Notes to Con
solidated
Condensed
Financial
Statements
N
ote 1 – Organization
Organization
Harvest Natural Resources, Inc. (“Harvest” or the “Company”) is a petroleum exploration and production company incorporated under Delaware law in 1988.
We hold exploration acreage offshore of the Republic of Gabon (“Gabon”) through the Dussafu Marin Permit (“Dussafu PSC”). See
Note 7 – Gabon
. We currently are evaluating the continued development or possible sale of our Gabon interests.
We previously owned significant interests in the Bolivarian Republic of Venezuela (“Venezuela”). We sold these interests in a transaction that closed on October 7, 2016. See
Share Purchase Agreement
, below, for more information.
Interim Reporting
In our opinion, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position as of
September 30, 2016
, results of operations for the
three and nine months ended September 30, 2016
and
2015
, and the cash flows
for the nine months ended September 30, 2016 and 2015. The
December 31, 2015
consolidated balance sheet data was derived from audited financial statements, but does not include
all disclosures required by
United States of America generally accepted
accounting principles (“U.S. GAAP”
)
. The unaudited consolidated condensed financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by
U.S.
GAAP. The consolidated condensed financial statements included in this report should be read with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2015
, which include certain definitions and a summary of significant accounting policies. The results of operations for any interim period
are not necessarily indicative of the results of operations for the entire year.
Securities
Purchase Agreement
On June 19, 2015, the Company and certain of its domestic subsidiaries entered into a securities purchase agreement (the “Securities Purchase Agreement”) with CT Energy Holding SRL (“CT Energy”), a private investment firm organized as a Barbados Society with Restricted Liability, under which CT Energy purchased certain securities of the Company and acquired certain governance rights. Harvest immediately received gross proceeds of
$32.2
million from the sale of the securities, as described below. Key terms of the transaction include:
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·
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CT Energy acquired a
$25.2
million,
five
year,
15.0%
non-convertible senior secured promissory note (the “15% Note”).
|
|
·
|
|
CT Energy acquired a
$7.0
million,
five
year,
9.0%
convertible senior secured n
ote (the “9% Note”). The 9% Note and associated accrued interest of
$0.1
million was converted into
8,667,597
shares (approximately
2,166,900
shares taking into account the
November 3, 2016
one-for-four
reverse stock split) of Harvest common stock at a c
onversion price of
$0.82
per share
on Se
ptember 15, 2015
(approximately
$3.28
per share taking into account the
November 3, 2016
one-for-four
reverse stock split)
.
|
|
·
|
|
CT Energy acquired a warrant to purchase up to
34,070,82
0
shares (approximately
8,517,705
shares taking into account the November 3, 2016
one-for-four
reverse stock split)
of Harvest's common stock at an in
itial exercise price of
$1.25
per share
(
$5.00
per share taking into account the November 3, 2016
one-for-four
reverse stock split)
(the “CT Warrant”), subject to certain conditions set forth in the CT Warrant.
|
|
·
|
|
CT
Energy
acquired a
five
-year
15.0%
non-convertible senior secured note (the “
Additional Draw Note
”), under which CT Energy could
elect to provide
$2.0
million of additional funds to the Company per month for up to
six
months following the
one
-year anniversary of the closing date of the transaction
.
|
|
·
|
|
CT Energy was granted certain governance rights in the transaction, including the right to appoint specified directors.
|
|
·
|
|
CT Energia Holding Ltd. (“CT Energia”), a Malta corporation and the Company, entered into a Management Agreement (the “Management Agreement”), under which CT Energia and its representatives provided management services with respect to the operations of the Company’s business as it relates to Petrodelta and Venezuela generally.
|
The securities sold to CT Energy under the Securities Purchase Agreement, as well as CT Energy’s governance rights, the Management Agreement and the Company’s relationship with CT Energy generally, were terminated on October 7, 2016 upon the
closing of the sale of all of the Company’s Venezuelan interests to an affiliate of CT Energy.
See
Share Purchase Agreement
, below, for more information.
Share Purchase Agreement
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia BV (“HNR Energia”), completed the sale of all of HNR Energia’s
51%
interest in Harvest-Vinccler Dutch Holding B.V., a Netherlands company (“Harvest Holding”), to Delta Petroleum N.V., a limited liability company organized under the laws of Curacao (“Delta Petroleum”), pursuant to a share purchase agreement, dated June 29, 2016 (the “Share Purchase Agreement”). Harvest Holding owns, indirectly through wholly owned subsidiaries, a
40%
interest in Petrodelta, S.A., a mixed company organized under Venezuelan law (“Petrodelta”), through which all of the Company’s interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to Delta Petroleum.
Delta Petroleum is an affiliate of CT Energy, which assigned all of its rights and obligations under the Share Purchase Agreement to Delta Petroleum on September 26, 2016. For more information about CT Energy, see
Securities Purchase Agreement
, above.
At the closing, the Company received consideration consisting of:
|
·
|
|
$69.4
million in cash paid after various closing adjustments;
|
|
·
|
|
an
11%
non-convertible senior promissory note payable by Delta Petroleum to HNR Energia
six
months from the closing date in the principal amount of
$12.0
million, guaranteed by the sole member and sole equity-holder of Delta Petroleum (the “ 11% Note ”);
|
|
·
|
|
the return of all of the Company’s common stock owned by CT Energy, consisting of
8,667,597
shares
(approximately
2,166,900
shares taking into account the November 3, 2016
one-for-four
reverse stock split
) which was
approximately
16.8%
of all outstanding shares pre-closing, to be held by the Company as treasury shares;
|
|
·
|
|
the cancellation of
$30.0
million in outstanding principal under the
15%
Note;
|
|
·
|
|
the cancellation of the CT Warrant.
|
At the closing, the outstanding principal and accrued interest totaling
$38.9
million and
$1.4
million, respectively, under both the 15% Note and the Additional Draw Note, were repaid, net of withholding tax, as a closing adjustment to cash, and the 15% Note and Additional Draw Note were terminated. (The $69.4 million in cash referenced above takes these adjustments into account.) To fund Harvest’s transaction expenses and operations until the closing under the Share Purchase Agreement, CT Energy had loaned Harvest
$2.0
million on each of June 21, 2016, July 20, 2016, August 24, 2016 and September 21, 2016 unde
r the Additional Draw Note.
The relationship between the Company and CT Energy effectively terminated upon the closing under the Share Purchase Agreement. In addition to the termination or relinquishment of all Company securities held by CT Energy, Oswaldo Cisneros and Alberto Sosa resigned as CT Energy’s non-independent designees to the Company’s board of directors. Additionally, the Securities Purchase Agreement and certain agreements related to the Securities Purchase Agreement, including the Management Agreement, terminated. Finally, all liens securing Company debt formerly owed to CT Energy were released at the closing. Upon the closing, the Company’s primary assets were cash from the proceeds of the transaction and the Company’s oil and gas interests in Gabon.
Long-Term Receivable – CT Energia
On
January 4, 2016
, HNR Finance B.V., a wholly owned subsidiary of Harvest Holding (“HNR Finance”), provided a loan to CT Energia of
$5.2
million under an
11.0%
promissory note due
2019
(the “CT Energia Note”). The purpose of the loan was to provide CT Energia with collateral to obtain funds for one or more loans to Petrodelta, which is
40%
owned by HNR Finance. HNR Finance’s sole recourse for payment of the principal amount of the loan was the payments of principal and interest from loans that CT Energia has made to Petrodelta.
The source of funds for HNR Finance’s $5.2 million loan to CT Energia was a capital contribution from Harvest Holding, which, in return, received the same aggregate amount of capital contributions from its shareholders, pro rata according to their equity interests in Harvest Holding. Of that aggregate amount of capital contributions, HNR Energia contributed
$2.6
million, which was a capital contribution from Harvest. During the three months ended March 31, 2016, we recorded a $5.2 million allowance to fully reserve the CT Energia Note due to concerns related to the continued deteriorating economic conditions in Venezuela and our assessment relating to the probability that the CT Energia Note will be collected. As of September 30, 2016, the CT Energia Note remained fully reserved and we had not accrued any interest with respect to this note receivable.
As discussed above under
Share Purchase Agreement
, the Company sold its 51% interest in Harvest Holding, the parent company of HNR Finance, which holds the CT Energia Note), to an affiliate of CT Energy on October 7, 2016.
Reverse Stock Split
On December 2, 2015, the Company received notification from the New York Stock Exchange (“NYSE”) that the Company was not in compliance with the NYSE's continued listing standards, which require a minimum average closing price of $1.00 per share over 30 consecutive trading days. In an effort to correct the deficiency, after the market closed on November 3, 2016, the Company completed a
one
-for-four reverse split of its issued and outstanding common stock. The Company’s common stock began trading on a split-adjusted basis at market open on November 4, 2016. In connection with the reverse stock split, the Company amended its amended and restated certificate of incorporation to reduce the authorized number of shares of common stock from
150,000,000
to
37,500,000
.
As of November 4, 2016, the closing price of the Company’s common stock had increased to
$4.45
per share. Given the increase in our common stock price, the Company expects that it will regain compliance with the NYSE’s minimum price listing standard on December 19, 2016.
All share and per share amounts in this report have been reported on a post-split basis.
