Empire Petroleum Corp 8-K/A, filed Jun 23, 2020
Empire Petroleum Corp (EP)
About this 8-K/A
Empire Petroleum Corp filed this 8-K/A on June 23, 2020, reporting on events of April 6, 2020.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 8-K/A
(Amendment No. 1)
_________________
Current Report
Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
APRIL 6, 2020
_______________________________
EMPIRE PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
_______________________________
| Delaware | 001-16653 | 73-1238709 |
| (State or Other Jurisdiction | (Commission | (I.R.S. Employer |
| of Incorporation) | File Number) | Identification No.) |
1203 E. 33rd Street, Suite 250, Tulsa Oklahoma 74105
(Address of Principal Executive Offices) (Zip Code)
(539) 444-8002
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None |
EMPR |
None |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
EXPLANATORY NOTE
On April 10, 2020, Empire Petroleum Corporation (the "Company") filed with the Securities and Exchange Commission a Current Report on Form 8-K, dated April 6, 2020 (the "Initial Form 8-K"), to report, among other things, that Empire Texas LLC (“Empire Texas”), a Delaware limited liability company, which is a wholly owned subsidiary of the Company , acquired (a) certain oil and gas properties, (b) 77.3 miles of gathering lines and pipelines and related facilities and equipment and (c) all general and limited partner shares and general and limited partner interest in Pardus Oil & Gas Operating, LP, from Pardus Oil & Gas, LLC ("Pardus") and Pardus Oil & Gas Operating GP, LLC (the "Pardus Acquisition").
This Current Report on Form 8-K/A amends Item 9.01 of the Initial Form 8-K to present certain financial statements of Pardus and to present certain unaudited pro forma financial statements of the Company in connection with the Pardus Acquisition.
Item 9.01 Financial Statements and Exhibits
| (a) | Financial Statements of Business Acquired. |
Filed as Exhibit 99.1 to this Current Report on Form 8-K/A, and incorporated herein by reference, are audited historical consolidated financial statements of Pardus as of and for the years ended December 31, 2019 and 2018.
Filed as Exhibit 99.2 to this Current Report on Form 8-K/A, and incorporated herein by reference, is unaudited Supplemental Oil and Gas Information of Pardus.
Filed as Exhibit 99.3 to this Current Report on Form 8-K/A, and incorporated herein by reference, are unaudited historical consolidated financial statements of Pardus as of March 31, 2020 and for the three months ended March 31, 2020 and 2019.
| (b) | Pro Forma Financial Information. |
Filed as Exhibit 99.4 to this Current Report on Form 8-K/A, and incorporated herein by reference, are unaudited pro forma condensed consolidated financial statements of the Company as of and for the three months ended March 31, 2020, and for the year ended December 31, 2019, which have been prepared to give effect to the Pardus Acquisition. These unaudited pro forma condensed consolidated financial statements are provided for illustrative purposes only and do not purport to represent what the Company’s actual results of operations or financial position would have been if the Pardus Acquisition had occurred on the dates indicated, nor are they necessarily indicative of the Company’s future operating results or financial position.
| (d) | Exhibits. |
| The following exhibits are filed herewith. | |
Exhibit Number | Description |
| 2.1* | |
| 99.1** | Audited Historical Consolidated Financial Statements of Pardus. |
| 99.2** | |
| 99.3** | Unaudited Historical Consolidated Financial Statements of Pardus. |
| 99.4** | Unaudited Pro Forma Condensed Consolidated Financial Statements of the Company. |
________________________
* Previously filed with the Initial Form 8-K.
** Filed with this Current Report on Form 8-K/A.
| 2 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
EMPIRE PETROLEUM CORPORATION
|
|||
| Date: June 23, 2020 | By: | /s/ Michael R. Morrisett | |
Michael R. Morrisett President |
|||
3
EXHIBIT 99.1
Pardus Oil & Gas, LLC
Consolidated Financial Statements
December 31, 2019
Table of Contents
| Page | ||
| INDEPENDENT AUDITORS’ REPORT | 2-3 | |
| CONSOLIDATED FINANCIAL STATEMENTS | ||
| Consolidated Balance Sheets | 4 | |
| Consolidated Statements of Operations and Member’s Deficit | 5 | |
| Consolidated Statements of Cash Flows | 6 | |
| Notes to Consolidated Financial Statements | 7-17 | |
INDEPENDENT AUDITORS’ REPORT
To the Management and Member of
Pardus Oil & Gas, LLC
We have audited the accompanying consolidated financial statements of Pardus Oil & Gas, LLC (the “Company”), which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of operations and member’s deficit, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of 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 auditor considers internal control relevant to the entity’s 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 entity's 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 opinion.
| 2 |
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pardus Oil & Gas, LLC as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the consolidated financial statements, the Company is in default of its term loan facilities and the lenders may demand payment at any time. No such demand has been made. The Company does not have adequate liquidity to pay the loans if demand is made. As a result, there is substantial doubt about the ability of the Company to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans in regard to that matter are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.
Subsequent Event
As discussed in Note 13 to the consolidated financial statements, on April 7, 2020, the Company sold substantially all of its operating assets to Empire Texas, LLC.
/s/ Postlethwaite & Netterville, APAC
Metairie, Louisiana
June 19, 2020
| 3 |
PARDUS OIL & GAS, LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2019 AND 2018
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 2,291,187 | $ | 1,461,732 | ||||
| Oil and gas receivables | 867,061 | 1,049,422 | ||||||
| Derivative asset | — | 223,706 | ||||||
| Joint interest receivables, net | 58,367 | 170,698 | ||||||
| Prepaid expenses | 66,832 | 190,669 | ||||||
| Other current assets | 3,609 | 75,607 | ||||||
| Total current assets | 3,287,056 | 3,171,834 | ||||||
| PROPERTY AND EQUIPMENT, NET | ||||||||
| Oil and gas property and equipment, at cost, under the successful | ||||||||
| efforts method of accounting for oil and gas properties: | ||||||||
| Proved properties | 21,570,403 | 41,808,711 | ||||||
| Unproved properties | — | 3,376,428 | ||||||
| 21,570,403 | 45,185,139 | |||||||
| Other property and equipment | 772,155 | 583,111 | ||||||
| Less accumulated depreciation, depletion and amortization | (9,881,094 | ) | (3,088,357 | ) | ||||
| Total property and equipment, net | 12,461,464 | 42,679,893 | ||||||
| OTHER NONCURRENT ASSETS | ||||||||
| Due from related party | 564,059 | 471,384 | ||||||
| Other noncurrent assets | 397,862 | 424,844 | ||||||
| Total noncurrent assets | 961,921 | 896,228 | ||||||
| TOTAL ASSETS | $ | 16,710,441 | $ | 46,747,955 | ||||
| LIABILITIES AND MEMBERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 2,343,408 | $ | 2,727,191 | ||||
| Asset retirement obligations, current portion | 396,303 | 256,333 | ||||||
| Accrued liabilities | 307,857 | 566,130 | ||||||
| Notes payable - first lien due November 12, 2021 (face value of $106.2 and $92.7 million | ||||||||
| in 2019 and 2018, respectively, see Note 9) | 85,608,327 | 61,480,842 | ||||||
| Notes payable - second lien due May 13, 2022 (face value of $49.8 and $46.5 million | ||||||||
| in 2019 and 2018, respectively, see Note 9) | 26,652,870 | 13,702,723 | ||||||
| Total current liabilities | 115,308,765 | 78,733,219 | ||||||
| LONG TERM LIABILITIES | ||||||||
| Asset retirement obligations, net of current portion | 8,297,187 | 7,659,129 | ||||||
| Other non-current liabilities | 90,954 | 12,773 | ||||||
| Total long term liabilities | 8,388,141 | 7,671,902 | ||||||
| TOTAL LIABILITIES | 123,696,906 | 86,405,121 | ||||||
| MEMBER'S DEFICIT | (106,986,465 | ) | (39,657,166 | ) | ||||
| TOTAL LIABILITIES AND MEMBER'S DEFICIT | $ | 16,710,441 | $ | 46,747,955 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
PARDUS OIL & GAS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND MEMBER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| 2019 | 2018 | |||||||
| REVENUE | ||||||||
| Oil and natural gas sales | $ | 9,575,070 | $ | 15,372,018 | ||||
| OPERATING EXPENSES | ||||||||
| Lease operating expense | 6,114,214 | 7,288,709 | ||||||
| Production taxes | 456,862 | 731,871 | ||||||
| Dry hole costs and loss on abandonment of oil and gas properties | 3,702,076 | 980,982 | ||||||
| General and administrative | 1,660,058 | 3,901,059 | ||||||
| Depreciation, depletion, amortization and accretion | 7,570,764 | 3,596,937 | ||||||
| Impairment on oil and gas properties | 20,500,000 | — | ||||||
| Total operating expenses | 40,003,974 | 16,499,558 | ||||||
| Operating loss | (30,428,904 | ) | (1,127,540 | ) | ||||
| Interest expense, net | 38,588,715 | 36,294,057 | ||||||
| Gain on settlement, net | (1,693,818 | ) | — | |||||
| Price risk management activities loss (income) | 120,459 | (224,436 | ) | |||||
| Other income | (114,961 | ) | (30,300 | ) | ||||
| NET LOSS | (67,329,299 | ) | (37,166,861 | ) | ||||
| Member's deficit, beginning of year | (39,657,166 | ) | (2,490,305 | ) | ||||
| Member's deficit, end of year | $ | (106,986,465 | ) | $ | (39,657,166 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
PARDUS OIL & GAS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (67,329,299 | ) | $ | (37,166,861 | ) | ||
| Adjustments to reconcile net loss to net cash provided by | ||||||||
| operating activities: | ||||||||
| Accretion of asset retirement obligations | 778,028 | 751,892 | ||||||
| Amortization of debt discount | 20,309,320 | 20,309,323 | ||||||
| Paid-in-kind interest expense | 18,268,312 | 15,977,077 | ||||||
| Depreciation, depletion, and amortization | 6,792,737 | 2,845,045 | ||||||
| Dry hole costs | 3,376,428 | — | ||||||
| Impairment on oil and gas properties | 20,500,000 | — | ||||||
| Settlement of asset retirement obligations | — | (493,097 | ) | |||||
| Change in operating assets and liabilities: | ||||||||
| Receivables | 294,692 | 1,243,393 | ||||||
| Derivative asset | 223,706 | (223,706 | ) | |||||
| Prepaid expenses and other current assets | 195,835 | 124,359 | ||||||
| Accounts payable and accrued liabilities | (642,056 | ) | (523,885 | ) | ||||
| Other assets and liabilities | 105,163 | (13,713 | ) | |||||
| Net cash provided by operating activities | 2,872,866 | 2,829,827 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Capital expenditures | (450,736 | ) | (4,939,447 | ) | ||||
| Net cash used in investing activities | (450,736 | ) | (4,939,447 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net change in due to/from related parties | (92,675 | ) | (256,176 | ) | ||||
| Payments on notes payable | (1,500,000 | ) | — | |||||
| Net cash used in financing activities | (1,592,675 | ) | (256,176 | ) | ||||
| Net change in cash | 829,455 | (2,365,796 | ) | |||||
| Cash at beginning of period | 1,461,732 | 3,827,528 | ||||||
| Cash at end of period | $ | 2,291,187 | $ | 1,461,732 | ||||
| DISCLOSURE OF SUPPLEMENTAL NON-CASH INVESTING | ||||||||
| AND FINANCING ACTIVITIES | ||||||||
| Adjustment to purchase price allocation to recievables and notes payable | $ | — | $ | 938,958 | ||||
| Capital expenditures included in accounts payable at end of year | $ | — | $ | 22,469 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
PARDUS OIL & GAS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER, 31, 2019
| 1. | Organization |
On September 1, 2016, Energy & Exploration Partners, LLC changed its name to Pardus Oil & Gas, LLC.
