NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – Organization and Basis of Presentation
Organization
Yuma Energy, Inc., a Delaware corporation (“Yuma” and
collectively with its subsidiaries, the “Company”), is
an independent Houston-based exploration and production company
focused on acquiring, developing and exploring for conventional and
unconventional oil and natural gas resources, primarily in the U.S.
Gulf Coast, the Permian Basin of west Texas and California. The
Company has employed a 3-D seismic-based strategy to build an
inventory of development and exploration prospects. The
Company’s operations are currently focused on onshore
properties located in southern Louisiana, southeastern Texas, and
the Permian Basin of west Texas. In addition, the Company has
non-operated positions in the East Texas Eagle Ford and Woodbine
and the Bakken Shale in North Dakota, and operated positions in
Kern and Santa Barbara Counties in California.
On
October 26, 2016, Yuma Energy, Inc., a California corporation
(“Yuma California”), merged (the “Reincorporation
Merger”) with and into Yuma. Pursuant to the Reincorporation
Merger, Yuma California was reincorporated in Delaware as Yuma.
Immediately thereafter, a wholly owned subsidiary of Yuma merged
(the “Davis Merger”) with and into privately-held Davis
Petroleum Acquisition Corp., a Delaware corporation
(“Davis”). As a result of the Davis Merger, Davis
became a wholly owned subsidiary of Yuma.
Prior
to the Reincorporation Merger, each share of Yuma
California’s existing 9.25% Series A Cumulative Redeemable
Preferred Stock (the “Yuma California Series A Preferred
Stock”) was converted into 35 shares of common stock of Yuma
California (“Yuma California Common Stock”). As a
result of the closing of the Reincorporation Merger, each share of
Yuma California Common Stock was converted into one-twentieth of
one share (the “Reverse Stock Split”) of common stock
of Yuma (the “common stock”). As a result of the
Reverse Stock Split, Yuma issued an aggregate of approximately 4.75
million shares of its common stock.
As a
result of the Davis Merger, Yuma issued approximately 7.45 million
shares of its common stock to the former stockholders of
Davis’ common stock. Yuma also issued approximately 1.75
million shares of Series D Convertible Preferred Stock of Yuma
(the “Series D Preferred Stock”) to existing Davis
preferred stockholders. Upon completion of the Reincorporation
Merger and the Davis Merger, there was an aggregate of
approximately 12.2 million shares of common stock outstanding and
1.75 million shares of Series D Preferred Stock
outstanding.
At the
closing of the Davis Merger, Davis appointed a majority of the
board of directors of Yuma. Four out of the five members of
Yuma’s board of directors prior to the closing of the Davis
Merger continued to serve on the board of directors of Yuma, with
one of those four directors having been appointed by Davis. Three
additional directors were appointed by Davis. The Davis Merger was
accounted for as a “reverse acquisition” and a
recapitalization since the former common stockholders of Davis have
control over the combined company through their post-merger 61.1%
ownership of the common stock and majority representation on
Yuma’s board of directors.
The
Davis Merger was accounted for as a business combination in
accordance with ASC 805 Business Combinations (“ASC
805”). ASC 805, among other things, requires assets acquired
and liabilities assumed to be measured at their acquisition date
fair value. Although Yuma was the legal acquirer, Davis was the
accounting acquirer. The historical financial statements are
therefore those of Davis. Hence, the financial statements included
in this report reflect (i) the historical results of Davis prior to
the Davis Merger; (ii) the combined results of the Company
following the Davis Merger; (iii) the acquired assets and
liabilities of Davis at their historical cost; and (iv) the fair
value of Yuma’s assets and liabilities as of the closing of
the Davis Merger.
Basis of Presentation
The
accompanying unaudited consolidated financial statements of the
Company and its wholly owned subsidiaries have been prepared in
accordance with Article 8-03 of Regulation S-X for interim
financial statements required to be filed with the Securities and
Exchange Commission (“SEC”). The information furnished
herein reflects all adjustments that are, in the opinion of
management, necessary for the fair presentation of the
Company’s Consolidated Balance Sheets as of March 31, 2017,
and December 31, 2016; the Consolidated Statements of Operations
for the three months ended March 31, 2017 and 2016; the
Consolidated Statements of Changes in Equity for the three months
ended March 31, 2017; and the Consolidated Statements of Cash Flows
for the three months ended March 31, 2017 and 2016. The
Company’s balance sheet at December 31, 2016 is derived from
the audited consolidated financial statements of the Company at
that date.
