Attached files
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EX-99.2 - EX-99.2 - PDC ENERGY, INC. | a16-17851_4ex99d2.htm |
EX-23.2 - EX-23.2 - PDC ENERGY, INC. | a16-17851_4ex23d2.htm |
EX-23.1 - EX-23.1 - PDC ENERGY, INC. | a16-17851_4ex23d1.htm |
EX-10.1 - EX-10.1 - PDC ENERGY, INC. | a16-17851_4ex10d1.htm |
8-K - 8-K - PDC ENERGY, INC. | a16-17851_48k.htm |
Exhibit 99.1
Arris Petroleum Corporation
Consolidated Financial Statements
and
Independent Auditors Report
December 31, 2015 and 2014
ARRIS PETROLEUM CORPORATION
Table of Contents
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Page |
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Independent Auditors Report |
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1 |
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Consolidated Financial Statements |
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Consolidated Balance Sheets |
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3 |
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Consolidated Statements of Operations |
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4 |
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Consolidated Statement of Changes in Stockholders Deficit |
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5 |
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Consolidated Statements of Cash Flows |
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6 |
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Notes to Consolidated Financial Statements |
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7 |
INDEPENDENT AUDITORS REPORT
Board of Directors and Stockholders
Arris Petroleum Corporation
Denver, Colorado
We have audited the accompanying consolidated financial statements of Arris Petroleum Corporation and its subsidiaries, which are comprised of the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders deficit, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
MANAGEMENTS RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
AUDITORS RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arris Petroleum Corporation and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ EKS&H LLLP
March 16, 2016, except as to Note 12, which is as of September 2, 2016
Denver, Colorado
ARRIS PETROLEUM CORPORATION
Consolidated Balance Sheets
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December 31, |
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2015 |
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2014 |
| ||
Assets |
| ||||||
Current assets |
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|
|
|
| ||
Cash and cash equivalents |
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$ |
3,720,366 |
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$ |
23,549,819 |
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Revenue receivable |
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660,452 |
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147,190 |
| ||
JIB receivable |
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1,277,575 |
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|
| ||
Due from stockholders |
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5,167,774 |
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|
| ||
Other current assets |
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414,726 |
|
141,478 |
| ||
Total current assets |
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11,240,893 |
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23,838,487 |
| ||
Property and equipment |
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|
|
|
| ||
Oil and gas properties, successful efforts method |
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|
|
|
| ||
Proved properties |
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76,050,422 |
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23,496,364 |
| ||
Unproved properties |
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58,904,693 |
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62,392,823 |
| ||
Other property and equipment |
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608,217 |
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205,519 |
| ||
Accumulated depreciation, depletion, amortization, and accretion |
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(5,552,375 |
) |
(234,741 |
) | ||
Property and equipment, net |
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130,010,957 |
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85,859,965 |
| ||
Total assets |
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$ |
141,251,850 |
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$ |
109,698,452 |
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Liabilities and Stockholders Deficit |
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Current liabilities |
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Accounts payable |
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$ |
15,800,636 |
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$ |
6,591,876 |
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Accrued liabilities |
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5,749,725 |
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5,276,517 |
| ||
Revenue payable |
|
421,064 |
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55,256 |
| ||
Total current liabilities |
|
21,971,425 |
|
11,923,649 |
| ||
Asset retirement obligations |
|
689,292 |
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45,680 |
| ||
Total liabilities |
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22,660,717 |
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11,969,329 |
| ||
Redeemable Convertible Senior Preferred Stock, $0.001 par value, 325,000 shares authorized, 175,043 (2015) and 102,476 (2014) shares issued and outstanding, liquidation preference of $192,218,143 (2015) and $108,551,697 (2014) |
|
192,218,143 |
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108,551,697 |
| ||
Commitments and contingencies (Note 5) |
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Stockholders deficit |
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Class A and Class B Common Stock, $0.001 par value, 210,000 shares authorized, 161,675 (2015) and 140,686 (2014) shares issued and outstanding |
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162 |
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141 |
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Additional paid-in capital |
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(17,549,895 |
) |
(6,306,998 |
) | ||
Accumulated deficit |
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(56,077,277 |
) |
(4,515,717 |
) | ||
Total stockholders deficit |
|
(73,627,010 |
) |
(10,822,574 |
) | ||
Total liabilities and stockholders deficit |
|
$ |
141,251,850 |
|
$ |
109,698,452 |
|
See notes to consolidated financial statements.
ARRIS PETROLEUM CORPORATION
Consolidated Statements of Operations
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For the Year Ended |
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December 31, |
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2015 |
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2014 |
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Revenues |
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Oil revenues |
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$ |
2,259,778 |
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$ |
30,124 |
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Gas revenues |
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1,346,022 |
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117,101 |
| ||
Total revenues |
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3,605,800 |
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147,225 |
| ||
Operating expenses |
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|
| ||
Lease operating expenses |
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1,109,792 |
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26,738 |
| ||
Gathering and processing |
|
173,556 |
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46,101 |
| ||
Production taxes |
|
203,557 |
|
9,191 |
| ||
Geological and geophysical |
|
3,056,049 |
|
450,924 |
| ||
Depreciation, depletion, amortization, and accretion |
|
5,326,141 |
|
234,085 |
| ||
General and administrative expenses |
|
5,912,755 |
|
3,571,776 |
| ||
Impairment of proved properties |
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38,661,606 |
|
|
| ||
Total operating expenses |
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54,443,456 |
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4,338,815 |
| ||
Other (expense) income |
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|
|
|
| ||
(Loss) gain on sale of unproved property |
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(733,000 |
) |
199,236 |
| ||
Interest income |
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9,096 |
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22,614 |
| ||
Total other (expense) income |
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(723,904 |
) |
221,850 |
| ||
Net loss |
|
$ |
(51,561,560 |
) |
$ |
(3,969,740 |
) |
See notes to consolidated financial statements.
ARRIS PETROLEUM CORPORATION
Consolidated Statement of Changes in Stockholders Deficit
For the Years Ended December 31, 2015 and 2014
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Additional |
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Total |
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Class A Common Stock |
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Class B Common Stock |
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Paid-In |
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Accumulated |
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Stockholders |
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Shares |
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Amount |
|
Shares |
|
Amount |
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Capital |
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Deficit |
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Deficit |
| |||||
Balance - December 31, 2013 |
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100,000 |
|
$ |
100 |
|
7,692 |
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$ |
8 |
|
$ |
107,578 |
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$ |
(545,977 |
) |
$ |
(438,291 |
) |
Issuance of Class A and Class B Common Stock |
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36,667 |
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37 |
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4,020 |
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4 |
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41,360 |
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41,401 |
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Redemptions and dividends |
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|
|
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(7,693 |
) |
(8 |
) |
(36,667 |
) |
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(36,675 |
) | |||||
Equity issuance costs |
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|
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(343,583 |
) |
|
|
(343,583 |
) | |||||
Accrued dividends on Redeemable Convertible Senior Preferred Stock |
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|
|
|
|
|
|
|
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(6,075,686 |
) |
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|
(6,075,686 |
) | |||||
Net loss |
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|
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|
|
|
|
|
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(3,969,740 |
) |
(3,969,740 |
) | |||||
Balance - December 31, 2014 |
|
136,667 |
|
137 |
|
4,019 |
|
4 |
|
(6,306,998 |
) |
(4,515,717 |
) |
(10,822,574 |
) | |||||
Issuance of Class A and Class B Common Stock |
|
34,898 |
|
35 |
|
629 |
|
1 |
|
35,490 |
|
|
|
35,526 |
| |||||
Redemptions and dividends |
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(11,768 |
) |
(12 |
) |
(2,770 |
) |
(3 |
) |
(14,523 |
) |
|
|
(14,538 |
) | |||||
Equity issuance costs |
|
|
|
|
|
|
|
|
|
(107,215 |
) |
|
|
(107,215 |
) | |||||
Accrued dividends on Redeemable Convertible Senior Preferred Stock |
|
|
|
|
|
|
|
|
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(11,156,649 |
) |
|
|
(11,156,649 |
) | |||||
Net loss |
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|
|
|
|
|
|
|
|
|
|
(51,561,560 |
) |
(51,561,560 |
) | |||||
Balance - December 31, 2015 |
|
159,797 |
|
$ |
160 |
|
1,878 |
|
$ |
2 |
|
$ |
(17,549,895 |
) |
$ |
(56,077,277 |
) |
$ |
(73,627,010 |
) |
See notes to consolidated financial statements.
