ABRAXAS PETROLEUM CORP - Quarter Report: 2020 March (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2020

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______

  

COMMISSION FILE NUMBER: 001-16071

  

ABRAXAS PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada		74-2584033
(State of Incorporation)		(I.R.S. Employer Identification No.)

18803 Meisner Drive, San Antonio, TX 78258

(Address of principal executive offices) (Zip Code)

 

210-490-4788

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol	Name of each exchange on which registered:
Common Stock, par value $.01 per share	AXAS	The NASDAQ Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One)

 

Large accelerated filer  ☐	Accelerated filer  ☒
Non-accelerated filer  ☐	Smaller reporting company  ☐
(Do not mark if a smaller reporting company)	Emerging growth company  ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Sec 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No ☒

 

The number of shares of the issuer’s common stock outstanding as of  June 30,  2020 was 168,069,305.

 

 

 

 

 

ABRAXAS PETROLEUM CORPORATION

FORM 10 – Q

INDEX

 

 

PART I
ITEM 1 -	Financial Statements
	Condensed Consolidated Balance Sheets - March 31, 2020 (unaudited) and December 31, 2019		6
	Condensed Consolidated Statements of Operations – (unaudited) Three Months Ended March 31, 2020 and 2019		8
	Condensed Consolidated Statements of Stockholders' Equity (unaudited)  Three Months Ended March 31, 2020 and 2019		9
	Condensed Consolidated Statements of Cash Flows – (unaudited) Three Months Ended March 31, 2020 and 2019		10
	Notes to Condensed Consolidated Financial Statements - (unaudited)		11
ITEM 2 -	Management's Discussion and Analysis of Financial Condition and Results of Operations		24
ITEM 3 -	Quantitative and Qualitative Disclosures about Market Risk		35
ITEM 4 -	Controls and Procedures		35

 

PART II
OTHER INFORMATION
ITEM 1 -	Legal Proceedings	36
ITEM 1A -	Risk Factors	36
ITEM 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	36
ITEM 3 -	Defaults Upon Senior Securities	36
ITEM 4 -	Mine Safety Disclosure	36
ITEM 5 -	Other Information	36
ITEM 6 -	Exhibits	36
	Signatures	37

 

 

 

		March 31,				December 31,
		2020				2019
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	-			$	-
Accounts receivable:
Joint owners, net			1,250				2,397
Oil and gas production sales			5,783				16,985
Other			4,499				263
Total accounts receivable			11,532				19,645
Derivative asset - short-term			34,020				83
Other current assets			1,280				1,193
Total current assets			46,832				20,921
Property and equipment:
Proved oil and gas properties, full cost method			1,166,720				1,162,094
Other property and equipment			39,304				39,295
Total			1,206,024				1,201,389
Less accumulated depreciation, depletion, amortization and impairment			(908,266	)			(872,431	)
Total property and equipment, net			297,758				328,958
Operating lease right-of-use assets			295				327
Derivative asset - long-term			36,788				4,170
Other assets			255				255
Total assets		$	381,928			$	354,631

		March 31,				December 31,
		2020				2019
		(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	14,594			$	19,280
Joint interest oil and gas production payable			8,097				18,050
Accrued interest			119				133
Accrued insurance claim and other expenses			5,355				361
Operating lease liability - current			88				98
Derivative liability short-term			800				10,688
Current maturities of long-term debt			284				280
Other current liabilities			390				582
Total current liabilities			29,727				49,472
Long-term debt – less current maturities			199,081				192,718
Operating lease liabilities			181				203
Derivative liability long-term			—				999
Future site restoration			7,447				7,420
Total liabilities			236,436				250,812
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, par value $0.01 per share – authorized 1,000,000 shares; -0- shares issued and outstanding			—				—
Common stock, par value $0.01 per share, authorized 400,000,000 shares; 168,069,305 and 168,361,061 issued and outstanding at March 31, 2020 and December 31, 2019, respectively			1,681				1,684
Additional paid-in capital			420,373				420,140
Accumulated deficit			(276,562	)			(318,005	)
Total stockholders’ equity			145,492				103,819
Total liabilities and stockholders’ equity		$	381,928			$	354,631

 

		Three Months Ended March 31,
		2020				2019
Revenues:
Oil and gas production revenues
Oil		$	15,535			$	31,981
Gas			86				1,473
Natural gas liquids			97				1,056
Other			8				4
Total revenue			15,726				34,514
Operating costs and expenses:
Lease operating			5,286				7,734
Production and ad valorem taxes			1,537				3,098
Rig expense			299				672
Depreciation, depletion, amortization and accretion			9,279				13,574
Proved property impairment			26,659				-
General and administrative (including stock-based compensation of $230 and $373)			2,447				2,728
Total operating cost and expenses			45,507				27,806
Operating (loss) income			(29,781	)			6,708
Other (income) expense:
Interest income			(9	)			-
Interest expense			4,386				2,967
Amortization of deferred financing fees			129				121
(Gain) 1oss on derivative contracts			(75,730	)			29,075
Total other (income) expense			(71,224	)			32,163
Income (loss) before income tax			41,443				(25,455	)
Income tax (expense) benefit			—				—
Net income (loss)		$	41,443			$	(25,455	)
Net income (loss) per common share - basic		$	0.24			$	(0.15	)
Net income (loss) per common share - diluted		$	0.24			$	(0.15	)
Weighted average shares outstanding:
Basic			169,723				166,041
Diluted			169,723				166,041

 

										Additional
		Common Stock								Paid in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance at December 31, 2019			168,361,061			$	1,684			$	420,140			$	(318,005	)		$	103,819
Net income			-				-				-				41,443				41,443
Stock-based compensation			-				-				230				-				230
Restricted stock cancellations and forfeitures			(291,756	)			(3	)			3				-				-
Balance at March 31, 2020			168,069,305			$	1,681			$	420,373			$	(276,562	)		$	145,492

										Additional
		Common Stock								Paid in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance at December 31, 2018			166,713,784			$	1,667			$	417,844			$	(253,001	)		$	166,510
Net loss			-				-				-				(25,455	)			(25,455	)
Stock-based compensation			-				-				373				-				373
Stock options exercised			422,614				4				397				-				401
Balance at March 31, 2019			167,136,398			$	1,671			$	418,614			$	(278,456	)		$	141,829

 