The
preparation of financial statements in conformity with the
generally accepted accounting principles of the United States of
America (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. For further information, see
Note 2 in the Notes to Consolidated Financial Statements contained
in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2016.
Interim
period results are not necessarily indicative of results of
operations or cash flows for the full year and accordingly, certain
information normally included in financial statements and the
accompanying notes prepared in accordance with GAAP has been
condensed or omitted. These financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2016. The Company has evaluated events
or transactions through the date of issuance of these unaudited
consolidated financial statements.
NOTE 2 – Changes in Accounting
Principles
Not Yet Adopted
In
August 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU 2016-15, “Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments,” which provides clarification on how certain cash
receipts and cash payments are presented and classified on the
statement of cash flows. This ASU is effective for annual and
interim periods beginning after December 15, 2017 and is required
to be adopted using a retrospective approach if practicable, with
early adoption permitted. The Company does not expect the adoption
of this ASU to have a material impact on its Consolidated
Statements of Cash Flows.
In
February 2016, the FASB issued ASU 2016-02, “Leases,” a
new lease standard requiring lessees to recognize lease assets and
lease liabilities for most leases classified as operating leases
under previous GAAP. The guidance is effective for fiscal years
beginning after December 15, 2018 with early adoption permitted.
The Company will be required to use a modified retrospective
approach for leases that exist or are entered into after the
beginning of the earliest comparative period in the financial
statements. The Company is currently evaluating the impact of
adopting this standard on its Consolidated Financial Statements,
but does believe that it will materially impact the Company’s
consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01, “Recognition and
Measurement of Financial Assets and Financial Liabilities,”
which changes certain guidance related to the recognition,
measurement, presentation and disclosure of financial instruments.
This update is effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years.
Early adoption is not permitted for the majority of the update, but
is permitted for two of its provisions. The Company is evaluating
the new guidance, but does not believe that it will materially
impact the Company’s consolidated financial statement
presentation.
In May
2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers (Topic 606).” In March, April, and
May of 2016, the FASB issued rules clarifying several aspects of
the new revenue recognition standard. The new guidance is effective
for fiscal years and interim periods beginning after December 15,
2017. This guidance outlines a new, single comprehensive model for
entities to use in accounting for revenue arising from contracts
with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. This new revenue
recognition model provides a five-step analysis in determining when
and how revenue is recognized. The new model will require revenue
recognition to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration a company
expects to receive in exchange for those goods and services. The
new standard also requires more detailed disclosures related to the
nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers. The Company will not early
adopt the standard although early adoption is permitted. The
Company is currently evaluating whether to apply the retrospective
approach or modified retrospective approach with the cumulative
effect recognized as of the date of initial application. The
Company is currently evaluating the impact the standard is expected
to have on its consolidated financial statements by evaluating
current revenue streams and evaluating contracts under the revised
standards.
Recently adopted
The
FASB issued ASU 2017-01, “Business Combinations (Topic 805):
Clarifying the Definition of a Business,” which assists in
determining whether a transaction should be accounted for as an
acquisition or disposal of assets or as a business. This ASU
provides a screen that when substantially all of the fair value of
the gross assets acquired, or disposed of, are concentrated in a
single identifiable asset, or a group of similar identifiable
assets, the set will not be considered a business. If the screen is
not met, a set must include an input and a substantive process that
together significantly contribute to the ability to create an
output to be considered a business. This ASU is effective for
annual and interim periods beginning in 2018 and is required to be
adopted using a prospective approach, with early adoption permitted
for transactions not previously reported in issued financial
statements. The Company adopted this ASU on January 1, 2017, and
expects that the adoption of this ASU could have a material impact
on future consolidated financial statements as goodwill would not
be allocated to divestitures or recorded for acquisitions that are
not considered to be businesses.
The
FASB issued ASU 2016-09, “Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting,”
which
simplifies the accounting for
share-based payment transactions, including the income tax
consequences, classification of awards as either equity or
liabilities, classification on the statement of cash flows, and
accounting for forfeitures. The Company adopted this ASU on January
1, 2017, and it will not have a material impact on the
Company’s future consolidated financial
statements.
