Notes
to Consolidated Financial Statements
(Unaudited)
Note
1 - Organization
Carbon
Energy Corporation and its subsidiaries (referred to herein as “
we
”, “
us
”,
the “
Company
” or “
Carbon”
) is an independent oil and gas company engaged in the exploration,
development and production of oil and natural gas in the United States. The Company’s business is comprised of the assets
and properties of Nytis Exploration (USA) Inc. (“Nytis USA”) and its subsidiary Nytis Exploration Company LLC (“Nytis
LLC”) which conducts the Company’s operations in the Appalachian and Illinois Basins, Carbon California Operating
Company, LLC (“CCOC”) and Carbon California Company, LLC (“Carbon California”) which conduct the Company’s
operations in California, and the Company’s equity investment in Carbon Appalachian Company, LLC (“Carbon Appalachia”).
Appalachian and Illinois Basin Operations
Nytis LLC conducts operations for Carbon
and Carbon Appalachia as illustrated in the following diagram.
Ventura
Basin Operations
CCOC
conducts our operations in the Ventura Basin of California. On February 1, 2018, an entity managed by Yorktown Partners, LLC (“Yorktown”)
exercised a warrant it held to purchase shares of our common stock at an exercise price of $7.20 per share (the “California
Warrant”), resulting in the issuance of 1,527,778 shares of our common stock. In exchange, we received Yorktown’s
Class A Units of Carbon California representing approximately 46.96% of the then outstanding Class A Units of Carbon California
(a profits interest of approximately 38.59%). As of February 1, 2018, we owned 56.4% of the voting and profits interests of Carbon
California. On May 1, 2018, Carbon California closed the Seneca Acquisition. Following the exercise of the California Warrant
by Yorktown and the Seneca Acquisition, we own 53.9% of the voting and profits interests and Prudential owns 46.1% voting and
profits interest in Carbon California. As of February 1, 2018, we consolidate Carbon California for financial reporting purposes.
The structure of the ownership of the operations and ownership of Carbon California is illustrated in the following diagram:
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include
all adjustments considered necessary to present fairly our financial position as of September 30, 2018, and our results of operations
and cash flows for the three and nine months ended September 30, 2018 and 2017. Operating results for the three and nine months
ended September 30, 2018, are not necessarily indicative of the results that may be expected for the full year because of the impact
of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development
drilling results, seasonality, and other factors. The unaudited condensed consolidated financial statements and related notes included
in this Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2017. Except as disclosed herein, there have been no
material changes to the information disclosed in the notes to the consolidated financial statements included in our 2017 Annual
Report on Form 10-K.
Principles of Consolidation
The unaudited condensed consolidated financial
statements include the accounts of Carbon, Carbon California, CCOC, Nytis USA and its consolidated subsidiary, Nytis LLC. Carbon
owns 100% of Nytis USA and CCOC. Nytis USA owns approximately 99% of Nytis LLC. Carbon owns 53.9% of Carbon California and Prudential
owns 46.1% voting and profits interest in Carbon California.
Nytis LLC also holds an interest in 64
oil and gas partnerships. For the 47 partnerships where we have a controlling interest, the partnerships are consolidated. In
these instances, we reflect the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests
on our unaudited consolidated statements of operations, non-controlling ownership interests in the net assets of the partnerships
as non-controlling interests within stockholders’ equity on our unaudited consolidated balance sheets. All significant intercompany
accounts and transactions have been eliminated.
In accordance with established practice
in the oil and gas industry our unaudited condensed consolidated financial statements also include our pro-rata share of assets,
liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which we
have a non-controlling interest.
Non majority interest owned investments
that do not meet the criteria for pro-rata consolidation are accounted for using the equity method when we have the ability to
significantly influence the operating decisions of the investee. When we do not have the ability to significantly influence the
operating decisions of an investee, the cost method is used. All transactions, if any, with investees have been eliminated in the
accompanying unaudited condensed consolidated financial statements.
Effective February 1, 2018, Yorktown exercised
the California Warrant, which resulted in us acquiring Yorktown’s ownership interest in Carbon California in exchange for
shares of our common stock. On May 1, 2018, Carbon California closed the Seneca Acquisition. Following the exercise of the California
Warrant by Yorktown and the Seneca Acquisition, we own 53.9%, of the voting and profits interests, and Prudential owns 46.1%.
Insurance Receivable
Insurance receivable is comprised of insurance
claims for the loss of property as a result of wildfires that impacted Carbon California in December 2017. The Company filed claims
with its insurance provider and is in receipt of a portion of partial funds associated with the claims as of September 30, 2018.
Therefore, the Company has determined the receivable is collectible and is included in insurance receivable on the unaudited consolidated
balance sheets. As of September 30, 2018, the Company has an insurance receivable of $871,000 and collected $2.7 million from the
previously submitted claims.
Long-term Assets
Long-term assets are comprised of (i) debt
issuance costs, (ii) bonds, and (iii) deferred registration fees associated with a registration statement for a possible equity
offering of the Company’s Common Stock. We have recorded debt issuance costs and amortize the balance over the life of the
loan. As of September 30, 2018, we have within non-current assets approximately $1.7 million of deferred financing costs associated
with our credit facility and with Carbon California’s Senior Revolving Notes (note 7). As of September 30, 2018, we have
incurred approximately $1.9 million for outside professional services in conjunction with the preparation of the completion of
a registration statement associated with the possible offering. We will continue to accumulate deferred financing costs until the
completion of the registration statement and a successful equity offering is commenced which at that time will be recognized as
a financing charge and applied against the equity component of the transaction. If the raise is unsuccessful, the amount will be
expensed in the current period.
Accounting for Oil and Gas Operations
The Company uses the full cost method of
accounting for oil and gas properties. Accordingly, all costs incidental to the acquisition, exploration and development of oil
and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Overhead costs
incurred that are directly identified with acquisition, exploration and development activities undertaken by the Company for its
own account, and which are not related to production, general corporate overhead or similar activities, are also capitalized.
Unproved properties are excluded from amortized
capitalized costs until it is determined if proved reserves can be assigned to such properties. The Company assesses its unproved
properties for impairment at least annually. Significant unproved properties are assessed individually.
Capitalized costs are depleted by an equivalent
unit-of-production method, converting oil to gas at the ratio of one barrel of oil to six thousand cubic feet of natural gas. Depletion
is calculated using capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based
on current costs) to be incurred in developing proved reserves, net of estimated salvage values.
No gain or loss is recognized upon disposal
of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves.
All costs related to production activities, including work-over costs incurred solely to maintain or increase levels of production
from an existing completion interval, are charged to expense as incurred.
The Company performs a ceiling test quarterly.
The full cost ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is
not a fair value based measurement, rather it is a standardized mathematical calculation. The ceiling test provides that capitalized
costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net
revenue from estimated production of proved oil and gas reserves using the un-weighted arithmetic average of the first-day-of-the
month price for the previous twelve month period, excluding the future cash outflows associated with settling asset retirement
obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (2) the cost of properties not being
amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized,
if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net
capitalized costs exceed the sum of the components noted above, a ceiling test write-down would be recognized to the extent of
the excess capitalized costs. Such impairments are permanent and cannot be recovered in future periods even if the sum of the components
noted above exceeds the capitalized costs in future periods.
For the three and nine months ended September
30, 2018, the Company did not recognize a ceiling test impairment as the Company’s full cost pool did not exceed the ceiling
limitations. For the three months ended September 30, 2017, the Company did not recognize a ceiling test impairment as the Company’s
full cost pool did not exceed the ceiling limitations.
Investments in Affiliates
Investments in non-consolidated affiliates
are accounted for under either the cost or equity method of accounting, as appropriate. The cost method of accounting is generally
used for investments in affiliates in which we have less than 20% of the voting interests of a corporate affiliate (or less than
a 3% to 5% interest of a partnership or limited liability company) and do not have significant influence. Investments in non-consolidated
affiliates, accounted for using the cost method of accounting, are recorded at cost and impairment assessments for each investment
are made annually to determine if a decline in the fair value of the investment, other than temporary, has occurred. A permanent
impairment is recognized if a decline in the fair value occurs.
If we hold between 20% and 50% of the voting
interest in non-consolidated corporate affiliates or generally greater than a 3% to 5% interest of a partnership or limited liability
company and can exert significant influence or control (e.g., through our influence with a seat on the board of directors or management
of operations), the equity method of accounting is generally used to account for the investment. Equity method investments will
increase or decrease by our share of the affiliate’s profits or losses and such profits or losses are recognized in our unaudited
consolidated statements of operations. For our equity method investment in Carbon Appalachia, we use the hypothetical liquidation
at book value method to recognize our share of the affiliate’s profits or losses. We review equity method investments for
impairment whenever events or changes in circumstances indicate that an other than temporary decline in value has occurred.
Related Party Transactions
Management Reimbursements
In our role as manager of Carbon California
and Carbon Appalachia, we received reimbursements for the provision of management from Carbon Appalachia of approximately $744,000
and $2.3 million for the three and nine months ended September 30, 2018, and $50,000 for the one month ended January 31, 2018,
from Carbon California. These reimbursements are included in general and administrative - related party reimbursement on our unaudited
consolidated statements of operations. Effective February 1, 2018, the management reimbursement received from Carbon California
is eliminated at consolidation. This elimination was $650,000 for the period February 1, 2018 through September 30, 2018.
In addition to the management reimbursements,
approximately $376,000 and $1.1 million in general and administrative expenses were reimbursed for the three and nine months ended
September 30, 2018, from Carbon Appalachia, and $14,000 for the one month ended January 31, 2018, from Carbon California. General
and administrative expenses reimbursed by Carbon California and eliminated upon consolidation were approximately $42,000 for the
period February 1, 2018, through September 30, 2018.
Operating Reimbursements
In our role as operator of Carbon Appalachia,
we receive reimbursements of operating expenses. These expenses are recorded directly to receivable - related party on our unaudited
consolidated balance sheets and are therefore not included in our operating expenses on our unaudited consolidated statements of
operations.
Carbon California Credit Facilities
The credit facilities of Carbon California,
including the Senior Revolving Notes, Carbon California Notes and Carbon California 2018 Subordinated Notes (all defined below),
are held by Prudential Legacy Insurance Company of New Jersey and Prudential Insurance Company of America or its affiliates (“Prudential”).
See note 7.
Preferred Stock
In April 2018, we issued 50,000 shares
of Preferred Stock to Yorktown in conjunction with our Seneca Acquisition. See note 9.
Old Ironsides Membership Interest Purchase
Agreement
On May 4, 2018, we entered into a Membership
Interest Purchase Agreement with Old Ironsides to acquire all of Old Ironsides’ membership interests of Carbon Appalachia.
Following the closing of the transaction we will own 100% of the issued and outstanding ownership in Carbon Appalachia and Carbon
Appalachia will become a wholly-owned subsidiary of ours. See note 6.
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to makes estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. There have been no changes in our critical accounting estimates from those that were
disclosed in the 2017 Annual Report on Form 10-K. Actual results could differ from these estimates.
Earnings (Loss) Per Common Share
Basic earnings per common share is computed
by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common shares
outstanding during the period. The shares of restricted stock granted to our officers, directors and employees are included in
the computation of basic net income per share only after the shares become fully vested. Diluted earnings per common share includes
both the vested and unvested shares of restricted. We issued 50,000 shares of Series B Convertible Preferred Stock, par value
$0.01 per share (the “Preferred Stock”), and the difference between the carrying amount of the Preferred Stock in equity
and the fair value of the Preferred Stock) is treated as a dividend for purposes of calculating earnings per common share. The
Preferred Stock deemed dividend could potentially dilute basic earnings per common share in the future.
In periods when we report a net loss, all
shares of restricted stock are excluded from the calculation of diluted weighted average shares outstanding because of its anti-dilutive
effect on loss per share. As a result, all restricted stock is excluded from the calculation of diluted earnings per common share
for the three months ended September 30, 2018. Potentially dilutive securities (restricted stock awards) included in the calculation
of diluted earnings per share totaled 315,040 for the three months ended September 30, 2018. Potentially dilutive securities that
are anti-dilutive totaled 315,040 for the three months ended September 30, 2018 and 901,109 for the three months ended September 30,
2017. The dilutive units did not have a material impact on our earnings per common share calculations for any of the periods presented.
The following table sets forth the calculation
of basic and diluted income per share:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
(in thousands except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
(725
|
)
|
|
$
|
(462
|
)
|
|
$
|
2,264
|
|
|
$
|
4,834
|
|
Less: warrant derivative gain
|
|
|
-
|
|
|
|
-
|
|
|
|
(225
|
)
|
|
|
(2,494
|
)
|
Less: deemed dividend for convertible preferred shares
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
(147
|
)
|
|
|
-
|
|
Less: beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,125
|
)
|
|
|
-
|
|
Diluted net (loss) income
|
|
$
|
(802
|
)
|
|
$
|
(462
|
)
|
|
$
|
767
|
|
|
$
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding during the period
|
|
|
7,701
|
|
|
|
5,628
|
|
|
|
7,466
|
|
|
|
5,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add dilutive effects of warrants and non-vested shares of restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
315
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding during the period
|
|
|
7,701
|
|
|
|
5,628
|
|
|
|
7,781
|
|
|
|
6,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per common share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.30
|
|
|
$
|
0.87
|
|
Diluted net (loss) income per common share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.10
|
|
|
$
|
0.36
|
|
Recently Adopted Accounting Pronouncement
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(Topic 606) (“ASU 2014-09”), which establishes a comprehensive new revenue recognition standard designed to depict
the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange
for those goods or services. In March 2016, the FASB released certain implementation guidance through ASU 2016-08 (collectively
with ASU 2014-09, the “Revenue ASUs”) to clarify principal versus agent considerations. The Revenue ASUs allow for
the use of either the full or modified retrospective transition method, and the standard is effective for annual reporting periods
beginning after December 15, 2017 including interim periods within that period, with early adoption permitted for annual reporting
periods beginning after December 15, 2016. We adopted the guidance using the modified retrospective method with the effective date
of January 1, 2018. We did not record a cumulative-effect adjustment to the opening balance of retained earnings as no adjustment
was necessary. The adoption of the Revenue ASUs did not impact net income or cash flows. See note 10 for the new disclosures required
by the Revenue ASUs.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
“
Leases
(Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease standard designed
to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance
sheet and disclosing key information about leasing arrangements. In transition, lessees and lessors are required to recognize and
measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective
approach includes a number of optional practical expedients that entities may elect to apply. An entity that elects to apply the
practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with
previous GAAP standards. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. The Company is in the process of evaluating the effect of adopting ASU 2016-02 on
the financial statements, accounting policies, and internal controls. The adoption is expected to result in an increase in the
assets and liabilities recorded on its consolidated balance sheet and additional disclosures. The Company does not expect a material
impact on its consolidated statement of operations.
There were various updates recently issued
by the FASB, most of which represented technical corrections to the accounting literature or application to specific industries
and are not expected to a have a material impact on our reported financial position, results of operations, or cash flows.
Note 3 - Acquisitions and Divestitures
Acquisition of Majority Control of Carbon California
Carbon California was formed in 2016 by
us and entities managed by Yorktown and Prudential to acquire oil and gas producing assets in the Ventura Basin of California.
In connection with the entry into the limited
liability company agreement of Carbon California, we received Class B Units and issued to Yorktown the California Warrant exercisable
for shares of our common stock. The exercise price for the California Warrant was payable exclusively with Class A Units of Carbon
California held by Yorktown and the number of shares of our common stock for which the California Warrant was exercisable was determined,
as of the time of exercise, by dividing (a) the aggregate unreturned capital of Yorktown’s Class A Units of Carbon California
by (b) the exercise price. The California Warrant had a term of seven years and included certain standard registration rights with
respect to the shares of our common stock issuable upon exercise of the California Warrant.
The issuance of the Class B Units and the California Warrant were in contemplation of each other (note
6), and under non-monetary related party guidance, we accounted for the California Warrant, at issuance, based on the fair value
of the California Warrant as of the date of grant (February 15, 2017) and recorded a long-term warrant liability with an associated
offset to Additional Paid in Capital (“APIC”). Future changes to the fair value of the California Warrant were recognized
in earnings. We accounted for the fair value of the Class B Units at their estimated fair value at the date of grant, which became
our investment in Carbon California with an offsetting entry to Additional Paid In Capital (“APIC”). Additionally,
we accounted for our 17.81% profits interest in Carbon California as an equity method investment until January 31, 2018.
On February 1, 2018, Yorktown exercised
the California Warrant resulting in the issuance of 1,527,778 shares of our common stock in exchange for Yorktown’s Class
A Units of Carbon California representing approximately 46.96% of the outstanding Class A Units of Carbon California (a profits
interest of approximately 38.59%). After giving effect to the exercise on February 1, 2018, we owned 56.4% of the voting and profits
interests of Carbon California. On May 1, 2018, Carbon California closed the Seneca Acquisition. Following the exercise of the
California Warrant by Yorktown and the Seneca Acquisition, we own 53.9% of the voting and profits interests, and Prudential owns
46.1% voting and profits interest in Carbon California.
The exercise of the California Warrant
and the acquisition of the additional ownership interest is accounted for as a step acquisition in which we obtained control in
accordance with ASC 805,
Business Combinations
(“ASC 805”) (referred to herein as the “Carbon California
Acquisition”). We recognized 100% of the identifiable assets acquired, liabilities assumed and the non-controlling interest
at their respective fair value as of the date of the acquisition. We exchanged 1,527,778 common shares at a fair value of approximately
$8.3 million ($5.45 per share), for 11,000 Class A Units of Carbon California, representing a 38.59% profits ownership interest
in Carbon California. We followed the fair value method to allocate the consideration transferred to the identifiable net assets
acquired and non-controlling interest (“NCI”) on a preliminary basis as follows:
|
|
Amount
(in thousands)
|
|
Fair value of Carbon common shares transferred as consideration
|
|
$
|
8,326
|
|
Fair value of NCI
|
|
|
16,466
|
|
Fair value of previously held interest
|
|
|
7,244
|
|
Fair value of business acquired
|
|
$
|
32,036
|
|
Assets
acquired and liabilities assumed are as follows:
|
|
Amount
(in thousands)
|
|
Cash
|
|
$
|
275
|
|
Accounts receivable:
|
|
|
|
|
Joint interest billings and other
|
|
|
690
|
|
Receivable - related party
|
|
|
1,610
|
|
Prepaid expense, deposits, and other current assets
|
|
|
1,723
|
|
Oil and gas properties:
|
|
|
|
|
Proved
|
|
|
56,477
|
|
Unproved
|
|
|
1,495
|
|
Other property and equipment, net
|
|
|
877
|
|
Other long-term assets
|
|
|
475
|
|
Accounts payable and accrued liabilities
|
|
|
(6,054
|
)
|
Commodity derivative liability - short-term
|
|
|
(916
|
)
|
Commodity derivative liability - long-term
|
|
|
(1,729
|
)
|
Asset retirement obligations - short-term
|
|
|
(384
|
)
|
Asset retirement obligations - long-term
|
|
|
(2,537
|
)
|
Subordinated Notes, related party, net
|
|
|
(8,874
|
)
|
Senior Revolving Notes, related party
|
|
|
(11,000
|
)
|
Notes payable
|
|
|
(92
|
)
|
Total net assets acquired
|
|
$
|
32,036
|
|
The preliminary fair value of the assets
acquired and liabilities assumed were determined using various valuation techniques, including an income approach.
On the date of the acquisition, we derecognized
our equity investment in Carbon California and recognized a gain of approximately $5.4 million based on the fair value of our previously
held interest compared to its carrying value.
For assets and liabilities accounted for as business combinations, including the Carbon California acquisition,
to determine the fair value of the assets acquired, the Company primarily used the income approach and made market assumptions
as to projections of estimated quantities of oil and natural gas reserves, future production rates, future commodity prices including
price differentials as of the date of closing, future operating and development costs, a market participant weighted average cost
of capital, and the condition of vehicles and equipment. The determination of the fair value of the accounts payable and accrued
liabilities assumed required significant judgement, including estimates relating to production assets
.
Seneca Acquisition
In October 2017, Carbon California signed
a Purchase and Sale Agreement with Seneca Resources (“
Seneca
”) to acquire approximately 309 oil wells and approximately
5,700 gross acres (5,500 net) of oil and gas leases, and fee interests in and to certain lands, situated in the Ventura Basin,
together with associated pipelines, facilities, equipment and other property rights. The transaction closed on May 1, 2018 for
a purchase price of $43.0 million, subject to customary and standard purchase price adjustments. We contributed approximately $5.0
million to Carbon California to fund our portion of the purchase price, through the $5.0 Preferred Stock issuance. Prudential also
contributed $5.0 million to fund its share of the equity portion of the purchase price. Carbon California funded the remaining
purchase price from cash, increased borrowings under the Senior Revolving Notes and $3.0 million in proceeds from the issuance
of Senior Subordinated Notes.
Utilizing the assistance of third-party
valuation specialists, we considered various factors in our estimate of fair value of the acquired assets including (i) reserves,
(ii) production rates, (iii) future operating and development costs, (iv) future commodity prices, including price differentials,
(v) future cash flows, and (vi) working conditions and expected lives of vehicles and equipment.
We determined that substantially all of
the fair value of the assets acquired related to proved oil and gas properties and, as such the Seneca Acquisition does not meet
the definition of a business. Therefore, we have accounted for the transaction as an asset acquisition and allocated the purchase
price based on the relative fair value of the assets acquired.
The fair value of the production assets
were determined using the income approach using Level 3 inputs according to the ASC 820,
Fair Value
, hierarchy. The
fair value of the other assets was determined using the market approach using Level 3 inputs. The determination of the fair value
of the oil and gas and other property and equipment acquired and accounts payable and accrued liability assumed, required significant
judgement, including estimates relating to the production assets and the other transaction costs. We recorded $639,000 in Asset
Retirement Obligation (“ARO”), and $330,000 in assumed liabilities in connection with the Seneca Acquisition. We incurred
transaction costs related to the Seneca Acquisition in the amount of $318,000. As this acquisition was determined to be an asset
acquisition, transaction costs were capitalized to oil and gas properties- proved, net on the balance sheet. Below is the summary
of the assets acquired (in thousands):
Identifiable assets acquired:
|
|
|
|
Proved oil and gas properties
|
|
$
|
37,386
|
|
Unproved oil and gas properties
|
|
|
100
|
|
Other property and equipment
|
|
|
545
|
|
Intangible assets
|
|
|
300
|
|
Total identified assets
|
|
$
|
38,331
|
|
Consolidation of Carbon California and
Seneca Acquisition Unaudited Pro Forma Results of Operations
Below are unaudited consolidated results
of operations for the three and nine months ended September 30, 2018 and 2017, as though the Carbon California Acquisition and
the Seneca Acquisition had been completed as of January 1, 2017. The Carbon California Acquisition closed February 1, 2018, and
the Seneca Acquisition closed May 1, 2018, and accordingly, our unaudited consolidated statements of operations for the year ended
September 30, 2018, includes the Carbon California Acquisition results of operations for the period February 1, 2018 through September
30, 2018, inclusive of the Seneca Acquisition results of operations for the period May 1, 2018 through September 30, 2018.
|
|
Unaudited Pro Forma
Consolidated Results
For Three Months Ended
September 30,
|
|
|
Unaudited Pro Forma
Consolidated Results
For Nine Months Ended
September 30,
|
|
(in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
12,742
|
|
|
$
|
11,227
|
|
|
$
|
33,256
|
|
|
$
|
35,122
|
|
Net (loss) income before non-controlling interests
|
|
|
(455
|
)
|
|
|
(1,518
|
)
|
|
|
5,232
|
|
|
|
13,969
|
|
Net (loss) income attributable to non-controlling interests
|
|
|
270
|
|
|
|
16
|
|
|
|
(2,334
|
)
|
|
|
92
|
|
Net (loss) income attributable to controlling interests
|
|
$
|
(725
|
)
|
|
$
|
(1,534
|
)
|
|
$
|
7,566
|
|
|
$
|
13,877
|
|
Net income per share (basic)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
1.00
|
|
|
$
|
2.49
|
|
Net income per share (diluted)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
.96
|
|
|
$
|
2.14
|
|
Liberty Acquisition
On July 11, 2018, we completed an acquisition
of 54 operated oil and gas wells covering approximately 55,000 gross acres (22,000 net) and the associated mineral interests in
the Appalachian Basin for a purchase price of $3.0 million, subject to customary and standard purchase price adjustments (the “
Liberty
Acquisition
”). The Liberty Acquisition increased our ownership in the acquired wells from 60% to 100%. The
Liberty Acquisition was funded through borrowings under our Credit Facility. The Liberty Acquisition is accounted for as a non-significant
asset acquisition.
Note
4 - Property and Equipment
Net
property and equipment as of September 30, 2018 and December 31, 2017, consists of the following:
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Oil and gas properties:
|
|
|
|
|
|
|
Proved oil and gas properties
|
|
$
|
215,620
|
|
|
$
|
114,893
|
|
Unproved properties not subject to depletion
|
|
|
3,616
|
|
|
|
1,947
|
|
Accumulated depreciation, depletion, amortization and impairment
|
|
|
(87,527
|
)
|
|
|
(80,715
|
)
|
Net oil and gas properties
|
|
|
131,709
|
|
|
|
36,125
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures, computer hardware and software, and other equipment
|
|
|
3,783
|
|
|
|
1,758
|
|
Accumulated depreciation and amortization
|
|
|
(1,794
|
)
|
|
|
(1,021
|
)
|
Net other property and equipment
|
|
|
1,989
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
Total net property and equipment
|
|
$
|
133,698
|
|
|
$
|
36,862
|
|
We
had approximately $3.6 million and $1.9 million, at September 30, 2018 and December 31, 2017, respectively, of unproved oil and
gas properties not subject to depletion. At September 30, 2018 and December 31, 2017, our unproved properties consist principally
of leasehold acquisition costs in the following areas:
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Ventura Basin
|
|
$
|
1,595
|
|
|
$
|
-
|
|
Illinois Basin:
|
|
|
|
|
|
|
|
|
Indiana
|
|
|
432
|
|
|
|
432
|
|
Illinois
|
|
|
142
|
|
|
|
136
|
|
Appalachian Basin:
|
|
|
|
|
|
|
|
|
Kentucky
|
|
|
952
|
|
|
|
915
|
|
Ohio
|
|
|
66
|
|
|
|
66
|
|
West Virginia
|
|
|
429
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
Total unproved properties not subject to depletion
|
|
$
|
3,616
|
|
|
$
|
1,947
|
|
During
the three and nine months ended September 30, 2018 and 2017, there were no expiring leasehold costs that were reclassified into
proved property. The excluded properties are assessed for impairment at least annually. Subject to industry conditions, evaluations
of most of these properties and the inclusion of their costs in amortized capital costs is expected to be completed within five
years.
We
capitalized overhead applicable to acquisition, development and exploration activities of approximately $106,000 and $306,000
for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2017,
we capitalized overhead applicable to acquisition, development, and exploration activities of approximately $47,000 and $178,000,
respectively.
Depletion
expense related to oil and gas properties for the three and nine months ended September 30, 2018 was approximately $2.4 million,
or $1.01 per Mcfe, and $5.6 million, or $0.88 per Mcfe, respectively. For the three and nine months ended September 30, 2017,
depletion expense was approximately $521,000, or $0.38 per Mcfe, and $1.6 million, or $0.40 per Mcfe, respectively.
Note
5 - Asset Retirement Obligation
Our
asset retirement obligations (“ARO”) relate to future costs associated with the plugging and abandonment of oil and
gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. The fair
value of a liability for an ARO is recorded in the period in which it is incurred or acquired, and the cost of such liability
is recorded as an increase in the carrying amount of the related long-lived asset by the same amount. The liability is accreted
each period and the capitalized cost is depleted on a units-of-production basis as part of the full cost pool. Revisions to estimated
AROs result in adjustments to the related capitalized asset and corresponding liability.
The
estimated ARO liability is based on estimated economic lives, estimates as to the cost to abandon the wells in the future, and
federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the
time the liability is incurred or acquired or increased as a result of a reassessment of expected cash flows and assumptions inherent
in the estimation of the liability. Upward revisions to the liability could occur due to changes in estimated abandonment costs
or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. AROs are
valued utilizing Level 3 fair value measurement inputs (see note 12).
The
following table is a reconciliation of the ARO:
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
7,737
|
|
|
$
|
5,120
|
|
Accretion expense
|
|
|
510
|
|
|
|
232
|
|
Additions from Carbon California Company, LLC
|
|
|
2,921
|
|
|
|
-
|
|
Additions from Seneca Acquisition
|
|
|
639
|
|
|
|
-
|
|
Additions from Liberty Acquisition
|
|
|
30
|
|
|
|
-
|
|
Additions during period
|
|
|
-
|
|
|
|
5
|
|
Obligations on sale of oil & gas properties
|
|
|
-
|
|
|
|
(93
|
)
|
|
|
|
11,837
|
|
|
|
5,264
|
|
Less: ARO recognized as a current liability
|
|
|
(902
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
10,935
|
|
|
$
|
5,120
|
|
Note
6 - Investments in Affiliates
Carbon California
Carbon California was formed in 2016 by
us and entities controlled by, Yorktown and Prudential to acquire producing assets in the Ventura Basin in California. On February
15, 2017, we, Yorktown and Prudential entered into a limited liability company agreement (the “Carbon California LLC Agreement”)
of Carbon California, a Delaware limited liability company.
Prior to February 1, 2018, we held 17.81%
of the voting and profits interests, Yorktown held 38.59% of the voting and profits interests and Prudential held 43.59% of the
voting and profits interests in Carbon California. On February 1, 2018, Yorktown exercised the California Warrant, pursuant to
which Yorktown obtained additional shares of common stock in us in exchange for the transfer and assignment by Yorktown of all
its rights in Carbon California. Following the exercise of the California Warrant by Yorktown, we owned 56.4% of the voting and
profits interests, and Prudential held the remainder of the interests, in Carbon California. On May 1, 2018, Carbon California
closed the Seneca Acquisition. Following the exercise of the California Warrant by Yorktown and the Seneca Acquisition, we own
53.9% of the voting and profits interests, and Prudential owns 46.1% voting and profits interest in Carbon California.
On
February 15, 2017, Carbon California (i) issued and sold Class A Units to Yorktown and Prudential for an aggregate cash consideration
of $22.0 million, (ii) entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Prudential Legacy
Insurance Company of New Jersey and Prudential Insurance Company of America for the issuance and sale of up to $25.0 million of
Senior Secured Revolving Notes (the “Senior Revolving Notes”) due February 15, 2022 and (iii) entered into a Securities
Purchase Agreement (the “Securities Purchase Agreement”) with Prudential for the issuance and sale of $10.0 million
of Senior Subordinated Notes (the “Subordinated Notes”) due February 15, 2024. We are not a guarantor of the Senior
Revolving Notes or the Subordinate Notes.
The
closing of the Note Purchase Agreement and the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance
by Carbon California of (i) Senior Revolving Notes in the principal amount of $10.0 million and (ii) Subordinated Notes in the
original principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving Notes is based upon
the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined at least semi-annually.
As of September 30, 2018, the borrowing base was $41.0 million, of which $38.5 million was outstanding.
Net
proceeds from the offering transaction were used by Carbon California to complete the acquisitions of oil and gas assets in the
Ventura Basin of California, which acquisitions also closed on February 15, 2017. The remainder of the net proceeds were used
to fund field development projects, to fund a future complementary acquisition and for general working capital purposes of Carbon
California.
For
the period February 15, 2017 (inception) through January 31, 2018, based on our 17.8% interest in Carbon California, our ability
to appoint a member to the board of directors and our role of manager of Carbon California, we accounted for our investment in
Carbon California under the equity method of accounting as we believed we exerted significant influence. We used the Hypothetical
Liquidation at Book Value Method (“HLBV”) to determine our share of profits or losses in Carbon California and adjusted
the carrying value of our investment accordingly. The HLBV is a balance-sheet approach that calculates the amount each member
of Carbon California would have received if Carbon California were liquidated at book value at the end of each measurement period.
The change in the allocated amount to each member during the period represents the income or loss allocated to that member. In
the event of liquidation of Carbon California, to the extent that Carbon California has net income, available proceeds are first
distributed to members holding Class B Units and any remaining proceeds are then distributed to members holding Class A Units.
For the period February 15, 2017 (inception) through January 31, 2018, Carbon California incurred a net loss of which our share
(as a holder of Class B Units for that period) was zero.
In
connection with our entry into the Carbon California LLC Agreement, we received the aforementioned Class B Units and issued to
Yorktown the California Warrant. The exercise price for the California Warrant was payable exclusively with Class A Units of Carbon
California held by Yorktown and the number of shares of our common stock for which the California Warrant was exercisable was
determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of Yorktown’s Class A Units of
Carbon California by (b) the exercise price. The California Warrant had a term of seven years and included certain standard registration
rights with respect to the shares of our common stock issuable upon exercise of the California Warrant. On February 1, 2018, Yorktown
exercised the California Warrant. As a result of the warrant exercise, Carbon holds 11,000 Class A Units of Carbon California
and all of the Class B units, resulting in an aggregate Sharing Percentage of 56.4%. Effective February 1, 2018, the Company consolidates
Carbon California in its unaudited condensed consolidated financial statements.
On
May 1, 2018, Carbon California entered into an agreement with Prudential Capital Energy Partners, L.P. for the issuance and sale
of $3.0 million of unsecured notes due February 15, 2024, bearing interest of 12% per annum (the “Carbon California 2018
Subordinated Notes”). Prudential received 585 Class A Units, representing an approximately 2% additional
sharing percentage, for the issuance of the Carbon California 2018 Subordinated Notes. Carbon California valued this unit issuance
based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding Carbon
California 2018 Subordinated Notes of $3.0 million. The Company then allocated the non-cash value of the units of approximately
$490,000, which was recorded as a discount to the Carbon California 2018 Subordinated Notes. As of September 30, 2018, Carbon
California had an outstanding discount of $454,000 associated with these notes, which is presented net of the Carbon California
2018 Subordinated Notes within Credit facility-related party on the unaudited consolidated balance sheets.
As a result of these transactions, we have
at September 30, 2018, an aggregate Sharing Percentage of 53.9%.
Carbon
Appalachia
Carbon
Appalachia was formed in 2016 by us, Yorktown and entities controlled by Old Ironsides Energy LLC (“Old
Ironsides”) to acquire producing assets in the Appalachian Basin in Kentucky, Tennessee, Virginia and West
Virginia.
Outlined
below is a summary of (i) our contributions, (ii) our resulting percentage of Class A unit ownership and (iii) our overall resulting
Sharing Percentage of Carbon Appalachia after giving effect to the Class C Unit ownership. Holders of units within each class
of units participate in profit or losses and distributions according to their proportionate share of each class of units (“Sharing
Percentage”). Each contribution and its use are described in summary following the table.
Date
|
|
Capital
Contribution
|
|
Resulting
Class A
Units (%)
|
|
|
Resulting
Sharing %
|
|
April
2017
|
|
$0.24
million
|
|
|
2.00
|
%
|
|
|
2.98
|
%
|
August 2017
|
|
$3.71 million
|
|
|
15.20
|
%
|
|
|
16.04
|
%
|
September 2017
|
|
$2.92 million
|
|
|
18.55
|
%
|
|
|
19.37
|
%
|
November
2017
|
|
Warrant
exercise
|
|
|
26.50
|
%
|
|
|
27.24
|
%
|
On
April 3, 2017, we, Yorktown and Old Ironsides, entered in to a limited liability company agreement (the “Carbon Appalachia
LLC Agreement”), with an initial equity commitment of $100.0 million, of which $37.0 million has been contributed as of
September 30, 2018.
Pursuant
to the Carbon Appalachia LLC Agreement, we acquired a 2.0% interest in Carbon Appalachia for $240,000 of Class A Units associated
with our initial equity commitment of $2.0 million. We also have the ability to earn up to an additional 14.7% of Carbon Appalachia
distributions (represented by Class B Units) after certain return thresholds to the holders of Class A Units are met. The Class
B Units were acquired for no cash consideration.
In
addition, we acquired a 1.0% interest represented by Class C Units which were obtained in connection with the contribution to
Carbon Appalachia of a portion of our working interest in undeveloped properties in Tennessee. If Carbon Appalachia agrees to
drill horizontal Chattanooga Shale wells on these properties, it will pay 100% of the cost of drilling and completion of the first
20 wells to earn a 75% working interest in such properties. We, through our subsidiary, Nytis LLC, will retain a 25% working interest
in the properties. There was no activity associated with these properties in 2017 nor during the first nine months of 2018.
In
2017, Carbon Appalachia Enterprises, LLC, formerly known as Carbon Tennessee Company, LLC (“CAE”), a subsidiary of
Carbon Appalachia, entered into a 4-year $100.0 million (with $1.5 million sublimit for letters of credit) senior secured asset-based
revolving credit facility with Legacy Texas Financial Group, Inc. (“LegacyTexas Bank”) with an initial borrowing base
of $10.0 million (the “CAE Credit Facility”).
The
CAE Credit Facility borrowing base was adjusted for acquisitions completed in 2017. Most recently, on April 30, 2018, the CAE
Credit Facility was amended, which increased the borrowing base to $70.0 million with redeterminations as of April 1 and October
1 each year. As of September 30, 2018, there was approximately $38.0 million outstanding under the CAE Credit Facility.
The
CAE Credit Facility is guaranteed by each of CAE’s existing and future direct or indirect subsidiaries (subject to certain
exceptions). CAE’s obligations and those of CAE’s subsidiary guarantors under the CAE Credit Facility are secured
by essentially all of CAE’s tangible and intangible personal and real property (subject to certain exclusions).
Interest
is payable quarterly and accrues on borrowings under the CAE Credit Facility at a rate per annum equal to either (i) the base
rate plus an applicable margin between 0.00% and 1.00% or (ii) the Adjusted LIBOR rate plus an applicable margin between 3.00%
and 4.00% at our option. The actual margin percentage is dependent on the CAE Credit Facility utilization percentage. CAE is obligated
to pay certain fees and expenses in connection with the CAE Credit Facility, including a commitment fee for any unused amounts
of 0.50%.
The
CAE Credit Facility contains affirmative and negative covenants that, among other things, limit CAE’s ability to (i) incur
additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve
or liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make certain investments; (vii) enter into
certain transactions with our affiliates; (viii) enter into sales-leaseback transactions; (ix) make optional or voluntary payments
of debt; (x) change the nature of our business; (xi) change our fiscal year to make changes to the accounting treatment or reporting
practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.
The
affirmative and negative covenants are subject to various exceptions, including basket amounts and acceptable transaction levels.
In addition, the CAE Credit Facility requires CAE’s compliance, on a consolidated basis, with (i) a maximum Debt/EBITDA
ratio of 3.5 to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0.
CAE
may at any time repay the loans under the CAE Credit Facility, in whole or in part, without penalty. CAE must pay down borrowings
under the CAE Credit Facility or provide mortgages of additional oil and natural gas properties to the extent that outstanding
loans and letters of credit exceed the borrowing base.
In
connection with our entry into the Carbon Appalachia LLC Agreement, and Carbon Appalachia engaging in certain transactions during
2017, we received the aforementioned Class B Units and issued to Yorktown a warrant to purchase approximately 408,000 shares of
our common stock at an exercise price of $7.20 per share (the “Appalachia Warrant”). The Appalachia Warrant was payable
exclusively with Class A Units of Carbon Appalachia held by Yorktown and the number of shares of our common stock for which the
Appalachia Warrant was exercisable was determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital
of Yorktown’s Class A Units of Carbon Appalachia plus a required 10% internal rate of return by (b) the exercise price.
On
November 1, 2017, Yorktown exercised the Appalachia Warrant, resulting in the issuance of approximately 432,000 shares of our
common stock in exchange for Class A Units representing approximately 7.95% of then outstanding Class A Units of Carbon Appalachia.
We accounted for the exercise through extinguishment of the warrant liability associated with the Appalachia Warrant of approximately
$1.9 million and the receipt of Yorktown’s Class A Units as an increase to investment in affiliates in the amount of approximately
$2.9 million. After giving effect to the exercise, we own 26.5% of Carbon Appalachia’s outstanding Class A Units along with
100% of its Class C Units.
The
issuance of the Class B Units and the Appalachia Warrant were in contemplation of each other, and under non-monetary related
party guidance, we accounted for the Appalachia Warrant, at issuance, based on the fair value of the Appalachia Warrant as of
the date of grant (April 3, 2017) and recorded a warrant liability with an associated offset to APIC. Future changes to the
fair value of the Appalachia Warrant were recognized in earnings. We accounted for the fair value of the Class B Units at
their estimated fair value at the date of grant, which became our investment in Carbon Appalachia with an offsetting entry to
APIC.
As
of the grant date of the Appalachia Warrant, we estimated that the fair market value of the Appalachia Warrant was approximately
$1.3 million, and the fair value of the Class B Units was approximately $924,000. The difference in the fair value of the Appalachia
Warrant from the grant date though its exercise on November 1, 2017, was approximately $619,000 and was recognized in warrant
derivative gain in our consolidated statements of operations for the year ended December 31, 2017.
Based
on our 27.24% combined Class A and Class C interest (and our ability as of September 30, 2018 to earn up to an additional 14.7%)
in Carbon Appalachia, our ability to appoint a member to the board of directors and our role of manager of Carbon Appalachia,
we are accounting for our investment in Carbon Appalachia under the equity method of accounting as we believe we exert significant
influence. We use the HLBV to determine our share of profits or losses in Carbon Appalachia and adjust the carrying value of our
investment accordingly. Our investment in Carbon Appalachia is represented by our Class A and C interests, which we acquired by
contributing approximately $6.9 million in cash and unevaluated property. In the event of liquidation of Carbon Appalachia, available
proceeds are first distributed to members holding Class C Units then to holders of Class A Units until their contributed capital
is recovered with an internal rate of return of 10%. Any additional distributions would then be shared between holders of Class
A, Class B and Class C Units. For the three and nine months ended September 30, 2018, Carbon Appalachia earned net income, of
which our share is approximately $139,000 and $1.1 million, respectively. The ability of Carbon Appalachia to make distributions
to its owners, including us, is dependent upon the terms of its credit facility, which currently prohibit distributions unless
agreed to by the lender.
As
of September 30, 2018, Carbon Appalachia is in compliance with all CAE Credit Facility covenants.
The
following table sets forth selected historical unaudited consolidated statements of operations and production data for Carbon
Appalachia.
(in thousands)
|
|
As of
September 30,
2018
|
|
Current assets
|
|
$
|
22,478
|
|
Total oil and gas properties, net
|
|
$
|
81,833
|
|
Total other property and equipment, net
|
|
$
|
15,880
|
|
Other long-term assets
|
|
$
|
1,302
|
|
Current liabilities
|
|
$
|
15,313
|
|
Non-current liabilities
|
|
$
|
61,234
|
|
Total members’ equity
|
|
$
|
44,946
|
|
|
|
Three months
ended
|
|
|
Three months
ended
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Revenues
|
|
$
|
18,058
|
|
|
$
|
1,348
|
|
Operating expenses
|
|
|
16,686
|
|
|
|
2,691
|
|
Income (loss) from operations
|
|
|
1,372
|
|
|
|
(1,344
|
)
|
Net income (loss)
|
|
$
|
537
|
|
|
$
|
(1,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
ended
|
|
|
April 3,
2017 to
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Revenues
|
|
$
|
62,480
|
|
|
$
|
2,905
|
|
Operating expenses
|
|
|
56,441
|
|
|
|
4,449
|
|
Income (loss) from operations
|
|
|
6,039
|
|
|
|
(1,544
|
)
|
Net income (loss)
|
|
$
|
4,017
|
|
|
$
|
(1,874
|
)
|
Old
Ironsides Membership Interest Purchase Agreement
On
May 4, 2018, we entered into a Membership Interest Purchase Agreement (the “MIPA”) with Old Ironsides. Old Ironsides
owns 73.5%, and we own 26.5%, of the issued and outstanding Class A Units of Carbon Appalachia. We also own all of the Class B
and Class C units of Carbon Appalachia. Pursuant to the MIPA, we may acquire all of Old Ironsides’ membership interests
of Carbon Appalachia. Subject to the terms and conditions of the MIPA, we will pay Old Ironsides, approximately $58.0 million
at closing, subject to adjustment, in accordance with the MIPA. The MIPA is contingent upon the issuance of common equity of the
Company. We have filed a registration statement.
Upon the completion of the transaction, we would own 100% of the issued and outstanding ownership interests in Carbon Appalachia,
and Carbon Appalachia will become a wholly-owned subsidiary of ours.
The MIPA contains termination rights
for us and Old Ironsides, including, among others, if the closing of the transaction has not occurred on or before November 30,
2018. The MIPA may also be terminated by mutual written consent of us and Old Ironsides. On November 6
,
2018, we entered
into an amendment to extend the closing of the transaction from November 6, 2018 to November 30, 2018.
Investments in Affiliates
During the three and nine months ended
September 30, 2018, we recorded total equity method income of approximately $83,000 and $1.0 million, respectively. For the
nine months ended September 30, 2017, we recorded total equity method income of approximately $32,000. On February 1, 2018, as
a result of the Carbon California Acquisition, we derecognized our equity investment in Carbon California and recognized a gain
of approximately $5.4 million based on the fair value of our previously held interest compared to its carrying value.
Note 7 - Credit Facilities
Our Credit Facility
In 2016, we entered into a 4-year $100.0
million senior secured asset-based revolving credit facility with LegacyTexas Bank. LegacyTexas Bank is the initial lender and
acts as administrative agent.
The
credit facility has a maximum availability of $100.0 million (with a $500,000 sublimit for letters of credit), which availability
is subject to the amount of the borrowing base. The initial borrowing base established under the credit facility was $17.0 million.
The borrowing base is subject to semi-annual redeterminations in March and September. In July 2018, the borrowing base was increased
from $25.0 to $28.0 million, of which approximately $26.1 million was outstanding as of September 30, 2018. Our effective interest
rate as of September 30, 2018 was 7.52%.
The
credit facility is guaranteed by each of our existing and future subsidiaries (subject to certain exceptions). Our obligations
and those of our subsidiary guarantors under the credit facility are secured by essentially all of our tangible and intangible
personal and real property (subject to certain exclusions).
Interest
is payable quarterly and accrues on borrowings under the credit facility at a rate per annum equal to either (i) the base rate
plus an applicable margin between 0.50% and 1.50% or (ii) the Adjusted LIBOR rate plus an applicable margin between 3.50% and
4.50% at our option. The actual margin percentage is dependent on the credit facility utilization percentage. We are obligated
to pay certain fees and expenses in connection with the credit facility, including a commitment fee for any unused amounts of
0.50%.
The
credit facility contains affirmative and negative covenants that, among other things, limit our ability to (i) incur additional
debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve or
liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make certain investments; (vii) enter into
certain transactions with our affiliates; (viii) enter into sales-leaseback transactions; (ix) make optional or voluntary payments
of debt; (x) change the nature of our business; (xi) change our fiscal year to make changes to the accounting treatment or reporting
practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.
The
affirmative and negative covenants are subject to various exceptions, including basket amounts and acceptable transaction levels.
In addition, the credit facility requires our compliance, on a consolidated basis, with (i) a maximum Debt/EBITDA ratio of 3.5
to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0.
On
March 27, 2018, the credit facility was amended to revise the calculation of the Leverage Ratio from a Debt/EBITDA ratio to a
Net Debt/Adjusted EBITDA ratio, reset the testing period used in the determination of Adjusted EBITDA, eliminated the minimum
current ratio and substituted alternative liquidity requirements, including maximum allowed current liabilities in relation to
current assets, a minimum cash balance requirement of $750,000 and maximum aged trade payable requirements. As of September 30,
2018, we were in compliance with our financial covenants.
We
may at any time repay the loans under the credit facility, in whole or in part, without penalty. We must pay down borrowings under
the credit facility or provide mortgages of additional oil and natural gas properties to the extent that outstanding loan and
letters of credit exceed the borrowing base.
As
required under the terms of the credit facility, we entered into derivative contracts with fixed pricing for a certain percentage
of our production. We are a party to an ISDA Master Agreement with BP Energy Company that established standard terms for the derivative
contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the
derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees
supporting the credit facility.
Carbon
California – Credit Facilities
Effective
as of February 1, 2018, our ownership in Carbon California increased to 56.4% due to the exercise of the California Warrant. As
a result of this transaction, we consolidate Carbon California for financial reporting purposes.
On May 1, 2018, Carbon California closed
the Seneca Acquisition. Following the exercise of the California Warrant by Yorktown and the Seneca Acquisition, we own 53.9%
of the voting and profits interests, and Prudential owns 46.1% voting and profit interest in Carbon California.
The table below summarizes the outstanding
notes payable for Carbon California as of September 30, 2018 (in thousands):
Senior Revolving Notes, related party, due February 15, 2022
|
|
$
|
38,500
|
|
Subordinated Notes, related party, due February 15, 2024
|
|
|
13,000
|
|
Long-term debt
|
|
|
65
|
|
Total gross notes payable
|
|
|
51,565
|
|
Less: Deferred notes costs
|
|
|
(220
|
)
|
Less: Notes discount
|
|
|
(1,284
|
)
|
Total net notes payable
|
|
$
|
50,061
|
|
Carbon
California-Senior Revolving Notes, Related Party
On
February 15, 2017, Carbon California entered into the Note Purchase Agreement with Prudential Legacy Insurance Company of New
Jersey and Prudential Insurance Company of America for the issuance and sale of the Senior Revolving Notes due February 15, 2022.
We are not a guarantor of the Senior Revolving Notes. The closing of the Note Purchase Agreement on February 15, 2017, resulted
in the sale and issuance by Carbon California of Senior Revolving Notes in the principal amount of $10.0 million. The maximum
principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California’s
proved oil and gas reserves which is to be determined at least semi-annually. As of September 30, 2018, the borrowing base was
$41.0 million, of which $38.5 million was outstanding.
Carbon
California may elect to incur interest at either (i) 5.0% plus the London interbank offered rate (“LIBOR”) or (ii)
4.00% plus Prime Rate (which is defined as the interest rate published daily by JPMorgan Chase Bank, N.A.). As of September 30,
2018, the effective borrowing rate for the Senior Revolving Notes was 8.14%. In addition, the Senior Revolving Notes include a
commitment fee for any unused amounts at 0.50% as well as an annual administrative fee of $75,000, payable on February 15 each
year.
The
Senior Revolving Notes are secured by all the assets of Carbon California. The Senior Revolving Notes require Carbon California,
as of January 1 and July 1 of each year, to hedge its anticipated proved developed production at such time for year one, two and
three at a rate of 75%, 65% and 50%, respectively. Carbon California may make principal payments in minimum installments of $500,000.
Distributions to equity members are generally restricted.
Carbon California incurred fees directly
associated with the issuance of the Senior Revolving Notes and amortizes these fees over the life of the Senior Revolving Notes.
The current portion of these fees are included in prepaid expense and deposits and the long-term portion is included in other long-term
assets for a combined value of $898,000. During the three and nine months ended September 30, 2018, Carbon California amortized
fees of $57,000 and $134,000, respectively. For the three and nine months ended September 30, 2017, Carbon California amortized
$29,000 and $72,000, respectively.
The Note Purchase Agreement requires Carbon
California to maintain certain financial and non-financial covenants which include the following ratios: total leverage ratio,
senior leverage ratio, interest coverage ratio, current ratio, and other qualitative covenants as defined in the Note Purchase
Agreement. As of September 30, 2018, Carbon California was in compliance with its financial covenants.
2017 Carbon California-Subordinated
Notes
On February 15, 2017, Carbon California
entered into the Securities Purchase Agreement with Prudential Capital Energy Partners, L.P. for the issuance and sale of the Subordinated
Notes due February 15, 2024, bearing interest of 12% per annum. We are not a guarantor of the Subordinated Notes. The closing of
the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California of Subordinated
Notes in the original principal amount of $10.0 million.
Prudential received an additional 1,425
Class A Units, representing 5% of total sharing percentage, for the issuance of the Subordinated Notes. Carbon California valued
this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the
outstanding Subordinated Notes of $10.0 million. The Company then allocated the non-cash value of the units of approximately $1.3
million, which was recorded as a discount to the Subordinated Notes. As of September 30, 2018, Carbon California has an outstanding
discount of $830,000, which is presented net of the Subordinated Notes within Credit facility-related party on the unaudited consolidated
balance sheets.
The
Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at
such time for year one, two and three at a rate of 67.5%, 58.5% and 45%, respectively.
Prepayment of the Subordinated Notes
is available after February 15, 2019. Prepayment is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment
is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted.
The
Securities Purchase Agreement requires Carbon California to maintain certain financial and non-financial covenants, which include
the following ratios: total leverage ratio, senior leverage ratio, interest coverage ratio, asset coverage ratio, current ratio,
and other qualitative covenants as defined in the Securities Purchase Agreement. As of September 30, 2018, Carbon California was
in compliance with its financial covenants.
Carbon
California-2018 Subordinated Notes
On
May 1, 2018, Carbon California entered into an agreement with Prudential for the issuance and sale of the Carbon California 2018
Subordinated Notes.
Prudential received 585 Class A Units,
representing an approximate 2% additional sharing percentage, for the issuance of the Carbon California 2018 Subordinated Notes.
Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating
the amount with the outstanding Carbon California 2018 Subordinated Notes of $3.0 million. The Company then allocated the non-cash
value of the units of approximately $490,000, which was recorded as a discount to the Carbon California 2018 Subordinated Notes.
As of September 30, 2018, Carbon California had an outstanding discount of $454,000 associated with these notes, which is presented
net of the Carbon California 2018 Subordinated Notes within Credit facility-related party on the unaudited consolidated balance
sheets. During the three and nine months ended September 30, 2018, Carbon California amortized $97,000 and $236,000, respectively.
The Carbon California 2018 Subordinated
Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for
year one, two and three at a rate of 67.5%, 58.5% and 45%, respectively.
Prepayment of the Subordinated Notes is
available after February 15, 2019. Prepayment is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is
not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted.
The
Carbon California 2018 Subordinated Notes agreement requires Carbon California to maintain certain financial and non-financial
covenants, which include the following ratios: total leverage ratio, senior leverage ratio, interest coverage ratio, asset coverage
ratio, current ratio, and other qualitative covenants as defined in the Carbon California 2018 Subordinated Notes. As of September
30, 2018, Carbon California was in compliance with its financial covenants.
Note
8 - Income Taxes
We
recognize deferred income tax assets and liabilities for the estimated future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We have net
operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits for net operating
loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. To the
extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
At
September 30, 2018, we have established a full valuation allowance against the balance of net deferred tax assets.
Note
9 - Stockholders’ Equity
Authorized
and Issued Capital Stock
Effective
March 15, 2017, and pursuant to a reverse stock split approved by the stockholders and Board of Directors, each 20 shares of issued
and outstanding common stock became one share of common stock and no fractional shares were issued. References to the number of
shares and price per share give retroactive effect to the reverse stock split for all periods presented.
As
of September 30, 2018, we had 35.0 million shares of common stock authorized with a par value of $0.01 per share, of which approximately
7.7 million were issued and outstanding, and 1.0 million shares of preferred stock authorized with a par value of $0.01 per share.
On April 6, 2018, the Company entered into a preferred stock purchase agreement with Yorktown for a private placement of 50,000
shares of the Preferred Stock for $5.0 million. During the nine months ended September 30, 2018, the increase in our issued and
outstanding common stock is primarily due to (a) Yorktown’s exercise of the California Warrant (see note 3), resulting in
the issuance of approximately 1.5 million shares of our common stock in exchange for Class A Units in Carbon California representing
approximately 46.96% of the then outstanding Class A Units, in addition to (b) restricted stock and restricted performance units
that vested during the year.
Carbon
Stock Incentive Plans
We
have two stock plans, the Carbon 2011 Stock Incentive Plan and the Carbon 2015 Stock Incentive Plan (collectively the “Carbon
Plans”). The Carbon Plans were approved by our shareholders and in the aggregate provide for the issuance of approximately
1.1 million shares of common stock to our officers, directors, employees or consultants eligible to receive the awards under the
Carbon Plans.
The
Carbon Plans provide for the granting of incentive stock options, non-qualified stock options, restricted stock awards, performance
awards and phantom stock awards, or a combination of the foregoing, as to employees, officers, directors or consultants, provided
that only employees may be granted incentive stock options and directors may only be granted restricted stock awards and phantom
stock awards.
Restricted
Stock
As
of September 30, 2018, approximately 649,000 shares of restricted stock have been granted under the terms of the Carbon Plans.
Restricted stock awards for employees vest ratably over a three-year service period or cliff vest at the end of a three-year service
period. For non-employee directors, the awards vest upon the earlier of a change in control of us or the date their membership
on the Board of Directors is terminated other than for cause. We recognize compensation expense for these restricted stock grants
based on the grant date fair value of the shares, amortized ratably over three years for employee awards (based on the required
service period for vesting) and seven years for non-employee director awards (based on a market survey of the average tenure of
directors among U.S. public companies). For restricted stock granted between 2014 and 2017, we recognized compensation expense
based on the grant date fair value of the shares, utilizing an enterprise value approach, using valuation metrics primarily based
on multiples of cash flow from operations, production and reserves. For restricted stock and performance units granted in 2013
and 2018, we utilized the closing price of our stock on the date of grant to recognize compensation expense. During the nine months
ended September 30, 2018, approximately 59,000 restricted stock units vested.
Compensation
costs recognized for these restricted stock grants were approximately $189,000 and $537,000 for the three and nine months ended
September 30, 2018, respectively. For the three and nine months ended September 30, 2017, we recognized compensation expense of
approximately $160,000 and $513,000, respectively. As of September 30, 2018, there was approximately $1.6 million unrecognized
compensation costs related to these restricted stock grants which we expect to be recognized over the next 6.5 years. In 2018 we
utilized the traded value of our common stock on the date of grant instead of the enterprise value to record compensation expense
related to new equity grants. Due to the price received for our Preferred Stock, we believe the closing price of our common
stock is now a better representation of the fair value of our common stock, instead of the enterprise value used to record compensation
expense related to new equity grants.
Restricted
Performance Units
As
of September 30, 2018, approximately 597,000 shares of performance units have been granted under the terms of the Carbon Plans.
Performance units represent a contractual right to receive one share of our common stock subject to the terms and conditions of
the agreements, including the achievement of certain performance measures relative to a defined peer group or the growth of certain
performance measures over a defined period of time as well as, in some cases, continued service requirements.
We
account for the performance units granted during 2014 through 2018 at their fair value determined at the date of grant, which
were $11.80, $8.00, $5.40, $7.20 and $9.80 per share, respectively. The final measurement of compensation cost will be based on
the number of performance units that ultimately vest. At September 30, 2018, we estimated that none of the performance units granted
in 2016-2018 would vest, and, accordingly, no compensation cost has been recorded for these performance units. During 2016, we
estimated that it was probable that the performance units granted in 2014 and 2015 would vest and therefore compensation costs
of approximately $135,000 and $239,000 related to these performance units were recognized for the nine months ended September
30, 2018 and 2017, respectively. As of September 30, 2018, compensation costs related to the performance units granted in 2014
and 2015 have been fully recognized. As of September 30, 2018, if change in control and other performance provisions pursuant
to the terms and conditions of these award agreements are met in full, the estimated unrecognized compensation cost related to
the performance units granted in 2012 and 2016 through 2018 would be approximately $3.3 million.
Preferred
Stock
Series
B Convertible Preferred Stock – Related Party
In
connection with the closing of the Seneca Acquisition, we raised $5.0 million through the issuance of 50,000 shares of Preferred
Stock to Yorktown. The Preferred Stock converts into common stock at the election of the holder or will automatically convert
into shares of our common stock upon completion of a qualifying equity financing event. The number of shares of common stock issuable
upon conversion is dependent upon the price per share of common stock issued in connection with any such qualifying equity financing
but has a floor conversion price equal to $8.00 per share. The conversion ratio at which the Preferred Stock will convert into
common stock is equal to an amount per share of $100 plus all accrued but unpaid dividends payable in respect thereof divided
by the greater of (i) $8.00 per share or (ii) the price that is 15% less than the lowest price per share of shares sold to the
public in the next equity financing. Using the floor of $8.00 per share would yield 12.5 shares of common stock for every unit
of Preferred Stock. The conversion price will be proportionately increased or decreased to reflect changes to the outstanding
shares of common stock, such as the result of a combination, reclassification, subdivision, stock split, stock dividend or other
similar transaction involving the common stock. Additionally, after the third anniversary of the issuance of the Preferred Stock,
we have the option to redeem the shares for cash.
The
Preferred Stock accrues cash dividends at a rate of six percent (6%) of the initial issue price of $100 per share per annum. The
holders of the Preferred Stock are entitled to the same number of votes of common stock that such share of Preferred Stock would
represent on an as converted basis. The holders of the Preferred Stock receive liquidation preference based on the initial issue
price of $100 per share plus any accrued dividends over common stock holders and the holders of any junior ranking stock. As of
September 30, 2018, we accrued $147,000 of dividends.
We
apply the guidance in ASC 480 “
Distinguishing Liabilities from Equity
” when determining the classification
and measurement of the Preferred Stock. The Preferred Stock does not feature any redemption rights within the holders’ control
or conditional redemption features not within our control as of September 30, 2018. Accordingly, the Preferred Stock is presented
as a component of consolidated stockholders’ equity.
We
have evaluated the Preferred Stock in accordance with ASC 815, “
Derivatives and Hedging
”, including consideration
of embedded derivatives requiring bifurcation. The issuance of the Preferred Stock could generate a beneficial conversion feature
(“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial
to the investor or in the money at inception because the conversion option has an effective strike price that is less than the
market price of the underlying stock at the commitment date. Based on the conversion terms and the price at the commitment date,
we determined that a BCF was required to be recorded related to the voluntary conversion option by the holder as of September
30, 2018. We recorded the BCF as a reduction of retained earnings and an increase to APIC of $1.1 million, which is based on the
difference between the floor price of $8.00 and our stock price as of the commitment date multiplied by the number of shares to
be issued. We are also required to evaluate a contingent BCF for the automatic conversion feature, but in accordance with ASC
470, “
Debt
”, we will not record the effect of the BCF until the contingency is resolved. As of September 30,
2018, we have a BCF of approximately $1.1 million.
Note
10 - Revenue Recognition
Revenue
from Contracts with Customers
We
recognize revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue is
measured based on the consideration we expect to receive in exchange for those products. Revenues from contracts with customers
are recorded on the unaudited consolidated statements of operations based on the type of product being sold.
Performance
Obligations and Significant Judgments
We
sell oil and natural gas products in the United States through a single reportable segment. We primarily sell products within
two regions of the United States: Appalachia and Illinois Basins and the Ventura Basin. We enter into contracts that generally
include one type of distinct product in variable quantities and priced based on a specific index related to the type of product.
Most of our contract pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether
a well delivers to a gathering or transmission line, quality of the oil or natural gas, and prevailing supply and demand conditions.
The
oil and natural gas is typically sold in an unprocessed state to third party purchasers. We recognize revenue based on the net
proceeds received from the purchaser when control of the oil or natural gas passes to the purchaser. For oil sales, control is
typically transferred to the purchaser upon receipt at the wellhead or a contractually agreed upon delivery point. Under our natural
gas contracts with purchasers, control transfers upon delivery at the wellhead or the inlet of the purchaser’s system. For
our other natural gas contracts, control transfers upon delivery to the inlet or to a contractually agreed upon delivery point.
Transfer of control drives the presentation
of transportation and gathering costs within the accompanying unaudited consolidated statements of operations. Transportation and
gathering costs incurred prior to control transfer are recorded within the transportation and gathering expense line item on the
accompanying unaudited consolidated statements of operations, while transportation and gathering costs incurred subsequent to control
transfer are recognized as a reduction to the related revenue.
A
portion of our product sales are short-term in nature. For those contracts, we use the practical expedient in ASC 606-10-50-14
exempting us from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation
is part of a contract that has an original expected duration of one year or less.
For
our product sales that have a contract term greater than one year, we have utilized the practical expedient in ASC 606-10-50-14(a)
which states we are not required to disclose the transaction price allocated to remaining performance obligations if the variable
consideration is allocated entirely to an unsatisfied performance obligation. Under these sales contracts, each unit of product
represents a separate performance obligation; therefore, future volumes are unsatisfied and disclosure of the transaction price
allocated to remaining performance obligations is not required. We have no unsatisfied performance obligations at the end of each
reporting period.
We
do not believe that significant judgments are required with respect to the determination of the transaction price, including any
variable consideration identified. There is a low level of uncertainty due to the precision of measurement and use of index-based
pricing with predictable differentials. Additionally, any variable consideration identified is not constrained.
Disaggregation
of Revenues
In
the following tables, revenue for the three and nine months ended September 30, 2018, is disaggregated by primary region within
the United States and major product line. As noted above, we operate as one reportable segment.
For
the three months ended September 30, 2018:
(in thousands)
|
|
|
|
|
|
|
|
|
|
Type
|
|
Appalachia and Illinois Basin
|
|
|
Ventura Basin
|
|
|
Total
|
|
Natural gas sales
|
|
$
|
3,856
|
|
|
$
|
516
|
|
|
$
|
4,372
|
|
Natural gas liquids sales
|
|
|
-
|
|
|
|
406
|
|
|
|
406
|
|
Oil sales
|
|
|
3,327
|
|
|
|
8,524
|
|
|
|
11,850
|
|
Total natural gas, natural gas liquids, and oil revenue
|
|
$
|
7,185
|
|
|
$
|
9,444
|
|
|
$
|
16,629
|
|
For
the nine months ended September 30, 2018:
(in thousands)
|
|
|
|
|
|
|
|
|
|
Type
|
|
Appalachia and Illinois Basin
|
|
|
Ventura Basin
|
|
|
Total
|
|
Natural gas sales
|
|
$
|
10,776
|
|
|
$
|
1,059
|
|
|
$
|
11,835
|
|
Natural gas liquids sales
|
|
|
-
|
|
|
|
1,119
|
|
|
|
1,119
|
|
Oil sales
|
|
|
5,952
|
|
|
|
16,972
|
|
|
|
22,924
|
|
Total natural gas, natural gas liquids, and oil revenue
|
|
$
|
16,728
|
|
|
$
|
19,150
|
|
|
$
|
35,878
|
|
Contract
Balances
Under
our product sales contracts, we invoice customers once our performance obligations have been satisfied, at which point payment
is unconditional. Accordingly, our product sales contracts do not typically give rise to contract assets or liabilities under
ASC 606.
Prior
Period Performance Obligations
We
record revenue in the month production is delivered to the purchaser, but settlement statements may not be received until 30 to
90 days after the month of production. As such, we estimate the production delivered and the related pricing. Any differences
between our initial estimates and actuals are recorded in the month payment is received from the customer. These differences have
not historically been material. For the three and nine months ended September 30, 2018, revenue recognized in the reporting period
related to prior period performance obligations is immaterial.
The
estimated revenue is recorded within Accounts receivable - Revenue on the unaudited consolidated balance sheets.
Note
11 - Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consist of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,923
|
|
|
$
|
3,274
|
|
Oil and gas revenue suspense
|
|
|
2,111
|
|
|
|
1,776
|
|
Gathering and transportation payables
|
|
|
817
|
|
|
|
497
|
|
Production taxes payable
|
|
|
375
|
|
|
|
214
|
|
Drilling advances received from joint venture partner
|
|
|
295
|
|
|
|
245
|
|
Accrued lease operating expenses
|
|
|
946
|
|
|
|
684
|
|
Accrued ad valorem taxes-current
|
|
|
1,704
|
|
|
|
1,054
|
|
Accrued general and administrative expenses
|
|
|
1,085
|
|
|
|
2,473
|
|
Accrued asset retirement obligation-current
|
|
|
902
|
|
|
|
380
|
|
Accrued interest
|
|
|
633
|
|
|
|
247
|
|
Accrued environmental liability
|
|
|
728
|
|
|
|
-
|
|
Other liabilities
|
|
|
859
|
|
|
|
374
|
|
Total accounts payable and accrued liabilities
|
|
$
|
14,378
|
|
|
$
|
11,218
|
|
Note
12 - Fair Value Measurements
Authoritative
guidance defines fair value 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 guidance establishes a hierarchy for inputs
used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing
the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs
that reflect our assumptions of what market participants would use in pricing the asset or liability developed based on the best
information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs
as follows:
|
Level 1:
|
Quoted
prices are available in active markets for identical assets or liabilities;
|
|
Level 2:
|
Quoted
prices in active markets for similar assets or liabilities that are observable for the asset or liability; or
|
|
Level 3:
|
Unobservable
pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.
|
Financial
assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our
policy is to recognize transfers in and/or out of fair value hierarchy as of the end of the reporting period for which the event
or change in circumstances caused the transfer. We have consistently applied the valuation techniques discussed below for all
periods presented.
The
following table presents our financial assets and liabilities that were accounted for at fair value on a recurring basis by level
within the fair value hierarchy:
|
|
Fair Value Measurements Using
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
-
|
|
|
$
|
10,801
|
|
|
$
|
-
|
|
|
$
|
10,801
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
-
|
|
|
$
|
225
|
|
|
$
|
-
|
|
|
$
|
225
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,017
|
|
|
$
|
2,017
|
|
Commodity
Derivative
As
of September 30, 2018, our commodity derivative financial instruments are comprised of natural gas and oil swaps and costless
collars. The fair values of these agreements are determined under an income valuation technique. The valuation model requires
a variety of inputs, including contractual terms, published forward prices, volatilities for options and discount rates, as appropriate.
Our estimates of fair value of derivatives include consideration of the counterparty’s credit worthiness, our credit worthiness
and the time value of money. The consideration of these factors results in an estimated exit-price for each derivative asset or
liability under a market place participant’s view. All the significant inputs are observable, either directly or indirectly;
therefore, our derivative instruments are included within the Level 2 fair value hierarchy. The counterparty for all our outstanding
commodity derivative financial instruments as of September 30, 2018, is BP Energy Company.
Warrant
Derivative
A
third-party valuation specialist was utilized to determine the fair value our California Warrant. The warrant was designated as
Level 3. We review the valuations, including the related model inputs and assumptions, and analyze changes in fair value measurements
between periods. We corroborate such inputs, calculations and fair value changes using various methodologies, and review unobservable
inputs for reasonableness utilizing relevant information from other published sources.
We
estimated the fair value of the California Warrant on February 15, 2017, the grant date of the warrant, to be approximately $5.8
million, using a call option pricing model with the following assumptions: a seven-year term, exercise price of $7.20, volatility
rate of 41.8% and a risk-free rate of 2.3%. As we will receive Class A Units in Carbon California in the event the holder exercises
the California Warrant, we also considered the fair value of the Class A Units in its valuation. We utilized the same measurement
as of December 31, 2017 for January 31, 2018, using a Monte Carlo valuation model which utilized unobservable inputs including
the percentage return on our shares at various timelines, the percentage return on the privately-held Carbon California Class
A Units at various timelines, an exercise price of $7.20, volatility rate of 45%, a risk-free rate of 2.1% and an estimated remaining
term of 6.4 years. As of December 31, 2017, the fair value of the California Warrant was approximately $2.0 million. On February
1, 2018, Yorktown exercised the California Warrant, resulting in the issuance of 1,527,778 shares of our common stock. In exchange,
we received Yorktown’s Class A Units of Carbon California representing approximately 46.96% of the outstanding Class A Units
of Carbon California and a profits interest of approximately 38.59%.
The
following table summarizes the changes in fair value of our financial instruments classified as Level 3 in the fair value hierarchy:
(in thousands)
|
|
Total
|
|
Balance, December 31, 2017
|
|
$
|
2,017
|
|
Warrant derivative gain for the period January 1- January 31, 2018
|
|
|
(225
|
)
|
CCC Warrant Exercise - liability extinguishment
|
|
|
(1,792
|
)
|
Balance, September 30, 2018
|
|
$
|
-
|
|
Assets
and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
The
fair value of each of the following assets and liabilities measured and recorded at fair value on a non-recurring basis are based
on unobservable pricing inputs and therefore, are included within the Level 3 fair value hierarchy.
We
use the income valuation technique to estimate the fair value of asset retirement obligations using the amounts and timing of
expected future dismantlement costs, credit-adjusted risk-free rates and time value of money. During the nine months ended September
30, 2018 and 2017, we recorded approximately $4.1 million and $5,000, in additions to asset retirement obligations, respectively.
Additions during the nine months ended September 30, 2018, primarily related to the Carbon California Acquisition. See note 3
for additional information.
The
exercise of the California Warrant and the acquisition of the additional ownership interest in Carbon California on February 1,
2018, is accounted for as a step acquisition in which we obtained control in accordance with ASC 805,
Business Combinations
(“ASC 805”). We consolidate the results of Carbon California into our unaudited condensed consolidated financial
statements from the date of the Carbon California Acquisition forward. The Carbon California Acquisition was accounted for as
a business combination, and the identifiable assets acquired, and liabilities assumed, were recorded at their estimated fair value
at the date of acquisition. We have completed our preliminary valuation to determine the fair value of the identifiable assets
acquired and liabilities assumed. The fair value of the assets acquired was determined using various valuation techniques, including
an income approach. The fair value measurements were primarily based on significant inputs that are not directly observable in
the market and are considered Level 3 under the fair value measurements and disclosure framework. See note 3 for additional information.
We
assume, at times, certain firm transportation contracts as part of our acquisitions of oil and natural gas properties. The fair
value of the firm transportation obligations was determined based upon the contractual obligations assumed by us and discounted
based upon our effective borrowing rate. These contractual obligations are being amortized monthly as we pay these firm transportation
obligations in the future.
Asset
Retirement Obligation
The
fair value of our asset retirement obligation liability is recorded in the period in which it is incurred or assumed by taking
into account the cost of abandoning oil and gas wells ranging from $15,000 to $45,000, which is based on industry expectations
for similar work; the estimated timing of reclamation ranging from one to 75 years based on estimates from reserve engineers;
an inflation rate of 1.92%; and a credit adjusted risk-free rate of 7.24%, which takes into account our 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 (see note 3). During the nine months ended September 30, 2018, we recorded additions to asset
retirement obligations of approximately $4.1 million, primarily due to the Carbon California Acquisition. Carbon California estimates
the fair value of asset retirement obligations using the amounts and timing of expected future dismantlement costs, credit-adjusted
risk-free rates and time value of money. Carbon California’s asset retirement obligation was calculated by taking into account
the cost of abandoning oil and gas wells based on industry expectations for similar work, the economic lives of its properties
between 1-49 years; an inflation rate between 2.01% and 2.03%; and a credit adjusted risk-free rate between 8.09% and 15.5%.
Class
B Units
We
received Class B Units from Carbon California and Carbon Appalachia as part of the entry into the Carbon California LLC and Carbon
Appalachia LLC agreements. We estimated the fair value of the Class B units, in each case, by utilizing the assistance of third-party
valuation specialists. The fair values were based upon enterprise values derived from inputs including estimated future production
rates, future commodity prices including price differentials as of the dates of closing, future operating and development costs
and comparable market participants.
Note
13 - Physical Delivery Contracts and Gas Derivatives
We
historically have used commodity-based derivative contracts to manage exposures to commodity price on certain of our oil and natural
gas production. We do not hold or issue derivative financial instruments for speculative or trading purposes. We also have entered
into fixed price delivery contracts to effectively provide commodity price hedges. Because these contracts are not expected to
be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, these contracts are not
recorded at fair value in the unaudited condensed consolidated financial statements.
Pursuant
to the terms of our credit facility, the Note Purchase Agreements and the Securities Purchase Agreement, we have entered into
swap and collar derivative agreements to hedge certain of our oil and natural gas production through 2021. As of September 30,
2018, these derivative agreements consisted of the following:
Our
Physical Delivery Contracts and Oil and Gas Derivatives
|
|
Natural Gas Swaps
|
|
|
Natural Gas Collars
|
|
|
Oil Swaps
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average Price
|
|
|
|
|
|
Average
|
|
Year
|
|
MMBtu
|
|
|
Price (a)
|
|
|
MMBtu
|
|
|
Range (a)
|
|
|
Bbl
|
|
|
Price (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
870,000
|
|
|
$
|
3.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,000
|
|
|
$
|
55.09
|
|
2019
|
|
|
2,596,000
|
|
|
$
|
2.86
|
|
|
|
204,000
|
|
|
|
$2.60-$2.80
|
|
|
|
61,900
|
|
|
$
|
56.05
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
1,018,000
|
|
|
|
$2.50-$2.70
|
|
|
|
21,000
|
|
|
$
|
60.72
|
|
(a)
|
NYMEX
Henry Hub Natural Gas futures contract for the respective period.
|
(b)
|
NYMEX
Light Sweet Crude West Texas Intermediate futures contract for the respective period.
|
Carbon
California Physical Delivery Contracts and Oil and Gas Derivatives
|
|
Natural Gas Swaps
|
|
|
Natural Gas Collars
|
|
|
Oil Swaps
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average Price
|
|
|
WTI
|
|
|
Average
|
|
|
Brent
|
|
|
Average
|
|
Year
|
|
MMBtu
|
|
|
Price (a)
|
|
|
MMBtu
|
|
|
Range (a)
|
|
|
Bbl
|
|
|
Price (b)
|
|
|
Bbl
|
|
|
Price (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
90,000
|
|
|
$
|
3.03
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,628
|
|
|
$
|
53.06
|
|
|
|
62,792
|
|
|
$
|
66.46
|
|
2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
360,000
|
|
|
|
$2.60-$3.03
|
|
|
|
139,797
|
|
|
$
|
51.96
|
|
|
|
141,786
|
|
|
$
|
66.58
|
|
2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73,147
|
|
|
$
|
50.12
|
|
|
|
139,682
|
|
|
$
|
65.71
|
|
2021
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
|
86,341
|
|
|
$
|
67.12
|
|
(a)
|
NYMEX
Henry Hub Natural Gas futures contract for the respective period.
|
(b)
|
NYMEX
Light Sweet Crude West Texas Intermediate futures contract for the respective period.
|
(c)
|
Brent
future and NYMEX contracts for the respective period.
|
For
our swap instruments, we receive a fixed price for the hedged commodity and pay a floating price to the counterparty. The fixed-price
payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.
Costless
collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. The ceiling establishes
a maximum price that we will receive for the volumes under contract, while the floor establishes a minimum price.
The
following table summarizes the fair value of the derivatives recorded in the unaudited consolidated balance sheets (see note 12).
These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Commodity derivative contracts:
|
|
|
|
|
|
|
Commodity derivative asset
|
|
$
|
-
|
|
|
$
|
215
|
|
Other long-term assets
|
|
$
|
-
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities
|
|
$
|
6,502
|
|
|
$
|
-
|
|
Commodity derivative liabilities, non-current
|
|
$
|
4,299
|
|
|
$
|
-
|
|
The
table below summarizes the commodity settlements and unrealized gains and losses related to our derivative instruments. These
commodity settlements and unrealized gains and losses are recorded and included in commodity derivative gain or loss in the accompanying
unaudited consolidated statements of operations.
|
|
For the three months ended
September 30,
|
|
|
For the nine months ended
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Commodity derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement (loss) gain
|
|
$
|
(1,108
|
)
|
|
$
|
345
|
|
|
$
|
(2,169
|
)
|
|
$
|
463
|
|
Unrealized (loss) gain
|
|
|
(2,794
|
)
|
|
|
(844
|
)
|
|
|
(8,381
|
)
|
|
|
2,179
|
|
Total settlement and unrealized (loss) gain, net
|
|
$
|
(3,902
|
)
|
|
$
|
(499
|
)
|
|
$
|
(10,550
|
)
|
|
$
|
2,642
|
|
Commodity
derivative settlement gains and losses are included in cash flows from operating activities in our unaudited consolidated statements
of cash flows.
The
counterparty in all our derivative instruments is BP Energy Company. We and Carbon California have entered into International
Swaps and Derivatives Association (“ISDA”) Master Agreements with BP Energy Company that establish standard terms
for the derivative contracts and inter-creditor agreements whereby any credit exposure related to the derivative contracts entered
into by us and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.
We
and Carbon California net our derivative instrument fair value amounts executed with BP Energy Company pursuant to ISDA master
agreements, which provide for the net settlement over the term of the contracts and in the event of default or termination of
the contracts. The following table summarizes the location and fair value amounts of all derivative instruments in the unaudited
consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited
consolidated balance sheets as of September 30, 2018.
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
Recognized
|
|
|
Gross
|
|
|
Fair Value
|
|
|
|
|
|
Assets/
|
|
|
Amounts
|
|
|
Assets/
|
|
|
|
Balance Sheet Classification
|
|
Liabilities
|
|
|
Offset
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative assets:
|
|
Commodity derivative
|
|
$
|
334
|
|
|
$
|
(334
|
)
|
|
$
|
-
|
|
|
|
Other long-term assets
|
|
|
248
|
|
|
|
(248
|
)
|
|
|
-
|
|
Total derivative assets
|
|
|
|
$
|
582
|
|
|
$
|
(582
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
|
|
$
|
(6,836
|
)
|
|
$
|
334
|
|
|
$
|
(6,502
|
)
|
|
|
Commodity derivative: non-current
|
|
|
(4,547
|
)
|
|
|
248
|
|
|
|
(4,299
|
)
|
Total derivative liabilities
|
|
|
|
$
|
(11,383
|
)
|
|
$
|
582
|
|
|
$
|
(10,801
|
)
|
The
following table summarizes the location and fair value amounts of all derivative instruments in the consolidated balance sheets,
as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheets as of December
31, 2017.
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
Recognized
|
|
|
Gross
|
|
|
Fair Value
|
|
|
|
|
|
Assets/
|
|
|
Amounts
|
|
|
Assets/
|
|
|
|
Balance Sheet Classification
|
|
Liabilities
|
|
|
Offset
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative assets:
|
|
Commodity derivative
|
|
$
|
624
|
|
|
$
|
(409
|
)
|
|
$
|
215
|
|
|
|
Other long-term assets
|
|
|
250
|
|
|
|
(240
|
)
|
|
|
10
|
|
Total derivative assets
|
|
|
|
$
|
874
|
|
|
$
|
(649
|
)
|
|
$
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
|
|
$
|
(409
|
)
|
|
$
|
409
|
|
|
$
|
-
|
|
|
|
Commodity derivative: non-current
|
|
|
(240
|
)
|
|
|
240
|
|
|
|
-
|
|
Total derivative liabilities
|
|
|
|
$
|
(649
|
)
|
|
$
|
649
|
|
|
$
|
-
|
|
Due
to the volatility of oil and natural gas prices, the estimated fair values of our derivatives are subject to large fluctuations
from period to period.
Note 14 – Commitment and Contingencies
We
have entered into employment agreements with certain of our executives and officers. The term of the agreements generally ranges
from one to two years and provides for renewal provisions in one-year increments thereafter. The agreements provide for, among
other items, severance and continuation of benefit payments upon termination of employment or certain change of control events.
We
have entered into long-term firm transportation contracts to ensure the transport for certain of our gas production to purchasers.
Firm transportation volumes and the related demand charges for the remaining term of these contracts at September 30, 2018 are
summarized in the table below.
Period
|
|
Dekatherms per day
|
|
|
Demand Charges
|
|
October 2018 - March 2020
|
|
|
3,230
|
|
|
$
|
0.20 - $0.62
|
|
April 2020 - May 2020
|
|
|
2,150
|
|
|
$
|
0.20
|
|
June 2020 - May 2036
|
|
|
1,000
|
|
|
$
|
0.20
|
|
A liability of approximately $166,000
related to firm transportation contracts assumed in the EXCO Acquisition in 2016, is reflected on our unaudited consolidated balance
sheets as of September 30, 2018. The fair value of these firm transportation obligations was determined based upon the contractual
obligations assumed upon acquisition by us and discounted based upon our effective borrowing rate. These contractual obligations
are being amortized monthly as they become due.
Capital Commitment
In our participation as a Class A member
of Carbon Appalachia we made a capital commitment of $23.6 million, of which we have contributed $6.9 million as of September 30,
2018.
As of September 30, 2018, we had no capital commitments associated
with Carbon California.
Contingency
During March 2018, we became aware through
our internal control system that one of our field employees had been misappropriating funds from our suspended revenue accounts
over a period of several years. Upon the discovery of the misappropriation, we terminated the employee and engaged an external
forensic specialist to lead an investigation to determine the extent of the misappropriation and the impact on our financial statements.
The investigation determined that the employee’s ability to misappropriate funds from the suspense accounts was eliminated
in 2017 when we instituted our current revenue accounting practices and internal controls.
We have recorded a provision at September
30, 2018, to reflect the estimated loss of suspended revenue. We have determined that this event constituted a significant
deficiency.
Note
15 - Supplemental Cash Flow Disclosure
Supplemental
cash flow disclosures are presented below:
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$
|
2,770
|
|
|
$
|
645
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Increase in asset retirement obligations
|
|
$
|
3,590
|
|
|
$
|
5
|
|
Decrease in accounts payable and accrued liabilities included in oil and gas properties
|
|
$
|
(491
|
)
|
|
$
|
(12
|
)
|
Non-cash acquisition of Carbon California interests (see note 3)
|
|
$
|
(18,906
|
)
|
|
$
|
-
|
|
Carbon California Acquisition on February 1, 2018 (see note 3)
|
|
$
|
17,114
|
|
|
$
|
-
|
|
Obligations assumed with Seneca asset purchase (see note 2)
|
|
$
|
330
|
|
|
$
|
-
|
|
Accrued dividend for convertible preferred stock (see note 9)
|
|
$
|
148
|
|
|
$
|
-
|
|
Beneficial conversion feature for convertible preferred stock (see note 9)
|
|
$
|
1,125
|
|
|
$
|
-
|
|
Issuance of warrants for investment in affiliates
|
|
$
|
-
|
|
|
$
|
7,094
|
|
Exercise of warrant derivative (see note 3)
|
|
$
|
(1,792
|
)
|
|
$
|
-
|
|