Yuma Energy, Inc. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

☐ 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: 001-37932

 

Yuma Energy, Inc.

(Exact name of registrant as specified in its charter)

 

DELAWARE (State or other jurisdiction of incorporation)

94-0787340 (IRS Employer Identification No.)

 

1177 West Loop South, Suite 1825 Houston, Texas (Address of principal executive offices)

77027 (Zip Code)

 

(713) 968-7000 (Registrant’s telephone number, including area code)

 

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

 

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 such 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, a 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.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	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 Section 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 ☒

 

At August 9, 2018, 23,243,763 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

 

 

TABLE OF CONTENTS

 

	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		5
		Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	5
		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017	7
		Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2018	8
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	9
		Notes to the Unaudited Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		36
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Defaults Upon Senior Securities		37
Item 4.	Mine Safety Disclosures		37
Item 5.	Other Information		37
Item 6.	Exhibits		38
	Signatures		39

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

Certain statements contained in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this report are forward-looking statements. These forward-looking statements can generally be identified by the use of words such as “may,” “will,” “could,” “should,” “project,” “intends,” “plans,” “pursue,” “target,” “continue,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” or “potential,” the negative of such terms or variations thereon, or other comparable terminology. Statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements. Readers should consider carefully the risks described under the “Risk Factors” section included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2017, and other disclosures contained herein and therein, which describe factors that could cause our actual results to differ from those anticipated in forward-looking statements, including, but not limited to, the following factors:

 

 

 

 

 

 

 

 

All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under applicable securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. You should not place undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this report or, if earlier, as of the date they were made.

 

 

PART I. FINANCIAL INFORMATION

 

Yuma Energy, Inc.

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

	June 30,	December 31,
	2018	2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$2,348,627	$137,363
Accounts receivable, net of allowance for doubtful accounts:
Trade	3,522,107	4,496,316
Officer and employees	7,781	53,979
Other	441,795	1,004,479
Prepayments	622,843	976,462
Other deferred charges	387,108	347,490
Total current assets	7,330,261	7,016,089
OIL AND GAS PROPERTIES (full cost method):
Proved properties	504,060,185	494,216,531
Unproved properties - not subject to amortization	534,627	6,794,372
	504,594,812	501,010,903
Less: accumulated depreciation, depletion and amortization	(425,547,424)	(421,165,400)
Net oil and gas properties	79,047,388	79,845,503
OTHER PROPERTY AND EQUIPMENT:
Assets held for sale	2,309,243	-
Land, buildings and improvements	-	1,600,000
Other property and equipment	1,793,397	2,845,459
	4,102,640	4,445,459
Less: accumulated depreciation and amortization	(1,324,152)	(1,409,535)
Net other property and equipment	2,778,488	3,035,924
OTHER ASSETS AND DEFERRED CHARGES:
Deposits	467,592	467,592
Other noncurrent assets	79,997	270,842
Total other assets and deferred charges	547,589	738,434
TOTAL ASSETS	$89,703,726	$90,635,950

 

The accompanying notes are an integral part of these financial statements.

 

 

Yuma Energy, Inc.

 

CONSOLIDATED BALANCE SHEETS– CONTINUED

(Unaudited)

 

	June 30,	December 31,
	2018	2017
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of debt	$35,094,226	$651,124
Accounts payable, principally trade	8,904,037	11,931,218
Commodity derivative instruments	2,613,690	903,003
Asset retirement obligations	88,722	277,355
Other accrued liabilities	1,555,117	2,295,438
Total current liabilities	48,255,792	16,058,138
LONG-TERM DEBT	-	27,700,000
OTHER NONCURRENT LIABILITIES:
Asset retirement obligations	10,492,311	10,189,058
Commodity derivative instruments	783,338	336,406
Deferred rent	272,506	290,566
Employee stock awards	143,961	191,110
Total other noncurrent liabilities	11,692,116	11,007,140
COMMITMENTS AND CONTINGENCIES (Notes 2 and 15)
EQUITY
Series D convertible preferred stock
($0.001 par value, 7,000,000 authorized, 1,971,072 issued and outstanding
as of June 30, 2018, and 1,904,391 issued and outstanding as of
December 31, 2017)	1,971	1,904
Common stock
($0.001 par value, 100 million shares authorized, 23,242,969 outstanding as of
June 30, 2018 and 22,661,758 outstanding as of December 31, 2017)	23,243	22,662
Additional paid-in capital	57,304,534	55,064,685
Treasury stock at cost (380,069 shares as of June 30, 2018 and 13,343 shares
as of December 31, 2017)	(438,890)	(25,278)
Accumulated earnings (deficit)	(27,135,040)	(19,193,301)
Total equity	29,755,818	35,870,672
TOTAL LIABILITIES AND EQUITY	$89,703,726	$90,635,950

 

The accompanying notes are an integral part of these financial statements.

 

 

Yuma Energy, Inc.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
REVENUES:
Sales of natural gas and crude oil	$5,822,577	$6,554,704	$11,468,113	$13,699,128
EXPENSES:
Lease operating and production costs	2,795,825	3,059,124	5,421,593	5,720,388
General and administrative – stock-based
compensation	64,230	385,097	360,524	436,832
General and administrative – other	1,587,628	1,906,629	3,336,866	4,082,631
Depreciation, depletion and amortization	2,245,170	2,763,444	4,462,491	5,904,384
Asset retirement obligation accretion expense	140,161	141,454	283,101	280,023
Impairment of long lived assets	176,968	-	176,968	-
Bad debt expense	261,659	73,513	327,467	73,513
Total expenses	7,271,641	8,329,261	14,369,010	16,497,771
LOSS FROM OPERATIONS	(1,449,064)	(1,774,557)	(2,900,897)	(2,798,643)
OTHER INCOME (EXPENSE):
Net gains (losses) from commodity derivatives	(2,095,570)	2,138,080	(3,346,830)	5,694,863
Interest expense	(567,635)	(482,285)	(1,033,927)	(978,376)
Gain (loss) on other property and equipment	-	(70,874)	-	484,768
Other, net	81,884	5,659	78,348	42,067
Total other income (expense)	(2,581,321)	1,590,580	(4,302,409)	5,243,322
INCOME (LOSS) BEFORE INCOME TAXES	(4,030,385)	(183,977)	(7,203,306)	2,444,679
Income tax expense (benefit)	-	(20,581)	-	5,950
NET INCOME (LOSS)	(4,030,385)	(163,396)	(7,203,306)	2,438,729
PREFERRED STOCK:
Dividends paid in kind	374,416	349,300	738,433	688,910
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS	$(4,404,801)	$(512,696)	$(7,941,739)	$1,749,819
INCOME (LOSS) PER COMMON SHARE:
Basic	$(0.19)	$(0.04)	$(0.35)	$0.14
Diluted	$(0.19)	$(0.04)	$(0.35)	$0.14
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic	23,082,334	12,235,286	22,948,475	12,223,337
Diluted	23,082,334	12,235,286	22,948,475	12,407,996

 

The accompanying notes are an integral part of these financial statements.

 

 

Yuma Energy, Inc.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited)

 

	Preferred Stock		Common Stock		Additional Paid-in Capital	Treasury Stock	Accumulated Deficit	Stockholders' Equity
	Shares	Value	Shares	Value
December 31, 2017	1,904,391	$1,904	22,661,758	$22,662	$55,064,685	$(25,278)	$(19,193,301)	$35,870,672
Net loss	-	-	-	-	-	-	(7,203,306)	(7,203,306)
Payment of Series "D" dividends in kind	66,681	67	-	-	738,366	-	(738,433)	-
Stock awards vested	-	-	962,063	962	(962)	-	-	-
Restricted stock awards forfeited	-	-	(14,126)	(14)	14	-	-	-
Restricted stock awards repurchased	-	-	(366,726)	(367)	367	-	-	-
Amortization of stock-based
compensation	-	-	-	-	1,502,064	-	-	1,502,064
Treasury stock (surrendered to
settle employee tax liabilities)	-	-	-	-	-	(413,612)	-	(413,612)
June 30, 2018	1,971,072	$1,971	23,242,969	$23,243	$57,304,534	$(438,890)	$(27,135,040)	$29,755,818

 

The accompanying notes are an integral part of these financial statements.

 

 

