Company Quick10K Filing
Lilis Energy
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 91 $55
10-Q 2019-11-07 Quarter: 2019-09-30
10-Q 2019-08-08 Quarter: 2019-06-30
10-Q 2019-05-09 Quarter: 2019-03-31
10-K 2019-03-07 Annual: 2018-12-31
10-Q 2018-11-02 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-10 Quarter: 2018-03-31
10-K 2018-03-09 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2018-01-26 Quarter: 2017-06-30
10-Q 2017-05-12 Quarter: 2017-03-31
10-K 2017-03-03 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-25 Quarter: 2016-06-30
10-Q 2016-05-20 Quarter: 2016-03-31
10-K 2016-04-14 Annual: 2015-12-31
10-Q 2015-11-23 Quarter: 2015-09-30
10-Q 2015-08-19 Quarter: 2015-06-30
10-Q 2015-05-15 Quarter: 2015-03-31
10-K 2015-04-15 Annual: 2014-12-31
10-Q 2015-02-26 Quarter: 2014-09-30
10-Q 2014-11-26 Quarter: 2014-06-30
10-Q 2014-06-17 Quarter: 2014-03-31
10-K 2014-06-11 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-15 Quarter: 2013-06-30
10-Q 2013-05-14 Quarter: 2013-03-31
10-K 2013-04-17 Annual: 2012-12-31
10-Q 2012-11-09 Quarter: 2012-09-30
10-Q 2012-08-09 Quarter: 2012-06-30
10-Q 2012-05-10 Quarter: 2012-03-31
10-K 2012-03-21 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-18 Quarter: 2011-06-30
10-Q 2011-05-16 Quarter: 2011-03-31
10-K 2011-03-31 Annual: 2010-12-31
10-Q 2010-11-12 Quarter: 2010-09-30
10-Q 2010-08-16 Quarter: 2010-06-30
10-Q 2010-05-20 Quarter: 2010-03-31
10-K 2010-04-14 Annual: 2009-12-31
8-K 2020-02-14 Enter Agreement, Other Events, Exhibits
8-K 2020-02-10 Other Events, Exhibits
8-K 2020-02-06 Enter Agreement, Exhibits
8-K 2020-01-23 Enter Agreement, Exhibits
8-K 2020-01-17 Enter Agreement, Exhibits
8-K 2019-12-17 Officers, Exhibits
8-K 2019-12-16 Enter Agreement, Exhibits
8-K 2019-12-06 Other Events, Exhibits
8-K 2019-11-27 Enter Agreement, Other Events, Exhibits
8-K 2019-11-13 Officers
8-K 2019-11-07 Earnings, Regulation FD, Exhibits
8-K 2019-08-08 Earnings, Regulation FD, Exhibits
8-K 2019-08-05 Enter Agreement, M&A, Exhibits
8-K 2019-08-01 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-06-06 Officers, Regulation FD, Exhibits
8-K 2019-05-23 Shareholder Vote
8-K 2019-05-09 Earnings, Regulation FD, Exhibits
8-K 2019-04-25 Earnings, Regulation FD, Exhibits
8-K 2019-03-07 Earnings, Regulation FD, Exhibits
8-K 2019-03-05 Earnings, Regulation FD, Exhibits
8-K 2018-12-07 Other Events
8-K 2018-11-01 Earnings, Regulation FD, Exhibits
8-K 2018-10-23 Earnings, Regulation FD, Exhibits
8-K 2018-10-10 Regulation FD, Exhibits
8-K 2018-10-10 Enter Agreement, Off-BS Arrangement, Sale of Shares, Amend Bylaw, Exhibits
8-K 2018-09-11 Regulation FD, Exhibits
8-K 2018-08-16 Officers, Exhibits
8-K 2018-08-09 Regulation FD, Exhibits
8-K 2018-08-06 Regulation FD, Exhibits
8-K 2018-08-02 Enter Agreement, Regulation FD, Exhibits
8-K 2018-07-26 Regulation FD, Exhibits
8-K 2018-07-23 Regulation FD, Exhibits
8-K 2018-06-28 Officers, Shareholder Vote, Exhibits
8-K 2018-06-01 Officers, Exhibits
8-K 2018-05-30 Regulation FD, Exhibits
8-K 2018-05-21 Enter Agreement, Exhibits
8-K 2018-05-10 Earnings, Exhibits
8-K 2018-05-03
8-K 2018-04-06 Officers
8-K 2018-03-15 M&A, Sale of Shares, Regulation FD, Exhibits
8-K 2018-03-08 Earnings, Exhibits
8-K 2018-03-01 Officers
8-K 2018-02-16 Enter Agreement, Officers, Regulation FD
8-K 2018-01-30 Enter Agreement, Off-BS Arrangement, Sale of Shares, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-01-08 Regulation FD, Exhibits
LLEX 2019-09-30
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization
Note 2 - Summary of Significant Accounting Policies and Estimates
Note 3 - Liquidity
Note 4 - Revenue
Note 5 - Oil and Natural Gas Properties
Note 6 - Acquisitions and Divestitures
Note 7 - Asset Retirement Obligations
Note 8 - Fair Value of Financial Instruments
Note 9 - Derivatives
Note 10 - Leases
Note 11 - Long-Term Debt
Note 12 - Long-Term Deferred Revenue Liabilities and Other Long-Term Liabilities
Note 13 - Related Party Transactions
Note 14 - Preferred Stock
Note 15 - Stockholders' Equity
Note 16 - Share Based and Other Compensation
Note 17 - Income (Loss) per Common Share
Note 18 - Supplemental Non-Cash Transactions
Note 19 - Segment Information
Note 20 - Commitments and Contingencies
Note 21 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.9 exhibit109llex10q-20190930.htm
EX-31.1 exhibit311llex10q-20190930.htm
EX-32.1 exhibit321llex10q-20190930.htm

Lilis Energy Earnings 2019-09-30

LLEX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
LONE 72 752 573 210 0 12 143 532 0% 3.7 2%
EPE 68 4,190 4,975 1,163 770 -1,153 -325 4,380 66% -13.5 -28%
MCF 59 253 124 65 0 24 67 59 0% 0.9 10%
LLEX 55 485 231 78 0 -10 22 171 0% 7.7 -2%
AMR 50 1,383 1,182 463 331 -1,520 -1,467 974 71% -0.7 -110%
DWSN 47 142 36 143 0 -28 -3 17 0% -5.0 -20%
TAT 46 144 94 72 0 -6 31 43 0% 1.4 -4%
UPL 40 1,873 2,729 904 0 156 156 2,191 0% 14.1 8%
ECR 35 1,920 943 598 0 54 124 25 0% 0.2 3%
HK 30 1,155 941 230 0 -913 -913 829 0% -0.9 -79%

10-Q 1 llex10q-20190930.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended September 30, 2019
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 001-35330
 
Lilis Energy, Inc.
(Name of registrant as specified in its charter) 
Nevada
 
74-3231613
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
201 Main St, Suite 700, Fort Worth, TX 76102
(Address of principal executive offices, including zip code)
 
(817) 585-9001
(Registrant's telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act
Title of each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
LLEX
NYSE American
 
Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No ¨
  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or emerging growth company (as defined in Rule 12b-2 of the Act):
 
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer 
¨
Smaller reporting company  
ý
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 ý

As of November 6, 2019, 91,736,516 shares of the registrant's common stock were issued and outstanding.

 




Lilis Energy, Inc.

INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements contained in this report that are not historical facts are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing needs, competitive position, and potential growth opportunities. Our forward-looking statements do not consider the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believes," "intends," "may," "should," "anticipates," "expects," "could," "plans," "estimates," "projects," "targets," or comparable terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.
 
Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this Quarterly Report on Form 10-Q and in the other documents we file with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the year ended December 31, 2018. There may also be other risks and uncertainties that we are unable to predict at this time or that we do not now expect to have a material adverse impact on our business. Should our underlying assumptions prove incorrect or the consequences of the aforementioned risks worsen, actual results could differ materially from those expected. Forward-looking statements speak only as to the date hereof. All such forward-looking statements and any subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the statements contained herein or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.


3



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Lilis Energy, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,339

 
$
21,137

Accounts receivable, net of allowance of $11 and $25, respectively
23,565

 
20,546

Derivative instruments
2,388

 
2,551

Prepaid expenses and other current assets
2,707

 
1,851

Total current assets
32,999

 
46,085

Property and equipment:
 
 
 
Oil and natural gas properties, full cost method of accounting, net
426,420

 
430,379

Other property and equipment, net
443

 
524

Total property and equipment, net
426,863

 
430,903

Right-of-use assets
10,635

 

Other assets
4,184

 
3,785

Total assets
$
474,681

 
$
480,773

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,033

 
$
47,112

Accrued liabilities and other
28,461

 
14,794

Revenue payable
8,955

 
14,546

Derivative instruments
2,855

 
515

Total current liabilities
50,304

 
76,967

Asset retirement obligations
2,709

 
2,433

Long-term debt
105,000

 
157,804

Long-term derivative instruments and other non-current liabilities
3,293

 
4,699

Long-term deferred revenue and other long-term liabilities
79,333

 
52,513

Total liabilities
240,639

 
294,416

Commitments and Contingencies (Note 20)


 


Mezzanine equity:
 
 
 
10,000,000 shares of preferred stock authorized
 
 
 
Series C-1 9.75% Participating Preferred Stock, 100,000 shares issued and outstanding with a stated value of $1,175 and $1,093, per share, as of September 30, 2019 and December 31, 2018, respectively
77,582

