Company Quick10K Filing
Lilis Energy
Price0.32 EPS-0
Shares92 P/E-1
MCap29 P/FCF-1
Net Debt101 EBIT-45
TEV130 TEV/EBIT-3
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-07-02
10-K 2019-12-31 Filed 2020-04-30
10-Q 2019-09-30 Filed 2019-11-07
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-07
10-Q 2018-09-30 Filed 2018-11-02
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-09
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2018-01-26
10-Q 2017-03-31 Filed 2017-05-12
10-K 2016-12-31 Filed 2017-03-03
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-25
10-Q 2016-03-31 Filed 2016-05-20
10-K 2015-12-31 Filed 2016-04-14
10-Q 2015-09-30 Filed 2015-11-23
10-Q 2015-06-30 Filed 2015-08-19
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-04-15
10-Q 2014-09-30 Filed 2015-02-26
10-Q 2014-06-30 Filed 2014-11-26
10-Q 2014-03-31 Filed 2014-06-17
10-K 2013-12-31 Filed 2014-06-11
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-15
10-Q 2013-03-31 Filed 2013-05-14
10-K 2012-12-31 Filed 2013-04-17
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-10
10-K 2011-12-31 Filed 2012-03-21
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-18
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-20
10-K 2009-12-31 Filed 2010-04-14
8-K 2020-06-27 Enter Agreement, Bankruptcy, Off-BS Arrangement, Officers, Regulation FD, Exhibits
8-K 2020-06-23
8-K 2020-06-05
8-K 2020-05-14
8-K 2020-05-08
8-K 2020-04-30
8-K 2020-04-21
8-K 2020-04-15
8-K 2020-04-14
8-K 2020-03-30
8-K 2020-03-27
8-K 2020-03-13
8-K 2020-03-13
8-K 2020-02-14
8-K 2020-02-10
8-K 2020-02-06
8-K 2020-01-23
8-K 2020-01-17
8-K 2019-12-17
8-K 2019-12-16
8-K 2019-12-06
8-K 2019-11-27
8-K 2019-11-13
8-K 2019-11-07
8-K 2019-08-08
8-K 2019-08-05
8-K 2019-08-01
8-K 2019-06-06
8-K 2019-05-23
8-K 2019-05-09
8-K 2019-04-25
8-K 2019-03-07
8-K 2019-03-05
8-K 2018-12-07
8-K 2018-11-01
8-K 2018-10-23
8-K 2018-10-10
8-K 2018-10-10
8-K 2018-09-11
8-K 2018-08-16
8-K 2018-08-09
8-K 2018-08-06
8-K 2018-08-02
8-K 2018-07-26
8-K 2018-07-23
8-K 2018-06-28
8-K 2018-06-01
8-K 2018-05-30
8-K 2018-05-21
8-K 2018-05-10
8-K 2018-05-03
8-K 2018-04-06
8-K 2018-03-15
8-K 2018-03-08
8-K 2018-03-01
8-K 2018-02-16
8-K 2018-01-30
8-K 2018-01-08

LLEX 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization
Note 2 - Chapter 11 Filing, Liquidity and Going Concern
Note 3 - Summary of Significant Accounting Policies and Estimates
Note 4 - Oil and Natural Gas Properties
Note 5 - Acquisitions and Divestitures
Note 6 - Asset Retirement Obligations
Note 7 - Revenue
Note 8 - Fair Value of Financial Instruments
Note 9 - Derivatives
Note 10 - Leases
Note 11 - Indebtedness
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 (Deficit)
Note 16 - Share Based and Other Compensation
Note 17 - Supplemental Non - Cash Transactions
Note 18 - Segment Information
Note 19 - Commitments and Contingencies
Note 20 - 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-4.1 exhibit41llex10q20200331.htm
EX-10.14 exhibit1014llex10q20200331.htm
EX-31.1 exhibit311llex10q20200331.htm
EX-32.1 exhibit321llex10q20200331.htm

Lilis Energy Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
49038528017570-352012201420172020
Assets, Equity
25131-11-23-352012201420172020
Rev, G Profit, Net Income
1157331-11-53-952012201420172020
Ops, Inv, Fin

10-Q 1 llex10q-20200331.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 March 31, 2020
 
¨
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
LLEXQ
*
 

* On June 29, 2020, the issuer’s common stock was suspended from trading on the NYSE American. Effective June 30, 2020, trades in the issuer’s common stock began to be quoted on the OTC Pink Marketplace under the symbol “LLEXQ”. The NYSE Regulation has determined to commence delisting proceedings pursuant to Section 1003(c)(iii) of the NYSE American Company Guide.

Securities registered pursuant to Section 12(g) of the Exchange Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes ¨   No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act: Yes ¨ No ý

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
¨
Non-accelerated filer 
ý
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 July 2, 2020, 95,122,430 shares of the registrant’s common stock were issued and outstanding.
 










EXPLANATORY NOTE

On May 14, 2020, Lilis Energy, Inc. (the “Company”) filed a Current Report on Form 8-K to indicate its intention to rely on an order issued by the U.S. Securities and Exchange Commission under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, dated March 25, 2020 (Release No. 34-88465) (the “Order”). Due to the outbreak and spread of the COVID-19 coronavirus, the Company has experienced significant delays and disruptions in operations, communications, and access to personnel and professional advisors, resulting in limited support and insufficient time to prepare and complete this Quarterly Report. Accordingly, the Company relied on the Order to delay the filing of this Quarterly Report. In light of the Company and certain of its consolidated subsidiaries filing voluntary petitions on June 29, 2020 seeking relief under Chapter 11 of the United States Bankruptcy Code, the Company filed a “Notification of Late Filing” on Form 12b-25 on June 30, 2020 pursuant to Rule 12b-25 of the Securities Exchange Act of 1934 to further delay the filing of this Quarterly Report.









TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



3







SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements may include the words “may,” “should,” “could,” “estimate,” “intend,” “plan,” “project,” “continue,” “believe,” “predict,” “expect,” “anticipate,” “goal,” “forecast,” “target” or other similar words.
 
All statements, other than statements of historical fact, that are included in this Quarterly Report, including such statements that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements, including, but not limited to, statements regarding the voluntary cases (the “Chapter 11 Cases”) filed by the Company and certain of its subsidiaries under Chapter 11 of the United States Bankruptcy Code, the provision of debtor-in-possession financing facilities, the effects of the Chapter 11 Cases on our liquidity or results of operations or business prospects, the expected terms of a proposed plan of reorganization, our ability to confirm and consummate a chapter 11 plan of reorganization, our ability to continue operating in the ordinary course while the Chapter 11 Cases are pending, the treatment of our creditors and other stakeholders (including holders of our common stock) under a plan of reorganization, the potential impact of epidemics and pandemics, including the COVID-19 coronavirus (“COVID-19”), any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning future production, reserves or other resource development opportunities; any projected well performance or economics, or potential joint ventures or strategic partnerships; any statements regarding future economic conditions or performance; any statements regarding future capital-raising activities; any statements of belief; commodity price risk management activities and the impact on our average realized price; and any statements of assumptions underlying any of the foregoing.
 
Although we believe that the expectations, plans, and intentions reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved, and our actual results could differ materially from those projected or assumed in any of our forward-looking statements.
 
Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, many of which are beyond our control. Some of the factors, which could affect our future results and could cause results to differ materially from those expressed in our forward-looking statements include but are not limited to, risks and uncertainties regarding the Company’s ability to complete a reorganization process under Chapter 11 of the United States Bankruptcy Code, including consummation of the restructuring in accordance with the terms of any restructuring support agreement; potential adverse effects of the Chapter 11 Cases on the Company’s liquidity and results of operations; the Company’s ability to obtain timely approval by the bankruptcy court regarding the motions filed in the Chapter 11 Cases; objections to the Company’s restructuring process, the debtor-in-possession financing facilities, or other pleadings filed that could protract the Chapter 11 Cases; employee attrition and the Company’s ability to retain senior management and other key personnel due to the distractions and uncertainties, including the Company’s ability to provide adequate compensation and benefits during the Chapter 11 Cases; the Company’s ability to comply with the restrictions imposed by the debtor-in-possession facilities and other financing arrangements; the Company’s ability to maintain relationships with suppliers, customers, employees and other third parties and regulatory authorities because of the Chapter 11 filing; the effects of the Chapter 11 Cases on the Company and on the interests of various constituents, including holders of the Company’s common stock; the effects of the Chapter 11 Cases on the market price of the Company’s common stock and on the Company’s ability to access the capital markets; the bankruptcy court’s rulings in the Chapter 11 Cases, including the approvals of the terms of the restructuring and the debtor-in-possession financing facilities, and the outcome of the Chapter 11 Cases generally; the time that the Company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases; risks associated with third party motions in the Chapter 11 Cases, which may interfere with the Company’s ability to consummate the restructuring or an alternative restructuring; increased administrative and legal costs related to the Chapter 11 process; potential delays in the Chapter 11 process due to the effects of the COVID-19 coronavirus; and other litigation and inherent risks involved in a bankruptcy process; the impacts of COVID-19 on our business, financial condition and results of operations; the significant fall in the price of oil since the beginning of 2020; other conditions and events that raise doubts about our ability to continue as a going concern, and the other Risk Factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2019, and updated in this Quarterly Report, in Part I, “Item 1A. Risk Factors.” Should one or more of the risks or uncertainties described in the Annual Report, as updated in this Quarterly Report, occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those in any forward-looking statements.
 