Yuma Energy, Inc.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

	Six Months Ended June 30,
	2018	2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income (loss) to net cash provided by (used in)
operating activities:
Net income (loss)	$(7,203,306)	$2,438,729
Depreciation, depletion and amortization of property and equipment	4,462,491	5,904,384
Impairment of long lived assets	176,968	-
Amortization of debt issuance costs	260,803	172,826
Deferred rent liability, net	25,668	-
Stock-based compensation expense	360,524	436,832
Settlement of asset retirement obligations	(575,817)	(227,346)
Asset retirement obligation accretion expense	283,101	280,023
Bad debt expense	327,467	73,513
Net (gains) losses from commodity derivatives	3,346,830	(5,694,863)
Gain on sales of fixed assets	-	(556,141)
Loss on write-off of abandoned facilities	-	71,373
(Gain) loss on write-off of liabilities net of assets	(103,045)	(34,835)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable	1,339,227	426,945
Decrease in prepaids, deposits and other assets	297,321	521,167
(Decrease) increase in accounts payable and other current and
non-current liabilities	65,487	(923,200)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	3,063,719	2,889,407
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for oil and gas properties	(6,928,684)	(4,526,587)
Proceeds from sale of oil and gas properties	1,000,000	5,400,563
Proceeds from sale of other fixed assets	-	641,556
Derivative settlements	(1,189,211)	550,675
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(7,117,895)	2,066,207
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on senior credit facility	14,300,000	-
Repayment of borrowings on senior credit facility	(7,000,000)	(7,500,000)
Repayments of borrowings - insurance financing	(556,898)	(512,783)
Debt issuance costs	-	(2,152)
Shelf registration costs	(64,050)	-
Treasury stock repurchases	(413,612)	(23,270)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	6,265,440	(8,038,205)
CHANGE IN CASH AND CASH EQUIVALENTS	2,211,264	(3,082,591)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	137,363	3,625,686
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$2,348,627	$543,095
Supplemental disclosure of cash flow information:
Interest payments (net of interest capitalized)	$773,150	$811,042
Interest capitalized	$133,772	$112,136
Supplemental disclosure of significant non-cash activity:
(Increase) decrease in capital expenditures financed by accounts payable	$3,252,112	$(386,337)

 

The accompanying notes are an integral part of these financial statements.

 

YUMA ENERGY, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – Organization and Basis of Presentation

 

Organization

 

Yuma Energy, Inc., a Delaware corporation (“Yuma” and collectively with its subsidiaries, the “Company”), is an independent Houston-based exploration and production company focused on acquiring, developing and exploring for conventional and unconventional oil and natural gas resources. Historically, the Company’s operations have focused on onshore properties located in central and southern Louisiana and southeastern Texas where it has a long history of drilling, developing and producing both oil and natural gas assets. In addition, during 2017 the Company began acquiring acreage in Yoakum County, Texas, with plans to explore and develop additional oil and natural gas assets in the Permian Basin of West Texas. Finally, the Company has operated positions in Kern County, California, and non-operated positions in the East Texas Woodbine and the Bakken Shale in North Dakota.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared in accordance with Article 8-03 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s Consolidated Balance Sheet as of June 30, 2018; the Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017; the Consolidated Statement of Changes in Equity for the six months ended June 30, 2018; and the Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017. The Company’s Consolidated Balance Sheet at December 31, 2017 is derived from the audited consolidated financial statements of the Company at that date.

 

The preparation of financial statements in conformity with the generally accepted accounting principles of the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For further information, see Note 2 in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements and the accompanying notes prepared in accordance with GAAP has been condensed or omitted. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Company has evaluated events or transactions through the date of issuance of these unaudited consolidated financial statements.

 

When required for comparability, reclassifications are made to the prior period financial statements to conform to the current year presentation.

Recently Issued Accounting Pronouncements

 

The accounting standard-setting organizations frequently issue new or revised accounting rules. The Company regularly reviews new pronouncements to determine their impact, if any, on the financial statements.

 

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which will supersede most of the existing revenue recognition requirements in GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which it expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires disclosures that are sufficient to enable users to understand an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This update provides clarifications in the assessment of principal versus agent considerations in the new revenue standard. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients. The update reduces the potential for diversity in practice at initial application of Topic 606 and the cost and complexity of applying Topic 606. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The update was issued to increase stakeholders’ awareness of the proposals for technical corrections and to expedite improvements. These ASUs are effective for annual and interim periods beginning after December 15, 2017. The Company adopted these standards effective January 1, 2018 using the full retrospective method. The Company finalized the detailed analysis of the impact of the standard on its contracts. The Company found that there was no significant impact on its financial position or results of operations. With the adoption of these standards, the Company was not required to record a cumulative effect adjustment due to the new standards not having a quantitative impact compared to existing GAAP (see Note 3 – Revenue Recognition – Adoption of ASC 606, “Revenue from Contracts with Customers”).

