10-Q 1 flmn-10q_20220331.htm 10-Q flmn-10q_20220331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended March 31, 2022

Or

 

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

For the transition period from              to             

Commission File Number: 001-38158

FALCON MINERALS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-0820780

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

609 Main Street, Suite 3950, Houston, TX

 

77002

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 814-4657

 

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock, par value $0.0001 per share

 

FLMN

 

Nasdaq Capital Market

Warrants, each to purchase one share of Class A Common Stock

 

FLMNW

 

Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 


 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of May 3, 2022, there were 47,117,505 shares of the registrant’s Class A common stock, par value $0.0001 per share, issued and outstanding and there were 39,387,782 shares of the registrant’s Class C common stock, par value of $0.0001 per share, issued and outstanding.

 

 

 


 

 

FALCON MINERALS CORPORATION

TABLE OF CONTENTS

 

 

    

 

  

 

Page

GLOSSARY OF TERMS

3

PART I.

  

FINANCIAL INFORMATION

 

 

  

Item 1.

  

Financial Statements (Unaudited)

 

 

  

 

  

Condensed Consolidated Balance Sheets

5

 

  

 

  

Condensed Consolidated Statements of Operations

6

 

  

 

  

Condensed Consolidated Statements of Cash Flows

7

 

  

 

  

Condensed Consolidated Statements of Shareholders’ Equity

8

 

  

 

  

Notes to Condensed Consolidated Financial Statements

9

 

  

Cautionary Statement Regarding Forward-Looking Statements

23

 

  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

32

 

  

Item 4.

  

Controls and Procedures

33

PART II.

  

OTHER INFORMATION

 

 

  

Item 1.

  

Legal Proceedings

33

 

  

Item 1A.

  

Risk Factors

33

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

Item 3.

 

Defaults Upon Senior Securities

34

 

 

Item 4.

 

Mine Safety Disclosures

34

 

  

Item 6.

  

Exhibits

34

EXHIBIT INDEX

35

SIGNATURES

36

 

 


 

 

GLOSSARY OF TERMS

Adjusted EBITDA:    Represents net income before interest expense, income taxes and depreciation and amortization expense, as further adjusted for other non-cash charges and other charges that are not reflective of our ongoing operations. Adjusted EBITDA is not a presentation made in accordance with GAAP. Please see the reconciliation of Adjusted EBITDA to net income in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Our Results of Operations—Adjusted EBITDA.”

Barrel or bbl   Stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.

BOE:    One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil.  

BOE/d:    BOE per day.

British Thermal Unit or Btu:    The quantity of heat required to raise the temperature of one pound of water by one-degree Fahrenheit.

Completion:    The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.

Condensate:  Liquid hydrocarbons associated with the production that is primarily natural gas.

Crude oil:    Liquid hydrocarbons retrieved from geological structures underground to be refined into fuel sources.

Developed acreage: Acreage allocated or assignable to productive wells.  

Differential:  An adjustment to the price of oil and natural gas from an established spot market price to reflect differences in the quality and/or location of oil or natural gas.  

GAAP:    Generally accepted accounting principles in the United States.

Gross acres or gross wells:    The total acres or wells, as the case may be, in which an overriding, royalty or mineral interest is owned.

MBbls:  Thousand barrels of crude oil or other liquid hydrocarbons.

MBOE:    One thousand BOE.  

Mcf:    Thousand cubic feet of natural gas.

Mineral interests:  The interests in ownership of the resource and mineral rights, giving an owner the right to profit from the extracted resources.  

MMBtu:    Million British Thermal Units.

MMcf:  Million cubic feet of natural gas.

Net royalty acres: Gross acreage multiplied by the net royalty interest.  

NGLs:    Natural gas liquids.

Prospect:    A specific geographic area which, based on supporting geological, geophysical or other data and preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved reserves:    The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

3


 

PUD:  Proved undeveloped, used to characterize reserves.

Reserves:    The estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to the market and all permits required to implement the project. Reserves are not assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

Reservoir:    A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Royalty interest:    An interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any costs of development.

SEC:    U.S. Securities and Exchange Commission.

Undeveloped acreage: Lease acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil and natural gas regardless of whether such acreage contains proved reserves.

