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8-K/A - 8-K/A AMENDMENT NO. 3 - Yuma Energy, Inc. | yuma_8ka.htm |
Exhibit 99.4
DAVIS PETROLEUM ACQUISITION CORP.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
(With Independent Auditor’s Report Thereon)
Table
of Contents
Independent Auditor’s Report
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1
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Consolidated Balance Sheets
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2
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Consolidated Income Statements
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3
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Consolidated Statements of Cash Flows
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4
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Consolidated Statements of Changes in Stockholders’
Equity
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5
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Notes to the Consolidated Financial Statements
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6
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Supplemental Oil and Gas Disclosures (unaudited)
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25
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Independent Auditor's Report
To the Board of
Directors of
Davis
Petroleum Acquisition Corp.:
We have audited the accompanying consolidated financial statements
of Davis Petroleum Acquisition Corp. and its subsidiaries, which
comprise the consolidated balance sheets as of December 31, 2015
and 2014, and the related consolidated statements of income,
stockholders’ equity and cash flows for the years then
ended.
Management's
Responsibility for the Consolidated Financial
Statements
Management is responsible for the preparation and fair presentation
of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America; this includes the design, implementation, and maintenance
of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. We conducted our audits
in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment,
including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, we consider internal
control relevant to the Company's preparation and fair presentation
of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company's internal control. Accordingly, we express no such
opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Davis Petroleum Acquisition Corp. and its subsidiaries
at December 31, 2015 and 2014, and the results of their operations
and their cash flows for the years then ended in accordance with
accounting principles generally accepted in the United States of
America.
Houston, Texas
April 5, 2016, except for the revision described in Note 20 and the
effects thereof, as to which the date is January 17,
2017.
1
DAVIS PETROLEUM ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
AS
OF DECEMBER 31
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2015
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2014
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($
in thousands)
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ASSETS
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Current:
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Cash
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$4,064
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$10,477
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Accounts
receivable
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5,112
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7,363
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Joint
interest advances paid
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175
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937
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Derivative
asset
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1,711
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8,098
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Other
current assets
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877
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7,457
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Total
current assets
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11,939
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34,332
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Property,
plant, and equipment:
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Oil
and gas properties - full cost method
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Proved
properties
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425,767
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408,799
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Unevaluated
properties
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179
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10,877
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Other
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9,034
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9,034
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Less:
Accumulated depreciation, depletion, amortization and
impairment
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(389,345)
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(331,727)
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Total
property, plant and equipment, net
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45,635
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96,983
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Other
assets
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405
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616
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Long-term
derivative asset
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-
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639
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Deferred
income taxes
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1,426
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11,881
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TOTAL ASSETS
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$59,405
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$144,451
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LIABILITIES
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Current:
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Accounts
payable and accrued expenses
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$3,936
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$19,991
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Oil
and gas revenues and royalties payable
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439
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821
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Joint
interest advances received
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475
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598
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Current
portion of asset retirement obligations
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185
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1,822
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Total
current liabilities
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5,035
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23,232
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Long-term
debt
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-
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5,000
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Asset
retirement obligations
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5,147
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5,404
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Other
long-term liabilities
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95
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95
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TOTAL LIABILITIES
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10,277
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33,731
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Commitments and contingencies (Note 16)
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STOCKHOLDERS' EQUITY
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Common
stock, par value $0.01 per share (authorized 400,100,000 shares;
issued 223,584,069 and 223,523,434 as of December 31, 2015 and
2014, respectively)
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2,236
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2,235
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Preferred
stock, par value $0.01 per share (authorized 50,000,000 shares;
issued 33,367,187 and 31,130,201 as of December 31, 2015 and
2014,
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334
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311
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Treasury
Stock, at cost; 72,111,216 and 71,622,528 shares at
December
31, 2015 and 2014, respectively
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(41,350)
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(41,140)
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Paid-in
capital
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207,284
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205,144
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Accumulated
deficit
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(119,376)
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(55,830)
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Total Stockholders' Equity
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49,128
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110,720
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$59,405
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$144,451
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See accompanying Notes to the Consolidated Financial
Statements
2
DAVIS PETROLEUM ACQUISITION CORP.
CONSOLIDATED INCOME STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31
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2015
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2014
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($
in thousands)
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REVENUES
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$18,774
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$58,694
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EXPENSES
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Lease
operating and production costs
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6,510
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12,611
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Production
taxes
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1,106
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2,468
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Depreciation,
depletion and amortization
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17,139
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32,880
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Impairment
of oil and gas properties
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40,480
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-
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General
and administrative
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7,807
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9,938
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Accretion
expense
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176
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852
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Other
operating expenses
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174
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1,006
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(Gain)
on derivative instruments
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(3,319)
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(9,290)
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Total
expenses
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70,073
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50,465
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INCOME (LOSS) FROM OPERATIONS
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(51,299)
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8,229
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Other
(income) and expense:
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Interest
and other income
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(21)
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(159)
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Interest
expense
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578
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1,226
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Income
(loss) before income taxes
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(51,856)
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7,162
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Income
tax expense (benefit) - current
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6
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(192)
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Income
tax expense - deferred
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10,455
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2,676
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NET INCOME (LOSS)
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$(62,317)
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$4,678
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Earnings
Per Share
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Basic
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$(0.42)
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$0.03
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Diluted
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$(0.42)
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$0.03
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Weighted
Average Shares Outstanding (in thousands)
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Basic
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149,182
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147,350
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Diluted
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149,182
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177,178
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See accompanying Notes to the Consolidated Financial
Statements
3
DAVIS PETROLEUM ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31
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2015
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2014
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($
in thousands)
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net
income (loss)
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$(62,317)
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$4,678
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Adjustments
to reconcile net income to net cash provided
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operating
activities:
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Depreciation,
depletion and amortization
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17,139
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32,880
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Amortization
of debt issuance costs
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210
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122
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Impairment
of oil and gas properties
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40,480
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-
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Net
deferred income tax expense
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10,455
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2,676
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Stock-based
compensation expense
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933
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1,712
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Accretion
expense
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176
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852
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Derivative
instruments
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(3,318)
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(9,290)
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Working
capital changes:
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Decrease
in accounts receivable
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2,804
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1,808
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Decrease
in other current and long-term assets
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6,583
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951
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(Decrease)
increase in accounts payable and other current and
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non-current
liabilities
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(5,307)
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2,740
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Increase
(decrease) in oil and gas revenues payable
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(382)
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(3,280)
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Increase
(decrease) in joint interest advances
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3,620
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(3,203)
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Net
cash provided by operating activities
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11,076
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32,646
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Acquisitions
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(1,401)
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(1,541)
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Capital
expenditures
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(22,932)
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(27,420)
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Proceeds
from the sale of properties
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1,710
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33,484
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Divestments
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-
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3,721
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Derivative
settlements
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10,344
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(1,264)
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Net
cash provided by (used in) investing activities
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(12,279)
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6,980
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Repayments
on Senior Credit Facility
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(15,000)
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(40,000)
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Borrowings
on Senior Credit Facility
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10,000
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5,000
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Treasury
stock repurchases
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(210)
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(699)
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Net
cash used in financing activities
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(5,210)
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(35,699)
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Net
(decrease) increase in cash
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(6,413)
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3,927
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Cash
- beginning of the period
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10,477
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6,550
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Cash
- end of the period
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$4,064
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$10,477
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See accompanying Notes to the Consolidated Financial
Statements
4
DAVIS PETROLEUM ACQUISITION CORP.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
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Common Stock
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Preferred Stock
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Treasury
Stock
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Paid-in Capital
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Accumulated Deficit
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Stockholders' Equity
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($
in thousands)
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Shares
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Value
|
|
|
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|
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December 31, 2013
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222,976
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$2,237
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$290
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$(40,441)
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$201,636
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$(59,356)
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$104,366
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Net
income
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-
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-
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-
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-
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-
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4,678
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4,678
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Payment
of dividends in kind
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-
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-
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21
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-
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1,131
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(1,152)
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-
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Restricted
stock grants, net of cancelations
|
547
|
(2)
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-
|
-
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2
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-
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-
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Treasury
stock - employee tax payment
|
-
|
-
|
-
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(699)
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-
|
-
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(699)
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Amortization
of stock-based compensation
|
-
|
-
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-
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-
|
2,375
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-
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2,375
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December 31, 2014
|
223,523
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$2,235
|
$311
|
$(41,140)
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$205,144
|
$(55,830)
|
$110,720
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
(62,317)
|
(62,317)
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Payment
of dividends in kind
|
-
|
-
|
23
|
-
|
1,206
|
(1,229)
|
-
|
Restricted
stock grants, net of cancelations
|
61
|
1
|
-
|
-
|
-
|
-
|
1
|
Treasury
stock - employee tax payment
|
-
|
-
|
-
|
(210)
|
-
|
-
|
(210)
|
Amortization
of stock-based compensation
|
-
|
-
|
-
|
-
|
934
|
-
|
934
|
December 31, 2015
|
223,584
|
$2,236
|
$334
|
$(41,350)
|
$207,284
|
$(119,376)
|
$49,128
|
See accompanying Notes to the Consolidated Financial
Statements
5
DAVIS PETROLEUM ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Nature of Business
Organization
Davis
Petroleum Acquisition Corp. (“DPAC”) is a Delaware
corporation formed on January 18, 2006, for the purpose of
acquiring the common stock of Davis Petroleum Corp., Davis
Offshore L.P. and Davis Petroleum Pipeline LLC. In August
2014, the Company sold its interest in Davis Offshore L.P.
Hereinafter, Davis Petroleum Acquisition Corp. and its wholly-owned
subsidiaries are collectively referred to as “Davis” or
the “Company”.
Nature of Business
Davis
is an independent private oil and gas exploration, development,
acquisitions and production company. The Company is focused
primarily on opportunities in the Onshore Gulf Coast region of
Louisiana and Texas, where it has developed significant technical,
operational and commercial expertise. Davis also regularly
evaluates opportunities to expand its activities to other areas
that may offer attractive exploration and development
potential.
2.
Summary of Significant Accounting Policies
Principles of Consolidation and Reporting
The
consolidated financial statements of the Company include the
accounts of DPAC and its wholly-owned subsidiaries. The Company
proportionately consolidates its interests in oil and gas joint
ventures. All significant intercompany transactions have been
eliminated in consolidation.
Accounting Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The most significant estimates pertain to proved natural
gas and crude oil reserves and related cash flow estimates used in
impairment tests of oil and gas properties and other long-lived
assets, estimates of future development costs, income taxes,
valuation of derivative instruments, dismantlement and abandonment
costs, valuation of assets acquired and liabilities incurred in
business combinations, estimates relating to certain natural gas
and crude oil revenues and expenses, as well as estimates of
expenses related to stock-based compensation, legal, environmental,
and other contingencies. Actual results could differ from those
estimates.
Cash
Cash
includes cash on hand and on deposit and the carrying value
approximates market value.
Trade Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not
bear interest. The Company uses the specific identification method
of providing allowances for doubtful accounts. The Company does not
have any off-balance-sheet credit exposure related to its
customers. In the normal course of business, collateral is not
required for financial instruments with credit risk.
6
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Oil and Gas Properties
The
Company accounts for its oil and gas producing activities using the
full cost method of accounting as prescribed by the Securities and
Exchange Commission (SEC). Accordingly, all costs incurred in the
acquisition, exploration, and development of proved oil and gas
properties, including the costs of abandoned properties, dry holes,
geophysical costs, and annual lease rentals, are capitalized.
Internal costs that are directly related to finding and developing
oil and gas properties are also capitalized. The Company
capitalized $1.5 million and $2.1 million of internal costs in 2015
and 2014, respectively. All general corporate costs are expensed as
incurred. Sales or other dispositions of oil and gas properties are
accounted for as adjustments to capitalized costs with no gain or
loss recorded unless the relationship of cost to proved reserves
would significantly change. Depletion of evaluated oil and gas
properties is computed on the units-of-production method based on
proved reserves. The net capitalized costs of proved oil and gas
properties are subject to a quarterly full cost ceiling limitation
in which the costs are not allowed to exceed their related
estimated future net revenues using the twelve-month average of the
first-day-of-the-month reference prices as adjusted for location
and quality differentials and discounted at 10%, net of tax
considerations. Costs associated with unevaluated properties are
excluded from the full cost pool until a determination is made as
to whether proved reserves can be attributed to the related
properties. Unevaluated properties are evaluated periodically to
determine whether the costs incurred should be reclassified to the
full cost pool and thereby subject to amortization.
Capitalized Interest
The Company capitalizes interest on capital invested in long-term
projects that are under development. Upon commencement of
production, capitalized interest, as a component of the total cost
of the full cost pool, is depleted. Capitalized interest is
calculated by multiplying the weighted-average interest rate on
debt by the amount of costs excluded. There was no interest
capitalized during the years ended December 31, 2015 and
2014.
Other Property, Plant, and Equipment
Other
property, plant, and equipment is stated at the lower of cost or
fair market value. Depreciation and amortization is calculated
using the straight-line method over the estimated useful lives of
the respective assets. The cost of normal maintenance and repairs
is charged to operating expense as incurred. Material expenditures
which extend the life of an asset are capitalized and depreciated
over the estimated remaining useful life of the asset. The cost of
other property, plant and equipment sold, or otherwise disposed of,
and the related accumulated depreciation or amortization is removed
from the accounts and any gains or losses are reflected in current
operations.
In the
event that facts and circumstances indicate that the carrying value
of other plant, property and equipment may be impaired, an
evaluation of recoverability is performed. If an evaluation is
required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset’s carrying amount to
determine if a write-down to market value (measured using
discounted cash flows) is required.
Asset Retirement Obligations
The
Company records a liability equal to the fair value of the
estimated cost to retire an asset. The asset retirement obligation
(“ARO”) liability is recorded in the period in which
the obligation meets the definition of a liability. When an ARO
liability is recorded, the Company increases the carrying amount of
the related long-lived asset by an amount equal to the original
liability. The liability is then accreted to its expected value
each period, and the capitalized cost is depreciated over the
useful life of the long-lived asset. Any difference between costs
incurred upon settlement of an asset retirement obligation and the
recorded liability is recognized as an increase or decrease to
proved properties, similar to how the Company recognizes gains and
losses on divested oil and gas properties. The ARO is based on a
number of assumptions requiring judgment. The Company cannot
predict the type of revisions to these assumptions that will be
required in future periods or the availability of additional
information, including prices for oil field services, technological
changes, governmental requirements, and other factors.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Debt Issuance Costs
Debt
issuance costs reflect the expenditures incurred in connection with
obtaining and renewing the Company’s senior credit facility.
Such debt issuance costs are being amortized over the term of the
credit facility to interest expense and had a carrying amount of $0
and $210.0 thousand at December 31, 2015 and 2014,
respectively. Amortization expense during the year ended
December 31, 2015 and 2014 was $210.0 and $122.1 thousand,
respectively.
Revenue Recognition
The
Company recognizes oil and gas sales upon delivery to the purchaser
(“sales method”). Under the sales method, the Company
and other joint owners may sell more or less than their entitled
share of the natural gas volume produced. Should the
Company’s sales of natural gas exceed its share of estimated
remaining recoverable reserves, a liability is recorded by the
Company and revenue is deferred. At December 31, 2015 and
2014, there were no material imbalance positions.
The
Company records its share of revenues when collection is reasonably
assured based on the volumes sold using contracted sales prices.
Sales prices for natural gas and crude oil are adjusted for
transportation costs and other related deductions. The
transportation costs and other deductions are based on contractual
or historical data and do not require significant judgment.
Subsequently, these deductions and transportation costs are
adjusted to reflect actual charges based on third party documents.
Historically, these adjustments have been insignificant. Since
there is a ready market for natural gas and crude oil, the Company
sells the majority of its products soon after production at various
locations where title and risk of loss pass to the
buyer.
Joint Interest Advances
The
Company periodically requires other joint interest owners and is
sometimes required by other joint interest owners to prepay
expected future expenditures generally related to drilling and
completion activities (joint interest advances). When cash is
received from other joint interest owners prior to costs being
incurred, the Company records a liability. When cash is paid to
other joint interest owners prior to costs being incurred, the
Company records an asset.
Royalty Payable
Royalty
liabilities are recorded in the period in which the natural gas and
crude oil are produced and such amounts are included in Oil and Gas
Revenues and Royalties Payable on the Company’s Consolidated
Balance Sheet.
Commodity Hedging Contracts and Other Derivatives
The
Company periodically enters into derivative contracts to hedge
future crude oil and natural gas production in order to mitigate
the risk of market price fluctuations. All derivatives are
recognized on the balance sheet and measured at fair value. The
Company does not designate its derivative contracts as hedges, as
defined in ASC 815, Derivatives
and Hedging, and accordingly recognizes changes in the fair
value of the derivatives currently in earnings
(see Note 7 – Commodity Hedging Contracts and Other
Derivatives).
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Income Taxes
Income
taxes are provided based on earnings reported for tax return
purposes in addition to a provision for deferred income taxes.
Deferred income taxes are provided to reflect the tax consequences
in future years of differences between the financial statement and
tax bases of assets and liabilities. A valuation allowance is
established to reduce deferred tax assets if it is more
likely-than-not that the related tax benefits will not be
realized.
Stock-Based Compensation
The
Company has a stock-based employee compensation plan which is
described more fully in Note 14 – Stockholders’
Equity. The Company uses the grant date fair value based method of
accounting for stock-based compensation. The Company recognizes
compensation cost using the straight line method over the requisite
service period for the entire award for its stock options and over
the requisite service period for each separately vesting portion of
restricted stock awards, as appropriate.
Treasury Stock
The
Company records treasury stock purchases at cost. Amounts are
recorded as reductions to stockholders’ equity. Shares of
common stock are repurchased by the Company as they are surrendered
by employees to pay withholding tax upon the vesting of restricted
stock awards.
Environmental Costs
Environmental
expenditures are expensed or capitalized, as appropriate, depending
on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that do not have
future economic benefit are expensed. Liabilities related to future
costs are recorded on an undiscounted basis when environmental
assessments and/or remediation activities are probable and the
costs can be reasonably estimated.
New Accounting Requirements
In
November 2015, the Financial Accounting Standards Board (FASB)
issued guidance regarding the presentation of deferred income taxes
in the balance sheet which requires that within a particular
jurisdiction, deferred tax liabilities and assets, as well as any
related valuation allowance, be offset and classified as a single
noncurrent amount. The guidance is required for interim and annual
periods beginning after December 15, 2016. However, early adoption
is available and we have implemented this guidance at December 31,
2015.
In
April 2015, the FASB issued guidance regarding the presentation of
debt issuance costs in the financial statements which requires that
debt issuance costs be presented as a reduction of the carrying
value of the financial liability and not as a separate asset. The
guidance requires retrospective adjustment to the balance sheet
presentation and disclosures applicable for a change in an
accounting principle. The guidance is effective for interim and
annual periods beginning after December 15, 2015. We will adopt
this guidance in the first quarter of 2016.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
In
August 2014, the FASB issued guidance regarding disclosures of
uncertainties about an entity's ability to continue as a going
concern. The guidance applies prospectively to all entities,
requiring management to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt
about the entity's ability to continue as a going concern and to
disclose certain information when substantial doubt is raised. The
guidance is effective for interim and annual periods beginning on
or after December 15, 2016. We will adopt this guidance in the
first quarter of 2017.
In May
2014, the FASB issued guidance regarding the accounting for revenue
from contracts with customers. The guidance may be applied
retrospectively or using a modified retrospective approach to
adjust retained earnings (deficit). In July 2015, the FASB approved
a one-year deferral of the effective date for this, guidance, which
is now effective for interim and annual periods beginning on or
after December 15, 2017. We are currently evaluating the impact of
this guidance on our financial statements.
3. Accounts Receivable
At
December 31, accounts receivable consisted of the
following:
|
2015
|
2014
|
($
in thousands)
|
|
|
Natural
gas and crude oil sales
|
$4,286
|
$6,527
|
Joint
interest billings
|
826
|
836
|
Accounts
receivable
|
$5,112
|
$7,363
|
4. Other Current Assets
At December 31, other current assets consisted of the
following:
|
2015
|
2014
|
($
in thousands)
|
|
|
Prepaid
insurance
|
$153
|
$261
|
ARO
receivable
|
-
|
7,196
|
Other
|
724
|
-
|
Total
other current assets
|
$877
|
$7,457
|
In
February 2015, the Company and one of its former partners completed
the arbitration proceeding for a breach of contract claim under the
Clipper Operating Agreement (‘Clipper’) against another
former partner who withdrew from Clipper but was contractually
obligated to fund a portion of the estimated future ARO
expenditures relative to Clipper.
Davis
claimed an award in the amount of $9,868 thousand. The
Arbitrator’s decision (the ‘Award’) was received
on April 1, 2015 and awarded Davis $7,196 thousand. The final
ruling was received on July 28, 2015 and the settlement of $7,196
thousand plus interest of $112 thousand was received in August
2015.
The ARO
receivable was reduced as a result of the Award, with the
corresponding increase to the Company’s full cost
pool.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
5. Acquisitions and Divestments
Acquisitions
Effective
August 1, 2015, the Company purchased an additional working
interest in their Lac Blanc field for $1,401 thousand.
Divestments
During
2015, the Company sold its interests in the following
fields:
●
Cat Spring - net
proceeds of $74,640
●
Carter Estate #1
– net proceeds of $867,500
●
Overriding Royalty
Interests (various) – net proceeds of $768,000
Pursuant
to full cost accounting rules, no gain or loss was recognized on
these sales.
During
2014, the Company sold its interest in Davis Offshore for $33,484
thousand. No gain or loss was recognized on this sale.
6. Property, Plant, and Equipment, net
Oil and Gas Properties
The
following table sets forth the capitalized costs and associated
accumulated depreciation, depletion and amortization (including
impairments), relating to the Company’s oil and gas
production, exploration, and development activities at
December 31:
|
2015
|
2014
|
($
in thousands)
|
|
|
Proved properties
|
$425,767
|
$408,799
|
Less:
accumulated depreciation, depletion, amortization and
impairment
|
(381,988)
|
(324,960)
|
Proved
properties, net
|
43,779
|
83,839
|
|
|
|
Unproved properties
|
|
|
Leasehold
acquisition costs
|
-
|
4,596
|
Exploration
and development
|
-
|
116
|
Unevaluated
properties
|
179
|
6,165
|
Total
unproved properties
|
179
|
10,877
|
Oil and gas properties, net
|
$43,958
|
$94,716
|
Under the full cost method, the Company is subject to quarterly
calculations of a “ceiling” or limitation on the amount
of costs associated with its oil and gas properties. This ceiling
limits such capitalized costs to the present value using a 10%
discount rate of estimated future cash flows from proved oil and
natural gas reserves reduced by future operating expenses,
development expenditures, abandonment costs (net of salvage values)
and estimated future income taxes thereon. The ceiling
calculation requires the Company to price its future oil and
gas production at the twelve-month average of the
first-day-of-the-month reference prices as adjusted for location
and quality differentials. In 2015 the Company recorded a $40.5
million ceiling test write-down. There
were no ceiling test limit write-downs required during
2014.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Costs Not Being Amortized
Costs
not being amortized are transferred to
the Company’s full cost pool as its drilling program is
executed or costs are evaluated and deemed impaired. The Company
anticipates that these unevaluated costs will be included in the
depletion computation over the next two years. The Company is
unable to predict the future impact on depletion rates. A summary
of the Company’s unevaluated properties by year incurred
follows:
December 31, 2015
|
Year Incurred
|
|
||
($
in thousands)
|
2015
|
2014
|
2013 & Prior
|
Total
|
Unevaluated
reserves
|
$179
|
$-
|
$-
|
$179
|
Total
unevaluated properties, at December 31, 2015
|
$179
|
$-
|
$-
|
$179
|
Other
Other
property and equipment consists of the following:
|
Useful
|
December 31,
|
|
|
life (years)
|
2015
|
2014
|
($
in thousands)
|
|
|
|
Plants
and pipeline systems
|
10
|
$4,599
|
$4,599
|
Buildings
|
10
|
179
|
179
|
Furniture
and fixtures
|
1-7
|
667
|
667
|
Automobiles
|
3
|
158
|
158
|
Software
and IT equipment
|
3-5
|
2,006
|
2,006
|
Leasehold
improvements
|
5
|
1,425
|
1,425
|
|
|
9,034
|
9,034
|
Less:
accumulated depreciation and amortization
|
|
(7,357)
|
(6,767)
|
Other
property and equipment, net
|
|
$1,677
|
$2,267
|
7. Commodity Hedging Contracts and Other
Derivatives
The
Company is exposed to various market risks, including volatility in
oil and gas commodity prices and interest rates. The level of derivative activity we engage in
depends on our view of market conditions, available derivative
prices and operating strategy. A variety of derivative instruments,
such as swaps, collars, puts, calls and various combinations of
these instruments, may be utilized to manage exposure to the
volatility of oil and gas commodity prices. Currently, the Company
does not use derivatives to manage its exposure to fluctuations in
interest rates.
All
derivative instruments are recorded on the balance sheet at fair
value. If a derivative does not qualify as a hedge or is not
designated as a hedge, the changes in fair value, both realized and
unrealized, are recognized in our income statement as (gains) loss
on derivative instruments. Cash flows are only impacted to the
extent the actual settlements under the contracts result in the
Company making a payment to or receiving a payment from the
counterparty. The Company’s derivative instruments in place
are not classified as hedges for accounting purposes.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
As of
December 31, 2015, the Company had the following outstanding
commodity derivative contracts, all of which settle
monthly:
Period
|
Instrument Type
|
Average Daily Volumes
|
Average Fixed Price
|
2016
|
Natural
Gas Swap
|
3,000
MMBtu
|
$4.05
|
Balance Sheet
At
December 31, 2015 and 2014, the Company had the following
outstanding commodity derivative contracts recorded in its
consolidated balance sheets ($ in thousands):
|
|
Estimated Fair Value
|
|
|
|
Year Ended December 31,
|
|
Instrument Type
|
Balance Sheet Classification
|
2015
|
2014
|
Natural
Gas/Crude Oil Swaps/Collars
|
Derivative
asset - short-term
|
$1,711
|
$8,098
|
Natural
Gas/Crude Oil Swaps/Collars
|
Derivative asset - long-term
|
-
|
639
|
Total
derivative instruments
|
|
$1,711
|
$8,737
|
8. Fair
Value Measurements of Assets and Liabilities
Authoritative
guidance on fair value measurements defines fair value, establishes
a framework for measuring fair value and stipulates the related
disclosure requirements. The Company follows a three-level
hierarchy, prioritizing and defining the types of inputs used to
measure fair value.
The
three levels of the fair value hierarchy are as
follows:
Level 1 —
Quoted prices are available in active markets for identical assets
or liabilities as of the reporting date. Active markets are those
in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on
an ongoing basis. Level 1 primarily consists of financial
instruments such as exchange-traded derivatives, marketable
securities and listed equities.
Level 2 —
Pricing inputs are other than quoted prices in active markets
included in Level 1, which are either directly or indirectly
observable as of the reported date. Level 2 includes those
financial instruments that are valued using models or other
valuation methodologies. These models are primarily
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors, and current market and contractual prices for
the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in
the marketplace throughout the full term of the instrument, can be
derived from observable data, or are supported by observable levels
at which transactions are executed in the marketplace. Instruments
in this category generally include non-exchange-traded derivatives
such as commodity swaps, basis swaps, options, and
collars.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Level 3 —
Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with
internally developed methodologies that result in
management’s best estimate of fair value.
The
Company’s commodity derivative instruments are recorded at
fair value on a recurring basis in its consolidated balance sheets
with fair value changes recorded in the consolidated statements of
income. The following table presents, for each fair value hierarchy
level, the Company’s commodity derivative assets and
liabilities measured at fair value on a recurring basis as of
December 31, 2015:
|
Recurring Fair Value Measures
|
||
|
As of December 31, 2015
|
||
($
in thousands)
|
Level 1
|
Level 2
|
Level
3
|
Natural
Gas Swaps
|
$-
|
$1,711
|
$-
|
Total
|
$-
|
$1,711
|
$-
|
|
|
|
|
|
Recurring Fair Value Measures
|
||
|
As of December 31, 2014
|
||
($
in thousands)
|
Level
1
|
Level 2
|
Level
3
|
Natural
Gas Swaps
|
$-
|
$3,195
|
$-
|
Crude
Oil Swaps
|
-
|
5,542
|
-
|
Total
|
$-
|
$8,737
|
$-
|
Derivatives
listed above are carried at fair value. The fair value amounts on
the consolidated balance sheets associated with the Company’s
derivatives resulted from Level 2 fair value methodologies,
which are based on observable market data for similar
instruments.
This
observable data includes the forward curve for commodity prices
based on quoted markets prices and prospective volatility factors
related to changes in commodity prices, as well as the credit
standing of the counterparty involved, the impact of credit
enhancements and the impact of the Company’s non-performance
risk on derivative liabilities, or the non-performance risk of the
Company’s counterparties on derivative assets, both of which
are derived using credit default swap values.
Authoritative
guidance also requires certain fair value disclosures for financial
instruments other than derivatives, including the Company’s
long-term debt. There were no borrowings as of December 31,
2015.
14
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable, and other payables approximate their
respective fair market values due to their short
maturities.
9. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following at
December 31:
|
2015
|
2014
|
($ in
thousands)
|
|
|
Trade
payables
|
$669
|
$3,639
|
Accrued
expenses
|
3,267
|
16,352
|
Total
accounts payable
|
$3,936
|
$19,991
|
The
provision for income taxes for the years ending December 31
follows:
|
2015
|
2014
|
($
in thousands)
|
|
|
Current Expense (Benefit)
|
|
|
Federal
|
$-
|
$4
|
State
|
6
|
(196)
|
Deferred Expense (Benefit)
|
|
|
Federal
|
11,060
|
2,585
|
State
|
(605)
|
91
|
Total
provision
|
$10,461
|
$2,484
|
15
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
A
reconciliation of the federal statutory income tax rate to the
effective income tax rate for the years ended December 31
follows:
|
2015
|
2014
|
U.S.
statutory rate
|
35.00%
|
35.00%
|
Valuation
allowance
|
-56.32%
|
0.00%
|
State
return to provision (net of federal benefit)
|
0.00%
|
-2.97%
|
State
income taxes (net of federal benefit)
|
1.16%
|
2.48%
|
Other
|
-0.01%
|
0.19%
|
Effective
rate
|
-20.17%
|
34.70%
|
Deferred
income tax (liabilities) assets at December 31
follows:
($
in thousands)
|
2015
|
2014
|
Deferred income tax liabilities
|
|
|
Property,
plant and equipment
|
$-
|
$7,014
|
Financial
accruals and other
|
566
|
3,020
|
|
566
|
10,034
|
Deferred income tax assets
|
|
|
Net
operating loss carryforward
|
(21,523)
|
(20,237)
|
Property,
plant and equipment
|
(9,006)
|
-
|
Stock
based compensation
|
(1,802)
|
(1,678)
|
Valuation
allowance
|
30,339
|
-
|
Deferred income taxes, net
|
$(1,426)
|
$(11,881)
|
At
December 31, 2015, the Company had a deferred tax asset
related to federal and state net operating loss carryforwards of
approximately $54.0 million which expire between 2027 and 2035.
There are no limitations on their annual usage. Realization of the
deferred tax asset is dependent, in part, on generating sufficient
taxable income prior to expiration of the loss carryforwards. At
December 31, 2015, the Company has recorded a full valuation
allowance against its Federal and Louisiana net deferred tax asset
of $30.3 million because the Company believes it is more likely
than not that the asset will not be utilized based on losses over
the most recent three-year period. At December 31, 2015 the Company
has not recorded a valuation allowance against its Texas net
deferred tax asset of $1.4 million based on its assessment of
several factors, including a history of paying Texas Margins tax
and projected future Texas Margins tax expense. At December 31,
2015, the Company does not have any unrecognized tax benefits and
does not anticipate any unrecognized tax benefits during the next
twelve months. The Company did not incur any income tax
deficiencies during fiscal year 2014 or 2015, and therefore has not
had any interest or penalties assessed during the years ended
December 31, 2014 or 2015. The tax years of the Company that remain
subject to examination by the Internal Revenue Service and other
income tax authorities are fiscal years 2011, 2012, 2013, 2014 and
2015.
16
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
11.
Long-term Debt
Long-term
debt at December 31 consisted of the following:
|
2015
|
2014
|
($
in thousands)
|
|
|
Senior
Credit Facility
|
$-
|
$5,000
|
Total
debt
|
-
|
5,000
|
Less:
current maturities
|
-
|
-
|
Total
long-term debt
|
$-
|
$5,000
|
Senior Credit Facility
In
December 2008, the Company amended and restated its senior
credit agreement (the “Senior Credit Facility”) with a
financial institution. The Senior Credit Facility was amended to
increase the total capacity from $50 million to $125 million,
subject to borrowing base limitations, and extend the term an
additional four years. In April 2011, the Senior Credit Facility was amended to add an
additional lender. In January 2013, the Company completed the
Second Amendment to Amended and Restated Credit Agreement. This
amendment extended the maturity date to January 4, 2016 and in
July 2015, it was extended until July 6, 2016.
The
borrowing base is determined at least semiannually using the
bank’s usual and customary criteria for oil and gas reserve
valuation, and at December 31, 2015 and 2014 was $24 million
and $35 million, respectively.
Additionally,
the Senior Credit Facility permits the issuance of letters of
credit up to the remaining capacity of the Senior Credit Facility.
All outstanding amounts owed under the Senior Credit Facility become due and
payable no later than the final maturity date of July 6, 2016, and
are subject to acceleration upon the occurrence of events of
default which the Company considers usual and customary for an
agreement of this type.
Revolving
tranches under the Senior Credit Facility bear interest, at the
Company’s election, at a prime rate or LIBOR rate, plus in
each case an applicable margin. In addition, a commitment fee is
payable on the unused portion of the lender’s commitment. The
Company incurred commitment fees of $107 thousand and $165 thousand
during 2015 and 2014, respectively. The applicable interest rate
margin varies from 1.25% to 2.00% in the case of borrowings based
on the prime rate, and from 2.25% to 3.00% in the case of
borrowings based on the LIBOR rate, depending on the utilization
level in relation to the borrowing base.
For the
years ended December 31, 2015 and 2014, the weighted average
interest rate on the Senior Credit Facility was 3.67% and 4.12%,
respectively.
The
Senior Credit Facility is collateralized by mortgages on
substantially all of the Company’s oil and gas properties and
contains customary financial and other covenants, the most
restrictive of which requires the Company’s ratio of
consolidated current assets to consolidated current liabilities to
be no less than 1.00 to 1.00 at the end of any quarter. In
addition, the Company is subject to covenants limiting dividends,
transactions with affiliates, incurrence of debt, changes of
control, asset sales, affirmative representations regarding the
absence of material adverse changes, and liens on properties. The
Company was in compliance with all debt covenants at
December 31, 2015 and 2014.
17
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
12. Asset Retirement Obligations
The
majority of the Company’s asset retirement obligations relate
to plugging and abandoning oil and gas wells and related equipment.
The following table reflects the changes in the Company’s
asset retirement obligations during the years ended
December 31:
($
in thousands)
|
2015
|
2014
|
Asset
retirement obligations at beginning of period
|
$7,226
|
$27,447
|
Liabilities
incurred during the period
|
1,079
|
415
|
Liabilities settled during the period
(1)
|
(2,906)
|
(20,957)
|
Current
period accretion expense
|
176
|
852
|
Revisions
in estimated cash flows
|
(243)
|
(531)
|
Asset
retirement obligations at end of period
|
$5,332
|
$7,226
|
Less:
current portion
|
(185)
|
(1,822)
|
Non-current
portion
|
$5,147
|
$5,404
|
|
|
|
(1)
Includes ARO's sold
as part of disposition in 2014
|
|
|
13. Significant Concentrations
In
2015, approximately 38 percent of the Company’s natural
gas, oil, and NGL production was transported and processed through
pipeline and processing systems owned by CrossTex Energy Partners.
The Company takes steps to mitigate these risks through
identification of alternative pipeline transportation. The Company
expects to continue to transport a substantial portion of its
future natural gas production through these pipeline
systems.
During
the years ended December 31, 2015, and 2014, sales to four
customers accounted to approximately 84 percent and sales to
five customers accounted to approximately 85 percent,
respectively, of the Company’s total revenues. Management
believes that the loss of these customers would not have a material
adverse effect on its results of operations or its financial
position since the market for the Company’s production is
highly liquid with other willing buyers.
Substantially
all of the Company’s accounts receivable at December 31,
2015 and 2014 were from sales of natural gas and crude oil as well
as joint interest billings to third party companies also in the oil
and gas industry. At December 31, 2015, there were four
customers that represented approximately 75 percent of the
Company’s accounts receivable balance. At December 31, 2014,
there were 10 customers that represented approximately 56% of the
Company’s accounts receivable balance. This concentration of
customers and joint interest owners may impact the Company’s
overall credit risk, either positively or negatively, in that these
entities may be similarly affected by changes in economic or other
conditions.
18
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
14. Stockholders’ Equity
Stock Compensation Plans
Davis
provides an incentive plan for the issuance of restricted stock and
stock options (the “Plan”). The purpose of the Plan is
to enable the Company to obtain and retain the services of selected
persons considered essential to the long-range success of the
Company by offering them an opportunity to become owners of the
Common Stock of the Company through restricted stock and stock
option grants. Stock options may be granted to officers, directors
and key employees at or above fair market value on the date of
grant, vest ratably over three to five years, and have a term of
ten years. Fair market value is the simple average of the value
that each of the Company’s three major investors
independently calculated as being representative of the value of
their Company stock at the date of grant. The total number of
shares of the Company’s Common Stock for which awards under
the Plan may be granted is 28,500,000. At December 31, 2015,
there were 4,008,383 shares available for grant under the
Plan.
Restricted Shares
The
Company has issued 21,701,127 shares of restricted stock from
the Plan of which 12,825,427 shares and 11,597,459 shares were
vested at December 31, 2015 and 2014, respectively. Of those
restricted shares vested at December 31, 2015, a total of
4,978,572 shares were returned to the Company in cashless
transactions to pay taxes on vested restricted stock and are
accounted for as treasury shares, and 569,600 shares were canceled
upon employee resignations and terminations. The Company issued
126,635 shares of restricted stock during the year ended
December 31, 2015 with a grant date fair value of $69
thousand. The restrictions on certain restricted stock generally
lapse within four years from the date of grant. Related
compensation expense recorded for the year ended December 31,
2015 was $553 thousand. The Company entered in a merger agreement
on February 10, 2016 (See Footnote 18). The merger will result in
the termination of employees over the time period from the date the
merger agreement was signed through the closing of the merger and
will result in the vesting of 4.7 million shares of restricted
stock and the recognition of approximately $998 thousand restricted
stock expenses.
Stock Options
The
Company’s stock option activity follows:
|
Options
|
Weighted average exercise price
|
December 31, 2013
|
7,893,651
|
$0.85
|
Canceled
and forfeited
|
(257,737)
|
0.88
|
December 31, 2014
|
7,635,914
|
$0.85
|
Canceled
and forfeited
|
(841,404)
|
1.28
|
December 31, 2015
|
6,794,510
|
$0.80
|
The
following table summarizes information related to stock options
outstanding and exercisable at December 31, 2015:
Options Outstanding
|
Options
Exercisable
|
|||
Number of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life
|
Number of Options
|
Weighted Average Exercise Price
|
4,000,000
|
$0.68
|
7.4
|
2,666,667
|
$0.68
|
1,450,000
|
0.73
|
3.7
|
1,450,000
|
0.73
|
200,000
|
0.76
|
4.6
|
200,000
|
0.76
|
200,000
|
0.78
|
4.3
|
200,000
|
0.78
|
200,000
|
0.96
|
6.7
|
150,000
|
0.96
|
496,001
|
1.00
|
0.4
|
496,001
|
1.00
|
248,509
|
2.50
|
0.5
|
248,509
|
2.50
|
6,794,510
|
$0.80
|
5.7
|
5,411,177
|
$0.82
|
19
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
Company uses the Black-Scholes option pricing model to calculate
the fair value of its stock options. Because the Company’s
stock is not publicly traded, the expected term and volatility used
to value its options are based on the expected volatilities and
terms of similar companies with publicly traded stock. During the
years ended December 31, 2015 and 2014, the Company recognized
expense of $380 thousand and $394 thousand (net of $75 thousand
capitalized), respectively, related to employee stock
options.
Total
share-based compensation expense recognized for the year ended
December 31, 2015 and 2014 was $933 thousand and $1,712
thousand, respectively, and is reflected in general and
administrative expenses in the Consolidated Income Statement. The
Company expects to recognize $1,165 thousand for the year ended
December 31, 2016.
Series A Convertible Preferred Stock and Common Stock
Redemption
On
March 8, 2013, the Company issued 27,442,727 shares of Series
A Convertible Preferred Stock (“Preferred Stock”)
providing for cumulative dividends of 7% per annum, payable
in-kind, for $15.1 million in proceeds. Proceeds from the issuance
of the Series A Convertible Preferred Stock, along with $14 million
in borrowings under the Senior Credit Facility and available cash
were used to purchase 65,672,512 million shares of the
Company’s common stock in March 2013. During 2015 and
2014, the Company issued 2,236,986 and 2,087,014 shares of
Preferred Stock, respectively, as paid in-kind dividends and as of
December 31, 2015, there are 33,367,187 shares of preferred stock
outstanding.
15. Earnings Per Share
Basic
earnings per common share is computed by dividing net income (loss)
attributable to common stock by the weighted average number of
common shares outstanding during each year. The diluted
earnings per share calculation adds to the weighted average number
of common shares outstanding: the incremental shares that would
have been outstanding assuming the exercise of dilutive stock
options, the vesting of unvested restricted shares of common stock
and the assumed conversion of convertible preferred
stock.
|
2015
|
2014
|
|
|
|
Net
income (loss)
|
$(62,317)
|
$4,678
|
|
|
|
Weighted
average common shares - Basic
|
149,182
|
147,350
|
Effect of exercise of stock options
(1)
|
-
|
-
|
Effective of conversion of preferred stock
|
31,963
|
29,828
|
Weighted
average common shares - Diluted
|
181,145
|
177,178
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
Basic
|
$(0.42)
|
$0.03
|
Diluted
|
$(0.42)
|
$0.03
|
|
|
|
There
were 6,795 thousand and 7,686 thousand stock options in 2015 and
2014, respectively
|
|
|
that
were not included in the diluted shares outstanding as they were
all out-of-the money.
|
|
|
20
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
16. Retirement Benefits
The
Company has a discretionary defined contribution savings plan
(“401(k) Plan”). Under the 401(k) Plan, an
employee may elect to contribute from 1 to 100 percent of
eligible compensation subject to Internal Revenue Service limits.
As of January 1, 2011, the employer match is calculated as 100
percent of the employee’s elective deferrals each payroll
period up to 6 percent of eligible compensation each payroll period
subject to Internal Revenue Service limits. The Company contributed
approximately $169 thousand and $198 thousand to this plan for the
years ended December 31, 2015 and 2014,
respectively.
17. Commitments and Contingent Liabilities
Lease Obligations and Other Commitments
The
Company has an operating lease for office space. The Company
incurred lease rental expense of $422 thousand and
$431 thousand during the years ended December 31, 2015
and 2014, respectively.
Future
minimum annual rental commitments under non-cancelable leases at
December 31, 2015 follow:
(In
thousands)
|
|
2016
|
194
|
2017
|
-
|
2018
|
-
|
2019
|
-
|
Thereafter
|
-
|
Total
|
$194
|
18. Supplemental Cash Flow Information
The following is additional information concerning supplemental
disclosures of cash payments and non-cash investing and financing
activities:
|
Year ended December 31, 2015
|
Year ended December 31, 2014
|
(In
thousands)
|
|
|
Cash
paid for interest, net of amounts capitalized
|
$362
|
$1,119
|
Non-cash
additions to asset retirement obligations
|
836
|
(116)
|
Change
in accrued capital expenditures
|
13,730
|
11,444
|
19. Subsequent
Events
On
February 10, 2016 and as amended on September 2, 2016, the Company
entered into a definitive merger agreement (the “Merger
Agreement”) with Yuma Energy, Inc., a California corporation
(“Yuma”), and Yuma Energy, Inc., a Delaware corporation
(“Yuma Delaware”). Under the terms of the definitive
agreement, Yuma reincorporated in Delaware, implemented a
one-for-twenty reverse split of its common stock, and converted
each share of its existing Series A preferred stock into 35 shares
of common stock prior to giving effect for the reverse split (1.75
shares post reverse split). Following these actions, Yuma
issued additional shares of common stock in an amount sufficient to
result in approximately 61.1% of the common stock being owned by
the current common stockholders of Davis. In addition, Yuma
issued approximately 1.75 million shares of a new Series D
preferred stock to existing Davis preferred stockholders,
which has a conversion price of approximately $11.074 per
share, after giving effect for the reverse split. The Series D
preferred stock had a liquidation preference of approximately $19.4
million at closing, and will be paid dividends in the form of
additional Series D preferred stock at a rate of 7% per annum. The
merger was completed on October 26, 2016.
21
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
merger resulted in the termination of employees from the date the
merger agreement was signed through the closing of the merger. On
April 1, 2016 the Company terminated a group of employees and $716
thousand of restricted stock expense was recognized.
20. Revision of Previously Issued Financial Statements
During
the preparation of Davis’ September 30, 2016 consolidated
financial statements and the associated September 30, 2016
unaudited pro forma condensed consolidated combined statements of
Yuma Delaware reflecting the merger between Davis and Yuma Delaware
that was completed on October 26, 2016, Davis management identified
certain errors related to the Company’s historical impairment
calculations. These errors related to the Company’s failure
to add back future cash outflows associated with abandonment cost
in its calculation of the ceiling test, as well as the
Company’s failure to update its fourth quarter 2015 ceiling
test calculation for certain period end financial reporting journal
entries. In addition, two journal entries related to the
Company’s accrued capital expenditures and prepaid AFE
amounts were identified as not having been made in the third
quarter of 2015. The Company assessed the materiality of these
errors on the Company’s previously issued statements, in
accordance with the SEC’s Staff Bulletin No. 99 (“SAB
99”) and the SEC’s Staff Accounting Bulletin No. 108
(“SAB 108”), and concluded that the errors were not
material to any previously issued financial statements. However,
the Company has elected to correct these errors by revising its
previously issued financial statements. The net effect of
correcting these errors resulted in a reduction in impairment
expense of $2.467 million and a reduction in depletion expense of
$274,000 for the year ended December 31, 2015. Also, as of December
31, 2015, the Company recognized a reduction of Accounts Payable
and Proved Properties of $780,212 as well as a reduction to the
Company’s Joint Interest Billing Prepaid account of $227,818
offset by an increase in Proved Properties for the same amount.
These revisions had no impact on the Company’s subtotal of
net cash provided by (used in) operating activities for the twelve
months ended December 31, 2015.
The
Company revised its previously issued consolidated balance sheet as
of December 31, 2015 and consolidated statements of
operations, consolidated statements of changes in equity and
consolidated statements of cash flows for the year ended
December 31, 2015, along with certain related notes (the
“Revision”).
The
tables below illustrate the impact of the Revision on the
Company’s consolidated financial statements, each as compared
with the amounts presented in the original Form S4 and related
quarterly information previously filed with the SEC.
22
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
following table represents a summary of the as previously reported
balances, adjustments to correct the errors and revised balances on
the Company’s consolidated balance sheets by impacted
financial statement line item for the year ended December 31,
2015:
|
As
of
|
||
|
December
31, 2015
|
||
|
($
thousands)
|
||
|
As
Reported
|
Adjustment
|
As
Revised
|
|
|
|
|
Joint interest
advances paid
|
403
|
(228)
|
175
|
Total current
assets
|
12,167
|
(228)
|
11,939
|
Proved
properties
|
426,320
|
(553)
|
425,767
|
Less: Accumulated
depreciation, depletion, amortization, and impairment
|
(392,086)
|
2,741
|
(389,345)
|
Total property,
plant and equipment, net
|
43,447
|
2,188
|
45,635
|
Total
Assets
|
57,444
|
1,961
|
59,405
|
Accounts payable
and accrued expenses
|
4,716
|
(780)
|
3,936
|
Total current
liabilities
|
5,815
|
(780)
|
5,035
|
Total
liabilities
|
11,057
|
(780)
|
10,277
|
Accumulated
deficit
|
(122,117)
|
2,741
|
(119,376)
|
Total
stockholders’ equity
|
46,387
|
2,741
|
49,128
|
Total liabilities
and stockholders’ equity
|
57,444
|
1,961
|
59,405
|
The
following table represents a summary of the as previously reported
balances, adjustments and revised balances on the Company’s
consolidated statements of operations by financial statement line
item for the year ended December 31, 2015:
|
Year
Ended
|
||
|
December
31, 2015 ($ thousands)
|
||
|
As
Reported
|
Adjustment
|
As
Revised
|
|
|
|
|
Depreciation,
depletion and amortization
|
17,413
|
(274)
|
17,139
|
Impairment of oil
and gas properties
|
42,947
|
(2,467)
|
40,480
|
Total
expenses
|
72,814
|
(2,741)
|
70,073
|
LOSS FROM
OPERATIONS
|
(54,040)
|
2,741
|
(51,299)
|
|
|
|
|
NET LOSS BEFORE
INCOME TAXES
|
(54,597)
|
2,741
|
(51,856)
|
|
|
|
|
NET
LOSS
|
(65,058)
|
2,741
|
(62,317)
|
|
|
|
|
NET LOSS
ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
(65,058)
|
2,741
|
(62,317)
|
|
|
|
|
EARNINGS
(LOSS) PER COMMON SHARE:
|
|
|
|
Basic
|
(0.44)
|
0.02
|
(0.42)
|
Diluted
|
(0.44)
|
0.02
|
(0.42)
|
23
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
following table represents a summary of the as previously reported
balances, adjustments and revised balances on the Company’s
consolidated statements of changes in equity by financial statement
line item for the year ended December 31, 2015:
|
Year
Ended December 31, 2015 ($ thousands)
|
||
|
As
Reported
|
Adjustment
|
As
Revised
|
|
|
|
|
Net loss
attributable to Davis Petroleum Acquisition Corp.
|
(65,058)
|
2,741
|
(62,318)
|
Balance at end of
period
|
(122,118)
|
2,742
|
(119,376)
|
TOTAL
EQUITY
|
46,386
|
2,742
|
49,128
|
The
following table represents a summary of the as previously reported
balances, adjustments and revised balances on the Company’s
consolidated statements of cash flows by financial statement line
item for the year ended December 31, 2015:
|
Year
Ended December 31, 2015 ($ thousands)
|
||
|
As
Reported
|
Adjustment
|
As
Revised
|
|
|
|
|
Net
loss
|
(65,058)
|
2,741
|
(62,317)
|
Depreciation,
depletion and amortization
|
17,413
|
(274)
|
17,139
|
Impairment of oil
and gas properties
|
42,947
|
(2,467)
|
40,480
|
24
DAVIS PETROLEUM ACQUISITION CORP.
SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
Oil and Natural Gas Exploration and Production
Activities
Oil and natural gas sales reflect the market prices of net
production sold or transferred with appropriate adjustments for
royalties, net profits interest, and other contractual provisions.
Lease operating expenses include lifting costs incurred to operate
and maintain productive wells and related equipment including such
costs as operating labor, repairs and maintenance, materials,
supplies, and fuel consumed. Production taxes include production
and severance taxes. Depletion of oil and natural gas
properties relates to capitalized costs incurred in acquisition,
exploration, and development activities. Results of operations do
not include interest
expense and general corporate amounts.
Costs Incurred and Capitalized Costs
The
costs incurred in oil and natural gas acquisition, exploration, and
development activities follow:
|
Year ended December 31, 2015
|
Year ended December 31, 2014
|
(In
thousands)
|
|
|
Costs
incurred for the year:
|
|
|
Exploration
(including geological and geophysical costs)
|
$-
|
$298
|
Development
|
3,847
|
33,724
|
Acquisition
of proved properties, net
|
1,401
|
3,918
|
Capitalized
salaries
|
1,502
|
2,737
|
Lease
acquisition costs, net of recoveries
|
899
|
951
|
Costs
incurred before estimated asset retirement obligations
|
7,649
|
41,628
|
Estimated
asset retirement obligations incurred, net of
revisions
|
-
|
(339)
|
Total costs incurred
|
$7,649
|
$41,289
|
Results
of operations for natural gas and crude oil producing activities,
which exclude processing and other activities, corporate general
and administrative expenses, and straight-line depreciation
expense, were as follows:
|
Year ended December 31, 2015
|
Year ended December 31, 2014
|
(In
thousands)
|
|
|
Revenues
|
$18,774
|
$58,663
|
|
|
|
Operating
costs:
|
|
|
Depreciation,
depletion, amortization and impairment
|
57,619
|
28,442
|
Lease
operating expenses
|
6,510
|
12,678
|
Production
taxes
|
1,106
|
2,467
|
Accretion
expense
|
176
|
852
|
Income
tax provision
|
-
|
4,073
|
Results
of operations
|
$(46,637)
|
$10,151
|
|
|
|
Amortization
rate per mcfe
|
$3.66
|
$4.20
|
25
DAVIS PETROLEUM ACQUISITION CORP.
SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
Oil and Natural Gas Reserves and Related Financial
Data
The
following tables present the Company’s independent petroleum
consultants’ estimates of proved oil and natural gas
reserves, all of which are located in the United States of America.
The Company emphasizes that reserves are estimates that are
expected to change as additional information becomes available.
Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be
measured in an exact way and the accuracy of any reserve estimate
is a function of the quality of available data and of engineering
and geological interpretation and judgment.
Proved
reserves are estimated quantities of natural gas and crude oil
which geological and engineering data indicate with reasonable
certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed
reserves are proved reserves that can be expected to be recovered
through existing wells with existing equipment and operating
methods.
|
Oil (bbls)
|
Gas (mcf)
|
Mcfe
|
Proved reserves at December 31, 2013
|
4,452,600
|
14,611,100
|
41,326,700
|
Revisions
of previous estimates
|
(331,700)
|
344,400
|
(1,645,800)
|
Extension,
discoveries and other additions
|
929,100
|
1,734,000
|
7,308,600
|
Sales
of minerals in place
|
(1,486,800)
|
(864,200)
|
(9,785,000)
|
Production
|
(849,900)
|
(3,174,700)
|
(8,274,100)
|
Proved reserves at December 31, 2014
|
2,713,300
|
12,650,600
|
28,930,400
|
Revisions
of previous estimates
|
(857,200)
|
3,711,100
|
(1,432,100)
|
Extension,
discoveries and other additions
|
664,800
|
2,132,100
|
6,120,900
|
Purchases
of minerals in place
|
37,900
|
516,600
|
744,000
|
Sales
of minerals in place
|
(23,600)
|
(945,100)
|
(1,086,700)
|
Production
|
(339,200)
|
(2,547,300)
|
(4,582,500)
|
Proved reserves at December 31, 2015
|
2,196,000
|
15,518,000
|
28,694,000
|
|
|
|
|
Proved developed reserves
|
|
|
|
December 31, 2013
|
2,167,500
|
12,203,700
|
25,208,700
|
December 31, 2014
|
1,664,400
|
11,901,600
|
21,888,000
|
December 31, 2015
|
1,307,600
|
10,464,300
|
18,309,900
|
|
|
|
|
Proved undeveloped reserves
|
|
|
|
December 31, 2013
|
2,285,100
|
2,407,200
|
16,117,800
|
December 31, 2014
|
1,049,000
|
748,900
|
7,042,900
|
December 31, 2015
|
888,400
|
5,053,600
|
10,384,000
|
26
DAVIS PETROLEUM ACQUISITION CORP.
SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
The
twelve-month unweighted arithmetic average of the
first-day-of-the-month reference prices used in the Company’s
reserve estimates at December 31, 2015 and 2014 were $
2.59/Mmbtu and $50.28/Bbl (West Texas Intermediate) and $4.35/Mmbtu
and $94.99/Bbl (West Texas Intermediate) respectively, for natural
gas and oil, respectively.
Standardized Measure of Discounted Future Net Cash
Flows
The following table presents a standardized measure of discounted
future net cash flows relating to proved oil and natural gas
reserves. Future cash flows were computed by applying year-end
prices of oil and natural gas, which are adjusted for applicable
transportation and quality differentials, to the estimated year-end
quantities of those reserves. Future production and development
costs were computed by estimating those expenditures expected to
occur in developing and producing the proved oil and natural gas
reserves at the end of the year, based on year-end costs. Actual
future cash flows may vary considerably, and the standardized
measure does not necessarily represent the fair value of the
Company’s oil and natural gas reserves.
Standardized Measure - Year Ended
|
2015
|
2014
|
($
in thousands)
|
|
|
Future
cash inflows
|
$112,449
|
$268,960
|
Less related future:
|
|
|
Production costs
|
38,404
|
80,726
|
Development costs
|
21,947
|
42,727
|
Income taxes
|
-
|
-
|
Future
net cash flows
|
52,098
|
145,507
|
10%
annual discount for estimated timing of cash flows
|
(11,118)
|
(43,836)
|
Standardized
measure of discounted future net cash flows
|
$40,980
|
$101,671
|
A
summary of the changes in the standardized measure of discounted
future net cash flows applicable to proved natural gas and crude
oil reserves follows:
Summary of Changes - Year Ended
|
2015
|
2014
|
($
in thousands)
|
|
|
January 1
|
$101,671
|
$174,699
|
Net
change in sales and transfer prices and in production
(lifting)
|
|
|
costs related to future production
|
(66,321)
|
(25,805)
|
Net
change due to revisions in quantity estimates
|
(12,951)
|
(13,702)
|
Net
change due to extensions, discoveries and improved
recovery
|
3,534
|
29,291
|
Purchases
of reserves in place
|
1,062
|
-
|
Sales
of reserves in place
|
(2,784)
|
(58,220)
|
Accretion
of discount
|
10,167
|
18,299
|
Sales
and transfers of oil and gas produced during the
period
|
(10,769)
|
(43,567)
|
Net
change in income taxes
|
-
|
8,289
|
Changes
in estimated future development costs
|
15,322
|
8,669
|
Other
|
2,049
|
3,718
|
Net
change
|
(60,691)
|
(73,028)
|
December 31
|
$40,980
|
$101,671
|
27