Note 2 – Liquidity
W
e expect the net proceeds from the sale of our Venezuelan interests
on October 7, 2016
will be adequate to meet our short-term liquidity requirements.
In January, April and July
2016, due to our liquidity position, the Company amended the
15%
Note to increase the principal amount of the note equal to the amount of the
accrued
interest, less withholding
tax, which
was due to CT Energy.
On May 3, 2016
, the Company increased the principal amount of the 15% Note by
$3.0
million
.
Taking these increases into account, t
he
principal
amount outstanding under the 15% Note
was
$30.
9
million
as of
September 30, 2016
.
As of
September 30, 2016,
we
had
capitalized interest payments
, less withholding tax,
totaling
$
2
.7
million.
As discussed above in
Note 1
– Organization
– Share Purchase Agreement
, the outstanding principal under the Additional Draw Note
wa
s
$8
.0
million
at
September 30
, 2016
. T
he Additio
nal Draw Note was cancelled on October 7, 2016
upon the closing of the sale of our Venezuelan interests
.
Our primary tangible asset is our oil and gas interests in Gabon. We have received two proposals for the purchase of our Gabon interests and are in discussions with both potential buyers; however, there can be no assurances that these discussions or either proposal will lead to a definitive transaction. We currently are evaluating the
continued development or
possible sale of our Gabon interests,
potential
distributions of cash to our stockholders, and possible dissolution of the Company.
The Company completed a one-for-four reverse split of its issued and outstanding common stock on November 3, 2016. See
Note 1 – Organization – Reverse Stock Split
, above, for more information.
All share and per share amounts in this report have been reflected on a post-split basis in these financial statements.
On April 25, 2016, the Company received a notice from the NYSE stating that the Company was not in compliance with a second NYSE continued listing requirement, which provides that a company is not in compliance if its average global market capitalization over a consecutive 30 trading-day period is less than $50 million and, at the same time, its stockholders’ equity is less than $50 million.
The Company believes that the sale of its Venezuelan interests on October 7, 2016 ultimately will allow it to regain compliance with this listing standard by increasing its stockholders’ equity. However, the Company must demonstrate compliance for two consecutive financial quarters before the deficiency can be cured.
Upon the closing of the sale of the Company’s 51 percent interest in Harvest Holding, the Company received, among other consideration, $69.4 million in net cash proceeds and a $
12.0
million note payable from Delta Petroleum, due
six
months after closing. A portion of the proceeds from the sale have been and will be used to fund costs associated with the either the sale or development of the Company’s Gabon prospect, to pay certain severance costs, to fund capital expenditures, to pay tax obligations related to the sale, to fund any potential future dividends declared and to maintain ongoing general operating and administrative expenses.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated condensed financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated. Third-party interests in our majority-owned subsidiaries are presented as noncontrolling interests owners.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not affect our consolidated condensed financial results.
Note Receivable
A loan is considered impaired if it is probable, based on current information and events, that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Loans are reviewed for impairment and include loans that are past due, non-performing or in bankruptcy. Recognition of interest income is suspended and the loan is placed on non-accrual status when management determines that collection of future interest income is not probable. Accrual is resumed, and previously suspended interest income is recognized, when the loan becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans are recorded first against the receivable and then to any unrecognized interest income.
Investment in Affiliate
Until the October 7, 2016 sale of our interests in Venezuela, w
e a
ccounted for the
investment in Petrodelta under
Accounting Standards Codification (
“ASC
”)
325 – Investments – Other
(the “cost method”
). Under the cost method we
did
not recognize any equity in earnings from
the
investment in Petrodelta in our results o
f operations, but
would have
recognize
d
any cash
dividends in the period they were
received.
As of December 31, 2015, we fully impaired the carrying value of
the
investment in Petrodelta
and effective with the October 7, 2016 closing of the CT Energy transaction, we no longer have an ownership interest in Petrodelta.
See
Note
1 – Organization
and
Note
5 – Investment in Affiliate
for further information.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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. Other important significant estimates are those included in the valuation of our assets and liabilities that are recorded at fair value on a recurring and non-recurring basis. Actual results could differ from those estimates.
Oil and Natural Gas Properties
The major components of property and equipment are as follows:
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|
|
|
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|
|
|
As of September 30,
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Unproved property costs - Dussafu PSC
|
$
|
28,072
|
|
$
|
28,000
|
Oilfield inventories
|
|
1,554
|
|
|
3,006
|
Other administrative property
|
|
2,192
|
|
|
1,922
|
Total property and equipment
|
|
31,818
|
|
|
32,928
|
Accumulated depreciation
|
|
(1,521)
|
|
|
(1,483)
|
Total property and equipment, net
|
$
|
30,297
|
|
$
|
31,445
|
Other Administrative Property
Furniture, fixtures and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which range from
three
to
five
years. Leasehold improvements are recorded at cost and amortized using the straight-line method over the life of the applicable lease. For the
three and nine months ended September 30, 2016
, depreciation expense
from
continuing
operations
was $
11
thousand and
$41
thousand, respectively. For the
three and nine months ended September 30, 2015
, depreciation expense
from
continuing operations
was
$
21
thousand and
$67
thousand,
respectively.
Other Assets
Other assets at
September 30, 2016
and December 31, 2015 include deposits and retainers. During 2015 we fully reserved the
$1.1
million blocked payment related to our drilling operations in Gabon. The payment was blocked in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”). See
Note 10 – Commitments and Contingencies
. At December 31, 2015, we recorded an allowance for doubtful accounts of
$0.7
million and the remaining balance of the blocked payment was reclassified to a receivable from our joint venture partner for
$0.4
million.
Capitalized Interest
We capitalize interest costs for qualifying oil and natural gas properties. The capitalization period begins when expenditures are incurred on qualified properties, activities begin which are necessary to prepare the property for production and interest costs have been incurred. The capitalization period continues as long as these events occur. The average additions for the period are used in the interest capitalization calculation. During the
three and nine months ended September 30, 2016
and 2015, we did
not
capitalize interest costs due to insufficient on-going activity related to our oil and natural gas activities.
Fair Value Measurements
We measure and disclose our fair values in accordance with the provisions of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
|
·
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|
Level 1 – Inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities.
|
|
·
|
|
Level 2 – Inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly.
|
|
·
|
|
Level 3 – Inputs to the valuation techniques that are unobservable for the assets or liabilities.
|
Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, accounts receivable, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), debt, embedded derivatives and warrant derivative liability. We maintain cash and cash equivalents in bank deposit accounts with commercial banks, which at times may exceed the federally insured limits. We have not experienced any losses from such investments. Concentrations of credit risk with respect to accounts receivable are limited due to the nature of our receivables. In the normal course of business, collateral is not required for financial instruments with credit risk. The estimated fair value of cash and cash equivalents and accounts receivable, p
repaid costs, accounts payable
and other current liabilities approximate their carrying value due to their short-term nature (Level 1). The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value as of
September 30, 2016
and December 31, 2015. During the year ended December 31, 2015, we impaired the carrying value of our Dussafu project in Gabon by
$23.2
million and our investment in affiliate by
$164.7
million. See
Note 5
–
Investment in Affiliate
and
Note 7
–
Gabon
for more information.
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As of September 30, 2016
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|
|
|
|
|
|
|
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|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
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|
|
|
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(in thousands)
|
Recurring
|
|
|
|
|
|
|
|
|
|
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Assets:
|
|
|
|
|
|
|
|
|
|
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Embedded derivative asset - 15% Note
(a)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8,391
|
|
$
|
8,391
|
Embedded derivative asset - Additional Draw Note
(a)
|
|
|
—
|
|
|
—
|
|
|
2,170
|
|
|
2,170
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10,561
|
|
$
|
10,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs liability
|
|
$
|
—
|
|
$
|
64
|
|
$
|
286
|
|
$
|
350
|
RSUs liability
|
|
|
—
|
|
|
424
|
|
|
—
|
|
|
424
|
Warrant derivative liability
(a)
|
|
|
—
|
|
|
—
|
|
|
14,879
|
|
|
14,879
|
|
|
$
|
—
|
|
$
|
488
|
|
$
|
15,165
|
|
$
|
15,653
|
(a) See
Note
8 – Debt and Financing
,
Note – 9 Warrant Derivative Liability
and
Note
13 – Dis
continued Operations
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|
|
As of December 31, 2015
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|
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|
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Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
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|
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|
|
|
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(in thousands)
|
Non recurring
|
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|
|
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Assets:
|
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|
|
|
|
|
|
|
|
|
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|
Dussafu PSC
|
|
$
|
—
|
|
$
|
—
|
|
$
|
28,000
|
|
$
|
28,000
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
28,000
|
|
$
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
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|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative asset
(a)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,010
|
|
$
|
5,010
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,010
|
|
$
|
5,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs liability
|
|
$
|
—
|
|
$
|
46
|
|
$
|
50
|
|
$
|
96
|
RSUs liability
|
|
|
—
|
|
|
174
|
|
|
—
|
|
|
174
|
Warrant derivative liability
(a)
|
|
|
—
|
|
|
—
|
|
|
5,503
|
|
|
5,503
|
|
|
$
|
—
|
|
$
|
220
|
|
$
|
5,553
|
|
$
|
5,773
|
|
(a)
|
|
See
Note 8 – Debt and Financing
,
Note – 9 Warrant Derivative Liability
and
Note 13 – Dis
continued Operations
|
As of
September 30, 2016
, the fair value of our liability awards included $
0.4
million for our SARs
and $
0.4
million for the RSUs
both of
which were recorded in accrued expenses. As of December 31, 2015, the fair value of our liability awards included $0.1 million for our SARs which were recorded in accrued expenses and $0.2 million for our RSUs which were recorded in accrued expenses and other long-term liabilities.
