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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

 

Form 10-Q

______________________

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

Commission file number: 001-34635

______________________

 

POSTROCK ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

______________________

 

 

 

Delaware

27-0981065

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

210 Park Avenue, Oklahoma City, OK 73102

(Address of principal executive offices) (Zip Code)

 

(405) 600-7704

(Registrant’s telephone number, including area code)

______________________

 

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 past 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

At May 8, 2015, there were 6,496,241 outstanding shares of the registrant’s common stock having an aggregate market value of $23.3 million based on a closing price of $3.58 per share.

 

 

 


 

POSTROCK ENERGY CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

 

TABLE OF CONTENTS

 

 

 

1

 


 

PART I — FINANCIAL INFORMATION

 

 

EXPLANATORY NOTE--RESTATEMENT OF FINANCIAL INFORMATION

 

On March 20, 2015, the Audit Committee of the Board of Directors (the "Audit Committee") of PostRock Energy Corporation (the “Company”), on the recommendation of management, and after consultation with the Company’s current and predecessor independent registered public accounting firms, BDO USA, LLP and UHY LLP, respectively, concluded that the Company’s audited consolidated financial statements and related consolidated financial information for each of the fiscal years ended December 31, 2010, 2011, 2012, and 2013, and the related reports of the Company’s independent registered public accounting firm thereon, and the unaudited condensed consolidated financial statements for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, and for each of the quarters in the years ended December 31, 2011, 2012 and 2013, and for the quarter ended September 30, 2010 (collectively, the "Restated Periods") should no longer be relied upon because of an accounting error.

 

On March 31, 2015, the Company filed its Annual Report on Form 10-K for the year ended December 31, 2014 (the “Form 10-K”), which included (1) a restated balance sheet as of December 31, 2013, (2) restated consolidated statements of operations, consolidated statements of cash flows, and consolidated statements of stockholders’ equity (deficit) for the years ended December 31, 2012 and 2013, (3) restated quarterly financial information for the quarters ended March 31, 2014 and 2013, June 30, 2014 and 2013, and September 30, 2014 and 2013, and December 31, 2013, and (4) restated selected financial data for the years ended December 31, 2010, 2011, 2012, and 2013. For more information concerning these restatements, see Item 6, “Selected Financial Data,” Item 8, “Financial Statements and Supplementary Data,” and Item 9A, “Controls and Procedures,” in Part II of the Form 10-K, including Notes 19 and 20 of the notes to the Consolidated Financial Statements.

 

This Quarterly Report on Form 10-Q for the period ended March 31, 2015, includes restated consolidated statements of operations and cash flows for the period ended March 31, 2014.   We do not plan to amend previously filed reports in connection with the restatement. The financial information that has been previously filed or otherwise reported for the three months ended March 31, 2014 is superseded by the information in this Quarterly Report on Form 10-Q.  Unless otherwise stated, all financial and accounting information contained in this Quarterly Report on Form 10-Q is presented on a restated basis.

 

 

 

2

 


 

 

Item 1. Financial Statements

 

POSTROCK ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

2014

 

2015

 

 

 

 

(Unaudited)

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

$

46 

 

$

66 

Accounts receivable—trade, net

 

9,080 

 

 

4,903 

Other receivables

 

515 

 

 

477 

Inventory

 

1,042 

 

 

1,106 

Other

 

1,031 

 

 

319 

Derivative financial instruments

 

11,151 

 

 

12,407 

Total

 

22,865 

 

 

19,278 

Oil and natural gas properties, full cost method of accounting, net

 

153,240 

 

 

148,682 

Other property and equipment, net

 

11,829 

 

 

10,958 

Derivative financial instruments

 

6,162 

 

 

6,999 

Other, net

 

1,579 

 

 

1,436 

Total assets

$

195,675 

 

$

187,353 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

9,278 

 

$

2,610 

Revenue payable

 

4,051 

 

 

3,251 

Accrued expenses and other

 

3,283 

 

 

4,155 

Total

 

16,612 

 

 

10,016 

Long-term debt

 

83,000 

 

 

83,500 

Mandatorily redeemable Series A preferred stock, $0.01 par value; 5,075 shares issued and outstanding

 

63,954 

 

 

66,625 

Asset retirement obligations

 

13,884 

 

 

13,990 

Other

 

 

 

 —

Total liabilities

 

177,451 

 

 

174,131 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $0.01 par value; 5,000,000 authorized shares; 23,098 and 33,566 shares of Series B Voting Preferred Stock issued and outstanding, respectively

 

 —

 

 

 —

Common stock, $0.01 par value; 100,000,000 authorized shares; issued—6,523,811 and 6,598,078; outstanding—6,336,728 and 6,415,100, respectively

 

65 

 

 

66 

Additional paid-in capital

 

481,050 

 

 

482,071 

Treasury stock, at cost

 

(2,432)

 

 

(2,080)

Accumulated deficit

 

(460,459)

 

 

(466,835)

Total stockholders’ equity

 

18,224 

 

 

13,222 

Total liabilities and stockholders’ equity

$

195,675 

 

$

187,353 

 

The accompanying notes are an integral part of these statements.

 

 

F-1


 

POSTROCK ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2014

 

2015

 

 

(Restated)

 

 

 

 

(in thousands, except per share data)

Revenues

 

 

 

 

 

Natural gas sales

$

15,963 

 

$

8,811 

Crude oil sales

 

5,105 

 

 

3,197 

Gathering

 

735 

 

 

488 

Total

 

21,803 

 

 

12,496 

Costs and expenses

 

 

 

 

 

Production

 

10,272 

 

 

9,675 

General and administrative

 

3,911 

 

 

3,395 

Depreciation, depletion and amortization

 

6,902 

 

 

7,299 

Gain on disposal of assets

 

(19)

 

 

(57)

Acquisition costs

 

34 

 

 

 —

Total

 

21,100 

 

 

20,312 

Operating income (loss)

 

703 

 

 

(7,816)

Other income (expense)

 

 

 

 

 

Gain (loss) from derivative financial instruments

 

(5,115)

 

 

5,184 

Gain on investment

 

1,619 

 

 

289 

Other income (expense), net

 

 —

 

 

308 

Interest expense, net

 

(4,829)

 

 

(4,341)

Total

 

(8,325)

 

 

1,440 

Loss before income taxes

 

(7,622)

 

 

(6,376)

Income taxes

 

 —

 

 

 —

Net loss attributable to common stockholders

$

(7,622)

 

$

(6,376)

Net loss per common share

 

 

 

 

 

Basic loss per share

$

(2.46)

 

$

(0.83)

Diluted loss per share

$

(2.46)

 

$

(0.83)

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

3,102 

 

 

7,717 

Diluted

 

3,102 

 

 

7,717 

 

The accompanying notes are an integral part of these statements.

 

 

 

F-2


 

POSTROCK ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2014

 

2015

 

 

(Restated)

 

 

 

 

(in thousands)

Cash flows from operating activities

 

 

 

 

 

Net loss

$

(7,622)

 

$

(6,376)

Adjustments to reconcile net loss to net cash flows from operating activities

 

 

 

 

 

Depreciation, depletion and amortization

 

6,902 

 

 

7,299 

Share-based and other compensation

 

968 

 

 

487 

Amortization of deferred loan costs

 

129 

 

 

141 

(Gain) loss on derivative financial instruments

 

5,115 

 

 

(5,184)

Settlement of derivative financial instruments

 

(2,507)

 

 

3,091 

Gain on disposal of assets

 

(19)

 

 

(57)

Gain on investment

 

(1,619)

 

 

(289)

Other non-cash changes to items affecting net loss

 

3,865 

 

 

3,489 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

(1,528)

 

 

4,215 

Accounts payable

 

(1,407)

 

 

(1,851)

Other

 

(758)

 

 

603 

Net cash flows from operating activities

 

1,519 

 

 

5,568 

Cash flows from investing activities

 

 

 

 

 

Restricted cash

 

(23)

 

 

 —

Proceeds from sale of investment

 

 —

 

 

289 

Expenditures for equipment, development and leasehold

 

(4,430)

 

 

(6,551)

Proceeds from sale of assets

 

59 

 

 

80 

Net cash flows used in investing activities

 

(4,394)

 

 

(6,182)

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt

 

19,000 

 

 

13,500 

Repayments of debt

 

(16,000)

 

 

(13,000)

Debt and equity financing costs

 

(11)

 

 

 —

Proceeds from issuance of common stock

 

 —

 

 

134 

Net cash flows from financing activities

 

2,989 

 

 

634 

Net increase in cash and cash equivalents

 

114 

 

 

20 

Cash and cash equivalents beginning of period

 

37 

 

 

46 

Cash and cash equivalents end of period

$

151 

 

$

66 

 

The accompanying notes are an integral part of these statements.