 
106,774

Series C-2 9.75% Participating Preferred Stock, 25,000 shares issued and outstanding with a stated value of $1,101 and $1,024, per share, as of September 30, 2019 and December 31, 2018, respectively
18,186

 
25,522

Series D 8.25% Participating Preferred Stock, 39,254 shares issued and outstanding with a stated value of $1,085 and $1,021, per share, as of September 30, 2019 and December 31, 2018, respectively
28,202

 
40,729

Series E 8.25% Convertible Participating Preferred Stock, 60,000 shares issued and outstanding with a stated value of $1,048, per share, as of September 30, 2019
64,988

 

Series F 9.00% Participating Preferred Stock, 55,000 shares issued and outstanding with a stated value of $1,052, per share, as of September 30, 2019
49,559

 


4



Stockholders' equity (deficit):
 
 
 
Common stock, $0.0001 par value per share; 150,000,000 shares authorized 91,796,964 and 71,182,016 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively.
9

 
7

Additional paid-in capital
349,315

 
321,753

Treasury stock, 253,598 shares at cost
(997
)
 
(997
)
Accumulated deficit
(352,802
)
 
(307,431
)
Total stockholders' equity (deficit)
(4,475
)
 
13,332

Total liabilities, mezzanine equity and stockholders' equity (deficit)
$
474,681

 
$
480,773


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

5



Lilis Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Oil sales
$
10,206

 
$
15,976

 
$
44,890

 
$
42,819

Natural gas sales
694

 
1,538

 
2,570

 
3,572

Natural gas liquid sales
697

 
1,968

 
3,408

 
4,969

Total revenues
11,597

 
19,482

 
50,868

 
51,360

Operating expenses:
 
 
 
 
 
 
 
Production costs
4,243

 
3,184

 
12,866

 
9,431

Gathering, processing and transportation
942

 
963

 
3,355

 
2,297

Production taxes
543

 
1,034

 
2,568

 
2,705

General and administrative
4,852

 
6,838

 
23,913

 
24,682

Depreciation, depletion, amortization and accretion
5,420

 
7,172

 
22,762

 
17,572

Impairment of oil and gas properties
16,580

 

 
16,580

 

Total operating expenses
32,580

 
19,191

 
82,044

 
56,687

Operating income (loss)
(20,983
)
 
291

 
(31,176
)
 
(5,327
)
Other income (expense):
 
 
 
 
 
 
 
Loss on early extinguishment of debt
(1,299
)
 

 
(1,299
)
 

Gain (loss) from commodity derivatives
3,943

 
(4,811
)
 
(3,733
)
 
(9,383
)
Change in fair value of financial instruments

 
10,612

 
(335
)
 
19,499

Interest expense
(2,186
)
 
(8,949
)
 
(8,859
)
 
(26,609
)
Other income
116

 
1

 
31

 
2

Total other income (expense)
574

 
(3,147
)
 
(14,195
)
 
(16,491
)
Net loss before income taxes
(20,409
)
 
(2,856
)
 
(45,371
)
 
(21,818
)
Income tax expense

 

 

 

Net loss
(20,409
)
 
(2,856
)
 
(45,371
)
 
(21,818
)
Paid-in-kind dividends on preferred stock
(7,185
)
 
(2,410
)
 
(18,385
)
 
(6,527
)
Net loss attributable to common stockholders
$
(27,594
)

$
(5,266
)
 
$
(63,756
)
 
$
(28,345
)
 
 
 
 
 
 
 
 
Net loss per common share-basic and diluted: (Note 17)
 
 
 
 
 
 
 
Basic
$
(0.30
)
 
$
(0.08
)
 
$
(0.74
)
 
$
(0.47
)
Diluted
$
(0.30
)
 
$
(0.09
)
 
$
(0.74
)
 
$
(0.47
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
91,349,994

 
64,572,104

 
86,734,449

 
60,082,902

Diluted
91,349,994

 
88,710,081

 
86,734,449

 
60,082,902


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


6



Lilis Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(Unaudited)
(In thousands, except share data)

For the Three Months Ended September 30, 2019 and 2018:
 
Common Shares
 
Additional
Paid-In Capital
 
Treasury Shares
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Balance, June 30, 2019
91,451,836


$
9


$
356,210


(253,598
)

$
(997
)

$
(332,393
)

$
22,829

Stock-based compensation




332








332

Common stock for restricted stock
422,789













Common stock withheld for taxes on stock-based compensation
(77,661
)



(42
)







(42
)
Dividends on preferred stock




(7,185
)







(7,185
)
Net loss










(20,409
)

(20,409
)
Balance, September 30, 2019
91,796,964


$
9


$
349,315


(253,598
)

$
(997
)

$
(352,802
)

$
(4,475
)
 
Common Shares
 
Additional
Paid-In Capital
 
Treasury Shares
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Balance, June 30, 2018
64,045,923

 
$
6

 
$
300,336

 
(253,598
)
 
$
(997
)
 
$
(322,250
)
 
$
(22,905
)
Stock-based compensation

 

 
2,100

 

 

 

 
2,100

Common stock for restricted stock
335,000

 

 

 

 

 

 

Common stock withheld for taxes on stock-based compensation
(181,204
)
 

 
(542
)
 

 

 

 
(542
)
Exercise of warrants
1,127,517

 

 

 

 

 

 

Exercise of stock options
441,672

 

 
1,555

 

 

 

 
1,555

Dividends on Series C convertible preferred stock

 

 
(2,410
)
 

 

 

 
(2,410
)
Net income

 

 

 

 

 
(2,856
)
 
(2,856
)
Balance, September 30, 2018
65,768,908

 
$
6

 
$
301,039

 
(253,598
)
 
$
(997
)
 
$
(325,106
)
 
$
(25,058
)













7



For the Nine Months Ended September 30, 2019 and 2018:
 
Common Shares
 
Additional
Paid-In Capital
 
Treasury Shares
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Balance, December 31, 2018
71,182,016

 
$
7

 
$
321,753

 
(253,598
)
 
$
(997
)
 
$
(307,431
)
 
$
13,332

Stock-based compensation

 

 
6,333

 

 

 

 
6,333

Common stock for restricted stock
3,260,275

 

 

 

 

 

 

Common stock withheld for taxes on stock-based compensation
(286,965
)
 

 
(452
)
 

 

 

 
(452
)
Common stock issued for extinguishment of debt
17,641,638

 
2

 
32,988

 

 

 

 
32,990

Gain on extinguishment of debt

 

 
7,078

 

 

 

 
7,078

Dividends on preferred stock

 

 
(18,385
)
 

 

 

 
(18,385
)
Net loss

 

 

 

 

 
(45,371
)
 
(45,371
)
Balance, September 30, 2019
91,796,964

 
$
9

 
$
349,315

 
(253,598
)
 
$
(997
)
 
$
(352,802
)
 
$
(4,475
)

 
Common Shares
 
Additional
Paid-In Capital
 
Treasury Shares
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Balance, December 31, 2017
53,368,331

 
$
5

 
$
272,335

 

 
$

 
$
(303,288
)
 
$
(30,948
)
Stock-based compensation

 

 
7,654

 

 

 

 
7,654

Common stock for restricted stock
802,860

 

 

 

 

 

 

Common stock withheld for taxes on stock-based compensation
(315,439
)
 

 
(1,051
)
 

 

 

 
(1,051
)
Common stock for acquisition of oil and gas properties
6,940,722

 
1

 
24,777

 

 

 

 
24,778

Exercise of warrants
3,975,957

 

 
1,051

 

 

 

 
1,051

Exercise of stock options
996,477

 

 
2,577

 

 

 

 
2,577

Reclassification of warrant derivative liabilities

 

 
223

 

 

 

 
223

Purchase of treasury stock

 

 

 
(253,598
)
 
(997
)
 

 
(997
)
Dividends on Series C convertible preferred stock

 

 
(6,527
)
 

 

 

 
(6,527
)
Net income

 

 

 

 

 
(21,818
)
 
(21,818
)
Balance, September 30, 2018
65,768,908

 
$
6

 
$
301,039

 
(253,598
)
 
$
(997
)
 
$
(325,106
)
 
$
(25,058
)

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


8



Lilis Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(45,371
)
 
$
(21,818
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation
6,333

 
7,654

Bad debt recovery
(14
)
 
(14
)
Amortization of debt issuance cost and accretion of debt discount
2,295

 
13,023

Payable in-kind interest
1,590

 
9,810

Loss on early extinguishment of debts
1,299

 

Loss from commodity derivatives, net
3,733

 
7,250

Net settlements received (paid) on commodity derivatives
(2,594
)
 
2,133

Change in fair value of financial instruments
335

 
(19,499
)
Impairment of oil and gas properties
16,580

 

Depreciation, depletion, amortization and accretion
22,762

 
17,572

Operating lease ROU amortization
12

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,769
)
 
(7,818
)
Prepaid expenses and other assets
(670
)
 
(1,707
)
Accounts payable and accrued liabilities
(47,406
)
 
27,093

Proceeds from options associated with future midstream services
2,500

 
50,000

Net cash provided by (used in) operating activities
(42,385
)
 
83,679

Cash flows from investing activities:
 
 
 
Acquisition of oil and natural gas properties

 
(61,416
)
Proceeds from the sale of assets
16,911

 

Capital expenditures
(55,628
)
 
(129,490
)
Net cash provided by (used in) investing activities
(38,717
)
 
(190,906
)
Cash flows from financing activities:
 
 
 
Proceeds from term loans, net of financing costs

 
44,960

Proceeds from revolving credit agreement, net of financing costs
47,126

 

Repayment of term loans and notes payable

 
(31,821
)
Repayment of revolving credit agreement
(18,000
)
 

Proceeds from the issuance of Series C Preferred Stock

 
100,000

Proceeds from the Värde financing arrangement, net of transaction costs
38,230

 

Partial repayment of the Värde financing arrangement
(2,600
)
 

Repurchase of common stock

 
(997
)
Proceeds from exercise of warrants and stock options

 
3,628

Payment for tax withholding on stock-based compensation
(452
)
 
(1,051
)
Net cash provided by financing activities
64,304

 
114,719

Net increase (decrease) in cash and cash equivalents
(16,798
)
 
7,492

Cash and cash equivalents at beginning of period
21,137

 
17,462

Cash and cash equivalents at end of period
$
4,339

 
$
24,954

Supplemental disclosure:
 
 
 
Cash paid for interest
$
4,829

 
$
3,776


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

9



Lilis Energy, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 1 - ORGANIZATION
  
Lilis Energy, Inc. ("Lilis" or the "Company") is an independent oil and natural gas exploration and production company focused on the Delaware Basin in Winkler, Loving, and Reeves Counties, Texas and Lea County, New Mexico.
     