		Three Months Ended March 31,
		2020				2019
Operating Activities
Net income (loss)		$	41,443			$	(25,455	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net (gain) loss on derivative contracts			(75,730	)			29,075
Net cash settlements paid on derivative contracts			1,713				(311	)
Depreciation, depletion and amortization			9,176				13,463
Proved property impairment			26,659				—
Accretion of future site restoration			103				111
Amortization of deferred financing fees and issuance discount			470				121
Stock-based compensation			230				373
Settlement of asset retirement obligation			—				(386	)
Changes in operating assets and liabilities:
Accounts receivable			8,113				10,110
Other assets			(3,502	)			84
Accounts payable and accrued expenses			(5,023	)			1,010
Net cash provided by operating activities			3,652				28,195
Investing Activities
Capital expenditures, including purchases and development of properties			(9,549	)			(28,008	)
Proceeds from the sale of oil and gas properties			—				992
Net cash used in investing activities			(9,549	)			(27,016	)
Financing Activities
Proceeds from long-term borrowings			8,000				3,000
Payments on long-term borrowings			(2,069	)			(4,066	)
Deferred financing fees			(34	)			(56	)
Exercise of stock options			—				401
Net cash provided by (used in) financing activities			5,897				(721	)
Increase (decrease) in cash and cash equivalents			—				458
Cash and cash equivalents at beginning of period			—				867
Cash and cash equivalents at end of period		$	-			$	1,325
Supplemental disclosures of cash flow information:
Interest paid		$	4,050			$	2,939
Non-cash investing and financing activities
Change in capital expenditures included in accounts payable		$	(4,914	)		$	1,822
Change in asset retirement obligations		$	-			$	85

 

1. Basis of Presentation

 

The accounting policies we follow as of January 1, 2020 are set forth in the notes to our audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on June 26, 2020.  The accompanying interim condensed consolidated financial statements have not been audited by our independent registered public accountants, and in the opinion of management, reflect all adjustments necessary for a fair presentation of the financial position and results of operations. Any and all adjustments are of a normal and recurring nature. Although management believes the unaudited interim related disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations and the cash flows for the three month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

COVID-19

 

On January 30, 2020, the World Health Organization ("WHO”) announced a global health emergency because of a new strain of coronavirus ("COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 as a pandemic, based on the rapid increase in exposure globally. In addition, in March 2020, members of OPEC failed to agree on production levels which is expected to cause an increased supply and has led to a substantial decrease in oil prices and an increasingly volatile market.

 

The price of both oil and gas has decreased primarily as a result of oil demand concerns due to the economic impacts of the COVID-19 virus and anticipated increases in supply from Russia and OPEC, particularly Saudi Arabia. Declines in oil and natural gas prices affect the Company's liquidity, however the Company's commodity hedges protect its cash flows from such price declines. Additionally, if oil or natural gas prices remain depressed or continue to decline the Company will be required to record oil and gas property write-downs.

 

Consumer demand has decreased since the spread of the COVID-19 outbreak and new travel restrictions placed by governments in an effort to curtail the spread of the coronavirus. The full impact of the coronavirus and the decrease in oil prices continue to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that they will have on the Company’s financial condition, liquidity and future results of operations. Management is actively monitoring the global situation and the impact or adverse effect on the Company’s results of future operations, financial position and liquidity in fiscal year 2020. Due to the recent oil price volatility, the Company has suspended its 2020 capital spending program. The Company has also laid off selected employees, reduced officer salaries from 20% - 40% and reduced all other salaries from 5% - 20%. The Company has also eliminated all overtime for field employees. Additionally, we have curtailed our capital expenditures. The Company began shutting in production in mid March 2020 and began bringing wells back on production in mid June 2020.

 

In early March 2020, global oil and natural gas prices declined sharply, have since been volatile, and may decline again. The Company expects ongoing oil price volatility over the short term. Continued depressed oil prices have had and will continue to have a material adverse impact on the Company's oil revenue, which is mitigated somewhat by the Company's our hedge contracts.

 

Consolidation Principles

 

The terms “Abraxas,” “Abraxas Petroleum,” “we,” “us,” “our” or the “Company” refer to Abraxas Petroleum Corporation and all of its subsidiaries, including Raven Drilling, LLC (“Raven Drilling”).

 

Rig Accounting

 

In accordance with SEC Regulation S-X, no income is recognized in connection with contractual drilling services performed in connection with properties in which we or our affiliates hold an ownership, or other economic interest. Any income not recognized as a result of this limitation is credited to the full cost pool and recognized through lower amortization as reserves are produced.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Stock-Based Compensation and Option Plans

 

Stock Options

 

We currently utilize a standard option-pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees and directors.

 

The following table summarizes our stock-based compensation expense related to stock options for the periods presented: 

 

 

 

 

The following table summarizes our stock option activity for the three months ended March 31, 2020:

 

 

    

As of March 31, 2020, there was approximately $0.1 million of unamortized compensation expense related to outstanding stock options that will be recognized from 2020 through 2022.

 

 

Restricted Stock Awards

 

Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the recipient of the award terminates employment with us prior to the lapse of the restrictions. The fair value of such stock was determined using the closing price on the grant date and compensation expense is recorded over the applicable vesting periods.

 

The following table summarizes our restricted stock activity for the three months ended March 31, 2020: 

 

 

 

The following table summarizes our stock-based compensation expense related to restricted stock for the periods presented: 

 

 

 

As of  March 31, 2020, there was approximately $1.3 million of unamortized compensation expense relating to outstanding restricted shares that will be recognized from 2020 through 2022.

 

Performance Based Restricted Stock

 

We issue performance-based shares of restricted stock to certain officers and employees under the Abraxas Petroleum Corporation Amended and Restated 2005 Employee Long-Term Equity Incentive Plan. The shares will vest in three years from the grant date upon the achievement of performance goals based on our Total Shareholder Return (“TSR”) as compared to a peer group of companies. The number of shares which would vest depends upon the rank of our TSR as compared to the peer group at the end of the three-year vesting period and can range from zero percent of the initial grant up to 200% of the initial grant.

 

The table below provides a summary of Performance Based Restricted Stock as of the date indicated:

 

 

 

Compensation expense associated with the performance based restricted stock is based on the grant date fair value of a single share as determined using a Monte Carlo Simulation model which utilizes a stochastic process to create a range of potential future outcomes given a variety of inputs. As the Compensation Committee intends to settle the performance based restricted stock awards with shares of our common stock, the awards are accounted for as equity awards and the expense is calculated on the grant date assuming a 100% target payout and amortized over the life of the awards.

 

 The following table summarizes our stock-based compensation expense related to performance based restricted stock for the periods presented: 

 

 

 

As of March 31, 2020, there was approximately $0.9 million of unamortized compensation expense relating to outstanding performance based restricted shares that will be recognized from 2020 through 2022.

 

 

Oil and Gas Properties

 

We follow the full cost method of accounting for oil and gas properties.  Under this method, all direct costs and certain indirect costs associated with the acquisition of properties and successful as well as unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized oil and gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.  Net capitalized costs of oil and gas properties, less related deferred taxes, are limited by country, to the lower of unamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on unescalated prices discounted at 10%, plus the cost of properties not being amortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related income taxes. Costs in excess of the present value of estimated net revenue from proved reserves discounted at 10% are charged to proved property impairment expense.  No gain or loss is recognized upon sale or disposition of oil and gas properties for full cost accounting companies with proceeds accounted for as an adjustment of capitalized cost. An exception to this rule occurs when the adjustment to the full cost pool results in a significant alteration of the relationship between capitalized cost and proved reserves. We apply the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented. At March 31, 2020  our net capitalized costs of oil and gas properties exceeded the cost ceiling of our estimated proved reserves resulting in an impairment of $26.7 million.  At March 31, 2019, our net capitalized costs of oil and gas properties did not exceed the cost ceiling of our estimated proved reserves.  We expect that we will have future impairments.

 

 

Restoration, Removal and Environmental Liabilities

 

We are subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum substances at various sites.  Environmental expenditures are expensed or capitalized depending on their future economic benefit.  Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed.

 

Liabilities for expenditures of a non-capital nature are recorded when environmental assessments and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component is fixed or reliably determinable.

 

We account for future site restoration obligations based on the guidance of ASC 410 which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value of a liability for an asset's retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. For all periods presented, we have included estimated future costs of abandonment and dismantlement in our full cost amortization base and amortize these costs as a component of our depletion expense in the accompanying condensed consolidated financial statements.

 

The following table summarizes our future site restoration obligation transactions for the three months ended March 31, 2020 and the year ended December 31, 2019:

 

 

 

 

Recently Issued Accounting Standards 

 

            Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13 and its related amendments.  This ASU primarily applies to the Company’s accounts receivable, of which the majority are due within 30 days. The Company monitors the credit quality of its counterparties through review of collections, credit ratings, and other analyses. The Company develops its estimated allowance for credit losses primarily using an aging method and analyses of historical loss rates as well as consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. The adoption and implementation of this ASU did not have a material impact on the Company’s financial statements.

 

In November 2019, the FASB issued ASU 2019-12 – Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are part of an initiative to reduce complexity in accounting standards and simplify the accounting for income taxes by removing certain exceptions from Topic 740 and making minor improvements to the codification. ASU 2019-12 and its related amendments will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The provisions of this update are not expected to have a material impact on the Company’s financial position or results of operations.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. ASU 2020-04 and its related amendments will be in effect through December 31, 2022. We are currently assessing the potential impact of ASU 2020-04 on our consolidated financial statements.

 

2. Revenue from Contracts with Customers

 

Revenue Recognition

 

Sales of oil, gas and natural gas liquids (“NGL”) are recognized at the point in time when control of the product is transferred to the customer and collectability is reasonably assured. Our contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, physical location, quality of the oil or gas, and prevailing supply and demand conditions. As a result, the price of the oil, gas and NGL fluctuates to remain competitive with other available oil, gas and NGL supplies in the market. We believe that the pricing provisions of our oil, gas and NGL contracts are customary in the industry.

 

Oil sales

 

Our oil sales contracts are generally structured such that we sell our oil production to a purchaser at a contractually specified delivery point at or near the wellhead. The crude oil production is priced on the delivery date based upon prevailing index prices less certain deductions related to oil quality, physical location and transportation costs incurred by the purchaser subsequent to delivery. We recognize revenue when control transfers to the purchaser upon delivery at or near the wellhead at the net price received from the purchaser.

 

Gas and NGL Sales

 

Under our gas processing contracts, we deliver wet gas to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity processes the natural gas and remits proceeds to us based upon either (i) the resulting sales price of NGL and residue gas received by the midstream processing entity from third party customers, or (ii) the prevailing index prices for NGL and residue gas in the month of delivery to the midstream processing entity. Gathering, processing, transportation and other expenses incurred by the midstream processing entity are typically deducted from the proceeds that we receive.

 

In these scenarios, we evaluate whether the midstream processing entity is the principal or the agent in the transaction. In our gas purchase contracts, we have concluded that the midstream processing entity is the agent, and thus, the midstream processing entity is our customer. Accordingly, we recognize revenue upon delivery to the midstream processing entity based on the net amount of the proceeds received from the midstream processing entity.

 

Disaggregation of Revenue

 

We are focused on the development of oil and natural gas properties primarily located in the following two operating regions in the United States: (i) the Permian/Delaware Basin and (ii) Rocky Mountain. We sold our remaining South Texas assets, which  closed on November 1, 2019. Revenue attributable to each of those regions is disaggregated in the tables below.

 

 

 

 

 

Significant Judgments

 

Principal versus agent

 

We engage in various types of transactions in which midstream entities process our gas and subsequently market resulting NGL and residue gas to third-party customers on our behalf, such as our percentage-of-proceeds and gas purchase contracts. These types of transactions require judgment to determine whether we are the principal or the agent in the contract and, as a result, whether revenues are recorded gross or net.

 

Transaction price allocated to remaining performance obligations

 

A significant number of our product sales are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC Topic 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 product sales that have a contract term greater than one year, we have utilized the practical expedient in ASC Topic 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 a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.

 

 

Contract balances

 

Under our product sales contracts, we are entitled to payment from purchasers once our performance obligations have been satisfied upon delivery of the product, at which point payment is unconditional. We record invoiced amounts as “Accounts receivable - Oil and gas production sales” in the accompanying condensed consolidated balance sheet.

 

To the extent actual volumes and prices of oil and natural gas are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and also recorded as “Accounts receivable - Oil and gas production sales” in the accompanying condensed consolidated balance sheets. In this scenario, payment is also unconditional, as we have satisfied our performance obligations through delivery of the relevant product. As a result, we have concluded that our product sales do not give rise to contract assets or liabilities under ASU 2014-09. At March 31, 2020 and December 31, 2019, our receivables from contracts with customers were $5.8 million and $16.9 million, respectively.

 

Prior-period performance obligations

 

We record revenue in the month production is delivered to the purchaser. However, settlement statements for certain gas and NGL sales may not be received for 30 to 60 days after the date production is delivered, and as a result, we are required to estimate the amount of production that was delivered to the midstream purchaser and the price that will be received for the sale of the product. Additionally, to the extent actual volumes and prices of oil are unavailable for a given reporting period because of timing or information not received from third party purchasers, the expected sales volumes and prices for those barrels of oil are also estimated.

 

We record the differences between our estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Any identified differences between our revenue estimates and actual revenue received historically have not been significant. For the three months ended March 31, 2020, and 2019 revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.

 

3.  Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the tax rates and laws expected to be in effect when the differences are expected to reverse.

 

For the three months ended March 31, 2020, and 2019, there was no income tax benefit due to net operating loss carryforwards ("NOLs") and we recorded a full valuation allowance against our net deferred taxes. 

 

At December 31, 2019, we had, subject to the limitation discussed below, $245.2 million of pre-2018 NOLs and $64.7 million of post 2017 NOL carryforwards for U.S. tax purposes.  Our pre-2018 NOLs will expire in varying amounts from 2022 through 2037, if not utilized; and can offset 100% of future taxable income. As a result of recent tax legislation, any NOLs arising in 2018, 2019, and 2020 can generally be carried back five years, carried forward indefinitely and can offset 100% of future taxable income for tax years before January 1, 2021 and up to 80% of future taxable income for tax years after December 31, 2020. Any NOLs arising on or after January 1, 2021 can generally be carried forward indefinitely and can offset up to 80% of future taxable income. 

 

The use of our NOLs will be limited if there is an "ownership change" in our common stock, generally a cumulative ownership change exceeding 50% during a three year period, as determined under Section 382 of the Internal Revenue Code. As of March 31, 2020, we have not had an ownership change as defined by Section 382. Given historical losses, uncertainties exist as to the future utilization of the NOL carryforwards. Therefore, we established a valuation allowance of $76.2 million for deferred tax assets at December 31, 2019 and of $67.4 million at March 31, 2020.

 

As of March 31, 2020, we did not have any accrued interest or penalties related to uncertain tax positions. The tax years 2014 through 2019 remain open to examination by the tax jurisdictions to which we are subject.

 

The Coronavirus Aid, Relief, and Economic Security Act  ("CARES") that was enacted March 27, 2020 includes income tax provisions that allow NOL's to be carried back, allows interest expense to be deducted up to a higher percentage of adjusted taxable income, and modifies tax depreciation of qualified improvement property, among other provisions.  These provisions have no material impact on the Company.

 

 

 

 

4. Long-Term Debt

 

The following is a description of our debt as of March 31, 2020 and December 31, 2019, respectively:

 

 

First Lien Credit Facility

 

The Company has a senior secured First Lien Credit Facility with Société Générale, as administrative agent and issuing lender, and certain other lenders.  As of March 31, 2020,  $102.0 million was outstanding under the First Lien Credit Facility. 

 

Prior to the amendments described in Note 10,  “Subsequent Events”, the First Lien Credit Facility had a maximum commitment of $200.0 million and availability is subject to a borrowing base. At March 31, 2020, the Company had a borrowing base of $135.0 million. The Company's borrowing base could never exceed the $200.0 million maximum commitment amount.  Outstanding amounts under the First Lien Credit Facility accrued interest at a rate per annum equal to (a)(i) for borrowings that we elect to accrue interest at the reference rate  at the greater of (x) the reference rate announced from time to time by Société Générale, (y) the federal funds rate plus 0.5%, and (z)  daily one-month LIBOR plus, in each case, 1.5%-2.5%, depending on the utilization of the borrowing base, and (ii) for borrowings that  we elect to accrue interest at the Eurodollar rate, LIBOR plus 2.5%-3.5% depending on the utilization of the borrowing base and (b) at any time an event of default exists, 3.0% plus the amounts set forth above. At March 31, 2020, the interest rate on the First Lien Credit Facility was approximately 4.8%.

 

Subject to earlier termination rights and events of default, the stated maturity date of the First Lien Credit Facility is May 16, 2022. Interest is payable quarterly on reference rate advances and not less than quarterly on LIBOR advances. The Company is permitted to terminate the First Lien Credit Facility and is able, from time to time, to permanently reduce the lenders’ aggregate commitment under the First Lien Credit Facility in compliance with certain notice and dollar increment requirements.

 

Each of the Company's subsidiaries has guaranteed our obligations under the First Lien Credit Facility on a senior secured basis. Obligations under the First Lien Credit Facility are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in all of the Company and its subsidiary guarantors’ material property and assets. As of March 31, 2020, the collateral is required to include properties comprising at least 90% of the PV-9 of the Company's proven reserves and 95% of the PV-9 of the Company's PDP  reserves.

 

Under the First Lien Credit Facility, the Company is subject to customary covenants, including certain financial covenants and reporting requirements.  Prior to the amendments described in Note 10, "Subsequent Events", the Company was required to maintain a current ratio, as defined in the First Lien Credit Facility, as of the last day of each quarter of not less than 1.00 to 1.00 and an interest coverage ratio of not less than 2.50 to 1.00. Prior to the amendments described in Note 10, "Subsequent Events", the Company was also required as of the last day of each quarter to maintain a total debt to EBITDAX ratio of not more than 3.50 to 1.00. The current ratio was defined as the ratio of consolidated current assets to consolidated current liabilities.  The interest coverage ratio was defined as the ratio of consolidated EBITDAX to consolidated interest expense for the four fiscal quarters ended on the calculation date. The total debt to EBITDAX ratio was defined as the ratio of total debt to consolidated EBITDAX for the four fiscal quarters ended on the calculation date.  In connection with the November 13, 2019 amendment to the First Lien Credit Facility and prior to the amendments described in Note 10, Subsequent Events", a minimum asset coverage ratio was added to the covenants. The minimum asset coverage ratio was defined as the ratio of (a) the sum of (i) PV-9 of proven reserves classified as "developed" and "producing" and (ii) the PV-9 of proven reserves classified as "drilled uncompleted" (up to 20% of the sum (i) and (ii)  to (b) total debt. Prior to the amendments described in Note 10, "Subsequent Events", the Company was required as of the last day  of each fiscal quarter to maintain a minimum asset coverage ratio of not less than 1.45 to 1.00 (for the period between March 31, 2021 and December 31, 2021) and not less than 1.55 to 1.00 after December 31, 2021).

 

 

 

 

 

 

 

Table of Contents

 

As of March 31, 2020 we were in compliance with the financial covenants under the First Lien Credit Facility, with the exception of the asset coverage ratio. And, as noted previously, the Company failed to

(i) deliver the 2019 Audited Financials not later than 90 days after the end of such fiscal year (ii) file this Form 10-Q Quarterly Report for the period ended March 31, 2020 no later than 45 days after the end of such fiscal quarter and (iii) prevent existing hedge agreements from exceeding the maximum coverage permitted pursuant to the First Lien Credit Facility and (iv) failure to comply with the minimum Asset Coverage Ratio requirement with respect to the fiscal quarter ended March 31, 2020, which resulted in violations of certain covenants under the First Lien Credit Facility (as in effect prior to the First Lien Credit Facility Amendment (the "1L Amendment"), as defined in Note 10, "Subsequent Events"). Subject to the terms and conditions of the 1L Amendment, Société Générale and each of the other lenders permanently waived such events of default and agreed not to charge default interest with respect to such defaults. 

 

The First Lien Credit Facility contains a number of covenants that, among other things, restrict our ability to: 

 

•

incur or guarantee additional indebtedness;

•

transfer or sell assets;

	•	create liens on assets;
	•	pay dividends of make other distributions on capital stock or make other restricted payments;

•

engage in transactions with affiliates other than on an “arm’s length” basis;

•

make any change in the principal nature of our business; and

•

permit a change of control.

 

The First Lien Credit Facility also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross acceleration to certain other indebtedness, bankruptcy and material judgments and liabilities. 

 

 

Second Lien Credit Facility

 

On November 13, 2019, we entered into the Term Loan Credit Agreement, with Angelo Gordon Energy Servicer, LLC, as administrative agent, and certain other lenders party thereto, which we refer to as the Second Lien Credit Facility.  The Second Lien Credit facility was amended on June 25, 2020. The Second Lien Credit Facility has a maximum commitment of $100.0 million. On November 13, 2019, $95.0 million of the net proceeds obtained from the Second Lien Credit Facility were used to permanently reduce the borrowings outstanding on the First Lien Credit Facility.  As of March 31, 2020, the outstanding balance on the Second Lien Credit Facility was $100.0 million. Prior to the amendments described in Note 10, "Subsequent Events",  outstanding amounts under the Second Lien Credit Facility accrues interest at a rate per annum equal (a)(i) for borrowings that we elect to accrue interest at the reference rate, the greater of (w) the reference rate utilized by Angelo Gordon Energy Servicer, LLC, (x) the federal funds rate plus 0.5%, (y) daily three-month LIBOR  and (z) 2.75%, plus, in each case 8.00%, (ii) for borrowings that we elect to accrue interest at the Eurodollar rate, the greater of (x) LIBOR and (y) 1.75%, plus, in each case, 9.0%, and (b) at any time an event of default exists, after as well as before judgment, 3% per annum plus the amount set forth above. At March 31, 2020, the interest rate on the Second Lien Credit Facility was approximately 10.9%. The Loans under the Second Lien Credit Facility were issued with an original issue discount of 3.50% of par.

 

The stated maturity date of the Second Lien Credit Facility is November 13, 2022. Prior to the amendments described in Note 10 "Subsequent Events", accrued interest was payable quarterly on reference rate loans and at the end of each three-month interest period on Eurodollar loans. We are permitted to prepay the loans in whole or in part, in compliance with certain notice and dollar increment requirements, and , if such prepayment is made prior to November 13, 2020, subject to payment of a Make Whole Amount, where applicable. “Make Whole Amount” is defined as, the sum of the interest payments (calculated on the basis of the interest rate as of the date of the relevant prepayment without discount) that would have accrued and been paid from the  date of prepayment to November 13, 2020 on the principal amount of such prepaid loans, whether such prepayments are optional, mandatory or as a result of acceleration.

 

Each of our subsidiaries has guaranteed our obligations under the Second Lien Credit Facility. Obligations under the Second Lien Credit Facility are secured by a first priority perfected security interest, subject to certain permitted liens, including those securing the indebtedness under the First Lien Credit Facility to the extent permitted by the Intercreditor Agreement, of even date with the Second Lien Credit Facility, among us, our subsidiaries, Angelo Gordon Energy Servicer, LLC and Société Générale, in all of our subsidiary guarantors’ material property and assets. As of March 31, 2020, the collateral is required to include properties comprising at least 90% of the PV-9 of the Company's our proven reserves and 95% of the PV-9 of the Company's PDP reserves. 

 

Under the Second Lien Credit Facility, the Company is subject to customary covenants, including certain financial covenants and reporting requirements. Prior to the amendments described in Note 10, "Subsequent Events" , the Company was  required to maintain a current ratio, as of the last day of each fiscal quarter, of not less than 1.00 to 1.00 and a total debt to consolidated EBITDAX ratio as of the last day of each fiscal quarter of  not more than 4.00 to 1.00. Prior to the amendments described in Note 10 " Subsequent Events" the Company was also are required as of the last day of each fiscal quarter to maintain a minimum asset coverage ratio of not less than 1.25 to 1.00 (for the period between December 31, 2019 and December 31, 2020), not less than 1.45 to 1.00 (for the period between March 31, 2021 and December 31, 2021), and not less than 1.55 to 1.00 (after December 31, 2021). The current ratio is defined as the ratio of consolidated current assets to consolidated current liabilities. The total debt to consolidated EBITDAX ratio was defined as the ratio of total debt to consolidated EBITDAX for the four fiscal quarters ended on the calculation date. The minimum asset coverage ratio was defined as the ratio of (a) the sum of (i) PV-9 of proven reserves classified as “developed” and “producing” and (ii) the PV-9 of proven reserves classified as “drilled uncompleted” (up to 20% of the sum (i) and (ii))  to (b) total debt.

 

 As of March 31, 2020 we were in compliance with the financial covenants under the Second Lien Credit Facility, with the exception of the asset coverage ratio. And, as noted previously, the Company (i) failed to deliver the 2019 Audited Financials not later than 90 days after the end of such fiscal year, (ii) failed to file this Quarterly Report on Form 10-Q for the period ended March 31, 2020 no later than 60 days after the end of such fiscal quarter, which resulted in violations of certain covenants under the Second Lien Credit Facility (as in effect prior to the Second Lien Credit Facility Amendment (the "2L Amendment"), as defined in Note 10, "Subsequent Events"). Additionally, the Company failed to maintain the required hedges under the Second Lien Credit Facility with respect to the fiscal quarter ended March 31, 2020, which resulted in a violation of the Company’s covenant under the Second Lien Credit Facility (as in effect prior to the 2L Amendment). Subject to the terms and conditions of the Second Lien Credit Facility, Angelo Gordon Energy Servicer, LLC and each of the other lenders permanently waived such events of default and agreed not to charge default interest with respect to such defaults.

 

The Second Lien Credit Facility contains a number of covenants that, among other things, restrict our ability to:

 

●

incur or guarantee additional indebtedness;

●

transfer or sell assets;

	●	create liens on assets;
	●	pay dividends or make other distributions on capital stock or make other restricted payments;

●

engage in transactions with affiliates other than on an “arm’s length” basis;

●

make any change in the principal nature of our business; and

●

permit a change of control

 

The Second Lien Credit Facility also contains customary events of default, including nonpayment of principal or interest, violation of covenants, cross default and cross acceleration to certain other indebtedness, bankruptcy and material judgments and liabilities.

