Item 1. Financial Statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Organization and Presentation
Organization and Description of Business
Falcon Minerals Corporation (the “Company” or “Falcon” and formerly named Osprey Energy Acquisition Corp.) was a blank check company, incorporated in Delaware in June 2016. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, recapitalization, or other similar business transaction, one or more operating businesses or assets (a “Business Combination”).
On July 26, 2017, the Company consummated an Initial Public Offering (“IPO”) issuing units consisting of common shares and warrants (“Unit”). Each Unit consists of one share of Class A common stock and one-half of one warrant (“Public Warrant”), totaling 13,750,000 Public Warrants. Each whole Public Warrant entitles the holder to purchase one share of Class A common stock at an initial exercise price of $11.50, subject to adjustment.
Simultaneously with the closing of the IPO, the Company consummated the sale of 7,500,000 warrants (the “Private Placement Warrants”) at a price of $1.00 per warrant in a private placement to the Company’s sponsor, Osprey Sponsor, LLC (“Sponsor”), generating gross proceeds of $7,500,000.
On August 23, 2018 (the “Closing Date”), the Company completed the acquisition of the equity interests ( the “Equity Interests”) in certain of the subsidiaries (the “Royal Entities”) of Noble Royalties Acquisition Co., LP (“NRAC”), Hooks Ranch Holdings LP (“Hooks Holdings”), DGK ORRI Holdings, LP (“DGK”), DGK ORRI GP LLC (“DGK GP”) and Hooks Holding Company GP, LLC (“Hooks GP”, and collectively with NRAC, Hooks Holdings, DGK, and DGK GP, the “Contributors”). The acquisition was made pursuant to the Contribution Agreement, dated as of June 3, 2018 (the “Contribution Agreement”), by and among the Company, Royal Resources L.P. (“Royal”), Royal Resources GP L.L.C. (“Royal GP”) and the Contributors. The acquisition of the Royal Entities pursuant to the Contribution Agreement is referred to as the “Business Combination” and the Business Combination together with the other transactions contemplated by the Contribution Agreement are referred to herein as the “de SPAC Transactions.”
Pursuant to the Contribution Agreement, on the Closing Date, the Company contributed cash to Falcon Minerals Operating Partnership, LP, a Delaware limited partnership and wholly owned subsidiary of the Company (“OpCo”), in exchange for (a) a number of OpCo Common Units representing limited partnership interests in OpCo (the “OpCo Common Units”) equal to the number of shares of the Company’s Class A common stock, par value $0.0001 per share (the “Class A Common Stock”), outstanding as of the Closing Date and (b) a number of OpCo warrants exercisable for OpCo Common Units equal to the number of the Company’s warrants outstanding as of the Closing Date. The Company controls OpCo through Falcon Minerals GP, LLC, a Delaware limited liability company, a wholly owned subsidiary of the Company and the sole general partner of OpCo (“OpCo GP”).
On the Closing Date, Falcon completed the acquisition of the Equity Interests and in return the Contributors received (i) $400 million of cash and (ii) 40 million OpCo Common Units. The Company also issued to the Contributors 40 million shares of non-economic Class C common stock of the Company, which entitles each holder to one vote per share. The OpCo Common Units are redeemable on a one-for-one basis for shares of Class A Common Stock at the option of the Contributors. Upon the redemption by any Contributor of OpCo Common Units for Class A Common Stock, a corresponding number of shares of Class C Common Stock held by such Contributor will be cancelled.
In connection with the closing of the Business Combination (the “Closing”), the Company changed its name from “Osprey Energy Acquisition Corp.” to “Falcon Minerals Corporation.” The Company is now structured as an “Up-C,” meaning that substantially all the assets of the Company are held by OpCo, and the Company’s only operating asset is its equity interest in OpCo. Each OpCo Common Unit, together with one share of Class C Common Stock, is exchangeable for one share of Class A Common Stock at the option of the holder pursuant to the terms of the Company’s and OpCo’s organizational documents, subject to certain restrictions.
The Company’s assets, via its controlling interest in OpCo, consist of royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests, or ORRIs (collectively, “Royalties”), underlying approximately 256,000 gross unit acres that are concentrated in what the Company believes is the “core-of-the-core” of the liquids-rich condensate region of the Eagle Ford Shale in Karnes, DeWitt and Gonzales Counties, Texas. The company owns additional assets of approximately 95,000 gross unit acres in Pennsylvania, Ohio and West Virginia which is prospective for the Marcellus Shale.
These Royalties entitle the holder to a portion of the production of oil and natural gas from the underlying acreage at the sales price received by the operator, net of any applicable post-production expenses and taxes. The holder of these interests has no obligation to fund exploration and development costs, lease operating expenses or pay for capital expenditures such as plugging and abandonment costs at the beginning and end of a well’s productive life.
9
Merger Agreement
On January 11, 2022, Falcon, OpCo, Ferrari Merger Sub A LLC, a Delaware limited liability company and wholly owned subsidiary of OpCo (“Merger Sub”), and DPM HoldCo, LLC, a Delaware limited liability company (“Desert Peak”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions in the Merger Agreement, Merger Sub will merge with and into Desert Peak (the “Merger”), with Desert Peak continuing as the surviving entity in the Merger as a wholly owned subsidiary of OpCo.
Pursuant to the terms of the Merger Agreement and subject to the conditions therein, at the effective time of the Merger (the “Merger Effective Time”), the limited liability company interests in Desert Peak (the “DPM Membership Units”) issued and outstanding immediately prior to the Merger Effective Time will be converted into the right to receive an aggregate of (a) 235,000,000 shares of Class C common stock, (b) 235,000,000 OpCo Common Units and (c) additional shares of Falcon Class C common stock (and a corresponding number of OpCo Common Units) equal to (i) the sum of (x) the difference between $140,000,000 and the Sierra Net Debt (as defined in the Merger Agreement) plus (y) the amount by which the Indebtedness (as defined in the Merger Agreement) for borrowed money of Falcon and its subsidiaries exceeds $45,000,000 as of immediately prior to the Merger Effective Time divided by (ii) $5.15 (collectively, the “Merger Consideration”).
