LIQUIDITY AND GOING CONCERN CONSIDERATIONS
|6 Months Ended|
Sep. 30, 2019
|Organization, Consolidation and Presentation of Financial Statements [Abstract]|
|LIQUIDITY AND GOING CONCERN CONSIDERATIONS||
At September 30, 2019, the Company’s total current assets of $10.0 million exceeded its total current liabilities of approximately $3.8 million, resulting in working capital of $6.2 million, while at March 31, 2019, the Company’s total current assets of $8.2 million exceeded its total current liabilities of approximately $2.1 million, resulting in working capital of $6.1 million, resulting in a minimal change in working capital. Substantially all of our working capital which is in cash constitutes cash held in an account designated for acquisitions and the use of such funds is only available with the consent of a designee of the Company’s outstanding Series E Preferred Stock, who has advised the Company that he does not plan to authorize the Company’s further use of the designated funds, unless or until the Company and the Series E and F Preferred Stock holders can agree to certain amended terms of the Plan of Merger. It is anticipated that an agreement will be reached, but the Company cannot provide any assurance that an agreement will be reached on favorable terms, if at all.
Management believes that with the elimination of its outstanding debt and the funds raised through equity transactions, along with revenues the Company anticipates generating through Lineal, the Company has sufficient capital to fund operating costs and planned capital expenditures through the end of August 2020, provided that it is able to use funds for working capital which are currently held in a designated bank account for acquisition (as discussed above). As discussed below under “NOTE 11 – Merger Agreement”, the Company deposited $4,000,000 into a newly opened and dedicated bank account in connection with the Merger, which was intended to be used for acquisitions. The disbursement of funds from the account is required to be approved by (i) a person designated by the holders of the Series E Preferred Stock; and (ii) the Company. As of September 30, 2019, a total of $4,000,000 remained of the Deposit and as of the date of this filing a total of approximately $3.4 million remains of the Deposit. The release of such funds requires the approval of the person designated by such Series E Preferred Stock holders, and such designated person has control over whether or not to release such funds. As of the date of this filing, the Series E Preferred Stock designee has advised the Company that he does not plan to authorize the Company’s further use of the designated funds, unless or until the Company and the Series E and F Preferred Stock holders can agree to certain amended terms of the Plan of Merger. Because the designated funds constitute substantially all of funds available for working capital, in the event the use of the funds, if required, is not authorized, we may not have sufficient capital to support our operations for the next 12 months, provided that with the use of the funds in the account, we believe that we will have sufficient funds to continue as a going concern. Additionally, moving forward, management intends to use funds (including amounts held in the designated account) to facilitate other targeted acquisitions and mergers. If additional financing is required to consummate transactions, management intends to seek additional equity and debt financing, as needed, of which no financing arrangements are currently in place. Finally, management intends to target additional acquisitions, combinations and potential mergers moving forward which will allow the Company to meet the NYSE American initial listing requirements, upon the closing of such transaction(s). The result of such transactions may be a change in the business focus and/or management of the Company. Furthermore, moving forward, the preferred stock issued to the Lineal Members as a result of the Merger may be redeemed, and the Lineal Members, subject to the terms of the preferred stock, may take back control of some or all of Lineal.
As discussed in “NOTE 6 – Notes Payable and Debenture”, the Company borrowed $40 million from IBC effective August 25, 2016. The proceeds of the loan were used to repay and refinance approximately $30.6 million of indebtedness owed by certain sellers in the Company’s August 2016 asset acquisition (the “Acquisition”) to International Bank of Commerce (“IBC” or “IBC Bank”) as part of the closing of the Acquisition. As of September 30, 2018, the Company was not in compliance with certain covenants of the loan agreement, including requiring the Company to maintain a net worth of $30 million, the Company was in default of the terms of the loan, and the balance of the loan due to IBC of $36.9 million (less unamortized debt issuance costs of approximately $1.3 million), was recognized as a short-term liability on the Company’s balance sheet as of September 30, 2018. The Company also recognized approximately $460,000 in accrued interest as of September 30, 2018 related to this note. In conjunction with the “Assumption Agreement” (discussed below under “Assumption Agreement”), the Company reduced its liabilities by $37.9 million, including all of the outstanding amounts due to IBC, and its assets by approximately $12.1 million, and has no secured debt outstanding as of September 30, 2019.
During the three and six months ended September 30, 2019 and 2018, the Company sold 0 shares and 735 shares and 0 shares and 945 shares, respectively, of Series C Preferred Stock pursuant to the terms of an October 2017 Stock Purchase Agreement, for total consideration of $0 and $7 million and $0 and $9.0 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, LLC as purchaser, which entity is affiliated with Richard N. Azar II, the Company’s former Chief Executive Officer and former director (“N&B Energy”), and Donnie B. Seay, the Company’s former director. 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 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 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 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, 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”); 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 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 (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 County and Hutchinson Counties, Texas and also retained a 12.5% production payment (effective until a total of $2.5 million has been received); a 3% overriding royalty interest in its 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 is 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:
The entire disclosure when substantial doubt is raised about the ability to continue as a going concern. Includes, but is not limited to, principal conditions or events that raised substantial doubt about the ability to continue as a going concern, management's evaluation of the significance of those conditions or events in relation to the ability to meet its obligations, and management's plans that alleviated or are intended to mitigate the conditions or events that raise substantial doubt about the ability to continue as a going concern.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef