Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1 – Organization and Nature
of Business
Effective April 2, 2012, Ante5, Inc. changed
its corporate name to Black Ridge Oil & Gas, Inc., and continues to be quoted on the OTCQB under the trading symbol “ANFC”.
Black Ridge Oil & Gas, Inc. (formerly Ante5, Inc.) (the “Company”) became an independent company in April 2010.
We became a publicly traded company when our shares began trading on July 1, 2010. Since October 2010, we had been engaged
in the business of acquiring oil and gas leases and participating in the drilling of wells in the Bakken and Three Forks trends
in North Dakota and Montana.
On June 21, 2016 we closed on a debt restructuring
transaction with our secured lenders as described in Note 3 – Debt Restructuring. Through June 30, 2017 we had also been
managing the oil and gas assets relinquished during the debt restructuring in which we continued to have an indirect minority interest.
Our management services agreement related to those same oil and gas assets was terminated on April 3, 2017, effective June 30,
2017.
The
Company is focused on acquiring, investing in, and managing the oil and gas assets for our partners. We continue to pursue asset
acquisitions in all major onshore unconventional shale formations that may be acquired with capital from our existing joint venture
partners or other capital providers.
On September 25, 2017, the Company finalized
an equity raise utilizing a rights offering and backstop agreement, raising net proceeds of $5,051,675 and issuing 431,819,910
shares. The proceeds were used to sponsor the Company’s obligations in sponsoring a special purpose acquisition company,
discussed below, with the remainder for general corporate purposes.
On
October 10, 2017, the Company’s sponsored special purpose acquisition company, Black Ridge Acquisition Corp. (“BRAC”),
completed an initial public offering raising $138,000,000 of gross proceeds (including proceeds from the exercise of an over-allotment
option by the underwriters on October 18, 2017). In addition, the Company purchased 445,000 BRAC units at $10.00 per unit in a
private placement transaction for a total contribution of $4,450,000 in order to fulfill its obligations in sponsoring BRAC.
BRAC
is a blank check company formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization,
reorganization or other similar business combination with one or more businesses or entities. BRAC’s efforts to identify
a prospective target business will not be limited to a particular industry or geographic region although it intends to focus its
search for target businesses in the energy or energy-related industries with an emphasis on opportunities in the upstream oil and
gas industry in North America. Following the initial public offering and over-allotment, the Company owns 22% of the outstanding
common stock of BRAC and manages BRAC’s operations via a management services agreement.
Note 2 – Basis of Presentation
and Significant Accounting Policies
The interim condensed financial statements
included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars,
have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to not make the information presented misleading.
These statements reflect all adjustments,
which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise
disclosed, all such adjustments are of a normal recurring nature. It is suggested that these interim condensed financial statements
be read in conjunction with the audited financial statements for the year ended December 31, 2016, which were included
in our Annual Report on Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the following entities, all of which are under common control and ownership:
Name of entity
|
|
State of Incorporation
|
|
Relationship
|
Black Ridge Oil and Gas, Inc.
|
|
Nevada
|
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Parent
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Black Ridge Acquisition Corp.
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Delaware
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Subsidiary
(1)
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(1)
Wholly-owned subsidiary
The consolidated financial statements herein
contain the operations of the wholly-owned subsidiary listed above. All significant inter-company transactions have been eliminated
in the preparation of theses financial statements. The parent company, Black Ridge Oil & Gas, Inc. and subsidiary, Black Ridge
Acquisition Corp. will be collectively referred to herein as the “Company” or “Black Ridge”. The Company’s
headquarters is in Minneapolis, Minnesota and substantially all of its operations are in the United States.
Reclassifications
As discussed in Note 3 – Debt Restructuring,
income, expense and cash flows from the restructured operations for the three and nine months ended September 30, 2016 have been
reclassified as net loss and cash flows from discontinued operations.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
The oil and gas industry is subject, by
its nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial losses from environmental
accidents or events which would have a material effect on the Company.
Cash and Cash Equivalents
Cash equivalents include money market accounts
which have maturities of three months or less. For the purpose of the statements of cash flows, all highly liquid investments with
an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost plus accrued
interest, which approximates market value. No cash equivalents were on hand at September 30, 2017 and December 31, 2016.
Cash in Excess of FDIC Insured Limits
The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) up to $250,000 and $500,000, respectively, under current
regulations. The Company had approximately $4,460,346 and $-0- in excess of FDIC and SIPC insured limits at September 30, 2017
and December 31, 2016, respectively.
As of September 30, 2017, the Company had not experienced losses
on these accounts and management believes the Company is not exposed to significant risks on such accounts.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Website Development Costs
The Company accounts for website development
costs in accordance with ASC 350-50, “Accounting for Website Development Costs” (“ASC 350-50”), wherein
website development costs are segregated into three activities:
|
1)
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Initial stage (planning), whereby the related costs are expensed.
|
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2)
|
Development (web application, infrastructure, graphics), whereby the related costs are capitalized
and amortized once the website is ready for use. Costs for development content of the website may be expensed or capitalized depending
on the circumstances of the expenditures.
|
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3)
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Post-implementation (after site is up and running: security, training, administration), whereby
the related costs are expensed as incurred. Upgrades are usually expensed, unless they add additional functionality.
|
We have capitalized a total of $56,660
of website development costs from inception through September 30, 2017. We depreciate our website development costs on a straight
line basis over the estimated useful life of the assets, which is currently three years. We have recognized depreciation expense
on these website costs of $-0- and $-0- for the nine months ended September 30, 2017 and 2016, respectively, as all website development
costs have been fully depreciated.
Income Taxes
The Company recognizes deferred tax assets
and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Basic and Diluted Loss Per Share
The basic net loss per share is computed
by dividing the net loss (the numerator) by the weighted average number of common shares outstanding for the period (the denominator).
Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares and potential
common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants and restricted
stock. The number of potential common shares outstanding relating to stock options, warrants and restricted stock is computed using
the treasury stock method.