The
FASB issued ASU 2014-15, “Presentation of Financial
Instruments – Going Concern,” which requires management
of an entity to evaluate whether there are conditions or events,
considered in the aggregate, that raise substantial doubt about the
entity’s ability to continue as a going concern within one
year after the date that the financial statements are issued or
available to be issued. This update is effective for annual periods
ending after December 15, 2016. The adoption of this standard did
not have a material impact on the Company’s consolidated
financial statements.
NOTE 3 – Asset Impairments
The
Company’s oil and natural gas properties are accounted for
using the full cost method of accounting, under which all
productive and nonproductive costs directly associated with
property acquisition, exploration and development activities are
capitalized. These capitalized costs (net of accumulated DD&A
and deferred income taxes) of proved oil and natural gas properties
are subject to a full cost ceiling limitation. The ceiling limits
these costs to an amount equal to the present value, discounted at
10%, of estimated future net cash flows from estimated proved
reserves less estimated future operating and development costs,
abandonment costs (net of salvage value) and estimated related
future income taxes. In accordance with SEC rules, prices used are
the 12 month average prices, calculated as the unweighted
arithmetic average of the first-day-of-the-month price for each
month within the 12 month period prior to the end of the reporting
period, unless prices are defined by contractual arrangements.
Prices are adjusted for “basis” or location
differentials. Prices are held constant over the life of the
reserves. The Company’s first quarter of 2017 full cost
ceiling calculation was prepared by using (i) $47.61 per barrel for
oil, and (ii) $2.73 per MMBTU for natural gas as of March 31, 2017.
If unamortized costs capitalized within the cost pool exceed the
ceiling, the excess is charged to expense and separately disclosed
during the period in which the excess occurs. Amounts thus required
to be written off are not reinstated for any subsequent increase in
the cost center ceiling. During the three month periods ended March
31, 2017 and 2016, the Company recorded full cost ceiling
impairments after income taxes of $-0- and $9.8 million,
respectively.
NOTE 4 – Asset Retirement Obligations
The
Company has asset retirement obligations associated with the future
plugging and abandonment of oil and natural gas properties and
related facilities. The accretion of the asset retirement
obligation is included in the Consolidated Statements of
Operations. Revisions to the liability typically occur due to
changes in the estimated abandonment costs, well economic lives and
the discount rate.
The
following table summarizes the Company’s asset retirement
obligation transactions recorded during the three months ended
March 31, 2017 in accordance with the provisions of FASB ASC Topic
410, “Asset Retirement and Environmental
Obligations”
:
|
|
|
|
Asset
retirement obligations at December 31, 2016
|
$
10,196,383
|
Liabilities
incurred
|
-
|
Liabilities
settled
|
-
|
Liabilities
sold
|
-
|
Accretion
expense
|
138,569
|
Revisions
in estimated cash flows
|
-
|
|
|
Asset
retirement obligations at March 31, 2017
|
$
10,334,952
|
Based
on expected timing of settlements, $383,830 of the asset retirement
obligation is classified as current at March 31, 2017.
NOTE 5 – Fair Value Measurements
Certain financial instruments are reported at fair value on our
Consolidated Balance Sheets. Under fair value measurement
accounting guidance, fair value is defined as the amount that would
be received from the sale of an asset or paid for the transfer of a
liability in an orderly transaction between market participants,
i.e., an exit price. To estimate an exit price, a three-level
hierarchy is used. The fair value hierarchy prioritizes the inputs,
which refer broadly to assumptions market participants would use in
pricing an asset or a liability, into three levels. The Company
uses a market valuation approach based on available inputs and the
following methods and assumptions to measure the fair values of its
assets and liabilities, which may or may not be observable in the
market.
Fair Value of Financial Instruments (other than Commodity
Derivative Instruments, see below) –
The carrying values of financial instruments,
excluding commodity derivative instruments, comprising current
assets and current liabilities approximate fair values due to the
short-term maturities of these instruments.