 

4


 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FALCON MINERALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets:

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,921

 

 

$

2,768

 

Account receivable

 

 

11,844

 

 

 

10,018

 

Prepaid expenses

 

 

856

 

 

 

1,220

 

Total current assets

 

 

15,621

 

 

 

14,006

 

Royalty interests in oil and natural gas properties, net of accumulated amortization

   of $163,102 and $159,678 respectively

 

 

190,120

 

 

 

193,544

 

Property and equipment, net

 

 

296

 

 

 

322

 

Deferred tax asset, net

 

 

51,655

 

 

 

52,135

 

Other assets

 

 

1,344

 

 

 

1,834

 

Total assets

 

$

259,036

 

 

$

261,841

 

Liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

6,463

 

 

$

3,471

 

Other current liabilities

 

 

199

 

 

 

502

 

Total current liabilities

 

 

6,662

 

 

 

3,973

 

Credit facility

 

 

38,000

 

 

 

40,000

 

Warrant liability

 

 

8,225

 

 

 

3,036

 

Other non-current liabilities

 

 

415

 

 

 

576

 

Total liabilities

 

 

53,302

 

 

 

47,585

 

Commitments and contingencies (See Note 14)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none

   issued and outstanding

 

 

-

 

 

 

-

 

Class A common stock, $0.0001 par value; 240,000,000 shares authorized;

47,106,218 and 47,013,958 shares issued and outstanding as of March 31, 2022 and

  December 31, 2021, respectively

 

 

5

 

 

 

5

 

Class C common stock, $0.0001 par value; 120,000,000 shares authorized;

   39,387,782 shares issued and outstanding as of March 31, 2022 and December 31, 2021

 

 

4

 

 

 

4

 

Additional paid in capital

 

 

121,349

 

 

 

121,029

 

Non-controlling interests

 

 

82,697

 

 

 

83,586

 

Retained earnings

 

 

1,679

 

 

 

9,632

 

Total shareholders' equity

 

 

205,734

 

 

 

214,256

 

Total liabilities and shareholders' equity

 

$

259,036

 

 

$

261,841

 

 

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

5


 

FALCON MINERALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

21,828

 

 

$

14,216

 

Lease bonus and other income

 

 

779

 

 

 

-

 

Loss on commodity derivative instruments

 

 

(302

)

 

 

(1,712

)

Total revenue

 

 

22,305

 

 

 

12,504

 

Operating expenses:

 

 

 

 

 

 

 

 

Production and ad valorem taxes

 

 

1,365

 

 

 

810

 

Marketing and transportation

 

 

374

 

 

 

391

 

Amortization of royalty interests in oil and natural gas properties

 

 

3,424

 

 

 

3,187

 

General, administrative, and other

 

 

5,865

 

 

 

3,436

 

Total operating expenses

 

 

11,028

 

 

 

7,824

 

Operating income

 

 

11,277

 

 

 

4,680

 

Other income (expense):

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

(5,189

)

 

 

(3,202

)

Other income

 

 

13

 

 

 

13

 

Interest expense

 

 

(493

)

 

 

(487

)

Total other income (expense)

 

 

(5,669

)

 

 

(3,676

)

Income before income taxes

 

 

5,608

 

 

 

1,004

 

Provision for income taxes

 

 

1,820

 

 

 

459

 

Net income:

 

 

3,788

 

 

 

545

 

Net income attributable to non-controlling interests

 

 

(4,917

)

 

 

(1,952

)

Net loss attributable to common shareholders

 

$

(1,129

)

 

$

(1,407

)

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

Common shares - basic and diluted

 

$

(0.03

)

 

$

(0.03

)

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

Common shares - basic and diluted

 

 

47,048

 

 

 

46,125

 

 

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

 

 

 

6


 

 

FALCON MINERALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,788

 

 

$

545

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of royalty interests in oil and natural gas properties

 

 

3,424

 

 

 

3,187

 

Depreciation of property and equipment

 

 

26

 

 

 

26

 

Amortization of debt issuance costs

 

 

168

 

 

 

168

 

Amortization of right-of-use assets

 

 

188

 

 

 

129

 

Unrealized (gain) loss on commodity derivative instruments

 

 

(250

)

 

 

583

 

Change in fair value of warrant liability

 

 

5,189

 

 

 

3,202

 

Stock-based compensation

 

 

390

 

 

 

972

 

Deferred income taxes

 

 

480

 

 

 

459

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,826

)

 

 

(2,831

)

Prepaid expenses

 

 

364

 

 

 

24

 

Other assets

 

 

134

 

 

 

-

 