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
 
Principles of Consolidation and Presentation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Brushy Resources, Inc., ImPetro Operating, LLC, ImPetro Resources, LLC, Lilis Operating Company, LLC, and Hurricane Resources LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in our opinion, necessary for a fair presentation of the information as of and for the periods presented. These unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and the instructions to Quarterly Report on Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all disclosures required under GAAP for complete consolidated financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10–K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (the "SEC") on March 7, 2019 (the "Annual Report").
   
Use of Estimates
 
The accompanying condensed consolidated financial statements are prepared in conformity with GAAP which requires the Company to make a number of estimates and assumptions relating to 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 period; and the quantities and values of proved oil, natural gas and natural gas liquid ("NGL") reserves used in calculating depletion and assessing impairment of its oil and natural gas properties. The most significant estimates pertain to the evaluation of unproved properties for impairment, proved oil and natural gas reserves and related cash flow estimates used in the depletion and impairment of oil and natural gas properties; the timing and amount of transfers of our unevaluated properties into our amortizable full cost pool; the fair value of embedded derivatives and commodity derivative contracts, accrued oil and natural gas revenues and expenses, valuation of options and warrants, and common stock; and the allocation of general administrative expenses. Actual results could differ significantly from these estimates.

Reclassifications

Certain reclassifications have been made to the prior year comparative financial statements to conform to the 2019 presentation. These reclassifications have no effect on the Company's previously reported results of operations, shareholders' equity or cash flows.

Recently Adopted Accounting Standards
 
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), a standard on lease accounting requiring a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. This standard was effective for annual and interim periods beginning after December 15, 2018. We adopted this standard effective January 1, 2019, utilizing a modified retrospective transition approach. We chose to use the effective date as our date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard were not provided for dates and periods before January 1, 2019.

The standard includes optional transition practical expedients intended to simplify its adoption. We elected to adopt the package of practical expedients, which allowed us to retain the historical lease classification, including treatment for land easements, determined under legacy GAAP as well as a relief from reviewing expired or existing contracts to determine if they contain leases. This standard does not apply to the Company's leases that provide the right to explore for minerals, oil, or natural gas resources.


10



Upon adoption, we recognized operating lease liabilities totaling approximately $7.5 million, with corresponding right of use assets totaling $7.4 million. The liabilities were calculated as the present value of the remaining minimum rental payments for existing operating leases. This standard did not materially impact our consolidated net earnings and had no impact on our cash flows (see Note 10 - Leases).

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the currently required incurred loss methodology with an expected loss methodology. This new methodology requires that a financial asset measured at amortized cost be presented at the net amount expected to be collected. The update is intended to provide financial statement users with more useful information about expected credit losses on financial instruments. The amended standard is effective for the Company on January 1, 2023, with early adoption permitted, and shall be applied using a modified retrospective approach resulting in a cumulative effect adjustment to retained earnings upon adoption. Historically, the Company's credit losses on oil and natural gas sales receivables and any joint interest receivables have not been significant, and the Company is evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.

Accrued Liabilities and Other
 
At September 30, 2019 and December 31, 2018, the Company's accrued liabilities consisted of the following:
 
September 30, 2019
 
December 31, 2018
 
(In thousands)
Accrued personnel costs
$
900

 
$
2,300

Accrued drilling and completion costs
10,720

 
2,849

Drilling advances
2,311

 
5,001

Accrued production expenses
3,810

 
2,926

Other accrued liabilities
2,508

 
1,718

Short-term operating lease liabilities
8,212

 

 
$
28,461

 
$
14,794

 
NOTE 3 - LIQUIDITY
 
As of October 31, 2019, we were fully drawn against the borrowing base under our Revolving Credit Agreement (as defined in Note 11 - Long-Term Debt), with $115 million of indebtedness outstanding under our Revolving Credit Agreement. Our next borrowing base redetermination, scheduled to occur on or about November 1, 2019, is expected to occur in mid-November 2019. If the borrowing base is reduced by the lenders in connection with this redetermination, we will be required to repay borrowings in excess of the borrowing base or eliminate the borrowing base deficiency by pledging additional oil and gas properties to secure our obligations under the Revolving Credit Agreement. Under the Revolving Credit Agreement, we have the option to affect such repayment either in full within 30 days after the redetermination or in monthly installments over a six-month period after the redetermination. We are currently considering alternative secured financing to replace the current revolving credit facility under our Revolving Credit Agreement.

As of September 30, 2019, the Company was in compliance with the Current Ratio covenant (as defined and described in Note 11 - Long-Term Debt) under the Revolving Credit Agreement but was not in compliance with the Leverage Ratio covenant (as defined and described in Note 11 - Long-Term Debt). Pursuant to the Fourth Amendment (as defined in Note 11 - Long-Term Debt), the Company obtained a waiver from the requisite lenders of its compliance with the Leverage Ratio covenant as of September 30, 2019. The Fourth Amendment also amended the Leverage Ratio with respect to certain future periods, as described in Note 11 - Long-Term Debt. The Company was not in compliance with the Leverage Ratio covenant as of September 30, 2019 due to the Company voluntarily shutting-in wells across our properties to begin testing and implementing certain natural gas and crude oil treating systems, in addition to shutting-in certain wells during the third quarter while flare permits were being extended.

Compliance with the Leverage Ratio covenant in future periods depends on our ability to keep wells online and consistently flowing to sales, commodity prices, our ability to control costs, and if necessary, our ability to complete sales of non-core assets or access other sources of capital to reduce indebtedness. During the third quarter of 2019, the necessary flaring permits were renewed and extended, and, therefore, we expect wells will not need to be shut-in for flaring regulations in the foreseeable future. Additionally, we expect the field treating installed across our properties will help to ensure consistent, uninterrupted flow of oil

11



and gas to sales compared to previous periods. We expect, with those measures providing a more consistent flow of oil and gas to sales, the continuing ability to execute cost reduction measures, the ability to sell non-core assets and the ability to access other sources of capital, will allow us to meet our financial covenants and maintain sufficient liquidity in future periods. However, our future cash flows, and consequently our EBITDAX, are subject to a number of variables, including uncertainty in forecasted production volumes and commodity prices, and we may not be able to complete sales of non-core assets or access other sources of capital on acceptable terms or at all.

Our ability to fund our future operations, including drilling and completion capital expenditures, over the next year and one day, post issuance of these consolidated financial statements, will largely be dependent upon our active management of our drilling and completion budget, and, if necessary, the reduction or continued suspension of our drilling plans until we are able to identify and access further sources of liquidity. We are currently considering alternative secured financing to replace the current revolving credit facility under our Revolving Credit Agreement. We are the operator of 100% of our 2019 operational capital program and we expect to operate a substantial majority of wells we may drill in the near future, and, as a result, we have had, and expect to continue to have, the discretion to control the amount and timing of a substantial portion of our capital expenditures. The Company has recently elected to temporarily suspend current drilling operations to focus on production and facilities optimization while the results and performance of the new wells are evaluated. The Company expects to begin drilling operations again in the first quarter of 2020. We may in the future, however, determine it prudent to extend the current suspension or temporarily suspend further drilling and completion operations due to capital constraints, shortage of liquidity, or reduced returns on investment as a result of commodity price weakness. The Company believes it is probable the above plans will be implemented and will provide the funds necessary to meet our obligations over the next year and one day, post issuance of these consolidated financial statements.

NOTE 4 - REVENUE
 
Revenue is recognized when control passes to the purchaser, which generally occurs when production is transferred to the purchaser. The Company measures revenue as the amount of consideration it expects to receive in exchange for the commodities transferred. All of the Company's revenues from contracts with customers represent products transferred at a point in time as control is transferred to the customer.
 
The Company records revenue based on consideration specified in its contracts with its customers. The amounts collected on behalf of third parties are recorded in revenue payable. The Company recognizes revenue in the amount that reflects the consideration it expects to receive in exchange for transferring control of those goods to the customer. The contract consideration in the Company's variable price contracts is typically allocated to specific performance obligations in the contract according to the price stated in the contract. Payment is generally received one or two months after the sale has occurred.

