Item 1. Financial Statements
LINNCO, LLC
BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
(in thousands, except
share amounts)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
11,023
|
|
|
$
|
11,023
|
|
Accounts receivable – related party
|
799
|
|
|
—
|
|
Income taxes receivable
|
5,673
|
|
|
7,414
|
|
Deferred offering costs
|
785
|
|
|
—
|
|
Total current assets
|
18,280
|
|
|
18,437
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
Deferred income taxes
|
—
|
|
|
18,971
|
|
Investment in Linn Energy, LLC
|
—
|
|
|
—
|
|
Total noncurrent assets
|
—
|
|
|
18,971
|
|
Total assets
|
$
|
18,280
|
|
|
$
|
37,408
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
1,372
|
|
|
$
|
573
|
|
Income taxes payable
|
22,578
|
|
|
29,829
|
|
Total current liabilities
|
23,950
|
|
|
30,402
|
|
|
|
|
|
Shareholders’ equity (deficit):
|
|
|
|
Voting shares; unlimited shares authorized; 1 share issued and outstanding at March 31, 2016, and December 31, 2015
|
1
|
|
|
1
|
|
Common shares; unlimited shares authorized; 128,544,174 shares issued and outstanding at March 31, 2016, and December 31, 2015
|
3,868,322
|
|
|
3,868,322
|
|
Additional paid-in capital
|
44,440
|
|
|
42,723
|
|
Accumulated deficit
|
(3,918,433
|
)
|
|
(3,904,040
|
)
|
|
(5,670
|
)
|
|
7,006
|
|
Total liabilities and shareholders’ equity (deficit)
|
$
|
18,280
|
|
|
$
|
37,408
|
|
The accompanying notes are an integral part of these financial statements.
LINNCO, LLC
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands, except
per share amounts)
|
|
|
|
|
Equity loss from investment in Linn Energy, LLC
|
$
|
—
|
|
|
$
|
(50,492
|
)
|
General and administrative expenses
|
(933
|
)
|
|
(976
|
)
|
Loss before income taxes
|
(933
|
)
|
|
(51,468
|
)
|
Income tax (expense) benefit
|
(13,460
|
)
|
|
18,493
|
|
Net loss
|
$
|
(14,393
|
)
|
|
$
|
(32,975
|
)
|
|
|
|
|
Net loss per share, basic and diluted
|
$
|
(0.11
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
Weighted average shares outstanding
|
128,544
|
|
|
128,544
|
|
|
|
|
|
Dividends declared per share
|
$
|
—
|
|
|
$
|
0.313
|
|
The accompanying notes are an integral part of these financial statements.
LINNCO, LLC
STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Share Amount
|
|
Additional Paid-In Capital
|
|
Accumulated Deficit
|
|
Total Shareholders’ Equity (Deficit)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
128,544
|
|
|
$
|
3,868,323
|
|
|
$
|
42,723
|
|
|
$
|
(3,904,040
|
)
|
|
$
|
7,006
|
|
Capital contributions from Linn Energy, LLC
|
|
|
—
|
|
|
1,717
|
|
|
—
|
|
|
1,717
|
|
Net loss
|
|
|
—
|
|
|
—
|
|
|
(14,393
|
)
|
|
(14,393
|
)
|
March 31, 2016
|
128,544
|
|
|
$
|
3,868,323
|
|
|
$
|
44,440
|
|
|
$
|
(3,918,433
|
)
|
|
$
|
(5,670
|
)
|
The accompanying notes are an integral part of these financial statements.
LINNCO, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
Cash flow from operating activities:
|
|
|
|
Net loss
|
$
|
(14,393
|
)
|
|
$
|
(32,975
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Equity loss from investment in Linn Energy, LLC
|
—
|
|
|
50,492
|
|
Noncash general and administrative expenses paid by Linn Energy, LLC
|
933
|
|
|
976
|
|
Deferred income taxes
|
18,971
|
|
|
(18,493
|
)
|
(Increase) decrease in income taxes receivable
|
(6,860
|
)
|
|
436
|
|
Increase (decrease) in income taxes payable
|
1,349
|
|
|
(97
|
)
|
Cash distributions received
|
—
|
|
|
40,183
|
|
Net cash provided by operating activities
|
—
|
|
|
40,522
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Dividends paid to shareholders
|
—
|
|
|
(41,519
|
)
|
Net cash used in financing activities
|
—
|
|
|
(41,519
|
)
|
|
|
|
|
Net decrease in cash and cash equivalents
|
—
|
|
|
(997
|
)
|
Cash and cash equivalents:
|
|
|
|
Beginning
|
11,023
|
|
|
6,544
|
|
Ending
|
$
|
11,023
|
|
|
$
|
5,547
|
|
The accompanying notes are an integral part of these financial statements.
LINNCO, LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
Nature of Business
LinnCo, LLC (“LinnCo” or the “Company”) is a Delaware limited liability company formed on April 30, 2012, that completed its initial public offering (“IPO”) in October 2012. After the IPO, LinnCo’s initial sole purpose was to own units representing limited liability company interests (“units”) in its affiliate, Linn Energy, LLC (“LINN Energy”). In connection with the acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”), LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent transfer of assets to LINN Energy for consideration received. As of
March 31, 2016
, LinnCo had
no
significant assets or operations other than those related to its interest in LINN Energy. LINN Energy is an independent oil and natural gas company that trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “LINE.” At
March 31, 2016
, LINN Energy’s last reported sales price was
$0.36
per unit, as reported by NASDAQ, and the Company owned approximately
36%
of LINN Energy’s outstanding units.
Voluntary Reorganization Under Chapter 11
On May 11, 2016, the Company, LINN Energy and Berry (collectively, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for reorganization under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Debtors have filed a motion with the Bankruptcy Court seeking joint administration of their Chapter 11 cases.
Prior to the filing of the Bankruptcy Petitions, on May 10, 2016, the Debtors entered into a restructuring support agreement (“Restructuring Support Agreement”) with certain holders (“Consenting Creditors”) collectively holding or controlling at least
66.67%
by aggregate outstanding principal amounts under (i) LINN Energy’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) and (ii) Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”).
The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment of the Debtors and the Consenting Creditors to support a comprehensive restructuring of the Debtors’ long-term debt (“Restructuring Transactions”). The Restructuring Transactions will be effectuated through one or more plans of reorganization (“Plan”) to be filed in cases commenced under Chapter 11 of the Bankruptcy Code.
The Restructuring Support Agreement provides that the Consenting Creditors will support the use of the LINN Energy’s and Berry’s cash collateral under specified terms and conditions, including adequate protection terms. The Restructuring Support Agreement obligates the Debtors and the Consenting Creditors to, among other things, support and not interfere with consummation of the Restructuring Transactions and, as to the Consenting Creditors, vote their claims in favor of the Plan. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones relating to the filing, confirmation and consummation of the Plan, among other requirements, and in the event of certain breaches by the parties under the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 250 days of the bankruptcy filing. There can be no assurances that the Restructuring Transactions will be consummated.
Subject to certain exceptions, under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Bankruptcy Petitions. Accordingly, although the filing of the Bankruptcy Petitions triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
LINNCO, LLC
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
Ability to Continue as a Going Concern
The Company’s only significant asset is its interest in LINN Energy units and the Company’s cash flow, which was historically used to pay dividends to the Company’s shareholders, is completely dependent upon the ability of LINN Energy to make distributions to its unitholders. In October 2015, LINN Energy suspended the payment of its distribution. As of
March 31, 2016
, the Company had income taxes payable of approximately
$23 million
and cash of approximately
$11 million
.
The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described above raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.
In April 2016, the Company made income tax payments of approximately
$10 million
related to statutory tax audit assessments for the tax years ended December 31, 2012, and December 31, 2011. The Company estimates that approximately
$23 million
of income taxes payable will become due later in 2016, but cannot be certain of the exact timing of payment, or of the final amount that will ultimately be owed. If the income taxes owed are greater than the cash on hand at such time, the payment will require some form of liquidity to satisfy it. As of May 12, 2016, LINN Energy had not agreed to provide any cash contribution to the Company.
Principles of Reporting
The information reported herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations; as such, this report should be read in conjunction with the financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results reported in these unaudited financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.
Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.
The financial statements for previous periods include certain reclassifications that were made to conform to current presentation. Such reclassifications have no impact on previously reported net income (loss), shareholders’ equity (deficit) or cash flows.
Reimbursement of LinnCo’s Costs and Expenses
LINN Energy has agreed to provide to LinnCo, or to pay on LinnCo’s behalf, any financial, legal, accounting, tax advisory, financial advisory and engineering fees, and other administrative and out-of-pocket expenses incurred by LinnCo, along with any other expenses incurred in connection with any public offering of common shares representing limited liability company interests (“shares”) in LinnCo or incurred as a result of being a publicly traded entity. These expenses include costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses, and registrar and transfer agent fees. In addition, LINN Energy has agreed to indemnify LinnCo and its officers and directors for damages suffered or costs incurred (other than income taxes payable by LinnCo) in connection with carrying out LinnCo’s activities. Because all general and administrative expenses and certain offering costs are actually paid by LINN Energy on LinnCo’s behalf, no cash is disbursed by LinnCo for these expenses and costs.