The forward-looking statements in this Quarterly Report present our estimates and assumptions only as of the date of this Quarterly Report. Except as required by law, we specifically disclaim all responsibility to publicly update any information

4







contained in any forward-looking statement and, therefore, disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
 
Unless the context otherwise requires, all references in this report to “Lilis,” “we,” “us,” “our,” “ours,” or “the Company” are to Lilis Energy, Inc. and its subsidiaries.


5







PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Lilis Energy, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
March 31,
 
December 31,
 
2020
 
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,290

 
$
3,753

Accounts receivable, net of allowance of $448 and $448, respectively
8,908

 
18,146

Derivative instruments
12,860

 
427

Prepaid expenses and other current assets
4,444

 
4,438

Total current assets
35,502

 
26,764

Property and equipment:
 
 
 
Oil and natural gas properties, full cost method of accounting, net
207,966

 
228,855

Other property and equipment, net
389

 
421

Total property and equipment, net
208,355

 
229,276

Right-of-use assets
2,037

 
1,722

Other assets
5,038

 
837

Total assets
$
250,932

 
$
258,599

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
97,750

 
$
115,000

Accounts payable
24,827

 
24,834

Accrued liabilities and other
10,810

 
13,972

Revenue payable
10,910

 
11,442

Derivative instruments
8,630

 
5,044

Total current liabilities
152,927

 
170,292

Asset retirement obligations
3,490

 
3,423

Long-term derivative instruments and other non-current liabilities
14,364

 
3,762

Long-term deferred revenue and other long-term liabilities
73,655

 
73,749

Total liabilities
244,436

 
251,226

Commitments and Contingencies - Note 19


 


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 $1,233 and $1,203, per share, as of March 31, 2020 and December 31, 2019, respectively
83,379

 
80,446

Series C-2 9.75% Participating Preferred Stock, 25,000 shares issued and outstanding with a stated value of $1,155 and $1,128, per share, as of March 31, 2020 and December 31, 2019, respectively
19,544

 
18,857

Series D 8.25% Participating Preferred Stock, 39,254 shares issued and outstanding with a stated value of $1,130 and $1,107, per share, as of March 31, 2020 and December 31, 2019, respectively
29,978

 
29,082

Series E 8.25% Convertible Participating Preferred Stock, 60,000 shares issued and outstanding with a stated value of $1,092 and $1,069, per share, as of March 31, 2020 and December 31, 2019, respectively
67,609

 
66,285


6







Series F 9.00% Participating Preferred Stock, 55,000 shares issued and outstanding with a stated value of $1,100 and $1,076, per share, as of March 31, 2020 and December 31, 2019, respectively
52,193

 
50,861

Stockholders’ equity (deficit):
 
 
 
Common stock, $0.0001 par value per share, 150,000,000 shares authorized 95,384,194 and 91,584,460 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
10

 
9

Additional paid-in capital
336,236

 
342,382

Treasury stock, 253,598 shares at cost
(997
)
 
(997
)
Accumulated deficit
(581,456
)
 
(579,552
)
Total stockholders’ deficit
(246,207
)
 
(238,158
)
Total liabilities, mezzanine equity and stockholders’ deficit
$
250,932

 
$
258,599


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


7







Lilis Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
 
Three Months Ended
 
2020
 
2019
Revenues:
 
 
 
Oil sales
$
12,362

 
$
14,701

Natural gas sales
189

 
1,526

Natural gas liquid sales
219

 
1,470

Total revenues
12,770

 
17,697

Operating expenses:
 
 
 
Production costs
4,696

 
4,764

Gathering, processing and transportation
327

 
1,178

Production taxes
613

 
906

General and administrative
5,826

 
9,679

Depreciation, depletion, amortization and accretion
3,292

 
8,153

Total operating expenses
14,754

 
24,680

Operating loss
(1,984
)
 
(6,983
)
Other income (expense):
 
 
 
Gain (loss) from commodity derivatives
21,198

 
(10,577
)
Change in fair value of financial instruments
(17,363
)
 
(335
)
Interest expense
(3,802
)
 
(4,828
)
Other income
47

 
31

Total other income (expense)
80

 
(15,709
)
Net loss before income taxes
(1,904
)
 
(22,692
)
Income tax expense

 

Net loss
(1,904
)
 
(22,692
)
Paid-in-kind dividends on preferred stock
(7,172
)
 
(4,825
)
Net loss attributable to common stockholders
$
(9,076
)
 
$
(27,517
)
 
 
 
 
Net loss per common share-basic and diluted:
 
 
 
Basic
$
(0.10
)
 
$
(0.35
)
Diluted
$
(0.10
)
 
$
(0.35
)
 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
94,148,261

 
77,916,448

Diluted
94,148,261

 
77,916,448


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


8







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 March 31, 2020 and 2019:
 
Common Shares
 
Additional
Paid-In Capital
 
Treasury Shares
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Balance, December 31, 2019
91,584,460

 
$
9

 
$
342,382

 
(253,598
)
 
$
(997
)
 
$
(579,552
)
 
$
(238,158
)
Stock-based compensation
3,931,834

 
1

 
1,063

 

 

 

 
1,064

Common stock withheld for taxes on stock-based compensation
(132,100
)
 

 
(37
)
 

 

 

 
(37
)
Dividends on preferred stock

 

 
(7,172
)
 

 

 

 
(7,172
)
Net loss

 

 

 

 

 
(1,904
)
 
(1,904
)
Balance, March 31, 2020
95,384,194

 
$
10

 
$
336,236

 
(253,598
)
 
$
(997
)
 
$
(581,456
)
 
$
(246,207
)


 
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
2,379,431

 

 
3,645

 

 

 

 
3,645

Common stock withheld for taxes on stock-based compensation
(165,183
)
 

 
(320
)
 

 

 

 
(320
)
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

 

 
(4,825
)
 

 

 

 
(4,825
)
Net loss

 

 

 

 

 
(22,692
)
 
(22,692
)
Balance, March 31, 2019
91,037,902

 
9

 
360,319

 
(253,598
)
 
(997
)
 
(330,123
)
 
29,208


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


9







Lilis Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) 
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(1,904
)
 
$
(22,692
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation
1,063

 
3,645

Amortization of debt issuance cost and accretion of debt discount
708

 
1,797

Payable in-kind interest

 
1,590

Loss (gain) from commodity derivatives, net
(21,198
)
 
10,577

Net settlements paid on commodity derivatives
(198
)
 
(843
)
Change in fair value of financial instruments
17,363

 
335

Depreciation, depletion, amortization and accretion
3,292

 
8,153

Other
(77
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,039

 
1,258

Prepaid expenses and other assets
(382
)
 
(423
)
Accounts payable and accrued liabilities
(686
)
 
(16,395
)
Proceeds from options associated with future midstream services

 
2,500

Net cash provided by (used in) operating activities
7,020

 
(10,498
)
Cash flows from investing activities:
 
 
 
Proceeds from the sale of unproved oil and natural gas properties
24,063

 
336

Capital expenditures
(8,008
)
 
(29,045
)
Net cash provided by (used in) investing activities
16,055

 
(28,709
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit agreement

 
30,000

Repayment of revolving credit agreement
(17,250
)
 

Debt issuance costs
(251
)
 
(382
)
Payment for tax withholding on stock-based compensation
(37
)
 
(320
)
Net cash provided by (used in) financing activities
(17,538
)
 
29,298

Net increase (decrease) in cash and cash equivalents
5,537

 
(9,909
)
Cash and cash equivalents at beginning of period
3,753

 
21,137

Cash and cash equivalents at end of period
$
9,290

 
$
11,228

Supplemental disclosure:
 
 
 
Cash paid for interest
$
1,502

 
$
1,441


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


10







Lilis Energy, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 1 - ORGANIZATION

Lilis Energy, Inc., a Nevada corporation, 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. Unless otherwise specified or the context otherwise requires, all references in these notes to “we”, “our”, “Lilis” or the “Company” are to Lilis Energy, Inc. and its consolidated subsidiaries.

NOTE 2 - CHAPTER 11 FILING, LIQUIDITY AND GOING CONCERN

Voluntary Petitions under Chapter 11 of the Bankruptcy Code

On June 28, 2020 (the “Petition Date”), Lilis Energy, Inc. and its consolidated subsidiaries Brushy Resources, Inc., ImPetro Operating LLC, ImPetro Resources, LLC, Lilis Operating Company, LLC and Hurricane Resources LLC (collectively, the “Debtors”) filed voluntary petitions seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) commencing cases for relief under Chapter 11 of the Bankruptcy Code (the “Chapter 11 Cases”). The Chapter 11 Cases are being jointly administered under the caption In re Lilis Energy, Inc., et al., Case No. 20-33274. We are currently operating our business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court, in accordance with the applicable provisions of the Bankruptcy Code.

To maintain and continue uninterrupted ordinary course operations during the bankruptcy proceedings, the Debtors filed a variety of “first day” motions seeking approval from the Bankruptcy Court for various forms of customary relief designed to minimize the effect of bankruptcy on the Debtors’ operations, customers and employees. On June 29, 2020, the Bankruptcy Court entered orders approving all requested “first day” relief. As a result, we are able to conduct normal business activities and pay all associated obligations for the period following our bankruptcy filing and (subject to caps applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders and critical vendors and funds belonging to third parties, including royalty interest and working interest holders and partners. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of our business require the prior approval of the Bankruptcy Court.

On June 28, 2020, the Debtors entered into a restructuring support agreement (the “RSA”) with (i) the lenders under our Revolving Credit Facility (other than Värde) (each as defined below) (the "Consenting RBL Lenders") and (ii) certain investment funds and entities affiliated with Värde Partners, Inc. (collectively, “Värde”) which collectively own all of our outstanding preferred stock and a subordinated participation in that certain Second Amended and Restated Senior Secured Revolving Credit Agreement dated as of October 10, 2018 (as amended, the “Revolving Credit Agreement” and the loan facility, the “Revolving Credit Facility”), by and among Lilis Energy, Inc., as borrower, the other Debtors, as guarantors, BMO Harris Bank, N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto (“RBL Lenders”), for the purpose of supporting (a) the implementation of restructuring transactions, including a chapter 11 plan of reorganization with terms consistent with those set forth in the RSA (the “Plan”), (b) an initial debtor-in-possession credit agreement (the "Initial DIP Credit Agreement") and related initial DIP credit facility (the “Initial DIP Facility”), (c) the terms of a replacement debtor-in-possession credit agreement (the “Replacement DIP Facility”) and replacement DIP credit facility (the “Replacement DIP Credit Agreement”) and (d) the form of an equity commitment letter contemplating an equity investment by one or more Värde entities in the event that Värde elects in its sole discretion to provide such a commitment to fund the Plan on or before August 17, 2020. If on or prior to August 17, 2020, (i) Värde has not funded the Replacement DIP Facility with sufficient cash such that the lenders’ claims under the Initial DIP Facility have not been repaid in full with proceeds from the Replacement DIP Facility and (ii) Värde has not made a commitment to make the Värde Equity Investment (which, if elected, will be funded on the effective date of the plan of reorganization contemplated by the RSA (the “Plan”)), the Debtors will pursue a sale of substantially all their assets pursuant to bidding procedures agreed to in the RSA to close on or before the 135th day following the Petition Date. See Note 11 - Indebtedness for additional details about the Initial DIP Credit Agreement and Initial DIP Facility. Below is a summary of the treatment that the stakeholders of the Company would receive under the Plan contemplated in the RSA:

each lender under the Revolving Credit Agreement that is unaffiliated with Värde (each, a “Non-Affiliate RBL Lender”) will receive its pro rata share of (i) $9.2 million in cash plus all accrued and unpaid interest as of the Petition Date (estimated to be $0.7 million), and (ii) participations in $55 million of new loans under the Exit Facility as described below;


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Värde, on account of claims held by its affiliates as lenders under the Revolving Credit Agreement and, if applicable, its claims under the Replacement DIP Facility, will receive an aggregate of 100% of the new common stock of the reorganized Lilis, and the treatment of the Company’s outstanding preferred stock, all of which is currently held by Värde, remains undecided and will be agreed on by Värde, the Company and the required Consenting RBL Lenders on or prior to the date the Replacement DIP Facility closes;

the treatment of allowed general unsecured claims will be determined no later than August 17, 2020, which treatment must be acceptable to Värde in consultation with the Administrative Agent, and as a condition to the effectiveness of the Plan (subject to certain exceptions provided in the RSA), the allowed general unsecured claims and allowed priority, other secured, and priority tax claims, other than claims held by Värde and its affiliates, must not exceed a total amount to be acceptable to Värde upon receipt of reasonably acceptable diligence at the time of signing the equity commitment letter providing for the Värde Equity Investment; and

each outstanding share of the Company’s common stock, share-based awards and warrants will be canceled for no consideration.

The Plan contemplated in the RSA is contingent upon, among other things, Värde’s election in its sole discretion, on or before August 17, 2020, to provide (i) an agreed commitment (which, if elected, will be funded on the effective date of the Plan) to buy the common stock of the reorganized Lilis for $55.0 million in cash less any funding provided by Värde under the Replacement DIP Facility (but excluding any amount of interest or fees paid-in-kind and capitalized thereunder), and (ii) certain Värde funds to provide for a Replacement DIP Facility.

The Consenting RBL Lenders and Värde have the right to terminate the RSA, and their support for the restructuring contemplated by the RSA (the “Restructuring”), for customary reasons, including, among others, the failure to timely achieve any of the milestones for the progress of the Chapter 11 Cases that are in the RSA, which include the dates by which the Debtors are required to, among other things, obtain certain court orders and consummate the Restructuring.

There can be no assurance that the Debtors will confirm and consummate the Plan as contemplated by the RSA or complete an alternative plan of reorganization. For the duration of our Chapter 11 Cases, our operations and our ability to develop and execute a business plan are subject to risks and uncertainties associated with bankruptcy.

Initial DIP Facility, Replacement DIP Facility and Exit Facility.

The RSA contemplates that, upon the interim approval of the Bankruptcy Court, the Debtors, as borrower and guarantors, the Consenting RBL Lenders (in that capacity, “Initial DIP Lenders”) and the Administrative Agent would enter into a Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “Initial DIP Credit Agreement”), under which the Initial DIP Lenders would provide a superpriority senior secured debtor-in-possession credit facility providing for an aggregate principal amount of (i) $15.0 million of new money revolving commitments, of which up to $5.0 million would be available upon entry of an interim order, with the remainder available upon entry of a final order, plus (ii) a tranche of roll-up term loans to refinance $15.0 million of the outstanding loans under the Revolving Credit Facility, including $1.5 million pre-petition bridge loans that the Non-Affiliate RBL Lenders advanced to the Company on June 17, 2020, of which $1.5 million of roll-up term loans would be incurred upon entry of an interim order, with the remaining $13.5 million to be incurred upon entry of a final order. On June 29, 2020, the Bankruptcy Court entered an order (the “Interim DIP Order”) granting interim approval of the Initial DIP Facility, thereby permitting the Company to incur up to $5.0 million new money loans on an interim basis. The Initial DIP Credit Agreement was entered into on June 30, 2020. A final hearing on the Initial DIP Facility and Initial DIP Credit Agreement is scheduled for August 18, 2020.

Subject to approval by the Bankruptcy Court, the proceeds of the Initial DIP Facility will be used to pay fees, expenses and other expenditures of the Debtors to be set forth in rolling budgets prepared as part of the Chapter 11 Cases, subject to approval by the Initial DIP Lenders. Closing the Initial DIP Facility is contingent on the satisfaction of customary conditions, including receipt of a final order by the Bankruptcy Court approving the Initial DIP Facility and the Initial DIP Credit Agreement.

The RSA further contemplates that Värde may elect, in its sole discretion and on or prior to August 17, 2020, to provide the Debtors with a Replacement DIP Facility or the Värde Equity Investment or both. Among other things, Värde’s notification to the Administrative Agent or Debtors of its intention not to provide the Replacement DIP Facility or the Värde Equity Investment will constitute a termination event for the RSA. If Värde elects to provide a Replacement DIP Facility, the RSA contemplates that the Replacement DIP Facility will consist of a senior secured superpriority debtor-in-possession term loan facility providing for $20 million new money loans. The proceeds of the Replacement DIP Facility will be used to refinance in full the outstanding

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obligations under the Initial DIP Facility, including accrued and unpaid interest and the fees and expenses of the DIP Lenders, and pay fees, expenses and other expenditures of the Debtors during the Chapter 11 Cases. Upon the Debtors’ emergence from the Chapter 11 Cases and to the extent any claims under the Replacement DIP Facility have not otherwise been repaid, each holder of an allowed claim under the Replacement DIP Facility will receive its pro rata share of a certain percentage of the new common stock of the reorganized Lilis (subject to dilution from the Värde Equity Investment, if applicable) such that Värde and its affiliates will collectively own 100% of the outstanding common stock of the reorganized Lilis on account of its claims under the Revolving Credit Facility and the Replacement DIP Facility. In addition, Värde may elect, in its sole discretion and on or prior to August 17, 2020, to purchase, upon the Debtors’ emergence from the Chapter 11 Cases, 100% of the common stock of the reorganized Lilis in exchange for $55.0 million in cash (less any funding provided by Värde pursuant to the Replacement DIP Facility (but excluding any amount of interest or fees paid-in-kind and capitalized thereunder)) (the “Värde Equity Investment”). The proceeds of the Värde Equity Investment will be used to repay a portion of the claims of the Non-Affiliate RBL Lenders under the Revolving Credit Facility on the effective date, to fund other distributions under the Plan, and to fund the working capital of the reorganized Debtors.

Pursuant to the RSA, on the effective date of the Plan, the Consenting RBL Lenders will provide a revolving credit facility to the reorganized Debtors in a principal amount of $55.0 million, with a 36-month term to maturity and a 9-month borrowing base redetermination holiday (the “Exit Facility”). The proceeds of the Exit Facility will be used to repay a portion of the Non-Affiliate RBL Lenders’ claims under the Revolving Credit Facility.

Acceleration of Our Existing Debt and Automatic Stay Due to Chapter 11 Filing

As of March 31, 2020, we had $97.8 million of indebtedness outstanding, and the borrowing base under our Revolving Credit Agreement was $90.0 million, resulting in a borrowing base deficiency of $7.8 million. Pursuant to the Fourteenth Amendment to the Revolving Credit Agreement, the remaining payment of $7.8 million was due June 5, 2020, which the Company did not pay.

On June 5, 2020, the Debtors, the Administrative Agent, and certain lenders entered into a Limited Forbearance Agreement to the Revolving Credit Agreement (the “Forbearance Agreement”).

Pursuant to the Forbearance Agreement, the Administrative Agent and the Majority Lenders agreed to refrain from exercising certain of their rights and remedies under the Revolving Credit Agreement and related documents arising solely as a result of the occurrence or continuance of certain specified defaults and events of default under the Revolving Credit Agreement (the “Specified Defaults”) during the Forbearance Period (as defined below). The Specified Defaults include the Company’s failure to make the borrowing base deficiency payment due June 5, 2020, deliver certain financial statements when due, failure to comply with requirements related to the status of trade payables and related liens and failure to maintain the leverage ratio and asset coverage ratio required by the Revolving Credit Agreement as of the fiscal quarter ended March 31, 2020. The “Forbearance Period” commenced on the date of the Forbearance Agreement and expired at 6:00 p.m., Central time, on June 26, 2020. In anticipation of a potential filing of the Chapter 11 Cases, the Company did not make the borrowing base deficiency payment.

The Forbearance Agreement also deferred the scheduled spring redetermination of the borrowing base under the Revolving Credit Agreement from on or about June 5, 2020 to on or about June 26, 2020.

The Forbearance Agreement permitted the lenders under the Revolving Credit Agreement, or the RBL Lenders, in their capacity as counterparties to the Company’s commodity swap agreements to unwind and liquidate such swap arrangements during the Forbearance Period and to apply any net proceeds to pay down the outstanding obligations under the Revolving Credit Agreement. The swap positions of such lenders were liquidated on June 9, 2020, for net proceeds of approximately $9.3 million, which was applied to reduce the outstanding obligations of the Company under the Revolving Credit Agreement. On June 17, 2020, certain of the RBL Lenders permitted the Company to borrow $1.5 million under the Revolving Credit Agreement. As of the filing of the Chapter 11 Cases, the remaining outstanding principal on our Revolving Credit Agreement was $89.9 million, including $25.7 million of such principal held by an affiliate of Värde which was subordinated to the indebtedness of the other RBL Lenders under the Revolving Credit Agreement.

Our remaining derivative contracts with counterparties that were not our RBL Lenders are governed by master agreements which generally specify that a default under any of our indebtedness as well as any bankruptcy filing is an event of default which may result in early termination of the derivative contracts. As a result of our debt defaults and our bankruptcy petition, we are currently in default under these remaining derivative contracts. We anticipate that our remaining outstanding derivative contracts may be terminated in conjunction with our bankruptcy proceedings. We have received notices from the four remaining counterparties that they intend to terminate their master agreements with us. Furthermore, since we are in default on our indebtedness

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and have a bankruptcy filing, we will no longer be able to represent that we comply with the credit default or bankruptcy covenants under our derivative master agreements and thus may not be able to enter into new hedging transactions.

The commencement of a voluntary proceeding in bankruptcy constitutes an immediate event of default under the Revolving Credit Agreement, resulting in the automatic and immediate acceleration of all of the Company’s outstanding debt. The Company has classified all of its outstanding debt as a current liability on its condensed consolidated balance sheet as of March 31, 2020.

Subject to certain exceptions, under the Bankruptcy Code, the filing of the bankruptcy petitions on the Petition Date automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or the filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Creditors are stayed from taking any actions against the Debtors as a result of debt defaults, subject to certain limited exceptions permitted by the Bankruptcy Code

Ability to Continue as a Going Concern

We have experienced losses and working capital deficiencies, and at times in the past, negative cash flows from operations. Additionally, our liquidity and operating forecasts have been negatively impacted by the recent decrease in commodity prices and resulting temporary shut-in of wells, which has negatively impacted our ability to comply with debt covenants under our Revolving Credit Agreement. Commodity price volatility, as well as concerns about the COVID-19 pandemic, which has significantly decreased worldwide demand for oil and natural gas. Our Revolving Credit Agreement contains financial covenants that require the Company to maintain a ratio of total debt to EBITDAX (the “Leverage Ratio”) of not more than 4.00 to 1.00 and a ratio of current assets to current liabilities (the “Current Ratio”) of not less than 1.00 to 1.00 as of the last day of each fiscal quarter. See Note 11-Indebtedness for additional information regarding the financial covenants under our Revolving Credit Agreement. As of March 31, 2020, the Company was not in compliance with the Leverage Ratio and Current Ratio covenants under the Revolving Credit Agreement. Pursuant to the Fourteenth Amendment (as defined in Note 11 - Indebtedness), the Company obtained a waiver from the requisite lenders of its non-compliance with the Leverage Ratio and Current Ratio covenants, among other waivers of default, as of March 31, 2020. Pursuant to the Forbearance Agreement, the administrative agent and the majority lenders agreed to refrain from exercising certain of their rights and remedies under the Revolving Credit Agreement and related documents, during the Forbearance Period as described above, that arose solely as a result of the Company’s breach of the Leverage Ratio and Current Ratio covenants, the Company’s failure to pay remaining borrowing base deficiency and certain other defaults or events of default.

Fluctuations in oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced. Historically, oil and natural gas prices have been volatile, and may be subject to wide fluctuations in the future. If continued depressed prices persist, the Company will continue to experience impairment of oil and natural gas properties, operating losses, negative cash flows from operating activities, and negative working capital.

We face uncertainty regarding the adequacy of our liquidity and capital resources and have extremely limited access to additional financing. The Interim DIP Order entered by the Bankruptcy Court on June 29, 2020 approved the Initial DIP Facility on an interim basis, thereby allowing us to borrow up to $5.0 million under the Initial DIP Facility. Our ability to borrow the additional $10.0 million new money loans under the Initial DIP Facility is contingent on the satisfaction of the conditions specified in the Initial DIP Credit Agreement, including receipt of a final order by the Bankruptcy Court approving the Initial DIP Facility and the Initial DIP Credit Agreement. In addition to the cash requirement necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees, costs and other expenses throughout our Chapter 11 Cases.

As part of the Chapter 11 Cases, the Company entered into the RSA described above. The Company’s operations and its ability to develop and execute its business plan are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is subject to a high degree of uncertainty and is dependent upon factors that are outside of the Company’s control, including actions of the Bankruptcy Court and the Company’s creditors. There can be no assurance that the Company will confirm and consummate a Plan as contemplated by the RSA or complete another plan of reorganization with respect to the Chapter 11 Cases. As a result, the Company has concluded these matters raise substantial doubt about the Company’s ability to continue as a going concern for a twelve-month period following the date of issuance of these consolidated financial statements.

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business for the twelve-month period following the date of issuance of these consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amount, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

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COVID-19
    
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency due to the COVID-19 outbreak, which originated in Wuhan, China, and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

In addition, in March 2020, members of OPEC failed to agree on production levels which has caused increased supply and led to a substantial decrease in oil prices and an increasingly volatile market. The oil price war ended with a deal to cut global petroleum output but did not go far enough to offset the impact of COVID-19 on demand. If depressed pricing continues for an extended period it will lead to i) reductions in availability under any reserve-based lending arrangements we may enter into, ii) reductions in reserves, and iii) additional impairment of proved and unproved oil and gas properties. We also expect disclosures of supplemental oil and gas information to be impacted by price declines.

In response to recent commodity prices and our efforts to strengthen our capital through reducing operating costs, during April 2020 the Company elected to shut-in 12 wells which were identified as uneconomic as a result of the continued decline in commodity prices in 2020 and 19 additional wells were identified for short term shut-in through May and June. The 19 wells identified for short term shut-in are naturally flowing wells and have been brought back online. In June 2020, the Company also laid off a significant number of employees to further reduce general and administrative costs.

The full impact of the COVID-19 outbreak and the oversupply of oil and resulting decrease in oil prices continues to evolve as of the date of these financial statements. As such, it is uncertain as to the full magnitude that they will have on the Company’s financial condition, liquidity, and future results of operations.

Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

These matters could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown, which the Company expects would impair the Company’s asset values, including reserve estimates.  Further, consumer demand has decreased since the spread of the outbreak and new travel restrictions placed by governments in an effort to curtail the spread of the coronavirus. Although the Company cannot estimate the length or gravity of the impacts of these events at this time, if the pandemic and/or decreased oil prices continue, they will have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020. 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
 
Principles of Consolidation and Presentation
 
The accompanying 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.
   
Use of Estimates
 
The accompanying 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 and administrative expenses. Actual results could differ significantly from these estimates.


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Reclassification

Certain amounts on the condensed consolidated statements of changes in stockholders' equity (deficit) have been conformed to the March 31, 2020 presentation.

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.

It also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The company was not eligible for these loans.

The CARES Act has not had a significant impact on our financial condition, results of operations, or liquidity.

Recently Adopted Accounting Standards
 
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the fair value disclosure requirements based on application of the disclosure framework. The provisions removed or amended certain disclosures and in some cases, the ASU requires additional disclosures. The standard is effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company has adopted ASU 2018-13 and did not have a material impact on its consolidated financial statements or disclosures.

Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary accounting relief for contract modifications to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to a new alternative reference rate. Interest on borrowings under the Company's revolving credit facility is calculated based upon LIBOR. ASU 2020-04 can be applied as of the beginning of the interim period that includes March 12, 2020 or any date thereafter. ASU 2020-04 will generally no longer be available to apply after December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
 
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. The Company is evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.

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Accrued Liabilities and Other
 
At March 31, 2020 and December 31, 2019, the Company’s accrued liabilities consisted of the following:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Accrued drilling, completion and facilities costs
$
2,163

 
$
5,021

Drilling advances
1,372

 
1,328

Accrued production expenses
2,037

 
3,326

Other accrued liabilities
4,409

 
3,885

Short-term operating lease liabilities
829

 
412

 
$
10,810

 
$
13,972

 
NOTE 4 - OIL AND NATURAL GAS PROPERTIES

The following table sets forth a summary of oil and natural gas property costs (net of divestitures) at March 31, 2020 and December 31, 2019:
 
March 31,
 
December 31,
 
2020
 
2019
 
(In thousands)
Oil and natural gas properties:
 
 
 
  Proved
$
484,433

 
$
478,569

  Unproved
86,028

 
109,590

Total oil and natural gas properties
570,461

 
588,159

Accumulated depletion, depreciation, amortization and impairment
(362,495
)
 
(359,304
)
Oil and natural gas properties, net
$
207,966

 
$
228,855


On February 28, 2020, the Company closed on the sale of approximately 1,185 undeveloped net acres in Lea County, New Mexico, for net cash proceeds of approximately $24.1 million, subject to customary purchase price adjustments.

During the three months ended March 31, 2020 and 2019, $1.3 million and $5.8 million, respectively, of unproved property costs were transferred to proved properties due to the uncertainty that the Company will have access to necessary funding to either extend the leases expiring through the first quarter of 2021 or begin drilling before their expiration dates. The reclassification for the 2019 period was the result of defective titles and lease expirations. During the three months ended March 31, 2020, leases holding 805 net acres in Reeves County and 593 net acres in Winkler County expired which were previously impaired.

Depreciation, depletion and amortization expense related to proved properties was approximately $3.3 million and $8.1 million, respectively for the three months ended March 31, 2020 and 2019.

NOTE 5 - ACQUISITIONS AND DIVESTITURES

Divestitures During 2020

On February 28, 2020, the Company closed on the sale of approximately 1,185 undeveloped net acres in Lea County, New Mexico, for net cash proceeds of approximately $24.1 million, subject to customary purchase price adjustments (the “Marlin Disposition”). The proceeds were used to satisfy a substantial portion of the then-existing borrowing base deficiency, $17.3 million.

NOTE 6 - 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.

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The following table summarizes the changes in the Company’s ARO for the three months ended March 31, 2020 and for the year ended December 31, 2019
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
ARO, beginning of period
$
3,423

 
$
2,444

Additional liabilities incurred
5

 
186

Accretion expense
62

 
433

Liabilities settled

 
(78
)
Revision in estimates

 
438

ARO, non-current
$
3,490

 
$
3,423


NOTE 7 - 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 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 through May 8, 2020, the Company’s crude oil was sold under a single long-term contract. The purchaser’s commitment had a quantity-based minimum 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.

Pursuant to the long-term contract, pricing was 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 was effective from March 1, 2019 through June 30, 2019, which decreased to $6.50 per barrel for the period of July 1, 2019 through May 8, 2020. 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 charged 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).

Effective May 9, 2020, the Company’s crude oil is sold under a single month-to-month contract. The purchaser’s commitment includes all quantities of crude oil from the leases covered by the contract, with no quantity-based restrictions or variable terms. Pricing is based on posted indexes for crude oil of similar quality, less a reduction equal to $4.60 per barrel.

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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 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 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 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 March 31, 2020 and 2019.

Contract balances and prior period performance obligations

The Company is entitled to payment from purchasers once its performance obligations have been satisfied upon delivery of the product, at which point payment is unconditional, and the Company records these invoiced amounts as accounts receivable
in its condensed consolidated balance sheets. To the extent actual volumes and prices of oil and natural gas are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and also recorded as accounts receivable in the accompanying consolidated balance sheets. In this scenario, payment is unconditional, as the Company has satisfied its performance obligations through delivery of the relevant product. As a result, the Company has concluded that its product sales do not give rise to contract assets or liabilities.

The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain oil, natural gas and NGL sales may not be received for 30 to 60 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the customer and the price that will be received for the sale of the product. Additionally, to the extent actual volumes and prices of oil, natural gas and NGLs are unavailable for a given reporting period because of timing or information not received from third-party purchasers, the expected sales volumes and prices for those barrels of oil, cubic feet of gas and gallons of NGL are also estimated. The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls in place for its estimation process, and any identified differences between its revenue estimates and actual revenue received historically have not been significant.

Significant judgments

The Company engages in various types of transactions in which midstream entities process its gas and subsequently market resulting NGLs and residue gas to third-party customers on the Company’s behalf per gas purchase contracts. These types of transactions require judgment to determine whether the Company is the principal or the agent in the contract and, as a result, whether revenues are recorded gross or net. The Company maintains control of the natural gas and NGLs during processing and considers itself the principal in these arrangements.


19







Practical expedients

A significant number of the Company’s product sales are short-term in nature with contract term of one year or less. For those contracts, the Company utilizes the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For the Company’s product sales that have contract terms less than one year, the Company utilizes the practical expedient in the new revenue standard that states that it is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
 
The following table disaggregates the Company’s revenue by contract type (in thousands) for the three months ended March 31, 2020:
 
Short-term contracts
 
Long-term contracts
 
Total
Crude oil
$

 
$
12,362

 
$
12,362

Natural gas
47

 
142

 
189

NGLs
54

 
165

 
219


Customer Credit Risk
 
Our principal exposure to credit risk is through receivables from the sale of our oil and natural gas production of approximately $3.9 million and $9.1 million at March 31, 2020 and December 31 2019, respectively, and through actual and accrued receivables from our joint interest partners of approximately $3.9 million and $9.5 million at March 31, 2020 and December 31, 2019, 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.
 
Major Customers

During the three months ended March 31, 2020 and 2019, the Company’s major customers as a percentage of total revenue consisted of the following:
 
Three Months Ended March 31,
 
2020
 
2019
ARM Energy Management, LLC
96
%
 
37
%
Lucid Energy Delaware, LLC
3
%
 
13
%
Other below 10%
1
%
 
2
%
Texican Crude & Hydrocarbon, LLC
%
 
48
%
 
100
%
 
100
%
    
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.


20







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 March 31, 2020
 

 
 

 
 

 
 

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

 
$
8,959

 
$

 
$
8,959

Oil and natural gas derivative collar contracts

 
7,201

 

 
7,201

Embedded derivative instruments:
 
 
 
 
 
 
 
Net settlement provisions under ARM sales agreement

 

 
(20,601
)
 
(20,601
)
Total
$

 
$
16,160

 
$
(20,601
)
 
$
(4,441
)
As of December 31, 2019
 
 
 
 
 
 
 
Oil and natural gas derivative instruments:
 
 
 
 
 
 
 
Oil and natural gas derivative swap contracts
$

 
$
(3,932
)
 
$

 
$
(3,932
)
Oil and natural gas derivative collar contracts

 
301

 

 
301

Embedded derivative instruments:
 
 
 
 
 
 
 
Net settlement provisions under ARM sales agreement

 

 
(3,238
)
 
(3,238
)
Total
$

 
$
(3,631
)
 
$
(3,238
)
 
$
(6,869
)

Derivative assets and liabilities include unsettled amounts related to commodity derivative positions, including swaps and collars, as of March 31, 2020 and December 31, 2019. 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.

In addition, derivative liabilities as of March 31, 2020 include an embedded derivative associated with the ARM sales agreement (see Note 19 - Commitments and Contingencies). The Company recognized a derivative liability of $20.6 million as of March 31, 2020 and an unrealized loss of $17.4 million for the three months ended March 31, 2020. This embedded derivative has fewer observable inputs from objective sources and are therefore measured using Level 3 inputs. The fair value of the net settlement provisions under the agreement was determined based on certain assumptions including (1) forward pricing for crude oil basis differentials, (ii) future LIBOR rates and (iii) the Company’s implied credit rating.


21







The following table sets forth a reconciliation of changes in the fair value of the Company’s financial assets and liabilities classified as Level 3 in the fair value hierarchy, except for the commodity derivatives classified as Level 2, as disclosed in Note 9, as of March 31, 2020 and 2019:
 
Firm Takeaway and Pricing Agreement Net Settlement Provisions
 
(in thousands)
Balance at January 1, 2020
$
(3,238
)
Change in fair value of embedded derivative liabilities
(17,363
)
Balance at March 31, 2020
$
(20,601
)

 
Firm Takeaway and Pricing Agreement Net Settlement Provisions
 
Second Lien Term
Loan Conversion
Features
 
Total
 
(in thousands)
Balance at January 1, 2019
$

 
$
(1,965
)
 
$
(1,965
)
Fair value of the converted portion of the embedded derivatives associated with the Second Lien Term Loan

 
2,300

 
2,300

Change in fair value of embedded derivative liabilities
(3,238
)
 
(335
)
 
(3,573
)
Balance at December 31, 2019
$
(3,238
)
 
$

 
$
(3,238
)
 
NOTE 9 - DERIVATIVES

The Company’s derivative instruments as of March 31, 2020 and December 31, 2019, include the following:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Derivative assets (liabilities):
 
 
 
Derivative assets - current
$
12,860

 
$
427

Derivative assets - non-current (1)
4,469

 
187

Derivative liabilities - current (3)
(8,630
)
 
(5,044
)
Derivative liabilities - non-current (2) (3)
(13,140
)
 
(2,439
)
Total derivative liabilities, net
$
(4,441
)
 
$
(6,869
)

(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) The ARM sales agreement includes an embedded derivative. As of March 31, 2020, the embedded derivative is included as current liabilities and non-current liabilities of $7.5 million and $13.1 million, respectively. As of December 31, 2019, the embedded derivative is included as current liabilities and non-current liabilities of $0.8 million and $2.4 million, respectively.

Embedded Derivatives

As discussed in Note 19 - Commitments and Contingencies, the ARM sales agreement contains minimum quantity commitments. Should the Company be unable to meet those minimum commitments, the agreement contains a two way make whole provision that allows for net settlement. The net settlement feature for remaining future minimum commitment volumes are considered embedded derivatives that are recorded, with changes in fair value included in the Company’s consolidated statement of operations.


22







As of March 31, 2020, the derivative liability associated with the ARM sales agreement was approximately $20.6 million with $7.5 million recorded in current derivative instruments and $13.1 million recorded in long-term derivative instruments on the Company’s consolidated balance sheets. As of December 31, 2019, the derivative liability associated with the ARM sales agreement was approximately $3.2 million with $0.8 million recorded in current derivative instruments and $2.4 million recorded in long-term derivative instruments on the Company’s consolidated balance sheets. On May 8, 2020, the Company terminated this agreement with ARM.

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 - Indebtedness). 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 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 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. 

As a result of the commencement of the Chapter 11 Cases, our ability to enter into derivatives is limited.

See Note 2 - Chapter 11 Filing, Liquidity and Going Concern for a description of certain subsequent events affecting the Company’s commodity derivative contracts.


23







The following table presents the Company’s derivative position for the production periods indicated as of March 31, 2020:
Description
 
 
 Notional Volume (Bbls/d)
 
Production Period
 
 Weighted Average Price ($/Bbl)
Oil Positions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oil Swaps
 
 
992

 
 April 2020 - December 2020
 
$
56.21

Oil Swaps
 
 
370

 
 January 2021 - December 2021
 
$
53.07

 
 
 
 
 
 
 
 
Basis Swaps (1)
 
 
1,500

 
 April 2020 - December 2020
 
$
(5.62
)
 
 
 
 
 
 
 
 
3 Way Collar
Floor sold price (put)
 
182

 
 April 2020 - December 2020
 
$
40.00

3 Way Collar
Floor purchase price (put)
 
182

 
 April 2020 - December 2020
 
$
50.00

3 Way Collar
Ceiling sold price (call)
 
182

 
 April 2020 - December 2020
 
$
59.60

3 Way Collar
Floor sold price (put)
 
80

 
 January 2021 - December 2021
 
$
37.50

3 Way Collar
Floor purchase price (put)
 
80

 
 January 2021 - December 2021
 
$
47.50

3 Way Collar
Ceiling sold price (call)
 
80

 
 January 2021 - December 2021
 
$
59.30

 
 
 
 
 
 
 
 
Oil Collar
Floor purchase price (put)
 
466

 
 April 2020 - December 2020
 
$
49.48

Oil Collar
Ceiling sold price (call)
 
466

 
 April 2020 - December 2020
 
$
63.81

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
 
 
5,881

 
 April 2020 - December 2020
 
$
2.57

Gas Swaps
 
 
4,184

 
 January 2021 - March 2021
 
$
2.77

 
 
 
 
 
 
 
 
3 Way Collar
Floor sold price (put)
 
434

 
 April 2020 - December 2020
 
$
1.60

3 Way Collar
Floor purchase price (put)
 
434

 
 April 2020 - December 2020
 
$
2.10

3 Way Collar
Ceiling sold price (call)
 
434

 
 April 2020 - December 2020
 
$
3.00

3 Way Collar
Floor sold price (put)
 
133

 
 January 2021 - December 2021
 
$
1.65

3 Way Collar
Floor purchase price (put)
 
133

 
 January 2021 - December 2021
 
$
2.15

3 Way Collar
Ceiling sold price (call)
 
133

 
 January 2021 - December 2021
 
$
3.05

Gas Collar
Floor purchase price (put)
 
1,081

 
 April 2020 - December 2020
 
$
2.20

Gas Collar
Ceiling sold price (call)
 
1,081

 
 April 2020 - December 2020
 
$
3.08

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.


24







The table below summarizes the Company’s net gain (loss) on commodity derivatives for the three March 31, 2020 and 2019:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands)
Unrealized gain (loss) on unsettled derivatives
$
19,993

 
$
(8,976
)
Net settlements paid on derivative contracts
(198
)
 
(842
)
Net settlements receivable (payable) on derivative contracts
1,403

 
(759
)
Net gain (loss) on commodity derivatives
$
21,198

 
$
(10,577
)
  
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 consolidated balance sheets as of March 31, 2020 and as of December 31, 2019:
 
As of March 31, 2020
 
Gross Amount of Recognized Assets and Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
 
(In thousands)
Offsetting Commodity Derivative Assets:
 
 
 
 
 
Current assets
$
12,931

 
$
(71
)
 
$
12,860

Long-term assets
4,469

 

 
4,469

Total assets
$
17,400

 
$
(71
)
 
$
17,329

Offsetting Derivative Liabilities:
 
 
 
 
 
Current commodity derivative liabilities
$
(1,240
)
 
$
71

 
$
(1,169
)
Current embedded derivative liabilities
(7,461
)
 

 
(7,461
)
Long-term embedded derivative liabilities
(13,140
)
 

 
(13,140
)
Total liabilities
$
(21,841
)
 
$
71

 
$
(21,770
)
 
 
 
 
 
 

 
As of December 31, 2019
 
Gross Amount of Recognized Assets and Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
 
(In thousands)
Offsetting Commodity Derivative Assets:
 
 
 
 
 
Current asset
$
1,009

 
$
(582
)
 
$
427

Long-term asset
359

 
(172
)
 
187

Total asset
$
1,368

 
$
(754
)
 
$
614

Offsetting Derivative Liabilities:
 
 
 
 
 
Current commodity derivative liabilities
$
(4,827
)
 
$
582

 
$
(4,245
)
Current embedded derivative liabilities
(799
)
 

 
(799
)
Long-term commodity derivative liabilities
(172
)
 
172

 

Long-term embedded derivative liabilities
(2,439
)
 

 
(2,439
)
Total liability
$
(8,237
)
 
$
754

 
$
(7,483
)
 

25







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, 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 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 March 31, 2020, the Company does not have any financing leases.

On the Petition Date, the Debtors filed a motion with the Bankruptcy Court to reject certain unexpired office leases. A hearing on the motion remains pending.

The Company’s ROU assets and operating lease liabilities were included in the consolidated balance sheets as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
Right of use assets:
 
 
 
Right of use assets - long-term (1)
$
2,037

 
$
1,722


 
 
 
Lease liabilities:
 
 
 
Lease liabilities - current (2)
$
829

 
$
412

Lease liabilities - long-term (3)
1,224

 
1,323

     Total lease liabilities
$
2,053

 
$
1,735

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

During the first quarter of 2020, the Company entered into six new equipment leases resulting in lease liabilities and ROU assets of $0.5 million.

26







Lease costs represent the straight line lease expense of ROU assets, short-term leases, and variable lease costs. The components of lease cost were classified as follows (in thousands):
 
Three Months Ended March 31, 2020
Fixed lease costs
$
265

Short-term lease costs
218

Variable lease costs
84

Sublease income
(22
)
Total lease costs
$
545


Lease Cost included in the Consolidated Financial Statements
 
Three Months Ended March 31, 2020
Production costs
 
370

General and administrative
 
175

Total lease costs expensed
 
545

Sublease income
 
(22
)
Total lease costs
 
$
545


During the three months ended March 31, 2020, 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
 
$
262

Investing cash flows from operating leases
 
$


As of March 31, 2020, 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)
 
3.53

Weighted-average discount rate
 
5.31
%

As of March 31, 2020, minimum future payments, including imputed interest, for long-term operating leases under the scope of ASC Topic 842, “Leases”, were as follows (in thousands):
Year
 
Amount
2020
 
$
780

2021
 
425

2022
 
353

2023
 
379

2024
 
315

Total
 
2,252

Less: the effects of discounting
 
(199
)
Present value of lease liabilities
 
$
2,053



27







NOTE 11 - INDEBTEDNESS
 
 
March 31,
 
December 31,
 
 
2020
 
2019
 
 
(In thousands)
Revolving Credit Agreement, due October 2023
 
$
97,750

 
$
115,000

Total long-term debt
 
$
97,750

 
$
115,000

Less: current portion
 
(97,750
)
 
(115,000
)
Total long-term debt, net of current portion
 
$

 
$

 
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”), the Administrative Agent, and the lenders party thereto (as amended, the “Revolving Credit Agreement”). The Revolving Credit Agreement provides for a senior secured reserves based revolving credit facility with a borrowing base of $115.0 million as of December 31, 2019. The borrowing base is subject to semiannual re-determinations in May and November of each year. As provided for in the Seventh Amendment and as a result of a decrease in commodity prices, the borrowing base was decreased to $90.0 million on January 17, 2020. The reduction in the borrowing base resulted in a borrowing base deficiency as of January 17, 2020, of $25.0 million. We have made scheduled repayments of $17.3 million and the remaining $7.8 million was due on June 5, 2020, which the Company did not pay.

On June 5, 2020, the Company, the Guarantors, the Administrative Agent and certain lenders entered into the Forbearance Agreement. See Note 2 - Chapter 11 Filing, Liquidity and Going Concern for a description of the terms of the Forbearance Agreement and the related subsequent events concerning the indebtedness under the Revolving Credit Agreement.

On the Petition Date, the Debtors filed voluntary petitions seeking relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court commencing cases for relief under Chapter 11 of the Bankruptcy Code. Under the Plan contemplated by the RSA, each Non-Affiliate RBL Lender will receive its pro rata share of (i) $9.2 million in cash plus all accrued and unpaid interest as of the Petition Date (estimated to be $0.7 million), and (ii) participations in $55 million of new loans under the Exit Facility. See Note 2 - Chapter 11 Filing, Liquidity and Going Concern for a description of the terms of the Chapter 11 Cases, the RSA and the Plan and the impact of the Chapter 11 Cases on the outstanding debt under our Revolving Credit Agreement.

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 March 31, 2020, outstanding borrowings under the Revolving Credit Agreement were $97.8 million, resulting in a borrowing base deficiency of $7.8 million. The Revolving Credit Agreement also provides for issuance of letters of credit in an aggregate amount of up to $5.0 million. As of March 31, 2020 and December 31, 2019, indebtedness outstanding under our Revolving Credit Agreement, was classified as current liability due to uncertainty of the Company’s ability to meet debt covenants over the next twelve months and the lender's ability to call the debt in the event of a default. As of the Petition Date, the remaining outstanding principal on our Revolving Credit Agreement was $89.9 million, including $25.7 million of such principal held by an affiliate of Värde which was subordinated to the indebtedness of the other bank lenders under the Revolving Credit Agreement. As a result of the filing of the Chapter 11 Cases, all indebtedness under the Revolving Credit Agreement was automatically accelerated and became due and payable.
  
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 months ended March 31, 2020 and 2019, the Company amortized debt issuance costs associated with the Revolving Credit Agreement of $0.7 million and $0.1 million, respectively. As of March 31, 2020, the Company had $2.1 million of unamortized deferred financing costs in other current assets. As of December 31, 2019, the Company had $2.6 million of unamortized deferred financing costs in other current assets.


28







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 (the “Leverage Ratio”) of not more than 4.00 to 1.00 and a ratio of current assets to current liabilities (the “Current Ratio”) of not less than 1.00 to 1.00 as of the last day of each fiscal quarter.

As of March 31, 2020, the Company was not in compliance with the Leverage Ratio and Current Ratio covenants. Pursuant to the Fourteenth Amendment, the Company obtained a waiver from the requisite lenders of its compliance with the Leverage Ratio and Current Ratio covenants as of March 31, 2020. As the Company is not expecting to be able to meet future covenants without obtaining additional sources of liquidity and as a result of the filing of the Chapter 11 cases, the outstanding amount on our Revolving Credit Agreement as of March 31, 2020 has been classified as current. Pursuant to the Forbearance Agreement, the Administrative Agent and the requisite lenders under the Revolving Credit Agreement agreed to refrain from exercising certain of their rights and remedies under the Revolving Credit Agreement and related documents during the Forbearance Period that arose solely as a result of the Company’s breach of the Leverage Ratio and Current Ratio covenants, the Company’s failure to pay remaining borrowing base deficiency and certain other defaults or events of default. See Note 2 - Chapter 11 Filing, Liquidity and Going Concern, for additional information.

The Revolving Credit Agreement also provides for the Company to have and maintain swap agreements in respect of crude oil and natural gas, 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 reserves 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. Pursuant to the Twelfth Amendment, the Company obtained a waiver from the requisite lenders of the requirement to comply with certain hedging obligations set forth in the Revolving Credit Agreement until the quarter ending June 30, 2020.

Subject to certain exceptions, under the Bankruptcy Code, the commencement of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or the filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Creditors are stayed from taking any actions against the Debtors as a result of debt defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. There can be no assurances that the Administrative Agent and the RBL lenders will consensually agree to a restructuring of the Revolving Credit Agreement. Any proposed non-consensual restructuring of the Revolving Credit Agreement could result in substantial delay in emergence from bankruptcy and there can be no assurances that the Bankruptcy Court would approve such proposed non-consensual restructuring.

Prior to the Forbearance Agreement entered into on June 5, 2020 and the filing of the Chapter 11 Cases on June 28, 2020, subsequent to December 31, 2019, and through the date of this quarterly report, the Company entered into various amendments to the Revolving Credit Agreement which included:

a borrowing base redetermination as of January 14, 2020 resulting in the borrowing base reduced to $90 million and a borrowing base deficiency in the amount of $25 million under the Revolving Credit Agreement, required to be paid in four equal monthly installments;

various amendments to extend the installment payments required as a result of the borrowing base deficiency;

waived the requirement under the Revolving Credit Agreement that the Company comply with a leverage ratio and a current ratio, in each case, as of December 31, 2019, and March 31, 2020, and granted certain other waivers, including the requirement to comply with certain hedging obligations set forth in the Revolving Credit Agreement until June 30, 2020;

an extension of an additional 45 days for the Company to provide its audited annual financial statements for the fiscal year ended December 31, 2019, and waived the requirement that such financial statements be delivered without a “going concern” or like qualification or exception; and

defer the timing of the scheduled spring redetermination of the borrowing base under the Revolving Credit Agreement from on or about May 1, 2020 to on or about June 5, 2020 (which was further extended to on or about June 26, 2020 pursuant to the Forbearance Agreement).


29







Second Lien Credit Agreement

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 indebtedness consists solely of borrowings under the Revolving Credit Agreement and, subject to the Bankruptcy Court’s approval, the DIP credit facility.

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.

Debtor-in-Possession Credit Agreement

On June 30, 2020, Lilis Energy, Inc., as borrower, and the other Debtors as guarantors, entered into a Senior Secured Super-Priority Debtor-in-Possession Credit Agreement, or the DIP Credit Agreement among the Debtors, the Non-Affiliate RBL Lenders, and the Administrative Agent. Under the Initial DIP Facility, the Initial DIP Lenders agreed to provide a superpriority senior secured debtor-in-possession credit facility providing for an aggregate principal amount of (i) $15.0 million of new money revolving commitments, of which up to $5.0 million became available upon entry of the Interim DIP Order, with the remainder to become available on a final basis, plus (ii) a tranche of roll-up term loans to refinance $15.0 million of the outstanding loans under the Revolving Credit Facility, including $1.5 million pre-petition bridge loans that the Non-Affiliate RBL Lenders advanced to the Company on June 17, 2020, of which $1.5 million of roll-up term loans were incurred upon entry of the Interim DIP Order, with the remaining $13.5 million to be incurred upon entry of a final order. On June 29, 2020, the Bankruptcy Court entered the Interim DIP Order granting interim approval of the Initial DIP Facility, thereby permitting the Debtors to incur up to $5.0 million new money loans on an interim basis. A final hearing on the Initial DIP Facility and Initial DIP Credit Agreement is scheduled for August 18, 2020.

Subject to approval by the Bankruptcy Court, the proceeds of the Initial DIP Facility will be used to pay fees, expenses and other expenditures of the Company RSA Parties to be set forth in rolling budgets prepared as part of the Chapter 11 Cases, subject to approval by the Initial DIP Lenders. Closing the Initial DIP Facility is contingent on the satisfaction of customary conditions, including receipt of a final order by the Bankruptcy Court approving the Initial DIP Facility and the Initial DIP Credit Agreement.

Borrowings under the Initial DIP Facility 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. Borrowings under the Initial DIP Facility mature on the earliest of (i) November 30, 2020, (ii) the effective date of an approved plan of reorganization and (iii) the date on which the Debtors consummate a sale of all or substantially all of their assets pursuant to Section 363 of Chapter 11 of the Bankruptcy Code or otherwise.

The Initial DIP Credit Agreement contains events of default customary for debtor-in-possession financings, including events related to the Chapter 11 proceedings, the occurrence of which could cause the acceleration of the Debtors’ obligation to

30







repay borrowings outstanding under the Initial DIP Facility. The Debtors’ obligations under the Initial DIP Credit Agreement are secured by a security interest in, and lien on, substantially all present and after-acquired property (whether tangible, intangible, real, personal or mixed) of the Debtors, including a superpriority priming lien on the property of the Debtors that secure their obligations under the Revolving Credit Facility.

Interest Expense
 
The components of interest expense are as follows for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Interest on debt
$
1,501

 
$
1,441

Net revenue payments on financing arrangement
1,594

 

Paid-in-kind interest on term loans

 
1,590

Amortization of debt financing costs
707

 
140

Amortization of discount on term loans

 
1,657

Total
$
3,802

 
$
4,828

   
NOTE 12 - LONG-TERM DEFERRED REVENUE LIABILITIES AND OTHER LONG-TERM LIABILITIES

 
March 31,
 
December 31,
 
2020
 
2019
 
(in thousands)
Long-term deferred revenue liabilities
$
36,826

 
$
36,920

Long-term deferred proceeds, WLR agreement
13,061

 
13,061

Long-term deferred proceeds, WLWI agreement
23,768

 
23,768

Total long-term deferred revenue liabilities and other long-term liabilities
$
73,655

 
$
73,749


SCM Water LLC’s Option to Exercise Purchase of Salt Water Disposal Assets

In July 2018, the Company entered into a water gathering and disposal agreement and a contract operating and right of first refusal agreement with SCM Water, LLC (“SCM Water”), a subsidiary of Salt Creek Midstream, LLC (“Salt Creek”). The water gathering agreement complements the Company’s existing water disposal infrastructure, and the Company has reserved the right to recycle its produced water. SCM Water will commence, upon receipt of regulatory approval, to build out new gathering and disposal infrastructure to all of the Company’s current and future well locations in Lea County, New Mexico, and Winkler County, Texas. All future capital expenditures to construct, maintain and operate the water gathering system will be fully funded by SCM Water and will be designed to accommodate all water produced by the Company’s operations. Pursuant to the contract operating agreement, the Company will act as contract operator of SCM Water’s salt water disposal wells.

Additionally, the Company sold to SCM Water an option to acquire the Company’s existing water infrastructure, a system which is comprised of approximately 14 miles of pipeline and one SWD well, for cash consideration upon closing, with additional payments based on reaching certain milestones.

On March 11, 2019, the Company, SCM Water, and ARM Energy Management, LLC (“ARM”), a related company to SCM Water, agreed to amend the terms of the previously negotiated water gathering and disposal agreement and entered into a new crude oil sales contract (See Note 7 - Revenue and Note 19 - Commitments and Contingencies). Under the terms of such agreements, the Company agreed to an increase in salt water disposal rates in exchange for more favorable pricing differentials on the crude oil sales contract, modification on the minimum quantities of crude oil required under the crude oil sales contract, an upfront payment of $2.5 million and the elimination of the potential bonus for hitting a target of 40,000 barrels of produced water per day. The Company determined that the upfront $2.5 million payment was primarily attributable to the crude oil sales contract, and the Company recorded the $2.5 million payment as deferred revenues. For the three months ended March 31, 2020, the Company has recognized, in income ratably as the crude oil is sold, $0.1 million.


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Crude Oil Gathering Agreement and Option Agreement

On May 21, 2018, the Company entered into a crude oil gathering agreement and option agreement with Salt Creek. The crude oil gathering agreement (the “Gathering Agreement”) enables Salt Creek to (i) design, engineer, and construct a gathering system which will provide gathering services for the Company’s crude oil under a tariff arrangement and (ii) gather the Company’s crude oil on the gathering system in certain production areas located in Winkler and Loving Counties, Texas and Lea County, New Mexico. Construction of the gathering system has commenced. The Gathering Agreement has a term of 12 years that automatically renews on a year to year basis until terminated by either party. On May 6, 2020, the Company delivered a notice to Salt Creek pursuant to which the Company terminated the Gathering Agreement in its entirety.
Salt Creek and the Company also entered into an option agreement (the “Option Agreement”) whereby the Company granted an option to Salt Creek to provide certain midstream services related to natural gas in Winkler and Loving Counties, Texas and Lea County, New Mexico, subject to the expiration and terms of the Company’s existing gas agreement. The Option Agreement has a term commencing May 21, 2018 and terminating January 1, 2027, pursuant to its one-time option. As consideration for this option, the Company received a one-time payment of $35.0 million, which was recorded in long-term deferred revenue.
See Note 19 - Commitments and Contingencies for a description of certain litigation concerning the Gathering Agreement, Salt Creek and ARM.
Asset Disposition Accounted for as a Financing Arrangement

As a result of certain repurchase rights contained in the agreements with affiliates of Värde for the sale of overriding royalty interests to Winkler Lea Royalty L.P. ("WLR") and the sale of working interests to Winkler Lea Working Interest L.P. ("WLWI"), entered into in July 2019, the agreements do not meet the criteria for a sale and were accounted for as a financing arrangement under ASC 470 - Debt. The net proceeds of the transaction of $39.0 million were included in long-term deferred revenue and other long-term liabilities on the Company’s consolidated balance sheets as of March 31, 2020 and December 2019. As a result of the transaction, the net revenue payments of $1.6 million for the three months ended March 31, 2020, are included in interest expense on the Company’s consolidated statements of operations. Under the working interest agreement with WLWI, the Company did not meet the schedule to bring the 4th and 5th wells to production, which was due to occur at the end of June. WLWI may be entitled to liquidated damages under the agreement, subject to any rights and defenses the Company may have.


NOTE 13 - RELATED PARTY TRANSACTIONS
 
As of March 31, 2020 and December 31, 2019, the Company was engaged in the following transactions with certain related parties:  
 
 
 
 
As of March 31,
 
As of December 31,
Related Party
 
Transactions
 
2020
 
2019
 
 
 
 
(In thousands)
Värde Partners, Inc. (1)
 
Payable due for revenue associated with VPD's net proportionate share of production revenue
 
$

 
$
(157
)
 
 
Receivable balance outstanding for operating costs in excess of production revenue associated with VPD's proportionate share of producing wells
 
73

 

 
 
Payable to WLWI for net proportionate share of production revenue
 
(1,235
)
 
(526
)
 
 
Payable to WLR for net proportionate share of production revenue
 
(187
)
 
(161
)
 
 
Asset disposition to WLWI accounted for as a financing arrangement (see footnote 12)
 
(23,768
)
 
(23,768
)
 
 
Asset disposition to WLR accounted for as a financing arrangement (see footnote 12)
 
(13,060
)
 
(13,060
)
 
 
Total:
 
$
(38,177
)
 
$
(37,672
)
(1) Värde is a major stockholder of the Company, and as of April 21, 2020, became a lender under out Revolving Credit Agreement (see Note 11 - Indebtedness). Värde Parties are holders of preferred shares outstanding (see Note 14 - Preferred Stock).
    

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On April 21, 2020, Värde Investment Partners, L.P., an affiliate of Värde Partners, Inc., became a lender under our Revolving Credit Agreement by acquiring, from a prior lender, loans and commitments under the Revolving Credit Agreement in the principal amount of approximately $25.7 million. The loans and commitments acquired by Värde Investment Partners, L.P. are subject to certain subordination provisions set forth in the Revolving Credit Agreement, as amended by the Fourteenth Amendment thereto dated April 21, 2020. For additional information regarding our Revolving Credit Agreement, as amended (see Note 11 - Indebtedness).

Under two agreements entered into with WLR and a non-operated working interest in newly developed assets to WLWI. For the three months ended March 31, 2020, WLR’s proportionate share of revenue of $0.2 million, and WLWI's net revenue (revenue less production costs) of $1.4 million are both included in interest expense on the Company’s condensed consolidated statements of operations.

Certain investment funds and entities affiliated with Värde Partners, Inc. are parties to the RSA. See Note 2 - Voluntary Petitions under Chapter 11 of the Bankruptcy Code for further information about the terms of the RSA and the transactions contemplated thereby.

NOTE 14 - PREFERRED STOCK
 
As of March 31, 2020, the Company accounted for the Series C, D, E and F Preferred Stock at its initial fair value at closing of the 2019 Transaction Agreement on March 5, 2019, plus cumulative paid-in-kind dividends accrued subsequent to the closing of the transactions contemplated by the 2019 Transaction Agreement, under mezzanine equity in the consolidated balance sheet. The components of each series of preferred stock are summarized in the table below:
 
 
Series C Preferred Stock
 
Series D Preferred Stock
 
Series E Preferred Stock
 
Series F Preferred Stock
 
 
Number of Shares
 
Amount
 
Number of Shares
 
Amount
 
Number of Shares
 
Amount
 
Number of Shares
 
Amount
 
 
(In thousands, except shares)
Balance, January 1, 2020
 
125,000

 
$
99,303

 
39,254

 
$
29,082

 
60,000

 
$