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” a new lease standard requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases under previous GAAP. The codification was amended through additional ASUs. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company will be required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements, and plans to adopt it no later than January 1, 2019.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. This ASU is effective for annual and interim periods beginning after December 15, 2017. The Company adopted this ASU on January 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides clarification on how certain cash receipts and cash payments are presented and classified on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2017 and is required to be adopted using a retrospective approach if practicable, with early adoption permitted. The Company adopted this ASU in the first quarter of 2018, and the adoption did not have a material impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which assists in determining whether a transaction should be accounted for as an acquisition or disposal of assets or as a business. This ASU is effective for annual and interim periods beginning in 2018 and is required to be adopted using a prospective approach, with early adoption permitted for transactions not previously reported in issued financial statements. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements, however, the Company will apply the provisions of ASU 2017-01 to future acquisitions.

 

 

NOTE 2 – Liquidity and Going Concern

 

The Company has borrowings under its credit facility which require, among other things, compliance with certain financial ratios and covenants.  Due to operating losses the Company sustained during recent quarters, at June 30, 2018 the Company was not in compliance under the credit facility with its (i) total debt to EBITDAX covenant for the trailing four quarter period, (ii) current ratio covenant, (iii) EBITDAX to interest expense covenant for the trailing four quarter period, and (iv) the liquidity covenant requiring the Company to maintain unrestricted cash and borrowing base availability of at least $4.0 million. In addition, due to this non-compliance, the Company classified its entire bank debt as a current liability in its financial statements as of June 30, 2018. On July 31, 2018, the Borrowers entered into the Waiver and Third Amendment to Credit Agreement (the “Third Amendment”) with the Lender. Pursuant to the Third Amendment, effective as of June 30, 2018, the Borrowers were granted a waiver for non-compliance from the liquidity covenant to have cash and cash equivalent investments together with borrowing base availability under the Credit Agreement of at least $4.0 million. In addition, as part of the Third Amendment, the Lenders requested that the Borrowers provide weekly cash flow forecasts and a monthly accounts payable report to the Lenders. The Third Amendment also provides for a redetermination of the borrowing base on August 15, 2018.

 

As of June 30, 2018, the Company had outstanding borrowings of $35.0 million under its credit facility, and its total borrowing base was $35.0 million, leaving no undrawn borrowing base. Due to drilling activities and other factors, the Company had a working capital deficit of $40.93 million (inclusive of the Company's outstanding debt under its credit facility) and a loss from operations of $2.90 million for the six months ended June 30, 2018. See Note 11 – Debt and Interest Expense.

 

These breaches of the terms and conditions of the Credit Agreement could result in acceleration of the Company’s indebtedness, in which case the debt would become immediately due and payable thereby giving our lenders various rights and remedies, including foreclosure.

 

The significant risks and uncertainties described above raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty.

 

The Company initiated several strategic alternatives to remedy its limited liquidity (defined as cash on hand and undrawn borrowing base), its financial covenant compliance issues, and to provide it with additional working capital to develop its existing assets. During the second quarter, the Company entered into an Asset Purchase and Sale Agreement on May 21, 2018 regarding its Kern County, California properties, including the sale of all of the Company’s oil and gas properties, fee properties, land, buildings, and other property and equipment in consideration of $4.7 million in gross proceeds and the buyer’s assumption of certain plugging and abandonment liabilities. The transaction is scheduled to close by August 31, 2018. Upon the closing of the transaction, it is anticipated that the majority of the proceeds will be applied to the repayment of borrowings under the credit facility. In addition, the Company has reduced its personnel by eight employees since December 31, 2017, a 24% decrease, including five positions that were eliminated on June 30, 2018. This brings the Company’s headcount to 26 employees at June 30, 2018. It should also be noted that, during the second quarter of 2018, the Company took additional steps to further reduce its general and administrative costs by reducing subscriptions, consultants and other non-essential services, as well as eliminating certain of its capital expenditures planned for 2018.

 

Additionally, the Company plans to take further steps to remedy its limited liquidity, which may include, but are not limited to, further reducing or eliminating capital expenditures; entering into additional commodity derivatives for a portion of the Company’s anticipated production; further reducing general and administrative expenses; selling certain non-core assets; seeking merger and acquisition related opportunities; and potentially raising proceeds from capital markets transactions, including the sale of debt or equity securities. There can be no assurance that the exploration of strategic alternatives will result in a transaction or otherwise remedy the Company’s limited liquidity.

 

 

NOTE 3 – Revenue Recognition – Adoption of ASC 606, “Revenue from Contracts with Customers”

 

The Company recognizes revenues to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services.

 

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 using the full retrospective method applied to those contracts which were not completed as of December 31, 2016. As a result of electing the full retrospective adoption approach as described above, results for reporting periods beginning after December 31, 2016 are presented under ASC 606.