Derivatives
– The fair
values of the Company’s commodity derivatives are considered
Level 2 as their fair values are based on third-party pricing
models which utilize inputs that are either readily available in
the public market, such as natural gas and oil forward curves and
discount rates, or can be corroborated from active markets or
broker quotes. These values are then compared to the values given
by the Company’s counterparties for reasonableness. The
Company is able to value the assets and liabilities based on
observable market data for similar instruments, which results in
the Company using market prices and implied volatility factors
related to changes in the forward curves. Derivatives are also
subject to the risk that counterparties will be unable to meet
their obligations.
|
Fair value measurements at March 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
Commodity
derivatives – oil
|
$
-
|
$
1,264,880
|
$
-
|
$
1,264,880
|
Commodity
derivatives – gas
|
-
|
(112,207
)
|
-
|
$
(112,207
)
|
Total
assets
|
$
-
|
$
1,152,673
|
$
-
|
$
1,152,673
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Commodity
derivatives – oil
|
$
-
|
$
(68,532
)
|
$
-
|
$
(68,532
)
|
Commodity
derivatives – gas
|
-
|
319,124
|
-
|
$
319,124
|
Total
liabilities
|
$
-
|
$
250,592
|
$
-
|
$
250,592
|
|
Fair value measurements at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Commodity
derivatives – oil
|
$
-
|
$
956,997
|
$
-
|
$
956,997
|
Commodity
derivatives – gas
|
-
|
1,599,005
|
-
|
$
1,599,005
|
Total
liabilities
|
$
-
|
$
2,556,002
|
$
-
|
$
2,556,002
|
Derivative instruments listed above include swaps and three-way
collars (see Note 6 – Commodity Derivative
Instruments).
Debt
– The
Company’s debt is recorded at the carrying amount on its
Consolidated Balance Sheets (see Note 10 – Debt and Interest
Expense). The carrying amount of floating-rate debt approximates
fair value because the interest rates are variable and reflective
of market rates.
Asset Retirement Obligations
– The Company estimates the fair value of
AROs based on discounted cash flow projections using numerous
estimates, assumptions and judgments regarding such factors as the
existence of a legal obligation for an ARO, amounts and timing of
settlements, the credit-adjusted risk-free rate to be used and
inflation rates (see Note 4 – Asset Retirement
Obligations).
NOTE 6 – Commodity Derivative Instruments
Objective and Strategies for Using Commodity Derivative
Instruments
– In order to mitigate the effect of
commodity price uncertainty and enhance the predictability of cash
flows relating to the marketing of the Company’s crude oil
and natural gas, the Company enters into crude oil and natural gas
price commodity derivative instruments with respect to a portion of
the Company’s expected production. The commodity derivative
instruments used include futures, swaps, and options to manage
exposure to commodity price risk inherent in the Company’s
oil and natural gas operations.
Futures
contracts and commodity price swap agreements are used to fix the
price of expected future oil and natural gas sales at major
industry trading locations such as Henry Hub, Louisiana for natural
gas and Cushing, Oklahoma for oil. Basis swaps are used to fix or
float the price differential between product prices at one market
location versus another. Options are used to establish a floor
price, a ceiling price, or a floor and ceiling price (collar) for
expected future oil and natural gas sales.
A
three-way collar is a combination of three options: a sold call, a
purchased put, and a sold put. The sold call establishes the
maximum price that the Company will receive for the contracted
commodity volumes. The purchased put establishes the minimum price
that the Company will receive for the contracted volumes unless the
market price for the commodity falls below the sold put strike
price, at which point the minimum price equals the reference price
(e.g., NYMEX) plus the excess of the purchased put strike price
over the sold put strike price.
While
these instruments mitigate the cash flow risk of future reductions
in commodity prices, they may also curtail benefits from future
increases in commodity prices.
The
Company does not apply hedge accounting to any of its derivative
instruments. As a result, gains and losses associated with
derivative instruments are recognized currently in
earnings.
Counterparty Credit Risk
– Commodity derivative
instruments expose the Company to counterparty credit risk. The
Company’s commodity derivative instruments are with
Société Générale (“SocGen”) and BP
Energy Company, both of which are rated “A” by Standard
and Poor’s and “A2” by Moody’s. Commodity
derivative contracts are executed under master agreements which
allow the Company, in the event of default, to elect early
termination of all contracts. If the Company chooses to elect early
termination, all asset and liability positions would be netted and
settled at the time of election.