 

 

 

F-3


 

POSTROCK ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts subsequent to December 31, 2014 are unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

Common

 

Common

 

Additional

 

Shares of

 

 

 

 

 

 

 

 

 

Preferred

 

Stock

 

Shares

 

Stock

 

Paid-in

 

Treasury

 

Treasury

 

Accumulated

 

Total

 

Shares

 

Par Value

 

Issued

 

Par Value

 

Capital

 

Stock

 

    Stock    

 

Deficit

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

Balance, December 31, 2014

23,098 

 

$

 —

 

6,523,811 

 

$

65 

 

$

481,050 

 

187,083 

 

$

(2,432)

 

$

(460,459)

 

$

18,224 

Stock-based compensation

 —

 

 

 —

 

 —

 

 

 —

 

 

241 

 

 —

 

 

 —

 

 

 —

 

 

241 

Restricted stock grants, net of forfeitures

 —

 

 

 —

 

(1,582)

 

 

 —

 

 

 —

 

 —

 

 

 

 

 —

 

 

Funding of 401K and deferred compensation plans

 —

 

 

 —

 

47,433 

 

 

 —

 

 

(170)

 

(4,105)

 

 

349 

 

 

 —

 

 

179 

Issuance of Series B preferred stock

10,468 

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of warrants

 —

 

 

 —

 

 —

 

 

 —

 

 

817 

 

 —

 

 

 —

 

 

 —

 

 

817 

Issuance of common stock, net

 —

 

 

 —

 

28,416 

 

 

 

 

133 

 

 —

 

 

 —

 

 

 —

 

 

134 

Net loss

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(6,376)

 

 

(6,376)

Balance, March 31, 2015

33,566 

 

$

 —

 

6,598,078 

 

$

66 

 

$

482,071 

 

182,978 

 

$

(2,080)

 

$

(466,835)

 

$

13,222 

 

The accompanying notes are an integral part of these statements.

 

 

F-4


 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Basis of Presentation 

 

PostRock Energy Corporation is an independent oil and gas company engaged in the acquisition, exploration, development, production and gathering of crude oil and natural gas. Its primary production activity is focused in the Cherokee Basin, a 15-county region in southeastern Kansas and northeastern Oklahoma, and in Central Oklahoma. It also has minor oil and gas producing properties in the Appalachian Basin. Unless the context requires otherwise, references to “PostRock,” the “Company,” “we,” “us” and “our” refer to PostRock Energy Corporation and its consolidated subsidiaries.

 

The unaudited interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods on a basis consistent with the annual audited consolidated financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 10-K”).

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period’s presentation.  These reclassifications had no effect on the financial position, results of operations or cash flows of the Company.

 

 

 

 

 

F-5


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Note 2 — Other Balance Sheet Items 

 

Components of the condensed consolidated balance sheet items are described below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

2014

 

2015

 

(in thousands)

Other current assets

 

 

 

 

 

Prepaid fees and deposits

$

975 

 

$

274 

Other

 

56 

 

 

45 

Total

$

1,031 

 

$

319 

Other noncurrent assets, net

 

 

 

 

 

Deferred financing costs

$

1,126 

 

$

985 

Noncurrent deposits and other

 

453 

 

 

451 

Total

$

1,579 

 

$

1,436 

Accrued expenses and other

 

 

 

 

 

Interest

$

26 

 

$

285 

Employee-related costs and benefits

 

1,870 

 

 

1,832 

Non-income related taxes

 

40 

 

 

636 

Fees for services

 

316 

 

 

175 

Asset retirement obligations

 

134 

 

 

134 

Other

 

897 

 

 

1,093 

Total

$

3,283 

 

$

4,155 

Other noncurrent liabilities

 

 

 

 

 

Other

$

 

$

 —

Total

$

 

$

 —

 

 

 

 

 

 

Note 3 — Derivative Financial Instruments 

 

The Company is exposed to commodity price risk and management believes it prudent to periodically reduce exposure to cash-flow variability resulting from this volatility. Accordingly, the Company enters into certain derivative financial instruments in order to manage exposure to commodity price risk inherent in its oil and gas production. Derivative financial instruments are also used to manage commodity price risk inherent in customer pricing requirements and to fix margins on the future sale of oil and natural gas. Specifically, the Company may utilize futures, swaps and options.