 

There was no material impact upon the adoption of ASC 606, and the Company did not record any adjustments to opening retained earnings as of January 1, 2017, because its revenue is primarily products sales revenue accounted for at a point in time.

 

Crude oil and condensate are sold through month-to-month evergreen contracts. The price for Louisiana production is tied to an index or a weighted monthly average of posted prices with certain adjustments for gravity, Basic Sediment and Water (“BS&W”) and transportation. Generally, the index or posting is based on customary industry spot prices. Pricing for the Company’s California properties is based on an average of specified posted prices, adjusted for gravity and transportation. The Company’s natural gas is sold under month-to-month contracts with pricing tied to either first of the month index or a monthly weighted average of purchaser prices received. Natural gas liquids are sold under month-to-month or year-to-year contracts usually tied to the related natural gas contract. Pricing is based on published prices for each product or a monthly weighted average of purchaser prices received.

 

Sales of crude oil, condensates, natural gas and natural gas liquids (“NGLs”) are recognized at the point control of the product is transferred to the customer. Virtually all of the Company’s contracts’ 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. As a result, the price of the crude oil, condensate, natural gas, and NGLs fluctuates to remain competitive with other available crude oil, natural gas, and NGLs supplies.

 

Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. The contract consideration in the Company’s variable price contracts is typically allocated to specific performance obligations in the contract according to the price stated in the contract. Amounts allocated in the Company’s fixed price contracts are based on the stand-alone selling price of those products in the context of long-term, fixed price contracts, which generally approximates the contract price.

 

The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and NGL sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Any identified differences between its revenue estimates and actual revenue received historically have not been significant. For the period from January 1, 2017 through December 31, 2017, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.

 

Gain or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales.

 

 

Natural Gas and Natural Gas Liquids Sales

 

Under the Company’s natural gas processing contracts, it delivers natural gas to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sales of NGLs and residue gas. In these scenarios, the Company evaluates whether it is the principal or the agent in the transaction. For those contracts where the Company has concluded it is the principal and the ultimate third party is its customer, the Company recognizes revenue on a gross basis, with transportation, gathering, processing and compression fees presented as an expense in its lease operating and production costs in the Consolidated Statements of Operations.

 

In certain natural gas processing agreements, the Company may elect to take its residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the Company delivers product to the ultimate third-party purchaser at a contractually agreed-upon delivery point and receives a specified index price from the purchaser. In this scenario, the Company recognizes revenue when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as lease operating and production costs in the Consolidated Statements of Operations.

 

Crude Oil and Condensate Sales

 

The Company sells oil production at the wellhead and collects an agreed-upon index price, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received.

 

The following table presents the Company’s revenues disaggregated by product source. Sales taxes are excluded from revenues.

 

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Sales of natural gas and crude oil:
Crude oil and condensate	$3,203,260	$3,122,848	$6,269,517	$6,938,780
Natural gas	1,775,919	2,587,968	3,567,170	5,141,410
Natural gas liquids	843,398	843,888	1,631,426	1,618,938
Total revenues	$5,822,577	$6,554,704	$11,468,113	$13,699,128

 

Transaction Price Allocated to Remaining Performance Obligations

 

A significant number of the Company’s product sales are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14 exempting the Company 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 the Company’s product sales that have a contract term greater than one year, it has utilized the practical expedient in ASC 606-10-50-14(a) which states that the Company is 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 

 

Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $2,367,596 and $2,636,867 as of June 30, 2018 and December 31, 2017, respectively, and are reported in trade accounts receivable, net on the Consolidated Balance Sheets. The Company currently has no other assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments.

 

Practical Expedients 

 

The Company has made use of certain practical expedients in adopting the new revenue standard, including not disclosing the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice, (iii) variable consideration which is allocated entirely to a wholly unsatisfied performance obligation and meets the variable allocation criteria in the standard and (iv) only contracts that are not completed at transition.

 

The Company has not adjusted the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less.

 

NOTE 4 – Asset Impairments

 

The Company’s oil and natural gas properties are accounted for using the full cost method of accounting, under which all productive and nonproductive costs directly associated with property acquisition, exploration and development activities are capitalized. These capitalized costs (net of accumulated DD&A and deferred income taxes) of proved oil and natural gas properties are subject to a full cost ceiling limitation. The full cost ceiling limitation limits these costs to an amount equal to the present value, discounted at 10%, of estimated future net cash flows from estimated proved reserves less estimated future operating and development costs, abandonment costs (net of salvage value) and estimated related future income taxes. In accordance with SEC rules, prices used are the 12 month average prices, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12 month period prior to the end of the reporting period, unless prices are defined by contractual arrangements. Prices are adjusted for “basis” or location differentials. Prices are held constant over the life of the reserves. The Company’s second quarter of 2018 full cost ceiling calculation was prepared by the Company using (i) $57.67 per barrel for oil, and (ii) $2.92 per MMBTU for natural gas as of June 30, 2018. If unamortized costs capitalized within the cost pool exceed the ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs. Amounts thus required to be written off are not reinstated for any subsequent increase in the cost center ceiling. During the three and six month periods ended June 30, 2018 and 2017, the Company did not record any full cost ceiling impairments.

 

NOTE 5 – Asset Retirement Obligations

 

The Company has asset retirement obligations (“AROs”) associated with the future plugging and abandonment of oil and natural gas properties and related facilities. The accretion of the ARO is included in the Consolidated Statements of Operations. Revisions to the liability typically occur due to changes in the estimated abandonment costs, well economic lives and the discount rate.

 

 

The following table summarizes the Company’s ARO transactions recorded during the six months ended June 30, 2018 in accordance with the provisions of FASB ASC Topic 410, “Asset Retirement and Environmental Obligations”.

 

	Six Months Ended
	June 30, 2018
Asset retirement obligations at December 31, 2017	$10,466,413
Liabilities incurred	25,940
Liabilities settled	(194,421)
Accretion expense	283,101
Revisions in estimated cash flows	-
Asset retirement obligations at June 30, 2018	$10,581,033

 

Based on expected timing of settlements, $88,722 of the ARO is classified as current at June 30, 2018.

 

NOTE 6 – Fair Value Measurements

 

Certain financial instruments are reported at fair value on the Consolidated Balance Sheets. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. The Company uses a market valuation approach based on available inputs and the following methods and assumptions to measure the fair values of its assets and liabilities, which may or may not be observable in the market.

Fair Value of Financial Instruments (other than Commodity Derivative Instruments, see below) – The carrying values of financial instruments, excluding commodity derivative instruments, comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments.

Derivatives – The fair values of the Company’s commodity derivatives are considered Level 2 as their fair values are based on third-party pricing models which utilize inputs that are either readily available in the public market, such as natural gas and oil forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are then compared to the values given by the Company’s counterparties for reasonableness. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which results in the Company using market prices and implied volatility factors related to changes in the forward curves. Derivatives are also subject to the risk that counterparties will be unable to meet their obligations.

 

 

	Fair value measurements at June 30, 2018
		Significant
	Quoted prices	other	Significant
	in active	observable	unobservable
	markets	inputs	inputs
	(Level 1)	(Level 2)	(Level 3)	Total
Liabilities:
Commodity derivatives – oil	$-	$3,317,684	$-	$3,317,684
Commodity derivatives – gas	-	79,344	-	79,344
Total liabilities	$-	$3,397,028	$-	$3,397,028

 

	Fair value measurements at December 31, 2017
		Significant
	Quoted prices	other	Significant
	in active	observable	unobservable
	markets	inputs	inputs
	(Level 1)	(Level 2)	(Level 3)	Total
Liabilities:
Commodity derivatives – oil	$-	$1,517,410	$-	$1,517,410
Commodity derivatives – gas	-	(278,001)	-	$(278,001)
Total liabilities	$-	$1,239,409	$-	$1,239,409

 

Derivative instruments listed above are related to swaps (see Note 7 – Commodity Derivative Instruments).

 

Debt – The Company’s debt is recorded at the carrying amount on its Consolidated Balance Sheets (see Note 11 – Debt and Interest Expense). The carrying amount of floating-rate debt approximates fair value because the interest rates are variable and reflective of market rates.

Asset Retirement Obligations – The Company estimates the fair value of AROs upon initial recording based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates (see Note 5 – Asset Retirement Obligations). Therefore, the Company has designated the initial recording of these liabilities as Level 3.

Assets Held for Sale – The fair values of property, plant and equipment, classified as assets held for sale, and related impairments, which are calculated using Level 3 inputs, are discussed in Note 14 – Divestitures and Oil and Gas Asset Sales.

NOTE 7 – Commodity Derivative Instruments

 

Objective and Strategies for Using Commodity Derivative Instruments – In order to mitigate the effect of commodity price uncertainty and enhance the predictability of cash flows relating to the marketing of the Company’s crude oil and natural gas, the Company enters into crude oil and natural gas price commodity derivative instruments with respect to a portion of the Company’s expected production. The commodity derivative instruments used include futures, swaps, and options to manage exposure to commodity price risk inherent in the Company’s oil and natural gas operations.

Futures contracts and commodity price swap agreements are used to fix the price of expected future oil and natural gas sales at major industry trading locations such as Henry Hub, Louisiana for natural gas and Cushing, Oklahoma for oil. Basis swaps are used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and ceiling price (collar) for expected future oil and natural gas sales.

 

A three-way collar is a combination of three options: a sold call, a purchased put, and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (e.g., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.

While these instruments mitigate the cash flow risk of future reductions in commodity prices, they may also curtail benefits from future increases in commodity prices.

The Company does not apply hedge accounting to any of its derivative instruments. As a result, gains and losses associated with derivative instruments are recognized currently in earnings.

Counterparty Credit Risk – Commodity derivative instruments expose the Company to counterparty credit risk. The Company’s commodity derivative instruments are with Société Générale (“SocGen”) and BP Energy Company. Commodity derivative contracts are executed under master agreements which allow the Company, in the event of default, to elect early termination of all contracts. If the Company chooses to elect early termination, all asset and liability positions would be netted and settled at the time of election.

 

Commodity derivative instruments open as of June 30, 2018 are provided below. Natural gas prices are New York Mercantile Exchange (“NYMEX”) Henry Hub prices, and crude oil prices are NYMEX West Texas Intermediate (“WTI”).

 

	2018	2019	2020
	Settlement	Settlement	Settlement
NATURAL GAS (MMBtu):
Swaps
Volume	887,533	1,660,297	1,095,430
Price	$2.97	$2.75	$2.68
CRUDE OIL (Bbls):
Swaps
Volume	89,995	156,320
Price	$53.17	$53.77

 

Derivatives for each commodity are netted on the Consolidated Balance Sheets. The following table presents the fair value and balance sheet location of each classification of commodity derivative contracts on a gross basis without regard to same-counterparty netting:

 

	Fair value as of
	June 30, 2018	December 31, 2017
Asset commodity derivatives:
Current assets	$52,439	$295,304
Noncurrent assets	69,622	118
Total asset commodity derivatives	122,061	295,422
Liability commodity derivatives:
Current liabilities	(2,666,129)	(1,198,307)
Noncurrent liabilities	(852,960)	(336,524)
Total liability commodity derivatives	(3,519,089)	(1,534,831)
Total commodity derivative instruments	$(3,397,028)	$(1,239,409)

 

 

Net gains (losses) from commodity derivatives on the Consolidated Statements of Operations are comprised of the following: 

 

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Derivative settlements	$(659,847)	$451,975	$(1,189,211)	$550,675
Mark to market on commodity derivatives	(1,435,723)	1,686,105	(2,157,619)	5,144,188
Net gains (losses) from commodity derivatives	$(2,095,570)	$2,138,080	$(3,346,830)	$5,694,863

 

NOTE 8 – Preferred Stock

 

Each share of the Company’s Series D Convertible Preferred Stock, $0.001 par value per share (the “Series D Preferred Stock”), is convertible into a number of shares of common stock determined by dividing the original issue price, which was $11.0741176, by the conversion price, which is currently $6.5838109. The conversion price is subject to adjustment for stock splits, stock dividends, reclassification, and certain issuances of common stock for less than the conversion price. As of June 30, 2018, the Series D Preferred Stock had a liquidation preference of approximately $21.8 million. The Series D Preferred Stock provides for cumulative dividends of 7.0% per annum, payable in-kind. The Company issued 33,810 shares of Series D Preferred Stock during the three months ended June 30, 2018. The Company does not have any dividends in arrears at June 30, 2018.

 

NOTE 9 – Stock-Based Compensation

 

2014 Long-Term Incentive Plan

 

On October 26, 2016, Yuma assumed the Yuma Energy, Inc., a California corporation (“Yuma California”), 2014 Long-Term Incentive Plan (the “2014 Plan”), which was approved by the shareholders of Yuma California. Under the 2014 Plan, Yuma could grant stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights (“SARs”), performance units, performance bonuses, stock awards and other incentive awards to employees of Yuma and its subsidiaries and affiliates.

 

At June 30, 2018, 14,126 shares of the 2,495,000 shares of common stock originally authorized under the 2014 Plan remained available for future issuance. However, upon adoption of the Company’s 2018 Long-Term Incentive Plan on June 7, 2018, none of these remaining shares will be issued.

 

2018 Long-Term Incentive Plan

 

The Company’s Board adopted the Yuma Energy, Inc. 2018 Long-Term Incentive Plan (the “2018 Plan”), and its stockholders approved the 2018 Plan at the Annual Meeting on June 7, 2018. The 2018 Plan will replace the 2014 Plan; however, the terms and conditions of the 2014 Plan and related award agreements will continue to apply to all awards granted under the 2014 Plan.

 

The 2018 Plan expires on June 7, 2028, and no awards may be granted under the 2018 Plan after that date. However, the terms and conditions of the 2018 Plan will continue to apply after that date to all 2018 Plan awards granted prior to that date until they are no longer outstanding.

 

Under the 2018 Plan, the Company may grant stock options, RSAs, RSUs, SARs, performance units, performance bonuses, stock awards and other incentive awards to employees or those of the Company’s subsidiaries or affiliates, subject to the terms and conditions set forth in the 2018 Plan. The Company may also grant nonqualified stock options, RSAs, RSUs, SARs, performance units, stock awards and other incentive awards to any persons rendering consulting or advisory services and non-employee directors, subject to the conditions set forth in the 2018 Plan. Generally, all classes of the Company’s employees are eligible to participate in the 2018 Plan.

 

The 2018 Plan provides that a maximum of 4,000,000 shares of the Company’s common stock may be issued in conjunction with awards granted under the 2018 Plan. Shares of common stock cancelled, settled in cash, forfeited, withheld, or tendered by a participant to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. At June 30, 2018, all of the 4,000,000 shares of common stock authorized under the 2018 Plan remain available for future issuance.

 

 

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”. The guidance requires that all stock-based payments to employees and directors, including grants of RSUs, be recognized over the requisite service period in the financial statements based on their fair values.

 

RSAs, SARs and Stock Options granted to officers and employees generally vest in one-third increments over a three-year period, or with three year cliff vesting, and are contingent on the recipient’s continued employment. RSAs granted to directors generally vest in quarterly increments over a one-year period.

 

Equity Based Awards – During the three months ended June 30, 2018, the Company did not grant any RSAs under the 2014 Plan or the 2018 Plan.

 

Liability Based Awards – During the three months ended June 30, 2018, the Company did not grant any liability based awards under the 2014 Plan or the 2018 Plan.

 

Share Buy-back – During the three months ended June 30, 2018, the Company purchased 10,831 common shares from employees at a cost of $4,332 in satisfaction of employee tax obligations upon the vesting of RSAs. During the six months ended June 30, 2018, the Company purchased 366,726 common shares from employees at a cost of $413,612 in satisfaction of employee tax obligations of vested RSAs.

 

Total share-based compensation expenses recognized for the three months ended June 30, 2018 and 2017 were $64,230 (none capitalized) and $385,097 (none capitalized), respectively. Total share-based compensation expenses recognized for the six months ended June 30, 2018 and 2017 were $360,524 (none capitalized) and $436,832 (none capitalized), respectively.

 

NOTE 10 – Net Income (Loss) Per Common Share

 

Net Income (Loss) per common share – Basic is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net Income (Loss) per common share – Diluted assumes the conversion of all potentially dilutive securities, and is calculated by dividing net income (loss) attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding plus potentially dilutive securities. Net Income (Loss) per common share – Diluted considers the impact of potentially dilutive securities except in periods where their inclusion would have an anti-dilutive effect.

 

A reconciliation of earnings (loss) per common share is as follows: 

 

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Net income (loss) attributable to common stockholders	$(4,404,801)	$(512,696)	$(7,941,739)	$1,749,819
Weighted average common shares outstanding
Basic	23,082,334	12,235,286	22,948,475	12,223,337
Add potentially dilutive securities:
Unvested restricted stock awards	-	-	-	184,659
Stock appreciation rights	-	-	-	-
Stock options	-	-	-	-
Series D preferred stock	-	-	-	-
Diluted weighted average common shares outstanding	23,082,334	12,235,286	22,948,475	12,407,996
Net income (loss) per common share:
Basic	$(0.19)	$(0.04)	$(0.35)	$0.14
Diluted	$(0.19)	$(0.04)	$(0.35)	$0.14

 

 

NOTE 11 – Debt and Interest Expense

  

Long-term debt consisted of the following:

 

	June 30,	December 31,
	2018	2017
Senior credit facility	$35,000,000	$27,700,000
Installment loan due 7/22/18 originating from the financing of
insurance premiums at 5.14% interest rate	94,226	651,124
Total debt	35,094,226	28,351,124
Less: current maturities	(35,094,226)	(651,124)
Total long-term debt	$-	$27,700,000