Commodity
derivative instruments open as of March 31, 2017 are provided
below. Natural gas prices are New York Mercantile Exchange
(“NYMEX”) Henry Hub prices, and crude oil prices are
NYMEX West Texas Intermediate (“WTI”).
|
|
|
|
|
|
|
|
NATURAL
GAS (MMBtu):
|
|
|
|
Swaps
|
|
|
|
Volume
|
1,748,574
|
1,451,734
|
-
|
Price
|
$
3.13
|
$
3.00
|
-
|
|
|
|
|
3-way
collars
|
|
|
|
Volume
|
132,587
|
-
|
-
|
Ceiling
sold price (call)
|
$
3.38
|
-
|
-
|
Floor
purchased price (put)
|
$
3.02
|
-
|
-
|
Floor
sold price (short put)
|
$
2.47
|
-
|
-
|
|
|
|
|
CRUDE
OIL (Bbls):
|
|
|
|
Swaps
|
|
|
|
Volume
|
105,214
|
195,152
|
156,320
|
Price
|
$
52.24
|
$
53.17
|
$
53.77
|
|
|
|
|
3-way
collars
|
|
|
|
Volume
|
83,023
|
-
|
-
|
Ceiling
sold price (call)
|
$
77.00
|
-
|
-
|
Floor
purchased price (put)
|
$
60.00
|
-
|
-
|
Floor
sold price (short put)
|
$
45.00
|
-
|
-
|
Derivatives for each commodity are netted on the Consolidated
Balance Sheets. The following table presents the fair value and
balance sheet location of each classification of commodity
derivative contracts on a gross basis without regard to
same-counterparty netting:
|
|
|
|
|
Asset
commodity derivatives:
|
|
|
Current
assets
|
$
896,651
|
$
734,464
|
Noncurrent
assets
|
678,470
|
54,380
|
|
1,575,121
|
788,844
|
|
|
|
Liability
commodity derivatives:
|
|
|
Current
liabilities
|
(669,000
)
|
(2,074,915
)
|
Noncurrent
liabilities
|
(4,040
)
|
(1,269,931
)
|
|
(673,040
)
|
(3,344,846
)
|
|
|
|
Total
commodity derivative instruments
|
$
902,081
|
$
(2,556,002
)
|
Net gains (losses) from commodity derivatives on the Consolidated
Statements of Operations are comprised of the
following:
|
Three Months Ended March 31,
|
|
|
|
|
|
|
Derivative
settlements
|
$
98,700
|
$
535,488
|
Mark
to market on commodity derivatives
|
3,458,083
|
(79,174
)
|
Net
gains (losses) from commodity derivatives
|
$
3,556,783
|
$
456,314
|
NOTE 7 – Preferred Stock
The
Company issued an aggregate of 1,754,179 shares of Series D
Preferred Stock as part of the completion of the Davis Merger to
former holders of Series A Preferred Stock, which is convertible
into shares of the Company’s common stock. Each share of
Series D Preferred Stock is convertible into a number of shares of
common stock determined by dividing the original issue price, which
was $11.0741176, by the conversion price, which is currently
$11.0741176. The conversion price is subject to adjustment for
stock splits, stock dividends, reclassification, and certain
issuances of common stock for less than the conversion price. As of
March 31, 2017, the Series D Preferred Stock had a liquidation
preference of approximately $20.0 million and a conversion rate of
$11.0741176 per share. The Series D Preferred Stock provides for
cumulative dividends of 7.0% per annum, payable in-kind. The
Company issued 30,667 shares of Series D Preferred Stock as in-kind
dividends for the period from January 1, 2017 through March 31,
2017.
NOTE 8 – Stock-Based Compensation
2014 Long-Term Incentive Plan
On
October 26, 2016, the Company assumed the Yuma California 2014
Long-Term Incentive Plan (the “2014 Plan”), which was
approved by the shareholders of Yuma California. The shareholders
of Yuma California originally approved the 2014 Plan at the special
meeting of shareholders on September 10, 2014 and the subsequent
amendment to the 2014 Plan at the special meeting of shareholders
on October 26, 2016. Under the 2014 Plan, Yuma may grant stock
options, restricted stock awards (“RSAs”), restricted
stock units (“RSUs”), stock appreciation rights
(“SARs”), performance units, performance bonuses, stock
awards and other incentive awards to employees of Yuma and its
subsidiaries and affiliates. Yuma may also grant nonqualified stock
options, RSAs, RSUs, SARs, performance units, stock awards and
other incentive awards to any persons rendering consulting or
advisory services and non-employee directors of Yuma and its
subsidiaries, subject to the conditions set forth in the 2014 Plan.
Generally, all classes of Yuma’s employees are eligible to
participate in the 2014 Plan.
