Acacia Research Corp 8-K/A, filed Jul 3, 2024
Acacia Research Corp (ACTG)
About this 8-K/A
Acacia Research Corp filed this 8-K/A on July 3, 2024, reporting on events of April 17, 2024.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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EXPLANATORY NOTE
As previously disclosed in the Current Report on Form 8-K filed by Acacia Research Corporation (the “Company”) on April 17, 2024 with the U.S. Securities and Exchange Commission (the “Original Form 8-K”), on April 17, 2024 (the “Closing Date”), BE Anadarko II, LLC (“BE Anadarko”), a subsidiary of Benchmark Energy II, LLC (together with its subsidiaries, “Benchmark”), a majority-owned subsidiary of the Company, consummated the previously announced transactions contemplated in the Purchase and Sale Agreement (the “Purchase Agreement”), dated February 16, 2024, by and among Benchmark and Revolution Resources II, LLC, Revolution II NPI Holding Company, LLC, Jones Energy, LLC, Nosley Assets, LLC, Nosley Acquisition, LLC, and Nosley Midstream, LLC (collectively, “Revolution”). The Purchase Agreement was reported in the Current Report on Form 8-K filed by the Company on February 20, 2024 with the Securities and Exchange Commission. Pursuant to the Purchase Agreement, on the Closing Date Benchmark purchased and Revolution sold certain upstream assets and related facilities (the “Assets”) in Texas and Oklahoma, upon the terms and subject to the conditions of the Purchase Agreement (such purchase and sale, together with the other transactions contemplated by the Purchase Agreement, the “Transaction”). Revolution II WI Holding Company, LLC was the holding company for Revolution and the Assets. The Assets represent substantially all of the remaining assets and operations owned by Revolution II WI Holding Company, LLC as of the Closing Date.
The Company is filing this Amendment to amend and supplement the Original Form 8-K to provide the financial statements and pro forma financial information relating to the Transaction required under Item 9.01 of Form 8-K as set forth below, which are incorporated herein by reference, and which were excluded from the Original Form 8-K in reliance on the instructions to such item. This Amendment reports no other updates or amendments to the Original Form 8-K. The pro forma financial information included in this Amendment has been presented for informational purposes only, as required by Form 8-K. It does not purport to represent the actual results of operations that the Company would have achieved had the Transaction been completed prior to the periods presented in the pro forma financial information and is not intended to project the future results of operations that the Company may achieve after completion of the Transaction.
| Item 9.01. |
Financial Statements and Exhibits. |
| (a) | Financial statements of businesses acquired. |
The Audited Consolidated Financial Statements of Revolution II WI Holding Company, LLC as of and for the year ended December 31, 2023, and the notes related thereto, are filed as Exhibit 99.1 and incorporated herein by reference.
| (b) | Pro forma financial information. |
The Unaudited Pro Forma Condensed Combined Financial Statements of the Company as of and for the year ended December 31, 2023, and the notes related thereto, are filed as Exhibit 99.2 and incorporated herein by reference. The Unaudited Pro Forma Condensed Combined Financial Statements give effect to the Transaction on the basis, and subject to the assumptions, set forth in accordance with Article 11 of Regulation S-X.
| (d) | Exhibits |
| Exhibit No. | Description of Exhibit | |
| 23.1 | Consent of BDO USA, P.C. | |
| 23.2 | Consent of Cawley, Gillespie & Associates, Inc. | |
| 99.1 | Audited Consolidated Financial Statements of Revolution II WI Holding Company, LLC as of and for the year ended December 31, 2023. | |
| 99.2 | Unaudited Pro Forma Condensed Combined Financial Statements of Acacia Research Corporation as of and for the year ended December 31, 2023. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Dated: July 3, 2024 | ||
| ACACIA RESEARCH CORPORATION | ||
| By: | /s/Jason Soncini | |
| Name: | Jason Soncini | |
| Title: | General Counsel | |
Exhibit 23.1
Consent of Independent Auditor
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-249984) and Forms S-8 (No. 333-189135, No. 333-217878, No. 333-279975 and No. 333-279976) of Acacia Research Corporation of our report dated April 29, 2024, relating to the consolidated financial statements of Revolution II WI Holding Company, LLC, appearing in Acacia Research Corporation’s Current Report on Form 8-K/A filed July 3, 2024.
| /s/ BDO USA, P.C. | |
| Houston, Texas |
July 3, 2024
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the inclusion in Amendment No. 1 to Current Report on Form 8-K of Acacia Research Corporation and incorporation by reference in Acacia Research Corporation’s Registration Statements on Form S-3 (File No. 333-249984) and Form S-8 (File Nos. 333-189135, 333-217878, 333-279975 and 333-279976) of all references to our firm and information from our estimated net proved reserves for the period ended December 31, 2023, and the changes in the net proved reserves for the period ended December 31, 2023, relating to the oil and gas reserves of Revolution Resources II, LLC.
| CAWLEY, GILLESPIE & ASSOCIATES, INC. | ||
| Texas Registered Engineering Firm | ||
| By: | /s/ W. Todd Brooker, P.E. | |
| Name: | W. Todd Brooker, P.E. | |
| Title: | President | |
Austin, Texas
July 3, 2024
Exhibit 99.1
Revolution II WI Holding Company, LLC and Subsidiaries
(A Delaware Limited Liability Company)
Consolidated Financial Statements
As of and for the Year Ended December 31, 2023
REVOLUTION II WI HOLDING COMPANY, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
Page
| INDEPENDENT AUDITOR’S REPORT | 3-4 |
| CONSOLIDATED FINANCIAL STATEMENTS | |
| Consolidated Balance Sheet as of December 31, 2023 | 5 |
| Consolidated Statement of Operations for the year ended December 31, 2023 | 6 |
| Consolidated Statement of Changes in Members’ Equity for the year ended December 31, 2023 | 7 |
| Consolidated Statement of Cash Flows for the year ended December 31, 2023 | 8 |
| Notes to Consolidated Financial Statements | 9-24 |
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Independent Auditor’s Report
Members of Management
Revolution II WI Holding Company, LLC
Oklahoma City, Oklahoma
Opinion
We have audited the consolidated financial statements of Revolution II WI Holding Company, LLC and its subsidiaries (the “Company”), which comprise the consolidated balance sheet as of December 31, 2023, and the related consolidated statement of operations, changes in members’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for 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.
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are available to be issued.
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Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS, we:
| · | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| · | Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. |
| · | Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Accordingly, no such opinion is expressed. |
| · | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements. |
| · | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
/s/ BDO USA, P.C.
Houston, TX
April 29, 2024
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REVOLUTION II WI HOLDING COMPANY, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
CONSOLIDATED BALANCE SHEET
ASSETS
| December 31, 2023 | ||||
| ($ in thousands) | ||||
| Current Assets | ||||
| Cash | $ | 2,738 | ||
| Accounts receivable: | ||||
| Oil and gas | 9,105 | |||
| Joint interest billings and other | 2,087 | |||
| Inventory | 4,510 | |||
| Derivative assets | 597 | |||
| Prepaid and other current assets | 8,022 | |||
| Total Current Assets | 27,059 | |||
| Long- Term Assets | ||||
| Oil and gas properties, successful efforts method | 149,927 | |||
| Less: Accumulated depletion, depreciation and amortization | (37,918 | ) | ||
| Oil and gas properties, net | 112,009 | |||
| Derivative assets | 32 | |||
| Other assets | 1,672 | |||
| Total Assets | $ | 140,772 | ||
LIABILITIES AND MEMBERS' EQUITY
| Current Liabilities | ||||
| Accounts payable | $ | 5,089 | ||
| Revenue payable | 7,023 | |||
| Accrued liabilities | 4,993 | |||
| Derivative liabilities | 7,655 | |||
| Asset retirement obligation | 219 | |||
| Other current liabilities | 619 | |||
| Total Current Liabilities | 25,598 | |||
| Long- Term Liabilities | ||||
| Debt | 52,500 | |||
| Asset retirement obligation | 23,553 | |||
| Derivative liabilities | 3,338 | |||
| Other long-term liabilities | 326 | |||
| Total Liabilities | 105,315 | |||
| Commitments and Contingencies (Note 9) | ||||
| Members' Equity | 35,457 | |||
| Total Liabilities and Members' Equity | $ | 140,772 | ||
The accompanying notes are an integral part of these consolidated financial statements.
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REVOLUTION II WI HOLDING COMPANY, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENT OF OPERATIONS
| Year ended December 31, 2023 | ||||
| ($ in thousands) | ||||
| Revenues | ||||
| Oil sales | $ | 49,363 | ||
| Natural gas sales | 4,918 | |||
| Natural gas liquids sales | 23,707 | |||
| Other income | 1,511 | |||
| Total Revenues | 79,499 | |||
| Costs and Expenses | ||||
| Production costs | 29,577 | |||
| Production taxes | 4,291 | |||
| Exploration expense | 23 | |||
| Depletion, depreciation, amortization and accretion | 12,941 | |||
| Loss on divestiture of oil and gas properties | 56,803 | |||
| General and administrative | 365 | |||
| Other | 47 | |||
| Total Costs and Expenses | 104,047 | |||
| Operating Loss | (24,548 | ) | ||
| Other Income (Expense) | ||||
| Gain on investment in Revolution II NPI Holdings Co | 3,162 | |||
| Interest expense | (6,582 | ) | ||
| Gain on derivatives, net | 15,001 | |||
| Other income, net | 35 | |||
| Total Other Income | 11,616 | |||
| Net Loss | $ | (12,932 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
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REVOLUTION II WI HOLDING COMPANY, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY
| Total Members' Equity | ||||
| ($ in thousands) | ||||
| Balance at December 31, 2022 | $ | 71,818 | ||
| Distributions to members | (23,429 | ) | ||
| Net Loss | (12,932 | ) | ||
| Balance at December 31, 2023 | $ | 35,457 | ||
The accompanying notes are an integral part of these consolidated financial statements.
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REVOLUTION II WI HOLDING COMPANY, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
| Year ended December 31, 2023 | ||||
| ($ in thousands) | ||||
| Cash Flows from Operating Activities | ||||
| Net Loss | $ | (12,932 | ) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||
| Depletion, depreciation, amortization and accretion | 12,941 | |||
| (Gain) on derivatives, net | (15,001 | ) | ||
| Settlements on derivatives | (27,269 | ) | ||
| Amortization of deferred financing costs | 484 | |||
| Loss on divestiture | 56,803 | |||
| (Gain) on investment in Revolution II NPI Holding Co | (3,162 | ) | ||
| Other | (282 | ) | ||
| Decrease in assets: | ||||
| Accounts receivable | 12,934 | |||
| Inventory | 130 | |||
| Other assets | 1,125 | |||
| Increase (decrease) in liabilities: | ||||
| Accounts payable and accrued liabilities | 5,836 | |||
| Revenue payable | (8,229 | ) | ||
| Other liabilities | (2,581 | ) | ||
| Net cash provided by operating activities | 20,797 | |||
| Cash Flows from Investing Activities | ||||
| Additions to oil and gas properties | (37,821 | ) | ||
| Distribution from Revolution II NPI Holding Co | 47,522 | |||
| Proceeds from disposition of assets | 30,960 | |||
| Additions to other property and equipment | (423 | ) | ||
| Net cash provided by investing activities | 40,238 | |||
| Cash Flows from Financing Activities | ||||
| Distributions to members | (23,429 | ) | ||
| Advances on long-term credit facility | 17,000 | |||
| Payments on long-term credit facility | (59,500 | ) | ||
| Debt issuance costs | (86 | ) | ||
| Net cash used in financing activities | (66,015 | ) | ||
| Net decrease in cash | (4,981 | ) | ||
| Cash at beginning of period | 7,719 | |||
| Cash at end of period | $ | 2,738 | ||
| Supplemental Cash Flow Information | ||||
| Cash paid for interest | $ | 5,761 | ||
| Supplemental Disclosure of non-cash investing activities | ||||
| Change in payables related to capital | $ | (2,885 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
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REVOLUTION II WI HOLDING COMPANY, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND BUSINESS |
Revolution II WI Holding Company, LLC (the “Company”) and its subsidiaries own and operate oil and natural gas properties in Oklahoma. The Company was established as a Delaware limited liability company on November 12, 2019 for the purpose of acquiring and developing interests in oil and natural gas properties.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation — The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidations.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable — Accounts receivable is primarily comprised of receivables from oil, natural gas, and natural gas liquids (“NGL”) purchasers and joint interest owners on properties the Company operates. Accounts receivable from the sale of oil, natural gas and NGLs is based on estimates of the volumetric sales and prices the Company believes it will receive. The Company had an allowance of approximately $0.6 million for expected credit losses at December 31, 2023.
Inventory — The Company’s inventory represents tangible assets such as drilling pipe, tubing, casing and operating supplies used in the Company’s future drilling program or repair operations. The Company accounts for its inventory using the first-in, first-out method and is valued at the lower of cost or net realizable value.
Derivative Instruments — The Company has elected not to designate its derivatives as hedging instruments. As such these derivatives are reported in the accompanying consolidated balance sheet at fair value and changes in fair value of these derivatives are recognized immediately in current period earnings.
Oil and Gas Properties — The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of certain non–producing leasehold costs are expensed as incurred. The costs of all development wells and related equipment used in the production of oil and natural gas are capitalized.
Sales proceeds are credited to the carrying value of the properties and no gains or losses are recognized upon the disposition of proved oil and natural gas properties except in transactions such as the significant disposition of an amortizable base that significantly affects the unit–of–production amortization rate.
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The capitalized costs of producing oil and natural gas properties (including plugging, abandonment, and site restoration costs) are charged to expense as depreciation, depletion, and amortization using the units–of–production method based on the ratio of current production to estimated total net proved oil and natural gas reserves as estimated by independent petroleum engineers. Proved developed reserves are used in computing unit rates for drilling and development costs and total proved reserves are used for depletion rates of acquisition and leasehold costs.
The Company reviews its proved oil and natural gas properties for impairment whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. There was no impairment expense recorded for the year ended December 31, 2023.
Unproved oil and natural gas properties are assessed periodically on a property–by–property basis, and any impairment in value is recognized. There was no impairment expense recorded for the year ended December 31, 2023.
The components of the Company’s oil and natural gas properties are presented below:
| December 31, 2023 | ||||
| ($ in thousands) | ||||
| Oil and gas properties: | ||||
| Proved | $ | 146,521 | ||
| Unproved | 3,406 | |||
| Less: accumulated depreciation, depletion and amortization | (37,918 | ) | ||
| Total oil and gas properties, net | $ | 112,009 | ||
Asset Retirement Obligations — Asset retirement obligations (“ARO”) represent the future abandonment costs of tangible assets, such as wells, service assets and other facilities. The Company records an ARO and capitalizes the asset retirement cost in oil and natural gas properties in the period in which the retirement obligation is incurred based upon the estimated fair value of the obligation to perform site reclamation, dismantle facilities, or plug and abandon wells. After recording these amounts, ARO is accreted to its future estimated value using an assumed cost of funds, and the additional capitalized costs are depreciated on a unit–of–production basis. If ARO is settled for an amount other than the recorded amount, a gain or loss is recognized.
Revenue Recognition — Revenue is measured based on a consideration specified in a contract with a customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company generally considers the delivery of each unit (Bbl or MMBtu) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer upon delivery to an agreed upon delivery point. Transfer of control typically occurs when the products are delivered to the purchaser, and title has transferred.
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The Company uses practical expedients permitted by Accounting Standards Codification (“ASC”) 606 when applicable. These practical expedients included:
| · | Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue; |
| · | The Company recognizes the incremental cost of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in General and administrative expenses; |
| · | For product sales that have a contract term greater than one year, the Company has utilized the practical expedient in ASC 606, which states that a company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under the Company’s product sales contracts, each unit of product delivered to the customer represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required; and |
| · | For product sales that have a contract term of one year or less, the Company has utilized the practical expedient in ASC 606, which states that a company is not required to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of the contract that has an original expected duration of one year or less. |
Investments —On December 21, 2022, the Company acquired 100 Series C Preferred Units in Revolution II NPI Holding Company, LLC (“Revolution II NPI Holding Co”), and affiliate of the Company, for $44.4 million. The Company’s investment was recorded utilizing the measurement alternative as there was no readily determinable fair value. The Series C Preferred Units entitle the Company to priority on distributions from Revolution II NPI Holding Co until its initial capital balance and a specified rate of return has been distributed.
In August 2023, $47.5 million was distributed from Revolution II NPI Holding Co on the Series C preferred units with a preferred return of $3.1 million, which settled the Series C preferred units.
Income Taxes — The Company is not a taxpaying entity for federal income tax purposes and, accordingly, it does not recognize any expense for such taxes. The federal income tax liability resulting from the Company’s activities is the responsibility of the Company’s members. In the event of an examination of the Company’s tax return, the tax liability of the partners could be changed if an adjustment of the Company’s income or loss is ultimately sustained by the taxing authorities. Since the Company does not have access to information regarding each member’s tax basis, the Company cannot readily determine the total difference in the basis of its net assets for financial and tax reporting purposes. There was no margin tax expense for the years ended December 31, 2023.
Financial Instruments — The Company’s financial instruments consist of cash, receivables, payables, derivatives and long–term debt. The carrying amounts of the Company’s financial instruments other than derivatives and long–term debt approximate fair value because of the short–term nature of the items. Derivatives are recorded at fair value (see Note 5 – Fair Value Measurement). The carrying value of the Company’s debt approximates fair value because the credit facility’s variable interest rate resets frequently and approximates current market rates available to the Company and is classified as Level 2 in the fair value hierarchy.
Deferred Financing Costs — Costs incurred in connection with the Company’s debt are capitalized and amortized as interest expense over the scheduled maturity period. Unamortized costs are associated with the Company’s revolving credit facility and are reflected as a component of other long-term assets in the accompanying consolidated balance sheet.
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Related Party Transactions — In October 2023, the Company, entered into an agreement whereas the Company was assigned 100% member interest in Revolution Operating Company, LLC, previously an affiliate of the Company. This transaction was accounted for as a combination of entities under common control, whereby the assets and liabilities acquired were recorded at their historical carrying amounts. Revolution Operating Company, LLC did not have material assets or liabilities.
Leases — The Company enters into lease agreements to support its operations, such as office space, drilling rigs and field equipment. ASC 842 does not impact the accounting or financial presentation of the Company’s mineral leases and also does not apply to leases used in the exploration or use of oil and natural gas, including the rights to explore for those natural resources and rights to use the land in which those natural resources are contained.
The Company determines if an arrangement is a lease at the inception of the arrangement by (i) identifying any assets within the contract (ii) determining whether the Company has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use and (iii) if the Company has the right to direct how and for what purpose the identified asset is used throughout the period of use. To the extent that it is determined that an arrangement represents a lease, the lease is classified as an operating lease or a finance lease. The Company capitalizes both lease classifications on its consolidated balance sheet through a right-of-use (“ROU”) asset and a corresponding lease liability. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Operating leases are included in other noncurrent assets, other current liabilities, and other noncurrent liabilities in the consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives, and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
In addition, for all asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to its short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, the Company recognizes lease payments related to its short-term leases as expense on a straight-line basis over the lease term.
Recently Issued Accounting Standards Adopted —In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses.” The standard changes the impairment model for trade receivables, held-to-maturity debt securities, net investments in leases, loans, and other financial assets measured at amortized cost. The ASU requires the use of a new forward-looking “expected loss” model compared to the current “incurred loss” model, resulting in accelerated recognition of credit losses. The Company adopted the new standard as of January 1, 2023. The Company's policy for implementing Current Expected Credit Loss is to estimate credit losses based on historical loss experience, current conditions, and reasonable and supportable forecasts. The estimation process considers relevant factors such as borrower creditworthiness, asset type, and the economic environment. These assumptions are based on management's judgment and are regularly reviewed and updated as necessary. Trade receivables (including the allowance for credit losses) are the only financial instrument in scope for ASU 2016-13 for the Company. The adoption of this guidance did not have a material impact to the Company and did not result in a transition adjustment as of January 1, 2023.
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| 3. | DIVESTITURE |
On July 26, 2023 the Company sold its properties located in the MERGE for net proceeds of $31 million. The sale was effective January 1, 2023 and resulted in a loss on sale of approximately $56.8 million. Additionally, $5.9 million of unadjusted purchase price is held in escrow and included in Prepaid and other current assets on the consolidated balance sheet at December 31, 2023. Escrow payment of $2.3 million was released in February 2024. The remaining balance of $3.6 million will be released in July 2024.
| 4. | RISK MANAGEMENT |
The Company’s business activities expose it to risks associated with changes in the market price of oil, natural gas and NGLs. As such, future earnings are subject to change due to changes in both the market price of oil and natural gas. The Company uses derivatives to reduce its risk of changes in the prices of oil and natural gas. The Company does not engage in speculative transactions.
As of December 31, 2023, the Company had the following open commodity contracts with the following terms:
| 2024 | 2025 | |||||||
| Oil swaps | ||||||||
| Volume (mbbl) | 241 | 96 | ||||||
| Weighted-average price per bbl | $ | 57.11 | $ | 50.34 | ||||
| Oil collars | ||||||||
| Volume (mbbl) | 385 | 25 | ||||||
| Weighted-average ceiling price per bbl | $ | 69.10 | $ | 69.00 | ||||
| Weighted-average floor price per bbl | $ | 62.05 | $ | 63.00 | ||||
| Natural gas swaps | ||||||||
| Volume (mmbtu) | 3,590 | 2,262 | ||||||
| Weighted-average price per mmbtu | $ | 2.46 | $ | 2.54 | ||||
| Natural gas basis swaps | ||||||||
| Volume (mmbtu) | 4,529 | N/A | ||||||
| Weighted-average price per mmbtu | $ | 0.17 | N/A | |||||
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The Company entered into negative volume oil and natural gas fixed price swaps. These negative volume derivative contracts were entered into as a method to decrease the Company’s production covered by the derivative contracts at the lower fixed prices. Additionally, the negative volume contracts prevented the need to early terminate, or cash settle existing contracts. As of December 31, 2023, the Company had the following open negative volume swaps with the following terms:
| 2024 | 2025 | |||||||
| Oil swaps | ||||||||
| Volume (mbbl) | (313 | ) | (111 | ) | ||||
| Weighted-average price per bbl | $ | 64.78 | $ | 63.86 | ||||
| Natural gas swaps | ||||||||
| Volume (mmbtu) | (1,415 | ) | N/A | |||||
| Weighted-average price per mmbtu | $ | 3.79 | N/A | |||||
The following tables sets forth the fair values and classification of the Company’s outstanding derivatives as of December 31, 2023:
| December 31, 2023 | ||||||||||||
| Gross Fair Value | Netting | Net Fair Value | ||||||||||
| ($ in thousands) | ||||||||||||
| Current derivative assets | $ | 3,249 | $ | (2,652 | ) | $ | 597 | |||||
| Long-term derivative assets | 512 | (480 | ) | 32 | ||||||||
| $ | 3,761 | $ | (3,132 | ) | $ | 629 | ||||||
| Current derivative liabilities | $ | (10,307 | ) | $ | 2,652 | (7,655 | ) | |||||
| Long-term derivative liabilities | (3,818 | ) | 480 | (3,338 | ) | |||||||
| $ | (14,125 | ) | $ | 3,132 | $ | (10,993 | ) | |||||
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| 5. | FAIR VALUE MEASUREMENT |
The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values determined based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 refers to fair values determined based on our own assumptions used to measure assets and liabilities at fair value.
Fair Value on a Recurring Basis
The following table presents the fair value hierarchy table for the Company’s assets and liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2023:
| December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| ($ in thousands) | ||||||||||||||||
| Assets | ||||||||||||||||
| Commodity derivatives | $ | - | $ | 3,761 | $ | - | $ | 3,761 | ||||||||
| Liabilities | ||||||||||||||||
| Commodity derivatives | $ | - | $ | (14,125 | ) | $ | - | $ | (14,125 | ) | ||||||
The Company’s derivatives consist of over–the–counter (“OTC”) contracts which are not traded on a public exchange. As the fair value of these derivatives is based on inputs using market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third party pricing services, brokers and market transactions, the Company has categorized these derivatives as Level 2. The Company values these derivatives using the income approach using inputs such as the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves. The Company’s estimates of fair value have been determined at discrete points in time based on relevant market data.
Fair Value on a Non-Recurring Basis
Assets and liabilities accounted for at fair value on a non-recurring basis include the initial recognition of ARO. The fair value of ARO is measured using valuation techniques consistent with the income approach, which converts future cash flows to a single discounted amount. Significant inputs include the estimated plug and abandonment cost per well, the estimated life per well, and the credit-adjusted risk-free rate.
| 6. | REVENUE RECOGNITION |
Oil Sales
The Company’s oil contracts transfer physical custody and title at or near the wellhead, which is commonly when control of the oil has been transferred to the purchaser. The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the NYMEX price. Any differentials incurred after the transfer of control of the oil are net against oil sales as they represent part of the transaction price of the contract. For its oil contracts, the Company generally records its sales based on the net amount received.
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Natural Gas and NGL Sales
Most of the Company’s natural gas is sold at the wellhead or inlet to the processor’s facility, which is commonly when control of the natural gas has been transferred to the purchaser. The natural gas is sold under percentage of proceeds processing contracts. Under these contracts, the purchaser gathers the natural gas where it is produced and transports it via pipeline to natural gas processing plants where NGL products are extracted. The NGL products and remaining residue gas are then sold by the purchaser. Under the natural gas percentage of proceeds contracts, the Company receives a percentage of the value for the extracted NGLs and the residue gas.
For its natural gas processing contracts, the Company generally records its natural gas and NGL sales net of gathering, processing and transportation expenses based on a principal versus agent assessment for individual contracts.
Performance Obligations
The Company satisfies the performance obligations under its oil and natural gas sales contracts through delivery of its production and transfer of control to a customer. Upon delivery of production, the Company has the right to receive consideration from its customers in amounts that correspond with the value of the production transferred. The Company typically receives payment for oil, natural gas and NGL sales within 30 days of the month of delivery for operated properties and within 90 days of the month of delivery for non-operated properties.
The Company’s oil sales contracts are short-term in nature with a contract term of one year or less. For those contracts, the Company utilized the practical expedient in ASC 606, which provides an exemption from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Contract Balances
The Company recognizes sales of oil, natural gas, and NGLs at a point in time when it satisfies a performance obligation and at that point the Company has an unconditional right to receive payment. Accordingly, these contracts do not give rise to contract assets or contract liabilities under ASC 606. The Company had accounts receivable related to revenue from contracts with customers of approximately $9.1 million and $21.7 million as of December 31, 2023 and 2022, respectively, which represent this unconditional right to receive payment.
Prior Period Performance Obligations
To record revenues for oil, natural gas and NGLs, the Company estimates the amount of production delivered at the end of each month and the prices expected to be received for those sales. Differences between estimated revenues and actual amounts received for all prior months are recorded in the month payment is received from the customer. For the year ended December 31, 2023, revenue recognized related to performance obligations satisfied in prior reporting periods was not material.
| 7. | LONG–TERM DEBT |
Credit Facility
The Company entered into a $125 million credit facility on January 7, 2020, which expires on January 7, 2025. Borrowings under the credit facility are collateralized by the Company’s oil and natural gas properties. Borrowings under the credit facility bear interest at a floating rate based on either (1) the Base Rate (as defined in the credit facility) plus the applicable margin or (2) the Eurodollar Rate plus the applicable margin. The Company amended the credit facility in 2023 resulting in a reduction of the borrowing base to $75 million. The weighted average effective interest rate as of December 31, 2023 was 8.69%. As of December 31, 2023, the Company had $52.5 million drawn on the credit facility.
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Borrowings under the credit facility may not exceed a “borrowing base” determined by the lenders based on the Company’s oil and natural gas reserves. The borrowing base is subject to semiannual borrowing base redeterminations. The terms of the credit facility require monthly repayments, among other remedies, to the extent that borrowing base redeterminations cause the outstanding borrowings to exceed the availability under the credit facility.
The credit facility contains financial covenants which, among other things, set earnings before interest, taxes, depreciation, depletion, amortization, and exploration expenses to interest expense and maximum debt/total capitalization ratio coverage requirements and various other standard affirmative and negative debt covenants. The Company is in compliance with its covenants as of December 31, 2023.
In connection with obtaining the credit facility and amendments to the credit facility during 2023, the Company incurred lender’s fees and related attorney fees of approximately $0.08 million. The Company capitalized these costs and included these deferred financing costs in other assets on the accompanying consolidated balance sheet. Deferred financing costs are amortized to interest expense over the term of the credit facility using the effective interest method.
| 8. | ASSET RETIREMENT OBLIGATIONS |
A summary of the Company’s ARO activity for the year ended December 31, 2023 is reflected in the table below (in thousands):
| December 31, 2023 | ||||
| Asset retirement obligation, December 31, 2022 | $ | 20,294 | ||
| Liabilities incurred or acquired | 27 | |||
| Revisions in estimated cash flows | 3,856 | |||
| Liabilities associated with properties sold | (1,159 | ) | ||
| Accretion expense | 754 | |||
| Asset retirement obligation, December 31, 2023 | 23,772 | |||
| Less: current portion | 219 | |||
| Asset retirement obligation, net of current, December 31, 2023 | $ | 23,553 | ||
| 9. | COMMITMENTS AND CONTINGENCIES |
The Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such disputes or legal actions will have a material adverse effect on the Company’s financial position or results of operations.
| 10. | EQUITY |
The Company has two classes of equity: Series A member units comprising 100% of the voting interests, and Series B member units that are nonvoting profits interests (“Incentive Units”). The Series A units earn an 8% preferential return on original investment before cash distributions are made to the Series B units.
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Incentive Units
The Amended and Restated Limited Liability Company Agreement of Revolution II WI Holding Company, LLC dated January 7, 2020 (the “Agreement”), authorizes the Company to issue 100,000 Series B Units to employees or certain nonemployees who provide services to the Company as incentive compensation.
The Agreement includes a call right on behalf of the Company. The call right becomes exercisable upon the termination of a participant and gives the Company the option to repurchase any Series B Units held by the participant. The repurchase price under the call right will be the fair market value as of the date of exercise as determined by our Board of Directors as applicable.
As of December 31, 2023, there were 100,000 Series B units granted with no value ascribed to those units based on the terms of vesting.
| 11. | CONCENTRATION OF CREDIT RISK |
The Company’s cash is maintained at several financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits; however, the Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant default risk.
The Company’s revenues are derived principally from uncollateralized sales to customers in the oil and natural gas industry; therefore, the Company’s customers may be similarly affected by changes in economic and other conditions within the industry. The Company had revenues from five purchasers, which represented a combined total of approximately 85% of total revenues for the year ended December 31, 2023. The majority of the Company’s accounts receivable from oil and natural gas sales are due from these purchasers. Expected losses are provided for currently and actual losses have been within management’s expectations.
All of the Company’s derivative contracts are with major financial institutions. Should one of these financial counterparties not perform, the Company may not realize the benefit of some of its derivative contracts and the Company could incur a loss. As of December 31, 2023, all the Company’s counterparties have performed pursuant to their derivative contracts.
| 12. | SUBSEQUENT EVENTS |
The Company evaluated its December 31, 2023 financial statements for subsequent events through April 29, 2024, the date the financial statements were available to be issued. On February 16, 2024, Revolution Resources II, LLC, a wholly-owned subsidiary of the Company, entered into a purchase and sale agreement to sell substantially all of the Revolution Resources II, LLC’s assets to BE Anadarko II, LLC for a purchase price of $145.0 million. The transaction closed on April 17, 2024. In connection with the closing of the purchase and sale agreement, the Company’s outstanding borrowings of $58.0 million was paid in full and the borrowing base on the Credit Facility was reduced to $0.
******
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| 13. | Supplemental Information on Oil and Natural Gas Properties (Unaudited) |
Oil and Gas Producing Activities
The following disclosures are made in accordance with definitions in Accounting Standards Codification (ASC) Topic 932 Extractive Industries – Oil and Gas, and the United States Securities and Exchange Commission's (SEC) final rule on "Modernization of Oil and Gas Reporting."
Oil and Gas Reserves. Users of this information should be aware that the process of estimating quantities of "proved," "proved developed" and "proved undeveloped" crude oil, natural gas liquids (NGLs) and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors, including, but not limited to, additional development activity; evolving production history; crude oil and condensate, NGLs and natural gas prices; and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures.
Proved reserves represent estimated quantities of crude oil, NGLs and natural gas, which, by analysis of geoscience and engineering data, can be estimated, with reasonable certainty, to be economically producible from a given date forward from known reservoirs under then-existing economic conditions, operating methods and government regulations before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.
Proved developed reserves are proved reserves expected to be recovered under operating methods being utilized at the time the estimates were made, through wells and equipment in place or if the cost of any required equipment is relatively minor compared to the cost of a new well.
All of the oil and natural gas properties in which we have working interests and mineral and royalty interests are located within the continental U.S., within Texas and Oklahoma. Therefore, the following disclosures about our costs incurred and proved reserves are presented on a combined and consolidated basis.
No major discovery or other favorable or adverse event subsequent to December 31, 2023, is believed to have caused a material change in the estimates of net proved reserves as of that date.
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The following tables set forth the Company's net proved reserves for the period ended December 31, 2023, and the changes in the net proved reserves for the period ended December 31, 2023, as estimated by Cawley, Gillespie, & Associates (“CGA”), an independent third-party reservoir engineering firm:
NET PROVED RESERVE SUMMARY
| Total | ||||
| NET PROVED RESERVES | ||||
| Crude Oil (MBbl) (1) | ||||
| Net proved reserves at December 31, 2022 | 12,681 | |||
| Revisions of previous estimates | (391 | ) | ||
| Extensions, discoveries and other additions | 608 | |||
| Sales in place | (5,737 | ) | ||
| Production | (665 | ) | ||
| Net proved reserves at December 31, 2023 | 6,495 | |||
| Natural Gas Liquids (MBbl) (1) | ||||
| Net proved reserves at December 31, 2022 | 21,933 | |||
| Revisions of previous estimates | (878 | ) | ||
| Extensions, discoveries and other additions | 847 | |||
| Sales in place | (11,475 | ) | ||
| Production | (1,017 | ) | ||
| Net proved reserves at December 31, 2023 | 9,409 | |||
| Natural Gas (Mcf) (2) | ||||
| Net proved reserves at December 31, 2022 | 187,170 | |||
| Revisions of previous estimates | (5,774 | ) | ||
| Extensions, discoveries and other additions | 5,135 | |||
| Sales in place | (110,386 | ) | ||
| Production | (8,704 | ) | ||
| Net proved reserves at December 31, 2023 | 67,441 | |||
| Oil Equivalents (MBoe) (1) | ||||
| Net proved reserves at December 31, 2022 | 65,809 | |||
| Revisions of previous estimates (3) | (2,231 | ) | ||
| Extensions, discoveries and other additions(4) | 2,310 | |||
| Sales in place(5) | (35,610 | ) | ||
| Production | (3,133 | ) | ||
| Net proved reserves at December 31, 2023 | 27,145 | |||
| (1) | Thousand barrels or thousand barrels of oil equivalent, as applicable; oil equivalents include crude oil and condensate, NGLs and natural gas. Oil equivalents are determined using a ratio of 1.0 barrel of crude oil and condensate or NGLs to 6.0 thousand cubic feet of natural gas. |
| (2) | Thousand cubic feet. |
| (3) | Revisions of previous estimates primarily relate to increased expected future costs driven by inflation and a lower commodity price environment. |
| (4) | Extensions, discoveries, and other additions of 2,310 thousand barrels of oil equivalent (MBoe) of proved reserves primarily relate to drilling activities and technical evaluation of major proved areas, mainly in the Anadarko Basin. |
| (5) | During 2023, the Company divested 35,610 MBOE, primarily related to the divestiture of assets in Oklahoma. |
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| Total | ||||
| NET PROVED DEVELOPED RESERVES | ||||
| Crude Oil (MBbl) | ||||
| December 31, 2022 | 9,328 | |||
| December 31, 2023 | 6,198 | |||
| Natural Gas Liquids (MBbl) | ||||
| December 31, 2022 | 16,739 | |||
| December 31, 2023 | 9,017 | |||
| Natural Gas (Mcf) | ||||
| December 31, 2022 | 134,576 | |||
| December 31, 2023 | 65,065 | |||
| Oil Equivalents (MBoe) | ||||
| December 31, 2022 | 48,497 | |||
| December 31, 2023 | 26,060 | |||
| NET PROVED UNDEVELOPED RESERVES | ||||
| Crude Oil (MBbl) | ||||
| December 31, 2022 | 3,353 | |||
| December 31, 2023 | 297 | |||
| Natural Gas Liquids (MBbl) | ||||
| December 31, 2022 | 5,194 | |||
| December 31, 2023 | 392 | |||
| Natural Gas (Mcf) | ||||
| December 31, 2022 | 52,594 | |||
| December 31, 2023 | 2,376 | |||
| Oil Equivalents (MBoe) | ||||
| December 31, 2022 | 17,312 | |||
| December 31, 2023 | 1,085 | |||
For the twelve-month period ended December 31, 2023, total PUDs decreased by 16,227 MBoe to 1,085 MBoe, primarily driven by the divestiture of approximately 70 PUD wells in Oklahoma. The Company added approximately 1,085 MBoe of PUDs, primarily in Oklahoma. During 2023, the Company did not transfer any PUD wells to proved developed reserves. Refer to "Reconciliation of Revisions of Previous Estimates" below for factors impacting revisions of previous estimates. All PUDs, including drilled but uncompleted wells (DUCs), are scheduled for completion within five years of the original reserve booking.
Reconciliation of Revisions of Previous Estimates. The Company engages Cawley, Gillespie, & Associates (“CGA”), an independent third-party reserve engineering firm to engineer reserves annually. CGA included a net negative revision of 100 MBoe of PUD reserves to its net proved reserves for the year ended December 31, 2023.
Revisions occur due to changes in factors such as crude oil, NGLs, and natural gas prices, well performance forecasts, marketing-related changes, changes in ownership interests, production costs, transportation costs, and gathering and processing costs, and investments in future wells and recompletions. The evaluation of such inter-related factors resulted in revisions to the Company’s net proved reserves and net PUD reserves for the year ended December 31, 2023.
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Capitalized Costs Relating to Oil and Gas Producing Activities. The following table sets forth the capitalized costs relating to the Company’s crude oil, NGLs and natural gas producing activities at December 31, 2023 (in thousands):
| As of December 31, 2023 | ||||
| Proved properties | $ | 146,521 | ||
| Unproved properties | 3,406 | |||
| Total | 149,927 | |||
| Accumulated depreciation, depletion and amortization | (37,918 | ) | ||
| Net capitalized costs | $ | 112,009 | ||
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities. The acquisition, exploration and development costs disclosed in the following tables are in accordance with definitions in Accounting Standards Codification (ASC) Topic 932 Extractive Industries - Oil and Gas.
Acquisition costs include costs incurred to purchase, lease or otherwise acquire property.
Exploration costs include additions to exploratory wells, including those in progress, and exploration expenses.
Development costs include additions to production facilities and equipment and additions to development wells, including those in progress. The following table sets forth costs incurred related to the Company’s oil and gas activities for the year ended December 31, 2023 (in thousands):
| Year Ended
December 31, 2023 | ||||
| Acquisition Costs of Properties | ||||
| Proved | 3,864 | |||
| Development Costs | 31,121 | |||
| Total Costs Incurred | $ | 34,985 | ||
Results of Operations for Oil and Gas Producing Activities (1). The following table sets forth results of operations for oil and gas producing activities for the year ended December 31, 2023 (in thousands):
| For the Year Ended December 31, 2023 | ||||
| Crude Oil and Condensate, Natural Gas Liquids and Natural Gas Revenues | $ | 77,988 | ||
| Production Costs | 29,577 | |||
| Production Taxes | 4,291 | |||
| Depreciation, Depletion and Amortization | 12,187 | |||
| Results of Operations Before Income Taxes | 31,933 | |||
| Income Tax Provision(2) | - | |||
| Results of Operations Net of Income Taxes | $ | 31,933 | ||
| (1) | Excludes gains or losses on the mark-to-market of financial commodity derivative contracts, gains or losses on sales of reserves and related assets, interest charges and general corporate expenses for the period ended December 31, 2023. |
| (2) | Federal income taxes have not been deducted from results of operations as each partner is separately taxed on its share of the Company’s taxable income. |
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Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves. The following information has been developed utilizing procedures prescribed by Accounting Standards Codification (ASC) Topic 932 – Extractive Industries – Oil and Gas and based on crude oil, NGL and natural gas reserves and production. The following information may be useful for certain comparative purposes, but should not be solely relied upon in evaluating the Company or its performance. Further, information contained in the following table should not be considered as representative of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the fair value of the Company.
The future cash flows presented below are based on sales prices, cost rates and statutory income tax rates in existence as of the date of the projections. It is expected that material revisions to some estimates of crude oil, NGL and natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used.
Management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable and possible reserves as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated. Future net cash flows were calculated by applying prices in accordance with SEC guidance, which were the simple average first-of-the-month commodity prices, adjusted for location and quality differentials. The following table provides the average benchmark prices per unit, before location and quality differential adjustments, used to calculate the related reserve category:
Average benchmark price per unit:
| Year Ended December 31, 2023 | ||||
| Crude oil (Bbl) | $ | 78.22 | ||
| Natural Gas (MMBtu) | $ | 2.637 | ||
The following table sets forth the standardized measure of discounted future net cash flows from projected production of the Company’s oil and gas reserves for the year ended December 31, 2023 (in thousands):
| Year Ended December 31, 2023 | ||||
| Future cash inflows (1) | $ | 810,007 | ||
| Future production costs | (377,828 | ) | ||
| Future development costs | (49,606 | ) | ||
| Future income taxes(2) | - | |||
| Future net cash flows | 382,573 | |||
| Discount to present value at 10% annual rate | (186,210 | ) | ||
| Standardized measure of discounted future net cash flows relating to proved oil and gas reserves | $ | 196,363 | ||
| (1) | Estimated realized crude oil prices used to calculate 2023 future cash inflows was $75.13. Estimated realized NGL price used to calculate 2023 future cash inflows was $23.80. Estimated realized natural gas prices used to calculate 2023 future cash inflows was $1.45. |
| (2) | Federal income taxes have not been deducted from future production cash inflows in the calculation of standardized measure as each partner is separately taxed on its share of the Company’s taxable income. |
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Changes in Standardized Measure of Discounted Future Net Cash Flows. The following table sets forth the changes in the standardized measure of discounted future net cash flows for the period ended December 31, 2023 (in thousands):
| Total | ||||
| December 31, 2022 | $ | 836,599 | ||
| Sales and transfers of oil and gas produced, net of production costs | (48,411 | ) | ||
| Net changes in prices and production costs | (192,693 | ) | ||
| Extensions, discoveries, additions and improved recovery, net of related costs | 22,085 | |||
| Development costs incurred | 325 | |||
| Revisions of estimated development cost | (10,853 | ) | ||
| Revisions of previous quantity estimates | (51,178 | ) | ||
| Accretion of discount | 83,660 | |||
| Sales of reserves in place | (442,687 | ) | ||
| Changes in timing and other | (484 | ) | ||
| December 31, 2023 | $ | 196,363 | ||
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Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On April 17, 2024 (the “Closing Date”), BE Anadarko II, LLC (“BE Anadarko”), a subsidiary of Benchmark Energy II, LLC (together with its subsidiaries, “Benchmark”), a majority-owned subsidiary of the Acacia Research Corporation (the “Company” or “Acacia”) consummated the previously announced transactions contemplated in the Purchase and Sale Agreement, dated February 16, 2024, by and among Benchmark and Revolution Resources II, LLC, Revolution II NPI Holding Company, LLC, Jones Energy, LLC, Nosley Assets, LLC, Nosley Acquisition, LLC, and Nosley Midstream, LLC (collectively, “Revolution”) (the “Purchase Agreement”).
At the closing of transactions pursuant to the Purchase Agreement, among other things, Benchmark acquired certain upstream assets and related facilities (the “Assets”) in Texas and Oklahoma, including approximately 140,000 net acres and an interest in approximately 470 operated producing wells, upon the terms and subject to the conditions of the Purchase Agreement (such purchase and sale, together with the other transactions contemplated by the Purchase Agreement, the “Transactions”) for a purchase price of $145 million in cash (the “Purchase Price”), subject to customary post-closing adjustments. Acacia funded a portion of the Purchase Price and related fees amounting to $59.9 million with cash on hand. The remainder of the Purchase Price was funded by a combination of borrowings under the new revolving credit facility and the remaining being funded through a cash contribution of $15.25 million from other investors. Following closing, the Company’s interest in Benchmark is approximately 73.5%. Revolution II WI Holding Company, LLC ("Revolution II WI") was the holding company for Revolution and the Assets. The Assets represent substantially all of the remaining assets and operations owned by Revolution II WI Holding Company, LLC as of the Closing Date.
The following unaudited pro forma condensed combined financial information are derived from the historical consolidated financial statements of Acacia and Revolution II WI, respectively, and reflects (i) the Transactions, which includes the impacts of (a) acquisition of assets of Revolution II WI by Acacia through Benchmark, (b) the issuance of new revolving credit facility to fund the portion of the Purchase Price, and (c) cash contribution from other investors. Amounts presented in the “Transaction Accounting Adjustments” column reflect the accounting for acquisition of Revolution II WI by Acacia. Amounts presented in the “Financing Adjustments” column represent additional transactions Acacia will undertake to issue new debt.
The unaudited pro forma combined financial information has been prepared using the acquisition of assets method of accounting under U.S. generally accepted accounting principles (US GAAP). The accounting for asset acquisitions is accounted for by using a cost accumulation model, where the cost of the acquisition is allocated to the assets acquired on the basis of relative fair values. The process of valuing the net assets of Revolution II WI, as well as evaluating accounting policies for conformity, is preliminary in nature and subject to change.
The transaction is being accounted for as an asset acquisition under Accounting Standards Codification 805, Business Combinations as substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets. The unaudited pro forma condensed combined balance sheet as of December 31, 2023 gives effect to the Transactions as if they had occurred as of December 31, 2023. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023 give effect to the Transactions as if they had occurred on January 1, 2023.
The unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of operations have been derived from and should be read in conjunction with the following financial statements:
| · | The historical audited consolidated financial statements of Acacia as of and for the year ended December 31, 2023; and |
| · | The historical audited consolidated financial statements of Revolution II WI as of and for the year ended December 31, 2023. |
The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X.
The pro forma adjustments are based on available information and upon assumptions that management believes are reasonable in order to reflect, on a pro forma basis, the effect of the Transactions on the historical financial information of Acacia. The adjustments are described in the notes to the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statement of operations.
1
The unaudited pro forma condensed combined financial information is included for informational purposes only. The unaudited pro forma condensed combined financial information should not be relied upon as being indicative of our results of operations or financial condition had the Transactions occurred on the dates assumed. The unaudited pro forma condensed combined financial information also does not project our results of operations or financial position for any future period or date, including, but not limited to, the anticipated realization of ongoing savings from potential operating efficiencies, cost savings, or economies of scale that the combined company may achieve with respect to the combined operations. Specifically, the unaudited pro forma condensed combined statements of operations does not include projected synergies expected to be achieved as a result of the Transactions and any associated costs that may be required to be incurred to achieve the identified synergies. The unaudited pro forma condensed combined statements of operations also exclude the effects of costs of integration activities that may result from the acquisition.
2
Unaudited Pro Forma Condensed Combined Balance Sheet
For the Year Ended December 31, 2023
(in thousands, except share and per share data)
| Acacia Historical | Revolution
II WI Historical |
Transaction Adjustments |
Financing Adjustments |
Reclassification | Combined
Pro Formas |
|||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 340,091 | $ | 2,738 | $ | (144,974 | ) | (F) | $ | 81,857 | (E) | $ | 281,699 | |||||||||||||||
| - | (D) | (10,525 | ) | (H) | ||||||||||||||||||||||||
| 15,250 | (G) | |||||||||||||||||||||||||||
| (2,738 | ) | (B) | ||||||||||||||||||||||||||
| Equity Securities | 63,068 | - | 63,068 | |||||||||||||||||||||||||
| Equity securities without readily determinable fair value | 5,816 | - | 5,816 | |||||||||||||||||||||||||
| Equity Method Investment | 30,934 | - | 30,934 | |||||||||||||||||||||||||
| Accounts receivable, net | 80,555 | - | 80,555 | |||||||||||||||||||||||||
| Oil and gas | - | 9,105 | (9,105 | ) | (B) | - | ||||||||||||||||||||||
| Joint interest billings and other | - | 2,087 | (2,087 | ) | (B) | - | ||||||||||||||||||||||
| Derivative Assets | - | 597 | (597 | ) | (B) | - | ||||||||||||||||||||||
| Inventories | 10,921 | 4,510 | (4,510 | ) | (B) | 13,506 | ||||||||||||||||||||||
| 2,585 | (C) | |||||||||||||||||||||||||||
| Prepaid expenses and other current assets | 23,127 | 8,022 | (8,022 | ) | (B) | 23,127 | ||||||||||||||||||||||
| Total current assets | 554,512 | 27,059 | (154,198 | ) | 71,332 | 498,705 | ||||||||||||||||||||||
| Property, plant and equipment, net | 2,356 | - | 353 | (C) | 2,709 | |||||||||||||||||||||||
| Oil and natural gas properties, net | 25,117 | 112,009 | 31,976 | (C) | 197,815 | |||||||||||||||||||||||
| 28,713 | (C) | |||||||||||||||||||||||||||
| Goodwill | 8,990 | - | 8,990 | |||||||||||||||||||||||||
| Other intangible assets, net | 33,556 | - | 33,556 | |||||||||||||||||||||||||
| Operating lease, right-of-use assets | 1,872 | - | 1,872 | |||||||||||||||||||||||||
| Deferred income tax assets, net | 2,915 | - | 2,915 | |||||||||||||||||||||||||
| Derivative assets | - | 32 | (32 | ) | (B) | - | ||||||||||||||||||||||
| Other non-current assets | 4,227 | 1,672 | (1,672 | ) | (B) | 803 | (E) | 5,030 | ||||||||||||||||||||
| - | ||||||||||||||||||||||||||||
| Total assets | 633,545 | 140,772 | (94,860 | ) | 72,135 | 751,592 | ||||||||||||||||||||||
| LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY | - | |||||||||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||||||||||
| Accounts Payable | 3,261 | 5,089 | (5,089 | ) | (B) | 3,261 | ||||||||||||||||||||||
| Accrued expenses and other current liabilities | 8,405 | 4,993 | (4,993 | ) | (B) | 8,805 | ||||||||||||||||||||||
| 400 | (I) | |||||||||||||||||||||||||||
| Accrued compensation | 4,207 | - | 4,207 | |||||||||||||||||||||||||
| Royalties and contingent legal fees payable | 10,786 | - | 1,949 | (D) | 12,735 | |||||||||||||||||||||||
| Deferred revenue | 977 | - | 977 | |||||||||||||||||||||||||
| Revenue payable | - | 7,023 | (7,023 | ) | (B) | - | ||||||||||||||||||||||
| Derivative liabilities | - | 7,655 | (7,655 | ) | (B) | - | ||||||||||||||||||||||
| Asset retirement obligation | - | 219 | 1,311 | (C) | 1,530 | |||||||||||||||||||||||
| Other current liabilities | - | 619 | (619 | ) | (B) | - | ||||||||||||||||||||||
| Total current liabilities | 27,636 | 25,598 | (21,719 | ) | - | 31,515 | ||||||||||||||||||||||
| Deferred revenue, net of current portion | 458 | - | 458 | |||||||||||||||||||||||||
| Debt | - | 52,500 | (52,500 | ) | (B) | - | ||||||||||||||||||||||
| Asset retirement obligation | - | 23,553 | 3,630 | (C) | 301 | (A) | 27,484 | |||||||||||||||||||||
| Long-term lease liabilities | 1,736 | - | 1,736 | |||||||||||||||||||||||||
| Derivative liabilities | - | 3,338 | (3,338 | ) | (B) | - | ||||||||||||||||||||||
| Revolving credit facility | 10,525 | - | 82,660 | (E) | 82,660 | |||||||||||||||||||||||
| (10,525 | ) | (H) | ||||||||||||||||||||||||||
| Other long-term liabilities | 3,581 | 326 | (326 | ) | (B) | (301 | ) | (A) | 3,280 | |||||||||||||||||||
| Total liabilities | 43,936 | 105,315 | (74,253 | ) | 72,135 | 147,133 | ||||||||||||||||||||||
| Commitments and contingencies | - | |||||||||||||||||||||||||||
| Series A redeemable convertible preferred stock | - | - | - | |||||||||||||||||||||||||
| Stockholder's equity | ||||||||||||||||||||||||||||
| Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding | - | - | - | |||||||||||||||||||||||||
| Common stock, par value $0.001 per share; 300,000,000 shares authorized; 99,895,473 shares issued and outstanding as of December 31, 2023 | 100 | - | 100 | |||||||||||||||||||||||||
| Treasury stock, at cost, 16,183,703 shares as of December 31, 2023 | (98,258 | ) | - | (98,258 | ) | |||||||||||||||||||||||
| Additional paid-in capital | 906,153 | - | 906,153 | |||||||||||||||||||||||||
| Members' Equity | 35,457 | (35,457 | ) | (B) | - | |||||||||||||||||||||||
| Accumulated deficit | (239,729 | ) | - | - | (D) | - | - | (240,129 | ) | |||||||||||||||||||
| (400 | ) | (I) | ||||||||||||||||||||||||||
| Total Acacia Research Corporation stockholders' equity | 568,266 | 35,457 | (35,857 | ) | - | 567,866 | ||||||||||||||||||||||
| Noncontrolling interests | 21,343 | - | 15,250 | (G) | - | 36,593 | ||||||||||||||||||||||
| Total stockholers' equity | 589,609 | 35,457 | (20,607 | ) | - | 604,459 | ||||||||||||||||||||||
| Total liabilities, redeemable convertible preferred stock and stockholders' equity | $ | 633,545 | $ | 140,772 | $ | (94,860 | ) | $ | 72,135 | $ | 751,592 | |||||||||||||||||
3
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2023
(in thousands, except share and per share data)
| Acacia Historical | Revolution
II WI Historical | Transaction Adjustments | Financing
Adjustments | Reclassifications | Combined
Pro Formas |
|||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Intellectual property operations | $ | 89,156 | $ | - | $ | 89,156 | ||||||||||||||||||||
| Industrial operations | 35,098 | - | 35,098 | |||||||||||||||||||||||
| Energy operations | 848 | - | $ | 56,983 | (AA) | 57,831 | ||||||||||||||||||||
| Oil sales | - | 49,363 | $ | (12,277 | ) | (BB) | (37,086 | ) | (AA) | - | ||||||||||||||||
| Natural gas sales | - | 4,918 | (230 | ) | (BB) | (4,688 | ) | (AA) | - | |||||||||||||||||
| Natural gas liquid sales | - | 23,707 | (8,498 | ) | (BB) | (15,209 | ) | (AA) | - | |||||||||||||||||
| Other income | - | 1,511 | (1,511 | ) | (BB) | - | ||||||||||||||||||||
| Total revenues | 125,102 | 79,499 | (22,516 | ) | - | - | 182,085 | |||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||
| Cost of revenues- intellectual property operations | 34,164 | - | 34,164 | |||||||||||||||||||||||
| Cost of revenues- industrial operations | 18,009 | - | 18,009 | |||||||||||||||||||||||
| Cost of revenues- energy operations | 656 | - | 46,871 | (AA) | 47,527 | |||||||||||||||||||||
| Production Costs | - | 29,577 | (4,458 | ) | (BB) | (25,119 | ) | (AA) | - | |||||||||||||||||
| Production taxes and deductions | - | 4,291 | (1,365 | ) | (BB) | (2,926 | ) | (AA) | - | |||||||||||||||||
| Exploration expenses | - | 23 | (23 | ) | (AA) | - | ||||||||||||||||||||
| Engineering and development expenses- industrial operations | 735 | - | 735 | |||||||||||||||||||||||
| Sales and marketing expenses- industrial operations | 6,908 | - | 6,908 | |||||||||||||||||||||||
| Depletion, depreciation, amortization and accretion | - | 12,941 | (12,941 | ) | (CC) | (18,803 | ) | (AA) | - | |||||||||||||||||
| 17,367 | (CC) | |||||||||||||||||||||||||
| 1,436 | (CC) | |||||||||||||||||||||||||
| Loss (gain) on divestiture of oil and gas properties | - | 56,803 | (56,803 | ) | (FF) | - | ||||||||||||||||||||
| General and administrative expenses | 43,694 | 365 | - | - | 44,059 | |||||||||||||||||||||
| - | - | |||||||||||||||||||||||||
| Other | - | 47 | 47 | |||||||||||||||||||||||
| Total operating expenses | 104,166 | 104,047 | (56,764 | ) | - | - | 151,449 | |||||||||||||||||||
| Operating income (loss) | 20,936 | (24,548 | ) | 34,248 | - | - | 30,636 | |||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||
| Equity securities investments: | ||||||||||||||||||||||||||
| Change in fair value of equity securities | 31,423 | - | 31,423 | |||||||||||||||||||||||
| (Loss) gain on sale of equity securities | (10,930 | ) | - | (10,930 | ) | |||||||||||||||||||||
| Earnings on equity investment in joint venture | 4,167 | - | 4,167 | |||||||||||||||||||||||
| Net realized and unrealized gain (loss) | 24,660 | - | 24,660 | |||||||||||||||||||||||
| Change in fair value of the Series A and B warrants and embedded derivatives | 8,241 | - | - | 8,241 | ||||||||||||||||||||||
| Gain (loss) on foreign currency exchange | 53 | - | 53 | |||||||||||||||||||||||
| Gain (loss) on derivatives, net | - | 15,001 | (15,001 | ) | (BB) | - | ||||||||||||||||||||
| Gain on investment | - | 3,162 | (3,162 | ) | (BB) | - | ||||||||||||||||||||
| Interest expense | (1,930 | ) | (6,582 | ) | 6,582 | (BB) | (7,542 | ) | (EE) | (9,472 | ) | |||||||||||||||
| Interest income and other, net | 15,466 | 35 | (35 | ) | (BB) | 133 | (DD) | 15,599 | ||||||||||||||||||
| Total other income (expense) | 46,490 | 11,616 | (11,616 | ) | (7,409 | ) | - | 39,081 | ||||||||||||||||||
| Income (loss) before income taxes | 67,426 | (12,932 | ) | 22,632 | (BB) | (7,409 | ) | 69,717 | ||||||||||||||||||
| Income tax benefit | 1,504 | - | (400 | ) | (HH) | 1,104 | ||||||||||||||||||||
| Net income (loss) including noncontrolling interests in subsidiaries | 68,930 | (12,932 | ) | 22,232 | (7,409 | ) | - | 70,821 | ||||||||||||||||||
| Net income attributable to noncontrolling interests in subsidiaries | (1,870 | ) | (2,242 | ) | (GG) | 1,963 | (GG) | (2,148 | ) | |||||||||||||||||
| Net income attributable to common stockholders | $ | 67,060 | $ | (12,932 | ) | $ | 19,991 | $ | (5,446 | ) | - | $ | 68,673 | |||||||||||||
| Income (loss) per share | ||||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders - Basic | $ | 55,140 | ||||||||||||||||||||||||
| Weighted average number of shares outstanding - Basic | 75,296,025 | |||||||||||||||||||||||||
| Basic net income (loss) per common share | $ | 0.73 | ||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders - Diluted | $ | 53,208 | ||||||||||||||||||||||||
| Weighted average number of shares outstanding - Diluted | 92,411,818 | |||||||||||||||||||||||||
| Diluted net income (loss) per common share | $ | 0.58 | ||||||||||||||||||||||||
4
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X, and presents the pro forma financial condition and results of operations of Acacia based upon the historical financial information of Acacia and Revolution II WI after giving effect to the Transactions and related adjustments set forth in the notes to the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined balance sheet as of December 31, 2023, gives effect to the Transactions as if they had occurred on December 31, 2023. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023, give effect to the Transactions as if they had occurred on January 1, 2023.
The unaudited pro forma condensed combined financial information has been prepared assuming the acquisition of assets method of accounting in accordance with GAAP. Under this method, Revolution II WI’s assets and liabilities as of the date of the Transactions will be recorded at their allocated relative fair value basis. The costs of the Transactions, which were direct and incremental, are also capitalized as a component of the purchase price. The unaudited pro forma financial information is based on preliminary accounting conclusions and are subject to potential revisions with further analysis.
The pro forma adjustments represent management’s estimates based on information available as of the date of this filing and are subject to change as additional information becomes available and additional analyses are performed. Acacia management considers this basis of presentation to be reasonable under the circumstances.
2. Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
The following adjustments were made related to the unaudited pro forma condensed combined balance sheet as of December 31, 2023:
| A. | The following reclassifications were made to conform Revolution II WI’s financial statement presentation to Acacia’s financial statement presentation: |
| · | The reclassification of $0.3 million of Acacia’s Other Long-Term Liabilities to Asset Retirement Obligation. |
| B. | As a part of the acquisition, Benchmark only acquired the oil and gas interests of Revolution II WI. No other assets or liabilities were assumed as a part of the transaction and therefore have been removed from Revolution II WI’s historical balances. |
| C. | Reflects the purchase price allocation adjustments to record Revolution II WI’s assets and liabilities at their relative fair value based on the cash consideration conveyed, inclusive of oil and gas properties, property, plant, and equipment and asset retirement obligation of $28.7 million. The asset retirement obligation adjustment is recorded to reflect the future cash flows to retire the oil and gas properties upon the end of their useful life. Additionally, the asset retirement costs were capitalized as a part of the initial recognition. |
| D. | Reflects the recognition of a $1.9 million liability related to the suspense fund, which relate to the historical royalties payable from the operator where the owner of the mineral interests cannot be identified, or there are questions as to the ownership of the mineral interests. |
| E. | Reflects the issuance and drawdown of $82.7 million of new revolving credit facility. The funds from the new revolving credit facility were used in part to fund the acquisition and in part to paydown the existing credit noted at adjustment (H). The debt issuance costs of $0.8 million will be deferred and amortized over the term of the credit facility. |
| F. | Reflects the cash paid by Benchmark of $145 million, inclusive of transaction costs. To fund the transaction, Acacia made a contribution to Benchmark in the amount of $59.9 million to increase their ownership within their subsidiary. The $59.9 million contribution to Benchmark increased Acacia’s ownership in Benchmark from 50.4% to 73.5%. |
5
| G. | Reflects the $15.25 million noncontrolling interest contribution by third parties to fund the acquisition of Revolution. |
| H. | Reflects the payoff of the $10.525 million on the existing West Texas National Bank Facility. |
| I. | Reflect the $0.4 million income tax payable recognized as a result of the acquisition of Revolution. |
3. Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
The following adjustments were made related to the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2023:
| AA. | The following reclassifications were made to conform Revolution II WI’s financial statement presentation to Acacia’s financial statement presentation: |
| · | The reclassification of $37.1 million of Revolution II WI’s Oil Sales to Energy Operations. |
| · | The reclassification of $4.7 million of Revolution II WI’s Natural Gas Sales to Energy Operations. |
| · | The reclassification of $15.2 million of Revolution II WI’s Natural Gas Liquids Sales to Energy Operations. |
| · | The reclassification of $25.1 million of Revolution II WI’s Production Costs to Cost of Revenues – Energy Operations. |
| · | The reclassification of $2.9 million of Revolution II WI’s Production Taxes and Deductions to Cost of Revenues – Energy Operations. |
| · | The reclassification of $0.02 million of Revolution II WI’s Exploration Expenses to Cost of Revenues – Energy Operations. |
| · | The reclassification of $18.8 million of Revolution II WI’s Depletion, Depreciation, Amortization and Accretion to Cost of Revenues – Energy Operations. |
| BB. | Reflects the elimination of the revenue-generating activities from Revolution II WI which were generated by assets during 2023 which were divested by Revolution II WI in 2023 as well as other activities not acquired by the Company. |
| CC. | Reflects the adjustment to remove the historical depletion and accretion expense related to the Revolution II WI’s historical statement of operations and record the expected depletion and accretion expense related to the oil and gas properties acquired and the asset retirement obligation recognized by Benchmark at adjustment (C). |
| DD. | Reflects the adjustment to remove the historical interest expense associated with the West Texas National Bank Facility paid off at adjustment (H). |
| EE. | Reflects interest expense related to the issuance of new revolving credit facility, as presented at adjustment (E), calculated based on an estimated interest rate of 8.8%. An increase or decrease in the interest rate of 50 basis points would result in an increase or decrease in interest expense of $0.4 million for the year ended December 31, 2023. This adjustment also includes the amortization of debt issuance costs of $0.8 million over the estimated three-year period of the credit facility. |
| FF. | Represents the elimination of the loss on divestiture of oil and gas properties of $56.8 million. |
| GG. | Reflects the adjustment to net income attributable to noncontrolling interests. After the transaction, Acacia’s interest in Benchmark increased from 50.4% to 73.5%. |
| HH. | Represents the $0.4 million income tax-related impact of the acquisition of Revolution. |
Note Prior to Acacia's acquisition Revolution II WI was not a taxpaying entity for federal income tax purposes and, accordingly, it did not recognize any expense for such taxes. The federal income tax liability resulting from Revolution II WI’s activities were the responsibility of Revolution II WI’s members. The income tax adjustment recorded relates to the income that would have been allocated to Acacia at the Corporate Statutory Income Tax Rate.
6
4. Unaudited Pro Forma Net Income Per Share
Acacia computes unaudited pro forma basic net income per share attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Acacia’s outstanding unvested restricted stock and Series A Redeemable Convertible Preferred Stock, are considered participating securities and are allocated a portion of the Acacia’s earnings.
Unaudited basic net income per share of common stock is computed by dividing unaudited pro forma net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Unaudited pro forma diluted net income per share of common stock is computed by dividing unaudited pro forma net income attributable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding for the period using the treasury stock method or the as-converted method, or the two-class method for participating securities, whichever is more dilutive.
7
| For the Twelve Months Ended | ||||
| (In thousands, except share and per share data) | December 31, 2023 | |||
| Numerator | ||||
| Pro forma net profit (loss) - basic and diluted | 68,673 | |||
| Less: | ||||
| Dividend on Series A redeemable convertible preferred stock | (1,400 | ) | ||
| Accretion of Series A redeemable convertible preferred stock | (3,230 | ) | ||
| Return on Settlement of Series A redeemable covertible preferred stock | (3,377 | ) | ||
| Undistributed earnings allocated to participating securities | (3,913 | ) | ||
| Net earnings (loss) allocated to common shares | 56,753 | |||
| Denominator | ||||
| Pro forma weighted average shares of common stock outstanding - basic | 75,296,025 | |||
| Pro forma basic earnings (loss) per share | 0.75 | |||
| Add: | ||||
| Interest expense associated with Starboard Notes | 1,518 | |||
| Undistributed earnings allocated to participating securities | 3,913 | |||
| Less: | ||||
| Change in fair value and gain on exercise of dilutive Series B warrants | (4,287 | ) | ||
| Reallocation of undistributed earnings to participating secutities | (3,076 | ) | ||
| Net earnings (loss) allocated to common shares - diluted | 54,821 | |||
| Denominator | ||||
| Pro forma weighted average shares of common stock outstanding - basic | 92,411,818 | |||
| Pro forma basic earnings (loss) per share - diluted | 0.59 | |||
5. Pro Forma Standardized Measure of Oil and Gas (“SMOG”) Disclosure
Prior to the acquisition of Revolution II WI, Acacia held only one investment in an oil and gas producing company, which was their investment in Benchmark. Benchmark’s oil and gas producing operations were not significant to Acacia as of December 31, 2023. Upon the acquisition of Revolution II WI, Acacia’s interest in Revolution II WI’s oil and gas producing operations were deemed significant to the company and therefore standardized measure of oil and gas (“SMOG”) disclosures are required to be presented. See Footnote 13. Supplemental Information on Oil and Natural Gas Properties (Unaudited) to Exhibit 99.1 to the Form 8-K/A to which these unaudited pro forma condensed combined financial statements relate for Revolution II WI’s SMOG disclosures as of December 31, 2023.
8