 

Real Estate Lien Note

 

We have a real estate lien note secured by a first lien deed of trust on the property and improvements which serves as our corporate headquarters. The outstanding principal accrues interest at a fixed rate of 4.9%. The note is payable in monthly installments of principal and accrues interest in the amount of $35,672. The maturity date of the note is July 20, 2023. As of  December 31, 2019, and March 31, 2020, $3.1 million and $3.0 million, respectively, were outstanding on the note.

 

 

 

 

 

5. Earnings per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Basic earnings per share, excluding any dilutive effects of stock options and unvested restricted stock, is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed similar to basic; however diluted income per share reflects the assumed conversion of all potentially dilutive securities. For the three month period ended March 31, 2019, 1,582 of potential shares relating to stock options, unvested restricted shares and unvested performance based restricted shares were excluded from the calculation of diluted income (loss) per share since their inclusion would have been anti-dilutive due to the loss incurred in the period. For the three month period ended March 31, 2020 there was no dilutive potential shares relating to stock options and restricted stock due to our depressed stock price. 

 

 

6.  Hedging Program and Derivatives

 

The derivative contracts we utilize are based on index prices that may and often differ from the actual oil and gas prices realized in our operations.  Our derivative contracts do not qualify for hedge accounting; therefore, fluctuations in the market value of the derivative contracts are recognized in earnings during the current period. There are no netting agreements relating to these derivative contracts and there is no policy to offset.

 

The following table sets forth the summary position of our derivative contracts as of March 31, 2020:

 

 

 

The following table illustrates the impact of derivative contracts on our balance sheet:

 

 

 

 

 

 

7. Financial Instruments

 

Assets and liabilities measured at fair value are categorized into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

 

•

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We are further required to assess the creditworthiness of the counter-party to the derivative contract. The results of the assessment of non-performance risk, based on the counter-party’s credit risk, could result in an adjustment of the carrying value of the derivative instrument. The following tables sets forth information about our assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, and indicate the fair value hierarchy of the valuation techniques utilized by us to determine such fair value:

 

 

 

As of  March 31, 2020 and December 31, 2019 our derivative contracts consisted of NYMEX-based fixed price swaps and basis differential swaps. Under fixed price swaps, we receive a fixed price for our production and pay a variable market price to the contract counter-party. Under basis swaps, if the market price is above the fixed price, we pay the counter-party, if the market price is below the fixed price, the counter-party pays us. The NYMEX-based fixed price derivative swaps and basis differential swap contracts are indexed to NYMEX futures contracts, which are actively traded, for the underlying commodity and are commonly used in the energy industry. A number of financial institutions and large energy companies act as counter-parties to these types of derivative contracts. As the fair value of NYMEX-based fixed price swaps are based on a number of inputs, including contractual volumes and prices stated in each derivative contract, current and future NYMEX commodity prices, and quantitative models that are based upon readily observable market parameters that are actively quoted and can be validated through external sources, we have characterized these derivative contracts as Level 2. In order to verify the third party valuation, we enter the various inputs into a model and compare our results to the third party for reasonableness. The fair value of the basis differential swap instruments are based on inputs that are not as observable as the fixed price swaps. In addition to the actively quoted market price, variables such as time value, volatility and other unobservable inputs are used. Accordingly, these instruments have been classified as Level 3.

 

The following is additional information for our recurring fair value measurements using significant unobservable inputs (Level 3 inputs) for the three months ended March 31, 2020.

 

 

 

Nonrecurring Fair Value Measurements

 

Non-financial assets and liabilities measured at fair value on a nonrecurring basis included certain non-financial assets and liabilities as may be acquired in a business combination and thereby measured at fair value and the initial recognition of asset retirement obligations for which fair value is used. Unproved oil and gas properties are assessed periodically, at least annually, to determine whether impairment has occurred. The assessment considers the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, the economic viability of development if proved reserves were assigned and other current market conditions. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to amortization.

 

The asset retirement obligation estimates are derived from historical costs as well as management’s expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3. A reconciliation of the beginning and ending balances of the Company’s asset retirement obligation is presented in Note 1.

 

Other Financial Instruments

 

The carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. The carrying value of our debt approximates fair value as the interest rates are market rates and this debt is considered Level 2.

 

 

8. Leases

 

Nature of Leases

 

We lease certain real estate, field equipment and other equipment under cancelable and non-cancelable leases to support our operations. A more detailed description of our significant lease types is included below.

 

Real Estate Leases

 

We rent a residence in North Dakota from a third party for living accommodations for certain field employees. Our real estate lease is non-cancelable with a term of five years. We have concluded our real estate agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term.

 

Field Equipment

 

We rent various field equipment from third parties in order to facilitate the downstream movement of our production from our drilling operations to market. Our compressor and cooler arrangements are typically structured with a non-cancelable primary term of one  year and continue thereafter on a month-to-month basis subject to termination by either party with thirty days' notice. These leases are considered short term and  are not capitalized. We have a small number of  compressor leases that are longer than  twelve months. We have concluded that our equipment rental agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreement subsequent to the primary term. We enter into daywork contracts for drilling rigs with third parties to support our drilling activities. Our drilling rig arrangements are typically structured with a term that is in effect until drilling operations are completed on a contractually specified well or well pad. Upon mutual agreement with the contractor, we typically have the option to extend the contract term for additional wells or well pads by providing thirty days' notice prior to the end of the original contract term. We have concluded that our drilling rig arrangements represent short-term operating leases. The accounting guidance requires us to make an assessment at contract commencement if we are reasonably certain that we will exercise the option to extend the term. Due to the continuously evolving nature of our drilling schedules and the potential volatility in commodity prices in an annual period, our strategy to enter into shorter term drilling rig arrangements allows us the flexibility to respond to changes in our operating and economic environment. We exercise our discretion in choosing to extend or not extend contracts on a rig by rig basis depending on the conditions present at the time the contract expires. At the time of contract commencement, we have determined we cannot conclude with reasonable certainty if we will choose to extend the contract beyond its original term. Pursuant to the full cost method, these costs are capitalized as part of natural gas and oil properties on our balance sheet when paid.

 

Discount Rate

 

Our leases typically do not provide an implicit rate. Accordingly, we are required to use our incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. Our incremental borrowing rate reflects the estimated rate of interest that we would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We use the implicit rate in the limited circumstances in which that rate is readily determinable.

 

 

Practical Expedients and Accounting Policy Elections

 

Certain of our lease agreements include lease and non-lease components. For all existing asset classes with multiple component types, we have utilized the practical expedient that exempts us from separating lease components from non-lease components. Accordingly, we account for the lease and non-lease components in an arrangement as a single lease component. In addition, for all of our existing asset classes, we have made an accounting policy election not to apply the lease recognition requirements to our short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that we are reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in our statement of operations on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our statement of operations in the period in which the obligation for those payments is incurred. None of our current leases contain variable payments.  Refer to “Nature of Leases” above for further information regarding those asset classes that include material short-term leases.

 

The components of our total lease expense for the three months ended March 31, 2020, the majority of which is included in lease operating expense, are as follows:

 

 

	(1)	Short-term lease expense represents expense related to leases with a contract term of 12 months or less.
	(2)	These short-term lease costs are related to leases with a contract term of 12 months or less which are related to drilling rigs and are capitalized as part of natural gas and oil properties on our balance sheet.

 

Supplemental balance sheet information related to our operating leases is included in the table below:
 

 

Our weighted average remaining lease term and weighted average discount rate for our operating leases are as follows:

 

 

Our lease liabilities with enforceable contract terms that are greater than one year mature as follows:

 

 

At March 31, 2020 we had only a lease on a residence and compressor equipment, with minimum lease payments with commitments that had initial or remaining lease terms in excess of one year. 

 

Supplemental cash flow information related to our operating leases is included in the table below:

 

 

 

 

9. Commitments and Contingencies

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. At March 31, 2020, we were not involved in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our financial position or results of operations.

 

 

10. Subsequent Events

 

Paycheck Protection Program Loan

 

On May 4, 2020, the Company entered into a an unsecured loan with the U.S. Small Business Administration ("SBA") in the amount of $1.4 million under the Paycheck Protection Program (the "PPP Loan") with an interest rate of 1.0% and maturity date two years from the effective date of the PPP Laon. The Paycheck Protection Program was established under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act") and is administered by the SBA.  Payments are required to be made in seventeen monthly installments of principal and interest, with the first payment being due on the date that is seven months after the date of the PPP loan. Under the CARES Act, the PPP Loan is eligible for forgiveness for the portion of the PPP Loan proceeds used for payroll costs and other designated operating expenses for up to eight weeks, provided at least 75% of PPP Loan proceeds are used for payroll costs and the Company meets all necessary criteria for forgiveness. Receipt of these funds requires the Company to, in good faith, certify that the PPP Loan was necessary to support ongoing operations of the Company during the economic uncertainty created by the COVID-19 pandemic. This certification further requires the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Additionally, the SBA provides no assurance that the Company will obtain forgiveness of the PPP Loan in whole or in part.

 

Amendments to First Lien Credit Facility and Second Lien Credit Facility

 

Waiver and Amendment No. 10 to Third Amended and Restated Agreement 
 
         

 On June 25, 2020, the Company and its subsidiary guarantors entered into the Waiver and Amendment No. 10 to Credit Agreement (the “1L Amendment”) with Société Générale, as administrative agent and  lender, and the lenders party thereto, pursuant to which the parties agreed to, among other things, (i) waive the Company’s events of default with respect to its First Lien Credit Facility as a result of the Borrower’s failure to (A) deliver audited financial statements for the fiscal year ended December 31, 2019 not later than 90 days after the end of such fiscal year in violation of the First Lien Credit Facility and the Second Lien Credit Facility, (B) deliver a consolidated unaudited balance sheet and unaudited financial statements for the fiscal quarter ended March 31, 2020 not later than 45 days after the end of such fiscal quarter in violation of the First Lien Credit Facility and not later than 60 days after the end of such fiscal quarter in violation of the Second Lien Credit Facility and (C) prevent existing hedge agreements from exceeding the maximum coverage permitted pursuant to the  First Lien Credit Facility and (D) failure to comply with the minimum Asset Coverage Ratio requirement with respect to the fiscal quarter ended March 31, 2020 coverage permitted pursuant to the  First Lien Credit Facility and (ii) amend certain covenants and payment provisions of the First Lien Credit Facility.  
 
          Due to the unprecedented conditions surrounding the outbreak and spread of the COVID-19 pandemic, the recent decline in oil prices, and related geopolitical developments, the Company failed to (i) file its Annual Report on Form 10-K for the period ended December 31, 2019 no later than 90 days after the end of such fiscal year, (ii) file this Quarterly Report on Form 10-Q for the period ended March 31, 2020 no later than 45 days after the end of such fiscal quarter and (iii) prevent existing hedge agreements from exceeding the maximum coverage permitted pursuant to the First Lien Credit Facility,  which resulted in violations of certain covenants under the First Lien Credit Facility (as in effect prior to the 1L Amendment). Subject to the terms and conditions of the 1L Amendment, Société Générale and each of the other lenders permanently waived such events of default and agreed not to charge default interest with respect to such defaults. 
 
       The 1L Amendment modified certain provisions of the First Lien Credit Facility, including (i) the addition of monthly mandatory prepayments from excess cash (defined as available cash minus certain cash set-asides and a $3.0 million working capital reserve) with corresponding reductions to the borrowing base; (ii) the elimination of scheduled redeterminations (which were previously made every six months) and interim redeterminations (which were previously made at the request of the lenders no more than once in the six month period between scheduled redeterminations) of the borrowing base; (iii) the replacement of total debt leverage ratio and minimum asset ratio covenants with a first lien debt leverage ratio covenant (comparing the outstanding debt of the First Lien Credit Facility to the consolidated EBITDAX of the Company and requiring that the ratio not exceed 2.75 to 1.00 as of the last day of each fiscal quarter) and a minimum first lien asset coverage ratio covenant (comparing the sum of, without duplication, (A) the PV-15 of producing and developed proven reserves of the Company, (B) the PV-9 of the Company’s hydrocarbon hedge agreements and (C) the PV-15 of proved reserves of the Company classified as “drilled uncompleted” (up to 20% of the sum of (A), (B) and (C)) to the outstanding debt of the First Lien Credit Facility and requiring that the ratio exceed 1.15 to 1.00 as of the last day of each fiscal quarter ending on or before December 31, 2020, and 1.25 to 1.00 for fiscal quarters ending thereafter); (iv) the elimination of current ratio and interest coverage ratio covenants; (v) additional restrictions on (A) capital expenditures (limiting capital expenditures to $3.0 million in any four fiscal quarter period (commencing with the four fiscal quarter period ended June 30, 2020 and calculated on an annualized basis for the 1, 2 and 3 quarter periods ending on June 30, 2020, September 30, 2020 and December 31, 2020, respectively, subject to certain exceptions, including capital expenditures financed with the proceeds of newly permitted, structurally subordinated debt and capital expenditures made when (1) the first lien asset coverage ratio is at least 1.60 to 1.00, (2) the Company is in compliance with the first lien leverage ratio, (3) the amounts outstanding under the First Lien Credit Facility are less $50.0 million, (4) no default exists under the First Lien Credit Facility and (5) and all representations and warranties in the First Lien Credit Facility and the related credit documents are true and correct in all material respects), (B) outstanding accounts payable (limiting all outstanding and undisputed accounts payable to $7.5 million, undisputed accounts payable outstanding for more than 60 days to $2.0 million and undisputed accounts payable outstanding for more than 90 days to $1.0 million and (C) general and administrative expenses (limiting cash general and administrative expenses the Company may make or become legally obligated to make in any four fiscal quarter period to $9.0 million for the four fiscal quarter period ending June 30, 2020, $8.25 million for the four fiscal quarter period ending September 30, 2020, $6.9 million for the four fiscal quarter period ending December 31, 2020, and $6.5 million for the fiscal quarter from March 31, 2021 through December 31, 2021 and $5.0 million thereafter; in all cases, general and administrative expense excludes up to $1.0 million in certain legal and professional fees; and (vi) permission for up to an additional $25.0 million in structurally subordinated debt to finance capital expenditures. Under the 1L Amendment, the borrowing base was adjusted from $135.0 million to $102.0 million. The borrowing base will be reduced by any mandatory prepayments from excess cash flow (in an amount equal to such prepayment) and upon the disposition of the Company’s oil and gas properties.

 

Waiver and Second Amendment to Term Loan Credit Agreement   

 
         On June 25, 2020, the Company and its subsidiary guarantors entered into the Waiver and Second Amendment to Term Loan Credit Agreement (the “2L Amendment”) with Angelo Gordon Energy Servicer, LLC, as administrative agent and issuing lender, and the lenders party there to, pursuant to which the parties agreed to, among other things, waive the Company’s designated events of default with respect to its Second Lien Credit Facility and amend certain covenants and payment provisions of the Second Lien Credit Facility. 
 
        As noted previously, the Company failed to file its Annual Report on Form 10-K for the period ended December 31, 2019 no later than 90 days after the end of such fiscal year, which resulted in violations of certain covenants under the Second Lien Credit Facility (as in effect prior to the 2L Amendment). Additionally, the Company failed to maintain the hedges required to be maintained pursuant to the Second Lien Credit Facility with respect to the fiscal quarter ended March 31, 2020, which resulted in a violation of the Company’s covenant under the Second Lien Credit Facility (as in effect prior to the 2L Amendment) to maintain certain required hedges. An additional Event of Default has occurred as a result of the Borrower’s failure to comply with the minimum Asset Coverage Ratio requirement with respect to the fiscal quarter ended March 31, 2020.  Subject to the terms and conditions of the Second Lien Credit Facility, Angelo Gordon Energy Servicer, LLC and each of the other lenders permanently waived such events of default and agreed not to charge default interest with respect to such defaults. 
 
       The 2L Amendment modifies certain provisions of the Second Lien Credit Facility, including (i) a requirement that, while the obligations under the First Lien Credit Facility are outstanding, scheduled payments of accrued interest under the Second Lien Credit Facility will be paid in the form of capitalized interest; (ii) an increase in the interest rate by 200bps for interest payable in cash and 500bps for interest payable in kind; (iii) modification of the minimum asset ratio covenant to be the sum of, without duplication, (A) the PV-15 of producing and developed proven reserves of the Company, (B) the PV-9 of the Company’s hydrocarbon hedge agreements and (C) the PV-15 of proved reserves of the Company classified as “drilled uncompleted” (up to 20% of the sum of (A), (B) and (C)) to the total outstanding debt of the Company and requiring that the ratio not exceed 1.45 to 1.00 as of the last day of each fiscal quarter ending between September 30, 2021 to December 31, 2021, and 1.55 to 1.00 for fiscal quarters ending thereafter); (iv) modification of the total leverage ratio covenant to set the first test date to occur on September 30, 2021; (v) modification of the current ratio to eliminate the exclusion of certain valuation accounts associated with hedge contracts from current assets and from current liabilities, (vi) additional restrictions on (A) capital expenditures (limiting capital expenditures to those expenditures set forth in a plan of development approved by Angelo Gordon Energy Servicer, LLC, subject to certain exceptions, including capital expenditures financed with the proceeds of newly permitted, structurally subordinated debt), (B) outstanding accounts payable (limiting all outstanding and undisputed accounts payable to $7.5 million, undisputed accounts payable outstanding for more than 60 days to $2.0 million and undisputed accounts payable outstanding for more than 90 days to $1.0 million and (C) general and administrative expenses (limiting cash general and administrative expenses the Company may make or become legally obligated to make in any four fiscal quarter period to $9.0 million for the four fiscal quarter period ending June 30, 2020, $8.25 million for the four fiscal quarter period ending September 30, 2020, $6.5 million for fiscal quarter period from March 31, 2021 through December 31, 2021 and $5.0 million thereafter. 

 

Fee Letter

 
       On June 25, 2020, the Company, in connection with the 2L Amendment and to induce Angelo Gordon Energy Servicer, LLC and the lenders to enter into the 2L Amendment, entered into the Fee Letter (the “Fee Letter”) with Angelo Gordon Energy Servicer, LLC, pursuant to which the Company will (i) pay $10.0 million exit fee to Angelo Gordon Energy Servicer, LLC and the lenders upon maturity of the obligations under the Second Lien Credit Facility or the earlier acceleration or payment in full; (ii) grant warrants having an exercise price of $0.01 in an amount equal to 19.9% of the fully diluted common equity of the Company to Angelo Gordon Energy Servicer, LLC and the lenders; (iii) negotiate and provide an alternative financial arrangement that would afford Angelo Gordon Energy Servicer, LLC and the lenders an economic benefit equivalent in value to the warrants if the warrants cannot be issued on terms satisfactory to Angelo Gordon Energy Servicer, LLC; and (iv) protect the lenders by taking such reasonable steps as necessary to grant the lenders either (a) the right to appoint one member to the Company’s Board of Directors or (b) Board observation rights reasonably satisfactory to the administrative agent.

 

Future compliance with the covenants under the First Lien Credit Facility and Second Lien Credit Facility is reliant upon the Company's ability to successfully implement cost reductions, control capital expenditures and restart production that has been shut in. In the event of a future covenant violation, the Company would attempt to obtain waivers or amendments of the related agreements; however, it is uncertain if such waivers or amendments could be obtained on acceptable terms or at all.  In the event we default under the First Lien Credit Facility or Second Lien Credit Facility, amounts outstanding would become due and payable at the option of the lenders.