Accounts payable and accrued expenses

 

 

2,992

 

 

 

(302

)

Other liabilities

 

 

(214

)

 

 

(151

)

Net cash provided by operating activities

 

 

14,853

 

 

 

6,011

 

Cash flows from investing activities:

 

 

-

 

 

 

-

 

Net cash used in investing activities

 

 

-

 

 

 

-

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from credit facility

 

 

3,000

 

 

 

4,000

 

Repayments of long-term debt

 

 

(5,000

)

 

 

(3,300

)

Dividends paid

 

 

(6,824

)

 

 

(3,458

)

Distributions to non-controlling interests

 

 

(5,806

)

 

 

(3,000

)

Distribution equivalent rights paid

 

 

(70

)

 

 

(50

)

Net cash used in financing activities

 

 

(14,700

)

 

 

(5,808

)

Net increase (decrease) in cash and cash equivalents

 

 

153

 

 

 

203

 

Cash and cash equivalents, beginning of period

 

 

2,768

 

 

 

2,724

 

Cash and cash equivalents, end of period

 

$

2,921

 

 

$

2,927

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

325

 

 

$

319

 

 

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

 

7


 

 

FALCON MINERALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Class A Common Stock

 

 

Class C Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional Paid In

Capital

 

 

Non-controlling

interests

 

 

Retained Earnings

 

 

Total Shareholders'

Equity

 

Balance at December 31, 2020

 

 

46,107

 

 

$

5

 

 

 

40,000

 

 

$

4

 

 

$

121,053

 

 

$

88,637

 

 

$

18,702

 

 

$

228,401

 

Vested restricted stock grants

 

 

78

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

972

 

 

 

-

 

 

 

-

 

 

 

972

 

Distribution equivalent rights paid

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50

)

 

 

-

 

 

 

-

 

 

 

(50

)

Distributions to non-controlling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,000

)

 

 

-

 

 

 

(3,000

)

Dividends to shareholders ($0.075 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,458

)

 

 

(3,458

)

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,952

 

 

 

(1,407

)

 

 

545

 

Balance at March 31, 2021

 

 

46,185

 

 

$

5

 

 

 

40,000

 

 

$

4

 

 

$

121,975

 

 

$

87,589

 

 

$

13,837

 

 

$

223,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

Class C Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional Paid In

Capital

 

 

Non-controlling

interests

 

 

Retained Earnings

 

 

Total Shareholders'

Equity

 

Balance at December 31, 2021

 

 

47,014

 

 

$

5

 

 

 

39,388

 

 

$

4

 

 

$

121,029

 

 

$

83,586

 

 

$

9,632

 

 

$

214,256

 

Vested restricted stock grants

 

 

92

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

390

 

 

 

-

 

 

 

-

 

 

 

390

 

Distribution equivalent rights paid

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(70

)

 

 

-

 

 

 

-

 

 

 

(70

)

Distributions to non-controlling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,806

)

 

 

-

 

 

 

(5,806

)

Dividends to shareholders ($0.145 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,824

)

 

 

(6,824

)

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,917

 

 

 

(1,129

)

 

 

3,788

 

Balance at March 31, 2022

 

 

47,106

 

 

$

5

 

 

 

39,388

 

 

$

4

 

 

$

121,349

 

 

$

82,697

 

 

$

1,679

 

 

$

205,734

 

 

 

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

 

 

 

 

 

 

 

 

 

 

8


 

 

 

FALCON MINERALS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Organization and Presentation

Organization and Description of Business

Falcon Minerals Corporation (the “Company” or “Falcon” and formerly named Osprey Energy Acquisition Corp.) was a blank check company, incorporated in Delaware in June 2016. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, recapitalization, or other similar business transaction, one or more operating businesses or assets (a “Business Combination”).

On July 26, 2017, the Company consummated an Initial Public Offering (“IPO”) issuing units consisting of common shares and warrants (“Unit”).  Each Unit consists of one share of Class A common stock and one-half of one warrant (“Public Warrant”), totaling 13,750,000 Public Warrants. Each whole Public Warrant entitles the holder to purchase one share of Class A common stock at an initial exercise price of $11.50, subject to adjustment.  

Simultaneously with the closing of the IPO, the Company consummated the sale of 7,500,000 warrants (the “Private Placement Warrants”) at a price of $1.00 per warrant in a private placement to the Company’s sponsor, Osprey Sponsor, LLC (“Sponsor”), generating gross proceeds of $7,500,000.