Derivative Financial Instruments
As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. See
Note 9 – Warrant Derivative Liability
for a description and discussion of our warrant derivative liability as well as a description of the valuation models and inputs used to calculate the fair value. See
Note 8 – Debt and Financing
for a description and discussion of our embedded derivatives related to our
15%
Note as well as a description of the valuation models and inputs used to calculate the fair value. All of our embedded derivatives
included in our assets held for sale
and warrants
included in liabilities held for sale
are classified as Level 3 within the fair value hierarchy.
See
Note 13 – Discontinued Operations
for discussion of our discontinued operations.
Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
The following table provides a reconciliation of financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
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Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
Financial assets - embedded derivative asset
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
7,144
|
|
$
|
2,627
|
|
$
|
5,010
|
|
$
|
—
|
Additions
|
|
2,692
|
|
|
—
|
|
|
3,139
|
|
|
2,504
|
Change in fair value
|
|
725
|
|
|
854
|
|
|
2,412
|
|
|
977
|
Ending balance
|
$
|
10,561
|
|
$
|
3,481
|
|
$
|
10,561
|
|
$
|
3,481
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) See
Note 8 – Debt and Financing
and
Note 13 – Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
Financial liabilities - embedded derivative liability:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
—
|
|
$
|
13,015
|
|
$
|
—
|
|
$
|
—
|
Additions - fair value at issuance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,449
|
Change in fair value
|
|
—
|
|
|
(1,873)
|
|
|
—
|
|
|
(2,307)
|
Conversion of debt
|
|
|
|
|
(11,142)
|
|
|
|
|
|
(11,142)
|
Ending balance
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
Financial liabilities - warrant derivative liability
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
16,417
|
|
$
|
37,595
|
|
$
|
5,503
|
|
$
|
—
|
Additions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,013
|
Change in fair value
|
|
(1,538)
|
|
|
(9,982)
|
|
|
9,376
|
|
|
(12,400)
|
Ending balance
|
$
|
14,879
|
|
$
|
27,613
|
|
$
|
14,879
|
|
$
|
27,613
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) See
Note 9 – Warrant Derivative Liability
and
Note 13 – Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
Financial liabilities - stock appreciation rights
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
241
|
|
$
|
—
|
|
$
|
50
|
|
$
|
—
|
Change in fair value
|
|
45
|
|
|
312
|
|
|
236
|
|
|
312
|
Ending balance
|
$
|
286
|
|
$
|
312
|
|
$
|
286
|
|
$
|
312
|
During
three and nine months ended September 30, 2016
and 2015, no transfers were made between Level 1, Level 2 and Level 3 liabilities or investments.
Share-Based Compensation
We use the fair value based method of accounting for share-based compensation. We utilized the Black-Scholes option pricing model to measure the fair value of stock options and SARs on their grant dates in years prior to 2015. Restricted stock and RSUs were measured at their fair values. During 2015, we issued options, SARs and RSUs with an additional market condition. To fair value these awards, we utilized a Monte Carlo simulation.
The following table is a summary of compensation expense recorded in general and administrative expense in our consolidated condensed statements of operations and comprehensive
income (
loss
)
by type of awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Employee Stock-Based Compensation
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Equity based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
372
|
|
$
|
444
|
|
$
|
1,485
|
|
$
|
1,364
|
Restricted stock
|
|
|
5
|
|
|
33
|
|
|
73
|
|
|
101
|
RSUs
|
|
|
75
|
|
|
—
|
|
|
224
|
|
|
—
|
Total expense related to equity based awards
|
|
|
452
|
|
|
477
|
|
|
1,782
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
|
17
|
|
|
93
|
|
|
255
|
|
|
370
|
RSUs
|
|
|
42
|
|
|
141
|
|
|
388
|
|
|
367
|
Total expense related to liability based awards
|
|
|
59
|
|
|
234
|
|
|
643
|
|
|
737
|
Total compensation expense
|
|
$
|
511
|
|
$
|
711
|
|
$
|
2,425
|
|
$
|
2,202
|
The assumptions summarized in the following table were used to calculate the fair value of the SARs classified as Level 3 instruments that were outstanding as of the balance sheet date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Hierarchy
|
|
As of September 30,
|
|
|
Level
|
|
2016
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
Exercise price
|
|
Level 1 input
|
|
$
|
4.52
|
|
Threshold price
|
|
Level 1 input
|
|
$
|
10.00
|
|
Suboptimal exercise factor
|
|
Level 3 input
|
|
|
2.5
|
|
Term (years)
|
|
Level 1 input
|
|
|
3.81
|
|
Volatility
|
|
Level 2 input
|
|
|
114
|
%
|
Risk-free rate
|
|
Level 1 input
|
|
|
0.98
|
%
|
Dividend yield
|
|
Level 2 input
|
|
|
0.0
|
%
|
Income Taxes
Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible
and
taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carryforwards. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.
We classify interest related to income tax liabilities and penalties as applicable, as interest expense. We recorded
no
penalties during the
three and nine months ended September 30, 2016
and 2015.
Since December 2013, we have provided deferred income taxes on undistributed earnings of our foreign subsidiaries where we are not able to assert that such earnings were permanently reinvested, or otherwise could be repatriated in a tax free manner, as part of our ongoing business. As of Decembe
r
31, 2015 and through the third
quarter of 2016, the deferred tax liability provided on such earnings was
zero
due to the impairment of the underlying book investment in Petrodelta.
The 15% Note was issued, for income tax purposes, with original issue discount (“OID”). OID generally is deductible for income tax purposes. However, if the debt instrument constitutes an “applicable high-yield discount obligation” (“AHYDO”) within the meaning of IRC Section 163(i)(1), then a portion of the OID likely would be non-deductible pursuant to IRC Section 163(e)(5). Our analysis of the 15% Note is that the note may be an AHYDO; consequently, a portion or all of the OID likely may be non-deductible for income tax purposes.
The Internal Revenue Service (“
IRS
”)
has
audit
ed
the Company’s 2013 and 2014 tax years. The audit commenced in April 2016 and the IRS
issue
d
a no chan
ge report
on August 16, 2016
.
Noncontrolling Interest Owners
Changes in noncontrolling interest owners were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Balance at beginning of period
|
|
$
|
(1,695)
|
|
$
|
78,701
|
|
$
|
447
|
|
$
|
79,152
|
Contributions by noncontrolling interest owners
|
|
|
297
|
|
|
380
|
|
|
1,221
|
|
|
543
|
Net loss attributable to noncontrolling interest owners
|
|
|
(207)
|
|
|
(294)
|
|
|
(3,273)
|
|
|
(908)
|
Balance at end of period
|
|
$
|
(1,605)
|
|
$
|
78,787
|
|
$
|
(1,605)
|
|
$
|
78,787
|
New Accounting Pronouncements
In February 2016, the
Financial Accounting Standards Board (“
FASB
”)
issued
Accounting Standards Update (“ASU”) No. 2016-02, “Leases”
. It is expected to be effective for periods beginning after December 15, 2018 for public entities. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (1) Financing leases, similar to capital leases, will require the recognition of an asset and liability, measured at the present value of the lease payments. Interest on the liability will be recognized separately from amortization of the asset. Principal repayments will be classified as financing outflows and payments of interest as operating outflows on the statement of cash flows. (2) Operating leases will also require the recognition of an asset and liability measured at the present value of the lease payments. A single lease cost, consisting of interest on the obligation and amortization of the asset, calculated such that the amortization of the asset will increase as the interest amount decreases resulting in a straight-line recognition of lease expense. All cash outflows will be classified as operating on the statement of cash flows. We do not believe the adoption of this guidance will have a material impact on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-06, “Derivatives and Hedging (Topic 815: Contingent Put and Call Options in Debt Instruments)”. This amendment addresses how an entity should assess whether contingent call (put) options that can accelerate the payment of debt instruments that are clearly and closely related to the debt hosts. This assessment is necessary to determine if the option(s) must be separately accounted for as a derivative. The ASU clarifies that an entity is required to assess the embedded call (put) options solely in accordance with the specific four-step decision sequence. This means entities are not also required to assess whether the contingency for exercising the option(s) is indexed to interest rates or credit risk. For example, when evaluating debt instruments puttable upon a change in control, the event triggering the change in control is not relevant to the assessment. Only the resulting settlement of debt is subject to the four-step decision sequence. The amendment is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. However, if an entity early adopts the amendment in an interim period, any adjustments should be reflected as of the beginning of that fiscal year. We do not believe the adoption of this guidance will have a material impact on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-07, “Investments — Equity Method and Joint Ventures (Topic 323)”. This amendment simplifies the accounting for equity method of investments, the amendment in the update eliminates the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendment in this update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendment should be applied prospectively upon the effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. We are currently evaluating the impact of this guidance.
In March 2016, the FASB issued ASU No 2016-09, “Compensation — Stock Compensation (Topic 718)”. It introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically the ASU requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assesses the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an Additional Paid In Capital pool. The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. The amendment is effective for public entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this guidance.
In June 2016, the FASB issued
ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The
new guidance
is
related to the calculation of credit losses on financial instruments. All financial instruments not accounted for at fair value will be impacted, including our trade and partner receivables. Allowances are to be measured using a current expected credit loss model as of the reporting date which is based on historical experience, current conditions and reasonable and supportable forecasts. This is significantly different from the current model which increases the allowance when losses are probable. This change is effective for all public companies for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years and will be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the provisions of this guidance and are assessing its potential impact on our financial position, results of operations, cash flows and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, or ASU 2016-15. ASU 2016-15 provides specific guidance on eight cash flow classification issues not specifically addressed by GAAP: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in ASU 2016-15 are effective for interim and annual periods beginning after December 15, 2017. ASU 2016-15 should be applied using a retrospective transition method, unless it is impracticable to do so for some of the issues. In such case, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted. We are currently evaluating the provisions of ASU 2016-15 but do not expect ASU 2016-15 to have a significant impact on the presentation of cash receipts and cash payments within our consolidated statements of cash flows.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory
, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. We will be required to adopt the amendments in this ASU in the annual and interim periods beginning January 1, 2018, with early adoption permitted at the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The application of the amendments will require the use of a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are evaluating the standard and the impact it will have on our consolidated financial statements
.
Note 4 – Earnings Per Share
Basic earnings per common share (“EPS”)
are computed by dividing loss from continuing operations
available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Loss from continuing operations
(a)
|
$
|
(7,156)
|
|
$
|
(3,450)
|
|
$
|
(15,850)
|
|
$
|
(14,970)
|
Discontinued operations, net of taxes
|
|
96
|
|
|
9,162
|
|
|
(18,204)
|
|
|
(10,360)
|
Net income (loss) attributable to Harvest
|
$
|
(7,060)
|
|
$
|
5,712
|
|
$
|
(34,054)
|
|
$
|
(25,330)
|
Weighted average common shares outstanding
|
|
12,849
|
|
|
11,019
|
|
|
12,852
|
|
|
10,785
|
Weighted average common shares, diluted
|
|
12,849
|
|
|
11,019
|
|
|
12,852
|
|
|
10,785
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
(a)
|
$
|
(0.56)
|
|
$
|
(0.31)
|
|
$
|
(1.23)
|
|
$
|
(1.39)
|
Discontinued operations
|
|
0.01
|
|
|
0.83
|
|
|
(1.42)
|
|
|
(0.96)
|
Basic income (loss) per share
(a)
|
$
|
(0.55)
|
|
$
|
0.52
|
|
$
|
(2.65)
|
|
$
|
(2.35)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
(a)
|
$
|
(0.56)
|
|
$
|
(0.31)
|
|
$
|
(1.23)
|
|
$
|
(1.39)
|
Discontinued operations
|
|
0.01
|
|
|
0.83
|
|
|
(1.42)
|
|
|
(0.96)
|
Diluted income (loss) per share
(a)
|
$
|
(0.55)
|
|
$
|
0.52
|
|
$
|
(2.65)
|
|
$
|
(2.35)
|
|
a)
|
|
Net of net loss attributable to noncontrolling interests.
|
During the
three months ended September 30, 2016
per share calculations above exclude
d
1.6
million options and
8.5
million warrants
because we had a loss from continuing operations
. During the
three months ended September 30, 2015 per share c
alculations above exclude
d
1.0
million options and
9.5
million warrants because
we had a loss from continuing operations.
During the
nine months ended September 30, 2016
per share calculations above exclude
d
1.7
million options and
8.5
million warrants
because we had a loss from continuing operations
. During
nine months ended September 30, 2015 per share c
alculations above exclude
d
1.0
million options and
9.5
million warrants because
we had a loss from continuing operations.
The excluded options and warrants above have been adjusted taking into account the November 3, 2016,
one-for-four
reverse stock split.
All share and p
er share amounts in this report
have been reflected on a post-split basis
in these financial statements
.
Note
5
– Investment in Affiliate
Venezuela – Petrodelta
Prior to the October 7, 2016 sale of our interests in Venezuela, our 40 percent investment in Petrodelta was
indirectly
owned through our subsidiary, Harvest Holding, which was sold in the transaction. Prior to the sale, we accounted for our investment in Petrodelta under the cost method as we did not exercise significant influence over the operations of Petrodelta.
Under the cost method we did not recognize any equity in earnings from our investment in Petrodelta in our results of operations, but would have recognized any cash dividends as income in the period they were received.
The carrying value of our investment in Petrodelta at September 30, 2016 and December 31, 2015 was nil. For more information about the sale of our interests in Venezuela, see
Note 1 – Organization – Share Purchase Agreement
.
Note 6 – Venezuela – Other
Prior to the October 7, 2016 sale of our Venezuelan interests,
Harvest Vinccler
, S.C.A, a wholly owned subsidiary of Harvest Holding (“Harvest Vinccler”)
assist
ed
in the oversight of
the
investment in Petrodelta and in negotiations with PDVSA. Harvest
Vinccler’s fun
ctional and reporting currency was
the
United States Dollar (“
USD
”)
.
They did
not have currency exchange risk other than the official preva
iling exchange rate that applied
to their operating costs denominated in Venezuelan Bolivars (“Bolivars”).
On March 9, 2016,
the
Venezuela
n
government
announced a new exchange agreement No. 35 (the “Exchange Agreement No. 35”). Exchange Agreement No. 35 was published in Venezuela’s Official Gazette No. 40865 dated March 9, 2016, and became effective on March 10, 2016. Exchange Agreement No. 35 will have a dual exchange rate for a controlled rate (named DIPRO) fixed at
DIPRO
10
Bolivars
/USD
for priority
goods and services and a comple
mentary rate (named DICOM) starting at
206.92
Bolivars
per USD
for travel and other non-essential goods. During the
three and nine months ended September 30, 2016
, Harvest Vinccler exchanged approximately
$0.1
million
and
$
0.2
million, respectively,
and received
660.16
Bolivars and
518.57
Bolivars
, respectively,
per USD
.
The monetary assets that were
exposed to exchange rate fluctuation
s were cash, accounts receivable and
prepaid expenses. The monetary liabilities that
were
exposed to exchange rate fluctuations are accounts payable, accruals, current and deferred income tax and other tax obligations and other current liabilities. All monetary assets and liabilities incurred at the
DIPRO
exchange rate
were
settled at the 10 Bolivar
/USD
exchange rate. At
September 30, 2016
, the balances in Harvest Vinccler’s Bolivar denominated monetary assets a
nd liabilities accounts that were
exposed to exchange rate changes
were
47.6
million Bolivars (
$
0.0
9
million) and
59.3
million Bolivars (
$
0.
11
million), respectively.
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia, completed the sale of all of HNR Energia’s 51% interest in Harvest Holding, to Delta Petroleum, pursuant to Share Purchase Agreement. See
Note 1 – Organization
for more information.
Note
7
– Gabon
Following the October 7, 2016 sale of our interests in Venezuela, our interests in Gabon represent our primary tangible asset. We have received two proposals for the purchase of our Gabon interests and are in discussions with both potential buyers; however, there can be no assurances that these discussions or either proposal will lead to a definitive transaction.
We are the operator of the Dussafu PSC with a
66.667
percent ownership interest. Located offshore Gabon, adjacent to the border with the Republic of Congo, the Dussafu PSC covers an area of
680,000
acres with water depths up to
1,650
feet.
The Dussafu PSC partners and the Republic of Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources, entered into the third exploration phase of the Dussafu PSC with an effective date of May 28, 2012.
T
he third exploration phase
expired
May 27, 2016.
Expiration of t
he exploration phase has no effect on the discovered fields under the Exclusive Exploitation Authorization (“EEA”) as discussed below.
On March 26, 2014, the joint venture partners approved a resolution that the discovered fields are commercial to exploit. On June 4, 2014, a Declaration of Commerciality (“DOC”) was signed with Gabon pertaining to
four
discoveries on the Dussafu Project offshore Gabon. Furthermore, on July 17, 2014, the Direction Generale Des Hydrocarbures (“DGH”) awarded an EEA for the development and exploitation of certain oil discoveries on the Dussafu Project and on October 10, 2014, the field development plan was approved. The Company has
four
years from the date of the EEA approval to begin production.
Operational activities during the
nine months ended September 30, 2016
, included continued evaluation of development plans, based on the 3D seismic data acquired in late 2013 and processed during 2014.
In September 2016, the Company assessed the need for impairment related to the unproved properties of the Dussafu PSC. The primary factors considered were the current bids received for the project which substantiated the carrying value at September 30, 2016. Other factors considered were price forecasts, drilling costs and the remaining time on the EEA; none of which currently indicated a need for impairment. Based on our September 2016 review, it is the opinion of the Company that no impairment is needed for the Dussafu prospect for the three months ending September 30, 2016.
We also reviewed the value of our oilfield inventories that are in the country of Gabon, of which the majority is steel conductor and casing.
At March 31, 2016, based on contemporaneous market prices, we impaired the value of this inventory by
$0.1 million
. At
September 30, 2016
, we determined
that
an
additional
$1.
3
million
impairment was necessary
after review of condition of equipment
leaving the value related to the inventory
at
$
1
.
6
million.
See
Note 10 – Commitments and Contingencies
for
additional information regarding
our Gabon operations.
The Dussafu PSC represents
$29.6
million of unproved oil and
natural
gas properties including inventory on our
September 30, 2016
balance sheet (
$31.0
million at
December 31, 2015
).
Note
8
– Debt and Financing
As described in
Note 1 – Organization – Securities Purchase Agreement,
on June 19, 2015, we issued the CT Warrant, the 9% Note, the 15% Note and the Additional Draw Note to CT Energy and received proceeds of
$30.6
million, net of financing fees of
$1.6
million. As described in
Note 1 – Organization – Share Purchase Agreement
, these securities were cancelled
, paid off
or relinquished by CT Energy on October 7, 2017 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
We previously identified embedded derivative assets and derivative liabilities in the 9% Note and 15% Note and determined that the CT Warrant did not meet the required conditions to qualify for equity classification and was required to be classified as a warrant derivative liability (see
Note 9 – Warrant Derivative Liability
). The estimated fair value, at issuance, of the embedded derivative asset, described below, was $2.5 million, the embedded derivative liability, described below, was $13.5 million and the warrant derivative liability was $40.0 million. In accordance with
ASC 815
, the proceeds were first allocated to the fair value of the embedded derivatives and CT Warrant, which resulted in no value being attributable to the 9% Note and the 15% Note.
The following table summarizes the changes in our long-term debt due to related party, net of discount
currently included in liabilities held for sale
in the balance sheet
:
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
Long-Term Debt
|
|
2016
|
|
|
(in thousands)
|
Beginning balance - January 1, 2016
|
|
$
|
214
|
Capitalization of accrued interest
|
|
|
2,704
|
Additional borrowings under the 15% Note
|
|
|
3,000
|
Additional Draw Note borrowings
|
|
|
8,000
|
15% Note and Additional Draw Note - premiums
|
|
|
3,139
|
Accretion of discount on debt
|
|
|
823
|
Amortization of premium on debt
|
|
|
(63)
|
|
|
$
|
17,817
|
At September
30, 2016, t
he
amended
face value of the
15%
Note
was
$30.
9
million. The unamortized discount
of the 15% Note
was $
23.0
m
illion
at
September 30, 2016
and
$25.0
million at December 31, 2015. T
he Company accrete
d
the discount over the life of the
15% N
ote using the interest method.
Total inter
est expense for the three months ended
September 30, 2016
associated with the
15% N
ote
from CT Energy, a related party,
was
$1.7
million, comprised of
$1.4
million related to the stated
rate of interest on the note,
$0.4
million related to the accretion of the discount on the debt
and
$(0.1)
million related to amortization of premium on debt
.
Total inter
est expense for the
nine months ended September 30, 2016
associated with the
15% N
ote
from CT Energy, a related party,
was
$4.0
million, comprised of
$3.3
million related to the stated rate of interest on the note
,
$
0.8
million related to the accretion of the discount on the debt
and
$(0.1)
million amortization of premium on debt
. The fair value of the 15% Note at
September 30, 2016
was
$
13.9
million,
calculated using a Monte Carlo simulation.
CT Energy agreed to lend Harvest
$2.0
million per month for up to
five
months at
15%
interest beginning on
July 19, 2016
, until the earlier of the closing under or the termination of the Share Purchase Agreement. These loans were made under the Additional Draw Note. See
Additional Draw Note
below for more information.
15% Note
On June 19, 2015, we issued the 15% Note to CT Energy. As described in
Note 1 – Organization – Share Purchase Agreement
, the 15% Note was cancelled on October 7, 2017 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
The 15% Note was a five-year note in the aggregate principal amount of $25.2 million with interest that compounded quarterly at a rate of 15% per annum. The 15% Note was payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2015. If the Stock Appreciation Date had not occurred by the Claim Date, the maturity date of the 15% Note could have been extended by
two
years and the interest rate on the 15% Note would have been adjusted to
8.0%
(the “15% Note Reset Feature”). The lending of funds under of the Additional Draw Note extended the Claim Date and 15% Note Reset Feature. See
Additional Draw Note
below for additional details.
On January 4, April 1, and May 3, 2016, Harvest entered into first, second and third amendments, respectively, to the 15%
Note. Each amendment converted
an interest payment and increased the principal amount of the 15% Note by the amount of the
convert
ed interest payment, less applicable withholding tax of
$0.1
million for January 4 and April 1. Additionally, the third amendment also increased the principal amount of the 15% Note by
$3.0
million in connection with additional funds received from CT Energy. After
taking into account the third amendment, the outstanding principal amount of the 15% Note was
$30.9
million effective as of July 1, 2016.
We evaluated the 15% Note Reset Feature related to the interest rate and maturity date using “ASC 815 Derivatives and Hedging”. Because the interest rate and maturity date reset were linked to achievement of a certain stock price, the feature was not considered clearly and closely related to the debt host. In addition, the interest rate at the reset date was not tied to any approximation of the expected
market
rate at the date of the term extension as required by ASC 815. As a result, we accounted for the 15% Note Reset Feature as an embedded derivative asset that had been measured at fair value with current changes in fair value reflected in our consolidated condensed statements of operations and comprehensive loss.
The embedded 15% Note Reset Feature in the 15% Note was valued using the ‘with’ and ‘without’ method. A Black-Derman-Toy (“BDT”)
Model
, which is a binomial interest rate lattice model, was used to value the 15% Note and the incremental value attributed to the embedded option was determined based on a comparison of the value of the 15% Note with the feature included and without the feature included. Key inputs into this valuation model are the U.S. Treasury rate, our credit spread and the underlying yield volatility. As part of our overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate, consistently applied, and reliable. We estimate the yield volatility for the 15% Note based on historical daily volatility of the USD denominated Venezuela Sovereign zero coupon yield over a look back period of
3.97
years. The risk-free interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the 15% Note. The credit spread was estimated based on the option adjusted spread (“OAS”) of the Venezuelan yield over the USD Treasury yield and the implied OAS for the transaction as of the date the term sheet was signed to capture the investor’s assessment of the risk in their investment in the Company. This model requires Level 3 inputs (see
Note 3 – Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements
) which were based on our estimates of the probability and timing of potential future financings and fundamental transactions.
The embedded derivative asset related to the 15% Note contains a Level 3 input related to the probability of our investor lending us additional funds or
not
lending us funds according to the terms of the loan agreement for the additional draws, as discussed below. We have assumed a 10/90 scenario (50/50 scenario at December 31, 2015) of the draw or no draw for valuation of the embedded derivative asset.
The
assumptions
summarized in the following table were used to calculate the fair value of the derivative asset associated with the 15% Note
and the Additional Draw Notes that were
outstanding as of
September 30, 2016
included in liabilities
held for sale
on our consolidated condensed balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Hierarchy
|
|
As of September 30,
|
|
|
Level
|
|
2016
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
Weighted Term (years)
|
|
|
|
|
3.72
|
|
Yield Volatility
|
|
Level 2 input
|
|
|
40
|
%
|
Risk-free rate
|
|
Level 1 input
|
|
|
1.0% to 1.2
|
%
|
Dividend yield
|
|
Level 2 input
|
|
|
0.0
|
%
|
Scenario probability:
|
|
|
|
|
|
|
Claim Date extended with Stock Appreciation Date threshold met
|
|
Level 3 input
|
|
|
72.2
|
%
|
Claim Date extended with Stock Appreciation Date threshold not met
|
|
Level 3 input
|
|
|
46.0
|
%
|
Claim Date not extended with Stock Appreciation Date threshold met
|
|
Level 3 input
|
|
|
72.2
|
%
|
Claim Date not extended with Stock Appreciation Date threshold not met
|
|
Level 3 input
|
|
|
44.9
|
%
|
Scenario probability (future draws/no future draws)
|
|
Level 3 input
|
|
|
10%/90
|
%
|
The fair value of the embedded derivative asset
related to the 15% Note Reset Feature
was $8.4 million
at
September 30, 2016
and $5.0 million at December 31, 2015. We recognized
$
0.5
million
and
$
2.2
million, respectively,
in changes in fair value of embedded derivative asset
in our consolidated condensed statement of operations
and comprehensive
income (
loss
)
for the
three and nine months ended September 30, 2016
.
We recognized
$2.7
million
and $
3.3
million, respectively,
in derivative expense
related to this embedded derivative asset
and liabilities
in our consolidated condensed statement of operations
and comprehensive
income (
loss
)
for the
three and nine months ended September 30, 2015
.
A
dditional Draw Note
On June 19, 2015,
the Company also issued the Additional Draw Note, under which CT Energy could elect to provide
$2.0
million of additional funds to the Company per month for up to
six
months following the
one
-year anniversary of the closing date of
the transaction (up to
$12.0
million in aggregate).
The outstanding principal under the Additional Draw Note was $8.0 million at September 30, 2016, consisting of loans of $2.0 million by CT Energy on each of June 21, 2016, July 20, 2016, August 24, 2016 and September 21, 2016. As described in
Note 1 – Organization – Share Purchase Agreement
, the Additional Draw Note was cancelled on October 7, 2017 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
Interest under the Additional Draw Note was to be compounded quarterly at a rate of 15.0% per annum and payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2016. If the Stock Appreciation Date had not occurred by the Claim Date, the maturity date of the Additional Draw Note could have been extended by
two
years and the interest rate on the Additional Draw Note would have adjusted to adjust to
8.0%
, (the “Additional Draw Note Reset Feature”).
However, while CT Energy was making the monthly $2.0 million loans under the Additional Draw Note, the Claim Date was to be extended.
At June 30, 2016, due to the $2.0 million loaned under the Additional Draw Note on June 20, 2016, we evaluated the Additional Draw Note Reset Feature related to the interest rate and maturity date using “ASC 815 Derivatives and Hedging”. We determined to account for the Additional Draw Note Reset Feature as an embedded derivative asset measured at fair value with current changes in fair value reflected in our consolidated condensed statements of operations and comprehensive loss. The embedded Additional Draw Note Reset Feature in the Additional Draw Note was valued using the same methods and assumptions as the 15% Note Reset Feature discussed above.
The
assumptions
summarized in the
table
above for the 15% Note
were used to calculate the fair value of the derivative asset associated with the
Additional Draw Notes that were
outstanding as of
September 30, 2016
included in liabilities held for sale
on our consolidated condensed balance sheet
The fair value of the
embedded derivative asset related to the Additional Draw Note Reset Feature was $
2.2
million at
September 30, 2016
. We recognized $
0.2
million for the three and nine
months ended
September 30, 2016
in change in fair value of embedded derivative assets in our consolidated condensed statement of operations and comprehensive
income (
loss
)
related to the
Additional Draw Note Reset Feature.
Note
9
– Warrant Derivative Liabili
ty
CT Warrant
On June 19, 2015, we issued CT Energy the CT Warrant, which was exercisable for
34,070,820
shares (approximately
8,517,705
shares taking into account the
November 3, 2016
one-for-four
reverse stock split) of the Company’s common stock at an initial exercise price of
$1.25
per share (
$5.00
per share taking into account the
November 3, 2016
one-for-four
reverse stock split). The CT Warrant could not be exercised until the volume weighted average price of the Company’s common stock over any consecutive 30-day period
equaled
or exceeded
$2.50
per share (
$10.00
per share taking into account the
November 3, 2016
one-for-four
reverse stock split) (the “Stock Appreciation Date”).
As described in
Note 1 – Organization – Share Purchase Agreement
, the CT Warrant was cancelled on October 7, 2017 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
We analyzed the CT Warrant to determine whether it should be classified as a derivative liability or equity
instrument
. Provisions of the CT Warrant agreement allowed for a change in the exercise price of the CT Warrant upon the occurrence of certain corporate events. These exercise price adjustments incorporated variables other than those used to determine the fair value of a fixed-for-fixed forward or option on equity shares; therefore, the CT Warrant was not considered to be “indexed to the issuer’s own stock” and did not meet the exception from derivative treatment in ASC 815. We continued to account for the CT Warrant as a derivative which was marked to market as of September 30, 2016.
A Monte Carlo simulation model is used to value the CT Warrant to estimate if the Stock Appreciation Date is achieved, which is based on the average stock price over a 30 day period (
21
trading days) reaching $2.50
($10.00 per share taking into account the
November 3, 2016
one-for-four
reverse stock split)
. This requires Level 3 inputs (see
Note 3 – Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements
) which are fundamentally based on market data but require complex modeling. The additional modeling is required in order to simulate future stock prices, to determine whether the Stock Appreciation Date is achieved and to model the projected exercise behavior of the warrant holders.
The assumptions summarized in the following table were used to calculate the fair value of the warrant derivative liability that was outstanding as of
the balance sheet date included in liabilities held for sale
on our consolidated condensed balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Hierarchy
|
|
As of September 30,
|
|
|
Level
|
|
2016
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
Stock price
|
|
Level 1 input
|
|
$
|
3.24
|
|
Exercise price
|
|
Level 1 input
|
|
$
|
5.00
|
|
Stock appreciation date price (hurdle)
|
|
Level 1 input
|
|
$
|
10.00
|
|
Term (warrants)
|
|
Level 1 input
|
|
|
1.7162
|
|
Term (Claim Date)
|
|
Level 1 input
|
|
|
0.0574
|
|
Term (Claim Date extended)
|
|
Level 1 input
|
|
|
0.2240
|
|
Volatility
|
|
Level 2 input
|
|
|
140.0
|
%
|
Risk-free rate (warrants)
|
|
Level 1 input
|
|
|
0.77
|
%
|
Risk-free rate (Claim Date)
|
|
Level 1 input
|
|
|
0.44
|
%
|
Risk-free rate (Claim Date extended)
|
|
Level 1 input
|
|
|
0.48
|
%
|
Dividend yield
|
|
Level 2 input
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
The stock price, exercise price, and stock appreciation date price have been adjusted taking into account the November 3, 2016
one-for-four
reverse stock split.
We estimate the volatility of our common stock based on historical volatility that matches the expected remaining life of the longest instrument in the transaction, seven years. The risk-free interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the CT Warrant. The expected life of the CT Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which we anticipate to remain at zero.
The fair value of the CT Warrant was $
14.9
millio
n at
September 30, 2016
and
$5.5
million at December 31, 2015.
We recognized
$1.5
million
and
$9.4
million, respectively,
in
change in fair value of
warrant liabilit
ies
in our consolidated condensed statement of operations
and comprehensive
income (
loss
)
for the
three and nine months ended September 30, 2016
.
We recognized
income of
$10.0
million
and $
12.4
million, respectively,
in
change in fair value of
warrant liabilit
ies
in our consolidated condensed statement of operations
and comprehensive
income (
loss
)
for the
three and nine months ended September 30, 2015
.
Note 1
0
– Commitments and Contingencies
We have various contractual commitments pertaining to leasehold, training, and development costs for the Dussafu PSC totaling
$4.5
million. Under the EEA granted for the Dussafu PSC on July 17, 2014, we are required to commence production within
four
years of the date of grant in order to preserve our rights to production under the EEA. We expect that significant capital expenditures will be required prior to commencement of production. These work commitments are non-discretionary; however, we do have the ability to control the pace of expenditures.
Under the agreements with our partner in the Dussafu PSC, we are jointly and severally liable to various third parties. As of
September 30, 2016
, the gross carrying amount associated with obligations to third parties which were fixed at the end of the period was
$37
thousand
(
$0.3
million as of
December 31, 2015
) and is related to accounts payable to vendors, accrued expenses and withholding taxes payable to taxing authorities. As we are currently the operator for the Dussafu PSC, the gross carrying amount related to accounts payable and withholding taxes are reflected in the consolidated condensed balance sheet in accounts payable. The net amount related to other accrued expenses is reflected in accrued expenses in the con
solidated condensed balance sheet. Our partners have obligations totaling
$12
thousand
as of
September 30, 2016
(
$0.1
million as of
December 31, 2015
) to us for these liabilities. As we expect our partners will continue to meet their obligations to fund their share of expenditures, we have not recognized any additional liability related to fixed joint interest obligations attributable to our joint interest partners.
The following related class action lawsuits were filed on the dates specified in the United States District Court, Southern District of Texas: John Phillips v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (March 22, 2013) (the “Phillips Case”); Sang Kim v. Harvest Natural Resources, Inc., James A. Edmiston, Stephen C. Haynes, Stephen D. Chesebro’, Igor Effimoff, H. H. Hardee, Robert E. Irelan, Patrick M. Murray and J. Michael Stinson (April 3, 2013); Chris Kean v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 11, 2013); Prastitis v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 17, 2013); Alan Myers v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 22, 2013); and Edward W. Walbridge and the Edward W. Walbridge Trust v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 26, 2013). The complaints alleged that the defendants made certain false or misleading public statements and demanded that the defendants pay unspecified damages to the class action plaintiffs based on stock price declines. All of these actions were consolidated into the Phillips Case. On August 25, 2016, the court granted the defendants’ motion to dismiss the
Phillips Case and entered a final judgment dismissing the Phillips Case in its entirety.
The plaintiffs declined to file an appeal, and the time for the filing an appeal expired on
September 26, 2016
.
In May 2012, Newfield Production Company (“Newfield”) filed notice pursuant to the Purchase and Sale Agreement between Harvest (US) Holdings, Inc. (“Harvest US”), a wholly owned subsidiary of Harvest, and Newfield dated March 21, 2011 (the “PSA”) of a potential environmental claim involving certain wells drilled on the Antelope Project. The claim asserts that locations constructed by Harvest US were built on, within, or otherwise impact or potentially impact wetlands and other water bodies. The notice asserts that, to the extent of potential penalties or other obligations that might result from potential violations, Harvest US must indemnify Newfield pursuant to the PSA. In June 2012, we provided Newfield with notice pursuant to the PSA (1) denying that Newfield has any right to indemnification from us, (2) alleging that any potential environmental claim related to Newfield’s notice would be an assumed liability under the PSA and (3) asserting that Newfield indemnify us pursuant to the PSA. We dispute Newfield’s claims and plan to vigorously defend against them. We are currently unable to estimate the amount or range of any possible loss.
On February 27, 2015, Harvest (US) Holdings, Inc. (“Harvest US”), a who
lly owned subsidiary of Harvest and
Branta, LLC and Branta Exploration & Production Company, LLC
filed a complaint
against Newfield in the United States District Court for the District of Colorado. The plaintiffs previously sold oil and natural gas assets located in Utah’s Uinta Basin to Newfield pursuant to
two
Purchase and Sale Agreements, each dated March 21, 2011. In the complaint, the plaintiffs allege that, prior to the sale, Newfield breached separate confidentiality agreements with Harvest US and Branta by discussing the auction of the assets with a potential bidder for the assets, which caused the potential bidder not to participate in the auction and resulted in a depressed sales price for the assets. The complaint seeks damages and fees for breach of contract, violation of the Colorado Antitrust Act, violation of the Sherman Antitrust Act and tortious interference with a prospective business advantage. In September 2015, plaintiffs amended their complaint to add Ute Energy, LLC and Crescent Point Energy Corporatio
n as defendants. Subsequently, p
laintiffs agreed to dismiss with prejudice all claims against Ute Energy, LLC and Crescent Point Energy Corporation.
On August 12, 2016, the court denied Newfield’s motion to dismiss the claim.
On May 31, 2011, the United Kingdom branch of our subsidiary, Harvest Natural Resources, Inc. (UK), initiated a wire transfer of approximately
$1.1
million (
$0.7
million net to our
66.667
percent interest) intending to pay Libya Oil Gabon S.A. (“LOGSA”) for fuel that LOGSA supplied to our subsidiary in the Netherlands, Harvest Dussafu, B.V., for the company’s drilling operations in Gabon. On June 1, 2011, our bank notified us that it had been required to block the payment in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by OFAC, because the payee, LOGSA, may be a blocked party under the sanctions. The bank further advised us that it could not release the funds to the payee or return the funds to us unless we obtain authorization from OFAC. On October 26, 2011, we filed an application with OFAC for return of the blocked funds to us. Until that application is approved, the funds will remain in the blocked account, and we can give no assurance when OFAC will permit the funds to be released. On April 23, 2014, we received a notice that OFAC had denied our October 26, 2011 application for the return of the blocked funds. During the year ended December 31, 2015 primarily due to the passage
of time
, we recorded a
$0.7
million allowance for doubtful accounts to general and administrative costs associated with the blocked payment and
$0.4
million receivable from our joint venture partner. On October 13, 2015, we filed a request that OFAC reconsider its decision and on March 8, 2016 OFAC denied our October 13, 2015 request for the return of blocked funds; however, the Company will continue attempts to recover the funds from OFAC.
Uracoa Municipality Tax Assessments. Harvest Vinccler, a subsidiary of Harvest Holding, has received nine assessments from a tax inspector for the Uracoa municipality in which part of the Uracoa, Tucupita and Bombal fields are located. Harvest Holding had filed claims in the Tax Court in Caracas against the Uracoa Municipality for the refund of all municipal taxes paid since 1997. Any potential liability for these tax assessments was transferred by the Company
upon the closing of the sale of the Company’s 51% interest in Harvest Holding on October 7, 2016
, and remains the responsibility of Harvest Vinccler
.
Libertador Municipality Tax Assessments. Harvest Vinccler has received five assessments from a tax inspector for the Libertador municipality in which part of the Uracoa, Tucupita and Bombal fields are located. Harvest Vinccler had filed claims in the Tax Court in Caracas against the Libertador Municipality for the refund of all municipal taxes paid since 2002. Any potential liability for these tax assessments was transferred by the Company upon the closing of the sale of the Company’s 51% interest in Harvest Holding on October 7, 2016
, and remains the responsibility of Harvest Vinccler
.
On January 26, 2015, Petroandina Resources Corporation N.V. (“Petroandina”), which owns a
29%
interest in Harvest Holding, filed a complaint for breach of contract against the Company and its subsidiary, HNR Energia, in the Court of Chancery of the State of Delaware (“Court of Chancery”). The complaint alleged
a January 15, 2015 Request for Arbitration filed by HNR Finance and Harvest Vinccler against the Government of Venezuela before the International Centre for Settlement of Investment Disputes regarding HNR Finance’s investment in Petrodelta (the “Request for Arbitration”)
constituted a breach of the Shareholders’ Agreement, dated December 16, 2013, which governed the rights of HNR Energia and Petroandina as shareholders of Harvest Holding (the “Shareholders Agreement”). Specifically, the Shareholders’ Agreement required HNR Energia to provide advance notice of, and deposit
$5.0
million into an escrow account, before bringing any claim against the Venezuelan government. On January 28, 2015, the Court of Chancery issued an injunction ordering the Company and HNR Energia to withdraw the Request for Arbitration and not take any action to pursue its claims against Venezuela until Harvest and HNR Energia have complied with the provisions of
the Shareholders’ Agreement or otherwise reached an agreement with Petroandina. Accordingly, on January 28, 2015, HNR Finance B.V. and Harvest Vinccler withdrew without prejudice the Request for Arbitration.
On October 11, 2016, as described in the following paragraph, the Court of Chancery dismissed this claim with prejudice pursuant to a settlement agreement among the Company, HNR Energia, CT Energy and Petroandina.
On July 12, 2016, Petroandina filed a second claim against the Company and HNR Energia in the Court of Chancery. The claim alleged that, by entering into the Share Purchase Agreement to sell its Venezuelan interests to CT Energy, the Company and HNR Energia breached the Shareholders’ Agreement. The claim requested an injunction to prevent the Company and HNR Energia from completing the proposed transaction with CT Energy. On August 16, 2016, the Court of Chancery granted Petroandina’s motion for a preliminary injunction. On September 8, 2016, the Company, HNR Energia, CT Energy and Petroandina entered into a settlement agreement (the “
Settlement Agreement
”) intended to resolve the claim. On September 8, 2016, the Court of Chancery granted an order amending its August 16, 2016 order and permitting Harvest and HNR Energia to effect the HNR Energia transaction, provided that the parties complied with the Settlement Agreement. On October 7, 2016, as contemplated in the Settlement Agreement, Petroandina completed the sale of its 29% interest in Harvest Holding to Delta Petroleum, the assignee of CT Energy’s rights and obligations under the Settlement Agreement (the “Petroandina Sale”). On October 11, 2016, in accordance with the Settlement Agreement, the Court of Chancery issued an order dismissing with prejudice Petroandina’s claims against the Company and HNR Energia. As part of the Settlement Agreement and effective upon closing of the Petroandina Sale, HNR Energia agreed to pay Petroandina
$1,000,000
accrued as of September 30, 2016 and the cost
as reimbursement for expenses incurred by Petroandina in connection with the litigation related to the Shareholders’ Agreement.
This was recorded to Transaction Costs Related to
Sale of Harvest Holding on our consolidated condensed statement of operations and comprehensive income (loss) during the nine months ended September 30, 2016.
Additionally, effective upon the closing of the Petroandina Sale, the Company, HNR Energia and CT Energy released Petroandina and its affiliates, and Petroandina released the Company, HNR Energia, CT Energy and their respective affiliates, from all claims or liabilities in connection with the Shareholders’ Agreement, the Share Purchase Agreement or the sale of the Company’s interests in Venezuela arising up to the date of the Settlement Agreement.
On August 9, 2016,
Robert Garfield, a stockholder of the Company, filed a lawsuit in the
215th
Civil District Court of Harris County, Texas against the members of the Company’s board of directors (the "Board") and CT Energy (and the Company, as a nominal defendant). The lawsuit asserts several class action and derivative claims, including that (i) the Board members breached their fiduciary duties to the Company’s stockholders by negotiating and causing the execution of the Share Purchase Agreement, (ii) CT Energy aided and abetted the Board members in breaching their fiduciary duties and (iii) the Proxy Statement contained inadequate disclosures about the proposed transaction. Among other relief, the lawsuit requests that the court grant an injunction to prevent the completion of the proposed transaction, in addition to unspecified rescissory and compensatory damages and attorneys’ fees and other costs. The Company intends to vigorously defend the lawsuit. We are unable to estimate the amount or range of any possible loss. On
September 14, 2016
plaintiff’s motion for a temporary injunction was denied. On November 3, 2016, we learned that the plaintiff will dismiss this lawsuit without prejudice.
On
October
14, 2016, Saltpond Offshore Producing Co., Ltd. (“Saltpond”) filed a petition in the 334th Judicial District Court of Harris County, Texas under Rule 202 of the Texas Rules of Civil Procedure to take a pre-suit deposition of the Company’s general counsel. The petition alleges that Alessandro Bazzoni, a representative of CT Energy, obtained proceeds from oil allegedly misappropriated from Saltpond and used these funds to consummate the June 19, 2015 Securities Purchase Agreement between CT Energy and the Company. The petition “seeks information to pursue a claim [against the Company] under the Uniform Fraudulent Transfer Act.” The Company denies the allegations in the petition and intends to mount a vigorous defense. Because the petition is in its preliminary stages, it is not possible to estimate the likelihood or magnitude of any potential liability at this time.
We are a defendant in or otherwise involved in other litigation incidental to our business. In the opinion of management, there is no such incidental litigation that will have a material adverse effect on our financial condition, results of operations and cash flows.
Note 11 – Operating Segments
We regularly allocate resources to and assess the performance of our operations by segments that are organized by unique geographic and operating characteristics. The segments are organized in order to manage regional business, currency and tax related risks and opportunities. Operations included under the heading “United States” include corporate management, cash management, business development and financing activities performed in the United States and other countries, which do not meet the requirements for separate disclosure. All intersegment revenues, other income and equity earnings, expenses and receivables are eliminated in order to reconcile to consolidated totals. Corporate general and administrative and interest expenses are included in the United States segment and are not allocated to other operating segments. Segment loss and operating segment assets for prior periods have been adjusted to conform to the current presentation method in which intersegment items are eliminated from each segment’s results and assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Segment Income (Loss) Attributable to Harvest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gabon
|
|
$
|
(1,718)
|
|
$
|
(1,293)
|
|
|
$
|
(2,741)
|
|
$
|
(4,141)
|
Indonesia
|
|
|
—
|
|
|
13
|
|
|
|
—
|
|
|
(42)
|
United States and other
|
|
|
(5,645)
|
|
|
(2,464)
|
|
|
|
(16,382)
|
|
|
(11,695)
|
Loss from continuing operations
|
|
|
(7,363)
|
|
|
(3,744)
|
|
|
$
|
(19,123)
|
|
$
|
(15,878)
|
Discontinued operations
(a)
|
|
|
303
|
|
|
9,456
|
|
|
|
(14,931)
|
|
|
(9,452)
|
Net income (loss) attributable to Harvest
|
|
$
|
(7,060)
|
|
$
|
5,712
|
|
|
$
|
(34,054)
|
|
$
|
(25,330)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
|
|
Net of net loss attributable to noncontrolling interest owners.
See
Note 13 - Discontinued Operations
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Operating Segment Assets
|
|
|
|
|
|
|
Gabon
|
|
$
|
30,051
|
|
$
|
32,710
|
Indonesia
|
|
|
—
|
|
|
5
|
United States and other
|
|
|
4,010
|
|
|
4,622
|
|
|
|
34,061
|
|
|
37,337
|
Discontinued operations
(b)
|
|
|
11,013
|
|
|
10,444
|
Total assets
|
|
$
|
45,074
|
|
$
|
47,781
|
b) See
Note 13 -
Dis
continued Operations
As described in
Note 1 – Organization – Share Purchase Agreement
, we sold all of our interests in Venezuela to an affiliate of CT Energy in a transaction that closed on October 7, 2016.
Note 1
2
– Related Party Transactions
The noncontrolling interest owners in Harvest Holdings,
Oil & Gas Technology Consultants (Netherlands) Cooperatie V.A. (“
Vinccler
”)
(currently owning
20
percent) and Petroandina (currently owning
29
percent) were
both related parties of the Company
prior to the sale of our interests in Venezuela on October 7, 2016
.
On January 4, April 1, and May 3, 2016, Harvest entered into first, second and third amendments, respectively, to the
15%
Note. Each amendment
converted
an interest payment and increased the principal amount of the 15% Note by the amount of the
converted
interest payment, less applicable withholding tax
of
$0.1
million for January 4 and April 1, 2016
. Additionally, the third amendment
also
increased the principal amount of the 15% Note by
$3.0
million in connection with additional funds received from CT Energy. After taking into account the third amendment, the outstanding principal amount of the 15% Note wa
s
$
30.9
million as of July 1
, 2016.
The 15% Note was cancelled upon the closing of the sale of our Venezuelan interests to an affiliate of CT Energy on October 7, 2016.
On January 4, 2016, HNR Finance B.V., a wholly owned subsidiary of Harvest Holding (“HNR Finance”), provided a loan to CT Energia in the amount of $5.2 million under an 11.0% promissory note due 2019 (the “CT Energia Note”). The purpose of the loan was to provide CT Energia with collateral to obtain funds for one or more loans to Petrodelta, which is 40% owned by HNR Finance. HNR Finance’s sole recourse for payment of the principal amount of the loan is the payments of principal and interest from loans that CT Energia has made to Petrodelta.
The source of funds for HNR Finance’s $5.2 million loan to CT Energia was a capital contribution from Harvest Holding, which, in return, received the same aggregate amount of capital contributions from its shareholders, pro rata according to their equity interests in Harvest Holding. Of that aggregate amount of capital contributions, HNR Energia contributed $2.6 million, which was a capital contribution from Harvest.
During the three months ended March 31, 2016, we recorded a $5.2 million allowance to fully reserve the CT Energia Note due to concerns related to the continued deteriorating economic conditions in Venezuela and our assessment relating to the probability that the CT Energia Note will be collected. As of September 30, 2016, the CT Energia Note remained fully reserved and we had not accrued any interest with respect to this note receivable. As described under
Note 1 – Organization – Share Purchase Agreement
, the Company sold its 51
% interest in Harvest Holding (the parent company of HNR Finance, which holds the CT Energia Note) to an affiliate of CT Energy on October 7, 2016.
On each of June 21, July 20, August 24, and September 21, 2016, CT Energy loaned $2.0 million to the Company pursuant to the Additional Draw Note. These loans were secured by substantially all of the Company’s assets, including equity in certain of Harvest’s subsidiaries. As described in
Note 1 – Organization – Share Purchase Agreement
, the Additional Draw Note was cancelled on October 7, 2017 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
Note 13 –
Discontinued Operations
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia BV, completed the sale of all of HNR Energ
ia’s 51% interest in Harvest Holding, to Delta Petroleum, pursuant to a share p
urchase agreement, dated June 29, 201
6
(the “
Share Purchase Agreement
”)
.
Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40% interest in Petrodelta
, thr
ough which all of the Company’s interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to Delta Petroleum and we do not have any continuing involvement in Venezuela.
See
Note 1 –
Organization -
Share Purchase Agreement
for further information.
The Company’s 51% interest in Harvest Holding
and the assets and liabilities
directly related to the sale
ha
ve
been reclassified to assets and li
abilities held for sale as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
Assets Held For Sale
|
2016
|
|
2015
|
|
|
|
|
|
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
230
|
|
$
|
5,256
|
Accounts receivable
|
|
49
|
|
|
3
|
Prepaid costs
|
|
7
|
|
|
15
|
Embedded derivative asset
|
|
10,561
|
|
|
5,010
|
Deferred taxes
|
|
85
|
|
|
120
|
Long-term note receivable, net
|
|
—
|
|
|
—
|
Administrative property, net
|
|
69
|
|
|
16
|
Other assets
|
|
12
|
|
|
24
|
|
$
|
11,013
|
|
$
|
10,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
Liabilities Held For Sale
|
2016
|
|
2015
|
|
|
|
|
|
|
|
(in thousands)
|
Accounts payable
|
$
|
2
|
|
$
|
5
|
Accrued Expenses
|
|
279
|
|
|
341
|
Accrued interest payable
|
|
1,351
|
|
|
954
|
Other current liabilities
|
|
107
|
|
|
160
|
15% Note and Additional Draw Note, net
|
|
17,817
|
|
|
214
|
CT Warrant liability
|
|
14,879
|
|
|
5,503
|
|
$
|
34,435
|
|
$
|
7,177
|
Harvest Holding’s effect on results of operation
s
and
other items directly related to discontinued operations
have been reported in discontinued operations
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Gain (loss) from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Harvest Holding
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(5)
|
|
$
|
(6)
|
|
$
|
(15)
|
|
$
|
(16)
|
Reserve for note receivable - related party
|
|
|
—
|
|
|
—
|
|
|
(5,160)
|
|
|
—
|
General and administrative expense
|
|
|
(497)
|
|
|
(683)
|
|
|
(2,114)
|
|
|
(2,027)
|
Change in fair value of warrant derivative liability
|
|
|
1,538
|
|
|
9,982
|
|
|
(9,376)
|
|
|
12,400
|
Change in fair value of embedded derivative asset and liabilities
|
|
|
725
|
|
|
2,727
|
|
|
2,412
|
|
|
3,284
|
Interest expense
|
|
|
(1,674)
|
|
|
(1,057)
|
|
|
(4,143)
|
|
|
(1,909)
|
Loss on debt conversion
|
|
|
—
|
|
|
(1,890)
|
|
|
—
|
|
|
(1,890)
|
Loss on issuance of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,402)
|
Foreign currency transaction gains
|
|
|
16
|
|
|
96
|
|
|
215
|
|
|
220
|
Income tax expense
|
|
|
(7)
|
|
|
(7)
|
|
|
(23)
|
|
|
(20)
|
Discontinued Operations, net of taxes
|
|
$
|
96
|
|
$
|
9,162
|
|
$
|
(18,204)
|
|
$
|
(10,360)
|
Note 14 – Subsequent Events
On October 7, 2016, the Company and its wholly owned subsidiary, HNR Energia, closed the sale of the Company’s Venezuelan interests to an affiliate of CT Energy. See
Note 1 – Organization – Share Purchase Agreement
for more information.
On November 3, 2016, a one-for-four reverse split of the Company’s common stock became effective. See
Note
1
–
Organization – Reverse Stock Split
for more information.
All share and p
er share amounts in this report
have been reflected on a post-split basis
in these financial statements
.