NOTES TO FINANCIAL STATEMENTS
Note 1 – Organization and Nature
of Business
Effective April 2, 2012, Ante5, Inc. changed
its corporate name to Black Ridge Oil & Gas, Inc., and continues to be quoted on the OTCQB under the trading symbol “ANFC”.
Black Ridge Oil & Gas, Inc. (formerly Ante5, Inc.) (the “Company”) became an independent company in April 2010.
We became a publicly traded company when our shares began trading on July 1, 2010. Since October 2010, we had been engaged
in the business of acquiring oil and gas leases and participating in the drilling of wells in the Bakken and Three Forks trends
in North Dakota and Montana.
On June 21, 2016 we closed on a debt restructuring
transaction with our secured lenders as described in Note 3 – Debt Restructuring. Following the transaction, our focus has
been managing the oil and gas assets in which we continue to have an indirect minority interest. Our management services agreement
related to those same oil and gas assets was terminated as described in Note 18 – Subsequent Events. In addition, we will
continue to pursue distressed asset acquisitions in the Bakken and/or Three Forks and other formations that may be acquired with
our existing joint venture partners or other capital providers.
Note 2
–
Summary
of Significant Accounting Policies
Basis of
Accounting
Our financial statements are prepared using
the accrual method of accounting as generally accepted in the United States of America (U.S. GAAP) and the rules of the Securities
and Exchange Commission (SEC).
Reclassifications
In the current year, the
Company classified assets and liabilities subject to our restructuring transaction outline in Note 3 - Debt Restructuring as
assets and liabilities from discontinued operations in the balance sheet and income, expense and cash flows from the
restructured operations are shows as net income and cash flows from discontinued operations. For comparative purposes,
amounts from prior periods have been reclassified to conform to current year presentation.
Segment Reporting
FASB ASC 280-10-50 requires
annual and interim reporting for an enterprise’s operating segments and related disclosures about its products, services,
geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business
activities from which it may earn revenues and expenses, and about which separate financial information is regularly evaluated
by the chief operating decision maker in deciding how to allocate resources. The Company operates as a single segment and will
evaluate additional segment disclosure requirements as it expands its operations.
Use
of 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
The oil and gas industry is subject, by its
nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial losses from environmental
accidents or events which would have a material effect on the Company.
Cash and Cash Equivalents
Cash equivalents include money market
accounts which have maturities of three months or less. For the purpose of the statements of cash flows, all highly liquid
investments with an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are
stated at cost plus accrued interest, which approximates market value. The Company had no cash equivalents on hand as of
December 31, 2016 and December 31, 2015.
Cash in Excess of FDIC Insured Limits
The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation
(FDIC) up to $250,000, under current regulations. The Company did not have any funds in excess of FDIC insured limits at December 31,
2016 and 2015. The Company has not experienced any losses in such accounts.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Debt Issuance
Costs
Costs relating to obtaining certain debts
are capitalized and amortized over the term of the related debt using the straight-line method, which approximates the
effective interest method. The Company paid $-0- and $50,000 of debt issuance costs during the years ended
December 31, 2016 and 2015, respectively, of which the unamortized balance of debt issuance costs at
December 31, 2016 and 2015 was $-0- and $-0-, respectively. Amortization of debt issuance costs charged to interest
expense was $-0- and $751,019 for the years ended December 31, 2016 and 2015, respectively. Interest expense
related to debt issuance costs is reflected as part of loss from discontinued operations on the statement of operations. When
a loan is paid in full or becomes due on demand due to a default on the loan, as was the case at December 31, 2015, any
unamortized financing costs are removed from the related accounts and charged to interest expense.
Website Development Costs
The Company accounts for website development
costs in accordance with ASC 350-50, “Accounting for Website Development Costs” (“ASC 350-50”), wherein
website development costs are segregated into three activities:
|
1)
|
Initial stage (planning), whereby the related costs are expensed.
|
|
2)
|
Development (web application, infrastructure, graphics), whereby the related costs are capitalized
and amortized once the website is ready for use. Costs for development content of the website may be expensed or capitalized depending
on the circumstances of the expenditures.
|
|
3)
|
Post-implementation (after site is up and running: security, training, admin), whereby the related
costs are expensed as incurred. Upgrades are usually expensed, unless they add additional functionality.
|
We have capitalized a total of $56,660 of website
development costs from inception through December 31, 2016. We have recognized depreciation expense on these website
costs of $-0- and $257 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, all
website development costs have been fully depreciated.
Income Taxes
The Company recognizes deferred tax assets
and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting
Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of
this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts
of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value
primarily due to the short term nature of the instruments.
The Company had no items that required fair
value measurement on a recurring basis.
Property and Equipment
Property and equipment are recorded at cost
and depreciated using the straight-line method over their estimated useful lives of three to seven years. Expenditures for replacements,
renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Long-lived assets are
evaluated for impairment to determine if current circumstances and market conditions indicate the carrying amount may not be recoverable.
The Company has not recognized any impairment losses on long-lived assets related to continuing operations. Depreciation expense
was $14,271 and $16,295 for the years ended December 31, 2016 and 2015, respectively.
Revenue Concentration
All of the Company’s revenue earned
from continuing operations has come from management fees earned through its management services agreement with Black Ridge Holding
Company, LLC (“BRHC”), which was formed as part of our debt restructuring. Our former secured lenders are the majority
owners of BRHC and we continue to have a minority interest in BRHC. The management services agreement was cancelled by BRHC subsequent
to year end as describe in Note 18 – Subsequent Events.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Revenue Recognition
The Company recognizes management fee income
as services are provided.
The Company recognized oil and gas revenues
from its former interests in producing wells when production was delivered to, and title was transferred to, the purchaser and
to the extent the selling price is reasonably determinable. The Company used the sales method of accounting for gas balancing of
gas production and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance
situation. Oil and gas revenues are reflected as a component of discontinued operations on the statements of operations.
Asset Retirement Obligations
The Company records the fair value of a liability
for an asset retirement obligation in the period in which the well is spud or the asset is acquired and a corresponding increase
in the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. The capitalized cost and asset retirement obligation as of December 31, 2015 and the expense
related to accretion of the discount on the asset retirement liability are reflected as component of discontinued operations on
the balance sheet and statement of operations.
Full Cost Method
The Company followed the full cost method of
accounting for oil and gas operations whereby all costs related to the exploration and development of oil and natural gas properties
are initially capitalized into a single cost center ("full cost pool"). Such costs include land acquisition costs, geological
and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and
exploration activities. Internal costs that are capitalized are directly attributable to acquisition, exploration and development
activities and do not include costs related to the production, general corporate overhead or similar activities. Costs associated
with production and general corporate activities were expensed in the period incurred. Capitalized costs are summarized as follows
for the years ended December 31, 2016 and 2015, respectively:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Capitalized Certain Payroll and Other Internal Costs
|
|
$
|
–
|
|
|
$
|
–
|
|
Capitalized Interest Costs
|
|
|
7,219
|
|
|
|
362,075
|
|
Total
|
|
$
|
7,219
|
|
|
$
|
362,075
|
|
Proceeds from property sales were credited
to the full cost pool, with no gain or loss recognized, unless such a sale significantly altered the relationship between capitalized
costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 20% or more
of the proved reserves related to a single full cost pool. During the year ended December 31, 2016, the Company sold
approximately 14 net leasehold acres of oil and gas properties for proceeds of $94,268. During the year ended December 31, 2015,
the Company sold approximately 14 net acres and rights to individual well bores for total proceeds of $127,348. The Company
assesses all items classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The assessment
includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved
reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred
to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are
then subject to amortization.
Capitalized costs associated with impaired
properties and properties having proved reserves, estimated future development costs, and asset retirement costs under FASB ASC
410-20-25 are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves as determined
by independent petroleum engineers. The costs of unproved properties are withheld from the depletion base until such time as they
are either developed or abandoned.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Capitalized costs of oil and natural gas properties
(net of related deferred income taxes) may not exceed an amount equal to the present value, discounted at 10% per annum, of the
estimated future net cash flows from proved oil and gas reserves plus the cost of unproved properties (adjusted for related income
tax effects). Should capitalized costs exceed this ceiling, impairment is recognized. The present value of estimated future net
cash flows is computed by applying the arithmetic average first day price of oil and natural gas for the preceding twelve months
to estimated future production of proved oil and gas reserves as of the end of the period, less estimated future expenditures to
be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions. Such present
value of proved reserves' future net cash flows excludes future cash outflows associated with settling asset retirement obligations.
Should this comparison indicate an excess carrying value, the excess is charged to earnings as an impairment expense.
As a result of currently
prevailing low commodity prices and their effect on the proved reserve values of properties throughout 2015 and 2016, we recorded
non-cash ceiling test impairments of $5,219,000 and $71,272,000 for the years ended December 31, 2016 and 2015, respectively. The
impairment charges affected our reported net income but did not reduce our cash flow.
The impairment charges are reflected
as component of discontinued operations on the statement of operations.
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”)
are computed by dividing net income (the numerator) by the weighted average number of common shares outstanding for the period
(the denominator). Diluted EPS is computed by dividing net income by the weighted average number of common shares and potential
common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants and restricted
stock. The number of potential common shares outstanding relating to stock options, warrants and restricted stock is computed using
the treasury stock method.
The reconciliation of the denominators used
to calculate basic EPS and diluted EPS for the years ended December 31, 2016 and 2015 are as follows:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average common shares outstanding – basic
|
|
|
47,979,990
|
|
|
|
47,979,990
|
|
Plus: Potentially dilutive common shares:
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
–
|
|
|
|
–
|
|
Weighted average common shares outstanding – diluted
|
|
|
49,979,990
|
|
|
|
49,979,990
|
|
For 2016 and 2015, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. Stock
options and warrants excluded from the calculation of diluted EPS because their effect was anti-dilutive were 10,957,000 and
15,603,375 as of December 31, 2016 and 2015, respectively.
Stock-Based Compensation
Under FASB ASC 718-10-30-2, all share-based
payments to employees, including grants of employee stock options, are to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. Amortization of the fair values of stock options issued for services
and compensation totaled $626,602 and $623,700 for the years ended December 31, 2016 and 2015, respectively. The
fair values of stock options were determined using the Black-Scholes options pricing model and an effective term of 6 to 6.5 years
based on the weighted average of the vesting periods and the stated term of the option grants and the discount rate on 5 to 7 year
U.S. Treasury securities at the grant date and are being amortized over the related implied service term, or vesting period.
Uncertain Tax Positions
In accordance with ASC 740, “Income Taxes”
(“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the
position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Various taxing authorities can periodically
audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions,
including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures
connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable
exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and
fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position
relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Recent Accounting Pronouncements
From time to time,
new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") that are adopted by the
Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards,
which are not yet effective, will not have a material impact on the Company's financial statements upon adoption.
In December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. This guidance updates narrow
aspects of the guidance issued in Update 2014-09. This amendment is effective for periods after December 15, 2017, with early adoption
permitted. The Company is in the process of evaluating the impact of this ASU on our financial statements.
In August, 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(a consensus of the Emerging Issues Task Force). The amendments are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects
early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the method of adoption
and impact this standard will have on its financial statements and related disclosures.
In March, 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
For public business
entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim
periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual
period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning
of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in
the same period. The Company is currently evaluating the method of adoption and impact this standard will have on its financial
statements and related disclosures.
In March, 2016, the FASB issued ASU No. 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
(a consensus of the Emerging
Issues Task Force). For public business entities, the amendments are effective for financial statements issued for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities,
the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods
within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If
an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal
year that includes that interim period. The Company is currently evaluating the method of adoption and impact this standard will
have on its financial statements and related disclosures.
In March, 2016, the FASB issued ASU No. 2016-05,
Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
(a
consensus of the Emerging Issues Task Force). For public business entities, the amendments are effective for financial statements
issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities,
the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods
within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The
Company is currently evaluating the method of adoption and impact this standard will have on its financial statements and related
disclosures.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 3 – Debt Restructuring
On March 29, 2016, the Company entered into
an Asset Contribution Agreement with Black Ridge Holding Company, LLC, a Delaware limited liability company (“BRHC”)
which was recently formed by the Company to contribute and assign to BRHC, all of the Company's (i) oil and gas assets (including
working capital and tangible and intangible assets) (the “Assets”), (ii) outstanding balances under that certain Credit
Agreement between the Company, as borrower, and Cadence Bank, N.A. (“Cadence”), as lender (the “Cadence Credit
Facility”) and the outstanding balances under that certain Credit Agreement between the Company, as borrower, and the several
banks and other financial institutions or entities from time to time parties thereto (the “Chambers”), and Chambers,
as administrative agent (the “Chambers Credit Facility”) and (iii) all current liabilities related to the Assets,
in exchange for 5% of the issued and outstanding Class A Units (the “Class A Units”) in BRHC (the “Asset Contribution”).
On March 29, 2016, affiliates of Chambers Energy Management, LP (“Chambers”) (specifically, Chambers Energy Capital
II, LP and CEC II TE, LLC (collectively, the “Chambers Affiliates”)) entered into a Debt Contribution Agreement between
BRHC and the Chambers Affiliates, pursuant to which BRHC issued a number of Class A Units representing 95% of the Class A Units
of BRHC to the Chambers Affiliates in exchange for the release of BRHC's obligations under the Chambers Credit Facility (the “Satisfaction
of Debt” and, together with the Asset Contribution, the “BRHC Transaction”). Concurrent with the Satisfaction
of Debt, each warrant originally issued with the Chambers Credit Facility was automatically retired and cancelled. The closing
of the BRHC Transaction was subject to the Company obtaining the approval of stockholders holding a majority of its outstanding
capital stock and to the Company having assigned the Cadence Credit Agreement to BRHC with Cadence’s consent, and BRHC and
Cadence entering into any applicable amendment agreements related to such assignment and waiver of financial covenant ratio compliance
for the quarter ended December 31, 2015 and quarter ending March 31, 2016.
On June 21, 2016,
the Company satisfied all of these conditions and, for accounting purposes, the BRHC Transaction was closed. The parties have
agreed that the BRHC Transaction, the Asset Contribution and the Satisfaction of Debt are effective, for valuation purposes, as
of April 1, 2016.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The terms of the Class A Units of BRHC are
set forth in the limited liability company agreement of BRHC (the “LLC Agreement”), which became effective upon the
closing of the BRHC Transaction. All distributions by BRHC of cash or other property, and whether upon liquidation or otherwise,
will be made as follows:
|
·
|
First, 100% to the Class A Members, pro rata, until each Class A Member has received distributions
in aggregate totaling the then Class A Preference, which is an amount equal to a 10.0% internal rate of return on the invested
capital amount.
|
|
·
|
Second, 90% to the Class A Members, pro rata, and 10% to the Class B Members, pro rata, until such
time as the aggregate distributions to Chambers equals 250% of the capital contribution of its Class A Units.
|
|
·
|
Third, 80% to the Class A Members, pro rata, and 20% to the Class B Members, pro rata.
|
BRHC will be managed by the BRHC Board, which
will be responsible for the conduct of the day-to-day business of BRHC and the management, oversight and disposition of the assets
of BRHC. The initial BRHC Board will be comprised of three managers, consisting of two managers appointed by Chambers and one member
from the Company.
In addition, under the LLC Agreement, Chambers
committed to contribute up to $30 million cash (the “Chambers Investment Commitment”) to BRHC in exchange for Class
A Units. At Closing, Chambers funded $10 million (the “Initial Chambers Investment”) of the Chambers Investment Commitment,
the proceeds of which were used to reduce outstanding amounts owed by BRHC to Cadence under the Cadence Credit Facility and for
general corporate purposes. The remaining $20 million (the “Subsequent Chambers Investment”), subject to certain conditions,
may be called from time to time during the Investment Period by the board of managers of BRHC (the “BRHC Board”). The
Initial Chambers Investment and any Subsequent Chambers Investment shall serve to proportionately reduce the Company's Class A
Units percentage ownership in BRHC. The investment period shall be the lesser of three years or such time as the entire Chambers
Investment Commitment has been called by the BRHC Board (the “Investment Period”). Any portion of Chambers Investment
Commitment not called by the BRHC Board prior to the expiration of the Investment Period will be cancelled. In no event will Chambers
be required to make a capital contribution in an amount in excess of its undrawn commitment.
The Company was granted 1,000,000 Class B Units
in BRHC at the Closing of the BRHC Transaction. At the discretion of the BRHC’s Board of Managers, the Company may be granted
additional Class B Units in BRHC, and in turn, the Company may transfer such Class B Units to certain members of the Company's
management. Subject to certain conditions, the Class B Units will entitle the holders to participate in any future distributions
of BRHC after distributions equal to the capital contributions and preferred return have been made to the holders of Class A Units
of BRHC.
At the closing of the BRHC Transaction, the Company entered into a Management Services Agreement with BRHC.
Under the Management Services Agreement, the Company provides services to BRHC with respect to the business operations of BRHC,
including but not limited to locating, investigating and analyzing potential non-operator oil and gas projects and day-to-day
operations related to such projects. The Company is paid a fee under the Management Services Agreement intended to cover the costs
of providing such services and is reimbursed for certain third party expenses. The term of the Management Services Agreement commenced
on the closing of the BRHC Transaction and continued indefinitely, unless terminated, which required a three month notice by the
terminating party. The management services agreement was terminated by BRHC subsequent to year end as describe in Note 18 –
Subsequent Events.
As a result of the transaction, the Company
recorded a gain on debt restructuring of $41,621,150 calculated as the difference between our final ownership interest in BRHC,
after conversion of debt to equity and the equity contribution of the Initial Chambers Investment within BRHC and our retention
of a 3.88% ownership interest in BRHC, and the net book value of the assets and labilities we transferred to BRHC.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The income
and expense for the associated with the operating activities (through June 21, 2016, the date of the BRHC transaction) contributed
in the BRHC Transaction are reflected as “Loss from discontinued items, net of income taxes” on our condensed statement
of operations for all periods presented herein. The items included in “Loss from discontinued operations, net of income taxes”
are as follows:
|
|
For the Year
|
|
|
|
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$
|
5,539,613
|
|
|
$
|
15,104,629
|
|
Gain on settled derivatives
|
|
|
1,043,026
|
|
|
|
11,477,653
|
|
Loss on the mark-to-market of derivatives
|
|
|
(4,288,736
|
)
|
|
|
(6,425,345
|
)
|
Total revenues
|
|
|
2,293,903
|
|
|
|
20,156,937
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Production expenses
|
|
|
1,400,639
|
|
|
|
3,767,444
|
|
Production taxes
|
|
|
568,028
|
|
|
|
1,574,110
|
|
General and administrative
|
|
|
476,461
|
|
|
|
421,189
|
|
Depletion of oil and gas properties
|
|
|
3,114,347
|
|
|
|
9,278,108
|
|
Impairment of oil and gas properties
|
|
|
5,219,000
|
|
|
|
71,272,000
|
|
Accretion of discount on asset retirement obligations
|
|
|
16,258
|
|
|
|
32,574
|
|
Total operating expenses
|
|
|
10,794,733
|
|
|
|
86,345,425
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(8,500,830
|
)
|
|
|
(66,188,488
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,696,544
|
)
|
|
|
(8,136,248
|
)
|
Total other income (expense)
|
|
|
(1,696,544
|
)
|
|
|
(8,136,248
|
)
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(10,197,374
|
)
|
|
|
(74,324,736
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
–
|
|
|
|
6,593,040
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,197,374
|
)
|
|
$
|
(67,731,696
|
)
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The assets
and liabilities subject to the BRHC Transaction have been retroactively reclassified as assets and liabilities from discontinued
operations on the Company’s balance sheet as of December 31, 2015.
Assets
and liabilities reclassified as assets and liabilities from discontinued operations as of December 31, 2015 consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Assets from discontinued operations, current
|
|
|
|
|
Derivative instruments
|
|
$
|
1,154,400
|
|
Accounts receivable
|
|
|
5,038,146
|
|
Total assets from discontinued operations, current
|
|
|
6,192,546
|
|
|
|
|
|
|
Assets from discontinued operations, long term
|
|
|
|
|
Oil and natural gas properties, full cost method of accounting
|
|
|
|
|
Proved properties
|
|
|
131,168,906
|
|
Unproved properties
|
|
|
10,394
|
|
Total oil and natural gas properties, full cost method of accounting
|
|
|
131,179,300
|
|
Less, accumulated depletion and allowance for impairment
|
|
|
(99,371,070
|
)
|
Total assets from discontinued operations, long term
|
|
|
31,808,230
|
|
|
|
|
|
|
Total assets from discontinued operations
|
|
$
|
38,000,776
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Liabilities from discontinued operations, current
|
|
|
|
|
Accounts payable
|
|
$
|
7,882,737
|
|
Accrued expenses
|
|
|
56,541
|
|
Current portion of revolving credit facility and long term debt
|
|
|
60,350,629
|
|
Total liabilities from discontinued operations, current
|
|
|
68,289,907
|
|
|
|
|
|
|
Liabilities from discontinued operations, long term
|
|
|
|
|
Asset retirement obligations
|
|
|
368,089
|
|
Total liabilities from discontinued operations, long term
|
|
|
368,089
|
|
|
|
|
|
|
Total liabilities from discontinued operations
|
|
$
|
68,657,996
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 – Prepaid Expenses
Prepaid expenses consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Prepaid insurance
|
|
$
|
43,324
|
|
|
$
|
8,611
|
|
Prepaid employee benefits
|
|
|
11,844
|
|
|
|
10,424
|
|
Prepaid office and other costs
|
|
|
31,724
|
|
|
|
18,065
|
|
Total prepaid expenses
|
|
$
|
86,892
|
|
|
$
|
37,100
|
|
Note 5 – Related Party
During the years ended December 31, 2016
and 2015, we granted various awards to our Officers and Directors as compensation for their services. These related party
grants are fully disclosed in Note 14 below.
Other Related Party Transactions
We leased office space on
a month to month basis where the lessor is an entity owned by our former CEO and current Chairman of the Board of Directors, Bradley
Berman. Pursuant to the lease, we occupied approximately 2,813 square feet of office space. We terminated the lease concurrent
with our move to another location on June 30, 2016. The lease had base rents of $2,110 per month, plus common area operations and
maintenance charges, and monthly parking fees of $240 per month, for the period from November 15, 2013 to October 31, 2014, and
was subject to increases of $117 per month beginning November 1, 2014 and for each of the subsequent annual periods. We paid a
total of $36,183 and $69,703 to this entity during the years ended December 31, 2016 and 2015, respectively.
Note 6 – Investment in Black Ridge
Holding Company, LLC
The investment in Black Ridge
Holding Company, LLC represents our equity interest in Black Ridge Holding Company, LLC following the debt restructuring and
related activity as described in Note 3 – Debt Restructuring. We account for the investment using the cost method.
Note 7 – Property and Equipment
Property and equipment at December 31, 2016 and December 31, 2015,
consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Property and equipment
|
|
$
|
140,547
|
|
|
$
|
139,004
|
|
Less: Accumulated depreciation and amortization
|
|
|
(112,128
|
)
|
|
|
(97,857
|
)
|
Total property and equipment, net
|
|
$
|
28,419
|
|
|
$
|
41,147
|
|
All of the oil and gas assets have been classified as non-current
assets from discontinued operations on the balance sheet as of December 31, 2015 as the Company effectively disposed of those assets
as part of the restructuring discussed in Note 3 – Debt Restructuring.
The following table shows depreciation, depletion, and amortization
expense by type of asset:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Depletion of costs for evaluated oil and gas properties
(1)
|
|
$
|
3,114,347
|
|
|
$
|
9,278,108
|
|
Depreciation and amortization of other property and equipment
|
|
|
14,271
|
|
|
|
16,295
|
|
Total depreciation, amortization and depletion
|
|
$
|
3,128,618
|
|
|
$
|
9,294,403
|
|
(1)
Presented as a component of loss
from discontinued operations, net of income taxes.
Impairment of Oil and Gas Properties
As a result of currently prevailing low commodity
prices and their effect on the proved reserve values of properties in 2016, we recorded non-cash ceiling test impairments of $5,219,000
and $71,272,000 for the years ended December 31, 2016 and 2015, respectively. The expense associated with the impairments is presented
as component of loss from discontinued operations, net of income taxes. The impairment charges affected our reported net income
but did not reduce our cash flow.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 8 – Oil and
Natural Gas Properties
The following tables summarize gross and net
productive oil wells by state at June 21, 2016 (prior to their disposition through our debt restructuring) and December 31, 2015.
A net well represents our percentage ownership of a gross well. The following tables do not include wells in which our interest
is limited to royalty and overriding royalty interests. The following tables also do not include wells which were awaiting completion,
in the process of completion or awaiting flow back subsequent to fracture stimulation.
|
|
June 21, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
North Dakota
|
|
|
352
|
|
|
|
10.64
|
|
|
|
344
|
|
|
|
10.58
|
|
Montana
|
|
|
5
|
|
|
|
0.37
|
|
|
|
5
|
|
|
|
0.37
|
|
|
|
|
357
|
|
|
|
11.01
|
|
|
|
349
|
|
|
|
10.95
|
|
The Company’s oil and natural gas properties
consist of all acreage acquisition costs (including cash expenditures and the value of stock consideration), drilling costs and
other associated capitalized costs. As of June 21, 2016 and December 31, 2015, our principal oil and gas assets included
approximately 7,016 and 8,100 net acres, respectively, located in North Dakota and Montana.
The following table summarizes our capitalized
costs for the purchase and development of our oil and natural gas properties for the years ended December 31, 2016 and 2015:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Purchases of oil and natural gas properties and development costs for cash
|
|
$
|
4,858,134
|
|
|
$
|
20,714,004
|
|
Purchase of oil and natural gas properties accrued at period end (prior to disposition)
|
|
|
3,155,016
|
|
|
|
6,899,503
|
|
Purchase of oil and natural gas properties accrued at the beginning of period
|
|
|
(6,899,503
|
)
|
|
|
(9,364,796
|
)
|
Capitalized asset retirement obligations
|
|
|
4,737
|
|
|
|
48,711
|
|
Total purchase and development costs, oil and natural gas properties
|
|
$
|
1,118,384
|
|
|
$
|
18,297,422
|
|
2016 Acquisitions
During 2016, the Company sold, prior to our
debt restructuring, approximately 14 net mineral acres of oil and natural gas properties for total proceeds of $94,628. No
gain or loss was recorded pursuant to the sales.
2016 Disposition in Debt Restructuring
On June 21, 2016 we disposed of all of our
oil and gas properties, with net carrying costs of $24,498,638, as part of our debt restructuring as outlined in Note 3 –
Debt Restructuring.
2015 Acquisitions
During 2015, the Company purchased approximately
9 net mineral acres of oil and natural gas properties in North Dakota and Montana. In consideration for the assignment of
these mineral leases, we paid the sellers a total of approximately $102,928.
2015 Divestitures
During 2015, the Company sold approximately
14 net mineral acres of oil and natural gas properties and rights to individual well bores in North Dakota for total proceeds
of $127,348. No gain or loss was recorded pursuant to the sales.
Undeveloped Acreage Expirations
Prior to our restructuring on June 21, 2016,
we had leases encompassing 1,079 net acres expire with carrying costs of $650,816 that had been reserved and transferred to the
full cost pool subject to depletion in 2015.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 9 – Asset Retirement
Obligation
The Company has asset retirement obligations
(ARO) associated with the future plugging and abandonment of proved properties and related facilities. Under the provisions of
FASB ASC 410-20-25, the fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred
and a corresponding increase in the carrying amount of the related long lived asset. The liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for
an amount other than the recorded amount, a gain or loss is recognized. The Company has no assets that are legally restricted for
purposes of settling asset retirement obligations.
The following table summarizes the Company’s
asset retirement obligation transactions recorded in accordance with the provisions of FASB ASC 410-20-25 during the years ended
December 31, 2016 and 2015:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning asset retirement obligation
|
|
$
|
368,089
|
|
|
$
|
286,804
|
|
Liabilities incurred for new wells placed in production
|
|
|
4,737
|
|
|
|
48,711
|
|
Accretion of discount on asset retirement obligations
|
|
|
16,258
|
|
|
|
32,574
|
|
Liability relieved in debt restructuring
|
|
|
(389,084
|
)
|
|
|
–
|
|
Ending asset retirement obligation
|
|
$
|
–
|
|
|
$
|
368,089
|
|
The ARO as of December 31,
2015 has been reclassified to non-current liabilities from discontinued operations on the balance sheet.
Note 10 – Derivative Instruments
The Company is required to recognize all derivative
instruments on the balance sheet as either assets or liabilities measured at fair value. The Company has not designated its derivative
instruments as hedges for accounting purposes and, as such, marks its derivative instruments to fair value and recognizes the realized
and unrealized changes in fair value in its statements of operations under the captions “Loss on Settled Derivatives”
and “Losses on the mark-to-market of derivatives.”
The Company has utilized swap and collar derivative
contracts to hedge against the variability in cash flows associated with the forecasted sale of crude oil production. While the
use of these derivative instruments limits the downside risk of adverse price movements, their use also limits the upside revenue
potential of upward price movements.
For a fixed price swap contract, the counterparty
is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price and
the Company is required to make a payment to the counterparty if the settlement price for any period is greater than the swap price.
For a collar contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement
period is below the floor price, the Company is required to make a payment to the counterparty if the settlement price for any
settlement period is above the ceiling price and no payment is required by either party if the settlement price for any settlement
period is between the floor price and the ceiling price.
The Company’s derivative contracts are
settled based on reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West Texas
Intermediate (“WTI”) pricing.
As of December 31, 2016, the Company had no
outstanding derivative contracts. As of June 21, 2016 all of our then outstanding derivative contracts, with a mark-to-market liability
valuation of $3,134,336, were transferred to BRHC as part of the debt restructuring.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Derivative Gains and Losses
The following table presents realized and unrealized
gains and losses on derivative instruments for the periods presented:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Realized gain on derivatives:
|
|
|
|
|
|
|
|
|
Crude oil fixed price swaps
|
|
$
|
922,872
|
|
|
$
|
10,325,126
|
|
Crude oil collars
|
|
|
120,154
|
|
|
|
1,152,527
|
|
Realized gain on derivatives, net
|
|
$
|
1,043,026
|
|
|
$
|
11,477,653
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on the mark-to-market of derivatives:
|
|
|
|
|
|
|
|
|
Crude oil fixed price swaps
|
|
$
|
(4,157,491
|
)
|
|
$
|
(5,669,678
|
)
|
Crude oil collars
|
|
|
(131,245
|
)
|
|
|
(755,667
|
)
|
Gain (loss) on the mark-to-market of derivatives, net
|
|
$
|
(4,288,736
|
)
|
|
$
|
(6,425,345
|
)
|
Balance Sheet Offsetting of Derivative Assets
and Liabilities
ASU No 2011-11,
Balance Sheet (Topic 210)-Disclosures
about Offsetting Assets and Liabilities
, requires an entity to disclose information about offsetting arrangements to enable
financial statement users to understand the effects of netting arrangements on an entity’s financial position. The Company
adopted the provision of the standard upon entering into our first derivative contract and has provided the applicable disclosures
below with respect to its derivative instruments.
All of the Company’s derivative contracts
are carried at their fair value in the condensed balance sheets under the captions “Current portion of derivative instruments”
and “Derivative instruments”. Derivative instruments from the same counterparty that are subject to contractual terms
which provide for net settlement are reported on a net basis in the condensed balance sheets. The following tables present the
gross amounts of recognized derivative assets and liabilities, the amounts offset under the netting arrangements with counterparties,
and the resulting net amounts presented in the condensed balance sheets for the periods presented, all at fair value.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
|
Gross
|
|
|
amounts
|
|
|
amounts of
|
|
|
Gross
|
|
|
amounts
|
|
|
amounts of
|
|
|
|
amounts of
|
|
|
offset
|
|
|
assets
|
|
|
amounts of
|
|
|
offset
|
|
|
assets
|
|
|
|
recognized
|
|
|
on balance
|
|
|
on balance
|
|
|
recognized
|
|
|
on balance
|
|
|
on balance
|
|
|
|
assets
|
|
|
sheet
|
|
|
sheet
|
|
|
assets
|
|
|
sheet
|
|
|
sheet
|
|
Commodity derivative assets
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,154,417
|
|
|
$
|
(17
|
)
|
|
$
|
1,154,400
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
amounts
of
recognized
liabilities
|
|
|
Gross
amounts
offset
on balance
sheet
|
|
|
Net
amounts of
liabilities
on balance
sheet
|
|
|
Gross
amounts of
recognized
liabilities
|
|
|
Gross
amounts
offset
on balance
sheet
|
|
|
Net
amounts of
liabilities
on balance
sheet
|
|
Commodity derivative liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The following table reconciles the net amounts
disclosed above to the individual financial statement line items in the condensed balance sheets:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Derivative assets
|
|
$
|
–
|
|
|
$
|
1,154,400
|
|
Noncurrent derivative assets
|
|
|
–
|
|
|
|
–
|
|
Net amount of assets on the balance sheet
|
|
|
–
|
|
|
|
1,154,400
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
–
|
|
|
|
–
|
|
Noncurrent derivative liabilities
|
|
|
–
|
|
|
|
–
|
|
Net amounts of liabilities on the balance sheet
|
|
|
–
|
|
|
|
–
|
|
Total derivative assets, net
|
|
$
|
–
|
|
|
$
|
1,154,400
|
|
Note 11 – Fair Value of Financial
Instruments
Under FASB ASC 820-10-5, fair value is defined
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 (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order
to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets
and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured
at fair value.
The Company has cash and cash equivalents and
a revolving credit facility that must be measured under the fair value standard. The Company’s financial assets and liabilities
are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for
similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves,
etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market
corroborated inputs).
Level 3 - Unobservable inputs that reflect
our assumptions about the assumptions that market participants would use in pricing the asset or liability.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The following schedule summarizes the valuation
of financial instruments at fair value on a recurring basis in the balances sheet as of December 31, 2016 and 2015:
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,269
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Derivative Instruments (crude oil swaps and collars)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total assets
|
|
|
66,269
|
|
|
|
–
|
|
|
|
–
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities and long term debt, net of discounts
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total Liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
66,269
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
228,194
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Derivative Instruments (crude oil swaps and collars)
|
|
|
–
|
|
|
|
1,154,400
|
|
|
|
–
|
|
Total assets
|
|
|
228,194
|
|
|
|
1,154,400
|
|
|
|
–
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities and long term debt, net of discounts
|
|
|
–
|
|
|
|
60,350,629
|
|
|
|
–
|
|
Total Liabilities
|
|
|
–
|
|
|
|
60,350,629
|
|
|
|
–
|
|
|
|
$
|
228,194
|
|
|
$
|
(59,196,229
|
)
|
|
$
|
–
|
|
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the years ended December 31, 2016 and 2015.
Level 2 liabilities include revolving credit
facilities. No fair value adjustment was necessary during the years ended December 31, 2016 and 2015.
Note 12 – Revolving Credit Facilities
and Long Term Debt
The Company, as borrower, entered into a
Credit Agreement dated August 8, 2013 and amendments thereto dated December 13, 2013,
March 24, 2014, April 21, 2014, September 11, 2014, March 30, 2015 and August 10,
2015 (as amended, the “Senior Credit Agreement
”
) with Cadence Bank, N.A. (“Cadence”), as
lender (the “Senior Credit Facility”). Under the terms of the Senior Credit Agreement, a senior secured revolving
line of credit in the maximum aggregate principal amount of $50 million was available from time to time (i) for direct
investment in oil and gas properties, (ii) for general working capital purposes, including the issuance of letters of credit,
and (iii) to refinance the then existing debt under the Company’s former credit facility.
Availability under the Senior Credit Facility
was at all times subject to the then-applicable borrowing base, determined by Cadence in a manner consistent with the normal and
customary oil and gas lending practices of Cadence. Availability was initially set at $7 million and was subject to periodic
redeterminations. Subject to availability under the borrowing base, the Company could borrow, repay and re-borrow funds in amounts
of $250,000 or more. At the Company’s election, the unpaid principal balance of any borrowings under the Senior Credit Facility
may bear interest at either (i) the Base Rate, as defined in the Senior Credit Facility, plus the applicable margin, which varies
from 1.00% to 1.50% or (ii) the LIBOR rate, as defined in the Senior Credit Facility, plus the applicable margin, which varies
from 3.00% to 3.50%. Interest was payable for Base Rate loans on the last business day of the month and for LIBOR loans on the
last LIBOR business day of each LIBOR interest period. The Company was also required to pay a quarterly fee of 0.50% on any unused
portion of the borrowing base, as well as a facility fee of 0.90% of the initial and any subsequent additions to the borrowing
base.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The Senior Credit Facility’s maturity
date of August 8, 2016, was subsequently amended to January 15, 2017 pursuant to the amendment on March 30, 2015.
The Company could prepay the entire amount of Base Rate loans at any time, and could prepay the entire amount of LIBOR loans upon
at least three business days’ notice to Cadence. The Senior Credit Facility was secured by first priority interests in mortgages
on substantially all of the Company’s assets, including but not limited to the Company’s mineral interests in North
Dakota and Montana.
As part of the debt restructuring outline in
Note 3 – Debt Restructuring, the Company transferred the obligation with a balance outstanding of $29,400,000 under the Senior
Credit Facility to BRHC. The Company had borrowings of $27.75 million outstanding under the Senior Credit Agreement as of
December 31, 2015.
Subordinated Credit Facility
The Company, as borrower, entered into a Second
Lien Credit Agreement dated August 8, 2013 and amendments thereto dated December 13, 2013, March 24, 2014,
April 21, 2014, September 11, 2014, March 30, 2015, and August 10, 2015 (as amended, the “Subordinated
Credit Agreement”) by and among the Company, as borrower, Chambers Energy Management, LP, as administrative agent (“Chambers”),
and the several other lenders named therein (the “Subordinated Credit Facility”). Under the Subordinated Credit Facility,
term loans in the aggregate principal amount of up to $75 million were available from time to time (i) to repay the Previous
Credit Facility, (ii) for fees and closing costs in connection with both the Senior Credit Facility and the Subordinated Credit
Facility (together, the “Credit Facilities”), and (iii) general corporate purposes.
The Subordinated Credit Agreement
provided initial commitment availability of $25 million, which was subsequently amended to $30 million, with the
remaining commitments subject to the approval of Chambers and other customary conditions. The Company could borrow the
available commitments in amounts of $5 million or more and could not request borrowings of such loans more than once a
month, provided that the initial draw was at least $15 million. Loans under the Subordinated Credit Facility were funded
net of a 2% OID. The unpaid principal balance of borrowings under the Subordinated Credit Facility bore interest at the Cash
Interest Rate plus the PIK Interest Rate. The Cash Interest Rate was 9.00% per annum plus a rate per annum equal to the
greater of (i) 1.00% and (ii) the offered rate for three-month deposits in U.S. dollars that appears on Reuters Screen LIBOR
01 as of 11:00 a.m. (London time) on the second full LIBOR business day preceding the first day of each calendar quarter. The
PIK Interest Rate was equal to 4.00% per annum. Interest was payable on the last day of each month. The Company was also
required to pay an annual nonrefundable administration fee of $50,000 and a monthly availability fee computed at a rate of
0.50% per annum on the average daily amount of any unused portion of the available amount under the commitment.
The Subordinated Credit Facility matured on
June 30, 2017. Upon at least three business days’ written notice, the Company could prepay the entire amount under
the loans, together with accrued interest. Each prepayment made prior to the second anniversary of the funding date, as defined
in the Subordinated Credit Facility, would be accompanied by a make-whole amount, as defined in the Subordinated Credit Agreement.
Prepayments made on or after the second anniversary of the funding date were accompanied by an applicable premium, as set forth
in the Subordinated Credit Agreement. The Subordinated Credit Facility was secured by second priority interests on substantially
all of the Company’s assets, including but not limited to second priority mortgages on the Company’s mineral interests
in North Dakota and Montana.
The first funding from the Subordinated Credit
Facility occurred on September 9, 2013 at which time we drew $14,700,000, net of a $300,000 original issue discount,
from the Subordinated Credit Agreement and used $10,226,057 of those proceeds to repay and terminate a previously outstanding revolving
credit facility. We had drawn an additional $14,700,000, net of $300,000 original issue discounts, through December 31, 2015. The
Company had borrowings of $30.0 million outstanding under the Subordinated Credit Facility as of December 31, 2015.
The obligations under the Subordinated Credit Facility, $30.0 million of principal and $2,931,369 of PIK interest payable, were
transferred to BRHC and converted to equity in BRHC as part of the debt restructuring outlined in Note 3- Debt Restructuring.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Intercreditor Agreements and Covenants
Cadence and Chambers had entered into an Intercreditor
Agreement dated August 8, 2013 (the “Intercreditor Agreement”). The Intercreditor Agreement provided that
any liens on the assets of the Company securing indebtedness under the Subordinated Credit Facility were subordinate to liens on
the assets securing indebtedness under the Senior Credit Facility and set forth the respective rights, obligations and remedies
of the lenders under the Senior Credit Facility with respect to their first priority liens and the lenders under the Subordinated
Credit Facility with respect to their second priority liens.
The Credit Facilities, as amended, required
customary affirmative and negative covenants for credit facilities of the respective types and sizes for companies operating in
the oil and gas industry, as well as customary events of default. Furthermore, the Credit Facilities contain financial covenants
that required the Company to satisfy certain specified financial ratios. The Senior Credit Agreement required the Company to maintain,
as of the last day of each fiscal quarter of the Company, (i) a collateral coverage ratio (reserve value plus consolidated working
capital to adjusted indebtedness) of at least 0.65 to 1.00 through the quarter ending June 30, 2014, 0.70 to 1.00 for
the quarters ending September 30, 2014 and December 31, 2014, was waived for the quarters ending March 31, 2015
and June 30, 2015, and 0.70 to 1.00 for the quarter ending September 30, 2015, and 0.80 to 1.00 for the quarter
ending December 31, 2015 and thereafter, (ii) a ratio of current assets, including debt facility available to be drawn,
to current liabilities of a minimum of 1.0 to 1.0, except for the quarter ending June 30, 2014, which was waived, (iii)
a net debt to EBITDAX, as defined in the Senior Credit Agreement, ratio of 3.75 to 1.00 for the quarter ended March 31, 2014,
4.25 to 1.00 for the quarters ended June 30, 2014 and September 30, 2014, 4.00 to 1.00 for the quarter ended
December 31, 2014, was waived for the quarters ended March 31, 2015 and June 30, 2015, and 3.50 to 1.00 for
the quarter ending September 30, 2015, and 3.65 to 1.00 for the quarter ending December 31, 2015, and 3.50
to 1.00 for the quarter ending March 31, 2016 and thereafter, in each case calculated on a modified trailing four quarter
basis, (iv) a maximum senior leverage ratio of not more than 2.5 to 1.0 calculated on a modified trailing four quarter basis, and
(v) a minimum interest coverage ratio of not less than 3.0 to 1.0. The Subordinated Credit Agreement required the Company to maintain,
as of the last day of each fiscal quarter of the Company, (i) a collateral coverage ratio (reserve value plus consolidated working
capital to adjusted indebtedness) of at least 0.65 to 1.00 through the quarter ending June 30, 2014, 0.70 to 1.00 for
the quarters ending September 30, 2014 and December 31, 2014, was waived for the quarters ending March 31, 2015
and June 30, 2015, and 0.70 to 1.00 for the quarter ending September 30, 2015, and 0.80 to 1.00 for the quarter ending
December 31, 2015 and thereafter, (ii) a consolidated net leverage ratio (adjusted total indebtedness less the amount
of unrestricted cash equivalents to consolidated EBITDA) of no more than 3.75 to 1.00 for the quarter ending March 31, 2014,
4.25 to 1.00 for the quarters ending June 30, 2014 and September 30, 2014, 4.00 to 1.00 for the quarter ending
December 31, 2014, was waived for the quarters ending March 31, 2015 and June 30, 2015, and 3.50 to 1.00 for
the quarter ending September 30, 2015, and 3.65 to 1.00 for the quarter ending December 31, 2015, and 3.50
to 1.00 for the quarter ending March 31, 2016 and thereafter, calculated on a modified trailing four quarter basis, (iii)
a consolidated cash interest coverage ratio (consolidated EBITDA to consolidated cash interest expense) of no less than 2.5 to
1.0, calculated on a modified trailing four quarter basis and (iv) a ratio of consolidated current assets to consolidated current
liabilities of at least 1.0 to 1.0, except for the quarter ending June 30, 2015 when the covenant was waived. In addition, each
of the Credit Facilities required that the Company enter into hedging agreements based on anticipated oil production from currently
producing wells as agreed to by the lenders.
Covenant Violations
The Company was out of compliance with the
collateral coverage ratio covenant as of March 31, 2016 and December 31, 2015 and the current ratio covenant as defined by the
Subordinated Credit Facility as of March 31, 2016. Additionally, the audit report the Company received with respect to its financial
statements as of December 31, 2015 contains an explanatory paragraph expressing uncertainty as to the Company’s ability to
continue as a going concern, the delivery of which constituted a default under both its Senior Credit Facility and Subordinated
Credit Facility. The Company received a waiver for all debt
covenants as of December 31, 2015 and March 31, 2016 as part of the debt restructuring outlined in Note 3 – Debt Restructuring.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Debt Discount, Detachable Warrants
In connection with the Subordinated Credit
Facility, the Company agreed to issue to the lenders detachable warrants to purchase up to 5,000,000 shares of the Company’s
common stock at an exercise price of $0.65 per share. The warrants were retired and cancelled as part of the debt restructuring.
Proceeds from the loan were allocated between
the debt and equity based on the relative fair values of the warrants at the time of issuance, resulting in a debt discount of
$2,473,576 at issuance that is presented as a debt discount on the balance sheet which was being amortized using the effective
interest method over the life of the credit facility, which matured on June 30, 2017. A total of $-0- and $1,645,749
was amortized during the years ended December 31, 2016 and 2015. The remaining unamortized balance of the debt discount attributable
to the warrants was $-0- as of December 31, 2016 and 2015. The amortization of the debt discount attributable to the warrants
was accelerated in 2015 to fully amortize the discount as of December 31, 2015 when the related debt became payable on demand due
to a default on the related debt.
Amounts outstanding under revolving credit
facilities and long term debts consisted of the following as of December 31, 2015:
|
December 31,
|
|
|
2015
|
|
Senior Revolving Credit Facility, Cadence Bank, N.A.
|
$
|
27,750,000
|
|
Subordinated Credit Agreement, Chambers
|
|
30,000,000
|
|
PIK Interest on Subordinated Credit Agreement, Chambers
|
|
2,600,629
|
|
|
|
|
|
Total credit facilities and long term debts
|
|
60,350,629
|
|
Less: Unamortized OID
|
|
–
|
|
Less: Unamortized debt discount attributable to warrants
|
|
–
|
|
Total credit facilities and long term debts, net of discounts
|
|
60,350,629
|
|
Less: current maturities
(1)
|
|
(60,350,629
|
)
|
|
|
|
|
Long term portion of credit facilities and long term debts
|
$
|
–
|
|
(1)
Due
to existing and anticipated covenant violations, the Company’s Senior Credit Facility and Subordinated Credit Facility were
classified as current December 31, 2015 and are presented as part of current liabilities from discontinued operations on the balance
sheet.
Net proceeds of $29.4 million was
received from our $30 million in advances due to $600,000 of OID pursuant to the Subordinated Credit Agreement at
issuance that is presented as a debt discount on the balance sheet and was being amortized using the effective interest
method over the life of the credit facility, was to mature on June 30, 2017. A total of $-0- and $426,734 was
amortized during the years ended December 31, 2016 and 2015, respectively. The remaining unamortized balance of the debt
discount attributable to the OID is $-0- as of December 31, 2016 and December 31, 2015 as the amortization was accelerated in
2015 to fully amortize the discount as of December 31, 2015 when the related debt became payable on demand due to a default
on the related debt.
The following presents components of interest
expense, presented as a component of loss from discontinued operations, for the years ended December 31, 2016 and 2015, respectively:
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
Accrued PIK interest
|
$
|
330,740
|
|
$
|
1,293,543
|
|
Amortization of OID
|
|
–
|
|
|
426,734
|
|
Interest and commitment fees
|
|
1,373,023
|
|
|
4,381,278
|
|
Amortization of debt issuance costs
|
|
–
|
|
|
751,019
|
|
Amortization of warrant costs
|
|
–
|
|
|
1,645,749
|
|
Less interest capitalized to the full cost pool of our proved oil & gas properties
|
|
(7,219
|
)
|
|
(362,075
|
)
|
|
$
|
1,696,544
|
|
$
|
8,136,248
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 13 – Stockholders’ Equity
Preferred Stock
The Company has 20,000,000 authorized shares
of $0.001 par value preferred stock. No shares have been issued to date.
Common Stock
The Company has 500,000,000 authorized shares
of $0.001 par value common stock.
Note 14 – Options
The following table presents
all options granted during the year ended December 31, 2016:
|
|
Number
|
|
|
Term
|
Vesting
|
Black-Scholes Options
|
Total
|
|
Expense
|
|
Expense
|
|
Grant
|
|
of
|
|
Strike
|
in
|
Term in
|
Pricing Model:
|
Fair
|
|
Recognized
|
|
Recognized
|
|
Date
|
Recipient
|
Options
|
|
Price
|
Years
(1)
|
Years
(1)
|
Volatility
|
Call Value
|
Value
|
|
in 2016
|
|
in 2015
|
|
12/12/16
|
K. DeCubellis, CEO
|
|
1,204,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
$
|
47,925
|
|
$
|
825
|
|
$
|
–
|
|
12/12/16
|
J. Moe, CFO
|
|
450,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
17,912
|
|
|
308
|
|
|
–
|
|
12/12/16
|
M. Eisele, COO
|
|
500,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
19,903
|
|
|
343
|
|
|
–
|
|
12/12/16
|
Employee
|
|
300,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
11,942
|
|
|
206
|
|
|
–
|
|
12/12/16
|
Employee
|
|
36,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
1,433
|
|
|
25
|
|
|
–
|
|
12/12/16
|
Employee
|
|
50,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
1,990
|
|
|
34
|
|
|
–
|
|
12/12/16
|
Employee
|
|
65,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
2,587
|
|
|
45
|
|
|
–
|
|
12/12/16
|
Employee
|
|
8,500
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
338
|
|
|
6
|
|
|
–
|
|
12/12/16
|
J. Lahti, Director
|
|
300,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
11,942
|
|
|
206
|
|
|
–
|
|
12/12/16
|
B. Oehler, Director
|
|
300,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
11,942
|
|
|
206
|
|
|
–
|
|
12/12/16
|
B. Berman, Director
|
|
300,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
11,942
|
|
|
206
|
|
|
–
|
|
12/12/16
|
L. Berman, Director
|
|
300,000
|
|
$0.040
|
10
|
3
|
228%
|
$0.0398
|
|
11,942
|
|
|
206
|
|
|
–
|
|
10/26/16
|
L. Berman, Director
|
|
100,000
|
|
$0.050
|
10
|
3
|
226%
|
$0.0497
|
|
4,973
|
|
|
297
|
|
|
–
|
|
|
|
|
3,913,500
|
|
|
|
|
|
|
$
|
156,771
|
|
$
|
2,913
|
|
$
|
–
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The following table presents
all options granted during the year ended December 31, 2015:
|
|
Number
|
|
|
Term
|
Vesting
|
Black-Scholes Options
|
Total
|
|
Expense
|
|
Expense
|
|
Grant
|
|
of
|
|
Strike
|
in
|
Term in
|
Pricing Model:
|
Fair
|
|
Recognized
|
|
Recognized
|
|
Date
|
Recipient
|
Options
|
|
Price
|
Years
(1)
|
Years
(1)
|
Volatility
|
Call Value
|
Value
|
|
in 2016
|
|
in 2015
|
|
9/30/15
|
K. DeCubellis, CEO
|
|
200,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
$
|
28,676
|
|
$
|
5,736
|
|
$
|
1,434
|
|
9/30/15
|
J. Moe, CFO
|
|
150,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
21,507
|
|
|
4,300
|
|
|
1,075
|
|
9/30/15
|
M. Eisele, COO
|
|
200,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
28,676
|
|
|
5,736
|
|
|
1,434
|
|
9/30/15
|
Employee
|
|
150,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
21,507
|
|
|
4,300
|
|
|
1,075
|
|
9/30/15
|
Employee
|
|
30,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
4,301
|
|
|
860
|
|
|
215
|
|
9/30/15
|
Employee
|
|
30,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
4,301
|
|
|
860
|
|
|
215
|
|
9/30/15
|
Employee
|
|
30,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
4,301
|
|
|
860
|
|
|
215
|
|
9/30/15
|
Employee
|
|
10,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
1,434
|
|
|
288
|
|
|
72
|
|
9/30/15
|
J. Lahti, Director
|
|
100,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
14,338
|
|
|
2,868
|
|
|
717
|
|
9/30/15
|
B. Oehler, Director
|
|
100,000
|
|
$0.172
|
10
|
5
|
106%
|
$0.1434
|
|
14,338
|
|
|
2,868
|
|
|
717
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
$
|
143,379
|
|
$
|
28,676
|
|
$
|
7,169
|
|
(1)
All options
vest in equal annual installments, commencing one year from the date of the grant, are exercisable for 10 years from the date of
the grant and are being amortized over the implied service term, or vesting period, of the options.
Options Cancelled
On September 30, 2015, 1,000,000
common stock options were voluntarily forfeited by our chairman of the board.
No other options were cancelled during 2016
or 2015.
Options Expired
On May 31, 2016, a total of 12,000 options
with a strike price of $0.33 per share expired.
On November 30, 2015, a total of
66,667 options with a strike price of $0.30 per share expired.
On October 17, 2015, a total of 86,667
options with a strike price of $1.00 per share expired.
No other options expired during 2016 or 2015.
Options Exercised
No options were exercised during the year ended
December 31, 2016 and 2015.
The following is a summary of information about
the Stock Options outstanding at December 31, 2016.
|
|
Shares Underlying
|
Shares Underlying Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Shares
|
|
Average
|
|
Weighted
|
|
Shares
|
|
Weighted
|
|
|
Underlying
|
|
Remaining
|
|
Average
|
|
Underlying
|
|
Average
|
Range of
|
|
Options
|
|
Contractual
|
|
Exercise
|
|
Options
|
|
Exercise
|
Exercise Prices
|
|
Outstanding
|
|
Life
|
|
Price
|
|
Exercisable
|
|
Price
|
$0.03 - $1.00
|
|
10,957,000
|
|
7.74 years
|
|
$0.29
|
|
4,415,500
|
|
$0.45
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants
under the fixed option plan:
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Average risk-free interest rates
|
|
|
2.06%
|
|
|
1.75%
|
Average expected life (in years)
|
|
|
5
|
|
|
5
|
Volatility
|
|
|
228%
|
|
|
106%
|
The Black-Scholes option pricing model was
developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility.
Because the Company’s employee stock options have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion
the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. During
the years ended December 31, 2016 and 2015 there were no options granted with an exercise price below the fair value
of the underlying stock at the grant date.
The following is a summary of activity of outstanding
stock options:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of Shares
|
|
|
Prices
|
|
Balance, December 31, 2014
|
|
|
7,208,834
|
|
|
$
|
0.56
|
|
Options expired
|
|
|
(153,334
|
)
|
|
|
(0.70
|
)
|
Options cancelled
|
|
|
(1,000,000
|
)
|
|
|
(1.00
|
)
|
Options granted
|
|
|
1,000,000
|
|
|
|
0.17
|
|
Options exercised
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2015
|
|
|
7,055,500
|
|
|
|
0.44
|
|
Options expired
|
|
|
(12,000
|
)
|
|
|
(0.33
|
)
|
Options cancelled
|
|
|
–
|
|
|
|
–
|
|
Options granted
|
|
|
3,913,500
|
|
|
|
0.04
|
|
Options exercised
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2016
|
|
|
10,957,000
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
4,415,500
|
|
|
$
|
0.47
|
|
The Company expensed $626,602
and $623,700 from the amortization of common stock options during the years ended December 31, 2016 and 2015, respectively.
Note 15 – Warrants
Warrants Granted
No warrants were granted during the year ended
December 31, 2016 and 2015.
Warrants Cancelled
A total of 5,000,000 warrants with a strike
price of $0.65 per share were forfeited on June 21, 2016 commensurate with our debt refinancing. No warrants were cancelled during
the year ended December 31, 2015.
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Warrants Expired
A total of 3,048,375 warrants with an average
strike price of $1.45 per share expired on July 26, 2016.
A total of 500,000 warrants with a strike price
of $0.95 per share expired on May 2, 2016.
A total of 585,000 warrants with a strike price
of $0.38 per share expired on September 5, 2015.
Warrants Exercised
No warrants were exercised during the years
ended December 31, 2016 and 2015.
There are no warrants outstanding as of December 31, 2016.
The following is a summary of activity of outstanding
warrants:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of Shares
|
|
|
Prices
|
|
Balance, December 31, 2014
|
|
|
9,133,375
|
|
|
$
|
0.92
|
|
Warrants expired
|
|
|
(585,000
|
)
|
|
|
(0.38
|
)
|
Warrants cancelled
|
|
|
–
|
|
|
|
–
|
|
Warrants granted
|
|
|
–
|
|
|
|
–
|
|
Warrants exercised
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2015
|
|
|
8,548,375
|
|
|
|
0.95
|
|
Warrants expired
|
|
|
(3,548,375
|
)
|
|
|
(1.38
|
)
|
Warrants cancelled
|
|
|
(5,000,000
|
)
|
|
|
(0.65
|
)
|
Warrants granted
|
|
|
–
|
|
|
|
–
|
|
Warrants exercised
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2016
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note 16 – Income
Taxes
We account for income taxes under the provisions
of ASC Topic 740,
Income taxes,
which provides for an asset and liability approach for income taxes. Under this approach,
deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws,
attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts calculated for income tax purposes.
Our provision for income taxes for the years
ended December 31, 2016 and 2015 consisted of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred tax provision (benefit), as part of discontinued operations
|
|
|
–
|
|
|
|
(6,593,040
|
)
|
Valuation allowance
|
|
|
–
|
|
|
|
–
|
|
Net income tax provision (benefit)
|
|
$
|
–
|
|
|
$
|
(6,593,040
|
)
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
The effective income tax rate for the years
ended December 31, 2016 and 2015 consisted of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal statutory income tax rate
|
|
|
35.00%
|
|
|
|
35.00%
|
|
State income taxes
|
|
|
3.26%
|
|
|
|
4.13%
|
|
Effect of statutory rate change on deferred taxes
|
|
|
1.68%
|
|
|
|
(0.44%
|
)
|
Permanent differences
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Change in valuation allowance
|
|
|
(39.34%
|
)
|
|
|
(30.12%
|
)
|
Net effective income tax rate
|
|
|
0.00%
|
|
|
|
8.57%
|
|
The Company’s state income tax rate as
of December 31, 2016 decreased by 1.13% from 4.13% as of December 31, 2015, to 3.26%. This decrease
in the effective tax rate is attributable to changes in the Company’s state apportionment factors in the current year. In
2015, due to the settled derivatives being sourced to the state of Minnesota for income tax purposes, a larger percentage of the
Company’s activity was expected to be apportioned to that state. The derivative gains, reported in discontinued operations,
were substantially lower in 2016. As compared to North Dakota and Montana, the other states the Company files tax returns in which
have a corporate income tax rate of 4.31% and 6.75%, respectively, the state of Minnesota has a 9.80% corporate income tax rate.
The components of the deferred tax assets and
liabilities as of December 31, 2016 and 2015 are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryovers
|
|
$
|
9,025,553
|
|
|
$
|
9,294,824
|
|
Stock compensation
|
|
|
2,715,486
|
|
|
|
2,531,641
|
|
Ceiling test impairment, intangible drilling costs and other exploration costs capitalized for financial reporting purposes
|
|
|
–
|
|
|
|
12,186,927
|
|
Derivative liabilities
|
|
|
–
|
|
|
|
–
|
|
Reorganization costs
|
|
|
51,258
|
|
|
|
52,415
|
|
Asset retirement obligation
|
|
|
–
|
|
|
|
144,005
|
|
Total deferred tax assets
|
|
$
|
11,792,297
|
|
|
$
|
24,209,812
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Ceiling test impairment, intangible drilling costs and other exploration costs capitalized for financial reporting purposes
|
|
$
|
–
|
|
|
$
|
–
|
|
Derivative assets
|
|
|
–
|
|
|
|
(451,628
|
)
|
Property and equipment
|
|
|
(3,731
|
)
|
|
|
(7,006
|
)
|
Total deferred liabilities
|
|
|
(3,731
|
)
|
|
|
(458,634
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
|
11,788,566
|
|
|
|
23,751,178
|
|
Less: valuation allowance
|
|
|
(11,788,566
|
)
|
|
|
(23,751,178
|
)
|
Deferred tax assets (liabilities)
|
|
$
|
–
|
|
|
$
|
–
|
|
BLACK RIDGE OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2016, the Company
has net operating loss carryover of approximately $23,590,835. Under existing Federal law, the net operating loss may be utilized
to offset taxable income through the year ended December 31, 2036. A portion of the net operating loss carryover begins
to expire in 2030.
ASC Topic 740 provides that a valuation
allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized. In 2015, the Company increased its valuation allowance from $579,522 to
$23,751,178. As of December 31, 2016, the Company has decreased its valuation allowance from $23,751,178 to
$11,788,566. This decrease was to adjust for the decrease in net deferred tax assets due to the transfer of oil and assets in
connection with the Company’s restructuring. The Company believes it is more likely than not that the benefit of these
remaining assets will not be realized.
The Company files annual
US Federal income tax returns and annual income tax returns for the states of Minnesota, North Dakota and Montana. We are not subject
to income tax examinations by tax authorities for years before 2010 for all returns. Income taxing authorities have conducted no
formal examinations of our past federal or state income tax returns and supporting records.
The Company adopted the provisions
of ASC Topic 740 regarding uncertainty in income taxes. The Company has found no significant uncertain tax positions as of any
date on or before December 31, 2016.
Note 17 – Commitments
and Contingencies
The Company is involved in various inquiries,
administrative proceedings and litigation relating to matters arising in the normal course of business. The Company is not currently
a defendant in any material litigation and is not aware of any threatened litigation that could have a material effect on the Company.
Management is not able to estimate the minimum loss to be incurred, if any, as a result of the final outcome of the matters arising
in the normal course of business but believes they are not likely to have a material adverse effect upon the Company’s financial
position or results of operations and, accordingly, no provision for loss has been recorded.
The Company periodically maintains cash balances
at banks in excess of federally insured amounts. The extent of loss, if any, to be sustained as a result of any future failure
of a bank or other financial institution is not subject to estimation at this time.
Note 18 – Subsequent
Events
Cancelation of Management Services Agreement
and Sale of BRHC Assets
On April 3, 2017, we were notified
by BRHC of their termination of our Management Services Agreement and that they had finalized the sale of BRHC’s oil
and gas assets to a third party. On April 3, BRHC signed a Contribution Agreement that provides for the transfer of
ownership and title of all oil and gas assets held by BRHC in exchange for preferred membership interest in the acquiring LLC
(the “BRHC Sale”). Consistent with the terms of the Management Services Agreement, we will be paid for our
management services for the three month period ended June 30, 2017. Additionally, Chambers Energy Capital II, LP and CEC II
TE, LLC , have agreed to purchase for cash our 3.88% equity share in BRHC, which is estimated to be approximately $1.1
million.