The
2014 Plan provides that a maximum of 2,495,000 shares of common
stock may be issued in conjunction with awards granted under the
2014 Plan. As of the closing of the Reincorporation Merger, there
were awards for approximately 179,165 shares of common stock
outstanding. Awards that are forfeited under the 2014 Plan will
again be eligible for issuance as though the forfeited awards had
never been issued. Similarly, awards settled in cash will not be
counted against the shares authorized for issuance upon exercise of
awards under the 2014 Plan.
The
2014 Plan provides that a maximum of 1,000,000 shares of common
stock may be issued in conjunction with incentive stock options
granted under the 2014 Plan. The 2014 Plan also limits the
aggregate number of shares of common stock that may be issued in
conjunction with stock options and/or SARs to any eligible employee
in any calendar year to 1,500,000 shares. The 2014 Plan also limits
the aggregate number of shares of common stock that may be issued
in conjunction with the grant of RSAs, RSUs, performance unit
awards, stock awards and other incentive awards to any eligible
employee in any calendar year to 700,000 shares.
At
March 31, 2017, 2,152,920 shares of the 2,495,000 shares of common
stock originally authorized under active share-based compensation
plans remained available for future issuance. The Company generally
issues new shares to satisfy awards under employee share-based
payment plans. The number of shares available is reduced by awards
granted.
The
Company accounts for stock-based compensation in accordance with
FASB ASC Topic 718, “Compensation – Stock
Compensation”.
The guidance requires that all
stock-based payments to employees and directors, including grants
of RSUs, be recognized in the financial statements based on their
fair values.
Restricted Stock and Stock Appreciation Rights –
RSAs
and SARs granted to officers, directors and employees generally
vest in one-third increments over a three-year period, and are
contingent on the recipient’s continued employment. During
the three months ended March 31, 2017, the Company granted -0- RSAs
and -0- SARs.
Total
share-based compensation expenses recognized for the three months
ended March 31, 2017 and 2016 were $51,735 and $196,924,
respectively, and are reflected in general and administrative
expenses in the Consolidated Statements of Operations.
NOTE 9 – Earning Per Common Share
Earnings
per common share – Basic is calculated by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding during the period. Earnings per common share –
Diluted assumes the conversion of all potentially dilutive
securities, and is calculated by dividing net income (loss) by the
sum of the weighted average number of shares of common stock
outstanding plus potentially dilutive securities. Earnings per
common share – Diluted considers the impact of potentially
dilutive securities except in periods where their inclusion would
have an anti-dilutive effect. Equity, including the average number
of shares of common stock and per share amounts, has been
retroactively restated to reflect the Davis Merger.
A
reconciliation of earnings per common share is as
follows:
|
Three Months Ended March 31,
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
$
2,262,515
|
$
(12,770,837
)
|
|
|
|
Weighted
average common shares outstanding
|
|
|
Basic
|
12,211,256
|
7,454,062
|
Add
potentially dilutive securities:
|
|
|
Unvested
restricted stock awards
|
67,855
|
-
|
Stock
appreciation rights
|
-
|
-
|
Stock
options
|
-
|
-
|
Series
A preferred stock
|
-
|
-
|
Series
D preferred stock
|
1,777,059
|
-
|
Diluted
weighted average common shares outstanding
|
14,056,170
|
7,454,062
|
|
|
|
Net
income (loss) per common share:
|
|
|
Basic
|
$
0.19
|
$
(1.71
)
|
Diluted
|
$
0.16
|
$
(1.71
)
|
For the
three months ended March 31, 2016, the Company excluded 235,646
shares of unvested RSAs, 337,452 stock options and 1,686,115 shares
of Series A Preferred Stock in calculating diluted earnings per
share, as the effect was anti-dilutive.
NOTE 10 – Debt and Interest Expense
Long-term
debt consisted of the following:
|
|
|
|
|
|
|
|
|
Senior
credit facility
|
$
39,500,000
|
$
39,500,000
|
Installment
loan due 7/15/17 originating from the financing of
|
|
|
insurance
premiums at 4.38% interest rate
|
344,315
|
599,341
|
Total
debt
|
39,844,315
|
40,099,341
|
Less:
current maturities
|
(344,315
)
|
(599,341
)
|
Total
long-term debt
|
$
39,500,000
|
$
39,500,000
|
Senior Credit Facility
In
connection with the closing of the Davis Merger, on October 26,
2016, Yuma and three of its subsidiaries, as the co-borrowers,
entered into a credit agreement providing for a $75.0 million
three-year senior secured revolving credit facility (the
“Credit Agreement”) with SocGen, as administrative
agent, SG Americas Securities, LLC (“SG Americas”), as
lead arranger and bookrunner, and the Lenders signatory thereto
(collectively with SocGen, the “Lender”).
The
initial borrowing base of the credit facility was $44.0 million,
which was reaffirmed as of January 1, 2017. The borrowing base is
subject to redetermination on April 1st and October 1st of each
year, as well as special redeterminations described in the Credit
Agreement. The April 2017 redetermination is still in process. The
amounts borrowed under the Credit Agreement bear annual interest
rates at either (a) the London Interbank Offered Rate
(“LIBOR”) plus 3.00% to 4.00% or (b) the prime lending
rate of SocGen plus 2.00% to 3.00%, depending on the amount
borrowed under the credit facility and whether the loan is drawn in
U.S. dollars or Euro dollars. The interest rate for the credit
facility at March 31, 2017 was 4.54% and was based on LIBOR.
Principal amounts outstanding under the credit facility are due and
payable in full at maturity on October 26, 2019. All of the
obligations under the Credit Agreement, and the guarantees of those
obligations, are secured by substantially all of the
Company’s assets. Additional payments due under the Credit
Agreement include paying a commitment fee to the Lender in respect
of the unutilized commitments thereunder. The commitment rate is
0.50% per year of the unutilized portion of the borrowing base in
effect from time to time. The Company is also required to pay
customary letter of credit fees.
The
Credit Agreement contains a number of covenants that, among other
things, restrict, subject to certain exceptions, the
Company’s ability to incur additional indebtedness, create
liens on assets, make investments, enter into sale and leaseback
transactions, pay dividends and distributions or repurchase its
capital stock, engage in mergers or consolidations, sell certain
assets, sell or discount any notes receivable or accounts
receivable, and engage in certain transactions with
affiliates.
In
addition, the Credit Agreement requires the Company to maintain the
following financial covenants: a current ratio of not less than 1.0
to 1.0, a ratio of total debt to earnings before interest, taxes,
depreciation, depletion, amortization and exploration expenses
(“EBITDAX”) ratio of not greater than 3.5 to 1.0, a
ratio of EBITDAX to interest expense for the four fiscal quarters
ending on the last day of the fiscal quarter immediately preceding
such date of determination to be less than 2.75 to 1.0, and cash
and cash equivalent investments together with borrowing
availability under the Credit Agreement of at least $3.0 million.
For fiscal quarters ending prior to and not including the fiscal
quarter ending December 31, 2017, EBITDAX will be calculated using
an annualized EBITDAX and interest expense will be calculated using
an annualized interest expense. Annualized EBITDAX is defined in
the Credit Agreement as follows: (a) EBITDAX for the four-fiscal
quarter period ending March 31, 2017 will be deemed to equal
EBITDAX for the two-fiscal quarter period comprising the fiscal
quarter ending December 31, 2016 and the fiscal quarter ending
March 31, 2017, multiplied by two (2); and (b)
EBITDAX for the four-fiscal quarter period ending
June 30, 2017 will be deemed to equal EBITDAX for the
three-fiscal quarter period comprising the fiscal quarter ending
December 31, 2016, the fiscal quarter ending
March 31, 2017 and the fiscal quarter ending
June 30, 2017, multiplied by four-thirds (4/3).
Annualized interest expense is defined in the Credit Agreement as
follows: (a) interest expense for the four-fiscal quarter period
ending on December 31, 2016 will be deemed to equal
interest expense for such fiscal quarter multiplied by
four (4); (b) interest expense for the four-fiscal quarter
period ending March 31, 2017 will be deemed to equal
interest expense for the two-fiscal quarter period comprising the
fiscal quarter ending December 31, 2016 and the fiscal quarter
ending March 31, 2017, multiplied by two (2); and (c) interest
expense for the four-fiscal quarter period ending
June 30, 2017 will be deemed to equal interest expense
for the three-fiscal quarter period comprising the fiscal quarter
ending December 31, 2016, the fiscal quarter ending
March 31, 2017 and the fiscal quarter ending
June 30, 2017, multiplied by four-thirds (4/3). The
Credit Agreement contains customary affirmative covenants and
defines events of default for credit facilities of this type,
including failure to pay principal or interest, breach of
covenants, breach of representations and warranties, insolvency,
judgment default, and a change of control. Upon the occurrence and
continuance of an event of default, the Lender has the right to
accelerate repayment of the loans and exercise its remedies with
respect to the collateral. As of March 31, 2017 and December 31,
2016, the Company was in compliance with the covenants under the
Credit Agreement.
NOTE 11 – Stockholders’ Equity
Yuma is authorized to issue up to 100,000,000 shares of common
stock, $0.001 par value per share, and 20,000,000 shares of
preferred stock, $0.001 par value per share. The holders of common
stock are entitled to one vote for each share of common stock,
except as otherwise required by law. The Company has designated
7,000,000 shares of preferred stock as Series D Preferred
Stock.
The Company assumed the 2014 Plan upon the completion of the
Reincorporation Merger as described in Note 8 – Stock-Based
Compensation, which describes outstanding stock options, RSAs and
SARs granted under the 2014 Plan.
NOTE 12 – Income Taxes
The
Company’s effective tax rate for the three months ended March
31, 2017 and 2016 was 1.01% and (.02%), respectively. The
difference between the statutory federal income taxes calculated
using a U.S. Federal statutory corporate income tax rate of 35% and
the Company’s effective tax rate of 1.01% for the three
months ended March 31, 2017 is related to the valuation allowance
on the deferred tax assets and state income taxes. The difference
between the statutory federal income taxes calculated using a U.S.
Federal statutory corporate income tax rate of 35% and the
Company’s effective tax rate of (.02%) for the three months
ended March 31, 2016 is primarily related to the full valuation
allowance against its Federal and Louisiana net deferred tax
assets.
As of
March 31, 2017, the Company had federal and state net operating
loss carryforwards of approximately $130.0 million which expire
between 2022 and 2035. Of this amount, approximately $61.3 million
is subject to limitation under Section 382 of the Internal Revenue
Code of 1986, as amended, which could result in some amounts
expiring prior to being utilized. Realization of a deferred tax
asset is dependent, in part, on generating sufficient taxable
income prior to expiration of the loss carryforwards.
The
Company provides for deferred income taxes on the difference
between the tax basis of an asset or liability and its carrying
amount in the financial statements in accordance FASB ASC Topic
740, “Income Taxes”. This difference will result in
taxable income or deductions in future years when the reported
amount of the asset or liability is recovered or settled,
respectively. In recording deferred tax assets, the Company
considers whether it is more likely than not that some portion or
all of the deferred income tax asset will be realized. The ultimate
realization of deferred income tax assets, if any, is dependent
upon the generation of future taxable income during the periods in
which those deferred income tax assets would be deductible. Based
on the available evidence, the Company has recorded a full
valuation allowance against its net deferred tax
assets.
NOTE 13 – Commitments and Contingencies
Joint Development Agreement
On
March 27, 2017, the Company entered into a Joint Development
Agreement with Firethorn Petroleum, LLC and Carnes Natural Gas,
Ltd., both unaffiliated entities, covering an area of approximately
52 square miles (33,280 acres) in Yoakum County, Texas. In
connection with the agreement, the Company acquired an 87.5%
interest in approximately 2,269 existing gross (1,985 net)
leasehold acres. As the operator of the property covered by this
agreement, the Company is committed to spend an additional $1.5
million. The Company intends to acquire additional leasehold
acreage and begin drilling its first joint venture well in
2017.
Certain Legal Proceedings
From
time to time, the Company is party to various legal proceedings
arising in the ordinary course of business. While the outcome of
lawsuits cannot be predicted with certainty, the Company is not
currently a party to any proceeding that it believes, if determined
in a manner adverse to the Company, could have a potential material
adverse effect on its financial condition, results of operations,
or cash flows. See Part II, Item 1 – “Legal
Proceedings” below for further details.
NOTE 14 – Subsequent Events
Yuma
and its subsidiary, Pyramid Oil LLC have executed a Purchase, Sale,
Settlement and Release Agreement with Texican Energy Corporation
dated effective April 26, 2017. By virtue of said agreement, the
Company has received $180,000 and conveyed its interest in all of
the leasehold acreage, wells, and equipment in the Cat Canyon
Prospect in Santa Barbara County, California, to Texican Energy
Corporation. The Company retained the obligation to plug and
abandon one well on the property and clean up its location pad
area. See Part II, Item 1 – “Legal Proceedings”
below for further details.