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NOTES PAYABLE

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

7. NOTES PAYABLE

In July and August 2018, the Company entered into two unsecured note agreements totaling $25,000 with Mr. Anthony Kamin, who is also a member of the Company's Board of Directors. The notes are payable on demand and accrue interest at 8% interest. In February 2019, the Company and Mr. Kamin entered into an unsecured note agreement in the amount of $25,000. The note was due May 1, 2019, and accrued interest at 8%. In March 2019, Mr. Kamin used the $50,000 note balances to exercise some of his outstanding warrants to purchase common stock (see Note 8).

In February 2019, the Company entered into five unsecured promissory note agreements with accredited investors, including the agreement with Mr. Kamin discussed above, totaling $90,000. The notes were due May 1, 2019, and accrued interest at 8%. One of the notes, in the amount of $15,000 was issued to Michael R. Morrisett, the Company's President. These notes and the related interest were paid in May 2019.

On March 27, 2019, the Company entered into a First Amendment to the Senior Revolver Loan Agreement (the "Agreement") with Crossfirst Bank. Under the terms of the Agreement, the commitment amount was increased to $9,000,000 and the maturity date was extended until March 27, 2021. The Company borrowed $4,880,383 of new funds and paid $76,900 in loan origination fees which were added to the balance of the loan. The unamortized loan origination fees have been netted against the outstanding loan balance in accordance with generally accepted accounting principles. The Agreement requires the Company to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 and funded debt to EBITDAX of 4:1 on a trailing 12-month basis. As a part of the First Amendment to the Agreement in conjunction with the Energy Quest II, LLC acquisition, the covenants were modified on a retrospective basis.

On December 31, 2018, the Company and investors for all of the Senior Unsecured Convertible Promissory Notes (the Notes) entered into amended agreements whereby the maturity dates for the notes maturing December 31, 2018 were extended to December 31, 2019, the conversion feature of the notes was modified from $0.15 per share of common stock to $0.10 per share. Additionally, the Warrant Certificates to purchase shares of common stock of the Company, which were issued as a part of the original agreements, were repriced from $0.25 per share to $0.15 per share. The value allocated to the Warrant Certificates modification was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 167%, risk free interest rate of 2.63% and an expected useful life of 12 months. The change in fair value of the Warrant Certificates as a result of the modifications of $139,985 was allocated to Paid in Capital and included as an expense in 2018. The Notes conversion features were equivalent to their intrinsic value at the date of modification. The remaining Debt Issue Costs as of September 30, 2019, from the original notes which mature at December 31, 2019, of $1,449 will be amortized as interest expense over the remaining life of the Notes.

The following table reflects the composition of convertible notes as of September 30:

		2019												2018
		Current				Long Term				Total				Total
Convertible Notes Outstanding		$	152,500			$	—			$	152,500			$	260,000
Debt Issue Costs – Warrants and Conversion Feature			(1,449	)			—				(1,449	)			(27,673	)

Convertible Notes Outstanding, Net		$	151,051			$	—			$	151,051			$	232,327

In the second quarter of 2019, three of the Senior Unsecured Promissory Note investors exercised the conversion feature and converted their $107,500 notes for 1,075,000 shares of the Company's common stock.