Stock (even if payable sooner than seven years after the issuance date), the total liquidation value required to be paid to Discover upon a liquidation, dissolution or winding up of the Company is approximately $97.2 million as of the date of this report. As referenced above, this liquidation preference would be payable prior to any amount being distributed the holders of our common stock. Because our net assets total significantly less than $97.2 million, it is likely that our common stockholders would not receive any amount in the event the Company was liquidated, dissolved or wound up, and that Discover would instead receive the entire amount of available funds after liquidation.
Discover, as holder of our Series C Preferred Stock, effectively has the ability to consent to any material transaction involving the Company including the Merger.
Due to the restrictions placed on the Company as a result of the Series C Preferred Stock, including, but not limited to the significant liquidation preference discussed above and the fact that, as long as Discover holds any shares of Series C Preferred Stock, we agreed that we would not issue or enter into or amend an agreement pursuant to which we may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price; or issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock. Discover has to effectively consent to any material transaction involving the Company. In the event Discover does not consent to any such transaction, we may be prohibited (either effectively or otherwise) from completing a material transaction in the future, including, but not limited to a combination or acquisition which may be accretive to stockholders. Furthermore, Discover may condition the approval of a future transaction, which conditions may not be favorable to stockholders. It is contemplated that Discover will be required to consent to the terms of the Merger in connection with the completion for the Merger, for the Merger to close. As such, in the event Discover fails to approve the Merger, it is likely the Merger won’t be able to move forward and will be terminated.
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Our Series C Preferred Stock holder, Discover, holds rights of first refusal to provide further funding and favored nation rights.
We have granted Discover a right of first offer to match any offer for financing we receive from any person while the shares of Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match. Such right of first refusal may delay or prevent us from raising funding in the future.
We also agreed that if we issue any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then we would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover, including the Series C Preferred Stock and the agreements relating to the sale thereof. Such favored nations provision may make it more costly to complete transactions in the future, may prevent future transactions from occurring and/or may provide Discover additional rights than it currently has, all of which may cause significant dilution to existing stockholders, and/or cause the value of our common stock to decline in value.
Discover, subject to applicable contractual restrictions, and/or a third party, may sell short our common stock, which could have a depressive effect on the price of our common stock.
Discover is currently prohibited from selling the Company’s stock short; however, in the event a trigger event occurs under the Series C Preferred Stock such restriction is waived. Additionally, nothing prohibits a third party from selling the Company’s common stock short based on their belief that due to the dilution caused by the conversions/exercises of the securities held by Discover, that the trading price of our common stock will decline in value. The significant downward pressure on the price of our common stock as Discover sells material amounts of our common stock could encourage investors to short sell our common stock. This could place further downward pressure on the price of our common stock and in turn result in Discover receiving additional shares of common stock upon exercise/conversion of its securities, and adjustments thereof.
The Shares of Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement include the obligation for us to redeem such shares under certain circumstances.
We agreed pursuant to the June 2020 Purchase Agreement that if the Merger does not close by the required date approved by the parties thereto (as such may be extended from time to time), which date is currently September 30, 2020, but which may be extended until December 31, 2020, in the event that we have not fully resolved SEC comments on the Form S-4 (a preliminary draft of which has previously been filed) or other SEC filings related to the Merger, and we are responding to such comments in a reasonable fashion, subject to certain exceptions, and, we are required, at Discover’s option in its sole and absolute discretion, to immediately repurchase from Discover all then outstanding Series C Preferred Stock shares acquired by Discover pursuant to the June 2020 Purchase Agreement, by paying to Discover 110% of the aggregate face value of all such shares ($6,930,000). Viking also agreed pursuant to the Merger Agreement to pay a break-up fee upon termination of the Merger Agreement, which if paid, would allow us to pay Discover the amount we would owe in connection with the required redemption of the 630 shares of Series C Preferred Stock ($6,930,000). The required redemption of the Series C Preferred Stock, if legally authorized under Nevada law, could reduce the amount of cash we have available for working capital and could require Camber to raise additional funding in the future, which funding may not be available on favorable terms, if at all. Due to certain redemption provisions that are outside the control of the Company, the Company has recorded the Series C Preferred Stock in temporary equity.
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Because the conversion discounts related to the conversion premiums payable in connection with the Series C Preferred Stock are fixed, and not based on percentages, the percentage of such discounts increase as our stock price declines.
As described in greater detail below under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Description of Capital Stock“, the conversion rate of such premiums and dividends payable on the Series C Preferred Stock equals 95% of the average of the lowest 5 individual daily volume weighted average prices during the applicable Measuring Period, not to exceed 100% of the lowest sales prices on the last day of the Measuring Period (the “Non-Triggering Event Percentage Discounted VWAP”), less $0.05 per share of common stock, unless a triggering event (described in the Series C Preferred Stock Designation) has occurred, in which case the conversion rate equals 85% of the lowest daily volume weighted average price during the Measuring Period (the “Triggering Event Percentage Discounted VWAP” and together with the Non-Triggering Event Percentage Discounted WWAP, as applicable, the “Percentage Discounted WWAP”), less $0.10 per share of common stock, not to exceed 85% of the lowest sales prices on the last day of such Measuring Period, less $0.10 per share. Because the $0.05 and $0.10 discounts (the “Fixed Conversion Discounts”) which apply to the already discounted Percentage Discounted VWAPs are fixed, the percentage of such discounts increase as the value of its common stock decreases. For example, see the table below:
| $0.05 Discount to Percentage |
|
| $0.10 Discount to Percentage |
| ||||||||||||||||||
| Percentage Discounted VWAP |
|
| Conversion |
|
| Percentage of Discount ($0.05) Compared to Percentage Discounted VWAP |
|
| Percentage Discounted VWAP |
|
| Conversion |
|
| Percentage of Discount ($0.10) Compared to Percentage Discounted VWAP |
| ||||||
| $ | 2.00 |
|
| $ | 1.95 |
|
|
| 2.5 | % |
| $ | 2.00 |
|
| $ | 1.90 |
|
|
| 5.0 | % |
| $ | 1.75 |
|
| $ | 1.70 |
|
|
| 2.9 | % |
| $ | 1.75 |
|
| $ | 1.65 |
|
|
| 5.7 | % |
| $ | 1.50 |
|
| $ | 1.45 |
|
|
| 3.3 | % |
| $ | 1.50 |
|
| $ | 1.40 |
|
|
| 6.7 | % |
| $ | 1.25 |
|
| $ | 1.20 |
|
|
| 4.0 | % |
| $ | 1.25 |
|
| $ | 1.15 |
|
|
| 8.0 | % |
| $ | 1.00 |
|
| $ | 0.95 |
|
|
| 5.0 | % |
| $ | 1.00 |
|
| $ | 0.90 |
|
|
| 10.0 | % |
| $ | 0.75 |
|
| $ | 0.70 |
|
|
| 6.7 | % |
| $ | 0.75 |
|
| $ | 0.65 |
|
|
| 13.3 | % |
| $ | 0.50 |
|
| $ | 0.45 |
|
|
| 10.0 | % |
| $ | 0.50 |
|
| $ | 0.40 |
|
|
| 20.0 | % |
| $ | 0.25 |
|
| $ | 0.20 |
|
|
| 20.0 | % |
| $ | 0.25 |
|
| $ | 0.15 |
|
|
| 40.0 | % |
| $ | 0.10 |
|
| $ | 0.05 |
|
|
| 50.0 | % |
| $ | 0.10 |
|
| $ | 0.001 |
|
|
| 99.0 | % |
| $ | 0.05 |
|
| $ | 0.001 |
|
|
| 98.0 | % |
| $ | 0.05 |
|
| $ | 0.001 |
|
|
| 98.0 | % |
* Minimum conversion price is $0.001 per share (the par value of the common stock).
As a result, as shown above, as the trading price of our common stock decreases in value, the percentage discount to the Percentage Discounted VWAP which each further $0.05/$0.10 discount results in, increases exponentially, and in certain cases may result in the ultimate conversion price being less than 0, which would result in a conversion price of $0.001 per share, the par value of Camber’s common stock (which occurred in 2019), and the minimum conversion price at which the Series C Preferred Stock is convertible.
The effects of the Fixed Conversion Discounts will be further exacerbated in the event of a reverse stock split of Camber’s outstanding common stock. For example, if in the future Camber completes a 1-for-25 reverse stock split of Camber’s outstanding shares of common stock, the $0.05/$0.10 Fixed Conversion Discounts will be automatically adjusted to equal a fixed conversion discount to the Percentage Discounted VWAP of $1.25/$2.50 per share, which will likely result in a conversion price significantly below such values, and any decrease in the Percentage Discounted VWAP below $1.25/$2.50 per share, will result in a conversion price of the Series C Preferred Stock of $0.001 per share.
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Areas of Activities
We have invested in areas that are known to be productive, with a reasonably established production history, in order to decrease geological and exploratory risk. Our Glasscock County, Texas properties produce oil and gas primarily from the Wolfberry, Cline and Fusselman formations and are all non-operated.
The following table summarizes our gross and net developed leasehold acreage at March 31, 2020. Developed acreage is the number of acres that are allocated or assignable to producing wells or wells capable of production. The Company holds no undeveloped acreage as of March 31, 2020. Acreage in which our interest is limited to royalty and overriding royalty interests is excluded:
Acreage
|
|
| Total |
|
| Developed |
|
| Undeveloped |
| |||||||||||||||
|
|
| Gross |
|
| Net |
|
| Gross |
|
| Net |
|
| Gross |
|
| Net |
| ||||||
| Glasscock and Hutchinson County, Texas |
|
| 4,138 |
|
|
| 776 |
|
|
| 4,138 |
|
|
| 776 |
|
|
| — |
|
|
| — |
|
| Total |
|
| 4,138 |
|
|
| 776 |
|
|
| 4,138 |
|
|
| 776 |
|
|
| — |
|
|
| — |
|
We believe we have satisfactory title, in all material respects, to substantially all of our producing properties in accordance with standards generally accepted in the oil and natural gas industry.
Production, Sales Price and Production Costs
The Company produced oil, natural gas and NGLs from 25 non-operated wells in Glasscock County, Texas during the year ended March 31, 2020. The Company operated 35 non-producing wells in Hutchinson County, Texas during the year ended March 31, 2020, which wells are in the process of being transferred to PetroGlobe as discussed under “Item 3. Legal Proceedings“.
The following tables represent our total production, average sales prices and average production costs for the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Net Operating Revenues: |
|
|
|
|
|
| ||
| Crude Oil |
| $ | 296,036 |
|
| $ | 526,365 |
|
| Natural Gas |
|
| 37,049 |
|
|
| 772,105 |
|
| NGL |
|
| 64,033 |
|
|
| 1,443,632 |
|
| Total Revenues |
| $ | 397,118 |
|
| $ | 2,742,102 |
|
|
|
|
|
|
|
|
|
|
|
| Production sales: |
|
|
|
|
|
|
|
|
| Crude oil (Bbls) |
|
| 5,399 |
|
|
| 8,846 |
|
| Natural gas (Mcf) |
|
| 18,892 |
|
|
| 321,423 |
|
| NGL (Gallons) |
|
| 190,503 |
|
|
| 2,153,280 |
|
| Total (barrels oil equivalent or Boe)(1) |
|
| 13,084 |
|
|
| 113,685 |
|
|
|
|
|
|
|
|
|
|
|
| Average Sales Price: |
|
|
|
|
|
|
|
|
| Crude Oil ($/Bbl) |
| $ | 54.83 |
|
| $ | 59.51 |
|
| Natural Gas ($/Mcf) |
|
| 1.96 |
|
|
| 2.40 |
|
| NGL ($/Gal) |
|
| 0.34 |
|
|
| 0.67 |
|
|
|
|
|
|
|
|
|
|
|
| Average Production Cost ($/Boe): |
| $ | 37.76 |
|
| $ | 26.42 |
|
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| Table of Contents |
As of March 31, 2020, production from the Glasscock field (the Company’s only field) comprises 100% of our total proved reserves. The production volumes for the years ended March 31, 2020 and 2019 are represented in the table below:
|
|
| 2020 |
|
| 2019 |
| ||
| Hutchinson Area |
|
|
|
|
|
| ||
| Crude oil (Bbls) |
|
| — |
|
|
| 132 |
|
| Natural gas (Boe) |
|
| — |
|
|
| — |
|
| NGL (Bbls) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
| Glasscock County |
|
|
|
|
|
|
|
|
| Crude oil (Bbls) |
|
| 4,962 |
|
|
| 5,897 |
|
| Natural gas (Boe) |
|
| 3,149 |
|
|
| 20,241 |
|
| NGL (Bbls) |
|
| 4,536 |
|
|
| 5,387 |
|
Well Summary
The following table presents our ownership in productive crude oil and natural gas wells at March 31, 2020. The gross number represents the number of wells in which we have a working interest. The net number is the sum of our net revenue interest in each well.
|
|
| Gross |
|
| Net |
| ||
| Hutchinson and Glasscock Counties, Texas: |
|
| 25 |
|
|
| 1.16 |
|
| Total |
|
| 25 |
|
|
| 1.16 |
|
Drilling Activity
In the years ended March 31, 2020 and 2019, we had no gross or net wells that were in the process of being drilled nor did we have any delivery commitments.
At March 31, 2020, we had no gross or net wells that were in the process of being drilled nor did we have any delivery commitments.
Oil and Natural Gas Reserves
Reserve Information. For estimates of Camber’s net proved producing reserves of crude oil and natural gas, as well as discussion of Camber’s proved and probable undeveloped reserves, see “Part II - Item 8 Financial Statements and Supplementary Data – Supplemental Oil and Gas Disclosures (Unaudited)“. At March 31, 2020, Camber’s total estimated proved reserves were 133,442 Boe of which 54,850 Bbls were crude oil reserves, 43,955 Bbls were NGL reserves and 207,823 Mcfs were natural gas reserves.
Internal Controls. Stephen R. Keene, a consultant, is the technical person primarily responsible for overseeing the preparation of the reserves estimates, which means that he was primarily responsible for the input parameters of our internal reserves estimation process (which are based upon the best available production, engineering and geologic data) and provided a technical review of the veracity of the annual audit of our year end reserves by our independent third party engineers.
Mr. Keene has over 40 years of experience in oil and gas and has performed oil and gas consulting, supervision and design and analysis services for various entities in the states of Colorado, Texas, New Mexico, Wyoming, Utah and Oklahoma. Mr. Keene graduated from Texas Tech University with a Bachelor’s of Science Degree in Petroleum Engineering in 1976. Mr. Keene has experience with leasing large ranches, assembling small lot tracts, leasing corporate mineral interests, drafting lease terms, managing land teams, negotiating on and offsite drilling locations, pipeline easements, review of title documents, farmout and participation agreements, Texas Rail Road Commission filings, gas contracts and JIB agreements. He also has experience with vertical and horizontal drilling supervision, well design, AFE cost estimations, well log analysis, and control, logistics, urban noise abatement and equipment routing.
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| Table of Contents |
The preparation of our reserve estimates is in accordance with our prescribed procedures that include verification of input data into a reserve forecasting and economic software, as well as management review. Our reserve analysis includes, but is not limited to, the following:
|
| ● | Research of operators near our lease acreage. Review operating and technological techniques, as well as reserve projections of such wells. |
|
| ● | The review of internal reserve estimates by well and by area by a qualified petroleum engineer. A variance by well to the previous year-end reserve report is used as a tool in this process. |
|
| ● | SEC-compliant internal policies to determine and report proved reserves. |
|
| ● | The discussion of any material reserve variances among management to ensure the best estimate of remaining reserves. |
Qualifications of Third-Party Engineers. For the years ended March 31, 2020 and 2019, respectively, the technical person responsible for the audit of our reserve estimates at Graves & Co. Consulting LLC was Allen C. Barron, who meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Graves & CO. Consulting LLC is an independent firm and does not own an interest in our properties and is not employed on a contingent fee basis. Reserve estimates are imprecise and subjective, and may change at any time as additional information becomes available. Furthermore, estimates of oil and gas reserves are projections based on engineering data. There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. A copy of the report issued by Graves & Co. Consulting LLC is filed with this report as Exhibit 99.1.
For more information regarding our oil and gas reserves, please refer to “Part II - Item 8 Financial Statements and Supplementary Data – Supplemental Oil and Gas Disclosures (Unaudited)“.
Office Lease
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. Monthly rent for October through December 2017 was $5,000 per month, increasing to $7,500 per month effective January 2018. The lease agreement was terminated effective June 30, 2018. The Company agreed under a verbal contract to lease the same space on a month-to-month basis for $2,500 per month beginning 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 with BlackBriar Advisors LLC (“BlackBriar”). Pursuant to the sublease, BlackBriar is providing us, without charge, use of the office space in Houston, Texas. BlackBriar is affiliated with the Company’s former Chief Financial Officer.
Camber is periodically named in legal actions arising from normal business activities. Camber evaluates the merits of these actions and, if it determines that an unfavorable outcome is probable and can be reasonably estimated, Camber will establish the necessary reserves. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
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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 and intends to vehemently defend itself against the allegations.
PetroGlobe Energy Holdings, LLC and Signal Drilling, LLC
In March 2019, PetroGlobe and Signal sued the Company in the 316th Judicial District of Hutchinson County, Texas (Cause No. 43781). The plaintiffs alleged causes of action relating to negligent misrepresentation; fraud and willful misconduct; gross negligence; statutory fraud; breach of contract; and specific performance, in connection with a purchase and sale agreement entered into between the parties in March 2018, relating to the purchase by plaintiffs of certain oil and gas assets from the Company, and a related joint venture agreement. The lawsuit seeks in excess of $600,000 in damages, as well as pre- and post-judgment interest, court costs and attorneys’ fees, and punitive and exemplary damages. Additionally, a portion of the revenues from the properties in contention are being held in suspense as a result of the lawsuit. On October 31, 2019, the Company brought counterclaims against PetroGlobe and Signal, and Petrolia Oil, LLC and Ian Acrey, including bringing claims for causes of actions including declaratory judgment (that PetroGlobe and certain other plaintiffs represented that a lease and related wells were free of all agreements and rights in favor of third parties and provided a special warranty of title pursuant to the purchase and sale agreement); breach of contract (in connection with the purchase and sale agreement); statutory fraud; common law fraud (against Mr. Acrey and other plaintiffs); fraud by non-disclosure (against Mr. Acrey and other plaintiffs); negligent misrepresentation (against Mr. Acrey and other plaintiffs); breach of fiduciary duty (against Mr. Acrey and other plaintiffs) and seeking attorney’s fees and pre- and post-judgment interest.
On January 31, 2020, the Company entered into a Compromise Settlement Agreement (the “Settlement Agreement”) with PetroGlobe, Signal Drilling, LLC (“Signal”), Petrolia Oil, LLC (“Petrolia”), Prairie Gas Company of Oklahoma, LLC (“PGCO”), and Canadian River Trading Company, LLC (“CRTC”). Pursuant to the Settlement Agreement, the Company agreed to pay PetroGlobe $250,000, of which $100,000 was due upon execution of the Settlement Agreement, which payment has been made, and $150,000 was paid to an escrow account, which release is subject to approval by the Company upon the successful transfer of all wells and partnership interests of the Company’s current wholly- owned subsidiary CE to PetroGlobe.
On July 16, 2020, the Company completed all of the requirements of the Settlement Agreement and assigned PetroGlobe all of its right, title, and interest in all wells, leases, royalties, minerals, equipment, and other tangible assets associated with specified wells and properties, located in Hutchinson County, Texas, the $150,000 held in escrow was released to PetroGlobe and the Settlement Agreement transactions closed. As a result of the transfers, the Company no longer owns CE, and no longer has any interest in or any liabilities related to the Hutchinson County, Texas wells.
The Company recognized a net settlement cost of $204,842 included on the statement of operations for the year ended March 31, 2020 in connection with the settlement, which is expected to close shortly after the filing of this Report.
The Company released the parties to the Settlement Agreement, including Ian Acrey, individually, as well as their officers, directors, or members from any claims asserted in the lawsuit, and the parties to the Settlement Agreement along with Ian Acrey, individually, released the Company, its officers, directors, shareholders and affiliate corporations from any claims asserted in the lawsuit. The Company did not release any claims or causes of action against N&B Energy, LLC, Sezar Energy, LLP related to Richard Azar, or any of their affiliates, or predecessors, or successors.
The parties filed a motion and order to dismiss the lawsuit with prejudice shortly after execution of the Settlement Agreement
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Apache Corporation
In December 2018, Apache Corporation (“Apache”) sued Camber, Sezar Energy, L.P., and Texokcan Energy Management Inc., in the 129th Judicial District Court of Harris County, Texas (Cause 2018-89515). Apache alleged causes of action for Breach of Contract, Money Had & Received and Conversion, relating to amounts Apache alleged it was owed under a joint operating agreement. Apache is seeking $656,908 in actual damages, exemplary damages, pre- and post-judgment interest, court costs, and other amounts to which it may be entitled. Camber filed a general denial to the claims and asserted the affirmative defense of failure to mitigate. On July 13, 2020, Apache filed a Second Amended Petition against Camber, Sezar, Texokcan, N&B Energy, LLC, and Richard N. Azar, II alleging Breach of Contract, Defaults under a Joint Operating Agreement, Money Had & Received and Conversion, relating to amounts Apache allegedly overpaid Sezar and Azar and Unjust Enrichment. On October 26, 2020, the Company entered into an agreement with Apache to obtain a release of all liability (both parties provided mutual releases) for $20,000, which was paid in October 2020, and the litigation against the Company was dismissed.
N&B Energy
On September 12, 2019, N&B Energy filed a petition in the District Court for the 285th Judicial District of Bexar County, Texas (Case #2019CI11816). Pursuant to the petition, N&B Energy raises claims against the Company for breach of contract, unjust enrichment, money had and received and disgorgement, in connection with $706,000 which it alleges it is owed under the July 2018 Asset Purchase Agreement between the Company and N&B Energy (the “Sale Agreement”), for true-ups and post-closing adjustments associated therewith. The petition sought amounts owed, pre- and post-judgment interest, and attorney’s fees. On October 21, 2020, the arbitrator issued an Interim Stage II Order granting an award that acknowledged the claims of both parties that resulted in an arbitration award in favor of N&B Energy of approximately $52,000, which was paid in December 2020.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Market Information
Our common stock is quoted on the NYSE American under the symbol “CEI”.
Holders
As of November 18, 2021, there were approximately 168 record holders of our common stock, not including holders who hold their shares in street name.
Description of Capital Stock
The total number of shares of all classes of stock that we have authority to issue is 250,005,200, consisting of 250,000,000 shares of common stock, par value $0.001 per share, and 5,200 shares of preferred stock, par value $0.001 per share. As of November 18, 2021, we had (i) 250,000,000 shares of common stock outstanding and (ii) 5,200 designated shares of Series C Preferred Stock, 3,886 of which were outstanding.
Common Stock
Holders of our common stock: (i) are entitled to share ratably in all of our assets available for distribution upon liquidation, dissolution or winding up of our affairs; (ii) do not have preemptive, subscription or conversion rights, nor are there any redemption or sinking fund provisions applicable thereto; and (iii) are entitled to one vote per share on all matters on which stockholders may vote at all stockholder meetings. Each stockholder is entitled to receive the dividends as may be declared by our directors out of funds legally available for dividends. Our directors are not obligated to declare a dividend. Any future dividends will be subject to the discretion of our directors and will depend upon, among other things, future earnings, the operating and financial condition of our Company, our capital requirements, general business conditions and other pertinent factors.
The presence of the persons entitled to vote 33% of the outstanding voting shares on a matter before the stockholders shall constitute the quorum necessary for the consideration of the matter at a stockholders meeting.
The vote of the holders of a majority of the votes cast on the matter at a meeting at which a quorum is present shall constitute an act of the stockholders, except for the election of directors, who shall be appointed by a plurality of the shares entitled to vote at a meeting at which a quorum is present. The common stock does not have cumulative voting rights, which means that the holders of a majority of the common stock voting for election of directors can elect 100% of our directors if they choose to do so.
Preferred Stock
Subject to the terms contained in any designation of a series of preferred stock, the Board of Directors is expressly authorized, at any time and from time to time, to fix, by resolution or resolutions, the following provisions for shares of any class or classes of preferred stock:
|
| 1) | The designation of such class or series, the number of shares to constitute such class or series which may be increased (but not below the number of shares of that class or series then outstanding) by a resolution of the Board of Directors; |
|
| 2) | Whether the shares of such class or series shall have voting rights, in addition to any voting rights provided by law, and if so, the terms of such voting rights; |
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| Table of Contents |
|
| 3)
| The dividends, if any, payable on such class or series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any share of stock of any other class or any other shares of the same class; |
|
| 4)
| Whether the shares of such class or series shall be subject to redemption by the Company, and, if so, the times, prices and other conditions of such redemption or a formula to determine the times, prices and such other conditions; |
|
| 5)
| The amount or amounts payable upon shares of such series upon, and the rights of the holders of such class or series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Company; |
|
| 6)
| Whether the shares of such class or series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such class or series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; |
|
| 7)
| Whether the shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of the same class or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchanges; |
|
| 8)
| The limitations and restrictions, if any, to be effective while any shares of such class or series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Company of the common stock or shares of stock of any other class or any other series of the same class; |
|
| 9)
| The conditions or restrictions, if any, upon the creation of indebtedness of the Company or upon the issuance of any additional stock, including additional shares of such class or series or of any other series of the same class or of any other class; |
|
| 10)
| The ranking (be it pari passu, junior or senior) of each class or series vis-à-vis any other class or series of any class of preferred stock as to the payment of dividends, the distribution of assets and all other matters; |
|
| 11)
| Facts or events to be ascertained outside the articles of incorporation of the Company, or the resolution establishing the class or series of stock, upon which any rate, condition or time for payment of distributions on any class or series of stock is dependent and the manner by which the fact or event operates upon the rate, condition or time of payment; and |
|
| 12)
| Any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof, insofar as they are not inconsistent with the provisions of our articles of incorporation, as amended, to the full extent permitted by the laws of the State of Nevada. |
The powers, preferences and relative, participating, optional and other special rights of each class or series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
The Company previously designated (a) 2,000 shares of preferred stock as Series A Convertible Preferred Stock (November 2011); (b) 600,000 shares of preferred stock as Series B Redeemable Convertible Preferred Stock (August 2016); (c) 50,000 shares of preferred stock as Series D Convertible Preferred Stock (July 2019); (d) 1,000,000 shares of preferred stock as Series E Redeemable Convertible Preferred Stock (July 2019); and (e) 16,750 shares of preferred stock as Series F Redeemable Preferred Stock (July 2019). Effective on May 15, 2020, due to the fact that no shares of Series A Convertible Preferred Stock, Series B Redeemable Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E Redeemable Convertible Preferred Stock or Series F Redeemable Preferred Stock were outstanding, the Company filed Certificate of Withdrawal of Certificate of Designations relating to such series of preferred stock with the Secretary of State of Nevada and terminated the designation of its Series A Convertible Preferred Stock, Series B Redeemable Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E Redeemable Convertible Preferred Stock or Series F Redeemable Preferred Stock effective as of the same date. As a result, the only preferred stock which is currently designated by the Company is the Company’s Series C Redeemable Convertible Preferred Stock, discussed below.
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Series C Redeemable Convertible Preferred Stock
Holders of the Series C Preferred Stock are entitled to cumulative dividends in the amount of 24.95% per annum (adjustable up to 34.95% if a trigger event, as described in the designation of the Series C Preferred Stock occurs), payable upon redemption, conversion, or maturity, and when, as and if declared by our Board of Directors in its discretion, provided that upon any redemption, conversion, or maturity, seven years of dividends are due and payable on such redeemed, converted or matured stock. The Series C Preferred Stock ranks senior to the common stock. The Series C Preferred Stock has no right to vote on any matters, questions or proceedings of the Company including, without limitation, the election of directors except: (a) during a period where a dividend (or part of a dividend) is in arrears; (b) on a proposal to reduce the Company’s share capital; (c) on a resolution to approve the terms of a buy-back agreement; (d) on a proposal to wind up the Company; (e) on a proposal for the disposal of all or substantially all of the Company’s property, business and undertakings; and (f) during the winding-up of the Company.
The Series C Preferred Stock may be converted into shares of common stock (“Conversion Shares”) at any time at the option of the holder, or at our option if certain equity conditions (as defined in the certificate of designation for the Series C Preferred Stock), are met. Upon conversion, we will pay the holders of the Series C Preferred Stock being converted an amount, in cash or stock at our sole discretion, equal to the dividends that such shares would have otherwise earned if they had been held through the maturity date (i.e., seven years), and issue to the holders 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 applicable Conversion of Price $3.25 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. Specifically, the conversion rate of such premiums and dividends equals 95% of the average of the lowest 5 individual daily volume weighted average prices during the Measuring Period, 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 trigger event has occurred, in which case the conversion rate equals 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 the Measuring Period, less $0.10 per share. The “Measuring Period” is the period beginning, if no trigger event has occurred, 30 trading days, and if a trigger event has occurred, 60 trading days, before the applicable notice has been provided regarding the exercise or conversion of the applicable security, and ending, if no trigger event has occurred, 30 trading days, and if a trigger event has occurred, 60 trading days, after the applicable number of shares stated in the initial exercise/conversion notice have actually been received into the holder’s designated brokerage account in electronic form and fully cleared for trading. Trigger events are described in the designation of the Series C Preferred Stock, but include items which would typically be events of default under a debt security, including filing of reports late with the SEC. As a result of an agreement entered into with the holder of the Series C Preferred Stock in February 2020, the Measuring Period begins on February 3, 2020.
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 investor 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.
We may not issue any preferred stock that is pari passu or senior to the Series C Preferred Stock with respect to any rights for a period of one year after the earlier of such date (i) a registration statement is effective and available for the resale of all shares of common stock issuable upon conversion of the Series C Preferred Stock, or (ii) Rule 144 under the Securities Act is available for the immediate unrestricted resale of all shares of common stock issuable upon conversion of the Series C Preferred Stock.
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The Series C Preferred Stock is subject to a beneficial ownership limitation, which prevents any 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 9.99% of our outstanding common stock.
Dividend Policy
We have not declared or paid cash dividends or made distributions in the past. We do not anticipate that we will pay cash dividends or make distributions in the foreseeable future. We currently intend to retain and reinvest future earnings to finance operations. We may however declare and pay dividends in shares of our common stock in the future (similar to how we have in the past).
Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the year ended March 31, 2020 and from the period from April 1, 2020 to the filing date of this report, which have not previously been disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K, except as set forth below:
On October 15, 2019, the Company entered into a Settlement and Mutual Release Agreement (the “Release”) with Regal Consulting (“Regal”), pursuant to which it agreed to settle and terminate a consulting agreement with Regal Consulting. Pursuant to the Release, the Company agreed to issue Regal Consulting 1,514 shares of the Company’s restricted common stock and to pay Regal Consulting $17,500 in consideration for agreeing to terminate the agreement. The Company and Regal Consulting also provided each other mutual releases in connection with the Release. The 1,514 shares of common stock were issued to Regal Consulting on June 1, 2020.
On February 15, 2020, the Company entered into a letter agreement with Sylva International LLC d/b/a SylvaCap Media (“SylvaCap”), pursuant to which SylvaCap agreed to act as the Company’s non-exclusive digital marketing service provider in consideration for an aggregate of 100,000 shares of restricted common stock (the “SylvaCap Shares”), which are fully-earned upon their issuance, and $50,000 per month during the term of the agreement, which ends, as extended, on October 19, 2020. The SylvaCap Shares were issued on May 15, 2020.
The Series C Preferred Stock holder, Discover, did not convert any shares of Series C Preferred Stock into common stock during the period from January 1, 2020 to March 31, 2020. Since April 1, 2020, and through June 24, 2020, Discover converted 498 shares of Series C Preferred Stock into approximately 13,033,208 shares of common stock, of which 7,354,416 shares of common stock had been issued as of June 24, 2020, and a total of approximately 5,678,792 shares of common stock were due to Discover, and are held in abeyance until such issuances are requested by Discover, subject to the 9.99% ownership limitation set forth in the designation of the Series C Preferred Stock. The number of Series C Preferred Stock converted by Discover of the Series C Preferred Stock since April 1, 2020, and through June 24, 2020, are summarized below:
|
| ● | On April 15, 2020, Discover converted 17 shares of Series C Preferred Stock into 442,804 shares of common stock, all of which have been issued to date; |
|
| ● | On April 23, 2020, Discover converted 236 shares of Series C Preferred Stock into 6,147,153 shares of common stock, all of which have been issued to date; and |
|
|
|
|
|
| ●
| On June 23, 2020, Discover converted 245 shares of Series C Preferred Stock into 6,412,992 shares of common stock, of which a total of approximately 5,678,792 shares of common stock remain due to Discover as of June 24, 2020, and are held in abeyance until such issuances are requested by Discover, subject to the 9.99% ownership limitation set forth in the designation of the Series C Preferred Stock. |
The sales and issuances of the securities described above have been determined to be exempt from registration under the Securities Act in reliance on Sections 3(a)(9) and 4(a)(2) of the Securities Act, Rule 506 of Regulation D promulgated thereunder and Regulation S promulgated thereunder, as transactions by an issuer not involving a public offering. The preferred stock holder (Discover) has represented that it is an accredited investor, as that term is defined in Regulation D, it is not a U.S. Person, and that it is acquiring the securities for its own account.
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| Table of Contents |
As of June 24, 2020, the 2,951 outstanding shares of Series C Preferred Stock can convert, pursuant to their terms, into approximately 86,142,223 shares of our common stock, which number includes 9,080,000 shares of common stock convertible upon conversion of all of the outstanding shares of outstanding Series C Preferred Stock at a conversion price of $3.25 per share (based on the $10,000 face amount of the Series C Preferred Stock) and approximately 77,062,223 shares of common stock for premium shares due thereunder (based on the current dividend rate of 24.95% per annum), and a conversion price of $0.6688 per share (the last conversion price provided in a conversion notice provided by Discover), which may be greater than or less than the conversion price that currently applies to the conversion of the Series C Preferred Stock pursuant to the terms of the Designation, which number of premium shares may increase significantly from time to time as the trading price of our common stock decreases, upon the occurrence of any trigger event under the Designation of the Series C Preferred Stock and upon the occurrence of certain other events, as described in greater detail in the Designation of the Series C Preferred Stock. The lowest possible conversion price of the Series C Preferred Stock is $0.001 per share. If converted in full at the lowest possible conversion price, the Series C Preferred Stock would convert into a maximum of 51,539,396,600 shares of common stock.
ITEM 6. SELECTED FINANCIAL DATA.
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The following is a discussion by management of its view of the Company’s business, financial condition, and corporate performance for the past year. The purpose of this information is to give management’s recap of the past year, and to give an understanding of management’s current outlook for the near future. This section is meant to be read in conjunction with “Item 8. Financial Statements and Supplementary Data“ of this Annual Report on Form 10-K.
Our fiscal year ends on the last day of March of the calendar year. We refer to the years ended March 31, 2020 and 2019 as our 2020 and 2019 fiscal years, respectively.
Financing
A summary of our financing transactions, funding agreements, lending transactions and other material funding transactions can be found under “Part II - Item 8 Financial Statements and Supplementary Data – Note 2 – Liquidity and Going Concern Considerations“, “Note 6 – Plan of Merger and Investment in Unconsolidated Entity“, “Note 7 – Long-Term Notes Receivable“, “Note 9 – Note Payables and Debenture“, “Note 13 - Merger Agreement and Divestiture“, “Note 15 – Stockholders’ Equity (Deficit)“ and “Note 21 – Subsequent Events“.
The Company believes that it will not have sufficient liquidity to meet its operating costs unless it raises funding, which may be through the sale of equity or debt, which may be more likely if it can close the Viking Merger, which is the Company’s current plan, which Merger is anticipated to close in the third calendar quarter of 2020, and which required closing date is currently September 30, 2020, but can be extended until up to December 31, 2020, pursuant to certain conditions in the Merger Agreement. There is no guarantee though that the Viking merger will be completed or other sources of funding be available. 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.
The Company is delinquent on its required filings with the SEC and has been working diligently to satisfy all of its filing requirements. The cause for the delinquent filings is primarily due to the restatements described in Note 4. As a result of the delinquent filings, the Company has been unable to complete its merger with Viking and obtain financing. There can be no assurance that financing and other opportunities will be available to the Company once the Company is current on all of its filings.
Restatements of previously issued Financial Statements
On October 31, 2020, the Company received an SEC Comment Letter with respect to Amendment No. 2 to the Registration Statement on Form S-4 filed on October 14, 2020. Among other things, the SEC Comment Letter questioned the Company’s historical accounting treatment regarding the sale of our Series C Stock. The Company recorded such sales as permanent equity and the SEC Comment Letter suggested the appropriate accounting classification was something other than permanent equity given certain provisions within the Certificate of Designation for the Series C Stock (“COD”). After considering the SEC Comment letter and reviewing the COD, the Company and the holder of the Series C Stock determined there were several errors made in the drafting of the COD that could result in unintended consequences.
Both parties agreed to subsequently correct the Certificate of Designation, and Certificates of Correction to the COD were filed on December 9, 2020 and on April 20, 2021 to correct the errors. Both parties agreed the corrections would be applied retroactive to the original filing date of the COD, being August 25, 2016. However, US GAAP requires a transaction to be accounted for in accordance with the terms of an agreement in effect during the period of the financial statements and, consequently, the Company determined that in accordance with the terms of the original COD, the Series C Stock should have been recorded as temporary equity instead of permanent equity. In addition, certain provisions of the original COD required the Company to recognize a derivative liability for certain conversions of the Series C Stock into common stock.
As a result of the errors described above, we restated our financial statements to reclassify the Series C Stock from permanent equity to temporary equity and to recognize a derivative liability for the potential obligation to issue additional shares after the Series C shares have been converted to common shares with Amendment No. 1 to our Annual Report on Form 10-K/A (“First Amendment”). We estimated the fair value of the derivative liability at March 31, 2020 and 2019 using a binomial pricing model, the actual conversion rate and the historical volatility rate for the Company’s common stock.
After additional consultations with the SEC staff and review of the applicable accounting requirements, the Company determined that the accounting for the Series C Stock required further adjustment from the accounting treatment applied in the First Amendment.
The Series C Stock were initially issued in September 2016 and should have been recorded with a deemed dividend to recognize the required conversion premium upon issuance and a loss on derivative liability to recognize the variability if the shares were converted to common shares. Subsequent measurement should have included adjustments to the carrying value of the Series C Stock to recognize changes in fair value due to changes in the Company’s stock price and recognition of gains or losses on conversion of the Series C Stock into common stock. Our restatements, accounting treatment and calculations are more fully described in notes 4 and 10.
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Operations
Camber’s objective for our current producing wells is to operate as efficiently as possible, look for technological advancements to increase the life of the wells, evaluate the economic viability of these wells and consider adding to or working over our low producing assets, provided that we do not currently have any plans to resume production activities on our Glasscock County, Texas wells.
Costs associated with producing oil, natural gas and NGLs are substantial. Some of these costs vary with commodity prices, some trend with the type and volume of production, and others are a function of the number of wells we own and operate. Production expenses are the costs incurred in the operation of productive properties and workover costs. Expenses for utilities, direct labor, water transportation, injection and disposal, materials and supplies comprise the most significant portion of our production expenses. Certain items, such as direct labor and materials and supplies, generally remain relatively fixed across broad production volume ranges, but can fluctuate depending on the activities performed during a given period. We monitor our operations to ensure that we are incurring production expenses at an acceptable level. For example, we monitor our production expenses per Boe to determine if any wells or properties should be shut in, recompleted or sold. This unit rate also allows us to monitor these costs to identify trends and to benchmark against other producers. Although we strive to reduce our production expenses, these expenses can increase or decrease on a per unit basis as a result of various factors as we operate our properties or make acquisitions and dispositions of properties.
Moving forward, Camber plans to complete the Merger with Viking and then focus on growing through the development of Viking’s properties while also seeking new acquisitions to grow its oil and gas production and revenues through the combined entity. Camber anticipates raising additional financing to complete acquisitions following the closing of the merger, which may be accomplished through the sale of debt or equity. The Merger is subject to various closing conditions which may not be met pursuant to the contemplated timeline, if at all.
For the year ended March 31, 2020, the Company produced oil, natural gas and NGLs at an average of approximately 36 Boepd from wells in two Texas counties. The Company serves as operator of 35 gross wells (all of which are shut-in and non-producing), which wells are in the process of being transferred pursuant to the terms of the Settlement Agreement discussed below under “Item 3. Legal Proceedings“. The total number of gross wells is 81, with the active producers being 36. The ratio between the gross and net production differs due to varied working interests and net revenue interests in each well. As we develop our properties, we may see the opportunity to increase our natural gas and natural gas liquids production.
Separately, the price Camber receives for its oil heavily influences its revenue and cash flows, and the present value and quality of its reserves. Oil, NGL and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. The price of crude oil has experienced significant volatility over the last five years, with the price per barrel of West Texas Intermediate (“WTI”) crude rising from a low of $27 in February 2016 to a high of $76 in October 2018, then, in 2020, most recently dropping below $20 per barrel due in part to reduced global demand stemming from the recent global COVID-19 outbreak. A prolonged period of low market prices for oil and natural gas, or further declines in the market prices for oil and natural gas, due to the COVID-19 outbreak, governmental responses thereto, decreased demand in connection therewith, or other factors will likely adversely affect Camber’s business, financial condition and liquidity and its ability to meet obligations, targets or financial commitments and could ultimately lead to restructuring or filing for bankruptcy.
Reserves
Camber’s estimated total net reserves as of March 31, 2020 were 98,805 Bbls of crude oil and NGL combined and 207,823 Mcf of natural gas which translates to an equivalent of 133,442 Boe. There were no probable reserves as of March 31, 2020. These reserves are based on the Oil and Gas Benchmark Prices to Estimate Year-End Petroleum Reserves and Values Using U.S. Securities and Exchange Commission Guidelines from the Modernization of Oil and Gas Reporting and on the quantities of oil, natural gas and NGLs, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward from known reservoirs under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the rights to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Reserves and economic evaluation of all of our properties are prepared on a well-by-well basis. The accuracy of the reserve estimates is a function of the quality and quantity of available data; interpretation of that data; accuracy of various mandated economic assumptions; and judgement of the independent reserve engineer.
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Using the average monthly crude oil price of $55.80 per Bbl and natural gas price of $2.30 per Mcf for the twelve months ended March 31, 2020, our estimated discounted future net cash flow (“PV-10”) before tax expenses for our total proved reserves was approximately $0.964 million. Total reserve value at March 31, 2020 represents a decrease of approximately $1.11 million or 54% from a year earlier using the same SEC pricing and reserves methodology. The decrease is primarily due to the September 2018 closing and natural declines in the production of our oil and gas properties. Oil, natural gas and NGL prices are market driven and have been historically volatile, and we expect that future prices will continue to fluctuate due to supply and demand factors, seasonality, and geopolitical and economic factors, and such volatility can have a significant impact on our estimates of proved reserves and the related PV-10 value.
The reserves as of March 31, 2020 were determined in accordance with standard industry practices and SEC regulations by the licensed independent petroleum engineering firm of Graves & Co. Consulting LLC. Oil, natural gas and NGL reserve estimates require significant judgments in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may change substantially over time as a result of numerous factors including, but not limited to, additional development activity, production history, projected future production, economic assumptions relating to commodity prices, operating expenses, severance and other taxes, capital expenditures and remediation costs and these estimates are inherently uncertain. If estimates of proved reserves decline, our depreciation, depletion and amortization (“DD&A”) rate will increase, resulting in a decrease in net income. A decline in estimates of proved reserves could also cause us to perform an impairment analysis to determine if the carrying amount of oil and natural gas properties exceeds fair value and could result in an impairment charge, which would reduce earnings. Although these hydrocarbon quantities have been determined in accordance with industry standards, they are prepared using the subjective judgments of the independent engineers, and may actually be more or less.
Oil and Gas Revenue
During the year ended March 31, 2020, our net crude oil sales volumes decreased to 5,399 Bbls from 8,846 Bbls, a 39% decrease over the previous fiscal year. The production decrease is primarily related to the sale of a significant amount of our assets which closed in September 2018, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
Major Expenditures
The table below sets out the major components of our operating and corporate expenditures for the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Additions to Oil and Gas Properties (Capitalized) |
|
|
|
|
|
| ||
| Acquisitions Using Cash |
| $ | — |
|
| $ | — |
|
| Other Capitalized Costs(a) |
|
| — |
|
|
| 2,095,991 |
|
|
|
|
|
|
|
|
|
|
|
| Total Additions (Deductions) to Oil and Gas Properties |
|
| — |
|
|
| 2,095,991 |
|
| Lease Operating Expenditures (Expensed) |
|
| 479,656 |
|
|
| 2,870,908 |
|
| Severance and Property Taxes (Expensed) |
|
| 14,440 |
|
|
| 132,993 |
|
|
|
| $ | 494,096 |
|
| $ | 5,099,892 |
|
|
|
|
|
|
|
|
|
|
|
| General and Administrative Expense (Cash-based) |
| $ | 4,709,181 |
|
| $ | 4,809,135 |
|
| Share-Based Compensation (Non-Cash) |
|
| 200,690 |
|
|
| 343,631 |
|
| Total General and Administrative Expense |
| $ | 4,909,871 |
|
| $ | 5,152,766 |
|
|
| (a) | Other capitalized costs include title related expenses and tangible and intangible drilling costs. |
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Market Conditions and Commodity Prices
Our financial results depend on many factors, particularly the price of natural gas and related natural gas liquids, and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our production volumes or revenues. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success. We expect prices to remain volatile for the remainder of the year. For information about the impact of realized commodity prices on our natural gas and crude oil and condensate revenues, refer to “Results of Operations” below.
Results of Operations
The following discussion and analysis of the results of operations for each of the two fiscal years in the period ended March 31, 2020 should be read in conjunction with the consolidated financial statements of Camber Energy, Inc. and notes thereto (see “Part II - Item 8. Financial Statements and Supplementary Data“).
We reported a net loss for the year ended March 31, 2020 of $27.96 million (net loss attributable to common shareholders of $35.1 million), or $16.64 per common share. For the year ended March 31, 2019, we reported a net loss of $42 million (net loss attributable to common shareholders of $42.6 million), or $10,794.66 per common share. The decrease in net loss was primarily due to a loss on derivative liability of $24.1 million for the year ended March 31, 2020 as compared to a loss on derivative liability of $58.7 million for the year ended March 31, 2019. The loss on derivative liability relates to the conversion premium for the conversion of the Series C Preferred Stock, as well as adjustments to the carrying value of the Series C Stock to recognize changes in fair value due to changes in the Company’s stock price and recognition of gains or losses on conversion of the Series C Stock into common stock more fully described in notes 4 and 10. The increase in the net loss was partially offset by the one-time gain on the sale of assets to N&B Energy that closed in September 2018, and resulted in a gain on sale of property and equipment of $25.8 million for the year ended March 31, 2019, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
Net Operating Revenues
The following table sets forth the revenue and production data for the years ended March 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
| % |
| ||||
|
|
|
|
|
|
|
| Increase |
|
| Increase |
| |||||
|
| 2020 |
|
| 2019 | (Decrease) | (Decrease) |
| |||||||||
| Sale Volumes: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Crude Oil (Bbls) |
|
| 5,399 |
|
|
| 8,846 |
|
|
| (3,447 | ) |
|
| (39 | )% |
| Natural Gas (Mcf) |
|
| 18,892 |
|
|
| 321,423 |
|
|
| (302,531 | ) |
|
| (94 | )% |
| NGL (Gallons) |
|
| 190,503 |
|
|
| 2,153,280 |
|
|
| (1,962,777 | ) |
|
| (91 | )% |
| Total (Boe) |
|
| 13,084 |
|
|
| 113,685 |
|
|
| (100,601 | ) |
|
| (88 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Crude Oil (Bbls per day) |
|
| 15 |
|
|
| 24 |
|
|
| (9 | ) |
|
| (38 | )% |
| Natural Gas (Mcf per day) |
|
| 52 |
|
|
| 881 |
|
|
| (829 | ) |
|
| (94 | )% |
| NGL (Gallons per day) |
|
| 522 |
|
|
| 5,899 |
|
|
| (5,377 | ) |
|
| (91 | )% |
| Total (Boe per day) |
|
| 36 |
|
|
| 311 |
|
|
| (275 | ) |
|
| (88 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Sale Price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Crude Oil ($/Bbl) |
| $ | 54.83 |
|
| $ | 59.51 |
|
| $ | (4.68 | ) |
|
| (8 | )% |
| Natural Gas($/Mcf) |
|
| 1.96 |
|
|
| 2.4 |
|
|
| (0.44 | ) |
|
| (18 | )% |
| NGL ($/Gallon) |
|
| 0.34 |
|
|
| 0.67 |
|
|
| (0.33 | ) |
|
| (49 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Crude Oil |
| $ | 296,036 |
|
| $ | 526,365 |
|
| $ | (230,329 | ) |
|
| (44 | )% |
| Natural Gas |
|
| 37,049 |
|
|
| 772,105 |
|
|
| (735,056 | ) |
|
| (95 | )% |
| NGL |
|
| 64,033 |
|
|
| 1,443,632 |
|
|
| (1,379,599 | ) |
|
| (96 | )% |
| Total Revenues |
| $ | 397,118 |
|
| $ | 2,742,102 |
|
| $ | (2,344,984 | ) |
|
| (86 | )% |
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| Table of Contents |
Total crude oil and natural gas revenues for the year ended March 31, 2020 decreased $2.3 million, or 86%, to approximately $0.4 million, compared to $2.7 million for the same period a year ago due primarily to the sale of a significant amount of our assets which closed in September 2018, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
Operating and Other Expenses
The following table sets forth operating and other expenses for the years ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
| Increase |
|
| Increase |
| |||||
|
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||
| Direct lease operating expense |
| $ | 395,506 |
|
| $ | 1,942,922 |
|
| $ | (1,547,416 | ) |
|
| (80 | )% |
| Workovers expense |
|
| — |
|
|
| 224,827 |
|
|
| (224,827 | ) |
|
| (100 | )% |
| Other |
|
| 84,150 |
|
|
| 703,159 |
|
|
| (619,099 | ) |
|
| (83 | )% |
| Total Lease Operating Expenses |
|
| 479,656 |
|
|
| 2,870,908 |
|
|
| (2,391,252 | ) |
|
| (83 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Severance and Property Taxes |
|
| 14,440 |
|
|
| 132,993 |
|
|
| (118,553 | ) |
|
| (89 | )% |
| Depreciation, Depletion, Amortization and Accretion |
|
| 20,420 |
|
|
| 478,770 |
|
|
| (458,350 | ) |
|
| (96 | )% |
| Impairment of Oil and Gas Properties |
|
| — |
|
|
| 1,304,785 |
|
|
| (1,304,785 | ) |
|
| (100 | )% |
| (Gain) Loss on Sale of Property and Equipment |
|
| — |
|
|
| -25,808,246 |
|
|
| 25,808,246 |
|
|
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| General and Administrative (Cash-based) |
|
| 4,709,181 |
|
|
| 4,809,135 |
|
|
| (99,954 | ) |
|
| (2 | )% |
| Share-Based Compensation (Non-Cash) |
|
| 200,690 |
|
|
| 343,631 |
|
|
| (142,941 | ) |
|
| (42 | )% |
| Total General and Administrative Expense |
| $ | 4,909,871 |
|
| $ | 5,152,766 |
|
| $ | (242,895 | ) |
|
| (5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Expense |
| $ | 14,771 |
|
| $ | 2,438,097 |
|
| $ | (2,423,326 | ) |
|
| (99 | )% |
| Equity in Earnings of Unconsolidated Entity |
|
| (957,169 | ) |
|
| — |
|
|
| (957,169 | ) |
|
| (100 | )% |
| Loss on Derivative Liability |
|
| 24,101,870 |
|
|
| 58,679,252 |
|
|
| (34,577,382 | ) |
|
| (59 | )% |
| Other (Income) Expense, Net |
| $ | (228,572 | ) |
| $ | (474,124 | ) |
| $ | (245,552 | ) |
|
| (52 | )% |
Lease Operating Expenses. Lease operating expenses can be divided into the following categories: costs to operate and maintain Camber’s crude oil and natural gas wells, the cost of workovers and lease and well administrative expenses. Operating and maintenance expenses include, among other things, pumping services, salt-water disposal, equipment repair and maintenance, compression expense, lease upkeep and fuel and power. Workovers are operations to restore or maintain production from existing wells. Each of these categories of costs individually fluctuates from time to time as Camber attempts to maintain and increase production while maintaining efficient, safe and environmentally responsible operations. The costs of services charged to Camber by vendors, fluctuate over time.
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In total, the overall lease operating expenses decreased $2.4 million or 83% for the current period, compared to the prior year’s period due primarily to the sale of a significant amount of our assets which closed in September 2018, as described above under “Part I – Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
Severance and Property Taxes. Severance and Property Taxes decreased by $0.1 million or 89% for the current period, compared to the prior year’s period due primarily to the sale of a significant amount of our assets which closed in September 2018, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
Depreciation, Depletion, Amortization and Accretion (“DD&A”). DD&A related to proved oil and gas properties is calculated using the unit-of-production method. Under full cost accounting, the amortization base is comprised of the total capitalized costs and total future investment costs associated with all proved reserves.
DD&A decreased for the current year as compared to the prior year period by $0.5 million or 96% primarily related to the decrease in total depreciable assets due to the sale of a significant amount of our assets which closed in September 2018, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
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 $0.84 and $4.17 per barrel of oil equivalent for the years ended March 31, 2020 and 2019, respectively.
Impairment of Oil and Gas Properties. During the year ended March 31, 2020, the Company recorded no impairments. During the year ended March 31, 2019, the Company recorded impairments totaling $1.3 million related to unproved properties which were associated with expirations of leaseholds.
Gain/(Loss) on Sale of Property and Equipment. During the year ended March 31, 2020, the Company had no gain or loss on sales of property. During the year ended March 31, 2019, the Company recorded a gain on sale of property and equipment of $25.8 million due primarily to the sale of a significant amount of our assets which closed in September 2018, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
General and Administrative Expenses (“G&A”) (excluding share-based compensation). G&A expenses for the current period decreased by approximately $0.1 million or 2% primarily related to decreased professional fees due to the reduction in size of operations due to the sale of a significant amount of our assets which closed in September 2018, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
Share-Based Compensation. Share-based compensation, which is included in General and Administrative expenses in the Statements of Operations decreased approximately $0.1 million or 42% for the year ended March 31, 2020, compared to the prior year, primarily due to the reduction in shares granted to consultants as compensation for services rendered. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations.
Interest Expense. Interest expense for the year ended March 31, 2020 decreased by $2.4 million or 99% when compared to the prior year’s period, primarily related to the assignment of the IBC Obligations to N&B Energy in connection with the sale of a significant amount of our assets which closed in September 2018, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“.
Equity in Earnings of Unconsolidated Entity. Equity in earnings of unconsolidated entities increased to $957,169 for the year ended March 31, 2020 from $0 for the year ended March 31, 2019, due to the February 3, 2020 acquisition of a 25% interest in Elysium Energy, LLC, as discussed above under “Item 1. Business - General – Viking Plan of Merger”.
Loss on derivative liability. Loss on derivative liability decreased by $34.6 million or 59% as compared to the prior period. During the year ended March 31, 2020, the Company experienced a significant decline in its stock price and had an additional 514 Series C Preferred Shares outstanding at March 31, 2020 as compared to March 31, 2019 that were subject to adjustment subsequent to year end. The decrease in the loss on derivative liabilities is due primarily to the stock price changes.
Other (Income) Expense. Other (income)/expense for the year ended March 31, 2020 decreased by approximately $0.2 million, or 52%, when compared to the prior period, due in part, to the reduction in interest earned on overnight investments due to the significant use of cash for operations in the current year.
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LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated 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 consolidated 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.
Additionally, recent oil and gas price volatility as a result of geopolitical conditions and the global COVID-19 pandemic have already had, and are expected to continue to have a negative impact on the Company’s financial position and results of operations. Negative impacts could include but are not limited to: the Company’s ability to sell its oil and gas production, reduction in the selling price of the Company’s oil and gas, failure of a counterparty to make required payments, possible disruption of production as a result of worker illness or mandated production shutdowns or ‘stay-at-home’ orders, and access to new capital and financing.
Our primary sources of cash for year ended March 31, 2020 were from funds generated from the sale of preferred stock during fiscal 2019, the sale of natural gas and crude oil production and revenue generated from Lineal which was acquired in July 2019 and divested effective December 31, 2019. The primary uses of cash were funds used in operations, funds invested in connection with Viking’s Rule 506(c) convertible note offering, as described above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“ and funds loaned to Lineal as described above under “Item 1. Business - General - Lineal Acquisition and Divestiture“. As of March 31, 2020, the Company had a working capital deficit of approximately $0.9 million. The Company believes that it will not have sufficient liquidity to operate as a going concern for the next twelve months following the issuance of the financial statements included herein unless it can close the Viking Merger, which is the Company’s current plan, which Merger is anticipated to close in the third calendar quarter of 2020, and which required closing date is currently September 30, 2020, but can be extended until up to December 31, 2020, pursuant to certain conditions in the Merger Agreement.
Pursuant to the December 31, 2019 Redemption Agreement, we entered into a new unsecured promissory note in the amount of $1,539,719 with Lineal, evidencing the repayment of the prior July 2019 Lineal Note, together with additional amounts loaned by Camber to Lineal through December 31, 2019; and loaned Lineal an additional $800,000, which was evidenced by an unsecured promissory note in the amount of $800,000, entered into by Lineal in favor of the Company on December 31, 2019. The December 2019 Lineal Note and Lineal Note No. 2, accrue interest, payable quarterly in arrears, beginning on March 31, 2020 and continuing until December 31, 2021, when all interest and principal is due, at 8% and 10% per annum (18% upon the occurrence of an event of default), respectively. The December 2019 Lineal Note and Lineal Note No. 2 are unsecured. Such loans are described in greater detail above under “Item 1. Business - General - Lineal Acquisition and Divestiture“.
On February 3, 2020, the Company and Discover entered into a Stock Purchase Agreement pursuant to which Discover purchased 525 shares of Series C Preferred Stock (described in greater detail below under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Description of Capital Stock- Preferred Stock - Series C Redeemable Convertible Preferred Stock“) for $5 million, at a 5% original issue discount to the $10,000 face value of such preferred stock.
On February 3, 2020, we advanced the $5.0 million raised from the sale of Series C Preferred Stock to Discover to Viking, and Viking provided us, among other things, a $5 million, 10.5% Secured Promissory Note. On June 25, 2020, we advanced an additional $4.2 million to Viking in consideration for, among other things, an additional 10.5% Secured Promissory Note in the principal amount of $4.2 million. The Secured Notes accrue interest at the rate of 10.5% per annum, payable quarterly and are due and payable on February 3, 2022. The notes include standard events of default, including certain defaults relating to the trading status of Viking’s common stock and change of control transactions involving Viking. The Secured Notes can be prepaid at any time with prior notice as provided therein, and together with a pre-payment penalty equal to 10.5% of the original amount of the Secured Notes. The Secured Notes are secured by a security interest, para passu with the other investors in Viking’s Secured Note offering (subject to certain pre-requisites) in Viking’s 70% ownership of Elysium and 100% of Ichor Energy Holdings, LLC. Additionally, pursuant to a separate Security and Pledge Agreement, Viking provided the Company a security interest in the membership, common stock and/or ownership interests of all of Viking’s existing and future, directly owned or majority owned subsidiaries, to secure the repayment of the Secured Notes. As additional consideration for providing the Secured Notes, Viking assigned us 30% of Elysium, which is fully or partially assignable back to Viking upon termination of the Merger, under certain circumstances as discussed in greater detail above under “Item 1. Business - General – Viking Plan of Merger“.
On June 22, 2020, the Company and Discover entered into a Stock Purchase Agreement pursuant to which Discover purchased 630 shares of Series C Preferred Stock for $6 million (of which $4.2 million of such funds were subsequently loaned to Viking as discussed above).
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Plan of Operations
As described in greater detail above under “Item 1. Business – General - Viking Plan of Merger“, on February 3, 2020, the Company entered into a Merger Agreement with Viking, which contemplates Viking merging with and into a newly-formed wholly-owned subsidiary of the Company, with Viking surviving the Merger as a wholly-owned subsidiary of the Company. The Merger Agreement also contemplates that, upon the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time of the Merger, each share of common stock, of Viking issued and outstanding immediately prior to the Effective Time, other than certain shares owned by the Company, Viking and Merger Sub, will be converted into the right to receive the pro rata share of 80% of the Company’s post-Effective Time capitalization, taking into account the number of shares of common stock of Camber outstanding on a fully-diluted basis and without taking into account any shares of common stock which the holder of the Company’s Series C Preferred Stock can receive upon conversion of the Series C Preferred Stock, or a separate series of preferred stock issued in exchange for such Series C Preferred Stock, which has fixed conversion provisions, subject to certain adjustments described in the Merger Agreement. Holders of Viking Common Stock will have any fractional shares of Company common stock after the Merger rounded up to the nearest whole share.
Moving forward, the Company plans to complete the Merger with Viking and then focus on growing through the development of Viking’s properties while also seeking new acquisitions to grow its oil and gas production and revenues through the combined entity. The Company anticipates raising additional financing to complete acquisitions following the closing of the Merger, which may through the sale of debt or equity. As described above, the Merger is subject to various closing conditions which may not be met pursuant to the contemplated timeline, if at all.
Separately, the price Camber receives for its oil heavily influences its revenue and cash flows, and the present value and quality of its reserves. Oil, NGL and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. The price of crude oil has experienced significant volatility over the last five years, with the price per barrel of West Texas Intermediate (“WTI”) crude rising from a low of $27 in February 2016 to a high of $76 in October 2018, then, in 2020, most recently dropping below $20 per barrel due in part to reduced global demand stemming from the recent global COVID-19 outbreak. A prolonged period of low market prices for oil and natural gas, or further declines in the market prices for oil and natural gas, due to the COVID-19 outbreak, governmental responses thereto, decreased demand in connection therewith, or other factors will likely adversely affect Camber’s business, financial condition and liquidity and its ability to meet obligations, targets or financial commitments and could ultimately lead to restructuring or filing for bankruptcy.
Working Capital
At March 31, 2020, the Company’s total current assets of $1.1 million were less than its total current liabilities of approximately $10.7 million, resulting in a working capital deficit of $9.6 million, while at March 31, 2019, the Company’s total current assets of $8.2 million exceeded its total current liabilities of approximately $6.0 million, resulting in working capital of $2.2 million. The reduction from working capital of $2.2 million to a working capital deficit of $10.7 million is due to losses on the Series C Preferred Stock derivative liability, losses from continuing operations, costs incurred with the Lineal merger and ultimate divestiture with Lineal as discussed above under “Item 1. Business – General – Lineal Acquisition and Divestiture“, and $7.3 million of advances on long-term notes receivable relating to amounts loaned to Lineal and advanced to Viking, as discussed in greater detail above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“ and “Item 1. Business – General – Viking Plan of Merger“, respectively.
At March 31, 2020, the Company’s total current assets of $1.1 million were less than its total current liabilities of approximately $79.7 million, resulting in a working capital deficit of $78.5 million, while at March 31, 2019, the Company’s total current assets of $8.2 million exceeded its total current liabilities of approximately $62.4 million, resulting in working capital deficit of $54.2 million. The reduction from aworking capital deficit of $54.2 million to a working capital deficit of $79.7 million is due to losses on the Series C Preferred Stock derivative liability, losses from continuing operations, costs incurred with the Lineal merger and ultimate divestiture with Lineal as discussed above under “Item 1. Business – General – Lineal Acquisition and Divestiture“, and $7.3 million of advances on long-term notes receivable relating to amounts loaned to Lineal and advanced to Viking, as discussed in greater detail above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“ and “Item 1. Business – General – Viking Plan of Merger“, respectively.
Cash Flows
|
|
| Year Ended |
| |||||
|
|
| 2020 |
|
| 2019 |
| ||
| Cash flows used in operating activities |
| $ | (3,588,464 | ) |
| $ | (5,773,428 | ) |
| Cash flows used in investing activities |
|
| (9,641,019 | ) |
|
| (2,327,000 | ) |
| Cash flows provided by financing activities |
|
| 6,107,375 |
|
|
| 15,000,000 |
|
| Net (decrease) increase in cash |
| $ | (7,122,108 | ) |
| $ | 6,989,572 |
|
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Net cash used in operating activities was $3.6 million for the year ended March 31, 2020, compared to $5.8 million for the same period a year ago. Net cash used in operating activities decreased due to a reduction in payments of accounts payable, a reduction in gain on sale of oil and gas properties in the prior period and $1.2 million of cash provided by Lineal during the current period (which is shown under net cash provided by operating activities from discounted operations).
Net cash used in investing activities was $9.6 million for the year ended March 31, 2020, compared to $2.3 million for the same period a year ago. The increase in net cash used in investing activities was primarily due to the loans made to Lineal and Viking during the year ended March 31, 2020 as discussed above under “Item 1. Business – General – Lineal Acquisition and Divestiture“, and above under “Item 1. Business - General - Mid-Continent Acquisition and Divestiture“ and “Item 1. Business – General – Viking Plan of Merger“, respectively.
Net cash provided by financing activities was $6.1 million for the year ended March 31, 2020, and cash provided by financing activities was $15.0 million for the year ended March 31, 2019. The decrease in net cash provided by financing activities was due to fewer sales of Series C Preferred Stock shares in the current period (sales of $5 million of Series C Preferred Stock in the current period, compared to sales of $15 million of Series C Preferred Stock in the prior period).
Financing
A summary of our financing transactions, funding agreements, lending transactions and other material funding transactions can be found under “Part II - Item 8 Financial Statements and Supplementary Data – Note 2 – Liquidity and Going Concern Considerations“, “Note 6 – Plan of Merger and Investment in Unconsolidated Entity“, “Note 7 – Long-Term Notes Receivable“, “Note 9 – Note Payables and Debenture“, “Note 13 - Merger Agreement and Divestiture“, “Note 15 – Stockholders’ Equity (Deficit)“ and “Note 21 – Subsequent Events“.
Off-Balance Sheet Arrangements
Camber does not participate in financial transactions that generate relationships with unconsolidated entities or financial partnerships, other than the Company’s 25% interest in Elysium which it held as of March 31, 2020 (30% as of the filing of this Report) as discussed herein. As of March 31, 2020, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Camber prepares its financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. Camber identifies certain accounting policies as critical based on, among other things, their impact on the portrayal of Camber’s financial condition, results of operations or liquidity, and the degree of difficulty, subjectivity and complexity in their deployment. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection and disclosure of each of the critical accounting policies. Following is a discussion of Camber’s most critical accounting policies:
Proved Oil and Natural Gas Reserves
Camber’s independent petroleum consultants estimate proved oil and gas reserves, which directly impact financial accounting estimates, including depreciation, depletion and amortization. Proved reserves represent estimated quantities of crude oil and condensate, natural gas liquids and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. For related discussion, see “Item 1A. Risk Factors“.
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Full Cost Accounting Method
Camber uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and 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 gas property costs on a country-by-country basis. Properties not subject to amortization consist of exploration and development costs, which 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. Costs of oil and gas properties are amortized using the units of production method. 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.
Full Cost Ceiling Test Limitation
In applying the full cost method, Camber performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value,” of its proved reserves discounted at a 10% interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.
Share-Based Compensation
In accounting for share-based compensation, judgments and estimates are made regarding, among other things, the appropriate valuation methodology to follow in valuing stock compensation awards and the related inputs required by those valuation methodologies. Assumptions regarding expected volatility of Camber’s common stock, the level of risk-free interest rates, expected dividend yields on Camber’s stock, the expected term of the awards and other valuation inputs are subject to change. Any such changes could result in different valuations and thus impact the amount of share-based compensation expense recognized in the Statements of Operations.
Revenue Recognition
The Company’s revenue is comprised entirely of revenue from exploration and production activities. The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.
Contracts with customers have varying terms, including month-to-month contracts, and contracts with a finite term. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs.
Revenues are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
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Derivative Liabilities
The Company has determined that certain warrants and certain obligations to issue additional shares relating to conversions of the Series C Preferred Stock contain provisions that could result in modification of the warrants’ exercise price or the Series C Preferred Stock conversion price that is 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 contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices. The warrants granted to Ironman PI Fund II, LP 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. The warrants expired on April 21, 2019.
The Series C Preferred Stock are convertible into shares of common stock at a fixed $3.25 conversion rate. Upon conversion, the holder is entitled to dividends as if the shares had been held to maturity, which is referred to as the Conversion Premium. The Conversion Premium may be paid in shares or cash, at the option of the Company. If the Conversion Premium is paid in cash, the amount is fixed and generally not subject to adjustment. If the Conversion Premium is paid in shares, the conversion ratio is based on a VWAP calculation based on the lowest stock price over the Measurement Period. The Measurement Period is 30 days (or 60 days if there is a Triggering Event) prior to the conversion date and 30 days (or 60 days if there is a Triggering Event) after the conversion date. The VWAP calculation is subject to adjustment if there is a Triggering Event and the Measurement Period is subject to adjustment in the event that the Company is in default of one or more Equity Conditions provided in the Certificate of Designation. For example, the Measurement period may be extended one day for every day the Company is not in compliance with one or more of the Equity Conditions. Trigger Events are described in the designation of the Series C Preferred Stock, but include items which would typically be events of default under a debt security, including filing of reports late with the SEC.
At the conversion date, the number of shares due for the Conversion Premium is estimated based on the previous 30-day (or 60 day) VWAP. If the Company does not elect to pay the Conversion Premium in cash, the Company will issue all shares due for the conversion and the estimated shares due for the conversion premium. If the VWAP calculation for the portion of the Measurement Period following the date of conversion is lower than the VWAP for the portion of the Measurement Period prior to the date of conversion, the holder will be issued additional common shares, referred to as “true-up” shares. If the VWAP calculation is higher, no true-up shares are issued.
The derivative liability at the end of each period includes a derivative liability for the outstanding Series C shares and a derivative liability for the potential obligation to issue True-Up Shares relating to Series C shares that have been converted and the Measurement Period has not expired, if applicable
The fair value of the derivative liability relating to the Conversion Premium for any outstanding Series C Shares is equal to the cash required to settle the Conversion Premium. The fair value of the potential true-up share obligation has been estimated using a binomial pricing mode and the lesser of the conversion price or the low closing price of the Company’s stock subsequent to the conversion date. and the historical volatility of the Company’s common stock.
Limitations on using the closing price of the Company’s common stock to determine fair value
The Company is a smaller reporting company and is traded on the NYSE American exchange. Historically, our stock price has been extremely volatile and subject to large and sometimes unexplained price variations on a daily or weekly basis. In addition, the Company declared four reverse stock splits in 2018 and 2019 and the Company’s common stock generally trades at less than $1.00 per share. These factors have exacerbated daily volatility of our stock price. Consequently, we believe that the closing price of our stock on the reporting date may not, in all cases, represent the fair value of the common share required to satisfy the redemption of the Series C preferred Stock. Recognizing that the closing share price of our publicly traded stock is an observable input to fair value, we used such price for determining fair value in most cases and only considered an alternative measure of fair value when the closing price of the Company’s common stock varied by more than 20% from the five-day moving average immediately prior to the measurement date. In such cases, we used an average closing price of the previous 30 day period as an estimate of fair value, adjusted for stock splits if applicable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements as of and for the fiscal years ended March 31, 2020 and 2019 have been audited by Turner, Stone & Company, L.L.P. independent registered public accounting firm, and have been prepared in accordance with generally accepted accounting principles pursuant to Regulation S-X.
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INDEX TO THE FINANCIAL STATEMENTS
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|
| Page |
|
|
| F-2 |
| |
|
| F-3 |
| |
| Consolidated Statements of Operations for the Years Ended March 31, 2020 and 2019 |
| F-4 |
|
|
| F-5 |
| |
| Consolidated Statements of Cash Flows for the Years Ended March 31, 2020 and 2019 |
| F-6 |
|
|
| F-7 |
|
| F-1 |
| Table of Contents |
| Your Vision Our Focus | |
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Camber Energy, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Camber Energy, Inc. (the “Company”) as of March 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years ended March 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019 and the results of its operations and its cash flows for each of the two years ended March 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Restatement of Previously Issued Financial Statements
As discussed in Note 4 to the financial statements, the Company has restated its 2020 and 2019 financial statements to correct errors related to accounting for its Series C Preferred Stock.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate
Series C Preferred Stock
As discussed in Notes 10 and 15, the Company issued a series of preferred stock that contained several features which derived value from sources unrelated to the host preferred stock instrument. The Company determined certain of the features included in the Series C Preferred Stock designations, including the conversion, dividend and liquidation value, required that the preferred stock be reported as a component of temporary equity with the conversion and dividend components bifurcated and accounted for on a stand-alone basis as derivatives. The determination of fair value of these derivatives as well as the value of the temporary equity involved using complex valuation methodologies and significant assumptions including volume weighted prices and the estimated valuation of the Company’s common stock taking into consideration the effect of these dilutive instruments.
We identified auditing the Company’s evaluation of the accounting for the features included in the Series C Preferred Stock, specifically the methods and assumptions used to estimate the fair value of the derivative liabilities, as a critical audit matter.
How We Addressed the Matter in Our Audit:
The primary procedures we performed to address this critical audit matter included:
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| - | Obtaining and reviewing the underlying Series C Preferred Stock certificate of designation and related amendments to understand the terms and conditions, economic substance, and identify embedded features requiring evaluation. |
|
|
|
|
|
| - | Testing management’s development of the assumptions used in the valuation models applied and the reasonableness of those assumptions. |
|
|
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|
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| - | Obtaining an understanding of management’s process for developing the estimated fair value of the embedded features, including evaluation of the appropriateness of the method selected by the Company, identifying the significant assumptions used to determine the fair value estimate, and the application of those assumptions in the related method. |
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|
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| - | Testing the data and significant assumptions used in developing the fair value estimate, including procedures to determine whether the data was complete and accurate and sufficiently precise. |
/s/ Turner, Stone & Company, L.L.P.
