Notes to Consolidated Financial Statements
NOTE 1 – ORGANIZATION
On September 21, 2007,
Universal Holdings, Inc. (“Universal”), a Nevada corporation, completed the acquisition of Coronado Acquisitions, LLC
(“Coronado”). Under the terms of the acquisition, Coronado was merged into Universal. On October 12, 2009, Universal
changed its name to Recovery Energy, Inc. On December 1, 2013, Recovery Energy, Inc. changed its name to Lilis Energy, Inc. (“Lilis”,
“Lilis Energy” and the “Company”).
The Company is an independent
oil and gas exploration and production company focused on the Delaware Basin in Winkler and Loving Counties, Texas and Lea County,
New Mexico and the Denver-Julesburg Basin (“DJ Basin”) in Wyoming, Colorado, and Nebraska.
On June 23, 2016, the
Company effected a 1-for-10 reverse stock split of its Common Stock (the “Reverse Split”). The accompanying consolidated
financial statements and these notes to the consolidated financial statements give retroactive effect to the Reverse Split for
all periods presented.
All references to production,
sales volumes and reserves quantities are net to the Company’s interest unless otherwise indicated.
NOTE 2 – MANAGEMENT PLANS AND
LIQUIDITY
The Company has reported
net operating losses during the year ended December 31, 2016 and for the past five years. As a result, the Company funded its operations
in 2016 and the merger with Brushy Resources, Inc. through additional debt and equity financing. On September 29, 2016, the Company
entered into a new Credit and Guaranty Agreement (the “Credit Agreement”) that provides for a three-year, senior, secured
term loan with initial aggregate principal commitments of $31 million and a maximum facility size of $50 million. The term loan
was funded in two draws, with $25 million collected as of September 30, 2016 and the additional $6 million collected as of November
11, 2016.
As of December 31,
2016, the Company had a working capital balance and a cash balance of approximately $5.7 million and $11.7 million, respectively.
As of March 1, 2017, the Company’s cash balance was approximately $9.0 million, which included a drawdown of additional principal
under its Credit Agreement on February 7, 2017 of $7.1 million and excluded net proceeds of the equity offering completed on March
1, 2017, or approximately $18.6 million. The Company believes that it will have sufficient capital to operate over the next 12
months from the date of the filing of this annual report. However, it is possible that the Company will seek to raise additional
debt, equity capital, or both depending on the pace of its drilling and leasing activity.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ESTIMATES
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s wholly owned subsidiaries
include Brushy Resources, Inc (“Brushy”), ImPetro Operating, LLC (“ImPetro Operating”) and ImPetro Resources,
LLC (“ImPetro”), and Lilis Operating Company, LLC (“Lilis Operating”). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of
consolidated financial statements in conformity with generally accepted accounting principles in the United States (“U.S.
GAAP”) requires the Company to make a number of estimates and assumptions relating to the reported amounts of assets and
liabilities; disclosure of contingent assets and liabilities at the date of the financial statements; the reported amounts of revenues
and expenses during the reporting period; and the quantities and values of proved oil, natural gas and NGL reserves used in calculating
depletion and assessing impairment of its oil and gas properties.
The most significant
financial estimates are associated with the Company’s estimated volumes of proved oil and natural gas reserves, asset retirement
obligations, assessments of impairment imbedded in the carrying value of undeveloped acreage and undeveloped properties, fair value
of financial instruments, including derivative liabilities, depreciation and accretion, income taxes and contingencies. Although
management believes that these estimates are reasonable, actual results could differ significantly from those estimates.
Reclassifications
Certain prior-period
amounts have been reclassified for comparative purposes to conform with the fiscal 2016 presentation. These reclassifications have
no effect on the Company’s previously reported results of operations.
Cash and Cash Equivalent
Cash and cash equivalents
include highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents as these
instruments are readily convertible to known amounts of cash and do not bear significant risk of changes in value due to their
short maturity period.
Accounts Receivable
The Company records
actual and estimated oil and gas revenue receivable from third parties at its net revenue interest. The Company also reflects costs
incurred on behalf of joint interest partners. The Company typically has the right to withhold future revenue disbursements to
recover outstanding joint interest billings on outstanding receivables from joint interest owners. Management periodically reviews
accounts receivable amounts for collectability and records its allowance for uncollectible receivables using the allowance method
based on past experience. Allowance for doubtful accounts are based primarily on joint interest billings for expenses related to
oil and natural gas wells. Receivables which derive from sales of certain oil and gas production are collateral under the Company’s
Credit Agreement.
Concentration of Credit Risk
The Company’s
cash is invested at major financial institutions primarily within the United States. At December 31, 2016 and 2015, the Company’s
cash was maintained in accounts that are insured up to the limit determined by the federal governmental agency. The Company may
at times have balances in excess of the federally insured limits. Periodically, the Company evaluates the creditworthiness of the
financial institutions, and has not experienced any losses in such accounts.
Significant Customers
The Company’s
major customers include, Noble Energy, Texican and Energy Transfer, Inc. These customers accounted for approximately 41%, 38% and
16% of the Company’s revenue for the year ended December 31, 2016. The Company’s major customers include, Shell Trading
(US), PDC Energy and Noble Energy, which accounted for approximately 43%, 26% and 21% of its revenue for the year ended December
31, 2015.
However, the Company
believe that the loss of a single purchaser could not materially affect the Company’s business because alternative purchasers
are available.
Reserves
All of the reserves
data included herein are estimates. Estimates of the Company’s crude oil and natural gas reserves are prepared in accordance
with guidelines established by the Securities Exchange Commission (“SEC”), including rule revisions designed to modernize
the oil and gas company reserves reporting requirements, which the Company implemented effective December 31, 2010. Reservoir engineering
is a subjective process of estimating underground accumulations of crude oil and natural gas. There are numerous uncertainties
inherent in estimating quantities of proved crude oil and natural gas reserves. Uncertainties include the projection of future
production rates and the expected timing of development expenditures. The accuracy of any reserves estimate is a function of the
quality of available data and of engineering and geological interpretation and judgment. As a result, reserves estimates may be
different from the quantities of crude oil and natural gas that are ultimately recovered. In addition, the ability to produce economic
reserves is dependent on the oil and gas prices used in the reserves estimate. The Company’s reserves estimates are based
on 12-month average commodity prices, unless contractual arrangements otherwise designate the price to be used, in accordance with
the SEC rules. However, oil and gas prices are volatile and, as a result, the Company’s reserves estimates may change in
the future.
Estimates of proved
crude oil and natural gas reserves significantly affect the Company’s depreciation, depletion, and amortization (“DD&A”)
expense. For example, if estimates of proved reserves decline, the DD&A rate will increase, resulting in a decrease in net
income. A decline in estimates of proved reserves could also result in an impairment charge, which would reduce earnings.
Oil and Gas Properties
The Company uses the
full cost method of accounting for oil and gas operations. Under this method, costs related to the exploration, non-production
related development and acquisition of oil and natural gas reserves are capitalized. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling, developing and completing
productive wells and/or plugging and abandoning non-productive wells, and any other costs directly related to acquisition and exploration
activities. Proceeds from property sales are generally applied as a credit against capitalized exploration and development costs,
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 25% or more of proved reserves.
The Company accounts
for its unproven long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05,
Accounting for the Impairment or Disposal of Long-Lived Assets
. ASC Topic 360-10-05 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no
longer be appropriate.
Depletion of exploration
and development costs and depreciation of wells and tangible production assets is computed using the units-of-production method
based upon estimated proved oil and gas reserves. Costs included in the depletion base to be amortized include (a) all proved capitalized
costs including capitalized asset retirement costs net of estimated salvage values, less accumulated depletion, (b) estimated future
development cost to be incurred in developing proved reserves; and (c) estimated decommissioning and abandonment/restoration costs,
net of estimated salvage values, that are not otherwise included in capitalized costs.
Costs associated with
undeveloped acreage are excluded from the depletion base until it is determined whether proved reserves can be assigned to the
properties. When proved reserves are assigned to such properties or one or more specific properties are deemed to be impaired,
the cost of such properties is added to full cost pool which is subject to depletion calculations.
Under the full cost
method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income taxes may not
exceed an amount equal to the sum of the present value, discounted at 10%, of estimated future net revenues from proved oil and
gas reserves and the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated
fair value, if lower, of unproved properties that are not subject to amortization. Should capitalized costs exceed this ceiling,
an impairment expense is recognized. During 2016, commodity prices continued to trade in a low range. With low commodity prices
sustained for the majority of 2016 in the DJ Basin, some of the Company’s properties became uneconomic triggering an impairment
charge of $4.7 million at December 31, 2016. Due to the decline in commodity prices and lack of liquidity the Company recorded
an impairment charge during the year ended December 31, 2015. During the years ended December 31, 2016 and 2015, the Company recorded
$4.7 million and $24.5 million impairment charges, respectively.
The present value of
estimated future net cash flows was computed by applying: a flat oil price to forecast revenues from estimated future production
of proved oil and gas reserves as of period-end, less estimated future expenditures to be incurred in developing and producing
the proved reserves (assuming the continuation of existing economic conditions), less any applicable future taxes.
Wells in Progress
Wells in progress connotes
wells that are currently in the process of being drilled or completed or otherwise under evaluation as to their potential to produce
oil and gas reserves in commercial quantities. Such wells continue to be classified as wells in progress and withheld from the
depletion calculation and the ceiling test until such time as either proved reserves can be assigned, or the wells are otherwise
abandoned. Upon either the assignment of proved reserves or abandonment, the costs for these wells are then transferred to the
full cost pool and become subject to both depletion and the ceiling test calculations in accordance with full cost accounting under
Rule 4-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended.
Other Property and Equipment
Property and equipment
include office equipment and furniture which are stated at cost. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets. The estimated useful lives of property and equipment range from three to seven years.
The Company recorded approximately $0.04 million and $0.03 million of depreciation for the years ended December 31, 2016 and 2015,
respectively.
Impairment of Long-lived Assets
The Company accounts
for long-lived assets (other than oil and gas properties) at cost. The Company may impair these assets whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Recoverability is measured by comparing
the carrying amount of an asset to the expected undiscounted future net cash flows generated by the asset. If it is determined
that the asset may not be recoverable, and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge
is recognized to the extent of the difference.
Asset Retirement Obligation
The Company incurs
retirement obligations for certain assets at the time they are placed in service. The fair values of these obligations are recorded
as liabilities on a discounted basis. The costs associated with these liabilities are capitalized as part of the related assets
and depreciated. Over time, the liabilities are accreted for the change in their present value. For purposes of depletion calculations,
the Company includes estimated dismantlement and abandonment cost, net of salvage values, associated with future development activities
that have not yet been capitalized as asset retirement obligations. Asset retirement obligations incurred are classified as Level
3 (unobservable inputs) fair value measurements. The asset retirement liability is allocated to operating expense using a systematic
and rational method.
Fair Value of Financial Instruments
As of December 31,
2016 and 2015, the carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, interest
and dividends payable and advance from joint interest partners approximates fair value due to the short-term nature of such items.
The carrying value of the Company’s secured debt is carried at cost which is approximately the fair value of the debt as
the related interest rate are at the terms approximates rates currently available to the Company.
Revenue Recognition
The Company recognizes
revenue when it is realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer
is fixed or determinable and (iv) collectability is reasonably assured.
The Company uses the
entitlements method of accounting for oil, NGLs and gas revenues. Sales proceeds in excess of the Company's entitlement are included
in other liabilities and the Company's share of sales taken by others is included in other assets in the accompanying consolidated
balance sheets. The Company had no material oil, NGL or gas entitlement assets or liabilities as of December 31, 2016 or 2015.
Stock Based Compensation
The Company measures
the fair value of stock-based compensation expense awards made to employees and directors, including stock options, restricted
stock units, and restricted stock, on the date of grant using a Black-Scholes model. For equity awards, compensation expense is
based on the fair value on the grant or modification date and is recognized in the Company’s financial statements over the
vesting period. The measurement of share-based compensation expense is based on several criteria, including but not limited to,
the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest
rate, dividend rate and award cancellation rate. These inputs are subjective and are determined using management’s judgment.
If differences arise between the assumptions used in determining share-based compensation expense and the actual factors, which
become known over time, the Company may change the input factors used in determining future share-based compensation expense.
The Company accounts
for warrant grants to nonemployees whereby the fair values of such warrants are determined using the option pricing model at the
earlier of the date at which the nonemployee’s performance is complete or a performance commitment is reached.
Warrant Modification Expense
The Company accounts
for the modification of warrants as an exchange of the old award for a new award. The incremental value is measured as the excess,
if any, of the fair value of the modified award over the fair value of the original award immediately before modification, and
is either expensed as a period expense or amortized over the performance or vesting date. The Company estimates the incremental
value of each warrant using the Black-Scholes option pricing model. The Black-Scholes model is highly complex and dependent on
key estimates by management. The estimate with the greatest degree of subjective judgment is the estimated volatility of the Company’s
stock price.
Earnings (Loss) Per Share
Basic income (loss) per share was calculated
by dividing net income or loss applicable to common shares by the weighted average number of common shares outstanding during the
periods presented. The calculation of diluted income (loss) per share should include the potential dilutive impact of shares issuable
upon the conversion of debt or preferred stock, vested restricted stock and exercise of warrants and options during the period,
unless their effect is anti-dilutive. At December 31, 2016 and 2015, shares underlying restricted stock units, restricted stock,
options, warrants, preferred stock and debentures have been excluded from the diluted share calculations as they were anti-dilutive
as a result of net losses incurred. The Company has included 3,522,735 warrants, with an exercise price of $.01, in its earnings
per share calculation for the year ended December 31, 2016.
The Company had the
following shares of Common Stock equivalents at December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Stock Options
|
|
|
5,956,833
|
|
|
|
6,083,333
|
|
Restricted Stock Units
|
|
|
149,584
|
|
|
|
1,869,000
|
|
Restricted Stock
|
|
|
1,068,305
|
|
|
|
-
|
|
Series A Preferred Stock
|
|
|
-
|
|
|
|
3,112,033
|
|
Series B Preferred Stock
|
|
|
15,454,545
|
|
|
|
-
|
|
Stock Purchase Warrants
|
|
|
12,392,776
|
|
|
|
24,383,161
|
|
Convertible Debentures
|
|
|
-
|
|
|
|
3,423,233
|
|
Convertible Bridge Notes
|
|
|
-
|
|
|
|
5,900,004
|
|
|
|
|
35,022,043
|
|
|
|
44,770,764
|
|
Income Taxes
The Company uses the
asset and liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences
between financial statement carrying amounts and the tax bases of assets and liabilities, and are measured using the tax rates
expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit
carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists
regarding their realization.
The Company recognizes
its tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The
amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement.
A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed that do not meet these recognition
and measurement standards. As of December 31, 2016 and 2015, the Company has determined that no liability is required to be recognized.
The Company’s
policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax expense. No interest or penalties
were required to be accrued at December 31, 2016 and 2015. Further, the Company does not expect that the total amount of unrecognized
tax benefits will significantly increase or decrease during the next 12 months.
Recently Issued Accounting Pronouncements
The Company considers
the applicability and impact of all Accounting Standards Updates (“ASUs”). The ASUs not listed below were assessed
and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position and/or
results of operations.
In January 2017, the
FASB issued ASU 2017-01
“Business Combinations (Topic 805): Clarifying the Definition of a Business”,
which
clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions
or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business
and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be
considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods
within that reporting period. The Company adopted this ASU on January 1, 2017, and expects that the adoption of this ASU could
have a material impact on future consolidated financial statements for acquisitions that are not considered to be businesses.
The FASB issued ASU
2016-18, “Restricted Cash (Topic 230),” to clarify the presentation of restricted cash in the statement of cash flows.
The amendments require that a statement of cash flows explain the change during the period in restricted cash or restricted cash
equivalents. In additions to changes in cash and cash equivalents, restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. As a result, transfers between cash and restricted cash will not be presented as a separate line item in the operating,
investing or financing section of the cash flow statement. The amendments are effect for public business entities for fiscal years
beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. The Company will
adopt this ASU in 2017. The adoption of this ASU will affect the presentations in the Company’s consolidated balance sheets
and consolidated statement of cash flows and will not materially impact the results of operations.
In February 2016, the
FASB issued ASU 2016-02, “Leases (Topic 842),” which requires companies to recognize the assets and liabilities for
the rights and obligations created by long-term leases of assets on the balance sheet. The guidance requires adoption by application
of a modified retrospective transition approach for existing long-term leases and is effective for fiscal years beginning after
December 15, 2018, including interim periods within those years. The effect of this guidance relating to the Company’s existing
long-term leases will not have material impact on the Company’s consolidated financial statements. As of December 31, 2016,
the Company currently has only one 2-year operating lease.
The FASB issued ASU
2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
This ASU
will simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual and interim
periods beginning in 2017 with early adoption permitted. The Company adopted this ASU on January 1, 2017 and does not believe that
the simplification of accounting for share-based compensation and related income taxes will have a material impact on its consolidated
financial statements.
In March 2016, the
FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net)
. This ASU amends the principal versus agent guidance in ASU No. 2014-09,
Revenue from Contracts
with Customers (Topic 606)
, which was issued in May 2014 (“ASU 2014-09”). Further, in April 2016, the FASB issued
ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. This
ASU also amends ASU 2014-09 and is related to the identification of performance obligations and accounting for licenses. The effective
date and transition requirements for both of these amendments to ASU 2014-09 are the same as those of ASU 2014-09, which was deferred
for one year by ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. That
is, the guidance under these standards is to be applied using a full retrospective method or a modified retrospective method, as
outlined in the guidance, and is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted only for annual periods, and interim period within those annual periods, beginning
after December 15, 2016. The Company has not selected a transition method and is evaluating its revenue recognition policies and
existing customer contracts to determine the impact this guidance will have on its financial statements.
In March 2016, the
FASB issued ASU No. 2016-06, “
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments”
(“ASU 2016-06”)
. This new standard simplifies the embedded derivative analysis for debt instruments containing
contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or
credit risks. This new standard will be effective for the Company on January 1, 2017. The Company expects the adoption of this
standard may have material impact on the Company’s result of operations from its continued efforts in raising capital to
fund its operations and develop its oil and gas properties from issuing convertible equity or debt instruments.
On August 26, 2016,
the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues
Task Force), (“ASU 2016-15”). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all
entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under
FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. The Company adopted this ASU on January 1, 2017 and expects the
adoption will only affect the classifications within the consolidated statement of cash flows.
In September 2015,
the FASB issued ASU No. 2015-16, “
Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period
Adjustments”
(“ASU 2015-16”). The update requires that the acquirer in a business combination recognize adjustments
to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts
are determined (not retrospectively as with prior guidance). Additionally, the acquirer must record in the same period’s
financial statements the effect on earnings of changes in depreciation, amortization or other income effects as a result of the
change to the provisional amounts, calculated as if the accounting had been completed at the time of acquisition. The acquiring
entity is required to disclose, on the face of the financial statements or in the footnotes to the financial statements, the portion
of the amount recorded in current period earnings, by financial statement line item, that would have been recorded in previous
reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance in
ASU No. 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those
fiscal years. Earlier application is permitted for financial statements that have not been issued. The Company adopted this standard
on January 1, 2016 and there were no material impact on its consolidated financial statements.
In April 2015, the
FASB issued ASU No. 2015-03 (“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with
debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for the Company on January 1, 2016. Once adopted,
entities are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents
a change in accounting principle. Early adoption is permitted for financial statements that have not been previously issued. The
Company adopted this standard on January 1, 2016. The adoption of ASU 2015-03 only affects the presentation of the Company’s
accompanying consolidated balance sheets and related financial statement disclosures in Note 9. In conjunction with the adoption
of ASU 2015-03, $1.8 million and $0.2 million of debt issuance costs, previously presented as part of other assets was included
as part of long-term debt which was reclassified as a direct deduction from the carrying amount of that debt liability as of December
31, 2016 and 2015, respectively.
In August 2014, the
FASB issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.”
ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about
a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management
will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability
to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective
for the Company on January 1, 2017. As of December 31, 2016, the Company believes that it has sufficient capital to operate for
the next 12 months – see management’s assessment and analysis of its plans and liquidity in Note 2 - Management Plans
and Liquidity above.
NOTE 4 – OIL AND GAS PROPERTIES
The following table
sets forth a summary of oil and gas property costs (net of divestitures) not being amortized at December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Undeveloped unevaluated acreage
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
-
|
|
|
$
|
2,886
|
|
Lease purchases
|
|
|
546
|
|
|
|
-
|
|
Assets conveyed
|
|
|
23,915
|
|
|
|
-
|
|
Transfer and other reclassification to evaluated properties
|
|
|
-
|
|
|
|
(2,886
|
)
|
Total undeveloped acreage
|
|
$
|
24,461
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Wells in progress:
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
-
|
|
|
$
|
6,042
|
|
Additions
|
|
|
7,453
|
|
|
|
-
|
|
Disposition of wells in progress for elimination of accrued expenses for drilling
|
|
|
-
|
|
|
|
(5,198
|
)
|
Reclassification to evaluated properties
|
|
|
-
|
|
|
|
(844
|
)
|
Total wells in progress and not subject to DD&A
|
|
$
|
7,453
|
|
|
$
|
-
|
|
During the year ended
December 31, 2016, the Company entered the Delaware Basin through the Merger. Since then, Lilis has increased its Delaware Basin
acreage position by 53% and has added 860 net contiguous acres further expanding its Delaware Basin footprint. At December 31,
2016 and 2015, the Company completed an assessment of its inventory of unevaluated acreage, which resulted in a transfer of $0
and $2.9 million, respectively from unevaluated acreage to evaluated properties.
Depreciation, depletion
and amortization (“DD&A”) expenses related to the proved properties were approximately $1.6 million and $0.6 million
for the years ended December 31, 2016 and 2015, respectively.
NOTE 5 – MERGER WITH BRUSHY RESOURCES,
INC. AND RELATED TRANSACTIONS
On June 23, 2016, the
Company completed the merger transaction contemplated by the Agreement and Plan of Merger dated as of December 29, 2015, as amended
to date (the “Merger Agreement”) by and among the Company, Brushy and Lilis Merger Sub, Inc., a Delaware corporation,
a wholly-owned subsidiary of the Company (“Merger Sub”). Pursuant to the terms of the Merger Agreement, at the effective
time (the “Effective Time”), Merger Sub merged with and into Brushy (the “Merger”), with Brushy continuing
as the surviving corporation and becoming a wholly-owned subsidiary of Brushy.
The
Merger resulted in the acquisition of Brushy’s properties in the Delaware Basin as well as the majority of its current operating
activity.
The results of Brushy, since the closing date of the Merger are included in the Company’s consolidated statement
of operations. The Merger was effected through the issuance of approximately 5.785 million shares of Common Stock in exchange for
all outstanding shares of Brushy common stock using a ratio of 0.4550916 shares of Lilis Common Stock for each share of Brushy
common stock and the assumption of Brushy's liabilities, including approximately $11.4 million of outstanding debt with Independent
Bank, Brushy’s former senior lender, and approximately $6.2 million of accounts payable, accrued expenses and asset retirement
obligations. In connection with the closing of the Merger, Lilis paid-down $6.0 million of the principal amount outstanding on
Brushy’s term loan with Independent Bank, made a cash payment of $500,000 to SOSV Investments, LLC (“SOS”), Brushy's
former subordinated lender and issued a $1 million promissory note to SOS (the “SOS Note”), along with a warrant to
purchase 200,000 shares of Common Stock (the “SOS Warrant”).
In connection with
the Merger, Lilis incurred costs of approximately $3.22 million to date, including (i) $3.05 million of consulting, investment,
advisory, legal and other Merger-related fees, and (ii) $170,000 of value in conjunction with the warrants issued to SOS recorded
additional Merger consideration.
Allocation of Purchase Price
- The
Merger has been accounted for as a business combination, using the acquisition method. The following table represents the allocation
of the total purchase price of Brushy to the assets and liabilities assumed based on the fair value on the closing date of the
Merger.
The following table sets forth the Company’s
purchase price allocation
(in thousands, except shares data and stock price):
Shares of Lilis Common Stock issued to Brushy shareholders
|
|
|
|
|
|
|
5,785,119
|
|
Lilis Common Stock closing price on June 23, 2016
|
|
|
|
|
|
$
|
1.20
|
|
Fair value of Common Stock issued
|
|
|
|
|
|
$
|
6,942
|
|
Cash consideration paid to SOS
|
|
|
|
|
|
|
500
|
|
SOS Note
|
|
|
|
|
|
|
1,000
|
|
Fair value of SOS warrant
|
|
|
|
|
|
|
170
|
|
Warrant liability - repricing derivative
|
|
|
|
|
|
|
164
|
|
Advance to Brushy pre-merger
|
|
|
|
|
|
|
2,508
|
|
Total purchase price
|
|
|
|
|
|
|
11,284
|
|
Plus: liabilities assumed by Lilis
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Account payable and accrued expenses
|
|
$
|
5,447
|
|
|
|
|
|
Term loan - Independent Bank
|
|
|
11,379
|
|
|
|
16,826
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
|
|
|
|
19
|
|
Asset Retirement Obligation
|
|
|
|
|
|
|
777
|
|
Amount attributable to liabilities assumed
|
|
|
|
|
|
|
17,622
|
|
|
|
|
|
|
|
$
|
28,906
|
|
Fair Value of Brushy Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
706
|
|
|
|
|
|
Other current assets
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,330
|
|
Oil and Gas Properties:
|
|
|
|
|
|
|
|
|
Evaluated properties
|
|
|
7,512
|
|
|
|
|
|
Unevaluated properties
|
|
|
19,662
|
|
|
|
|
|
|
|
|
|
|
|
|
27,174
|
|
Other assets
|
|
|
|
|
|
|
|
|
Other Property Plant & Equipment
|
|
|
42
|
|
|
|
|
|
Other assets
|
|
|
360
|
|
|
|
402
|
|
Total Asset Value
|
|
|
|
|
|
$
|
28,906
|
|
Pro forma Financial
Information
- The following pro forma condensed combined financial information was derived from the historical financial statements
of Lilis and Brushy and gives effect to the Merger as if it had occurred on January 1, 2015 for the year ended December 31, 2015.
Below information reflects pro forma adjustments based on available information and certain assumptions that the Company believes
are reasonable, including (i) Lilis’s Common Stock issued to convert Brushy’s outstanding shares of common stock as
of the closing date of the Merger, (ii) adjustments to conform Brushy’s historical policy of accounting for its oil and natural
gas properties from the successful efforts method to the full cost method of accounting, (iii) depletion of Brushy's fair-valued
proved oil and gas properties, and (iv) the estimated tax impacts of the pro forma adjustments. The pro forma results of operations
do not include any cost savings or other synergies that may result from the Merger or any estimated costs that have been or will
be incurred by Lilis to integrate the Brushy assets. The pro forma combined financial information has been included for comparative
purposes and is not necessarily indicative of the results that might have actually occurred had the Merger taken place on January
1, 2015; furthermore, the financial information is not intended to be a projection of future results.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except share data)
|
|
|
|
|
|
Revenue
|
|
$
|
4,989
|
|
|
$
|
3,173
|
|
Net loss
|
|
$
|
(35,835
|
)
|
|
$
|
(75,808
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(45,288
|
)
|
|
$
|
(76,528
|
)
|
Net loss per common share basic and diluted
|
|
$
|
(4.00
|
)
|
|
$
|
(13.32
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,328,252
|
|
|
|
5,745,785
|
|
NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures
fair value of its financial assets on a three-tier value hierarchy, which prioritizes the inputs, used in the valuation methodologies
in measuring fair value:
|
●
|
Level 1 - Observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level 2 - Other inputs that are directly or indirectly
observable in the marketplace.
|
|
●
|
Level 3 - Unobservable inputs which are supported by little
or no market activity.
|
The fair value hierarchy
also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value.
Asset Retirement Obligation
The fair value of the
Company’s asset retirement obligation liability is calculated at the point of inception by taking into account, the cost
of abandoning oil and gas wells, which is based on the Company’s and/or Industry’s historical experience for similar
work, or estimates from independent third-parties; the economic lives of its properties, which are based on estimates from reserve
engineers; the inflation rate; and the credit adjusted risk-free rate, which takes into account the Company’s credit risk
and the time value of money. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation
liability is deemed to use Level 3 inputs.
Executive Compensation
In September
2013, the Company announced the appointment of Abraham Mirman as its new president. In connection with Mr. Mirman’s appointment,
the Company entered into an employment agreement with Mr. Mirman (the “Mirman Agreement”). The Mirman Agreement provides
for an incentive bonus package that, depending upon the relative performance of the Company’s Common Stock compared to the
performance of stocks of certain peer group companies as measured from Mr. Mirman’s initial date of employment through December
31, 2014, may result in a cash bonus payment to Mr. Mirman of up to 3.0 times his base salary. The incentive bonus is recorded
as a liability and valued at each reporting period. The Company engaged a valuation firm (“VFIRM”) to complete a valuation
of this incentive bonus. As previously announced, on March 30, 2015, the Company entered into an amended and restated employment
agreement, which the Company refers to as the Mirman CEO Agreement with Mr. Mirman. The Mirman CEO Agreement also provides for
Mr. Mirman to receive a cash incentive bonus if certain production thresholds are achieved by the Company. Mr. Mirman’s
new incentive bonus liability was valued by VFIRM at $104,000 at December 31, 2015. As of December 31, 2016, there was no bonus
liability due to Mr. Mirman since the production thresholds were not met by the Company. As of December 31, 2015, the Company
provided for $87,000 of the bonus liability which represents the amount earned as of December31, 2015.
On March 6, 2015, the
Company announced the appointment of Kevin Nanke as its new Executive Vice President and Chief Financial Officer. Mr. Nanke would
also receive a cash incentive bonus if certain production thresholds were achieved by the Company and a performance bonus of $100,000
if the Company achieved certain goals set forth in Mr. Nanke’s employment agreement. Mr. Nanke’s new incentive bonus
liability was valued by VFIRM at $83,000 at December 31, 2015. As of December 31, 2016, there was no bonus liability due to Mr.
Nanke since the production thresholds were not met by the Company. As of December 31, 2015, the Company provided for $69,000 of
the liability which represents the amount earned as of that date.
On March 16, 2015,
the Company entered into an employment agreement with Ariella Fuchs for services to be performed as General Counsel to the Company.
Ms. Fuchs will also receive a cash incentive bonus if certain production thresholds are achieved by the Company. Ms. Fuchs’
new incentive bonus liability was valued by VFIRM at $80,000 at December 31, 2015. As of December 31, 2016, there was no bonus
liability due to Ms. Fuchs since the production thresholds were not met by the Company. As of December 31, 2015, the Company provided
for $67,000 of the liability which represents the amount earned as of that date.
Change in Warrant Liability
On September 2, 2014,
the Company entered into a Consulting Agreement with Bristol Capital, LLC, pursuant to which the Company issued to Bristol a warrant
to purchase up to 100,000 shares of Common Stock at an exercise price of $20.00 per share (or, in the alternative, 100,000 options,
but in no case both). The agreement has a price protection feature that will automatically reduce the exercise price if the Company
enters into another consulting agreement pursuant to which warrants are issued with a lower exercise price, which triggered during
fiscal year 2016.. On December 31, 2016, the Company revalued the warrants/option using the revised terms as follows: (i) 641,026
total warrants/options issued; (ii) stock price of $3.10; (iii) adjusted exercise price of $3.12; (iv) expected life of 2.67 years;
(v) volatility of 101%; (vi) risk free rate of 1.38% for a total value of $1.21 million, which adjusted the change in fair value
valuation of the derivative by $1.17 million. On December 31, 2015, the Company revalued the warrants/options using the following
variables: (i) 100,000 total warrants/options issued (as stated above, the Company will only issue a total of 100,000 shares of
Common Stock under the option or the warrant, but no more than 100,000 shares of Common Stock in the aggregate); (ii) stock price
of $2.00; (iii) exercise price of $20.00; (iv) expected life of 3.7 years; (v) volatility of 100%; risk free rate of 1.5% for
a total value of approximately $44,000, which adjusted the change in fair value valuation of the derivative by $350,000 for the
year ended December 31, 2015.
On January 8, 2015,
the Company entered into the Credit Agreement. In connection with the Credit Agreement, the Company issued to Heartland a warrant
to purchase up to 22,500 shares of Common Stock at an adjusted exercise price of $4.05 with the initial advance, which contains
an anti-dilution feature that will automatically reduce the exercise price if the Company enters into another agreement pursuant
to which warrants are issued with a lower exercise price.
On December 31,
2015, the Company revalued the warrants issued to the Heartland Bank using the following variables: (i) 22,500 warrants issued;
(ii) stock price of $2.00; (iii) exercise price of $ 25.00; (iv) expected life of 4.0 years; (v) volatility of 100%; (vi) risk
free rate of 1.5% for a total value of $12,000, which adjusted the change in fair value valuation of the derivative by $12,000
for the year ended December 31, 2015. On December 31, 2016, the Company revalued the warrants using the following variables:
(i) 22,500 warrants issued; (ii) stock price of $3.10; (iii) adjusted exercise price of $ 4.05; (iv) expected life of 3.02 years;
(v) volatility of 101%; (vi) risk free rate of 1.5% for a total value of approximately $42,000, which adjusted the change in fair
value valuation of the derivative by $30,000 for the year ended December 31, 2016.
Pursuant to the Merger
Agreement and as a condition to the Fourth Amendment (defined below), the Company was required to make a cash payment of $500,000,
issue the SOS Note and the SOS Warrant. The SOS Warrant contains a price protection feature that will automatically reduce the
exercise price if the Company enters into another financing agreement pursuant to which warrants are issued with a lower exercise
price after June 23, 2016. This initial value of $164,000 was recorded as additional Merger consideration. On December 31, 2016,
the Company evaluated the SOS Warrant using the following variables: (i) stock price of $3.10 (ii) exercise price of $25.00 (iii)
contractual life of 1.48 years; (iv) volatility of 101%; (v) risk free rate of 1.02% for a total value of approximately $144,000,
which adjusted the fair value valuation of the derivative by approximately $20,000 for the year ended December 31, 2016.
Debentures Conversion Derivative Liability
As of December 31,
2015, the Company had $6.85 million in remaining Debentures, which, subject to stockholder approval, were convertible at any time
at the holders’ option into shares of Common Stock at $20.00 per share, or 342,323 underlying conversion shares prior to
the execution of the Debenture Conversion Agreement. The Debentures have elements of a derivative due to the potential for certain
adjustments, including both the conversion option and the price protection embedded in the Debentures. The conversion option allows
the Debenture holders to convert their Debentures to underlying Common Stock at a conversion price of $20.00 per share, subject
to certain adjustments, including the requirement to reset the conversion for any subsequent offering at a lower price per share
amount. The Company values this conversion liability at each reporting period using a Monte Carlo pricing model.
On June 23, 2016,
pursuant to the terms of the Debenture Conversion Agreement, dated December 29, 2015, the Company's remaining outstanding 8% Convertible
Debentures (the “Debentures”) of approximately $6,846,000 converted automatically upon consummation of the Merger.
The conversion price was modified from $20.00 per share to $5.00 per share, resulting in the issuance of 1,369,293 shares of Common
Stock. Upon the conversion of the Debentures, the associated conversion liability of approximately $54,000 was reclassified to
additional paid-in capital. At December 31, 2016 and 2015, the Company valued the conversion feature associated with the Debentures
at $0 and $6,000, respectively. As of December 31, 2016, the remaining debentures were fully converted into 1,369,293 shares of
the Company’s common stock.
The following table
provides a summary of the recurring fair values of assets and liabilities measured at fair value
(in thousands)
:
December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,400
|
)
|
|
|
(1,400
|
)
|
Total recurring fair value measurements
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,400
|
)
|
|
$
|
(1,400
|
)
|
December 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive employment agreement
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(223
|
)
|
|
$
|
(223
|
)
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(56
|
)
|
|
|
(56
|
)
|
Convertible debenture conversion derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Total recurring fair value measurements
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(285
|
)
|
|
$
|
(285
|
)
|
The following table provides a summary
of changes in fair value of the Company’s Level 3 financial assets and liabilities as of December 31, 2016 and 2015
(in
thousands)
:
|
|
Conversion
derivative
liability
|
|
|
Bristol/
Heartland/SOS
warrant liability
|
|
|
Incentive
bonus
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
|
$
|
(6
|
)
|
|
$
|
(56
|
)
|
|
$
|
(223
|
)
|
|
$
|
(285
|
)
|
Additional liability
|
|
|
-
|
|
|
|
(164
|
)
|
|
|
(393
|
)
|
|
|
(557
|
)
|
Reversal of accrued bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
718
|
|
|
|
718
|
|
Converted to equity
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(54
|
)
|
Change in fair value of liability
|
|
|
60
|
|
|
|
(1,180
|
)
|
|
|
(102
|
)
|
|
|
(1,222
|
)
|
Balance at December 31, 2016
|
|
$
|
-
|
|
|
$
|
(1,400
|
)
|
|
$
|
-
|
|
|
$
|
(1,400
|
)
|
|
|
Conversion
derivative
liability
|
|
|
Bristol/Heartland
warrant
liability
|
|
|
Incentive
bonus
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
(1,249
|
)
|
|
$
|
(394
|
)
|
|
$
|
(40
|
)
|
|
$
|
(1,683
|
)
|
Additional liability
|
|
|
-
|
|
|
|
(56
|
)
|
|
|
(149
|
)
|
|
|
(205
|
)
|
Change in fair value of liability
|
|
|
1,243
|
|
|
|
394
|
|
|
|
(34
|
)
|
|
|
1,603
|
|
Balance at December 31, 2015
|
|
$
|
(6
|
)
|
|
$
|
(56
|
)
|
|
$
|
(223
|
)
|
|
$
|
(285
|
)
|
Assets and liabilities measured at fair
value on a nonrecurring basis.
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets
and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances.
These assets and liabilities can include proved and unproved oil and gas properties and other long-lived assets that are written
down to fair value when they are impaired or held for sale.
Proved oil and gas properties.
The
Company estimates the expected undiscounted future cash flows of its oil and natural gas properties and compares such amounts to
the carrying amount of the oil and natural gas properties to determine if the carrying amount is recoverable. If the carrying amount
exceeds the estimated undiscounted future cash flows, the Company will adjust the carrying amount of the oil and natural gas properties
to fair value. The factors used to determine fair value are subject to management’s judgement and expertise and include,
but are not limited to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated
operating and development costs using estimates or proved reserves, future commodity pricing, future production estimates, anticipated
capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing
the expected cash flows projected. These assumptions represent Level 3 inputs. Impairment of oil and gas assets for the year ended
December 31, 2016 and 2015 was $4.7 million and $24.5 million, respectively.
The following table
provides a summary of the non-recurring fair values of assets and liabilities measured at fair value
(in thousands)
:
December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Non-recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of proved oil and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
4,700
|
|
|
|
4,700
|
|
Total non-recurring fair value measurements
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,700
|
|
|
$
|
4,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of proved oil and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
24,500
|
|
|
|
24,500
|
|
Total non-recurring fair value measurements
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,500
|
|
|
$
|
24,500
|
|
The Company did not
have any transfers of assets or liabilities between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during
the years ended December 31, 2016 and 2015.
NOTE 7 – ASSET RETIREMENT OBLIGATIONS
(ARO)
The information below reconciles the value
of the asset retirement obligation for the periods presented (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Balance, beginning of year
|
|
$
|
208
|
|
|
$
|
200
|
|
Liabilities assumed from the Merger
|
|
|
777
|
|
|
|
-
|
|
Liabilities incurred
|
|
|
311
|
|
|
|
-
|
|
Accretion expense
|
|
|
132
|
|
|
|
10
|
|
Conveyance of liability with oil and gas properties conveyance
|
|
|
(92
|
)
|
|
|
-
|
|
Change in estimate
|
|
|
(79
|
)
|
|
|
(1
|
)
|
Balance, end of year
|
|
|
1,257
|
|
|
|
209
|
|
Less: current portion of ARO at end of year
|
|
|
(338
|
)
|
|
|
-
|
|
Total Long-term ARO at end of year
|
|
$
|
919
|
|
|
$
|
209
|
|
NOTE 8 – LONG-TERM DEBTS
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Term Loan:
|
|
|
|
|
|
|
|
|
6% Senior Secured Term Loan, due 2019, net of deferred financing costs and debt discount
|
|
$
|
29,214
|
|
|
$
|
-
|
|
Senior Secured Term Loan, interest at prime rate, due 2018, net of deferred financing costs and debt discount
|
|
|
-
|
|
|
|
2,492
|
|
6% note payable to SOS Investment, LLC, due 2019
|
|
|
1,000
|
|
|
|
-
|
|
Convertible Notes:
|
|
|
|
|
|
|
|
|
12% convertible related party note, due 2016, net of deferred financing costs and debt discount
|
|
|
-
|
|
|
|
1,055
|
|
12% convertible non-related party note, due 2016, net of deferred financing costs and debt discount
|
|
|
-
|
|
|
|
674
|
|
Convertible Debentures:
|
|
|
|
|
|
|
|
|
8% convertible debentures, due 2018, net of deferred financing costs and debt discount
|
|
|
|
|
|
|
6,846
|
|
Other notes payable
|
|
|
29
|
|
|
|
-
|
|
|
|
$
|
30,243
|
|
|
$
|
11,067
|
|
Less: current portion
|
|
|
(17
|
)
|
|
|
(11,067
|
)
|
|
|
$
|
30,226
|
|
|
$
|
-
|
|
Credit and Guarantee Agreement
On September 29, 2016,
the Company entered into a credit and guaranty agreement (the “Credit and Guarantee Agreement”) by and among the Company
and its wholly owned subsidiaries, Brushy, ImPetro Operating, LLC (“Operating”) and ImPetro Resources, LLC (“Resources”,
and together with Brushy and Operating, the “Initial Guarantors”), and the lenders party thereto (each a “Lender”
and together, the “Lenders”) and T.R. Winston & Company, LLC (“TRW”) acting as collateral agent.
The Credit and Guarantee
Agreement provides for a three-year senior secured term loan with initial commitments of $31 million, of which $25 million was
collected as of September 30, 2016, and the additional $6 million was collected at December 31, 2016. The initial aggregate principal
amount may be increased to a maximum principal amount of $50 million at the Company’s request and with the consent of the
Lenders holding loans in excess of 60% of the then outstanding loans pursuant to an accordion advance provision in the Credit and
Guarantee Agreement (the “Term Loan”).
In connection with
the Company’s entry into the Credit and Guarantee Agreement, it incurred commitment fees to each of the Lenders equal to
2.0% of their respective initial loan advances and advisory fees totaled to approximately $1.2 million as of December 31, 2016.
The Company accounted for the $1.2 million as deferred financing costs to be amortized over the term of the loan. As partial consideration
given to the lenders, we also amended certain warrants issued in the Series B preferred stock offering held by the lenders during
the third and fourth quarters of the year ended December 31, 2016, to purchase up to an aggregate amount of approximately 2,850,000
and approximately 672,000, shares of common stock respectively, such that the exercise price per share was lowered from $2.50 to
$0.01 on such warrants. The portion repriced in the fourth quarter was due to certain delayed funding that occurred after the initial
commitment. Additionally, each lender received a 2.0% commitment fee equal to their respective initial loan advance. All of the
amended warrants are immediately exercisable from the original issuance date, for a period of two years, subject to certain conditions.
The Company accounted for the reduction in the conversion price as a debt discount of $714,000 and will be accreted over the term
of the loan. For the year ended December 31, 2016, the Company amortized approximately $108,000 of deferred financing costs and
accreted approximately $119,000 of debt discount relating to the loan. These amounts were recorded as a component of non-cash interest
expense. As of December 31, 2016, the unamortized portion of the debt discount and deferred financing costs were $0.6 million and
$1.2 million, respectively.
The Term Loan bears
interest at a rate of 6.0% per annum and matures on September 30, 2019. The Company has the right to prepay the Term Loan, in whole
or in part, at any time at a prepayment premium equal to 6.0% of the amount repaid. Such prepayment premium must also be paid if
the Term Loan is repaid prior to maturity as a result of a change in control. In certain situations, the Credit and Guarantee Agreement
requires mandatory prepayments of the Term Loans at the request of the Lenders, including in the event of certain non-ordinary
course asset sales, the incurrence of certain debt, and receipt of proceeds in connection with insurance claims.
The Credit and Guarantee
Agreement also provides for events of default, including failure to pay any principal or interest when due, failure to perform
or observe covenants, cross-default on certain outstanding debt obligations, the failure of a Guarantor to comply with the provisions
of its Guaranty, and bankruptcy or insolvency events. The amounts under the Credit Agreement could be accelerated and be due and
payable upon an event of default.
SOS Investment LLC Note
On June 30, 2016, pursuant to the Merger
Agreement and as a condition of the Fourth Amendment, the Company was required to make a cash payment of $500,000 to SOSV LLC,
and also executed a subordinated promissory note with SOSV LLC, for $1 million, at an interest rate of 6% per annum which matures
on June 30, 2019. In conjunction with cash payment and the note, the Company also issued 200,000 warrants at an exercise price
of $25.00. The Company accounted for the cost of warrants of $0.2 million as part of the Merger transaction costs for the year
ended December 31, 2016.
Independent Bank and Promissory Note
On June 22, 2016, in
connection with the completion of the Merger, the Company, Brushy and Independent Bank (the “Lender”), Brushy’s
senior secured lender, entered into an amendment to Brushy’s forbearance agreement with the Lender (the “Fourth Amendment”),
which, among other things, provided for a pay-down of approximately $6.0 million of the principal amount outstanding on the loan
(the “Loan”), plus fees and other expenses incurred in connection with the Loan, in exchange for an extension of the
maturity date through December 15, 2016, at an interest rate of 6.5%, payable monthly. Additionally, the Company agreed to (i)
guaranty the approximately $5.4 million aggregate principal amount of the Loan, (ii) grant a lien in favor of the Lender on all
of the Company’s real and personal property, (iii) restrict the incurrence of additional debt and (iv) maintain certain deposit
accounts with various restrictions with the Lender. On September 29, 2016, in connection with the Company’s entry into the
Credit and Guarantee Agreement, the Company used part of the proceeds of the Term Loan to repay the balance of Brushy’s outstanding
indebtedness with Independent Bank in full.
Heartland Bank
On January 8, 2015,
the Company entered into the Credit Agreement with Heartland Bank (the “Credit Agreement”), as administrative agent
and the Lenders party thereto. The Credit Agreement provided for a three-year senior secured term loan in an initial aggregate
principal amount of $3 million, or the Term Loan. On December 29, 2015, after a default on an interest payment and in connection
with the Merger, the Company entered into the Forbearance Agreement with Heartland (the “Heartland Forbearance Agreement”).
The Heartland Forbearance Agreement, restricted Heartland from exercising any of its remedies until April 30, 2016, which was subject
to certain conditions, including a requirement for the Company to make a monthly interest payment to Heartland.
Following the First
Amendment to the Credit Agreement entered into on March 1, 2016, on May 4, 2016, as a result of a default on the required March
1, April 1 and May 1 interest payments pursuant to the Forbearance Agreement, the Company entered into a second amendment to the
Forbearance Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the limit on the amount of New Subordinated
Debt the Company had been permitted to raise was eliminated and the Forbearance Expiration Date was extended to May 31, 2016. As
consideration for the forgoing, the Company paid Heartland the overdue interest owed pursuant to the Term Loan and interest due
through June 23, 2016 in the approximate amount of $160,000 and reimbursement of a portion of Heartland’s fees and expenses
in an approximate amount of $53,000. During the year ended December 31, 2016, the Company amortized approximately $38,000 of debt
discount. This amount is recorded as a component of non-cash interest expense. As of December 31, 2016 and 2015, the unamortized
deferred financing costs were $0 and $38,000, respectively.
In connection with
the consummation of the Merger, on June 23, 2016, the Company repaid the entire balance of its outstanding indebtedness with Heartland
at a discount of $250,000 (recognized as a gain in other income (expense), resulting in the elimination of $2.75 million in senior
secured debt and the extinguishment of Heartland’s security interest in the assets of the Company.
Convertible Notes
From December 29, 2015
to January 5, 2016, the Company entered into 12% Convertible Subordinated Note Purchase Agreements with various lending parties,
which the Company refers to as the Purchasers, for the issuance of an aggregate principal amount of $3.75 million unsecured subordinated
convertible notes, or the Convertible Notes, which includes the $750,000 of short-term notes exchanged for Convertible Notes by
the Company and warrants to purchase up to an aggregate of approximately 1,500,000 shares of Common Stock at an exercise price
of $2.50 per share. The proceeds from this financing were used to pay a $2 million refundable deposit in connection with the Merger,
to fund approximately $1.3 million of interest payments to the Company’s lenders and for its working capital and accounts
payable.
The Convertible Notes
bear interest at a rate of 12% per annum, payable at maturity on June 30, 2016. The Convertible Notes and the accrued but unpaid
interest thereon are convertible in whole or in part from time to time at the option of the holders thereof into shares of the
Company’s Common Stock at a conversion price of $5.00. The Convertible Notes may be prepaid in whole or in part (but with
payment of accrued interest to the date of prepayment) at any time at a premium of 103% for the first 120 days and a premium of
105% thereafter, so long as no Senior Debt is outstanding. The Convertible Notes contain customary events of default, which, if
uncured, entitle each noteholder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest,
subject to certain subordination provisions.