 

Derivative instruments expose the Company to counterparty credit risk. The Company’s commodity derivative instruments are currently with two counterparties. The Company generally executes commodity derivative instruments under master agreements which allow it, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If the Company chooses to elect early termination, all asset and liability positions with the defaulting counterparty would be net cash settled at the time of election.

 

The Company monitors the creditworthiness of its counterparties; however, it is not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, it may be limited in its ability to mitigate an increase in counterparty credit risk. Possible actions include transferring its position to another counterparty or requesting a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices as well as incur a loss. The Company includes a measure of counterparty credit risk in its estimates of the fair values of derivative instruments in an asset position.

 

 

F-6


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

The Company does not designate its derivative financial instruments as hedging instruments for financial accounting purposes and, as a result, it recognizes the change in the respective instruments’ fair value currently in earnings. The table below outlines the classification of derivative financial instruments on the condensed consolidated balance sheet and their financial impact on the condensed consolidated statements of operations at and for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

Derivative Financial Instruments

 

                                Balance Sheet location                                          

2014

 

2015

 

 

 

(in thousands)

Commodity contracts

 

Current derivative financial instrument asset

$

11,151 

 

$

12,407 

Commodity contracts

 

Long-term derivative financial instrument asset

 

6,162 

 

 

6,999 

 

 

 

$

17,313 

 

$

19,406 

 

Gains and losses associated with derivative financial instruments related to oil and gas production were as follows for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2014

 

2015

 

 

(in thousands)

Realized gains (losses)

$

(2,507)

 

$

3,091 

 

Unrealized gains (losses)

 

(2,608)

 

 

2,093 

 

Total gain (loss) from derivative financial instruments

$

(5,115)

 

$

5,184 

 

 

The Company entered into an International Swap Dealers Association Master Agreement (ISDA) with each of its two counterparties for which it holds derivative contracts. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency. The Company has multiple oil swap contracts that could be offset under these provisions, but has elected not to offset the fair values of its derivative assets against the fair value of its derivative liabilities on its condensed consolidated balance sheets. The ISDA also includes a master netting arrangement in the event of early termination or default.

 

The following table discloses and reconciles the gross amounts as presented in the condensed consolidated balance sheets to the net amounts allowed under a master netting arrangement.  Amounts not offset on the condensed consolidated balance sheets represent positions that do not meet all the conditions for "a right of offset" or positions for which the Company has elected not to offset.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

2014

 

2015

 

 

 

 

 

 

 

(in thousands)

Derivative Assets

 

 

 

 

 

Gross amounts of recognized assets

$

11,151 

 

$

12,407 

Gross amounts offset in the balance sheet

 

6,162 

 

 

6,999 

Net amounts of assets presented in the balance sheet

 

17,313 

 

 

19,406 

Gross amounts not offset in the balance sheet

 

(17,313)

 

 

(19,406)

Net amount 

$

 —

 

$

 —

 

The following table summarizes the estimated volumes, fixed prices and fair values attributable to all of the Company’s oil and gas derivative contracts at March 31, 2015.

 

 

 

F-7


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of

 

Year Ending December 31,

 

 

 

 

2015

 

2016

 

Total

 

($ in thousands, except per unit data)

Natural Gas Swaps

 

 

 

 

 

 

 

 

Contract volumes (MMBtu)

 

6,737,670 

 

 

7,814,028 

 

 

14,551,698 

Weighted-average fixed price per MMBtu

$

4.01 

 

$

4.01 

 

$

4.01 

Fair value, net

$

8,242 

 

$

6,928 

 

$

15,170 

Crude Oil Swaps

 

 

 

 

 

 

 

 

Contract volumes (Bbl)

 

53,676 

 

 

65,568 

 

 

119,244 

Weighted-average fixed price per Bbl

$

92.73 

 

$

90.33 

 

$

91.41 

Fair value, net

$

2,152 

 

$

2,084 

 

$

4,236 

Total fair value, net 

$

10,394 

 

$

9,012 

 

$

19,406 

 

 

 

 

 

 

Note 4 — Fair Value Measurements 

 

Certain assets and liabilities are measured at fair value on a recurring basis in the Company’s condensed consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:

 

Cash and Equivalents, Accounts Receivable and Accounts PayableThe carrying amounts approximate fair value due to the short-term nature or maturity of the instruments.

 

Commodity Derivative InstrumentsThe Company’s oil and gas derivative instruments may consist of variable to fixed price swaps, collars and basis swaps. When possible, the Company estimates the fair values of these instruments based on published forward commodity price curves as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates adjusted for counterparty credit risk. Counterparty credit risk is incorporated into derivative assets while the Company’s own credit risk is incorporated into derivative liabilities. Both are based on the current published credit default swap rates.

 

InvestmentThe Company had an investment in Constellation Energy Partners LLC, now named Sanchez Production Partners LLC (“SPP”), which consisted of 224,850 Class B units at December 31, 2014 (see Note 5 —  Investment). Fair value for the Class B units, which are publicly traded, is based on market price and classified as a Level 1 measurement under the fair value hierarchy. At December 31, 2014, the fair value used for the Class B units was $1.40 per unit. During the first quarter of 2015, the Company sold the  remaining Class B units in SPP and therefore the Company sold all of its assets classified as Level 1 in the fair value hierarchy.

 

The Company classifies assets and liabilities within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement of each individual asset and liability taken as a whole. Measurement information for assets and liabilities that are measured at fair value on a recurring basis was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-8


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

 

 

 

 

 

 

 

 

Total Net Fair

 

Level 1

 

Level 2

 

Level 3

 

Value

 

(in thousands)

At December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Investment, gross

$

315 

 

$

 —

 

$

 —

 

$

315 

Derivative financial instruments—assets

 

 —

 

 

17,313 

 

 

 —

 

 

17,313 

Derivative financial instruments—liabilities

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

$

315 

 

$

17,313 

 

$

 —

 

$

17,628 

At March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Investment, gross

$

 —

 

$

 —

 

$

 —

 

$

 —

Derivative financial instruments—assets

 

 —

 

 

19,406 

 

 

 —

 

 

19,406 

Derivative financial instruments—liabilities

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

$

 —

 

$

19,406 

 

$

 —

 

$

19,406 

 

There were no movements between Levels 1 and 2 during the three months ended March 31, 2015. The Company has not owned any Level 3 assets or liabilities since 2012.

 

Additional Fair Value Disclosures — The Company had 5,075 outstanding shares of Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) (see Note 8 — Redeemable Preferred Stock and Warrants) at March 31, 2015. The obligation to redeem the preferred shares is reflected as debt (“mandatorily redeemable preferred stock”) in the condensed consolidated balance sheet (see Note 8 — Redeemable Preferred Stock and Warrants). The fair value and the carrying value of these securities at December 31, 2014 were $79.8 million and $64.0 million, respectively. The fair value and carrying value of these securities at March 31, 2015 is $82.2 million and $66.6 million, respectively. The fair value was determined by discounting the cash flows over the remaining life of the securities utilizing a LIBOR interest rate and a risk premium of approximately 10% and 11% at December 31, 2014 and March  31, 2015, respectively, which were based on companies with similar leverage ratios to PostRock. The Company has classified the valuation of these securities under Level 2 of the fair value hierarchy.

 

The Company’s debt consists entirely of floating-rate facilities. The carrying amount of floating-rate debt approximates fair value because the interest rates paid on such debt are generally set for periods of six months or shorter.

 

Note 5 — Investment 

 

The Company elected the fair value option to account for its interest in SPP at inception. The fair value option was chosen as the Company determined that the market price of SPP’s publicly traded interests provided a more accurate fair value measure of the Company’s investment in SPP. The Company has not elected the fair value option for any of its other assets or liabilities. During the first quarter of 2015, the Company sold the remaining units in SPP and recorded a realized gain of $313,000 as shown in the table below.

 

The following table presents the mark-to-market and realized gains on the Company’s investment (recorded as a component of other income in the condensed consolidated statements of operations):

 

 

F-9


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2014

 

2015

 

 

(in thousands)

Mark-to-market gain (loss) on investment

$

1,619 

 

$

(24)

 

Realized gain

 

 —

 

 

313 

 

 

The following table presents the Company’s investment in SPP at gross fair value, and the valuation allowance on SPP investment, which includes certain proceeds received from the settlement agreement as described below (presented net in the consolidated balance sheets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

2014

 

2015

 

 

 

 

 

 

 

(in thousands)

Investment, at gross fair value

$

315 

 

$

 —

Valuation allowance on investment

 

(315)

 

 

 —

 

 

 

 

Note 6 — Asset Retirement Obligations 

 

The following table reflects the changes to asset retirement obligations for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2014

 

2015

 

(in thousands)

Asset retirement obligations at beginning of period

$

13,228 

 

$

14,017 

Liabilities incurred

 

17 

 

 

 —

Liabilities settled

 

(22)

 

 

(117)

Accretion

 

256 

 

 

224 

Asset retirement obligations at end of period

 

13,479 

 

 

14,124 

Current portion of asset retirement obligations

 

134 

 

 

134 

Noncurrent portion of asset retirement obligations

$

13,345 

 

$

13,990 

 

 

 

 

 

 

 

Note 7 — Long-Term Debt 

 

The Company has a $200 million senior secured revolving credit facility (the “Borrowing Base Facility”) with the following outstanding balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

2014

 

2015

 

(in thousands)

Borrowing Base Facility

$

83,000 

 

$

83,500 

Less current maturities

 

 —

 

 

 —

Total long-term debt

$

83,000 

 

$

83,500 

 

 

 

F-10


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

With outstanding borrowings of $83.5 million and letters of credit of $1.4 million,  $30.1 million was available for additional borrowings at March 31, 2015. The Company is currently in discussion with its lenders regarding the redetermination of the Borrowing Base Facility that is to be effective as of May 1, 2015.  The terms of the Borrowing Base Facility are described within Note 10 of Item 8. Financial Statements and Supplementary Data in the 2014 10-K.

 

The Company was in compliance with all of its financial covenants under the Borrowing Base Facility at March 31, 2015.

 

Note 8 — Redeemable Preferred Stock and Warrants 

 

Prior to June 30, 2016, the Company may accrue dividends rather than pay them in cash for all outstanding Series A Preferred Stock. Whenever dividends are accrued on a quarterly dividend payment date, the liquidation preference of the Series A Preferred Stock is increased by the amount of the accrued dividends and additional warrants to purchase shares of PostRock common stock are issued. The Company records the increase in liquidation preference and the issuance of additional warrants by allocating their relative fair values to the amount of accrued dividends. The allocation results in an increase to the Company’s mandatorily redeemable preferred stock related to the Series A Preferred Stock and an increase to additional paid in capital related to the additional warrants issued. The increase to additional paid in capital related to additional warrants issued for dividends paid in kind was $817,000 during the three months ended March 31, 2015. The following table summarizes changes in the Series A Preferred Stock and associated warrants:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Liquidation

 

 

 

 

 

 

Carrying Value

 

Outstanding

 

Value of

 

Number of

 

Weighted Average

 

of Series A

 

Series A

 

Series A

 

Outstanding

 

Exercise Price of

 

Preferred Stock

 

Preferred Shares

 

Preferred Stock

 

Warrants

 

Warrants

 

(in thousands except share, warrant and per unit data)

December 31, 2014

$

63,954 

 

5,075 

 

$

79,760 

 

3,301,249 

 

$

13.00 

Accrued dividends

 

1,575 

 

 —

 

 

2,393 

 

1,076,653 

 

 

2.22 

Accretion

 

1,096 

 

 —

 

 

 —

 

 —

 

 

 —

March 31, 2015

$

66,625 

 

5,075 

 

$

82,153 

 

4,377,902 

 

$

10.35 

 

 

 

F-11


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

   

Note 9 — Equity and Earnings per Share 

 

Share-Based Payments — The Company recorded share based compensation expense of $105,000 and $241,000 for the three months ended March 31, 2014 and 2015, respectively. Total share-based compensation to be recognized on unvested stock awards and options at March 31, 2015, is $590,000 over a weighted average period of one year. The following table summarizes option and restricted awards granted during 2015 and their associated valuation assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Number of

 

fair value per

 

Weighted

 

Weighted

 

Weighted

 

awards granted

 

option or share

 

exercise price

 

risk free rate

 

volatility

Restricted Stock Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter 2015 director awards (1)

3,750 

 

$

3.04 

 

 

n/a

 

n/a

 

 

n/a

 

________

(1)

Awards vest immediately.

 

Income/(Loss) per Share — A reconciliation of the denominator (number of shares) used in the basic and diluted per share calculations for the periods indicated is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2014

 

2015

Denominator for basic earnings per share

3,101,512 

 

7,716,847 

Effect of potentially dilutive securities

 

 

 

Warrants

 —

 

 —

Denominator for diluted earnings per share

3,101,512 

 

7,716,847 

Securities excluded from earnings per share calculation due to antidilutive effect

 

 

 

Stock options

209,291 

 

255,561 

Warrants

2,038,596 

 

4,377,902 

 

 

Common Stock Issuance — The Company had an effective universal shelf registration statement on Form S-3 until March of 2015. Pursuant to the registration statement, we implemented an at-the-market program under which shares of our common stock could be sold.  In March 2015, our Board of Directors suspended the program. There were sales of 28,416 shares of common stock for net proceeds of $134,000 in the first two months of the year.

 

Note 10 — Commitments and Contingencies 

 

Litigation — The Company is subject, from time to time, to certain legal proceedings and claims in the ordinary course of conducting its business. It records a liability related to its legal proceedings and claims when it has determined that it is probable that it will be obligated to pay and the related amount can be reasonably estimated. The Company currently believes that there are no pending legal proceedings in which it is currently involved which have a reasonable possibility of materially affecting its financial position, results of operations or cash flows in an adverse manner. 

 

Contractual Commitments —  The Company has numerous contractual commitments in the ordinary course of business including debt service requirements, operating leases and purchase obligations. During the three months ended March 31, 2015, we have not entered into any significant contractual commitments that would increase the amounts included in our outstanding contractual commitments table at December 31, 2014.

 

 

 

 

 

F-12


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Note 11 — Profit sharing and deferred compensation plans 

 

401K plan — Substantially all of the Company’s employees are eligible to participate in a profit sharing plan under Section 401(k) of the Internal Revenue Code (the “401K plan”). Prior to 2013, employer matching contributions to the 401K plan were made in cash. Beginning in 2013, employer matching contributions to the 401K plan may be made in Company common stock. In general, the Company issues common stock to fund its matching contributions although, from time to time, purchases of common stock on the open market by the 401K plan trust may occur if funds are available as a result of forfeitures.  During the three months ended March 31, 2015,  34,789 shares of common stock were contributed to the 401K plan, of which 34,690 shares were issued by the Company.

 

The following table presents the expense incurred by the Company related to the 401K plan which is reflected in the condensed consolidated statements of operations as a component of general and administrative expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2014

 

2015

 

(in thousands)

401(k) profit sharing plan cost

$

149 

 

$

150 

 

Deferred compensation plan — Effective January 1, 2013, the Company established a deferred compensation plan that permits members of its board and certain employees to defer part or all of their eligible compensation. The Company issues common stock into a rabbi trust created to hold the assets associated with the plan. A participant’s deferred compensation is credited with earnings, gains and losses based on the Company’s common stock, the only investment option currently available under the plan. The Company may also make discretionary employer credits in an amount it determines each plan year. Distributions to participants will be made in shares of the Company’s common stock. Company shares held in the rabbi trust are recorded as treasury stock in the condensed consolidated balance sheets. Changes in the fair value of the deferred compensation obligation, currently recorded as a component of paid-in-capital, are not recognized.

 

 

The following table presents the number of shares and the related fair values of common stock contributed by the Company to the deferred compensation plan for the three months ended March 31, 2014 and 2015. The fair value of common stock is based on the market price of the stock on the preceding day that the stock is transferred and thus deemed to be a Level 1 measurement under the fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2014

 

2015

 

(in thousands, except per share amounts)

Shares of common stock contributed

 

915,809 

 

 

12,743 

Fair value of common stock contributed

$

1,001 

 

$

46 

 

 

 

 

 

 

 

 

Note 12Restatement of Previously Issued Consolidated Financial Statements

 

Prior to the issuance of the Company’s 2014 consolidated financial statements, the Company concluded that its previously issued 2010, 2011, 2012 and 2013 consolidated financial statements should be restated because of a misinterpretation of the guidance around accounting for its Series A Preferred Stock issued in September 2010.

 

Background of Restatement – As discussed further in Note 12 of Item 8. Financial Statements and Supplementary Data in the 2014 10-K, on September 21, 2010 and from time to time thereafter, the Company issued to White Deer Series A Preferred Stock, Series B Preferred Stock and warrants to purchase shares of the Company’s common stock in exchange for cash. The Series A Preferred Stock was recorded outside of permanent equity and liabilities, in the Company’s consolidated balance sheet because the settlement provisions of the warrants allowed White Deer to “net exercise” the warrants by permitting White Deer to pay the exercise price of the warrant by delivering the Series A Preferred Stock with a liquidation preference equal to the exercise price that would otherwise be due from White

 

 

F-13


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Deer in cash. Although the terms of the Series A Preferred Stock has a mandatory redemption date attributed to it, the Company believed this provision associated with the warrants excluded the Series A Preferred Stock from the definition of mandatorily redeemable preferred stock under FASB ASC 480, “Distinguishing Liabilities from Equity.”  The Company now believes that under U.S. generally accepted accounting principles, because the warrants are detachable, and thus are separate from the Series A Preferred Stock, the features of the warrants cannot be considered when evaluating the classification of the Series A Preferred Stock, and the Company therefore believes that the Series A Preferred Stock should have been classified as a liability for all periods from its issuance date. 

 

Impact of the Restatement - The effect of the restatement on the Company’s consolidated balance sheets for each quarter and annual period end, beginning with September 30, 2010, consists of reclassifications of the Series A Preferred Stock from temporary equity to a liability.  Additionally, dividends and accretion, originally taken to additional paid-in capital, have been reclassified to interest expense on the statement of operations. While these non-cash reclassifications have the effect of reducing net income (or increasing the net loss) in each period, they have no material impact on total stockholders’ equity, net income (loss) attributable to common stockholders, net income (loss) per common share or cash flows.

 

Details of the restatement for the quarter ending March 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2014

 

 

 

 

 

 

 

 

 

As Reported

 

Adjustment

 

Restated

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Operating loss

$

703 

 

$

 —

 

$

703 

Other income (expense)

 

 

 

 

 

 

 

 

Loss from derivative financial instruments

 

(5,115)

 

 

 —

 

 

(5,115)

Gain on investment

 

1619 

 

 

 —

 

 

1,619 

Interest expense, net

 

(3,530)

 

 

(1,299)

 

 

(4,829)

Total

 

(7,026)

 

 

(1,299)

 

 

(8,325)

Loss before income taxes

 

(6,323)

 

 

(1,299)

 

 

(7,622)

Income taxes

 

 —

 

 

 —

 

 

 —

Net Loss

 

(6,323)

 

 

(1,299)

 

 

(7,622)

Preferred stock dividends

 

(929)

 

 

929 

 

 

 —

Accretion of redeemable preferred stock

 

(370)

 

 

370 

 

 

 —

Net Loss attributable to common stockholders

$

(7,622)

 

$

 —

 

$

(7,622)

Net loss per common share

 

 

 

 

 

 

 

 

Basic

$

(2.46)

 

$

 —

 

$

(2.46)

Diluted

$

(2.46)

 

$

 —

 

$

(2.46)

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

3,102 

 

 

 —

 

 

3,102 

Diluted

 

3,102 

 

 

 —

 

 

3,102 

 

 

 

F-14


 

 

Table of Contents

 

POSTROCK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2014

 

 

 

 

 

 

 

 

 

As Reported

 

Adjustment

 

Restated

 

(in thousands, except per share data)

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

$

(6,323)

 

$

(1,299)

 

$

(7,622)

Adjustments to reconcile net loss to net cash flows from operating activities

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

6,902 

 

 

 

 

 

6,902 

Share-based and other compensation

 

968 

 

 

 

 

 

968 

Amortization of deferred loan costs

 

129 

 

 

 —

 

 

129 

(Gain) loss derivative financial instruments

 

5,115 

 

 

 —

 

 

5,115 

Settlement of derivative financial instruments

 

(2,507)

 

 

 —

 

 

(2,507)

Gain on disposal of assets

 

(19)

 

 

 —

 

 

(19)

Gain on investment

 

(1,619)

 

 

 —

 

 

(1,619)

Other non-cash changes to items affecting net loss

 

2,566 

 

 

1,299 

 

 

3,865 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 —

Accounts receivable

 

(1,528)

 

 

 —

 

 

(1,528)

Accounts payable