Pardus Oil & Gas, LLC, formerly Energy & Exploration Partners, LLC (together with its consolidated subsidiary (Pardus Oil & Gas Operating, LP), (“Pardus,” “the Company,” “we,” “our,” “us” or similar terms) is an independent exploration and production company focused on the acquisition, exploration, development and exploitation of unconventional oil and natural gas resources. The Company has developed and undeveloped leasehold acres in the East Texas Basin where the Company is pursuing opportunities in the Lower Cretaceous formations of the Buda, Georgetown, Edwards and Glen Rose (the Buda-Rose play), the Woodbine sandstone, the Good Land limestone and the Eagle Ford shale, collectively referred to as the East Texas stacked play. Pardus Oil & Gas, LLC is a wholly-owned subsidiary of ENXP Holding Company, LLC (“ENXP”)
| 2. | Going Concern |
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date these consolidated financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.
The Company is in default under each of the First Lien Facility and Second Lien Facility and the lenders may demand payment at any time. No such demand has been made. The Company does not have adequate liquidity to pay the amounts due under the First Lien Facility and the Second Lien Facility if demand is made. A substantial amount of the First Lien Facility and Second Lien Facility are held by HPS, the parent of ENXP. The Company does not expect that the First Lien Facility and Second Lien Facility (aggregate face value of $156 million as of December 31, 2019) will be called, but management cannot give any assurance this will not occur.
| 3. | Emergence from Voluntary Reorganization under Chapter 11 Proceedings |
On November 25, 2015, an involuntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) was filed against Energy & Exploration Partners Operating, LP in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division [Docket No. 1] (the “Bankruptcy Court”). On December 7, 2015, the Company, along with Energy & Exploration Partners, Inc., Energy & Exploration Partners Operating GP, LLC, and Energy & Exploration Partners Operating, LP, filed voluntary petitions seeking relief under the Bankruptcy Code and sought to convert the involuntary proceeding into a voluntary Chapter 11 case. On December 9, 2015, the Bankruptcy Court entered an order converting the involuntary proceeding into a voluntary chapter 11 case [Docket No. 12]. These proceedings were filed in order to effectuate a restructuring of the debtors’ outstanding obligations. The bankruptcy case was closed on April 20, 2020 (Docket No. 1283).
On April 26, 2016, the Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization (the “Plan”) pursuant to section 1129 of the Bankruptcy Code. Reorganized Energy & Exploration Partners, LLC and all reorganized subsidiaries subsequently emerged from bankruptcy on May 12, 2016 once all material contingencies of the Plan were satisfied.
| 7 |
Additionally, pursuant to the Plan, Energy & Exploration Partners, Inc., Energy & Exploration Partners, LLC’s parent company, was liquidated and its entire estate was transferred to Energy & Exploration Partners, LLC. Subsequent to emergence from bankruptcy, Energy & Exploration Partners, LLC changed its name to Pardus Oil & Gas, LLC, as noted in Note 1.
In connection with the emergence of bankruptcy, the Company entered into two credit agreements: (i) Senior Secured First Lien Credit Agreement dated as of May 13, 2016 (the “First Lien Facility”) and (ii) Senior Secured Second Lien Credit Agreement dated as of May 13, 2016 (the “Second Lien Facility”). See Note 9 for additional information.
| 4. | HPS Investment Partners, LLC Transaction |
In connection with the Plan, an entity controlled by HPS Investment Partners, LLC (“HPS”) owned approximately 11.75% of the equity in ENXP and 10.11% of the First Lien Facility and 9.31% of the Second Lien Facility.
On November 29, 2017 (“Acquisition Date”), HPS completed two transactions (“HPS Transaction”). In the first transaction, HPS and the majority of the holders of the First Lien Credit Facility and the Second Lien Credit Facility executed a purchase and sale agreement. The purchase and sale agreement provided that HPS would acquire (i) 89.8879% of the aggregate outstanding indebtedness incurred under the First Lien Credit Facility and (ii) 81.6939% of the aggregate outstanding indebtedness incurred under the Second Lien Facility. As a result of the purchase and sale agreement, HPS owns 100% of the First Lien Credit Facility and 91% of the Second Lien Facility. In the second transaction, HPS and a majority of the holders of ENXP’s equity executed a merger agreement. As a result of the merger agreement, HPS owns 100% of the equity in ENXP, the 100% owner of Pardus Oil & Gas, LLC.
| 5. | Summary of Significant Accounting Policies |
Push Down Accounting
Pardus applied Push Down Accounting in connection with the HPS Transaction on the Acquisition Date which resulted in the Company becoming a new entity for financial accounting purposes. Upon adoption of Push Down Accounting, the Company’s assets and liabilities were recorded at their fair value as of Acquisition Date. The Acquisition Date fair value of the Company’s assets and liabilities differed materially from the recorded values of the Company’s assets and liabilities as reflected in the historical balance sheet.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Pardus Oil and Gas, LLC and its wholly owned subsidiary. Pardus is an independent exploration and production company engaged in the exploration, development, acquisition, and operation of oil and gas properties, with a focus on liquids-rich resource plays of oil and natural gas reserves in Texas.
The Company’s consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”) and in accordance with the rules and regulations of the United States Securities and Exchange Commission. All intercompany transactions and account balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods then ended. Significant items subject to such estimates and assumptions include the carrying amount of oil and gas properties, the accrual of asset retirement obligations, and the fair value of notes payable (as of the acquisition date). The Company evaluates its estimates and assumptions on a regular basis. Changes in facts and circumstances or additional information may result in revised estimates and actual results could differ from those estimates.
| 8 |
There are also numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, including many factors beyond the control of the Company. Actual future production, oil and gas prices, revenues, taxes, capital expenditures, operating expenses, geologic success and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimate, and could materially affect the estimated quantity and value of reserves. Accordingly, reserve estimates may be different from the quantities of oil and gas ultimately recovered. Such changes affect the amount of depreciation, depletion and amortization expenses recorded in the financial statements and could affect the carrying value of oil and gas properties.
The Company is subject to legal proceedings, claims, liabilities and environmental matters that arise in the ordinary course of business. The Company accrues for losses when such losses are considered probable and the amounts can be reasonably estimated.
Cash and Cash Equivalents
Cash and cash equivalents maturing in three months or less from the date of purchase are classified as cash and cash equivalents. The Company determines the appropriate classification of its investments in cash and cash equivalents at the time of purchase and reevaluates such designation at each balance sheet date. There were no cash equivalents as of December 31, 2019 and 2018.
The Company maintains a substantial amount of cash in certain banks, which at times may exceed federally insured deposit limits. The Company has not experienced any loss in such accounts and management believes that the Company is not exposed to any significant credit risk related to the cash in banks.
Revenue Recognition and Accounts Receivable
Pardus’ oil and natural gas are sold to various purchasers. The Company recognizes oil and natural gas revenues based on the quantities of its proportionate share of such sales at market prices at the time the purchaser takes control of the product.
Accounts receivable are generated from the sale of oil and natural gas to various customers. The Company’s accounts receivable are uncollateralized and are generally due within 30 days of the invoice date. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to the earliest unpaid items. The Company also has joint interest receivables from other entities with a working interest in the properties operated by the Company for their proportionate share of costs. Management periodically reviews accounts receivable for collectability. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on historical experience and current economic conditions using the specific identification method. At December 31, 2019 and 2018, the Company had $50,000 recorded for the allowance.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead, and similar activities are expensed as incurred. If an exploratory well provides evidence to justify potential development of reserves, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.
| 9 |
Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized. Depreciation of the cost of proved oil and gas properties is calculated using the unit-of-production (“UOP”) method. The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the carrying value of those reserves. The reserve base used to calculate the depreciation for capitalized costs for exploratory and development wells is the sum of proved developed reserves only. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are included in the depreciable cost. Depreciation, depletion, and amortization expense related to oil and gas properties was approximately $6,690,000 and $2,699,000 for the years ended December 31, 2019 and 2018, respectively.
During 2019 and 2018, the Company incurred costs of approximately $242,000 and $3,400,000, respectively, to drill and partially complete a vertical well in Madison County, Texas. At December 31, 2018 the Company was still evaluating the completion and artificial lift for the well. During 2019, management concluded that it will not be completing the well and has expensed the costs incurred as dry hole costs in 2019.
When circumstances indicate that proved oil and gas properties may be impaired, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for oil and gas properties. If the expected undiscounted pre-tax future cash flows, based on Company’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. For the year ended December 31, 2019 an impairment of $20,500,000 was recognized. No impairment was recorded in 2018.
Other Property and Equipment
Other property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using straight-line method over the estimated useful lives (ranging from 2-15 years) of the respective assets. The costs of normal maintenance and repairs are charged to expense as incurred unless they extend the useful life of the asset. Material expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of equipment sold, or otherwise disposed of, and the related accumulated depreciation are removed from the accounts and any gain or loss is reflected in current operations.
Oil and Gas Reserve Quantities
The estimates of oil and natural gas reserves at December 31, 2019 were prepared by an independent reservoir engineer utilizing information provided by management and other available information. The estimates of oil and natural gas reserves as of December 31, 2018 were prepared internally by updating a December 31, 2017 reserve report prepared by an independent reservoir engineer.