LINNCO, LLC
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
For the three months ended
March 31, 2016
, LinnCo incurred total general and administrative expenses and certain offering costs of approximately
$1.7 million
, including approximately
$603,000
related to services provided by LINN Energy. Of the expenses and costs incurred during the three months ended
March 31, 2016
, approximately
$918,000
had been paid by LINN Energy on LinnCo’s behalf as of
March 31, 2016
.
For the three months ended
March 31, 2015
, LinnCo incurred total general and administrative expenses and certain offering costs of approximately
$1.4 million
, including approximately
$491,000
related to services provided by LINN Energy. Of the expenses and costs incurred during the three months ended
March 31, 2015
, approximately
$1.1 million
had been paid by LINN Energy on LinnCo’s behalf as of
March 31, 2015
.
Dividends
Within
five
business days after receiving a cash distribution related to its interest in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income taxes liability (“tax reserve”), if any, as dividends to its shareholders. The amount of the tax reserve is calculated on a quarterly basis and is determined based on the estimated tax liability for the entire year. The current tax reserve can be increased or reduced, at Company management’s discretion, to account for the over/(under) tax reserve previously recorded. Because the tax reserve is an estimate, upon filing the annual tax returns, if the actual amount of tax due is greater or less than the total amount of tax reserved, the subsequent tax reserve, at Company management’s discretion, could be adjusted accordingly. Any such adjustments are subject to approval by the Company’s Board of Directors (“Board”).
Use of Estimates
The preparation of the accompanying financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of income and expenses. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Recently Issued Accounting Standards
In November 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that is intended to simplify the presentation of deferred taxes by requiring that all deferred taxes be classified as noncurrent, presented as a single noncurrent amount for each tax-paying component of an entity. The ASU is effective for fiscal years beginning after December 15, 2016; however, the Company early adopted it on January 1, 2016, on a retrospective basis. The adoption of this ASU resulted in the reclassification of previously-classified current deferred taxes of approximately
$3 million
to noncurrent on the Company’s balance sheet at December 31, 2015. There was no impact to the statements of operations.
In August 2014, the FASB issued an ASU that provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter (early adoption permitted). The Company does not expect the adoption of this ASU to have a material impact on its financial statements or related disclosures.
Accounting for Investment in Linn Energy, LLC
The Company uses the equity method of accounting for its investment in LINN Energy. The Company’s equity income (loss) consists of its share of LINN Energy’s earnings or losses attributed to the units the Company owns, the amortization of the difference between the Company’s investment in LINN Energy and LINN Energy’s underlying net assets attributable to certain
LINNCO, LLC
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
assets and liabilities, and impairments of its investment in LINN Energy. The Company records its share of LINN Energy’s net income (loss) in the period in which it is earned. If the Company’s share of LINN Energy’s losses reduces its investment in LINN Energy to
zero
, the Company temporarily discontinues applying the equity method. At
March 31, 2016
, the Company owned approximately
36%
of LINN Energy’s outstanding units. The Company’s ownership percentage could change if the Company acquires additional units or if LINN Energy issues or repurchases additional units. Changes in the Company’s ownership percentage affect its net income (loss).
Impairment testing on the Company’s investment in LINN Energy is performed when events or circumstances warrant such testing and considers whether there is an inability to recover the carrying value of the investment that is other than temporary.
No
impairment had occurred with respect to the Company’s investment in LINN Energy for the three months ended
March 31, 2016
, or
March 31, 2015
.
Primarily as a result of cumulative losses recognized by the Company, its investment in LINN Energy was reduced to
zero
as of December 31, 2015, at which time the Company discontinued applying the equity method. The amount of excess losses incurred was approximately
$560 million
and
$490 million
as of
March 31, 2016
, and December 31, 2015, respectively.
At
March 31, 2016
, the carrying amount of the Company’s investment in LINN Energy was greater than the Company’s ownership interest in LINN Energy’s underlying net assets by approximately
$571 million
. The difference is attributable to cumulative excess losses, as well as proved and unproved oil and natural gas properties and senior notes, and is included in “investment in Linn Energy, LLC” on the balance sheets. The difference attributable to oil and natural gas properties and senior notes is amortized over the lives of the related assets and liabilities. Such amortization is included in the equity income (loss) from the Company’s investment in LINN Energy.
Note 2 – Capitalization
LinnCo’s authorized capital structure consists of
two
classes of interests: (1) shares with limited voting rights and (2) voting shares,
100%
of which are currently held by LINN Energy. At
March 31, 2016
, LinnCo’s issued capitalization consisted of approximately
$3.9 billion
in common shares and
$1,000
contributed by LINN Energy in connection with LinnCo’s formation and in exchange for its voting share. LinnCo is authorized to issue an unlimited number of common shares and voting shares. Additional classes of equity interests may be created upon approval by the Board and the holders of a majority of the outstanding common shares and voting shares, voting as separate classes.
Offer to Exchange LINN Energy Units for LinnCo Shares
In March 2016, the Company filed a Registration Statement on Form S-4 related to an offer to exchange each outstanding unit representing limited liability company interests of LINN Energy for one common share representing limited liability company interests of LinnCo. In April 2016, the Company extended the offer to April 25, 2016. The offer expired on April 25, 2016, and on April 26, 2016, the Company commenced a subsequent offering period that will expire on May 23, 2016, unless extended. During April 2016,
104,719,468
LINN Energy units were exchanged for an equal number of LinnCo shares. As a result of the exchange of LINN Energy units for LinnCo shares, LinnCo’s ownership of LINN Energy’s outstanding units increased from approximately
36%
to approximately
66%
as of April 30, 2016.
Note 3 – Summarized Financial Information for Linn Energy, LLC
Following are summarized statements of operations and balance sheets information for LINN Energy. Additional information on LINN Energy’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended
March 31, 2016
, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.
LINNCO, LLC
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
Summarized Linn Energy, LLC Statements of Operations Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
Revenues and other
|
$
|
414,767
|
|
|
$
|
916,547
|
|
Expenses
|
(1,647,184
|
)
|
|
(1,124,155
|
)
|
Other income and (expenses)
|
(105,085
|
)
|
|
(138,679
|
)
|
Income tax (expense) benefit
|
(10,244
|
)
|
|
7,127
|
|
Net loss
|
$
|
(1,347,746
|
)
|
|
$
|
(339,160
|
)
|
Summarized Linn Energy, LLC Balance Sheets Information
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
(in thousands)
|
|
|
|
|
Current assets
|
$
|
2,443,743
|
|
|
$
|
1,534,547
|
|
Noncurrent assets
|
6,995,754
|
|
|
8,393,711
|
|
|
9,439,497
|
|
|
9,928,258
|
|
Current liabilities
|
5,133,113
|
|
|
4,291,901
|
|
Noncurrent liabilities
|
5,910,802
|
|
|
5,905,258
|
|
Unitholders’ deficit
|
$
|
(1,604,418
|
)
|
|
$
|
(268,901
|
)
|
Note 4 – Income Taxes
The Company is a limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of the Company’s assets and liabilities for financial and tax reporting purposes. At
March 31, 2016
, and December 31, 2015, the majority of the Company’s temporary differences and associated deferred taxes result from its investment in LINN Energy. Based on projections of future taxable income for the periods in which the deferred tax assets are deductible, valuation allowances of approximately
$470 million
and
$468 million
, respectively, were recorded to reduce the net deferred tax assets to an amount that is more likely than not to be realized.
The Company had
no
gross liability for uncertain income tax benefits at
March 31, 2016
. At December 31, 2015, the Company had a gross liability for uncertain income tax benefits of approximately
$15 million
. During the three months ended
March 31, 2016
, the Company reduced the balance of its unrecognized income tax benefits by approximately
$15 million
due to settlements with taxing authorities. The Company had
zero
and approximately
$203,000
of accrued interest related to its uncertain income tax positions as of
March 31, 2016
, and December 31, 2015, respectively. The tax years 2013 – 2015 remain open to examination for federal income tax purposes.
Note 5 – Supplemental Disclosures to the Statements of Cash Flows
For the three months ended
March 31, 2016
, and
March 31, 2015
, LinnCo incurred and recorded approximately
$1.7 million
and
$1.4 million
, respectively, of general and administrative expenses and certain offering costs. Of the expenses and costs incurred, approximately
$918,000
had been paid by LINN Energy on LinnCo’s behalf as of
March 31, 2016
, and approximately
$1.1 million
had been paid by LINN Energy on LinnCo’s behalf as of
March 31, 2015
. All of these expenses and costs are paid by LINN Energy on LinnCo’s behalf, and therefore, are accounted for as capital contributions and reflected as noncash transactions by LinnCo.
The Company made
no
cash payments for income taxes during the three months ended
March 31, 2016
. During the three months ended
March 31, 2015
, the Company made cash payments for income taxes of approximately
$96,000
.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the financial statements and related notes included in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The following discussion contains forward-looking statements based on expectations, estimates and assumptions. Actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors set forth in “Cautionary Statement Regarding Forward-Looking Statements” below and in Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and elsewhere in the Annual Report.
The reference to a “Note” herein refers to the accompanying Notes to Financial Statements contained in Item 1. “Financial Statements.”
General
LinnCo, LLC (“LinnCo” or the “Company”) is a Delaware limited liability company formed on April 30, 2012, under the Delaware Limited Liability Company Act, that has elected to be treated as a corporation for United States (“U.S.”) federal income tax purposes. Linn Energy, LLC (“LINN Energy”), an independent oil and natural gas company that trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “LINE,” owns LinnCo’s sole voting share.
LinnCo’s success is dependent upon the operations and management of LINN Energy and its resulting performance. Therefore, LINN Energy’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, has been included in this filing as Exhibit 99.1 and incorporated herein by reference.
Business
At no time after LinnCo’s formation and prior to the initial public offering (“IPO”) did LinnCo have any operations or own any interest in LINN Energy. After the IPO, LinnCo’s initial sole purpose was to own units representing limited liability company interests (“units”) in its affiliate, LINN Energy. In connection with the acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”), LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent transfer of assets to LINN Energy for consideration received. As of March 31, 2016, LinnCo had no significant assets or operations other than those related to its interest in LINN Energy.
Recent Developments
Voluntary Reorganization Under Chapter 11
On May 11, 2016, the Company, LINN Energy and Berry (collectively, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Debtors have filed a motion with the Bankruptcy Court seeking joint administration of their Chapter 11 cases.
Prior to the filing of the Bankruptcy Petitions, on May 10, 2016, the Debtors entered into a restructuring support agreement (“Restructuring Support Agreement”) with certain holders (“Consenting Creditors”) collectively holding or controlling at least 66.67% by aggregate outstanding principal amounts under (i) LINN Energy’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) and (ii) Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”).
The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment of the Debtors and the Consenting Creditors to support a comprehensive restructuring of the Debtors’ long-term debt (“Restructuring Transactions”). The Restructuring Transactions will be effectuated through one or more plans of reorganization (“Plan”) to be filed in cases commenced under Chapter 11 of the Bankruptcy Code.
The Company expects ordinary-course operations to continue substantially uninterrupted during and after the Chapter 11 proceedings. The Restructuring Support Agreement provides that the Consenting Creditors will support the use of the LINN Energy’s and Berry’s cash collateral under specified terms and conditions, including adequate protection terms.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
Certain principal terms of the Plan are outlined below. See Item 1A. “Risk Factors” for risks relating to Chapter 11 proceedings, including the risk that the Company may not be able to obtain confirmation of a Chapter 11 plan of reorganization.
|
|
•
|
Claims under the LINN Credit Facility will receive participation in a new company $2.2 billion reserve-based and term loan credit facility, as described further below (“New LINN Exit Facility”), and payment of the remainder of claims under the LINN Credit Facility (if any) in cash or, to the extent not viable, a later-agreed-upon alternative consideration.
|
|
|
•
|
LINN Energy’s 12.00% senior secured second lien notes due December 2020 (“Second Lien Notes”) will be allowed as a $2.0 billion unsecured claim consistent with the settlement agreement, dated April 4, 2016, entered into between LINN Energy and certain holders of the Second Lien Notes.
|
|
|
•
|
Unsecured claims against LINN Energy, including under the Second Lien Notes and LINN Energy’s unsecured notes, will convert to equity in the reorganized LINN Energy or reorganized LinnCo (“New LINN Common Stock”) in to-be-determined allocations.
|
|
|
•
|
The Restructuring Support Agreement contemplates that Berry will separate from LINN Energy under the Plan. Claims under the Berry Credit Facility will receive participation in a new Berry exit facility, if any, and a to-be-determined allocation of equity in reorganized Berry (“New Berry Common Stock”).
|
|
|
•
|
Unsecured claims against Berry, including under Berry’s unsecured notes, will receive a to-be-determined allocation of New Berry Common Stock up to the full amount of Berry’s unencumbered collateral and/or collateral value in excess of amounts outstanding under the Berry Credit Facility.
|
|
|
•
|
Cash payments under the Plan may be funded by rights offerings or other new-money investments. The Restructuring Support Agreement contemplates that Berry may undertake a marketing process for the opportunity to sponsor its Plan.
|
|
|
•
|
All existing equity interests of the Company, LINN Energy and Berry will be extinguished without recovery.
|
The New LINN Exit Facility will consist of (i) a term loan in the amount of $800 million (“New LINN Term Loan”) and (ii) a revolving loan in the initial amount of $1.4 billion (“New LINN Revolving Loan”). The New LINN Term Loan will mature on the earlier of June 30, 2021, or the day prior to the fourth anniversary of the closing date, with interest payable at LIBOR plus 7.50% and amortized principal payments payable quarterly, beginning March 31, 2017. The New LINN Revolving Loan will be composed of two tranches as follows: (a) a conforming tranche with an initial amount of $1.2 billion subject to the borrowing base (“Conforming Tranche”) and (b) a non-conforming tranche with an initial amount of $200 million (“Non-Conforming Tranche”). The Conforming Tranche will mature on the earlier of June 30, 2021, or the day prior to the fourth anniversary of the closing date, with an interest rate of LIBOR plus 3.50%. The Non-Conforming Tranche will mature on the earlier of December 31, 2020, or the day prior to the date that is three years and six months after the closing date, with an interest rate of LIBOR plus 5.50%. The New LINN Exit Facility is subject to a variety of other terms and conditions including conditions precedent to funding, financial covenants and various other covenants and representations and warranties.
The Plan will provide for the establishment of a customary management incentive plan at LINN Energy and Berry under which no less than 10% of the New LINN Common Stock and New Berry Common Stock, respectively, will be reserved for grants made from time to time to the officers and other key employees of the respective reorganized entities. The Plan will provide for releases of specified claims held by the Debtors, the Consenting Creditors and certain other specified parties against one another and for customary exculpations and injunctions.
The Restructuring Support Agreement obligates the Debtors and the Consenting Creditors to, among other things, support and not interfere with consummation of the Restructuring Transactions and, as to the Consenting Creditors, vote their claims in favor of the Plan. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones relating to the filing, confirmation and consummation of the Plan, among other requirements, and in the event of certain breaches by the parties under the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 250 days of the bankruptcy filing. There can be no assurances that the Restructuring Transactions will be consummated.
Subject to certain exceptions, under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Bankruptcy Petitions. Accordingly, although the filing of the Bankruptcy Petitions triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
For the duration of the Company’s Chapter 11 proceedings, the Company’s and LINN Energy’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Item 1A. “Risk Factors.” As a result of these risks and uncertainties, the number of the Company’s shares and shareholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 proceedings, and the description of the Company’s operations included in this quarterly report may not accurately reflect its operations following the Chapter 11 process.
Ability to Continue as a Going Concern
The Company’s only significant asset is its interest in LINN Energy units and the Company’s cash flow, which was historically used to pay dividends to the Company’s shareholders, is completely dependent upon the ability of LINN Energy to make distributions to its unitholders. In October 2015, LINN Energy suspended the payment of its distribution. As of March 31, 2016, the Company had income taxes payable of approximately $23 million and cash of approximately $11 million.
The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described above raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.
In April 2016, the Company made income tax payments of approximately $10 million related to statutory tax audit assessments for the tax years ended December 31, 2012, and December 31, 2011. The Company estimates that approximately $23 million of income taxes payable will become due later in 2016, but cannot be certain of the exact timing of payment, or of the final amount that will ultimately be owed. If the income taxes owed are greater than the cash on hand at such time, the payment will require some form of liquidity to satisfy it. As of May 12, 2016, LINN Energy had not agreed to provide any cash contribution to the Company.
Offer to Exchange LINN Energy Units for LinnCo Shares
In March 2016, the Company filed a Registration Statement on Form S-4 related to an offer to exchange each outstanding unit representing limited liability company interests of LINN Energy for one common share representing limited liability company interests of LinnCo. In April 2016, the Company extended the offer to April 25, 2016. The offer expired on April 25, 2016, and on April 26, 2016, the Company commenced a subsequent offering period that will expire on May 23, 2016, unless extended. During April 2016, 104,719,468 LINN Energy units were exchanged for an equal number of LinnCo shares. As a result of the exchange of LINN Energy units for LinnCo shares, LinnCo’s ownership of LINN Energy’s outstanding units increased from approximately 36% to approximately 66% as of April 30, 2016.
Results of Operations
Equity Loss from Investment in Linn Energy, LLC
The Company uses the equity method of accounting for its investment in LINN Energy. The Company’s equity loss consists of its share of LINN Energy’s losses attributed to the units the Company owns, the amortization of the difference between the Company’s investment in LINN Energy and LINN Energy’s underlying net assets attributable to certain assets and liabilities, and impairments of its investment in LINN Energy. The percentage ownership in LINN Energy could continue to change if the Company acquires additional units or if LINN Energy issues or repurchases additional units.
Impairment testing on the Company’s investment in LINN Energy is performed when events or circumstances warrant such testing and considers whether there is an inability to recover the carrying value of the investment that is other than temporary.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
No impairment had occurred with respect to the Company’s investment in LINN Energy for the three months ended March 31, 2016, or March 31, 2015.
Primarily as a result of cumulative losses recognized by the Company, its investment in LINN Energy was reduced to zero as of December 31, 2015, at which time the Company discontinued applying the equity method. The amount of excess losses incurred was approximately $560 million and $490 million as of March 31, 2016, and December 31, 2015, respectively.
Following are summarized statements of operations information for LINN Energy. Additional information on LINN Energy’s results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.
Summarized Linn Energy, LLC Statements of Operations Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
Revenues and other
|
$
|
414,767
|
|
|
$
|
916,547
|
|
Expenses
|
(1,647,184
|
)
|
|
(1,124,155
|
)
|
Other income and (expenses)
|
(105,085
|
)
|
|
(138,679
|
)
|
Income tax (expense) benefit
|
(10,244
|
)
|
|
7,127
|
|
Net loss
|
$
|
(1,347,746
|
)
|
|
$
|
(339,160
|
)
|
General and Administrative Expenses
The Company’s general and administrative expenses are associated with managing the business and affairs of LinnCo and include services provided by LINN Energy necessary for the conduct of LinnCo’s business, such as accounting, legal, tax, information technology and other expenses. For the three months ended March 31, 2016, LinnCo incurred total general and administrative expenses of approximately $933,000, including approximately $603,000 related to services provided by LINN Energy. Of the expenses incurred during the three months ended March 31, 2016, approximately $902,000 had been paid by LINN Energy on LinnCo’s behalf as of March 31, 2016.
For the three months ended March 31, 2015, LinnCo incurred total general and administrative expenses of approximately $976,000, including approximately $491,000 related to services provided by LINN Energy. Of the expenses incurred during the three months ended March 31, 2015, approximately $712,000 had been paid by LINN Energy on LinnCo’s behalf as of March 31, 2015.
Because all general and administrative expenses are actually paid by LINN Energy on LinnCo’s behalf, no cash is disbursed by LinnCo for these expenses.
Income Tax (Expense) Benefit
The income tax expense of approximately $13 million for the three months ended March 31, 2016, is associated with settlements with taxing authorities related to statutory audits of previous tax years, and the income tax benefit of approximately $18 million for the three months ended March 31, 2015, is based on the Company’s losses, primarily associated with the equity losses from its investment in LINN Energy.
Liquidity and Capital Resources
The Company’s authorized capital structure consists of two classes of interests: (1) shares with limited voting rights, which were issued in the IPO and in connection with the Berry acquisition and (2) voting shares, 100% of which are held by LINN Energy. At March 31, 2016, LinnCo’s issued capitalization consisted of approximately $3.9 billion in common shares
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
representing limited liability company interests (“shares”) and $1,000 contributed by LINN Energy in connection with LinnCo’s formation and in exchange for its voting share. Additional classes of equity interests may be created upon approval by the Board of Directors (“Board”) and the holders of a majority of the outstanding common shares and voting shares, voting as separate classes.
LINN Energy has agreed to provide to LinnCo, or to pay on LinnCo’s behalf, any financial, legal, accounting, tax advisory, financial advisory and engineering fees, and other administrative and out-of-pocket expenses incurred by LinnCo, along with any other expenses incurred in connection with any public offering of LinnCo shares or incurred as a result of being a publicly traded entity. These expenses include costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses, and registrar and transfer agent fees.
The Company expects neither to generate nor to require significant cash in its ongoing business. Any cash received from the sale of additional shares will be immediately used to purchase LINN Energy units. Accordingly, the Company does not anticipate any other sources or needs for additional liquidity, other than if the Company had a tax obligation. Such tax obligation would require some form of liquidity to satisfy it, including a cash contribution from LINN Energy, which LINN Energy is not required to provide.
The Company’s only significant asset is its interest in LINN Energy units and the Company’s cash flow, which was historically used to pay dividends to the Company’s shareholders, is completely dependent upon the ability of LINN Energy to make distributions to its unitholders. In October 2015, LINN Energy suspended the payment of its distribution. As of March 31, 2016, the Company had income taxes payable of approximately $23 million and cash of approximately $11 million.
The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described under “Recent Developments” raise substantial doubt about the Company’s ability to continue as a going concern.
In April 2016, the Company made income tax payments of approximately $10 million related to statutory tax audit assessments for the tax years ended December 31, 2012, and December 31, 2011. The Company estimates that approximately $23 million of income taxes payable will become due later in 2016, but cannot be certain of the exact timing of payment, or of the final amount that will ultimately be owed. If the income taxes owed are greater than the cash on hand at such time, the payment will require some form of liquidity to satisfy it. As of May 12, 2016, LINN Energy had not agreed to provide any cash contribution to the Company.
In order to decrease LINN Energy’s level of indebtedness and maintain its liquidity at levels sufficient to meet its commitments, LINN Energy has undertaken a number of actions, including minimizing capital expenditures and further reducing its recurring operating expenses. LINN Energy believes that even after taking these actions, it will not have sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As previously disclosed, the Company and LINN Energy have engaged financial and legal advisors to assist with, among other things, analyzing various strategic alternatives to address its liquidity and capital structure. The Company and LINN Energy believe a filing under Chapter 11 may provide the most expeditious manner in which to effect a capital structure solution. There can be no assurances that the Company or LINN Energy will be able to reorganize its capital structure on terms acceptable to the Company or LINN Energy, its respective creditors, or at all.
See above under “Voluntary Reorganization Under Chapter 11” for information about the Company’s entry into the Restructuring Support Agreement.
Distributions and Dividends
Within five business days after receiving a cash distribution related to its interest in LINN Energy units, LinnCo is required to pay the cash received, net of reserves for its income taxes liability, if any, as dividends to its shareholders. In October 2015, LINN Energy suspended the payment of its distribution. Since LinnCo pays its dividend from the receipt of cash distributions from LINN Energy, LinnCo will not pay a dividend while LINN Energy’s distributions are suspended.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based on the financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and related disclosures of contingent assets and liabilities. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that are believed to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Actual results may differ from these estimates and assumptions used in the preparation of the financial statements.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 1.
Accounting for Investment in Linn Energy, LLC
The Company uses the equity method of accounting for its investment in LINN Energy. The Company records its share of LINN Energy’s net income (loss) in the period in which it is earned. If the Company’s share of LINN Energy’s losses reduces its investment in LINN Energy to zero, the Company temporarily discontinues applying the equity method. At March 31, 2016, the Company owned approximately 36% of LINN Energy’s outstanding units. The Company’s ownership percentage could change if the Company acquires additional units or if LINN Energy issues or repurchases additional units. Changes in the Company’s ownership percentage affect its net income (loss).
At March 31, 2016, the carrying amount of the Company’s investment in LINN Energy was greater than the Company’s ownership interest in LINN Energy’s underlying net assets by approximately $571 million. The difference is attributable to cumulative excess losses, as well as proved and unproved oil and natural gas properties and senior notes, and is included in “investment in Linn Energy, LLC” on the balance sheets. The difference attributable to oil and natural gas properties and senior notes is amortized over the lives of the related assets and liabilities. Such amortization is included in the equity income (loss) from the Company’s investment in LINN Energy.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. Because substantially all of LinnCo’s assets consist of its interest in LINN Energy’s units, these risks and uncertainties primarily relate to LINN Energy’s business which include the following:
|
|
•
|
potential adverse impact of restructuring transactions on LINN Energy’s operations, management and employees, as well as the risks associated with operating the business during the anticipated Chapter 11 proceedings;
|
|
|
•
|
ability to consummate restructuring transactions;
|
|
|
•
|
large or multiple customer defaults on contractual obligations, including defaults resulting from actual or potential insolvencies;
|
|
|
•
|
effects of legal proceedings;
|
|
|
•
|
ability to resume payment of distributions in the future or maintain or grow them after such resumption;
|
|
|
•
|
oil, natural gas and NGL reserves;
|
|
|
•
|
realized oil, natural gas and NGL prices;
|
|
|
•
|
economic and competitive advantages;
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
|
|
|
•
|
credit and capital market conditions;
|
|
|
•
|
lease operating expenses, general and administrative expenses and development costs;
|
|
|
•
|
future operating results, including results of acquired properties;
|
|
|
•
|
plans, objectives, expectations and intentions;
|
|
|
•
|
integration of acquired businesses and operations and commencement of activities in LINN Energy’s strategic alliances with GSO Capital Partners LP and Quantum Energy Partners, which may take longer than anticipated, may be more costly than anticipated as a result of unexpected factors or events and may have an unanticipated adverse effect on LINN Energy’s business.
|
All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Item 2. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on LINN Energy and Company expectations, which reflect estimates and assumptions made by LINN Energy and Company management. These estimates and assumptions reflect management’s best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management’s assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the events will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements due to factors set forth in Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2015, and elsewhere in the Annual Report. The forward-looking statements speak only as of the date made and, other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
The forward-looking statements related to the Plan involve known and unknown risks, uncertainties, assumptions and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any results, performance or achievements expressed or implied by other forward-looking statements contained in this Quarterly Report on Form 10-Q, including but not limited to potential adverse effects related to the following: potential delisting of the Company’s shares and LINN Energy’s units on NASDAQ; potential restructuring of LINN Energy’s debt and related effects on the holders of its outstanding units; potential effects of the industry downturn on LINN Energy’s business, financial condition and results of operations; potential limitations on the Company’s and LINN Energy’s ability to maintain contracts and other critical business relationships; requirements for adequate liquidity to fund the Company’s and LINN Energy’s operations in the future, including obtaining sufficient financing on acceptable terms; and other matters related to the potential restructuring and LINN Energy’s indebtedness, including any defaults related thereto.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The nature of the Company’s business and operations is such that no activities or transactions are conducted or entered into by the Company that would require it to have a discussion under this item.
For a discussion of these matters as they pertain to LINN Energy, please read Item 3. “Quantitative and Qualitative Disclosures About Market Risk” of LINN Energy’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, which is included in this filing as Exhibit 99.1 and incorporated herein by reference as activities of LINN Energy have an impact on the Company’s results of operations and financial position.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, and the Company’s Audit Committee of the Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2016.
Changes in the Company’s Internal Control Over Financial Reporting
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal controls were designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation and presentation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes in the Company’s internal control over financial reporting during the first quarter of 2016 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.