Crude Oil Revenues
 
Crude oil from our operated properties is produced and stored in field tanks. The Company recognizes crude oil revenue when control passes to the purchaser. Effective January 1, 2019 through February 28, 2019, the Company's crude oil was sold under a single short-term contract. The purchaser's commitment included all quantities of crude oil from the leases that were covered by the contract, with no quantity-based restrictions or variable terms. Pricing was based on posted indexes for crude oil of similar quality, less a negotiable fees deduction of $5.15 per barrel.

Effective March 1, 2019, the Company's crude oil is sold under a single long-term contract with a term that extends to at least December 31, 2024. The purchaser's commitment has a quantity-based limit set forth in the contract, measured in barrels per day, with the minimum quantity commitment increasing at periodic intervals over the life of the contract to coincide with the Company's expected growth in production. During the three month period ended September 30, 2019, the Company did not meet its required minimum quantity commitment under the contract due to a temporary production outage. The purchaser declined to enforce any make whole provisions and production has been restored. (See Note 12 - Long-Term Deferred Revenue Liabilities and Other Long-Term Liabilities and Note 20 - Commitments and Contingencies)

Pursuant to the long-term contract, pricing is based on posted indexes for crude oil of similar quality, with a differential based on pipeline delivery to Houston, as opposed to the previous contract differential based on truck delivery to Midland-Cushing, along with a differential basis reduction of $9.25 per barrel that is effective from March 1, 2019 through June 30, 2019, which decreases to $6.50 per barrel for the period of July 1, 2019 through June 30, 2020, and then to $4.95 per barrel for the period from July 1, 2020 through December 31, 2024. The posted index prices and differentials change monthly based on the average of daily index price points for each sales month. The purchaser's affiliate shipper also charges a tariff fee of $0.75 as a deduction from the received price (see Note 12 - Long-Term Deferred Revenue Liabilities and Other Long-Term Liabilities).


12



Natural Gas and NGL Revenues
 
Natural gas from our properties is produced and transported via pipelines to gas processing facilities. NGLs are extracted from the natural gas at the processing facilities and processed natural gas and NGLs are marketed and sold separately on the Company's behalf after processing. All of our operated natural gas production is sold under one of two natural gas contracts, both of which are long-term in nature; however, one of these natural gas contracts includes 30-day cancellation provisions, and the Company therefore classifies such contract as short-term. The processor's commitment to sell on the Company's behalf includes all quantities of natural gas and NGLs produced from specific wellbores or dedicated acreage as defined in the contract, with no quantity-based restrictions or variable terms. Pricing under the gas contracts is generally market-based pricing less adjustments for transportation and processing fees. A portion of natural gas delivered to the processing plants is used as fuel at the processing plant without reimbursement. The Company recognizes revenue for natural gas and NGLs when control passes at the tailgate of the processing plant.
 
Gathering, Processing and Transportation
 
Natural gas must be transported to a gas processing plant facility for treatment and to extract NGLs, then the final residue gas and liquid products are marketed for sale to end users at the tailgate of the plant. As a result of these activities, the Company incurs costs that are contractually passed to it from the gatherer per customary industry practice. Such costs include fees for gathering the gas and moving it from wellhead to plant inlet, plant electricity usage, inlet compression, carbon dioxide and hydrogen sulfide treatments, processing tax, fuel usage, and marketing at the tailgate. Gathering, processing and transportation costs are presented as operating expenses in the condensed consolidated statement of operations.
 
Imbalances
 
Natural gas imbalances occur when the Company sells more or less than its entitled ownership percentage of total natural gas production. Any amount received in excess of its share is treated as a liability. If the Company receives less than its entitled share, the under production is recorded as a receivable. The Company did not have any significant natural gas imbalance positions as of September 30, 2019 and December 31, 2018.
 
The following table disaggregates the Company's revenue by contract type (in thousands) for the three and nine months ended September 30, 2019:
Three Months Ended September 30, 2019
Short-term contracts
 
Long-term contracts
 
Total
Crude oil
$

 
$
10,206

 
$
10,206

Natural gas
18

 
676

 
694

NGLs
6

 
691

 
697


Nine Months Ended September 30, 2019
Short-term contracts
 
Long-term contracts
 
Total
Crude oil
$
9,711

 
$
35,179

 
$
44,890

Natural gas
136

 
2,434

 
2,570

NGLs
113

 
3,295

 
3,408


Customer Credit Risk
 
Our principal exposure to credit risk is through receivables from the sale of our oil and natural gas production of approximately $6.9 million and $8.2 million at September 30, 2019 and December 31, 2018, respectively, and through actual and accrued receivables from our joint interest partners of approximately $16.7 million and $11.4 million at September 30, 2019 and December 31, 2018, respectively. We are subject to credit risk due to the concentration of our oil and natural gas receivables with our most significant customers. We do not require our customers to post collateral, and the inability of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results.
 

13



Major Customers

During the three and nine months ended September 30, 2019, the Company's major customers as a percentage of total revenue consisted of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Texican Crude & Hydrocarbon, LLC
%
 
80
%
 
16
%
 
84
%
ARM Energy Management, LLC
89
%
 
%
 
74
%
 
%
Lucid Energy Delaware, LLC
11
%
 
17
%
 
10
%
 
12
%
ETC Field Services LLC
%
 
2
%
 
%
 
3
%
Other below 10%
%
 
1
%
 
%
 
1
%
 
100
%
 
100
%
 
100
%
 
100
%
    
Due to availability of other purchasers, we do not believe the loss of any single oil or natural gas customer would have a material adverse effect on our results of operations.

NOTE 5 - OIL AND NATURAL GAS PROPERTIES

The Company uses the full cost method of accounting for oil and natural gas operations. Under this method, costs related to the exploration, non-production related development and acquisition of oil and natural gas reserves are capitalized. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling, costs of developing and completing productive wells, and other costs directly related to acquisition and exploration activities. Proceeds from property sales are generally applied as a credit against our capitalized exploration and development costs, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of our proved reserves.

Depletion of exploration and development costs and depreciation of wells and tangible production assets are computed using the units-of-production method based upon estimated proved oil and natural gas reserves. Costs included in the depletion base to be amortized include (a) all proved capitalized costs, including capitalized asset retirement costs net of estimated salvage values, less accumulated depletion, and (b) estimated future development costs to be incurred in developing proved reserves that are not otherwise included in capitalized costs.

Under the full cost method of accounting, capitalized oil and natural gas property costs less accumulated depletion (net of deferred income taxes) may not exceed an amount equal to the sum of the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves and the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are not subject to amortization. Should capitalized costs exceed this ceiling, an impairment expense is recognized. The present value of estimated future net cash flows was computed by applying a flat oil price to forecast revenues from estimated future production of proved oil and natural gas reserves as of period-end, less estimated future expenditures to be incurred in developing and producing the proved reserves (assuming the continuation of existing economic conditions), less any applicable future taxes. For the three and nine months ended September 30, 2019, low commodity prices primarily contributed to the excess of net book value of our oil and natural gas properties over the ceiling resulting in the recognition of an impairment charge of $16.6 million. As of September 30, 2019, the ceiling value of the Company's reserves was calculated based upon SEC pricing of $57.77 per barrel for oil and $2.83 per MMBtu for natural gas.

The costs of unproved oil and gas properties are excluded from amortization until the properties are evaluated. Costs are transferred into the amortization base on an ongoing basis as the properties are evaluated and proved oil and natural gas reserves are established or if impairment is determined. Unproved oil and gas properties are assessed periodically (at least annually) to determine whether impairment has occurred. The assessment considers the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, the economic viability of development if proved reserves were assigned and other current market conditions. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to amortization.


14



During the nine months ended September 30, 2019, and 2018, impairments of $15.3 million and $11.1 million, respectively, were recorded on the Company's unproved oil and natural gas properties and transferred to the full cost pool due to title defects on certain leases. During the three months ended September 30, 2019 an impairment of $3.9 million were transferred to the full cost pool. There were no unproved property impairments during the three months ended September 30, 2018. For the three months ended September 30, 2019 and 2018, depreciation, depletion, amortization and accretion expense related to proved properties were $5.4 million and $7.2 million, respectively. For the nine months ended September 30, 2019 and 2018, depreciation, depletion, amortization and accretion expense related to proved properties were $22.8 million and $17.6 million, respectively.

The following table sets forth a summary of oil and natural gas property costs (net of divestitures) at September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
 
(In thousands)
Oil and natural gas properties:
 
 
 
  Proved
$
413,065

 
$
358,858

  Unproved
150,652

 
169,863

Total oil and natural gas properties
563,717

 
528,721

Accumulated depletion, depreciation, amortization and impairment
(137,297
)
 
(98,342
)
Oil and natural gas properties, net
$
426,420

 
$
430,379


NOTE 6 - ACQUISITIONS AND DIVESTITURES

Divestitures During 2019

On July 31, 2019, the Company entered into two agreements with Winkler Lea Royalty, L.P. ("WLR") and Winkler Lea WI, L.P. ("WLWI") for the sale of an overriding royalty interest and a non-operated working interest in undeveloped assets, respectively, for combined cash proceeds of $39.0 million, including WLWI's drilling advance (the "Asset Sales"). WLR and WLWI are affiliates of Värde Partners, Inc., a related party (see Note 13 - Related Party Transactions).