Estimates of proved reserves are based on the quantities of oil and natural gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. The oil price per barrel used in the December 31, 2019 and 2018 reserve estimates was $58.25 and $64.51, respectively.
Asset Retirement Obligations
The Company has obligations under its lease agreements and federal regulations to remove equipment and facilities from leased acreage and return such land to its original condition. In general, the Company’s future asset retirement obligations (“ARO”) relate to future costs associated with plugging and abandonment of its oil and natural gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. The ARO is recorded as a liability at its estimated present value in the period in which it is incurred with a corresponding increase in the carrying amount of the related oil and gas property on the balance sheet.
Periodic accretion of the discounted value of the estimated liability is recorded as an expense in the consolidated statement of operations. The Company has classified these fair value measurements as Level 3 based on the fair value inputs, including future plugging, abandonment, and remediation costs, future well life, inflation factors and the credit-adjusted risk-free interest rate (see Note 10 for further discussion). The fair value of the liability is measured on a non-recurring basis. Revisions to the liability can occur due to changes in its estimate or if federal or state regulators enact new plugging and abandonment requirements. At the time of actual plugging and abandonment of the Company’s oil and natural gas wells, any gains or losses associated with the operation are recognized in earnings during the period in which the work is performed. Accretion expense was $778,028 and $751,892 for the years ended December 31, 2019 and 2018, respectively.
| 10 |
Price Risk Management Activities
The Company uses commodity price derivatives to manage fluctuating oil and natural gas market risks. The Company periodically enters into commodity derivative contracts, which may require payments to (or receipts from) counterparties based on the differential between a fixed price and a variable price for a fixed quantity of oil or natural gas without the exchange of underlying volumes.
Commodity derivatives are recorded on the consolidated balance sheet at fair value with settlements of such contracts and changes in the unrealized fair value recorded in earnings each period. Realized gains and losses on the settlement of commodity derivatives and changes in their unrealized gains and losses are reported in price risk management activities loss (income) in the consolidated statements of operations. The Company does not enter into derivative agreements for trading or other speculative purposes. There were no outstanding contracts as of December 31, 2019. Outstanding oil contracts as of December 31, 2018 were as follows:
| Instrument | |||
| Period | Type | Volume | Price |
| January 2019 | Swap | 4,836 Bbls | $ 63.00 |
| February 2019 | Swap | 4,172 Bbls | $ 62.44 |
| March 2019 | Swap | 4,526 Bbls | $ 61.87 |
Income Taxes
Pardus Oil & Gas, LLC is a disregarded entity for income tax purposes. Therefore, federal taxable income or loss is reported by ENXP for inclusion in its respective tax return.
Pardus Oil & Gas, LLC accounts for the effect of any uncertain tax positions based on a “more-likely-than-not” threshold to the recognition of the tax positions being sustained based on the technical merits of the position under scrutiny by the applicable taxing authority. If a tax position or positions are deemed to result in uncertainties of those positions, the unrecognized tax benefit is estimated based on a “cumulative probability assessment” that aggregates the estimated tax liability for all uncertain tax positions.
Management has determined that the Company does not have any uncertain income tax positions and associated unrecognized benefits or liabilities that materially impact the consolidated financial statements or related disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance that the Company's tax returns will not be challenged by the taxing authorities and that the Company or its member will not be subject to additional tax, penalties, and interest as a result of such challenge.
Business and Credit Concentrations
The Company engages principally in the exploration, development and production of onshore oil and gas in the East Texas region of the United States. Products are sold under short-term contracts at prevailing rates.
Presently, all of the Company’s proved reserves and estimated future net revenues are expected to be generated by a limited number of producing fields in Texas. The Company earned 90% and 84% of its revenue for the years ended December 31, 2019 and 2018, respectively, from the sale of oil. The Company sold 100% of its oil to one customer from January 2018 through June 2018 and 100% of its oil to a new customer from July 2018 through December 31, 2019. Receivables from the latter customer represented 92% and 85% of total oil and gas receivables at December 31, 2019 and 2018, respectively.
Reclassification
Certain amounts in the accompanying financial statements have been reclassified to conform to the current year presentation.
| 11 |
Accounting Pronouncements Issued but not yet Adopted
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, to update its revenue recognition standard to clarify the principles of recognizing revenue and eliminate industry-specific guidance as well as help financial statement users better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. On June 3, 2020, the FASB deferred the effective date of this standard for certain entities that had not yet issued their 2019 financial statements. This standard will be effective for the Company for annual periods beginning after December 15, 2019.
In February 2016, the FASB issued ASU 2016-02, Leases. This accounting standard requires lessees to recognize assets and liabilities related to lease arrangements longer than 12 months on the balance sheet as well as additional disclosures. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to simplify the lease standard’s implementation. The amended guidance relieves businesses and other organizations of the requirement to present prior comparative years’ results when they adopt the new lease standard. Instead of recasting prior year results using the new accounting when they adopt the guidance, companies can choose to recognize the cumulative effect of applying the new standard to leased assets and liabilities as an adjustment to the opening balance of retained earnings. On June 3, 2020, the FASB deferred the effective date of this standard for private companies. This standard will be effective for the Company for annual periods beginning after December 15, 2021.
The Company is currently assessing the impact of these pronouncements on its consolidated financial statements.
| 6. | Acquisition |
The HPS Transaction has been accounted for as a business combination, using the acquisition method. HPS, ENXP, and Pardus have elected to utilize Push Down Accounting in these separate financial statements. This election is irrevocable. The election is effective as of the Acquisition Date and results in a new basis for the assets, liabilities, and equity of the Company as of that date. Such basis is determined using the fair value of assets acquired and liabilities assumed.
The following table summarizes the preliminary purchase price and the preliminary estimated fair values of assets and liabilities assumed as of the Acquisition Date, with any deficit of the purchase price over the estimated fair value of the identified net assets acquired recorded as a reduction in the face value of the First Lien Facility and Second Lien Facility.
| Receivables | $ | 2,735,437 | ||
| Prepaid expenses and other current assets | 586,008 | |||
| Property and equipment | 538,041 | |||
| Oil and gas properties | 40,265,302 | |||
| Other long term deposits | 164,196 | |||
| Accounts payable, accrued expenses, and other liabilities | (5,943,702 | ) | ||
| Asset retirement obligations | (7,593,863 | ) | ||
| Notes payable | (35,210,560 | ) | ||
| Cash paid to sellers | 950 | |||
| Net cash acquired | $ | (4,458,191 | ) |
| 12 |
Adjustments were made in 2018 to the preliminary purchase price allocation recorded in 2017 resulting from the recognition of an additional $938,958 in assets, primarily receivables not initially included as of the Acquisition Date. As a result of these adjustments to the fair value of assets acquired as of the Acquisition Date, the fair value of the notes payable at the acquisition date were adjusted by a corresponding amount.
The fair values of natural gas and oil properties are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of natural gas and oil properties were measured using valuation techniques that convert future cash flows into a single discounted amount. Significant inputs to the valuation of natural gas and oil properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital. These inputs required significant judgments and estimates by management. These inputs have a significant impact on the valuation of oil and gas properties and future changes may occur. The fair value of undeveloped property was determined based upon a market approach of comparable transactions using Level 3 inputs. See Note 10 for further discussion.
| 7. | Asset Retirement Obligations |
The change in the Company’s asset retirement obligations (“ARO”) for the years ended December 31, 2019 and 2018 is set forth below:
| 2019 | 2018 | |||||||
| ARO, at beginning of year | $ | 7,915,462 | $ | 7,656,667 | ||||
| Accretion expense | 778,028 | 751,892 | ||||||
| Liabilities settled | — | (493,097 | ) | |||||
| ARO, at end of year | 8,693,490 | 7,915,462 | ||||||
| Current portion of ARO | 396,303 | 256,333 | ||||||
| ARO, net of current portion | $ | 8,297,187 | $ | 7,659,129 | ||||
| 8. | Other Property and Equipment |
The Company’s other property and equipment, net, consists of the following at December 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Land | $ | 223,197 | $ | 223,197 | ||||
| Land improvements | 114,498 | 114,498 | ||||||
| Furniture and equipment | 116,408 | 116,408 | ||||||
| Vehicles | 318,052 | 129,008 | ||||||
| 772,155 | 583,111 | |||||||
| Less: accumulated depreciation | (260,800 | ) | (158,556 | ) | ||||
| Other property and equipment, net | $ | 511,355 | $ | 424,555 | ||||
Depreciation expense for the Company related to other property and equipment was approximately $102,000 and $148,000 for the years ended December 31, 2019 and 2018, respectively.
| 13 |
| 9. | Notes Payable |
As described in Note 6 of the consolidated financial statements, as of the date when HPS acquired control of ENXP and Pardus, all assets acquired and all liabilities assumed were valued at fair value. See Note 10 for further discussion. The discount between the fair value recorded and the face value of the loan facilities as of the Acquisition Date is amortized over the terms of the respective loan facilities and is recorded as additional interest expense.
As of December 31, 2019, the First Lien Facility and Second Lien Facility’s face value consisted of the following:
| Additional | ||||||||||||
| Paid-in-Kind | ||||||||||||
| Principal | Interest | Total | ||||||||||
| First lien credit facility | $ | 65,000,000 | $ | 41,152,259 | $ | 106,152,259 | ||||||
| Second lien credit facility | 40,000,000 | 9,830,508 | 49,830,508 | |||||||||
| $ | 105,000,000 | $ | 50,982,767 | $ | 155,982,767 | |||||||
As of December 31, 2018, the First Lien Facility and Second Lien Facility’s face value consisted of the following:
| Additional | ||||||||||||
| Paid-in-Kind | ||||||||||||
| Principal | Interest | Total | ||||||||||
| First lien credit facility | $ | 65,000,000 | $ | 27,743,347 | $ | 92,743,347 | ||||||
| Second lien credit facility | 40,000,000 | 6,471,108 | 46,471,108 | |||||||||
| $ | 105,000,000 | $ | 34,214,455 | $ | 139,214,455 | |||||||
On May 13, 2016 the Company entered into the Senior Secured First Lien Credit Agreement (the “First Lien Facility”) with a group of institutional lenders and Wilmington Trust, National Association, (the “Administrative Agent” and the “Collateral Agent”). The First Lien Facility consists of senior secured credit facilities in an aggregate principal amount of up to $90 million consisting of:
| (i) | senior secured term loan facility (the “Tranche A Loan Facility”) in an aggregate principal amount of $65 million funded on May 13, 2016 upon emergence from bankruptcy. |
| (ii) | senior secured term loan facility (the “Tranche B Loan Facility”) amount of up to $25 million made available to the Company in a single draw at a future date. This Tranche B Term Loan Facility has not been funded as of December 31, 2019. |
| 14 |
The Company’s obligations under the First Lien Facility are secured, subject to certain exceptions, by granting to the Collateral Agent, for the benefit of the secured parties, a security interest in and lien on substantially all of the property and assets of the Company.
The First Lien Facility are due and payable on the maturity date of November 12, 2021. The Term Loans bear interest at a rate per annum equal to 13% payable in arrears on each interest payment date which is each six-month anniversary of the closing date, May 13, 2016. All interest is accrued in kind by increasing the outstanding principal amount of the loans by the accrued interest. Interest is calculated based upon the compounded principal balance. The Company may elect to pay interest in cash by delivering written notice to the Administrative Agent indicating that the Company is exercising its right to pay cash on such interest payment date. A payment of $1.5 million was made in 2019. No principal or interest payments were made in 2018.
The First Lien Facility provides for customary events of default, subject to applicable grace periods. As of December 31, 2019, the Company is not in compliance with certain debt covenants. The failure to comply with these covenants gives the lenders the right to terminate the commitments and, or declare the debt outstanding due and payable in whole or in part. Although the Company has not received any indications from its lenders that they will exercise their right to terminate the commitment or declare the debt due and payable, the Company has reclassified the outstanding balance of principal and accrued in kind interest from non-current to current. As required by the First Lien Facility, during the continuance of the failure to comply with these covenants, the outstanding balance will bear interest at 15%.
On May 13, 2016 the Company entered into the Senior Secured Second Lien Credit Agreement (the “Second Lien Facility”) with the Company’s lenders under the prior pre-petition senior secured term loan and Wilmington Trust, National Association, (the “Administrative Agent” and the “Collateral Agent”). These lenders converted their pre-petition loans to loans under the Second Lien Facility in an aggregate principal amount of $40 million.
The Company’s obligations under the Second Lien Facility are secured, subject to certain exceptions, by granting to the Collateral Agent, for the benefit of the secured parties, a security interest in and lien on substantially all of the property and assets of the Company.
The Second Lien Facility which is due and payable on the maturity date of May 13, 2022 bears interest at a rate per annum equal to 5% payable in arrears on each interest payment date which is each annual anniversary of the closing date, May 13, 2016. All interest is accrued in kind by increasing the outstanding principal amount of the loans by the accrued interest on an annual basis. Interest is calculated based upon the compounded principal balance. The Company may elect to pay interest in cash by delivering written notice to the Administrative Agent indicating that the Company is exercising its right to pay cash on such interest payment date. No principal or interest payments were made in either 2019 or 2018.
The Second Lien Facility provides for customary events of default, subject to applicable grace periods. As of December 31, 2019, the Company is not in compliance with certain debt covenants. The failure to comply with these covenants gives the lenders the right to terminate the commitments and, or declare the debt outstanding due and payable in whole or in part. Although the Company has not received any indications from its lenders that they will exercise their right to terminate the commitment or declare the debt due and payable, the Company has reclassed the outstanding balance of principal and accrued in kind interest from non-current to current. As required by the Second Lien Facility, during the continuance of the failure to comply with these covenants, the outstanding balance will bear interest at 7%.
| 10. | Fair Value Measures |
The Company follows a framework for measuring fair value, which outlines a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
| 15 |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses market data, or assumptions that market participants would use, to value the asset or liability. These assumptions include market risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
The Company primarily applies the market approach for recurring fair value measurements and attempts to use the best available information. Accounting standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities, a Level 1 measurement, and lowest priority to unobservable inputs, a Level 3 measurement. The three levels of fair value hierarchy are as follows:
| · | Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| · | Level 2 inputs: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. |
| · | Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. |
| 11. | Related Party Transactions |
Pursuant to a management services agreement, the Company paid a management fee related to accounting, regulatory and land services of approximately $100,000 per month to a company also controlled by HPS. This management agreement was terminated effective February 1, 2019. In the years ended December 31, 2019 and 2018, management fees of $100,000 and $1,200,000, respectively, were paid.
The Company advances funds to its parent, ENXP, as needed. As of December 31, 2019 and 2018, the amount due from ENXP is $564,059 and $471,384, respectively. Such amounts are non-interest bearing and do not have a set repayment date.
| 12. | Gain on Settlement |
In October 2019, the Company settled a sales tax dispute with the Texas Comptroller of Public Accounts and received a refund of $1,693,818, net of $934,176 in fees incurred.
| 13. | Subsequent Events |
Management has evaluated subsequent events through the date that the financial statements were available to be issued, June 19, 2020, and determined that the following matters required additional disclosure in the financial statements. No subsequent events occurring after this date have been evaluated for inclusion in these financial statements.
| 16 |
Acquisition of Gathering System
On April 6, 2020, Pardus Oil & Gas Operating, LP, a wholly owned subsidiary of Pardus Oil & Gas, LLC, acquired a natural gas gathering system located in Houston and Madison counties in Texas from Trinity River Midstream, LLC (“TRM”). The purchase price was the assumption of liabilities, including any unpaid operating expenses as of the closing date. TRM and Pardus Oil & Gas Operating, LP agreed to share on any proceeds in connection with the disposition of certain salvage equipment. Such economic sharing arrangement is set forth in the purchase and sale agreement. The natural gas from a portion of Pardus’s oil and gas properties is delivered to buyers through this natural gas gathering system.
Sale of Assets
On April 7, 2020, Pardus Oil & Gas, LLC sold substantially all of its operating assets, and the general and limited partnership interest in Pardus Oil & Gas Operating, LP, which included the TRM assets discussed above, to Empire Texas, LLC, a wholly owned subsidiary of Empire Petroleum Corporation. As described in the purchase and sale agreement, the purchase price included (i) the assumption of obligations and expenses related to the operating assets, including suspended royalties and plugging and abandonment costs, and (ii) a contingent cash payment in an amount not to exceed approximately $985,000, subject to post-closing adjustments. The contingent cash payment is calculated each quarter beginning June 30, 2020 and ending December 31, 2022 and such quarterly contingent cash payment is equal to a percentage of gross revenue if such quarterly gross production from the acquired oil and gas properties and the average realized price per barrel achieve certain thresholds. In addition to the purchase price described above, Empire Texas, LLC (as Debtor) and Pardus Oil & Gas, LLC (as Creditor) executed a promissory note with the principal sum of $378,000 plus a variable rate equal to LIBOR and a maturity date of April 1, 2021.
Crude Oil Price Decline
On March 9, 2020, as a result of multiple significant factors impacting supply and demand in the global oil markets, including a global outbreak of a novel coronavirus, and the announced price reductions and possible production increases by members of Organization of the Petroleum Exporting Countries and other oil exporting nations, the posted price for West Texas Intermediate oil declined sharply. Oil commodity prices are expected to continue to be volatile. The duration or effects of this sudden decrease cannot be predicted.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact on the Company’s customers, employees and vendors, all of which are uncertain and cannot be predicted.
17
Exhibit 99.2
UNAUDITED SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION
The following reserve estimates present the estimate of the proven natural gas and oil reserves and net cash flow of the acquired properties, as prepared by an independent engineer, in accordance with the guidelines established by the Securities and Exchange Commission. Reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing natural gas and oil properties. Accordingly, the estimates are expected to change as future information becomes available.
Excluded Properties
Certain oil and natural gas properties owned by Pardus are included in the Purchase and Sale Agreement, but are the subject of litigation which prevents Empire Texas (“Empire”) from being able to obtain clear title at closing. While Empire believes it will ultimately obtain clear title, the reserve information for these properties has been excluded from the supplemental information presented.
Reserve Quantity Information
Proved oil and natural gas reserves are those quantities of oil and 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, and under existing economic conditions, operating methods, and government regulations. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well. Proved undeveloped reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditures is required for recompletion. Below are the net quantities of net proved developed and undeveloped reserves of the properties:
| As of December, 31 | As of December 31, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
Oil (MBbls) | Natural Gas (MMcf) | Natural Gas Liquids (MGal) | Oil (MBbls) | Natural Gas (MMcf) | Natural Gas Liquids (MGal) | |||||||||||||||||||
| Proved developed reserves: | ||||||||||||||||||||||||
| Beginning of year | 415 | 1,274 | 149 | 477 | 1,452 | 166 | ||||||||||||||||||
| Revision of previous estimates | 297 | 16 | (13 | ) | 120 | 161 | (15 | ) | ||||||||||||||||
| Production | (132 | ) | (198 | ) | (1 | ) | (182 | ) | (339 | ) | (2 | ) | ||||||||||||
| End of year | 580 | 1,092 | 135 | 415 | 1,274 | 149 | ||||||||||||||||||
| Proved developed | 309 | 816 | 135 | 415 | 1,274 | 149 | ||||||||||||||||||
| Proved undeveloped | — | — | — | — | — | — | ||||||||||||||||||
| Proved behind pipe | — | — | — | — | — | — | ||||||||||||||||||
| Proved shut in | 271 | 276 | — | — | — | — | ||||||||||||||||||
| Total proved | 580 | 1,092 | 135 | 415 | 1,274 | 149 | ||||||||||||||||||
Standardized Measure of Discounted Future Net Cash Flows Relating to Oil and Natural Gas Reserves
The standardized measure of discounted future net cash flows relating to oil and natural gas reserves and associated changes in standard measure amounts were prepared in accordance with the provision of Financial Accounting Standard Board ASC 932-235-555. Future cash inflows were computed by applying average prices of oil and natural gas for the last 12 months to estimated future production. Future production and development costs were computed by estimating the expenditures to be incurred in developing the oil and natural gas reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. Future net cash flows are discounted at the rate of 10% annually to derive the standardized measure of discounted cash flows. Actual future cash inflows may vary considerably, and the standardized measure does not necessarily represent the fair value of the acquired properties' oil and natural gas reserves. Standard measure amounts are:
| 2019 | 2018 | |||||||
| Future cash inflows | $ | 37,136,840 | $ | 31,543,580 | ||||
| Future production costs | (18,601,650 | ) | (15,842,570 | ) | ||||
| Future development costs | (1,344,500 | ) | — | |||||
| Future net cash flows | 17,190,690 | 15,701,010 | ||||||
| 10% annual discount for timing of cash flows | (3,495,834 | ) | (4,412,650 | ) | ||||
| Standardized Measure | $ | 13,694,856 | $ | 11,288,360 | ||||
The 12-month average prices were adjusted to reflect applicable transportation and quality differentials on a well-by-well basis to arrive at realized sales prices used to estimate the properties' reserves. The prices for the properties' reserves were as follows:
| 2019 | 2018 | |||||||
| Natural gas (MMBtu) | $ | 2.37 | $ | 2.96 | ||||
| Oil (Bbl) | $ | 58.25 | $ | 66.61 | ||||
| Natural Gas Liquids (MGal) | $ | 0.36 | $ | 0.68 | ||||
Changes in the Standardized Measure of Discounted Future Net Cash Flows at 10% per annum are as follows:
| 2019 | 2018 | |||||||
| Standardized measure – beginning of year | $ | 11,288,360 | $ | 10,174,800 | ||||
| Sales of oil and gas production | (2,627,218 | ) | (7,028,671 | ) | ||||
| Purchase of minerals in place | — | — | ||||||
| Changes in price and production costs | (1,728,235 | ) | 4,714,160 | |||||
| Revisions of quantity estimates | 5,928,380 | 1,978,984 | ||||||
| Changes in estimated development costs | (1,071,088 | ) | — | |||||
| Accretion of discount | 1,128,836 | 1,017,480 | ||||||
| Production timing and other | 775,821 | 431,607 | ||||||
| Change in standardized measure | 2,406,496 | 1,113,560 | ||||||
| Standardized measure – end of year | $ | 13,694,856 | $ | 11,288,360 | ||||
Estimates of economically recoverable natural gas and oil reserves and of future net revenues are based upon a number of variable factors and assumptions, all of which are to some degree subjective and may vary considerably from actual results. Therefore, actual production, revenues, development and operating expenditures may not occur as estimated. The reserve data are estimates only, are subject to many uncertainties, and are based on data gained from production histories and on assumptions as to geologic formations and other matters. Actual quantities of natural gas and oil may differ materially from the amounts estimated.
2
Exhibit 99.3
Pardus Oil & Gas, LLC
Unaudited Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Table of Contents
| Page | ||
| UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | ||
| Unaudited Condensed Consolidated Balance Sheets | 2 | |
| Unaudited Condensed Consolidated Statements of Operations and Member’s Deficit | 3 | |
| Unaudited Condensed Consolidated Statements of Cash Flows | 4 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | 5-11 |
PARDUS OIL & GAS, LLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2020 AND DECEMBER 31, 2019
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,109,248 | $ | 2,291,187 | ||||
| Oil and gas receivables | 319,479 | 867,061 | ||||||
| Joint interest receivables, net | 80,382 | 58,367 | ||||||
| Prepaid expenses | 44,858 | 66,832 | ||||||
| Other current assets | 3,609 | 3,609 | ||||||
| Total current assets | 1,557,576 | 3,287,056 | ||||||
| PROPERTY AND EQUIPMENT, NET | ||||||||
| Oil and gas property and equipment, at cost, under the successful | ||||||||
| efforts method of accounting for oil and gas properties: | ||||||||
| Proved properties | 21,599,669 | 21,570,403 | ||||||
| Unproved properties | — | — | ||||||
| 21,599,669 | 21,570,403 | |||||||
| Other property and equipment | 772,155 | 772,155 | ||||||
| Less accumulated depreciation, depletion and amortization | (10,442,225 | ) | (9,881,094 | ) | ||||
| Total property and equipment, net | 11,929,599 | 12,461,464 | ||||||
| OTHER NONCURRENT ASSETS | ||||||||
| Due from related party | 597,184 | 564,059 | ||||||
| Other noncurrent assets | 397,862 | 397,862 | ||||||
| Total noncurrent assets | 995,046 | 961,921 | ||||||
| TOTAL ASSETS | $ | 14,482,221 | $ | 16,710,441 | ||||
| LIABILITIES AND MEMBERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 1,337,590 | $ | 2,343,408 | ||||
| Asset retirement obligations, current portion | 405,694 | 396,303 | ||||||
| Accrued liabilities | 240,621 | 307,857 | ||||||
| Notes payable - first lien due November 12, 2021 (face value of $109.8 and $106.2 million | ||||||||
| at March 31, 2020 and December 31, 2019, respectively, see Note 9) | 91,908,584 | 85,608,327 | ||||||
| Notes payable - second lien due May 13, 2022 (face value of $50.7 and $49.8 million | ||||||||
| at March 31, 2020 and December 31, 2019, respectively, see Note 9) | 29,927,692 | 26,652,870 | ||||||
| Total current liabilities | 123,820,181 | 115,308,765 | ||||||
| LONG TERM LIABILITIES | ||||||||
| Asset retirement obligations, net of current portion | 8,493,818 | 8,297,187 | ||||||
| Other non-current liabilities | 90,954 | 90,954 | ||||||
| Total long term liabilities | 8,584,772 | 8,388,141 | ||||||
| TOTAL LIABILITIES | 132,404,953 | 123,696,906 | ||||||
| MEMBER'S DEFICIT | (117,922,732 | ) | (106,986,465 | ) | ||||
| TOTAL LIABILITIES AND MEMBER'S DEFICIT | $ | 14,482,221 | $ | 16,710,441 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
PARDUS OIL & GAS, LLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND MEMBER'S DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
| 2020 | 2019 | |||||||
| REVENUE | ||||||||
| Oil and natural gas sales | $ | 1,374,612 | $ | 2,700,965 | ||||
| OPERATING EXPENSES | ||||||||
| Lease operating expense | 1,139,887 | 1,988,870 | ||||||
| Production taxes | 63,513 | 131,547 | ||||||
| Dry hole costs and loss on abandonment of oil and gas properties | — | 76,691 | ||||||
| General and administrative | 367,653 | 395,968 | ||||||
| Depreciation, depletion, amortization and accretion | 767,154 | 2,165,569 | ||||||
| Total operating expenses | 2,338,207 | 4,758,645 | ||||||
| Operating loss | (963,595 | ) | (2,057,680 | ) | ||||
| Interest expense, net | 9,975,074 | 9,418,968 | ||||||
| Price risk management activities loss | — | 120,459 | ||||||
| Other income | (2,402 | ) | (34,749 | ) | ||||
| NET LOSS | (10,936,267 | ) | (11,562,358 | ) | ||||
| Member's deficit, beginning of period | (106,986,465 | ) | (39,657,166 | ) | ||||
| Member's deficit, end of period | $ | (117,922,732 | ) | $ | (51,219,524 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
PARDUS OIL & GAS, LLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (10,936,267 | ) | $ | (11,562,358 | ) | ||
| Adjustments to reconcile net loss to net cash provided by | ||||||||
| (used in) operating activities: | ||||||||
| Accretion of asset retirement obligations | 206,022 | 182,376 | ||||||
| Amortization of debt discount | 5,077,330 | 5,077,330 | ||||||
| Paid-in-kind interest expense | 4,897,749 | 4,339,532 | ||||||
| Depreciation, depletion, and amortization | 561,131 | 1,983,193 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Derivative asset | — | 206,951 | ||||||
| Receivables | 525,567 | 101,831 | ||||||
| Prepaid expenses and other current assets | 21,974 | (87,104 | ) | |||||
| Accounts payable and accrued liabilities | (1,073,054 | ) | (671,794 | ) | ||||
| Other assets and liabilities | — | 123,975 | ||||||
| Net cash used in operating activities | (719,548 | ) | (306,068 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Capital expenditures | (29,266 | ) | (420,720 | ) | ||||
| Net cash used in investing activities | (29,266 | ) | (420,720 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net change in due to/from related parties | (33,125 | ) | 200,617 | |||||
| Payments on notes payable | (400,000 | ) | — | |||||
| Net cash provided by (used in) financing activities | (433,125 | ) | 200,617 | |||||
| Net change in cash | (1,181,939 | ) | (526,171 | ) | ||||
| Cash at beginning of period | 2,291,187 | 1,461,732 | ||||||
| Cash at end of period | $ | 1,109,248 | $ | 935,561 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
PARDUS OIL & GAS, LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2020 AND DECEMBER 31, 2019
AND FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
| 1. | Organization |
On September 1, 2016, Energy & Exploration Partners, LLC changed its name to Pardus Oil & Gas, LLC.
Pardus Oil & Gas, LLC, formerly Energy & Exploration Partners, LLC (together with its consolidated subsidiary (Pardus Oil & Gas Operating, LP), (“Pardus,” “the Company,” “we,” “our,” “us” or similar terms) is an independent exploration and production company focused on the acquisition, exploration, development and exploitation of unconventional oil and natural gas resources. The Company has developed and undeveloped leasehold acres in the East Texas Basin where the Company is pursuing opportunities in the Lower Cretaceous formations of the Buda, Georgetown, Edwards and Glen Rose (the Buda-Rose play), the Woodbine sandstone, the Good Land limestone and the Eagle Ford shale, collectively referred to as the East Texas stacked play. Pardus Oil & Gas, LLC is a wholly-owned subsidiary of ENXP Holding Company, LLC (“ENXP”)
| 2. | Going Concern |
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date these consolidated financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.
The Company is in default under each of the First Lien Facility and Second Lien Facility and the lenders may demand payment at any time. No such demand has been made. The Company does not have adequate liquidity to pay the amounts due under the First Lien Facility and the Second Lien Facility if demand is made. A substantial amount of the First Lien Facility and Second Lien Facility are held by HPS, the parent of ENXP. The Company does not expect that the First Lien Facility and Second Lien Facility (aggregate face value of $160.5 million and $156.0 million as of March 31, 2020 and December 31, 2019, respectively) will be called, but management cannot give any assurance this will not occur.
| 3. | Emergence from Voluntary Reorganization under Chapter 11 Proceedings |
On November 25, 2015, an involuntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) was filed against Energy & Exploration Partners Operating, LP in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division [Docket No. 1] (the “Bankruptcy Court”). On December 7, 2015, the Company, along with Energy & Exploration Partners, Inc., Energy & Exploration Partners Operating GP, LLC, and Energy & Exploration Partners Operating, LP, filed voluntary petitions seeking relief under the Bankruptcy Code and sought to convert the involuntary proceeding into a voluntary Chapter 11 case. On December 9, 2015, the Bankruptcy Court entered an order converting the involuntary proceeding into a voluntary chapter 11 case [Docket No. 12]. These proceedings were filed in order to effectuate a restructuring of the debtors’ outstanding obligations. The bankruptcy case was closed on April 20, 2020 (Docket No. 1283).
On April 26, 2016, the Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization (the “Plan”) pursuant to section 1129 of the Bankruptcy Code. Reorganized Energy & Exploration Partners, LLC and all reorganized subsidiaries subsequently emerged from bankruptcy on May 12, 2016 once all material contingencies of the Plan were satisfied.
| 5 |
Additionally, pursuant to the Plan, Energy & Exploration Partners, Inc., Energy & Exploration Partners, LLC’s parent company, was liquidated and its entire estate was transferred to Energy & Exploration Partners, LLC. Subsequent to emergence from bankruptcy, Energy & Exploration Partners, LLC changed its name to Pardus Oil & Gas, LLC, as noted in Note 1.
In connection with the emergence of bankruptcy, the Company entered into two credit agreements: (i) Senior Secured First Lien Credit Agreement dated as of May 13, 2016 (the “First Lien Facility”) and (ii) Senior Secured Second Lien Credit Agreement dated as of May 13, 2016 (the “Second Lien Facility”). See Note 6 for additional information.
| 4. | HPS Investment Partners, LLC Transaction |
In connection with the Plan, an entity controlled by HPS Investment Partners, LLC (“HPS”) owned approximately 11.75% of the equity in ENXP and 10.11% of the First Lien Facility and 9.31% of the Second Lien Facility.
On November 29, 2017 (“Acquisition Date”), HPS completed two transactions (“HPS Transaction”). In the first transaction, HPS and the majority of the holders of the First Lien Credit Facility and the Second Lien Credit Facility executed a purchase and sale agreement. The purchase and sale agreement provided that HPS would acquire (i) 89.8879% of the aggregate outstanding indebtedness incurred under the First Lien Credit Facility and (ii) 81.6939% of the aggregate outstanding indebtedness incurred under the Second Lien Facility. As a result of the purchase and sale agreement, HPS owns 100% of the First Lien Credit Facility and 91% of the Second Lien Facility. In the second transaction, HPS and a majority of the holders of ENXP’s equity executed a merger agreement. As a result of the merger agreement, HPS owns 100% of the equity in ENXP, the 100% owner of Pardus Oil & Gas, LLC.
| 5. | Summary of Significant Accounting Policies |
Unaudited Interim Financial Statements
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes for each of the two years ended December 31, 2019 and 2018.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and with instructions of the Securities and Exchange Commission as they apply to interim financial information. Accordingly, the interim condensed consolidated financial statements do not include all the information and notes required by US GAAP for complete annual financial statements, although Pardus believes that the disclosures made are adequate to make the information not misleading.
The interim condensed consolidated financial statements are unaudited, but in the opinion of the management of Pardus, include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of Pardus’ financial position, results of operations, and cash flows for the periods presented. The results for the interim periods are not necessarily indicative of the results expected for the full year or any future period.
Push Down Accounting
Pardus applied Push Down Accounting in connection with the HPS Transaction on the Acquisition Date which resulted in the Company becoming a new entity for financial accounting purposes. Upon adoption of Push Down Accounting, the Company’s assets and liabilities were recorded at their fair value as of Acquisition Date. The Acquisition Date fair value of the Company’s assets and liabilities differed materially from the recorded values of the Company’s assets and liabilities as reflected in the historical balance sheet.
| 6 |
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Pardus Oil and Gas, LLC and its wholly owned subsidiary. All intercompany transactions and account balances have been eliminated. Pardus is an independent exploration and production company engaged in the exploration, development, acquisition, and operation of oil and gas properties, with a focus on liquids-rich resource plays of oil and natural gas reserves in Texas.
Use of Estimates
The preparation of the financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods then ended. Significant items subject to such estimates and assumptions include the carrying amount of oil and gas properties, the accrual of asset retirement obligations, and the fair value of notes payable (as of the acquisition date). The Company evaluates its estimates and assumptions on a regular basis. Changes in facts and circumstances or additional information may result in revised estimates and actual results could differ from those estimates.
There are also numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, including many factors beyond the control of the Company. Actual future production, oil and gas prices, revenues, taxes, capital expenditures, operating expenses, geologic success and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimate, and could materially affect the estimated quantity and value of reserves. Accordingly, reserve estimates may be different from the quantities of oil and gas ultimately recovered. Such changes affect the amount of depreciation, depletion and amortization expenses recorded in the financial statements and could affect the carrying value of oil and gas properties.
The Company is subject to legal proceedings, claims, liabilities and environmental matters that arise in the ordinary course of business. The Company accrues for losses when such losses are considered probable and the amounts can be reasonably estimated.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead, and similar activities are expensed as incurred. If an exploratory well provides evidence to justify potential development of reserves, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.
Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized. Depreciation of the cost of proved oil and gas properties is calculated using the unit-of-production (“UOP”) method. The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the carrying value of those reserves. The reserve base used to calculate the depreciation for capitalized costs for exploratory and development wells is the sum of proved developed reserves only. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are included in the depreciable cost. Depreciation, depletion, and amortization expense related to oil and gas properties was approximately $535,000 and $1,973,000 for the three months ended March 31, 2020 and 2019, respectively.
During the three months ended March 31, 2020 and 2019, the Company incurred costs of approximately $-0- and $242,000, respectively, to drill and partially complete a vertical well in Madison County, Texas. At March 31, 2019, the Company was still evaluating the completion and artificial lift for the well. During 2019, but subsequent to March 31, 2019, management concluded that it will not be completing the well and has expensed approximately $3.7 million as dry hole costs in the year ended December 31, 2019.
When circumstances indicate that proved oil and gas properties may be impaired, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for oil and gas properties. If the expected undiscounted pre-tax future cash flows, based on Company’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. No impairment was recorded in the three months ended March 31, 2020 and 2019.
| 7 |
Price Risk Management Activities
The Company uses commodity price derivatives to manage fluctuating oil and natural gas market risks. The Company periodically enters into commodity derivative contracts, which may require payments to (or receipts from) counterparties based on the differential between a fixed price and a variable price for a fixed quantity of oil or natural gas without the exchange of underlying volumes. There were no outstanding contracts as of March 31, 2020, December 31, 2019, or March 31, 2019.
Income Taxes
Pardus Oil and Gas, LLC is a disregarded entity for income tax purposes. Therefore, federal taxable income or loss is reported by ENXP for inclusion in its respective tax return.
Pardus Oil and Gas, LLC accounts for the effect of any uncertain tax positions based on a “more-likely-than-not” threshold to the recognition of the tax positions being sustained based on the technical merits of the position under scrutiny by the applicable taxing authority. If a tax position or positions are deemed to result in uncertainties of those positions, the unrecognized tax benefit is estimated based on a “cumulative probability assessment” that aggregates the estimated tax liability for all uncertain tax positions.
Management has determined that the Company does not have any uncertain income tax positions and associated unrecognized benefits or liabilities that materially impact the consolidated financial statements or related disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance that the Company's tax returns will not be challenged by the taxing authorities and that the Company or its member will not be subject to additional tax, penalties, and interest as a result of such challenge.
Business and Credit Concentrations
The Company engages principally in the exploration, development and production of onshore oil and gas in the East Texas region of the United States. Products are sold under short-term contracts at prevailing rates.
Presently, all of the Company’s proved reserves and estimated future net revenues are expected to be generated by a limited number of producing fields in Texas. The Company earned 92% and 86% of its revenue for the three months ended March 31, 2020 and 2019, respectively, from the sale of oil. The Company sold 100% of its oil to one customer during these periods. Receivables from this customer represented 85% and 92% of total oil and gas receivables at March 31, 2020 and December 31, 2019, respectively.
Accounting Pronouncements Issued but not yet Adopted
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, to update its revenue recognition standard to clarify the principles of recognizing revenue and eliminate industry-specific guidance as well as help financial statement users better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. On June 3, 2020, the FASB deferred the effective date of this standard for certain entities that had not yet issued their 2019 financial statements. This standard will be effective for the Company for annual periods beginning after December 15, 2019.
| 8 |
In February 2016, the FASB issued ASU 2016-02, Leases. This accounting standard requires lessees to recognize assets and liabilities related to lease arrangements longer than 12 months on the balance sheet as well as additional disclosures. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to simplify the lease standard’s implementation. The amended guidance relieves businesses and other organizations of the requirement to present prior comparative years’ results when they adopt the new lease standard. Instead of recasting prior year results using the new accounting when they adopt the guidance, companies can choose to recognize the cumulative effect of applying the new standard to leased assets and liabilities as an adjustment to the opening balance of retained earnings. On June 3, 2020, the FASB deferred the effective date of this standard for private companies. This standard will be effective for the Company for annual periods beginning after December 15, 2021.
The Company is currently assessing the impact of these pronouncements on its consolidated financial statements.
| 6. | Notes Payable |
As described in Note 4 of the consolidated financial statements, HPS acquired control of ENXP and Pardus on November 29, 2017. As of the acquisition date, all assets acquired and all liabilities assumed were valued at fair value. The discount between the fair value recorded and the face value of the loan facilities as of the Acquisition Date is amortized over the terms of the respective loan facilities and is recorded as additional interest expense.
As of March 31, 2020, the First Lien Facility and Second Lien Facility’s face value consisted of the following:
| Additional | ||||||||||||
| Paid-in-Kind | ||||||||||||
| Principal | Interest | Total | ||||||||||
| First lien credit facility | $ | 65,000,000 | $ | 44,772,872 | $ | 109,772,872 | ||||||
| Second lien credit facility | 40,000,000 | 10,707,638 | 50,707,638 | |||||||||
| $ | 105,000,000 | $ | 55,480,510 | $ | 160,480,510 | |||||||
As of December 31, 2019, the First Lien Facility and Second Lien Facility’s face value consisted of the following:
| Additional | ||||||||||||
| Paid-in-Kind | ||||||||||||
| Principal | Interest | Total | ||||||||||
| First lien credit facility | $ | 65,000,000 | $ | 41,152,259 | $ | 106,152,259 | ||||||
| Second lien credit facility | 40,000,000 | 9,830,508 | 49,830,508 | |||||||||
| $ | 105,000,000 | $ | 50,982,767 | $ | 155,982,767 | |||||||
On May 13, 2016 the Company entered into the Senior Secured First Lien Credit Agreement (the “First Lien Facility”) with a group of institutional lenders and Wilmington Trust, National Association, (the “Administrative Agent” and the “Collateral Agent”). The First Lien Facility consists of senior secured credit facilities in an aggregate principal amount of up to $90 million consisting of:
| i. | senior secured term loan facility (the “Tranche A Loan Facility”) in an aggregate principal amount of $65 million funded on May 13, 2016 upon emergence from bankruptcy. |
| ii. | senior secured term loan facility (the “Tranche B Loan Facility”) amount of up to $25 million made available to the Company in a single draw at a future date. This Tranche B Term Loan Facility has not been funded as of December 31, 2019. |
The Company’s obligations under the First Lien Facility are secured, subject to certain exceptions, by granting to the Collateral Agent, for the benefit of the secured parties, a security interest in and lien on substantially all of the property and assets of the Company.
| 9 |
The First Lien Facility are due and payable on the maturity date of November 12, 2021. The Term Loans bear interest at a rate per annum equal to 13% payable in arrears on each interest payment date which is each six-month anniversary of the closing date, May 13, 2016. All interest is accrued in kind by increasing the outstanding principal amount of the loans by the accrued interest. Interest is calculated based upon the compounded principal balance. The Company may elect to pay interest in cash by delivering written notice to the Administrative Agent indicating that the Company is exercising its right to pay cash on such interest payment date. A payment of $400,000 was made in the three months ended March 31, 2020. No principal or interest payments were made during the three months ended March 31, 2019.
The First Lien Facility provides for customary events of default, subject to applicable grace periods. As of December 31, 2019, the Company is not in compliance with certain debt covenants. The failure to comply with these covenants gives the lenders the right to terminate the commitments and, or declare the debt outstanding due and payable in whole or in part. Although the Company has not received any indications from its lenders that they will exercise their right to terminate the commitment or declare the debt due and payable, the Company has reclassified the outstanding balance of principal and accrued in kind interest from non-current to current. As required by the First Lien Facility, during the continuance of the failure to comply with these covenants, the outstanding balance will bear interest at 15%.
On May 13, 2016 the Company entered into the Senior Secured Second Lien Credit Agreement (the “Second Lien Facility”) with the Company’s lenders under the prior pre-petition senior secured term loan and Wilmington Trust, National Association, (the “Administrative Agent” and the “Collateral Agent”). These lenders converted their pre-petition loans to loans under the Second Lien Facility in an aggregate principal amount of $40 million.
The Company’s obligations under the Second Lien Facility are secured, subject to certain exceptions, by granting to the Collateral Agent, for the benefit of the secured parties, a security interest in and lien on substantially all of the property and assets of the Company.
The Second Lien Facility which is due and payable on the maturity date of May 13, 2022 bears interest at a rate per annum equal to 5% payable in arrears on each interest payment date which is each annual anniversary of the closing date, May 13, 2016. All interest is accrued in kind by increasing the outstanding principal amount of the loans by the accrued interest on an annual basis. Interest is calculated based upon the compounded principal balance. The Company may elect to pay interest in cash by delivering written notice to the Administrative Agent indicating that the Company is exercising its right to pay cash on such interest payment date. No principal or interest payments were made during the three months ended March 31, 2020 and 2019.
The Second Lien Facility provides for customary events of default, subject to applicable grace periods. As of December 31, 2019, the Company is not in compliance with certain debt covenants. The failure to comply with these covenants gives the lenders the right to terminate the commitments and, or declare the debt outstanding due and payable in whole or in part. Although the Company has not received any indications from its lenders that they will exercise their right to terminate the commitment or declare the debt due and payable, the Company has reclassed the outstanding balance of principal and accrued in kind interest from non-current to current. As required by the Second Lien Facility, during the continuance of the failure to comply with these covenants, the outstanding balance will bear interest at 7%.
| 7. | Related Party Transactions |
Pursuant to a management services agreement, the Company paid a management fee related to accounting, regulatory and land services of approximately $100,000 per month to a company also controlled by HPS. This management agreement was terminated effective February 1, 2019. In the three months ended March 31, 2020 and 2019, management fees of $-0- and $100,000, respectively, were paid.
The Company advances funds to its parent, ENXP, as needed. As of March 31, 2020 and December 31, 2019, the amount due from ENXP is $597,184 and $564,059, respectively. Such amounts are non-interest bearing and do not have a set repayment date.
| 10 |
| 8. | Subsequent Events |
Management has evaluated subsequent events through the date that the financial statements were available to be issued, June 19, 2020, and determined that the following matters required additional disclosure in the financial statements. No subsequent events occurring after this date have been evaluated for inclusion in these financial statements.
Acquisition of Gathering System
On April 6, 2020, Pardus Oil & Gas Operating, LP, a wholly owned subsidiary of Pardus Oil & Gas, LLC, acquired a natural gas gathering system located in Houston and Madison counties in Texas from Trinity River Midstream, LLC (“TRM”). The purchase price was the assumption of liabilities, including any unpaid operating expenses as of the closing date. TRM and Pardus Oil & Gas Operating, LP agreed to share on any proceeds in connection with the disposition of certain salvage equipment. Such economic sharing arrangement is set forth in the purchase and sale agreement. The natural gas from a portion of Pardus’s oil and gas properties is delivered to buyers through this natural gas gathering system.
Sale of Assets
On April 7, 2020, Pardus Oil & Gas, LLC sold substantially all of its operating assets, and the general and limited partnership interest in Pardus Oil & Gas Operating, LP, which included the TRM assets discussed above, to Empire Texas, LLC, a wholly owned subsidiary of Empire Petroleum Corporation. As described in the purchase and sale agreement, the purchase price included (i) the assumption of obligations and expenses related to the operating assets, including suspended royalties and plugging and abandonment costs, and (ii) a contingent cash payment in an amount not to exceed approximately $985,000, subject to post-closing adjustments. The contingent cash payment is calculated each quarter beginning June 30, 2020 and ending December 31, 2022 and such quarterly contingent cash payment is equal to a percentage of gross revenue if such quarterly gross production from the acquired oil and gas properties and the average realized price per barrel achieve certain thresholds. In addition to the purchase price described above, Empire Texas, LLC (as Debtor) and Pardus Oil & Gas, LLC (as Creditor) executed a promissory note with the principal sum of $378,000 plus a variable rate equal to LIBOR and a maturity date of April 1, 2021.
Crude Oil Price Decline
On March 9, 2020, as a result of multiple significant factors impacting supply and demand in the global oil markets, including a global outbreak of a novel coronavirus, and the announced price reductions and possible production increases by members of Organization of the Petroleum Exporting Countries and other oil exporting nations, the posted price for West Texas Intermediate oil declined sharply. Oil commodity prices continue to be depressed subsequent to March 31, 2020 and are expected to continue to be volatile. The duration or effects of this sudden decrease cannot be predicted.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption of financial markets and continues subsequent to March 31, 2020. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact on the Company’s customers, employees and vendors, all of which are uncertain and cannot be predicted.
11
EXHIBIT 99.4
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On April 7, 2020 a wholly owned subsidiary of Empire Petroleum Corporation ("Empire") closed on certain oil and gas properties owned by Pardus Oil & Gas, LLC and Pardus Oil & Gas Operating GP, LLC ("Pardus"), under a Purchase and Sale Agreement dated April 6, 2020 (the "Agreement") for a purchase price whereby Empire assumed certain obligations and a contingent payment of cash, not to exceed $2,000,000. The effective date of the transaction was April 1, 2020.
The following unaudited pro forma combined financial statements (which we refer to as the "unaudited pro forma financial statements") present the combination of the historical consolidated financial statements of Empire adjusted to give effect to the purchase of the Pardus assets and related transactions. The unaudited pro forma combined statements of operations (which we refer to as the "unaudited pro forma statements of operations") for the year ended December 31, 2019 and three months ended March 31, 2020, combine the historical statements of consolidated operations of Empire and the Pardus assets purchased, giving effect to the purchase and related transactions as if they had been consummated on January 1, 2019, the beginning of the earliest period presented. The unaudited pro forma combined balance sheet (which we refer to as the "unaudited pro forma balance sheet") combines the historical consolidated balance sheet of Empire and the purchase of the Pardus assets as of March 31, 2020, giving effect to the purchase as if it had been consummated on March 31, 2020.
As of the date of this Form 8-K/A, Empire has not completed the detailed valuation study necessary to arrive at the required final estimates of the fair value of the Pardus assets acquired and the liabilities assumed and the related allocations of purchase price. A final determination of the fair value of Pardus's assets and liabilities, including intangible assets with both indefinite or finite lives, will be based on the actual net tangible and intangible assets and liabilities of Pardus that exist as of the closing date of the purchase. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma financial statements presented below. Empire estimated the fair value of Pardus's assets and liabilities based on preliminary valuation studies, due diligence and information obtained from the previous owner of the Pardus assets. Any increases or decreases in the fair value of assets acquired and liabilities assumed upon completion of the final valuations will result in adjustments to the unaudited pro forma balance sheet and/or statements of operations. The final purchase price allocation may be materially different than that reflected in the pro forma purchase price allocation presented herein.
Assumptions and estimates underlying the adjustments to the unaudited pro forma financial statements (which we refer to as the "pro forma adjustments") are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the unaudited pro forma financial statements to give effect to the purchase that are directly attributable to the purchase, factually supportable and, with respect to the unaudited pro forma statements of operations, expected to have a continuing impact on the combined results of Empire and the Pardus assets following the purchase. The unaudited pro forma financial statements have been presented for illustrative purposes only and are not necessarily indicative of the operating results and financial position that would have been achieved had the purchase occurred on the dates indicated. Further, the unaudited pro forma financial statements do not purport to project the future operating results or financial position of Empire following the purchase.
The unaudited pro forma financial statements have been developed from and should be read in conjunction with:
| • | the accompanying notes to the unaudited pro forma financial statements; |
| • | the historical audited consolidated financial statements of Empire for the year ended December 31, 2019, included in Empire's Annual Report on Form 10-K; and |
| • | the historical unaudited consolidated financial statements of Empire as of and for the three months ended March 31, 2020, included in Empire’s Quarterly Report on Form 10-Q. |
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of March 31, 2020
| Empire Historical | Pro Forma Adjustments | Empire Pro Forma Combined | ||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash | $ | 590,183 | $ | 179,643 | C | $ | 769,826 | |||||
| Accounts receivable | 678,794 | 325,808 | C | 1,004,602 | ||||||||
| Unrealized gain on derivative instruments | 1,532,968 | — | 1,532,968 | |||||||||
| Inventory | 155,388 | 171,403 | C | 326,791 | ||||||||
| Prepaids | 222,409 | — | 222,409 | |||||||||
| Total current assets | 3,179,742 | 676,854 | 3,856,596 | |||||||||
| Oil and natural gas properties, successful efforts | 13,149,816 | 12,173,024 | A,B | 25,322,840 | ||||||||
| Less: accumulated depreciation, depletion, and impairment | (4,433,025 | ) | — | (4,433,025 | ) | |||||||
| 8,716,791 | 12,173,024 | 20,889,815 | ||||||||||
| Other property and equipment, net of accumulated depreciation | 11,841 | — | 11,841 | |||||||||
| Total property and equipment, net | 8,728,632 | 12,173,024 | 20,901,656 | |||||||||
| Unrealized gain on derivative instruments - long term | 219,160 | — | 219,160 | |||||||||
| Deposit | 850,000 | 378,000 | H | 1,228,000 | ||||||||
| Total assets | $ | 12,977,534 | 13,227,878 | $ | 26,205,412 | |||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | 1,095,394 | 1,691,034 | B,C | $ | 2,786,428 | ||||||
| Accrued expenses | 904,138 | — | 904,138 | |||||||||
| Short term note payable | — | 378,000 | H | 378,000 | ||||||||
| Current portion of long-term notes payable | 8,338,908 | — | 8,338,908 | |||||||||
| Total current liabilities | 10,338,440 | 2,069,034 | 12,407,474 | |||||||||
| Contingent liability | — | 985,820 | B | 985,820 | ||||||||
| Asset retirement obligations | 5,887,234 | 10,173,024 | A | 16,060,258 | ||||||||
| Total liabilities | 16,225,674 | 13,227,878 | 29,453,552 | |||||||||
| Stockholders' deficit: | ||||||||||||
| Common stock - $.001 par value 150,000,000 shares | ||||||||||||
| authorized, 21,392,277 shares | ||||||||||||
| issued and outstanding | 21,392 | — | 21,392 | |||||||||
| Additional paid-in capital | 18,925,401 | — | 18,925,401 | |||||||||
| Accumulated deficit | (22,194,933 | ) | — | (22,194,933 | ) | |||||||
| Total stockholders' deficit | (3,248,140 | ) | — | (3,248,140 | ) | |||||||
| Total liabilities and stockholders' deficit | $ | 12,977,534 | $ | 13,227,878 | $ | 26,205,412 | ||||||
See accompanying notes to unaudited pro forma financial statements
| 2 |
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2020
| Empire Historical | Pardus Historical | Pro Forma Adjustments | Empire Pro Forma Combined | |||||||||||||
| Revenue: | ||||||||||||||||
| Petroleum sales, net of realized and unrealized derivative gains and losses | $ | 3,823,444 | $ | 1,374,612 | $ | (141,324 | ) | D | $ | 5,065,732 | ||||||
| Costs and expenses: | ||||||||||||||||
| Production and operating | 1,465,954 | 1,139,887 | (104,559 | ) | D | 2,501,282 | ||||||||||
| Taxes – production | 83,959 | 63,513 | (6,544 | ) | D | 140,928 | ||||||||||
| Depreciation, depletion and amortization | 268,018 | 561,131 | (481,821 | ) | D,E | 347,328 | ||||||||||
| Impairment of oil and natural gas properties | 800,452 | — | — | 800,452 | ||||||||||||
| Accretion of asset retirement obligation | 98,954 | 206,023 | (58,442 | ) | A,D | 246,535 | ||||||||||
| General and administrative | 528,983 | 367,653 | (125,760 | ) | G | 770,876 | ||||||||||
| Total costs and expenses | 3,246,320 | 2,338,207 | (777,126 | ) | 4,807,401 | |||||||||||
| Operating income (loss) | 577,124 | (963,595 | ) | 635,802 | 249,331 | |||||||||||
| Other income (expense): | ||||||||||||||||
| Gain on sale of assets | 1,143,760 | — | — | 1,143,760 | ||||||||||||
| Interest expense | (132,869 | ) | (9,975,074 | ) | 9,975,074 | F | (132,869 | ) | ||||||||
| Other income | — | 2,402 | (2,402 | ) | F | — | ||||||||||
| Total other income (expense) | 1,010,891 | (9,972,672 | ) | 9,972,672 | 1,010,891 | |||||||||||
| Net income (loss) | $ | 1,588,015 | $ | (10,936,267 | ) | $ | 10,608,474 | $ | 1,260,222 | |||||||
| Net income per common share, basic & diluted | $ | 0.08 | $ | — | $ | — | $ | 0.06 | ||||||||
| Weighted average number of | ||||||||||||||||
| common shares outstanding | ||||||||||||||||
| basic and diluted | 21,050,610 | — | — | 21,050,610 | ||||||||||||
See accompanying notes to unaudited pro forma financial statements
| 3 |
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
| Empire Historical | Pardus Historical | Pro Forma Adjustments | Empire Pro Forma Combined | |||||||||||||
| Revenue: | ||||||||||||||||
| Petroleum sales, net of realized and unrealized derivative gains and losses | $ | 5,859,089 | $ | 9,575,070 | $ | (934,750 | ) | D | $ | 14,499,409 | ||||||
| Costs and expenses: | ||||||||||||||||
| Operating | 4,337,649 | 6,114,214 | (554,148 | ) | D | 9,897,715 | ||||||||||
| Taxes - production | 379,604 | 456,862 | (43,826 | ) | D | 792,640 | ||||||||||
| Depletion, depreciation and accretion | 3,351,643 | 6,792,736 | (6,440,506 | ) | D,E | 3,703,873 | ||||||||||
| Accretion of asset retirement obligation | 306,301 | 778,028 | (174,776 | ) | A,D | 909,553 | ||||||||||
| Dry hole cost and loss on abandonment | — | 3,702,076 | (3,702,076 | ) | F | — | ||||||||||
| Impairment | — | 20,500,000 | (20,500,000 | ) | F | — | ||||||||||
| General and administrative | 3,634,887 | 1,660,058 | (791,640 | ) | G | 4,503,305 | ||||||||||
| Total costs and expenses | 12,010,084 | 40,003,974 | (32,206,972 | ) | 19,807,086 | |||||||||||
| Operating loss | (6,150,995 | ) | (30,428,904 | ) | 31,272,222 | (5,307,677 | ) | |||||||||
| Other income (expense): | ||||||||||||||||
| Gain on settlement | — | 1,693,818 | (1,693,818 | ) | F | — | ||||||||||
| Interest expense | (503,607 | ) | (38,588,715 | ) | 38,588,715 | F | (503,607 | ) | ||||||||
| Price risk management activities | — | (120,459 | ) | 120,459 | F | — | ||||||||||
| Other income | — | 114,961 | (114,961 | ) | F | — | ||||||||||
| Total other income (expense) | (503,607 | ) | (36,900,395 | ) | 36,900,395 | (503,607 | ) | |||||||||
| Net loss | $ | (6,654,602 | ) | $ | (67,329,299 | ) | $ | 68,172,617 | $ | (5,811,284 | ) | |||||
| Net loss per common share, basic & diluted | $ | (0.33 | ) | $ | — | $ | — | $ | (0.29 | ) | ||||||
| Weighted average number of | ||||||||||||||||
| common shares outstanding | ||||||||||||||||
| basic and diluted | 19,867,277 | — | — | 19,867,277 | ||||||||||||
See accompanying notes to unaudited pro forma financial statements
| 4 |
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited pro forma combined financial information has been derived from the historical consolidated financial statements of Empire and information provided by the previous owners of the Pardus assets. The unaudited pro forma combined balance sheet as of March 31, 2020 gives effect to the purchase as if the purchase had been completed on March 31, 2020. The unaudited pro forma combined statements of operations for the year ended December 31, 2019 and the three months ended March 31, 2020 give effect to the purchase as if the purchase had been completed on January 1, 2019.
The unaudited pro forma combined financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions that Empire believes are reasonable; however, actual results may differ from those reflected in these statements. In Empire's opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The unaudited pro forma combined financial statements do not purport to represent what the Empire's financial position or results of operations would have been if the transaction had actually occurred on the dates indicated above, nor are they indicative of Empire's future financial position or results of operations. These unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and related notes of Empire for the periods presented.
Note 2. Unaudited Pro Forma Combined Balance Sheet
The allocation of the preliminary estimated purchase price is based upon management's estimates of and assumptions related to the fair value of assets acquired and liabilities assumed as of April 7, 2020 using currently available information. Due to the fact that the unaudited pro forma combined financial information has been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on financial position and results of operations may differ significantly from the pro forma amounts included herein. Empire expects to finalize its allocation of the purchase consideration as soon as practicable after the date of the purchase.
The fair values of assets acquired, and liabilities assumed were based on the following key inputs:
Oil and natural gas properties
The fair value of proved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. Empire utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.
The fair value of asset retirement obligations totaled $10,173,024 and is included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted estimated plugging and abandonment costs.
The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
Financial instruments and other
The fair values determined for accounts receivable and accounts payable and accrued liabilities were equivalent to the carrying value due to their short-term nature.
| 5 |
Contingent Liability
The Agreement provided for certain contingent payments of up to $985,820 based on oil production in excess of a specified level from the purchased properties and an average realized oil price of $40 or more per barrel of oil through December 31, 2022. The full contingent liability is included in the pro forma balance sheet.
Excluded Properties
Certain oil and natural gas properties owned by Pardus are included in the Agreement, but are the subject of litigation which prevents Empire from being able to obtain clear title at closing. While Empire believes it will ultimately obtain a clear title to such properties, the operating results of such properties have been excluded from the pro forma results.
Note 3. Pro Forma Adjustments
The following adjustments have been made to the accompanying unaudited pro forma combined financial statements:
| A. | Reflects estimate of asset retirement obligation and associated accretion. |
| B. | Reflects the purchase of the oil and gas properties and recording of the related liabilities. |
| C. | Reflects working capital adjustments. |
| D. | Reflects exclusion of some oil and gas properties where title has not been transferred due to legal issues. |
| E. | Reflects adjustment to depreciation, depletion, and amortization relating to properties for which title has been transferred based on purchase price. |
| F. | Reflects cost which would not have been incurred based on assets purchased. |
| G. | Reflects reduction in general and administrative expenses for professional fees related to bankruptcy or redundant costs for information technology and accounting services. |
| H. | Reflects deposits with utility and government entities which will be reimbursed to the seller |
6