ARRIS PETROLEUM CORPORATION
Consolidated Statements of Cash Flows
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For the Years Ended |
| ||||
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December 31, |
| ||||
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2015 |
|
2014 |
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Net loss |
|
$ |
(51,561,560 |
) |
$ |
(3,969,740 |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
| ||
Depreciation, depletion, amortization, and accretion |
|
5,326,141 |
|
234,085 |
| ||
Redeemable Convertible Senior Preferred Stock issued for services |
|
182,500 |
|
83,300 |
| ||
Loss (gain) on sale of unproved property |
|
733,000 |
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(199,236 |
) | ||
Impairment of proved properties |
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38,661,606 |
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|
| ||
Changes in operating assets and liabilities |
|
|
|
|
| ||
Accounts receivable |
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(1,790,837 |
) |
(147,190 |
) | ||
Other current assets |
|
(273,248 |
) |
(108,538 |
) | ||
Accounts payable and accrued liabilities |
|
2,394,789 |
|
146,574 |
| ||
Oil and gas revenue payable |
|
365,808 |
|
55,256 |
| ||
|
|
45,599,759 |
|
64,251 |
| ||
Net cash used in operating activities |
|
(5,961,801 |
) |
(3,905,489 |
) | ||
Cash flows from investing activities |
|
|
|
|
| ||
Investment in oil and gas properties |
|
(77,204,249 |
) |
(64,485,241 |
) | ||
Acquisition of oil and gas properties |
|
(4,760,000 |
) |
|
| ||
Proceeds from sale of unproved property |
|
1,426,000 |
|
3,820,449 |
| ||
Purchase of furniture and equipment |
|
(402,699 |
) |
(186,085 |
) | ||
Net cash used in investing activities |
|
(80,940,948 |
) |
(60,850,877 |
) | ||
Cash flows from financing activities |
|
|
|
|
| ||
Proceeds from issuance of common stock |
|
35,526 |
|
41,401 |
| ||
Proceeds from issuance of Redeemable Convertible Senior Preferred Stock |
|
67,990,241 |
|
83,668,983 |
| ||
Redemption of Redeemable Convertible Preferred Stock |
|
(830,718 |
) |
|
| ||
Redemption of common stock |
|
(14,538 |
) |
(36,675 |
) | ||
Equity issuance costs |
|
(107,215 |
) |
(343,583 |
) | ||
Net cash provided by financing activities |
|
67,073,296 |
|
83,330,126 |
| ||
Net (decrease) increase in cash and cash equivalents |
|
(19,829,453 |
) |
18,573,760 |
| ||
Cash and cash equivalents - beginning of year |
|
23,549,819 |
|
4,976,059 |
| ||
Cash and cash equivalents - end of year |
|
$ |
3,720,366 |
|
$ |
23,549,819 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
| ||
Current liabilities related to oil and gas property additions |
|
$ |
19,008,998 |
|
$ |
11,721,819 |
|
Capitalized asset retirement obligations |
|
$ |
363,084 |
|
$ |
45,680 |
|
Acquired asset retirement obligations |
|
$ |
272,022 |
|
$ |
|
|
Contribution of undeveloped leaseholds for Redeemable Convertible Senior Preferred Stock |
|
$ |
|
|
$ |
13,139,808 |
|
Accrued Redeemable Convertible Senior Preferred Stock dividends |
|
$ |
11,156,649 |
|
$ |
6,075,686 |
|
Redeemable Convertible Senior Preferred Stock in subscription receivable |
|
$ |
5,167,774 |
|
$ |
|
|
See notes to consolidated financial statements.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
Arris Petroleum Corporation (the Company) is an independent energy company with substantially all of its producing oil and gas property located in the Permian Basin.
The Company was formed in the state of Delaware on October 16, 2013 with the purpose of acquiring and developing oil and gas properties located in the United States and commenced substantial operations in 2014.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Arris Petroleum Corporation and its wholly owned subsidiaries, Arris Operating Company, LLC; Arris Delaware Basin, LLC; Kimmeridge West Texas, LLC; and Arris Reeves Infrastructure, LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The impact of oil and gas prices has a significant influence on estimates made by management. Changes in oil and gas prices directly affect the economic limits of estimated oil and gas reserves. These economic limits have significant effects upon estimated reserve quantities and valuations. These estimates are the basis for the calculation of depreciation, depletion, and amortization for the oil and gas properties and the assessment as to whether an impairment of such properties is required. In addition, significant estimates include the estimated cost and timing related to asset retirement obligations and the recoverability of unproved properties.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.
Accounts Receivable
The Company accrues for oil and gas sales based on actual production dates. Joint interest billings represent monthly billings to working interest owners in the properties the Company operates. These receivables are due within 30 days of billing, with a right of offset against revenues due to working interest owners in the properties. No interest is charged on past-due balances. All receivables are reviewed periodically, and appropriate actions are taken on past-due amounts, if any.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
The Company grants credit in the normal course of business to oil and gas purchasers in the United States. Collectibility of the Companys oil and gas sales is dependent upon the financial condition of the Companys purchasers as well as general economic conditions of the industry. As of December 31, 2015, three purchasers accounted for 75% of oil and gas sales and 89% of revenue receivable. As of December 31, 2014, two purchasers accounted for 100% of the oil and gas sales and revenue receivable.
Accounting for Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and gas properties. The Company does not capitalize general and administrative expenses directly identifiable with such activities. Costs of unsuccessful exploration efforts are expensed in the period it is determined that such costs are not recoverable through future net revenues. Geological and geophysical costs and delay rentals are expensed as incurred. The cost of development wells are capitalized whether productive or non-productive. Upon the sale of proved properties, the cost and accumulated depletion are removed from the accounts, and any gain or loss is reflected in the consolidated statement of operations. If it is determined that the sale of proved properties did not significantly affect the units-of-production depletion rate, the sale is treated as a normal retirement with no gain or loss recognized.
Capitalized costs for unproved oil and gas properties are assessed at least annually to determine if an impairment in value needs to be recognized. There were no unproved property impairments during the years ended December 31, 2015 and 2014. For sales of partial interests in unproved properties, the Company treats the proceeds as a recovery of costs with no gain recognized until all costs have been recovered. During the years ended December 31, 2015 and 2014, the Company recognized (loss) gain of $(733,000) and $199,236, respectively, related to the sales of an entire interest in unproved properties.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Accounting for Oil and Gas Properties (continued)
The Company accounts for suspended exploratory well costs in accordance with the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 932, Extractive Activities - Oil and Gas. There were no exploratory wells-in-progress as of December 31, 2015 as all exploratory well costs were transferred to proved properties during the year. Exploratory wells-in-progress as of December 31, 2014 represents one well included in unproved properties that was spud in the fourth quarter of 2014, which the Company fully evaluated in 2015. The following table for the years ended December 31, 2015 and 2014 reflects the net change in capitalized exploratory well costs.
|
|
For the Year Ended |
| ||||
|
|
2015 |
|
2014 |
| ||
Beginning balance |
|
$ |
11,793,120 |
|
$ |
|
|
Additions to capitalized exploratory well costs pending the determination of proved reserves |
|
1,180,372 |
|
11,793,120 |
| ||
Reclassifications to proved properties due to the determination of proved reserves |
|
(12,973,492 |
) |
|
| ||
Ending balance |
|
$ |
|
|
$ |
11,793,120 |
|
Depreciation, depletion, and amortization of proved oil and gas properties is calculated using the units-of-production method based on proved reserves and estimated salvage values. For the years ended December 31, 2015 and 2014, the Company recorded $5,234,936 and $211,914, respectively, of depreciation and depletion expense on oil and gas properties. As of December 31, 2015 and 2014, the Company had approximately $10,091,984 and $8,116,097, respectively, designated as developmental wells-in-progress, which is included in proved oil and gas properties. The costs related to developmental wells-in-progress were excluded from the units-of-production depletion calculation.
The Company assesses the recoverability of its capitalized costs for its proved oil and gas properties periodically, or when circumstances indicate there is a need for such review. To determine if a depletable unit (generally defined as an individual field) is impaired, the Company compares the carrying value of the depletable unit to the undiscounted future net cash flows by applying estimated future prices over the economic lives of the reserves. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the estimated fair value of the depletable unit will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of expected future cash flows computed by applying estimated future oil and gas prices, as determined by management, to estimated future production of oil and gas reserves over the economic lives of the reserves and the application of a discount rate commensurate with the risk associated with realizing the expected cash flows. The discount rate is a rate that management believes is representative of current market conditions and includes estimates for the risk premium. Due to low oil and gas prices, the Company recorded proved property impairments of $38,661,606 and $0, during the years ended December 31, 2015 and 2014, respectively.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from five to seven years.
Reclassifications
Certain amounts in the 2014 consolidated financial statements have been reclassified to conform to the 2015 presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Revenue Recognition
Natural gas revenues are recognized when the title and risk pass to the purchaser. The Company records its share of revenues based on its share of proceeds. The Company sells the majority of its products soon after production at various locations, including the wellhead, at which time title and risk of loss pass to the buyer.
Gas imbalances occur when the Company sells more or less than its entitled ownership percentage of total gas production. Any amount received in excess of the Companys share is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable.
At December 31, 2015 and 2014, the Company did not have any material gas imbalances.
Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title is transferred, and collectibility is assured.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The Companys temporary differences result primarily from depletion and impairments of oil and gas properties under the successful efforts method of accounting.
The Companys deferred income taxes include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed for the years ended December 31, 2015 and 2014.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards when all performance and service conditions are probable of being satisfied (generally upon a liquidation event).
Subsequent Events
On January 14, 2016 and March 14, 2016, the Company issued an additional 21,000 shares and 11,139 shares, respectively, of Redeemable Convertible Preferred Stock for $1,000 per share.
In January 2016, the Company commenced midstream operations under its Arris Reeves Infrastructure, LLC subsidiary to transport crude oil and natural gas via the Reeves infrastructure pipeline.
The Company has evaluated all subsequent events through the auditors report date of March 16, 2016, which is the date the consolidated financial statements were available for issuance. There were no additional material subsequent events that required recognition or additional disclosure in these consolidated financial statements. See Note 12.
Note 2 - Acquisitions and Divestitures
In June 2015, the Company entered into a purchase and sale agreement with an unrelated party to acquire the right, title, and interest in and to several oil and gas properties totaling $4,760,000. The Company recorded the estimated fair value of the identifiable assets acquired as of the acquisition date.
See below for a summary of the assets acquired and liabilities assumed with this transaction:
Purchase price |
|
|
| |
Cash consideration |
|
$ |
4,760,000 |
|
Recognized amounts of identifiable assets and liabilities acquired |
|
|
| |
Proved oil and gas properties |
|
$ |
3,561,922 |
|
Pipeline and gas gathering equipment |
|
951,575 |
| |
Unproved properties |
|
518,525 |
| |
Asset retirement obligation assumed |
|
(272,022 |
) | |
Total identifiable net assets |
|
$ |
4,760,000 |
|
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 2 - Acquisitions and Divestitures (continued)
To determine the fair value of the proved oil and gas properties acquired in the business combination, the Company used an income approach based on a discounted cash flow model and made market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The Company determined the appropriate discount rates used for the discounted cash flow analyses by using a weighted-average cost of capital from a market participant perspective plus property-specific risk premiums for the assets acquired. The pipeline and gas gathering equipment acquired is included in proved oil and gas properties and is subject to units-of-production depletion and impairment at the depletable unit.
In December 2015, the Company entered into a purchase and sale agreement with an unrelated party to divest certain unproved oil and gas properties. The properties were sold for $1,426,000 in cash, resulting in a loss of $733,000.
In June 2014, the Company entered into a purchase and sale agreement with an unrelated party to divest all of its unproved acreage in Irion County. The properties were sold for $1,626,300 in cash, resulting in a gain of $199,236.
In November 2014, the Company entered into a purchase and sale agreement with an unrelated party to divest certain unproved oil and gas properties. The properties were sold for $2,194,149 in cash, net of broker fees; no gain or loss was recorded as a result of this sale.
Note 3 - Fair Value Measurements
The Company applies the authoritative guidance applicable to all financial assets and liabilities required to be measured and reported at fair value on a recurring basis, as well as to non-financial assets and liabilities measured at fair value on a non-recurring basis, including impairments of proved oil and gas properties and other long-lived assets and asset retirement obligations initially measured at fair value. The fair value of an asset or liability is the amount that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions of what market participants would use in valuing the asset or liability based on the best information available in the circumstances.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 3 - Fair Value Measurements (continued)
Financial and non-financial assets and liabilities are classified within the valuation hierarchy based upon the lowest level of input that is significant to the fair value measurement. The Companys policy is to recognize transfers in and out of the fair value hierarchy as of the end of the reporting period in which the event or change in circumstances caused the transfer. The hierarchy is organized into three levels based on the reliability of the inputs as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Quoted prices in active markets for similar assets and liabilities and inputs, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs or significant value drivers are observable; or
Level 3: Unobservable pricing inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.
Recurring Fair Value Measurements
The Company did not have any assets or liabilities that were required to be measured at fair value on a recurring basis as December 31, 2015 and 2014.
Non-Recurring Fair Value Measurements
The following table presents the Companys non-financial assets and liabilities that were measured at fair value on a non-recurring basis during the year ended December 31, 2015 by level within the fair value hierarchy:
Description |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Asset |
|
|
|
|
|
|
|
|
| ||||
Proved oil and gas properties: |
|
|
|
|
|
|
|
|
| ||||
Culberson field |
|
$ |
|
|
$ |
|
|
$ |
9,799,797 |
|
$ |
9,799,797 |
|
Liability |
|
|
|
|
|
|
|
|
| ||||
Asset retirement obligations |
|
$ |
|
|
$ |
|
|
$ |
363,084 |
|
$ |
363,084 |
|
The following table presents the Companys non-financial assets and liabilities that were measured at fair value on a non-recurring basis during the year ended December 31, 2014 by level within the fair value hierarchy:
Description |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Liability |
|
|
|
|
|
|
|
|
| ||||
Asset retirement obligations |
|
$ |
|
|
$ |
|
|
$ |
45,680 |
|
$ |
45,680 |
|
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 3 - Fair Value Measurements (continued)
Non-Recurring Fair Value Measurements (continued)
Proved oil and gas properties are recorded at fair value if the carrying value exceeds undiscounted cash flows. The Company uses Level 3 inputs and the income valuation technique to measure the fair value of proved properties using discount rates and year-end commodity future prices selected by the Companys management. The discount rate used was 10%, which is a rate that management believes is representative of current market conditions and includes estimates for the risk premium. The price forecast used for crude oil was the December 31, 2015 New York Mercantile (NYMEX) WTI price, adjusted for an estimated differential. The price forecast used for natural gas was the December 31, 2015 NYMEX Henry Hub price, adjusted for an estimated differential. During the year ended December 31, 2015, the Company valued its Culberson field at $9,799,797, which resulted in an impairment of $38,661,606. The impairment was driven primarily by the significant decline in commodity prices during the year ended December 31, 2015.
Fair value used in the initial recognition of asset retirement obligations and any subsequent upward changes in estimates is determined under the income approach using the present value of expected future remediation and dismantlement costs, incorporating the Companys best estimate of inputs used by industry participants when valuing similar liabilities. Accordingly, the fair value is based on unobservable pricing inputs and, therefore, is considered a Level 3 measurement in the fair value hierarchy. During the years ended December 31, 2015 and 2014, the Company recorded asset retirement obligations of $363,084 and $45,680, respectively. See Note 4 for additional information.
Other assets and liabilities not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and revenue payable. The consolidated financial statement carrying amounts of these items approximate their fair values due to their short-term nature.
Note 4 - Asset Retirement Obligations
The Company follows the provisions of ASC Topic 410, Asset Retirement and Environmental Obligations. This topic requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the asset. The asset retirement obligations are allocated to operating expenses by using a systematic, rational method. The Companys asset retirement obligations relate to the plugging and abandoning of its oil and gas wells and the reclamation of its well locations. The revisions made during the year ended December 31, 2015 were due to changes in estimated abandonment costs obtained by the Company based on current economic factors.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 4 - Asset Retirement Obligations (continued)
A reconciliation of the changes in the Companys liabilities are as follows:
|
|
December 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Beginning asset retirement obligations |
|
$ |
45,680 |
|
$ |
|
|
Liabilities acquired |
|
272,022 |
|
|
| ||
Liabilities incurred |
|
219,517 |
|
45,680 |
| ||
Revisions |
|
143,567 |
|
|
| ||
Accretion |
|
8,506 |
|
|
| ||
Long-term asset retirement obligations |
|
$ |
689,292 |
|
$ |
45,680 |
|
Note 5 - Commitments and Contingencies
Operating Leases
The Company leases facilities, equipment, and vehicles under non-cancelable operating leases. Rent expense for the years ended December 31, 2015 and 2014 was $256,554 and $115,877, respectively.
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31, |
|
|
| |
2016 |
|
$ |
161,690 |
|
2017 |
|
54,916 |
| |
|
|
$ |
216,606 |
|
Litigation
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 5 - Commitments and Contingencies (continued)
Investor Consulting Agreement
On January 29, 2014, the Company entered into an agreement with one of its investors whereby the investor has the right to nominate up to three consultants whom the Company will train in the upstream oil and gas industry (Investor Consultants). As of December 31, 2015 and 2014, the Company was training one and two Investor Consultants, respectively. Direct payroll and related costs of the Investor Consultants are to be paid by the investor; however, the Company is required to pay $250,000 per year to the investor, prorated for partial years, regardless of the number of Investor Consultants being trained. The payment for services is to be made in shares of Redeemable Convertible Senior Preferred Stock (Note 6), valued at $1,000 per share. During 2015, the Company incurred expense of $182,500 related to Investor Consultants, which represented a partial year of services and was paid with approximately 183 shares of Redeemable Convertible Senior Preferred Stock. During 2014, the Company incurred expense of $83,300 related to Investor Consultants, which represented a partial year of services and was paid with approximately 83 shares of Redeemable Convertible Senior Preferred Stock. The Investor Consultants are providing services to the Company, and the value of the professional services are comparable to the value of the Redeemable Convertible Senior Preferred Stock issued.
Management Employment Agreements
The Company has employment agreements with certain members of management. Under the terms of these agreements, the Company has agreed, under certain circumstances, to pay salaries and benefits to these members of management until the termination of the employment agreements. No provisions have been made in the accompanying consolidated balance sheet for these commitments.
Management Separation Agreements
During the year ended December 31, 2015, the Company entered into separation agreements with certain members of management. Pursuant to these separation agreements, these terminated members of management are entitled to receive up to $733,333 upon the achievement of certain events after their termination, as defined. As of December 31, 2015, the Company has not recorded an accrual related to these separation agreements as the events are not considered probable at December 31, 2015.
Shut-In Wells
In November 2015, the third-party gas plant servicing the Companys wells in Culberson County was closed due to a gas processing plant explosion. As a result, those wells are shut-in indefinitely pending the reopening of the plant.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 6 - Redeemable Convertible Senior Preferred Stock
The Company is authorized to issue up to 350,000 preferred shares, par value $0.001. Of the 350,000 preferred shares authorized, the Company has designated 325,000 shares as Redeemable Convertible Senior Preferred Stock (Senior Preferred Stock). As of December 31, 2015 and 2014, there were 175,043 and 102,476 shares of Senior Preferred Stock issued and outstanding, respectively, issued at an original issuance price of $1,000 per share (Original Issue Price). As of December 31, 2015, the Company had a remaining capital commitment on the Senior Preferred Stock of $32,166,145.
During the year ended December 31, 2015, the Company redeemed 774 Senior Preferred shares for $773,772, plus the related cumulative preferred return of $56,946, as part of separation agreements entered into with certain members of management (Note 5).
At December 31, 2015, the Company had $5,167,774 recorded as due from stockholders on the accompanying consolidated balance sheet relating to shares issued in December 2015. The balance of $5,167,774 was received by the Company on January 4, 2016.
Voting
The Senior Preferred Stock holders are entitled to vote as a separate class on certain matters, including (i) any amendment to the certificate of incorporation that would adversely affect the rights and preferences of Senior Preferred Stock; (ii) adoption of a Certification of Designation with respect to any series of preferred shares; (iii) any amendment to the Bylaws of the Company proposed by the holders of the Common Stock; and (iv) consummation by the Company of any contract for a liquidation event, as defined (Liquidation Event). In instances where both holders of Common Stock and Senior Preferred Stock have voting rights with respect to a matter for which a vote is being taken, holders will vote as separate classes. Approval of such matter will require majority approval of each voting class.
Conversion
Holders of the Senior Preferred Stock may elect to convert some or all of the Senior Preferred Stock within 30 days after the closing of an initial public offering (IPO) into the class of stock in the IPO at the IPO price.
Dividends
Holders of the Senior Preferred Stock are entitled to a cumulative preferred return of 8% per annum, compounded continually on the Adjusted Capital Balance with respect to such share through the earlier of (i) the redemption date of such share or (ii) a Liquidation Event, as defined. The Adjusted Capital Balance is defined as (i) the Original Issue Price, less (ii) the aggregate amount of all distributions made by the Company with respect to such share prior to such date, if any. As of December 31, 2015 and 2014, the Company recorded cumulative accrued Senior Preferred Stock dividends of $17,175,389 and $6,075,686.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 6 - Redeemable Convertible Senior Preferred Stock (continued)
Liquidation
In the event of liquidation, dissolution, or winding up of the Company, the holders of the Senior Preferred Stock will be paid in cash for each share of Senior Preferred Stock held in an amount equal to the Original Issue Price, plus all accrued unpaid dividends (the Liquidation Preference), before any payment is made to any Common Stock holders. If the assets of the Company available for distribution to the holders of shares of the Senior Preferred Stock are insufficient to permit payment in full to such holders of the sums that such holders are entitled to receive in such case, then all of the assets available for distribution to holders of shares of the Senior Preferred Stock will be distributed among and paid to such holders ratably in proportion to the amounts that would be payable if such assets were sufficient to permit full payment.
Redemption
The Company may, but is not obligated to, redeem all or any portion of the Senior Preferred Stock at the Liquidation Preference. Upon a Liquidation Event, the Company is required to repurchase the Senior Preferred Stock with the proceeds received. Due to this conditional redemption feature, the Senior Preferred Stock has been classified outside of permanent equity.
Note 7 - Stockholders Deficit
The Company is authorized to issue up to 210,000 shares of Common Stock, par value $0.001, which is divided into two classes: Class A Common Stock (Class A Stock) and Class B Common Stock (Class B Stock) (collectively, Common Stock). There were 159,797 Class A Stock shares and 1,878 Class B Stock shares issued and outstanding as of December 31, 2015. There were 136,667 Class A Stock shares and 4,019 Class B Stock shares issued and outstanding as of December 31, 2014. During the year ended December 31, 2015, the Company redeemed 11,768 Class A Stock shares and 2,770 Class B Stock shares for $1 per share as part of separation agreements entered into with certain members of management (Note 5).
Voting
Each holder of Common Stock will be entitled to one vote for each share.
Conversion
Upon achievement of the Required Investor Return, each outstanding share of Class B Stock will be automatically converted into Class A Stock.
If, immediately prior to the effective date of an IPO, the Required Investor Return has not been achieved, all outstanding shares of Class B Stock will automatically convert into fractional shares of Class A Stock based upon the actual rate of return achieved through that date.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 7 - Stockholders Deficit (continued)
Dividends
Holders of the Common Stock shall not be entitled to dividends until the Senior Preferred Stock has been redeemed at the Liquidation Preference and, after that, only when declared by the Board of Directors. When and if dividends are properly declared on the Common Stock:
a. The holders of the outstanding shares of Class A Stock will be entitled to receive dividends with respect to each share of Class A Stock, prior to the payment of any dividend or other distribution on shares of Class B Stock, until a required investor return (Required Investor Return) has been achieved and paid in full.
b. Once the Required Investor Return has been achieved and paid in full, the holders of all Common Stock will be entitled to receive all further dividends from the Company.
c. Thereafter, all dividends with respect to shares of each class of Common Stock will be paid pro rata and in like matter to all of the holders entitled thereto.
Liquidation
In the event of liquidation, dissolution, or winding up of the Company, the assets of the Company legally available to the stockholders, after payment in full of the Liquidation Preference to the Senior Preferred Stock, will be distributed to the holders of Common Stock, first to the holders of Class A Stock, until the Required Investor Return has been achieved and paid in full. Once this is achieved, the holders of Common Stock will be entitled to all residual assets of the Company pro rata without limit.
Management Incentive Units
The Class B Stock is available to management only, and a portion of Class A Stock is also held by management (Management Incentive Units). The number of Class A Stock and Class B Stock shares held by management as of December 31, 2015 was 7,990 and 1,879, respectively. The number of Class A Stock and Class B Stock shares held by management as of December 31, 2014 was 17,083 and 4,019, respectively. The Management Incentive Units were purchased with cash at $1.00 per share and are generally subject to vesting over four years. As of December 31, 2015 and 2014, 4,935 and 5,276 shares were vested, respectively. If subsequent issuances of Class A Stock and Class B Stock occur, management is entitled to maintain their relative percentage of Class A Stock and Class B Stock without further consideration, subject to the original vesting schedule.
Note 8 - Income Taxes
The Companys deferred tax assets or liabilities are computed based on the difference between the financial statement basis and tax basis of certain assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the asset or liability from year to year.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 8 - Income Taxes (continued)
The reconciliation between the statutory rate and the effective rate is mainly attributable to the valuation allowance on the deferred tax assets and items that are not deductible for tax, such as meals and entertainment.
The following is a summary of the Companys deferred tax assets and liabilities:
|
|
December 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Deferred tax assets |
|
|
|
|
| ||
Net operating loss carryforwards |
|
$ |
9,869,160 |
|
$ |
2,788,882 |
|
Organizational fees |
|
26,404 |
|
28,462 |
| ||
Oil and gas property |
|
11,265,387 |
|
|
| ||
Asset retirement obligation |
|
261,996 |
|
|
| ||
Total deferred tax assets |
|
21,422,947 |
|
2,817,344 |
| ||
Deferred tax liabilities |
|
|
|
|
| ||
Oil and gas property |
|
|
|
(1,064,580 |
) | ||
Other |
|
(116,916 |
) |
(39,796 |
) | ||
Total deferred tax liabilities |
|
(116,916 |
) |
(1,104,376 |
) | ||
Net deferred tax asset |
|
21,306,031 |
|
1,712,968 |
| ||
Less: valuation allowance |
|
(21,306,031 |
) |
(1,712,968 |
) | ||
Deferred tax asset |
|
$ |
|
|
$ |
|
|
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. This guidance may either be applied prospectively or retrospectively. The Company early adopted this guidance during the year ended December 31, 2015.
The Company has pre-tax net operating loss carryforwards of as of December 31, 2015 and 2014 of $25,964,982 and $7,337,329, respectively, which expire before 2036 and 2035, respectively. Internal Revenue Code Section 382 imposes limitations on a Companys ability to recognize certain deferred tax assets upon a change of control of the Company. During 2014, the Company had a change of control event under Section 382, which will limit its ability to utilize its deferred tax assets, including net operating loss carryforwards, to offset future taxable income. The approximate amount of net operating losses subject to the Section 382 limitation is $650,000.
A valuation allowance is provided when it is more likely than not that all or some of the deferred income tax assets will not be realized. Based upon cumulative losses since inception and projections of future taxable income, the Company has recorded a valuation allowance of $21,306,031 and $1,712,968 at December 31, 2015 and 2014, respectively.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 8 - Income Taxes (continued)
The Company does not believe that it has any uncertain tax positions. It is the Companys policy to recognize interest and penalties related to uncertain tax benefits in income tax expense. As of December 31, 2015 and 2014, the Company has not recognized any interest or penalties in its statement of operations or balance sheet.
Note 9 - Employee Benefit Plan
The Company has a 401(k) Plan (the Plan) to provide retirement and incidental benefits for its employees. Employees may contribute from 1% to 80% of their annual compensation to the Plan, limited to a maximum annual amount as updated annually by the IRS. The Company matches employee contributions dollar for dollar up to a maximum of 6% per year per person. All matching contributions vest immediately. In addition, the Plan provides for discretionary matching contributions as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. During the years ended December 31, 2015 and 2014, the Company contributed $93,133 and $87,293, respectively, as discretionary matching contributions.
Note 10 - Related Party Transactions
During 2014, one investor contributed unproved oil and gas properties with an estimated fair value of $13,139,808 in exchange for 13,139 shares of Senior Preferred Stock. No such contributions occurred during 2015.
Note 11 - Supplemental Oil and Gas Information (Unaudited)
Costs Incurred in Oil and Gas Producing Activities
Costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed, are summarized as follows:
|
|
For the Year Ended |
| ||||
|
|
2015 |
|
2014 |
| ||
Development costs |
|
$ |
62,493,919 |
|
$ |
18,272,490 |
|
Exploration costs |
|
4,236,421 |
|
12,244,044 |
| ||
Acquisitions |
|
|
|
|
| ||
Proved properties |
|
4,241,475 |
|
|
| ||
Unproved properties |
|
21,698,746 |
|
59,398,419 |
| ||
Total, including asset retirement obligation |
|
$ |
92,670,561 |
|
$ |
89,914,953 |
|
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 11 - Supplemental Oil and Gas Information (Unaudited) (continued)
Oil and Gas Reserve Quantities
The reserves at December 31, 2015 presented below were prepared by the independent engineering firm Cawley, Gillespie & Associates, Inc. The reserves at December 31, 2014 presented below were prepared internally by the Companys petroleum engineer. All proved reserves are located within the Reeves and Culberson Counties in Texas. Estimates of proved reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, price changes, and other factors.
Guidelines prescribed in FASB Topic 932, Extractive Industries Oil and Gas, have been followed for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. Future cash inflows and future production and development costs are determined by applying prices and costs, including transportation, quality, and basis differentials, to the year-end estimated quantities of oil and gas to be produced in the future. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor. Future operating costs are determined based on estimates of expenditures to be incurred in producing the proved oil and gas reserves in place at the end of the period using year-end costs and assuming continuation of existing economic conditions, plus overhead incurred. Future development costs are determined based on estimates of capital expenditures to be incurred in developing proved oil and gas reserves.
The assumptions used to compute the standardized measure are those prescribed by the FASB and the SEC. These assumptions do not necessarily reflect the Companys expectations of actual revenues to be derived from those reserves, nor their present value. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these reserve quantity estimates are the basis for the valuation process. Reserve estimates are inherently imprecise and estimates of new discoveries and undeveloped locations are more imprecise than estimates of established proved producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 11 - Supplemental Oil and Gas Information (Unaudited) (continued)
Oil and Gas Reserve Quantities (continued)
The following table sets forth information for the years ended December 31, 2015 and 2014 with respect to changes in the Companys proved (i.e., proved developed and undeveloped) reserves:
|
|
(Mbbl) |
|
(MMcf) |
|
December 31, 2013 |
|
|
|
|
|
Extension, discoveries, and other additions |
|
547.1 |
|
3,517.4 |
|
Revisions |
|
|
|
|
|
Production |
|
(0.6 |
) |
(31.3 |
) |
December 31, 2014 |
|
546.5 |
|
3,486.1 |
|
Extension, discoveries, and other additions |
|
2,901.6 |
|
18,499.4 |
|
Revisions |
|
(228.5 |
) |
852.8 |
|
Production |
|
(58.8 |
) |
(638.4 |
) |
December 31, 2015 |
|
3,160.8 |
|
22,199.9 |
|
Proved developed reserves, included above: |
|
|
|
|
|
December 31, 2014 |
|
156.8 |
|
2,255.8 |
|
December 31, 2015 |
|
1,050.7 |
|
11,447.9 |
|
Proved undeveloped reserves, included above: |
|
|
|
|
|
December 31, 2014 |
|
389.7 |
|
1,230.3 |
|
December 31, 2015 |
|
2,110.1 |
|
10,752.0 |
|
Notable changes in proved reserves for the year ended December 31, 2015 relate to extensions and discoveries resulting from the drilling of one successful exploratory well in Culberson county and three successful exploratory wells in Reeves County.
Standardized Measure of Discounted Future Net Cash Flows
As of December 31, 2015, the reserves are comprised of 46.1% crude oil and 53.9% natural gas, on an energy equivalent basis of one barrel per six Mcf. The following values for the 2015 proved reserves were derived based on prices of $50.28 per Bbl of crude oil and $2.59 per Mcf of natural gas. The following values for the 2014 proved reserves were derived based on prices of $76.55 per Bbl of crude oil and $4.04 per Mcf of natural gas. These prices were based on the 12-month arithmetic average first-of-month price for January 2015 through December 2015 and January 2014 through December 2014, respectively. The crude oil pricing was based on the West Texas Intermediate price and the natural gas pricing was based on the Henry Hub price. All prices have been adjusted for transportation, quality, and basis differentials.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 11 - Supplemental Oil and Gas Information (Unaudited) (continued)
Standardized Measure of Discounted Future Net Cash Flows (continued)
The following summary sets forth the Companys future net cash flows relating to proved oil and gas reserves based on the standardized measure prescribed in ASC Topic 932 (in thousands):
|
|
As of |
| ||||
|
|
2015 |
|
2014 |
| ||
Future crude oil and natural gas sales |
|
$ |
202,923 |
|
$ |
55,910 |
|
Future production costs |
|
(64,859 |
) |
(13,235 |
) | ||
Future development costs |
|
(46,839 |
) |
(7,050 |
) | ||
Future income tax expense |
|
(1,065 |
) |
(155 |
) | ||
Future net cash flows |
|
90,160 |
|
35,470 |
| ||
10% annual discount |
|
(44,897 |
) |
(17,160 |
) | ||
Standardized measure of discounted future net cash flows |
|
$ |
45,263 |
|
$ |
18,310 |
|
The principle sources of change in the standardized measure of discounted future net cash flows are (in thousands):
|
|
For the Years Ended |
| ||||
|
|
2015 |
|
2014 |
| ||
Balance at beginning of year |
|
$ |
18,310 |
|
$ |
|
|
Sales of crude oil and natural gas |
|
(2,119 |
) |
(65 |
) | ||
Net change in prices and production costs |
|
(13,935 |
) |
|
| ||
Net changes in future development costs |
|
1 |
|
|
| ||
Extensions, discoveries, and other additions |
|
38,442 |
|
18,478 |
| ||
Revision of previous quantity estimates |
|
(3,612 |
) |
|
| ||
Previously estimated development costs incurred |
|
7,000 |
|
|
| ||
Net change in income taxes |
|
(499 |
) |
(92 |
) | ||
Accretion of discount |
|
1,840 |
|
|
| ||
Other |
|
(165 |
) |
(11 |
) | ||
Balance at end of year |
|
$ |
45,263 |
|
$ |
18,310 |
|
Note 12 - Events Subsequent to March 16, 2016
In June 2016, the Company and an affiliate of a stockholder (Stockholder Affiliate) entered into a services agreement whereby the Company will be charged up to $2,450 per day of services provided to the Company by a group of employees of the Stockholder Affiliate. This agreement can be terminated with 10 days notice.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 12 - Events Subsequent to March 16, 2016 (continued)
In June 2016, the Company and an investee company of a stockholder (Stockholder Investee Company) entered into a services agreement whereby the Company may charge the Stockholder Investee Company up to $6,850 per day of services provided to the Stockholder Investee Company by a group of employees of the Company. This agreement can be terminated with 10 days notice.
In July 2016, the Company entered into a senior revolving line-of-credit (the Credit Agreement) with Texas Capital Bank with a maximum commitment of $100,000,000. The Credit Agreement has an initial borrowing base of $20,000,000, which is subject to semi-annual redeterminations. Repayment of borrowings is required in the event that the redetermined borrowing base is less than outstanding borrowings or on the maturity date in July 2020. Interest accrues at either the Alternate Base Rate or LIBOR plus applicable margins ranging 2.00% to 4.00% based upon the borrowing base usage. The Company pays a commitment fee of 0.50% of the unused borrowing base. Amounts borrowed under the Credit Agreement are collateralized by substantially all of the Companys assets. As of September 2, 2016, the outstanding amount of borrowings under this Credit Agreement was $20,000,000. The Credit Agreement restricts the Companys ability to, among other items, incur additional indebtedness, sell assets, pay dividends; and requires the Company to enter into swaps, puts, or collars representing between 75% and 85% of projected proved developed producing volumes. The Credit Agreement contains certain financial covenants, including but not limited to, a maximum senior debt to EBITDAX (as defined in the Credit Agreement) ratio, a minimum current ratio, and a minimum interest coverage ratio.
In July 2016, the Company entered into one oil costless collar and one natural gas costless collar, details of which are as follows:
Commodity |
|
Settlement |
|
Volumes |
|
Floor Price |
|
Ceiling (Sold |
| ||
Oil WTI |
|
August 2016 |
|
34,272 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
September 2016 |
|
37,551 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
October 2016 |
|
33,810 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
November 2016 |
|
30,926 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
December 2016 |
|
29,093 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Natural Gas Henry Hub |
|
August 2016 |
|
157,065 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
September 2016 |
|
266,876 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
October 2016 |
|
251,654 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
November 2016 |
|
234,892 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
December 2016 |
|
215,413 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
On August 5, 2016, the Company acquired approximately 655 net acres (the Acquired Acreage) and interests in three well bores in exchange for $10.5 million and interests in certain acreage and surface interests. If the Company or its successor sells the Acquired Acreage within one year, the Company or its successor is obligated to pay additional consideration equal to 50% of the amount that exceeds a value of $11,000 per net acre.
ARRIS PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Note 12 - Events Subsequent to March 16, 2016 (continued)
On August 23, 2016, the Company entered into a stock purchase agreement with PDC Energy, Inc. with an effective date of July 1, 2016 (the Sale Agreement). The Sale Agreement calls for payments in both privately placed stock and cash and is expected to close in the fourth quarter of 2016. The purchase price for 100% of the Companys stock was valued at $864 million.
Arris Petroleum Corporation
Unaudited Consolidated Balance Sheets
as of June 30, 2016 and Audited Consolidated Balance Sheet as of December 31, 2015
and
Unaudited Consolidated Statements of Operations and Changes in Cash Flows
for the Six Month Periods Ended June 30, 2016 and 2015
and
Unaudited Condensed Changes in Stockholders Deficit
for the Six Month Period Ended June 30, 2016
ARRIS PETROLEUM CORPORATION
Consolidated Balance Sheets
|
|
June 30, |
|
December 31, |
| ||
|
|
2016 |
|
2015 |
| ||
|
|
(Unaudited) |
|
|
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and equivalents |
|
$ |
1,294,354 |
|
$ |
3,720,366 |
|
Revenue receivable |
|
4,430,177 |
|
660,452 |
| ||
JIB receivable |
|
249,162 |
|
1,277,575 |
| ||
Due from stockholder |
|
|
|
5,167,774 |
| ||
Affiliate receivable |
|
32,106 |
|
|
| ||
Other current assets |
|
266,109 |
|
414,726 |
| ||
Total current assets |
|
6,271,908 |
|
11,240,893 |
| ||
|
|
|
|
|
| ||
Property and equipment |
|
|
|
|
| ||
Oil and gas properties (successful efforts method) |
|
|
|
|
| ||
Proved properties |
|
117,594,525 |
|
76,050,422 |
| ||
Unproved properties |
|
51,571,119 |
|
58,904,693 |
| ||
Other property and equipment |
|
632,576 |
|
608,217 |
| ||
Accumulated depreciation, depletion, and amortization |
|
(14,321,291 |
) |
(5,552,375 |
) | ||
Property and equipment, net |
|
155,476,929 |
|
130,010,957 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
161,748,837 |
|
$ |
141,251,850 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders Deficit |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Trade payables |
|
$ |
10,452,283 |
|
$ |
15,800,636 |
|
Accrued liabilities |
|
1,722,388 |
|
5,749,725 |
| ||
Revenue payable |
|
2,156,338 |
|
421,064 |
| ||
Total current liabilities |
|
14,331,009 |
|
21,971,425 |
| ||
|
|
|
|
|
| ||
Asset retirement obligations |
|
1,039,444 |
|
689,292 |
| ||
Total liabilities |
|
15,370,453 |
|
22,660,717 |
| ||
|
|
|
|
|
| ||
Redeemable Convertible Senior Preferred Stock, $0.001 par value, 325,000 shares authorized, 207,182 (2016) and 175,043 (2015) shares issued and outstanding, liquidation preference of $233,086,435 (2016) and $192,218,143 (2015) |
|
233,086,435 |
|
192,218,143 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stockholders deficit |
|
|
|
|
| ||
Class A and Class B Common Stock, $0.001 par value, 210,000 shares authorized, 161,675 (2016 and 2015) shares issued and outstanding |
|
162 |
|
162 |
| ||
Additional paid-in capital |
|
(26,279,551 |
) |
(17,549,895 |
) | ||
Accumulated deficit |
|
(60,428,662 |
) |
(56,077,277 |
) | ||
Total stockholders deficit |
|
(86,708,051 |
) |
(73,627,010 |
) | ||
|
|
|
|
|
| ||
Total liabilities and stockholders deficit |
|
$ |
161,748,837 |
|
$ |
141,251,850 |
|
ARRIS PETROLEUM CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
|
|
Six Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2016 |
|
2015 |
| ||
|
|
|
|
|
| ||
Revenues |
|
|
|
|
| ||
Oil revenues |
|
$ |
7,616,977 |
|
$ |
327,337 |
|
Gas and natural gas liquids revenues |
|
1,338,890 |
|
464,835 |
| ||
Total oil and gas revenues |
|
8,955,867 |
|
792,172 |
| ||
|
|
|
|
|
| ||
Other revenue |
|
6,756 |
|
|
| ||
Total revenues |
|
8,962,623 |
|
792,172 |
| ||
|
|
|
|
|
| ||
Operating expenses |
|
|
|
|
| ||
Lease operating expenses |
|
1,502,197 |
|
451,350 |
| ||
Production taxes |
|
427,961 |
|
51,117 |
| ||
Depreciation, depletion, amortization, and accretion |
|
8,792,106 |
|
1,876,033 |
| ||
Workover expense |
|
112,276 |
|
5,030 |
| ||
Geological and geophysical |
|
1,802 |
|
1,262,559 |
| ||
General and administrative expense |
|
2,480,269 |
|
2,299,589 |
| ||
Total operating expenses |
|
13,316,611 |
|
5,945,678 |
| ||
|
|
|
|
|
| ||
Other income |
|
|
|
|
| ||
Interest and dividend income |
|
2,595 |
|
5,781 |
| ||
Other income |
|
8 |
|
|
| ||
Total other income |
|
2,603 |
|
5,781 |
| ||
|
|
|
|
|
| ||
Net loss |
|
$ |
(4,351,385 |
) |
$ |
(5,147,725 |
) |
ARRIS PETROLEUM CORPORATION
Condensed Consolidated Statement of Changes in Stockholders Deficit (Unaudited)
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
Total |
| |||||||
|
|
Class A Common Stock |
|
Class B Common Stock |
|
Paid-In |
|
Accumulated |
|
Stockholders |
| |||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Deficit |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - December 31, 2015 |
|
159,797 |
|
$ |
160 |
|
1,878 |
|
$ |
2 |
|
$ |
(17,549,895 |
) |
$ |
(56,077,277 |
) |
$ |
(73,627,010 |
) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Other |
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
(151 |
) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Accrued dividends on Redeemable Convertible Senior Preferred Stock |
|
|
|
|
|
|
|
|
|
(8,729,505 |
) |
|
|
(8,729,505 |
) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(4,351,385 |
) |
(4,351,385 |
) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance - June 30, 2016 |
|
159,797 |
|
$ |
|
160 |
|
1,878 |
|
$ |
2 |
|
$ |
(26,279,551 |
) |
$ |
(60,428,662 |
) |
$ |
(86,708,051 |
) | |
ARRIS PETROLEUM CORPORATION
Condensed Consolidated Statements of Changes in Cash Flows (Unaudited)
|
|
Six Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2016 |
|
2015 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Net loss |
|
$ |
(4,351,385 |
) |
$ |
(5,147,725 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
|
|
|
|
| ||
Depreciation, depletion, amortization, and accretion |
|
8,792,106 |
|
1,876,033 |
| ||
Changes in operating assets and liabilities |
|
|
|
|
| ||
Accounts receivable |
|
(2,741,312 |
) |
79,836 |
| ||
Affiliate receivable |
|
(32,106 |
) |
|
| ||
Other current assets |
|
148,617 |
|
74,668 |
| ||
Accounts payable and accrued liabilities |
|
(1,746,900 |
) |
135,501 |
| ||
Oil and gas revenue payable |
|
1,735,274 |
|
1,558 |
| ||
|
|
6,155,679 |
|
2,167,596 |
| ||
|
|
|
|
|
| ||
Net cash provided by (used in) operating activities |
|
1,804,294 |
|
(2,980,129 |
) | ||
|
|
|
|
|
| ||
Cash flows from investing activities |
|
|
|
|
| ||
Investment in oil and gas properties |
|
(41,512,357 |
) |
(28,531,315 |
) | ||
Acquisition of oil and gas properties |
|
|
|
(4,760,000 |
) | ||
Purchase of furniture and equipment |
|
(24,359 |
) |
(29,563 |
) | ||
Net cash used in investing activities |
|
(41,536,716 |
) |
(33,320,878 |
) | ||
Cash flows from financing activities |
|
|
|
|
| ||
Proceeds from issuance of common stock |
|
|
|
1,878 |
| ||
Proceeds from issuance of Redeemable Convertible Senior Preferred Stock |
|
37,306,561 |
|
20,768,065 |
| ||
Redemption of Redeemable Convertible Preferred Stock |
|
|
|
(830,712 |
) | ||
Redemption of common stock |
|
|
|
(14,538 |
) | ||
Other |
|
(151 |
) |
|
| ||
Net cash provided by financing activities |
|
37,306,410 |
|
19,924,693 |
| ||
|
|
|
|
|
| ||
Net decrease in cash and cash equivalents |
|
(2,426,012 |
) |
(16,376,314 |
) | ||
|
|
|
|
|
| ||
Cash and cash equivalents - beginning of year |
|
3,720,366 |
|
23,549,819 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents - end of year |
|
$ |
1,294,354 |
|
$ |
7,173,505 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
| ||
Current liabilities related to oil and gas property additions |
|
$ |
11,380,208 |
|
$ |
1,173,537 |
|
Capitalized asset retirement obligations |
|
$ |
326,962 |
|
$ |
143,567 |
|
Acquired asset retirement obligations |
|
$ |
|
|
$ |
272,022 |
|
Accrued Redeemable Convertible Senior Preferred Stock dividends |
|
$ |
8,729,505 |
|
$ |
4,651,356 |
|
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Description of Business and Summary of Significant Accounting Policies
Arris Petroleum Corporation (the Company) is an independent energy company with substantially all of its producing oil and gas property located in the Permian Basin.
The Company was formed in the state of Delaware on October 16, 2013 with the purpose of acquiring and developing oil and gas properties located in the United States and commenced substantial operations in 2014.
Interim Financial Information
In the Companys opinion, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Accordingly, certain notes and other financial information included in audited financial statements have been condensed or omitted. The information presented in these interim period financial statements should be read in conjunction with the Companys audited consolidated financial statements and notes thereto for the year ended December 31, 2015. Results of operations and cash flows for the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year or any other future period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Arris Petroleum Corporation and its wholly owned subsidiaries, Arris Operating Company, LLC; Arris Delaware Basin, LLC; Kimmeridge West Texas, LLC; and Arris Reeves Infrastructure, LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The impact of oil and gas prices has a significant influence on estimates made by management. Changes in oil and gas prices directly affect the economic limits of estimated oil and gas reserves. These economic limits have significant effects upon estimated reserve quantities and valuations. These estimates are the basis for the calculation of depreciation, depletion, and amortization for the oil and gas properties and the assessment as to whether an impairment of such properties is required. In addition, significant estimates include the estimated cost and timing related to asset retirement obligations and the recoverability of unproved properties.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.
Accounts Receivable
The Company accrues for oil and gas sales based on actual production dates. Joint interest billings represent monthly billings to working interest owners in the properties the Company operates. These receivables are due within 30 days of billing, with a right of offset against revenues due to working interest owners in the properties. No interest is charged on past-due balances. All receivables are reviewed periodically, and appropriate actions are taken on past-due amounts, if any.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
The Company grants credit in the normal course of business to oil and gas purchasers in the United States. Collectibility of the Companys oil and gas sales is dependent upon the financial condition of the Companys purchasers as well as general economic conditions of the industry. As of and for the six months ended June 30, 2016, three purchasers accounted for 97% of oil and gas sales and two purchasers accounted for 97% of revenue receivable. For the six months ended June 30, 2015, three purchasers accounted for 100% of oil and gas sales.
Accounting for Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and gas properties. The Company does not capitalize general and administrative expenses directly identifiable with such activities. Costs of unsuccessful exploration efforts are expensed in the period it is determined that such costs are not recoverable through future net revenues. Geological and geophysical costs and delay rentals are expensed as incurred. The cost of development wells are capitalized whether productive or non-productive. Upon the sale of proved properties, the cost and accumulated depletion are removed from the accounts, and any gain or loss is reflected in the consolidated statement of operations. If it is determined that the sale of proved properties did not significantly affect the units-of-production depletion rate, the sale is treated as a normal retirement with no gain or loss recognized.