The Company entered into a Purchase and Sale Agreement with WLR (the "ORRI Agreement"), pursuant to which the Company sold to WLR an overriding royalty interest (the "ORRI") in approximately 1,446 net royalty acres in Winkler and Loving Counties, Texas, and Lea County, New Mexico. The ORRI is equal to the positive difference, if any, between 25% and existing royalties and other burdens, subject to proportionate reduction and the other terms and conditions set forth in the instrument of conveyance. The ORRI Agreement provides the Company with a right to repurchase all, but not less than all, of the ORRI for a period of three years and an obligation, at WLR's election only upon a change of control, to repurchase all, but not less than all, of the ORRI, and also includes certain limitations on WLR's right to transfer the ORRI during such three year period without the consent of the Company. The repurchase price for the first two years of the repurchase period is 1.5 times the purchase price paid by WLR, less the proportionate share of production paid by the Company. For the third year, the repurchase price is the same with the multiplier increased to 1.75. After the third year, the repurchase period expires.

The Company entered into a Purchase and Sale Agreement with WLWI (the "WI Agreement"), pursuant to which the Company sold an undivided 49% of its right, title and interest in certain undeveloped assets located in Winkler and Loving Counties, Texas, consisting of approximately 749 net acres. The WI Agreement provides that the Company must drill, complete and equip five commitment wells after closing. Contemporaneously with the purchase, WLWI paid a drilling advance which funded its proportionate share of the development costs to drill, complete and equip such commitment wells. Any drilling cost overruns or costs incurred below estimated costs are the responsibility of the Company. The WI Agreement provides the Company with a right to repurchase all, but not less than all, of the interest for a period of three years and an obligation, at WLWI's election only upon a change of control, to repurchase all, but not less than all, of the interest, and also includes certain limitations on WLWI's right to transfer the interest during such three year period without the consent of the Company. The repurchase price is 1.5 times the consideration paid by WLWI plus additional capital expenditures of WLWI. The repurchase period expires after three years.

As a result of the repurchase rights, the agreements with WLR and WLWI do not meet the criteria for a conveyance or sale of assets under ASC 932 and are accounted for as a financing arrangement under ASC 470. The net proceeds of the transaction of $39.0 million are included in long-term deferred revenue and other long-term liabilities on the Company's condensed consolidated balance sheet as of September 30, 2019. WLR's proportionate share of production of $0.1 million for the three and nine months ended September 30, 2019 are included in interest expense on the Company's condensed consolidated statements of operations. None of the properties included in the WI Agreement were producing as of September 30, 2019.

15




On August 16, 2019, we sold approximately 513 noncontiguous net acres in New Mexico for net cash proceeds of $16.6 million, which was recorded as a reduction to the full cost pool. The Company repurchased certain overriding royalty interests in the acreage previously sold to WLR under the ORRI Agreement for $2.6 million, resulting in a $1.3 million loss on extinguishment of a portion of the financing arrangement and is included in loss on early extinguishment of debt on the Company's condensed consolidated statements of operations.

Acquisitions During 2018

During the nine months ended September 30, 2018, the Company acquired the following oil and natural gas properties:

Certain leasehold acreage in the Delaware Basin in Lea County, New Mexico from OneEnergy Partners Operating, LLC for $40.0 million in cash and 6,940,722 shares of the Company's common stock valued at approximately $24.9 million, for total consideration of approximately $64.9 million. Transaction costs associated with this acquisition were approximately $1.1 million. The transaction was recorded as an asset acquisition.

Certain leasehold interests and other oil and natural gas assets in Loving and Winkler Counties, Texas from VPD Texas, L.P. for total cash consideration of approximately $11.1 million, including approximately $0.5 million of related acquisition costs. The transaction was recorded as an asset acquisition.
 
Certain leasehold interests and other oil and natural gas assets in Loving and Winkler Counties, Texas from Anadarko for total cash consideration of $7.1 million. The transaction was recorded as an asset acquisition.

Certain leasehold interests and other oil and natural gas assets in Lea County, New Mexico from Ameradev II, LLC for total cash consideration of $7.2 million and was recorded as an adjustment to the full cost pool.
 
Certain leasehold interests and other oil and natural gas assets in Loving and Winkler Counties, Texas from Felix Energy Holdings II, LLC for total cash consideration of $0.4 million and was recorded as an adjustment to the full cost pool.

NOTE 7 - ASSET RETIREMENT OBLIGATIONS
 
The Company's asset retirement obligations ("ARO") represent the present value of the estimated cash flows expected to be incurred to plug, abandon and remediate producing properties, excluding salvage values, at the end of their productive lives in accordance with applicable laws. Revisions in estimated liabilities during the period relate primarily to changes in estimates of asset retirement costs. Revisions in estimated liabilities can also include, but are not limited to, revisions of estimated inflation rates, changes in property lives and expected timing of settlement.
 
The following table summarizes the changes in the Company's ARO for the nine months ended September 30, 2019 and the year ended December 31, 2018
 
September 30, 2019
 
December 31, 2018
 
(In thousands)
ARO, beginning of period
$
2,444

 
$
952

Additional liabilities incurred
152

 
374

Accretion expense
244

 
85

Liabilities settled
(78
)
 
(87
)
Revision in estimates
(42
)
 
1,120

ARO, end of period
2,720

 
2,444

Less: current portion of ARO
(11
)
 
(11
)
ARO, non-current
$
2,709

 
$
2,433



16



NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company measures the fair value of its financial assets on a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
 
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
 
Level 3 - Unobservable inputs which are supported by little or no market activity.
 
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Determination of the fair values of our derivative contracts incorporates various factors, including not only the impact of our non-performance risk on our liabilities, but also the credit standing of the counterparties involved. The Company utilizes counterparty rate of default values to assess the impact of non-performance risk when evaluating both our liabilities to, and receivables from, counterparties.
 
Recurring Fair Value Measurements
 
Fair Value Measurement Classification
 
 
 
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(In thousands)
As of September 30, 2019
 

 
 

 
 

 
 

Oil and natural gas derivative instruments:
 
 
 
 
 
 
 
Oil and natural gas derivative swap contracts
$

 
$
(1,343
)
 
$

 
$
(1,343
)
Oil and natural gas derivative collar contracts

 
2,355

 

 
2,355

Total
$

 
$
1,012

 
$

 
$
1,012

As of December 31, 2018
 
 
 
 
 
 
 
Oil and natural gas derivative instruments:
 
 
 
 
 
 
 
Oil and natural gas derivative swap contracts
$

 
$
(2,923
)
 
$

 
$
(2,923
)
Oil and natural gas derivative collar contracts

 
4,047

 

 
4,047

Embedded derivative instruments:
 
 
 
 
 
 
 
Second Lien Term Loan conversion features

 

 
(1,965
)
 
(1,965
)
Total
$

 
$
1,124

 
$
(1,965
)
 
$
(841
)

Derivative assets and liabilities include unsettled amounts related to commodity derivative positions, including swaps and collars, as of September 30, 2019 and December 31, 2018. The fair value of the Company's derivatives is based on third-party pricing models which utilize inputs that are either readily in the public market or which can be corroborated from active markets of broker quotes. Swaps and collars generally have observable inputs and these instruments are measured using Level 2 inputs.

The Company's derivative liabilities as of December 31, 2018 also include embedded derivatives associated with the Second Lien Term Loan (as defined in Note 11 - Long-Term Debt). These instruments have fewer observable inputs from objective sources and are therefore measured using Level 3 inputs.
 

17



NOTE 9 - DERIVATIVES

The Company's derivative instruments as of September 30, 2019 and December 31, 2018, include the following:
 
September 30, 2019
 
December 31, 2018
 
(In thousands)
Derivative assets (liabilities):
 
 
 
Derivative assets - current
$
2,388

 
$
2,551

Derivative assets - non-current (1)
2,155

 
1,822

Derivative liabilities - current
(2,855
)
 
(515
)
Derivative liabilities - non-current (2)(3)
(676
)
 
(4,699
)
Total derivative liabilities, net
$
1,012

 
$
(841
)

(1) The non-current derivative assets are included in other assets in the consolidated balance sheets.
(2) The non-current derivative liabilities are included in long-term derivative instruments and other non-current liabilities in the consolidation balance sheets.
(3) Includes $2.0 million of embedded derivatives associated with Second Lien Term Loan and $2.7 million associated with commodity derivatives as of December 31, 2018.

 Embedded Derivatives

As discussed in Note 11 - Long-Term Debt, the Second Lien Term Loan contained conversion features that were exercisable at the option of the lead lender thereunder or, in certain circumstances, the Company. The conversion features have been identified as embedded derivatives which (i) contain economic characteristics that are not clearly and closely related to the host contract, the Second Lien Term Loan, and (ii) are separate, stand-alone instruments with similar terms that would qualify as derivative instruments. As such, the conversion features were bifurcated and accounted for separately from the Second Lien Term Loan. The conversion features are recorded at fair value for each reporting period with changes in fair value included in the Company's condensed consolidated statement of operations for each reporting period.

As of December 31, 2018, the derivative liabilities associated with the Second Lien Term Loan were approximately $2.0 million. On March 5, 2019, the embedded derivative associated with the Second Lien Term Loan was written off against the gain on extinguishment of debt following the extinguishment of the Second Lien Term Loan on March 5, 2019, pursuant to the provisions of the 2019 Transaction Agreement (as defined in Note 11 - Long-Term Debt).

Commodity Derivatives

To reduce the impact of fluctuations in oil and natural gas prices on the Company's revenues and to protect the economics of property acquisitions, the Company periodically enters into derivative contracts with respect to a portion of its projected oil and natural gas production through various transactions that fix or modify the future prices to be realized. The derivative contracts may include fixed-for-floating price swaps (whereby, on the settlement date, the Company will receive or pay an amount based on the difference between a pre-determined fixed price and a variable market price for a notional quantity of production), put options (whereby the Company pays a cash premium in order to establish a fixed floor price for a notional quantity of production and, on the settlement date, receives the excess, if any, of the fixed floor price over a variable market price), and costless collars (whereby, on the settlement date, the Company receives the excess, if any, of a variable market price over a fixed floor price up to a fixed ceiling price for a notional quantity of production).
  
Our hedging activities are intended to support oil and natural gas prices at targeted levels and manage exposure to oil and natural gas price fluctuations, as well as to meet our obligations under our Revolving Credit Agreement (as defined in Note 11 - Long-Term Debt). It is our policy to enter into derivative contracts only with counterparties that are creditworthy and competitive market makers. All of our derivatives are designated as unsecured. Certain of our derivative counterparties may require the posting of cash collateral under certain conditions. The Company does not enter into derivative contracts for speculative trading purposes.
 
All of our derivatives are accounted for as mark-to-market activities. Under Accounting Standard Codification ("ASC") Topic 815, "Derivatives and Hedging," these instruments are recorded on the Company's condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. The Company nets derivative assets and liabilities by commodity for counterparties where a legal right to such offset exists. Because the Company

18



has elected not to designate its current derivative contracts as cash flow hedges for accounting purposes, changes in the fair values of the derivatives are recognized in current earnings. 

The following table presents the Company's derivative position for the production periods indicated as of September 30, 2019:
Description
 
 
 Notional Volume (Bbls/d)
 
Production Period
 
 Weighted Average Price ($/Bbl)
Oil Positions
 
 
 
 
 
 
 
Oil Swaps
 
 
173

 
 October 2019 - December 2019
 
$
58.80

Oil Swaps
 
 
1,028

 
 January 2020 - December 2020
 
$
56.28

Oil Swaps
 
 
370

 
 January 2021 - December 2021
 
$
53.07

 
 
 
 
 
 
 
 
Basis Swaps (1)
 
 
1,500

 
 October 2019 - December 2019
 
$
(5.62
)
Basis Swaps (1)
 
 
1,500

 
 January 2020 - December 2020
 
$
(5.62
)
 
 
 
 
 
 
 
 
3 Way Collar
Floor sold price (put)
 
1,500

 
 October 2019 - December 2019
 
$
45.00

3 Way Collar
Floor purchase price (put)
 
1,500

 
 October 2019 - December 2019
 
$
55.00

3 Way Collar
Ceiling sold price (call)
 
1,500

 
 October 2019 - December 2019
 
$
70.47

 
 
 
 
 
 
 
 
Oil Collar
Floor purchase price (put)
 
500

 
 October 2019 - December 2019
 
$
50.00

Oil Collar
Ceiling sold price (call)
 
500

 
 October 2019 - December 2019
 
$
58.00

Oil Collar
Floor purchase price (put)
 
512

 
 January 2020 - December 2020
 
$
49.50

Oil Collar
Ceiling sold price (call)
 
512

 
 January 2020 - December 2020
 
$
63.87

Oil Collar
Floor purchase price (put)
 
742

 
 January 2021 - December 2021
 
$
50.00

Oil Collar
Ceiling sold price (call)
 
742

 
 January 2021 - December 2021
 
$
59.70

 
 
 
 
 
 
 
 
Description
 
 
Notional Volume (MMBtus/d)
 
Production Period
 
Weighted Average Price ($/MMBtu)
Natural Gas Positions
 
 
 
 
 
 
Gas Swaps
 
 
4,807

 
 October 2019 - December 2019
 
$
2.53

Gas Swaps
 
 
4,557

 
 January 2020 - December 2020
 
$
2.57

Gas Swaps
 
 
4,184

 
 January 2021 - March 2021
 
$
2.77

 
 
 
 
 
 
 
 
Gas Collar
Floor purchase price (put)
 
6,921

 
 November 2019 - December 2019
 
$
2.80

Gas Collar
Ceiling sold price (call)
 
6,921

 
 November 2019 - December 2019
 
$
3.06

Gas Collar
Floor purchase price (put)
 
2,748

 
 January 2020 - December 2020
 
$
2.55

Gas Collar
Ceiling sold price (call)
 
2,748

 
 January 2020 - December 2020
 
$
3.07

Gas Collar
Floor purchase price (put)
 
4,464

 
 January 2021 - December 2021
 
$
2.20

Gas Collar
Ceiling sold price (call)
 
4,464

 
 January 2021 - December 2021
 
$
2.97


(1) 
The weighted average price under these basis swaps is the fixed price differential between the index prices of the Midland WTI and the Cushing WTI.


19



The table below summarizes the Company's net gain (loss) on commodity derivatives for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
(in thousands)
Unrealized gain (loss) on unsettled derivatives
$
4,383

 
$
(4,008
)
 
$
(112
)
 
$
(7,250
)
Net settlements paid on derivative contracts
(233
)
 
(611
)
 
(3,414
)
 
(1,941
)
Net settlements receivable (payable) on derivative contracts
(207
)
 
(192
)
 
(207
)
 
(192
)
Net gain (loss) on commodity derivatives
$
3,943

 
$
(4,811
)
 
$
(3,733
)
 
$
(9,383
)
  
The following information summarizes the gross fair values of derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on the Company's condensed consolidated balance sheets as of September 30, 2019 and as of December 31, 2018:
 
As of September 30, 2019
 
Gross Amount of Recognized Assets and Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in the Condensed Consolidated Balance Sheets
 
(In thousands)
Offsetting Derivative Assets:
 
 
 
 
 
Current assets
$
2,750

 
$
(362
)
 
$
2,388

Long-term assets
2,227

 
(72
)
 
2,155

Total assets
$
4,977

 
$
(434
)
 
$
4,543

Offsetting Derivative Liabilities:
 
 
 
 
 
Current liabilities
$
(3,217
)
 
$
362

 
$
(2,855
)
Long-term commodity derivative liabilities
(748
)
 
72

 
(676
)
Total liabilities
$
(3,965
)
 
$
434

 
$
(3,531
)

 
As of December 31, 2018
 
Gross Amount of Recognized Assets and Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in the Condensed Consolidated Balance Sheets
 
(In thousands)
Offsetting Derivative Assets:
 
 
 
 
 
Current assets
$
4,122

 
$
(1,571
)
 
$
2,551

Long-term assets
1,854

 
(32
)
 
1,822

Total assets
$
5,976

 
$
(1,603
)
 
$
4,373

Offsetting Derivative Liabilities:
 
 
 
 
 
Current liabilities
$
(2,086
)
 
$
1,571

 
$
(515
)
Long-term commodity derivative liabilities
(2,766
)
 
32

 
(2,734
)
Long-term embedded derivative liabilities
(1,965
)
 

 
(1,965
)
Total liabilities
$
(6,817
)
 
$
1,603

 
$
(5,214
)
 

20



NOTE 10 - LEASES

Lease Recognition

The Company has entered into contractual lease arrangements to rent office space, compressors, drilling rigs and other equipment from third-party lessors. Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make future lease payments arising from the lease. Operating lease ROU assets and liabilities are recorded at commencement date based on the present value of lease payments over the lease term. Lease payments included in the measurement of the lease liability include fixed payments and termination penalties or extensions that are reasonably certain to be exercised. Variable lease costs associated with leases are recognized when incurred and generally represent maintenance services provided by the lessor, allocable real estate taxes and local sales and business taxes. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense on a straight-line basis over the lease term. The Company does not account for lease components separately from the non-lease components. The Company uses the implicit interest rate when readily determinable; however, most of the Company's lease agreements do not provide an implicit interest rate. As such, at implementation and for new or modified leases subsequent to January 1, 2019, the Company uses its incremental borrowing rate based on the information available at commencement date of the contract in determining the present value of future lease payments. The incremental borrowing rate is calculated using a risk-free interest rate adjusted for the Company's risk. Operating lease ROU assets also include any lease incentives received in the recognition of the present value of future lease payments. Certain of the Company's leases may also include escalation clauses or options to extend or terminate the lease. These options are included in the present value recorded for the leases when it is 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.

The Company determines if an arrangement is or contains a lease at inception of the contract and records the resulting operating lease asset on the condensed consolidated balance sheets as an asset, with offsetting liabilities recorded as a liability. The Company recognizes a lease in the consolidated financial statements when the arrangement either explicitly or implicitly involves property or equipment, the contract terms are dependent on the use of the property or equipment, and the Company has the ability or right to operate the property or equipment or to direct others to operate the property or equipment and receives greater than 10% of the economic benefits of the assets. As of September 30, 2019, the Company does not have any financing leases.

The Company has adopted the modified retrospective method for the new lease recognition rule. Therefore, prior periods are not presented as prior period amounts have not been adjusted under the modified retrospective. Refer to Note 2 - Summary of Significant Accounting Policies and Estimates for additional information.

As of September 30, 2019, the Company's ROU assets and operating lease liabilities were included in the condensed consolidated balance sheets as follows (in thousands):
Right of use assets:
 
 
Right of use assets - long-term (1)
 
$
10,635

 
 
 
Lease liabilities:
 
 
Lease liabilities - current (2)
 
$
8,212

Lease liabilities - long-term (3)
 
2,617

     Total lease liabilities
 
$
10,829

(1) Right of use assets - long-term are included in other assets on the condensed consolidated balance sheets.
(2) Lease liabilities - current are included in accrued liabilities and other on the condensed consolidated balance sheets.
(3) Lease liabilities - long-term are included in long-term derivatives instruments and other on the condensed consolidated balance sheets.

During the second quarter of 2019, the Company canceled a long-term drilling rig lease, within the terms of the agreement, which resulted in the write-off of the related lease liability and ROU asset of $5.4 million, respectively.

During the third quarter of 2019, the Company entered into a new long-term drilling rig lease which resulting in a lease liability and ROU asset of $10.8 million, respectively.


21



Lease costs represent the straight line lease expense of ROU assets, short-term leases, and variable lease costs. For the three and nine months ended September 30, 2019, the components of lease cost were classified as follows (in thousands):
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Fixed lease costs
$
1,249

 
$
4,085

Short-term lease costs
120

 
329

Variable lease costs
508

 
626

Total lease costs
$
1,877

 
$
5,040


Lease Cost included in the Condensed Consolidated Financial Statements
 
Nine Months Ended September 30, 2019
Oil and natural gas properties, full cost method of accounting, net (1)
 
$
4,417

Total lease costs capitalized
 
4,417

 
 
 
Production costs
 
312

General and administrative
 
311

Total lease costs expensed
 
623

Total lease costs
 
$
5,040

(1) Represents short-term lease capital expenditures related to drilling rigs for the nine months ended September 30, 2019.

During the nine months ended September 30, 2019, the following cash activities were associated with the Company's leases as follows (in thousands):
Cash paid for amounts included in the measurement of operating lease liabilities:
 
 
Operating cash flows from operating leases
 
$
115

Investing cash flows from operating leases
 
$
3,767


As of September 30, 2019, the weighted average lease term and discount rate related to the Company's remaining leases were as follows:
Lease term and discount rate
Weighted-average remaining lease term (years)
 
1.26

Weighted-average discount rate
 
5.6
%

As of September 30, 2019, minimum future payments, including imputed interest, for long-term operating leases under the scope of ASC Topic 842, "Leases", are as follows (in thousands):
Year
 
Amount
2019
 
$
2,168

2020
 
9,007

2021
 
79

2022
 

2023
 

After 2023
 

Less: the effects of discounting
 
(425
)
Present value of lease liabilities
 
$
10,829



22



As of December 31, 2018, minimum future payments, including imputed interest, for long-term operating leases under the scope of ASC Topic 840, "Leases", are as follows (in thousands):
Year
 
Amount
2019
 
$
7,586

2020
 
66

2021
 

2022
 

2023
 

After 2023
 

Total lease commitment
 
$
7,652


NOTE 11 - LONG-TERM DEBT
 
 
September 30, 2019
 
December 31, 2018
 
 
(In thousands)
8.25% Second Lien Term Loan, due 2021, net of debt issuance costs and debt discount
 
$

 
$
82,804

Revolving Credit Agreement, due October 2023
 
105,000

 
75,000

Total long-term debt
 
$
105,000

 
$
157,804

 
Revolving Credit Agreement

On October 10, 2018, the Company entered into a five-year, $500.0 million senior secured revolving credit agreement by and among the Company, as borrower, certain subsidiaries of the Company, as guarantors (the "Guarantors"), BMO Harris Bank, N.A., as administrative agent, and the lenders party thereto (the "Revolving Credit Agreement"). The Revolving Credit Agreement provides for a senior secured reserve based revolving credit facility with an initial borrowing base of $95.0 million. The borrowing base is subject to semiannual re-determinations in May and November of each year. In December 2018, the borrowing base was increased to $108.0 million in connection with our scheduled borrowing base re-determination. On March 5, 2019, the Company's borrowing base under the Revolving Credit Agreement was increased from $108.0 million to $125.0 million, as the result of an acceleration of the scheduled May 2019 borrowing base redetermination pursuant to the First Amendment (as defined below). As provided in the Third Amendment (as defined below) and as a result of the Asset Sales (as defined in Note 6 - Acquisitions and Divestitures), in July 2019, the borrowing base was decreased to $115.0 million. The redetermination of the borrowing base in the Third Amendment was the scheduled July redetermination, and we expect the next redetermination, scheduled to occur on or about November 1, 2019, to occur in mid-November 2019.

Borrowings under the Revolving Credit Agreement bear interest at a floating rate of either LIBOR or a specified base rate plus a margin determined based upon the usage of the borrowing base. The Company is required to pay a commitment fee of 0.5% per annum on any unused portion of the borrowing base. The Company's obligations under the Revolving Credit Agreement are secured by first priority liens on substantially all of the Company's and the Guarantors' assets and are unconditionally guaranteed by each of the Guarantors.

As of September 30, 2019, outstanding borrowings under the Revolving Credit Agreement were $105.0 million, leaving $10.0 million available for future borrowing. Future borrowings may be used to fund working capital requirements, including for the acquisition, exploration and development of oil and gas properties, and for general corporate purposes. The Revolving Credit Agreement also provides for issuance of letters of credit in an aggregate amount of up to $5.0 million. As of October 31, 2019, we were fully drawn against the borrowing base under our Revolving Credit Agreement, with $115 million of indebtedness outstanding under our Revolving Credit Agreement.

The Company capitalizes certain direct costs associated with the debt issuance under the Revolving Credit Agreement and amortizes such costs over the term of the debt instrument. The deferred financing costs related to the Revolving Credit Agreement are classified in assets. For the three and nine months ended September 30, 2019, the Company amortized debt issuance costs associated with the Revolving Credit Agreement of $0.3 million and $0.6 million, respectively. As of September 30, 2019, the Company had $0.6 million and $1.9 million of unamortized deferred financing costs in other current assets and non-current assets, respectively. As of December 31, 2018, the Company has $0.5 million and $1.7 million of unamortized deferred financing costs in other current assets and non-current assets, respectively. The Company did not have a revolving credit agreement in place

23



during the nine months ended September 30, 2018.

The Revolving Credit Agreement matures on October 10, 2023. Borrowings under the Revolving Credit Agreement are subject to mandatory repayment in certain circumstances, including upon certain asset sales and debt incurrences or if a borrowing base deficiency occurs. The Company also may voluntarily repay borrowings from time to time and, subject to the borrowing base limitation and other customary conditions, may re-borrow amounts that are voluntarily repaid. Mandatory and voluntary repayments generally will be made without premium or penalty.

The Revolving Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants, including covenants relating to: maintenance of books and records; financial reporting and notification; compliance with laws; maintenance of properties and insurance; and limitations on incurrence of indebtedness, liens, fundamental changes, international operations, asset sales, certain debt payments and amendments, restrictive agreements, investments, dividends and other restricted payments and hedging. It also requires the Company to maintain a ratio of Total Debt to EBITDAX (each as defined in the Revolving Credit Agreement) (the "Leverage Ratio") of not more than 4.00 to 1.00 and a ratio of Current Assets to Current Liabilities (each as defined in the Revolving Credit Agreement) (the "Current Ratio") of not less than 0.85 to 1.00 as of September 30, 2019 and not less than 1.00 to 1.00 as of the last day of each fiscal quarter thereafter.

As of September 30, 2019, the Company was in compliance with the Current Ratio covenant under the Revolving Credit Agreement but was not in compliance with the Leverage Ratio covenant under the Revolving Credit Agreement. Pursuant to the Fourth Amendment (as defined below), the Company obtained a waiver from the requisite lenders of its compliance with the Leverage Ratio covenant as of September 30, 2019. The Company was not in compliance with the Leverage Ratio covenant as of September 30, 2019 due to the Company voluntarily shutting-in wells across its properties to begin testing and implementing certain natural gas and crude oil treating systems, in addition to shutting-in certain wells during the third quarter while flare permits were being extended.

Compliance with the Leverage Ratio covenant in future periods depends on our ability to keep wells online and consistently flowing to sales, commodity prices, our ability to control costs, and if necessary, our ability to complete sales of non-core assets or access other sources of capital to reduce indebtedness. During the third quarter of 2019, the necessary flaring permits were renewed and extended, and, therefore, we expect wells will not need to be shut-in for flaring regulations in the foreseeable future. Additionally, we expect the field treating installed across our properties will help to ensure consistent, uninterrupted flow of oil and gas to sales compared to previous periods. We expect, with those measures providing a more consistent flow of oil and gas to sales, the continuing ability to execute cost reduction measures, the ability to sell non-core assets and the ability to access other sources of capital, will allow us to meet our financial covenants and maintain sufficient liquidity in future periods. However, our future cash flows, and consequently our EBITDAX, are subject to a number of variables, including uncertainty in forecasted production volumes and commodity prices, and we may not be able to complete sales of non-core assets or access other sources of capital on acceptable terms or at all.

The Revolving Credit Agreement also provides for events of default, including failure to pay any principal, interest or other amounts when due, failure to perform or observe covenants, cross-default on certain outstanding debt obligations, inaccuracy of representations and warranties, certain ERISA events, change of control, the security documents or guaranty ceasing to be effective, and bankruptcy or insolvency events, subject to customary cure periods. Amounts owed by the Company under the Revolving Credit Agreement could be accelerated and become immediately due and payable following the occurrence of an event of default.

The Revolving Credit Agreement also provides for the Company to have and maintain Swap Agreements (as defined in the Revolving Credit Agreement) in respect of crude oil and natural gas, on not less than 50% of the projected production from the proved reserves classified as Developed Producing Reserves attributable to the oil and natural gas properties of the Company as reflected in the most recently delivered reserve report for a period through at least 24 months after the end of each applicable quarter. Pursuant to the Third Amendment, commencing with the fiscal quarter ending September 30, 2019, the Company will be required to maintain Swap Agreements on not less than 75% of the projected production from proved reserves classified as "Developed Producing Reserves" attributable to the oil and natural gas properties of the Company, as reflected in the most recently delivered reserve report, for a period through at least 24 months after the end of each applicable quarter. For further information on our hedges, see Note 9 - Derivatives.


24



First Amendment and Waiver to Revolving Credit Agreement

On March 1, 2019, the Company entered into a First Amendment and Waiver (the "First Amendment") to the Revolving Credit Agreement. Among other matters, the First Amendment provided for the acceleration of the scheduled May 2019 redetermination of the borrowing base described above, which became effective on March 5, 2019 upon closing of the transactions contemplated by the 2019 Transaction Agreement (as defined below), including the satisfaction in full, as described below, of the Second Lien Term Loan under the Second Lien Credit Agreement (as defined below). The First Amendment also provides for the July 2019 scheduled redetermination of the borrowing base described above.

In addition, the First Amendment provided for a limited waiver of compliance by the Company with the Leverage Ratio covenant in the Revolving Credit Agreement as of December 31, 2018. Further, in connection with the satisfaction in full of the Second Lien Term Loan and the termination of the Second Lien Credit Agreement, the First Amendment amended the maturity date provisions of the Revolving Credit Agreement to eliminate any springing maturity under the Revolving Credit Agreement tied to the maturity of the Second Lien Credit Agreement, resulting in a fixed maturity date under the Revolving Credit Agreement of October 10, 2023. The First Amendment also effected certain other ministerial and conforming amendments to the Revolving Credit Agreement related to the transactions contemplated by the 2019 Transaction Agreement and required payment by the Company to the lenders of customary fees.

Second Amendment and Waiver to Revolving Credit Agreement

On May 6, 2019, the Company entered into a Second Amendment and Waiver (the "Second Amendment") to the Revolving Credit Agreement, pursuant to which the requisite lenders under the Revolving Credit Agreement waived compliance by the Company with the Current Ratio covenant as of March 31, 2019 in exchange for a customary consent fee. Additionally, the Second Amendment provided for a 25-basis point increase in the interest rate margin applicable to loans under the Revolving Credit Agreement if the Company's Leverage Ratio is equal to or greater than 3.00 to 1.00. The Second Amendment also provides that if the Company has available cash and cash equivalents (subject to certain carveouts) in excess of $10 million for a period of at least five consecutive business days, then it must prepay the loans under the Revolving Credit Agreement in the amount of such excess.

Third Amendment and Waiver to Revolving Credit Agreement

On July 26, 2019, the Company entered into a Third Amendment (the "Third Amendment") to the Revolving Credit Agreement, pursuant to which the requisite required lenders under the Revolving Credit Agreement agreed to reduce the borrowing base to $115 million from $125 million as a part of the scheduled July 1, 2019 redetermination and as a result of the Asset Sales; to give pro forma effect to the Asset Sales for the calculation of EBITDAX, Total Debt, and Current Liabilities at June 30, 2019; and, subject to the consummation of the Asset Sales completed on July 31, 2019 and the required use of the proceeds, to amend the Current Ratio to be not less than 0.85 to 1.00 on September 30, 2019, rather than the minimum Current Ratio of 1.00 to 1.00 required otherwise. Additionally, the Third Amendment provides for, among other things, an increase in the required amount hedged to 75% of projected production from proved reserves classified as "Developed Producing Reserves". The Third Amendment also effected certain other ministerial changes to the Revolving Credit Agreement and required payment by the Company to the lenders of customary fees.

Fourth Amendment and Waiver to Revolving Credit Agreement

On November 5, 2019, the Company entered into a Fourth Amendment and Waiver (the "Fourth Amendment") to the Revolving Credit Agreement, pursuant to which, among other matters, the requisite lenders under the Revolving Credit Agreement waived compliance by the Company with the Leverage Ratio covenant as of September 30, 2019 in exchange for a customary consent fee. Additionally, the Fourth Amendment modified the Leverage Ratio for future periods by modifying the manner in which EBITDAX is calculated for the periods ending December 31, 2019, March 31, 2020 and June 30, 2020 such that EBITDAX is calculated on an annualized basis for those periods, excluding quarterly periods ended prior to December 31, 2019. The Fourth Amendment also (1) requires the Company to use 100% of net cash proceeds from dispositions to repay borrowings until completion of the scheduled November 1, 2019 redetermination or during a borrowing base deficiency, (2) added completion of the scheduled November 1, 2019 redetermination as a condition precedent to future borrowings and (3) limits certain exceptions to certain of the negative covenants under the Revolving Credit Agreement during the period from the date of the Fourth Amendment to the date on which annual financial statements for the fiscal year ending December 31, 2019 are delivered.
 

25



Second Lien Credit Agreement

On April 26, 2017, the Company entered into a second lien credit agreement (the "Second Lien Credit Agreement"), by and among the Company, certain subsidiaries of the Company, as guarantors, Wilmington Trust, National Association, as administrative agent, and the lenders party thereto, consisting of certain private funds affiliated with Värde Partners, Inc. ("Värde"). The Second Lien Credit Agreement provided for convertible loans in an aggregate initial principal amount of up to $125 million in two tranches (together, the "Second Lien Term Loan"). The first tranche consisted of an $80 million term loan, which was fully drawn and funded on April 26, 2017. The second tranche consisted of up to $45 million in delayed-draw term loans, which was fully drawn and funded in October 2017. In November 2017, the Second Lien Credit Agreement was amended to increase the amount available for borrowing under the second tranche of the Second Lien Term Loan by $25 million, and the additional $25 million was fully drawn and funded in November 2017.

Prior to the satisfaction in full of the Second Lien Term Loan and the termination of the Second Lien Credit Agreement on March 5, 2019, as described below, the Second Lien Term Loan bore interest at a rate per annum of 8.25%, compounded quarterly in arrears and payable only in-kind by increasing the principal amount of the loan by the amount of the interest due on each interest payment date, and had a maturity date of April 26, 2021.

Each tranche of the Second Lien Term Loan was separately convertible at any time, in full and not in part, at the option of Värde, as lead lender, as follows: (i) 70% of the principal amount, together with accrued and unpaid interest and the make-whole premium on such principal amount, would convert into a number of shares of the Company's common stock determined by dividing the total of such principal amount, accrued and unpaid interest and make-whole premium by $5.50 (subject to certain customary adjustments, the "Conversion Price"); and (ii) 30% of the principal amount, together with accrued and unpaid interest and the make-whole premium on such principal amount, would convert on a dollar for dollar basis into a new term loan. Additionally, if the closing price of the Company's common stock on the principal exchange on which it was traded had been at least 150% of the Conversion Price then in effect for at least 20 of the 30 immediately preceding trading days, the Company had the option to convert the Second Lien Term Loan, in whole or in part, into a number of shares of its common stock determined by dividing the principal amount to be converted, together with accrued and unpaid interest on such principal amount, by the Conversion Price.

On October 10, 2018, the Company entered into a transaction agreement (the "2018 Transaction Agreement") by and among the Company and certain private funds affiliated with Värde that were lenders under the Second Lien Credit Agreement (collectively, the "Värde Parties"), pursuant to which, among other matters, the Company issued to the Värde Parties (i) an aggregate of 5,952,763 shares of its common stock and (ii) 39,254 shares of a newly created series of preferred stock of the Company, designated as "Series D 8.25% Convertible Participating Preferred Stock", as consideration for the reduction by approximately $56.3 million of the outstanding principal amount of the Second Lien Term Loan under the Second Lien Credit Agreement, together with accrued and unpaid interest and the make-whole amount thereon totaling approximately $11.9 million.

On March 5, 2019, the Company entered into a transaction agreement (the "2019 Transaction Agreement") by and among the Company and the Värde Parties pursuant to which, among other matters, the Company issued to the Värde Parties shares of two new series of its preferred stock and shares of its common stock, as consideration for the termination of the Second Lien Credit Agreement and the satisfaction in full, in lieu of repayment in cash, of the Second Lien Term Loan. Specifically, in exchange for satisfaction of the outstanding principal amount of the Second Lien Term Loan, accrued and unpaid interest thereon and the make-whole amount totaling approximately $133.6 million (the "Second Lien Exchange Amount"), the Company issued to the Värde Parties:

an aggregate of 55,000 shares of a newly created series of preferred stock of the Company, designated as "Series F 9.00% Participating Preferred Stock" (the "Series F Preferred Stock"), corresponding to $55 million of the Second Lien Exchange Amount based on the aggregate initial Stated Value (as defined in Note 14 - Preferred Stock) of the shares of Series F Preferred Stock;

an aggregate of 60,000 shares of a newly created series of preferred stock of the Company, designated as "Series E 8.25% Convertible Participating Preferred Stock" (the "Series E Preferred Stock"), corresponding to $60 million of the Second Lien Exchange Amount based on the aggregate initial Stated Value (as defined in Note 14 - Preferred Stock) of the shares of Series E Preferred Stock; and

9,891,638 shares of common stock, corresponding to approximately $18.6 million of the Second Lien Exchange Amount, based on the closing price of the Company's common stock on the NYSE American on March 4, 2019 of $1.88.

Subsequent to this transaction, the Company's long-term debt consists solely of borrowings under the Revolving Credit Agreement.

26




As a result of the satisfaction in full of the Second Lien Term Loan pursuant to the 2019 Transaction Agreement, the Company recorded a gain on extinguishment of debt of $7.1 million, which was recorded as an increase in additional paid in capital due to the Värde Parties, being existing shareholders of the Company.

Interest Expense
 
The components of interest expense are as follows (in thousands) for the three and nine months ended September 30, 2019 and 2018: