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EX-31.1 - EXHIBIT 31.1 - Bonanza Creek Energy, Inc.ex31193017.htm
EX-32.2 - EXHIBIT 32.2 - Bonanza Creek Energy, Inc.ex32293017.htm
EX-32.1 - EXHIBIT 32.1 - Bonanza Creek Energy, Inc.ex32193017.htm
EX-31.2 - EXHIBIT 31.2 - Bonanza Creek Energy, Inc.ex31293017.htm
EX-10.2 - EXHIBIT 10.2 - Bonanza Creek Energy, Inc.ex10293017.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
 Commission File Number:  001-35371
 Bonanza Creek Energy, Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
61-1630631
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

410 17th Street, Suite 1400
 
 
Denver, Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
(720) 440-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x  Yes ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x  Yes ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer x
 
 
 
                                 Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
 
 
 
 
Smaller reporting company ¨
 
 
 
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨  Yes x  No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. x  Yes ¨ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 6, 2017, the registrant had 20,453,549 shares of common stock outstanding.
 

1


BONANZA CREEK ENERGY, INC.
INDEX
 
 
    
    
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I - FINANCIAL INFORMATION
Item 1.     Financial Statements.
BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except per share amounts)
 
Successor
 
 
Predecessor
 
September 30, 2017
 
 
December 31, 2016
ASSETS
 

 
 
 

Current assets:
 

 
 
 

Cash and cash equivalents
$
31,096

 
 
$
80,565

Accounts receivable:
 

 
 
 

Oil and gas sales
25,443

 
 
14,479

Joint interest and other
4,488

 
 
6,784

Prepaid expenses and other
5,032

 
 
5,915

Inventory of oilfield equipment
3,270

 
 
4,685

Derivative assets
48

 
 

Total current assets
69,377

 
 
112,428

Property and equipment (successful efforts method):
 

 
 
 

Proved properties
508,955

 
 
2,525,587

Less: accumulated depreciation, depletion and amortization
(10,771
)
 
 
(1,694,483
)
Total proved properties, net
498,184

 
 
831,104

Unproved properties
183,534

 
 
163,369

Wells in progress
44,049

 
 
18,250

Other property and equipment, net of accumulated depreciation of $560 in 2017 and $11,206 in 2016
6,163

 
 
6,245

Total property and equipment, net
731,930

 
 
1,018,968

Long-term derivative assets
6

 
 

Other noncurrent assets
2,750

 
 
3,082

Total assets
$
804,063

 
 
$
1,134,478

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 
 

Current liabilities:
 

 
 
 

Accounts payable and accrued expenses (note 5)
$
50,848

 
 
$
61,328

Oil and gas revenue distribution payable
19,828

 
 
23,773

Derivative liability
2,044

 
 

Revolving credit facility - current portion (note 6)

 
 
191,667

Senior Notes - current portion (note 6)

 
 
793,698

Total current liabilities
72,720

 
 
1,070,466

 
 
 
 
 
Long-term liabilities:
 

 
 
 

Ad valorem taxes
8,531

 
 
14,118

Derivative liability
772

 
 

Asset retirement obligations for oil and gas properties
28,973

 
 
30,833

Total liabilities
110,996

 
 
1,115,417

 
 
 
 
 
Commitments and contingencies (note 7)


 
 


 
 
 
 
 
Stockholders’ equity:
 

 
 
 

Predecessor preferred stock, $.001 par value, 25,000,000 shares authorized, none outstanding as of December 31, 2016

 
 

Predecessor common stock, $.001 par value, 225,000,000 shares authorized, 49,660,683 issued and outstanding as of December 31, 2016

 
 
49

Successor preferred stock, $.01 par value, 25,000,000 shares authorized, none outstanding as of September 30, 2017

 
 

Successor common stock, $.01 par value, 225,000,000 shares authorized, 20,453,444 issued and outstanding as of September 30, 2017
4,286

 
 

Additional paid-in capital
688,033

 
 
814,990

Accumulated earnings (deficit)
748

 
 
(795,978
)
Total stockholders’ equity
693,067

 
 
19,061

Total liabilities and stockholders’ equity
$
804,063

 
 
$
1,134,478

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

3


BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands, except per share amounts)
 
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
Operating net revenues:
 

 
 
 

Oil and gas sales
$
45,232

 
 
$
49,325

Operating expenses:
 

 
 
 

Lease operating expense
9,643

 
 
9,893

Gas plant and midstream operating expense
3,265

 
 
2,874

Severance and ad valorem taxes
2,434

 
 
4,100

Depreciation, depletion and amortization
7,350

 
 
27,296

Abandonment and impairment of unproved properties

 
 
7,682

Unused commitments

 
 
1,688

General and administrative (including $2,646 and $1,863, respectively, of stock-based compensation)
15,181

 
 
18,671

Total operating expenses
37,873

 
 
72,204

Income (loss) from operations
7,359

 
 
(22,879
)
Other income (expense):
 

 
 
 

Derivative gain (loss)
(2,762
)
 
 
2,206

Interest expense
(265
)
 
 
(15,142
)
Other income (loss)
(4
)
 
 
913

Total other expense
(3,031
)
 
 
(12,023
)
Income (loss) from operations before taxes
4,328

 
 
(34,902
)
Income tax benefit (expense)

 
 

Net income (loss)
$
4,328

 
 
$
(34,902
)
 
 
 
 
 
Comprehensive income (loss)
$
4,328

 
 
$
(34,902
)
 
 
 
 
 
Basic net income (loss) per common share
$
0.21


 
$
(0.71
)
 
 
 
 
 
Diluted net income (loss) per common share
$
0.21

 
 
$
(0.71
)




 


Basic weighted-average common shares outstanding
20,439


 
49,324





 


Diluted weighted-average common shares outstanding
20,447


 
49,324

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

4


BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands, except per share amounts)

 
Successor
 
 
Predecessor
Predecessor
 
April 29, 2017 through September 30, 2017
 
 
January 1, 2017 through April 28, 2017
Nine Months Ended September 30, 2016
Operating net revenues:
 
 
 
 
 

Oil and gas sales
$
73,346

 
 
$
68,589

$
148,029

Operating expenses:
 
 
 
 
 

Lease operating expense
15,796

 
 
13,128

33,928

Gas plant and midstream operating expense
5,027

 
 
3,541

10,198

Severance and ad valorem taxes
4,842

 
 
5,671

11,531

Exploration
359

 
 
3,699

943

Depreciation, depletion and amortization
12,186

 
 
28,065

84,602

Impairment of oil and gas properties

 
 

10,000

Abandonment and impairment of unproved properties

 
 

24,463

Unused commitments

 
 
993

3,460

General and administrative (including $10,595, $2,116 and $7,249, respectively, of stock-based compensation)
31,320

 
 
15,092

49,591

Total operating expenses
69,530

 
 
70,189

228,716

Income (loss) from operations
3,816

 
 
(1,600
)
(80,687
)
Other income (expense):
 
 
 
 
 
Derivative loss
(2,762
)
 
 

(11,724
)
Interest expense
(460
)
 
 
(5,656
)
(46,216
)
Reorganization items, net (note 4)

 
 
8,808


Gain on termination fee (note 2)

 
 

6,000

Other income
154

 
 
1,108

1,011

Total other income (expense)
(3,068
)
 
 
4,260

(50,929
)
Income (loss) from operations before taxes
748

 
 
2,660

(131,616
)
Income tax benefit (expense)

 
 


Net income (loss)
$
748

 
 
$
2,660

$
(131,616
)
 
 
 
 
 
 
Comprehensive income (loss)
$
748

 
 
$
2,660

$
(131,616
)
 
 
 
 
 
 
Basic net income (loss) per common share
$
0.04

 
 
$
0.05

$
(2.67
)
 
 
 
 
 
 
Diluted net income (loss) per common share
$
0.04

 
 
$
0.05

$
(2.67
)
 
 
 
 
 
 
Basic weighted-average common shares outstanding
20,410

 
 
49,559

49,244

 
 
 
 
 
 
Diluted weighted-average common shares outstanding
20,438

 
 
50,971

49,244

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


5


BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands, except share amounts)
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Accumulated
 
 
 
 
    
Shares
    
Amount
    
Capital
    
Earnings (Deficit)
    
Total
Balances, December 31, 2016 (Predecessor)
 
49,660,683

 
$
49

 
$
814,990

 
$
(795,978
)
 
$
19,061

Restricted common stock issued
 
767,848

 
 
1

 
 

 
 

 
 
1

Restricted common stock forfeited
 
(5,134
)
 
 

 
 

 
 

 
 

Restricted stock used for tax withholdings
 
(318,180
)
 
 
(1
)
 
 
(427
)
 
 

 
 
(428
)
Fair value of equity issued to existing common stockholders
 

 
 

 
 
(23,410
)
 
 

 
 
(23,410
)
Stock-based compensation
 

 
 

 
 
2,116

 
 

 
 
2,116

Net Income
 

 
 

 
 

 
 
2,660

 
 
2,660

Balances, April 28, 2017 (Predecessor)
 
50,105,217

 
$
49

 
$
793,269

 
$
(793,318
)
 
$

Cancellation of Predecessor equity
 
(50,105,217
)
 
 
(49
)
 
 
(793,269
)
 
 
793,318

 
 

Balances, April 28, 2017 (Predecessor)
 

 
 

 
 

 
 

 
 

Issuance of Successor equity
 
20,356,071

 
 
4,285

 
 
679,836

 
 

 
 
684,121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, April 28, 2017 (Successor)
 
20,356,071

 
 
4,285

 
 
679,836

 
 

 
 
684,121

Restricted common stock issued
 
173,047

 
 
1

 
 

 
 

 
 
1

Restricted stock used for tax withholdings
 
(75,674
)
 
 

 
 
(2,398
)
 
 

 
 
(2,398
)
Stock-based compensation
 

 
 

 
 
10,595

 
 

 
 
10,595

Net Income
 

 
 

 
 

 
 
748

 
 
748

Balances, September 30, 2017
 
20,453,444

 
$
4,286

 
$
688,033

 
$
748

 
$
693,067

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



6


BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Successor
 
 
Predecessor
Predecessor
 
April 29, 2017 through September 30, 2017
 
 
January 1, 2017 through April 28, 2017
Nine Months Ended September 30, 2016
 
 
 
 
 
 
Cash flows from operating activities:
 

 
 
 
 

Net income (loss)
$
748

 
 
$
2,660

$
(131,616
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 

Depreciation, depletion and amortization
12,186

 
 
28,065

84,602

Non-cash reorganization items

 
 
(44,160
)

Impairment of oil and gas properties

 
 

10,000

Abandonment and impairment of unproved properties

 
 

24,463

Well abandonment costs and dry hole expense
74

 
 
2,931

905

Stock-based compensation
10,595

 
 
2,116

7,249

Amortization of deferred financing costs and debt premium

 
 
374

2,705

Derivative loss
2,762

 
 

11,724

Derivative cash settlements

 
 

15,749

Other
7

 
 
18

127

Changes in current assets and liabilities:
 
 
 
 
 

Accounts receivable
(2,027
)
 
 
(6,640
)
29,442

Prepaid expenses and other assets
(80
)
 
 
963

(1,047
)
Accounts payable and accrued liabilities
(11,910
)
 
 
(5,880
)
(23,252
)
Settlement of asset retirement obligations
(936
)
 
 
(331
)
(473
)
Net cash (used in) provided by operating activities
11,419

 
 
(19,884
)
30,578

Cash flows from investing activities:
 

 
 
 
 

Acquisition of oil and gas properties
(5,074
)
 
 
(445
)
(919
)
Exploration and development of oil and gas properties
(42,355
)
 
 
(5,123
)
(47,491
)
Payments of contractual obligation

 
 

(12,000
)
(Increase) decrease in restricted cash
(12
)
 
 
118

(7,707
)
Additions to property and equipment - non oil and gas
(667
)
 
 
(454
)
(106
)
Net cash used in investing activities
(48,108
)
 
 
(5,904
)
(68,223
)
Cash flows from financing activities:
 

 
 
 
 

Proceeds from credit facility

 
 

209,000

Payments to credit facility

 
 
(191,667
)
(58,667
)
Proceeds from sale of common stock

 
 
207,500


Payment of employee tax withholdings in exchange for the return of common stock
(2,398
)
 
 
(427
)
(283
)
Deferred financing costs

 
 

(316
)
Net cash (used in) provided by financing activities
(2,398
)
 
 
15,406

149,734

Net change in cash and cash equivalents
(39,087
)
 
 
(10,382
)
112,089

Cash and cash equivalents:
 

 
 
 
 

Beginning of period
70,183

 
 
80,565

21,341

End of period
$
31,096

 
 
$
70,183

$
133,430

Supplemental cash flow disclosure:
 

 
 
 
 

Cash paid for interest
$
455

 
 
$
3,509

$
39,235

Cash paid for reorganization items
$

 
 
$
52,968

$

Changes in working capital related to drilling expenditures
$
9,325

 
 
$
3,360

$
(27,952
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

7


BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION AND BUSINESS
Bonanza Creek Energy, Inc. (“BCEI” or, together with our consolidated subsidiaries, the “Company”) is engaged primarily in acquiring, developing, exploiting and producing oil and gas properties. The Company's assets and operations are concentrated primarily in the Wattenberg Field in Colorado and in the Dorcheat Macedonia Field in southern Arkansas.
NOTE 2 - BASIS OF PRESENTATION
     These statements have been prepared in accordance with the Securities and Exchange Commission and accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information with the condensed consolidated balance sheets (“balance sheets”) and the condensed consolidated statements of cash flows (“statements of cash flows”) as of and for the period ended December 31, 2016, being derived from audited financial statements. The quarterly financial statements included herein do not necessarily include all of the disclosures as may be required under generally accepted accounting principles for complete financial statements. Except as disclosed herein, and with the exception of information in this report related to our emergence from Chapter 11 and fresh-start accounting, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”). These consolidated financial statements include all of the adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations. All such adjustments are of a normal recurring nature only. As described below, however, such prior financial statements are not comparable to our interim financial statements due to the adoption of fresh-start accounting. The results of operations for the quarter are not necessarily indicative of the results to be expected for the full fiscal year. The Company evaluated events subsequent to the balance sheet date of September 30, 2017, and through the filing date of this report.
On January 4, 2017, the Company and certain of its subsidiaries (collectively with the Company, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions,” and the cases commenced thereby, the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue the Debtors’ Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as proposed, the “Plan”). The Bankruptcy Court granted the Debtors' motion seeking to administer all of the Debtors' Chapter 11 Cases jointly under the caption In re Bonanza Creek Energy, Inc., et al (Case No. 17-10015). The Debtors received bankruptcy court confirmation of their Plan on April 7, 2017, and emerged from bankruptcy on April 28, 2017 (the “Effective Date”). Although the Company is no longer a debtor-in-possession, the Company was a debtor-in-possession during a portion of the nine months ended September 30, 2017. As such, certain aspects of the bankruptcy proceedings of the Company and related matters are described below in order to provide context and explain part of our financial condition and results of operations for the period presented.
Upon emergence from bankruptcy, the Company adopted fresh-start accounting and became a new entity for financial reporting purposes. As a result of the application of fresh-start accounting and the effects of the implementation of the Plan, the Company’s condensed consolidated financial statements after April 28, 2017 are not comparable with the financial statements on or prior to April 28, 2017. The Company's condensed consolidated financial statements and related footnotes are presented with a black line division which delineates the lack of comparability between amounts presented after April 28, 2017 and dates prior thereto. See Note 4 - Fresh-Start Accounting for additional discussion.
Subsequent to January 4, 2017 and through the date of emergence, all expenses, gains and losses directly associated with the reorganization are reported as reorganization items, net in the accompanying condensed consolidated statements of operations and comprehensive income (loss) (“statements of operations”).
References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to April 28, 2017. References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of the Company on or prior to April 28, 2017. References to “Current Successor Period” relates to the period of April 29, 2017 through September 30, 2017. References to “Current Predecessor Period” relate to the period of January 1, 2017 through April 28, 2017. References to "Prior Predecessor Period" relate to the nine months ended September 30, 2016.
Principles of Consolidation
     The balance sheets include the accounts of the Company and its wholly owned subsidiaries, Bonanza Creek Energy Operating Company, LLC, Bonanza Creek Energy Resources, LLC, Bonanza Creek Energy Upstream LLC, Bonanza Creek

8


Energy Midstream, LLC, Holmes Eastern Company, LLC and Rocky Mountain Infrastructure, LLC. All significant intercompany accounts and transactions have been eliminated.
Rocky Mountain Infrastructure, LLC
In 2015, the Company’s wholly owned subsidiary, Bonanza Creek Energy Operating Company, LLC, formed a wholly owned subsidiary, Rocky Mountain Infrastructure, LLC (“RMI”), to hold gathering systems, central production facilities and related infrastructure that service the Wattenberg Field.
Assets Held for Sale
The Company had its ownership interests in RMI and all assets within the Mid-Continent region as held for sale during a portion of the nine months ended September 30, 2016. Upon the termination of the previously reported purchase and sale agreement of its RMI interest in the first quarter of 2016, the Company received $6.0 million as shown in the gain on termination fee line item in the accompanying statements of operations. During the nine months ended September 30, 2016, the Company recorded an impairment of oil and gas properties of $10.0 million based on the latest received bid at the time for its Mid-Continent assets. The Company moved these assets back into held for use during the second quarter of 2016.
Significant Accounting Policies
     The significant accounting policies followed by the Company were set forth in Note 1 to the 2016 Form 10-K and are supplemented by the notes throughout this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2016 Form 10-K.
Going Concern Presumption
Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and the satisfaction of liabilities and other commitments in the normal course of business.
Recently Issued Accounting Standards
Effective January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“Update”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify the current guidance for stock compensation. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This update is effective for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. As of January 1, 2017, and thereafter, the Company did not have excess tax benefits associated with its stock compensation, and therefore, there was no tax impact upon adoption of this standard. In addition, the employee taxes paid on the statement of cash flows when shares were withheld for taxes have already been classified as a financing activity, therefore, there was no cash flow statement impact upon adoption of this standard. This standard allowed Company's to elect to account for forfeitures as they occurred or estimate the number of awards that will vest. The Company elected to account for forfeitures as they occur, resulting in a minimal impact upon adoption of this standard.
In January 2017, the FASB issued Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is to be applied using a prospective method and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company will apply this guidance to any future acquisitions or disposals of assets or business.
In February 2017, the FASB issued Update No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This update is meant to clarify existing guidance and to add guidance for partial sales of nonfinancial assets. This guidance is to be applied using a full retrospective method or a modified retrospective method as outlined in the guidance and is effective at the same time as Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the provisions of this guidance and assessing its potential impact on the Company’s financial statements and disclosures.

9


In November 2016, the FASB issued Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. This guidance is to be applied using a retrospective method and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company has evaluated the provisions of this guidance and has determined that it will not have a material effect on the Company’s financial statements or disclosures.
In August 2016, the FASB issued Update No. 2016-15 – Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation of specific cash receipts and cash payments within the statement of cash flows. This authoritative accounting guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company has evaluated the provisions of this guidance and has determined that it will not have a material effect on the Company’s financial statements or disclosures.
In February 2016, the FASB issued Update No. 2016-02 – Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This authoritative guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company has begun the identification process of all leases and is evaluating the provisions of this guidance and assessing its impact.
In May 2014, the FASB issued Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) for the recognition of revenue from contracts with customers. Several additional related updates have been issued. Based on assessments performed to date, the standard is not expected to have a material effect on the timing of the Company's revenue recognition or its financial position, net income, or cash flows, but is expected to have an impact on the Company's revenue-related disclosures. The Company has assessed all of its revenue contracts and is in the process of implementing appropriate changes to its business processes, systems and controls to support the recognition and disclosure requirements of this guidance. This guidance also includes provisions regarding future revenues and expenses under a gross-versus-net presentation. Currently, the Company presents the majority of its revenues and expenses impacted by this guidance on a net basis. Upon adoption of this guidance, the Company will present its revenues and expenses covered under this guidance on a gross basis. This guidance is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted, or the modified retrospective approach, with a cumulative adjustment to retained earnings on the opening balance sheet. The Company will adopt this guidance on January 1, 2018, using the modified retrospective approach with a cumulative adjustment to retained earnings as necessary.
NOTE 3 - CHAPTER 11 PROCEEDINGS AND EMERGENCE
On December 23, 2016, Bonanza Creek Energy, Inc. and its subsidiaries entered into a Restructuring Support Agreement with (i) holders of approximately 51% in aggregate principal amount of the Company's 5.75% Senior Notes due 2023 (“5.75% Senior Notes”) and 6.75% Senior Notes due 2021 (“6.75% Senior Notes”), collectively (the “Senior Notes”) and (ii) NGL Energy Partners, LP and NGL Crude Logistics, LLC (collectively “NGL”).
On January 4, 2017, the Company filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. The Debtors received bankruptcy court confirmation of their Plan on April 7, 2017, and emerged from bankruptcy on April 28, 2017.
During the bankruptcy proceedings, the Company conducted normal business activities and was authorized to pay and did pay pre-petition liabilities.
In addition, subject to specific exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed most judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, we did not record interest expense on the Company’s Senior Notes from January 6, 2017, the agreed-upon date, through April 28, 2017. For that period, contractual interest on the Senior Notes totaled $16.0 million.
Plan of Reorganization    
On the Effective Date, the Senior Notes and existing common shares of the Company (“existing common shares”) were canceled, and the reorganized Company issued: (i) new common stock; (ii) three year warrants (“warrants”); and (iii) rights (the “subscription rights”) to acquire the new common shares offered in connection with the rights offering (the “rights offering”), each of which will be distributed as set forth below;

10


the Senior Notes aggregate principal amount of $800.0 million, plus $14.9 million of accrued and unpaid pre-petition interest and $51.2 million of prepayment premiums was settled for 46.6% or 9,481,610 shares of the of the Company's new common stock;
the Company issued 803,083 or 3.9% of the new common stock to holders of our existing common stock, of which 1.75% is for the ad hoc equity committee settlement in exchange for $7.5 million, on terms equivalent to the rights offering;
the Company issued 10,071,378 shares of new common stock in exchange for $200.0 million relating to the rights offering;
the Company issued 1,650,510 of warrants entitling their holders upon exercise thereof, on a pro rata basis, to 7.5% of the total outstanding new common shares at a per share price of $71.23 per warrant; and
the Company reserved 2,467,430 shares of the new common stock for issuance under its 2017 Long Term Incentive Plan (“LTIP”).
Pursuant to the terms of the approved Plan the following transactions were completed on the Effective Date;
the Company paid Silo Energy, LLC (“Silo”) the contract settlement amount of $7.2 million in full;
with respect to the predecessor revolving credit facility, dated March 29, 2011 (the “predecessor revolving credit facility”), principal, accrued interest and fees of $193.7 million were paid in full;
the Company paid $1.6 million for the 2016 Short Term Incentive Plan (“2016 STIP”) to various employees;
the Company funded an escrow account in the amount of $17.2 million for professional service fees attributable to its advisers;
the Company paid $13.8 million for professional services attributable to advisers of third parties involved in the bankruptcy proceedings;
the Company emerged with cash on hand of $70.2 million for operations; and
the Company amended its articles of incorporation and bylaws for the authorization of the new common stock.
Board of Directors
Upon emergence from bankruptcy the Company's board of directors was made up of seven individuals, two of which were existing board members, Richard J. Carty and Jeffrey E. Wojahn, and five new board members consisting of Paul Keglevic, Brian Steck, Thomas B. Tyree, Jr., Jack E. Vaughn, and Scott D. Vogel were appointed.
Executive Departure
On June 11, 2017, Richard J. Carty resigned as a member of the board of directors and left his role as President and Chief Executive Officer of the Company. In connection with the departure of Mr. Carty, the board of directors appointed R. Seth Bullock, a managing director of Alvarez & Marsal, LLC, interim Chief Executive Officer, and is currently conducting a search for a new Chief Executive Officer.
NOTE 4 - FRESH-START ACCOUNTING
Upon the Company's emergence from Chapter 11 bankruptcy, the Company adopted fresh-start accounting, pursuant to FASB Accounting Standards Codification (“ASC”) 852, Reorganizations, and applied the provisions thereof to its financial statements. The Company qualified for fresh-start accounting because: (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company; and (ii) the reorganization value of the Company's assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. The Company applied fresh-start accounting as of April 28, 2017, when it emerged from bankruptcy protection. Adopting fresh-start accounting results in a new reporting entity for financial reporting purposes with no beginning retained earnings or deficit as of the fresh-start reporting date. The cancellation of all existing shares outstanding on the Effective Date and issuance of new shares of the Successor Company caused a related change of control of the Company under ASC 852.



11


Reorganization Value
Under fresh-start accounting, reorganization value represents the fair value of the Successor Company’s total assets and is intended to approximate the amount a willing buyer would pay for the assets immediately after restructuring. Under application of fresh-start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values.
The Company's reorganization value is derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long-term debt, other interest bearing liabilities and shareholders’ equity less total cash and cash equivalents. In support of the Plan, the enterprise value of the Successor Company was estimated and approved by the Bankruptcy Court to be in the range of $570.0 million to $680.0 million. Based on the estimates and assumptions used in determining the enterprise value, as further discussed below, the Company estimated the enterprise value to be approximately $643.0 million. This valuation analysis was prepared with the assistance of an independent third-party consultant utilizing reserve information prepared by the Company's internal reserve engineers, internal development plans and schedules, other internal financial information and projections and the application of standard valuation techniques including risked net asset value analysis and comparable public company metrics.
The Company's principal assets are its oil and gas properties. The Company determined the fair value of its oil and gas properties based on the discounted cash flows expected to be generated from these assets segregated into geographic regions. The computations were based on market conditions and reserves in place as of the Effective Date. Discounted cash flow models were generated using the estimated future revenues and development and operating costs for all developed wells and undeveloped locations comprising our proved reserves. The proved locations were limited to wells expected to be drilled in the Company's five year plan. Future cash flows before application of risk factors were estimated by using the New York Mercantile Exchange five year forward prices for West Texas Intermediate oil and Henry Hub natural gas with inflation adjustments applied to periods beyond five years. The prices were further adjusted for typical differentials realized by the Company for the location and product quality. Wattenberg Field oil differential estimates were based on the new NGL purchase agreement that was confirmed as part of the Plan. Development costs were based on recent bids received by the Company and the operating costs were based on actual costs, and both were adjusted by the same inflation rate used for revenues. The discounted cash flow models also included estimates not typically included in proved reserves, such as an industry standard general and administrative expense and income tax expense. Due to the limited drilling plans that we had in place, proved undeveloped locations were risked within industry standards.
The risk-adjusted after-tax cash flows were discounted at a rate of 11.0%. This rate was determined from a weighted-average cost of capital computation which utilized a blended expected cost of debt and expected returns on equity for similar industry participants.
From this analysis the Company concluded the fair value of its proved, probable and possible reserves was $397.3 million, $146.8 million and $31.7 million, respectively, as of the Effective Date. The Company also reviewed its undeveloped leasehold acreage and determined that the fair value of its probable and possible reserves appropriately capture the fair value of its undeveloped leasehold acreage.
The Company performed an analysis of the RMI assets using a replacement cost method which estimated the assets' replacement cost (for new assets), less any depreciation, physical deterioration or obsolescence resulting, in a fair value of $103.1 million.
The Company follows the lower of cost or net realizable value when valuing inventory of oilfield equipment. The valuation of the inventory of oilfield equipment as of the Effective Date did not yield a material difference from the Company's carrying value immediately prior to emergence from bankruptcy; as such, there was no valuation adjustment recorded.
The valuation of the Company's other property and equipment as of the Effective Date did not yield a material difference from the Predecessor Company's net book value; as such there was no valuation adjustment recorded.
Our liabilities on the Effective Date include working capital liabilities and asset retirement obligations. Our working capital liabilities are ordinary course obligations, and their carrying amounts approximate their fair values. The asset retirement obligation was reset using a revised credit-adjusted risk-free rate and known attributes as of the Effective Date, resulting in a $29.1 million obligation.
In conjunction with the Company's emergence from bankruptcy, the Company issued 1,650,510 warrants to existing equity holders. The fair value of $4.1 million was estimated using a Black-Scholes pricing model. The model used the following assumptions; an expected volatility of 40%, a risk-free interest rate of 1.44%, a stock price of $34.36, a strike price of $71.23, and an expiration date of 3 years.

12


The following table reconciles the enterprise value to the estimated fair value of Successor Company's common stock as of the Effective Date (in thousands, except per share amounts):
Enterprise Value
$
642,999

Plus: Cash and cash equivalents
70,183

Less: Interest bearing liabilities
(29,061
)
Less: Fair value of warrants
(4,081
)
Fair value of Successor common stock
$
680,040

 
 
Shares outstanding at April 28, 2017
20,356

 
 
Per share value
$
33.41

The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (in thousands):
Enterprise Value
$
642,999

Plus: Cash and cash equivalents
70,183

Plus: Working capital liabilities
63,871

Plus: Other long-term liabilities
17,919

Reorganization value of Successor assets
$
794,972

Successor Condensed Consolidated Balance Sheet
The adjustments set forth in the following condensed consolidated balance sheet reflect the effect of the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as estimated fair value adjustments as a result of the adoption of fresh-start accounting (reflected in the column “Fresh-Start Adjustments”). The explanatory notes highlight methods used to determine estimated fair values or other amounts of assets and liabilities, as well as significant assumptions.
 
Predecessor Company
 
Reorganization Adjustments
 
Fresh-Start Adjustments
 
Successor Company
 
(in thousands, except share amounts)
ASSETS
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
96,286

 
$
(26,103
)
(1)
$

 
$
70,183

Accounts receivable:

 
 
 
 
 

Oil and gas sales
24,876

 

 

 
24,876

Joint interest and other
3,028

 

 

 
3,028

Prepaid expenses and other
4,952

 

 

 
4,952

Inventory of oilfield equipment
4,218

 

 

 
4,218

Total current assets
133,360

 
(26,103
)
 

 
107,257

Property and equipment (successful efforts method):
 
 
 
 
 
 
 
Proved properties
2,531,834

 

 
(2,031,373
)
(6)
500,461

Less: accumulated depreciation, depletion and amortization
(1,720,736
)
 

 
1,720,736

(6)

Total proved properties, net
811,098

 

 
(310,637
)
 
500,461

Unproved properties
163,781

 

 
14,679

(6)
178,460

Wells in progress
18,002

 

 
(18,002
)
(7)

Other property and equipment, net
6,056

 

 

 
6,056

Total property and equipment, net
998,937

 

 
(313,960
)
 
684,977


13


Other noncurrent assets
2,738

 

 

 
2,738

Total assets
$
1,135,035

 
$
(26,103
)
 
$
(313,960
)
 
$
794,972

 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS'S EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
72,635

 
$
(33,701
)
(2)
$

 
$
38,934

Oil and gas revenue distribution payable
24,937

 

 

 
24,937

Revolving credit facility - current portion
191,667

 
(191,667
)
(3)

 

Total current liabilities
289,239

 
(225,368
)
 

 
63,871

Long-term liabilities:
 
 
 
 
 
 
 
Ad valorem taxes
17,919

 

 

 
17,919

Asset retirement obligations for oil and gas properties
31,660

 

 
(2,599
)
(8)
29,061

Liabilities subject to compromise
873,292

 
(873,292
)
(4)

 

Total liabilities
$
1,212,110

 
$
(1,098,660
)
 
$
(2,599
)
 
$
110,851

Stockholders' equity:
 
 
 
 
 
 
 
Predecessor preferred stock

 

 

 

Predecessor common stock
49

 

 
(49
)
(9)

Additional paid in capital
816,679

 

 
(816,679
)
(9)

Successor common stock

 
204

(5)

 
204

Successor warrants

 
4,081

(5)

 
4,081

Additional paid-in capital

 
679,836

(5)

 
679,836

Retained deficit
(893,803
)
 
388,436

(4)
505,367

(10)

Total stockholders' equity
(77,075
)
 
1,072,557

 
(311,361
)
 
684,121

Total liabilities and stockholders' equity
$
1,135,035

 
$
(26,103
)
 
$
(313,960
)
 
$
794,972

Reorganization Adjustments
(1) The following table reflects the net cash payments made upon emergence on the Effective Date (in thousands):
Sources:
 
Proceeds from rights offering
$
200,000

Proceeds from ad hoc equity committee
7,500

Total sources
$
207,500

Uses and transfers:
 
Payment on revolving credit facility (principal, interest and fees)
$
(193,729
)
Payment and funding of escrow account related to professional fees
(17,193
)
Payment of professional fees and other
(13,831
)
Payment of Silo contract settlement and other
(7,228
)
Payment of remaining 2016 STIP
(1,622
)
Total uses and transfers
$
(233,603
)
 
 
Total net sources, uses and transfers
$
(26,103
)

14


(2) The following table shows the decrease of accounts payable and accrued liabilities attributable to reorganization items settled or paid upon emergence (in thousands):
Accounts payable and accrued expenses:
 
Accrued 2016 STIP payment
$
(1,574
)
Escrow account funding
(17,193
)
Professional fees and other
(13,831
)
Accrued unpaid interest on revolving credit facility
(1,103
)
Total accounts payable and accrued expenses settled
$
(33,701
)
(3) Represents the payment in full of the predecessor revolving credit facility on the Effective Date.
(4) On the Effective Date, the obligations of the Company with respect to the Senior Notes were canceled. Liabilities subject to compromise were settled as follows in accordance with the Plan (in thousands):
Senior Notes
$
800,000

Accrued interest on Senior Notes (pre-petition)
14,879

Make-whole payment on Senior Notes
51,185

Silo contract settlement accrual
7,228

Total liabilities subject to compromise of the predecessor
873,292

 
 
Rights offering
200,000

Fair value of equity issued to creditors, excluding equity issued to existing equity holders
(653,212
)
Payment of Silo contract settlement
(7,228
)
Gain on settlement of liabilities subject to compromise
412,852

 
 
Payment on revolving credit facility fees and remaining unaccrued 2016 STIP
(1,007
)
 
 
Total reorganization items at emergence
$
411,845

 
 
Issuance of warrants to existing shareholders
$
(4,081
)
Proceeds from ad hoc equity committee
7,500

Issuance of shares to existing shareholders
(26,828
)
Total reorganization adjustments to retained deficit
$
388,436

(5) Represents the fair value of 20,356,071 shares of new common stock and 1,650,510 warrants issued upon emergence from bankruptcy on the Effective Date.
Fresh-Start Adjustments
(6) Fair value adjustments to proved and unproved oil and natural gas properties. A combination of the market and income approach were utilized to perform valuations. Included in this line items were adjustments to the fully-owned subsidiary, Rocky Mountain Infrastructure, LLC. Lastly, the accumulated depreciation was reset to zero in accordance with fresh-start accounting.
(7) Represents the reset of wells in progress with fair valuation of the associated reserves in proved property.
(8) Upon application of fresh-start accounting and due to the Company’s emergence with no debt, the Company revalued its asset retirement obligations based upon comparable companies’ credit-adjusted risk-free rates in accordance with ASC 410 - Asset Retirement and Environmental Obligations.
(9) Cancellation of Predecessor Company’s common stock and additional paid-in capital.
(10) Adjustment to reset retained deficit to zero.

15


Reorganization Items, Net
Reorganization items represent liabilities settled, net of amounts incurred subsequent to the Chapter 11 filing as a direct result of the Plan and are classified as Reorganization items, net in our statements of operations. The following table summarizes reorganization items (in thousands):
Fresh-start related:
 
Gain on settlement of liabilities subject to compromise
$
412,852

Payment on revolving credit facility fees and remaining unaccrued 2016 STIP
(1,007
)
Fresh-start valuation adjustments
(311,361
)
Total fresh-start reorganization items, net
$
100,484

Current predecessor quarter professional fees and other
(2,673
)
Current predecessor quarter reorganization items, net
97,811

Prior period reorganization:
 
Legal and professional fees and expenses
(31,662
)
Write-off of debt issuance and premium costs
(6,156
)
Make-whole payment on Senior Notes
(51,185
)
Total prior-period reorganization items, net
$
(89,003
)
 
 
Total reorganization items, net
$
8,808

NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses contain the following (in thousands):
 
Successor
 
 
Predecessor
 
As of September 30, 2017
 
 
As of December 31, 2016
Drilling and completion costs
$
15,100

 
 
$
2,415

Accounts payable trade
7,271

 
 
1,140

Accrued general and administrative cost
6,836

 
 
17,539

Lease operating expense
3,607

 
 
2,895

Accrued interest

 
 
14,209

Silo contract settlement accrual

 
 
7,228

Production and ad valorem taxes and other
18,034

 
 
15,902

Total accounts payable and accrued expenses
$
50,848

 
 
$
61,328

NOTE 6 - LONG-TERM DEBT 
The Company filing for Chapter 11 constituted an event of default with respect to its existing debt obligations. As a result, the Company's Senior Notes and predecessor revolving credit facility became immediately due and payable, but any efforts to enforce such payment obligations were automatically stayed as a result of the Chapter 11 filing. On April 28, 2017, upon the Company's emergence from bankruptcy, the Senior Notes were exchanged for new common stock of the reorganized entity. Please refer to Note 3 - Chapter 11 Proceedings and Emergence for additional discussion.

16


Long-term debt consisted of the following (in thousands):
 
Successor
 
 
Predecessor
 
As of September 30, 2017
 
 
As of December 31, 2016(1)
Revolving credit facility
$

 
 
$
191,667

6.75% Senior Notes due 2021

 
 
500,000

Unamortized premium on 6.75% Senior Notes

 
 
5,165

5.75% Senior Notes due 2023

 
 
300,000

Less debt issuance costs - Senior Notes

 
 
(11,467
)
Total debt, net

 
 
985,365

Less current portion

 
 
(985,365
)
Total long-term debt
$

 
 
$

_____________________________________
(1) Due to covenant violations, the Company classified the predecessor revolving credit facility and Senior Notes as current liabilities on the accompanying balance sheets.
Predecessor Revolving Credit Facility
The borrowing base on the predecessor revolving credit facility at the time the Company entered bankruptcy and throughout the bankruptcy proceedings was $150.0 million. As of December 31, 2016, the Company had $191.7 million outstanding under the predecessor revolving credit facility and had a borrowing base deficiency of $41.7 million, which was required to be paid back in monthly installments, with no available borrowing capacity. The Company filed for bankruptcy on January 4, 2017, granting the Company a stay from making any further deficiency payments. During the bankruptcy proceedings, the Company paid interest on the predecessor revolving credit facility in the normal course. On the Effective Date, the predecessor revolving credit facility was terminated and the outstanding principal balance of $191.7 million, accrued interest of $1.1 million, and fees of $0.9 million were paid in full. The obligations were funded with proceeds from the rights offering.
New Revolving Credit Facility
On the Effective Date, the Company entered into a new revolving credit facility, as the borrower, with KeyBank National Association, as the administrative agent, and certain lenders party thereto (the “new revolving credit facility”). The new borrowing base of $191.7 million is redetermined semiannually, as early as April and October of each year, with the first redetermination set to occur in April of 2018. The new revolving credit facility matures on March 31, 2021. The Company has yet to draw on the revolving credit facility.
The new revolving credit facility restricts, among other items, certain dividend payments, additional indebtedness, asset sales, loans, investments and mergers. The new revolving credit facility also contains certain financial covenants, which require the maintenance of certain financial and leverage ratios, as defined by the revolving credit facility. The new credit facility states that beginning with the fiscal quarter ending September 30, 2017, and each following fiscal quarter through the maturity of the new revolving credit facility, the Company's leverage ratio of indebtedness to EBITDAX is not to exceed 3.50 to 1.00. Beginning also with the fiscal quarter ending September 30, 2017, and each following fiscal quarter, the Company must maintain a minimum current ratio of 1.00 to 1.00 and a minimum interest coverage ratio of 2.50 to 1.00 as of the end of the respective fiscal quarter. The new revolving credit facility also requires the Company maintain a minimum asset coverage ratio of 1.35 to 1.00 as of the fiscal quarters ending September 30, 2017 and December 31, 2017. The minimum asset coverage ratio is only applicable until the first redetermination in April of 2018. As of September 30, 2017, and through the filing date of this report, the Company was in compliance with all of the new revolving credit facility covenants.
 The new revolving credit facility provides for interest rates plus an applicable margin to be determined based on LIBOR or a base rate, at the Company’s election. LIBOR borrowings bear interest at LIBOR, plus a margin of 3.00% to 4.00% depending on the utilization level, and the base rate borrowings bear interest at the “Bank Prime Rate,” as defined in the new revolving credit facility, plus a margin of 2.00% to 3.00% depending on the utilization level.
Senior Unsecured Notes
The $500.0 million aggregate principal amount of 6.75% Senior Notes that mature on April 15, 2021 and the $300.0 million aggregate principal amount of 5.75% Senior Notes that mature on February 1, 2023 were unsecured senior obligations.

17


The Senior Notes were included in liabilities subject to compromise on the condensed consolidated balance sheets of the Predecessor Company as of April 28, 2017, as presented in Note 4 - Fresh-Start Accounting, and in current liabilities as of December 31, 2016 within the accompanying balance sheets. On the Effective Date, by operation of the Plan, all outstanding obligations under the Senior Notes were canceled and 9,481,610 shares of the Company's new common stock was issued.
Please refer to Note 3 - Chapter 11 Proceedings and Emergence and Note 4 - Fresh-Start Accounting for additional discussion about the Company's emergence from bankruptcy. 
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings 
From time to time, the Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. In accordance with accounting authoritative guidance, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the most likely anticipated outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. Other than matters disclosed in the Company's 2016 Annual Report on Form 10-K, no claims have been made, nor is the Company aware of any material uninsured liability which the Company may have, as it relates to any environmental cleanup, restoration or the violation of any rules or regulations. As of the filing date of this report, there were no material pending or overtly threatened legal actions against the Company of which it is aware.
As previously described in the Company’s 2016 Annual Report on Form 10-K, the Company and the Colorado Department of Public Health and Environment (“CDPHE”) have discussed settlement terms regarding a compliance advisory issued to the Company for certain storage tank facilities located in the Wattenberg Field with respect to applicable air quality regulations. Effective October 3, 2017, the Company and the CDPHE entered into a compliance order in consent (“COC”) resolving the matters addressed by the compliance advisory. Pursuant to the terms of the COC, the Company paid an administrative penalty of $0.2 million. The COC further sets forth compliance requirements and criteria for continued operations and contains provisions regarding, e.g., record-keeping, modifications to the COC, circumstances under which the COC may terminate with respect to certain wells and facilities, and the sale or transfer of operational or ownership interests. In order to be in compliance, the Company currently anticipates spending $1.7 million in 2017, $1.9 million in 2018, and $3.1 million for 2019 through 2022. The COC can be terminated after four years with a showing of substantial compliance.
Commitments
Upon emergence from bankruptcy, the new purchase agreement to deliver fixed determinable quantities of crude oil with NGL (the “new NGL agreement”) became effective and the original purchase agreement with NGL was canceled. The terms of the new NGL agreement consists of defined volume commitments over an initial seven-year term. Under terms of the new NGL agreement, the Company will be required to make periodic deficiency payments for any shortfalls in delivering minimum volume commitments, which are set in six-month periods beginning in January 2018. There are no minimum volume commitments for the year ending December 31, 2017. During 2018, the average minimum volume commitment will be approximately 10,100 barrels per day and increases by approximately 41% from 2018 to 2019 and approximately 3% each year for the remainder of the contract, to a maximum of approximately 16,000 barrels per day. The aggregate financial commitment fee over the seven-year term, based on the minimum volume commitment schedule (as defined in the agreement) and the applicable differential fee, is $154.5 million as of September 30, 2017. Upon notifying NGL at least twelve months prior to the expiration date of the new NGL agreement, the Company may elect to extend the term of the new NGL agreement for up to three additional years.
In October 2014, the Company entered into a purchase agreement to deliver fixed determinable quantities of crude oil to Silo. This agreement went into effect during the second quarter of 2015 for 12,580 barrels per day over an initial five-year term. While the volume commitment could be met with Company volumes or third-party volumes, delegated by the Company, the Company was required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitments. As confirmed in the Plan, the Company terminated its purchase agreement with Silo on February 1, 2017, and entered into a settlement agreement pursuant to which Silo received $21.0 million. Specifically, the settlement allowed Silo to: (i) retain the $5.0 million adequate assurance deposit it maintained; (ii) retain the Company's $8.7 million crude oil revenue

18


receivable due to the Company for December 2016 production; and (iii) receive additional cash payment of $7.2 million, which was paid on the Effective Date. The $21.0 million settlement was expensed during 2016.
The Company rejected its Denver office lease, which was confirmed in the Plan. On April 29, 2017, the Company entered into a new office lease agreement to rent office facilities. The lease is non-cancelable and expires in February 2022.
The annual minimum commitment payments on the new NGL agreement and the new office lease for the next five years as of September 30, 2017 are presented below (in thousands):
 
    
NGL Commitments(1)
 
Office Lease Commitments
 
Total
2017
 
$

$
234

$
234

2018
 
 
15,692

 
1,078

 
16,770

2019
 
 
22,176

 
1,224

 
23,400

2020
 
 
27,949

 
1,335

 
29,284

2021
 
 
28,791

 
1,423

 
30,214

2022 and thereafter
 
 
59,933

 
240

 
60,173

Total
 
$
154,541

$
5,534

$
160,075

_______________________________
(1) The above calculation is based on the minimum volume commitment schedule (as defined in the new NGL agreement) and applicable differential fees.
There are no purchase commitments post emergence, except for the new NGL agreement, as discussed above.
There have been no other material changes from the commitments disclosed in the notes to the Company’s consolidated financial statements included in its 2016 Form 10-K.
NOTE 8 - STOCK-BASED COMPENSATION
Predecessor Long Term Incentive Plan
 
Upon emergence from bankruptcy, the Company's existing restricted stock, performance stock units and LTIP units (“predecessor awards”) were canceled. Stock compensation expense for predecessor awards was $2.1 million, $1.9 million, and $7.2 million for the Current Predecessor Period and the three and nine months ended September 30, 2016, respectively. Compensation expense associated with predecessor awards was recognized as general and administrative expense.
 
2017 Long Term Incentive Plan

Upon emergence from bankruptcy, the Company adopted a new Long Term Incentive Plan and issued new grants to employees consisting of options with a ten-year term and strike price of $34.36 and restricted stock units. These awards vest over a three-year period in equal installments each year from the grant date. See below for further discussion of awards under the LTIP.

Restricted Stock Units

The new LTIP allows for the issuance of restricted stock units (“RSU”) to employees of the Company at the discretion of the board of directors. Each RSU represents one share of the Company's new common stock to be released from restriction upon completion of the vesting period. The RSUs are valued at the grant date share price and are recognized as general and administrative expense over the vesting period of the award.
    
During June 2017, the Company granted 63,894 RSUs to non-executive members of the board of directors, with a fair value of $2.3 million. This grant is intended to cover a three-year period, and the RSUs will vest in equal installments on each of the first three anniversaries. The vested shares will be released upon the earlier of the third anniversary of the grant date, a change of control or separation from the Company.

The Company granted 389,102 RSUs with a fair value $13.4 million during the Current Successor Period. Total expense recorded for RSUs, inclusive of the board of director grants, for the three months ended September 30, 2017 and the

19


Current Successor Period was $1.8 million and $7.1 million, respectively. As of September 30, 2017, unrecognized compensation cost was $8.0 million and will be amortized through 2020.

A summary of the status and activity of non-vested restricted stock units for the Current Successor Period is presented below:
 
Restricted Stock Units
 
Weighted-
Average
Grant-Date
Fair Value    
Non-vested at beginning of Current Successor Period

 
$

Granted
452,996

 
$
34.69

Vested
(173,047
)
 
$
34.19

Forfeited
(15,054
)
 
$
34.36

Non-vested at end of Current Successor Period
264,895

 
$
34.92

Stock Options
The new LTIP allows the issuance of stock options to the Company's employees at the sole discretion of the board of directors. Options expire ten years from the grant date unless otherwise determined by the board of directors. Compensation expense on the stock options are recognized as general and administrative expense over the vesting period of the award.
The Company granted 389,102 stock options with a fair value $6.8 million during the Current Successor Period. Total expense recorded for stock options for the three months ended September 30, 2017 and the Current Successor Period was $0.8 million and $3.5 million. As of September 30, 2017, unrecognized compensation cost was $3.0 million and will be amortized through 2020.
The options were valued using a Black-Scholes Model using the following assumptions:
Expected volatility
52.1
%
Expected dividends
%
Expected term (years)
6.0

Risk-free interest rate
1.96
%
Expected volatility is based on an average historical volatility of a peer group selected by management over a period consistent with the expected life assumption on the grant date. The risk-free rate of return is based on the U.S. Treasury constant maturity yield on the grant date with a remaining term equal to the expected term of the awards. The Company’s expected life of stock option awards is derived from the midpoint of the average vesting time and contractual term of the awards.
A summary of the status and activity of non-vested stock options for the Current Successor Period is presented below:
 
Stock Options
 
Weighted-
Average
Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at beginning of Current Successor Period

 
$

 

 
$

Granted
389,102

 
34.36

 

 
$

Exercised

 

 

 

Forfeited
(152,905
)
 
34.36

 
6.0

 
$

Outstanding at end of Current Successor Period
236,197

 
$
34.36

 
6.0

 
$


A summary of additional information related to options outstanding as of September 30, 2017 is presented below:
Exercise Price
Number of Options Outstanding and Exercisable
Weighted-Average Remaining Contractual Life (in days)
$34.36
35,196
54

20


NOTE 9 - FAIR VALUE MEASUREMENTS
The Company follows fair value measurement authoritative guidance, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The authoritative accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1: Quoted prices are available in active markets for identical assets or liabilities 
Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable
Level 3: Significant inputs to the valuation model are unobservable
Financial and non-financial assets and liabilities are to be classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
There were no financial or non-financial assets or liabilities recorded at fair value as of September 30, 2017. The following table presents the Company’s financial and non-financial assets and liabilities that were accounted for at fair value as of December 31, 2016 and their classification within the fair value hierarchy (in thousands):
 
Predecessor
 
As of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Unproved properties(1)
$

 
$

 
$
162,682

Asset retirement obligations(2)
$

 
$

 
$
3,145

____________________________
(1)
Represents non-financial assets that are measured at fair value on a nonrecurring basis. Please refer to the Unproved Oil and Gas Properties sections below for additional discussion.
(2)
Represents the revision to estimates of the asset retirement obligation, which is a non-financial liability that is measured at fair value on a nonrecurring basis. Please refer to the Asset Retirement Obligation section below for additional discussion.
Proved Oil and Gas Properties
Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs exceed the sum of the undiscounted cash flows. Depending on the availability of data, the Company uses Level 3 inputs and either the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of risk-adjusted discount rates and price forecasts selected by the Company’s management, or the market valuation approach. The calculation of the risk-adjusted discount rate is a significant management estimate based on the best information available. Management believes that the risk-adjusted discount rate is representative of current market conditions and reflects the following factors: (i) estimates of future cash payments; (ii) expectations of possible variations in the amount and/or timing of cash flows; and (iii) the risk premium and nonperformance risk. The price forecast is based on the Company's internal budgeting model derived from the NYMEX strip pricing, adjusted for management estimates and basis differentials. Future operating costs are also adjusted as deemed appropriate for these estimates. Proved properties classified as held for sale are valued using a market approach, based on an estimated selling price, as evidenced by the most current bid prices received from third parties. If a relevant estimated selling price is not available, the Company utilizes the income valuation technique discussed above. There were no proved property impairments during the nine months ended September 30, 2017. The Company impaired its oil and gas properties in the Mid-Continent region, which had a carrying value of $110.0 million to its fair value of $100.0 million, and recognized an impairment of $10.0 million for the year ended December 31, 2016.

21


Upon emergence from bankruptcy, the Company valued its proved oil and gas properties at $500.5 million, which has subsequently been depleted.
Unproved Oil and Gas Properties
 Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be fully recoverable. To measure the fair value of unproved properties, the Company uses Level 3 inputs and the income valuation technique, which takes into account the following significant assumptions: future development plans, risk weighted potential resource recovery, remaining lease life and estimated reserve values. There were no unproved oil and gas property impairments during the nine months ended September 30, 2017. The Company impaired non-core acreage in the Wattenberg Field due to leases expiring, which had a carrying value of $187.4 million to their fair value of $162.7 million, and recognized an impairment of unproved properties for the year ended December 31, 2016 of $24.7 million.
Upon emergence from bankruptcy, the Company valued its unproved oil and gas properties at $178.5 million, which has subsequently increased due to acquired acreage in the Current Successor Period.
Asset Retirement Obligation
The Company utilizes the income valuation technique to determine the fair value of the asset retirement obligation liability at the point of inception by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Upon completion of wells and natural gas plants, the Company records an asset retirement obligation at fair value using Level 3 assumptions. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. There were no asset retirement obligations measured at fair value as of September 30, 2017. The Company had $3.1 million of asset retirement obligations recorded at fair value as of December 31, 2016.
Upon emergence from bankruptcy, the Company valued its asset retirement obligations at $29.1 million, which has subsequently been accreted.
Long-term Debt
Upon emergence from bankruptcy, the Company's Senior Notes were canceled and the predecessor revolving credit facility was paid in full.
The fair value of the 6.75% Senior Notes and 5.75% Senior Notes as of December 31, 2016 was $371.9 million and $222.0 million, respectively. The Senior Notes were measured using Level 1 inputs based on a secondary market trading price. The outstanding balance under the predecessor revolving credit facility as of December 31, 2016 was $191.7 million, which approximates fair value as the applicable interest rates are floating.  
NOTE 10 - ASSET RETIREMENT OBLIGATIONS
The Company recognizes an estimated liability for future costs to abandon its oil and gas properties. The fair value of the asset retirement obligation is recorded as a liability when incurred, which is typically at the time the asset is acquired or placed in service. There is a corresponding increase to the carrying value of the asset which is included in the proved properties line item in the accompanying balance sheets. The Company depletes the amount added to proved properties and recognizes expense in connection with accretion of the discounted liability over the remaining estimated economic lives of the properties.
The Company’s estimated asset retirement obligation liability is based on historical experience in abandoning wells, estimated economic lives, estimated costs to abandon the wells and regulatory requirements. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred; the rate ranges from 8% to 18% for the Predecessor Company and is 7.29% for the Successor Company.
    

22


Upon the Company's emergence from bankruptcy, as discussed in Note 3 - Chapter 11 Proceedings and Emergence and Note 4 - Fresh-Start Accounting, the Company applied fresh-start accounting. This included adjusting the asset retirement obligations based on the estimated fair values at April 28, 2017. The following provides a roll-forward of our asset retirement obligations (in thousands):
Beginning balance as of December 31, 2016 (Predecessor)
$
30,833

Liabilities settled
 
(218
)
Accretion expense
 
1,045

Ending balance as of April 28, 2017 (Predecessor)
$
31,660

 
 
 
Fair value fresh-start adjustment
$
(2,599
)
 
 
 
 
 
 
Beginning balance as of April 29, 2017 (Successor)
$
29,061

Liabilities settled
 
(936
)
Accretion expense
 
848

Ending balance as of September 30, 2017 (Successor)
$
28,973

Revisions to the liability could occur due to changes in the estimated economic lives, abandonment costs of the wells, inflation rates, credit-adjusted risk-free rates, and newly enacted regulatory requirements.
NOTE 11 - DERIVATIVES
The Company enters into commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. The Company’s derivatives include oil and gas swap arrangements and cashless collars, none of which qualify as having hedging relationships for accounting purposes.
Due to the Company being in default on the predecessor revolving credit facility, all of the Company's previous derivative contracts were terminated during the fourth quarter of 2016.
    
