Completion of the Merger is subject to certain customary conditions, including, among others, the following: (a) the affirmative vote of the holders of at least (i) a majority of the votes cast at Falcon’s stockholder meeting (the “Falcon Stockholder Meeting”) on the approval of the issuance of the Merger Consideration (the “Stock Issuance Proposal”) and (ii) a majority of the voting power of the outstanding capital stock of Falcon entitled to vote on the approval of the adoption of certain amendments to Falcon’s certificate of incorporation providing for a reverse stock split of the Class C common stock and the Class A common stock prior to the Merger Effective Time, at a ratio of four to one (the “Falcon Reverse Stock Split” and, together with the Stock Issuance Proposal, the “Required Falcon Stockholder Proposals”); (b) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement (the “Transactions”); (c) approval for listing on the Nasdaq Capital Market of the Class A common stock issuable upon exchange of the Merger Consideration; (d) the expiration or termination of all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, applicable to the Transactions, and any commitment to, or agreement (including any timing agreement) with, any government entity to delay the consummation of, or not to close before a certain date, the Transactions; (e) the effectiveness of the Falcon Reverse Stock Split and the adoption of a reverse unit split of the OpCo Common Units prior to the Merger Effective Time, at a ratio of four to one; (f) subject to specified materiality standards, the accuracy of certain representations and warranties of each party; (g) compliance by each party in all material respects with its covenants included in the Merger Agreement; (h) each of the Registration Rights Agreement (as defined in the Merger Agreement) and the Director Designation Agreement (as defined in the Merger Agreement) being in full force and effect; and (i) the Available Liquidity (as defined in the Merger Agreement) is no less than $65,000,000 and the Sierra Net Debt is not in excess of $140,000,000.
Note 2—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements have been included. All intercompany balances and transactions are eliminated in consolidation.
The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the audited financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K that the Company filed with the SEC on March 11, 2022.
Cash and Cash Equivalents
Cash and cash equivalents represent unrestricted cash on hand and include all highly liquid investments purchased with a maturity of three months or less and money market funds. The Company maintains cash and cash equivalents in bank deposit accounts which, at times, may exceed the federally insured limits. The Company has not experienced any significant losses from such investments.
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; disclosure of contingent assets and liabilities at the date of the financial statements; the reported amounts of revenues and expenses during the reporting periods; and the quantities and values of proved oil, natural gas and NGLs reserves used in calculating depletion and assessing impairment of oil and natural gas properties. Actual results could differ significantly from these estimates. Significant estimates made by management include the quantities of proved oil, natural gas and NGLs reserves, related present value estimates of future net cash flows therefrom, the carrying value of oil
10
and natural gas properties, fair value of the Company’s warrants, and estimates of current and deferred income taxes. While management believes these estimates are reasonable, changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates and it is reasonably possible these estimates could be revised in the near term, and these revisions could be material.
Accounts Receivable
The Company’s accounts receivable balance results primarily from operators’ sales of oil and natural gas to their customers. Accounts receivable are recorded at the contractual amounts and do not bear interest. The Company reserves for specific accounts receivables when it is probable that all or a part of an outstanding balance will not be collected. The Company regularly reviews collectability and establishes or adjusts the allowance as necessary using the specific identification method. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered doubtful. As of March 31, 2022, and December 31, 2021, the Company had not recorded any reserves for uncollectible amounts or deemed any amounts to be uncollectible.
Commodity Derivative Financial Instruments
The Company’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the price risk associated with its operations, the Company uses commodity derivative financial instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts, and other contractual arrangements. The Company does not enter into derivative instruments for speculative purposes.
Derivative instruments are recognized at fair value. If a right of offset exists under master netting arrangements and certain other criteria are met, derivative assets and liabilities with the same counterparty are netted on the consolidated balance sheets. The Company does not specifically designate derivative instruments as fair value or cash flow hedges, even though they reduce its exposure to changes in oil and natural gas prices; therefore, gains and losses arising from changes in the fair value of the derivative instruments are recognized on a net basis in the accompanying consolidated statements of operations within Loss on commodity derivative instruments.
Royalty Interests in Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for oil and natural gas operations. Under this method, costs to acquire mineral and royalty interests in oil and natural gas properties are capitalized when incurred. Acquisitions of royalty interests of oil and natural gas properties are considered asset acquisitions and are recorded at cost.
Acquisition costs of proven royalty interests are amortized using the units of production method over the life of the property, which is estimated using proven reserves. Acquisition costs of royalty interests on unproved properties, where there are no proven reserves, are not amortized. When the associated exploration stage interests are converted to proven reserves, the cost basis is amortized using the units of production methodology over the life of the property, using proven reserves. For purposes of amortization, interests in oil and natural gas properties are grouped in a reasonable aggregation of properties with common geological structural features or stratigraphic condition.
We review and evaluate our royalty interests in oil and natural gas properties for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Proved oil and gas properties are reviewed for impairment when events and circumstances indicate a potential decline in the fair value of such properties below the carrying value, such as a downward revision of the reserve estimates or lower commodity prices. When such events or changes in circumstances occur, we estimate the undiscounted future cash flows expected in connection with the properties and compare such future cash flows to the carrying amounts of the properties to determine if the carrying amounts are recoverable. If the carrying value of the properties is determined to not be recoverable based on the undiscounted cash flows, an impairment charge is recognized by comparing the carrying value to the estimated fair value of the properties. The factors used to determine fair value include, but are not limited to, estimates of proved, probable and possible reserves, future commodity prices, the timing of future production and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. There was no such impairment of proved oil and natural gas properties for the three months ended March 31, 2022 or 2021.
Unproved properties are also assessed for impairment periodically on a depletable unit basis when facts and circumstances indicate that the carrying value may not be recoverable, at which point an impairment loss is recognized to the extent the carrying value exceeds the estimated recoverable value. The fair value of unproved properties, including unleased mineral rights, is determined based on management’s assessment of fair value using factors similar to those previously noted for proved properties, as well as geographic and geologic data. There was no impairment of unproved properties for the three months ended March 31, 2022 and 2021.
Upon the sale of a complete depletable unit, the book value thereof, less proceeds or salvage value, is charged to income. Upon the sale or retirement of an individual well, or an aggregation of interests which make up less than a complete depletable unit, the proceeds are credited to accumulated depreciation, depletion and amortization (“DD&A”), unless doing so would significantly alter the DD&A rate of the depletable unit, in which case a gain or loss would be recorded.
11
Debt Issuance Costs
Other assets include capitalized financing costs of $0.9 million and $1.1 million as of March 31, 2022 and December 31, 2021, respectively. The costs are associated with the Company’s credit agreement and are being amortized over the term of the credit agreement.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Fair value measurements are derived using inputs and assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. GAAP establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This three-tier hierarchy classifies fair value amounts recognized or disclosed in the consolidated financial statements based on the observability of inputs used to estimate such fair values. The classification within the hierarchy of an asset or liability is determined based on the lowest level input that is significant to the fair value measurement. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, the Company categorizes its assets and liabilities recorded at fair value using this hierarchy.
The amounts reported in the balance sheet for cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term maturities of these instruments. The Company’s Public Warrants also approximate their fair value because the publicly quoted prices on active, liquid, and visible markets such as stock exchanges (Level 1). Because the Credit Facility (as defined in “Note 6 – Debt – Falcon Credit Facility” below) has a market rate of interest, its carrying amount approximated fair value (Level 2). The Company’s commodity derivative instruments are classified within Level 2. The fair values of the Company’s commodity derivative instruments are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, volatility factors and discount rates, or can be corroborated from active markets. The Company’s Private Placement Warrant liability is classified within Level 3 due to the significant unobservable inputs utilized in determining the fair value. See “Note 7 – Warrants” for further information on the Public and Private Placement Warrants.
Warrant Liability
The Company issued the Public and Private Placement Warrants in connection with its IPO in 2017. Warrants are accounted for in accordance with applicable accounting guidance provided in ASC 815-40 – “Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815”), as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. The Company’s warrants were classified as liabilities and are recorded at fair value upon issuance and are subject to remeasurement at each reporting period. Any change in fair value has been recorded in the statements of operations.
Revenue from Contracts with Customers
Revenues from Royalties are recorded under the cash receipts approach as directly received from the remitters’ statement accompanying the revenue check. Since the revenue checks are generally received 30 to 90 days after the production month, the Company accrues for revenue earned but not received by estimating production volumes and product prices. Revenues from lease bonus are recorded upon receipt. The lease bonus is separate from the lease itself and is recognized as revenue to the Company upon receipt of payment.
Transaction price allocated to remaining performance obligations
The Company’s right to royalty income does not originate until production occurs and, therefore, is not considered to exist beyond each day’s production. Therefore, there are no remaining performance obligations under any of the Company’s royalty income contracts.
Contract balances
Under the Company’s royalty income contracts, it would have the right to receive royalty income from the producer once production has occurred, at which point payment is unconditional. Accordingly, the Company’s royalty income contracts do not give rise to contract assets or liabilities.
Prior-period performance obligations
The Company records revenue in the month production is delivered to the purchaser. However, operator statements for certain oil, natural gas and NGLs sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of royalty income to be received based upon the Company’s interest. The Company records the differences between its estimates and the actual amounts received for royalties in the quarter that payment is received from the operator. Identified differences between the Company’s revenue estimates and actual revenue received historically have not been significant. For the three months ended March 31, 2022 and 2021, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. The Company believes that the pricing provisions of its oil, natural gas and NGLs contracts are customary in the industry. To the extent actual volumes and prices of oil and natural gas sales are
12
unavailable for a given reporting period because of timing or information not received from third parties, the royalties related to expected sales volumes and prices for those properties are estimated and recorded.
Income Taxes
The Company, under ASC 740, uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at March 31, 2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The Company has been subject to income tax examinations by major taxing authorities since inception.
Share-Based Compensation
Share-based compensation awards are measured at fair value on the date of grant and are expensed, net of any actual forfeitures, over the required service period. See “Note 9—Share-Based Compensation” for additional information.
Segment Reporting
The Company derives revenue from Royalties in oil and natural gas properties in North America. The Company operates in a single operating and reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s Chief Executive Officer has been determined to be the CODM and allocates resources and assesses performance based upon financial information at the consolidated level.
Recently Issued Accounting Pronouncements
The Company is an “emerging growth company” (“EGC”) as defined by the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of this exemption and, as a result, its financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that the Company can elect to opt out of the extended transition period at any time, which election is irrevocable.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides optional expedients and exceptions, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The standard was effective upon issuance and generally can be applied through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments in this update must be applied prospectively for all eligible contract modifications. In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope.” This standard clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. Management has elected to apply these updates subsequent to March 12, 2020 but has not elected to apply this update as of March 31, 2022. Management is currently evaluating the impact of the above guidance but does not expect this update to have a material impact on the Company's financial statements.
Note 3—Leases
Substantially all of the Company’s leases are long-term operating leases with fixed payment terms and will terminate at various dates through February 2025. The Company’s right-of-use (“ROU”) assets represent its right to use an underlying asset for the lease term, and its operating lease liabilities represent its obligation to make lease payments.
ROU assets are recognized at commencement date and consist of the present value of the remaining lease payments over the lease term, initial direct costs, prepaid lease payments less any lease incentives. Operating lease liabilities are recognized at commencement
13
date based on the present value of the remaining lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. Since the Company’s leases do not provide an implicit rate that can readily be determined, the Company used a discount rate based on its incremental borrowing rate, which is determined by the information available in our Credit Facility. The incremental borrowing rate reflects the estimated rate of interest the Company would pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.
Our lease obligations are primarily comprised of the main office spaces used for operations and are recorded as general, administrative, and other expenses in the consolidated statements of operations. As of March 31, 2022, our lease obligations were classified as operating leases. The Company’s rental costs associated with these office spaces for the three months ended March 31, 2022 and 2021 was $0.1 million and $0.2 million, respectively.
The lease terms may include periods covered by options to extend the lease when it is reasonably certain that the Company will exercise that option and periods covered by options to terminate the lease when it is not reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. In the event that the Company’s assumptions and expectations change, it may have to revise its ROU assets and operating lease liabilities. As of March 31, 2022, the weighted average remaining lease term is 2.9 years and the weighted average discount rate is 4.32%.
As of March 31, 2022, the Company had ROU assets of $0.3 million recorded as Other Assets, $0.2 million of corresponding obligations recorded as Other Current Liabilities and $0.4 million of corresponding obligations recorded as Other Liabilities on the Company’s condensed consolidated balance sheet.
As of March 31, 2022, the undiscounted cash flows for operating lease liabilities are as follows (in thousands):
|
|
Payments Due by Period |
|
|
|
Total |
|
|
Remainder of 2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
Thereafter |
|
Lease obligations |
|
$ |
658 |
|
|
$ |
167 |
|
|
$ |
225 |
|
|
$ |
228 |
|
|
$ |
38 |
|
|
$ |
- |
|
|
$ |
- |
|
Total |
|
$ |
658 |
|
|
$ |
167 |
|
|
$ |
225 |
|
|
$ |
228 |
|
|
$ |
38 |
|
|
$ |
- |
|
|
$ |
- |
|
Note 4—Commodity Derivative Financial Instruments
The Company’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Company periodically uses oil and natural gas commodity derivative instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts, and other contractual arrangements. The Company enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty. The Company does not enter into derivative instruments for speculative purposes.
As of March 31, 2022, the Company’s did not have any open derivative contracts. A fixed price swap contract between the Company and a counterparty specifies a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume. A costless collar contract between the Company and the counterparty specifies a floor and a ceiling commodity price over a specified period for a contracted volume. The Company has not designated any of its contracts as fair value or cash flow hedges. Accordingly, the changes in fair value of the contracts are included in the consolidated statements of operations in the period of the change. All derivative gains and losses from the Company’s derivative contracts have been recognized in revenue in the Company’s accompanying consolidated statements of operations. Derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Company’s accompanying consolidated balance sheets.
The Company’s oil fixed price swap transactions are settled based upon the average daily prices for the calendar month of the contract period and its natural gas costless collar contracts are settled based upon the last day settlement price of the first nearby month futures contract of the contract period. Payment for oil derivative contracts occurs in the succeeding month and natural gas derivative contracts are paid in the production month.
The Company’s derivative contracts expose it to credit risk in the event of nonperformance by counterparties that may adversely impact the fair value of the Company’s commodity derivative assets. While the Company does not require contract counterparties to post collateral, the Company does evaluate the credit standing on each counterparty as deemed appropriate. The evaluation includes reviewing a counterparty’s credit rating and latest financial information. As of March 31, 2022, the Company did not have any open derivative contracts and therefore has not engaged any counterparties.
The Company utilizes the market approach in determining the fair value of its derivative positions by using either NYMEX, ICE or Magellan East Houston (“MEH”) published market prices, independent broker pricing data or broker/dealer valuations. The valuations of derivatives with pricing based on NYMEX, ICE or MEH published market prices may be considered Level 1 if they are settled through a NYMEX, ICE or MEH clearing broker account with daily margining. Over-the-counter derivatives with NYMEX,
14
ICE or MEH based prices are considered Level 2 due to the impact of counterparty credit risk. The Company’s derivatives are classified within Level 2.
The table below summarizes the fair values and classifications of the Company’s derivative instruments as of March 31, 2022 and December 31, 2021 (in thousands):
|
|
|
|
As of March 31, 2022 |
|
Classification |
|
Balance Sheet Location |
|
Gross Fair Value |
|
|
Effect of Netting |
|
|
Net Carrying Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current asset |
|
Other current assets |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Long-term asset |
|
Other assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total assets |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability |
|
Other current liabilities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Long-term liability |
|
Other non-current liabilities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total liabilities |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021 |
|
Classification |
|
Balance Sheet Location |
|
Gross Fair Value |
|
|
Effect of Netting |
|
|
Net Carrying Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current asset |
|
Other current assets |
|
$ |
217 |
|
|
$ |
(217 |
) |
|
$ |
- |
|
Long-term asset |
|
Other assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total assets |
|
|
|
$ |
217 |
|
|
$ |
(217 |
) |
|
$ |
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability |
|
Other current liabilities |
|
$ |
467 |
|
|
$ |
(217 |
) |
|
$ |
250 |
|
Long-term liability |
|
Other non-current liabilities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total liabilities |
|
|
|
$ |
467 |
|
|
$ |
(217 |
) |
|
$ |
250 |
|
Changes in the fair values of the Company’s derivative instruments are presented on a net basis in the accompanying consolidated statements of operations and consolidated statements of cash flows and consist of the following for the periods presented (in thousands):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Unrealized gain (loss) of open non-hedge derivative instruments |
|
$ |
250 |
|
|
$ |
(583 |
) |
Realized loss on settlement of non-hedge derivative instruments |
|
|
(552 |
) |
|
|
(1,129 |
) |
Gain (loss) on commodity derivative instruments |
|
$ |
(302 |
) |
|
$ |
(1,712 |
) |
Note 5—Oil and Natural Gas Interests
Oil and natural gas interest include the following (in thousands):
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Oil and natural gas interests: |
|
|
|
|
|
|
|
|
Subjection to depletion |
|
$ |
325,948 |
|
|
$ |
325,512 |
|
Not subjection to depletion |
|
|
27,274 |
|
|
|
27,710 |
|
Gross oil and natural gas interests |
|
|
353,222 |
|
|
|
353,222 |
|
Accumulated depletion and impairment |
|
|
(163,102 |
) |
|
|
(159,678 |
) |
Oil and natural gas interests, net |
|
$ |
190,120 |
|
|
$ |
193,544 |
|
15
Note 6—Debt
Falcon Credit Facility
On the Closing Date, OpCo entered into a credit facility with Citibank, N.A., as administrative agent and collateral agent for the lenders from time-to-time party thereto (the “Credit Facility”). The Credit Facility provides for a maximum credit amount of $500.0 million and a borrowing base based on its oil and natural gas reserves and other factors which is currently $70.0 million, subject to scheduled semi-annual and other borrowing base redeterminations and expires on the fifth anniversary of the Closing Date. As of March 31, 2022, OpCo had borrowings of $38.0 million under the Credit Facility at an interest rate of 2.96% and $32.0 million available for future borrowings under the Credit Facility. Unamortized deferred issuance costs were $0.9 million as of March 31, 2022 and are being amortized over the remaining term of the Credit Facility.
Principal amounts borrowed are payable on the maturity date. OpCo has a choice of borrowing at an alternative base rate (which is equal to the greatest of the federal funds rate plus one-half of 1.0%, the prime rate or the one-month LIBOR rate plus 1.0%) or LIBOR, with such borrowings bearing interest, payable quarterly in arrears for base rate loans and one month, two-month, three month or six-month periods for LIBOR loans. LIBOR loans bear interest at a rate per annum equal to the rate appearing on the Reuters Reference LIBOR01 or LIBOR02 page as the LIBOR, for deposits in dollars at 12:00 noon (London, England time) for one, two, three, or six months plus an applicable margin ranging from 200 to 300 basis points. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one-month LIBOR loans plus 1%, plus an applicable margin ranging from 100 to 200 basis points. The scheduled redeterminations of our borrowing base take place on April 1st and October 1st of each year.
Obligations under the Credit Facility are guaranteed by OpCo and each of its existing and future, direct and indirect domestic subsidiaries (the “Credit Parties”) and are secured by all the present and future assets of the Credit Parties, subject to customary carve-outs.
The Credit Facility contains various affirmative, negative, and financial maintenance covenants. These covenants, among other things, include restrictions on the Company’s ability to incur additional indebtedness, acquire and sell assets, create liens, enter into certain lease agreements, make investments, make distributions and require the maintenance of the financial ratios described below.
Financial Covenant |
|
Required Ratio |
Ratio of total net debt to EBITDAX, as defined in the Credit Facility |
|
Not greater than 4.0 to 1.0 |
Ratio of current assets to current liabilities, as defined in the Credit Facility |
|
Not less than 1.0 to 1.0 |
As of March 31, 2022, OpCo was in compliance with such covenants.
Note 7—Warrants
In July 2017, the Company consummated its IPO of units, each consisting of one share of Class A Common Stock and one-half of one warrant. Each Public Warrant entitles the holder to purchase one share of Class A Common Stock at the initial price of $11.50 per share. Pursuant to the Warrant Agreement, to the extent that any common stock dividend paid by the Company, when combined with other common stock dividends paid in the prior 365 days, exceeds $0.50, it is categorized as an Extraordinary Dividend. Extraordinary Dividends reduce, penny for penny, the exercise price of the Company’s warrants. For the quarters ended June 30, 2019, September 30, 2019, and December 31, 2021, the Company paid Extraordinary Dividends of $0.12, $0.04 and $0.05, respectively. Accordingly, the exercise price of the Company’s warrants was reduced to $11.38 after the Extraordinary Dividend paid for the quarter ended June 30, 2019, reduced to $11.34 after the Extraordinary Dividend paid for the quarter ended September 30, 2019 and further reduced to $11.29 after the Extraordinary Dividend paid for the quarter ended December 31, 2021. Subsequent to the quarter ended March 31, 2022, the exercise price of the Company’s warrants will be further reduced to $11.21 after the Extraordinary Dividend is paid in May 2022. The Public Warrants will expire five years after the closing of the deSPAC Transactions or earlier upon redemption or liquidation. The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant with not less than 30 days’ notice provided to the Public Warrant holders. However, this redemption right can only be exercised if the last sale price of the Class A Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-day trading period ending three business days before we send the notice of redemption to the Public Warrant holders.
Upon closing of the IPO, the Sponsor purchased an aggregate of 7,500,000 warrants at a price of $1.00 per warrant. Each Private Placement Warrant is exercisable for one share of Class A Common Stock at a price of $11.21. The Private Placement Warrants are identical to the Public Warrants discussed above, except (i) they will not be redeemable by the Company so long as they are held by the Sponsor and (ii) they may be exercisable by the holders on a cashless basis.
The Company accounted for the Public and Private Placement Warrants (the “Warrants”) in accordance with ASC 815. ASC 815 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s
16
own stock. This applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815, including any freestanding financial instrument that is potentially settled in an entity’s own stock.
Due to certain circumstances that could require the Company to settle the Warrants in cash, the Warrants have been classified as derivative liabilities, as opposed to an equity contract. Therefore, the Warrants were recorded at fair value upon issuance and remeasured at each reporting period with the change in fair value recorded in the statements of operations. As of March 31, 2022 and December 31, 2021, there were 13,749,998 Public Warrants outstanding for each period. As of March 31, 2022 and December 31, 2021, there were 7,500,000 Private Placement Warrants outstanding for each period. The fair value of the Public Warrants was determined using the readily observable publicly traded price (Level 1) as of the end of each reporting period. The fair value of the Public Warrants as of March 31, 2022 and December 31, 2021 was $5.2 million and $1.9 million, respectively. The Private Placement Warrants were estimated utilizing a binomial lattice model using the following range of significant unobservable inputs (Level 3) for the respective periods:
|
|
2022 |
|
|
2021 |
Stock price |
|
$6.74 |
|
|
$4.49 - $5.08 |
Volatility |
|
|
50.8 |
% |
|
61.2% - 65.2% |
Risk-free rate |
|
|
1.88 |
% |
|
0.24% - 0.28% |
Dividend yield |
|
|
8.51 |
% |
|
6.63% - 12.57% |
Term |
|
1.4 years |
|
|
1.9 - 2.4 years |
The following is a reconciliation of the beginning and ending balance for the Private Placement Warrant liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2022 and 2021 (in thousands):
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Balance at January 1 |
|
$ |
1,125 |
|
|
$ |
1,500 |
|
Increase (decrease) in fair value |
|
|
1,875 |
|
|
|
1,650 |
|
Balance at March 31 |
|
$ |
3,000 |
|
|
$ |
3,150 |
|
Note 8—Shareholders’ Equity and Dividends
Shares Outstanding
The Company is a holding company whose sole material operating asset consists of its interest in OpCo.
The following table summarizes the changes in the outstanding stock and warrants through March 31, 2022.
|
|
Class A
Common Stock |
|
|
Class C
Common Stock |
|
|
Warrants |
|
Beginning Balance at December 31, 2021 |
|
|
47,013,958 |
|
|
|
39,387,782 |
|
|
|
21,249,998 |
|
Restricted stock grant vesting |
|
|
92,260 |
|
|
|
- |
|
|
|
- |
|
Shares outstanding at March 31, 2022 |
|
|
47,106,218 |
|
|
|
39,387,782 |
|
|
|
21,249,998 |
|
Preferred Stock – At March 31, 2022, there were no shares of preferred stock issued or outstanding. The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share with such designation, rights and preferences as may be determined from time to time by the Company’s Board of Directors.
Class A Common Stock – At March 31, 2022, there were 47,106,218 shares of Class A Common Stock issued and outstanding. Holders of the Company’s Class A Common Stock are entitled to one vote for each share. The Company is authorized to issue 240,000,000 shares of Class A Common Stock with a par value of $0.0001 per share.
Class C Common Stock – At March 31, 2022, there were 39,387,782 shares of Class C Common Stock issued and outstanding. Class C Common Stock was issued to the Contributors in connection with the de SPAC Transactions and are non-economic but entitle the holder to one vote per share. The Company is authorized to issue 120,000,000 shares of Class C Common Stock with a par value of $0.0001 per share.
In connection with the de SPAC Transactions, the Company issued 40,000,000 OpCo Common Units to the Contributors. The OpCo Common Units are redeemable on a one-for-one basis for shares of Class A Common Stock at the option of the holder. Upon the redemption by any holder of OpCo Common Units for shares of Class A Common Stock, a corresponding number of shares of
17
Class C Common Stock held by such holder will be cancelled. During the year ended December 31, 2021, 612,218 OpCo Common Units and shares of Class C Common Stock were redeemed for shares of Class A Common Stock.
Earn-Out
In addition to the above, the Contributors will be entitled to receive earn-out consideration to be paid in the form of OpCo Common Units (with a corresponding number of shares of Class C Common Stock) if the volume-weighted average price of the trading days during any thirty (30) calendar days (the “30-Day VWAP”) of the Class A Common Stock equals or exceeds certain hurdles set forth in the Contribution Agreement. If the 30-Day VWAP of the Class A Common Stock is $12.50 or more per share at any time within the seven years following the closing, Royal LP will receive (i) an additional 10 million OpCo Common Units (and an equivalent number of shares of Class C Common Stock), plus (ii) an amount of OpCo Common Units (and an equivalent number of shares of Class C Common Stock) equal to (x) the amount by which annual cash dividends paid on each share of Class A Common Stock exceeds $0.50 in each year between the closing and the date the first earn-out is achieved (with any dividends paid in the stub year in which the first earn-out is achieved annualized for purposes of determining what portion of such dividends would have, on an annual basis, exceeded $0.50), multiplied by 10 million, (y) divided by $12.50. If the 30-Day VWAP of the Class A Common Stock is $15.00 or more per share at any time within the seven years following the closing (which $15.00 threshold will be reduced by the amount by which annual cash dividends paid on each share of Class A Common Stock exceeds $0.50 in each year between the closing and the date the earn-out is achieved, but not below $12.50), the Contributors will receive an additional 10 million OpCo Common Units (and an equivalent number of Class C Common Stock). Upon recognition of the earn-out, as there is no consideration received, the Company would record the payment of the earn-out as adjustments through equity (non-controlling interest and additional-paid-in-capital).
Noncontrolling Interest
The Company owns 100% of the general partner interests and 54% of the limited partner interests of OpCo and due to the Company’s controlling interest in OpCo, OpCo is a consolidated subsidiary of the Company. Non-controlling ownership interests in OpCo are presented in the consolidated balance sheet within shareholders’ equity as a separate component. In addition, consolidated net income includes earnings attributable to both the shareholders and the non-controlling interests. For the three months ended March 31, 2022 and 2021, $5.8 million and $3.0 million, respectively, of distributions have been made to non-controlling interest holders of the consolidated subsidiaries.
Cash Dividends
The table below summarizes the quarterly dividends related to the Company’s quarterly financial results:
Quarter Ended |
|
Total
Quarterly
Dividend
Per Class A Common Share |
|
|
Total
Cash
Dividend |
|
|
Payment
Date |
|
Stockholders
Record Date |
March 31, 2022 |
|
$ |
0.1800 |
|
|
$ |
8,479,119 |
|
|
May 31, 2022 |
|
May 18, 2022 |
December 31, 2021 |
|
$ |
0.1450 |
|
|
$ |
6,823,918 |
|
|
March 9, 2022 |
|
February 28, 2022 |
September 30, 2021 |
|
$ |
0.1550 |
|
|
$ |
7,190,332 |
|
|
December 8, 2021 |
|
November 23, 2021 |
June 30, 2021 |
|
$ |
0.1500 |
|
|
$ |
6,956,511 |
|
|
September 8, 2021 |
|
August 25, 2021 |
March 31, 2021 |
|
$ |
0.1000 |
|
|
$ |
4,620,937 |
|
|
June 8, 2021 |
|
May 25, 2021 |
Note 9—Share-Based Compensation
The Falcon Board of Directors has adopted the Falcon Minerals Corporation 2018 Long-Term Incentive Plan (the “Plan”). An aggregate of 8.6 million shares of Class A Common Stock are available for issuance under the Plan. The Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. Common shares that are cancelled, forfeited, or withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. Distribution equivalent rights (“DER”) are also available for grant under the Plan, either alone or in tandem with other specific awards, which will entitle the recipient to receive an amount equal to dividends paid on a Class A common share. The Plan is administered by the Falcon Board of Directors or a committee thereof.
Restricted Stock Grants
In accordance with the Plan, the Falcon Board of Directors is authorized to issue restricted stock awards (“RSA”) to eligible employees and directors. The Company estimates the fair value of the RSAs as the closing price of the Company’s Class A Common Stock on the grant date of the award, which is expensed over the applicable vesting period. Each RSA that has been granted has a DER included in each agreement. Dividends paid in connection with the DERs are accounted for as a reduction in retained earnings for those awards that are expected to vest. RSAs that are forfeited could cause a reclassification of any previously recognized DER payments from a reduction in retained earnings to additional compensation cost.
18
Performance Stock Units
Under the Plan, the Falcon Board of Directors is authorized to issue performance stock units (“PSU”) to eligible employees and directors. The Company estimates the fair value and the derived service period of the PSUs utilizing a lattice model since one of the vesting requirements is a market-based condition (indexed to the Falcon stock price). The Company engaged a third-party consultant to calculate fair value and the derived service period of the grants at the time of issuance. The fair value of the PSUs is then amortized over the longer of the service condition or the derived service period attributable to each grant. All compensation cost for the PSUs will be recognized over the longer of the service condition or the derived service period, even if the market-condition is never satisfied as long as the award is not forfeited. The PSUs that have been granted to date do not have any DERs included in the agreements.
We utilized a lattice model pricing model to measure the fair value of the PSUs. The derived service period equals the median time to achieve the hurdle in all simulations where the hurdle was achieved. Volatility assumptions are based on the average historical volatility of Falcon stock over the derived service period of the PSU. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the derived service period of the PSU. The dividend yield is based on an annual dividend yield, taking into account historical dividends, over the derived service period of the PSU. The Company did not issue any new PSUs during the three months ended March 31, 2022. The Company used the following weighted average assumptions to estimate the grant date fair value of the PSUs granted during the three months ended March 31, 2021:
|
|
2021 |
|
Stock price |
|
$ |
3.97 |
|
Volatility |
|
|
68.6 |
% |
Risk-free rate |
|
|
0.30 |
% |
Dividend yield |
|
|
6.50 |
% |
Derived service period |
|
3.00 years |
|
The following table summarizes the activity in our unvested RSAs and PSUs for the three months ended March 31, 2022:
|
|
|
|
|
|
Weighted Average |
|
|
Performance |
|
|
Weighted Average |
|
|
|
Restricted |
|
|
Grant-Date |
|
|
Stock |
|
|
Grant-Date |
|
|
|
Stock |
|
|
Fair Value |
|
|
Units |
|
|
Fair Value |
|
Unvested at December 31, 2021 |
|
|
529,397 |
|
|
$ |
4.07 |
|
|
|
927,818 |
|
|
$ |
1.82 |
|
Granted |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Vested |
|
|
(92,260 |
) |
|
$ |
3.13 |
|
|
|
- |
|
|
$ |
- |
|
Forfeited |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Unvested at March 31, 2022 |
|
|
437,137 |
|
|
$ |
4.27 |
|
|
|
927,818 |
|
|
$ |
1.82 |
|
For the three months ended March 31, 2022 and 2021, the Company recorded expense of $0.4 million and $1.0 million respectively, of share-based compensation, which is included in general, administrative, and other expenses in the accompanying consolidated statements of operations. The unamortized estimated fair value of unvested RSAs and PSUs was $1.8 million at March 31, 2022. These costs are expected to be recognized as expense over a weighted average period of 1.5 years. For the three months ended March 31, 2022 and 2021, the Company paid $0.1 million and less than $0.1 million, respectively, related to DERs of RSA holders.
Note 10—Earnings Per Share
Earnings per share is computed using the two-class method. The two-class method determines earnings per share of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Participating securities represent restricted stock awards in which the recipients have non-forfeitable rights to dividend equivalents during the performance period.
19
The following table sets forth the calculation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders - basic |
|
$ |
(1,129 |
) |
|
$ |
(1,407 |
) |
Less: Earnings allocated to participating securities |
|
|
(65 |
) |
|
|
- |
|
Net loss attributable to common stockholders - diluted |
|
$ |
(1,194 |
) |
|
$ |
(1,407 |
) |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic |
|
|
47,048 |
|
|
|
46,125 |
|
Effect of dilutive securities |
|
|
- |
|
|
|
- |
|
Weighted average shares outstanding - diluted |
|
|
47,048 |
|
|
|
46,125 |
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
The Company had the following shares that were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive for the periods presented but could potentially dilute basic earnings per share in future periods (in thousands):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Warrants |
|
|
21,250 |
|
|
|
21,250 |
|
Class C common shares |
|
|
39,388 |
|
|
|
40,000 |
|
Total |
|
|
60,638 |
|
|
|
61,250 |
|
Diluted net income per share also excludes the effects of OpCo Common Units (and related Class C Common Stock) associated with the earn-out, which are convertible into Class A Common Stock, and the PSUs because each are considered contingently issuable shares and the conditions for issuance were not satisfied as of March 31, 2022.
Note 11—Income Taxes
The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
For the three months ended March 31, 2022 and 2021, the Company recorded an income tax expense of $1.8 million and $0.5 million, respectively.
As of March 31, 2022 and December 31, 2021, the Company had $51.7 million and $52.1 million, respectively, of net deferred tax assets net of valuation allowances. These net deferred tax assets relate to oil and gas assets and other temporary items where the tax basis differs from the GAAP carrying amounts.
At March 31, 2022 and December 31, 2021, the Company had $0 million and $0.4 million of prepaid income taxes, respectively.
The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
Note 12—Related Party Transactions
Founder Shares
In June 2016, the Company issued an aggregate of 125,000 shares of Class B Common Stock to Osprey Sponsor, LLC (the “Sponsor”) for an aggregate purchase price of $25,000 (the “Founder Shares”). In March 2017, the Company effectuated a 57.5-for-1 stock split resulting in an aggregate of 7,187,500 Founder Shares outstanding and held by the Sponsor. The Founder Shares automatically converted into Class A Common Stock upon the consummation of the deSPAC Transactions on a one-for-one basis. Due to the underwriter’s election not to exercise the remaining portion of the over-allotment option related to the Company’s IPO, 312,500 Founder Shares were forfeited resulting in an aggregate of 6,875,000 Founder Shares held by the Sponsor prior to the deSPAC Transactions.
20
Hepco Capital Management, LLC
Hepco Capital Management, LLC (“Hepco Capital”), of which Company officer Jeffrey Brotman is also a director and officer, and its affiliates share certain employees and office space and reimburses the Company for a proportionate amount of the shared expenses on a monthly basis. For the three months ended March 31, 2022 and 2021, the Company was reimbursed less than $0.1 million during each period under this agreement.
Royal Resources L.P.
Royal, which owns 35.2 million shares of the Class C Common Stock of the Company, as well as 35.2 million OpCo Common Units, entered into a Master Service Agreement (“MSA”) with the Company in December 2018. Under the MSA, the Company provides certain management services to Royal. For the three months ended March 31, 2022 and 2021, the Company received $0.1 million and less than $0.1 million, respectively, under this agreement.
Note 13—Major Operators
The following table presents the percentage of revenues with the Company’s significant operators (those that have accounted for 10% or more of the Company’s revenues in a given period) for the periods indicated:
|
|
% of Revenues |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
ConocoPhillips |
|
|
51 |
% |
|
|
62 |
% |
EOG Resources |
|
|
19 |
% |
|
|
16 |
% |
Devon |
|
|
13 |
% |
|
|
11 |
% |
Total |
|
|
83 |
% |
|
|
89 |
% |
Note 14—Commitments and Contingencies
The Company could be subject to various possible loss contingencies which arise primarily from interpretation of federal and state laws and regulations affecting the natural gas and crude oil industry. Such contingencies include differing interpretations as to the prices at which natural gas and crude oil sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues, and other matters. Management believes it has complied with the various laws and regulations, administrative rulings, and interpretations.
Litigation Relating to the Merger
On March 2, 2022, a purported Falcon stockholder filed a lawsuit entitled Huth v. Falcon Minerals Corporation, Case No. 22-cv-01754, in the United States District Court for the Southern District of New York against Falcon and the members of the Falcon Board (the “Huth Case”). On March 4, 2022, a purported Falcon stockholder filed a lawsuit entitled Newman v. Falcon Minerals Corporation, Case No. 22-cv-01203, in the United States District Court for the Eastern District of New York against Falcon and the members of the Falcon Board (the “Newman Case” and, together with the Huth Case, the “Federal Cases”). On March 15, 2022, a purported Falcon stockholder filed a class action lawsuit, entitled Allen v. Falcon Minerals Corporation, Case No. 2022-0248-MTZ, in the Court of Chancery of the State of Delaware on behalf of Class A stockholders of Falcon against the members of the Falcon Board, Desert Peak and Falcon OpCo (the “Delaware Case”).
Each lawsuit alleges that the proxy statement filed by Falcon with the SEC on February 9, 2022 in connection with the proposed Merger omits material information with respect to the Merger. The Federal Cases allege that these omissions render the proxy statement false and misleading in violation of Sections 14(a) and 20(a) of the Exchange Act. The Delaware Case alleges that the defendants breached their fiduciary duties by failing to disclose all material information in the proxy statement. Each plaintiff seeks, among other things, injunctive relief until the defendants thereto disclose the alleged omitted material information.
Falcon and Desert Peak each believe that the claims asserted in these lawsuits are without merit and intend to defend vigorously against all claims asserted. Additional lawsuits arising out of or relating to the Merger Agreement and the transactions contemplated thereby may be filed in the future.
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Note 15—Subsequent Events
Cash Dividends
In May 2022, the Company declared a quarterly cash dividend of $0.18 per share of Class A Common Stock totaling approximately $8.5 million for all shares of Class A Common Stock outstanding. The dividend is for the period from January 1, 2022 through March 31, 2022. The dividend is payable on May 31, 2022 to all Class A shareholders of record on May 18, 2022.
OpCo Distribution
In May 2022, OpCo declared distributions totaling $17.4 million to its unitholders, of which $9.5 million will be distributed to the Company.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of present or historical fact, included in this report regarding our strategy, future operations, financial position, estimated revenues, and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “should,” “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” the negative of such terms and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report. We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of oil, natural gas and NGLs. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
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our ability to execute our business strategies; |
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the possibility that the Merger is not consummated in a timely manner or at all; |
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the diversion of management in connection with the Merger and Falcon’s ability to successfully integrate Desert Peak’s operations and achieve or realize fully or at all the anticipated benefits, savings or growth of the Merger; |
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the impact of the announcement of the Merger on relationships with third parties, including commercial counterparties, employees and competitors, and risks associated with the loss and ongoing replacement of key personnel; |
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Falcon’s, Desert Peak’s and the Post-Combination Company’s respective abilities to execute their respective business strategies; |
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changes in general economic conditions, including the material and adverse negative consequences of the COVID-19 pandemic and its unfolding impact on the global and national economy and/or as a result of the armed conflict in Ukraine and associated economic sanctions on Russia; |
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the actions of the Organization of Petroleum Exporting Countries (“OPEC”) and other significant producers and governments, including the armed conflict in Ukraine and the potential destabilizing effects such conflict may pose for the global oil and natural gas markets, and the ability of such producers to agree to and maintain oil price and production controls; |
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the effect of change in commodity prices, including volatility of realized oil and natural gas prices, as a result of the Russian invasion of Ukraine that has led to significant armed hostilities and a number of severe economic sanctions on Russia or otherwise; |
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the level of production on our properties; |
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regional supply and demand factors, delays, or interruptions of production; |
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our ability to replace our oil and natural gas reserves; |
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our ability to identify, complete and integrate acquisitions of properties or businesses; |
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general economic, business or industry conditions; |
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competition in the oil and natural gas industry; |
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the ability of our operators to obtain capital or financing needed for development and exploration operations; |
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title defects in the properties in which we invest; |
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uncertainties with respect to identified drilling locations and estimates of reserves; |
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the availability or cost of rigs, equipment, raw materials, supplies, oilfield services or personnel; |
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restrictions on the use of water; |
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the availability of transportation facilities; |
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the ability of our operators to comply with applicable governmental laws and regulations and to obtain permits and governmental approvals; |
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federal and state legislative and regulatory initiatives relating to hydraulic fracturing; |
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future operating results; |
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risk related to our hedging activities; |
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exploration and development drilling prospects, inventories, projects, and programs; |
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weather conditions, natural disasters and other matters beyond our control; |
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operating hazards faced by our operators; and |
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the ability of our operators to keep pace with technological advancements. |
For additional information regarding known material factors that could affect our operating results and performance, please read the section entitled “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 11, 2022. Should one or more of the risks or uncertainties described in this report occur, or should underlying assumptions prove incorrect, actual results and plans could different materially from those expressed in any forward-looking statements.
Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and the price and cost assumptions made by reserve engineers. In addition, the results of drilling, completion and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that are ultimately recovered.
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