On August 23, 2018 (the “Closing Date”), the Company completed the acquisition of the equity interests ( the “Equity Interests”) in certain of the subsidiaries (the “Royal Entities”) of Noble Royalties Acquisition Co., LP (“NRAC”), Hooks Ranch Holdings LP (“Hooks Holdings”), DGK ORRI Holdings, LP (“DGK”), DGK ORRI GP LLC (“DGK GP”) and Hooks Holding Company GP, LLC (“Hooks GP”, and collectively with NRAC, Hooks Holdings, DGK, and DGK GP, the “Contributors”). The acquisition was made pursuant to the Contribution Agreement, dated as of June 3, 2018 (the “Contribution Agreement”), by and among the Company, Royal Resources L.P. (“Royal”), Royal Resources GP L.L.C. (“Royal GP”) and the Contributors. The acquisition of the Royal Entities pursuant to the Contribution Agreement is referred to as the “Business Combination” and the Business Combination together with the other transactions contemplated by the Contribution Agreement are referred to herein as the “de SPAC Transactions.”

Pursuant to the Contribution Agreement, on the Closing Date, the Company contributed cash to Falcon Minerals Operating Partnership, LP, a Delaware limited partnership and wholly owned subsidiary of the Company (“OpCo”), in exchange for (a) a number of OpCo Common Units representing limited partnership interests in OpCo (the “OpCo Common Units”) equal to the number of shares of the Company’s Class A common stock, par value $0.0001 per share (the “Class A Common Stock”), outstanding as of the Closing Date and (b) a number of OpCo warrants exercisable for OpCo Common Units equal to the number of the Company’s warrants outstanding as of the Closing Date. The Company controls OpCo through Falcon Minerals GP, LLC, a Delaware limited liability company, a wholly owned subsidiary of the Company and the sole general partner of OpCo (“OpCo GP”).

On the Closing Date, Falcon completed the acquisition of the Equity Interests and in return the Contributors received (i) $400 million of cash and (ii) 40 million OpCo Common Units. The Company also issued to the Contributors 40 million shares of non-economic Class C common stock of the Company, which entitles each holder to one vote per share. The OpCo Common Units are redeemable on a one-for-one basis for shares of Class A Common Stock at the option of the Contributors. Upon the redemption by any Contributor of OpCo Common Units for Class A Common Stock, a corresponding number of shares of Class C Common Stock held by such Contributor will be cancelled.  

In connection with the closing of the Business Combination (the “Closing”), the Company changed its name from “Osprey Energy Acquisition Corp.” to “Falcon Minerals Corporation.” The Company is now structured as an “Up-C,” meaning that substantially all the assets of the Company are held by OpCo, and the Company’s only operating asset is its equity interest in OpCo. Each OpCo Common Unit, together with one share of Class C Common Stock, is exchangeable for one share of Class A Common Stock at the option of the holder pursuant to the terms of the Company’s and OpCo’s organizational documents, subject to certain restrictions.

The Company’s assets, via its controlling interest in OpCo, consist of royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests, or ORRIs (collectively, “Royalties”), underlying approximately 256,000 gross unit acres that are concentrated in what the Company believes is the “core-of-the-core” of the liquids-rich condensate region of the Eagle Ford Shale in Karnes, DeWitt and Gonzales Counties, Texas. The company owns additional assets of approximately 95,000 gross unit acres in Pennsylvania, Ohio and West Virginia which is prospective for the Marcellus Shale.

These Royalties entitle the holder to a portion of the production of oil and natural gas from the underlying acreage at the sales price received by the operator, net of any applicable post-production expenses and taxes. The holder of these interests has no obligation to fund exploration and development costs, lease operating expenses or pay for capital expenditures such as plugging and abandonment costs at the beginning and end of a well’s productive life.

9


 

Merger Agreement

On January 11, 2022, Falcon, OpCo, Ferrari Merger Sub A LLC, a Delaware limited liability company and wholly owned subsidiary of OpCo (“Merger Sub”), and DPM HoldCo, LLC, a Delaware limited liability company (“Desert Peak”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions in the Merger Agreement, Merger Sub will merge with and into Desert Peak (the “Merger”), with Desert Peak continuing as the surviving entity in the Merger as a wholly owned subsidiary of OpCo.

Pursuant to the terms of the Merger Agreement and subject to the conditions therein, at the effective time of the Merger (the “Merger Effective Time”), the limited liability company interests in Desert Peak (the “DPM Membership Units”) issued and outstanding immediately prior to the Merger Effective Time will be converted into the right to receive an aggregate of (a) 235,000,000 shares of Class C common stock, (b) 235,000,000 OpCo Common Units and (c) additional shares of Falcon Class C common stock (and a corresponding number of OpCo Common Units) equal to (i) the sum of (x) the difference between $140,000,000 and the Sierra Net Debt (as defined in the Merger Agreement) plus (y) the amount by which the Indebtedness (as defined in the Merger Agreement) for borrowed money of Falcon and its subsidiaries exceeds $45,000,000 as of immediately prior to the Merger Effective Time divided by (ii) $5.15 (collectively, the “Merger Consideration”).

Completion of the Merger is subject to certain customary conditions, including, among others, the following: (a) the affirmative vote of the holders of at least (i) a majority of the votes cast at Falcon’s stockholder meeting (the “Falcon Stockholder Meeting”) on the approval of the issuance of the Merger Consideration (the “Stock Issuance Proposal”) and (ii) a majority of the voting power of the outstanding capital stock of Falcon entitled to vote on the approval of the adoption of certain amendments to Falcon’s certificate of incorporation providing for a reverse stock split of the Class C common stock and the Class A common stock prior to the Merger Effective Time, at a ratio of four to one (the “Falcon Reverse Stock Split” and, together with the Stock Issuance Proposal, the “Required Falcon Stockholder Proposals”); (b) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement (the “Transactions”); (c) approval for listing on the Nasdaq Capital Market of the Class A common stock issuable upon exchange of the Merger Consideration; (d) the expiration or termination of all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, applicable to the Transactions, and any commitment to, or agreement (including any timing agreement) with, any government entity to delay the consummation of, or not to close before a certain date, the Transactions; (e) the effectiveness of the Falcon Reverse Stock Split and the adoption of a reverse unit split of the OpCo Common Units prior to the Merger Effective Time, at a ratio of four to one; (f) subject to specified materiality standards, the accuracy of certain representations and warranties of each party; (g) compliance by each party in all material respects with its covenants included in the Merger Agreement; (h) each of the Registration Rights Agreement (as defined in the Merger Agreement) and the Director Designation Agreement (as defined in the Merger Agreement) being in full force and effect; and (i) the Available Liquidity (as defined in the Merger Agreement) is no less than $65,000,000 and the Sierra Net Debt is not in excess of $140,000,000.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements have been included. All intercompany balances and transactions are eliminated in consolidation.

The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the audited financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K that the Company filed with the SEC on March 11, 2022.

Cash and Cash Equivalents

Cash and cash equivalents represent unrestricted cash on hand and include all highly liquid investments purchased with a maturity of three months or less and money market funds. The Company maintains cash and cash equivalents in bank deposit accounts which, at times, may exceed the federally insured limits. The Company has not experienced any significant losses from such investments.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities; disclosure of contingent assets and liabilities at the date of the financial statements; the reported amounts of revenues and expenses during the reporting periods; and the quantities and values of proved oil, natural gas and NGLs reserves used in calculating depletion and assessing impairment of oil and natural gas properties. Actual results could differ significantly from these estimates. Significant estimates made by management include the quantities of proved oil, natural gas and NGLs reserves, related present value estimates of future net cash flows therefrom, the carrying value of oil

10


 

and natural gas properties, fair value of the Company’s warrants, and estimates of current and deferred income taxes. While management believes these estimates are reasonable, changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates and it is reasonably possible these estimates could be revised in the near term, and these revisions could be material.

Accounts Receivable

The Company’s accounts receivable balance results primarily from operators’ sales of oil and natural gas to their customers. Accounts receivable are recorded at the contractual amounts and do not bear interest. The Company reserves for specific accounts receivables when it is probable that all or a part of an outstanding balance will not be collected.  The Company regularly reviews collectability and establishes or adjusts the allowance as necessary using the specific identification method.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered doubtful.  As of March 31, 2022, and December 31, 2021, the Company had not recorded any reserves for uncollectible amounts or deemed any amounts to be uncollectible.  

Commodity Derivative Financial Instruments

The Company’s ongoing operations expose it to changes in the market price for oil and natural gas.  To mitigate the price risk associated with its operations, the Company uses commodity derivative financial instruments.  From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts, and other contractual arrangements.  The Company does not enter into derivative instruments for speculative purposes.

Derivative instruments are recognized at fair value.  If a right of offset exists under master netting arrangements and certain other criteria are met, derivative assets and liabilities with the same counterparty are netted on the consolidated balance sheets.  The Company does not specifically designate derivative instruments as fair value or cash flow hedges, even though they reduce its exposure to changes in oil and natural gas prices; therefore, gains and losses arising from changes in the fair value of the derivative instruments are recognized on a net basis in the accompanying consolidated statements of operations within Loss on commodity derivative instruments.    

Royalty Interests in Oil and Natural Gas Properties 

The Company follows the successful efforts method of accounting for oil and natural gas operations. Under this method, costs to acquire mineral and royalty interests in oil and natural gas properties are capitalized when incurred. Acquisitions of royalty interests of oil and natural gas properties are considered asset acquisitions and are recorded at cost.

Acquisition costs of proven royalty interests are amortized using the units of production method over the life of the property, which is estimated using proven reserves. Acquisition costs of royalty interests on unproved properties, where there are no proven reserves, are not amortized. When the associated exploration stage interests are converted to proven reserves, the cost basis is amortized using the units of production methodology over the life of the property, using proven reserves. For purposes of amortization, interests in oil and natural gas properties are grouped in a reasonable aggregation of properties with common geological structural features or stratigraphic condition.  

We review and evaluate our royalty interests in oil and natural gas properties for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Proved oil and gas properties are reviewed for impairment when events and circumstances indicate a potential decline in the fair value of such properties below the carrying value, such as a downward revision of the reserve estimates or lower commodity prices. When such events or changes in circumstances occur, we estimate the undiscounted future cash flows expected in connection with the properties and compare such future cash flows to the carrying amounts of the properties to determine if the carrying amounts are recoverable. If the carrying value of the properties is determined to not be recoverable based on the undiscounted cash flows, an impairment charge is recognized by comparing the carrying value to the estimated fair value of the properties. The factors used to determine fair value include, but are not limited to, estimates of proved, probable and possible reserves, future commodity prices, the timing of future production and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. There was no such impairment of proved oil and natural gas properties for the three months ended March 31, 2022 or 2021.

Unproved properties are also assessed for impairment periodically on a depletable unit basis when facts and circumstances indicate that the carrying value may not be recoverable, at which point an impairment loss is recognized to the extent the carrying value exceeds the estimated recoverable value. The fair value of unproved properties, including unleased mineral rights, is determined based on management’s assessment of fair value using factors similar to those previously noted for proved properties, as well as geographic and geologic data. There was no impairment of unproved properties for the three months ended March 31, 2022 and 2021.

Upon the sale of a complete depletable unit, the book value thereof, less proceeds or salvage value, is charged to income. Upon the sale or retirement of an individual well, or an aggregation of interests which make up less than a complete depletable unit, the proceeds are credited to accumulated depreciation, depletion and amortization (“DD&A”), unless doing so would significantly alter the DD&A rate of the depletable unit, in which case a gain or loss would be recorded.  

11


 

Debt Issuance Costs

Other assets include capitalized financing costs of $0.9 million and $1.1 million as of March 31, 2022 and December 31, 2021, respectively. The costs are associated with the Company’s credit agreement and are being amortized over the term of the credit agreement.  

Fair Value of Financial Instruments

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 a specified measurement date. Fair value measurements are derived using inputs and assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. GAAP establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This three-tier hierarchy classifies fair value amounts recognized or disclosed in the consolidated financial statements based on the observability of inputs used to estimate such fair values. The classification within the hierarchy of an asset or liability is determined based on the lowest level input that is significant to the fair value measurement. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, the Company categorizes its assets and liabilities recorded at fair value using this hierarchy.

The amounts reported in the balance sheet for cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term maturities of these instruments. The Company’s Public Warrants also approximate their fair value because the publicly quoted prices on active, liquid, and visible markets such as stock exchanges (Level 1). Because the Credit Facility (as defined in “Note 6 – Debt – Falcon Credit Facility” below) has a market rate of interest, its carrying amount approximated fair value (Level 2). The Company’s commodity derivative instruments are classified within Level 2.  The fair values of the Company’s commodity derivative instruments are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, volatility factors and discount rates, or can be corroborated from active markets.  The Company’s Private Placement Warrant liability is classified within Level 3 due to the significant unobservable inputs utilized in determining the fair value.  See “Note 7 – Warrants” for further information on the Public and Private Placement Warrants.

Warrant Liability

The Company issued the Public and Private Placement Warrants in connection with its IPO in 2017.  Warrants are accounted for in accordance with applicable accounting guidance provided in ASC 815-40 – “Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815”), as either liabilities or as equity instruments depending on the specific terms of the warrant agreement.  The Company’s warrants were classified as liabilities and are recorded at fair value upon issuance and are subject to remeasurement at each reporting period.  Any change in fair value has been recorded in the statements of operations.

Revenue from Contracts with Customers

Revenues from Royalties are recorded under the cash receipts approach as directly received from the remitters’ statement accompanying the revenue check. Since the revenue checks are generally received 30 to 90 days after the production month, the Company accrues for revenue earned but not received by estimating production volumes and product prices.  Revenues from lease bonus are recorded upon receipt. The lease bonus is separate from the lease itself and is recognized as revenue to the Company upon receipt of payment.

Transaction price allocated to remaining performance obligations

The Company’s right to royalty income does not originate until production occurs and, therefore, is not considered to exist beyond each day’s production. Therefore, there are no remaining performance obligations under any of the Company’s royalty income contracts.

Contract balances

Under the Company’s royalty income contracts, it would have the right to receive royalty income from the producer once production has occurred, at which point payment is unconditional. Accordingly, the Company’s royalty income contracts do not give rise to contract assets or liabilities.

Prior-period performance obligations

The Company records revenue in the month production is delivered to the purchaser. However, operator statements for certain oil, natural gas and NGLs sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of royalty income to be received based upon the Company’s interest. The Company records the differences between its estimates and the actual amounts received for royalties in the quarter that payment is received from the operator. Identified differences between the Company’s revenue estimates and actual revenue received historically have not been significant. For the three months ended March 31, 2022 and 2021, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. The Company believes that the pricing provisions of its oil, natural gas and NGLs contracts are customary in the industry. To the extent actual volumes and prices of oil and natural gas sales are

12


 

unavailable for a given reporting period because of timing or information not received from third parties, the royalties related to expected sales volumes and prices for those properties are estimated and recorded.

Income Taxes

The Company, under ASC 740, uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at March 31, 2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The Company has been subject to income tax examinations by major taxing authorities since inception.

Share-Based Compensation

Share-based compensation awards are measured at fair value on the date of grant and are expensed, net of any actual forfeitures, over the required service period.  See “Note 9Share-Based Compensation” for additional information.  

Segment Reporting

The Company derives revenue from Royalties in oil and natural gas properties in North America. The Company operates in a single operating and reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s Chief Executive Officer has been determined to be the CODM and allocates resources and assesses performance based upon financial information at the consolidated level.

Recently Issued Accounting Pronouncements

The Company is an “emerging growth company” (“EGC”) as defined by the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of this exemption and, as a result, its financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that the Company can elect to opt out of the extended transition period at any time, which election is irrevocable.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides optional expedients and exceptions, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The standard was effective upon issuance and generally can be applied through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments in this update must be applied prospectively for all eligible contract modifications. In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope.” This standard clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. Management has elected to apply these updates subsequent to March 12, 2020 but has not elected to apply this update as of March 31, 2022. Management is currently evaluating the impact of the above guidance but does not expect this update to have a material impact on the Company's financial statements.

Note 3—Leases

Substantially all of the Company’s leases are long-term operating leases with fixed payment terms and will terminate at various dates through February 2025. The Company’s right-of-use (“ROU”) assets represent its right to use an underlying asset for the lease term, and its operating lease liabilities represent its obligation to make lease payments.  

ROU assets are recognized at commencement date and consist of the present value of the remaining lease payments over the lease term, initial direct costs, prepaid lease payments less any lease incentives.  Operating lease liabilities are recognized at commencement

13


 

date based on the present value of the remaining lease payments over the lease term.  The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments.  Since the Company’s leases do not provide an implicit rate that can readily be determined, the Company used a discount rate based on its incremental borrowing rate, which is determined by the information available in our Credit Facility.  The incremental borrowing rate reflects the estimated rate of interest the Company would pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.  

Our lease obligations are primarily comprised of the main office spaces used for operations and are recorded as general, administrative, and other expenses in the consolidated statements of operations.  As of March 31, 2022, our lease obligations were classified as operating leases.  The Company’s rental costs associated with these office spaces for the three months ended March 31, 2022 and 2021 was $0.1 million and $0.2 million, respectively.

The lease terms may include periods covered by options to extend the lease when it is reasonably certain that the Company will exercise that option and periods covered by options to terminate the lease when it is not reasonably certain that the Company will exercise that option.  Lease expense for lease payments is recognized on a straight-line basis over the lease term.  In the event that the Company’s assumptions and expectations change, it may have to revise its ROU assets and operating lease liabilities.  As of March 31, 2022, the weighted average remaining lease term is 2.9 years and the weighted average discount rate is 4.32%.  

As of March 31, 2022, the Company had ROU assets of $0.3 million recorded as Other Assets, $0.2 million of corresponding obligations recorded as Other Current Liabilities and $0.4 million of corresponding obligations recorded as Other Liabilities on the Company’s condensed consolidated balance sheet.  

As of March 31, 2022, the undiscounted cash flows for operating lease liabilities are as follows (in thousands):

 

 

Payments Due by Period

 

 

 

Total

 

 

Remainder of 2022

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

Thereafter

 

Lease obligations

 

$

658

 

 

$

167

 

 

$

225

 

 

$

228

 

 

$

38

 

 

$

-

 

 

$

-

 

Total

 

$

658

 

 

$

167

 

 

$

225

 

 

$

228

 

 

$

38

 

 

$

-

 

 

$

-

 

 

Note 4—Commodity Derivative Financial Instruments

The Company’s ongoing operations expose it to changes in the market price for oil and natural gas.  To mitigate the inherent commodity price risk associated with its operations, the Company periodically uses oil and natural gas commodity derivative instruments.  From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts, and other contractual arrangements.  The Company enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty.  The Company does not enter into derivative instruments for speculative purposes.  

As of March 31, 2022, the Company’s did not have any open derivative contracts. A fixed price swap contract between the Company and a counterparty specifies a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.  A costless collar contract between the Company and the counterparty specifies a floor and a ceiling commodity price over a specified period for a contracted volume.  The Company has not designated any of its contracts as fair value or cash flow hedges.  Accordingly, the changes in fair value of the contracts are included in the consolidated statements of operations in the period of the change.  All derivative gains and losses from the Company’s derivative contracts have been recognized in revenue in the Company’s accompanying consolidated statements of operations.  Derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Company’s accompanying consolidated balance sheets.    

The Company’s oil fixed price swap transactions are settled based upon the average daily prices for the calendar month of the contract period and its natural gas costless collar contracts are settled based upon the last day settlement price of the first nearby month futures contract of the contract period.  Payment for oil derivative contracts occurs in the succeeding month and natural gas derivative contracts are paid in the production month.  

The Company’s derivative contracts expose it to credit risk in the event of nonperformance by counterparties that may adversely impact the fair value of the Company’s commodity derivative assets.  While the Company does not require contract counterparties to post collateral, the Company does evaluate the credit standing on each counterparty as deemed appropriate.  The evaluation includes reviewing a counterparty’s credit rating and latest financial information.  As of March 31, 2022, the Company did not have any open derivative contracts and therefore has not engaged any counterparties.

The Company utilizes the market approach in determining the fair value of its derivative positions by using either NYMEX, ICE or Magellan East Houston (“MEH”) published market prices, independent broker pricing data or broker/dealer valuations. The valuations of derivatives with pricing based on NYMEX, ICE or MEH published market prices may be considered Level 1 if they are settled through a NYMEX, ICE or MEH clearing broker account with daily margining. Over-the-counter derivatives with NYMEX,

14


 

ICE or MEH based prices are considered Level 2 due to the impact of counterparty credit risk.  The Company’s derivatives are classified within Level 2.  

The table below summarizes the fair values and classifications of the Company’s derivative instruments as of March 31, 2022 and December 31, 2021 (in thousands):

 

 

 

 

As of March 31, 2022

 

Classification

 

Balance Sheet Location

 

Gross Fair Value

 

 

Effect of Netting

 

 

Net Carrying Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current asset

 

Other current assets

 

$

-

 

 

$

-

 

 

$

-

 

Long-term asset

 

Other assets

 

 

-

 

 

 

-

 

 

 

-

 

Total assets

 

 

 

$

-

 

 

$

-

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liability

 

Other current liabilities

 

$

-