Additionally, on March
18, 2016, the Company issued an additional aggregate principal amount of $500,000 of Convertible Notes, which have the same terms
and conditions as the Convertible Notes with the exception of the maturity date, which is April 1, 2017. The proceeds from these
Convertible Notes were used to make advances to Brushy for payment of operating expenses pending completion of the Merger. These
notes were fully converted following the consummation of the Merger.
In connection with
the closing of the Merger, on June 23, 2016, certain holders of Convertible Notes in an aggregate principal amount of approximately
$4.0 million entered into a Conversion Agreement with the Company (the "Note Conversion Agreement"). The terms of the
Note Conversion Agreement provided that the Convertible Notes were automatically converted into Common Stock upon the closing of
the Merger. Pursuant to the terms of the Note Conversion Agreement, in exchange for immediate conversion upon closing, the conversion
price of the Convertible Notes was reduced to $1.10, which resulted in the issuance of 3,636,366 shares of Common Stock. The modification
of such conversion rate resulted in a $3.4 million inducement charge recorded in other expense. Holders of these Convertible Notes
waived and forfeited approximately $198,000 rights to receive accrued but unpaid interest.
On August 3,
2016, the Company entered into the first amendment to the Convertible Notes with the remaining holders of approximately $1.8
million of Convertible Notes. Pursuant to the first amendment: (i) the maturity date was changed to January 2, 2017, (ii) the
conversion price was adjusted to $1.10 and (iii) the coupon rate was increased to 15% per annum. All accrued and unpaid
interest on the Convertible Notes would also be convertible in certain circumstances at the conversion price. Additionally,
if the aggregate principal amount outstanding on the Convertible Notes was not either converted by the holder or repaid in
full on or before the maturity date, the Company agreed to pay a 25% premium on the maturity date. The Company accounted for
the reduction in the conversion price of remaining outstanding convertible notes as an inducement expense and recognized
approximately $1.6 million in other income (expense). In exchange for the holders’ willingness to enter into the first
amendment, the Company issued to the holders additional warrants to purchase up to approximately 1.65 million shares of
Common Stock. The warrants issued were valued using the following variables: (i) stock price of $1.12; (ii) exercise price of
$2.50; (iii) contractual life of 3 years; (iv) volatility of 203%; (v) risk free rate of 0.76% for a total value of
approximately $1.63 million. This amount was recorded as an inducement expense and an increase to additional paid-in
capital.
On September 29, 2016,
in connection with the Company’s entry into the Credit and Guarantee Agreement the remaining holders of the Convertible Notes
converted the outstanding principal amount of approximately $1.8 million and accrued and unpaid interest in an amount of approximately
$138,000 into 1,772,456 shares of Common Stock.
Convertible Debentures
In numerous separate
private placement transactions between February 2011 and October 2013, the Company issued an aggregate of approximately $15.6 million
of Debentures, secured by mortgages on several of its properties. On January 31, 2014, the Company entered into a debenture conversion
agreement (the “First Conversion Agreement”) with all of the holders of the Debentures.
Pursuant to the terms
of the First Conversion Agreement, $9.0 million in Debentures (approximately $8.73 million of principal and $270,000 in interest)
was converted by the holders to shares of Common Stock at a conversion price of $20.00 per share. In addition, the Company issued
warrants to the Debenture holders to purchase one share of Common Stock for each share issued in connection with the conversion
of the Debentures, at an exercise price equal to $25.00 per share.
Under the terms of
the First Conversion Agreement, the balance of the Debentures may be converted to Common Stock on the terms provided therein (including
the terms related to the warrants) at the election of the holder, subject to receipt of stockholder approval as required by Nasdaq
continued listing requirements.
On December 29, 2015,
the Company entered into a second agreement with the holders of its Debentures, which provides for the full automatic conversion
of Debentures into shares of the Company’s Common Stock at a price of $5.00 per share, upon the receipt of requisite stockholder
approval and the consummation of the Merger. If the Debentures are converted on these terms, it would result in the issuance of
1,369,293 shares of Common Stock and the elimination of $8.08 million in short-term debt obligations including accrued but unpaid
interest which would be forfeited and cancelled upon conversion pursuant to the terms of the agreement.
On June 23, 2016,
pursuant to the terms of the Debenture Conversion Agreement, dated December 29, 2015, the Company's remaining outstanding 8% Convertible
Debentures (the “Debentures”) of approximately $6,846,000 converted automatically upon consummation of the Merger.
The conversion price was modified from $20.00 per share to $5.00 per share, resulting in the issuance of 1,369,293 shares of Common
Stock. In exchange for the reduction in conversion price, all accrued but unpaid interest of approximately $1,835,000 was forgiven
by the Debenture holders, resulting in a net gain on the modification and conversion of the Debentures of approximately $602,000
and recorded as other income and expenses in the accompanying consolidated statements of operations. Upon the conversion of the
Debentures, the associated conversion liability of approximately $54,000 was reclassified to additional paid-in capital. There
were no unamortized deferred financing costs and debt discount at December 31, 2016 and 2015, respectively.
Interest Expense
Interest expense for
the years ended December 31, 2016 and 2015 was approximately $4.9 million and $1.7 million, respectively. The non-cash interest
expense during the years ended December 31, 2016 and 2015 was approximately $4.2 million and $1.3 million, respectively. The non-cash
interest expenses consisted of non-cash interest expense and amortization of the deferred financing costs, accretion of the Debentures
payable discount, and Debentures interest paid in Common Stock.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Environmental and Governmental Regulation
At December 31, 2016,
there were no known environmental or regulatory matters which are reasonably expected to result in a material liability to the
Company. Many aspects of the oil and gas industry are extensively regulated by federal, state, and local governments in all areas
in which the Company has operations. Regulations govern such things as drilling permits, environmental protection and air emissions/pollution
control, spacing of wells, the unitization and pooling of properties, reports concerning operations, land use, and various other
matters including taxation. Oil and gas industry legislation and administrative regulations are periodically changed for a variety
of political, economic, and other reasons. As of December 31, 2016 the Company had not been fined or cited for any violations of
governmental regulations that would have a material adverse effect upon the financial condition of the Company.
Legal Proceedings
The Company may from
time to time be involved in various legal actions arising in the normal course of business. In the opinion of management, the Company’s
liability, if any, in these pending actions would not have a material adverse effect on the financial position of the Company.
The Company’s general and administrative expenses would include amounts incurred to resolve claims made against the Company.
The Company believes
there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on its results of operations
or financial condition.
Operating Leases
The Company has a
two-year operating lease for office space in San Antonio, Texas and various other operating leases on a month-to-month basis which
include office leases in Denver, Colorado and New York City, New York and corporate apartment leases in San Antonio, Texas. Rent
expense for the years ended December 31, 2016 and 2015, was approximately $201,000 and $73,000, respectively. As of December
31, 2016, the Company has approximately $0.4 million of minimum lease payments on its operating lease which consists of annual
minimum lease payments of approximately $0.2 million in 2017 and $0.2 million in 2018.
NOTE 10 – RELATED PARTY TRANSACTIONS
During the years ended
December 31, 2016 and 2015, the Company has engaged in the following transactions with related party:
|
|
|
|
December 31,
|
|
Related Party
|
|
Transactions
|
|
2016
|
|
|
2015
|
|
More than 5% Shareholder:
|
|
|
|
(In thousands)
|
|
T.R. Winston & Company LLC ("TRW")
|
|
Cash paid for Series B Preferred Stock offering fees
|
|
$
|
500
|
|
|
$
|
-
|
|
|
|
Reinvest fee for 150 shares of Series B Preferred Stock and 68,182 warrants at exercise price of $2.50
|
|
|
150
|
|
|
|
-
|
|
|
|
Cash paid for advisory fee on Convertible Notes
|
|
|
350
|
|
|
|
-
|
|
|
|
Sublet office space in New York to Lilis Energy, Inc for rent of $10,000 per month
|
|
|
15
|
|
|
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017
|
|
|
400
|
|
|
|
-
|
|
|
|
Cashless net exercised warrants to purchase 80,000 shares of Common Stock at a reset exercise price of $0.10, resulting in the issuance of 75,820 shares.
|
|
|
-
|
|
|
|
-
|
|
|
|
Total:
|
|
$
|
1,415
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven B. Dunn and Laura Dunn Revocable Trust dated 10/28/10
|
|
Conversion of convertible debentures into common stock
|
|
$
|
1,020
|
|
|
$
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
|
Bryan Ezralow (EZ Colony Partners, LLC)
|
|
Conversion of convertible debentures into common stock
|
|
$
|
1,540
|
|
|
$
|
-
|
|
|
|
Participated in the Series B Preferred offering
|
|
|
1,300
|
|
|
|
-
|
|
|
|
Total:
|
|
$
|
2,840
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Pierre Caland (Wallington Investment Holdings, Ltd.)
|
|
Conversion of convertible debentures into common stock
|
|
$
|
2,090
|
|
|
$
|
2,090
|
|
|
|
Participated in the Series B Preferred offering
|
|
|
250
|
|
|
|
-
|
|
|
|
Conversion of Series A Preferred stock into common stock
|
|
|
125
|
|
|
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017
|
|
|
300
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
2,765
|
|
|
$
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Officers:
|
|
|
|
|
|
|
|
|
|
|
Nuno Brandolini (Director)
|
|
Conversion of Series A Preferred stock into common stock
|
|
$
|
100
|
|
|
$
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017
|
|
|
250
|
|
|
|
150
|
|
|
|
Total:
|
|
$
|
350
|
|
|
$
|
150
|
|
General Merrill McPeak (Director)
|
|
Conversion of Series A Preferred stock into common stock
|
|
$
|
250
|
|
|
$
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017
|
|
|
250
|
|
|
|
250
|
|
|
|
Total:
|
|
$
|
500
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Glenn Dawson (Director)
|
|
Participated in the Series B Preferred offering
|
|
$
|
125
|
|
|
$
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017
|
|
|
50
|
|
|
|
50
|
|
|
|
Total:
|
|
$
|
175
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald D Ormand (Executive Chairman)
|
|
Participated in the Series B Preferred offering through Perugia Investments LP
(1)
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
|
Conversion of convertible debentures into common stock through Perugia Investments LP
|
|
|
500
|
|
|
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017 through Brian Trust
(2)
|
|
|
1,150
|
|
|
|
1,150
|
|
|
|
Consulting fee paid to MLV & Co. LLC (“MLC”) which Mr. Ormand previously was the Managing Director and Head of the Energy Investment Banking Group at MLV
|
|
|
100
|
|
|
|
150
|
|
|
|
Total:
|
|
$
|
2,750
|
|
|
$
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Abraham Mirman (Chief Executive Officer and Director)
|
|
Participated in the Series B Preferred offering through Bralina Group, LLC
(3)
|
|
$
|
1,650
|
|
|
$
|
-
|
|
|
|
Conversion of Series A Preferred stock into common stock
|
|
|
250
|
|
|
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017 through Bralina Group, LLC
|
|
|
750
|
|
|
|
1,000
|
|
|
|
Total:
|
|
$
|
2,650
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Nanken (former Executive Vice President and Chief Financial Officer)
|
|
Participated in the Series B Preferred offering through KKN Holdings LLC
(4)
|
|
$
|
200
|
|
|
$
|
-
|
|
|
|
Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017 through KKN Holdings LLC
|
|
|
100
|
|
|
|
-
|
|
|
|
Total:
|
|
$
|
300
|
|
|
$
|
-
|
|
|
(1)
|
Mr. Ormand is the manager of Perugia Investments L.P. ("Perugia")
and has sole voting and dispositive power over the securities held by Perugia
|
|
(2)
|
An irrevocable trust managed by Jerry Ormand, Mr. Ormand's
brother, as trustee and whose beneficiaries are adult children of Mr. Ormand
|
|
(3)
|
Mr. Mirman has shared voting and dispositive power over
the securities held by The Bralina Group, LLC with Susan Mirman.
|
|
(4)
|
Mr, Nanke is the natural person with sole voting and dispositive
power over the securities held by KKN Holdings LLC.
|
NOTE 11 – INCOME TAXES
The income tax provision
(benefit) for the years ended December 31, 2016 and 2015 consisted of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
U.S. Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(2,971
|
)
|
|
|
(10,560
|
)
|
|
|
|
|
|
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(124
|
)
|
|
|
(914
|
)
|
|
|
|
(3,095
|
)
|
|
|
(11,474
|
)
|
Change in valuation allowance
|
|
|
3,095
|
|
|
|
11,474
|
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The tax effects of
temporary differences that give rise to the Company’s deferred tax asset as of December 31, 2016 and 2015 consisted of the
following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Oil and gas properties and equipment
|
|
$
|
5,156
|
|
|
$
|
3,848
|
|
Net operating loss carry-forward
|
|
|
42,017
|
|
|
|
41,389
|
|
Share based compensation
|
|
|
2,135
|
|
|
|
1,279
|
|
Abandonment obligation
|
|
|
445
|
|
|
|
77
|
|
Derivative instruments
|
|
|
-
|
|
|
|
21
|
|
Accrued liabilities
|
|
|
-
|
|
|
|
37
|
|
Debt conversion costs
|
|
|
482
|
|
|
|
488
|
|
Other
|
|
|
28
|
|
|
|
29
|
|
Total deferred tax asset
|
|
|
50,263
|
|
|
|
47,168
|
|
Valuation allowance
|
|
|
(50,263
|
)
|
|
|
(47,168
|
)
|
Deferred tax asset , net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Oil and gas properties and equipment
|
|
$
|
-
|
|
|
$
|
-
|
|
Total deferred tax liability
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
Reconciliation of the
Company’s effective tax rate to the expected U.S. federal tax rate is:
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Effective federal tax rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State tax rate, net of federal benefit
|
|
|
1.42
|
%
|
|
|
2.94
|
%
|
Change in fair value derivative liability
|
|
|
-1.32
|
%
|
|
|
1.42
|
%
|
Debt discount amortization
|
|
|
-4.11
|
%
|
|
|
-0.01
|
%
|
Share based compensation differences and forfeitures
|
|
|
-2.28
|
%
|
|
|
-4.18
|
%
|
Change in rate
|
|
|
-5.90
|
%
|
|
|
2.34
|
%
|
Other permanent differences
|
|
|
-12.29
|
%
|
|
|
-1.07
|
%
|
Other
|
|
|
-0.10
|
%
|
|
|
0.01
|
%
|
Valuation allowance
|
|
|
-9.42
|
%
|
|
|
-35.45
|
%
|
Net
|
|
|
-
|
%
|
|
|
-
|
%
|
The net operating losses
for these years will not be available to reduce future taxable income until the returns are filed. Assuming these returns are filed,
as of December 31, 2016 and 2015, the Company had net operating loss carry-forwards for federal income tax purposes of approximately
$118.6 million and $112.0 million, respectively, available to offset future taxable income. To the extent not utilized, the net
operating loss carry-forwards as of December 31, 2016 will expire beginning in 2027 through 2036. The net operating loss carryovers
may be subject to reduction or limitation by application of Internal Revenue Code Section 382 from the result of ownership changes.
A full Section 382 analysis has not been prepared and the Company's net operating losses could be subject to limitation under Section
382.
In assessing the need
for a valuation allowance on the Company’s deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon
whether future book income is sufficient to reverse existing temporary differences that give rise to deferred tax assets, as well
as whether future taxable income is sufficient to utilize net operating loss and credit carryforwards. Assessing the need for,
or the sufficiency of, a valuation allowance requires the evaluation of all available evidence, both positive and negative. Management
had no positive evidence to consider. Negative evidence considered by management includes cumulative book and tax losses in recent
years, forecasted book and tax losses, no taxable income in available carryback years, and no tax planning strategies contemplated
to realize the valued deferred tax assets.
As of December 31,
2016 and 2015, management assessed the available positive and negative evidence to estimate if sufficient future taxable income
would be generated to use the Company’s deferred tax assets and determined that it is not more-likely-than-not that the deferred
tax assets would be realized in the near future. Therefore, the Company recorded a full valuation allowance of approximately $50.
million and $47.2 million on its deferred tax assets as of December 31, 2016 and 2015, respectively.
NOTE 12 – STOCKHOLDERS’ EQUITY
May 2014 Private Placement - Series A 8% Convertible Preferred
Stock
On May 30, 2014, the
Company consummated a private placement of 7,500 shares of Series A Preferred Stock, along with detachable warrants to purchase
up to 155,602 shares of Common Stock, at an exercise price of $28.90 per share, for aggregate gross proceeds of $7.50 million.
The Series A Preferred Stock has a par value of $0.0001 per share, a stated value of $1,000 per share, a conversion price of $24.10
per share, and a liquidation preference to any junior securities. Except as otherwise required by law, holders of Series A Preferred
Stock shall not be entitled to voting rights, except with respect to proposals to alter or change adversely the powers, preferences
or rights given to the Series A Preferred Stock, authorize or create any class of stock ranking senior to the Series A Preferred
Stock as to dividends, redemption or distribution of assets upon liquidation, amend its certificate of incorporation or other charter
documents in any manner that adversely affects any rights of the Preferred Stock holder, or increase the number of authorized Series
A Preferred Stock. The holders of the Series A Preferred Stock are entitled to receive a dividend payable, at the election of the
Company (subject to certain conditions as set forth in the Certificate of Designations), in cash or shares of Common Stock, at
a rate of 8% per annum payable a day after the end of each quarter. The Series A Preferred Stock is convertible at any time at
the option of the holders, or at the Company’s discretion when the Common Stock trades above $75.00 for ten consecutive days
with a daily dollar trading volume above $300,000. In addition, the Company has the right to redeem the shares of Series A Preferred
Stock, along with any accrued and unpaid dividends, at any time, subject to certain conditions as set forth in the Certificate
of Designations. In addition, holders of the Series A Preferred Stock can require the Company to redeem the Series A Preferred
upon the occurrence of certain triggering events, including (i) failure to timely deliver shares of Common Stock after valid delivery
of a notice of conversion by the holder; (ii) failure to have available a sufficient number of authorized and unreserved shares
of Common Stock to issue upon conversion; (iii) the occurrence of certain change of control transactions; (iv) the occurrence of
certain events of insolvency; and (v) the ineligibility of the Company to electronically transfer its shares via the Depository
Trust Company or another established clearing corporation.
In connection with
issuance of the Series A Preferred Stock, the beneficial conversion feature (“BCF”) was valued at $2.21 million and
the fair value of the warrant was valued at $1.35 million. The aggregate value of the Series A Preferred Stock and warrant, valued
at $3.56 million, was considered a deemed dividend and the full amount was expensed immediately. The Company determined the transaction
created a beneficial conversion feature which is calculated by taking the net proceeds of $6.79 million and valuing the warrants
as of May 2014, utilizing a Black Scholes option pricing model. The inputs for the pricing model are: $24.80 market price per share;
exercise price of $28.90 per share; expected life of 3 years; volatility of 70%; and risk free rate of 0.20%. The Company calculated
the total consideration given to be $8.40 million comprised of $6.80 million for the Series A Preferred and $1.6 million for the
warrants. The Company deemed the value of the beneficial conversion feature to be $2.21 million and immediately accreted that amount
as a deemed dividend. As of December 31, 2015, the Company has accrued a cumulative dividend for approximately $0.6 million.
On June 23, 2016, in
connection with the completion of the Merger, each outstanding share of the Company’s Series A Preferred Stock (the “Series
A Preferred Stock”) automatically converted into Common Stock at a conversion price of $5.00, resulting in the issuance of
1,500,000 shares of Common Stock with a market value of $1.20 per share. As consideration for the automatic conversion, the Company
reduced the conversion price on the Series A Preferred Stock from $24.10 to $5.00. The modification of such conversion price and
forgiveness of accrued but unpaid dividend of approximately $0.9 million resulted in a net loss on the conversion of the Series
A Preferred Stock of approximately $0.5 million.
Conditionally Redeemable 6% Preferred
Stock
In August 2014, the
Company designated 2,000 shares of its authorized preferred stock as Conditionally Redeemable 6% Preferred Stock, or the Redeemable
Preferred. All 2,000 shares of Redeemable Preferred were issued in September 2014, pursuant to the Settlement Agreement with Hexagon.
The Redeemable Preferred has the same par value and stated value characteristics as the Series A Preferred Stock, yet the Conditionally
Redeemable 6% Preferred Stock is not convertible into Common Stock or any other securities of the Company. Except as otherwise
required by law, holders of the Redeemable Preferred shall not be entitled to voting rights.
The Redeemable Preferred
Stock bears a 6% dividend per annum, payable quarterly, and is redeemable at face value (plus any accrued and unpaid dividends)
at any time at the Company’s option, or at the Holders option upon the Company’s achievement of certain production
and reserves thresholds. These thresholds include, the Company’s annualized gross production average for 90 consecutive days
at 2,500 BOE per day or higher or the Company’s PV-10 value of its producing developed properties filed with the Securities
and Exchange Commission exceeds $50 million. As of December 31, 2016 and 2015, the Company has accrued a cumulative dividend of
$240,000 and $120,000, respectively. The total outstanding Redeemable Preferred was valued at approximately $1.9 million and $1.2
million at December 31, 2016 and 2015, respectively.
Series B 6% Convertible Preferred Stock
On June 15, 2016, the
Company entered into a purchase agreement for the private placement of 20,000 shares of its Series B Preferred Stock, along with
detachable warrants to purchase up to 9,090,926 shares of Common Stock, at an exercise price of $2.50 per share, for aggregate
gross proceeds of $20 million.
Each share of Series
B Preferred Stock is convertible, at the option of the holder, subject to adjustment under certain circumstances into shares of
Common Stock of the Company at a conversion price of $1.10. Except as otherwise required by law, holders of the Series B Preferred
Stock shall not be entitled to voting rights. The Series B Preferred Stock is convertible at any time, subject to certain conditions,
at the option of the holders, or at the Company’s discretion when the Company’s Common Stock trades above $10.00 (subject
to any reverse or forward stock splits and the like) for ten consecutive days. In addition, the Company has the right to redeem
the shares of Series B Preferred Stock, along with any accrued and unpaid dividends, at any time, subject to certain conditions
as set forth in the Certificate of Designation. The holders of the Series B Preferred Stock are entitled to receive a dividend
payable (subject to certain conditions as set forth in the Certificate of Designation), in cash or shares of Common Stock of the
Company, at the election of the Company, at a rate of 6% per annum.
The Series B Preferred
Stock is classified as equity based on the following criteria: i) the redemption of the instrument at the control of the Company;
ii) the instrument is convertible into a fixed amount of shares at a conversion price of $1.10; iii) the instrument is closely
related to the underlying Company’s Common Stock; iv) the conversion option is indexed to the Company’s stock; v) the
conversion option cannot be settled in cash and only can be redeemed at the discretion of the Company; vi) and the Series B Preferred
Stock is not considered convertible debt.
Shares of the Series
B Preferred Stock and related warrants were valued using the relative fair value method. The Company determined the transaction
created a beneficial conversion feature of $7.9 million, which was expensed immediately and was calculated by taking the net proceeds
of approximately $15.2 million and valuing the warrants as of June 15, 2016, utilizing a Black Scholes option pricing model. The
inputs for the pricing model are: $1.20 market price per share; exercise price of $2.50 per share; contractual life of 2 years;
volatility of 238%; and risk free rate of 0.78%. As of December 31, 2016, the total value of the issued and outstanding shares
of Series B Preferred Stock was approximately $13.4 million.
As of December 31,
2016, approximately 3,000 shares of the Series B Preferred Stock plus approximately $0.06 million of cumulative dividend payable
were converted into approximately 2.7 million shares of the Company’s Common Stock at conversion price of $1.10 per share.
As of December 31, 2016, the Company accrued approximately $0.6 million of cumulative dividend for Series B Preferred Stock.
Warrants
A summary of warrant activity for the twelve
months ended December 31, 2016 and 2015 (adjusted to reflect 1-for10 reverse stock split on June 23, 2016):
|
|
Warrants
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at January 1, 2015
|
|
|
1,700,707
|
|
|
$
|
1.76
|
|
Warrants issued to consultants
|
|
|
60,000
|
|
|
|
16.30
|
|
Warrants issued to Heartland
|
|
|
22,500
|
|
|
|
8.70
|
|
Warrants issued with Convertible Notes
|
|
|
1,180,000
|
|
|
|
2.50
|
|
Exercised, forfeited, or expired
|
|
|
(484,891
|
)
|
|
|
(61.30
|
)
|
Outstanding at December 31, 2015
|
|
|
2,478,316
|
|
|
$
|
14.80
|
|
Warrants issued to Series B Preferred Stock
|
|
|
9,090,926
|
|
|
|
1.54
|
|
Warrants issued for fees
|
|
|
1,272,727
|
|
|
|
1.30
|
|
Warrants issued with Convertible Notes
|
|
|
1,145,238
|
|
|
|
2.47
|
|
Warrants issued to amend Convertible Notes
|
|
|
1,648,267
|
|
|
|
2.50
|
|
Additional warrants issued to Bristol
|
|
|
541,026
|
|
|
|
3.12
|
|
Warrants issued to SOS in connection with the Merger
|
|
|
200,000
|
|
|
|
2.50
|
|
Exercised, forfeited, or expired
|
|
|
(460,989
|
)
|
|
|
(34.74
|
)
|
Outstanding at December 31, 2016
|
|
|
15,915,511
|
|
|
$
|
3.34
|
|
The aggregate intrinsic
value associated with outstanding warrants was approximately $18.3 million at December 31, 2016, as the strike price of all warrants
exceeded the market price for Common Stock, based on the Company’s closing Common Stock price of $3.10. The weighted average
remaining contract life was 1.64 years and 2.13 years as of December 31, 2016 and 2015.
During the year ended
December 31, 2016, the Company issued approximately 13.16 million warrants to purchase shares of Common Stock to Purchasers of
the Convertible Notes, Purchasers of Series B Preferred Stock and placement agent fees in connection with the Series B Preferred
Stock Offering. The Company also issued a warrant to purchase 200,000 shares of Common Stock to Brushy's subordinated lender in
exchange for extinguishment of certain debt owed by Brushy.
The fair value of
each stock warrant issued is determined using the Black-Scholes-Merton pricing model based on the following variables as summarized
in the table below
(fair value in thousands):
|
|
Fair Value
of Warrants
|
|
|
Number
of
Warrants
|
|
|
Stock Price
|
|
|
Exercise
Price
|
|
|
Expected
Volatility
|
|
|
Risk Free
Rate
|
|
|
Contractual
Life
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for Series B Preferred Stock
|
|
$
|
9,486
|
|
|
|
9,090,926
|
|
|
$
|
1.30
|
|
|
$
|
2.50
|
|
|
|
238
|
%
|
|
|
0.78
|
%
|
|
2 years
|
Warrants issued for Series B Preferred Stock offering fees
|
|
$
|
1,590
|
|
|
|
1,272,724
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
|
|
238
|
%
|
|
|
0.92
|
%
|
|
3 years
|
Warrants issued with Convertible Notes
|
|
$
|
1,446
|
|
|
|
975,051
|
|
|
$
|
1.70
|
|
|
$
|
1.00
|
|
|
|
245
|
%
|
|
|
0.75
|
%
|
|
2 years
|
Warrants issued with Convertible Notes
|
|
$
|
277
|
|
|
|
170,187
|
|
|
$
|
1.70
|
|
|
$
|
1.10
|
|
|
|
245
|
%
|
|
|
0.75
|
%
|
|
3 years
|
Warrants issued to amend convertible debts
|
|
$
|
1,625
|
|
|
|
1,648,270
|
|
|
$
|
1.12
|
|
|
$
|
2.50
|
|
|
|
203
|
%
|
|
|
0.76
|
%
|
|
3 years
|
Warrants issued to SOS
|
|
$
|
170
|
|
|
|
200,000
|
|
|
$
|
1.20
|
|
|
$
|
25.00
|
|
|
|
199
|
%
|
|
|
0.76
|
%
|
|
3 years
|
Additional warrants issued to Bristol
|
|
$
|
1,024
|
|
|
|
541,026
|
|
|
$
|
3.10
|
|
|
$
|
3.12
|
|
|
|
101
|
%
|
|
|
1.38
|
%
|
|
3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for bridge term loan
|
|
$
|
1,222
|
|
|
|
1,180,000
|
|
|
$
|
2.48
|
|
|
$
|
2.89
|
|
|
|
170
|
%
|
|
|
0.20
|
%
|
|
3 years
|
Warrants issued for consultants
|
|
$
|
425
|
|
|
|
60,000
|
|
|
$
|
23.30
|
|
|
$
|
42.50
|
|
|
|
99
|
%
|
|
|
1.29
|
%
|
|
5 years
|
Warrants issued for Heartland Bank
|
|
$
|
56
|
|
|
|
22,500
|
|
|
$
|
25.00
|
|
|
$
|
25.00
|
|
|
|
99
|
%
|
|
|
1.29
|
%
|
|
5 years
|
In connection with
the May Financing, in exchange for additional consideration in the form of participation in the May Convertible Notes offering,
certain Purchasers received amended and restated warrants to purchase approximately 620,000 shares of Common Stock, which reduced
the exercise price of the warrants issued to these Purchasers in each of the prior two Convertible Notes issuances from $2.50 to
$0.10, 80,000 of which were subsequently exercised. Additionally, during the three months ended June 30, 2016, in exchange for
several offers to immediately exercise a portion of each investor’s outstanding warrants issued between 2013 and 2014, the
Company reduced the exercise price on warrants to purchase a total of 416,454 shares of Common Stock ranging from $42.50 to $25.00
per share to $0.10 per share, of which a total of 315,990 were subsequently exercised, resulting in the issuance of an aggregate
amount of 300,706 shares of Common Stock due to certain cashless exercises. The Company accounted for the reduction in the exercise
price as an inducement expense and recognized $1.72 million in other income (expense).
Additionally, in connection
with the Credit and Guarantee Agreement, as partial consideration to the Lenders, the Company also amended certain warrants issued
in the Series B private placement held by the Lenders to purchase up to an aggregate amount of approximately 3.5 million shares
of Common Stock to date, such that the exercise price per share was lowered from $2.50 to $0.01 on such warrants. The number of
warrants amended for each Lender was based on the amount of each Lender’s respective participation in the initial Term Loan
relative to the amount invested in the Series B private placement. All of the amended warrants are immediately exercisable from
the original issuance date, for a period of two years, subject to certain conditions. For a more detailed description of the terms
of the Credit and Guarantee Agreement and the warrant reprice see “Note 8—Loan Agreements—Credit and Guarantee
Agreement.”
NOTE 13 – SHARE BASED AND OTHER COMPENSATION
Share-Based Compensation
On April 20, 2016,
the Company’s Board and the Compensation Committee of the Board approved the Company’s 2016 Omnibus Incentive Plan
(the “2016 Plan”). On November 3, 2016, the Company’s stockholders voted to increase number of shares of Common
Stock authorized for issuance under the 2016 Plan to 10.0 million.
During the year ended
December 31, 2016, the Company granted 120,000 shares of restricted Common Stock to certain nonemployee directors in connection
with each of their appointment anniversaries pursuant to each director's nonemployee director award agreement and 85,000 shares
of restricted Common Stock as Board fees for the quarter ended December 31, 2015, paid in stock in lieu of cash. During the year
ended December 31, 2016, the Company also issued (i) 10,000 restricted stock units and options to purchase 45,000 shares of Common
Stock under the 2016 Plan to a newly appointed director pursuant to his nonemployee director award and 32,052 shares of restricted
common stock as compensation for consulting services. Additionally, during the year ended December 31, 2016, the Company granted
options to purchase a total of 5,683,500 shares of Common Stock to management and employees under the 2016 Plan.
During the year ended
December 31, 2016, certain of the Company's employees, directors and consultants forfeited 26,483 restricted stock units and 335,000
options to purchase Common Stock previously granted in connection with various terminations and forfeitures.
As a result, as of
December 31, 2016, the Company had 149,584 restricted stock units, 1,068,305 restricted shares, and 5,956,833 options to purchase
shares of Common Stock outstanding to employees and directors. Options issued to employees vest in equal installments over specified
time periods during the service period or upon achievement of certain performance based operating thresholds.
The Company requires
that employees and directors pay the tax on equity grants in order to issue the shares and there is currently no cashless exercise
option. As of December 31, 2016, 149,584 restricted stock units and 1,780,052 restricted shares have been granted, but have not
been issued.
Compensation Costs
(in thousands)
|
|
As of December 31, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Stock
Options
|
|
|
Restricted
Stock
|
|
|
Total
|
|
|
Stock
Options
|
|
|
Restricted
Stock
|
|
|
Total
|
|
Stock-based compensation expensed
|
|
$
|
4,475
|
|
|
$
|
2,398
|
|
|
$
|
6,873
|
|
|
$
|
2,191
|
|
|
$
|
469
|
|
|
$
|
2,660
|
|
Unamortized stock-based compensation costs
|
|
$
|
5,200
|
|
|
$
|
1,249
|
|
|
$
|
6,449
|
|
|
$
|
2,091
|
|
|
$
|
266
|
|
|
$
|
2,357
|
|
Weighted average amortization period remaining*
|
|
|
1.68
|
|
|
|
1.45
|
|
|
|
|
|
|
|
2.18
|
|
|
|
1.05
|
|
|
|
|
|
* Only includes directors and employees which the options vest
over time instead of performance criteria which the performance criteria have not been met as of December 31, 2016 and 2015.
Restricted Stock
Summary of non-cash compensation in Statement
of Changes in Stockholders’ Equity:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Statement of Stockholder’s Equity:
|
|
|
|
|
|
|
|
|
Common stock issued for directors’ fees
|
|
$
|
85
|
|
|
$
|
215
|
|
Common stock issued for officer and Board compensation
|
|
|
120
|
|
|
|
-
|
|
Stock based compensation for vesting of restricted stock
|
|
|
-
|
|
|
|
469
|
|
Stock based compensation for issuance of stock options
|
|
|
4,475
|
|
|
|
2,191
|
|
Stock based compensation for issuance of restricted stock
|
|
|
2,398
|
|
|
|
-
|
|
Common stock issued for professional services
|
|
|
-
|
|
|
|
150
|
|
Fair value of warrants issued for professional services
|
|
|
-
|
|
|
|
425
|
|
Total non-cash compensation in Statement of Changes in Stockholders’ Equity
|
|
$
|
7,078
|
|
|
$
|
3,450
|
|
A summary of restricted stock grant activity
pursuant to the 2016 Plan for the year ended December 31, 2016 is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Price
|
|
Outstanding at January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
1,780,052
|
|
|
|
1.54
|
|
Vested and issued
|
|
|
(711,747
|
)
|
|
|
(1.75
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2016
|
|
|
1,068,305
|
|
|
$
|
1.55
|
|
There was no restricted stock grant activity for the year ended
December 31, 2015.
A summary of restricted stock unit grant
activity pursuant to the 2012 Plan for the years ended December 31, 2016 and 2015 is presented below. Share activities for the
year ended December 31, 2015 have been adjusted for 1-for-10 reverse stock split on June 23, 2016.
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Price
|
|
Outstanding at January 1, 2015
|
|
|
163,067
|
|
|
$
|
24.40
|
|
Granted
|
|
|
114,501
|
|
|
|
9.00
|
|
Vested and issued
|
|
|
(77,835
|
)
|
|
|
6.60
|
|
Forfeited
|
|
|
(12,833
|
)
|
|
|
22.70
|
|
Outstanding at December 31, 2015
|
|
|
186,900
|
|
|
|
12.29
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested and issued
|
|
|
(10,834
|
)
|
|
|
(18.75
|
)
|
Forfeited
|
|
|
(26,482
|
)
|
|
|
(16.15
|
)
|
Outstanding at December 31, 2016
|
|
$
|
149,584
|
|
|
$
|
10.56
|
|
As of December 31,
2016, the total unrecognized compensation costs related to 1,217,889 unvested shares of restricted stock was approximately $1.2
million, which is expected to be recognized over a weighted-average remaining services period of 1.45 year. As of December 31,
2015, the Company had 151,900 shares vested but unissued and total unrecognized compensation cost related to the 34,999 unvested
shares of restricted stock was approximately $266,000, which is expected to be recognized over a weighted-average remaining service
period of 1.05 years.
Stock Options
A summary of stock
options activity for the years ended December 31, 2016 and 2015 is presented below:
|
|
|
|
|
|
|
|
Stock Options Outstanding and
Exercisable
|
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of Options
Vested/
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
Outstanding at January 1, 2015
|
|
|
358,333
|
|
|
$
|
21.60
|
|
|
|
138,333
|
|
|
|
4.24
|
|
Granted
|
|
|
480,000
|
|
|
$
|
12.60
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(230,000
|
)
|
|
$
|
(24.60
|
)
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
608,333
|
|
|
$
|
14.60
|
|
|
|
296,666
|
|
|
|
4.10
|
|
Granted
|
|
|
5,683,500
|
|
|
|
2.14
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(335,000
|
)
|
|
|
(5.34
|
)
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
5,956,833
|
|
|
$
|
2.04
|
|
|
|
2,208,757
|
|
|
|
1.68
|
|
During 2016, option
to purchase 5,683,500 shares of the Company’s common stock were granted under the 2016 Plan. The weighted average fair values
of these options of $1.38. The fair values were determined using the Black-Scholes-Merton option valuation method assuming no dividends,
a risk-free interest rate of 1.08%, a weighted average expected life of 4.12 years and weighted-average volatility of 152%
As of December 31,
2016, total unrecognized compensation costs relating to the outstanding options was $5.2 million, which is expected to be recognized
over the remaining vesting period of approximately 3.68 years.
The outstanding options
have an intrinsic value of approximately $12.3 million at December 31, 2016.
During the year ended
December 31, 2016 and 2015, the Company issued options to purchase shares of Common Stock to certain officers and directors. The
options are valued using a Black Scholes model and amortized over the life of the option. During the years ended December 31, 2016
and 2015, the Company amortized $4.5 million and $2.19 million, respectively relating to options outstanding.
NOTE 14 –
Supplemental
Non-cash Transactions
The following table
presents information about supplemental cash flows for the years ended December 31, 2016 and 2015
(in thousands)
;
|
|
2016
|
|
|
2015
|
|
Non-cash investing and financing activities excluded from the statement of cash flows:
|
|
|
|
|
|
|
|
|
Common stock issued for Series A Preferred Stock and accrued dividends
|
|
|
7,682
|
|
|
|
-
|
|
Common stock issued for convertible notes and accrued interest
|
|
|
14,872
|
|
|
|
-
|
|
Common stock issued for Brushy’s common stock
|
|
|
7,111
|
|
|
|
-
|
|
Common stock issued for Series B Preferred Stock and accrued dividends
|
|
|
3,230
|
|
|
|
-
|
|
Warrants issued for fees associated with Series B Preferred Stock issuance
|
|
|
1,590
|
|
|
|
-
|
|
Warrants issued for Series B Preferred Stock issuance and recorded as a deemed dividend
|
|
|
7,879
|
|
|
|
-
|
|
Fair value of warrants issued as debt discount and financing costs
|
|
|
2,192
|
|
|
|
1,222
|
|
Disposition of oil and gas assets for elimination of accrued expense for drilling
|
|
|
-
|
|
|
|
5,198
|
|
NOTE 15 – SUBSEQUENT EVENTS
Credit Agreement Drawdown
On February 7, 2017,
pursuant to the terms of the Credit Agreement, we exercised the accordion advance feature, increasing the aggregate principal amount
outstanding under the term loan from $31 million to $38.1 million. The total availability for borrowing remaining under the Credit
Agreement is $11.9 million. We intend to use the proceeds to fund its drilling and development program, for working capital and
for general corporate purposes.
As partial consideration,
we also amended certain warrants issued in the June 2016 private placement held by the Lenders to purchase up to an aggregate amount
of approximately 738,638 shares of common stock such that the exercise price per share was lowered from $2.50 to $0.01 on such
warrants The number of warrants amended for each Lender was based on the amount of each Lender’s respective participation
in the initial Term Loan relative to the amount invested in the June 2016 private placement. All of the amended warrants are immediately
exercisable from the original issuance date, for a period of two years, subject to certain conditions.
March 2017 Private Placement
On February 28, 2017,
we entered into a Securities Subscription Agreement (the “Subscription Agreement”) with certain institutional and
accredited investors in connection with a private placement (the “March 2017 Private Placement”) to sell 5.2 million
units, consisting of approximately 5.2 million shares of common stock and warrants to purchase approximately an additional 2.6
million. Each unit consists of one share of common stock and a warrant to purchase 0.50 shares of common stock (each, a “Unit”),
at a price per unit of $3.85. Each warrant has an exercise price of $4.50 and may be subject to redemption by the Company, upon
prior written notice, if the price of the Company’s common stock closes at or above $6.30 for twenty trading days during
a consecutive thirty trading day period. The Offering closed on March 6, 2017.
We expect to use the
net proceeds from the Offering to support our planned 2017 capital budget, and for general corporate purposes including working
capital.
The securities to be
sold in the private placement have not been registered under the Securities Act or any state securities laws and may not be offered
or sold in the United States absent registration or an applicable exemption from registration. However, in conjunction with the
closing of the March 2017 Private Placement, we have also entered into a registration rights agreement whereby we agreed to use
our reasonable best efforts to register, on behalf of the investors, the shares of common stock underlying the Units and the shares
of common stock underlying the warrants no later than April 1, 2017.
Our 2017 capital budget may require additional
financing above the level of cash generated by our operations and proceeds from recent financing activities. We can provide
no assurance that additional financing would be available to us on acceptable terms, if
NOTE 16 – SUPPLEMENTAL OIL AND GAS
RESERVE INFORMATION (UNAUDITED)
The following table sets forth information
for the years ended December 31, 2016 and 2015 with respect to changes in the Company's proved (i.e. proved developed and undeveloped)
reserves:
|
|
Crude Oil
(Bbls)
|
|
|
Natural Gas
(Mcf)
|
|
December 31, 2014
|
|
|
899,727
|
|
|
|
4,237,241
|
|
Purchase of reserves
|
|
|
-
|
|
|
|
-
|
|
Revisions of previous estimates
|
|
|
(859,230
|
)
|
|
|
(4,063,500
|
)
|
Extensions, discoveries
|
|
|
-
|
|
|
|
-
|
|
Sale of reserves
|
|
|
-
|
|
|
|
-
|
|
Production
|
|
|
(7,067
|
)
|
|
|
(32,291
|
)
|
December 31, 2015
|
|
|
33,430
|
|
|
|
141,450
|
|
Purchase of reserves
|
|
|
93,972
|
|
|
|
292,018
|
|
Revisions of previous estimates
|
|
|
455,202
|
|
|
|
3,506,794
|
|
Extensions, discoveries
|
|
|
|
|
|
|
|
|
Sale of reserves
|
|
|
|
|
|
|
|
|
Production
|
|
|
(31,899
|
)
|
|
|
(68,756
|
)
|
December 31, 2016
|
|
|
550,705
|
|
|
|
3,871,506
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Reserves, included above:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
50,185
|
|
|
|
197,146
|
|
Balance, December 31, 2015
|
|
|
33,430
|
|
|
|
141,450
|
|
Balance, December 31, 2016
|
|
|
550,705
|
|
|
|
3,871,506
|
|
Proved Undeveloped Reserves, included above:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
849,542
|
|
|
|
4,040,095
|
|
Balance, December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
As of December 31,
2016 and December 31, 2015, the Company had estimated proved reserves of 550,705 and 33,430 barrels of oil, respectively and 3,871,506
and 141,450 thousand cubic feet (“MCF”) of natural gas, respectively. The Company’s reserves are comprised of 46%
and 59% crude oil and 54% and 41% natural gas on an energy equivalent basis, as of December 31, 2016 and December 31, 2015, respectively.
The following
values for the December 31, 2016 and December 31, 2015 oil and gas reserves are based on the 12 month arithmetic average first
of month price January through December 31; resulting in a natural gas price of $2.05 and $2.79 per MMBtu (NYMEX price), respectively,
and crude oil price of $37.30 and $42.59 per barrel (West Texas Intermediate price), respectively. All prices are then further
adjusted for transportation, quality and basis differentials.
The following summary sets forth the Company's
future net cash flows relating to proved oil and gas reserves
(in thousands)
:
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Future oil and gas sales
|
|
$
|
28,514
|
|
|
$
|
1,819
|
|
Future production costs
|
|
|
(15,939
|
)
|
|
|
(983
|
)
|
Future development costs
|
|
|
(3,388
|
)
|
|
|
-
|
|
Future income tax expense (1)
|
|
|
-
|
|
|
|
-
|
|
Future net cash flows
|
|
|
9,187
|
|
|
|
836
|
|
10% annual discount
|
|
|
(2,531
|
)
|
|
|
(228
|
)
|
Standardized measure of discounted future net cash flows
|
|
$
|
6,656
|
|
|
$
|
608
|
|
The principal sources of change in the
standardized measure of discounted future net cash flows are
(in thousands):
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
608
|
|
|
$
|
23,254
|
|
Sales of oil and gas, net
|
|
|
(1,989
|
)
|
|
|
(146
|
)
|
Net change in prices and production costs
|
|
|
(309
|
)
|
|
|
(26,115
|
)
|
Net change in future development costs
|
|
|
4,617
|
|
|
|
20,626
|
|
Extensions and discoveries
|
|
|
-
|
|
|
|
-
|
|
Acquisition of reserves
|
|
|
7,919
|
|
|
|
-
|
|
Sale / conveyance of reserves
|
|
|
-
|
|
|
|
-
|
|
Revisions of previous quantity estimates
|
|
|
1,087
|
|
|
|
(19,336
|
)
|
Previously estimated development costs incurred
|
|
|
(8,942
|
)
|
|
|
-
|
|
Net change in income taxes
|
|
|
-
|
|
|
|
-
|
|
Change in timing and other
|
|
|
3,630
|
|
|
|
-
|
|
Accretion of discount
|
|
|
35
|
|
|
|
2,325
|
|
Balance at end of period
|
|
$
|
6,656
|
|
|
$
|
608
|
|
(1)
|
Calculations of the standardized measure of discounted future net cash flows include the effect of estimated future income tax expenses for all years reported. The Company expects that all of its Net Operating Loss’ (“NOL”) will be realized within future carry forward periods. All of the Company's operations, and resulting NOLs, are attributable to its oil and gas assets.
|
A variety of methodologies
are used to determine the Company’s proved reserve estimates. The principal methodologies employed are reservoir simulation,
decline curve analysis, volumetric, material balance, advance production type curve matching, petro-physics/log analysis and analogy.
Some combination of these methods is used to determine reserve estimates in substantially all of our fields.
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
2016
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value and share
data)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
864
|
|
|
$
|
2,839
|
|
Trade receivable
|
|
|
785
|
|
|
|
1,101
|
|
Joint interest receivable
|
|
|
162
|
|
|
|
172
|
|
Current derivative asset
|
|
|
-
|
|
|
|
733
|
|
Prepaid expenses
|
|
|
124
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,935
|
|
|
|
4,904
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties and other equipment
|
|
|
|
|
|
|
|
|
Oil and natural gas properties, successful efforts method, net of accumulated depletion and impairment
|
|
|
16,366
|
|
|
|
16,884
|
|
Other property and equipment, net of depreciation
|
|
|
63
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas properties and other equipment, net
|
|
|
16,429
|
|
|
|
16,951
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
960
|
|
|
|
960
|
|
Other
|
|
|
359
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,319
|
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,683
|
|
|
$
|
23,174
|
|
The accompanying notes are an integral part
of these condensed financial statements
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value and share
data)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
4,728
|
|
|
$
|
5,564
|
|
Going public delay fee
|
|
|
738
|
|
|
|
738
|
|
Joint interest revenues payable
|
|
|
1,025
|
|
|
|
1,018
|
|
Current maturities of related party notes payable
|
|
|
21,718
|
|
|
|
20,892
|
|
Current maturities of notes payable
|
|
|
13,743
|
|
|
|
14,172
|
|
Current asset retirement obligations
|
|
|
400
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
42,352
|
|
|
|
42,776
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Asset retirement obligations
|
|
|
3,260
|
|
|
|
3,204
|
|
Other long-term liabilities
|
|
|
30
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
3,290
|
|
|
|
3,239
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, authorized 10,000,000 shares; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.001 par value, authorized 150,000,000 shares; 12,711,986 shares issued at March 31, 2016 and December 31, 2015
|
|
|
13
|
|
|
|
13
|
|
Additional Paid-in capital
|
|
|
57,251
|
|
|
|
57,044
|
|
Accumulated deficit
|
|
|
(83,223
|
)
|
|
|
(79,898
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(25,959
|
)
|
|
|
(22,841
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
19,683
|
|
|
$
|
23,174
|
|
The accompanying notes are an integral part
of these condensed financial statements
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Oil, natural gas, and related product sales
|
|
$
|
1,232
|
|
|
$
|
2,757
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Depreciation and depletion
|
|
|
718
|
|
|
|
2,507
|
|
Lease operating
|
|
|
908
|
|
|
|
1,126
|
|
General and administrative
|
|
|
684
|
|
|
|
1,342
|
|
Professional fees
|
|
|
674
|
|
|
|
211
|
|
Production taxes
|
|
|
59
|
|
|
|
103
|
|
Accretion of discount on asset retirement obligation
|
|
|
63
|
|
|
|
63
|
|
Exploration
|
|
|
-
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,106
|
|
|
|
5,373
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,874
|
)
|
|
|
(2,616
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(1,100
|
)
|
|
|
(773
|
)
|
Realized gain from derivative contracts
|
|
|
732
|
|
|
|
616
|
|
Change in fair value of derivative contracts
|
|
|
(733
|
)
|
|
|
(202
|
)
|
Loss on sales of assets
|
|
|
-
|
|
|
|
(2
|
)
|
Settlement expense
|
|
|
(350
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(1,451
|
)
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,325
|
)
|
|
|
(2,977
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
-
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,325
|
)
|
|
$
|
(2,689
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per basic and diluted common shares
|
|
$
|
(0.26
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted common share outstanding
|
|
|
12,711,986
|
|
|
|
12,482,711
|
|
The accompanying notes are an integral part
of these condensed financial statements.
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
(In thousands, except per share amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,325
|
)
|
|
$
|
(2,689
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and depletion
|
|
|
718
|
|
|
|
2,507
|
|
Deferred income taxes
|
|
|
-
|
|
|
|
(288
|
)
|
Stock-based compensation
|
|
|
206
|
|
|
|
506
|
|
Accretion of asset retirement obligation
|
|
|
63
|
|
|
|
63
|
|
Change in fair value of derivative contracts
|
|
|
733
|
|
|
|
202
|
|
Loss on asset sales
|
|
|
-
|
|
|
|
2
|
|
Amortization of debt issuance costs
|
|
|
7
|
|
|
|
54
|
|
Increase (decrease) in cash attributable to changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
316
|
|
|
|
631
|
|
Joint interest receivables
|
|
|
10
|
|
|
|
135
|
|
Prepaid expenses and other assets
|
|
|
(65
|
)
|
|
|
15
|
|
Accounts payable and accrued liabilities
|
|
|
(117
|
)
|
|
|
(2,151
|
)
|
Joint interest revenues payable
|
|
|
7
|
|
|
|
(118
|
)
|
Net cash (used) in operating activities
|
|
|
(1,447
|
)
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition and development of oil and natural gas properties
|
|
|
(90
|
)
|
|
|
(316
|
)
|
Acquisition of other property and equipment
|
|
|
(4
|
)
|
|
|
-
|
|
Proceeds from sales of oil and natural gas properties
|
|
|
-
|
|
|
|
3
|
|
Net cash (used) in investing activities
|
|
|
(94
|
)
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
608
|
|
|
|
-
|
|
Repayments of notes payable
|
|
|
(1,042
|
)
|
|
|
(765
|
)
|
Deferred offering costs
|
|
|
-
|
|
|
|
(7
|
)
|
Net cash (used) in financing activities
|
|
|
(434
|
)
|
|
|
(772
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(1,975
|
)
|
|
|
(2,216
|
)
|
Cash, beginning of period
|
|
|
2,839
|
|
|
|
3,574
|
|
Cash, end of period
|
|
$
|
864
|
|
|
$
|
1,138
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
451
|
|
|
$
|
270
|
|
Supplemental disclosure of non-cash investing transactions
|
|
|
|
|
|
|
|
|
Payables related to oil and natural gas capitalized expenditures
|
|
$
|
102
|
|
|
$
|
298
|
|
The accompanying notes are an integral part
of these condensed financial statements.
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS
Brushy was originally formed as Starboard Resources
LLC in Delaware on June 2, 2011 as a limited liability company to acquire, own, operate, produce, and develop oil and natural gas
properties primarily in Texas and Oklahoma. On June 28, 2012, Starboard converted from a Delaware limited liability company to
a Delaware C-Corporation and was named Starboard Resources, Inc. The membership units of Starboard Resources LLC were exchanged
on a 1:1 basis for common shares of the Company. On July 31, 2015, Brushy sold substantially all of its Oklahoma producing properties
and is primarily now focused on its Texas and New Mexico properties. On August 25, 2015, Starboard changed its name to Brushy Resources,
Inc. (“Brushy,” the “Company,” or “its”).
NOTE 2 - GOING CONCERN
The Company’s independent registered
public accounting firm for the year ended December 31, 2015 issued their report dated April 20, 2016, that included an explanatory
paragraph describing the existence of conditions that raise substantial doubt about the Company’s ability to continue
as a going concern due to its significant accumulated deficit, working capital deficit, significant net losses and need to raise
additional funds to meet its obligations and sustain its operations.
Given the precipitous decline in oil and natural
gas prices during 2015 and into 2016, the Company expects to continue to face liquidity constraints. The Company’s
cash flows are negatively impacted by lower realized oil and natural gas sales prices and the significant decline in oil and natural
gas prices also increases the uncertainty as to the impact of commodity prices on its estimated proved reserves. As a result,
the Company has been in default under the 2013 Credit Agreement between it and Independent Bank, acting for itself and as administrative
agent for the other lenders (as amended, the “IB Credit Agreement”) since November 2015. As a result of these
defaults, the Company is no longer permitted to make further draws on the IB Credit Agreement and has been subject to a forbearance
agreement with the lenders (the “IB Forbearance Agreement”) pursuant to which the lenders agreed to forbear exercising
any of their remedies for the existing covenant defaults for a period of time (the “Forbearance Period”) to permit
the Company to seek refinancing of the indebtedness owed under the IB Credit Agreement in the approximate amount of $11,000,000,
which is referred to as the IB Indebtedness or a sale of sufficient assets to repay the IB Indebtedness. During the Forbearance
Period the Company is not permitted to drill new oil or gas wells or make distributions to equity holders. Furthermore, this also
cross defaulted the SOSventures Credit Agreement. The Forbearance Period began with the execution of the IB Forbearance Agreement
on November 24, 2015 and ended on January 31, 2016, was subsequently extended to March 31, 2016. The Company is currently
in discussions with the lender under the IB Credit Agreement regarding a further extension of the Forbearance Period. If
the Company does not obtain a further extension of the Forbearance Period, the lenders under the IB Credit Agreement will be able
to accelerate the repayment of debt under the IB Credit Agreement. For more information see Note 9 - Notes Payable.
Proposed Merger with Lilis
On December 29, 2015, the Company agreed to
combine its business with Lilis pursuant to the Agreement and Plan of Merger (the “merger agreement”). Pursuant to
the merger agreement, Lilis Merger Sub, Inc. (“Merger Sub”) will merge with and into Brushy, with Brushy surviving
the merger as a wholly-owned subsidiary of Lilis (the “merger”). Upon completion of the merger, each share of the Company’s
common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive an amount
of shares of Lilis’s common stock such that the Company’s former stockholders will represent approximately 50% of the
then-outstanding shares of Lilis’s common stock after the closing of the merger (without taking into account outstanding
restricted stock units or options or warrants to purchase shares of Lilis’s common stock). In connection with the merger,
the Company is obligated to convey Giddings Field and the Bigfoot Area, to SOSventures, LLC (“SOSventures”), in exchange
for a release of its obligations under the subordinated credit agreement with SOSventures, dated March 29, 2013, as amended. The
Company expects the closing of the merger to occur in the first half of 2016. However, the merger is subject to the satisfaction
or waiver of other conditions, and it is possible that factors outside the Company’s control could result in the merger being
completed at an earlier time, a later time or not at all. If the merger has not been completed on or before May 31, 2016, either
Lilis or Brushy may terminate the merger agreement unless the failure to complete the merger by that date is due to the failure
of the party seeking to terminate the merger agreement to fulfill any material obligations under the merger agreement or a material
breach of the merger agreement by such party.
Collectively, these matters raise substantial
doubt about the Company’s ability to continue as a going concern. The Company’s Board of Directors and management
team continue to take steps to try to strengthen the Company’s balance sheet. The Company intends to execute the merger
(which is subject to usual and customary closing conditions beyond the Company’s control) and, in the event the merger is
not consummated, the Company intends to refinance its existing debt, sell non-core properties and seek private financings to fund
its cash needs. Any decision regarding the merger or financing transaction, and the Company’s ability to
complete such a transaction, will depend on prevailing market conditions and other factors. No assurances can be given that
such transactions can be consummated on terms that are acceptable to the Company, or at all. If the Company is unable to
restructure its current obligations under its existing outstanding debt and preferred stock instruments, and address near-term
liquidity needs, the Company may need to seek relief under the U.S. Bankruptcy Code. This relief may include: (i) seeking bankruptcy
court approval for the sale or sales of some, most or substantially all of the Company’s assets pursuant to section 363(b)
of the U.S. Bankruptcy Code and a subsequent liquidation of the remaining assets in the bankruptcy case; (ii) pursuing a plan of
reorganization (where votes for the plan may be solicited from certain classes of creditors prior to a bankruptcy filing) that
the Company would seek to confirm (or “cram down”) despite any classes of creditors who reject or are deemed to have
rejected such plan; or (iii) seeking another form of bankruptcy relief, all of which involve uncertainties, potential delays and
litigation risks.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Additionally, the accompanying unaudited condensed consolidated financial statements as of March 31, 2016 and for the three months
ended March 31, 2016 and 2015 have been prepared in accordance with accounting principles generally accepted in the United States
of America for interim financial statements and with the instructions to Form 10-Q, and reflect, in the opinion of management,
all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods.
Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2016. Certain information and footnote disclosures normally included in the consolidated financial
statements prepared in accordance with GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual
report on Form 10-K for the year ended December 31, 2015 and filed with the SEC on April 20, 2016.
Principles of Consolidation
The accompanying condensed consolidated financial
statements include the accounts of the Company together with its wholly owned subsidiaries, ImPetro Resources, LLC (“ImPetro”)
and ImPetro Operating (“Operating”) which collectively are referred to as the Company. All intercompany transactions
and balances have been eliminated in consolidation.
Reclassification
In April 2015, the FASB issued ASU No. 2015-03
(“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of
being presented as an asset. ASU 2015-03 is effective for the Company on January 1, 2016. Once adopted, entities are required
to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents a change in
accounting principle. Early adoption is permitted for financial statements that have not been previously issued. The Company adopted
of this guidance during the first quarter of 2016. The adoption of this guidance did not have a material impact on the Company’s
condensed consolidated financial statements.
A $7,000 reclassification from “Prepaid
expenses” to a reduction of “Current maturities of related party notes payable” associated with the aforementioned
adoption of ASU No. 2015-3, “Interest - Imputation of Interest,” have been made to 2015 condensed consolidated
financial statements to conform to the 2016 presentation and have no effect on previously reported net (loss).
Oil and Gas Natural Gas Properties
The Company uses the successful efforts method
of accounting for oil and natural gas producing activities, as further defined under ASC 932,
Extractive Activities - Oil and
Natural Gas
. Under these provisions, costs to acquire mineral interests in oil and natural gas properties, to drill exploratory
wells that find proved reserves, and to drill and equip development wells are capitalized.
Exploratory drilling costs are capitalized
when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found
proved reserves is made shortly after drilling is completed. The determination is based on a process that relies on interpretations
of available geologic, geophysic and engineering data. If a well is determined to be successful, the capitalized drilling costs
will be reclassified as part of the cost of the well. Capitalized costs of producing oil and natural gas interests are depleted
on a unit-of-production basis at the field level.
If an exploratory well is determined to be
unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. If a determination
cannot be made as to whether the reserves that have been found can be classified as proved, the cost of drilling the exploratory
well is not carried as an asset for more than one year following completion of drilling. If, after that year has passed, a determination
that proved reserves exist cannot be made, the well is assumed to be impaired and its costs are charged to expense. Its cost can,
however, continue to be capitalized if a sufficient quantity of reserves is discovered in the well to justify its completion as
a producing well and the entity is making sufficient progress assessing the reserves and the economic and operating viability of
the project.
The carrying value of oil and gas properties
is assessed for possible impairment on a field by field basis and on at least an annual basis, or as circumstances warrant, based
on geological analysis or changes in proved reserve estimates. When impairment occurs, an adjustment is recorded as a reduction
of the asset carrying value. For the three months ended March 31, 2016 and 2015, there were no impairment charge.
Goodwill
Goodwill represents the excess of the purchase
price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized;
rather, it is tested for impairment annually and when events or changes in circumstances indicate that fair value of a reporting
unit with goodwill has been reduced below carrying value. The impairment test requires allocating goodwill and other assets and
liabilities to reporting units. However, the Company only has one reporting unit. To assess impairment, the Company has the option
to qualitatively assess if it is more likely than not that the fair value of the reporting unit is less than the book value. Absent
a qualitative assessment, or, through the qualitative assessment, if the Company determines it is more likely than not that the
fair value of the reporting unit is less than the book value, a quantitative assessment is prepared to calculate the fair market
value of the reporting unit. If it is determined that the fair value of the reporting unit is less than the book value, the recorded
goodwill is impaired to its implied fair value with a charge to operating expenses. As of March 31, 2016 and December 31, 2015
there was no impairment of goodwill. Goodwill of $959,681 was from the acquisition of ImPetro on June 13, 2011.
Revenue Recognition and Natural Gas Imbalances
The Company utilizes the accrual method of
accounting for natural gas and crude oil revenues, whereby revenues are recognized based on the Company’s net revenue interest
in the wells upon delivery to third parties. The Company will also enter into physical contract sale agreements through its normal
operations.
Gas imbalances are accounted for using the
sales method. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. However, the
Company has no history of significant gas imbalances.
Stock-Based Compensation and Equity Incentive
Plans
The Company accounts for stock-based compensation
in accordance with ASC 718,
Compensation - Stock Compensation
. The standard requires the measurement and recognition of
compensation expense in the Company’s condensed consolidated statements of operations for all share-based payment awards
made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock and
equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at the grant date, based on
the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized
as an expense over the employees’ expected requisite service period, generally using the straight-line method. In addition,
ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash
flow, rather than as an operating cash flow as prescribed under previous accounting rules.
The Company’s forfeiture rate represents
the historical rate at which the Company’s stock-based awards were surrendered prior to vesting. ASC 718 requires forfeitures
to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
During the three months ended March 31, 2016
and 2015, the Company incurred stock based compensation expense of approximately $206,000 and $506,000, respectively, and is included
in the accompanying condensed consolidated statements of operations in general and administrative expenses.
Net Loss Per Common Share
Basic net loss per common share is computed
by dividing the net loss attributable to stockholders by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is calculated in the same manner, but also considers the impact to common shares for the potential
dilution from stock options, non-vested share appreciation rights and non-vested restricted shares. For the three months
ended March 31, 2016, there were 900,000 potentially dilutive non-vested and vested stock options and 2,542,397 stock warrants.
For the three months ended March 31, 2015, there were 900,000 potentially dilutive non-vested restricted shares and stock options.
The potentially dilutive shares, for the three months ended March 31, 2016 and 2015, are considered antidilutive since the Company
is in a net loss position and thus result in the basic net loss per common share equaling the diluted net loss per common share.
Use of Estimates
The preparation of condensed consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company’s estimates of oil and natural
gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of production and the timing of development expenditures.
Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that are difficult to
measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation
and judgment. Estimates of economically recoverable natural gas and oil reserves and future net cash flows necessarily depend upon
a number of variable factors and assumptions, such as historical production from the area compared with production from other producing
areas, the assumed effect of regulations by governmental agencies, and assumptions governing future natural gas and oil prices,
future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from
actual results. The future drilling costs associated with reserves assigned to proved, undeveloped locations may ultimately increase
to the extent that these reserves are later determined to be uneconomic. For these reasons, estimates of the economically recoverable
quantities of expected natural gas and oil attributable to any particular group of properties, classifications of such reserves
based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions
could materially affect the estimated quantity of the reserves, which could affect the carrying value of the Company’s oil
and natural gas properties and/or the rate of depletion related to the oil and natural gas properties.
The most significant financial estimates are
associated with the Company’s estimated volumes of proved oil and natural gas reserves, asset retirement obligations, assessments
of impairment imbedded in the carrying value of undeveloped acreages undeveloped properties and developed properties, fair value
of financial instruments, including derivative liabilities, depreciation and accretion, income taxes and contingencies.
New Accounting Pronouncement
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements
to employee share-based payment accounting, which includes provisions intended to simplify various aspects related to how share-based
compensation payments are accounted for and presented in the financial statements. This amendment will be effective prospectively
for reporting periods beginning on or after December 15, 2016, and early adoption is permitted. The Company is currently assessing
the impact of the ASU on the Company’s condensed consolidated financial statements.
NOTE 4 - FAIR VALUE MEASUREMENTS
As defined by ASC 820, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or
paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement
date. The carrying amounts of the Company’s financial assets and liabilities, such as cash, trade receivable, joint interest
receivable, joint interest revenues payable, accounts payable and accrued liabilities and related party payable, approximate their
fair values because of the short maturity of these instruments. The carrying amount of the notes payable in long-term debt also
approximates fair value due to its variable-rate characteristics.
The following tables present information about
the Company’s financial assets and liabilities measured at fair value as of March 31, 2016 and December 31, 2015:
($ in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance as of
March 31, 2016
|
Assets (at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets (oil collar and put options)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities (at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,660
|
|
|
$
|
3,660
|
|
($ in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance as of
December 31, 2015
|
Assets (at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets (oil collar and put options)
|
|
$
|
—
|
|
|
$
|
733
|
|
|
$
|
—
|
|
|
$
|
733
|
|
Liabilities (at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,597
|
|
|
$
|
3,597
|
|
The Company’s derivative contracts consist
of NYMEX-based fixed price commodity swaps and NYMEX collars. The NYMEX-based fixed price derivative contracts are indexed to NYMEX
futures contracts, which are actively traded, for the underlying commodity and are commonly used in the energy industry. A number
of financial institutions and large energy companies act as counter-parties to these type of derivative contracts. As the fair
value of these derivative contracts is based on a number of inputs, including contractual volumes and prices stated in each derivative
contract, current and future NYMEX commodity prices, and quantitative models that are based upon readily observable market parameters
that are actively quoted and can be validated through external sources, the Company have characterized these derivative
contracts as Level 2.
The asset retirement liability is measured
using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging
costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current
estimated costs. See Note 7 - Asset Retirement Obligations.
The Company estimates the expected undiscounted
future cash flows of its oil and natural gas properties and compares such amounts to the carrying amount of the oil and natural
gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future
cash flows, the Company will adjust the carrying amount of the oil and natural gas properties to fair value. The factors used to
determine fair value are subject to management’s judgment and expertise and include, but are not limited to, recent sales
prices of comparable properties, the present value of future cash flows, net of estimated operating and development costs using
estimates or proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various
discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected.
These assumptions represent Level 3 inputs.
NOTE 5 - PROPERTY ACQUISITION AND DIVESTITURE
On July 31, 2015, the Company sold all of its
Oklahoma properties, which were located in Logan and Kingfisher Counties, Oklahoma, to Remora Petroleum, LP (Austin, TX) for $7,249,390.
The purchaser is not affiliated with any Company officers, directors or stockholders.
The following table summarized the results
of operation from the properties sold during three months ended March 31, 2015:
Oil, natural gas, and related product sales
|
|
$
|
720
|
|
Expenses
|
|
|
138
|
|
Operating income
|
|
$
|
582
|
|
As part of this transaction, the Company entered
into the Fifth Amendment to its Credit Agreement with Independent Bank (“Fifth Amendment”). The Fifth Amendment provides
that $4,000,000 of the purchase price was paid to Independent Bank to pay down its credit facility with Independent Bank.
NOTE 6 - OIL AND NATURAL GAS PROPERTIES
The following table presents a summary of the
Company’s oil and natural gas properties at March 31, 2016 and December 31, 2015:
($ in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Oil and natural gas properties
|
|
|
|
|
|
|
|
|
Proved-developed producing properties
|
|
$
|
43,710
|
|
|
$
|
43,912
|
|
Proved-developed non-producing properties
|
|
|
6,228
|
|
|
|
5,865
|
|
Proved-undeveloped properties
|
|
|
-
|
|
|
|
-
|
|
Unproved properties
|
|
|
2,420
|
|
|
|
2,389
|
|
Gross oil and natural gas properties
|
|
|
52,358
|
|
|
|
52,166
|
|
Less: Accumulated depletion
|
|
|
(35,992
|
)
|
|
|
(35,282
|
)
|
Total oil and natural gas properties, net of accumulated depletion and impairment
|
|
$
|
16,366
|
|
|
$
|
16,884
|
|
During the three months ended March 31, 2016
and 2015, the Company incurred depletion expense of approximately $710,000 and $2,495,000, respectively. As of March
31, 2016 and December 31, 2015, the accumulated impairment was approximately $55,985,000.
NOTE 7 - ASSET RETIREMENT OBLIGATIONS
The Company has recognized the fair value of
its asset retirement obligations related to the future costs of plugging, abandonment, and remediation of oil and natural gas producing
properties. The present value of the estimated asset retirement obligations has been capitalized as part of the carrying amount
of the related oil and natural gas properties. The liability has been accreted to its present value as of the end of each period.
At December 31, 2015 and December 31, 2014, the Company evaluated 147 and 169 wells, respectively, and has determined a range of
abandonment dates between April 2016 and October 2044. The following table represents a reconciliation of the asset retirement
obligations for the three months ended March 31, 2016 and the year ended December 31, 2015:
|
|
Three Months
Ended
March 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Asset retirement obligations, beginning of period
|
|
$
|
3,597
|
|
|
$
|
3.606
|
|
Additions to asset retirement obligation
|
|
|
-
|
|
|
|
-
|
|
Liabilities settled during the period
|
|
|
-
|
|
|
|
(155
|
)
|
Accretion of discount
|
|
|
63
|
|
|
|
187
|
|
Revision of estimate
|
|
|
-
|
|
|
|
(41
|
)
|
Asset retirement obligations, end of period
|
|
$
|
3,660
|
|
|
$
|
3,597
|
|
During the three months ended March 31, 2016
and 2015, the Company incurred accretion expense of approximately $63,000 and $63,000, respectively. As of March 31,
2016 and December 31, 2015, the current asset retirement obligation was approximately $400,000 and $392,000 respectively, and the
long term asset retirement obligation was approximately $3,260,000 and $3,204,000, respectively.
See Note 4 - Fair Value Measurements.
NOTE 8 - DERIVATIVES
The Company uses derivatives to hedge its oil
production. The Company’s hedge position as of December 31, 2015 consisted of put options, some of which were deferred premiums
paid at settlement. As of March 31, 2016, pursuant to the IB Forbearance Agreement, the Company did not have any remaining hedge
positions. Specifically, the Company unwound the remaining existing hedge contract with Cargill and Cargill paid Independent
Bank all hedge settlement proceeds, all hedge liquidation proceeds, and all amounts otherwise payable by Cargill to the Company.
Such payments satisfied outstanding interest and default interest owing to Independent Bank as well as certain other expenses.
Fair Value of Derivative Financial Instruments
($ in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Derivative financial instruments - Current asset
|
|
$
|
-
|
|
|
$
|
733
|
|
Derivative financial instruments - Long-term assets
|
|
|
-
|
|
|
|
-
|
|
Net derivative financial instruments
|
|
$
|
-
|
|
|
$
|
733
|
|
Effect of Derivative Financial Instruments
|
|
Three Months Ended
March 31,
|
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
Realized gain/(loss) on settlement of derivative contracts
|
|
$
|
732
|
|
|
$
|
616
|
|
Change in fair value of derivative contracts
|
|
$
|
(733
|
)
|
|
$
|
(202
|
)
|
NOTE 9 - NOTES PAYABLE
On June 27, 2013, the Company entered into
the IB Credit Agreement to borrow up to $100,000,000 at a current rate of 4.00% annum. The IB Credit Agreement was obtained to
fund the development of the Company’s oil and natural gas properties and refinance the prior bank facility. At March 31,
2016 and December 31, 2015, the Company had approximately $11,363,000 and $12,400,000 in borrowings outstanding under the IB Credit
Agreement, respectively.
In November 2015, counsel for Independent Bank notified
the Company that it was in default under IB Credit Agreement.
On November 24, 2015, the Company entered into
the IB Forbearance Agreement and the Third Amendment to the IB Credit Agreement with Independent Bank under which Independent Bank,
acting for itself and as administrative agent for other lenders, agreed to forbear exercising any of its remedies for the existing
covenant defaults for period of time to permit the Company to seek refinancing of the indebtedness owed to Independent Bank, which
is referred to as the IB Indebtedness or a sale of sufficient assets to repay the IB Indebtedness. The Forbearance Period began
with the execution of the IB Forbearance Agreement on November 24, 2015 and ended on January 31, 2016. The Forbearance Period
was subsequently extended to March 31, 2016.
At the time of the extension of the Forbearance
Period to March 31, 2016, the Company agreed to unwind the remaining existing hedge contract with Cargill and permit Cargill to
pay to Independent Bank all hedge settlement proceeds, all hedge liquidation proceeds, and all amounts otherwise payable by Cargill
to the Company. Such payments satisfied outstanding interest and default interest owing to Independent Bank as well as certain
other expenses. In addition, such payments reduced the principal due Independent Bank by $406,720.
During the Forbearance Period, the Company
is not permitted to drill new oil or gas wells or to make any distributions to equity holders. Furthermore, this default also cross
defaulted the SOSVentures Credit Agreement, however the maturity of the second lien note to SOSventures was extended to August
1, 2016.
The Company is currently in discussions with
the lenders under the IB Credit Agreement regarding a further extension of the Forbearance Period. The Company is also in
discussions with Lilis and other financing parties regarding possible refinance options for the amount outstanding under the IB
Credit Agreement
On December 29, 2015, the Company entered into
the merger agreement. At March 31, 2016 and December 31, 2015, the refundable deposit paid by Lilis to the Company was approximately
$2,358,000 and $1,750,000, respectively.
NOTE 10 - STOCK BASED COMPENSATION AND CONDITIONAL
PERFORMANCE AWARDS
On April 1, 2012, the Company entered into
employment agreements (the “Employment Agreement”) which provided a restricted stock grant and a conditional performance
award to key members of management.
The restricted stock grant of 349,650 shares
had a grant date fair value of $10.00 per share as approved by the Company’s compensation committee and vests in full upon
the earlier of an initial public offering (“IPO”) which includes the sale of shares to the public, a business combination
whereas 50% or more of the voting power is transferred to the new owners, or March 1, 2015. Those 349,650 shares were earned by
the employee recipients and issued to them during the three months ended March 31, 2015.
During the three months ended March 31, 2016
and 2015, the Company incurred a stock-based compensation expense of approximately $0 and $300,000, respectively, related to the
restricted stock grant, which is included in the accompanying condensed consolidated statements of operations in general and administrative
expenses.
Additionally, the Employment Agreement provides for a conditional
performance award if an IPO occurs, the employee will receive: (1) a cash payment of 1% of the difference between the Company
market capital and the book value at the time of the IPO, (2) common stock options to purchase 1.0% of the fully-diluted capital
stock as of the IPO date and IPO price which will vest over a four year period and contain a cashless exercise, (3) common stock
options to purchase 1.0% of the fully-diluted capital stock as of the 2nd anniversary of the IPO date at the closing price of the
common stock on the 2nd anniversary date of the IPO and will vest six years after the grant and contain a cashless exercise. As
of the three months ended March 31, 2016 and 2015, the conditional performance feature is not probable and as such, no compensation
expense related to the conditional performance feature has been recognized.
On August 30, 2014, the Company amended and
restated the Employment Agreement which provided for additional stock options.
The equity award of options to purchase 900,000
shares of common stock at the exercise price of $4.75 per share and vesting over three years from September 4, 2014 with a one-year
cliff (in respect of 300,000 shares) and monthly vesting thereafter of 25,000 shares over the remaining two years. During the three
months ended March 31, 2016 and 2015, the Company incurred a stock-based compensation expense of approximately $206,000 in both
years related to stock options, which is included in the accompanying condensed consolidated statements of operations in general
and administrative expenses. As of March 31, 2016, there was approximately $1,169,000 of unrecognized stock-based compensation
related to the non-vested stock options to be recognized over 1.42 years.
The assumptions used in the Black-Scholes Option
Pricing Model for the stock options granted were as follows:
|
|
2014
|
|
Risk-free interest rate
|
|
|
1.87
|
%
|
Expected volatility of common stock
|
|
|
92
|
%
|
Dividend yield
|
|
$
|
0.00
|
|
Expected life of options
|
|
|
5.72 years
|
|
For the three months ended March 31, 2016,
there were no new stock options granted. As of March 31, 2016, there were 900,000 stock options outstanding and the intrinsic
value of the associated options was zero. The weighted average exercise of $4.75/share, weighted average grant date fair value
of $2.75/share and the weighted average remaining contractual life of 8.3 years. On March 31, 2016, 500,000 stock options were
exercisable.
NOTE 11 - RELATED PARTY TRANSACTIONS
Subordinated Credit Facility with SOSVentures
A director currently serving on the Company’s
Board of Directors, Bill Liao, works for SOSventures. Further, a group composed of SOSventures, Sean O’Sullivan Revocable
Living Trust and Bradford R. Higgins constitute a group owning 4,863,720 or 39.34% of the Company’s common stock shares.
On June 3, 2014, the Company agreed to amend
its credit agreement with SOSventures, originally entered into on July 25, 2013, providing for a term loan through February 16,
2016 in an amount up to $20,000,000 at an 18.00% interest rate. The loan under this agreement is secured by a second lien on the
Company’s assets.
The SOSventures credit agreement
requires the Company to maintain certain financial ratios. First, the Company must maintain an interest coverage ratio of 3:1
at the end of each quarter so that its consolidated net income less the Company’s fees under the credit facility,
lender expenses, non-cash charges relating to the hedge agreements, interest, income taxes, depreciation, depletion,
amortization, exploration expenditures and costs and other non-cash charges (netted for noncash income)
(“EBITDAX”) is greater than 3 times the Company’s interest expense under the credit facility. Second, the
Company must maintain a debt to EBITDAX ratio of less than 3.5:1 at the end of each quarter. Third, the Company must maintain
a current ratio of at greater than 1:1 at the end of each quarter, meaning that the Company’s consolidated current
assets (including the unused amount of the credit facility by excluding non-cash assets under ASC 410 and 815) must be
greater than the Company’s consolidated current liabilities (excluding non-cash obligations under ASC 410 and 815 and
current maturities under the credit facility.) The credit agreement prevents the Company from incurring indebtedness to banks
or lenders, other than Independent Bank, without the consent of SOSventures. It also prevents the Company from incurring most
contingent obligations or liens (other than to Independent Bank). It also restricts the Company’s ability to pay
dividends, issue options and warrants and repurchase the Company’s common stock shares. The limitation on options and
warrants does not apply to equity compensation plans.
This credit facility is currently in default due to the default
under the IB Credit Agreement.
As of March 31, 2016, with accrued and unpaid
interest the Company has $21,718,000 drawn against the SOSventures credit facility. In light of the December 19, 2014 notice from
Independent Bank relating to the payment of interest to SOSventures, pursuant to the Intercreditors Agreement, the Company is accruing
interest payments to SOSventures since the date of that notice.
NOTE 12 - LEGAL PROCEEDINGS
From time-to-time, the Company may become subject
to proceedings, lawsuits and other claims in the ordinary course of business including proceedings related to environmental and
other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.
The Company is subject to various possible
contingencies that arise primarily from interpretation of federal and state laws and regulations affecting the oil and natural
gas industry. Such contingencies include differing interpretations as to the prices at which oil and natural gas sales may be made,
the prices at which royalty owners may be paid for production from their leases, environmental issues and other matters. Although
management believes that it has complied with the various laws and regulations, administrative rulings and interpretations thereof,
adjustments could be required as new interpretations and regulations are issued. In addition, environmental matters are subject
to regulation by various federal and state agencies.
Lawsuit Relating to 17.23% of the Company’s Common
Stock Shares
Approximately 17.23% of the Company common
stock was interpleaded into Connecticut Superior Court for the Judicial District of Stamford/Norwalk at Stamford, Cause No. FST-CV12-6015112-S
(“Interpleader Action”). These are the residual shares of common stock that belonged to the Partnerships, after the
distribution of the partnerships shares. Claims related to the Interpleader Action were heard in an American Arbitration Association
arbitration in 2015. The claims, counterclaims and cross claims relate to the governance, control and termination of the Partnerships,
including the distribution by the Partnerships of the Company’s shares of common stock to the limited partners in the
Partnerships in a liquidating distribution in February 2014 as part of a “monetization” event, and other matters. On
September 10, 2015, the American Arbitration Association issued an arbitration award in the Interpleader Action.
Bexar County Proceedings
On April 17, 2015,the Company was served with
a lawsuit filed in Bexar County, Texas (the “Bexar County Proceedings”) by William F. Pettinati, Jr., Nicholas
Garofolo, Sigma Gas Barbastella Fund and Sigma Gas Antrozous Fund against Starboard (now Brushy), its directors, its Chief Operating
Officer, Edward Shaw, its former Chief Financial Officer, Eric Alfuth, the Company’s stockholder, Bradford Higgins,
and Sean O’Sullivan, the managing director of the Company’s stockholder, SOSventures (the “Plaintiffs”).
Mr. Pettinati, Mr. Garofolo and the Sigma Gas Antrozous Fund are stockholders. Mr. Pettinati owns 145,112 shares, Mr. Garofolo
owns 226,680 shares of common stock and Sigma Gas Antrozous Fund owns 44,610 shares of common stock. Combined these stockholders
account for approximately 3.3% of the Company’s outstanding common stock. These parties became stockholders in February 2014.
The Plaintiffs allege several derivative and
direct causes of action. These derivative claims include, breach of fiduciary duty, waste of corporate assets, concerted action
and conspiracy, joint enterprise, agency, alter ego, exemplary damages, and unjust enrichment. The direct claims include, breach
of fiduciary duty, conversion, stockholder oppression, concerted action and conspiracy, declaratory judgment that the distribution
of stock to the plaintiffs was invalid, joint enterprise, agency, alter ego, exemplary damages, concerted action and conspiracy
and failure to allow for inspection of books and records. Many of the allegations relate to events that allegedly happened before
the Plaintiffs became stockholders, including the distributions from the Partnerships that led to the Plaintiffs becoming stockholders
in February 2014. Some similar claims involving these Plaintiffs (including the legality of the Partnerships’ liquidating
distribution) were previously heard in the arbitration relating to the Partnerships referenced above. Plaintiffs were parties to
that arbitration. For actions after February 2014, Plaintiffs complain that the Company’s common stock still lacks a trading
venue, that a books and records request was not honored, that the Company “delayed” a public offering, that
SOSventures had allegedly taken steps to “foreclose” on the Company’s assets under the SOSventures Credit Agreement
and that the Company filed for an extension to the filing date for the Company’s annual report on Form 10-K for the year
ended December 31, 2014. On October 6, 2015, Plaintiffs withdrew the claim about not honoring a books and records request.
The Company’s directors and officers
are subject to indemnification under the Company’s bylaws.
Settlement of Interpleader Action and
Bexar County Proceedings
On February 17, 2016, the various parties to
the Interpleader Action and the Bexar County Proceedings entered into a global settlement agreement (the “Settlement Agreement”)
under which the parties to the proceedings issued mutual releases and the plaintiffs in all proceedings agreed to withdraw their
claims. In return, the plaintiffs received a cash settlement, the majority of which was covered by the Company’s insurance.
$350,000 of the settlement payment will be due and payable by the Company on the first to occur of (a) consummation of the merger
with Lilis and (b) July 31, 2016.
NOTE 13 - STOCKHOLDERS’ EQUITY
Warrants
Upon entering into the Second Amendment to
the First Amended and Restated Credit Agreement on April 15, 2015 with SOSVentures, SOSVentures received warrants to purchase 2,542,397
shares of the Company’s common stock for $1.00 per share with a two-year term. The intrinsic value associated with the outstanding
warrants was zero at March 31, 2016, as the strike price of all warrants exceeded the implied market price for common stock. The
remaining contract life was 1 year. The implied value of the warrants were based on the Company’s peer group, which included
Company’s owning assets in the same areas and of similar size. This valuation determined that the value of the warrants
was approximately zero. As such, the Company has placed no value on the warrants issued.
NOTE 14 - SUBSEQUENT EVENTS
Special Meeting of Stockholders Regarding
Merger Agreement
On May 20, 2016, the Company held a special
meeting of stockholders to consider and vote on (1) a proposal to approve and adopt the merger agreement; and (2) a proposal to
authorize the Company’s board of directors, in its discretion, to adjourn the special meeting to a later date or dates, if
necessary or appropriate, to solicit additional proxies in favor of the proposal to approve and adopt the Merger Agreement. The
proposals were approved by the Company’s stockholders.
Third Amendment to Forbearance Agreement
with Independent Bank
On May 20, 2016, the Company, ImPetro and Operating
entered into the Third Amendment to the Forbearance agreement (the “Third Amendment”) with Independent Bank, pursuant
to which Independent Bank agreed to extend the Forbearance Period to May 31, 2016 (and in certain circumstances June 15, 2016)
upon payment by the Company of (i) $79,772.64, such payment representing non-default and default interest accrued and to be accrued
through May 31, 2016, and (ii) $30,000, such payment representing legal fees and expenses incurred by Independent Bank in connection
with the Third Amendment. In the event the Company pays Independent Bank, on or before May 31, 2016, an additional $18,938.11,
the Forbearance Period will be extended to June 15, 2016. On May 20, 2016, the above referenced payments were made to Independent
Bank by the Company.
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2015 AND 2014
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
Lease Operating Expenses
Lease operating expenses
represent, pumpers’ salaries, saltwater disposal, ad valorem taxes, repairs and maintenance, expensed workovers and other
operating expenses. Lease operating expenses are expensed as incurred.
Sales-Based Taxes
The Company incurs severance
tax on the sale of its production which is generated in Texas, New Mexico and Oklahoma. These taxes are reported on a gross basis
and are included in production taxes within the accompanying consolidated statements of operations.
Stock-Based Compensation and Equity Incentive
Plans
The Company accounts for
stock-based compensation in accordance with ASC 718,
Compensation - Stock Compensation
. The standard requires the measurement
and recognition of compensation expense in the Company’s consolidated statements of operations for all share-based payment
awards made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock
and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at the grant date, based
on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized
as an expense over the employees’ expected requisite service period, generally using the straight-line method. In addition,
ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash
flow, rather than as an operating cash flow as prescribed under previous accounting rules.
The Company’s forfeiture
rate represents the historical rate at which the Company’s stock-based awards were surrendered prior to vesting. ASC 718
requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
During the years ended
December 31, 2015 and 2014, the Company incurred a stock based compensation expense of approximately $1,125,000 and $1,474,000,
respectively, and is included in the accompanying consolidated statements of operations in general and administrative expenses.
Income Taxes
Deferred income tax assets
and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will
result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets
to the amount expected to be realized.
The Company is required
to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit
recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Company
recording a tax liability that increases expense in that period. Based on its analysis, the Company has determined that it has
not incurred any liability for unrecognized tax benefits as of December 31, 2015. The Company’s conclusions may be subject
to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax
laws, regulations and interpretations thereof.
The Company recognizes
interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense
or penalties have been recognized as of December 31, 2015.
Long-Lived Assets
The Company accounts for long-lived assets
(other than oil and gas properties) at cost. Other long-lived assets consist principally of property and equipment and identifiable
intangible assets with finite useful lives (subject to amortization, depletion, and depreciation). The Company may impair these
assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
Recoverability is measured by comparing the carrying amount of an asset to the expected undiscounted future net cash flows generated
by the asset. If it is determined that the asset may not be recoverable, and if the carrying amount of an asset exceeds its estimated
fair value, an impairment charge is recognized to the extent of the difference.
Net Loss Per Common Share
Basic net income (loss)
per common share is computed by dividing the net income (loss) attributable to stockholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per common share is calculated in the same manner, but also considers
the impact to common shares for the potential dilution from stock options, non-vested share appreciation rights and non-vested
restricted shares. For the year ended December 31, 2015, there were 900,000 potentially dilutive non-vested and vested stock options
and 2,542,397 stock warrants. For the year ended December 31, 2014, there were 1,249,650 potentially dilutive non-vested restricted
shares and stock options. The potentially dilutive shares, for the December 31, 2015 and 2014, are considered antidilutive since
the Company is in a net loss position and thus result in the basic net loss per common share equaling the diluted net loss
per common share.
Use of Estimates
The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
The Company’s estimates
of oil and natural gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties
inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that are
difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological
interpretation and judgment. Estimates of economically recoverable natural gas and oil reserves and future net cash flows necessarily
depend upon a number of variable factors and assumptions, such as historical production from the area compared with production
from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future natural
gas and oil prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary
considerably from actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations may
ultimately increase to the extent that these reserves are later determined to be uneconomic. For these reasons, estimates of the
economically recoverable quantities of expected natural gas and oil attributable to any particular group of properties, classifications
of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant
variance in the assumptions could materially affect the estimated quantity of the reserves, which could affect the carrying value
of the Company’s oil and natural gas properties and/or the rate of depletion related to the oil and natural gas properties.
The most significant
financial estimates are associated with the Company’s estimated volumes of proved oil and natural gas reserves, asset retirement
obligations, assessments of impairment imbedded in the carrying value of undeveloped acreages undeveloped properties and developed
properties, fair value of financial instruments, including derivative liabilities, depreciation and accretion, income taxes and
contingencies.
New Accounting Pronouncement
In May 2014, the FASB issued
ASU No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize
revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration which
the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting
useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows
arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in
GAAP when it becomes effective. The new standard is effective for us on January 1, 2018. Early application is only permitted as
of January 1, 2017. The Company is currently evaluating the effect that ASU 2014-09 will have on its financial statements and related
disclosures.
In June 2014, the FASB
issued ASU No. 2014-12 (“ASU 2014-12”), “Accounting for Share-Based Payments When the Terms of an Award Provide
That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires a performance target that
affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12
states that the performance target should not be reflected in estimating the grant date fair value of the award. ASU 2014-12 clarifies
that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved
and should represent the periods for which the requisite service has already been rendered. The new standard is effective for us
on January 1, 2016. The Company does not expect adoption of ASU 2014-12 to have a significant impact on its financial statements.
In August 2014, the FASB
issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.”
ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about
a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management
will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability
to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective
for us on January 1, 2017. The Company does not expect the adoption of ASU 2014–15 to have a significant impact on its financial
statements.
In November 2014, the FASB
issued ASU No. 2014-16 (“ASU 2014-16”), “Derivative and Hedging (Topic 815).” ASU 2014-16 addresses whether
the host contract in a hybrid financial instrument issued in the form of share should be accounted for as debt or equity. ASU 2014-16
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does
not expect the adoption of ASU 2014–16 to have a significant impact on its financial statements.
In April 2015, the FASB
issued ASU No. 2015-03 (“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with
debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for us on January 1, 2016. Once adopted, entities
are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents
a change in accounting principle. Early adoption is permitted for financial statements that have not been previously issued. The
Company is currently evaluating the effect that ASU 2015-03 will have on its financial statements and related disclosures.
In May 2015, the FASB issued
ASU No. 2015-07 (“2015-07”), “Fair Value Measurement.” ASU 2015-07 removes the requirement to categorize
within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical
expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured
at fair value using the net asset value per share practical expedient. ASU 2015-07 is effective for us on January 1, 2016. Early
adoption is permitted. The Company does not expect the adoption of ASU 2015–07 to have a significant impact on its financial
statements.
In September 2015, the
FASB issued ASU No. 2015-16 (“ASU 2015-16”), “Business Combinations (Topic 805), Simplifying the Accounting for
Measurement-Period Adjustments”. The update requires that the acquirer in a business combination recognize adjustments to
provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are
determined (not retrospectively as with prior guidance). Additionally, the acquirer must record in the same period’s financial
statements the effect on earnings of changes in depreciation, amortization or other income effects as a result of the change to
the provisional amounts, calculated as if the accounting had been completed at the time of acquisition. The acquiring entity is
required to disclose, on the face of the financial statements or in the footnotes to the financial statements, the portion of the
amount recorded in current period earnings, by financial statement line item, that would have been recorded in previous reporting
periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for
us on January 1, 2016. The adoption of this standard is not expected to have a material impact on the Company’s financial
statements.
In November 2015, the FASB
has issued an update to ASU No. 2015-17 (“ASU 2015-17”) “Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes.” The update requires a company to classify all deferred tax assets and liabilities as noncurrent. The
update of ASU 2015-17 is effective for us on January 1, 2018. The Company does not expect the adoption of the update of ASU 2015–17
to have a significant impact on its financial statements.
In January 2016, the FASB
issued ASU No. 2016-01 (“ASU 2016-01”), “Financial Instruments – Overall (Subtopic 825-10)”.
ASU 2016-01 updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new
guidance is effective for us on January 1, 2018. The Company does not expect the adoption of ASU 2016–01 to have a significant
impact on its financial statements.
In February 2016, the FASB
issued ASU No. 2016-02 (“ASU 2016-02), “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize a lease
liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the
lease term. ASU 2016-02 is effective for us on January 1, 2019. Early adoption is permitted. The Company is currently evaluating
the effect that ASU 2016-02 will have on its financial statements and related disclosures.
In March 2016, the FASB
issued ASU No. 2016-06 (“ASU 2016-06”), “Contingent Put and Call Option in Debt Instruments”. ASU
2016-06 is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options.
The amendments in ASU 2016-06 clarify that an entity is required to assess the embedded call or put options solely in accordance
with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have
to initially assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or
credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issued for fiscal
years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The Company does not expect the adoption of ASU 2016–01 to have a significant impact on its
financial statements.
NOTE 4 - FAIR VALUE MEASUREMENTS
As defined by ASC 820,
the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to
sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants
at the measurement date. The carrying amounts of the Company’s financial assets and liabilities, such as cash, trade receivable,
joint interest receivable, joint interest revenues payable, accounts payable and accrued liabilities and related party payable,
approximate their fair values because of the short maturity of these instruments. The carrying amount of the notes payable in long-term
debt also approximates fair value due to its variable-rate characteristics.
The following tables present
information about the Company’s financial assets and liabilities measured at fair value as of December 31, 2015 and December
31, 2014:
($ in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance as of
December 31,
2015
|
|
Assets
(at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets (oil collar and put options)
|
|
$
|
-
|
|
|
$
|
733
|
|
|
$
|
-
|
|
|
$
|
733
|
|
Liabilities (at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,597
|
|
|
$
|
3,597
|
|
($ in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance as of
December 31,
2014
|
|
Assets
(at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets (oil collar and put options)
|
|
$
|
-
|
|
|
$
|
1,766
|
|
|
$
|
-
|
|
|
$
|
1,766
|
|
Liabilities (at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,606
|
|
|
$
|
3,606
|
|
The Company's derivative
contracts consist of NYMEX-based fixed price commodity swaps and NYMEX collars. The NYMEX-based fixed price derivative contracts
are indexed to NYMEX futures contracts, which are actively traded, for the underlying commodity and are commonly used in the energy
industry. A number of financial institutions and large energy companies act as counter-parties to these type of derivative contracts.
As the fair value of these derivative contracts is based on a number of inputs, including contractual volumes and prices stated
in each derivative contract, current and future NYMEX commodity prices, and quantitative models that are based upon readily observable
market parameters that are actively quoted and can be validated through external sources, we have characterized these derivative
contracts as Level 2.
The asset retirement liability is measured using
primarily Level 3 inputs./ The significant unobservable inputs to this fair value measurement include estimates of plugging
costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current
estimated costs. See Note 7 - Asset Retirement Obligations.
The Company estimates the
expected undiscounted future cash flows of its oil and natural gas properties and compares such amounts to the carrying amount
of the oil and natural gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated
undiscounted future cash flows, the Company will adjust the carrying amount of the oil and natural gas properties to fair value.
The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited
to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated operating and development
costs using estimates or proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures
and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash
flows projected. These assumptions represent Level 3 inputs. Impairment of oil and gas assets for the year ended December 31, 2015
and 2014 was $55,753 thousand and $4,428 thousand, respectively.
NOTE 5 - PROPERTY ACQUISITION AND
DIVESTITURE
On March 26, 2014 (the
“Acquisition Date”), the Company completed the purchase of oil and natural gas leases and leasehold interests (the
“Oil and Natural Gas Properties”) from White Oak Resources VI, LLC and Permian Atlantis LLC (collectively the “Seller”)
for the purpose of increasing the Company’s oil and natural gas operations in the Permian Basin. The assets acquired are:
(a) oil and natural gas leases and leasehold interests in Winkler and Loving Counties in Texas and Lea County, New Mexico; (b)
twenty-nine wellbores; and (c) any contracts or agreements related to the foregoing lands, leases and wells. The Oil and Natural
Gas Properties include total acreage held by production of 5,160 gross developed acres (1,983.61 net developed acres). Additionally,
producing wells and surrounding acreage have been unitized under Texas Railroad Commission regulations. Under the terms of the
agreement, the Company purchased the Oil and Natural Gas Properties for $16,803,000 in cash, including before purchase price adjustments.
For the year ended December 31, 2014, the Company recognized $1,932 thousand of oil, natural gas and products sales and $725
thousand of net operating income related to properties acquired from White Oak Resources VI, LLC and Permian Atlantis
LLC and transaction cost of $45 thousand in profession fees.
Unaudited Pro Forma Condensed Combined Financial Statements
The following unaudited
pro forma financial statements give effect to the acquisition of the Oil and Natural Gas Properties. The unaudited pro forma statement
of operations for the year ended December 31, 2014, reflects the acquisition of the Oil and Natural Gas Properties as if it
had occurred on January 1, 2014.
It is not intended to be
indicative of the Company's results of operations or financial position that might have been achieved had the acquisition been
completed as of the dates presented, or the Company's future results of operations or financial position.
in thousands, except share data
|
|
Year Ended
December 31,
2014
|
|
Oil, natural gas, and related product sales
|
|
$
|
20,855
|
|
|
|
|
|
|
Net loss
|
|
$
|
2,442
|
|
|
|
|
|
|
Net loss per basic and diluted common share
|
|
$
|
0.20
|
|
|
|
|
|
|
Weighted average basic and diluted common shares outstanding
|
|
|
12,362,336
|
|
Financial Statement Presentation and Purchase Price Allocation
The following table summarizes
the purchase price and values of assets acquired and liabilities assumed:
Fair value of assets acquired and liabilities assumed (in thousands)
|
|
|
|
|
Proved oil and natural gas properties (1)
|
|
$
|
17,662
|
|
Revenue payable
|
|
|
(27
|
)
|
Asset retirement obligations
|
|
|
(832
|
)
|
Total fair value of assets acquired and liabilities assumed, net
|
|
$
|
16,803
|
|
|
|
|
|
|
Cash consideration transferred
|
|
$
|
16,803
|
|
(1) Amount includes asset retirement costs of approximately $832.
On July 31, 2015, the Company
sold all of its Oklahoma properties, which were located in Logan and Kingfisher Counties, Oklahoma, to Remora Petroleum, LP (Austin,
TX) for $7,249,390. The purchaser is not affiliated with any Company officers, directors or material stockholders.
The following table summarized
the results of operation from the properties sold:
($ in thousands)
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Oil, natural gas, and related product sales
|
|
$
|
1,368
|
|
|
$
|
6,720
|
|
Expenses
|
|
|
269
|
|
|
|
782
|
|
Operating income
|
|
$
|
1,099
|
|
|
$
|
5,938
|
|
As part of this transaction,
the Company entered into the Fifth Amendment to its Credit Agreement with Independent Bank (“Amendment”). The Amendment
provides that $4,000,000 of the purchase price was paid to Independent Bank to pay down its credit facility with Independent Bank.
NOTE 6 - OIL AND NATURAL GAS PROPERTIES
The following table presents a summary of the
Company’s oil and natural gas properties at December 31, 2015 and December 31, 2014:
($ in thousands)
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Oil and natural gas properties
|
|
|
|
|
|
|
|
|
Proved-developed producing properties
|
|
$
|
43,912
|
|
|
$
|
96,691
|
|
Proved-developed non-producing properties
|
|
|
5,865
|
|
|
|
2,880
|
|
Proved-undeveloped properties
|
|
|
-
|
|
|
|
13,330
|
|
Unproved properties
|
|
|
2,389
|
|
|
|
1,996
|
|
Less: Accumulated depletion
|
|
|
(35,282
|
)
|
|
|
(23,131
|
)
|
Total oil and natural gas properties, net of accumulated depletion and impairment
|
|
$
|
16,884
|
|
|
$
|
91,766
|
|
As of December 31, 2015 and December 31, 2014,
the accumulated impairment was $55,985 thousand and $3,955 thousand, respectively.
NOTE 7 - ASSET RETIREMENT OBLIGATIONS
The Company has recognized
the fair value of its asset retirement obligations related to the future costs of plugging, abandonment, and remediation of oil
and natural gas producing properties. The present value of the estimated asset retirement obligations has been capitalized as part
of the carrying amount of the related oil and natural gas properties. The liability has been accreted to its present value as of
the end of each period. At December 31, 2015 and December 31, 2014, the Company evaluated 147 and 169 wells, respectively, and
has determined a range of abandonment dates between January 2016 and October 2044. The following table represents a reconciliation
of the asset retirement obligations for the year ended December 31, 2015 and December 31, 2014:
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Asset retirement obligations, beginning of period
|
|
$
|
3,606
|
|
|
$
|
2,437
|
|
Additions to asset retirement obligation
|
|
|
0
|
|
|
|
859
|
|
Liabilities settled during the period
|
|
|
(155
|
)
|
|
|
0
|
|
Accretion of discount
|
|
|
187
|
|
|
|
320
|
|
Revision of estimate
|
|
|
(41
|
)
|
|
|
(10
|
)
|
Asset retirement obligations, end of period
|
|
$
|
3,597
|
|
|
$
|
3,606
|
|
As of December 31, 2015 and 2014, the current
asset retirement obligation was approximately $392 thousand and $428 thousand respectively, and the long term asset
retirement obligation was approximately $3,204 thousand and $3,177 thousand respectively.
See Note 4 - Fair Value Measurements.
NOTE 8 – DERIVATIVES
We use derivatives to hedge
our oil production. Our current hedge position consists put options, of some which have deferred premiums paid at settlement. These
contracts and any future hedging arrangements may expose us to risk of financial loss in certain circumstances, including instances
where production is less than expected or oil prices increase. In addition, these arrangements may limit the benefit to us of increases
in the price of oil. Accordingly, our earnings may fluctuate significantly as a result of changes in the fair value of our derivative
instrument, which we utilize entirely to hedge our production and do not enter into for speculative purposes. We have not designated
the derivative contracts as hedges for accounting purposes, and accordingly, we record the derivative contracts at fair value and
recognize changes in fair value in earnings as they occur.
At January 1, 2016, we had the following open
crude oil derivative contracts:
|
|
|
|
|
|
January 1, 2016
|
|
|
|
Instrument
|
|
Commodity
|
|
Volume
(bbl /
month)
|
|
|
Floor
Price
|
|
|
Ceilings
Price
|
|
|
Purchased
Put
Option
Price
|
|
January 2016 – March 2016
|
|
Put
|
|
Crude Oil
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
75.00
|
|
January 2016 – December 2016
|
|
Put
|
|
Crude Oil
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
50.00
|
|
January 2016 – December 2016
|
|
Collar
|
|
Crude Oil
|
|
|
3,000
|
|
|
|
54.00
|
|
|
|
79.30
|
|
|
|
|
|
The following tables identify
the fair value amounts of derivative instruments included in the accompanying consolidated balance sheets as derivative contracts,
categorized by primary underlying risk. Balances are presented on a gross basis, prior to the application of the impact of counterparty
and collateral netting. The following tables also identify the net gain (loss) amounts included in the accompanying consolidated
statements of operations as gain (loss) from derivative contracts.
Fair Value of Derivative Financial Instruments
($ in thousands)
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Derivative financial instruments - Current asset
|
|
$
|
733
|
|
|
$
|
1,699
|
|
Derivative financial instruments - Long-term assets
|
|
|
-
|
|
|
|
67
|
|
Net derivative financial instruments
|
|
$
|
733
|
|
|
$
|
1,766
|
|
Effect of Derivative Financial Instruments
($ in thousands)
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Realized gain/(loss) on settlement of derivative contracts
|
|
$
|
2,303
|
|
|
$
|
186
|
|
Change in fair value of derivative contracts
|
|
|
(1,033
|
)
|
|
|
1,880
|
|
Realized/Unrealized gain/(loss) from derivative contracts
|
|
$
|
1,270
|
|
|
|
2,066
|
|
NOTE 9 - NOTES PAYABLE
On
June 27, 2013, the Company entered into a credit agreement (“Credit Agreement”) with Independent Bank to borrow up
to $100,000,000 at a current rate of 4.00% annum. The Credit Agreement was obtained to fund the development of the Company’s
oil and natural gas properties and refinance the prior bank facility. At December 31, 2015 and December 31, 2014, the Company had
approximately $12,600,000 and $22,500,000 in borrowings outstanding under the Credit Agreement, respectively.
Loans
under the Credit Agreement bear interest at the greater of: (1) the prime rate, the annual rate of interest announced by the Wall
Street Journal as its “prime rate”, or (2) the floor rate of 4.00%.
In
November 2015 counsel for Independent Bank had notified us of the following defaults under IB Credit Agreement: i) the interest
coverage ratio covenant set forth in Section 7.15.1 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, (ii)
the current ratio covenant set forth in Section 7.15.2 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, (iii)
the leverage ratio covenant set forth in Section 7.15.3 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015,
and (iv) the Company is not currently maintaining the minimum Commodity Hedging Transactions (as defined in the IB Credit Agreement)
required by Section 7.21 of the IB Credit Agreement. The letter further stated that the bank was contemplating its course of action.
On
November 24, 2015, we entered into the Forbearance Agreement and the Third Amendment to the Amended and Restated Credit Agreement
with Independent Bank under which Independent Bank, acting for itself and as administrative agent for other lenders, agreed to
forbear exercising any of its remedies for the existing covenant defaults for period of time to permit us to seek refinancing of
the indebtedness owed to Independent Bank in the approximate amount of $11,000,000, which is referred to as the IB Indebtedness
or a sale of sufficient assets to repay the IB Indebtedness. The Forbearance Period began with the execution of the IB Forbearance
Agreement on November 24, 2015 and ended on January 31, 2016. The Forbearance Period was subsequently extended to March 31,
2016.
In
connection with IB Forbearance Agreement, we provided certain additional collateral protections to Independent Bank. The Company
granted a first lien mortgage on a newly completed well in New Mexico. We also delivered certain written directives to Independent
Bank. In the event of default on the IB Forbearance Agreement or any IB Non-Forbearance Default, Independent Bank is authorized
to send the written directives to Cargill, the counterparty to certain hedging contracts with the Company. These written directives
instruct Cargill to pay over to Independent Bank “all hedge settlement proceeds, all hedge liquidation proceeds, and all
amount otherwise payable by such hedge providers to Brushy.” We also executed and delivered to Independent Bank certain letters
in lieu of transfer orders, whereby we instructed first purchasers of oil and gas production to pay directly to Independent Bank
all production revenues attributable to our interest in such oil and gas assets. Independent Bank agrees not to send such letters
provided that the IB Indebtedness is paid in full on or before the end of the Forbearance Period. At the time of the extension
of the Forbearance Period to March 31, 2016, we agreed to unwind the remaining existing hedge contract with Cargill and permit
Cargill to pay to Independent Bank all hedge settlement proceeds, all hedge liquidation proceeds, and all amounts otherwise payable
by Cargill to us. Such payments satisfied outstanding interest and default interest owing to Independent Bank as well as
certain other expenses. In addition, such payments reduced the principal due Independent Bank by $406,720.
During
the Forbearance Period, we are not permitted to drill new oil or gas wells or to make any distributions to equity holders. Furthermore,
this also cross defaulted the SOSVentures Credit Agreement, however the maturity of the second lien note to SOSventures was extended
to August 1, 2016.
We are currently in
discussions with the lenders under the IB Credit Agreement regarding a further extension of the Forbearance Period. We are
also in discussions with Lilis and other financings parties regarding possible refinance options for the amount outstanding under
the IB Credit Agreement
NOTE 10 - STOCK BASED COMPENSATION AND CONDITIONAL
PERFORMANCE AWARDS
On April 1, 2012, the Company
entered into employment agreements (the “Employment Agreement”) which provided a restricted stock grant and a conditional
performance award to key members of management.
The restricted stock grant
of 349,650 shares had a grant date fair value of $10.00 per share as approved by the Company's compensation committee and vests
in full upon the earlier of an initial public offering (“IPO”) which includes the sale of shares to the public, a business
combination whereas 50% or more of the voting power is transferred to the new owners, or March 1, 2015. Those 349,650 shares were
earned by the employee recipients and issued to them during the three month period ending March 31, 2015.
During the twelve months
ended December 31, 2015 and 2014, the Company incurred a stock-based compensation expense of approximately $300,000 and $1,199,000,
respectively, related to the restricted stock grant, which is included in the accompanying consolidated statements of operations
in general and administrative expenses.
Additionally, the Employment
Agreement provides for a conditional performance award where if an IPO occurs, the employee will receive: (1) a cash payment of
1% of the difference between the Company market capital and the book value at the time of the IPO, (2) common stock options to
purchase 1.0% of the fully-diluted capital stock as of the IPO date and IPO price which will vest over a four year period and contain
a cashless exercise, (3) common stock options to purchase 1.0% of the fully-diluted capital stock as of the 2nd anniversary of
the IPO date at the closing price of the common stock on the 2nd anniversary date of the IPO and will vest six years after the
grant and contain a cashless exercise. As of the twelve months months ended December 31, 2015 and 2014, the conditional performance
feature is not probable and as such, no compensation expense related to the conditional performance feature has been recognized.
On August 30, 2014, the
Company amended and restated the Employment Agreement which provided for additional stock options.
The equity award of options
to purchase 900,000 shares at the exercise price of $4.75 per share and vesting over three years from September 4, 2014 with a
one-year cliff (in respect of 300,000 shares) and monthly vesting thereafter of 25,000 shares over the remaining two years. During
the twelve months ended December 31, 2015 and 2014, the Company incurred a stock-based compensation expense of approximately $825,000
and $275,000, respectively, related to stock option, which is included in the accompanying consolidated statements of operations
in general and administrative expenses. As of December 31 2015, there was approximately $1,375,000 of unrecognized stock-based
compensation related to the non-vested stock options to be recognized over 1.67 years.
The
assumptions used in the Black-Scholes Option Pricing Model for the stock options granted were as follows:
|
|
2014
|
|
Risk-free interest rate
|
|
|
1.87
|
%
|
Expected volatility of common stock
|
|
|
92
|
%
|
Dividend yield
|
|
$
|
0.00
|
|
Expected life of options
|
|
|
5.72 years
|
|
There
was no new option granted in 2015. On December 31, 2015, there were 900,000 stock options outstanding and the intrinsic
value of the associated options was zero. The weighted average exercise of $4.75/share, weighted average grant date fair value
of $2.75/share and the weighted average remaining contractual life of 8.55 years . On December 31, 2015, 425,000 stock options
were exercisable.
NOTE 11 - RELATED PARTY TRANSACTIONS
Subordinated Credit Facility with SOSVentures
The Chairman of the Company’s
Board of Directors, Bill Liao, works for SOSventures. Further, a group composed of SOSventures, Sean O’Sullivan Revocable
Living Trust and Bradford R. Higgins constitute a group owning 4,863,720 or 39.34% of the Company’s common stock shares.
On June 3, 2014 the Company agreed to amend
its credit agreement with SOSventures, originally entered into on July 25, 2013, providing for a term loan through February 16,
2016 in an amount up to $20,000,000 at an 18.00% interest rate. The loan under this agreement is secured by a second lien on the
Company’s assets.
The SOSventures credit
agreement requires the Company to maintain certain financial ratios. First, the Company must maintain an interest coverage ratio
of 3:1 at the end of each quarter so that its consolidated net income less the Company’s fees under the credit facility,
lender expenses, non-cash charges relating to the hedge agreements, interest, income taxes, depreciation, depletion, amortization,
exploration expenditures and costs and other non-cash charges (netted for noncash income) (“EBITDAX”) is greater than
3 times the Company’s interest expense under the credit facility. Second, the Company must maintain a debt to EBITDAX ratio
of less than 3.5:1 at the end of each quarter. Third, the Company must maintain a current ratio of at greater than 1:1 at the end
of each quarter, meaning that the Company’s consolidated current assets (including the unused amount of the credit facility
by excluding non-cash assets under ASC 410 and 815) must be greater than the Company’s consolidated current liabilities (excluding
non-cash obligations under ASC 410 and 815 and current maturities under the credit facility.)
The credit agreement prevents
the Company from incurring indebtedness to banks or lenders, other than Independent Bank, without the consent of SOSventures. It
also prevents the Company from incurring most contingent obligations or liens (other than to Independent Bank). It also restricts
the Company’s ability to pay dividends, issue options and warrants and repurchase the Company’s common stock shares.
The limitation on options and warrants does not apply to equity compensation plans.
This credit facility is currently in default
due to the default under the IB Credit Agreement.
As of March 16, 2016, with
accrued and unpaid interest the Company has $21.6 million drawn against the SOSventures credit facility. In light of the December
19, 2014 notice from Independent Bank relating to the payment of interest to SOSventures, pursuant to the Intercreditors Agreement,
the Company is are accruing interest payments to SOSventures since the date of that notice.
NOTE 12 - LEGAL PROCEEDINGS
From
time-to-time, the Company may become subject to proceedings, lawsuits and other claims in the ordinary course of business including
proceedings related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable
with assurance.
The Company is subject
to various possible contingencies that arise primarily from interpretation of federal and state laws and regulations affecting
the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil and natural
gas sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues and
other matters. Although management believes that it has complied with the various laws and regulations, administrative rulings
and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition, environmental
matters are subject to regulation by various federal and state agencies.
Lawsuit Relating to 17.23% of our
Common Stock Shares
Approximately
17.23% of the Company common stock was interpleaded into Connecticut Superior Court for the Judicial District of Stamford/Norwalk
at Stamford, Cause No. FST-CV12-6015112-S (“Interpleader Action”). These are the residual shares of common stock that
belonged to the Partnerships after the distribution of the partnerships shares. Claims related to the Interpleader Action were
heard in an American Arbitration Association arbitration in 2015. The claimants were Gregory Imbruce; Giddings Investments
LLC; Giddings Genpar LLC, Hunton Oil Genpar LLC, ASYM Capital Ill LLC, Glenrose Holdings LLC; ASYM Energy Investments
LLC. “Certain” respondents and counterclaimants were Charles Henry, Ahmed Ammar; John P. Vaile, as Trustee of
John P. Vaile Living Trust, John Paul Otieno, SOSventures, Bradford Higgins, William Mahoney, Edward M. Conrads, Robert J. Conrads,
and the Partnerships. “PKG Respondents” and cross claimants were William F. Pettinati, Jr., Sigma Gas Barbastella Fund,
Sigma Gas Antrozous Fund, Nicholas P. Garofolo (the plaintiffs in the above-referenced stockholder litigation) who made claims
against Charles S. Henry, III, Bradford Higgins and SOSventures. The relief respondents were Rubicon Resources LLC, Sean O’Sullivan,
King Lee, Michael Rihner, Scott Decker, Andrew Gillick, Briana Gillick, Steve Heinemann, Stanley Goldstein, Sidney Orbach, James
P. Ashman, and Patricia R. Ashman. The claims, counterclaims and cross claims relate to the governance, control and termination
of the Partnerships, including the distribution by the Partnerships of our shares of common stock to the limited partners in the
Partnerships in a liquidating distribution in February 2014 as part of a “monetization” event, and other matters.
On September 10, 2015,
the American Arbitration Association issued an arbitration award in the Interpleader Action, which is referred to as the Award.
The Award states as follows:
|
1)
|
All claims asserted by Claimants, including Gregory Imbruce and various business entities controlled
by Mr. Imbruce against all Respondents were denied and award was made in favor of the “Certain” respondents, including the
Company director, Charles S. Henry, III, as well as SOSventures, Bradford Higgins, John Paul Otieno, Estate of William Mahoney,
Ahmed Ammar, John P. Vaile, as Trustee of John P. Vaile Living Trust, Edward M. Conrads, Robert J. Conrads, Giddings Oil &
Gas LP, Asym Energy Fund III LP and Hunton Oil Partners LP.
|
|
2)
|
All claims asserted by Claimants, Gregory Imbruce and various business entities controlled by Mr.
Imbruce against Relief Respondents, including Rubicon Resources LLC, Sean O’Sullivan Revocable Living Trust, King Lee, Michael
Rihner, Scott Decker, Andrew Gillick, Briana Gillick, Steve Heinemann, Stanly Goldstein, Sidney Orbach, James P. Ashman and Patricia
R. Ashman, were denied.
|
|
3)
|
An award was made in favor of the “Certain” respondents, including the Company director,
Charles S. Henry, III, as well as SOSventures, Bradford Higgins, John Paul Otieno, Estate of William Mahoney, Ahmad Ammar, John
P. Vaile, as Trustee of John P. Vaile Living Trust, Edward M. Conrads, Robert J. Conrads, Giddings Oil & Gas LP, Asym Energy
Fund III LP and Hunton Oil Partners LP against Mr. Imbruce and his entities on the following claims:
|
|
a)
|
breach of fiduciary duty;
|
|
b)
|
breach of implied covenant of good faith and fair dealing;
|
|
c)
|
partnership dissolution;
|
|
g)
|
violation of Connecticut Unfair Trade Practices Act;
|
|
i)
|
piercing the corporate veil.
|
|
4)
|
All claims asserted by William F. Pettinati, Jr. Sigma Gas Barbastella Fund, Sigma Gas Antrozous
Fund and Nicholas P. Garofolo against the Company's director, Charles S. Henry III, as well as SOSventures and Bradford
Higgins were denied.
|
|
5)
|
A declaratory award was entered declaring that the removal of Hunton Oil Genpar LLC, Giddings Genpar
LLC and Asym Capital III LLC and/or Gregory Imbruce as the General Partner(s) of the Partnerships was lawful and in compliance
with all legal and contractual requirements, and thus was effective;
|
|
6)
|
A declaratory award that the distribution of our -issued common stock made in February 2014 to
limited partners in the Partnerships with remaining shares of common stock ultimately being interpleaded into Court in Connecticut
was lawful, met all legal requirements and is effective in that the distribution was the result of a “monetization”
event under the Partnership agreements;
|
|
7)
|
A declaratory award that the Partnerships were effectively dissolved at the time of the distribution
of the above-referenced shares of common stock issued by the Company from the Partnerships to the limited partners in
the Partnerships;
|
|
8)
|
A denial of any and all fees and expenses claimed by Mr. Imbruce and his entities due to “multiple
and repeated violations of the Connecticut Uniform Securities Act;”
|
|
9)
|
A denial of fees and expenses claimed by Mr. Imbruce and his entities for the time periods subsequent
to the 2011 rollup that formed us;
|
|
10)
|
An award of damages in favor of the “Certain” respondents, in the amount of $1,602,235,
subject to trebling under a Civil Theft finding to $4,806,705, plus attorney and expert fees of $2,998,839 for a total award of
$7,805,544, payable by Claimants, including Mr. Imbruce and his business entities;
|
|
11)
|
Injunctive relief ordering an accounting of the sources and uses of all funds and other assets
of the Partnerships during the time that Mr. Imbruce and his entities served as general partners of the Partnerships;
|
|
12)
|
Post-judgment interest at 10 percent per year payable by Mr. Imbruce and his business entities;
and
|
|
13)
|
Arbitration administrative fees, expenses and compensation of the Arbitrator totaling $122,200
to be paid by Gregory Imbruce et al, and William F. Pettinati, Jr., Sigma Gas Barbastella Fund, Sigma Gas Antrozous Fund and Nicholas
P. Garofolo.
|
The “Certain” respondents filed
in Connecticut Superior Court seeking to confirm the Award. Likewise, Claimants have filed in Connecticut Superior Court to vacate
the Award. If the Connecticut Superior Court confirms the Award, we anticipate that the Court will subsequently issue a related
order as to ownership of the 2,190,891 common stock of the Company, which may result in modifying the Company ownership
structure.
Bexar County Proceedings
On April 17, 2015,the Company was served
with a lawsuit filed in Bexar County, Texas by William F. Pettinati, Jr., Nicholas Garofolo, Sigma Gas Barbastella Fund and Sigma
Gas Antrozous Fund against Starboard (now Brushy), its directors, its Chief Operating Officer, Edward Shaw, its former Chief Financial
Officer, Eric Alfuth, our stockholder, Bradford Higgins, and Sean O’Sullivan, the managing director of our stockholder, SOSventures
(the “Bexar County Proceedings”). Mr. Pettinati, Mr. Garofolo and the Sigma Gas Antrozous Fund are stockholders. Mr.
Pettinati owns 145,112 shares, Mr. Garofolo owns 226,680 shares of common stock and Sigma Gas Antrozous Fund owns 44,610 shares
of common stock. Combined these stockholders account for approximately 3.3% of the Company's outstanding common stock. These parties
became stockholders in February 2014.
The Plaintiffs allege
several derivative and direct causes of action. These derivative claims include, breach of fiduciary duty, waste of corporate assets,
concerted action and conspiracy, joint enterprise, agency, alter ego, exemplary damages, and unjust enrichment. The direct claims
include, breach of fiduciary duty, conversion, shareholder oppression, concerted action and conspiracy, declaratory judgment that
the distribution of stock to the plaintiffs was invalid, joint enterprise, agency, alter ego, exemplary damages, concerted action
and conspiracy and failure to allow for inspection of books and records. Many of the allegations relate to events that allegedly
happened before the Plaintiffs became stockholders, including the distributions from the Partnerships that led to the Plaintiffs
becoming stockholders in February 2014. Some similar claims involving these Plaintiffs (including the legality of the Partnerships’
liquidating distribution) were previously heard in the arbitration relating to the Partnerships referenced above. Plaintiffs were
parties to that arbitration. For actions after February 2014, Plaintiffs complain that the Company's common stock still lacks a
trading venue, that a books and records request was not honored, that we “delayed” a public offering, that SOSventures
had allegedly taken steps to “foreclose” on the Company's assets under the SOSventures Credit Agreement and that we
filed for an extension to the filing date for the Company's annual report on Form 10-K for the year ending December 31, 2014. On
October 6, 2015 Plaintiffs withdrew the claim about not honoring a books and records request.
The matter is styled Sigma Barbastella
Fund et al v. Charles S. Henry, III et al. and it is Cause No. 20105-CI-05672 in the 224th District Court in Bexar County, Texas.
The Company's directors and officers
are subject to indemnification under the Company's bylaws.
Settlement of Interpleader Action
and Bexar County Proceedings
On February 17, 2016, the various parties
to the Interpleader Action and the Bexar County Proceedings entered into a global settlement agreement (the “Settlement Agreement”)
under which the parties to the proceedings issued mutual releases and the plaintiffs in all proceedings agreed to withdraw their
claims. In return, the plaintiffs received a cash settlement, the majority of which was covered by the Company's insurance.
NOTE 13 - STOCKHOLDER’S EQUITY
Preferred Shares
The
Company is authorized to issue up to 10,000,000 preferred shares, par value $0.001 per share, with such designations, voting and
other rights and preferences as may be determined from time to time by the Company’s board of directors. No preferred shares
were issued and outstanding as of December 31, 2015 and 2014.
Common Shares
The
Company has a single class of common shares that have the same rights, preferences, limitations, and qualifications. The Company
is authorized to issue up to 150,000,000 shares, par value $0.001 per share, in the aggregate and from time to time may increase
the number of shares authorized.
Warrants
Upon
entering into the Second Amendment to the First Amended and Restated Credit Agreement with SOSVentures, SOSVentures received warrants
to purchase 2,542,397 of the Company’s common shares for $1.00 per share with a two-year term. The intrinsic value associated
with the outstanding warrants was zero at December 31, 2015, as the strike price of all warrants exceeded the implied market price
for Common Stock. The remaining contract life was 1.29 years. The implied value of the warrants were based on our peer group, which
included Company’s owning assets in the same areas and of similar size. This valuation determined that the value of
the warrants were zero. As such, the Company has placed no value on the warrants issued.
NOTE 14 - INCOME
TAXES
For
the years ended December 31, 2015 and 2014, the Company estimated that its current and deferred tax provision was as follows:
|
|
2015
|
|
|
2014
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
17,157
|
|
|
|
(15,465
|
)
|
Total current tax benefit / (expense)
|
|
|
17,157
|
|
|
|
(15,465
|
)
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
27,984,379
|
|
|
|
1,449,296
|
|
State
|
|
|
133,932
|
|
|
|
53,375
|
|
Total deferred tax benefit
|
|
|
28,118,311
|
|
|
|
1,502,671
|
|
Change in valuation allowance
|
|
|
(14,078,569
|
)
|
|
|
-
|
|
Total deferred income tax expense
|
|
|
14,039,742
|
|
|
|
1,502,671
|
|
Total current and deferred tax expenses
|
|
$
|
14,056,899
|
|
|
$
|
1,487,206
|
|
A
reconciliation of income tax expense (benefit) computed by applying the U.S. federal statutory income tax rate and the reported
effective tax rate on income for the years ended December 31, 2015 and 2014 are as follows:
|
|
2015
|
|
|
2014
|
|
Income tax provision calculated using the federal statutory income tax rate
|
|
$
|
(27,139,366
|
)
|
|
$
|
1,444,432
|
|
State income taxes, net of federal income taxes
|
|
|
(25,205
|
)
|
|
|
37,910
|
|
Permanent differences, rate changes and other
|
|
|
3,932
|
|
|
|
4,864
|
|
Adjustment of previous deferred tax amounts
|
|
|
(974,829
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
14,078,569
|
|
|
|
-
|
|
Total income tax expense
|
|
$
|
(14,056,899
|
)
|
|
$
|
(1,487,206
|
)
|
Deferred income taxes arise from temporary differences in the recognition of certain items for income tax and financial
reporting purposes. The approximate tax effects of significant temporary differences which comprise the deferred tax assets and
liabilities at December 31, 2015 and 2014 are as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforwards
|
|
$
|
9,380,168
|
|
|
$
|
6,864,241
|
|
Oil and natural gas properties and other equipment
|
|
|
2,122,275
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
1,596,776
|
|
|
|
1,214,378
|
|
Asset retirement obligations
|
|
|
1,222,830
|
|
|
|
1,225,887
|
|
Other
|
|
|
5,784
|
|
|
|
5,784
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
14,327,833
|
|
|
|
9,310,290
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Oil and natural gas properties and other equipment
|
|
|
-
|
|
|
|
(22,749,563
|
)
|
Derivatives
|
|
|
(249,264
|
)
|
|
|
(600,469
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(249,264
|
)
|
|
|
(23,350,032
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax (liability)
|
|
|
14,078,569
|
|
|
|
(14,039,742
|
)
|
Valuation allowance
|
|
|
(14,078,569
|
)
|
|
|
-
|
|
Deferred tax asset (liability), net of valuation allowance
|
|
$
|
-
|
|
|
$
|
(14,039,742
|
)
|
At
December 31, 2015, the Company has net operating losses as follows:
|
|
Amount
|
|
|
Expiration
|
Net operating losses:
|
|
|
|
|
|
|
Federal
|
|
$
|
26,846,276
|
|
|
Dec. 2032 to 2035
|
State
|
|
|
6,562,922
|
|
|
Dec. 2032 to 2035
|
In
assessing the need for a valuation allowance on our deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent
upon whether future book income is sufficient to reverse existing temporary differences that give rise to deferred tax assets,
as well as whether future taxable income is sufficient to utilize net operating loss and credit carryforwards. Assessing the need
for, or the sufficiency of, a valuation allowance requires the evaluation of all available evidence, both positive and negative.
Management had no positive evidence to consider. Negative evidence considered by management includes cumulative book and tax losses
in recent years, forecasted book and tax losses, no taxable income in available carryback years, and no tax planning strategies
contemplated to realize the valued deferred tax assets.
As
of December 31, 2015 and 2014, management assessed the available positive and negative evidence to estimate if sufficient future
taxable income would be generated to use the Company’s deferred tax assets and determined that it is not more-likely-than-not
that the deferred tax assets would be realized in the near future. Therefore, the Company recorded a full valuation allowance of
approximately $14,078,569 and $0 on its deferred tax assets as of December 31, 2015 and 2014, respectively.
NOTE 15 - SUBSEQUENT EVENTS
Credit Facilities and Forbearance Agreement.
The maturity of our
second lien note to SOSventures was extended to August 1, 2016. The Forbearance Period began with the execution of the IB Forbearance
Agreement on November 24, 2015 and ended on January 31, 2016, but was subsequently extended to March 31, 2016. We are currently
in discussions with the lender under the IB Credit Agreement regarding a further extension of the Forbearance Period.
On January 20, 2016,
the Company, Lilis and Merger Sub entered into an amendment to the merger agreement (the “Amendment”). Pursuant to
the Amendment: (i) the amount of the refundable deposit was increased by $1 million to a total of $2 million and (ii) the scope
of the refundable deposit was broadened such that it now covers the amount paid by Lilis to Independent Bank on December 29, 2015
in addition to certain other matters, such as payments towards accounts payable, transactions costs and other operating costs of
the Company.
On March 24, 2016,
the Company, Lilis and Merger Sub entered into a second amendment to the Merger Agreement (the “Second Amendment”).
Pursuant to the Second Amendment: (i) the definition of refundable deposit was modified to include such further increases as may
be mutually agreed upon between the parties, (ii) the amount and treatment of restricted stock units of the Company with respect
to the Merger Agreement was clarified, the definition of “Stock Exchange Ratio” was fixed at 4.550916 to account for
certain grants of restricted stock to members of the Board of Directors of the Company pursuant to existing service agreements
and (iv) the definition of “Termination Date” was changed from April 30, 2016 to May 31, 2016.
SUPPLEMENTAL INFORMATION
Presented in accordance with
FASB ASC Topic 932,
Extractive Activities
- Oil and Gas
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Supplemental Oil and Natural Gas Disclosures (Unaudited)
The following tables set forth supplementary
disclosures for oil and gas producing activities in accordance with FASB ASC Topic 932,
Extractive Activities - Oil and Gas
.
Capitalized Costs
The following table presents a summary of the
Company’s oil and natural gas properties at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Oil and natural gas properties
|
|
|
|
|
|
|
|
|
Proved-developed producing properties
|
|
$
|
43,912
|
|
|
$
|
96,691
|
|
Proved-developed non-producing properties
|
|
|
5,865
|
|
|
|
2,880
|
|
Proved-undeveloped properties
|
|
|
-
|
|
|
|
13,330
|
|
Unproved properties
|
|
|
2,389
|
|
|
|
1,996
|
|
Less: Accumulated depletion
|
|
|
(35,282
|
)
|
|
|
(23,131
|
)
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas properties, net of accumulated depletion
|
|
$
|
16,884
|
|
|
$
|
91,766
|
|
The following table summarizes
costs incurred in oil and natural gas property acquisition, exploration, and development activities. Property acquisition costs
as those incurred to purchase lease or otherwise acquire property, including both undeveloped leasehold and the purchase of reserves
in place. Exploration costs include costs of identifying areas that may warrant examination and examining specific areas that are
considered to have prospects containing oil and natural gas reserves, including costs of drilling exploratory wells, geological
and geophysical costs, and carrying costs on undeveloped properties. Development costs are incurred to obtain access to proved
reserves, including the cost of drilling development wells, and to provide facilities for extracting, treating, gathering and storing
oil and natural gas. Additionally, costs incurred also include new asset retirement obligations established. Asset retirement obligations
included in the tables below in the as reported columns for the years ended December 31, 2015 and 2014 were approximately $(42,000)
and $849,000, respectively
Costs incurred (capitalized
and charged to expense) in oil and natural gas activities for the years ended December 31, 2015 and 2014 were as follows:
|
|
2015
|
|
|
2014
|
|
Acquisitions of proved properties
|
|
$
|
-
|
|
|
$
|
16,803,448
|
|
Exploration
|
|
|
73,496
|
|
|
|
785,314
|
|
Development
|
|
|
8,118,390
|
|
|
|
17,244,950
|
|
|
|
|
|
|
|
|
|
|
Total costs incurred
|
|
$
|
8,191,886
|
|
|
$
|
34,749,337
|
|
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Supplemental Oil and Natural Gas Disclosures (Unaudited) (continued)
Results of operations from
oil and natural gas producing activities for the years ended December 31, 2015 and 2014, excluding Company overhead and interest
costs, were as follows:
|
|
2015
|
|
|
2014
|
|
Oil, natural gas and related product sales
|
|
$
|
8,606,606
|
|
|
$
|
20,172,792
|
|
Lease operating costs
|
|
|
(3,677,845
|
)
|
|
|
(5,457,471
|
)
|
Production taxes
|
|
|
(369,317
|
)
|
|
|
(695,693
|
)
|
Exploration costs
|
|
|
(49,531
|
)
|
|
|
(80,533
|
)
|
Depletion
|
|
|
(22,510,290
|
)
|
|
|
(10,140,152
|
)
|
Impairment
|
|
|
(55,753,481
|
)
|
|
|
(4,428,378
|
)
|
Results of operations from oil and natural gas producing activities
|
|
$
|
(73,753,858
|
)
|
|
$
|
(629,435
|
)
|
Proved Reserves Methodology
The Company’s estimated
proved reserves, as of December 31, 2014 and 2013, are made in accordance with the SEC’s final rule,
Modernization of
Oil and Gas Reporting,
which amended Rule 4-10 of Regulation S-X (the “Final Rule”). As defined by the Final Rule,
proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated
with reasonable certainty to be economically producible in future years from known reservoirs under existing economic conditions,
operating methods, and government regulations. Projects to extract the hydrocarbons must have commenced or an operator must be
reasonably certain that it will commence the projects within a reasonable time. In addition, there must exist, or there must be
a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means
of delivering oil and gas or related substances to market, and all permits and financing required to implement the projects. Further
requirements for assignment of estimated proved reserves include the following:
The area of a reservoir considered proved includes
(A) that portion delineated by drilling and defined by natural gas, oil, and/or water contacts, if any; and (B) adjacent undrilled
portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible
oil or gas on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities
in a reservoir are limited by the lowest known hydrocarbons and highest known oil seen in well penetrations unless geoscience,
engineering, or performance data and reliable technology establishes a lower or higher contact with reasonable certainty. Reliable
technologies are any grouping of one or more technologies (including computational methods) that have been field-tested and have
been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or
in an analogous formation.
Reserves which can be produced economically
through applications of improved recovery techniques (including, but not limited to fluid injections) are included in the proved
classification when successful testing by a pilot project in an area of the reservoir with properties no more favorable than in
the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, and other evidence
using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was
based.
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Supplemental Oil and Natural Gas Disclosures (Unaudited) (continued)
Existing economic conditions include prices
and costs at which economic producibility from a reservoir is to be determined. The prices used are the average crude oil and natural
gas prices during the twelve month period prior to the ending date of the period covered by the report, determined as an unweighted
arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual
arrangements, excluding escalations based upon future conditions.
Reserves engineering is
a subjective process of estimating underground accumulations of crude oil, condensate, natural gas, and natural gas liquids that
cannot be measured in an exact manner. The accuracy of any reserves estimate is a function of the quality of available date and
of engineering and geological interpretation and judgment. The reserves actually recovered, the timing of production of those reserves,
as well as operating costs and the amount and timing of development expenditures may be substantially different from original estimates.
Revisions result primarily from new information obtained from development drilling, production history, field tests, and data analysis
and from changes in economic factors including expectation and assumptions as to availability of financing for development projects.
Reserve Quantity Information
The following table presents the Company’s
estimate of its proved oil and gas reserves all of which are located in the United States. The estimates have been prepared with
the assistance of Forrest A. Garb & Associates, Inc., an independent petroleum reservoir engineering firm. Oil reserves, which
include condensate and natural gas liquids, are stated in barrels and gas reserves are stated in thousands of cubic feet.
PROVED-DEVELOPED AND UNDEVELOPED RESERVES
|
|
Crude Oil
(Bbl)
|
|
|
Natural Gas
(Mcf)
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
3,650,910
|
|
|
|
8,639,620
|
|
Revisions of previous estimates
|
|
|
(772,982
|
)
|
|
|
(758,638
|
)
|
Extensions and discoveries
|
|
|
558,000
|
|
|
|
333,230
|
|
Acquisitions of reserves
|
|
|
797,360
|
|
|
|
3,811,000
|
|
Sales of reserves
|
|
|
(59,370
|
)
|
|
|
(474,930
|
)
|
Production
|
|
|
(180,898
|
)
|
|
|
(779,012
|
)
|
December 31, 2014
|
|
|
3,993,020
|
|
|
|
10,771,270
|
|
Revisions of previous estimates
|
|
|
(3,334,352
|
)
|
|
|
(7,207,552
|
)
|
Extensions and discoveries
|
|
|
327,865
|
|
|
|
1,313,149
|
|
Acquisitions of reserves
|
|
|
-
|
|
|
|
-
|
|
Sales of reserves
|
|
|
(165,430
|
)
|
|
|
(1,430,690
|
)
|
Production
|
|
|
(152,273
|
)
|
|
|
(676,847
|
)
|
December 31, 2015
|
|
|
668,830
|
|
|
|
2,769,330
|
|
|
|
|
|
|
|
|
|
|
PROVED DEVELOPED RESERVES
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
668,830
|
|
|
|
2,769,330
|
|
December 31, 2014
|
|
|
853,560
|
|
|
|
4,324,760
|
|
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Supplemental Oil and Natural Gas Disclosures (Unaudited) (continued)
The following table presents the Company’s
changes in proved undeveloped reserves.
PROVED UNDEVELOPED RESERVES
|
|
Crude Oil
(Bbl)
|
|
|
Natural Gas
(Mcf)
|
|
December 31, 2013
|
|
|
3,166,300
|
|
|
|
6,539,420
|
|
Revisions of previous estimates
|
|
|
(704,790
|
)
|
|
|
(921,280
|
)
|
Extensions and discoveries
|
|
|
540,150
|
|
|
|
237,800
|
|
Acquisitions of reserves
|
|
|
531,350
|
|
|
|
1,887,730
|
|
Sales of reserves
|
|
|
(59,370
|
)
|
|
|
(474,930
|
)
|
Transfer to developed
|
|
|
(334,170
|
)
|
|
|
(822,240
|
)
|
December 31, 2014
|
|
|
3,139,470
|
|
|
|
6,446,500
|
|
Revisions of previous estimates
|
|
|
(3,099,750
|
)
|
|
|
(6,128,780
|
)
|
Extensions and discoveries
|
|
|
0
|
|
|
|
0
|
|
Acquisitions of reserves
|
|
|
0
|
|
|
|
0
|
|
Sales of reserves
|
|
|
(39,720
|
)
|
|
|
(317,720
|
)
|
Transfer to developed
|
|
|
0
|
|
|
|
0
|
|
December 31, 2015
|
|
|
0
|
|
|
|
0
|
|
Due to the lack of available
capital required to drill the proved undeveloped locations, all proven undeveloped reserves were removed during 2015.
Future cash flows are computed
by applying a first-day-of-the-month 12-month average price of natural gas (Henry Hub) and oil (West Texas Intermediate) to year
end quantities of proved natural gas and oil reserves. Future operating expenses and development costs are computed primarily by
the Company's petroleum engineers by estimating the expenditures to be incurred in developing and producing the Company’s
proved natural gas and oil reserves at the end of the year, based on year end costs and assuming continuation of existing economic
conditions. For the year ended December 31, 2015, the oil and natural gas prices were applied at $47.03/Bbl and $2.23/Mcf, respectively,
in the standardized measure. For the year ended December 31, 2014, the oil and natural gas prices were applied at $91.42/Bbl and
$6.53Mcf, respectively, in the standardized measure.
Standardized Measure of Discounted Future Net Cash Flow and Changes
Therein Relating to Proved Oil and Gas Reserves
The following tables, which
presents a standardized measure of discounted future cash flows and changes therein relating to proved oil and gas reserves as
of December 31, 2015 and 2014, for the years ended December 31, 2015 and 2014, is presented pursuant to ASC 932. In computing this
data, assumptions other than those required by the Financial Accounting Standards Board could produce different results. Accordingly,
the data should not be construed as being representative of the fair market value of the Company’s proved oil and gas reserves.
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Supplemental Oil and Natural Gas Disclosures
(Unaudited) (continued)
A discount factor of 10
percent was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is
not intended to represent the replacement costs or fair value of the Company's natural gas and oil properties. An estimate of fair
value would take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future
changes in prices and costs, and a discount factor more representative of time value of money and the risks inherent in reserve
estimates of natural gas and oil producing operations. There have been no estimates for future plugging and abandonment costs
Standardized Measure of Discounted Future
Net Cash Flows as of December 31, 2015
Future cash inflows
|
|
|
37,611,800
|
|
Less: Future production costs
|
|
|
(16,468,590
|
)
|
Future development costs
|
|
|
-
|
|
Future income tax expense
|
|
|
-
|
|
Future net cash flows
|
|
|
21,143,210
|
|
10% discount factor
|
|
|
(6,300,765
|
)
|
Strandardized measure of discounted future net cash inflows
|
|
|
14,842,445
|
|
Changes in Standardized Measure of Discounted
Future Net Cash Flows for the Year Ended December 31, 2015
Standardized measure - beginning of year
|
|
|
90,116,131
|
|
Sales of oil and natural gas, net of production costs
|
|
|
(4,559,444
|
)
|
Net changes in prices and production costs
|
|
|
(134,395,658
|
)
|
Development costs incurred during the year
|
|
|
457,344
|
|
Changes in future development costs
|
|
|
71,777,018
|
|
Extensions, discoveries, and improved recoveries
|
|
|
9,321,938
|
|
Revisions/timing of previous quantity estimates
|
|
|
(69,250,616
|
)
|
Accretion of discount
|
|
|
13,199,248
|
|
Net change in income taxes
|
|
|
39,332,749
|
|
Purchases and sale of mineral interests
|
|
|
(1,156,265
|
)
|
|
|
|
|
|
End of year
|
|
|
14,842,445
|
|
Standardized Measure of Discounted Future
Net Cash Flows as of December 31, 2014
Future cash inflows
|
|
|
435,341,260
|
|
Less: Future production costs
|
|
|
(104,680,910
|
)
|
Future development costs
|
|
|
(92,010,030
|
)
|
Future income tax expense
|
|
|
(72,379,134
|
)
|
Future net cash flows
|
|
|
166,271,186
|
|
10% discount factor
|
|
|
(76,155,055
|
)
|
Standardized measure of discounted future net cash inflows
|
|
|
90,116,131
|
|
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Supplemental Oil and Natural Gas Disclosures (Unaudited) (continued)
Changes in Standardized Measure of Discounted
Future Net Cash Flows for the Year Ended December 31, 2015
Net Changes in Prices and Production Costs
:
For the year ended December 31, 2015, the oil and natural gas prices were applied at $47.03/Bbl and $2.23/Mcf, respectively, in
the standardized measure. At December 31, 2014, the oil and natural gas prices were applied at $91.42/Bbl and $6.53/Mcf, respectively,
in the standardized measure. The decrease in oil and natural gas prices resulted in a significant decrease in future expected cash
flows and reserves.
Extensions, Discoveries, and Improved Recoveries:
During the year ended December 31, 2015, the Company had extensions and discoveries of 327,870 Bbl of crude oil and 1,313,150 Mcf
of natural gas from primarily newly identified horizontal drilling opportunities in the Delaware Basin, located in the Crittendon
field.
Revisions of Previous Quantity Estimates:
During the year ended December 31, 2015, the Company adjusted its previous estimates by (3,460,067) Bbl of crude oil and (8,320,523)
Mcf of natural gas from primarily removal of proven undeveloped reserves that the Company currently has interests in due to lack
of available capital.
Purchases and sales of mineral interests:
During the year ended December 31, 2015, the Company sold its Oklahoma properties in Logan and Kingfisher counties.
Accretion of Discount:
Accretion during
the year ended December 31, 2014 was the result of accretion of the future net revenues at a standard rate of 10% due to the passage
of time.
Significant Changes in Reserves for the Year Ended December 31,
2013
Net Changes in Prices and Production Costs
:
For the year ended December 31, 2014, the oil and natural gas prices were applied at $95.28/Bbl and $4.36/MMBtu, respectively,
in the standardized measure. At December 31, 2013, the oil and natural gas prices were applied at $96.90/Bbl and $3.67/MMBtu, respectively,
in the standardized measure. The increase in oil and natural gas prices resulted in a significant increase in future expected cash
flows and reserves. Each of the reference prices for oil and natural gas were adjusted for quality factors and regional differences.
Extensions, Discoveries, and Improved Recoveries:
During the year ended December 31, 2014, the Company had extensions and discoveries of 558,000 Bbl of crude oil and 333,230
Mcf of natural gas from primarily newly identified drilling opportunities in the Eaglebine oil and natural gas reservoirs as well
as new drills in Oklahoma.
Revisions of Previous Quantity Estimates:
During the year ended December 31, 2014, the Company adjusted its previous estimates by (772,982) Bbl of crude oil and (758,638)
Mcf of natural gas from primarily revisions of proved undeveloped reserves that the Company currently has interests in due to increases
in estimated production costs and the requirement that a development plan for the undeveloped oil and gas reserves must be adopted
indicating that such reserves are scheduled to be drilled within five years under SEC Regulation S-X Rule 4-10(a)(31)(ii).
BRUSHY RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Supplemental Oil and Natural Gas Disclosures (Unaudited) (continued)
Purchases and sales of mineral interests:
During the year ended December 31, 2014, the Company purchased the Crittendon Field.
Accretion of Discount:
Accretion during
the year ended December 31, 2014 was the result of accretion of the future net revenues at a standard rate of 10% due to the passage
of time.
Up to 40,993,017
Shares of Common Stock
LILIS
ENERGY, INC.
PROSPECTUS
March 29, 2017