We have served as the Company’s auditor since 2021
Dallas, Texas
November 19, 2021 (except for Notes 2, 4 and 21 as to which the date is May 17, 2022)
| Turner, Stone & Company, L.L.P. Accountants and Consultants 12700 Park Central Drive, Suite 1400 Dallas, Texas 75251 Telephone: 972-239-1660 ⁄ Facsimile: 972-239-1665 Toll Free: 877-853-4195 Web site: turnerstone.com |
INTERNATIONAL ASSOCIATION OF ACCOUNTANTS AND AUDITORS |
| F-2 |
| Table of Contents |
| CAMBER ENERGY, INC. | ||||||||
| CONSOLIDATED BALANCE SHEETS (Restated) |
| |||||||
|
|
|
|
|
| ||||
| As of March 31, |
| 2020 |
|
| 2019 |
| ||
| ASSETS |
|
|
|
|
|
| ||
| Current Assets |
|
|
|
|
|
| ||
| Cash |
| $ | 656,615 |
|
| $ | 7,778,723 |
|
| Accounts Receivable, Net of Allowance |
|
| 255,363 |
|
|
| 129,037 |
|
| Other Current Assets |
|
| 220,682 |
|
|
| 263,205 |
|
| Total Current Assets |
|
| 1,132,660 |
|
|
| 8,170,965 |
|
|
|
|
|
|
|
|
|
|
|
| Property and Equipment |
|
|
|
|
|
|
|
|
| Oil and Gas Properties - Subject to Amortization |
|
| 50,443,883 |
|
|
| 50,528,953 |
|
| Oil and Gas Properties - Not Subject to Amortization |
|
| 28,016,989 |
|
|
| 28,016,989 |
|
| Other Property and Equipment |
|
| 1,570 |
|
|
| 1,570 |
|
| Total Property and Equipment |
|
| 78,462,442 |
|
|
| 78,547,512 |
|
| Accumulated Depletion, Depreciation, Amortization and Impairment |
|
| (78,351,825 | ) |
|
| (78,334,324 | ) |
| Total Property and Equipment, Net |
|
| 110,617 |
|
|
| 213,188 |
|
|
|
|
|
|
|
|
|
|
|
| Equity Method Investment – Elysium Energy, LLC |
|
| 957,169 |
|
|
| — |
|
| Notes Receivable |
|
| 7,339,719 |
|
|
| — |
|
| Other Assets |
|
| 155,053 |
|
|
| 198,519 |
|
| Total Assets |
| $ | 9,695,218 |
|
| $ | 8,582,672 |
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
| Current Liabilities |
|
|
|
|
|
|
|
|
| Accounts Payable |
| $ | 1,474,221 |
|
| $ | 1,521,329 |
|
| Common Stock Payable |
|
| 173,000 |
|
|
| 303,340 |
|
| Accrued Expenses |
|
| 348,460 |
|
|
| 276,134 |
|
| Current Asset Retirement Obligations |
|
| 30,227 |
|
|
| — |
|
| Current Income Taxes Payable |
|
| 3,000 |
|
|
| 3,000 |
|
| Derivative Liability |
|
| 77,636,666 |
|
|
| 60,303,474 |
|
| Total Current Liabilities |
|
| 79,665,574 |
|
|
| 62,407,277 |
|
|
|
|
|
|
|
|
|
|
|
| Long-term Notes Payable, Net of Discount |
|
| — |
|
|
| — |
|
| Asset Retirement Obligations |
|
| 41,523 |
|
|
| 303,809 |
|
| Derivative Liability |
|
| — |
|
|
| 5 |
|
| Total Liabilities |
|
| 79,707,097 |
|
|
| 62,711,091 |
|
|
|
|
|
|
|
|
|
|
|
| Commitments and Contingencies (see Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Temporary Equity |
|
|
|
|
|
|
|
|
| Preferred Stock Series C, 2,819 and 2,305 Shares Issued and Outstanding, Respectively, Liquidation Preference of $97,156,835 and $79,338,430, respectively |
|
| 9,801,446 |
|
|
| 2,710,680 |
|
|
|
|
|
|
|
|
|
|
|
| Stockholders’ Deficit |
|
|
|
|
|
|
|
|
| Preferred Stock Series A, 2,000 Shares Authorized of $0.001 Par Value, -0- Shares issued and Outstanding |
|
| — |
|
|
| — |
|
| Preferred Stock Series B, 600,000 Shares Authorized of $0.001 Par Value, -0- and 44,000 Shares issued and Outstanding, respectively |
|
| — |
|
|
| 44 |
|
| Preferred Stock Series D, 50,000 Shares Authorized of $0.001 Par Value, -0- Shares issued and outstanding |
|
| — |
|
|
| — |
|
| Preferred Stock Series E, 1,000,000 Shares Authorized of $0.001 Par Value, -0- Shares issued and Outstanding |
|
| — |
|
|
| — |
|
| Preferred Stock Series F, 16,750 Shares Authorized of $0.001 Par Value, -0- Shares issued and Outstanding |
|
| — |
|
|
| — |
|
| Common Stock, 25,000,000 Shares Authorized of $0.001 Par Value, 5,000,000 and 13,441 Shares Issued and Outstanding, respectively |
|
| 5,000 |
|
|
| 13 |
|
| Additional Paid-in Capital |
|
| 179,783,233 |
|
|
| 174,804,234 |
|
| Accumulated Deficit |
|
| (259,601,558 | ) |
|
| (231,643,390 | ) |
| Total Stockholders’ Deficit |
|
| (79,813,325 | ) |
|
| (56,839,099 | ) |
| Total Liabilities and Stockholders’ Deficit |
| $ | 9,695,218 |
|
| $ | 8,582,672 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
| Table of Contents |
| CONSOLIDATED STATEMENTS OF OPERATIONS (Restated) |
| For the Year Ended March 31, |
| 2020 |
|
| 2019 |
| ||
| Operating Revenues |
|
|
|
|
|
| ||
| Crude Oil |
| $ | 296,036 |
|
| $ | 526,365 |
|
| Natural Gas |
|
| 37,049 |
|
|
| 772,105 |
|
| Natural Gas Liquids |
|
| 64,033 |
|
|
| 1,443,632 |
|
| Total |
|
| 397,118 |
|
|
| 2,742,102 |
|
|
|
|
|
|
|
|
|
|
|
| Operating Expenses |
|
|
|
|
|
|
|
|
| Lease Operating Expenses |
|
| 479,656 |
|
|
| 2,870,908 |
|
| Severance and Property Taxes |
|
| 14,440 |
|
|
| 132,993 |
|
| Depreciation, Depletion, Amortization and Accretion |
|
| 20,420 |
|
|
| 478,770 |
|
| Impairment of Oil and Gas Properties |
|
| — |
|
|
| 1,304,785 |
|
| Gain on Sale of Property and Equipment |
|
| — |
|
|
| (25,808,246 | ) |
| General and Administrative |
|
| 4,909,871 |
|
|
| 5,152,766 |
|
| Total |
|
| 5,424,387 |
|
|
| (15,868,024 | ) |
|
|
|
|
|
|
|
|
|
|
| Operating Income (Loss) |
|
| (5,027,269 | ) |
|
| 18,610,126 |
|
|
|
|
|
|
|
|
|
|
|
| Other Expense (Income) |
|
|
|
|
|
|
|
|
| Interest Expense |
|
| 14,771 |
|
|
| 2,438,098 |
|
| Equity in Earnings of Unconsolidated Entity |
|
| (957,169 | ) |
|
| — |
|
| Loss on Derivative liability |
|
| 24,101,870 |
|
|
| 58,679,252 |
|
| Other (Income) Expense, Net |
|
| (228,572 | ) |
|
| (474,124 | ) |
| Total Other Expense (Income) |
|
| 22,930,900 |
|
|
| 60,643,226 |
|
|
|
|
|
|
|
|
|
|
|
| Loss Before Income Taxes |
|
| (27,958,169 | ) |
|
| (42,033,100 | ) |
| Income Tax Benefit (Expense) |
|
| — |
|
|
| (3,000 | ) |
| Net Loss |
| $ | (27,958,169 | ) |
| $ | (42,036,100 | ) |
| Less preferred dividends |
|
| (7,131,495 | ) |
|
| (613,594 | ) |
| Net loss attributable to common shareholders |
|
| (35,089,664 | ) |
|
| (42,649,694 | ) |
|
|
|
|
|
|
|
|
|
|
| Income (Loss) Per Common Share |
|
|
|
|
|
|
|
|
| Basic |
| $ | (16.64 | ) |
| $ | (10,794.66 | ) |
| Diluted |
| $ | (16.64 | ) |
| $ | (10,794.66 | ) |
|
|
|
|
|
|
|
|
|
|
| Weighted Average Number of Common Shares Outstanding |
|
|
|
|
|
|
|
|
| Basic |
|
| 2,109,622 |
|
|
| 3,951 |
|
| Diluted |
|
| 2,109,622 |
|
|
| 3,951 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
| Table of Contents |
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2020 and 2019 (Restated)
| Series C | Series E | Series F | Series B | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Additional | Stock | Stockholders' | |||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Preferred | Number | Preferred | Number | Preferred | Number | Preferred | Number | Common | Paid In | Divided | Accumulated | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||
| Of Shares | Stock | Of Shares | Stock | Of Shares | Stock | Of Shares | Stock | Of Shares | Stock | Capital | Distributable | Deficit | Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2018 (Restated) | 1,132 | $ | 2,681,273 | - | $ | - | - | $ | - | 408,508 | $ | 409 | 184 | $ | - | $ | 140,191,737 | $ | - | $ | (189,607,290 | ) | $ | (49,415,144 | ) | |||||||||||||||||||||||||||||||
| Common Shares issued for: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B to Common | - | - | - | - | - | - | (364,508 | ) | (365 | ) | 3 | - | 365 | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Conversion of Series C Preferred Stock | (404 | ) | (584,186 | ) | - | - | - | - | - | - | 3,794 | 4 | 32,742,914 | - | - | 32,742,918 | ||||||||||||||||||||||||||||||||||||||||
| Rounding Adjustment for Split | - | - | - | - | - | - | - | - | 22 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Debenture | - | - | - | - | - | - | - | - | 9,414 | 9 | 917,095 | - | - | 917,104 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Shares for Consulting Fees | - | - | - | - | - | - | - | - | 14 | - | 234,430 | - | - | 234,430 | ||||||||||||||||||||||||||||||||||||||||||
| Warrants - Abeyance | - | - | - | - | - | - | - | - | 10 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Share-Based Compensation | - | - | - | - | - | - | - | - | - | - | 343,730 | - | - | 343,730 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series C Preferred Shares for Cash Proceeds | 1,577 | 1,601,026 | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||
| Preferred Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (613,594 | ) |
|
|
|
|
|
|
|
|
|
| (613,594 | ) |
| Change in fair value of Series C shares | - | (987,432 | ) | - | - | - | - | - | - | - | - | 987,432 | - | - | 987,432 | |||||||||||||||||||||||||||||||||||||||||
| Other | - | (1 | ) | - | - | - | - | - | - | - | - | 125 | - | - | 125 | |||||||||||||||||||||||||||||||||||||||||
| - | - | - | - | - | - | - | - | - | - | - | - | (42,036,100 | ) | (42,036,100 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balances March 31, 2019 | 2,305 | $ | 2,710,680 | - | $ | - | - | $ | - | 44,000 | $ | 44 | 13,441 | $ | 13 | $ | 174,804,234 | $ | - | $ | (231,643,390 | ) | $ | (56,839,099 | ) | |||||||||||||||||||||||||||||||
| Common Shares issued for: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series C Preferred Stock | (11 | ) | (40,729 | ) | - | - | 4,899,442 | 4,900 | 11,804,507 | - | - | 11,809,407 | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Debenture - Abeyance | - | - | 29,073 | 29 | (29 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| True-Up Shares | 57,363 | 57 | (57 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment of Consulting Fees | 680 | 1 | 331,029 | - | 331,030 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B to Common | (44,000 | ) | (44 | ) | - | - | 44 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Payment of Series B Dividend | - | - | - | - | 3 | (3 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series E and F Preferred Stock | 1,000,000 | 18,701,000 | 16,750 | 1,417,000 | - | 20,118,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in valuation of Series E and F Preferred Stock | (4,035,000 | ) | - | 1,017,000 | - | 3,018,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series E and F Preferred Stock | (1,000,000 | ) | (14,666,000 | ) | (16,750 | ) | (2,434,000 | ) | - | - | - | - | - | - | - | 17,100,000 | ||||||||||||||||||||||||||||||||||||||||
| Series C issuance/deemed dividend | 525 | 7,131,495 | - | - | - | - | (7,131,495 | ) | - | (7,131,495 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Settlement of Preferred B Stock Warrants | (25,000 | ) | - | (25,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 1 | 1 | (3 | ) | 3 | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (27,958,169 | ) | (27,958,169 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances March 31, 2020 | 2,819 | $ | 9,801,446 | - | $ | - | - | $ | - | - | $ | - | 5,000,000 | $ | 5,000 | $ | 179,783,233 | $ | - | $ | (259,601,558 | ) | $ | (79,813,325 | ) | |||||||||||||||||||||||||||||||
See accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
| Table of Contents |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) |
| For the Year Ended March 31, |
| 2020 |
|
| 2019 |
| ||
| Cash Flows from Operating Activities |
|
|
|
|
|
| ||
| Net Loss |
| $ | (27,958,169 | ) |
| $ | (42,036,100 | ) |
| Net Loss from Discontinued Operations |
|
| — |
|
|
| — |
|
| Net Loss from Continuing Operations |
|
| (27,958,169 | ) |
|
| (42,036,100 | ) |
| Adjustments to Reconcile Net (Loss) to Net Cash Used in Operating Activities: |
|
|
|
|
|
|
|
|
| Depreciation, Depletion, Amortization and Accretion |
|
| 20,420 |
|
|
| 478,770 |
|
| Impairment of Oil and Gas Properties |
|
| — |
|
|
| 1,304,785 |
|
| Share-Based Compensation |
|
| 200,690 |
|
|
| 343,730 |
|
| Amortization of Discount on Notes |
|
| — |
|
|
| 1,499,647 |
|
| Bad Debt Expense |
|
| 17,694 |
|
|
| 190,365 |
|
| Gain on Sale of Property and Equipment |
|
| — |
|
|
| (25,808,246 | ) |
| Litigation Settlement – PetroGlobe |
|
| 204,842 |
|
|
| — |
|
| Change in Fair Value of Derivative Liability |
|
| 24,101,870 |
|
|
| 58,679,252 |
|
| Equity in Earnings of Unconsolidated Entity |
|
| (957,169 | ) |
|
| — |
|
| Changes in Operating Assets and Liabilities: |
|
|
|
|
|
|
|
|
| Accounts Receivable |
|
| (144,020 | ) |
|
| 327,489 |
|
| Other Current Assets |
|
| 42,523 |
|
|
| (34,472 | ) |
| Accounts Payable and Accrued Expenses |
|
| (329,531 | ) |
|
| (718,648 | ) |
| Net Cash Used in Operating Activities from Continuing Operations |
|
| (4,800,855 | ) |
|
| (5,773,428 | ) |
| Net Cash Provided by Operating Activities from Discontinued Operations |
|
| 1,212,391 |
|
|
| — |
|
| Net Cash Used in Operating Activities |
|
| (3,588,464 | ) |
|
| (5,773,428 | ) |
| Investing Cash Flows |
|
|
|
|
|
|
|
|
| Cash paid for Oil and Gas Property Development Costs |
|
| — |
|
|
| (2,095,991 | ) |
| Cash Acquired in Lineal Acquisition |
|
| 449,763 |
|
|
| — |
|
| Cash Disposed of in Connection with Lineal Redemption |
|
| (2,101,879 | ) |
|
| — |
|
| Cash Paid for Issuance of Notes Receivable |
|
| (7,339,719 | ) |
|
| — |
|
| Cash Proceeds from (Paid for) Deposits |
|
| 43,466 |
|
|
| (141,009 | ) |
| Net Cash Provided by (Used in) Investing Activities from Operating Activities |
|
| (8,948,369 | ) |
|
| (2,237,000 | ) |
| Cash Used in Investing Activities from Discontinued Operations |
|
| (692,650 | ) |
|
| — |
|
| Cash Used in Investing Activities |
|
| (9,641,019 | ) |
|
| (2,237,000 | ) |
| Financing Cash Flows |
|
|
|
|
|
|
|
|
| Proceeds from Issuance of Series C Preferred Stock |
|
| 5,000,000 |
|
|
| 15,000,000 |
|
| Cash Settlement of Preferred B Dividends |
|
| (25,000 | ) |
|
| — |
|
| Net Cash Provided by Financing Activities from Continuing Operations |
|
| 4,975,000 |
|
|
| 15,000,000 |
|
| Cash Provided by Financing Activities from Discontinued Operations |
|
| 1,132,375 |
|
|
| — |
|
| Cash Provided by Financing Activities |
|
| 6,107,375 |
|
|
| 15,000,000 |
|
| (Decrease) Increase in Cash |
|
| (7,122,108 | ) |
|
| 6,989,572 |
|
| Cash at Beginning of the Year |
|
| 7,778,723 |
|
|
| 789,151 |
|
| Cash at End of the Year |
| $ | 656,615 |
|
| $ | 7,778,723 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
| Table of Contents |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Operations of the Company
Camber Energy, Inc. (“Camber” or the “Company”) is an independent oil and natural gas company engaged in the acquisition, development and sale of crude oil, natural gas and natural gas liquids from various known productive geological formations, including the Cline shale and upper Wolfberry shale in Glasscock County, Texas. Additionally, from the July 8, 2019 acquisition of Lineal Star Holdings, LLC (“Lineal”), until the divestiture of Lineal effective on December 31, 2019, each as discussed below, the Company, through Lineal, was involved in the oil and gas services industry.
On July 8, 2019, the Company acquired Lineal pursuant to the terms of an Agreement and Plan of Merger dated as of the same date (the “Lineal Plan of Merger” and the merger contemplated therein, the “Lineal Merger” or the “Lineal Acquisition”), by and between Lineal, Camber, Camber Energy Merger Sub 2, Inc., Camber’s wholly-owned subsidiary, and the Members of Lineal (the “Lineal Members”). Lineal is a specialty construction and oil and gas services enterprise providing services to the energy industry. Pursuant to the Lineal Plan of Merger, Camber acquired 100% of the ownership of Lineal from the Lineal Members in consideration for newly issued shares of Series E Redeemable Convertible Preferred Stock (“Series E Preferred Stock”) and Series F Redeemable Preferred Stock (“Series F Preferred Stock”). See also “Note 13 - Merger Agreement and Divestiture“. On October 8, 2019, Lineal acquired an 80% interest in Evercon Energy LLC (“Evercon”). The acquisition required Lineal to assume certain liabilities and provide working capital for a period of six months in the amount of $50,000 per month to Evercon. As part of the Lineal Divestiture, described below, Evercon was divested effective December 31, 2019.
On December 31, 2019, the Company entered into a Preferred Stock Redemption Agreement (the “Redemption Agreement”) by and between the Company and Lineal, whereby the Company redeemed the Company’s Series E and F Preferred Stock (the holders of such preferred stock, collectively, the “Preferred Holders”) issued in connection with the Lineal Merger. Pursuant to the Redemption Agreement, effective as of December 31, 2019, ownership of 100% of Lineal was transferred back to the Preferred Holders, and, all of the Series E Preferred Stock and Series F Preferred Stock of the Company outstanding were cancelled through the redemption (the “Lineal Divestiture”). See also “Note 13 - Merger Agreement and Divestiture“.
Prior to the acquisition of Lineal, the Company sold a significant portion of its oil and gas production assets in Oklahoma to N&B Energy, LLC (“N&B Energy”) effective August 1, 2018 (see further discussion in “Note 2 – Liquidation and Going Concern Considerations“). Additionally, as part of the sale of its assets to N&B Energy, the Company also retained a 12.5% production payment (effective until a total of $2.5 million has been received) and a 3% overriding royalty interest, in its then existing Okfuskee County, Oklahoma assets; and an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignments of Overriding Royalty Interests. No payments were received in regard to any of the retained items noted above through March 31, 2020 and the filing date of these financial statements.
Camber retained its assets in Glasscock County and operated wells in Hutchinson County, Texas until completion of the Settlement Agreement discussed below.
On January 31, 2020, the Company entered into a Compromise Settlement Agreement (the “Settlement Agreement”) with PetroGlobe Energy Holdings, LLC (“PetroGlobe”), Signal Drilling, LLC (“Signal”), Petrolia Oil, LLC (“Petrolia”), Prairie Gas Company of Oklahoma, LLC (“PGCO”), and Canadian River Trading Company, LLC (“CRTC”). Pursuant to the Settlement Agreement, the Company agreed to pay PetroGlobe $250,000, of which $100,000 was due upon execution of the Settlement Agreement, which payment has been made, and $150,000 was paid to an escrow account, which will be released by the Company upon the successful transfer of all wells and partnership interests of the Company’s prior wholly-owned subsidiary C E Energy LLC (“CE”) to PetroGlobe which is expected to occur shortly. CE operates all of the wells and leases which we held prior to such transfer which are located in Hutchinson County, Texas. See also “Note 11 – Commitments and Contingencies“ – “Legal Proceedings”.
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On February 3, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Viking Energy Group, Inc. (“Viking”). Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock of Viking (the “Viking Common Stock”) issued and outstanding, other than certain shares owned by the Company, Viking and Merger Sub, will be converted into the right to receive the pro rata share of 80% of the Company’s post-closing capitalization, subject to certain adjustment mechanisms discussed in the Merger Agreement (and excluding shares issuable upon conversion of the Series C Preferred Stock of the Company). Holders of Viking Common Stock will have any fractional shares of Company common stock after the Merger rounded up to the nearest whole share. The completion of the Merger is subject to certain closing conditions. A further requirement to the closing of the Merger was that the Company was required to have acquired 25% of Viking’s subsidiary Elysium Energy, LLC (“Elysium”) as part of a $5,000,000 investment in Viking’s Rule 506(c) offering, which transaction was completed on February 3, 2020. See also “Note 6 – Plan of Merger and Investment in Unconsolidated Entity“.
On March 1, 2018, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to affect 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 every 25 shares of outstanding common stock into one new share, with no change in authorized shares or par value per share. On December 20, 2018, the Company filed a Certificate of Change with the Secretary of State of Nevada to affect another 1-for-25 reverse stock split of the Company’s (a) authorized shares of common stock (from 500,000,000 shares to 20,000,000 shares); and (b) issued and outstanding shares of common stock. The reverse stock split was effective on December 24, 2018. The effect of the reverse stock split was to combine every 25 shares of outstanding common stock into one new share, with a proportionate 1-for-25 reduction in the Company’s authorized shares of common stock, but no change in the par value per share of the common stock. Effective on April 10, 2019, 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 20,000,000 shares to 250,000,000 shares. On July 3, 2019, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to affect another 1-for-25 reverse stock split of all outstanding common stock shares of the Company. The reverse stock split was effective on July 8, 2019. The effect of the reverse stock split was to combine every 25 shares of outstanding common stock into one new share, with no change in authorized shares (250,000,000 shares of common stock) or par value per share. On October 28, 2019, the Company filed a Certificate of Change with the Secretary of State of Nevada to affect a 1-for-50 reverse stock split of the Company’s (a) authorized shares of common stock (from 250,000,000 shares to 5,000,000 shares); and (b) issued and outstanding shares of common stock. The reverse stock split was effective on October 29, 2019. The effect of the reverse stock split was to combine every 50 shares of outstanding common stock into one new share, with a proportionate 1-for-50 reduction in the Company’s authorized shares of common stock, but with no change in the par value per share of the common stock. The result of the reverse stock split was to reduce, as of the effective date of the reverse stock split, the number of common stock shares outstanding from approximately 74.5 million shares to approximately 1.5 million shares (prior to rounding). Effective on April 16, 2020, Camber filed a Certificate of Amendment to its Articles of Incorporation to increase its authorized shares of common stock to 25 million shares of common stock.
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 in connection with each of the reverse splits described above. The reverse stock splits did not affect any stockholder’s ownership percentage of the Company’s common stock, except to the limited extent that the reverse stock splits resulted in any stockholder 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 splits for all periods presented.
Note 2 – Liquidity and Going Concern Considerations
At March 31, 2020, the Company’s total current assets of $1.1 million were less than its total current liabilities of approximately $79.67 million, resulting in a working capital deficit of $78.5 million, while at March 31, 2019, the Company’s total current assets of $8.2 million were less than its total current liabilities of approximately $62.4 million, resulting in working capital deficit of $54.2 million. The reduction from a working capital deficit of $54.2 million to a working capital deficit of $78.5 million is due to losses from continuing operations, costs incurred with the Lineal merger and ultimate divestiture with Lineal as discussed below under “Note 13 - Merger Agreement and Divestiture“, and $7.3 million of advances on long-term notes receivable relating to amounts loaned to Lineal and advanced to Viking, as discussed in greater detail above under “Note 1 - Organization and Operations of the Company“.
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Additionally, recent oil and gas price volatility as a result of geopolitical conditions and the global COVID-19 pandemic have already had, and are expected to continue to have a negative impact on the Company’s financial position and results of operations. Negative impacts could include, but are not limited to, the Company’s ability to sell its oil and gas production, reduction in the selling price of the Company’s oil and gas, failure of a counterparty to make required payments, possible disruption of production as a result of worker illness or mandated production shutdowns or ‘stay-at-home’ orders, and access to new capital and financing.
The factors above raise substantial doubt about the Company’s ability to continue to operate as a going concern for the twelve months following the issuance of these financial statements. The Company believes that it may not have sufficient liquidity to meet its operating costs unless it can raise new funding, which may be through the sale of debt or equity or unless it closes the Viking Merger (discussed below), which is the Company’s current plan, which Merger is anticipated to close in the third calendar quarter of 2020, and which required closing date is currently September 30, 2020, but can be extended until up to December 31, 2020, pursuant to certain conditions in the Merger Agreement. There is no guarantee though that the Viking merger will be completed or other sources of funding be available. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company had no secured debt outstanding as of March 31, 2020.
During the years ended March 31, 2020 and 2019, the Company sold 525 shares and 1,577 shares, respectively, of Series C Preferred Stock pursuant to the terms of various Stock Purchase Agreements, for total proceeds of $5 million and $15 million, respectively.
N&B Energy Asset Disposition Agreement
On July 12, 2018, the Company entered into an Asset Purchase Agreement (as amended by the First Amendment to the Sale Agreement dated August 3, 2018 and the Second Amendment to Sale Agreement dated September 24, 2018, the “Sale Agreement”), as seller, with N&B Energy as purchaser, which entity is affiliated with Richard N. Azar II, the Company’s former Chief Executive Officer and former director (“Azar”), and Donnie B. Seay, the Company’s former director (“Seay”). 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 and certain other acquisitions, other than the production payment and overriding royalty interests discussed below (the “Disposed Assets”). In consideration for the Disposed Assets, N&B Energy agreed to pay the Company $100 in cash to assume the Company’s liabilities and contractual obligations in connection with the Disposed Assets (including lease and bonus payments), to assume all of the Company’s obligations and debt owed under its outstanding loan agreement with International Bank of Commerce (“IBC Bank”), which had a then outstanding principal balance of approximately $36.9 million and the other parties agreed to enter into a settlement agreement.
Assumption Agreement
On September 26, 2018, the Company entered into an Assumption Agreement (the “Assumption Agreement”) with IBC Bank; CE Operating, LLC, the Company’s wholly-owned subsidiary (“CE Operating”), which became a party to the Sale Agreement pursuant to the second amendment thereto; N&B Energy; Azar; RAD2 Minerals, Ltd., an entity owned and controlled by Azar (“RAD2”); Seay; and DBS Investments, Ltd., an entity owned and controlled by Seay. Azar, Seay, RAD2, and DBS are collectively referred to as the “Guarantors”.
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Pursuant to the Assumption Agreement, N&B Energy agreed to assume all of the Company’s liabilities and obligations owed to IBC Bank and IBC Bank approved the transactions contemplated by the Sale Agreement and the assumption by N&B Energy of all of the amounts and liabilities which the Company owed to IBC Bank (collectively, the “IBC Obligations”). Finally, pursuant to the Assumption Agreement, IBC Bank released and forever discharged the Company and CE Operating and each of their current and former officers, directors, and stockholders, from all covenants, agreements, obligations, claims and demands of any kind, whether in law or at equity, which IBC Bank then had, arising out of or related to the amounts which the Company owed to IBC Bank under the Note, Loan Agreement or mortgages and/or under such documents or agreements, and further agreed to release the lien which IBC Bank then held on certain of the Company’s properties located in west Texas.
N&B Energy Sale Agreement Closing
On September 26, 2018, the transactions contemplated by the Sale Agreement closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid the Company $100 in cash, and the Company transferred ownership of the Assets to N&B Energy.
Notwithstanding the sale of the Assets, the Company retained its assets in Glasscock and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received) and a 3% overriding royalty interest, in its prior Okfuskee County, Oklahoma assets; and retained an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignment of Overriding Royalty Interests.
The effective date of the Sale Agreement was August 1, 2018. The Assets were assigned “as is” with all faults.
As a result of the Assumption Agreement and the Sale Agreement, the Company reduced its liabilities by $37.9 million and its assets by approximately $12.1 million.
The following table summarizes the net assets sold and gain recognized in connection with the Assumption Agreement and Sale Agreement:
|
|
| Transaction |
| |
| Assumption of IBC Bank Loan |
| $ | 36,943,617 |
|
| Assumption of ARO Liability |
|
| 699,536 |
|
| Assumption of Capital Lease Obligations and Other |
|
| 287,074 |
|
| Cash Received at Closing |
|
| 100 |
|
| Oil and Gas Properties Transferred |
|
| (12,122,081 | ) |
| Total Gain on Sale |
| $ | 25,808,246 |
|
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements of Camber Energy include the accounts of its wholly-owned subsidiaries, Camber Permian LLC, a Texas limited liability company, which is wholly-owned, CE Operating, LLC, an Oklahoma limited liability company, which is wholly-owned, and C E Energy LLC, a Texas limited liability company, which is wholly-owned, and which will be assigned to PetroGlobe shortly after the date of this report, as discussed below under “Note 11 – Commitments and Contingencies“ – “Legal Proceedings”. All material intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform them with the current year presentation. These reclassifications had no effect on the reported results of operations.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Camber’s financial statements are based on a number of significant estimates, including oil and natural gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties, and timing and costs associated with its asset retirement obligations, as well as those related to the fair value of stock options, stock warrants and stock issued for services. While the Company believes that its estimates and assumptions used in preparation of the financial statements are appropriate, actual results could differ from those estimates.
Financial Instruments
Accounting Standards Codification, “ASC” Topic 820-10, “Fair Value Measurement” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 820-10, defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measurement. The carrying amounts reported in the consolidated balance sheets for deposits, accrued expenses and other current liabilities, accounts payable, derivative liabilities, amount due to director, and convertible notes each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
| • | Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
| • | Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
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| • | Level 3: inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Assets and liabilities measured at fair value as of and for the year ended March 31, 2020 are classified below based on the three fair value hierarchy described above:
| Description |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
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| Significant Unobservable Inputs (Level 3) |
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| Total Gains (Losses) |
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|
|
|
|
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|
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| ||||
| Financial liabilities |
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| ||||
| Derivative liability (conversion of Series C preferred Stock) |
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|
|
|
|
|
|
| 77,636,666 |
|
|
| (24,101,870 | ) | ||
|
|
| $ | - |
|
| $ | - |
|
| $ | 77,636,666 |
|
| $ | (24,101,870 | ) |
The Series C Preferred Stock are convertible into shares of common stock at a fixed $3.25 conversion rate. Upon conversion, the holder is entitled to dividends as if the shares had been held to maturity, which is referred to as the Conversion Premium. The Conversion Premium may be paid in shares or cash, at the option of the Company. If the Conversion Premium is paid in cash, the amount is fixed and not subject to adjustment. If the Conversion Premium is paid in shares, the conversion ratio is based on a VWAP calculation based on the lowest stock price over the Measurement Period. The Measurement Period is 30 days (or up to 60 days) prior to the conversion date and 30 days after the conversion date. Both the VWAP calculation and the Measurement Period are subject to adjustment in the event that the Company is in default of one or more provisions in the certificate of designation. For example, the Measurement period may be extended one day for every day the Company is not in compliance with one or more of the Equity Conditions.
At the conversion date, the number of shares due for the Conversion Premium is estimated based on the stock price during the Measurement Period prior to the conversion date. If the Company does not elect to pay the Conversion Premium in cash, the Company will issue all shares due for the conversion and the estimated shares due for the conversion premium. If the VWAP calculation for the measurement period after the conversion date, is lower than the VWAP calculation prior to the conversion date, the holder will be issued additional shares, referred to as true-up shares. If the VWAP calculation is higher, no true-up shares are issued.
Management has determined that the obligation to issue additional shares under the Conversion Premium creates a derivative liability. The determination of the number of true-up shares due, if any, is based on the lowest VWAP calculation over the Measurement Period that extends beyond the conversion date. In addition, if the Company is in non-compliance with certain provisions of the certificate of designation, the Measurement Period does not end until the company is in compliance. The obligation to issue additional shares (“True-up Shares”) is a derivative liability.
The derivative liability for the True-Up Shares at the end of each period represents Series C Preferred Stock conversions in which the Measurement Period had not expired as of the period end. The fair value of the derivative liability has been estimated using a binomial model and the historical volatility of the Company’s common stock.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase. The Company maintains cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits of $250,000. At March 31, 2020 and 2019, the Company’s cash in excess of the federally insured limit was $399,833 and $7,463,944, respectively. Historically, the Company has not experienced any losses in such accounts. The Company had no cash equivalents at March 31, 2020 or 2019, respectively.
Accounts Receivable
Accounts receivable, net, include amounts due for oil and gas revenues from prior month production, accrued interest on the notes receivable due from Lineal and Viking and an estimate of amounts due from N&B Energy related to the September 2018 Sale Agreement. The allowance for doubtful accounts is the Company’s best estimate of the probable amount of credit losses in the Company’s existing accounts receivable. At March 31, 2020 and March 31, 2019, there were allowances for doubtful accounts of approximately $208,000 and $190,000, respectively, included in accounts receivable, and there were bad debts of $17,694 and $0, recognized for the years ended March 31, 2020 and 2019, respectively.
Notes Receivable
Notes receivable includes the $5,000,000 note from Viking as described in “Note 7 – Long-Term Notes Receivable“ and “Note 6 – Plan of Merger and Investment in Unconsolidated Entity“, and two notes due from Lineal in the amounts of $1,539,719 and $800,000, respectively, as more fully discussed in “Note 7 – Long-Term Notes Receivable“ and “Note 13 – Merger Agreement and Divestiture“. As of March 31, 2020, the Company had no allowance for uncollectible amounts related to the notes receivable.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their useful lives. Amortization of the equipment under capital leases related to the Lineal operations was computed using the straight-line method over lives ranging from 3 to 5 years and is included in depreciation expense. Costs of maintenance and repairs were charged to expense when incurred.
Long-lived assets including intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the assets carrying amount to determine if an impairment of such asset is necessary. This evaluation, as well as an evaluation of our intangible assets, requires the Company to make long-term forecasts of the future revenues and costs related to the assets subject to review. Forecasts require assumptions about demand for the Company’s services and future market conditions. Estimating future cash flows requires significant judgment, and the Company’s projections may vary from the cash flows eventually realized. Future events and unanticipated changes to assumptions could require a provision for impairment in a future period. The effect of any impairment would be to expense the difference between the fair value (less selling costs) of such asset and its carrying value. Such expense would be reflected in earnings. No impairments were deemed necessary for the years ended March 31, 2020 and 2019, respectively.
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Investment in Unconsolidated Entities
The Company accounts for its investment in unconsolidated entities under the equity method of accounting when it owns less than 51% of a controlling interest and does not have the ability to exercise significant influence over the operating and financial policies of the entity. The investment is adjusted accordingly for dividends or distributions it receives and its proportionate share of earnings or losses of the entity. The current investment in unconsolidated entities is a 30% in interest in Elysium Energy, LLC, which is involved in oil and gas exploration and production in the United States. The balance sheet of Elysium Energy, LLC at March 31, 2020 included current assets of $4.0 million, total assets of $37.7 million, total liabilities of $34.0 million and net assets of $3.7 million. Additionally, the income statement for Elysium Energy, LLC for the period from February 3, 2020 (the date of investment) through March 31, 2020 included total revenues of $4.0 million and net income of $3.8 million. See also “Note 6 – Plan of Merger and Investment in Unconsolidated Entity“.
Goodwill
Goodwill is tested for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Goodwill is reviewed for impairment at the reporting unit level, which is defined as operating segments or groupings of businesses one level below the operating segment level. The Company’s operating segments are the same as the reporting units used in its goodwill impairment test. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit, determined using a market approach, if market prices are available, or alternatively, a discounted cash flow model, with its carrying value. The annual evaluation of goodwill requires the use of estimates about future operating results, valuation multiples and discount rates of each reporting unit to determine their estimated fair value. Changes in these assumptions can materially affect these estimates. Once an impairment of goodwill has been recorded, it cannot be reversed. The Company recognized goodwill during the three months ended September 30, 2019 in conjunction with the Lineal Merger, which was written off during the quarter ended December 31, 2019 as a result of the Lineal Divestiture as discussed in “Note 13 – Merger Agreement and Divestiture“.
Revenue Recognition
Exploration and Production Revenue
The Company’s revenue for its exploration and production operations are comprised entirely of revenue from exploration and production activities. The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. Natural gas liquids (“NGLs”) are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.
Contracts with customers have varying terms, including month-to-month contracts, and contracts with a finite term. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs.
Revenues are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
Oil and Gas Services Revenue
The majority of Lineal’s oil and gas service revenue is derived from contracts and projects that typically span between 3 to 12 months. The oil and gas service contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
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Lineal’s construction contracts are recognized over time because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. Contract costs include labor, material, and indirect costs. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, Lineal estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, and the performance of subcontractors.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) on the consolidated balance sheet. On Lineal’s construction contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs prior to revenue recognition, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.
Fair Value of Financial Instruments
Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
|
| ● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
|
| ● | Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services. |
|
| ● | Level 3 – Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort. |
As of March 31, 2020 and March 31, 2019, the significant inputs to the Company’s derivative liability and mezzanine equity calculations were Level 3 inputs.
Concentration of Credit Risk
The Company generally sells a significant portion of its oil and gas production to a relatively small number of customers. For the year ended March 31, 2020, the Company’s consolidated revenues were from the sale of oil, gas and natural gas liquids under marketing contracts primarily with Apache Corporation. For the year ended March 31, 2019, the Company’s consolidated revenues were from the sale of oil, gas and natural gas liquids under marketing contracts primarily with Superior Pipeline Company, Scissortail Energy, LLC and Apache Corporation. The Company has alternative purchasers available at competitive market prices if there is disruption in services or other events that cause the Company to search for other ways to sell the Company’s production.
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During the year ended March 31, 2020, one customer accounted for 92% of total revenues. During the year ended March 31, 2019, three customers accounted for 84% of total revenues. The Company does not believe the loss of any customer will have a material effect on the Company because alternative customers are readily available.
Oil and Natural Gas Properties, Full Cost Method
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.
Ceiling Test
In applying the full cost method, Camber performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value” of its proved reserves discounted at a 10% interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.
During the year ended March 31, 2020, no impairments were recorded. During the year ended March 31, 2019, the Company recorded impairments totaling $1.3 million that were primarily related to unproved properties due to expirations of leaseholds.
Asset Retirement Obligations
The Company records the fair value of a liability for asset retirement obligations (“ARO”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. Camber accrues an abandonment liability associated with its oil and natural gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at Camber’s credit-adjusted risk-free interest rate. No market risk premium has been included in Camber’s calculation of the ARO balance.
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Other Property and Equipment
Other property and equipment are stated at cost and consist primarily of furniture and computer equipment. Depreciation is computed on a straight-line basis over the estimated useful lives.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating losses and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and accrued tax liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Camber has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of March 31, 2020 and 2019. The Company’s policy is to classify assessments, if any, for tax related interest expense and penalties as interest expense.
Earnings per Common Share
Basic and diluted income (loss) per share calculations are calculated on the basis of the weighted average number of shares of the Company’s common stock outstanding during the year. Diluted earnings per share give effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted earnings per share, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise price of the options and warrants. Purchases of treasury stock reduce the outstanding shares commencing on the date that the stock is purchased. Common stock equivalents are excluded from the calculation when a loss is incurred as their effect would be anti-dilutive.
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.
Derivative Liabilities
Certain warrants and certain obligations to issue additional shares relating to conversions of the Series C Preferred Stock contain provisions that could result in modification of the warrants’ exercise price or the Series C Preferred Stock conversion price that is 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 contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these The warrants granted to Ironman PI Fund II, LP 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. The warrants expired on April 21, 2019.
The Series C Preferred Stock are convertible into shares of common stock at a fixed $3.25 conversion rate. Upon conversion, the holder is entitled to dividends as if the shares had been held to maturity, which is referred to as the Conversion Premium. The Conversion Premium may be paid in shares or cash, at the option of the Company. If the Conversion Premium is paid in cash, the amount is fixed and not subject to adjustment. If the Conversion Premium is paid in shares, the conversion ratio is based on a VWAP calculation based on the lowest stock price over the Measurement Period. The Measurement Period is 30 days (or 60 days if there is a Triggering Event) prior to the conversion date and 30 days (or 60 days if there is a Triggering Event) after the conversion date. The VWAP calculation is subject to adjustment if there is a Triggering Event and the Measurement Period is subject to adjustment in the event that the Company is in default of one or more Equity Conditions provided in the Certificate of Designation. For example, the Measurement period may be extended one day for every day the Company is not in compliance with one or more of the Equity Conditions. Trigger events are described in the designation of the Series C Preferred Stock, but include items which would typically be events of default under a debt security, including filing of reports late with the SEC.
At the conversion date, the number of shares due for the Conversion Premium is estimated based on the previous 30-day VWAP. If the Company does not elect to pay the Conversion Premium in cash, the Company will issue all shares due for the conversion and the estimated shares due for the conversion premium. If the VWAP calculation for the portion of the Measurement Period following the date of conversion is lower than the VWAP for the portion of the Measurement Period prior to the date of conversion, the holder will be issued additional common shares, referred to as “true-up” shares. If the VWAP calculation is higher, no true-up shares are issued.
The derivative liability at the end of each period includes a derivative liability for the outstanding Series C shares and a derivative liability for the potential obligation to issue True-Up Shares relating to Series C shares that have been converted and the Measurement Period has not expired, if applicable
The fair value of the derivative liability relating to the Conversion Premium for any outstanding Series C Shares is equal to the cash required to settle the Conversion Premium. The fair value of the potential true-up share obligation has been estimated using a binomial pricing mode and the lesser of the conversion price or the low closing price of the Company’s stock subsequent to the conversion date. and the historical volatility of the Company’s common stock. (See notes 4 and 10)
Recently Adopted Accounting Pronouncements
ASC 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 2020 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 12 – 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.
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.
| F-15 |
| Table of Contents |
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.
In February 2016, the FASB issued ASU No. 2016.02 “Leases (Topic 842)”. The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. Topic 840 does not apply to leases to explore for, or to use, minerals, oil, natural gas and similar nongenerative resources including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. In July 2018, the FASB issued “Leases (Topic 842): Targeted Improvements”, which provides entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting Topic 842. The Company adopted Topic 842 as of April 1, 2019, using the alternative modified transition, for which, comparative periods, including the disclosures related to those periods, are not restated.
In addition, the Company elected practical expedients provided by the new standard, and the Company has elected to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs and to retain off-balance sheet treatment of short-term leases (i.e., 12 months or less which do not contain purchase options that the Company is reasonably likely to exercise). As a result of the short-term expedient election, the Company does not have leases that require the recording of a net lease asset and lease liability on the Company’s consolidated balance sheet or have a material impact on consolidated earnings or cash flows as of April 1, 2019. Moving forward, the Company will evaluate any new lease commitments for application of Topic 842.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement,” which changes the disclosure requirements for fair value measurements by removing, adding, and modifying certain disclosures. The Company adopted ASU 2018-13 effective April 1, 2019. The adoption did not have a material impact on its consolidated financial statements.
Effective January 1, 2020, the Company adopted the Financial Accounting Standards Board’s update, Financial Instruments – Credit Losses (Topic 326), as amended. The standard requires a valuation allowance for credit losses be recognized for certain financial assets that reflects the current expected credit loss over the asset’s contractual life. The valuation allowance considers the risk of loss, even if remote, and considers past events, current conditions and expectations of the future. The standard did not have a material impact on the Company’s financial statements.
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.
| F-16 |
| Table of Contents |
Subsequent Events
The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure consideration.
NOTE 4 – Restatement of previously issued financial statements
On October 31, 2020, the Company received a SEC Comment Letter with respect to Amendment No. 2 to the Registration Statement on Form S-4 filed on October 14, 2020. Among other things, the SEC Comment Letter questioned the Company’s historical accounting treatment regarding the accounting treatment for our Series C Stock. The Company recorded such sales as permanent equity and the SEC Comment Letter suggested the appropriate accounting classification was something other than permanent equity given certain provisions within the Certificate of Designation for the Series C Stock (“COD”). After considering the SEC Comment letter and reviewing the COD, the Company and the holder of the Series C Stock determined there were several errors made in the drafting of the COD that could result in unintended consequences.
Both parties agreed to subsequently correct the Certificate of Designation, and Certificates of Correction to the COD were filed on December 9, 2020 and on April 20, 2021 to correct the errors. Both parties agreed the corrections would be applied retroactive to the original filing date of the COD, being August 25, 2016. However, US GAAP requires a transaction to be accounted for in accordance with the terms of an agreement in effect during the period of the financial statements and, consequently, the Company determined that in accordance with the terms of the original COD, the Series C Stock should have been recorded as temporary equity instead of permanent equity. In addition, certain provisions of the original COD required the Company to recognize a derivative liability for certain conversions of the Series C Stock into common stock.
As a result of the errors described above, we restated our financial statements to reclassify the Series C Stock from permanent equity to temporary equity and to recognize a derivative liability for the potential obligation to issue additional shares after the Series C shares have been converted to common shares with Amendment No. 1 to our Annual Report on Form 10-K/A (“First Amendment”). We estimated the fair value of the derivative liability at March 31, 2020 and 2019 using a binomial pricing model, the actual conversion rate and the historical volatility rate for the Company’s common stock.
After additional consultations with the SEC staff and review of the applicable accounting requirements, the Company determined that the accounting for the Series C Stock required further adjustment from the accounting treatment applied in the First Amendment.
The Series C Stock were initially issued in September 2016 and should have been recorded with a deemed dividend to recognize the required conversion premium upon issuance and a loss on derivative liability to recognize the variability if the shares were converted to common shares. Subsequent measurement should have included adjustments to the carrying value of the Series C Stock to recognize changes in fair value due to changes in the Company’s stock price and recognition of gains or losses on conversion of the Series C Stock into common stock. Our accounting treatment and calculations are more fully described in note 10.
The impact of the restatement on our financial statements included in the First amendment is as follows:
The table below sets forth changes to the consolidated balance sheet as of March 31, 2020:
|
|
| As Previously |
|
|
|
|
|
|
| |||
|
|
| Restated (First Amendment) |
|
| Adjustments |
|
| As Restated |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| TOTAL ASSETS |
|
| 9,695,218 |
|
|
|
|
|
| 9,695,218 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Current liabilities |
|
|
|
|
|
|
|
|
|
|
| |
| Accounts payable |
|
| 1,474,221 |
|
|
| - |
|
|
| 1,474,221 |
|
| Common stock payable |
|
| 173,000 |
|
|
| - |
|
|
| 173,000 |
|
| Accrued expenses |
|
| 348,460 |
|
|
| - |
|
|
| 348,460 |
|
| Derivative liability - Series C |
|
| 8,669,831 |
|
|
| 68,966,835 |
|
|
| 77,636,666 |
|
| Current ARO |
|
| 30,227 |
|
|
| - |
|
|
| 30,227 |
|
| Current income taxes payable |
|
| 3,000 |
|
|
| - |
|
|
| 3,000 |
|
| Total current liabilities |
|
| 10,698,739 |
|
|
| 68,966,835 |
|
|
| 79,665,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset retirement obligations |
|
| 41,523 |
|
|
| - |
|
|
| 41,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL LIABILITIES |
|
| 10,740,262 |
|
|
| 68,966,835 |
|
|
| 79,707,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
| - |
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TEMPORARY EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred Stock Series C |
|
| 39,389,202 |
|
|
| (29,587,756 | ) |
|
| 9,801,446 |
|
| STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
| 5,000 |
|
|
| - |
|
|
| 5,000 |
|
| Additional paid in capital |
|
| 149,825,528 |
|
|
| 29,957,705 |
|
|
| 179,783,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retained (deficit) |
|
| (190,264,774 | ) |
|
| (69,336,784 | ) |
|
| (259,601,558 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total stockholders’ equity (deficit) |
|
| (40,434,246 | ) |
|
| (39,379,079 | ) |
|
| (79,813,325 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL LIABILITIES AND EQUITY |
|
| 9,695,218 |
|
|
| -- |
|
|
| 9,695,218 |
|
| F-17 |
| Table of Contents |
The table below sets forth changes to the consolidated balance sheet as of March 31, 2019:
|
|
| As Previously |
|
|
|
|
|
|
| |||
|
|
| Restated (First Amendment) |
|
| Adjustments |
|
| As Restated |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| TOTAL ASSETS |
|
| 8,582,672 |
|
|
|
|
|
| 8,582,672 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Current liabilities |
|
|
|
|
|
|
|
|
|
|
| |
| Accounts payable |
|
| 1,521,329 |
|
|
| - |
|
|
| 1,521,329 |
|
| Common stock payable |
|
| 303,340 |
|
|
| - |
|
|
| 303,340 |
|
| Accrued expenses |
|
| 276,133 |
|
|
| 1 |
|
|
| 276,134 |
|
| Current income taxes payable |
|
| 3,000 |
|
|
| - |
|
|
| 3,000 |
|
| Derivative liability - Series C |
|
| 3,911,649 |
|
|
| 56,391,825 |
|
|
| 60,303,474 |
|
| Total current liabilities |
|
| 6,015,451 |
|
|
| 56,391,826 |
|
|
| 62,407,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset retirement obligations |
|
| 303,809 |
|
|
| - |
|
|
| 303,809 |
|
| Derivative liability |
|
| 5 |
|
|
| - |
|
|
| 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL LIABILITIES |
|
| 6,319,265 |
|
|
| 56,391,826 |
|
|
| 62,711,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
| - |
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TEMPORARY EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred Stock Series C |
|
| 28,248,946 |
|
|
| (25,538,266 | ) |
|
| 2,710,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred Stock Series B |
|
| 44 |
|
|
| - |
|
|
| 44 |
|
| Common Stock |
|
| 13 |
|
|
| - |
|
|
| 13 |
|
| Additional paid in capital |
|
| 155,664,694 |
|
|
| 19,139,540 |
|
|
| 174,804,234 |
|
| Retained earnings (deficit) |
|
| (181,650,290 | ) |
|
| (49,993,100 | ) |
|
| (231,643,390 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total stockholders’ (deficit) |
|
| (25,985,539 | ) |
|
| (30,853,560 | ) |
|
| (56,839,099 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL LIABILITIES AND EQUITY |
|
| 8,582,672 |
|
|
| - |
|
|
| 8,582,672 |
|
The table below sets forth changes to the consolidated statement of operations for the year ended March 31, 2020:
| For the Year Ended March 31, 2020 |
| As previously Restated (First Amendment) |
|
| Adjustments |
|
| Restated |
| |||
| Operating revenues |
|
| 397,118 |
|
|
| - |
|
|
| 397,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| Lease Operating Expenses |
|
| 479,656 |
|
|
| - |
|
|
| 479,656 |
|
| Severance and Property Taxes |
|
| 14,440 |
|
|
| - |
|
|
| 14,440 |
|
| Depreciation, Depletion, Amortization and Accretion |
|
| 20,420 |
|
|
| - |
|
|
| 20,420 |
|
| Impairment of Oil and Gas Properties |
|
| — |
|
|
| - |
|
|
| — |
|
| Gain on Sale of Property and Equipment |
|
| — |
|
|
| - |
|
|
| — |
|
| General and Administrative |
|
| 4,909,871 |
|
|
| - |
|
|
| 4,909,871 |
|
| Total |
|
| 5,424,387 |
|
|
| - |
|
|
| 5,424,387 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Income (Loss) |
|
| (5,027,269 | ) |
|
| - |
|
|
| (5,027,269 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Expense (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Expense |
|
| 14,771 |
|
|
| - |
|
|
| 14,771 |
|
| Equity in Earnings of Unconsolidated Entity |
|
| (957,169 | ) |
|
| - |
|
|
| (957,169 | ) |
| Loss on Derivative liability |
|
| 4,758,182 |
|
|
| 19,343,688 |
|
|
| 24,101,870 |
|
| Other (Income) Expense, Net |
|
| (228,572 | ) |
|
| - |
|
|
| (228,572 | ) |
| Total Other Expense |
|
| 3,587,212 |
|
|
| 19,343,688 |
|
|
| 22,930,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss Before Income Taxes |
|
| (8,614,481 | ) |
|
| (19,343,688 | ) |
|
| (27,958,169 | ) |
| Income Tax Benefit (Expense) |
|
| — |
|
|
| - |
|
|
| — |
|
| Net Loss |
| $ | (8,614,481 | ) |
|
| (19,343,688 | ) |
| $ | (27,958,169 | ) |
| Less preferred dividends |
|
| 6,041,356 |
|
|
| 1,090,139 |
|
|
| 7,131,495 |
|
| Net loss attributable to common shareholders |
|
| (14,655,837 | ) |
|
| (20,433,827 | ) |
|
| (35,089,664 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Loss) Per Common Share |
|
|
|
|
|
|
|
|
|
|
| |
| Basic |
| $ | (6.95 | ) |
|
|
| $ | (16.64 | ) | ||
| Diluted |
| $ | (6.95 | ) |
|
|
| $ | (16.64 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Number of Common Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| 2,109,622 |
|
|
|
|
|
| 2,109,622 |
| |
| Diluted |
|
| 2,109,622 |
|
|
|
|
|
| 2,109,622 |
| |
| F-18 |
| Table of Contents |
The table below sets forth changes to the consolidated statement of operations for the year ended March 31, 2019:
| For the Year Ended March 31, 2019 |
| As previously Restated (First Amendment) |
|
| Adjustments |
|
| Restated |
| |||
| Operating revenues |
|
| 2,742,102 |
|
|
|
|
|
| 2,742,102 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Operating Expenses |
|
|
|
|
|
|
|
|
|
|
| |
| Lease Operating Expenses |
|
| 2,870,908 |
|
|
|
|
|
| 2,870,908 |
| |
| Severance and Property Taxes |
|
| 132,993 |
|
|
|
|
|
| 132,993 |
| |
| Depreciation, Depletion, Amortization and Accretion |
|
| 478,770 |
|
|
|
|
|
| 478,770 |
| |
| Impairment of Oil and Gas Properties |
|
| 1,304,785 |
|
|
|
|
|
| 1,304,785 |
| |
| Gain on Sale of Property and Equipment |
|
| (25,808,246 |
|
|
|
|
|
| (25,808,246 | ) | |
| General and Administrative |
|
| 5,152,766 |
|
|
|
|
|
| 5,152,766 |
| |
| Total |
|
| (15,868,024 |
|
|
|
|
|
| (15,868,024 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Operating (Loss) |
|
| 18,610,126 |
|
|
|
|
| 18,610,126 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Other Expense (Income) |
|
|
|
|
|
|
|
|
|
|
| |
| Interest Expense |
|
| 2,438,097 |
|
|
|
|
|
| 2,438,097 |
| |
| Equity in Earnings of Unconsolidated Entity |
|
|
|
|
|
|
|
|
| — |
| |
| Loss on Derivative liability |
|
| 27,431,824 |
|
|
| 31,247,428 |
|
|
| 58,679,252 |
|
| Other (Income) Expense, Net |
|
| (474,124 | ) |
|
|
|
|
|
| (474,124 | ) |
| Total Other Expense (Income) |
|
| 29,395,798 |
|
|
| 31,247,428 |
|
|
| 60,643,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss Before Income Taxes |
|
| (10,785,671 |
|
|
| (31,247,428 | ) |
|
| (42,033,100 | ) |
| Income Tax Benefit (Expense) |
|
| (3,000 | ) |
|
|
|
|
|
| (3,000 | ) |
| Net Loss |
| $ | (10,788,671 | ) |
|
| (31,247,428 | ) |
| $ | (42,036,100 | ) |
| Less preferred dividends |
|
| 4,224,027 |
|
|
| (3,610,433 | ) |
|
| 613,594 |
|
| Net (loss) attributable to common shareholders |
|
| (15,012,698 | ) |
|
| (27,636,995 | ) |
|
| (42,649,694 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss) Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| $ | (3,799.72 | ) |
|
| (6,994.94 | ) |
| $ | (10,794.66 | ) |
| Diluted |
| $ | (3,799.72 | ) |
|
| (6,994.94 | ) |
| $ | (10,794.66 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average Number of Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| 3,951 |
|
|
|
|
|
| 3,951 |
| |
| Diluted |
|
| 3,951 |
|
|
|
|
|
| 3,951 |
| |
The table below sets forth changes to the consolidated statement of shareholders’ equity for the year ended March 31, 2020:
|
|
| As previously restated (First Amendment) |
|
| Adjustments |
|
| As Restated |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balances March 31, 2020 |
|
|
|
|
|
|
|
|
| |||
| Series C preferred Stock |
| $ | 39,389,202 |
|
| $ | (29,587,756 | ) |
| $ | 9,801,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock |
| $ | 5,000 |
|
|
|
|
|
| $ | 5,000 |
|
| Additional Paid-in Capital |
|
| 149,825,528 |
|
|
| 29,957,756 |
|
|
| 179,783,233 |
|
| Accumulated Deficit |
|
| (190,264,774 | ) |
|
| (69,336,784 | ) |
|
| (259,601,558 | ) |
| Total Stockholders' Equity, March 31, 2020 |
| $ | (40,434,246 | ) |
| $ | (39,379,079 | ) |
| $ | (79,813,325 | ) |
| F-19 |
| Table of Contents |
The table below sets forth changes to the consolidated statement of shareholders’ equity for the year ended March 31, 2019:
|
|
| As previously restated (First Amendment) |
|
| Adjustments |
|
| As Restated |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balances March 31, 2019 |
|
|
|
|
|
|
|
|
| |||
| Series C preferred Stock |
| $ | 28,248,946 |
|
| $ | (25,538,266 | ) |
| $ | 2,710,680 |
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
| Series B preferred stock |
| $ | 44 |
|
|
|
|
|
| $ | 44 |
|
| Common stock |
|
| 13 |
|
|
|
|
|
|
| 13 |
|
| Additional Paid-in Capital |
|
| 155,664,694 |
|
|
| 19,139,540 |
|
|
| 174,804,234 |
|
| Stock Dividend distributable |
|
| 3 |
|
|
| (3 | ) |
|
| - |
|
| Accumulated Deficit |
|
| (181,650,293 | ) |
|
| (49,993,096 | ) |
|
| (231,643,389 | ) |
| Total Stockholders' Equity, March 31, 2019 |
| $ | (25,985,539 | ) |
| $ | (30,853,559 | ) |
| $ | (56,839,098 | ) |
The table below sets forth changes to the consolidated statements of cash flows for the year ended March 31, 2020:
| For the Year Ended March 31, 2020 |
| As previously Restated (First Amendment) |
|
| Adjustments |
|
| Restated |
| |||
| Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| |||
| Net Loss |
| $ | (8,614,481 | ) |
| $ | (19,343,688 | ) |
| $ | (27,958,169 | ) |
| Net Loss from Discontinued Operations |
|
| — |
|
|
| — |
|
|
| — |
|
| Net Loss from Continuing Operations |
|
| (8,614,481 | ) |
|
| (19,343,688 | ) |
|
| (27,958,169 | ) |
| Adjustments to Reconcile Net (Loss) to Net Cash Used in Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation, Depletion, Amortization and Accretion |
|
| 20,420 |
|
|
|
|
|
|
| 20,420 |
|
| Share-Based Compensation |
|
| 200,690 |
|
|
|
|
|
|
| 200,690 |
|
| Bad Debt Expense |
|
| 17,694 |
|
|
|
|
|
|
| 17,694 |
|
| Litigation Settlement – PetroGlobe |
|
| 204,842 |
|
|
|
|
|
|
| 204,842 |
|
| Change in Fair Value of Derivative Liability |
|
| 4,758,177 |
|
|
| 19,343,688 |
|
|
| 24,101,870 |
|
| Equity in Earnings of Unconsolidated Entity |
|
| (957,169 | ) |
|
|
|
|
|
| (957,169 | ) |
| Changes in Operating Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts Receivable |
|
| (144,020 | ) |
|
|
|
|
|
| (144,020 | ) |
| Other Current Assets |
|
| 42,523 |
|
|
|
|
|
|
| 42,523 | ) |
| Accounts Payable and Accrued Expenses |
|
| (329,531 | ) |
|
|
|
|
|
| (329,531 | ) |
| Net Cash Used in Operating Activities from Continuing Operations |
|
| (4,800,855 |
|
|
|
|
|
|
| (4,800,855 | ) |
| Net Cash Provided by Operating Activities from Discontinued Operations |
|
| 1,212,391 |
|
|
|
|
|
|
| 1,212,391 |
|
| Net Cash Used in Operating Activities |
|
| (3,588,464 |
|
|
|
|
|
|
| (3,588,464 | ) |
| Net Cash Used in Investing Activities from Continuing Operations |
|
| (8,948,369 |
|
|
|
|
|
|
| (8,948,369 | ) |
| Cash Used in Investing Activities from Discontinued Operations |
|
| (692,650 |
|
|
|
|
|
|
| (692,650 | ) |
| Cash Used in Investing Activities |
|
| (9,641,019 |
|
|
|
|
|
|
| (9,641,019 | ) |
| Financing Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from Issuance of Series C Preferred Stock |
|
| 5,000,000 |
|
|
|
|
|
|
| 5,000,000 |
|
| Cash Settlement of Preferred B Dividends |
|
| (25,000 | ) |
|
|
|
|
|
| (25,000 | ) |
| Net Cash Provided by Financing Activities from Continuing Operations |
|
| 4,975,000 |
|
|
|
|
|
|
| 4,975,000 |
|
| Cash Provided by Financing Activities from Discontinued Operations |
|
| 1,132,375 |
|
|
|
|
|
|
| 1,132,375 |
|
| Cash Provided by Financing Activities |
|
| 6,107,375 |
|
|
|
|
|
|
| 6,107,375 |
|
| (Decrease) in Cash |
|
| (7,122,108 | ) |
|
|
|
|
|
| (7,122,108 | ) |
| Cash at Beginning of the Year |
|
| 7,778,723 |
|
|
|
|
|
|
| 7,778,723 |
|
| Cash at End of the Year |
| $ | 656,615 |
|
|
|
|
|
| $ | 656,615 |
|
| F-20 |
| Table of Contents |
The table below sets forth changes to the consolidated statements of cash flows for the year ended March 31, 2019:
| For the Year Ended March 31, 2019 |
| As previously Restated (First Amendment) |
|
| Adjustments |
|
| Restated |
| |||
| Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| |||
| Net Loss |
| $ | (10,788,672 | ) |
| $ | (31,247,428 | ) |
| $ | (42,036,100 | ) |
| Adjustments to Reconcile Net (Loss) to Net Cash Used in Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation, Depletion, Amortization and Accretion |
|
| 478,770 |
|
|
|
|
|
|
| 478,770 |
|
| Impairment of Oil and Gas Properties |
|
| 1,304,785 |
|
|
|
|
|
|
| 1,304,785 |
|
| Share-Based Compensation |
|
| 343,730 |
|
|
|
|
|
|
| 343,730 |
|
| Amortization of Discount on Notes |
|
| 1,499,647 |
|
|
|
|
|
|
| 1,499,647 |
|
| Bad Debt Expense |
|
| 190,365 |
|
|
|
|
|
|
| 190,365 |
|
| Gain on Sale of Property and Equipment |
|
| (25,808,246 | ) |
|
|
|
|
|
| (25,808,246 | ) |
| Change in Fair Value of Derivative Liability |
|
| 27,431,824 |
|
|
| 31,247,428 |
|
|
| 58,679,252 |
|
| Changes in Operating Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts Receivable |
|
| 327,489 |
|
|
|
|
|
| 327,489 |
| |
| Other Current Assets |
|
| (34,472 | ) |
|
|
|
|
|
| (34,472 | ) |
| Accounts Payable and Accrued Expenses |
|
| (718,649 | ) |
|
| — |
|
|
| (718,648 | ) |
| Net Cash Used in Operating Activities from Continuing Operations |
|
| (5,773,428 | ) |
|
| — |
|
|
| (5,773,428 | ) |
| Cash Used in Investing Activities |
|
| (2,237,000 | ) |
| / |
|
|
| (2,237,000 | ) | |
| Financing Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from Issuance of Series C Preferred Stock |
|
| 15,000,000 |
|
|
|
|
|
|
| 15,000,000 |
|
| Cash Provided by Financing Activities |
|
| 15,000,000 |
|
|
|
|
|
|
| 15,000,000 |
|
| (Decrease) Increase in Cash |
|
| 6,989,572 |
|
|
|
|
|
| 6,989,572 |
| |
| Cash at Beginning of the Year |
|
| 789,151 |
|
|
|
|
|
|
| 789,151 |
|
| Cash at End of the Year |
| $ | 7,778,723 |
|
|
|
|
|
| $ | 7,778,723 |
|
NOTE 5 – 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.
| F-21 |
| Table of Contents |
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 its 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 $1.30 and $1.18 per barrel of oil equivalent for the year ended March 31, 2020 and 2019, respectively.
All of Camber’s oil and natural gas properties are located in the United States. Costs being amortized at March 31, 2020 and 2019 are as follows:
|
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||
| Oil and gas properties subject to amortization |
| $ | 50,352,033 |
|
| $ | 50,352,304 |
|
| Oil and gas properties not subject to amortization |
|
| 28,016,989 |
|
|
| 28,016,989 |
|
| Capitalized asset retirement costs |
|
| 91,850 |
|
|
| 176,649 |
|
| Total oil & natural gas properties |
|
| 78,460,872 |
|
|
| 78,545,942 |
|
| Accumulated depreciation, depletion, and impairment |
|
| (78,350,605 | ) |
|
| (78,333,628 | ) |
| Net Capitalized Costs |
| $ | 110,267 |
|
| $ | 212,314 |
|
Impairments
For the year ended March 31, 2020, the Company recorded no impairments. For the year ended March 31, 2019, the Company recorded impairments totaling $1,304,785, which were due to lease expirations.
Additions and Depletion
During the years ended March 31, 2020 and 2019, the Company incurred costs of approximately $0 and $2.1 million, respectively, for technical and other capital enhancements to extend the lives of the Company’s wells. Additionally, the Company recorded $16,977 and $473,521 for depletion for the years ended March 31, 2020 and 2019, respectively.
| F-22 |
| Table of Contents |
Disposition of Oil and Natural Gas Properties
On July 12, 2018, the Company entered into the Sale Agreement, as seller, with N&B Energy as purchaser. 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 and certain other acquisitions, other than a production payment and overriding royalty interests (the “Disposed Assets”). In consideration for the Disposed 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 had a then outstanding principal balance of approximately $36.9 million, and certain other parties agreed to enter into a settlement agreement. The transaction closed in September 2018.
Leases
As part of the Lineal Acquisition, the Company acquired various operating and finance leases for sales and administrative offices, motor vehicles and machinery and equipment. Due to the Redemption Agreement discussed below in “Note 13 – Merger Agreement and Divestiture“, the Company no longer owns the operating and finance leases that it had acquired in connection with the Lineal Acquisition.
Effective August 1, 2018, the Company entered into a month-to-month lease at 1415 Louisiana, Suite 3500, Houston, Texas 77002. The entity providing use of the space without charge is affiliated with the Company’s Chief Financial Officer.
NOTE 6 – PLAN OF MERGER AND INVESTMENT IN UNCONSOLIDATED ENTITY
Viking Plan of Merger and Related Transactions
On February 3, 2020, the Company and Viking entered into a merger agreement (the “Merger Agreement”). Pursuant to the Merger Agreement, at the effective time of the Merger, each share of common stock of Viking issued and outstanding, other than certain shares owned by the Company, Viking and the Company’s merger sub which will be merged with and into Viking, with Viking being the surviving entity in the merger (“Merger Sub”), will be converted into the right to receive the pro rata share of 80% of the Company’s post-closing capitalization, subject to certain adjustment mechanisms discussed in the Merger Agreement (and excluding shares issuable upon conversion of the Series C Preferred Stock of the Company). Holders of Viking Common Stock will have any fractional shares of Company common stock after the Merger rounded up to the nearest whole share. The Merger Agreement can be terminated under certain circumstances, including by either Viking or the Company if the Merger has not been consummated on or before September 30, 2020, provided that the Company or Viking shall have the right to extend such date from time to time, until up to December 31, 2020, in the event that the Company has not fully resolved SEC comments on the Form S-4 (a preliminary draft of which has previously been filed) or other SEC filings related to the Merger, and Camber is responding to such comments in a reasonable fashion, subject to certain exceptions.
A further requirement to the closing of the Merger was that the Company was required to have acquired 25% of Viking’s subsidiary Elysium Energy, LLC (“Elysium”) as part of a $5,000,000 investment in Viking’s Rule 506(c) offering, which transaction was completed on February 3, 2020, as discussed below and an additional 5% of Elysium as part of a $4,200,000 investment in Viking’s Rule 506(c) offering, which transaction was completed on June 25, 2020 (as discussed below under “Note 21 – Subsequent Events“. In the event of termination of the Merger Agreement, Camber is required, under certain circumstances described below, to return a portion of the Elysium interests to Viking:
| Reason for Termination | Percentage of Elysium Retained by Camber |
| The reasonable likelihood that the combined company will not meet the initial listing requirements of the NYSE American, required regulatory approvals will not be obtained, or the registration statement on Form S-4 will not be declared effective, through no fault of Camber or Viking | 20%* |
| Termination of the Merger Agreement by either party, through no fault of Camber | 25%* |
| Termination of the Merger Agreement due to a material breach of the Merger Agreement by Camber or its disclosure schedules | 0%* |
| Termination of the Merger Agreement for any reason and in the event the Secured Notes (defined below) are not repaid within 90 days of the date of termination and the Additional Payment (defined below) is not made. | 30% |
*Assumes the payment of Secured Notes within 90 days of the date of termination of the Merger Agreement and the Additional Payment (defined below) is made.
| F-23 |
| Table of Contents |
The Merger Agreement provides that the Secured Notes (defined below) will be forgiven in the event the Merger closes, and the Secured Notes will be due 90 days after the date that the Merger Agreement is terminated by any party for any reason, at which time an additional payment shall also be due to the Company and payable by Viking in an amount equal to (i) 115.5% of the original principal amount of the Secured Notes, minus (ii) the amount due to the Company pursuant to the terms of the Secured Notes upon repayment thereof (the “Additional Payment”) is due.
A required condition to the entry into the Merger was that the Company loan Viking $5 million, pursuant to the terms of a Securities Purchase Agreement, which was entered into on February 3, 2020 (the “SPA”). On February 3, 2020, the Company and Discover entered into a Stock Purchase Agreement pursuant to which Discover purchased 525 shares of Series C Preferred Stock, for $5 million, at a 5% original issue discount to the $10,000 face value of such preferred stock. Pursuant to the SPA, the Company made a $5 million loan to Viking (using funds raised from the sale of the Series C Preferred Stock shares to Discover), which was evidenced by a 10.5% Secured Promissory Note (the “Secured Note”). The Secured Note is secured by a security interest, para passu with the other investors in Viking’s Secured Note offering (subject to certain pre-requisites) in Viking’s then 75% ownership of Elysium and 100% of Ichor Energy Holdings, LLC, which is wholly-owned by Viking. Additionally, pursuant to a separate Security and Pledge Agreement entered into on February 3, 2020, Viking provided the Company a security interest in the membership, common stock and/or ownership interests of all of Viking’s existing and future, directly owned or majority owned subsidiaries, to secure the repayment of the Secured Note.
The Secured Note is convertible into common shares of Viking at a conversion price of $0.24 per share at any time after March 4, 2020, and before the 15th day after Viking’s common stock has traded at an average daily price of at least $0.55 for 15 consecutive business days (at which point the Secured Note is no longer convertible), provided that the Company is restricted from converting any portion of the Secured Note into Viking’s common stock if upon such conversion the Company would beneficially own more than 4.99% of Viking’s common stock (which percentage may be increased or decreased, with 61 days prior written notice to Viking, provided that such percentage cannot under any circumstances be increased to greater than 9.99%).
As additional consideration for the Company making the loan to Viking, Viking assigned the Company a 25% interest in Elysium pursuant to the terms of an Assignment of Membership Interests dated February 3, 2020.
Subsequently, on June 25, 2020, as discussed in greater detail below under “Note 21 – Subsequent Events“, the Company loaned an additional $4.2 million to Viking evidenced by another Secured Note (such $9.2 million in aggregate outstanding Secured Notes, the “Secured Notes”).
Investment in Unconsolidated Entity
The Company accounts for its investment in unconsolidated entities under the equity method of accounting when it owns less than 51% of a controlling interest and does not have the ability to exercise significant influence over the operating and financial policies of the entity. The Company owns 30% of Elysium as of March 31, 2020, as discussed above, and accounts for such ownership under the equity method of accounting. The investment is adjusted accordingly for dividends or distributions it receives and its proportionate share of earnings or losses of the entity. Elysium is involved in oil and gas exploration and production in the United States. The balance sheet of Elysium at March 31, 2020 included current assets of $4.0 million, total assets of $37.7 million, total liabilities of $34.0 million and net assets of $3.7 million. Additionally, the income statement for Elysium for the period from February 3, 2020 (the date acquired) through March 31, 2020 included total revenues of $4.0 million and net income of $3.8 million.
| F-24 |
| Table of Contents |
Table below shows the changes in the Investment in entities for the years ended March 31, 2020 and 2019, respectively:
|
|
| 2020 |
|
| 2019 |
| ||
| Carrying amount at beginning of year |
| $ | — |
|
| $ | — |
|
| Investment in Elysium |
|
| — |
|
|
| — |
|
| Proportionate Share of Elysium Earnings |
|
| 957,169 |
|
|
| — |
|
| Carrying amount at end of year |
| $ | 957,169 |
|
| $ | — |
|
NOTE 7 – LONG-TERM NOTES RECEIVABLE
Long-term notes receivable as of March 31, 2020 and 2019 are comprised of:
|
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||
| Note receivable from Viking Energy Group, Inc. pursuant to a 10.5% Secured Promissory Note dated February 3, 2020 in the original principal amount of $5,000,000, having an annual interest rate of 10.5%, with interest due quarterly beginning on May 1, 2020, maturing February 3, 2022. Accrued and unpaid interest of $83,425 is included in accounts receivable at March 31, 2020. The Note is secured by secured interests in 6 Viking Energy Group, Inc. subsidiaries. See also “Note 6 – Plan of Merger and Investment in Unconsolidated Entity“. |
| $ | 5,000,0000 |
|
| $ | — |
|
| Note receivable from Lineal Star Holdings, LLC pursuant to a Promissory Note dated effective December 31, 2019, in the original principal amount of $1,539,719, accruing annual interest of 10.5%, due quarterly beginning on March 31, 2020, maturing December 31, 2021, with accrued and unpaid interest of $37,966 included in accounts receivable at March 31, 2020. See also “Note 12 - Merger Agreement and Divestiture“. |
|
| 1,539,719 |
|
|
| — |
|
| Note receivable from Lineal Star Holdings, LLC pursuant to a Promissory Note No. 2 dated effective December 31, 2019, in the original principal amount of $800,000, accruing annual interest of 8%, due quarterly beginning on March 31, 2020, maturing December 31, 2021, with accrued and unpaid interest of $15,781 included in accounts receivable at March 31, 2020. See also “Note 13 - Merger Agreement and Divestiture“. |
|
| 800,000 |
|
|
| — |
|
| Less: current maturities |
|
| — |
|
|
| — |
|
| Total |
| $ | 7,339,719 |
|
| $ | — |
|
| F-25 |
| Table of Contents |
NOTE 8 – 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 future retirement of oil and natural gas properties for the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Carrying amount at beginning of year |
| $ | 303,809 |
|
| $ | 979,159 |
|
| Payments |
|
| (149,910 | ) |
|
| — |
|
| Accretion |
|
| 2,920 |
|
|
| 4,725 |
|
| Dispositions |
|
| — |
|
|
| (699,536 | ) |
| Revisions of previous estimates |
|
| (85,069 | ) |
|
| 19,461 |
|
| Carrying amount at end of year |
| $ | 71,750 |
|
| $ | 303,809 |
|
Camber has short-term obligations of $30,227 and $0 related to the plugging liabilities at March 31, 2020 and 2019, respectively.
NOTE 9 – NOTES PAYABLE AND DEBENTURE
The Company had no notes payable or debenture outstanding as of March 31, 2020 and 2019.
Debenture
On October 31, 2018, an accredited institutional investor, Discover Growth Fund LLC (“Discover”) converted the entire $495,000 remaining balance of principal owed under the terms of a convertible debenture which it held, into an aggregate of 642 shares of common stock, including 5 shares of common stock issuable upon conversion of the principal amount thereof (at a conversion price of $101,562.50 per share), and 637 shares in connection with conversion premiums due thereon (at an initial conversion price, as calculated as provided in such debenture, of $1,912.50 per share). A total of 80 of such shares were issued to Discover in connection with the initial conversion and the remaining shares were held in abeyance subject to Discover’s 9.99% ownership limitation, to be issued from time to time, at the request of Discover. Subsequent to the October 31, 2018 conversion date, Discover was due an additional 38,116 shares of common stock in connection with true ups associated with the original issuance, as a result of the conversion price of the conversion premiums falling to $31.25 per share pursuant to the terms of the convertible debenture. Through March 31, 2020, all of the shares have been issued.
NOTE 10 – DERIVATIVE LIABILITIES
| F-26 |
| Table of Contents |
The Series C Preferred Stock are convertible into shares of common stock at a fixed $3.25 conversion rate. Upon conversion, the holder is entitled to dividends as if the shares had been held to maturity, which is referred to as the Conversion Premium. The Conversion Premium may be paid in shares or cash, at the option of the Company. If the Conversion Premium is paid in cash, the amount is fixed and not subject to adjustment. If the Conversion Premium is paid in shares, the conversion ratio is based on a volume weighted average stock price of the Company’s common stock (“VWAP”) calculation based on the lowest stock price over the Measurement Period. The conversion price is equal to 95% (85% following a Triggering Event) of the five lowest VWAPs over the Measurement Period, less $0.05 ($0.10 following a Triggering Event) per share. The Measurement Period is 30 days (or 60 days if there is a Triggering Event) prior to the conversion date and 30 days (or 60 days if there is a Triggering Event) after the conversion date. The VWAP calculation is subject to adjustment if there is a Triggering Event and the Measurement Period is subject to adjustment in the event that the Company is in default of one or more Equity Conditions provided in the Certificate of Designation. For example, the Measurement period may be extended one day for every day the Company is not in compliance with one or more of the Equity Conditions.
At the conversion date, the number of shares due for the Conversion Premium is estimated based on the previous 30-day VWAP. If the Company does not elect to pay the Conversion Premium in cash, the Company will issue all shares due for the conversion and the estimated shares due for the conversion premium. If the VWAP calculation for the portion of the Measurement Period following the date of conversion is lower than the VWAP for the portion of the Measurement Period prior to the date of conversion, the holder will be issued additional common shares, referred to as “true-up” shares. If the VWAP calculation is higher, no true-up shares are issued.
Our accounting treatment of the Series C Stock is described below:
Prior to April 20, 2021
Issuance of the Series C Stock
Upon issuance we determined that the Series C Stock included an embedded derivative and, because the conversion was generally outside the control of the Company, the Series C Stock were required to be recorded as temporary equity. Upon issuance of the Series C Stock, we determined the amount to be the allocated to the derivative liability to be the Conversion Premium, assuming a cash settlement and we determined the redemption value of the Series C Stock to be the fair value of the common shares issuable to satisfy the conversion of the Series C Stock. To the extent that consideration paid for the Series C Stock was less than the redemption value plus the derivative liability, we first allocated the consideration to the derivative liability and recorded the difference as a loss on derivative liability. The consideration received never exceeded the derivative liability. Consequently, no proceeds were allocated to the redemption value. The redemption value was recorded as temporary equity and a deemed dividend. The cash obligation required to satisfy the Conversion Premium, less cash received was recorded as a derivative liability.
Conversion of the Series C Stock
The Company receives notice of conversion from the holder with a calculation of the number of common shares required to be issued to satisfy the redemption value plus the Conversion Premium. The Company has never elected to satisfy the conversion premium in cash. The Company then issues the number of common shares determined by the holder using a VWAP calculation for the Measurement Period before the conversion date. The shares may be issued over time due to ownership limitations of the holder. Upon conversion of the Series C Stock, the Company reduces the derivative liability by the amount that was originally recorded for the number of Series C Stock converted. Any difference between the current fair value of the common shares issued to satisfy the conversion premium and the originally recorded derivative liability was recorded as a loss on derivative liability. Temporary equity is also reduced by the fair value the common shares issued to satisfy the redemption value (amounts recorded in temporary equity). Any difference is recorded as additional deemed dividend or an equity contribution.
The holder may be entitled to additional shares subsequent to the conversion date if the VWAP calculation for the portion of the Measurement Period following the date of conversion is lower than the VWAP for the portion of the Measurement Period prior to the date of conversion, referred to as “true-up” shares. If the VWAP calculation is higher, no true-up shares are issued.
Management has determined that the potential obligation to issue “true-up” shares under the Conversion Premium creates an additional derivative liability. The determination of the number of true-up shares due, if any, is based on the lowest VWAP calculation over the Measurement Period that extends beyond the conversion date. In addition, if the Company has not complied with certain provisions of the Certificate of Designation, the Measurement Period does not end until the Company is in compliance. The potential obligation to issue true-up shares after the conversion date is a derivative liability.
The derivative liability for the True-Up Shares at the end of each period represents Series C Stock conversions in respect of which the Measurement Period had not expired as of the period end. The fair value of the derivative liability has been estimated using a binomial pricing model, the estimated remaining Measurement Period, the share price and the historical volatility of the Company’s common stock.
Adjustments to the Carrying value of the Series C Stock and the Derivative Liability
At each reporting period the Company determined the fair value of the common shares required to satisfy the redemption of the outstanding Series C Stock and recorded an additional deemed dividend or an equity contribution for any differences. The redemption Conversion Premium was assumed to be settled in cash because cash settlement is more favorable to the Company. The fair value of the common shares required to satisfy the redemption of the Series C Stock was determined generally using the closing share price of the Company’s stock as of the reporting date. The amount of cash required to settle the Conversion Premium was generally fixed at the time of issuance. Consequently, the fair value of the derivative liability relating to the cash obligation to satisfy the Conversion Premium is generally unchanged until conversion.
The cash required to settle the conversion premium was unchanged until the dividend rate of 24.95% was increased in accordance with the terms of the Series C Stock to 34.95% due to covenant violations. The increase in the conversion premium was recorded as an increase in the derivative liability and a loss on change in fair value of derivative liability.
The fair value of the derivative liability relating to the potential obligation to issue true-up shares is subject to adjustment as the Company’s stock price changes. Such changes are recorded as changes in fair value of derivative liability.
April 20, 2021 Amendment to the Series C Stock COD
On April 20, 2021, the Company amended the Series C Stock certificate of designation (COD) to require all conversions to be in common shares, thus removing the cash option for redemption of the Conversion Premium. We determined that the amendment required reclassification of the Series C Stock recorded in temporary equity to be reclassified to permanent equity with no further quarterly adjustments.
Effect on derivative liability
We determined that the removal of the cash option for conversion of the Conversion Premium changed the cash redemption assumption to assume, in all cases, share redemption. Therefore, the derivative liability is required to be recorded at the fair value of the equivalent number of common shares issuable to satisfy the Conversion Premium. We recorded an adjustment to derivative liability and loss on derivative on April 20, 2021 and we will record changes in fair value of the derivative liability each quarter thereafter as long as any Series C Stock are outstanding. We estimated the fair value of the derivative liability for the outstanding Series C Stock Conversion Premium using the period end number of shares required to satisfy the Conversion Premium at the period end closing share price of the Company’s common stock, except as noted below.
Limitations on using the closing price of the Company’s common stock to determine fair value
The Company is a smaller reporting company and is traded on the NYSE American exchange. Historically, our stock price has been extremely volatile and subject to large and sometimes unexplained price variations on a daily or weekly basis. In addition, the Company declared four reverse stock splits in 2018 and 2019 and the Company’s common stock generally trades at less than $1.00 per share. These factors have exacerbated daily volatility of our stock price. Consequently, we believe that the closing price of our stock on the reporting date may not, in all cases, represent the fair value of the common share required to satisfy the redemption of the Series C Stock. Recognizing that the closing share price of our publicly traded stock is an observable input to fair value, we used such price for determining fair value in most cases and only considered an alternative measure of fair value when the closing price of the Company’s common stock varied by more than 20% from the five-day moving average immediately prior to the measurement date. In such cases, we used an average closing price of the previous 30-day period as an estimate of fair value, adjusted for stock splits if applicable. In addition, conversion of the Series C shares require a significant number of common shares to be issued in relation to the total number of shares outstanding. We do not believe that the market price of the Company’s common stock appropriately reflects the potential for significant dilution caused by a large conversion and may not be representative of market value. In cases where the number of common shares required to satisfy a conversion of the Series C shares into common stock was significant in relation to the total number of shares outstanding (approximately 30% or greater) we determined the fair value of the embedded features based on the historical market capitalization of the Company.
| F-27 |
| Table of Contents |
Activities for derivative warrant instruments during the years ended March 31, 2020 and 2019 were as follows:
|
|
| 2020 |
|
| 2019 |
| ||
| Carrying amount at beginning of period |
| $ | 5 |
|
| $ | 5 |
|
| Change in fair value |
|
| (5 | ) |
|
| — |
|
| Carrying amount at end of period |
| $ | — |
|
| $ | 5 |
|
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 March 31, 2019 include (1) discount rate of 2.20%, (2) expected term of 0.10 years, (3) expected volatility of 253.77%, and (4) zero expected dividends.
Activities for derivative Series C Preferred Stock derivative liability during the years ended March 31, 2020 and 2019 were as follows:
|
|
| 2020 |
|
| 2019 |
| ||
| Carrying amount at beginning of period |
| $ | 60,303,474 |
|
| $ | 19,770,385 |
|
| Change in fair value |
|
| 17,602,307 |
|
|
| 72,180,129 |
|
| Settlement of Obligation (issuance of common shares) |
|
| (269,115 | ) |
|
| (31,647,040 | ) |
| Carrying amount at end of period |
| $ | 77,636,666 |
|
| $ | 60,303,474 |
|
The fair value of the derivative liability has been estimated using a binomial model and the historical volatility of the Company’s common stock as of the date of conversion
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Office Lease. Information regarding the Company’s office space is disclosed in greater detail above under “Note 5 Property and Equipment –Leases“, above.
During March and April 2018, the Company purchased certain equipment pursuant to capital leases. The effective borrowing rate was approximately 35%, and all obligations were due by December 2018. In conjunction with the assignment of the liabilities owed under the IBC Bank loan agreements to N&B Energy in September 2018, as discussed under “Note 2 – Liquidity and Going Concern Considerations“ – “Assumption Agreement” all of the remaining obligations were assumed by the purchaser.
Lineal (which as of December 31, 2019 has been completely divested in connection with the Lineal Divestiture discussed in “Note 13 – Merger Agreement and Divestiture“) has the usual liability of contractors for the completion of contracts and the warranty of its work. In addition, Lineal acts as prime contractor on a majority of the projects it undertakes and is normally responsible for the performance of the entire project, including subcontract work. Management is not aware of any material exposure related thereto which has not been provided for in the accompanying consolidated financial statements.
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 and intends to vehemently defend itself against the allegations.