The reconciliation of the denominators
used to calculate basic EPS and diluted EPS for the three and nine months ended September 30, 2017 and 2016 are as follows:
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Three Months Ended
|
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Nine Months Ended
|
|
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September 30,
|
|
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September 30,
|
|
|
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2017
|
|
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2016
|
|
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2017
|
|
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2016
|
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Weighted average common shares outstanding – basic
|
|
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64,438,566
|
|
|
|
47,979,990
|
|
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53,526,470
|
|
|
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47,979,990
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|
Plus: Potentially dilutive common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
75,122
|
|
Weighted average common shares outstanding – diluted
|
|
|
64,438,566
|
|
|
|
47,979,990
|
|
|
|
53,526,470
|
|
|
|
48,055,112
|
|
Stock options and warrants excluded from
the calculation of diluted EPS because their effect was anti-dilutive were 11,380,000 and 7,043,500 for the three months ended
September 30, 2017 and 2016, respectively, and 11,380,000 and 6,906,500 for the nine months ended September 30, 2017 and 2016,
respectively.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial
Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The
adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying
amounts of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate
fair value primarily due to the short term nature of the instruments.
The Company had no items that
required fair value measurement on a recurring basis.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Property and Equipment
Property and equipment that are not oil
and gas properties are recorded at cost and depreciated using the straight-line method over their estimated useful lives of three
to seven years. Expenditures for replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to
operations as incurred. Long-lived assets, other than oil and gas properties, are evaluated for impairment to determine if current
circumstances and market conditions indicate the carrying amount may not be recoverable. The Company has not recognized any impairment
losses on non-oil and gas long-lived assets. Depreciation expense was $8,291 and $10,848 for the nine months ended September 30,
2017 and 2016, respectively.
Revenue Recognition
The Company recognizes management fee income
as services are provided.
The Company recognized oil and gas revenues
from its former interests in producing wells when production was delivered to, and title was transferred to, the purchaser and
to the extent the selling price is reasonably determinable. Oil and gas revenues are reflected as a component of discontinued operations
on the statements of operations.
Asset Retirement Obligations
The Company records the fair value of a
liability for an asset retirement obligation in the period in which the well is spud or the asset is acquired and a corresponding
increase in the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other
than the recorded amount, a gain or loss is recognized. The expense related to accretion of the discount on the asset retirement
liability is reflected as a component of discontinued operations on the statement of operations for the nine months ended September
30, 2016.
Full Cost Method
The Company followed the full cost method
of accounting for oil and gas operations in 2016 whereby all costs related to the exploration and development of oil and gas properties
were initially capitalized into a single cost center ("full cost pool"). The Company had no oil and gas operations in
2017 as they were disposed as part of the debt restructuring transaction on June 21, 2016 described in Note 3 – Debt Restructuring.
Capitalized costs included land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties,
costs of drilling directly related to acquisition, and exploration activities. Internal costs that were capitalized were directly
attributable to acquisition, exploration and development activities and did not include costs related to the production, general
corporate overhead or similar activities. Costs associated with production and general corporate activities were expensed in the
period incurred. Capitalized costs for the nine month period ended September 30, 2016 are summarized as follows:
|
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Nine Months Ended
|
|
|
|
September 30, 2016
|
|
Capitalized Certain Payroll and Other Internal Costs
|
|
$
|
–
|
|
Capitalized Interest Costs
|
|
|
7,219
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|
Total
|
|
$
|
7,219
|
|
Proceeds from sales of proved properties
were credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship
between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve
a sale of 20% or more of the proved reserves related to a single full cost pool. The Company assessed all items classified as unevaluated
property on a quarterly basis for possible impairment or reduction in value. The assessment included consideration of the following
factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity;
the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period
in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion
of the associated leasehold costs were transferred to the full cost pool and were then subject to amortization.
Capitalized costs associated with impaired
properties and properties having proved reserves, estimated future development costs, and asset retirement costs under FASB ASC
410-20-25 were depleted and amortized on the unit-of-production method based on the estimated gross proved reserves as determined
by independent petroleum engineers. The costs of unproved properties were withheld from the depletion base until such time as they
are either developed or abandoned.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Capitalized costs of oil and gas properties
(net of related deferred income taxes) could not exceed an amount equal to the present value, discounted at 10% per annum, of the
estimated future net cash flows from proved oil and gas reserves plus the cost of unproved properties (adjusted for related income
tax effects). When capitalized costs exceeded this ceiling, impairment was recognized. The present value of estimated future net
cash flows was computed by applying the arithmetic average first day price of oil and natural gas for the preceding twelve months
to estimated future production of proved oil and gas reserves as of the end of the period, less estimated future expenditures to
be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions. Such present
value of proved reserves' future net cash flows excludes future cash outflows associated with settling asset retirement obligations.
When this comparison indicated an excess carrying value, the excess was charged to earnings as an impairment expense. The Company
recognized an impairment loss of $5,219,000 during the nine months ended September 30, 2016. The impairment loss is reflected as
a component of discontinued operations on the statement of operations for the period.
Stock-Based
Compensation
The Company adopted FASB guidance on stock
based compensation upon inception at April 9, 2010. Under FASB ASC 718-10-30-2, all share-based payments to employees, including
grants of employee stock options, are recognized in the income statement based on their fair values. Expense related to common
stock and stock options issued for services and compensation totaled $473,053 and $473,472 for the nine months ended September
30, 2017 and 2016, respectively, using the Black-Scholes options pricing model and an effective term of 6 to 6.5 years based on
the weighted average of the vesting periods and the stated term of the option grants and the discount rate on 5 to 7 year U.S.
Treasury securities at the grant date.
Uncertain Tax Positions
Effective upon inception at April 9, 2010,
the Company adopted standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition.
Various taxing authorities may periodically
audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions,
including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures
connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable
exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and
fully resolved. Black Ridge Oil & Gas, Inc. has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax
position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Derivative Instruments and Price Risk
Management
During the 2016 period, while the Company
had oil and gas operations, the Company entered into derivative contracts, including price swaps, caps and floors, which required
payments to (or receipts from) counterparties based on the differential between a fixed price and a variable price for a fixed
quantity of crude oil without the exchange of underlying volumes. The notional amounts of these financial instruments were based
on a portion of the expected production from existing wells.
Any realized gains and losses were recorded
to gain (loss) on settled derivatives and unrealized gains or losses as a result of mark-to market valuations were recorded to
gain (loss) on the mark-to-market of derivatives and are included as a component of loss from discontinued operations on the statements
of operations.
Recent Accounting Pronouncements
New accounting pronouncements are issued
by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective
date. If not discussed below, management believes there have been no developments to recently issued accounting standards, including
expected dates of adoption and estimated effects on our financial statements, from those disclosed in our Annual Report on Form
10-K for the year ended December 31, 2016.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 3 – Debt Restructuring
On March 29, 2016, the Company entered
into an Asset Contribution Agreement with Black Ridge Holding Company, LLC, a Delaware limited liability company (“BRHC”)
which was formed by the Company to contribute and assign to BRHC, all of the Company's (i) oil and gas assets (including working
capital and tangible and intangible assets) (the “Assets”), (ii) outstanding balances under that certain Credit Agreement
between the Company, as borrower, and Cadence Bank, N.A. (“Cadence”), as lender (the “Cadence Credit Facility”)
and the outstanding balances under that certain Credit Agreement between the Company, as borrower, and the several banks and other
financial institutions or entities from time to time parties thereto (the “Chambers”), and Chambers, as administrative
agent (the “Chambers Credit Facility”) and (iii) all current liabilities related to the Assets, in exchange for 5%
of the issued and outstanding Class A Units (the “Class A Units”) in BRHC (the “Asset Contribution”). On
March 29, 2016, affiliates of Chambers Energy Management, LP (“Chambers”) (specifically, Chambers Energy Capital II,
LP and CEC II TE, LLC (collectively, the “Chambers Affiliates”)) entered into a Debt Contribution Agreement between
BRHC and the Chambers Affiliates, pursuant to which BRHC issued a number of Class A Units representing 95% of the Class A Units
of BRHC to the Chambers Affiliates in exchange for the release of BRHC's obligations under the Chambers Credit Facility (the “Satisfaction
of Debt” and, together with the Asset Contribution, the “BRHC Transaction”). Concurrent with the Satisfaction
of Debt, each warrant originally issued with the Chambers Credit Facility was automatically retired and cancelled. The closing
of the BRHC Transaction was subject to the Company obtaining the approval of stockholders holding a majority of its outstanding
capital stock and to the Company having assigned the Cadence Credit Agreement to BRHC with Cadence’s consent, and BRHC and
Cadence entering into any applicable amendment agreements related to such assignment and waiver of financial covenant ratio compliance
for the quarter ended December 31, 2015 and quarter ending March 31, 2016.
On June 21, 2016,
the Company satisfied all of these conditions and, for accounting purposes, the BRHC Transaction was closed. The parties agreed
that the BRHC Transaction, the Asset Contribution and the Satisfaction of Debt were effective, for valuation purposes, as of April
1, 2016.
The terms of the Class A Units of BRHC
are set forth in the limited liability company agreement of BRHC (the “LLC Agreement”), which became effective upon
the closing of the BRHC Transaction. All distributions by BRHC of cash or other property, and whether upon liquidation or otherwise,
are to be made as follows:
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•
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First, 100% to the Class A Members, pro rata, until each Class A Member has
received distributions in aggregate totaling the then Class A Preference, which is an amount equal to a 10.0% internal rate of
return on the invested capital amount.
|
|
•
|
Second, 90% to the Class A Members, pro rata, and 10% to the Class B Members,
pro rata, until such time as the aggregate distributions to Chambers equals 250% of the capital contribution of its Class A Units.
|
|
•
|
Third, 80% to the Class A Members, pro rata, and 20% to the Class B Members,
pro rata.
|
BRHC is managed by the BRHC Board, which
is responsible for the conduct of the day-to-day business of BRHC and the management, oversight and disposition of the assets of
BRHC. The initial BRHC Board is comprised of three managers, consisting of two managers appointed by Chambers and one member from
the Company.
In addition, under the LLC Agreement, Chambers
committed to contribute up to $30 million cash (the “Chambers Investment Commitment”) to BRHC in exchange for Class
A Units. At Closing, Chambers funded $10 million (the “Initial Chambers Investment”) of the Chambers Investment Commitment,
the proceeds of which were used to reduce outstanding amounts owed by BRHC to Cadence under the Cadence Credit Facility and for
general corporate purposes. The remaining $20 million (the “Subsequent Chambers Investment”), subject to certain conditions,
could be called from time to time during the Investment Period by the board of managers of BRHC (the “BRHC Board”).
The Initial Chambers Investment and any Subsequent Chambers Investment shall serve to proportionately reduce the Company's Class
A Units percentage ownership in BRHC. The investment period is the lesser of three years or such time as the entire Chambers Investment
Commitment has been called by the BRHC Board (the “Investment Period”). Any portion of Chambers Investment Commitment
not called by the BRHC Board prior to the expiration of the Investment Period will be cancelled. In no event will Chambers be required
to make a capital contribution in an amount in excess of its undrawn commitment.
The Company was granted 1,000,000 Class
B Units in BRHC at the Closing of the BRHC Transaction. At the discretion of the BRHC’s Board of Managers, the Company may
be granted additional Class B Units in BRHC, and in turn, the Company may transfer such Class B Units to certain members of the
Company's management. Subject to certain conditions, the Class B Units will entitle the holders to participate in any future distributions
of BRHC after distributions equal to the capital contributions and preferred return have been made to the holders of Class A Units
of BRHC.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
At the closing of the BRHC Transaction,
the Company entered into a Management Services Agreement with BRHC. Under the Management Services Agreement, the Company provides
services to BRHC with respect to the business operations of BRHC, including but not limited to locating, investigating and analyzing
potential non-operator oil and gas projects and day-to-day operations related to such projects. The Company is paid a fee under
the Management Services Agreement intended to cover the costs of providing such services and is reimbursed for certain third party
expenses. The term of the Management Services Agreement commenced on the closing of the BRHC Transaction and continued indefinitely,
until terminated, which required a three month notice by the terminating party. The management services agreement was terminated
by BRHC on April 3, 2017, effective June 30, 2017.
As a result of the transaction, the Company
recorded a gain on debt restructuring of $41,621,150 calculated as the difference between our final ownership interest in BRHC,
after conversion of debt to equity and the equity contribution of the Initial Chambers Investment within BRHC and the Company’s
retention of a 3.88% ownership interest in BRHC at the date of the restructuring, and the net book value of the assets and labilities
the Company transferred to BRHC.
The
income and expense associated with the operating activities contributed in the BRHC Transaction are reflected as “Loss from
discontinued items, net of income taxes” on our condensed statement of operations for the nine months ended September 30,
2016. The items included in “Loss from discontinued operations, net of income taxes” are as follows:
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|
For the Nine Months Ended
|
|
|
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September 30, 2016
|
|
Oil and gas sales
|
|
$
|
5,539,613
|
|
Gain on settled derivatives
|
|
|
1,043,026
|
|
Gain (loss) on the mark-to-market of derivatives
|
|
|
(4,288,736
|
)
|
Total revenues
|
|
|
2,293,903
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Production expenses
|
|
|
1,400,639
|
|
Production taxes
|
|
|
568,028
|
|
General and administrative expenses
|
|
|
476,461
|
|
Depletion of oil and gas properties
|
|
|
3,114,347
|
|
Impairment of oil and gas properties
|
|
|
5,219,000
|
|
Accretion of discount on asset retirement obligations
|
|
|
16,258
|
|
Total operating expenses
|
|
|
10,794,733
|
|
|
|
|
|
|
Net operating loss
|
|
|
(8,500,830
|
)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
Interest expense
|
|
|
(1,696,544
|
)
|
Total other income (expense)
|
|
|
(1,696,544
|
)
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(10,197,374
|
)
|
|
|
|
|
|
Provision for income taxes
|
|
|
–
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,197,374
|
)
|
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 – Rights Offering and Formation
of Black Ridge Acquisition Corp.
The Company filed a Registration Statement
on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register
the 431,819,910 shares of common stock to be offered in the Rights Offering that was declared effective by the SEC on August 3,
2017. As such, the Company distributed, on a pro rata basis, one Right for each share of common stock owned by shareholders at
5:00 p.m., Central Time, on August 2, 2017 (the “Record Date”). Each Right permitted a shareholder to purchase up to
nine shares of common stock at a subscription price of $0.012 per share. The Rights Offering expired at 5:00 p.m., Central Time,
September 8, 2017 (the “Expiration Date”).
In connection with the Rights Offering,
the Company also entered into a Standby Purchase Agreement (the “Backstop Agreement”) with a consortium of investors,
including members of the Company’s board of directors and our Chief Executive Officer (collectively, the “Backstop
Purchasers”), who agree to purchase up to $2.9 million of the unsubscribed shares following the completion of the rights
offering.
On September 26, 2017, the Company completed
the Rights Offering, raising gross proceeds of $5,181,839 and issued 431,819,910 shares in connection with the exercise of rights
in connection with the Rights Offering and related Backstop Agreement. Under the Rights Offering the Company’s current shareholders
exercised rights to purchase 199,811,421 shares of stock for a total of $2,397,737. Under the Backstop Agreement, the Backstop
Purchasers purchased 232,008,489 shares of stock for a total of $2,784,102. Officers and directors of the Company purchased 173,843,308
shares between the Rights Offering and as participants of the Backstop Agreement for $2,086,120 and received 179,376 warrants to
purchase shares of common stock at $0.01 per share for their participation in the Backstop Agreement. The warrants issued to related
parties fair value was estimated to be $4,179 (see Note 16). The Company incurred $130,164 in costs associated with raising capital,
which has been netted against stockholders’ equity. Additionally as part of Backstop agreement, the Company issued 435,000
warrants to purchase its common stock at $0.01 for participants in the Backstop Agreement. The warrants fair value was estimated
to be $10,135 (see Note 16).
Subsequent to September 30, 2017, the Company
use
d $4,450,000 of
the net proceeds of the Rights Offering to fulfill
its obligation as sponsor of a special purpose acquisition company,
Black Ridge Acquisition Corp. (“BRAC”),
as part of BRAC’s initial public offering (IPO). BRAC was formed on May 9, 2017 with the purpose of becoming the special
acquisition company as a wholly owned subsidiary of the Company. After the IPO, the Company retained ownership of 22% of BRAC’s
common stock. The remaining
proceeds from the Rights Offering following the sponsorship
are intended
to
be used for general corporate purposes which may include other investments and acquisitions.
BRAC had incurred costs of $151,549 related
to its initial public offering through September 30, 2017, which have been classified on the balance sheet as deferred offering
costs. The deferred offering costs were reclassified to additional paid-in capital upon the successful IPO on October 4, 2017.
Note 5 – Prepaid Expenses
Prepaid expenses consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid insurance costs
|
|
$
|
9,827
|
|
|
$
|
43,324
|
|
Prepaid employee benefits
|
|
|
12,781
|
|
|
|
11,844
|
|
Prepaid office and other costs
|
|
|
17,512
|
|
|
|
31,724
|
|
Total prepaid expenses
|
|
$
|
40,120
|
|
|
$
|
86,892
|
|
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 – Investment in Black Ridge
Holding Company, LLC
The investment in Black Ridge Holding Company,
LLC (“BRHC”) represents our equity interest in BRHC following the debt restructuring and related activity as described
in Note 3 – Debt Restructuring. We account for the investment using the cost method.
Subsequent to September 30, 2017, on
October 2, 2017, BRHC was liquidated and certain assets the Company received in the liquidation were sold to the Chambers
Affiliates. Between cash and receivables the Company received directly in the liquidation, and the proceeds of the sale of
assets to the Chambers Affiliates, $1,083,038, representing a gain on the sale of its investment in BRHC of $1,030,185.
Note 7 – Property and Equipment
Property and equipment at September 30, 2017 and December 31,
2016, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Property and equipment
|
|
$
|
128,155
|
|
|
$
|
140,547
|
|
Less: Accumulated depreciation and amortization
|
|
|
(114,901
|
)
|
|
|
(112,128
|
)
|
Total property and equipment, net
|
|
$
|
13,254
|
|
|
$
|
28,419
|
|
During the nine months ended September
30, 2017 we sold certain assets with a net book value of $6,874 for proceeds of $2,160, resulting in a loss on disposal of $4,714.
The following table shows depreciation, depletion, and amortization
expense by type of asset:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Depletion of costs for evaluated oil and gas properties
(1)
|
|
$
|
–
|
|
|
$
|
3,114,347
|
|
Depreciation and amortization of other property and equipment
|
|
|
8,291
|
|
|
|
10,848
|
|
Total depreciation, amortization and depletion
|
|
$
|
8,291
|
|
|
$
|
3,125,195
|
|
(1)
Presented as a component
of loss from discontinued operations, net of income taxes.
Impairment of Oil and Gas Properties
As a result of currently prevailing low
commodity prices and their effect on the proved reserve values of properties in 2016, we recorded a non-cash ceiling test impairment
of $5,219,000 for the nine months ended September 30, 2016. The expense associated with the impairment is presented as a component
of loss from discontinued operations, net of income taxes as described in Note 3 – Debt Restructuring. The impairment charge
affected our reported net income but did not reduce our cash flow.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 8 – Oil and Gas Properties
The following table summarizes gross and
net productive oil wells by state at June 21, 2016 (prior to their disposition in our debt restructuring). A net well represents
our percentage ownership of a gross well. The following table does not include wells in which our interest is limited to royalty
and overriding royalty interests. The following table also does not include wells which were awaiting completion, in the process
of completion or awaiting flow back subsequent to fracture stimulation.
|
|
June 21, 2016
|
|
|
|
Gross
|
|
|
Net
|
|
North Dakota
|
|
|
352
|
|
|
|
10.64
|
|
Montana
|
|
|
5
|
|
|
|
0.37
|
|
Total
|
|
|
357
|
|
|
|
11.01
|
|
The Company’s oil and gas properties
consisted of all acreage acquisition costs (including cash expenditures and the value of stock consideration), drilling costs and
other associated capitalized costs. As of June 21, 2016 (prior to the their disposition through our debt restructuring) our
principal oil and gas assets included approximately 7,016 net acres located in North Dakota and Montana and were disposed by the
Company on June 21, 2016 as part of the debt restructuring transaction summarized in Note 3 – Debt Restructuring.
The following table summarizes our capitalized
costs for the purchase and development of our oil and gas properties for the nine months ended September 30, 2016:
|
|
Nine Months Ended September 30, 2016
|
|
Purchases of oil and gas properties and development costs for cash
|
|
$
|
4,858,134
|
|
Purchase of oil and gas properties accrued at period-end
|
|
|
3,155,016
|
|
Purchase of oil and gas properties accrued at beginning of period (prior to disposition)
|
|
|
(6,899,503
|
)
|
Capitalized asset retirement costs
|
|
|
4,737
|
|
Total purchase and development costs, oil and gas properties
|
|
$
|
1,118,384
|
|
2016 Acquisitions
During the nine months ended September
30, 2016, we did not purchase any oil and gas properties.
2016 Divestitures
During the nine months ended September
30, 2016, we sold approximately 14 net leasehold acres of oil and gas properties for total proceeds of $94,628. No gain or loss
was recorded pursuant to the sales.
2016 Disposition in Debt Restructuring
On June 21, 2016 we disposed of all of
our oil and gas properties, with net carrying costs $24,498,638, as part of our debt restructuring as outlined in Note 3 –
Debt Restructuring.
Note 9 – Asset
Retirement Obligation
The Company had asset retirement obligations
(ARO) associated with the future plugging and abandonment of proved properties and related facilities prior to the disposition
of the Company’s oil and gas operations as part of its debt restructuring summarized in Note 3 – Debt Restructuring.
Under the provisions of FASB ASC 410-20-25, the fair value of a liability for an asset retirement obligation is recorded in the
period in which it is incurred and a corresponding increase in the carrying amount of the related long lived asset. The liability
is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset.
If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. The Company has no assets
that are legally restricted for purposes of settling ARO.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following table summarizes the Company’s
asset retirement obligation transactions recorded in accordance with the provisions of FASB ASC 410-20-25 during the nine months
ended September 30, 2016:
|
|
Nine Months Ended September 30, 2016
|
|
Beginning ARO
|
|
$
|
368,089
|
|
Liabilities incurred for new wells placed in production
|
|
|
4,737
|
|
Accretion of discount on ARO (a component of loss from discontinued operations)
|
|
|
16,258
|
|
Liability relieved in debt restructuring
|
|
|
(389,084
|
)
|
Ending ARO
|
|
$
|
–
|
|
Note 10 – Related Party
Prior to July 1, 2016 the Company leased
office space on a month to month basis where the lessor was an entity owned by our former CEO and current Chairman of the Board
of Directors, Bradley Berman. Pursuant to the lease, we occupied approximately 2,813 square feet of office space. We terminated
the lease concurrent with our move to another location on June 30, 2016. The lease had base rents of $2,110 per month, plus common
area operations and maintenance charges, and monthly parking fees of $240 per month, for the period from November 15, 2013 to October
31, 2014, and was subject to increases of $117 per month beginning November 1, 2014 and for each of the subsequent annual periods.
We paid a total of $36,183 to this entity during the nine months ended September 30, 2016.
The Company sold 173,843,308 shares to
officers and directors between the Rights Offering and as participants of the Backstop Agreement for $2,086,120 and issued 179,376
warrants to purchase shares of common stock at $0.01 per share to officers and directors for their participation in the Backstop
Agreement.
Note 11 – Derivative Instruments
The Company was required to recognize all
derivative instruments on the balance sheet as either assets or liabilities measured at fair value. The Company did not designate
its derivative instruments as cash flow hedges for accounting purposes and, as such, marked its derivative instruments to fair
value and recognized the realized and unrealized changes in fair value in its statements of operations under the captions “Loss
on settled derivatives” and “Loss on the mark-to-market of derivatives” as a component of loss from discontinued
operations.
The Company had utilized swap and collar
derivative contracts. While the use of these derivative instruments limited the downside risk of adverse price movements, their
use also limited the upside revenue potential of upward price movements.
For a fixed price swap contract, the counterparty
is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price and
the Company is required to make a payment to the counterparty if the settlement price for any period is greater than the swap price.
For a collar contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement
period is below the floor price, the Company is required to make a payment to the counterparty if the settlement price for any
settlement period is above the ceiling price and no payment is required by either party if the settlement price for any settlement
period is between the floor price and the ceiling price.
The Company’s derivative contracts
were settled based on reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West
Texas Intermediate (“WTI”) pricing.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Derivative Gains and Losses
The following table presents realized and
unrealized gains and losses on derivative instruments for the periods presented:
|
|
Nine Months Ended September 30, 2016
|
|
Realized gain (loss) on derivatives:
|
|
|
|
|
Crude oil fixed price swaps
|
|
$
|
922,872
|
|
Crude oil collars
|
|
|
120,154
|
|
Realized loss on derivatives, net
|
|
$
|
1,043,026
|
|
|
|
|
|
|
Gain (loss) on the mark-to-market of derivatives:
|
|
|
|
|
Crude oil fixed price swaps
|
|
$
|
(4,157,491
|
)
|
Crude oil collars
|
|
|
(131,245
|
)
|
Gain (loss) on the mark-to-market of derivatives, net
|
|
$
|
(4,288,736
|
)
|
Note 12 – Fair Value of Financial
Instruments
The Company adopted FASB ASC 820-10 upon
inception at April 9, 2010. Under FASB ASC 820-10-5, fair value is defined 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 (an exit price).
The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability
of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value,
and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company had revolving credit facilities
that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using
inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
Level 2 - Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield
curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means
(market corroborated inputs).
Level 3 - Unobservable inputs
that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation
of financial instruments at fair value on a recurring basis in the balance sheets as of September 30, 2017 and December 31, 2016:
|
|
Fair Value Measurements at September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,721,876
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total assets
|
|
|
4,721,876
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
4,721,876
|
|
|
$
|
–
|
|
|
$
|
–
|
|
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,269
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total assets
|
|
|
66,269
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
66,269
|
|
|
$
|
–
|
|
|
$
|
–
|
|
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the nine months ended September 30, 2017.
Note 13 – Revolving Credit Facilities
and Long Term Debt
Promissory Note
On July 7, 2017 the Company entered into
a $500,000 Promissory Note (the Note) issued to Cadence Bank, N.A. (Cadence) and a Security Agreement by the Company in favor of
Cadence. The Note bore interest at 4.5% per annum payable monthly and was due on October 7, 2017. The Note was repaid in full on
September 14, 2017. The Note was secured by the Company’s deposit account at Cadence and all of the Company’s rights,
title and interests in and to the contractual rights of the Company to receive payment from Chambers Energy Management for the
purchase of the Company’s interest in Black Ridge Holding Company, LLC. The Company incurred and paid $4,313 in interest
on the Note and paid $4,400 in origination fees and other set up costs that are included in interest expense on the statement of
operations.
Former Senior Credit Agreement
The Company, as borrower, entered into
a Credit Agreement dated August 8, 2013 and amendments thereto dated December 13, 2013, March 24, 2014,
April 21, 2014, September 11, 2014, March 30, 2015 and August 10, 2015 (as amended, the “Senior
Credit Agreement
”
) with Cadence, as lender (the “Senior Credit Facility”). Under the terms of the Senior
Credit Agreement, a senior secured revolving line of credit in the maximum aggregate principal amount of $50 million was available
from time to time (i) for direct investment in oil and gas properties, (ii) for general working capital purposes, including the
issuance of letters of credit, and (iii) to refinance the then existing debt under the Company’s former credit facility.
Availability under the Senior Credit Facility
was at all times subject to the then-applicable borrowing base, determined by Cadence in a manner consistent with the normal and
customary oil and gas lending practices of Cadence. Availability was initially set at $7 million and was subject to periodic
redeterminations. Subject to availability under the borrowing base, the Company could borrow, repay and re-borrow funds in amounts
of $250,000 or more. At the Company’s election, the unpaid principal balance of any borrowings under the Senior Credit Facility
may bear interest at either (i) the Base Rate, as defined in the Senior Credit Facility, plus the applicable margin, which varies
from 1.00% to 1.50% or (ii) the LIBOR rate, as defined in the Senior Credit Facility, plus the applicable margin, which varies
from 3.00% to 3.50%. Interest was payable for Base Rate loans on the last business day of the month and for LIBOR loans on the
last LIBOR business day of each LIBOR interest period. The Company was also required to pay a quarterly fee of 0.50% on any unused
portion of the borrowing base, as well as a facility fee of 0.90% of the initial and any subsequent additions to the borrowing
base.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Senior Credit Facility’s maturity
date of August 8, 2016, was subsequently amended to January 15, 2017 pursuant to the amendment on March 30, 2015.
The Company could prepay the entire amount of Base Rate loans at any time, and could prepay the entire amount of LIBOR loans upon
at least three business days’ notice to Cadence. The Senior Credit Facility was secured by first priority interests in mortgages
on substantially all of the Company’s assets, including but not limited to the Company’s mineral interests in North
Dakota and Montana.
As part of the debt restructuring outline in Note 3 –
Debt Restructuring, the Company transferred the obligation with a balance outstanding of $29,400,000 under the Senior Credit Facility
to BRHC on June 21, 2016.
Former Subordinated Credit Facility
The Company, as borrower, entered into
a Second Lien Credit Agreement dated August 8, 2013 and amendments thereto dated December 13, 2013, March 24, 2014,
April 21, 2014, September 11, 2014, March 30, 2015, and August 10, 2015 (as amended, the “Subordinated
Credit Agreement”) by and among the Company, as borrower, Chambers Energy Management, LP, as administrative agent (“Chambers”),
and the several other lenders named therein (the “Subordinated Credit Facility”). Under the Subordinated Credit Facility,
term loans in the aggregate principal amount of up to $75 million were available from time to time (i) to repay the Previous
Credit Facility, (ii) for fees and closing costs in connection with both the Senior Credit Facility and the Subordinated Credit
Facility (together, the “Credit Facilities”), and (iii) general corporate purposes.
The Subordinated Credit Agreement provided
initial commitment availability of $25 million, which was subsequently amended to $30 million, with the remaining commitments
subject to the approval of Chambers and other customary conditions. The Company could borrow the available commitments in amounts
of $5 million or more and could not request borrowings of such loans more than once a month, provided that the initial draw
was at least $15 million. Loans under the Subordinated Credit Facility were funded net of a 2% OID. The unpaid principal
balance of borrowings under the Subordinated Credit Facility bore interest at the Cash Interest Rate plus the PIK Interest Rate.