Capitalized costs for unproved oil and gas properties are assessed at least annually to determine if an impairment in value needs to be recognized. There were no unproved property impairments during the six months ended June 30, 2016 and the year ended December 31, 2015. For sales of partial interests in unproved properties, the Company treats the proceeds as a recovery of costs with no gain recognized until all costs have been recovered. During the year ended December 31, 2015 the Company recognized a loss of $733,000, related to the sales of an entire interest in unproved properties. No sales of unproved properties occurred during the six months ended June 30, 2016.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Accounting for Oil and Gas Properties (continued)
Depreciation, depletion, and amortization of proved oil and gas properties is calculated using the units-of-production method based on proved reserves and estimated salvage values. For the six months ended June 30, 2016 and 2015, depletion expense was approximately $8,685,506 and $1,841,630, respectively.
The Company assesses the recoverability of its capitalized costs for its proved oil and gas properties periodically, or when circumstances indicate there is a need for such review. To determine if a depletable unit (generally defined as an individual field) is impaired, the Company compares the carrying value of the depletable unit to the undiscounted future net cash flows by applying estimated future prices over the economic lives of the reserves. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the estimated fair value of the depletable unit will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of expected future cash flows computed by applying estimated future oil and gas prices, as determined by management, to estimated future production of oil and gas reserves over the economic lives of the reserves and the application of a discount rate commensurate with the risk associated with realizing the expected cash flows. The discount rate is a rate that management believes is representative of current market conditions and includes estimates for the risk premium. Due to low oil and gas prices, the Company recorded proved property impairments of $38,661,606 during the fourth quarter of 2015. No proved property impairments were recorded during the three and six months ended June 30, 2016.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from five to seven years.
Revenue Recognition
Natural gas revenues are recognized when the title and risk pass to the purchaser. The Company records its share of revenues based on its share of proceeds. The Company sells the majority of its products soon after production at various locations, including the wellhead, at which time title and risk of loss pass to the buyer.
Gas imbalances occur when the Company sells more or less than its entitled ownership percentage of total gas production. Any amount received in excess of the Companys share is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable.
At June 30, 2016 and December 31, 2015, the Company did not have any material gas imbalances.
Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title is transferred, and collectibility is assured.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The Companys temporary differences result primarily from depletion and impairments of oil and gas properties under the successful efforts method of accounting.
The Companys deferred income taxes include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed for the six months ended June 30, 2016 and 2015 and the year ended December 31, 2015.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards when all performance and service conditions are probable of being satisfied (generally upon a liquidation event).
Note 2 - Acquisitions and Divestitures
In June 2015, the Company entered into a purchase and sale agreement with an unrelated party to acquire the right, title, and interest in and to several oil and gas properties totaling $4,760,000. The Company recorded the estimated fair value of the identifiable assets acquired as of the acquisition date.
See below for a summary of the assets acquired and liabilities assumed with this transaction:
Purchase price |
|
|
| |
Cash consideration |
|
$ |
4,760,000 |
|
|
|
|
| |
Recognized amounts of identifiable assets and liabilities acquired |
|
|
| |
Proved oil and gas properties |
|
$ |
3,561,922 |
|
Pipeline and gas gathering equipment |
|
951,575 |
| |
Unproved properties |
|
518,525 |
| |
Asset retirement obligation assumed |
|
(272,022 |
) | |
Total identifiable net assets |
|
$ |
4,760,000 |
|
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 2 - Acquisitions and Divestitures (continued)
To determine the fair value of the proved oil and gas properties acquired in the business combination, the Company used an income approach based on a discounted cash flow model and made market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The Company determined the appropriate discount rates used for the discounted cash flow analyses by using a weighted-average cost of capital from a market participant perspective plus property-specific risk premiums for the assets acquired. The pipeline and gas gathering equipment acquired is included in proved oil and gas properties and is subject to units-of-production depletion and impairment at the depletable unit.
In December 2015, the Company entered into a purchase and sale agreement with an unrelated party to divest certain unproved oil and gas properties. The properties were sold for $1,426,000 in cash, resulting in a loss of $733,000.
Note 3 - Fair Value Measurements
The Company applies the authoritative guidance applicable to all financial assets and liabilities required to be measured and reported at fair value on a recurring basis, as well as to non-financial assets and liabilities measured at fair value on a non-recurring basis, including impairments of proved oil and gas properties and other long-lived assets and asset retirement obligations initially measured at fair value. The fair value of an asset or liability is the amount that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions of what market participants would use in valuing the asset or liability based on the best information available in the circumstances.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 3 - Fair Value Measurements (continued)
Financial and non-financial assets and liabilities are classified within the valuation hierarchy based upon the lowest level of input that is significant to the fair value measurement. The Companys policy is to recognize transfers in and out of the fair value hierarchy as of the end of the reporting period in which the event or change in circumstances caused the transfer. The hierarchy is organized into three levels based on the reliability of the inputs as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Quoted prices in active markets for similar assets and liabilities and inputs, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs or significant value drivers are observable; or
Level 3: Unobservable pricing inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.
Recurring Fair Value Measurements
The Company did not have any assets or liabilities that were required to be measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015.
Non-Recurring Fair Value Measurements
The following table presents the Companys non-financial assets and liabilities that were measured at fair value on a non-recurring basis during the period ended June 30, 2016 by level within the fair value hierarchy:
Description |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Liability |
|
|
|
|
|
|
|
|
| ||||
Asset retirement obligations |
|
$ |
|
|
$ |
|
|
$ |
326,962 |
|
$ |
326,962 |
|
The following table presents the Companys non-financial assets and liabilities that were measured at fair value on a non-recurring basis during the year ended December 31, 2015 by level within the fair value hierarchy:
Description |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Asset |
|
|
|
|
|
|
|
|
| ||||
Proved oil and gas properties: |
|
|
|
|
|
|
|
|
| ||||
Culberson field |
|
$ |
|
|
$ |
|
|
$ |
9,799,797 |
|
$ |
9,799,797 |
|
Liability |
|
|
|
|
|
|
|
|
| ||||
Asset retirement obligations |
|
$ |
|
|
$ |
|
|
$ |
363,084 |
|
$ |
363,084 |
|
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 3 - Fair Value Measurements (continued)
Non-Recurring Fair Value Measurements (continued)
Proved oil and gas properties are recorded at fair value if the carrying value exceeds undiscounted cash flows. The Company uses Level 3 inputs and the income valuation technique to measure the fair value of proved properties using discount rates and year-end commodity future prices selected by the Companys management. The discount rate used was 10%, which is a rate that management believes is representative of current market conditions and includes estimates for the risk premium. The price forecast used for crude oil was the December 31, 2015 New York Mercantile (NYMEX) WTI price, adjusted for an estimated differential. The price forecast used for natural gas was the December 31, 2015 NYMEX Henry Hub price, adjusted for an estimated differential. During the year ended December 31, 2015, the Company valued its Culberson field at $9,799,797, which resulted in an impairment of $38,661,606. The impairment was driven primarily by the significant decline in commodity prices during the year ended December 31, 2015.
Fair value used in the initial recognition of asset retirement obligations and any subsequent upward changes in estimates is determined under the income approach using the present value of expected future remediation and dismantlement costs, incorporating the Companys best estimate of inputs used by industry participants when valuing similar liabilities. Accordingly, the fair value is based on unobservable pricing inputs and, therefore, is considered a Level 3 measurement in the fair value hierarchy. During the period ended June 30, 2016 and the year ended December 31, 2015, the Company recorded asset retirement obligations of $326,962 and $363,084, respectively. See Note 4 for additional information.
Other assets and liabilities not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and revenue payable. The consolidated financial statement carrying amounts of these items approximate their fair values due to their short-term nature.
Note 4 - Asset Retirement Obligations
The Company follows the provisions of ASC Topic 410, Asset Retirement and Environmental Obligations. This topic requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the asset. The asset retirement obligations are allocated to operating expenses by using a systematic, rational method. The Companys asset retirement obligations relate to the plugging and abandoning of its oil and gas wells and the reclamation of its well locations. The revisions made during the year ended December 31, 2015 were due to changes in estimated abandonment costs obtained by the Company based on current economic factors.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4 - Asset Retirement Obligations (continued)
A reconciliation of the changes in the Companys liabilities are as follows:
|
|
For the Six |
|
For the Year |
| ||
Beginning asset retirement obligations |
|
$ |
689,292 |
|
$ |
45,680 |
|
Liabilities acquired |
|
|
|
272,022 |
| ||
Liabilities incurred |
|
326,962 |
|
219,517 |
| ||
Revisions |
|
|
|
143,567 |
| ||
Accretion |
|
23,190 |
|
8,506 |
| ||
|
|
|
|
|
| ||
Long-term asset retirement obligations |
|
$ |
1,039,444 |
|
$ |
689,292 |
|
Note 5 - Commitments and Contingencies
Litigation
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 5 - Commitments and Contingencies (continued)
Shut-In Wells
In November 2015, the third-party gas plant servicing the Companys wells in Culberson County was closed due to a gas processing plant explosion. As a result, those wells were shut-in temporarily pending the reopening of the plant. The plant reopened during the second quarter of 2016.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6 - Redeemable Convertible Senior Preferred Stock
The Company is authorized to issue up to 350,000 preferred shares, par value $0.001. Of the 350,000 preferred shares authorized, the Company has designated 325,000 shares as Redeemable Convertible Senior Preferred Stock (Senior Preferred Stock). On January 14, 2016 and March 14, 2016, the Company issued an additional 21,000 shares and 11,139 shares, respectively, of Redeemable Convertible Preferred Stock for $1,000 per share. As of June 30, 2016 and December 31, 2015, there were 207,182 and 175,043 shares of Senior Preferred Stock issued and outstanding, respectively, issued at an original issuance price of $1,000 per share (Original Issue Price).
During the year ended December 31, 2015, the Company redeemed 774 Senior Preferred shares for $773,772, plus the related cumulative preferred return of $56,946, as part of separation agreements entered into with certain members of management.
At December 31, 2015, the Company had $5,167,774 recorded as due from stockholders on the accompanying consolidated balance sheet relating to shares issued in December 2015. The balance of $5,167,774 was received by the Company on January 4, 2016.
Voting
The Senior Preferred Stock holders are entitled to vote as a separate class on certain matters, including (i) any amendment to the certificate of incorporation that would adversely affect the rights and preferences of Senior Preferred Stock; (ii) adoption of a Certification of Designation with respect to any series of preferred shares; (iii) any amendment to the Bylaws of the Company proposed by the holders of the Common Stock; and (iv) consummation by the Company of any contract for a liquidation event, as defined (Liquidation Event). In instances where both holders of Common Stock and Senior Preferred Stock have voting rights with respect to a matter for which a vote is being taken, holders will vote as separate classes. Approval of such matter will require majority approval of each voting class.
Conversion
Holders of the Senior Preferred Stock may elect to convert some or all of the Senior Preferred Stock within 30 days after the closing of an initial public offering (IPO) into the class of stock in the IPO at the IPO price.
Dividends
Holders of the Senior Preferred Stock are entitled to a cumulative preferred return of 8% per annum, compounded continually on the Adjusted Capital Balance with respect to such share through the earlier of (i) the redemption date of such share or (ii) a Liquidation Event, as defined. The Adjusted Capital Balance is defined as (i) the Original Issue Price, less (ii) the aggregate amount of all distributions made by the Company with respect to such share prior to such date, if any. As of June 30, 2016 and December 31, 2015, the Company recorded cumulative accrued Senior Preferred Stock dividends of $25,904,894 and $17,175,389, respectively.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6 - Redeemable Convertible Senior Preferred Stock (continued)
Liquidation
In the event of liquidation, dissolution, or winding up of the Company, the holders of the Senior Preferred Stock will be paid in cash for each share of Senior Preferred Stock held in an amount equal to the Original Issue Price, plus all accrued unpaid dividends (the Liquidation Preference), before any payment is made to any Common Stock holders. If the assets of the Company available for distribution to the holders of shares of the Senior Preferred Stock are insufficient to permit payment in full to such holders of the sums that such holders are entitled to receive in such case, then all of the assets available for distribution to holders of shares of the Senior Preferred Stock will be distributed among and paid to such holders ratably in proportion to the amounts that would be payable if such assets were sufficient to permit full payment.
Redemption
The Company may, but is not obligated to, redeem all or any portion of the Senior Preferred Stock at the Liquidation Preference. Upon a Liquidation Event, the Company is required to repurchase the Senior Preferred Stock with the proceeds received. Due to this conditional redemption feature, the Senior Preferred Stock has been classified outside of permanent equity.
Note 7 - Stockholders Deficit
The Company is authorized to issue up to 210,000 shares of Common Stock, par value $0.001, which is divided into two classes: Class A Common Stock (Class A Stock) and Class B Common Stock (Class B Stock) (collectively, Common Stock). There were 159,797 Class A Stock shares and 1,878 Class B Stock shares issued and outstanding as of June 30, 2016 and December 31, 2015. During the year ended December 31, 2015, the Company redeemed 11,768 Class A Stock shares and 2,770 Class B Stock shares for $1 per share as part of separation agreements entered into with certain members of management.
Voting
Each holder of Common Stock will be entitled to one vote for each share.
Conversion
Upon achievement of the Required Investor Return, each outstanding share of Class B Stock will be automatically converted into Class A Stock.
If, immediately prior to the effective date of an IPO, the Required Investor Return has not been achieved, all outstanding shares of Class B Stock will automatically convert into fractional shares of Class A Stock based upon the actual rate of return achieved through that date.
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Dividends
Holders of the Common Stock shall not be entitled to dividends until the Senior Preferred Stock has been redeemed at the Liquidation Preference and, after that, only when declared by the Board of Directors. When and if dividends are properly declared on the Common Stock:
a. The holders of the outstanding shares of Class A Stock will be entitled to receive dividends with respect to each share of Class A Stock, prior to the payment of any dividend or other distribution on shares of Class B Stock, until a required investor return (Required Investor Return) has been achieved and paid in full.
b. Once the Required Investor Return has been achieved and paid in full, the holders of all Common Stock will be entitled to receive all further dividends from the Company.
c. Thereafter, all dividends with respect to shares of each class of Common Stock will be paid pro rata and in like matter to all of the holders entitled thereto.
Liquidation
In the event of liquidation, dissolution, or winding up of the Company, the assets of the Company legally available to the stockholders, after payment in full of the Liquidation Preference to the Senior Preferred Stock, will be distributed to the holders of Common Stock, first to the holders of Class A Stock, until the Required Investor Return has been achieved and paid in full. Once this is achieved, the holders of Common Stock will be entitled to all residual assets of the Company pro rata without limit.
Management Incentive Units
The Class B Stock is available to management only, and a portion of Class A Stock is also held by management (Management Incentive Units). The number of Class A Stock and Class B Stock shares held by management as of June 30, 2016 and December 31, 2015 was 7,990 and 1,879, respectively. The Management Incentive Units were purchased with cash at $1.00 per share and are generally subject to vesting over four years. If subsequent issuances of Class A Stock and Class B Stock occur, management is entitled to maintain their relative percentage of Class A Stock and Class B Stock without further consideration, subject to the original vesting schedule.
Note 8 - Income Taxes
The Company has pre-tax net operating loss carryforwards as of December 31, 2015 of $25,964,982, which expire before 2036. Internal Revenue Code Section 382 imposes limitations on a Companys ability to recognize certain deferred tax assets upon a change of control of the Company. During 2014, the Company had a change of control event under Section 382, which will limit its ability to utilize its deferred tax assets, including net operating loss carryforwards, to offset future taxable income. The approximate amount of net operating losses subject to the Section 382 limitation is $650,000.
A valuation allowance is provided when it is more likely than not that all or some of the deferred income tax assets will not be realized. Based upon cumulative losses since inception and projections of future taxable income, the Company has recorded a valuation allowance of $21,306,031 at December
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
31, 2015. During the three and six months ended June 30, 2016, the effective tax rate was zero due to the full valuation allowance on the deferred tax assets. For the year ended December 31, 2016, the Company estimates the annual effective tax rate to be zero due to the full valuation allowance on the deferred tax assets.
The Company does not believe that it has any uncertain tax positions. It is the Companys policy to recognize interest and penalties related to uncertain tax benefits in income tax expense.
Note 9 - Related Party Transactions
In June 2016, the Company and an affiliate of a stockholder (Stockholder Affiliate) entered into a services agreement whereby the Company will be charged up to $2,450 per day of services provided to the Company by a group of employees of the Stockholder Affiliate. This agreement can be terminated with 10 days notice.
In June 2016, the Company and an investee company of a stockholder (Stockholder Investee Company) entered into a services agreement whereby the Company may charge the Stockholder Investee Company up to $6,850 per day of services provided to the Stockholder Investee Company by a group of employees of the Company. This agreement can be terminated with 10 days notice.
Note 10 Subsequent Events
In July 2016, the Company entered into a senior revolving line-of-credit (the Credit Agreement) with Texas Capital Bank with a maximum commitment of $100,000,000. The Credit Agreement has an initial borrowing base of $20,000,000, which is subject to semi-annual redeterminations. Repayment of borrowings is required in the event that the redetermined borrowing base is less than outstanding borrowings or on the maturity date in July 2020. Interest accrues at either the Alternate Base Rate or LIBOR plus applicable margins ranging 2.00% to 4.00% based upon the borrowing base usage. The Company pays a commitment fee of 0.50% of the unused borrowing base. Amounts borrowed under the Credit Agreement are collateralized by substantially all of the Companys assets. As of September 2, 2016, the outstanding amount of borrowings under this Credit Agreement was $20,000,000. The Credit Agreement restricts the Companys ability to, among other items, incur additional indebtedness, sell assets, pay dividends; and requires the Company to enter into swaps, puts, or collars representing between 75% and 85% of projected proved developed producing volumes. The Credit Agreement contains certain financial covenants, including but not limited to, a maximum senior debt to EBITDAX (as defined in the Credit Agreement) ratio, a minimum current ratio, and a minimum interest coverage ratio.
In July 2016, the Company entered into one oil costless collar and one natural gas costless collar, details of which are as follows:
ARRIS PETROLEUM CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Commodity |
|
Settlement |
|
Volumes |
|
Floor |
|
Ceiling (Sold |
| ||
Oil WTI |
|
August 2016 |
|
34,272 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
September 2016 |
|
37,551 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
October 2016 |
|
33,810 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
November 2016 |
|
30,926 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Oil WTI |
|
December 2016 |
|
29,093 Bbls |
|
$ |
42.00 |
|
$ |
45.75 |
|
Natural Gas Henry Hub |
|
August 2016 |
|
157,065 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
September 2016 |
|
266,876 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
October 2016 |
|
251,654 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
November 2016 |
|
234,892 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
Natural Gas Henry Hub |
|
December 2016 |
|
215,413 Mcf |
|
$ |
2.10 |
|
$ |
3.65 |
|
On August 5, 2016, the Company acquired approximately 655 net acres (the Acquired Acreage) and interests in three well bores in exchange for $10.5 million and interests in certain acreage and surface interests. If the Company or its successor sells the Acquired Acreage within one year, the Company or its successor is obligated to pay additional consideration equal to 50% of the amount that exceeds a value of $11,000 per net acre.
On August 23, 2016, the Company entered into a stock purchase agreement with PDC Energy, Inc. with an effective date of July 1, 2016 (the Sale Agreement). The Sale Agreement calls for payments in both privately placed stock and cash and is expected to close in the fourth quarter of 2016. The purchase price for 100% of the Companys stock was valued at $864 million.