PetroGlobe Energy Holdings, LLC and Signal Drilling, LLC
In March 2019, PetroGlobe and Signal sued the Company in the 316th Judicial District of Hutchinson County, Texas (Cause No. 43781). The plaintiffs alleged causes of action relating to negligent misrepresentation; fraud and willful misconduct; gross negligence; statutory fraud; breach of contract; and specific performance, in connection with a purchase and sale agreement entered into between the parties in March 2018, relating to the purchase by plaintiffs of certain oil and gas assets from the Company, and a related joint venture agreement. The lawsuit seeks in excess of $600,000 in damages, as well as pre- and post-judgment interest, court costs and attorneys’ fees, and punitive and exemplary damages. Additionally, a portion of the revenues from the properties in contention are being held in suspense as a result of the lawsuit. On October 31, 2019, the Company brought counterclaims against PetroGlobe and Signal, and Petrolia Oil, LLC and Ian Acrey, including bringing claims for causes of actions including declaratory judgment (that PetroGlobe and certain other plaintiffs represented that a lease and related wells were free of all agreements and rights in favor of third parties and provided a special warranty of title pursuant to the purchase and sale agreement); breach of contract (in connection with the purchase and sale agreement); statutory fraud; common law fraud (against Mr. Acrey and other plaintiffs); fraud by non-disclosure (against Mr. Acrey and other plaintiffs); negligent misrepresentation (against Mr. Acrey and other plaintiffs); breach of fiduciary duty (against Mr. Acrey and other plaintiffs) and seeking attorney’s fees and pre- and post-judgment interest.
| F-28 |
| Table of Contents |
On January 31, 2020, the Company entered into a Compromise Settlement Agreement (the “Settlement Agreement”) with PetroGlobe Energy Holdings, LLC (“PetroGlobe”), Signal Drilling, LLC (“Signal”), Petrolia Oil, LLC (“Petrolia”), Prairie Gas Company of Oklahoma, LLC (“PGCO”), and Canadian River Trading Company, LLC (“CRTC”). Pursuant to the Settlement Agreement, the Company agreed to pay PetroGlobe $250,000, of which $100,000 was due upon execution of the Settlement Agreement, which payment has been made, and $150,000 was paid to an escrow account, which release is subject to approval by the Company upon the successful transfer of all wells and partnership interests of the Company’s current wholly-owned subsidiary CE to PetroGlobe.
The Company recognized a net settlement cost of $204,842 included on the statement of operations for the year ended March 31, 2020 in connection with the settlement.
The Company has since brought the applicable wells into regulatory compliance to the extent such compliance was required by the Railroad Commission of Texas and the Company is in the process of assigning to PetroGlobe all of its right, title and interest in all wells, leases, royalties, minerals, equipment, and other tangible assets associated with specified wells and properties, which is expected to be completed shortly after the date of this report. The Company also plans to assign all of its membership interests in CE to Petrolia shortly after the date of this report.
The Company released the parties to the Settlement Agreement, including Ian Acrey, individually, as well as their officers, directors, or members from any claims asserted in the lawsuit, and the parties to the Settlement Agreement along with Ian Acrey, individually, released the Company, its officers, directors, shareholders and affiliate corporations from any claims asserted in the lawsuit. The Company did not release any claims or causes of action against N&B Energy, LLC, Sezar Energy, LLP related to Richard Azar, or any of their affiliates, or predecessors, or successors.
The parties filed a motion and order to dismiss the lawsuit with prejudice shortly after execution of the Settlement Agreement.
Apache Corporation
In December 2018, Apache Corporation (“Apache”) sued the Company, Sezar Energy, L.P., and Texokcan Energy Management Inc., in the 129th Judicial District Court of Harris County, Texas (Cause 2018-89515). Apache alleged causes of action for Breach of Contract, Money Had & Received and Conversion, relating to amounts Apache alleged it was owed under a joint operating agreement. Apache is seeking $586,438 in actual damages, exemplary damages, pre- and post-judgment interest, court costs and other amounts which it may be entitled. The Company has filed a general denial to the claims and asserted the affirmative defense of failure to mitigate. The parties are currently moving towards discovery. The Company denies Apache’s claims and intends to vehemently defend itself against the allegations.
N&B Energy
On September 12, 2019, N&B Energy filed a petition in the District Court for the 285th Judicial District of Bexar County, Texas (Case #2019CI11816). Pursuant to the petition, N&B Energy raises claims against the Company for breach of contract, unjust enrichment, money had and received and disgorgement, in connection with $706,000 which it alleges it is owed under the Sale Agreement for true ups and post-closing adjustments associated therewith. The petition seeks amounts owed, pre- and post-judgment interest and attorney’s fees. The Company denies N&B Energy’s claims. Effective December 18, 2020, the Company entered into a Settlement Agreement and Mutual Release with N&B, and the lawsuit/arbitration was dismissed with prejudice.
| F-29 |
| Table of Contents |
NOTE 12 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Oil and Gas Contracts
The following table disaggregates revenue by significant product type for the years ended March 31, 2020 and 2019, respectively:
|
|
| 2020 |
|
| 2019 |
| ||
| Oil sales |
| $ | 296,036 |
|
| $ | 526,365 |
|
| Natural gas sales |
|
| 37,049 |
|
|
| 772,105 |
|
| Natural gas liquids sales |
|
| 64,033 |
|
|
| 1,443,632 |
|
| Total oil and gas revenue from customers |
| $ | 397,118 |
|
| $ | 2,742,102 |
|
NOTE 13 – MERGER AGREEMENT AND DIVESTITURE
Merger Agreement
On July 8, 2019 (the “Closing Date”), the Company entered into, and closed the transactions contemplated by, the Lineal Plan of Merger, by and between the Company, Camber Energy Merger Sub 2, Inc., the Company’s then newly formed wholly-owned subsidiary, Lineal, and the Lineal Members. Pursuant to the Lineal Plan of Merger, the Company acquired 100% of the ownership of Lineal from the Lineal Members in consideration for newly issued shares of Series E Redeemable Convertible Preferred Stock and Series F Redeemable Preferred Stock, as described in greater detail below.
In connection with the Lineal Plan of Merger, the Company entered into several other agreements, including (a) a Security Exchange Agreement dated July 8, 2019 (the “Exchange Agreement”), by and between the Company and Discover; (b) a Termination Agreement dated July 8, 2019, by and between the Company and Discover Growth Fund, which purchased shares of Series C Preferred Stock from us in December 2018 (“Discover Growth”, which subsequently transferred all of its shares of Series C Preferred Stock to Discover); and (c) a Funding and Loan Agreement dated July 8, 2019, by and among the Company, Lineal, and certain of the Lineal Members who also acquired shares of the Company’s preferred stock as a result of the Lineal Merger (the “Funding Agreement”), which provided for the Company to loan $1,050,000 to Lineal, which loan was evidenced by a Promissory Note entered into by Lineal, as borrower, in favor of the Company, as lender, dated July 8, 2019 (the “July 2019 Lineal Note”).
Also as part of the Lineal Merger, the Company designated three new series of preferred stock, (1) Series D Convertible Preferred Stock (the “Series D Preferred Stock” and the certificate of designations setting forth the rights thereof, the “Series D Designation”); (2) Series E Redeemable Convertible Preferred Stock (the “Series E Preferred Stock” and the certificate of designation setting forth the rights thereof (the “Series E Designation”); and (3) Series F Redeemable Preferred Stock (the “Series F Preferred Stock” and the certificate of designation setting forth the rights thereof, the “Series F Designation”, and the Series E Preferred Stock and the Series F Preferred Stock, collectively, the “Series E and F Preferred Stock”). Additionally, with the approval of the holders thereof, the Company amended and restated the designation of its Series C Redeemable Convertible Preferred Stock (the “Series C Preferred Stock” and the amended and restated designation setting forth the rights thereof, the “Series C Designation”).
The Lineal Plan of Merger, Series D Designation and Series E Designation, provided that, effective upon the date that the stockholders of the Company had approved the Lineal Plan of Merger and issuance of shares in connection therewith (the “Stockholder Approval” and such date of Stockholder Approval, the “Stockholder Approval Date”), and subject to certain closing conditions, (a) the common stock holders of the Company were to hold between 6% and 6.67% of the Company’s fully-diluted capitalization (depending on certain factors); (b) Discover was to hold Series D Preferred Stock convertible into 26.67% of the Company’s fully-diluted capitalization, subject to the terms of the Series D Preferred Stock; and (c) the Lineal Members, who held the Series E Preferred Stock, were to have the right to convert such Series E Preferred Stock, subject to the terms thereof, as discussed above, into 66.67% of the Company’s fully-diluted capitalization, or 70%, subject to certain factors.
| F-30 |
| Table of Contents |
Pursuant to the Lineal Plan of Merger, Merger Sub merged with and into Lineal, with Lineal continuing as the surviving entity in the Lineal Merger and as a wholly-owned subsidiary of the Company.
The Funding Agreement required the Company to fund $1,050,000 in immediately available funds to Lineal (the “Loan”). The Loan was documented by the July 2019 Lineal Note and the Loan was made on July 9, 2019.
The consideration paid for the acquisition was as follows:
| Series E Preferred Shares |
| $ | 18,701,000 |
|
| Series F Preferred Shares |
|
| 1,417,000 |
|
| Total consideration |
| $ | 20,118,000 |
|
The Series E Preferred Shares and the Series F Preferred Shares were determined to be contingently redeemable preferred stock and were accounted for as mezzanine equity. The fair value of the instruments was determined using an income valuation approach to estimated cash flows of the acquired business, analysis of the terms and rights of each class of equity instrument issued by the Company and an assessment of the probability of the various scenarios that could occur depending on the outcome of the Stockholder Approval vote, and the impact each scenario would have on the capital structure of the Company. Subsequent to the date of the Lineal Merger, the instruments will be assessed to determine whether it is probable of the instruments being redeemed as a result of contingencies being resolved. When it is deemed probable, the fair value will be adjusted to the new estimate of fair value in that period.
The allocation of the preliminary purchase price to the assets and liabilities acquired in connection with the Lineal Merger was based on the current values of the assets and liabilities of Lineal as of the Lineal Merger date on July 8, 2019 and are as follows:
| Cash |
| $ | 449,763 |
|
| Accounts receivable |
|
| 2,776,477 |
|
| Deferred tax assets |
|
| 34,000 |
|
| Cost in excess of billings |
|
| 944,250 |
|
| Property and equipment |
|
| 1,436,920 |
|
| Right of use asset – operating leases |
|
| 913,396 |
|
| Other current assets and deposits |
|
| 60,132 |
|
| Goodwill |
|
| 17,992,118 |
|
| Accounts payable – trade |
|
| (400,889 | ) |
| Accrued and other liabilities |
|
| (893,013 | ) |
| Operating lease liabilities |
|
| (913,396 | ) |
| Finance lease liabilities |
|
| (313,472 | ) |
| Loan Payable – shareholder |
|
| (492,337 | ) |
| Notes payable |
|
| (1,475,949 | ) |
| Net assets acquired |
| $ | 20,118,000 |
|
The total purchase price was allocated to the acquired tangible and intangible assets and liabilities of Lineal based on their estimated fair values as of the purchase closing date. The excess of the purchase price over the fair value of assets and liabilities acquired was allocated to goodwill.
Divestiture
On December 31, 2019, the Company entered into, and closed the transactions contemplated by the Redemption Agreement, by and between the Company, Lineal and the Preferred Holders.
Pursuant to the Redemption Agreement, the Company redeemed the Company’s Series E and F Preferred Stock issued in connection with the Lineal Merger and ownership of 100% of Lineal was transferred back to the Preferred Holders, and all of the Series E Preferred Stock and Series F Preferred Stock of the Company outstanding were cancelled through the redemption.
| F-31 |
| Table of Contents |
The Redemption Agreement also provided for (a) the entry by Lineal and the Company into a new unsecured promissory note in the amount of $1,539,719, the outstanding amount of the July 2019 Lineal Note together with additional amounts loaned by Camber to Lineal through December 31, 2019 (the “December 2019 Lineal Note”); (b) the unsecured loan by the Company to Lineal on December 31, 2019 of an additional $800,000, entered into by Lineal in favor of the Company on December 31, 2019 (“Lineal Note No. 2”); and (c) the termination of the prior Lineal Plan of Merger and Funding Agreement entered into in connection therewith (pursuant to which all funds previously held in a segregated account for future Lineal acquisitions, less amounts loaned pursuant to Lineal Note No. 2, were released back to the Company). The December 2019 Lineal Note and Lineal Note No. 2, accrue interest, payable quarterly in arrears, beginning on March 31, 2020 and continuing until December 31, 2021, when all interest and principal is due, at 8% and 10% per annum (18% upon the occurrence of an event of default), respectively. As of March 31, 2020, $53,746 of interest related to the December 2019 Lineal Note and Lineal Note No. 2 was accrued and included in the consolidated balance sheet in Accounts Receivable.
The divestiture resulting from the Redemption Agreement qualifies as a discontinued operation in accordance with U.S. generally accepted accounting principles (“GAAP”). As a result, operating results and cash flows related to the Lineal operations have been reflected as discontinued operations in the Company’s consolidated statements of operations and consolidated statements of cash flows for the periods presented.
The net consideration received for the divestiture was as follows:
| Return of Series E Preferred Shares |
| $ | 14,666,000 |
|
| Return of Series F Preferred Shares |
|
| 2,434,000 |
|
| Total net consideration |
| $ | 17,100,000 |
|
The fair value of the instruments immediately prior to the divestiture was determined using an income valuation approach to estimate cash flows of the acquired business, analysis of the terms and rights of each class of equity instrument issued by the Company and an assessment of the probability of the various scenarios that could occur depending on the outcome of the Stockholder Approval vote, and the impact each scenario would have on the capital structure of the Company. Immediately prior to the Lineal Disposition, the Company recognized a gain on the change in fair value of the Series E and F Preferred Shares of $3,018,000, included within net loss from discontinued operations.
The following table summarizes the assets and liabilities of Lineal which were transferred from the Company to the Preferred Holders, together with Lineal, as part of the Redemption agreement:
| Cash |
| $ | 2,101,879 |
|
| Accounts receivable |
|
| 1,673,538 |
|
| Deferred tax assets |
|
| 34,000 |
|
| Cost in excess of billings |
|
| 497,340 |
|
| Property and equipment |
|
| 1,996,229 |
|
| Right of use asset – operating leases |
|
| 710,898 |
|
| Other current assets and deposits |
|
| 49,275 |
|
| Goodwill |
|
| 18,314,222 |
|
| Accounts payable – trade |
|
| (260,882 | ) |
| Accrued and other liabilities |
|
| (369,448 | ) |
| Billings in excess of costs |
|
| (445,759 | ) |
| Operating lease liabilities |
|
| (710,898 | ) |
| Finance lease liabilities |
|
| (237,925 | ) |
| Notes payable |
|
| (3,545,841 | ) |
| Net assets divested |
| $ | 19,806,628 |
|
As a result of the above, the Company recognized a loss on the disposal of the Lineal operations of $2,706,628 included within net loss from discontinued operations.
| F-32 |
| Table of Contents |
Components of amounts reflected in the Company’s consolidated statements of operations related to discontinued operations are presented in the following table for the year ended March 31, 2020.
|
|
| Year Ended |
| |
|
|
| 31-Mar-20 |
| |
| Contract revenue |
| $ | 9,106,764 |
|
| Contract costs |
|
| (7,772,726 | ) |
| Depreciation and amortization |
|
| (155,282 | ) |
| Selling, general and administrative |
|
| (1,649,643 | ) |
| Operating loss |
|
| (470,887 | ) |
| Other income |
|
| 273,037 |
|
| Interest expense |
|
| (113,522 | ) |
| Net (loss) from discontinued operations |
|
| (311,372 | ) |
| Loss on disposal of business |
|
| (2,706,628 | ) |
| Change in value of preferred stock |
|
| 3,018,000 |
|
| Total loss on discontinued operations |
| $ | — |
|
NOTE 14 – INCOME TAXES
The Company recorded a provision for income taxes of approximately $0 and $3,000 for the years ended March 31, 2020 and March 31, 2019, respectively.
|
|
| 2020 |
|
| 2019 |
| ||
| Current taxes: |
|
|
|
|
|
| ||
| Federal |
| $ | — |
|
| $ | — |
|
| State |
|
| — |
|
|
| 3,000 |
|
|
|
|
| — |
|
|
| 3,000 |
|
| Deferred taxes: |
|
|
|
|
|
|
|
|
| Federal |
|
| — |
|
|
| — |
|
| State |
|
| — |
|
|
| — |
|
|
|
|
| — |
|
|
| — |
|
| Total |
| $ | — |
|
| $ | 3,000 |
|
The following is a reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate of 21% to income from continuing operations before income taxes for the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Tax expense (benefit), computed at expected tax rates |
| $ | (1,809,041 | ) |
| $ | (2,265,621 | ) |
| Nondeductible expenses |
|
| 3,298 |
|
|
| 77,473 |
|
| State taxes net of FIT benefit |
|
| — |
|
|
| 2,370 |
|
| Return to accrual true-up |
|
| — |
|
|
| 1,490,624 |
|
| Change in valuation allowance |
|
| 1,805,743 |
|
|
| 698,154 |
|
| Total |
| $ | — |
|
| $ | 3,000 |
|
| F-33 |
| Table of Contents |
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:
|
|
| At March 31, |
| |||||
|
|
| 2020 |
|
| 2019 |
| ||
| Deferred tax assets: |
|
|
|
|
|
| ||
| Net operating tax loss carryforwards |
| $ | 18,179,682 |
|
| $ | 15,160,612 |
|
| Depreciation, depletion and amortization |
|
| 611,157 |
|
|
| 640,803 |
|
| Income from subsidiary |
|
| (201,005 | ) |
|
| — |
|
| Share-based compensation |
|
| 302,916 |
|
|
| 302,916 |
|
| Bad debt reserve |
|
| 43,692 |
|
|
| 39,977 |
|
| Other |
|
| — |
|
|
| 1 |
|
| Total deferred tax assets (liabilities) |
|
| 18,936,442 |
|
|
| 16,144,309 |
|
|
|
|
|
|
|
|
|
|
|
| Less: valuation allowance |
|
| (18,936,442 | ) |
|
| (16,144,309 | ) |
| Total |
| $ | — |
|
| $ | — |
|
The above estimates are based on management’s decisions concerning certain elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly.
The Company experienced an “ownership change” within the meaning of IRC Section 382 during the year ended March 31, 2017. As a result, certain limitations apply to the annual amount of net operating losses that can be used to offset post ownership change taxable income. The Company has estimated that $44.5 million of its pre-ownership change net operating loss could potentially be lost due to the IRC Section 382 limitation for the year ending March 31, 2017. This amount may increase if the Company experiences another ownership change(s) since the last ownership change. However, the income tax effect of those ownership change(s) should be nil as the Company had recorded a full valuation allowance against its deferred assets.
At March 31, 2020, the Company had estimated net operating loss carryforwards for federal income tax purposes of approximately $50 million, adjusted for the ownership change limitation discussed above, which will begin to expire, if not previously used, beginning in the fiscal year 2028. A valuation allowance has been established for the entire amount of the deferred tax assets for the years ended March 31, 2020 and March 31, 2019.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the 2017 Tax Cuts and Jobs Act (“2017 Tax Reform”). The 2017 Tax Reform significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. The Company has reasonably estimated the effects of the 2017 Tax Reform and recorded provisional amounts in the consolidated financial statements as of March 31, 2018. This amount is primarily comprised of the re-measurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21%, from 34%. The Company will continue to monitor additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, so we may make adjustments to the provisional amounts (if any). However, management’s opinion is that future adjustments due to the 2017 Tax Reform should not have a material impact on the Company’s provision for income taxes.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES ACT”). The CARES Act, among other things, includes provisions relating to net operating loss (“NOL”) carryback periods. The Company is evaluating the impact, if any, that the CARES Act may have on the Company’s future operations, financial position, and liquidity in fiscal year 2021. At this time, the Company does not expect to realize the benefits of the NOL carryback provisions.
The Company files income tax returns for federal and state purposes. Management believes that with few exceptions, the Company is not subject to examination by United States tax authorities for periods prior to 2016.
| F-34 |
| Table of Contents |
NOTE 15 – STOCKHOLDERS’ DEFICIT
Common Stock
On April 20, 2018, Discover was issued 5 shares of common stock as a result of true-ups in connection with the August 23, 2017 conversion of $35,000 of the principal amount of the debenture held by Discover.
During the quarter ended September 30, 2018, the Company issued a stock dividend on the Series B Preferred Stock consisting of 1 share (with a fair value of $15,625 based on the share price at September 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 $882 and stock dividends distributable but not issued based on the par value of the common stock issued. During the quarter ended September 30, 2018, the Company issued 1 share to settle a stock dividend accrued on Series B Preferred Stock.
On November 15, 2018, the Company entered into a consulting agreement with Regal Consulting (“Regal”), an investor relations firm, pursuant to which the firm agreed to provide the Company investor relations and consulting services for a period of six months, for monthly consideration of $28,000 and 7 restricted shares of the Company’s common stock. In January 2019, the Company issued 13 shares of restricted common stock to Regal Consulting for the months of November and December 2018, which shares were issued during the year ended March 31, 2019. On February 13, 2019, and effective on January 31, 2019, the Company entered into a First Amendment to the Consulting Agreement previously entered into with Regal Consulting. Pursuant to the First Amendment, the parties agreed to expand the investor relations services required to be provided by Regal Consulting under the agreement in consideration for $50,000 per month and 40 restricted shares of common stock per month (the “Regal Shares”)(which are fully-earned upon issuance) during the term of the agreement, and agreed to extend the term of the agreement until October 1, 2019 (unless the Company completes an acquisition or combination prior to such date). All of the Regal Shares had been earned and issued to Regal as of September 30, 2019. On October 15, 2019, the Company entered into a Settlement and Mutual Release Agreement (the “Release”) with Regal, pursuant to which it agreed to settle and terminate the consulting agreement with Regal. Pursuant to the Release, the Company agreed to issue Regal 1,514 shares of the Company’s restricted common stock and to pay Regal $17,500 in consideration for agreeing to terminate the agreement. The Company and Regal also provided each other mutual releases in connection with the Release. The 1,514 shares of common stock were issued to Regal on June 1, 2020.
On February 13, 2019, the Company entered into a letter agreement with SylvaCap Media (“SylvaCap”), pursuant to which SylvaCap agreed to act as the Company’s non-exclusive digital marketing service provider in consideration for an aggregate of 480 shares of restricted common stock (the “SylvaCap Shares”), which are fully-earned upon their issuance, and $50,000 per month during the term of the agreement, which ends on November 12, 2019 (unless the Company completes an acquisition or combination prior to such date) or upon termination by either party for cause. The Company also agreed to provide SylvaCap piggy-back registration rights in connection with the SylvaCap Shares and to pay SylvaCap $6,250 every three months as an expense reimbursement. The total value of the restricted shares of common stock due of $261,540 was accrued in common stock payable as of March 31, 2019. The 480 SylvaCap shares were issued in May 2019 and there are no shares due as of March 31, 2020.
During the year ended March 31, 2020, Discover and Discover Growth, which purchased shares of Series C Preferred Stock from the Company in December 2018, and which subsequently transferred all of its shares of Series C Preferred Stock to Discover, converted 11 shares of the Series C Preferred Stock with a face value of $110,000, and a total of 4,899,442 shares of common stock were issued, which includes additional shares for conversion premiums and true ups in connection with those conversions through March 31, 2020.
From April 1, 2019 to March 31, 2020, Discover was issued 29,073 shares of common stock as true-ups in connection with the October 31, 2018 conversion of the $495,000 remaining balance of principal owed under the terms of a convertible debenture. No additional shares were owed to Discover as of March 31, 2020, pursuant to the debenture.
| F-35 |
| Table of Contents |
Series A Convertible Preferred Stock
As of March 31, 2020 and 2019, the Company had no Series A Convertible Preferred Stock issued or outstanding.
Series B Redeemable Convertible Preferred Stock
As of March 31, 2020 and 2019, there were 0 and 44,000 shares of Series B Preferred Stock outstanding, respectively, 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 1/781,250 of one vote. |
During the quarter ended September 30, 2018, the Company issued a stock dividend on the Series B Preferred Stock consisting of 1 share of the Company’s common stock as described above.
On May 15, 2019, the Company entered into a conversion agreement with the then holder of all 44,000 shares of the Company’s then outstanding Series B Preferred Stock. Pursuant to the Conversion Agreement, all of the Series B Preferred Stock was converted into 1 share of the Company’s common stock pursuant to the stated terms of such Series B Preferred Stock, in consideration for $25,000 in cash due at the time of the parties entry into the agreement, which payment was made during the three months ended September 30, 2019. The holder also provided the Company a release in connection with certain of his rights under the Series B Preferred Stock (including any and all accrued and unpaid dividends) and certain other matters.
Effective on May 15, 2020, due to the fact that no shares of Series B Preferred Stock were outstanding, the Board of Directors approved, and the Company filed, a Certificate of Withdrawal of Certificate of Designation relating to such series of preferred stock with the Secretary of State of Nevada and terminated the designation of its Series B Preferred Stock effective as of the same date.
Series C Redeemable Convertible Preferred Stock
During the year ended March 31, 2020, the Company sold 525 shares of Series C Preferred Stock for total proceeds of $5 million. In the event the Merger Agreement entered into with Viking in February 2020 is terminated for any reason, we (until June 22, 2020, when such terms were amended) were required to redeem the 525 shares of Series C Preferred Stock which we sold during the year ended March 31, 2020, at a 110% premium, in an aggregate amount equal to $5,775,000. In addition, certain provisions of the Series C Preferred Stock may require the Company to redeem the stock, including the requirement to redeem 525 shares of Series C Preferred Stock in the event the Merger Agreement is terminated, are outside the control of the Company, the Series C Preferred Stock is classified as temporary. Temporary equity is a security with redemption features that are outside the control of the issuer, is not classified as an asset or liability in conformity with GAAP, and is not mandatorily redeemable.
During the year ended March 31, 2019, the Company sold and issued 1,577 shares of Series C Preferred Stock pursuant to the terms of a October 2017 Stock Purchase Agreement, October 2018 Stock Purchase Agreement and November 2018 Stock Purchase Agreement, for total consideration of $15 million. As of March 31, 2020 and 2019, there were 2,819 and 2,305 shares of Series C Preferred Stock outstanding, respectively.
During the year ended March 31, 2019, Discover and Discover Growth converted 404 shares of the Series C Preferred Stock with a face value of $4.04 million, and a total of 3,794 shares of common stock were issued, which includes additional shares for conversion premiums and true ups in connection with those conversions through March 31, 2019.
During the year ended March 31, 2020, Discover and Discover Growth converted 11 shares of the Series C Preferred Stock with a face value of $110,000, and a total of 4,899,442 shares of common stock were issued, which includes additional shares for conversion premiums and true ups in connection with those conversions through March 31, 2020.
Under certain circumstances, the Company may be required to issue additional common shares after the Series C Preferred Stock has been converted. The Company records an estimate of the obligation to issue additional shares as a derivative liability.
| F-36 |
| Table of Contents |
The Securities Purchase Agreements (“SPAs”) between the Company and the Investors regarding the purchase and sale of the Series C Preferred Shares require the Company to, among other things, timely file all reports required to be filed by Company pursuant to requirements of the SEC, and to maintain sufficient reserves from its duly authorized Common Stock for issuance of all Conversion Shares. On October 6, 2021, the Company received notice from the Investors that they believed the Company breached the SPAs for failing to comply with the foregoing two items, and the Notes contain a provision stating a breach by the Company of any terms within the SPA or COD is also a breach under the Notes, which would result in an immediate acceleration of the Notes at the holder’s option.
On October 9, 2021 the Company entered into agreements (the “October Agreements”) with each of the First Series C Preferred Stock investors, pursuant to which the investors agreed to refrain from declaring defaults or bringing a breach of contract action under the SPAs, and one investor, a noteholder, agreed to refrain from declaring defaults or bringing a breach of contract action under the Notes, in each case provided the Company: (i) within 30 days of the date of the October Agreements, amended the COD to provide that holders of the Preferred Shares will vote together with holders of common stock on all matters other than election of directors and shareholder proposals (including proposals initiated by any holders of Preferred Shares), on an as-if converted basis, subject to the beneficial ownership limitation in the COD, even if there are insufficient shares of authorized common stock to fully convert the Preferred Shares (the “COD Amendment Requirement”); (ii) files by November 19, 2021 all reports required to be filed by the Company with the SEC; and (iii) to implement and maintain, as soon as possible but no later than December 31, 2021, a sufficient reserve from its duly authorized Common Stock for issuance of all Conversion Shares
In November 2021, as a further accommodation to the Company and in order to help facilitate implementation of the Company’s business plans and continued trading on the NYSE American, the investors agreed to extend the deadline for the Filing Requirement to December 6, 2021. The Company did not meet satisfy the Filing Requirement.
As of March 31, 2020 and 2019, the Series C Preferred shares were convertible into a substantial number of the Company’s common shares which could result in significant dilution of the Company’s existing shareholders. If the outstanding Series C Preferred were converted as of March 31, 2020 and 2019, the Company estimates that the following common shares would be required to be issued to satisfy the conversion of the Series C Preferred shares:
|
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||
| Estimated number of shares issuable for conversion at $3.25 per share |
|
| 8,673,846 |
|
|
| 283,692 |
|
| Estimated number of common shares required to satisfy Conversion Premium using VWAP at period end |
|
| 129,932,618 |
|
|
| 9,892,800 |
|
|
|
|
| 138,606,464 |
|
|
| 10,176,492 |
|
Additionally. if the Series C preferred shares were converted on the above dates, the Company could be required to issue additional common shares (true-up shares).
As of March 31, 2020, the Company had 25,000,000 authorized common shares and 5,000,000 common shares outstanding. Under the terms of the Series C COD in effect as of that date, it did not clearly articulate the issue if there were an insufficient number of shares available for issuance. However, the Company believed that it was under no obligation to satisfy the conversion option in anything other than common shares and had a verbal agreement with the holder of this understanding. This understanding was later memorialized in the April 20, 2021 amendment which specifies that the Company is required to use its best efforts to obtain shareholder approval to increase the number of authorized shares to satisfy conversions. The Company is under no obligation to satisfy any requested conversions if there is an insufficient number of unissued authorized shares available.
The Certificates of Designations with respect to the Company’s Series C Preferred Stock and Series G Preferred Stock (collectively, the “CODs”) and/or the Stock Purchase Agreements regarding the sale of such Series C Preferred Stock and Series G Preferred Stock (collectively, the “SPA’s”), contain covenants requiring the Company to timely file all reports required to be filed by the Company pursuant to the Exchange Act (the “Filing Requirement”). The Company did not satisfy the Filing Requirement and, consequently, on or about March 9, 2022, the preferred stock holders, Discover and Antilles, filed a Verified Complaint against the Company (the “Discover/Antilles Complaint”) as a result of the default by the Company under the CODs. A default under the CODs and/or SPA’s is also considered an event of default under each of the Promissory Notes executed by the Company in favor of Discover (collectively, the “Discover Notes”) (see subsequent events), and upon an event of default under the Discover Notes, Discover may, at its option, declare the principal and any and all interest then accrued thereon, at once due and payable, and exercise any other rights under applicable agreements. Discover did not exercise its right to declare the amount owing under the Discover Notes immediately due and payable, but Failure by Discover to exercise such right does not constitute a waiver of the right to exercise the same in the event of any subsequent default. As of April 18, 2022, Discover, Antilles and the Company entered into a Settlement Agreement to settle the Discover/Antilles Complaint, and the Settlement Agreement was approved by the Court on or about May 12, 2022. If the Company fails to satisfy future Filing Requirements, it would be considered a default under the CODs and SPA’s, which in turn would constitute an event of default under the Discover Notes.
Series E Redeemable Convertible Preferred Stock and Series F Convertible Preferred Stock
As described above in “Note 1 – General“ and “Note 13 – Merger Agreement and Divestiture“, on the Closing Date, pursuant to the Lineal Plan of Merger, the Company acquired 100% of the ownership of Lineal from the Lineal Members in consideration for 1,000,000 of the newly issued shares of Series E Preferred Stock and 16,750 of the newly issued shares of Series F Preferred Stock and effective on December 31, 2019, the Company divested its ownership in Lineal and the Series E Preferred Stock and Series F Preferred Stock were returned to the Company and cancelled.
Effective on May 15, 2020, due to the fact that no shares of Series E Preferred Stock and Series F Preferred Stock were outstanding, the Board of Directors approved, and the Company filed, Certificates of Withdrawal of the Certificate of Designations relating to such series of preferred stock with the Secretary of State of Nevada and terminated the designation of its Series E Preferred Stock and Series F Preferred Stock effective as of the same date.
Warrants
The following is a summary of the Company’s outstanding warrants at March 31, 2020:
| Warrants |
|
| Exercise |
|
| Expiration |
| Intrinsic Value at |
| |||
| Outstanding |
|
| Price ($) |
|
| Date |
| March 31, 2020 |
| |||
|
| 1 | (1) |
|
| 1,171,875.00 |
|
| April 26, 2021 |
| $ | — |
|
|
| 3 | (2) |
|
| 195,312.50 |
|
| September 12, 2022 |
|
| — |
|
|
| 32 | (3) |
|
| 12,187.50 |
|
| May 24, 2023 |
|
| — |
|
|
| 36 |
|
|
|
|
|
|
|
| $ | — |
|
| (1) | 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. |
| (2) | Warrants issued in connection with funding. The warrants were exercisable on the grant date (September 12, 2017) and remain exercisable until September 12, 2022. |
| (3)
| Warrants issued in connection with a Severance Agreement with Richard N. Azar II, the Company’s former Chief Executive Officer. The warrants were exercisable on the grant date (May 25, 2018) and remain exercisable until May 24, 2023. |
NOTE 16 – SHARE-BASED COMPENSATION
Common Stock
The Company stockholders approved the 2014 Stock Incentive Plan (as amended to date, the “2014 Plan”) at the annual stockholder meeting held on February 13, 2014. The 2014 Plan provides the Company with the ability to offer up to 2.5 million (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; or (vi) any combination of the foregoing, to employees, consultants and contractors as provided in the 2014 Plan.
The Company stockholders approved the Lucas Energy, Inc. 2012 Stock Incentive Plan (“2012 Incentive Plan”) at the annual stockholder meeting held on December 16, 2011. The 2012 Incentive Plan provides the Company with the ability to offer (i) incentive stock options (to eligible employees only); (ii) nonqualified stock options; (iii) restricted stock; (iv) stock awards; (v) shares in performance of services; or (vi) any combination of the foregoing, to employees, consultants and contractors as provided in the 2012 Incentive Plan.
| F-37 |
| Table of Contents |
The Company stockholders approved the Lucas Energy, Inc. 2010 Long Term Incentive Plan (“2010 Incentive Plan” or ”2010 Plan”) at the annual stockholder meeting held on March 30, 2010. The 2010 Incentive Plan provides the Company with the ability to offer (1) incentive stock options, (2) non-qualified stock options, and (3) restricted shares (i.e., shares subject to such restrictions, if any, as determined by the Compensation Committee or the Board) to employees, consultants and contractors as performance incentives.
Under the 2010 Incentive Plan, 58 shares of the Company’s common stock are authorized for initial issuance or grant, under the 2012 Incentive Plan, 96 shares of the Company’s common stock are authorized for initial issuance or grant, and under the 2014 Incentive Plan, as amended, 2,500,000 shares of the Company’s common stock are authorized for issuance or grant. As of March 31, 2020, there was an aggregate of 1 share available for issuance or grant under the 2010 Incentive Plan, 5 shares were available for issuance or grant under the 2012 Incentive Plan and an aggregate of approximately 1,999 securities were available for issuance or grant under the 2014 Incentive Plan as amended for future issuances and grants, respectively. The number of securities available under the 2010, 2012 and 2014 Plans is reduced one for one for each security delivered pursuant to an award under the Plans. Any issued or granted security that becomes available due to expiration, forfeiture, surrender, cancellation, termination or settlement in cash of an award under the Incentive Plans may be requested and used as part of a new award under the Plans.
The Plans are administered by the Compensation Committee and/or the Board in its discretion (the “Committee”). The Committee interprets the Plans and has broad discretion to select the eligible persons to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the exercise price of stock options, the number of shares subject to awards, the expiration date of awards, and the vesting schedule or other restrictions applicable to awards.
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
The following summarizes Camber’s stock option activity for each of the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||||||||||
|
|
| Number of Stock |
|
| Weighted Average Exercise Price |
|
| Number of Stock |
|
| Weighted Average Exercise Price |
| ||||
| Outstanding at Beginning of Year |
|
| 2 |
|
| $ | 40,429,700 |
|
|
| 2 |
|
| $ | 40,429,700 |
|
| Expired/Cancelled |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| Outstanding at End of Year |
|
| 2 |
|
| $ | 40,429,700 |
|
|
| 2 |
|
| $ | 40,429,700 |
|
Of the Company’s outstanding options, no options were exercised or forfeited during the years ended March 31, 2020 and 2019, respectively. Compensation expense related to stock options during the years ended March 31, 2020 and 2019 was $0.
Options outstanding and exercisable at March 31, 2020 and 2019 had no intrinsic value. The intrinsic value is based upon the difference between the market price of Camber’s common stock on the date of exercise and the grant price of the stock options.
As of March 31, 2020 and 2019, there was no remaining unrecognized share-based compensation expense related to all non-vested stock options, respectively.
| F-38 |
| Table of Contents |
Options outstanding and exercisable as of March 31, 2020:
| Exercise |
|
| Remaining |
|
| Options |
|
| Options |
| ||||
| Price ($) |
|
| Life (Yrs.) |
|
| Outstanding |
|
| Exercisable |
| ||||
|
| 40,429,700 |
|
|
| 0.50 |
|
|
| 2 |
|
|
| 2 |
|
|
|
|
|
| Total |
|
|
| 2 |
|
|
| 2 |
| |
NOTE 17– INCOME (LOSS) PER COMMON SHARE
The calculation of earnings (loss) per share for the years ended March 31, 2020 and 2019 was as follows:
|
|
| Year Ended |
| |||||
|
|
| March 31, |
| |||||
|
|
| 2020 (as Restated) |
|
| 2019 (as Restated) |
| ||
| Numerator: |
|
|
|
|
|
| ||
| Income (loss) |
| $ | (27,958,169 | ) |
| $ | (42,036,100 | ) |
| Less preferred dividends |
|
| (7,131,495 | ) |
|
| (613,594 | ) |
| Net loss attributable to common stockholders |
| $ | (35,089,664 | ) |
| $ | (42,649,694 | ) |
|
|
|
|
|
|
|
|
|
|
| Denominator |
|
|
|
|
|
|
|
|
| Weighted average share – basic |
|
| 2,109,622 |
|
|
| 3,951 |
|
|
|
|
|
|
|
|
|
|
|
| Dilutive effect of common stock equivalents |
|
|
|
|
|
|
|
|
| Options/warrants |
|
| — |
|
|
| — |
|
| Denominator |
|
|
|
|
|
|
|
|
| Total Weighted average shares – diluted |
|
| 2,109,622 |
|
|
| 3,951 |
|
| Income (loss) per share – basic |
|
|
|
|
|
|
|
|
| Continuing operations |
| $ | (16.64 | ) |
| $ | (10,794.66 | ) |
| Income (loss) per share – diluted |
|
|
|
|
|
|
|
|
| Continuing Operations |
| $ | (16.64 | ) |
| $ | (10,794.66 | ) |
For the year ended March 31, 2019, the effect of the common stock equivalents was anti-dilutive. Consequently, basic and dilutive earning per share are the same. For the years ended March 31, 2020 and 2019, the following share equivalents related to convertible debt and warrants to purchase shares of common stock were excluded from the computation of diluted net income (loss) per share as the inclusion of such shares would be anti-dilutive (assuming the maximum possible conversion price).
|
|
| 2020 |
|
| 2019 |
| ||
| Common Shares Issuable for: |
|
|
|
|
|
| ||
| Convertible Debt |
|
| 276 |
|
|
| — |
|
| Options and Warrants |
|
| 38 |
|
|
| 41 |
|
| Series C Preferred Shares |
|
| 138,606,464 |
|
|
| 10,176,492 |
|
| Total |
|
| 138,606,778 |
|
|
| 10,176,533 |
|
NOTE 18 – SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for interest and income taxes was as follows for the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Interest |
| $ | 14,771 |
|
| $ | 842,520 |
|
| Income taxes |
| $ | — |
|
| $ | — |
|
| F-39 |
| Table of Contents |
Non-cash investing and financing activities for the years ended March 31, 2020 and 2019 included the following:
|
|
| 2020 |
|
| 2019 |
| ||
|
|
|
|
|
|
|
| ||
| Reduction in Accounts Payable for Payments Made on Previously Accrued Capital Expenditures |
| $ | — |
|
| $ | 547,033 |
|
| Change in Estimate for Asset Retirement Obligations |
| $ | 85,069 |
|
| $ | 19,461 |
|
| Issuance of Common Stock for Payment of Consulting Fees |
| $ | — |
|
| $ | 234,430 |
|
| Settlement of Common Stock Payable |
| $ | 331,030 |
|
| $ | — |
|
| Conversion of Preferred B Shares to Common Stock |
| $ | 44 |
|
| $ | 365 |
|
|
|
|
|
|
|
|
|
|
|
| Conversion of Notes and Accrued Interest to Common Stock |
| $ | — |
|
| $ | 917,104 |
|
| Conversion of Preferred Stock to Common Stock |
| $ | 4,899 |
|
| $ | 4 |
|
| Warrants Issued in Abeyance |
| $ | 29 |
|
| $ | — |
|
| Issuance of Common Stock for Dividends |
| $ | 3 |
|
| $ | 2,782 |
|
Note 19 – FAIR VALUE MEASUREMENTS
When applying fair value principles in the valuation of assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the fiscal years presented. The fair value estimates take into consideration the credit risk of both the Company and its counterparties.
When active market quotes are not available for financial assets and liabilities, the Company uses industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including credit risk, interest rate curves, foreign currency rates and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value. Generally, the fair value of our Level 3 instruments are estimated as the net present value of expected future cash flows based on internal and external inputs.
Fair Value Measurements
The liabilities carried at fair value as of March 31, 2020 and March 31, 2019 were as follows:
|
|
| March 31, 2020 |
| |||||||||||||
|
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
| Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Derivative liability |
| $ | 77,636,666 |
|
| $ | — |
|
| $ | — |
|
| $ | 77,636,666 |
|
| Total liabilities at fair value |
| $ | 77,636,666 |
|
| $ | — |
|
| $ | — |
|
| $ | 77,636,666 |
|
|
|
| March 31, 2019 |
| |||||||||||||
|
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
| Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Derivative liability |
| $ | 60,303,479 |
|
| $ | — |
|
| $ | — |
|
| $ | 60,303,479 |
|
| Total liabilities at fair value |
| $ | 60,303,479 |
|
| $ | — |
|
| $ | — |
|
| $ | 60,303,479 |
|
The derivative liabilities relating to the Series C Preferred Stock are considered level 3 because, under certain circumstances the closing price of the Company’s common stock as quoted on the NYSE American stock exchange may not represent fair value and require adjustment (see note 10). There were no transfers in or out of Level 3 for the year ended March 31, 2020 or 2019.
| F-40 |
| Table of Contents |
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
In addition to the financial instruments that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a non-recurring basis as required by U.S. GAAP. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges or as part of a business combination. As discussed in “Note 13 – Merger Agreement and Divestiture” , during the year ended March 31, 2020, the Company recorded non-recurring fair value measurements related to the Lineal Plan of Merger. These fair value measurements were classified as Level 3 within the fair value hierarchy.
Additionally, the Series E Preferred Stock and Series F Preferred Stock were considered contingently redeemable preferred stock and were classified as mezzanine equity during the period. The fair value of these instruments was estimated as part of the accounting for the Lineal Plan of Merger described in “Note 13 – Merger Agreement and Divestiture”. Effective December 31, 2019, the Series E and Series F Preferred Stock were returned to the Company and cancelled as part of the Lineal Divestiture. Immediately prior to the Lineal Divestiture, the estimated fair value of the Series E and Series F Preferred Stock was determined using an income valuation approach to estimate the future cash flows of the Lineal business as of December 31, 2019, including an analysis of the terms and rights of each class of equity and their current value based on the disposition of the Lineal business. No Series E and Series F Preferred Stock was outstanding as of March 31, 2020.
NOTE 20 – RELATED PARTY TRANSACTIONS
Effective August 1, 2018, the Company entered into a month-to-month lease at 1415 Louisiana, Suite 3500 Houston, Texas 77002 with BlackBriar Advisors LLC (“BlackBriar”). Pursuant to the sublease, BlackBriar is providing us, without charge, use of the office space in Houston, Texas. BlackBriar is affiliated with the Company’s former Chief Financial Officer.
During the years ended March 31, 2020 and 2019, the Company paid Louis G. Schott, the interim chief executive officer consulting and other fees of $334,453 and $358,120 respectively.
During the years ended March 31, 2020 and 2019, the Company paid Robert Schleizer, the former chief financial officer, consulting and directors of $538,333 and $739,666 respectively, either directly or through owned or controlled by him.
During the year ended March 31, 2019 the Company paid Richard N. Azar, the former Chief Executive Officer consulting and other fees of $454,000 and warrants valued at $390,000.
During the years ended March 31, 2020 and 2019 the Company paid Fred Zeidman directors fees of $53,333 annually.
During the year ended March 31, 2020 the Company paid James Miller directors fees of $53,333.
NOTE 21– SUBSEQUENT EVENTS
Authorized Shares of Common Stock:
On April 16, 2020, pursuant to the authorization and approval provided by the stockholders of the Company at the special meeting of stockholders held on April 16, 2020, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to increase its authorized shares of common stock, $0.001 par value per share, from 5 million shares to 25 million shares, which filing became effective on the same date.
On February 23, 2021, pursuant to the authorization and approval provided by the stockholders of the Company at the special meeting of stockholders held on February 23, 2021, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to increase its authorized shares of common stock, $0.001 par value per share, from 25 million shares to 250 million shares, which filing became effective on the same date.
On December 30, 2021, pursuant to the authorization and approval provided by the stockholders of the Company at the special meeting of stockholders held on December 30, 2021, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to increase its authorized shares of common stock, $0.001 par value per share, from 250 million shares to 1 billion shares, which filing became effective on the same date.
Consulting Agreements:
On February 15, 2020, the Company entered into a letter agreement (“Sylva Agreement”) with Sylva International LLC d/b/a SylvaCap Media (“SylvaCap”), pursuant to which SylvaCap agreed to act as the Company’s non-exclusive digital marketing service provider in consideration for an aggregate of 100,000 shares of restricted common stock (the “SylvaCap Shares”), which are fully-earned upon their issuance, and $50,000 per month during the term of the agreement, which was to end on June 15, 2020. On May 12, 2020, the Company entered into the first amendment to the Sylva Agreement. Pursuant to the amendment, the Company and SylvaCap extended the term of the letter agreement to October 19, 2020. The SylvaCap Shares were issued on May 15, 2020.
On January 6, 2021, the Company entered into a letter agreement SylvaCap (the “2021 Sylva Agreement”), pursuant to which SylvaCap agreed to act as the Company’s non-exclusive digital marketing service provider in consideration for an aggregate of 275,000 shares of restricted common stock, which are fully-earned upon their issuance, and $50,000 per month during the term of the agreement, which was to end on December 31, 2021.On or about January 1, 2022, the Company and SylvaCap extended the term of the 2021 Sylva Agreement to June 30, 2022, and the Company agreed to issue SylvaCap an additional 150,000 shares of restricted common stock. The monthly cash fee remained the same.
On or about January 11, 2021, the Company entered into a consulting agreement with Agro Consulting, LLC (“Agro”) pursuant to which Agro agreed to provide services, including introductions to business development and acquisition opportunities, to the Company for a 4-month period ending May 11, 2021. The Company agreed to pay Agro a consulting fee of $195,000, payable, at the Company’s option, in cash or shares of restricted common stock of the Company based on a share price equal to the closing price of the Company’s common stock on January 11, 2021. The Company opted to pay $25,000 in cash and $170,000 in stock. On or about February 25, 2021 the parties entered into an amending agreement to extend the term to November 15, 2021, in exchange for which the Company agreed to pay Agro a fee of $295,000, which the Company opted to pay $25,000 in cash and $270,000 in stock (based on the same stock price as per the original agreement). On or about April 22, 2021 the parties entered into a second amending agreement to extend the term to March 15, 2022, in exchange for which the Company agreed to pay Agro a cash fee of $50,000 and issue to Agro 360,000 shares of restricted common stock. On or about July 28, 2021 the parties entered into a third amending agreement to extend the term to August 31, 2022, in exchange for which the Company agreed to pay Agro a cash fee of $50,000 and issue to Agro 450,000 shares of restricted common stock.
On or about April 22, 2021, the Company entered into a letter agreement with Regal Consulting LLC (“Regal”), pursuant to which Regal agreed to provide the Company with strategic consulting and business advisory services in consideration for warrants entitling Regal to purchase 100,000 shares of common stock (the “Regal Warrants”), and $20,000 per month during the term of the agreement, which was to end on October 22, 2021. The Regal Warrants have a one-year term and an exercise price equal to closing price of the Company’s common stock on April 22, 2021. On October 14, 2021, the Company entered into an amendment to the agreement to extend the term to April 22, 2022. Pursuant to the amendment, the Company and SylvaCap extended the term of the letter agreement to October 19, 2020, and the Company agreed to issue Regal 5,000 shares of restricted common stock per month during the extended term.
Shares of Series A, Series B, Series E and Series F Convertible Preferred Stock:
The Company previously designated (a) 2,000 shares of preferred stock as Series A Convertible Preferred Stock (November 2011); (b) 600,000 shares of preferred stock as Series B Redeemable Convertible Preferred Stock (Amended and Restated on August 2016); (c) 50,000 shares of preferred stock as Series D Convertible Preferred Stock (July 2019); (d) 1,000,000 shares of preferred stock as Series E Redeemable Convertible Preferred Stock (July 2019); and (e) 16,750 shares of preferred stock as Series F Redeemable Preferred Stock (July 2019).
Effective May 15, 2020, due to the fact that no shares of Series A Convertible Preferred Stock, Series B Redeemable Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E Redeemable Convertible Preferred Stock or Series F Redeemable Preferred Stock were outstanding, the Board of Directors approved, and the Company filed, Certificate of Withdrawal of Certificate of Designations relating to such series of preferred stock with the Secretary of State of Nevada and terminated the designation of its Series A Convertible Preferred Stock, Series B Redeemable Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E Redeemable Convertible Preferred Stock and Series F Redeemable Preferred Stock effective as of the same date. As a result, the only preferred stock which is currently designated by the Company is the Company’s Series C Redeemable Convertible Preferred Stock.
| F-41 |
| Table of Contents |
Shares of Series C Preferred Stock:
Conversions of Series C Stock in 2020:
From April 1, 2020 through December 31, 2020, Discover converted 756 shares of Series C Preferred Stock into approximately 19,823,487 shares of common stock.
Sales of Series C Stock in 2020:
On and effective June 22, 2020, the Company and Discover entered into a Stock Purchase Agreement (the “June 2020 Purchase Agreement”), pursuant to which Discover purchased 630 shares of Series C Preferred Stock for $6 million, at a 5% original issue discount to the $10,000 face value of such preferred stock (the “Face Value”). Pursuant to the June 2020 Purchase Agreement, as long as Discover holds any shares of Series C Preferred Stock, the Company agreed that, except as contemplated in connection with the Merger, the Company would not issue or enter into or amend an agreement pursuant to which the Company may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price. The Company also agreed that it would not issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock.
Additionally, provided that the Company has not materially breached the terms of the June 2020 Purchase Agreement, the Company may at any time, in its sole and absolute discretion, repurchase from Discover all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Discover 110% of the aggregate face value of all such shares.
The Company also agreed to provide Discover a right of first offer to match any offer for financing the Company receives from any person while the shares of Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, the Company agreed that if it issues any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then the Company would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover.
The Company agreed pursuant to the June 2020 Purchase Agreement that if the Merger does not close by the required date approved by the parties thereto (as such may be extended from time to time), the Company is required, at Discover’s option, in its sole and absolute discretion, to immediately repurchase from Discover all then outstanding Series C Preferred Stock shares acquired by Discover pursuant to the June 2020 Purchase Agreement, by paying to Discover 110% of the aggregate Face Value of all such shares (the “Repurchase Requirement”), which totals $6,930,000.
| F-42 |
| Table of Contents |
Finally, the Company agreed to include proposals relating to the approval of the June 2020 Purchase Agreement and the issuance of the shares of common stock upon conversion of the Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement, as well as an increase in authorized common stock to fulfill the Company’s obligations to issue such shares, at the meeting held to approve the Merger or a separate meeting in the event the Merger is terminated prior to shareholder approval, and to use commercially reasonable best efforts to obtain such approvals as soon as possible and in any event prior to December 31, 2020.
On June 22, 2020, the Company and Discover entered into an Amendment to Stock Purchase Agreement (the “SPA Amendment”), pursuant to which Discover agreed to terminate the obligation set forth in the Stock Purchase Agreement previously entered into between the Company and Discover on February 3, 2020, which contained a Repurchase Requirement substantially similar to the one contained in the June 2020 Purchase Agreement (as to the 525 shares of Series C Preferred Stock sold to Discover on February 3, 2020), which would have required that the Company pay Discover an aggregate of $5,775,000 in connection with the redemption of the 525 shares of Series C Preferred Stock the Company sold to Discover in the event the Merger was terminated.
On December 11, 2020, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Discover. The transactions contemplated by the Exchange Agreement closed on December 11, 2020. Pursuant to the Exchange Agreement, as an accommodation to the Company, and in order to reduce the potential dilutive impact of the Series C Preferred Stock, by reducing the number of outstanding shares of Series C Preferred Stock, the Investor exchanged 600 shares of Series C Preferred Stock, which had an aggregate face value of $6,000,000 (600 shares each with a face value of $10,000 per share), for a $6,000,000 secured Promissory.
Sales of Series C Stock in 2021:
On January 8, 2021, the Company issued, effective December 31, 2020, 1,890 shares of Series C Stock to EMC Capital Partners, LLC, and received 16,153,846 shares of Viking common stock as consideration.
On or about July 9, 2021, Antilles Family Office, LLC purchased 1,575 shares of Series C Stock from the Company for $15 million.
True-Up Issuances in 2021:
Between February 23, 2021 and June 17, 2021, the Company issued Discover 43,970,077 shares of common stock in connection with the shares of Series C Stock converted by Discover in 2020. This “true-up” entitlement was a result of the price of the Company’s common stock being lower during the portion of the Measurement Period following the initial conversions than the low VWAP of the common stock during the portion of the Measurement Period prior to the initial conversions.
On September 1, 2021, the Company issued 10,360,076 shares of common stock to Discover in connection with a true-up notice from Discover. The Company disputed the issuance but issued the shares on a without prejudice basis. In October, 2021, as part of a forbearance arrangement entered into with Discover in connection with the Company not filing all reports required with the Securities and Exchange Commission, the Company acknowledged that all prior conversion notices issued by Discover were true and correct.
Conversions of Series C Stock in 2021:
From June 18, 2021 through December 31, 2021, Discover converted 1,575 shares of Series C Preferred Stock into approximately 174,218,536 shares of common stock.
From September 14, 2021 through December 31, 2021, EMC converted 97 shares of Series C Preferred Stock into approximately 12,443,320 shares of common stock.
Redemptions of Series C Stock in 2022:
On or about January 3, 2022, the Company purchased for cancellation 1,664 shares of Series C Stock held by EMC Capital Partners, LLC for a redemption price of $18,850,000.
True-Up Issuances in 2022:
Between January 18, 2022 and February 22, 2022, the Company issued Discover 38,185,136 shares of common stock in connection with the shares of Series C Stock converted by Discover in 2021. This “true-up” entitlement was a result of the price of the Company’s common stock being lower during the portion of the Measurement Period following the initial conversions than the low VWAP of the common stock during the portion of the Measurement Period prior to the initial conversions
Conversions of Series C Stock in 2022:
On or about January 4, 2022, EMC converted 129 shares of Series C Preferred Stock, entitling EMC to receive 16,548,332 shares of common stock, of which 2,052,507 shares of common stock were issued to EMC and the balance of 14,495,825 were issued May 16, 2022.
From February 23, 2022 through March 7, 2022, Discover converted 488 shares of Series C Preferred Stock into approximately 62,601,441 shares of common stock. On May 16, 2022, Discover converted their remaining 30 shares of Series C Preferred Stock into 3,848,450 shares of common stock.
On May 16, 2022, Antilles converted 400 shares of Series C Preferred Stock into approximately 35,834,731 shares of common stock.
Outstanding Series C Stock
As of May 16, 2022, Discover no longer holds any Series C Preferred Stock and Antilles holds 1,175 shares of Series C Preferred Stock. Based on applicable conversion metrics and entitlements set out in the COD, the Company estimates the number of common shares issuable to Antilles on the conversion of such shares of Series C Preferred Stock to be as follows:
Common Shares Potentially Issuable to Antilles:
| Antilles Family Office - Est. Common Share Calc. |
|
|
| |
| Conversion Price for Preferred Stock |
|
| 3.25 |
|
| Camber Common Share Price |
|
| 0.4503 |
|
| Price for Calculating Conversion Premium (i.e. 85% of VWAP less $0.10) |
| $ | 0.2828 |
|
| Series C Pref Shares |
|
| 1,175 |
|
| Face value per share |
| $ | 10,000 |
|
| Total value |
| $ | 11,750,000 |
|
| Annual Conversion Premium |
|
| 4,106,625 |
|
| Total conversion Premium (7 years guaranteed) |
| $ | 28,746,375 |
|
| Underlying common shares for Face Value Portion |
|
| 3,315,385 |
|
| Underlying common shares for Conversion Premium |
|
| 101,649,134 |
|
| Total Potential Shares |
|
| 104,394,519 |
|
| Less: Converted |
|
|
|
|
| Balance |
|
| 104,394,519 |
|
Dealings with Viking Energy Group, Inc.
Amendments to and Termination of 2020 Merger Agreement:
On May 27, 2020, Viking and Camber entered into the First Amendment to Agreement and Plan of Merger (the “First Amendment”) to amend the Merger Agreement to (i) modify the Camber Percentage (as defined below) adjustment mechanism to cap the aggregate Camber Percentage Increase (as defined below) or Camber Percentage Decrease (as defined below) at 5%; (ii) modify the events resulting in such adjustments; (iii) correct a prior error with such calculation which discussed Camber being required to have $4 million in cash at closing; and (iv) agree that neither party will raise capital from the other party’s existing shareholders without the prior written consent of the other party.
On June 15, 2020, Viking and the Company entered into a Second Amendment to Agreement and Plan of Merger (the “Second Amendment”) to amend the Merger Agreement to extend the date after which the Merger Agreement can be cancelled by either the Company or Viking, if not completed thereby, from June 30, 2020 to September 30, 2020.
On and effective June 22, 2020, the Company and Discover entered into a Stock Purchase Agreement (the “June 2020 Purchase Agreement”), pursuant to which Discover purchased 630 shares of Series C Preferred Stock for $6 million, at a 5% original issue discount to the $10,000 face value of such preferred stock (the “Face Value”). Pursuant to the June 2020 Purchase Agreement, as long as Discover holds any shares of Series C Preferred Stock, the Company agreed that, except as contemplated in connection with the Merger, the Company would not issue or enter into or amend an agreement pursuant to which the Company may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price. The Company also agreed that it would not issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock.
| F-43 |
| Table of Contents |
Additionally, provided that the Company has not materially breached the terms of the June 2020 Purchase Agreement, the Company may at any time, in its sole and absolute discretion, repurchase from Discover all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Discover 110% of the aggregate face value of all such shares.
The Company also agreed to provide Discover a right of first offer to match any offer for financing the Company receives from any person while the shares of Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, the Company agreed that if it issues any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then the Company would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover.
The Company agreed pursuant to the June 2020 Purchase Agreement that if the Merger does not close by the required date approved by the parties thereto (as such may be extended from time to time), the Company is required, at Discover’s option, in its sole and absolute discretion, to immediately repurchase from Discover all then outstanding Series C Preferred Stock shares acquired by Discover pursuant to the June 2020 Purchase Agreement, by paying to Discover 110% of the aggregate Face Value of all such shares (the “Repurchase Requirement”), which totals $6,930,000.
Finally, the Company agreed to include proposals relating to the approval of the June 2020 Purchase Agreement and the issuance of the shares of common stock upon conversion of the Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement, as well as an increase in authorized common stock to fulfill the Company’s obligations to issue such shares, at the meeting held to approve the Merger or a separate meeting in the event the Merger is terminated prior to shareholder approval, and to use commercially reasonable best efforts to obtain such approvals as soon as possible and in any event prior to December 31, 2020.
On June 22, 2020, the Company and Discover entered into an Amendment to Stock Purchase Agreement (the “SPA Amendment”), pursuant to which Discover agreed to terminate the obligation set forth in the Stock Purchase Agreement previously entered into between the Company and Discover on February 3, 2020, which contained a Repurchase Requirement substantially similar to the one contained in the June 2020 Purchase Agreement (as to the 525 shares of Series C Preferred Stock sold to Discover on February 3, 2020), which would have required that the Company pay Discover an aggregate of $5,775,000 in connection with the redemption of the 525 shares of Series C Preferred Stock the Company sold to Discover in the event the Merger was terminated.
On June 25, 2020, the Company and Viking entered into a Third Amendment to Agreement and Plan of Merger, which (i) provided for the entry into the June 2020 SPA (defined below)
On June 25, 2020, the Company loaned Viking an additional $4.2 million, pursuant to the terms of a Securities Purchase Agreement, which was entered into on the same date (the “June 2020 SPA”). The $4.2 million loan was evidenced by a 10.5% Secured Promissory Note (the “June 2020 Secured Note” and together with the February 2020 Secured Note, the “Secured Notes”), the repayment of which was secured by the terms of a Security and Pledge Agreement. The June 2020 Secured Note has substantially similar terms as the February 3, 2020 10.5% Secured Note discussed under “Note 6 – Plan of Merger and Investment in Unconsolidated Entity“, and substantially similar security obligations of Viking in connection therewith.
As additional consideration for the Company making the loan to Viking, Viking assigned the Company an additional 5% of Elysium pursuant to the terms of an Assignment of Membership Interests dated June 25, 2020, which brings the Company’s current total ownership of Elysium up to 30%.
| F-44 |
| Table of Contents |
December 23, 2020 Transaction:
On December 23, 2020, the Company entered into a Securities Purchase Agreement with Viking, pursuant to which Camber acquired (“Camber’s Acquisition”) 26,274,510 shares of Viking common stock (“Camber’s Viking Shares”), which constituted 51% of the total outstanding common stock of Viking, in consideration of (i) Camber’s payment of $10,900,000 to Viking (the “Cash Purchase Price”), and (ii) cancellation of $9,200,000 in promissory notes issued by Viking to Camber (“Camber’s Viking Notes”). Pursuant to the purchase agreement, Viking is obligated to issue additional shares of Viking common stock to Camber to ensure that Camber shall own at least 51% of the common stock of Viking through July 1, 2022.
In connection with Camber’s Acquisition, the Company and Viking terminated their previous merger agreement, dated August 31, 2020, as amended, and the Company assigned its membership interests in one of Viking’s subsidiaries, Elysium Energy Holdings, LLC, to Viking. Also in connection with Camber’s Acquisition, effective December 23, 2020, the Company (i) borrowed $12,000,000 from an institutional investor; (ii) issued the investor a promissory note in the principal amount of $12,000,000, accruing interest at the rate of 10% per annum and maturing December 11, 2022 (the “Camber Investor Note”); (iii) granted the Investor a first-priority security interest in Camber’s Viking Shares and Camber’s other assets pursuant to a pledge agreement and a general security agreement, respectively; and (iv) entered into an amendment to the Company’s $6,000,000 promissory note previously issued to the investor dated December 11, 2020 (the “Additional Camber Investor Note”), amending the acceleration provision of the note to provide that the note repayment obligations would not accelerate if the Company increased its authorized capital stock by March 11, 2021 (and the Company increased its authorized capital stock in February 2021 as required). In order to close Camber’s Acquisition, effective December 23, 2020, Viking entered into a Guaranty Agreement, guaranteeing repayment of the Camber Investor Note and the Additional Camber Investor Note.
On December 23, 2020, the Camber Investor Note was funded, and the Company and Viking closed Camber’s Acquisition, with the Company paying the Cash Purchase Price to Viking and cancelling Camber’s Viking Notes, as additional consideration. In exchange, Viking issued 26,274,510 shares of its common stock to Camber, representing 51% of Viking’s total outstanding common shares, the Viking Shares. At the closing, James Doris and Frank Barker, Jr., Viking’s CEO and CFO, were appointed the CEO and CFO of Camber, and Mr. Doris was appointed a member of the Board of Directors of Camber.
Extinguishment of $18.9 million Promissory Note:
On January 8, 2021, the Company entered into another purchase agreement with Viking pursuant to which the Company agreed to acquire an additional 16,153,846 shares of Viking common stock (the “Shares”) in consideration of (i) the Company issuing 1,890 shares of Camber’s Series C Redeemable Convertible Preferred Stock to EMC Capital Partners, LLC (“EMC”), one of the Viking’s lenders which held a secured promissory note issued by Viking to EMC in the original principal amount of $20,869,218 in connection with the purchase of oil and gas assets on or about February 3, 2020 (the “EMC Note”); and (ii) EMC considering the EMC Note paid in full and cancelled pursuant to the Cancellation Agreement described below.
Simultaneously, on January 8, 2021, Viking entered into a Cancellation Agreement with EMC (the “Cancellation Agreement”) pursuant to which Viking agreed to pay $325,000 to EMC, and EMC agreed to cancel and terminate in the EMC Note and all other liabilities, claims, amounts owing and other obligations under the Note. At the same time, the Company entered into a purchase agreement with EMC pursuant to which (i) the Company agreed to issue 1,890 shares of Camber’s Series C Redeemable Convertible Preferred Stock to EMC, and (ii) EMC agreed to enter into the Cancellation Agreement with Viking to cancel the EMC Note.
February 2021 Merger Agreement with Viking :
On February 15, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Viking. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, a newly-formed wholly-owned subsidiary of Camber (“Merger Sub”) will merge with and into Viking (the “Merger”), with Viking surviving the Merger as a wholly-owned subsidiary of the Company.
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Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share: (i) of common stock, of Viking (the “Viking Common Stock”) issued and outstanding immediately prior to the Effective Time, other than shares owned by Camber, Viking and Merger Sub, will be converted into the right to receive one share of common stock of the Company; and (ii) of Series C Convertible Preferred Stock of Viking (the “Viking Preferred Stock”) issued and outstanding immediately prior to the Effective Time will be converted into the right to receive one share of Series A Convertible Preferred Stock of the Company (the “Camber Series A Preferred Stock”). Each share of Camber Series A Preferred Stock will convert into 890 shares of common stock of Camber (subject to a beneficial ownership limitation preventing conversion into Camber common stock if the holder would be deemed to beneficially own more than 9.99% of the Company’s common stock), will be treated equally with the Company’s common stock with respect to dividends and liquidation, and will only have voting rights with respect to voting: (a) on a proposal to increase or reduce the Company’s share capital; (b) on a resolution to approve the terms of a buy-back agreement; (c) on a proposal to wind up Camber; (d) on a proposal for the disposal of all or substantially all of Camber’s property, business and undertaking; (f) during the winding-up of Camber; and/or (g) with respect to a proposed merger or consolidation in which Camber is a party or a subsidiary of Camber is a party. Holders of Viking Common Stock and Viking Preferred Stock will have any fractional shares of Camber common stock or preferred stock after the Merger rounded up to the nearest whole share.
At the Effective Time, each outstanding Viking equity award, will be converted into the right to receive the merger consideration in respect of each share of Viking Common Stock underlying such equity award and, in the case of Viking stock options, be converted into vested Camber stock options based on the merger exchange ratio calculated as provided above (the “Exchange Ratio”).
The Merger Agreement provides, among other things, that effective as of the Effective Time, James A. Doris, the current Chief Executive Officer of both the Company and Viking, shall continue to serve as President and Chief Executive Officer following the Effective Time. The Merger Agreement provides that, as of the Effective Time, the Combined Company will have its headquarters in Houston, Texas.
The Merger Agreement also provides that, during the period from the date of the Merger Agreement until the Effective Time, each of Viking and the Company will be subject to certain restrictions on its ability to solicit alternative acquisition proposals from third parties, to provide non-public information to third parties and to engage in discussions with third parties regarding alternative acquisition proposals, subject to customary exceptions. Viking is required to hold a meeting of its stockholders to vote upon the adoption of the Merger Agreement and, subject to certain exceptions, to recommend that its stockholders vote to adopt the Merger Agreement. The Company is required to hold a meeting of its stockholders to approve the issuance of Viking Common Stock and Viking Preferred Stock in connection with the Merger (the “Merger Share Issuances”).
The completion of the Merger is subject to customary conditions, including (i) adoption of the Merger Agreement by the Company’s stockholders and approval of the Merger Share Issuances by the Company’s stockholders, (ii) receipt of required regulatory approvals, (iii) effectiveness of a registration statement on Form S-4 for the Company’s common stock to be issued in the Merger (the “Form S-4”), and (iv) the absence of any law, order, injunction, decree or other legal restraint preventing the completion of the Merger or making the completion of the Merger illegal. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) subject to certain exceptions, performance by the other party of its obligations under the Merger Agreement, and (iii) the absence of any material adverse effect on the other party, as defined in the Merger Agreement.
Additional closing conditions to the Merger include that in the event the NYSE American determines that the Merger constitutes, or will constitute, a “back-door listing” or “reverse merger”, the Company (and its common stock) would be required to qualify for initial listing on the NYSE American, pursuant to the applicable guidance and requirements of the NYSE as of the Effective Time.
The Merger Agreement can be terminated (i) at any time with the mutual consent of the parties; (ii) by either the Company or Viking if any governmental consent or approval required for closing is not obtained, or any governmental entity issues a final non-appealable order or similar decree preventing the Merger; (iii) by either Company or Viking if the Merger shall not have been consummated on or before August 1, 2021; (iv) by the Company or Viking, upon the breach by the other of a term of the Merger, which is not cured within 30 days of the date of written notice thereof by the other; (v) by Company or Viking is unable to obtain the affirmative vote of its stockholders for approval of the Merger; (vi) by Viking if Company is unable to obtain the affirmative vote of its stockholders required pursuant to the terms of the Merger Agreement; and (vii) by Company or Viking if there is a willful breach of the Merger Agreement by the other party thereto.
The Merger Agreement contains customary indemnification obligations of the parties and representations and warranties.
As of the date hereof, neither Viking nor Camber has advised of its intention to terminate the Merger Agreement.
July, 2021 Transaction
On July 29, 2021, the Company entered into a Securities Purchase Agreement with Viking to acquire an additional 27,500,000 shares of Viking common stock for an aggregate purchase price of $11,000,000. The proceeds from the transaction were used by Viking to (i) acquire an approximate 60.5% interest Simson-Maxwell, Ltd, a Canadian company engaged in the manufacture and supply of industrial engines, power generation products, services and custom energy solutions; (ii) acquire a license of a patented carbon-capture system for exclusive use in Canada and for a specified number of locations in the United States; and (iii) for general working capital purposes.
December 2021 Financing Transactions
$1,000,000 Loan:
On or about December 9, 2021, the Company received $1,000,000 from Discover and in connection therewith executed and delivered the following in favor of Discover: (i) a promissory note dated on or about December 8, 2021 in the principal amount of $1,052,631.58, representing a 5% original issue discount, accruing interest at the rate of 10% per annum and maturing March 8, 2022; (ii) a Security Agreement-Pledge granting Discover a first-priority security interest in Camber’s common shares of Viking; and (iii) a general security agreement granting Discover a first-priority security interest in Camber’s other assets. Discover may convert amounts owing under the promissory note into shares of common stock of Camber at a fixed price of $1.25 per share, subject to beneficial ownership limitations. This promissory note was paid in full by the Company on January 4, 2022.
$25,000,000 Loan:
On December 31, 2021, Discover loaned the Company $25,000,000 pursuant to a loan agreement dated on or about December 24, 2021 (the “Loan”). Features of the Loan include: (i) a maturity date of January 1, 2027; (ii) an interest rate equal to the Wall Street Journal Prime Rate, and payable at maturity: (iii) an original issue discount equal to 5%; and (iv) a conversion feature entitling the Investor to convert all or part of the principal amount of the Loan into shares of common stock of the Company at a price equal to $1.50 per share, subject to a 9.99% beneficial ownership limitation. The Loan is secured by a first-priority security interest in the Company’s assets, including a pledge of the shares of common stock owned by the Company in Viking. The Loan is also supported by a Guaranty from Viking.
The Company also executed a Warrant Agreement in favor of Discover entitling Discover to purchase up to 50,000,000 shares of common stock of the Company at an exercise price of ten dollars ($10.00) per share for the first 25,000,000 shares, and twenty dollars ($20.00) per share for the remaining 25,000,000 shares. The Warrant Agreement will have a term of five years.
Amendments to Promissory Notes:
Effective December 24 2021, Camber and Discover executed amendments to previously issued Promissory Notes by the Company in favor of Discover, pursuant to which:
| (i) | the Maturity Date of each of the Promissory Notes was extended from January 1, 2024 to January 1, 2027; | |
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| (ii) | the conversion price was increased from $1.25 to $1.50 per share of common stock; and |
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| (iii) | the interest rate was decreased from 10% per annum to the WSJ Prime Rate. |
Sale of Series G Preferred Stock:
On December 30, 2021, Antilles Family Office, LLC (“Antilles”) agreed to purchase from the Company 10,544 shares of newly designated Series G redeemable convertible preferred stock (the “Series G Preferred Stock”), having a face value of $10,000 per share, for an aggregate price of $100,000,000 (the “Purchase Price”), representing at a 5% original issue discount. The Purchase Price was paid by Antilles via payment of $5,000,000 in cash on December 31, 2021, and the execution and delivery of four Promissory Notes (each a “Note” and collectively, the “Notes”) from Antilles in favor of Company, each in the amount of $23,750,000 and payable by Antilles to the Company on March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022, respectively. There are 2,636 shares of Series G Preferred Stock associated with each Note, and Antilles may not convert the shares of preferred stock associated with each Note into shares of common stock or sell any of the underlying shares of common stock (the “Conversion Shares”) unless that Note is paid in full by Antilles. The Company may in its sole discretion redeem the 2,636 shares of Series G Preferred Stock associated with each Note by paying Antilles $1,375,000 as full consideration for such redemption. Also, Antilles may offset the then outstanding balance of each Note against the 2,636 shares of Series G Preferred Stock associated with that Note by electing to cancel the 2,636 shares as full consideration for cancellation of the Note in the event of a breach or default of any of the transaction documents by the Company.
On December 31, 2021, the Company also executed and delivered a Warrant Agreement (the “Warrant Agreement”) in favor of Antilles entitling Antilles to purchase up to 100,000,000 shares of common stock of the Company (the “Warrant Shares”) at an exercise price of $2.00 per share for the first 50,000,000 shares and an exercise price of $4.00 per share for the remaining 50,000,000 shares. The Warrant Agreement has a term of five years.
The Company agreed to use its best efforts to file with the Securities and Exchange Commission as promptly as practicable, and in any event within 30 days after the date on which the Company files all reports required to be filed pursuant to the Securities Exchange Act of 1934 (the “Act”), a Registration Statement on Form S-3 registering the delayed and continuous resale of all Conversion Shares and Warrant Shares pursuant to Rule 415 under the Act, subject to any limitations imposed by applicable securities laws as to the number of Conversion Shares and/or Warrant Shares that are eligible for registration, and to use best efforts to cause such Registration Statement to be declared effective under the Act as promptly as practicable and in any event within 60 days after filing. No Registration Statement will be declared effective unless the Investor pays for the particular tranche of shares of Series G Preferred Stock in full.
Partial Redemption of Series G Preferred Stock
On March 10, 2022, the Company paid Antilles $1,375,000 and redeemed the 2,636 shares of Series G Preferred Stock associated with the Note due March 31, 2022, thereby canceling such Note and reducing the number of shares of Series G Preferred Stock outstanding from 10,544 to 7,908. As mentioned above, Antilles may not convert any of the remaining shares of preferred stock associated with any remaining Note into shares of common stock or sell any of the underlying shares of common stock unless that Note is paid in full by Antilles, and the Company may redeem the shares of Series G Preferred Stock associated with each Note by paying Antilles $1,375,000 as full consideration for such redemption.
Terms of Series G Stock
The rights, entitlements and other characteristics of the Series G Preferred Stock are set out in the Certificate of Designations of Preferences, Powers, Rights and Limitations of Series G Redeemable Convertible Preferred Stock filed by the Company with the State of Nevada on December 30, 2021 (the “COD”).
Pursuant to the COD, the Series G Preferred Stock may be converted into shares of common stock at any time at the option of the holder at a price per share of common stock equal to one cent above the closing price of the Company’s common stock on the date of the issuance of such shares of Series G Preferred Stock, or as otherwise specified in the Stock Purchase Agreement, subject to adjustment as otherwise provided in the COD. Upon conversion, the Company will pay the holders of the Series G Preferred Stock being converted a conversion premium equal to the amount of dividends that such shares would have otherwise earned if they had been held through the maturity date.
The Series G Preferred Stock, with respect to dividend rights and rights upon liquidation, winding-up or dissolution, rank: (a) senior to the Company’s common stock; (b) junior to the Series C Redeemable Convertible Preferred Stock, (c) senior to the Series E Redeemable Convertible Preferred Stock and Series F Redeemable Convertible Preferred Stock, as such may be designated as of the date of this Designation, or which may be designated by the Company after the date of this Designation; (d) senior, pari passu or junior with respect to any other series of Preferred Stock, as set forth in the Certificate of Designations of Preferences, Powers, Rights and Limitations with respect to such Preferred Stock; and (d) junior to all existing and future indebtedness of the Company.
Except as prohibited by applicable law or as set forth herein, the holders of shares of Series G Preferred Stock will have the right to vote together with holders of common stock and Series C Preferred on all matters other than: (i) the election of directors; (ii) and any shareholder proposals, including proposals initiated by any holder of shares of Series G Preferred Stock), in each instance on an as-converted basis, subject to the beneficial ownership limitation in the COD even if there are insufficient shares of authorized common stock to fully convert the shares of Series G Preferred Stock into common stock.
Commencing on the date of the issuance of any such shares of Series G Preferred Stock, each outstanding share of Series G Preferred Stock will accrue cumulative dividends at a rate equal to 10.0% per annum, subject to adjustment as provided in the COD, of the Face Value. Dividends will be payable with respect to any shares of Series G Preferred Stock upon any of the following: (a) upon redemption of such shares in accordance with the COD; (b) upon conversion of such shares in accordance with the COD; and (c) when, as and if otherwise declared by the board of directors of the Corporation.
Dividends, as well as any applicable Conversion Premium payable hereunder, will be paid in shares of common stock valued at (i) if there is no Material Adverse Change (“MAC”) as at the date of payment or issuance of common shares for the Conversion Premium, as applicable, (A) 95.0% of the average of the 5 lowest individual daily volume weighted average prices of the common stock on the Trading Market during the applicable Measurement Period, which may be non-consecutive, less $0.05 per share of common stock, not to exceed (B) 100% of the lowest sales price on the last day of such Measurement Period less $0.05 per share of common stock, or (ii) during the time that any MAC is ongoing, (A) 85.0% of the lowest daily volume weighted average price during any Measurement Period for any conversion by Holder, less $0.10 per share of common stock, not to exceed (B) 85.0% of the lowest sales price on the last day of any Measurement Period, less $0.10 per share of common stock.
On the Dividend Maturity Date, the Corporation may redeem any or all shares of Series G Preferred Stock by paying Holder, in registered or unregistered shares of common stock valued at an amount per share equal to 100% of the Liquidation Value for the shares redeemed, and the Corporation will use its best efforts to register such shares.
Legal Proceedings
On October 29, 2021, a Class Action Complaint (i.e. C.A.No.4:21-cv-03574) was filed against the Company, its CEO and CFO by Ronald E. Coggins, Individually and on Behalf of All Others Similarly Situated v. Camber Energy, Inc., et al.; in the U.S. District Court for the Southern District of Texas, Houston Division, pursuant to which the Plaintiffs are seeking to recover damages alleged to have been suffered by them as a result of the defendants’ violations of federal securities laws. The defendants deny the allegations contained in the Class Action Complaint, and have engaged Baker Botts L.L.P. to defend the action.
On or about April 18, 2022, the Company was made aware of a Shareholder Derivative Complaint filed with the District Court in Clark County, Nevada (Case No.: A-22-848486-B) against the Company and its directors. The allegations contained in the Complaint are similar to those in the above-noted Class Action Complaint. The defendants deny the allegations contained in the Class Action Complaint, and have engaged Baker Botts L.L.P. to defend the action.
Effective as of April 18, 2022, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Discover and Antilles (collectively the “Investors”), pursuant to which the Company agreed to settle claims asserted by the Investors in the Verified Complaint filed by the Investors against the Company in the United States District Court (the “Court”) for the Southern District of Texas (Case No. 4:22-cv-755) on or about March 9, 2022, which complaint alleged that the Company breached its Stock Purchase Agreements with the Investors, pursuant to which the Investors had purchased shares of Series C Redeemable Convertible Preferred Stock and Series G Redeemable Convertible Preferred Stock of the Company (collectively the “Preferred Stock”), by failing to timely file all reports required to be filed by the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Conditioned upon the Court approving the Settlement Agreement, the Company and its transfer agent are required to issue “free-trading” shares of Company common stock to the Investors without restrictive legend pursuant to the conversion terms in the Certificates of the Designation governing the Preferred Stock. The Investors and the Company are required to jointly request a stipulated order (a) finding that (i) under Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”) that the exchange of Preferred Stock for shares of Company common stock provided for in the Settlement Agreement is fair, (ii) the shares of Company common stock issued upon conversion of the shares of Preferred Stock previously purchased by the Investors are not required to be registered under the Securities Act, and (iii) the Investors are not required to register as dealers pursuant to Section 15(b) of the Exchange Act; (b) requiring 500,000,000 shares of Company common stock to be reserved for issuance on conversion of all shares Preferred Stock currently held by the Investors, or which the Investors are entitled to acquire under their purchase agreements; and (c) requiring the immediate issuance of free-trading shares of Company common stock on delivery of a conversion request regarding shares of Preferred Stock. On April 18, 2022, the parties submitted that stipulated order to the Court for approval. No payments are due to the Investors pursuant to the Settlement Agreement, and the number of shares of common stock to be issued to the Investors upon conversion of the Preferred Stock will be calculated pursuant to the terms of the applicable Certificate of Designation, the terms of which have not been modified by the Settlement Agreement. On or about May 12, 2022, the Settlement Agreement was approved by the Court.
The Stock Purchase Agreements between the Investors and the Company remain in full force and effect, as do the Promissory Notes executed and delivered by Antilles Family Office, LLC (“Antilles”) in favor of the Company (the “Antilles Notes”). Among other things, (i) Antilles shall not be entitled to sell or convert any Series G Redeemable Convertible Preferred Stock unless Antilles has paid all amounts owing under the Antilles Notes, and (ii) the Company is still entitled to redeem the remaining Series G Redeemable Convertible Preferred Stock pursuant to the terms of the Stock Purchase Agreements and/or Antilles Notes.
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Supplemental Oil and Gas Disclosures (Unaudited)
The following disclosures for the Company are made in accordance with authoritative guidance regarding disclosures about oil and natural gas producing activities. Users of this information should be aware that the process of estimating quantities of “proved,” “proved developed,” and “proved undeveloped” crude oil, natural gas liquids and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures.
Proved reserves represent estimated quantities of crude oil, natural gas liquids and natural gas that geoscience and engineering data can estimate, with reasonable certainty, to be economically producible from a given day forward from known reservoirs under economic conditions, operating methods and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.
Proved developed reserves are proved reserves expected to be recovered under operating methods being utilized at the time the estimates were made, through wells and equipment in place or if the cost of any required equipment is relatively minor compared to the cost of a new well.
The Company reported financial results from its acquisition of 25% of the membership interests of Elysium effective February 3, 2020, based on information provided by Viking’s management, which was derived from reserve reports prepared by an independent third party in conjunction with the acquisition due diligence as of September 1, 2019. Those balances were then adjusted for production reported by the seller through December 31, 2019 and then for actual production from the acquisition date through March 31, 2020. Elysium reported estimated total net reserves as of March 31, 2020 were 2,988,160 barrels (Bbls) of crude oil and 41,576,500 thousand cubic feet (Mcf) of natural gas which translates to an equivalent of 9,917,580 barrel of oil equivalents (Boe). Camber’s 25% interest in Elysium equates to ownership of 747,040 Bbls of crude oil and 10,394,130 Mcf of natural gas, which translates to an equivalent of 2,479,390 Boe.
These reserves are based on the Oil and Gas Benchmark Prices to Estimate Year-End Petroleum Reserves and Values Using U.S. Securities and Exchange Commission Guidelines from the Modernization of Oil and Gas Reporting and on the quantities of oil, natural gas and natural gas liquids (NGLs), which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, under existing economic conditions, operating methods and government regulations, prior to the time at which contracts providing the rights to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Reserves and economic evaluation of all of the Company’s properties are prepared on a well-by-well basis. The accuracy of the reserve estimates is a function of the quality and quantity of available data; interpretation of that data; and accuracy of various mandated economic assumptions.
As of March 31, 2020, Viking had net capitalized costs of $30.2 million and a net operating income from its oil and gas properties of $1.6 million. Camber’s 25% ownership in Elysium equates to net capitalized costs of $7.6 million and net operating income from its interest in the Elysium oil and gas properties of $0.4 million.
Viking’s management used an average monthly crude oil price of $52.048 per Bbl and a natural gas price of $2.74 per Mcf, for the twelve months ended March 31, 2020, to calculate the estimated discounted future net cash flow (“PV-10”) before tax expenses for total proved reserves of Elysium of approximately $104.9 million. Camber’s 25% ownership of Elysium equates to a PV10 before tax expense $26.2 million. Oil, natural gas and NGL prices are market driven and have been historically volatile, and we expect that future prices will continue to fluctuate due to supply and demand factors, seasonality, and geopolitical and economic factors, and such volatility can have a significant impact on our estimates of proved reserves and the related PV-10 value.
Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
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PROVED RESERVE SUMMARY
All of the Company’s reserves are located in the United States. The following tables sets forth the changes in Camber’s net proved reserves (including developed and undeveloped reserves) for the years ended March 31, 2020 and 2019. Reserves estimates as of March 31, 2020 and 2019, respectively, were estimated by the independent petroleum consulting firm Graves & Co. Consulting LLC:
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| March 31, |
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| 2020 |
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| 2019 |
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| Crude Oil (Bbls) |
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| Net proved reserves at beginning of year |
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| 124,524 |
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| 129,573 |
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| Revisions of previous estimates |
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| (64,275 | ) |
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| (3,868 | ) |
| Purchases in place |
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| — |
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| — |
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| Extensions, discoveries and other additions |
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| — |
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| — |
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| Sales in place |
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| — |
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| (75 | ) |
| Production |
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| (5,399 | ) |
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| (8,846 | ) |
| Net proved reserves at end of year |
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| 54,850 |
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| 124,520 |
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| Natural Gas (Mcf) |
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| Net proved reserves at beginning of year |
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| 208,710 |
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| 8,147,168 |
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| Revisions of previous estimates |
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| 18,005 |
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| (7,609,052 | ) |
| Purchases in place |
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| — |
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| — |
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| Extensions, discoveries and other additions |
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| — |
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| — |
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| Sales in place |
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| — |
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| (7,983 | ) |
| Production |
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| (18,892 | ) |
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| (321,423 | ) |
| Net proved reserves at end of year |
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| 207,823 |
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| 208,710 |
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| NGL (Bbls) |
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| Net proved reserves at beginning of year |
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| 44,110 |
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| 1,435,703 |
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| Revisions of previous estimates |
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| 4,381 |
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| (1,338,916 | ) |
| Purchases in place |
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| — |
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| — |
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| Extensions, discoveries and other additions |
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| — |
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| — |
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| Sales in place |
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| — |
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|
| (1,418 | ) |
| Production |
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| (4,536 | ) |
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| (51,269 | ) |
| Net proved reserves at end of year |
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| 43,955 |
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| 44,100 |
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|
|
|
|
|
|
| Oil Equivalents (Boe) |
|
|
|
|
|
|
|
|
| Net proved reserves at beginning of year |
|
| 203,406 |
|
|
| 2,923,138 |
|
| Revisions of previous estimates |
|
| (56,880 | ) |
|
| (2,603,224 | ) |
| Purchases in place |
|
| — |
|
|
| — |
|
| Extensions, discoveries and other additions |
|
| — |
|
|
| — |
|
| Sales in place |
|
| — |
|
|
| (2,823 | ) |
| Production |
|
| (13,084 | ) |
|
| (113,685 | ) |
| Net proved reserves at end of year |
|
| 133,442 |
|
|
| 203,406 |
|
The following table sets forth Camber’s proved developed and undeveloped reserves at March 31, 2020 and 2019:
|
|
| At March 31, |
| |||||
|
|
| 2020 |
|
| 2019 |
| ||
| Proved Developed Producing Reserves |
|
|
|
|
|
| ||
| Crude Oil (Bbls) |
|
| 54,850 |
|
|
| 76,490 |
|
| Natural Gas (Mcf) |
|
| 207,823 |
|
|
| 208,710 |
|
| NGL (Bbls) |
|
| 43,955 |
|
|
| 44,100 |
|
| Oil Equivalents (Boe) |
|
| 133,442 |
|
|
| 155,376 |
|
|
|
|
|
|
|
|
|
|
|
| Proved Developed Non-Producing Reserves |
|
|
|
|
|
|
|
|
| Crude Oil (Bbls) |
|
| — |
|
|
| 48,030 |
|
| Natural Gas (Mcf) |
|
| — |
|
|
| — |
|
| NGL (Bbls) |
|
| — |
|
|
| — |
|
| Oil Equivalents (Boe) |
|
| — |
|
|
| 48,030 |
|
|
|
|
|
|
|
|
|
|
|
| Proved Undeveloped Reserves |
|
|
|
|
|
|
|
|
| Crude Oil (Bbls) |
|
| — |
|
|
| — |
|
| Natural Gas (Mcf) |
|
| — |
|
|
| — |
|
| NGL (Bbls) |
|
| — |
|
|
| — |
|
| Oil Equivalents (Boe) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
| Proved Reserves |
|
|
|
|
|
|
|
|
| Crude Oil (Bbls) |
|
| 54,850 |
|
|
| 124,520 |
|
| Natural Gas (Mcf) |
|
| 207,823 |
|
|
| 208,710 |
|
| NGL (Bbls) |
|
| 43,955 |
|
|
| 44,100 |
|
| Oil Equivalents (Boe) |
|
| 133,442 |
|
|
| 203,406 |
|
*The Company engaged Graves & Co Consulting, LLC, an independent reserve engineering firm, to provide a reserve report on the Company’s properties as of March 31, 2020.
Proved Developed Not Producing Reserves
At March 31, 2020 and 2019, the Company had proved developed not producing reserves of crude oil of 0 Bbls and 48,030, respectively.
Proved Undeveloped Reserves
At March 31, 2020 and 2019, the Company had no proved undeveloped reserves.
| F-48 |
| Table of Contents |
The following table sets forth Camber’s net reserves in Boe by reserve category and by formation at March 31, 2020 and 2019:
|
|
| Proved Developed |
|
| Proved |
|
| Proved Undeveloped |
|
| Total Proved |
| ||||
| Hutchinson Area |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| At March 31, 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| At March 31, 2019 |
|
| 18,200 |
|
|
| 48,030 |
|
|
| — |
|
|
| 66,230 |
|
| Trend Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At March 31, 2020 |
|
| 133,442 |
|
|
| — |
|
|
| — |
|
|
| 133,442 |
|
| At March 31, 2019 |
|
| 132,361 |
|
|
| — |
|
|
| — |
|
|
| 132,361 |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At March 31, 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| At March 31, 2019 |
|
| 4,815 |
|
|
| — |
|
|
| — |
|
|
| 4,815 |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At March 31, 2020 |
|
| 133,442 |
|
|
| — |
|
|
| — |
|
|
| 133,442 |
|
| At March 31, 2019 |
|
| 155,376 |
|
|
| 48,030 |
|
|
| — |
|
|
| 203,406 |
|
Capitalized Costs Relating to Oil and Natural Gas Producing Activities. The following table sets forth the capitalized costs relating to Camber’s crude oil and natural gas producing activities at March 31, 2020 and 2019:
|
|
| At March 31, |
| |||||
|
|
| 2020 |
|
| 2019 |
| ||
| Oil and gas properties subject to amortization |
| $ | 50,352,033 |
|
| $ | 50,352,306 |
|
| Oil and gas properties not subject to amortization |
|
| 28,016,989 |
|
|
| 28,016,989 |
|
| Capitalized asset retirement costs |
|
| 91,850 |
|
|
| 176,649 |
|
| Total oil & natural gas properties |
|
| 78,460,872 |
|
|
| 78,545,944 |
|
| Accumulated depreciation, depletion, and impairment |
|
| (78,350,605 | ) |
|
| (78,333,628 | ) |
| Net Capitalized Costs |
| $ | 110,267 |
|
| $ | 212,316 |
|
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities. The following table sets forth the costs incurred in Camber’s oil and natural gas property acquisition, exploration and development activities for the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Acquisition of properties |
|
|
|
|
|
| ||
| Proved |
| $ | — |
|
| $ | — |
|
| Unproved |
|
| — |
|
|
| — |
|
| Exploration costs |
|
| — |
|
|
| — |
|
| Development costs |
|
| — |
|
|
| 1,548,953 |
|
| Total |
| $ | — |
|
| $ | 1,548,953 |
|
| F-49 |
| Table of Contents |
Results of Operations for Oil and Natural Gas Producing Activities. The following table sets forth the results of operations for oil and natural gas producing activities for the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Crude oil and natural gas revenues |
| $ | 397,118 |
|
| $ | 2,742,102 |
|
| Production costs |
|
| (494,096 | ) |
|
| (3,003,901 | ) |
| Depreciation and depletion |
|
| (16,977 | ) |
|
| (473,521 | ) |
| Results of operations for producing activities, excluding corporate overhead and interest costs |
| $ | (113,955 | ) |
| $ | (735,320 | ) |
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves. The following information has been developed utilizing procedures prescribed by ASC Topic 932 and based on crude oil and natural gas reserves and production volumes estimated by the independent petroleum consultants of Camber. The estimates were based on a 12-month average of first-of-the-month commodity prices for the years ended March 31, 2020 and 2019. The following information may be useful for certain comparison purposes, but should not be solely relied upon in evaluating Camber or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of Camber.
The future cash flows presented below are based on cost rates and statutory income tax rates in existence as of the date of the projections and average prices over the preceding twelve months. It is expected that material revisions to some estimates of crude oil and natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used.
Management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable and possible as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated.
The following table sets forth the standardized measure of discounted future net cash flows from projected production of Camber’s oil, NGL, and natural gas reserves as of March 31, 2020 and 2019:
|
|
| At March 31, |
| |||||
|
|
| 2020 |
|
| 2019 |
| ||
| Future cash inflows |
| $ | 4,069,441 |
|
| $ | 9,223,561 |
|
| Future production costs |
|
| (1,832,098 | ) |
|
| (4,073,084 | ) |
| Future development costs |
|
| — |
|
|
| (595,000 | ) |
| Future income taxes |
|
| (469,846 | ) |
|
| (956,650 | ) |
| Future net cash flows |
|
| 1,767,497 |
|
|
| 3,598,827 |
|
| Discount to present value at 10% annual rate |
|
| (803,608 | ) |
|
| (1,520,346 | ) |
| Standardized measure of discounted future net cash flows relating to proved oil and gas reserves |
| $ | 963,889 |
|
| $ | 2,078,481 |
|
| F-50 |
| Table of Contents |
Changes in Standardized Measure of Discounted Future Net Cash Flows. The following table sets forth the changes in the standardized measure of discounted future net cash flows for each of the years ended March 31, 2020 and 2019:
|
|
| 2020 |
|
| 2019 |
| ||
| Standardized measure, beginning of year |
| $ | 2,078,481 |
|
| $ | 7,468,115 |
|
| Crude oil and natural gas sales, net of production costs |
|
| 96,978 |
|
|
| 260,928 |
|
| Net changes in prices and production costs |
|
| (408,944 | ) |
|
| 1,842,171 |
|
| Changes in estimated future development costs |
|
| (324,481 | ) |
|
| 344,759 |
|
| Revisions of previous quantity estimates |
|
| (145,373 | ) |
|
| 17,112,424 |
|
| Accretion of discount |
|
| 122,014 |
|
|
| 263,955 |
|
| Net change in income taxes |
|
| 304,877 |
|
|
| 3,460,184 |
|
| Purchases of reserves in place |
|
| — |
|
|
| — |
|
| Sales of reserves in place |
|
| — |
|
|
| (10,083 | ) |
| Change in timing of estimated future production |
|
| (759,663 | ) |
|
| (28,663,972 | ) |
| Standardized measure, end of year |
| $ | 963,889 |
|
| $ | 2,078,481 |
|
| F-51 |
| Table of Contents |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 16, 2021, the Audit Committee of the Board of Directors (the “Audit Committee”) of Camber Energy, Inc, Inc. (the “Company”), dismissed Marcum LLP (“Marcum”) as its independent registered public accounting firm, effective as of such date.
The report of Marcum on the Company’s consolidated financial statements as of March 31, 2019 and March 31, 2018 and for the years then ended did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles, other than an explanatory paragraph relating to the Company’s ability to continue as a going concern. The consolidated financial statements as of March 31, 2020 and March 31, 2019, and for the years then ended were the most current audited financial statements of the Company, the Company changed its fiscal year to December 31st on February 4, 2021, and on September 11, 2021, the Company determined that those audited financial statements should not be relied on, and filed a Current Report on Form 8-K with the Securities and Exchange Commission on or about September 16, 2021, regarding that non-reliance.
During the Company’s prior fiscal years ended March 31, 2020 and March 31, 2019 and through September 16, 2021, there were no disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) with Marcum on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Marcum, would have caused Marcum to make reference to the matter in its report on the consolidated financial statements for such year.
On September 17, 2021, the Audit Committee approved the appointment of Turner, Stone & Company, L.L.P. (“Turner Stone”) as the Company’s independent registered public accounting firm for the fiscal years ended March 31, 2020 and March 31 2019, and for the transition period ended December 31, 2020, and such engagement was formalized on September 21, 2021.
During the prior fiscal years ended March 31, 2019 and March 31, 2018 and through September 21, 2021, neither the Company nor anyone on their behalf consulted with Turner Stone with respect to either (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither written nor oral advice was provided to the Company that Turner Stone concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, our management, with the participation of our Interim Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2020, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our management, including our interim principal executive officer and principal financial officer, have concluded that, as of March 31, 2020, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
| 67 |
| Table of Contents |
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of our Interim Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
|
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
|
| ●
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
|
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
Management has identified the following material weaknesses in the Company’s system of internal control over financial reporting:
1. The Company does not have sufficient staff to maintain a proper segregation of duties;
2. The Company lacks sufficient internal resources to analyze and interpret accounting for certain complex features of the Series C Preferred shares and other complex accounting issues; and
3. The Company does not have enough competent accounting staff and senior management that can provide proper oversight and detection of errors.
Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2020 based on the criteria framework established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the assessment, our management has concluded that our internal controls over financial reporting were not effective as of March 31, 2020.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Management of the Company is addressing these material weaknesses by hiring additional staff and seeking the assistance of subject matter experts for accounting advice on complex matters.
Limitations on the Effectiveness of Controls
The Company’s disclosure controls and procedures are designed to provide the Company’s Interim Chief Executive Officer and Chief Financial Officer with reasonable assurances that the Company’s disclosure controls and procedures will achieve their objectives. However, the Company’s management does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and such design may not succeed in achieving its stated objectives under all potential future conditions.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
| 68 |
| Table of Contents |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our Executive Officers and Directors
The following table and accompanying descriptions indicate the name of each officer and director, including their age, principal occupation or employment, and the year in which each person first became a director.
| Name |
| Position |
| Date First |
| Age |
| James A. Doris |
| Chief Executive Officer and Director |
| December 23, 2020 |
| 50 |
| Frank W. Barker, Jr |
| Chief Financial Officer and Treasurer |
| December 23,2020 |
| 66 |
| Louis G. Schott |
| Former Interim Chief Executive Officer |
| January 11, 2018 |
| 55 |
| Robert Schleizer |
| Former Chief Financial Officer, Treasurer and Director |
| October 6, 2017 |
| 67 |
| Fred Zeidman |
| Director |
| January 11, 2018 |
| 74 |
| James G. Miller |
| Director |
| July 10, 2018 |
| 72 |
| Robert Greene |
| Director |
| December 23, 2020 |
| 59 |
Information Concerning the Board of Directors and its Committees
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We have historically compensated our directors for service on the Board and committees thereof through the issuance of shares of common stock, stock options and cash compensation for meeting fees. Additionally, we reimburse directors for expenses incurred by them in connection with the attendance at meetings of the Board and any committee thereof (as described below). The Board appoints annually the executive officers of the Company and the executive officers serve at the discretion of the Board.
The business experience of each of the persons listed above during the past five years is as follows:
James A. Doris, Chief Executive Officer
Mr. Doris was appointed as Chief Executive Officer and Chairman of the Board of Directors for the Company on December 23, 2020 in conjunction with the acquisition of Viking by the Company. He has been an officer and director of the Viking Energy Group, Inc. since 2014 and has been an integral part of transitioning the Company’s to an appropriate platform to facilitate growth. He has over 25 years of experience negotiating national and international business transactions. Formerly a lawyer in Canada, Mr. Doris represented domestic and foreign clients regarding their investment activities in Canada for over 16 years. Prior to starting his own law firm, Mr. Doris served as Executive Vice President and In-House Counsel for a real estate investment and development company as well as working at one of Canada’s leading law firms. Mr. Doris graduated cum laude from the University of Ottawa.
Frank W. Barker, Jr. Chief Financial Officer
Mr. Barker was appointed as Chief Financial Officer for the Company on December 23, 2020 in conjunction with the acquisition of Viking by the Company. Mr. Barker is a Certified Public Accountant licensed to practice in the State of Florida. Mr. Barker has been providing professional services to Viking Energy Group, Inc. since the beginning of 2015. On December 29, 2017, Mr. Barker accepted the position as Chief Financial Officer of Viking Energy Group, Inc. Mr. Barker has vast experience providing strategic, financial, accounting and tax-related services in various capacities to both Public and Private entities, including Compliance Reporting with the Securities and Exchange Commission, the planning, preparation and oversight of annual audit functions, presentation of financial data to Public Company Boards, turn-around management, bankruptcy and asset recovery, Strategic planning for survival of troubled companies, financial forecasting and cash flow management, litigation support and forensic analysis, mergers and acquisitions and reverse mergers. Mr. Barker has served as Chief Financial Officer of several Public Companies with Revenues in excess of $40 million. Mr. Barker’s Industry experience include the fields of Defense Contracting, Manufacturing, Alternative Energy, Electrical Contracting, Healthcare Research and Construction, Oil and Gas, Health Care Services and Administration, Not for Profit, Retail, Distribution, Gaming, Real Estate, Professional Services, Internet Technologies, Media Communications, Web Based Technologies, Banking, Investments, Insurance, Private Equity, Municipal and County Governments and Treasure Exploration. Mr. Barker received a B.A. in Accounting and Finance from the University of South Florida, Tampa, Florida in 1978.
Louis G. Schott, Interim Chief Executive Officer
Mr. Schott has served as the Interim Chief Executive Officer of the Company since May 25, 2018. Mr. Schott has over 25 years of legal and business experience with 20 years in the oil and gas industry, including a strong background in restructuring, mergers and acquisitions, public company regulations and requirements, title, energy finance, business development, general negotiations and land. Mr. Schott’s recent restructuring experience includes restructurings within and outside of bankruptcy and both public, traded on the TSX and NYSE American, and private entities.
Prior to being engaged as Interim Chief Executive Officer of the Company, Mr. Schott served as an advisor to the Company (a position he held between December 2017 and the date he was appointed as Interim Chief Executive Officer, May 25, 2018) and is also an advisor to other companies in various stages of growth.
Mr. Schott was recently the Interim Chief Executive Officer of EnerJex Resources, Inc., a Nevada corporation listed on the NYSE American (“EnerJex”), a position which he held from February 2017 to March 2018. As CEO, he led restructuring efforts, cost reductions and the successful completion of a merger between EnerJex and a privately held company (AgEagle Aerial Systems, Inc.).
Mr. Schott was previously General Counsel and Treasurer of TexOak Petro Holdings LLC (“TexOak”) and its subsidiaries including Equal Energy (“Equal”), from 2009 through August 2016, where he actively performed all legal functions, including corporate structure and governance, negotiation of oil and gas acquisitions and divestitures, drafting review and certification of all corporate and financial documents, legal and land due diligence, corporate finance, litigation management, risk management, insurance, corporate policies, and human resource management. At TexOak, Mr. Schott successfully managed two mergers including the merger with Equal, a Canadian public company dually listed on the New York Stock Exchange and the Toronto Stock Exchange and Equal’s subsequent privatization and redomestication. Mr. Schott was also instrumental in working with the CEO and the Board in guiding Petroflow’s predecessor through restructuring and bankruptcy emerging as a private company with no debt and capital to grow.
| 69 |
| Table of Contents |
Prior to joining TexOak’s subsidiary, Petroflow, in 2005, Mr. Schott served in various senior roles with TDC Energy (“TDC”) from 1996 through 2005. Prior to TDC, Mr. Schott was an oil and gas attorney with Liskow & Lewis in New Orleans.
Mr. Schott is a graduate of Tulane University with an MBA and a Juris Doctorate. Mr. Schott is also a non-practicing unlicensed Certified Public Accountant.
Robert Schleizer, Chief Financial Officer and Director
Mr. Schleizer has served as Chief Financial Officer (beginning as Interim Chief Financial Officer) since June 2, 2017, as a member of the Board of Directors since October 6, 2017, and as Treasurer of the Company since January 9, 2018. Mr. Schleizer has over 30 years of financial and operational experience serving private and public companies in financial and organization restructuring, crisis management, acquisitions and divestitures, and equity and debt financings across multiple industries. He is a co-founder of BlackBriar Advisors LLC, a business renewal and acceleration firm, where he has served as Managing Partner since 2010. Prior to BlackBriar, Mr. Schleizer served as Chief Financial Officer and Director for Xponential, Inc., a public holding company that owned 34 specialty finance and retail stores, from 2001 to 2013, and as a Managing Director for BBK, an international financial advisory firm, where he provided restructuring and refinancing financial advisory services. Mr. Schleizer holds a Bachelor of Science in Accounting from Arizona State University and is a Certified Turnaround Professional. Effective August 17, 2017, Mr. Schleizer was appointed as Interim Chief Financial Officer and principal accounting/financial officer of Enerjex Resources, Inc., a position he held until March 26, 2018.
Director Qualifications:
Mr. Schleizer has served as a director of many private and public companies in the past and his industry financial expertise makes him an asset to the Company and qualified to serve as a director of the Company.
Fred S. Zeidman, Director
In December 2014, Mr. Zeidman was appointed as Chairman of Gordian Group LLC, a U.S. investment bank specializing in board level advice in complex, distressed or “story” financial matters. Mr. Zeidman currently serves as Director of External Affairs of MCNA Dental, lead Director of Straight Path Communications, Inc., Director REMA and Director Prosperity Bank in Houston. He was formerly Restructuring Officer of TransMeridian Exploration Inc. and Chief Bankruptcy Trustee of AremisSoft Corp.
Mr. Zeidman, Chairman Emeritus of the United States Holocaust Memorial Council, was appointed by President George W. Bush in March 2002 and served in that position from 2002-2010. A prominent Houston based business and civic leader, Mr. Zeidman also is Chairman Emeritus of the University of Texas Health Science System Houston and Director and Chief Financial Officer of the Texas Heart Institute. He is on the board of the Development Corp of Israel (Israel Bonds) and served on the Board of the National World War II Museum.
Over the course of his distinguished 50-year career, Mr. Zeidman has been involved in numerous high-profile workouts, restructurings and reorganizations. He was the former CEO, President and Chairman of Seitel, Inc., a Houston-based onshore seismic data provider where he was instrumental in the successful turnaround of the Company. He held the post of Chairman of the Board and CEO of Unibar Corporation, the largest domestic independent drilling fluids company, until its sale to Anchor Drilling Fluids in 1992.
Mr. Zeidman holds a Bachelor’s degree from Washington University in St. Louis and a Master’s in Business Administration from New York University.
Director Qualifications:
The Board of Directors believes that Mr. Zeidman is highly qualified to serve as a member of the Board due to his significant experience serving as a director of public and private companies and institutions and his substantial understanding of the oil and gas industry in general.
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James G. Miller, Director
Mr. Miller is a retired corporate executive, having served as president and CEO of several energy companies. He has previously served on the Board of Directors of companies listed on NYSE, NASDAQ and the Australian Stock Exchange. From 2009 until 2016, Mr. Miller served as a Director of Guardian 8 Holdings. From December 31, 2010 through March 2018, he was a Director of Enerjex Resources, Inc. (NYSE American), an oil and gas exploration and production company, and chaired the Audit Committee. In March 2018, Enerjex executed a merger which concluded his Board service.
He also served on the Board of Trustees of The Nature Conservancy, Missouri Chapter, for 16 years and is a past Board Chair.
Mr. Miller holds a BS in Electrical Engineering and an MBA in management from the University of Wisconsin-Madison.
Director Qualifications:
The Board of Directors believes that Mr. Miller is highly qualified to serve as a member of the Board due to his experience having served as president and CEO of several energy companies and serving on the Board of Directors of several publicly-traded companies.
Family Relationships
There are no family relationships among our directors or executive officers.
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of our directors or executive officers were involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, (5) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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Information Concerning the Board and its Committees
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We have previously compensated our directors for service on the Board and committees thereof through the issuance of shares of common stock, stock options and cash compensation for meeting fees. Additionally, we reimburse directors for expenses incurred by them in connection with the attendance at meetings of the Board and any committee thereof (as described below). The Board appoints annually the executive officers of the Company and the executive officers serve at the discretion of the Board.
Executive Sessions of the Board
The independent members of the Board of the Company meet in executive session (with no management directors or management present) from time to time, but at least once annually. The executive sessions include whatever topics the independent directors deem appropriate.
Risk Oversight
The Board exercises direct oversight of strategic risks to the Company. The Audit Committee reviews and assesses the Company’s processes to manage business and financial risk and financial reporting risk. It also reviews the Company’s policies for risk assessment and assesses steps management has taken to control significant risks. The Compensation Committee oversees risks relating to compensation programs and policies. In each case management periodically reports to our Board or relevant committee, which provides the relevant oversight on risk assessment and mitigation.
Communicating with our Board
Stockholders may contact the Board about bona fide issues or questions about the Company by writing the Secretary at the following address: Attn: Secretary, Camber Energy, Inc., 1415 Louisiana, Suite 3500, Houston, Texas 77002.
Our Secretary, upon receipt of any communication other than one that is clearly marked “Confidential,” will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “Confidential,” our Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication to the director(s) to whom it is addressed. If the correspondence is not addressed to any particular Board member or members, the communication will be forwarded to a Board member to bring to the attention of the Board.
Board and Committee Activity and Compensation
For the fiscal year ending March 31, 2020, the Board held 14 meetings and took various other actions via the unanimous written consent of the Board and the various committees described below. All directors attended at least 75% of the Board of Directors meetings and committee meetings relating to the committees on which each director served. All of the then current directors attended our fiscal year 2020 Annual Stockholder meeting held on March 11, 2020. The Company encourages, but does not require all directors to be present at annual meetings of stockholders.
The Board has a standing Audit Committee, Compensation Committee, and Nominating and Governance Committee. Mr. Fred Zeidman and Mr. James G. Miller are “independent” members of the Board, as defined in Section 803(A) of the NYSE American Company Guide. Committee membership and the functions of those committees are described below.
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Board of Directors Committee Membership
|
|
| Audit Committee |
| Compensation |
| Nominating and |
| Robert Schleizer |
|
|
|
|
|
|
| Fred Zeidman |
| M |
|
|
| C |
| James G. Miller |
| C |
| M |
| M |
C - Chairman of Committee.
M – Member.
Audit Committee
The Board has selected the members of the Audit Committee based on the Board’s determination that the members are financially literate and qualified to monitor the performance of management and the independent auditors and to monitor our disclosures so that our disclosures fairly present our business, financial condition and results of operations.
The Audit Committee’s function is to provide assistance to the Board in fulfilling the Board’s oversight functions relating to the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of the Company’s independent auditors, and perform such other activities consistent with its charter and our Bylaws as the Committee or the Board deems appropriate. The Audit Committee produces an annual report for inclusion in our proxy statement. The Audit Committee is directly responsible for the appointment, retention, compensation, oversight and evaluation of the work of the independent registered public accounting firm (including resolution of disagreements between our management and the independent registered public accounting firm regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The Audit Committee shall review and pre-approve all audit services, and non-audit services that exceed a de minimis standard, to be provided to us by our independent registered public accounting firm. The Audit Committee carries out all functions required by the NYSE American, the SEC and the federal securities laws.
The Audit Committee has the sole authority, at its discretion and at our expense, to retain, compensate, evaluate and terminate our independent auditors and to review, as it deems appropriate, the scope of our annual audits, our accounting policies and reporting practices, our system of internal controls, our compliance with policies regarding business conduct and other matters. In addition, the Audit Committee has the authority, at its discretion and at our expense, to retain special legal, accounting or other advisors to advise the Audit Committee.
The Board has determined that Mr. Fred Zeidman and Mr. James G. Miller are “independent,” and that Mr. Miller is an “audit committee financial expert” (as defined in the SEC rules) because he has the following attributes: (i) an understanding of generally accepted accounting principles in the United States of America (“GAAP”) and financial statements; (ii) the ability to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (iii) experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements; (iv) an understanding of internal control over financial reporting; and (v) an understanding of audit committee functions. Mr. Miller has acquired these attributes by means of having held various positions that provided relevant experience, as described in his biographical information above.
For the fiscal year ending March 31, 2020, the Audit Committee held four formal meetings, and took various actions via a unanimous written consent of the committee. The Audit Committee’s charter is available on our website at www.camber.energy at “Governance” - “Policies” and was filed as Exhibit 14.3 to our Annual Report on Form 10-K/A for the year ended March 31, 2009, filed with the Commission on July 29, 2009.
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Compensation Committee
The Compensation Committee is responsible for the administration of our stock compensation plans, approval, review and evaluation of the compensation arrangements for our executive officers and directors and oversees and advises the Board on the adoption of policies that govern the Company’s compensation and benefit programs. In addition, the Compensation Committee has the authority, at its discretion and at our expense, to retain advisors to advise the Compensation Committee. The Compensation Committee may delegate its authority to subcommittees of independent directors, as it deems appropriate.
For the fiscal year ending March 31, 2020, the Compensation Committee held no formal meetings. The Compensation Committee’s charter is available on our website at www.camber.energy at “Governance” - “Policies” and was filed as Exhibit 14.5 to our Annual Report on Form 10-K/A for the year ended March 31, 2009, filed with the Commission on July 29, 2009.
Nominating and Governance Committee
The Nominating and Governance Committee is responsible for (1) assisting the Board by identifying individuals qualified to become Board members; (2) recommending individuals to the Board for nomination as members of the Board and its committees; (3) leading the Board in its annual review of the Board’s performance; (4) monitoring the attendance, preparation and participation of individual directors and to conduct a performance evaluation of each director prior to the time he or she is considered for re-nomination to the Board; (5) reviewing and recommending to the Board responses to shareowner proposals; (6) monitoring and evaluating corporate governance issues and trends; (7) providing oversight of the corporate governance affairs of the Board and the Company, including consideration of the risk oversight responsibilities of the full Board and its committees; (8) assisting the Board in organizing itself to discharge its duties and responsibilities properly and effectively; and (9) assisting the Board in ensuring proper attention and effective response to stockholder concerns regarding corporate governance. We have not paid any third party a fee to assist in the process of identifying and evaluating candidates for director.
The Nominating and Governance Committee uses a variety of methods for identifying and evaluating director nominees. The Nominating and Governance Committee also regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or other circumstances. In addition, the Nominating and Governance Committee considers, from time to time, various potential candidates for directorships. Candidates may come to the attention of the Nominating and Governance Committee through current Board members, professional search firms, stockholders or other persons. These candidates may be evaluated at regular or special meetings of the Nominating and Governance Committee and may be considered at any point during the year.
The Nominating and Governance Committee evaluates director nominees at regular or special Committee meetings pursuant to the criteria described above and reviews qualified director nominees with the Board. The Committee selects nominees that best suit the Board’s current needs and recommends one or more of such individuals for election to the Board.
The Nominating and Governance Committee will consider candidates recommended by stockholders, provided the names of such persons, accompanied by relevant biographical information, are properly submitted in writing to the Secretary of the Company in accordance with the manner described below. The Secretary will send properly submitted stockholder recommendations to the Committee. Individuals recommended by stockholders in accordance with these procedures will receive the same consideration received by individuals identified to the Committee through other means. The Committee also may, in its discretion, consider candidates otherwise recommended by stockholders without accompanying biographical information, if submitted in writing to the Secretary.
In addition, the Company’s Bylaws permit stockholders to nominate directors at an annual meeting of stockholders or at a special meeting at which directors are to be elected in accordance with the notice of meeting pursuant to the requirements of the Company’s Bylaws and applicable NYSE American and SEC rules and regulations.
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For the fiscal year ending March 31, 2020, the Nominating and Governance Committee held no formal meetings, but did take various actions via a unanimous written consent of the committee. The Nominating and Governance Committee’s charter is available on our website at www.camber.energy at “Governance” - “Policies” and was filed as Exhibit 99.2 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, filed with the Commission on June 28, 2013.
Director Nominations Process. As described above, the Nominating and Governance Committee will consider qualified director candidates recommended in good faith by stockholders, provided those nominees meet the requirements of NYSE American and applicable federal securities law. The Nominating and Governance Committee’s evaluation of candidates recommended by stockholders does not differ materially from its evaluation of candidates recommended from other sources. Any stockholder wishing to recommend a nominee should submit the candidate’s name, credentials, contact information and his or her written consent to be considered as a candidate. These recommendations should be submitted in writing to the Company, Attn: Secretary, Camber Energy, Inc., 1415 Louisiana, Suite 3500, Houston, Texas 77002. The proposing stockholder should also include his or her contact information and a statement of his or her share ownership. The Committee may request further information about stockholder recommended nominees in order to comply with any applicable laws, rules, the Company’s Bylaws or regulations or to the extent such information is required to be provided by such stockholder pursuant to any applicable laws, rules or regulations.
Delinquent Section 16(a) Reports
None.
CODE OF BUSINESS AND ETHICAL CONDUCT
On November 29, 2016, the Board of Directors approved and adopted an amended and restated Code of Business and Ethical Conduct (the “Revised Code”), which applies to all officers, directors and employees. The Revised Code replaced the Company’s prior Code of Ethics adopted in June 2009 and reflects, among other matters, clarifications and revisions relating to conflicts of interest, confidentiality, compliance with laws, reporting and enforcement, and other matters intended to update the Company’s Code of Ethics.
You can access our Revised Code on our website at www.camber.energy, and any stockholder who so requests may obtain a free copy of our Code of Ethics by submitting a written request to our Secretary. Additionally, the Code of Ethics was filed as an exhibit to the Company’s Form 8-K dated November 29, 2016, filed with the SEC on December 5, 2016, as Exhibit 14.1 thereto.
We intend to disclose any amendments or future amendments to our Revised Code and any waivers with respect to our Revised Code granted to our principal executive officer, our principal financial officer, or any of our other employees performing similar functions on our website at www.camber.energy within four business days after the amendment or waiver. In such case, the disclosure regarding the amendment or waiver will remain available on our website for at least 12 months after the initial disclosure. There have been no waivers granted with respect to our Revised Code to any such officers or employees.
The Revised Code includes a policy on reporting illegal or unethical business or workplace conduct by employees, officers or members of the Board, which replaced our prior Whistleblower Protection Policy adopted in 2009.
Policy on Equity Ownership
The Company does not have a policy on equity ownership at this time.
Policy Against Hedging
The Company does not currently have a policy against hedging.
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Compensation Recovery
Under the Sarbanes–Oxley Act of 2002 (the “Sarbanes-Oxley Act”), in the event of misconduct that results in a financial restatement that would have reduced a previously paid incentive amount, we can recoup those improper payments from our Chief Executive Officer and Chief Financial Officer. We plan to implement a clawback policy in the future, although we have not yet implemented such policy.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation of our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and the most highly compensated executive officer other than the CEO and CFO who was serving as an executive officer of the Company at the end of March 31, 2020 and 2019 (the Company did not have any executive officers other than its CEO and CFO as of March 31, 2020), and up to two additional individuals for whom disclosure would have been required had they been serving as an executive officer at the end of the last completed fiscal year (collectively, the “Named Executive Officers”).
| Name and Principal Position |
| Fiscal |
| Consulting |
|
| Bonus |
|
| Stock |
|
| All Other |
|
| Total |
| |||||
| Louis G. Schott |
| 2020 |
| $ | 300,000 | (4) |
| $ | — |
|
| $ | — |
|
| $ | 34,453 | (5) |
| $ | 334,453 |
|
| Interim Chief Executive Officer (1) |
| 2019 |
| $ | 300,000 | (4) |
| $ | 25,000 |
|
| $ | — |
|
| $ | 33,120 | (5) |
| $ | 358,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Robert Schleizer |
| 2020 |
| $ | 200,000 | (6) |
| $ | — |
|
| $ | — |
|
| $ | 53,333 | (6) |
| $ | 253,333 |
|
| Chief Financial Officer (2) |
| 2019 |
| $ | 200,000 | (6) |
| $ | — |
|
| $ | — |
|
| $ | 26,666 | (6) |
| $ | 226,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Richard N. Azar II |
| 2019 |
| $ | 90,000 | (7) |
| $ | — |
|
| $ | — |
|
| $ | 214,000 |
|
| $ | 304,000 |
|
| Former Chief Executive Officer (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000.
No executive officer earned any non-equity incentive plan compensation or nonqualified deferred compensation during the periods reported above. The value of the Stock Awards in the table above was calculated based on the fair value of such securities calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718.
(1) Mr. Schott has served as the Interim Chief Executive Officer of Camber since May 25, 2018.
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(2) Mr. Schleizer has served as Chief Financial Officer (beginning as Interim Chief Financial Officer) since June 2, 2017, as a member of the Board of Directors since October 6, 2017, and as Treasurer of Camber since January 9, 2018.
(3) From June 2, 2017 to May 25, 2018, Mr. Richard N. Azar II served as the Interim Chief Executive Officer (through January 9, 2018) and then Chief Executive Officer of Camber. On December 28, 2017, the Board approved compensation of $10,000 per month to Mr. Azar for services which he rendered over the last seven months of calendar 2017, and compensation of $35,000 per month beginning in January 2018, for future services as CEO, which services as CEO were terminated in May 2018. Effective on June 21, 2018, Mr. Azar resigned as a member of the Board of Directors.
(4) Mr. Schott works on a consulting basis through Fides Energy LLC.
(5) Represents amounts paid to Mr. Schott in connection with reimbursement for health insurance premiums.
(6) Mr. Schleizer is the Managing Partner of BlackBriar Advisors LLC (“BlackBriar”). In addition to financial management, BlackBriar provides accounting, treasury, administrative and financial reporting services to Camber. Total fees paid by Camber to BlackBriar during the years ended March 31, 2020 and 2019 were $485,000 and $713,000, respectively, of which Mr. Schleizer attributed $200,000 to his services as Chief Financial Officer for each of 2020 and 2019. Mr. Schleizer also received director’s fees from Camber for the years ended March 31, 2020 and March 31, 2019 of $53,333 and $26,666, respectively.
(7) Includes $90,000 paid to McClowd Dynamics, Ltd. (an entity which Mr. Azar owns and controls) in fiscal 2019.
Compensation Agreements
Severance Agreement
Anthony C. Schnur
Effective on June 2, 2017, Mr. Anthony C. Schnur’s employment as Chief Executive Officer of the Company was terminated. In connection with such termination, the Company entered into a severance agreement with Mr. Schnur, which provided (as amended), for Mr. Schnur to be issued 1 share of common stock and the payment of $168,000 in total compensation (payable over time). The payments owed as of March 31, 2018 of $79,025 were accrued and included in Accrued Expenses on the balance sheet. The Settlement Shares were issued in February 2018. During the year ended March 31, 2019 the Company paid all remaining amounts to Mr. Schnur pursuant to the original settlement. The Company and Mr. Schnur entered into an amendment to the severance agreement on April 8, 2019, pursuant to which the Company paid Mr. Schnur $10,000 in lieu of the payment of payroll taxes on amounts previously paid to Mr. Schnur under the original settlement.
Separation and Release Agreement
Effective on May 25, 2018, Richard N. Azar II resigned as Chief Executive Officer of the Company. Pursuant to a Separation Agreement entered into with Mr. Azar, he released 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 and to grant him warrants to purchase 32 shares of our common stock at an exercise price of $12,187.50 per share.
Engagement Agreement
Effective upon Mr. Azar’s resignation, the Board of Directors of the Company appointed Mr. Louis G. Schott as Interim Chief Executive Officer of the Company. In connection with Mr. Schott’s appointment as Interim Chief Executive Officer of the Company, the Company entered into an engagement letter with Fides Energy LLC (“Fides”). Pursuant to the letter, Fides agreed to supply Mr. Schott’s services to the Company as Interim Chief Executive Officer and we agreed to pay Fides $25,000 per month for the use of Mr. Schott’s services. The agreement can be terminated by either party with 90 days’ notice and terminates automatically upon the death of Mr. Schott. Pursuant to the agreement, Mr. Schott is also eligible to receive bonus compensation at the discretion of the Board of Directors.
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Letter Agreement
Effective on December 1, 2017, the Company entered into a letter agreement with BlackBriar Advisors LLC (“BlackBriar”), pursuant to which BlackBriar agreed to provide advisory and accounting services to the Company and to make Mr. Robert Schleizer available to the Company as the Company’s Chief Financial Officer. In consideration for such services, the Company agreed to pay BlackBriar a fee of $40,000 per month, and to reimburse BlackBriar for reasonable customary and necessary expenses including for travel and related costs. BlackBriar is also eligible for bonuses in the discretion of the Compensation Committee of the Company. The letter agreement includes customary indemnification obligations and can be terminated at any time upon written notice of either party.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
None of our Named Executive Officers had any stock options or stock awards outstanding as of March 31, 2020.
DIRECTOR COMPENSATION
The following table sets forth compensation information with respect to our non-executive directors during our fiscal year ended March 31, 2020.
| Name |
| Fees Earned or Paid in Cash ($)* |
|
| Option Awards ($) |
|
| All Other Compensation ($) |
|
| Total ($) |
| ||||
| Fred S. Zeidman (2) |
| $ | 53,333 |
|
| $ | — |
|
| $ | — |
|
| $ | 53,333 |
|
| James G. Miller (4) |
| $ | 53,333 |
|
| $ | — |
|
| $ | — |
|
| $ | 53,333 |
|
The table above does not include the amount of any expense reimbursements paid to the above directors. No directors received any Stock Awards, Non-Equity Incentive Plan Compensation, or Nonqualified Deferred Compensation Earnings during the period presented. Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000.
The Company pays each member of the Board of Directors their pro rata portion of a $40,000 quarterly Board fee in cash, payable in arrears and based on the number of members of the Board at the end of each calendar quarter (for example if there are three (3) members of the board at the end of a calendar quarter, each member would receive $13,333 in total compensation for such applicable calendar quarter).
The following table presents certain information as of June 24, 2020, as to:
|
| ● | each stockholder known by us to be the beneficial owner of more than five percent of our outstanding shares of common stock, |
|
| ● | each director, |
|
| ● | each Named Executive Officer, and |
|
| ● | all directors and executive officers as a group. |
The percentages shown in the table under the column “Percent” are based on 12,455,929 shares of common stock outstanding as of June 24, 2020.
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Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of the applicable date of determination, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to applicable community property laws. Unless otherwise indicated, the address for each of the officers or directors listed in the table below is 1415 Louisiana, Suite 3500, Houston, Texas 77002.
| Stockholder |
| Number of Shares of Common Stock |
|
| Percent of Common |
| ||
| Executive Officers and Directors |
|
|
|
|
|
| ||
| Louis G. Schott |
|
| — |
|
| — | % | |
| Robert Schleizer |
|
| — |
|
| — | % | |
| Fred S. Zeidman |
|
| — |
|
| — | % | |
| James G. Miller |
|
| — |
|
| — | % | |
| Richard N. Azar II (+)(1) |
|
| 7 |
|
| * | % | |
| All Executive Officers and Directors as a Group (Four Persons) |
|
| — |
|
| — | % | |
|
|
|
|
|
|
|
|
| |
| Greater than 5% Stockholders |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
| Discover Growth Fund (2) |
|
| 1,244,347 |
|
|
| 9.99 | % |
* Indicates beneficial ownership of less than 1% of the outstanding common stock.
(+) Named Executive Officer who no longer has any affiliation or contact with the Company. Information disclosed is based solely on our review of our record stockholders’ list, without independent verification, and including for purposes of the table above, ownership only in the name of the applicable holder and those entities which the holder is listed as a contact person for. The applicable stockholder may actually beneficially own more or less shares than as disclosed above.
(1) Address: P.O. Box 6172 San Antonio, Texas 78209.
(2) 103 South Church Street, 4th Floor, Grand Cayman KYI-002, Cayman Islands. The holder holds 2,951 shares of Series C Redeemable Convertible Preferred Stock; provided that the Company may not issue shares which, when aggregated with all other shares of common stock then deemed beneficially owned by the holder, would result in the reporting person holding at any one time more than 9.99% of all common stock outstanding immediately after giving effect to such issuance. To the best of the Company’s knowledge, David Sims has voting and dispositive control over the securities held by Discover Growth Fund. Does not include, as of June 24, 2020, a total of approximately 5,678,792 shares of common stock which were due to Discover, as of such date, which are held in abeyance until such issuances are requested by Discover, subject to the 9.99% ownership limitation set forth in the designation of the Series C Preferred Stock.
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Equity Compensation Plan Information
| Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
|
| Weighted-average exercise price of outstanding options, warrants and rights (b) |
|
| Number of securities available for future issuance under equity compensation plans (excluding those in column (a)) |
| |||
| Equity compensation plans approved by the security holders |
|
| 2 |
|
| $ | 40,429,700 |
|
|
| 2,000 |
|
| Equity compensation plans not approved by the security holders |
|
| — |
|
|
| — |
|
|
| — |
|
| Total |
|
| 2 |
|
| $ | 40,429,700 |
|
|
| 2,000 |
|
|
| (a)
| Includes any compensation plan and individual compensation arrangement of the Company under which equity securities of the Company are authorized for issuance to employees, or non-employees including directors, consultants, advisors, vendors, customers, suppliers or lenders in exchange for consideration in the form of goods or services, as of March 31, 2020. |
|
| (b) | Includes the weighted average exercise price of outstanding options, warrants, and rights identified in (a). |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
There have been no other transactions between us and any officer, director, or any stockholder owning greater than five percent (5%) of our outstanding voting shares, or any member of the above referenced individual’s immediate family, since the beginning of the Company’s last fiscal year, and there is not currently any proposed transaction, in which the Company was or is to be a participant, where the amount involved exceeds $120,000, and in which we had or will have a direct or indirect material interest, except as set forth below or otherwise disclosed above under “Item 11. Executive Compensation“ and “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities“ - “Recent Sales of Unregistered Securities“, which information, as applicable, is incorporated by reference into this “Item 13. Certain Relationships and Related Transactions, and Director Independence“.
N&B Energy Asset Disposition Agreement
On July 12, 2018, Camber entered into an Asset Purchase Agreement (the “Sale Agreement”), as seller, with N&B Energy, LLC (“N&B Energy”) as purchaser, which entity is affiliated with Richard N. Azar II, Camber’s former Chief Executive Officer and former director, and Donnie B. Seay, Camber’s former director. Pursuant to the Sale Agreement, Camber agreed to sell to N&B Energy a substantial portion of its assets, including all of the assets acquired pursuant to the terms of a December 31, 2015 Asset Purchase Agreement with Segundo Resources, LLC (“Segundo”, which entity is controlled by Mr. Azar) and certain other more recent acquisitions, other than the production payment and overriding royalty interests discussed below (the “Disposed Assets”). In consideration for the Disposed Assets, N&B Energy agreed to pay Camber $100 in cash, to assume all of Camber’s obligations and debt owed under its outstanding loan agreement with International Bank of Commerce (“IBC Bank”), which had a then outstanding principal balance of approximately $36.9 million and Segundo agreed to enter into the Segundo Settlement, described below.
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Segundo Settlement
On July 12, 2018, Camber entered into a Compromise Settlement Agreement and Mutual Release with Segundo, which is owned and controlled by Mr. Azar, in partial consideration for N&B Energy agreeing to enter into the Sale Agreement. Pursuant to the Segundo Settlement, Segundo surrendered 1 share of common stock valued at $1,191,875 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) for cancellation (which cancellation occurred in October 2018), and released Camber from any and all claims which Segundo previously alleged were owed under the terms of the December 31, 2015 Asset Purchase Agreement. Camber and Segundo also provided each other full releases in connection with the December 31, 2015 Asset Purchase Agreement and Segundo agreed to indemnify Camber and hold it harmless against any claims made by the other sellers under the December 31, 2015 Asset Purchase Agreement.
First Amendment to Sale Agreement
Also on August 3, 2018, Camber 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 Camber as part of such Sale Agreement; (b) amend the Sale Agreement to remove the requirement that Camber obtain stockholder 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.
Additionally, 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 stockholder approval, and because such stockholder approval was not required pursuant to applicable law or the rules of the NYSE American, Camber’s management determined to not seek stockholder approval, but to instead seek a third-party opinion as to the fairness of the transaction to Camber’s stockholders.
Second Amendment to Sale Agreement
On September 24, 2018, Camber, N&B Energy and CE Operating, LLC, Camber’s wholly-owned subsidiary (“CE Operating”), entered into a Second Amendment to Asset Purchase Agreement (the “Second Amendment”), which amended the terms of the Sale Agreement. Pursuant to the Second Amendment, Camber, N&B Energy and CE Operating agreed (a) to clarify that all of the representations of Camber made in the Sale Agreement relating to portions of the Disposed Assets held in the name of CE Operating shall be deemed made by CE Operating and not Camber and that CE Operating shall be deemed a party to the Sale Agreement, solely in order to make such representations; and (b) to extend the deadline for closing the transactions contemplated by the Sale Agreement to September 26, 2018, or such other date as Camber and N&B shall agree upon in writing.
Assumption Agreement
On September 26, 2018, Camber entered into an Assumption Agreement (the “Assumption Agreement”) with IBC Bank; CE Operating; N&B Energy, which entity is affiliated with Richard N. Azar, II, Camber’s former Chief Executive Officer and former director (“Azar”), and Donnie B. Seay, Camber’s former director (“Seay”); Azar; RAD2 Minerals, Ltd., an entity owned and controlled by Azar (“RAD2”); Seay; and DBS Investments, Ltd., an entity owned and controlled by Seay. Azar, Seay, RAD2, and DBS are collectively referred to as the “Guarantors”.
Pursuant to the Assumption Agreement, N&B Energy agreed to assume all of Camber’s liabilities and obligations owed to IBC Bank under Camber’s prior note, loan agreement and related documents with IBC Bank (the “Loan Documents”), the amount due under and in connection which was secured by (a) an Oil and Gas Mortgage, Security Agreement, Financing Statement and Assignment of Production (Oklahoma) dated August 25, 2016, covering all of Camber’s right, title and interest in and to certain oil, gas and mineral leases and/or minerals, mineral interests and estates located in Lincoln, Payne, and Logan Counties, Oklahoma; (b) an Oil and Gas Mortgage, Security Agreement, Financing Statement and Assignment of Production (Oklahoma) dated August 1, 2018, covering all of Camber’s right, title, and interest in and to certain oil, gas, and mineral leases and/or mineral interests and estates located in Okfuskee County, Oklahoma (collectively, the “Orion Interests”); and (c) the Mortgage, Deed of Trust, Assignment, Security Agreement and Financing Statement dated as of August 25, 2016, covering Camber’s mineral interests located in Glasscock County, Texas (collectively, the “West Texas Properties”).
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Additionally, pursuant to the Assumption Agreement, IBC Bank approved the transactions contemplated by the Sale Agreement and the assumption by N&B Energy of all of the amounts and liabilities which Camber owed to IBC Bank (the “IBC Obligations”) and N&B Energy agreed to assume all of the IBC Obligations. Finally, pursuant to the Assumption Agreement, IBC Bank released and forever discharged Camber and CE Operating and each of their current and former officers, directors, and stockholders, from all covenants, agreements, obligations, claims and demands of any kind, whether in law or at equity, which IBC Bank then had, arising out of or related to the amounts which Camber owed to IBC Bank under the Note, Loan Agreement or mortgages and/or under such documents or agreements, and further agreed to release the lien which IBC Bank then held on the West Texas Properties.
N&B Energy Sale Agreement Closing
On September 26, 2018, the transactions contemplated by the Sale Agreement closed and N&B Energy assumed all of the IBC Obligations (pursuant to the Assumption Agreement described above) and paid Camber $100 in cash, and Camber transferred ownership of the Disposed Assets to N&B Energy.
Notwithstanding the sale of the Disposed Assets, Camber retained its assets in Glasscock County and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received) and a 3% overriding royalty interest in its prior Okfuskee County, Oklahoma assets; and retained an overriding royalty interest on certain other undeveloped leasehold interests, pursuant to an Assignment of Production Payment and Assignment of Overriding Royalty Interests.
The effective date of the Sale Agreement was August 1, 2018. The Assets were assigned “as is” with all faults.
As a result of the Assumption Agreement and the Sale Agreement, Camber reduced its liabilities by $37.9 million and its assets by approximately $12.1 million.
Discover Transactions
On October 5, 2017, Camber and Discover Growth entered into a Stock Purchase Agreement, amended on March 2, 2018 (as amended, the “October 2017 Purchase Agreement”) pursuant to which Camber agreed to sell, pursuant to the terms thereof, 1,683 shares of its Series C Preferred Stock for $16 million (a 5% original issue discount to the face value of such shares), subject to certain conditions set forth therein.
During the years ended March 31, 2020 and 2019, the Company sold 525 shares and 1,577 shares, respectively, of Series C Preferred Stock to Discover and Discover Growth, pursuant to the terms of various Stock Purchase Agreements, for total consideration of $5 million and $15 million, respectively. From April 1, 2020 through the date of this Report, the Company sold 630 shares of Series C Preferred Stock to Discover in consideration for $6 million.
During the year ended March 31, 2019, Discover converted 404 shares of the Series C Preferred Stock with a face value of $4.04 million, and a total of 3,794 shares of common stock were issued, which includes additional shares for conversion premiums and true ups in connection with those conversions through March 31, 2019.
During the year ended March 31, 2020, Discover and Discover Growth, which purchased shares of Series C Preferred Stock from us in December 2018 and which subsequently transferred all of its shares of Series C Preferred Stock to Discover, converted 11 shares of the Series C Preferred Stock with a face value of $110,000, and a total of 4,899,442 shares of common stock were issued, which includes additional shares for conversion premiums and true ups in connection with those conversions through March 31, 2020.
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The Series C Preferred Stock holder (Discover) did not convert any shares of Series C Preferred Stock into common stock during the period from January 1, 2020 to March 31, 2020. Since April 1, 2020, and through June 24, 2020, Discover has converted 498 shares of Series C Preferred Stock into approximately 13,033,208 shares of common stock, of which 7,354,416 shares of common stock had been issued as of June 24, 2020, and a total of approximately 5,678,792 shares of common stock were due to Discover, and are held in abeyance until such issuances are requested by Discover, subject to the 9.99% ownership limitation set forth in the designation of the Series C Preferred Stock. The number of Series C Preferred Stock converted by Discover of the Series C Preferred Stock since April 1, 2020, and through June 24, 2020, are summarized below:
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| ● | On April 15, 2020, Discover converted 17 shares of Series C Preferred Stock into 442,804 shares of common stock, all of which have been issued to date; |
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| ● | On April 23, 2020, Discover converted 236 shares of Series C Preferred Stock into 6,177,412 shares of common stock, all of which have been issued to date; and |
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| ●
| On June 23, 2020, Discover converted 245 shares of Series C Preferred Stock into 6,412,992 shares of common stock, of which a total of approximately 5,678,792 shares of common stock remain due to Discover as of June 24, 2020, and are held in abeyance until such issuances are requested by Discover, subject to the 9.99% ownership limitation set forth in the designation of the Series C Preferred Stock. |
As of June 24, 2020, the 2,951 outstanding shares of Series C Preferred Stock can convert, pursuant to their terms, into 77,243,823 shares of our common stock, which number includes 181,600 shares of common stock convertible upon conversion of all of the outstanding shares of outstanding Series C Preferred Stock at a conversion price of $162.50 per share (based on the $10,000 face amount of the Series C Preferred Stock) and approximately 77,062,223 shares of common stock for premium shares due thereunder (based on the current dividend rate of 24.95% per annum), and a conversion price of $0.6688 per share (the last conversion price provided in a conversion notice provided by Discover), which may be greater than or less than the conversion price that currently applies to the conversion of the Series C Preferred Stock pursuant to the terms of the Designation, which number of premium shares may increase significantly from time to time as the trading price of our common stock decreases, upon the occurrence of any trigger event under the Designation of the Series C Preferred Stock and upon the occurrence of certain other events, as described in greater detail in the Designation of the Series C Preferred Stock. The lowest possible conversion price of the Series C Preferred Stock is $0.001 per share. If converted in full at the lowest possible conversion price, the Series C Preferred Stock would convert into a maximum of 51,539,396,600 shares of common stock.
On April 6, 2016, Camber entered into a Securities Purchase Agreement with Discover, pursuant to which Camber issued a redeemable convertible subordinated debenture, with a face value of $530,000, initially convertible into shares of common stock at a conversion price equal to $101,562.50 per share. The debenture matures in seven years and accrues interest at a rate of 6.0% per annum. Due to the prior decline in the price of Camber’s common stock and that a trigger event occurred on June 30, 2016 as a result of the delay in filing Camber’s 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 (a) 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 Discover receives the last of the shares due), less $78,125 per share of common stock which resulting value is not to exceed (b) 85% of the lowest sales price on the last day of such period less $78,125 per share.
On October 31, 2018, Discover converted the entire $495,000 remaining balance of principal owed under the terms of a convertible debenture, into an aggregate of 642 shares of common stock, including 5 shares of common stock issuable upon conversion of the principal amount thereof (at a conversion price of $101,562.50 per share), and 637 shares in connection with conversion premiums due thereon (at an initial conversion price, as calculated as provided in such debenture, of $1,912.50 per share). A total of 80 of such shares were issued to Discover in connection with the initial conversion and the remaining shares were held in abeyance subject to Discover’s 9.99% ownership limitation, to be issued from time to time, at the request of Discover. Subsequent to the October 31, 2018 conversion date, Discover was due additional shares of common stock in connection with true ups associated with the original issuance, as a result of the conversion price of the conversion premiums falling to $31.25 per share pursuant to the terms of the convertible debenture. As a result, from April 1, 2019 to March 31, 2020, Discover was issued 29,073 shares of common stock as true-ups in connection with the October 31, 2018 conversion of the $495,000 remaining balance of principal owed under the terms of a convertible debenture. No additional shares were owed to Discover as of March 31, 2020, pursuant to the debenture.
October 2018 Purchase Agreement
On October 29, 2018 and effective October 26, 2018, Camber and Discover, entered into a Stock Purchase Agreement (as amended from time to time, the “October 2018 Purchase Agreement”).
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Under the terms of the October 2018 Purchase Agreement, Discover purchased 369 shares of Series C Preferred Stock on the closing date of the agreement, October 29, 2018, for $3.5 million.
Provided that Camber has not materially breached the terms of the October 2018 Purchase Agreement, Camber may at any time, in its sole and absolute discretion, repurchase from Discover all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Discover 110% of the aggregate face value of all such shares.
Camber also agreed to provide Discover a right of first offer to match any offer for financing Camber may receive from any person while the shares of Series C Preferred Stock sold pursuant to the October 2018 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, Camber agreed that if it issues any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then it would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover.
The October 2018 Purchase Agreement includes customary provisions requiring that Camber indemnify Discover against certain losses; representations and warranties and covenants.
November 2018 Purchase Agreement
On November 23, 2018 and effective November 23, 2018, Camber and Discover entered into a Stock Purchase Agreement, which was amended on December 3, 2018 (as amended to date, and from time to time, the “November 2018 Purchase Agreement”).
Under the terms of the November 2018 Purchase Agreement, Discover purchased 263 shares of Series C Preferred Stock, in consideration for $2.5 million on December 4, 2018.
Pursuant to the November 2018 Purchase Agreement, as long as Discover holds any shares of Series C Preferred Stock, Camber agreed that it would not issue or enter into or amend an agreement pursuant to which it may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price; or issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security, or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of Camber or the market for the common stock.
Additionally, provided that Camber has not materially breached the terms of the November 2018 Purchase Agreement, Camber may at any time, in its sole and absolute discretion, repurchase from Discover all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Discover 110% of the aggregate face value of all such shares.
Camber also agreed to provide Discover a right of first offer to match any offer for financing it may receive from any person while the shares of Series C Preferred Stock sold pursuant to the November 2018 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, Camber agreed that if Camber issues any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then Camber would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover.
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The November 2018 Purchase Agreement includes customary provisions requiring that Camber indemnify Discover against certain losses; representations and warranties and covenants.
February 2020 Stock Purchase Agreement
On and effective February 3, 2020, Camber and Discover entered into a Stock Purchase Agreement (the “February 2020 Purchase Agreement”).
Under the terms of the February 2020 Purchase Agreement, Discover purchased 525 shares of Series C Preferred Stock for $5 million, at a 5% original issue discount to the $10,000 face value of such preferred stock (the “Face Value”).
Pursuant to the February 2020 Purchase Agreement, as long as Discover holds any shares of Series C Preferred Stock, Camber agreed that, except as contemplated in connection with the Merger, it would not issue or enter into or amend an agreement pursuant to which Camber may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price. Camber also agreed that it would not issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of Camber or the market for the common stock.
Additionally, provided that Camber has not materially breached the terms of the February 2020 Purchase Agreement, Camber may at any time, in its sole and absolute discretion, repurchase from Discover all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Discover 110% of the aggregate face value of all such shares.
Camber also agreed to provide Discover a right of first offer to match any offer for financing Camber receives from any person while the shares of Series C Preferred Stock sold pursuant to the February 2020 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, Camber agreed that if it issues any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then Camber would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover.
Camber also agreed pursuant to the February 2020 Purchase Agreement that if the Merger does not close by the required date approved by the parties thereto (as such may be extended from time to time), and if the amount of funds loaned by Camber to Viking in connection with the Secured Notes, plus any applicable interest is returned to Camber by Viking, Camber is required, at Discover’s option in its sole and absolute discretion, to immediately repurchase from Discover all then outstanding Series C Preferred Stock shares acquired by Discover pursuant to the June 2020 Purchase Agreement, by paying to Discover 110% of the aggregate Face Value of all such shares.
Waiver and Amendment Agreement
On February 3, 2020, Camber and Discover entered into a Waivers and Amendments to Stock Purchase Agreements (the “Amendment”), pursuant to which Discover (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 February 3, 2020, (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 (a) waived any and all breaches and defaults that have occurred through February 3, 2020, and (b) waived all rights and remedies with respect to such breaches and defaults.
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The Amendment also provided that Camber was required to file a proxy to hold a stockholder meeting to approve an increase in Camber’s authorized common stock to 25 million shares as soon as possible (which meeting was held on April 16, 2020), and use its commercially reasonable best efforts to cause such increase to be declared effective as soon as possible, and in any event within 90 days of February 3, 2020; provided that such increase became effective on April 17, 2020. Discover also agreed that all calculations provided for in the Designation shall be made as if no such Trigger Event had occurred, and to waive any right to receive any additional shares of common stock based upon any such Trigger Event.
Discover agreed, pursuant to the Amendment, that the conversion rate of conversion premiums pursuant to the Designation would remain (a) 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 Camber’s previously reported reverse stock splits; and (b) 85% of the average of the lowest individual daily volume weighted average price 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 $0.10 per share of common stock, if a triggering event has occurred, and that such $0.10 per share discount would not be adjusted in connection with Camber’s previously reported reverse stock splits.
The Amendment also provided that the Measuring Period (as defined the Designation) would begin on the date of the Agreement, February 3, 2020; and that the Designation would be amended to provide that holders of the Series C Preferred Stock will vote with holders of common stock as a single class, on an as converted basis subject to the beneficial ownership limitation set forth in the Designation; provided that the NYSE American has since advised Camber that such amendment would not be possible under the current rules of the NYSE American.
Securities Exchange Agreement and Termination Agreement
In connection with an Agreement and Plan of Merger entered into on July 9, 2019 with Lineal, Camber entered into (a) a Security Exchange Agreement dated July 8, 2019 (the “Exchange Agreement”), by and between Camber and Discover Growth Fund LLC (“Discover”); and (b) a Termination Agreement dated July 8, 2019, by and between Camber and Discover Growth Fund (“Discover Growth”), both of which agreements have since terminated prior to any transactions contemplated thereunder becoming effective as a result of the Redemption Agreement (discussed below).
June 2020 Stock Purchase Agreement
On and effective June 22, 2020, the Company and Discover entered into a Stock Purchase Agreement (the “June 2020 Purchase Agreement”), pursuant to which Discover purchased 630 shares of Series C Preferred Stock for $6 million, at a 5% original issue discount to the $10,000 face value of such preferred stock (the “Face Value”). Pursuant to the June 2020 Purchase Agreement, as long as Discover holds any shares of Series C Preferred Stock, the Company agreed that, except as contemplated in connection with the Merger, the Company would not issue or enter into or amend an agreement pursuant to which the Company may issue any shares of common stock, other than (a) for restricted securities with no registration rights, (b) in connection with a strategic acquisition, (c) in an underwritten public offering, or (d) at a fixed price. The Company also agreed that it would not issue or amend any debt or equity securities convertible into, exchangeable or exercisable for, or including the right to receive, shares of common stock (i) at a conversion price, exercise price or exchange rate or other price that is based upon or varies with, the trading prices of or quotations for the shares of common stock at any time after the initial issuance of the security or (ii) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock.
Additionally, provided that the Company has not materially breached the terms of the June 2020 Purchase Agreement, the Company may at any time, in its sole and absolute discretion, repurchase from Discover all, but not less than all, of the then outstanding shares of Series C Preferred Stock sold pursuant to the agreement by paying to Discover 110% of the aggregate face value of all such shares.
The Company also agreed to provide Discover a right of first offer to match any offer for financing the Company receives from any person while the shares of Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement are outstanding, except for debt financings not convertible into common stock, which are excluded from such right to match.
Finally, the Company agreed that if it issues any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Discover, then the Company would notify Discover of such additional or more favorable term and such term, at Discover’s option, may become a part of the transaction documents with Discover.
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The Company agreed pursuant to the June 2020 Purchase Agreement that if the Merger does not close by the required date approved by the parties thereto (as such may be extended from time to time), the Company is required, at Discover’s option, in its sole and absolute discretion, to immediately repurchase from Discover all then outstanding Series C Preferred Stock shares acquired by Discover pursuant to the June 2020 Purchase Agreement, by paying to Discover 110% of the aggregate Face Value of all such shares (the “Repurchase Requirement”), which totals $6,930,000.
Finally, the Company agreed to include proposals relating to the approval of the June 2020 Purchase Agreement and the issuance of the shares of common stock upon conversion of the Series C Preferred Stock sold pursuant to the June 2020 Purchase Agreement, as well as an increase in authorized common stock to fulfill the Company’s obligations to issue such shares, at the meeting held to approve the Merger or a separate meeting in the event the Merger is terminated prior to shareholder approval, and to use commercially reasonable best efforts to obtain such approvals as soon as possible and in any event prior to December 31, 2020.
Amendment to February 2020 Stock Purchase Agreement
On June 22, 2020, the Company and Discover entered into an Amendment to Stock Purchase Agreement (the “SPA Amendment”), pursuant to which Discover agreed to terminate the obligation set forth in the Stock Purchase Agreement previously entered into between the Company and Discover on February 3, 2020, which contained a Repurchase Requirement substantially similar to the one contained in the June 2020 Purchase Agreement (as to the 525 shares of Series C Preferred Stock sold to Discover on February 3, 2020), which would have required that the Company pay Discover an aggregate of $5,775,000 in connection with the redemption of the 525 shares of Series C Preferred Stock the Company sold to Discover in the event the Merger was terminated.
Redemption Agreement
On December 31, 2019 (the “Effective Date”), Camber entered into, and closed the transactions contemplated by, a Preferred Stock Redemption Agreement (the “Redemption Agreement” and the redemption contemplated thereby, the “Redemption”), by and between Camber, Lineal Star Holdings, LLC, Camber’s wholly-owned subsidiary at the time of the entry into the Redemption Agreement (“Lineal”), Lineal’s wholly-owned subsidiaries, and the holders of Camber’s Series E Redeemable Convertible Preferred Stock (“Series E Preferred Stock”) and Series F Redeemable Preferred Stock (“Series F Preferred Stock”, and the holders of the Series E Preferred Stock and Series F Preferred Stock, the “Preferred Holders”).
Effective on July 9, 2019, Camber had acquired 100% ownership of Lineal from the Preferred Holders, then members of Lineal, in consideration for 1,000,000 shares of Series E Preferred Stock and 16,750 shares of Series F Preferred Stock, pursuant to the terms of an Agreement and Plan of Merger entered into on July 9, 2019 (the “Lineal Merger”).
The certificate of designations providing for the rights and preferences of the Series E Preferred Stock and Series F Preferred Stock allowed for certain rights of the Preferred Holders, including, in certain cases, the redemption, at the option of the Preferred Holders, of all shares of Series E Preferred Stock and Series F Preferred Stock, for 100% of the outstanding interests of Lineal held by Camber.
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Pursuant to the Redemption Agreement, the parties thereto mutually agreed to unwind the Lineal Merger and allow for the redemption in full of Lineal by the Preferred Holders. The mutual determination to move forward with such redemption transaction was due partially to the fact that Lineal had, since the date of the Lineal Merger, been unable to complete a further acquisition or combination which would allow the post-Lineal Merger combined company to meet the initial listing standards of the NYSE American. This was a requirement to Camber having to seek stockholder approval for the terms of the Series E Preferred Stock (including the voting rights (i.e., the right, together with the Series F Preferred Stock, to vote 80% of Camber’s voting shares) and conversion rights (i.e., the right to convert into between 67-70% of Camber’s post-stockholder approval capitalization) associated therewith). Consequently, and because no definitive timeline was able to be established for when Camber believed it would meet the NYSE American initial listing standards and consequently, when stockholder approval would be sought or received for the terms of the Series E Preferred Stock and Series F Preferred Stock, the Preferred Holders and Camber determined it was in their mutual best interests to unwind the Lineal Merger by way of the Redemption.
Pursuant to the Redemption Agreement, effective as of December 31, 2019, each holder of Series E Preferred Stock transferred such Series E Preferred Stock to Camber in consideration for their pro rata share (except as discussed below in connection with the Series F Preferred Stock holder, who was also a holder of Series E Preferred Stock) of 100% of the Common Shares of Lineal and the holder of the Series F Preferred Stock transferred such Series F Preferred Stock (and such Series E Preferred Stock shares held by such holder) to Camber in consideration for 100% of the Preferred Shares of Lineal and as a result, ownership of 100% of Lineal was transferred back to the Preferred Holders, the original owners of Lineal prior to the Lineal Merger. Additionally, all of the Series E Preferred Stock and Series F Preferred Stock of Camber was automatically cancelled and deemed redeemed by Camber and the Series F Holder waived and forgave any and all accrued dividends on the Series F Preferred Stock.
The Redemption Agreement also provided for (a) the entry by Lineal and Camber into a new promissory note in the amount of $1,539,719, evidencing the repayment of a promissory note in the original amount of $1,050,000 provided by Lineal to Camber at the time of the closing of the Lineal Merger, together with additional amounts loaned by Camber to Lineal through December 31, 2019 (the “New Note”); (b) the loan by Camber to Lineal of an additional $800,000, which was evidenced by a promissory note in the amount of $800,000, entered into by Lineal in favor of Camber on December 31, 2019 (“Note No. 2”); and (c) the termination of the prior Plan of Merger and Funding and Loan Agreement entered into in connection therewith (pursuant to which all funds previously held in a segregated account for future Lineal acquisitions, less amounts loaned pursuant to Note No. 2, were released back to Camber).
The Redemption Agreement also requires Camber to obtain a tail directors and officers liability insurance policy for six years following the effective date of the Redemption, which must be in place prior to December 31, 2020 and provides for (i) mutual general releases by (a) Lineal, its subsidiaries, and each Preferred Holder, subject to certain limited exceptions in the event of a third-party claim and (b) Camber; (ii) non-disparagement and confidentiality obligations of the parties; and (iii) indemnification obligations, each as described in greater detail in the Redemption Agreement.
The New Note, issued by Lineal as borrower, in the amount of $1,539,719, accrues interest, payable quarterly in arrears, beginning on March 31, 2020, at 10% per annum (18% upon the occurrence of an event of default), and continuing until December 31, 2021, when all interest and principal is due. The New Note contains a provision whereby payments of principal and interest owed under the note are suspended and interest does not accrue if Camber fails to pay certain indemnification obligations under the Redemption Agreement, and if such amounts continue unpaid for 30 days, then the amount of principal and interest due under the note is offset by the amount of such unpaid obligations. The New Note contains standard and customary events of default, including cross-defaults with Note No. 2, and if a change of control of Lineal occurs (as described in the New Note) which is not pre-approved by Camber.
Note No. 2, issued by Lineal as borrower, in the amount of $800,000, accrues interest, payable quarterly in arrears, beginning on March 31, 2020, at 8% per annum (18% upon the occurrence of an event of default), and continuing until December 31, 2021, when all interest and principal is due. The New Note contains a provision whereby payments of principal and interest owed under the note are suspended and interest does not accrue if Camber fails to pay certain indemnification obligations under the Redemption Agreement, and if such amounts continue unpaid for 30 days then the amount of principal and interest due under the note is offset by the amount of such unpaid obligations (provided there is only one offset under either of the New Note and Note No. 2, with priority being given to the New Note). The New Note contains standard and customary events of default, including cross-defaults with the New Note, if a change of control of Lineal occurs (as described in the New Note) which is not pre-approved by Camber or if Lineal distributes cash or other assets to its members, other than amounts to cover taxes of the members, as described in greater detail in the New Note.
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The result of the Redemption was to effectively unwind the Lineal Merger, effective as of December 31, 2019.
Related Party Office Space Use
BlackBriar is also providing Camber’s office space without charge to Camber.
Director Independence
During the year ended March 31, 2020, the Board determined that 67% of the Board is independent under the definition of independence and in compliance with the listing standards of the NYSE American listing requirements. Based upon these standards, the Board has determined that Mr. Miller and Mr. Zeidman are “independent” members of the Board of Directors as defined in Section 803(A) of the NYSE American Company Guide, and Mr. Schleizer is not “independent” due to his status as an officer of the Company (see “Item 10. Directors, Executive Officers and Corporate Governance“).
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Our Audit Committee of the Board of Directors approves in advance the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services.
Audit Fees
The aggregate fees billed by our independent auditors, GBH, CPAs, PC (“GBH”), which combined its practice with Marcum , LLP (“Marcum”) effective July 1, 2018, and Marcum LLP, for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K for the years ended March 31, 2020 and 2019, and for the review of quarterly financial statements included in our Quarterly Reports on Form 10-Q for the quarters ending June 30, September 30, and December 31, 2019 and 2018, were:
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| 2020 |
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| 2019 |
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| Marcum |
| $ | 323,100 |
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| $ | 56,500 |
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| GBH CPAs, PC |
| $ | — |
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| $ | 93,500 |
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Audit fees incurred by the Company were pre-approved by the Audit Committee.
Audit Related Fees: A total of $100,000 of the fees disclosed above for fiscal 2020 relate to the audit of Lineal in connection with the Company’s July 2019 acquisition of Lineal (which has since been divested).
Tax Fees: None.
All Other Fees: A total of $30,000 of the fees disclosed above for fiscal 2020 relate to the review of the Company’s pro forma financial statements relating to the July 2019 acquisition of Lineal (which has since been divested).
We do not use the auditors for financial information system design and implementation. Such services, which include designing or implementing a system that aggregates source data underlying the financial statements or that generates information that is significant to our financial statements, are provided internally or by other service providers. We do not engage the auditors to provide compliance outsourcing services.
The Audit Committee of the Board of Directors has considered the nature and amount of fees billed by GBH/Marcum and believes that the provision of services for activities unrelated to the audit is compatible with maintaining GBH/Marcum’s independence.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | Documents filed as part of this report |
(1) All financial statements
| Index to Financial Statements |
| Page |
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| Report of Independent Registered Public Accounting Firm |
| F-2 |
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| Consolidated Balance Sheets as of March 31, 2020 and 2019 |
| F-3 |
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| Consolidated Statements of Operations for the Years Ended March 31, 2020 and 2019 |
| F-4 |
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| Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the Years Ended March 31, 2020 and 2019 |
| F-5 |
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| Consolidated Statements of Cash Flows for the Years Ended March 31, 2020 and 2019 |
| F-6 |
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| Notes to Consolidated Financial Statements |
| F-7 |
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(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto included in this Form 10-K.
(3) Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
None.
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In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAMBER ENERGY, INC.
| BY: | /s/ James A. Doris |
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| James A. Doris |
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| Interim Chief Executive Officer |
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| (Principal Executive Officer) |
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Dated: June 7, 2022
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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EXHIBIT INDEX
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| Agreed Conversion Agreement dated May 15, 2019, by and between Camber Energy, Inc. and Alan Dreeben | |
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| Section 302 Certification of Periodic Report of Principal Executive Officer | |
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| Section 302 Certification of Periodic Report of Principal Financial Officer | |
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| Section 906 Certification of Periodic Report of Principal Executive Officer | |
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| Section 906 Certification of Periodic Report of Principal Financial Officer | |
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| 101.INS |
| XBRL Instance Document |
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| 101.SCH |
| XBRL Taxonomy Extension Schema Document |
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| 101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.CAL |
| XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
* Exhibits filed herewith.
** Exhibits furnished herewith.
*** Management contract or compensatory plan.
+ Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) and/or Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Commission upon request; provided
| 98 |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
REQUIRED BY RULE 13A-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James Doris, certify that:
| 1. | I have reviewed this annual report on Form 10-K/A of Camber Energy, Inc.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 7, 2022 | By: | /s/ James Doris |
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| Chief Executive Officer (Principal Executive Officer) |
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EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER
REQUIRED BY RULE 13A-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank A. Barker, Jr., certify that:
| 1. | I have reviewed this annual report on Form 10-K/A of Camber Energy, Inc.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 7, 2022 | By: | /s/ Frank A. Barker, Jr. |
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| Frank A. Barker, Jr. Chief Financial Officer (Principal Accounting Officer) |
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EXHIBIT 32.1
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, James Doris, Chief Executive Officer of Camber Energy, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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| (1) | the Annual Report on Form 10-K/A of the Company for the period ended March 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: June 7, 2022 | By: | /s/ James Doris |
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| James Doris Chief Executive Officer (Principal Executive Officer) |
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EXHIBIT 32.2
CERTIFICATION OF
PRINCIPAL ACCOUNTING OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, Frank A. Barker, Jr., Chief Financial Officer of Camber Energy, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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| (1) | the Annual Report on Form 10-K/A of the Company for the period ended March 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: June 7, 2022 | By: | /s/ Frank A. Barker, Jr. |
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| Frank A. Barker, Jr. Chief Financial Officer (Principal Accounting Officer) |
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