The Cash Interest Rate was 9.00% per annum plus a rate per annum equal to the greater of (i) 1.00% and (ii) the offered rate for
three-month deposits in U.S. dollars that appears on Reuters Screen LIBOR 01 as of 11:00 a.m. (London time) on the second full
LIBOR business day preceding the first day of each calendar quarter. The PIK Interest Rate was equal to 4.00% per annum. Interest
was payable on the last day of each month. The Company was also required to pay an annual nonrefundable administration fee of $50,000
and a monthly availability fee computed at a rate of 0.50% per annum on the average daily amount of any unused portion of the available
amount under the commitment.
The Subordinated Credit Facility was to
mature on June 30, 2017. Upon at least three business days’ written notice, the Company could prepay the entire
amount under the loans, together with accrued interest. Each prepayment made prior to the second anniversary of the funding date,
as defined in the Subordinated Credit Facility, would be accompanied by a make-whole amount, as defined in the Subordinated Credit
Agreement. Prepayments made on or after the second anniversary of the funding date were accompanied by an applicable premium, as
set forth in the Subordinated Credit Agreement. The Subordinated Credit Facility was secured by second priority interests on substantially
all of the Company’s assets, including but not limited to second priority mortgages on the Company’s mineral interests
in North Dakota and Montana.
The first funding from the Subordinated
Credit Facility occurred on September 9, 2013 at which time we drew $14,700,000, net of a $300,000 original issue discount,
from the Subordinated Credit Agreement and used $10,226,057 of those proceeds to repay and terminate a previously outstanding revolving
credit facility. We had drawn an additional $14,700,000, net of $300,000 original issue discounts, through June 21, 2016. The Company
had borrowings of $30.0 million outstanding under the Subordinated Credit Facility as of June 21, 2016. The obligations under
the Subordinated Credit Facility, $30.0 million of principal and $2,931,369 of PIK interest payable, were transferred to BRHC and
converted to equity in BRHC as part of the debt restructuring outlined in Note 3 - Debt Restructuring on June 21, 2016.
Intercreditor Agreements and Covenants
Cadence and Chambers had entered into an
Intercreditor Agreement dated August 8, 2013 (the “Intercreditor Agreement”). The Intercreditor Agreement
provided that any liens on the assets of the Company securing indebtedness under the Subordinated Credit Facility were subordinate
to liens on the assets securing indebtedness under the Senior Credit Facility and set forth the respective rights, obligations
and remedies of the lenders under the Senior Credit Facility with respect to their first priority liens and the lenders under the
Subordinated Credit Facility with respect to their second priority liens.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Credit Facilities, as amended, required
customary affirmative and negative covenants for credit facilities of the respective types and sizes for companies operating in
the oil and gas industry, as well as customary events of default. Furthermore, the Credit Facilities contain financial covenants
that required the Company to satisfy certain specified financial ratios. The Senior Credit Agreement required the Company to maintain,
as of the last day of each fiscal quarter of the Company, (i) a collateral coverage ratio (reserve value plus consolidated working
capital to adjusted indebtedness) of at least 0.65 to 1.00 through the quarter ending June 30, 2014, 0.70 to 1.00 for
the quarters ending September 30, 2014 and December 31, 2014, was waived for the quarters ending March 31, 2015
and June 30, 2015, and 0.70 to 1.00 for the quarter ending September 30, 2015, and 0.80 to 1.00 for the quarter
ending December 31, 2015 and thereafter, (ii) a ratio of current assets, including debt facility available to be drawn,
to current liabilities of a minimum of 1.0 to 1.0, except for the quarter ending June 30, 2014, which was waived, (iii)
a net debt to EBITDAX, as defined in the Senior Credit Agreement, ratio of 3.75 to 1.00 for the quarter ended March 31, 2014,
4.25 to 1.00 for the quarters ended June 30, 2014 and September 30, 2014, 4.00 to 1.00 for the quarter ended
December 31, 2014, was waived for the quarters ended March 31, 2015 and June 30, 2015, and 3.50 to 1.00 for
the quarter ending September 30, 2015, and 3.65 to 1.00 for the quarter ending December 31, 2015, and 3.50
to 1.00 for the quarter ending March 31, 2016 and thereafter, in each case calculated on a modified trailing four quarter
basis, (iv) a maximum senior leverage ratio of not more than 2.5 to 1.0 calculated on a modified trailing four quarter basis, and
(v) a minimum interest coverage ratio of not less than 3.0 to 1.0. The Subordinated Credit Agreement required the Company to maintain,
as of the last day of each fiscal quarter of the Company, (i) a collateral coverage ratio (reserve value plus consolidated working
capital to adjusted indebtedness) of at least 0.65 to 1.00 through the quarter ending June 30, 2014, 0.70 to 1.00 for
the quarters ending September 30, 2014 and December 31, 2014, was waived for the quarters ending March 31, 2015
and June 30, 2015, and 0.70 to 1.00 for the quarter ending September 30, 2015, and 0.80 to 1.00 for the quarter ending
December 31, 2015 and thereafter, (ii) a consolidated net leverage ratio (adjusted total indebtedness less the amount
of unrestricted cash equivalents to consolidated EBITDA) of no more than 3.75 to 1.00 for the quarter ending March 31, 2014,
4.25 to 1.00 for the quarters ending June 30, 2014 and September 30, 2014, 4.00 to 1.00 for the quarter ending
December 31, 2014, was waived for the quarters ending March 31, 2015 and June 30, 2015, and 3.50 to 1.00 for
the quarter ending September 30, 2015, and 3.65 to 1.00 for the quarter ending December 31, 2015, and 3.50
to 1.00 for the quarter ending March 31, 2016 and thereafter, calculated on a modified trailing four quarter basis, (iii)
a consolidated cash interest coverage ratio (consolidated EBITDA to consolidated cash interest expense) of no less than 2.5 to
1.0, calculated on a modified trailing four quarter basis and (iv) a ratio of consolidated current assets to consolidated current
liabilities of at least 1.0 to 1.0, except for the quarter ending June 30, 2015 when the covenant was waived. In addition, each
of the Credit Facilities required that the Company enter into hedging agreements based on anticipated oil production from currently
producing wells as agreed to by the lenders.
Covenant Violations
The Company was out of compliance with
the collateral coverage ratio covenant as of March 31, 2016 and December 31, 2015 and the current ratio covenant as defined by
the Subordinated Credit Facility as of March 31, 2016. Additionally, the audit report the Company received with respect to its
financial statements as of December 31, 2015 contains an explanatory paragraph expressing uncertainty as to the Company’s
ability to continue as a going concern, the delivery of which constituted a default under both its Senior Credit Facility and Subordinated
Credit Facility. The Company received a waiver for all debt covenants as of December 31, 2015 and March 31, 2016 as part of the
debt restructuring outlined in Note 3 – Debt Restructuring.
The following presents components of interest
expense which is presented as a component of loss from discontinued operations, net of tax, on the Company’s statement of
operations for the nine months ended September 30, 2016:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued PIK interest
|
|
$
|
–
|
|
|
$
|
330,740
|
|
Interest and fees
|
|
|
8,713
|
|
|
|
1,373,023
|
|
Less interest capitalized to the full cost pool of our proved oil & gas properties
|
|
|
–
|
|
|
|
(7,219
|
)
|
|
|
$
|
8,713
|
|
|
$
|
1,696,544
|
|
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 14 – Changes in Stockholders’
Equity
Preferred Stock
The Company has 20,000,000 authorized
shares of $0.001 par value preferred stock. No shares have been issued to date.
Common Stock
The Company has 500,000,000 authorized
shares of $0.001 par value common stock.
As discussed in Note 4, the Company issued
431,819,910 shares of common stock for gross proceeds of $5,181,839 as part of its Rights Offering and associated Backstop Agreement.
The Company incurred $130,164 in costs associated with the offering.
Note 15 –Options
Options Granted
No options were granted during the nine
months ended September 30, 2017 and 2016.
The Company recognized a total of $473,053
and $473,472 of compensation expense during the nine months ended September 30, 2017 and 2016, respectively, related to common
stock options issued to Employees and Directors that are being amortized over the implied service term, or vesting period, of the
options. The remaining unamortized balance of these options is $549,336 as of September 30, 2017.
Options Exercised
No options were exercised during the nine
months ended September 30, 2017 and 2016.
Options Forfeited
During the nine months ended September 30, 2017, 12,000 options
expired. No options were forfeited during the nine months ended September 30, 2016.
Note 16 – Warrants
Warrants Granted
The Company issued 435,000 warrants to
purchase shares at $0.01 per share to participants of the Backstop Agreement on September 22, 2017.
The
Company accounted for the warrants as an expense of the Rights Offering which resulted in a charge directly to stockholders’
equity. The Company estimated the fair value of these warrants to be approximately $10,135 (or $.0233 per warrant) using the Black-Scholes
option-pricing model. The fair value of the warrants was estimated as of the date of grant using the following assumptions: (1)
expected volatility of 388%, (2) risk-free interest rate of 1.89% and (3) expected life of five years.
No warrants were
granted during the nine months ended September 30, 2016.
Warrants Exercised
No warrants were exercised during the nine months ended September
30, 2017 and 2016.
During 2016, all remaining warrants either expired or were forfeited
pursuant to our debt restructuring as described in Note 3- Debt Restructuring. The Company has no outstanding warrants as of September
30, 2017.
Note 17 – Income
Taxes
The Company accounts for income taxes under
ASC Topic 740,
Income Taxes,
which provides for an asset and liability approach of accounting for income taxes. Under this
approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted
tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts calculated for income tax purposes.
We currently estimate that our
effective tax rate for the year ending December 31, 2017 will be 0%. Losses incurred during the period from April 9, 2011
(inception) to September 30, 2017 could be used to offset future tax liabilities. Accounting standards require the
consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some
component or all of the benefits of deferred tax assets will not be realized. As of September 30, 2017, net deferred tax
assets were $13,033,057, primarily related to net operating loss carryforwards. A valuation allowance of
$13,033,057 was applied to the net deferred tax assets.
BLACK RIDGE OIL & GAS, INC.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The tax benefit for the nine months ended
September 30, 2017 of $-0- was primarily driven by the Company’s loss before provision for income taxes and offset by the
valuation allowance on the resulting deferred tax asset.
In accordance with FASB ASC 740, the Company
has evaluated its tax positions and determined there are no significant uncertain tax positions as of any date on, or before September
30, 2017.
Note 18 – Commitments
and Contingencies
The Company from time to time may be involved
in various inquiries, administrative proceedings and litigation relating to matters arising in the normal course of business. The
Company is not aware of any inquiries or administrative proceedings and is not currently a defendant in any material litigation
and is not aware of any threatened litigation that could have a material effect on the Company.
Note 19 – Subsequent
Events
The Company evaluates subsequent events and transactions that
occur after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than
as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the
financial statements.
BRAC IPO
As discussed in Note 4,
On
October 10, 2017, the Company’s sponsored special purpose acquisition company, Black Ridge Acquisition Corp. (“BRAC”),
completed an IPO raising $138,000,000 of gross proceeds (including proceeds from the exercise of an over-allotment option by the
underwriters on October 18, 2017).
BRAC is a blank check company formed for the purpose of entering into a merger, share
exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or
more businesses or entities. BRAC’s efforts to identify a prospective target business will not be limited to a particular
industry or geographic region although it intends to focus its search for target businesses in the energy or energy-related industries
with an emphasis on opportunities in the upstream oil and gas industry in North America. BRAC was a wholly owned subsidiary of
the Company prior to the IPO. Following the IPO and over-allotment option exercise, the Company owns 22% of the outstanding common
stock of BRAC and manages BRAC’s operations via a management services agreement.
Dissolution of BRHC
As discussed in Note 5, the Company, Chambers Energy Capital
II, LP and CEC II TE, LLC (together with Chambers Energy Capital II, LP the “Chambers Affiliates”) as the members of
Black Ridge Holding Company, LLC (“BRHC”) agreed to dissolve and wind up BRHC and filed a Certificate of Cancellation
under the Delaware Limited Liability Company Act as of October 3, 2017. On October 2, 2017, the Company entered into an agreement
with the Chambers Affiliates whereby certain assets distributed to the Company upon the dissolution and winding up of BRHC on October
1, 2017, were sold to the Assignees in exchange for cash consideration of $1,078,394. Additionally, cash and receivables totaling
to $4,645 in value, were distributed directly to the Company from BRHC.