Quarterly report pursuant to Section 13 or 15(d)

4. Debt Restructuring

v3.5.0.2
4. Debt Restructuring
9 Months Ended
Sep. 30, 2016
Restructuring and Related Activities [Abstract]  
Debt Restructuring

On March 29, 2016, the Company entered into an Asset Contribution Agreement with Black Ridge Holding Company, LLC, a Delaware limited liability company (“BRHC”) which was recently formed by the Company to contribute and assign to BRHC, all of the Company's (i) oil and gas assets (including working capital and tangible and intangible assets) (the “Assets”), (ii) outstanding balances under that certain Credit Agreement between the Company, as borrower, and Cadence Bank, N.A. (“Cadence”), as lender (the “Cadence Credit Facility”) and the outstanding balances under that certain Credit Agreement between the Company, as borrower, and the several banks and other financial institutions or entities from time to time parties thereto (the “Chambers”), and Chambers, as administrative agent (the “Chambers Credit Facility”) and (iii) all current liabilities related to the Assets, in exchange for 5% of the issued and outstanding Class A Units (the “Class A Units”) in BRHC (the “Asset Contribution”). On March 29, 2016, affiliates of Chambers Energy Management, LP (“Chambers”) (specifically, Chambers Energy Capital II, LP and CEC II TE, LLC (collectively, the “Chambers Affiliates”)) entered into a Debt Contribution Agreement between BRHC and the Chambers Affiliates, pursuant to which BRHC will issue a number of Class A Units representing 95% of the Class A Units of BRHC to the Chambers Affiliates in exchange for the release of BRHC's obligations under the Chambers Credit Facility (the “Satisfaction of Debt” and, together with the Asset Contribution, the “BRHC Transaction”). Concurrent with the Satisfaction of Debt, each warrant originally issued with the Chambers Credit Facility was automatically retired and cancelled. The closing of the BRHC Transaction was subject to the Company obtaining the approval of stockholders holding a majority of its outstanding capital stock and to the Company having assigned the Cadence Credit Agreement to BRHC with Cadence’s consent, and BRHC and Cadence entering into any applicable amendment agreements related to such assignment and waiver of financial covenant ratio compliance for the quarter ended December 31, 2015 and quarter ending March 31, 2016. On June 21, 2016, the Company satisfied all of these conditions and, for accounting purposes, the BRHC Transaction was closed. The parties have agreed that the BRHC Transaction, the Asset Contribution and the Satisfaction of Debt are effective, for valuation purposes, as of April 1, 2016.

 

The terms of the Class A Units of BRHC are set forth in the limited liability company agreement of BRHC (the “LLC Agreement”), which became effective upon the closing of the BRHC Transaction. All distributions by BRHC of cash or other property, and whether upon liquidation or otherwise, will be made as follows:

 

  First, 100% to the Class A Members, pro rata, until each Class A Member has received distributions in aggregate totaling the then Class A Preference, which is an amount equal to a 10.0% internal rate of return on the invested capital amount.

 

  Second, 90% to the Class A Members, pro rata, and 10% to the Class B Members, pro rata, until such time as the aggregate distributions to Chambers equals 250% of the capital contribution of its Class A Units.

 

  Third, 80% to the Class A Members, pro rata, and 20% to the Class B Members, pro rata.

 

BRHC will be managed by the BRHC Board, which will be responsible for the conduct of the day-to-day business of BRHC and the management, oversight and disposition of the assets of BRHC. The initial BRHC Board will be comprised of three managers, consisting of two managers appointed by Chambers and one member from the Company.

 

In addition, under the LLC Agreement, Chambers committed to contribute up to $30 million cash (the “Chambers Investment Commitment”) to BRHC in exchange for Class A Units. At Closing, Chambers funded $10 million (the “Initial Chambers Investment”) of the Chambers Investment Commitment, the proceeds of which were used to reduce outstanding amounts owed by BRHC to Cadence under the Cadence Credit Facility and for general corporate purposes. The remaining $20 million (the “Subsequent Chambers Investment”), subject to certain conditions, may be called from time to time during the Investment Period by the board of managers of BRHC (the “BRHC Board”). The Initial Chambers Investment and any Subsequent Chambers Investment shall serve to proportionately reduce the Company's Class A Units percentage ownership in BRHC. The investment period shall be the lesser of three years or such time as the entire Chambers Investment Commitment has been called by the BRHC Board (the “Investment Period”). Any portion of Chambers Investment Commitment not called by the BRHC Board prior to the expiration of the Investment Period will be cancelled. In no event will Chambers be required to make a capital contribution in an amount in excess of its undrawn commitment.

 

The Company was granted 1,000,000 Class B Units in BRHC at the Closing of the BRHC Transaction. At the discretion of the BRHC’s Board of Managers, the Company may be granted additional Class B Units in BRHC, and in turn, the Company may transfer such Class B Units to certain members of the Company's management. Subject to certain conditions, the Class B Units will entitle the holders to participate in any future distributions of BRHC after distributions equal to the capital contributions and preferred return have been made to the holders of Class A Units of BRHC.

 

At the closing of the BRHC Transaction, the Company entered into a Management Services Agreement with BRHC. Under the Management Services Agreement, the Company will provide services to BRHC with respect to the business operations of BRHC, including but not limited to locating, investigating and analyzing potential non-operator oil and gas projects and day-to-day operations related to such projects. The Company will be paid a fee under the Management Services Agreement intended to cover the costs of providing such services and will be reimbursed for certain third party expenses. The term of the Management Services Agreement commenced on the closing of the BRHC Transaction and continues indefinitely, unless terminated. The Management Services Agreement provides termination provisions upon reasonable notice for both BRHC and the Company as well as upon a change of control, provided that if the Management Services Agreement is terminated before December 31, 2016 that BRHC shall pay the Company a termination fee equal to the amount that would have been paid if the Management Services Agreement was in place until December 31, 2016.

 

The Company believes that the BRHC Transaction and related actions will allow the Company to continue as a manager of the oil and gas assets in which we will continue to have an indirect minority interest. In addition, it will give us the flexibility to pursue distressed asset acquisitions in the Bakken and/or Three Forks formation that may be acquired with capital from our secured lenders as part of the restructuring terms, existing joint venture partners or other capital providers.

 

As a result of the transaction, the Company recorded a gain on debt restructuring of $41,621,150 calculated as the difference between our final ownership interest in BRHC, after conversion of debt to equity and the equity contribution of the Initial Chambers Investment within BRHC and our retention of a 3.88% ownership interest in BRHC, and the net book value of the assets and labilities we transferred to BRHC.

 

The income and expense for the associated with the operating activities (through June 21, 2016, the date of the BRHC transaction) contributed in the BRHC Transaction are reflected as “Loss from discontinued items, net of income taxes” on our condensed statement of operations for all periods presented herein. The items included in “Loss from discontinued operations, net of income taxes” are as follows:

 

    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2016     2015     2016     2015  
                         
Oil and gas sales   $     $ 3,359,684     $ 5,539,613     $ 11,296,220  
Gain on settled derivatives           7,456,284       1,043,026       9,436,903  
Loss on the mark-to-market of derivatives           (3,297,358 )     (4,288,736 )     (4,886,184 )
Total revenues           7,518,610       2,293,903       15,846,939  
                                 
Operating expenses:                                
Production expenses           887,187       1,400,639       3,030,707  
Production taxes           330,186       568,028       1,171,530  
General and administrative           102,129       476,461       309,858  
Depletion of oil and gas properties           1,778,580       3,114,347       7,346,356  
Impairment of oil and gas properties           30,995,000       5,219,000       52,634,000  
Accretion of discount on asset retirement obligations           8,039       16,258       23,900  
Total operating expenses           34,101,121       10,794,733       64,516,351  
                                 
Net operating loss           (26,582,511 )     (8,500,830 )     (48,669,412 )
                                 
Other income (expense):                                
Interest expense           (1,681,307 )     (1,696,544 )     (4,795,727 )
Total other income (expense)           (1,681,307 )     (1,696,544 )     (4,795,727 )
                                 
Loss before provision for income taxes           (28,263,818 )     (10,197,374 )     (53,465,139 )
                                 
Provision for income taxes                       6,593,040  
                                 
Net income (loss)   $     $ (28,263,818 )   $ (10,197,374 )   $ (46,872,099 )

 

The assets and liabilities subject to the BRHC Transaction have been retroactively reclassified as assets and liabilities from discontinued operations on the Company’s balance sheet as of December 31, 2015.

 

Assets and liabilities reclassified as assets and liabilities from discontinued operations as of December 31, 2015 consisted of the following:

 

    December 31,  
    2015  
ASSETS        
         
Assets from discontinued operations, current        
Derivative instruments   $ 1,154,400  
Accounts receivable     5,038,146  
Prepaid expenses     37,100  
Total assets from discontinued operations, current     6,229,646  
         
Assets from discontinued operations, long term        
Oil and natural gas properties, full cost method of accounting        
Proved properties     131,168,906  
Unproved properties     10,394  
Total oil and natural gas properties, full cost method of accounting     131,179,300  
Less, accumulated depletion and allowance for impairment     (99,371,070 )
Total assets from discontinued operations, long term     31,808,230  
         
Total assets from discontinued operations   $ 38,037,876  
         
         
LIABILITIES        
         
Liabilities from discontinued operations, current        
Accounts payable   $ 7,906,438  
Accrued expenses     55,830  
Current portion of revolving credit facility and long term debt     60,350,629  
Total liabilities from discontinued operations, current     68,312,897  
         
Liabilities from discontinued operations, long term        
Asset retirement obligations     368,089  
Total liabilities from discontinued operations, long term     368,089  
         
Total liabilities from discontinued operations   $ 68,680,986