23


As of September 30, 2017, the Company had entered into the following commodity derivative contracts:
 
 
Crude Oil
(NYMEX WTI)
 
Natural Gas
(NYMEX Henry Hub)
 
 
Bbls/day
 
Weighted Avg. Price per Bbl
 
MMBTU/day
 
Weighted Avg. Price per MMBTU
4Q17
 
 
 
 
 
 
 
 
Cashless Collar
 
2,000

 
$41.50/$51.00
 
2,600

 
$3.00/$3.30
Swap
 
2,000

 
$51.86
 

 
1Q18
 
 
 
 
 
 
 
 
Cashless Collar
 
2,000

 
$42.00/$52.50
 
5,600

 
$2.75/$3.43
Swap
 
2,000

 
$51.61
 
6,000

 
$3.36
2Q18
 
 
 
 
 
 
 
 
Cashless Collar
 
2,000

 
$42.00/$52.50
 
5,600

 
$2.75/$3.43
Swap
 
2,000

 
$51.61
 

 
3Q18
 
 
 
 
 
 
 
 
Cashless Collar
 
2,000

 
$43.00/$53.50
 
5,600

 
$2.75/$3.43
Swap
 
1,000

 
$51.15
 

 
4Q18
 
 
 
 
 
 
 
 
Cashless Collar
 
2,000

 
$43.00/$53.50
 
5,600

 
$2.75/$3.43
Swap
 
1,000

 
$51.15
 

 
1Q19
 
 
 
 
 
 
 
 
Cashless Collar
 
2,000

 
$43.00/$54.53
 
2,600

 
$2.75/$3.40
Q219
 
 
 
 
 
 
 
 
Cashless Collar
 
1,330

 
$44.01/$54.79
 
857

 
$2.75/$3.40
Derivative Assets Fair Value
 
The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities.
 
The following table contains a summary of all the Company’s derivative positions reported on the accompanying balance sheets as of September 30, 2017 and December 31, 2016:
 
 
 
As of September 30, 2017
 
As of December 31, 2016
 
Balance Sheet Location
 
Fair Value
 
Fair Value
 
 
 
(in thousands)
 
(in thousands)
Derivative Assets:
 
 
 
 
 

Commodity contracts
Current assets
 
$
48

 
$

Commodity contracts
Noncurrent assets
 
6

 

Derivative Liabilities:
 
 
 
 
 

Commodity contracts
Current liabilities
 
(2,044
)
 

Commodity contracts
Long-term liabilities
 
(772
)
 

Total derivative liabilities, net
 
 
$
(2,762
)
 
$






24


The following tables summarizes the components of the derivative gain (loss) presented on the accompanying statements of operations for the periods below (in thousands):
 
Successor
Successor
 
 
Predecessor
Predecessor
Predecessor
 
Three Months Ended September 30, 2017
April 29, 2017 through September 30, 2017
 
 
January 1, 2017 through April 28, 2017
Three Months Ended September 30, 2016
Nine Months Ended September 30, 2016
Derivative cash settlement gain:
 
 

 
 
 

 
 
Oil contracts
$

$

 
 
$

$
4,348

$
15,749

Gas contracts


 
 



Total derivative cash settlement gain(1)
$

$

 

$

$
4,348

$
15,749

 
 
 
 
 
 
 
 
Change in fair value loss
$
(2,762
)
$
(2,762
)
 
 
$

$
(2,142
)
$
(27,473
)
 
 
 
 
 
 
 
 
Total derivative gain (loss)(1)
$
(2,762
)
$
(2,762
)
 

$

$
2,206

$
(11,724
)
_______________________________
(1)
Total derivative gain (loss) and total derivative cash settlement gain for the Current Successor Period, Current Predecessor Period and Prior Predecessor Period is reported in the derivative loss line item and derivative cash settlements line item on the accompanying statements of cash flows within cash flows from operating activities. 
Subsequent to quarter end, the Company entered into a 1,000 barrels per day oil swap contract at $52.77 per barrel for the time period of July 2018 through December 2018.
NOTE 12  - EARNINGS PER SHARE
The Predecessor Company issued shares of restricted stock, which were participating securities, and performance stock units (“PSUs”). The dilutive impact of the restricted stock and PSUs were included in the Current Predecessor Period and the three and nine months ended September 30, 2016.
The Successor Company issued restricted stock units which represent the right to receive, upon vesting, one share of the Company's new common stock. The Successor Company issued stock options and warrants, which both represent the right to purchase the Company's new common stock at a specified price. The number of potentially dilutive shares related to the stock options is based on the number of shares, if any, that would be exercised at the end of the respective reporting period, assuming that date was the end of such stock options term. The number of potentially dilutive shares related to the warrants is based on the number of shares, if any, that would be exercisable at the end of the respective reporting period.
Please refer to Note 8 - Stock-Based Compensation for additional discussion.
The RSUs, stock options and warrants of the Successor Company are all non-participating securities, and therefore, the Company used the treasury stock method to calculate earnings per share as shown in the following table (in thousands, except per share amounts):
 
Successor
Successor
 
Three Months Ended September 30, 2017
April 29, 2017 through September 30, 2017
Net income
$
4,328

$
748

 
 
 
Basic net income per common share
$
0.21

$
0.04

 
 
 
Diluted net income per common share
$
0.21

$
0.04

 
 
 
Weighted-average shares outstanding - basic
20,439

20,410

Add: dilutive effect of contingent stock awards
8

28

Weighted-average shares outstanding - diluted
20,447

20,438

There were 628,872 and 628,897 anti-dilutive shares in the three months ended September 30, 2017 and Current Successor Period, respectively.
The Predecessor Company issued restricted stock, which are participating securities, and PSUs, and therefore, the Company used the two-class method to calculate earnings per share as shown in the following table (in thousands, except per share amounts):

25


 
Predecessor
 
January 1, 2017 through April 28, 2017
Three Months Ended September 30, 2016
Nine Months Ended September 30, 2016
Net income (loss)
$
2,660

$
(34,902
)
$
(131,616
)
Less: undistributed income to unvested restricted stock
120



Undistributed income (loss) to common shareholders
2,540

(34,902
)
(131,616
)
Basic net income (loss) per common share
$
0.05

$
(0.71
)
$
(2.67
)
Diluted net income (loss) per common share
$
0.05

$
(0.71
)
$
(2.67
)
 
 
 
 
Weighted-average shares outstanding - basic
49,559

49,324

49,244

Add: dilutive effect of contingent stock awards
1,412



Weighted-average shares outstanding - diluted
50,971

49,324

49,244

The Company was in a net loss position for the three and nine months ended September 30, 2016, which made any potentially dilutive shares anti-dilutive. There were 258,126, 425,761 and 569,943 anti-dilutive shares in the Current Predecessor Period and the three and nine months ended September 30, 2016, respectively. The participating shareholders are not contractually obligated to share in the losses of the Company, and therefore, the entire net loss is allocated to the outstanding common shareholders.
NOTE 13 - INCOME TAXES
The Company uses the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate in effect at that time. During the periods presented within this report for 2017 and 2016, the effective tax rate was zero percent. As of December 31, 2015, and thereafter, a full valuation allowance was placed against the net deferred tax assets causing the Company’s current rate to differ from the U.S. statutory income tax rate.
As of September 30, 2017, the Company had no unrecognized tax benefits. The Company’s management does not believe that there are any new items or changes in facts or judgments that would impact the Company's tax position taken thus far in 2017.
As described in Note 3 - Chapter 11 Proceedings and Emergence above, in accordance with the Plan, our Senior Notes were canceled and exchanged for new common stock. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideratio