UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 20152017

 

or

 

☐¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________to_________

 

Commission file number: 001-35330

 

Lilis Energy, Inc.

(Name of registrant as specified in its charter)

NEVADANevada 74-3231613

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

216 16th Street,300 E. Sonterra Blvd., Suite 1350, Denver, CO 80202No. 1220, San Antonio, TX 78258

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number including area code: (303) 893-9000(210) 999-5400

Securities registered under Section 12(b) of the Act:

 

Common Stock, $0.0001 par value The Nasdaq Capital MarketNYSE American
Title of class Name of exchange on which registered

 

Securities registered under Section 12(g) of the Act:

 

None

 

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

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  ☐¨    No  ☒x

 

Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒x      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). Yes  ☒x      No  ☐¨

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

 

Large accelerated filer☐¨Accelerated filer☐x
Non-accelerated filer   ☐¨Smaller reporting company☒x
Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐¨ No  ☒x

 

TheAs of June 30, 2017, the aggregate market value of the voting and non-voting shares of common equitystock of the registrant issued and outstanding on such date, excluding shares held by non-affiliatesaffiliates of the registrant as a group was $186,032,195 based on the closing sales price of $4.90 per share of the registrant’s common stock on June 30, 2015 was $11,917,000.2017 on the NYSE American.

 

As of March 30, 2016, 29,166,5905, 2018, 53,496,205 shares of the registrant’s Common Stockcommon stock were issued and outstanding.

 

 

  

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 20152017

LILIS ENERGY, INC.

 

  Page
PART I
 
Special Note regarding Forward Looking Statements
Items 1 and 2.Business and Properties64
Item 1A.Risk Factors19
Item 1B.Unresolved Staff Comments3633
Item 3.Legal Proceedings3633
Item 4.Mine Safety Disclosures33
   
PART II
 
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities3734
Item 6.Selected Financial Data3735
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations3835
Item 7A.Quantitative and Qualitative Disclosures About Market Risk4950
Item 8.Financial Statements and Supplementary Data4950
Item 9.Changes in and disagreements with Accountants on Accounting and Financial Disclosure4950
Item 9A.Controls and Procedures4950
Item 9B.Other Information5051
   
PART III
 
Item 10.Directors, Executive Officers and Corporate Governance51
Item 11.Executive Compensation57
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters6578
Item 13.Certain Relationships and Related Transactions, and Director Independence6983
Item 14.Principal AccountantAccounting Fees and Services7386
   
PART IV
 
Item 15.Exhibits, and Financial Statement Schedules7490
Item 16. Form 10-K Summary90

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1995. 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements may include the words “may,” “should,” “could,” “estimate,” “intend,” “plan,” “project,” “continue,” “believe,” “predict,” “expect,” “anticipate,” “goal,” “forecast,” “target” or other similar words.

All statements, other than statements of historical fact, that are “forward-looking statements” for purposes of federal and state securities laws,included in this Annual Report that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements,” including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning future production, reserves or other resource development opportunities; any projected well performance or economics, or potential joint ventures or strategic partnerships; any statements regarding future economic conditions or performance; any statements regarding future capital-raising activities; any statements of belief; commodity price risk management activities and the impact on our average realized price; and any statements of assumptions underlying any of the foregoing.

 

Forward-looking statements may include the words “may,” “should,” “could,” “estimate,” “intend,” “plan,” “project,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this presentation.  Except as required by law, we do not intend, and undertake no obligation, to update any forward-looking statement.

Although we believe that the expectations, plans, and intentions reflected in or suggested by any of our forward-looking statements are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved, and the actual results could differ materially from those projected or assumed in any of our forward-looking statements.

Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. Theuncertainties, many of which are beyond our control. Some of the factors, impacting these riskswhich could affect our future results and uncertaintiescould cause results to differ materially from those expressed in our forward-looking statements include but are not limited to, the Risk Factors set forth in this Annual Report on Form 10-K in Part I, “Item 1A. Risk Factors”Factors.”

Should one or more of the risks or uncertainties described in this Annual Report Form occur, or should underlying assumptions prove incorrect, our actual results and the following factors:plans could differ materially from those in any forward-looking statements.

 

●we may not realize the expected benefits of our merger with Brushy Resources, Inc.(“Brushy”) quickly or at all;
●the closing conditions with respect to our merger with Brushy may not be satisfied;
●it may be more difficult or costly to integrate our business and operations with Brushy’s, it may take longer than anticipated, or it may have unanticipated adverse results relating to our existing business or the combined company’s business;
●availability of capital on an economic basis, or at all, to fund our capital or operating needs;
●our level of debt, which could adversely affect our ability to raise additional capital, limit our ability to react to economic changes and make it more difficult to meet our obligations under our debt;
●restrictions imposed on us under our credit agreement or other debt instruments that limit our discretion in operating our business;
●failure to meet requirements or covenants under our debt instruments, which could lead to foreclosure of significant core assets;
●failure to fund our authorization for expenditures from other operators for key projects which will reduce or eliminate our interest in the wells/asset;
●our history of losses;
●inability to address our negative working capital position in a timely manner;
●the inability of management to effectively implement our strategies and business plans;
●potential default under our secured obligations, material debt agreements or agreements with our investors;
●estimated quantities and quality of oil and natural gas reserves;
●exploration, exploitation and development results;
●fluctuations in the price of oil and natural gas, including further reductions in prices that would adversely affect our revenue, cash flow, liquidity and access to capital;
●availability of, or delays related to, drilling, completion and production, personnel, supplies (including water) and equipment;

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●the timing and amount of future production of oil and natural gas;
●the timing and success of our drilling and completion activity;
●lower oil and natural gas prices negatively affecting our ability to borrow or raise capital, or enter into joint venture arrangements;
●declines in the values of our natural gas and oil properties resulting in further write-down or impairments;
●inability to hire or retain sufficient qualified operating field personnel;
●our ability to successfully identify and consummate acquisition transactions;
●our ability to successfully integrate acquired assets or dispose of non-core assets;
●availability of funds under our credit agreement;
●increases in interest rates or our cost of borrowing;
●deterioration in general or regional (especially Rocky Mountain) economic conditions;
●the strength and financial resources of our competitors;
●the occurrence of natural disasters, unforeseen weather conditions, or other events or circumstances that could impact our operations or could impact the operations of companies or contractors we depend upon in our operations;
●inability to acquire or maintain mineral leases at a favorable economic value that will allow us to expand our development efforts;
●inability to successfully develop our large inventory of undeveloped acreage we currently hold on a timely basis;
●constraints, interruptions or other issues affecting the Denver-Julesburg Basin, including with respect to transportation, marketing, processing, curtailment of production, natural disasters, and adverse weather conditions;
●technique risks inherent in drilling in existing or emerging unconventional shale plays using horizontal drilling and complex completion techniques;
●delays, denials or other problems relating to our receipt of operational consents, approvals and permits from governmental entities and other parties;
●unanticipated recovery or production problems, including cratering, explosions, blow-outs, fires and uncontrollable flows of oil, natural gas or well fluids;
●environmental liabilities;
●operating hazards and uninsured risks;
●data protection and cyber-security threats;
●loss of senior management or technical personnel;
●litigation and the outcome of other contingencies, including legal proceedings;
●adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations, including those related to climate change and hydraulic fracturing;
●anticipated trends in our business;
●effectiveness of our disclosure controls and procedures and internal controls over financial reporting;
●changes in generally accepted accounting principles in the United States (“GAAP”),or in the legal, regulatory and legislative environments in the markets in which we operate; and
●other factors, many of which are beyond our control.

Many of these factors are beyondThese forward-looking statements present our ability to control or predict. These factors are not intended to represent a complete listestimates and assumptions only as of the generaldate of this Annual Report. Except as required by law, we specifically disclaim all responsibility to publicly update any information contained in any forward-looking statement and, therefore, disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to us or specific factors that may affect us.persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

 

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, we urge you to carefully review and consider the disclosures made in the “Risk Factors” sections of our SEC filings, available free of charge at the SEC’s website (www.sec.gov).

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GLOSSARY

In this report, the following abbreviation and terms are used:

Bbl.  Stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude, condensate or natural gas liquids.

Bcf.  Billion cubic feet of natural gas.

BOE.  Barrels of crude oil equivalent, determined using the .ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

BOE/d.  BOE per day.

BTU or British Thermal Unit.The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Completion.  Installation of permanent equipment for production of natural gas or oil, or in the case of a dry hole, the reporting to the appropriate authority that the well has been abandoned.

Condensate.  A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure but that, when produced, is in the liquid phase at surface pressure and temperature.

Development well. A well drilled within the proved area of a natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive.

Drilling locations.  Total gross locations specifically quantified by management to be included in our multi-year drilling activities on existing acreage. Our actual drilling activities may change depending on the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, drilling results and other factors.

Dry well; dry hole.  A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Exploratory well.  A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of natural gas or oil in another reservoir.

Field.  An area consisting of either a single reservoir or multiple reservoirs all grouped on or related to the same geological structural feature and/or stratigraphic condition.

Formation.  An identifiable layer of subsurface rocks named after its geographical location and dominant rock type.

Gross acres, gross wells, or gross reserves.  A well, acre or reserve in which the Company owns a working interest, reported at the 100% or 8/8ths level. For example, the number of gross wells is the total number of wells in which the Company owns a working interest.

Lease.  A legal contract that specifies the terms of the business relationship between an energy company and a landowner or mineral rights holder on a particular tract of land.Securities Exchange Commission (the “SEC”) - www.sec.gov.

 

Leasehold.  Mineral rights leased in a certain area to form a project area.

Mbbls.  Thousand barrels of crude oil or other liquid hydrocarbons.

Mboe.  Thousand barrels of crude oil equivalent, determined using the ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

Mcf.  Thousand cubic feet of natural gas.

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Mcfe.  Thousand cubic feet equivalent, determined using the ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.PART I

 

MMbtu.  Million British Thermal Units.Items 1. Business and Properties

 

MMcf.  Million cubic feet of natural gas.Overview

 

Net acres; net wells.  A “net acre” or “net well”

Lilis is deemed to exist when the sum of fractional ownership working interests in gross acres or wells equals one. The number of net acres or wells is the sum of the fractional working interests owned in gross acres or wells expressed as whole numbers and fractions of whole numbers.

Ngl. Natural gas liquids, or liquid hydrocarbons found as a by-product of natural gas.

Overriding royalty interest.  Is similar to a basic royalty interest except that it is created out of the working interest. For example, an operator possesses a standard lease providing for a basic royalty to the lessor or mineral rights owner of 1/8 of 8/8.  This then entitles the operator to retain 7/8 of the totalindependent oil and natural gas produced.  The 7/8 in this case iscompany focused on the 100% working interest the operator owns.  This operator may assign his working interest to another operator subject to a retained 1/8 overriding royalty.  This would then result in a basic royalty of 1/8, an overriding royalty of 1/8exploration, acquisition, development, and a working interest of 3/4.  Overriding royalty interest owners have no financial or other obligation or responsibility for developing and operating the property.  The only expenses borne by the overriding royalty owner are a share of the production or severance taxes and sometimes costs incurred to make the oil or gas salable.

Plugging and abandonment.  Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface.  Regulations of all states require plugging of abandoned wells.

Production.  Natural resources, such as oil or gas, flowed or pumped out of the ground.

Productive well.  A producing well or a well that is mechanically capable of production.

Proved reserves.  Those quantities of oil and natural gas which, by analysisreserves from properties in the Permian Basin. Our operations are focused in the Delaware Basin of geosciencethe Permian in Winkler, Loving, and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, under existing economic conditions, operating methods,Reeves Counties, Texas and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. Lea County, New Mexico.

 

Proved developedOur Business

Lilis was incorporated in the State of Nevada in 2007 as “Universal Holdings, Inc.” The name of the corporation was changed to “Recovery Energy, Inc.” in October 2009 and changed to “Lilis Energy, Inc.” in December 2013.

On June 23, 2016, we completed a merger transaction with Brushy Resources, Inc. (“Brushy Resources” or “Brushy”). The merger resulted in the acquisition of our initial properties in the Delaware Basin. In connection with the merger with Brushy Resources, we effected a 1-for-10 reverse stock split. As a result of the reverse split, every ten shares of issued and outstanding common stock were automatically converted into one newly issued and outstanding share of common stock, without any change in the par value per share; however, the number of authorized shares of common stock remained unchanged. Subsequently, on March 31, 2017, we completed the divestiture of all our oil and gas reserves.Proved developedproperties located in the Denver-Julesburg Basin (the “DJ Basin”), completing our transformation to a pure play Permian Basin oil and natural gas reserves are proved reservescompany.

We intend to grow our company through generating cash flow from new production of oil, natural gas and natural gas liquids (“NGL”), as well as through de-risking the development profile of our portfolio of properties in order to add overall value. We believe that can be expectedhorizontal development of our properties will provide attractive returns on a majority of our acreage positions. We believe our significant inventory of oil and liquids-rich drilling opportunities in the Delaware Basin provides us with a platform for continued growth. As of December 31, 2017, we had accumulated approximately 35,200 gross (15,700 net) acres that we believe to be recovered (i) through existing wells with existing equipment and operating methods or in which the costcore of the required equipmentDelaware Basin, with approximately 33,080 gross (14,430 net) acres in Winkler, Loving, and Reeves Counties, Texas and approximately 2,120 gross (1,270 net) acres in Lea County, New Mexico. Our leasehold position is relatively minor comparedlargely contiguous, which we believe gives us significant control over the pace of our development and the ability to the costdesign an efficient and profitable drilling program that maximizes recovery of a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Proved undeveloped reserves.  Proved undeveloped oil and gas reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

Project.  A targeted development area where it is probable that commercial oil and/or gas can be produced from new wells.

Prospect.  A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

 

Shortly after our merger with Brushy Resources, we commenced a development program to delineate and de-risk our properties by drilling of new horizontal wells across multiple potentially productive formations. Our drilling program utilizes the development of new horizontal wells across several potentially productive formations in the Delaware Basin. We commenced our drilling program in 2016, when we drilled two wells, which were completed in 2017. In 2017, we drilled eight wells on our leases and completed five of these wellbores, which targeted the Wolfcamp formation for initial development.

As a result of our development activity, our proved reserves increased to approximately 11,453 MBOE (million barrels of oil equivalent) as of December 31, 2017. Our proved reserves as of that date consisted of 63% oil, 23% natural gas and 14% NGL. Of those reserves, 37% of our proved reserves are classified as proved developed and approximately 63% are classified as proved undeveloped.

In addition, 34% of our net acreage position was held by production, and we operated approximately 90% of our acreage, which we believe gives us significant control over the pace of our development and the ability to design a more efficient and profitable drilling program to maximize recovery of oil and natural gas.

In 2017, we also entered into a long-term gas gathering, processing and purchase agreement with an affiliate of Lucid Energy Group (“Lucid”) to support our active drilling program in the Delaware Basin. Lucid will receive, gather and process our gas production from certain production areas located in Lea County, New Mexico and Winkler and Loving Counties, Texas. The agreement secures sufficient term and capacity for Lilis during our development and exploitation life cycle of the production areas committed to the new agreement.

We expect that substantially all of our estimated 2018 capital expenditure budget will be focused on the development and expansion of our Delaware Basin acreage and operations in order to further delineate the prospectivity of Wolfcamp and Bone Spring development on our properties. We also plan to continue selectively and opportunistically pursuing strategic acreage acquisitions and organic leasing prospects in the Delaware Basin.

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PV-10 (Present value of future net cash flow). The present value of estimated future revenues to be generated from the production of estimated proved reserves, net of capital expenditures and operating expenses, using the simple 12 month arithmetic average of first of the month prices and current costs (unless such prices or costs are subject to change pursuant to contractual provisions), without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expenses, depreciation, depletion and amortization or impairment, discounted using an annual discount rate of 10%. While this non-GAAP measure does not include the effect of income taxes as would the use of the standardized measure calculation, we believe it provides an indicative representation of the relative value of Lilis Energy on a comparative basis to other companies and from period to period.

Recompletion.  The process of re-entering an existing well bore that is either producing or not producing and modifying the existing completion and/or completing new reservoirs in an attempt to establish new production or increase or re-activate existing production.Our Business Strategy

 

Reserves.  Estimated remaining quantitiesOur business objective is to increase stockholder value by growing our leasehold position, reserves, production and cash flows at attractive rates of oil, natural gasreturn on invested capital. We continue to focus on developing our existing acreage position, gaining additional operational control and gas liquids anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interestexpanding our core assets in the production, installed means of delivering oil and gas or related substancesDelaware Basin. We plan to market, and all permits and financing required to implementachieve our business objective by implementing a business strategy focused on the project.following:

 

·Execute our Operated, Horizontal Drilling Program to Grow Production from our Delaware Basin Leasehold.We plan to drill and develop our existing acreage base of approximately 35,800 gross (16,200 net) acres in the Delaware Basin, which we believe will maximize our resource potential and value to our stockholders. Through the development of our properties, we seek to de-risk our acreage position and substantially increase our production and cash flow, thereby increasing the value of our properties. Our current leasehold position in the Delaware Basin has significant stacked-pay potential, which we believe includes at least seven productive zones. We estimate that all productive zones within our properties may support approximately 900 future drilling locations, including over 400 longer lateral locations, and we expect that inventory to increase with the closing of our pending acquisition from OneEnergy Partners Operating, LLC. We focused our horizontal development in 2017 on the Wolfcamp B formation but intend to expand our target zones to the Wolfcamp A, Wolfcamp XY and 2nd Bone Spring during 2018. Our long-term gas gathering, processing and purchase agreement with Lucid will support our active drilling program and alleviate production constraints we have experienced.

Reservoir.  A subsurface formation containing a natural accumulation of producible natural gas and/or oil that is naturally trapped by impermeable rock or other geologic structures or water barriers and is individual and separate from other reservoirs.

·Focus on Delineation of our Existing Acreage.We plan to focus on the delineation and de-risking of our existing acreage. We expect that our drilling activity will also grow our drilling inventory and the identified resource potential of our Delaware Basin properties. We believe that our current reserves represent only a small portion of the resource potential within our acreage. Our development plan for 2018 contemplates the continued delineation of our acreage both geographically and geologically by testing our eastern acreage and by drilling and completing wells within additional prospective benches, including the Wolfcamp A, Wolfcamp XY and the 2nd Bone Spring.

·Leverage our Extensive Operational Expertise to Reduce Costs and Enhance Returns. As of December 31, 2017, we operated approximately 90% of our acreage position, giving us significant control over the pace of our development and allowing us to increase value through operational and cost efficiencies. We intend to obtain the highest possible returns on the capital we expend on our development projects using results from the wells we have completed and the operational expertise of our management team. We also plan to focus on operational efficiencies, including salt water disposal and midstream costs, and capital costs of our development wells in order to maximize returns to our stockholders.

·Pursue Selective Acquisitions and Organic Leasing to Grow Our Leasehold Position.Since entering the Delaware Basin in June 2016, we have grown our net acreage position approximately 376% from 3,400 net (7,200 gross) acres to approximately 16,200 net (35,800 gross) acres at March 1, 2018. On January 30, 2018, we announced our entry into a pending Purchase and Sale Agreement with OneEnergy Partners Operating, LLC to acquire 2,798 net acres in New Mexico, which are largely overlapping or contiguous with our existing properties, for approximately $70 million (the “OEP Acquisition”).  Pro forma for the closing of the OEP Acquisition, we expect our acreage position to approximate 19,000 net acres.  Our most significant acquisition in 2017 included approximately 4,400 net acres, approximately 92% of which overlapped our existing acreage position. Our acquisitions to date have added approximately 600 drilling locations with multiple stacked pay zones. In addition to our continued evaluation of strategic acquisition opportunities in the Delaware Basin, we will continue to expand our leasehold position through our organic leasing program.

·Maintain Fiscal Discipline and Financial Liquidity.We actively manage the level of our development, leasing and acquisition activity in response to commodity prices, access to capital, and to the performance of our wells. We hold significant control over the pace of our drilling activity as a result of our operatorship on approximately 90% of our properties. During 2017, we commenced an active hedging program to provide certainty regarding our cash flow and protect returns from our development activity in the event of decreases in the prices received for our production. In addition, we have structured our balance sheet with the intent to reduce our leverage profile over time. The Second Lien Term Loan (as defined below) that we primarily relied upon to finance our capital spending and operations in 2017 is convertible, and we announced the issuance of $100 million in convertible, perpetual Series C preferred stock on January 31, 2018.  In addition, the closing of our recently announced OEP Acquisition, which carries a purchase price of approximately $70 million, will be funded in part with $30 million of common stock to be issued to the seller.

Our Strengths

 

Secondary Recovery.  A recovery process that uses mechanisms other than the natural pressure or fluid drive of the reservoir, such as gas injection or water flooding, to produce residual oil and natural gas remaining after the primary recovery phase.

·Pure Play Permian Focus with Established Acreage Position in the Core of the Delaware Basin.We believe we have assembled a substantial portfolio of Delaware Basin properties that offers significant exploration and low-risk development opportunities, including one of the highest rates of return among formations in North America. As of March 1, 2018, we hold over 35,800 gross (16,200 net) acres in the core of the Delaware Basin, with an average working interest per well of approximately 66%. In addition, 35% of our acreage position is held by production, and we operate approximately 90% of our acreage, which we believe gives us significant control over the pace of development and the ability to design a more efficient and profitable drilling program to maximize recovery of oil and natural gas. Based on our drilling and production results to date and well-established offset operator activity in and around our project areas, we believe there are relatively low geologic risks and ample repeatable drilling opportunities across our core acreage.

 

·Multi-year Portfolio of Drilling and Development Opportunities. We have a significant inventory of drilling and development locations in Winkler, Loving and Reeves Counties, Texas and Lea County, New Mexico. We believe our properties form part of the core of the Delaware Basin. Based on our drilling to date and results from nearby wells, we have identified more than 900 horizontal well locations on our acreage, including approximately 400 longer lateral locations, exclusive of the acreage to be acquired pursuant to the pending OEP Acquisition. We believe that inventory of drilling locations will allow us to grow our reserves and production at attractive rates of return based on current expectations for commodity prices.

Shut-in.  A well suspended from production or injection but not abandoned.

Standardized measure.  The present value of estimated future cash flows from proved oil and natural gas reserves, less future development, abandonment, production and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10.  Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes.

Successful.  A well is determined to be successful if it is producing oil or natural gas in paying quantities.

Undeveloped acreage.  Leased acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or natural gas regardless of whether such acreage contains proved reserves.

Water-flood.  A method of secondary recovery in which water is injected into the reservoir formation to maintain or increase reservoir pressure and displace residual oil and enhance hydrocarbon recovery.

Working interest.  The operating interest that gives the lessees/owners the right to drill, produce and conduct operating activities on the property, and to receive a share of the production revenue, subject to all royalties, overriding royalties and other burdens, all development costs, and all risks in connection therewith.

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Part I

·Contiguous Acreage Position Provides Operating Leverage and Consolidation Opportunities.Our geographically-concentrated acreage position allows us to capitalize on economies of scale with respect to drilling and production costs. Our leasehold position is highly contiguous, and we held operatorship on approximately 90% of our properties at December 31, 2017, enabling us to maximize our development efficiency and manage our costs. In addition, we believe those efficiencies provide us with an advantage in competing for acquisitions and organic leasing opportunities on and around our acreage. On January 31, 2018, we announced our pending OEP Acquisition, pursuant to which we expect  to acquire 2,798 net acres comprised of working interests that overlap or are contiguous to our existing properties in Lea County, New Mexico. We expect that we will continue to see opportunities for accretive acquisitions where we may benefit from current and potential economies of scale going forward.

·Strong Financial Position and Liquidity.We believe our financial position is strong and provides the financial flexibility to fund our currently planned 2018 capital expenditures. On January 31, 2018, we announced our entry into a new $50 million, three-year term loan with Riverstone Credit Partners, LLC, that refinanced our existing first-lien bridge loan and provided approximately $18 million in net proceeds, and the concurrent issuance of $100 million in convertible, perpetual Series C preferred stock to Varde Partners, Inc. We expect to use $40 million in proceeds from the preferred stock issuance to fund the closing of the OEP Acquisition and to use remaining net proceeds from both financings to fund our planned 2018 capital expenditures. The remainder of the $70 million purchase price for the OEP Acquisition will be funded from the issuance of common stock to the sellers. We believe this financial liquidity and flexibility will result in continued growth in our oil and natural gas production, proved reserves, and cash flows.

·Experienced Management Team.We have an experienced and skilled management team with a long track record of driving growth through asset development and strategic acquisitions. Our management team holds 105 years of collective experience in the oil and gas industry, with a significant amount of such experience being in the Permian Basin. We believe that our team’s experience through various commodity price cycles and operational expertise position us to operate effectively and efficiently and will help us to increase our returns and value to our stockholders.

Business Segments

 

Items 1Our operations are all oil and 2. BUSINESS AND PROPERTIESnatural gas exploration and production related activities in the United States.

 

Lilis Energy, Inc. (“we,” “us,” “our,” “Lilis Energy,” “Lilis,” or the “Company”) is an upstream independentSummary of Oil and Natural Gas Properties and Projects

We are engaged in oil and natural gas company engaged in the acquisition, drillingexploration, development and production, with all of our oil and natural gas properties and prospects.  We were incorporated in August of 2007being located in the State of Nevada as Universal Holdings, Inc.  In October 2009, we changed our name to Recovery Energy, Inc. and in December 2013, we changed our name to Lilis Energy, Inc.

Our current operating activities are focused on the Denver-Julesburg Basin (“DJ Basin”) in Colorado, Wyoming and Nebraska.  

Overview of Our Business and Strategy

We have acquired and developed a producing base of oil and natural gas proved reserves, as well as a portfolio of exploration and other undeveloped assets with conventional and non-conventional reservoir opportunities, with an emphasis on those with multiple producing horizons, in particular the Muddy “J” conventional reservoirs and the Niobrara shale and Codell resource plays. We believe these assets offer the possibility of repeatable year-over-year success and significant and cost-effective production and reserve growth. Our acquisition, development and exploration pursuits are principally directed at oil and natural gas properties in North America. As of December 31, 2015 we owned interests in 8 economically producing wells and 16,000 net leasehold acres, of which 8,000 net acres are classified as undeveloped acreage and all of which are located in Colorado, Wyoming and Nebraska within the DJ Basin. We are primarily focused on acquiring companies and production throughout North America and developing our North and South Wattenberg Field assets, which include attractive unconventional reservoir drilling opportunities in mature development areas with low risk Niobrara and Codell formation productive potential.  

Our goal is to create value by acquiring producing assets and developing our remaining inventory of low and controlled-risk conventional and unconventional properties, while maintaining a low cost structure. To achieve our goal, our business strategy includes the following elements:

Capital raising.The business of oil and natural gas property acquisition, exploration and development is highly capital intensive and the level of operations attainable by oil and natural gas companies is directly linked to and limited by the amount of available capital. Therefore, it is critical that we raise the additional capital required to finance the exploration and development of our current oil and natural gas prospects and the acquisition of additional properties and companies. We plan to seek additional capital through the sale of our securities, through potential refinancing activities, debt and project financing, joint venture agreements with industry partners, and through sale of assets. Our ability to obtain additional capital may be subject to the repayment of our existing obligations.

Acquiring additional assets and companies throughout North America. We target acquisitions in North America, which meet certain current and future production thresholds. We anticipate the acquisitions will be funded with funds borrowed under new debt instruments or the issuance of new equity.

Pursuing the initial development of our Greater Wattenberg Field unconventional assets. We plan to drill several horizontal wells on our South Wattenberg Field property if we can obtain the financing to do so. Drilling activities will target the well-established Niobrara and Codell formations.  

Extending the development of certain conventional prospects within our inventory of other DJ Basin properties.  Subject to the securing of additional capital, we anticipate drilling and developing our DJ Basin assets where initial exploration has yielded positive results.

Retaining operational control and significant working interest.  In our principal development targets, we typically seek to maintain operational control of our development and drilling activities.  As operator, we retain more control over the timing, selection and process of drilling prospects and completion design, which enhances our ability to maximize our return on invested capital and gives us greater control over the timing, allocation and amounts of capital expenditures.  However, due to our recent liquidity difficulties, we are not the operator on a significant amount of our current drilling activity on wells in which we own a working interest. 

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Leasing of prospective acreage.  We seek to identify drilling opportunities on properties that have not yet been leased.  Subject to securing additional capital, we may take the initiative to lease prospective acreage and we may sell all or any portion of the leased acreage to other companies that want to participate in the drilling and development of the prospect acreage.

Consistently evaluating acreage.Currently, our inventory of developed and undeveloped acreage includes approximately 18,000 gross (16,000 net) acres, of which 10,000 gross (8,000 net) that are held by production, approximately, 2,000, 5,000 and 1,000 net acres that expire in the years 2016, 2017, and thereafter, respectively. Approximately 88% of our inventory of undeveloped acreage provides for extension of lease terms from two to five years, at our option, by payment of varying, but typically nominal, extension amounts. In 2015, we evaluated our leases and allowed 63% of our leaseholds to expire due to capital constraints or the determination that present and future carrying and drilling costs were uneconomic. We continue to evaluate the 2016 and 2017 lease expirations to determine if production on this acreage would be economic and as such, a focus for future development. If determined to be a focus for future development, we plan to re-lease if available. If not a focus, we plan to let the acreage expire. We will continue to pursue additional properties, acquire other properties throughout North America, or drill wells on our core properties to hold the property by production if financing is available to us and the properties are economic.

Hedging. From time to time, we may use commodity price hedging instruments to reduce our exposure to oil and natural gas price fluctuations and to help ensure that we have adequate cash flow to fund our debt service costs and capital programs. As such, we expect to enter into futures contracts, collars and basis swap agreements, as well as fixed price physical delivery contracts. We intend to use hedging primarily to manage price risks and returns on certain acquisitions and drilling programs. Our policy is to consider hedging an appropriate portion of our production at commodity prices we deem attractive. In the future we may also be required by our lenders to hedge a portion of production as part of any financing.

Outsourcing.We intend to continue to use the services of independent consultants and contractors to provide various professional services, including land, legal, environmental, technical, investor relations and tax services.  We believe that by limiting our management and employee costs, we may be able to better control lifting costs and retain general and administrative expense flexibility.

Pending Merger with Brushy Resources, Inc.

On December 29, 2015, we announced entering into an Agreement and Plan of Merger (the “Merger Agreement”) with Brushy Resources, Inc. (“Brushy”), whereby we will issue approximately 4.550916 shares of our Common Stock for each outstanding share of Brushy common stock in a merger in which Brushy will be a direct wholly-owned subsidiary of ours, which we refer to as the “Merger.”

The location and predominant nature of Brushy’s oil and gas properties is consistent with our strategy to focus our efforts on oil and gas properties in similar areas, and the complementary nature of our two companies’ respective asset bases is expected to permit our combined company to compete more effectively with other exploration and production companies. In addition, we expect that the combined entity will result in a larger company with a greater market capitalization, which we in turn expect to provide us with more liquidity in our Common Stock and better access to capital markets.

The combination with Brushy would provide us with a significant presence in the PermianDelaware Basin in southeastWinkler, Loving, and Reeves Counties, Texas and Lea County, New Mexico and west Texas, which we do not currently have a presence in, including in the Crittendon Field, as well as the ability to participate and jointly operate, along with a related party of Brushy, in the Giddings Field. The Crittendon Field is approximately 2,759 net acres and contains approximately 16 gross (10.4 net) oil and natural gas wells, with estimated proved reserves of approximately 1,432 MBOE.

Consummation of the Merger is subject to the satisfaction of various closing conditions, including the registration and listing of the shares of our Common Stock that will be issued in the merger transaction, the approval of Brushy’s senior lender, and the approval of the Merger by the holders of a majority of the shares of our Common Stock and Brushy’s common stock entitled to vote on the transaction. We may not be able to satisfy all of these closing conditions, in which case the Merger may not be completed.

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The foregoing discussion of the Merger does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement and our other filings with the Securities and Exchange Commission (“SEC”). For additional details regarding the terms and conditions of the Merger, you can refer to our filings with the SEC, which can be accessed at www.sec.gov. Additional information regarding the Merger, including risks associated with the Merger, will be contained in a joint proxy statement/prospectus to be filed by us and Brushy.

Principal Oil and Gas Interests

All references to production, sales volumes and reserve quantities are net to our interest unless otherwise indicated.Mexico.

 

As of December 31, 2015,2017, we owned interestsleasehold in approximately 16,000 net leasehold35,200 gross (15,700 net) acres in the Delaware Basin, comprised of which 8,000approximately 14,430 net acres arein Winkler, Loving, and Reeves Counties, Texas and approximately 1,270 net acres in Lea County, New Mexico.

Of these properties, approximately 8,300 gross (5,300 net) acres were classified as undeveloped acreagedeveloped and held by production and the remaining approximately 26,900 gross (10,400 net) acres we classified as undeveloped. We currently estimate our properties include at least seven productive zones and hold approximately 900 future drilling locations across all of which are located in Colorado, Wyoming and Nebraskathe productive zones within this position. Our reserve estimates include 20 horizontal PUD wells, as well as the DJ Basin.  Our primary targets within the DJ Basin are the conventional Dakota and Muddy “J” formations, and the developing unconventional Niobrara shale play.  Additional horizons include the Codell, Greenhorn, the Permian Basin and other potential resource formations.    capital costs required to develop these wells.

 

During the year ended December 31, 2015, we made minimal capital expenditures on our oil and gas properties due to capital constraints. In addition, the lower commodity prices and lack of capital to develop our undeveloped oil and gas properties caused us to recognize an impairment expense of $24.48 million. No impairment expense was recognized during the year ended December 31, 2014.Reserve Data

 

ReservesReserve Estimates

 

The table below presents summary information with respect to theOur reserve data and estimates of our proved oilwere compiled and gas reserves for the year ended December 31, 2015. We engaged Forrest A Garbprepared internally and audited by third party independent consultants, Cawley, Gillespie & Associates, Inc. (“Forrest Garb”CG&A”), as described in more detail herein, in compliance with SEC definitions and Ralph E. Davis to audit internalguidance and in accordance with generally accepted petroleum engineering estimates for 100% of our proved reserves at year-end 2015 and 2014, respectively.  The prices used in the calculation of proved reserve estimates as of December 31, 2015, were $42.59 per Bbl and $2.79 per MCF; as of December 31, 2014, were $81.71 per Bbl and $5.34 per MCF and as of December 31, 2013, were $89.57 per Bbl and $4.74 per MCF for oil and natural gas, respectively.  The prices were adjusted for basis differentials, pipeline adjustments, and BTU content.principles.

We emphasize that reserve estimates are inherently imprecise and that estimates of all new discoveries and undeveloped locations are more imprecise than estimates of established producing oil and gas properties.  Accordingly, these estimates are expected to change as new information becomes available.  The PV-10 values shown in the following table are not intended to represent the current market value of the estimated proved oil and gas reserves owned by us.  Neither prices nor costs have been escalated (or reduced).  The following table should be read along with the section entitled “Risk Factors—Risks Related to Our Company”.  The actual quantities and present values of our proved oil and natural gas reserves may be less than we have estimated.

 

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Summary of Oil and Gas Reserves as of Fiscal-Year End

  As of December 31, 
  2015  2014  2013 
Reserve data:   
Proved developed         
Oil (MBbl)  33   50   171 
Gas (MMcfe)  141   197   313 
Total (MBOE)(1)  57   83   223 
Proved undeveloped            
Oil (MBbl)  -   850   672 
Gas (MMcfe)  -   4,040   2,251 
Total (MBOE)(1)  -   1,523   1,047 
Total Proved            
Oil (MBbl)  33   900   843 
Gas (MMcfe)  141   4,237   2,564 
Total (MBOE)(1)  57   1,606   1,270 
Proved developed reserves %  100%  5%  18%
Proved undeveloped reserves %  -   95%  82%
             
Reserve value data (in thousands):            
Proved developed PV-10 $608   2,340  $7,675 
Proved undeveloped PV-10 $-   20,914  $15,667 
Total proved PV-10 (2) $608   23,254  $23,342 
Standardized measure of discounted future cash flows $608   23,254  $23,342 
Reserve life (years)  26.2   39.25   33.25 

(1)BOE is determined using the ratio of six MCF of natural gas to one Bbl of crude oil, condensate or natural gas.
(2)As we currently do not expect to pay income taxes in the near future, there is no difference between the PV-10 value and the standardized measure of discounted future net cash flows.  Please see the definitions of standardized measure of discounted future net cash flows and PV-10 value in the “Glossary.”

Changes in Proved Undeveloped Reserves

During the year ended December 31, 2015, we recognized an impairment expense of $24.48 million due to the lower commodity prices and lack of capital to develop our undeveloped oil and gas properties. As such, we currently have no proved undeveloped reserves.

Internal Controls over Reserves Estimate

 

Our policy regarding internal controls over the recording of reserves is structured to objectively and accurately estimate our oil and gas reserve quantities and values in compliance with the regulations of the SEC. Responsibility for compliance in reserve bookings is delegated to our Chief Financial Officer with assistance from our senior geologist consultant and a senior reserve engineering consultant.reservoir engineer. We have a Reserves Committee to provide additional oversightof our reserves estimation and certification process. The members of the Reserves Committee currently consist of Ron Ormand, our Executive Chairman, and Glenn Dawson, a member of our Board of Directors. Mr. Dawson serves as the Chairman of the Reserves Committee.

 

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Technical reviews are performed throughout the year by our senior reserve engineering consultantreservoir engineer and our senior geologist and other consultants who evaluate all available geological and engineering data, under the guidance of the Chief Financial Officer.our appropriate executive officer(s). This data, in conjunction with economic data and ownership information, is used in making a determination of estimated proved reserve quantities. The 20152017 and 2016 reserve process wasprocesses were overseen by Kent Lina,Chris Cantrell, our senior reserve engineering consultant.reservoir engineer. Mr. Lina was previously employed by us from October 2010 through December 2012, and prior to that was employed by Delta Petroleum Corporation from March 2002 to September 2010 in various operations and reservoir engineering capacities culminating as the Senior Vice President of Corporate Engineering. Mr. Lina receivedCantrell holds a Bachelor of Science degree in CivilPetroleum Engineering fromconferred by Texas A&M University in 1995. He is a registered professional engineer licensed in the State of Missouri at RollaTexas, license number 90521. He has been continuously involved in 1981. Mr. Lina currently serves various industry clients asevaluating oil and gas properties since 1997 and is a senior reserve engineering consultant.member of the Society of Petroleum Engineers and the American Petroleum Institute.

 

Third-party Reserves Study

 

AnOur independent third-party consultant, CG&A, performed reserve studystudies as of December 31, 2015 was performed by Forrest Garb2017 and 2016, using its own engineering assumptions and other economic data provided by us. All of our total calculated proved reserve PV-10 value was preparedaudited by Forrest Garb. Forrest GarbCG&A. CG&A is an independent petroleum engineering consulting firm that has been providing petroleum engineering consulting services for over 2820 years. The individual at Forrest GarbCG&A primarily responsible for overseeing our reserve audit is Stacy M. Light, Senior ViceTodd Brooker, President of Petroleum Engineering,CG&A, who received a Bachelor of Science degree in Petroleum Engineering from the University of Texas A&M and is a registered Professional Engineer in the StatesState of Texas. SheHe is also a member of the Society of Petroleum Engineers.

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The Forrest Garb report dated April 13, 2016, is filed as Exhibit 99.1Mr. Brooker and the other technical persons employed by CG&A engaged in the reserve study met the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to this Annual Report on Form 10-K.the Estimating and Auditing of Oil and Natural Gas Reserves Information promulgated by the Society of Petroleum Engineer.

 

Oil and natural gas reserves and the estimates of the present value of future net cash flows therefrom were determined based on prices and costs as prescribed by the SEC and Financial Accounting Standards Board (“FASB”) guidelines. Reserve calculations involve the estimate of future net recoverable reserves of oil and natural gas and the timing and amount of future net cash flows to be received therefrom. Such estimates are not precise and are based on assumptions regarding a variety of factors, many of which are variable and uncertain. Proved reserves were estimated in accordance with guidelines established by the SEC and the FASB, which require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. For the yearyears ended December 31, 2015, commodity prices over2017 and 2016, we based the prior 12-month period and year end costs were used in estimatingestimated discounted future net cash flows from proved reserves on the 12-month average oil and natural gas index prices, calculated as the un-weighted arithmetic average for the first-day-of-the-month price for each month and costs in accordance with SEC guidelines.effect on the date of the estimate, holding the prices and costs constant throughout the life of the properties.

 

In addition to a third-party reserve study, our reserves and the corresponding report, along with the process for developing such estimates, are reviewed by our Chief Financial Officer, geologist and principal accounting officer and the Audit Committee of our Board of Directors.  Our Chief Financial Officer is responsible for reviewingDirectors to ensure compliance with SEC disclosure and verifying thatinternal control requirements and to verify the estimateindependence of proved reserves is reasonable, complete, and accurate.the third-party consultants. The Audit Committee of our Board of Directors reviews the final reserves estimate in conjunction with Forrest Garb’sCG&A’s audit letter.

 

Actual quantities of reserves recovered will most likely vary from the estimates set forth below. Reserves and cash flow estimates rely on interpretations of data and require assumptions that may be inaccurate. For a discussion of these interpretations and assumptions, see " Any significant inaccuracies in these reserves estimates or underlying assumptions will materially affect the quantities and present value of our reserves” under Item 1A, "Risk Factors," of this Annual Report. See "Supplementary Information on Oil and Natural Gas Exploration, Development and Production Activities" to our consolidated financial statements in Item 15 of this Annual Report for additional reserves disclosures.

Estimates of Proved Reserves

The table below summarizes our estimates of proved reserves at December 31, 2017.

  

Oil

(MBbl)

  Natural Gas
(MMcf)		  NGLs  
(MBbl)		  Total
(MBOE)		 
             
Proved Developed Reserves  2,531   6,594   645   4,275 
Proved Undeveloped Reserves  4,640   9,466   960   7,178 
Total Proved Reserves  7,171   16,060   1,605   11,453 

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Total Proved Reserves

Our estimates of proved reserves and related standardized measure of future net cash flows and PV-10 as of December 31, 2017 are calculated based upon SEC pricing, which uses a twelve-month unweighted average of first-day-of-the-month oil and natural gas benchmark prices, adjusted for marketing and other differentials and costs in effect on the date of the estimate, holding the prices and costs constant throughout the life of the properties. SEC pricing for crude oil, natural gas and NGLs has been volatile since December 2014, and any future changes in oil and natural gas pricing will impact future estimated proved reserve volumes.

Our year-end 2017 proved reserves of 11,453 MBOE consisted of 4,275 MBOE proved developed, and 7,178 MBOE proved undeveloped reserves. For 2017, crude oil reserves increased to 6,620 MBbls to 7,131 MBbls from 551 MBbls at December 31, 2016, while NGL reserves increased to 1,605 MBbls from 3 MBbls at December 31, 2016. At December 31, 2017, our proved natural gas reserves increased 12,188 MMcf to 16,060 Mcf from 3,872 MMcf at December 31, 2016. At year-end 2017, all our proved reserves were located in the Delaware Basin.

At December 31, 2017, the SEC pricing for oil was $51.34 per barrel, a 20% increase compared to the prior year end price of $42.75 per barrel, and pricing for natural gas was $2.98 per MMBtu, a 21% increase compared to the prior year end price of $2.46 per MMBtu. Our total proved reserves increased by 10,253 MBOE; 10,654 MBOE in extensions, discoveries and other additions and 331 MBOE in revisions offset by a 732 MBOE reduction in proved reserves from production and the sale of reserves in 2017.

Proved Undeveloped Reserves

During 2017, we added 7,178 MBOE of proved undeveloped (“PUD”) reserves through the extension of proved acreage, primarily as a result of successful drilling on properties in the core of the Delaware Basin in Winkler, Loving, and Reeves Counties, Texas and Lea County, New Mexico.

Estimates of proved undeveloped reserve quantities are limited by development drilling activity that we intend to undertake during the 2018 to 2022 timeframe. For additional information regarding the changes in our proved reserves, see our "Supplementary Information on Oil and Natural Gas Exploration, Development and Production Activities" to our consolidated financial statements in Item 15 of this Annual Report.

Production History

 

The following table summarizes the average volumes and realized prices excluding the effects of our economic hedges, of oil and natural gas produced from properties in which we held an interest during the periods indicated, and production cost per BOE:

 

  For the Year Ended
December 31,		 
  2015  2014  2013 
Product         
Oil (Bbl.)  7,067   33,508   51,705 
Oil (Bbls)-average price (1) $41.36  $77.05  $83.40 
             
Natural Gas (MCFE)-volume  32,291   77,954   64,845 
Natural Gas  (MCFE)-average price (2) $2.39  $4.68  $5.25 
             
Barrels of oil equivalent (BOE)  12,449   46,500   62,512 
Average daily net production (BOE)  34   127   171 
Average Price per BOE (1) $29.67  $63.36  $74.43 
  For the Years Ended December 31,
  2017 2016
Product    
Oil (Bbls)-net production  371,993   61,088 
Oil (Bbls)-average realized price $47.92  $39.59 
         
Natural Gas (MCF)-production  776,164   332,643 
Natural Gas (MCF)-average realized price $2.74  $2.54 
         
Natural gas liquids (Bbls)-net production  73,875   11,355 
Natural gas liquids (Bbls)-average realized price $22.49  $15.22 
         
Barrels of oil equivalent (BOE)  575,229   127,863 
Average daily net production (BOE)  1,576   350 
Average Price per BOE $37.57  $26.87 

 

(1)Does not include the realized price effects of hedges
(2)Includes proceeds from the sale of NGL's

Oil and gas production costs, production taxes, depreciation, depletion, and amortization

Production costs per BOE  15.70   20.52   19.48 
Production taxes per BOE  2.24   5.80   4,21 
Depreciation, depletion, and amortization per BOE  46.93   28.76   38.21 
Total operating costs per BOE (1) $64.87  $55.08  $61.90 
Gross margin per BOE (1) $(35.20) $8.28  $12.53 
Gross margin percentage  119%  13%  17%

(1)Does not include the loss on conveyance

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Oil and Natural Gas Production Costs, Production Taxes, Depreciation, Depletion, and Amortization

  For the Years Ended December 31,
  2017 2016
Production costs per BOE $12.21  $12.43 
Production taxes per BOE  2.06   (1.30)
Depreciation, depletion, and amortization per BOE  12.21   12.25 
Total operating costs per BOE $26.48  $23.38 

The average oil and NGL sales prices above are calculated by dividing revenue from oil sales by volume of oil sold, in barrels “Bbl.” The average natural gas sales prices above are calculated by dividing revenue from natural gas sales by the volume of natural gas sold, in thousand cubic feet “Mcf.” The total average sales price amounts are calculated by dividing total revenues by total volume sold, in BOE. The average production costs above are calculated by dividing production costs by total production in BOE.

Acreage

The following table sets forth our approximate gross and net developed and undeveloped acreage as of December 31, 2017:

  Undeveloped Acreage  Developed Acreage  Total 
  Gross  Net  Gross  Net  Gross  Net 
Delaware Basin  26,900   10,400   8,300   5,300   35,200   15,700 

Productive Wells

 

As of December 31, 2015,2017, we have had working interests in 613 gross (1.27(10.4 net) productive oil wells and 210 gross (0.14(6.6 net) productivenatural gas wells. A net well is our percentage ownership interest of a gross well.

Productive wells are either wells producing in commercial quantities or wells capable of commercial production, althoughbut are currently shut-in. Multiple completions in the same wellbore are counted as one well. A well is categorized under state reporting regulations as an oil well or a natural gas well based on the ratio of natural gas to oil produced when it first commenced production, and such designation may not be indicative of current production.

 

AcreageDrilling Activity

Exploratory Wells

During 2017, we drilled 8 gross (6.7 net) horizontal exploratory wells in the Delaware Basin. We completed and placed on production 5 gross (4.1 net) horizontal exploratory wells, leaving 3 gross (2.6 net) horizontal exploratory wells drilled but not yet completed as of December 31, 2017. All of these wells were successful and none were a dry hole.

During 2016, we drilled 2 gross (1.6 net) horizontal exploratory wells in Texas. These wells were drilled but not yet completed. These wells were successful and placed on production during the first quarter of 2017.

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Year Ended December 31,
  2017  2016 
  Gross  Net  Gross  Net 
Exploratory:            
Productive  5.00   4.10   —   — 
Dry  —   —   —   — 
Total:                
Productive  5.00   4.10   —   — 
Dry  —       —   — 

 

As of December 31, 2015,2017, we owned 8 producinghad 3 gross (2.6 net) wells in Wyoming, Nebraska and Colorado within the DJ Basin, as well as approximately 18,000process of drilling, completing or dewatering or shut in awaiting infrastructure that are not reflected in the above table. At December 31, 2016, we had 2 gross (16,000(1.6 net) acres,wells in the process of which 10,000 gross (8,000 net) acresdrilling, completing or dewatering or shut in awaiting infrastructure that are not reflected in the above table that were classified as undeveloped acreage. Our primary assets included acreage located in Laramie and Goshen Counties in Wyoming; Banner, Kimball, and Scotts Bluff Counties in Nebraska; and Weld, Arapahoe and Elbert Counties in Colorado.  placed on production during the first quarter of 2017.

 

The following table sets forth our gross and net developed and undeveloped acreage as ofPresent Activities

Subsequent to December 31, 2015:

  Undeveloped  Developed 
  Gross  Net  Gross  Net 
DJ Basin  10,000   8,000   8,000   8,000 
                 
Total  10,000   8,000   8,000   8,000 

Currently, our inventory of developed2017 and undeveloped acreage includes approximately 18,000 gross (16,000 net) acres, of which 10,000 gross (8,000 net) that are held by production, approximately, 2,000, 5,000 and 1,000 net acres that expirethrough March 1, 2018, we drilled or were in the years 2016, 2017,process of drilling 6 gross (5.1 net) horizontal wells and thereafter, respectively. Approximately 88%completed or were in the process of our inventory of undeveloped acreage provides for extension of lease terms from two to five years, at our option, by payment of varying, but typically nominal, extension amounts. In 2015, we evaluated our leasescompleting 4 gross (3.6 net) horizontal wells and allowed 63% of our leaseholds to expire due to capital constraints or the determination that present and future carrying and drilling costs were uneconomic. We continue to evaluate the 2016 and 2017 lease expirations to determine if production on this acreage would be economic and as such is a focus for future development. If determined to be a focus for future development, we plan to re-lease if available. If not a focus, we plan to let the acreage expire. We will continue to pursue additional properties, acquire other properties throughout North America, or drillhad 5 gross (4.1 net) horizontal wells on our core properties to hold the property by production if financing is available to us and the properties are economic.awaiting completion.

Drilling Activity

The following table describes the development and exploratory wells we drilled from 2013 through 2015:

  For the Year Ended December 31, 
  2015  2014  2013 
  Gross  Net  Gross  Net  Gross  Net 
Development:                  
Productive wells  -   -   -   -   2   1 
Dry wells  -   -   -   -   -   - 
   -   -   -   -   2   1 
Exploratory:                        
Productive wells  -   -   -   -   -   - 
Dry wells  -   -   -   -   -   - 
                         
                         
Total development and exploratory  -   -   -   -   2   1 

The number of wells drilled refers to the number of wells completed at any time during the respective year, regardless of when drilling was initiated. 

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Title to Properties

 

Substantially allWe generally conduct a preliminary title examination prior to the acquisition of properties or leasehold interests. Prior to commencement of operations on such acreage, a thorough title examination will usually be conducted and any significant defects will be remedied before proceeding with operations. We believe the title to our leasehold interestsproperties is good, defensible and customary with practices in the oil and natural gas industry, subject to such exceptions that we believe do not materially detract from the use of such properties. Our properties are held pursuantpotentially subject to leases from third parties. Theone or more of the following:

·royalties and other burdens and obligations under oil and natural gas leases, purchase agreements and leasehold assignments;
·overriding royalties and other burdens created by us or our predecessors in title;
·contractual obligations arising under operating agreements, farm-out agreements, production sales contracts and other agreements that may affect the properties or their titles;
·liens that arise in the normal course of operations, including those for unpaid taxes, statutory liens securing obligations to unpaid suppliers and contractors and contractual liens under operating agreements; and
·easements, restrictions, rights-of-way and other matters that commonly affect property.

Additionally, the majority of our producing properties areDelaware Basin leasehold position is subject to mortgages securing indebtedness under both our Credit Agreement, entered into on January 8, 2015 (the “Credit Agreement”) with Heartland Bank (“Heartland”), as administrative agentcredit and the lenders party thereto, andguarantee agreement.

With respect to our 8% Senior Secured Convertible Debentures (“Debentures”),properties of which we believe doare not materially interferethe record owner, we rely instead on contracts with the useowner or operator of the property or affectassignment of leases, pursuant to which, among other things, we generally have the value of, such properties.right to have our interest placed on record.

 

Marketing and Pricing

We derive revenue and cash flow principally from the sale of oil and natural gas.  As a result, our revenues are determined, to a large degree, by prevailing prices for crude oil and natural gas.  We sell our oil and natural gas on the open market at prevailing market prices or through forward delivery contracts.  The market price for oil and natural gas is dictated by supply and demand, and we cannot accurately predict or control the price we may receive for our oil and natural gas.

Our revenues, cash flows, profitability and future rate of growth will depend substantially upon prevailing prices for oil and natural gas.  Prices may also affect the amount of cash flow available for capital expenditures and other cash requirements and our ability to borrow money or raise additional capital.  Lower prices may also adversely affect the value of our reserves and make it uneconomical for us to commence or continue production levels of natural gas and crude oil.  Historically, the prices received for oil and natural gas have fluctuated widely.  Among the factors that can cause these fluctuations are:

●changes in global supply and demand for oil and natural gas;
●the actions of the Organization of Petroleum Exporting Countries;
●the price and quantity of imports of foreign oil and natural gas;
●acts of war or terrorism;
●political conditions and events, including embargoes, affecting oil-producing activity;
●the level of global oil and natural gas exploration and production activity;
●the level of global oil and natural gas inventories;
●weather conditions;
●technological advances affecting energy consumption;
●transportation options from trucking, rail, and pipeline; and
●the price and availability of alternative fuels.

Furthermore, regional natural gas, condensate, oil and NGL prices may move independently of broad industry price trends. Because some of our operations are located outside major markets, we are directly impacted by regional prices regardless of Henry Hub, WTI or other major market pricing.

From time to time, we may enter into derivative contracts. These contracts economically hedge our exposure to decreases in the prices of oil and natural gas. Hedging arrangements may expose us to risk of significant financial loss in some circumstances, including instances in which:

●there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received;
●our production and/or sales of oil or natural gas are less than expected;
●payments owed under derivative hedging contracts come due prior to receipt of the hedged month’s production revenue; or
●the other party to the hedging contract defaults on its contract obligations.

In addition, hedging arrangements may limit the benefit we would receive from increases in the prices for oil and natural gas.

As of December 31, 2015, we had no hedging agreements in place.

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Major Customers

Our major customers include, Shell Trading (US), PDC Energy and Noble Energy. These customers accounted for approximately 42%, 26% and 21% of our revenue for the year ended December 31, 2015 and approximately 63%, 14% and 9% of our revenue for the year ended December 31, 2014, respectively. 

However, we do not believe that the loss of any single customer would materially affect our business because there are numerous other purchasers of our production.

Seasonality

Generally, but not always, the demand and price levels for natural gas increase during colder winter months and decrease during warmer summer months. To lessen seasonal demand fluctuations, pipelines, utilities, local distribution companies, and industrial users utilize natural gas storage facilities and forward purchase some of their anticipated winter requirements during the summer.  However, increased summertime demand for electricity has placed increased demand on storage volumes.  Demand for crude oil and heating oil is also generally higher in the winter and the summer driving season, although oil prices are much more driven by global supply and demand.  Seasonal anomalies, such as mild winters, sometimes lessen these fluctuations.  The impact of seasonality on crude oil has been somewhat magnified by overall supply and demand economics attributable to the narrow margin of production capacity in excess of existing worldwide demand for crude oil.

CompetitionCompetitive Business Conditions

 

The oil and gas industry is intensely competitive, particularly with respect to acquiring prospective oil and natural gas properties. We believe our leasehold position provides a solid foundation for an economically robust exploration program and our future growth. Our success and growth also dependsdepend on our geological, geophysical, and engineering expertise, design and planning, and our financial resources. We believe the location of our acreage, our technical expertise, available technologies, our financial resources and expertise, and the experience and knowledge of our management enables us to compete effectively in our core operating areas. However, we face intense competition from a substantial number of major and independent oil and gas companies, which have larger technical staffs and greater financial and operational resources than we do.  Many of these companies not only engage in the acquisition, exploration, development, and production of oil and natural gas reserves, but also have refining operations, market refined products, own drilling rigs, and generate electricity.resources.

 

We also compete with other oil and gas companies in attempting to secure drilling rigs and other equipment and services necessary for the drilling, completion, production, processing and maintenance of wells. Consequently, we may face shortages or delays in securing these services from time to time. The oil and gas industry also faces competition from alternative fuel sources, including other fossil fuels such as coal and imported liquefied natural gas. Competitive conditions may also be affected by future new energy, climate-related, financial, and other policies, legislation, and regulations.

 

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In addition, we compete for people, including experienced geologists, geophysicists, engineers, and other professionals and consultants. Throughout the oil and gas industry, the need to attract and retain talented people has grown at a time when the number of talented people available is constrained. We are not insulated from this resource constraint, and we must compete effectively in this market in order to be successful.

 

Marketing and Pricing

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Government RegulationsWe derive revenue and cash flow principally from the sale of oil, natural gas and NGLs. As a result, our revenues are determined, to a large degree, by prevailing prices for crude oil, natural gas and NGLs. We sell our oil and natural gas on the open market at prevailing market prices or through forward delivery contracts. The market price for oil, natural gas and NGLs is dictated by supply and demand, and we cannot accurately predict or control the price we may receive for our oil and natural gas.

Our revenues, cash flows, profitability and future rate of growth will depend substantially upon prevailing prices for oil, natural gas and NGLs. Prices may also affect the amount of cash flow available for capital expenditures and other cash requirements and our ability to borrow money or raise additional capital. Lower prices may also adversely affect the value of our reserves and make it uneconomical for us to commence or continue production levels of natural gas and crude oil. Historically, the prices received for oil, natural gas and NGLs have fluctuated widely.

Furthermore, regional natural gas, condensate, oil and NGL prices may move independently of broad industry price trends. Because some of our operations are located outside major markets, we are directly impacted by regional prices regardless of Henry Hub, WTI or other major market pricing.

From time to time, we may enter into derivative contracts. These contracts economically hedge our exposure to decreases in the prices of oil and natural gas. Hedging arrangements may expose us to risk of significant financial loss in some circumstances. In addition, hedging arrangements may limit the benefit we would receive from increases in the prices for oil and natural gas.

Major Customers

Our major customers for the year ended December 31, 2017 include Texican Crude & Hydrocarbons, LLC and ETC Field Services LLC, who accounted for approximately 85% and 14% of our revenue for the year ended December 31, 2017, respectively. Our major customers for the year ended December 31, 2016 included Noble Energy, Inc., Texican Crude & Hydrocarbons, LLC and Energy Transfer Partners, L.P., who accounted for approximately 41%, 38%, and 16% of our revenue for the year ended December 31, 2016, respectively.

Delivery Commitments

As of December 31, 2017, we were not committed to providing a fixed quantity of oil or natural gas under any existing contracts.

Regulation of the Oil and Natural Gas Industry

 

General.Our operations covering the exploration, production and sale of oil and natural gas are subject to various types of federal, state and local laws and regulations. The failure to comply with these laws and regulations can result in substantial penalties. These laws and regulations materially impact our operations and can affect our profitability. However, we do not believe that these laws and regulations affect us in a manner significantly different than our competitors. Matters regulated include, but are not limited to, permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells and unitization and pooling of properties, restoration of surface areas, plugging and abandonment of wells, requirements for the operation of wells, production and processing facilities, land use, subsurface injection, air emissions, the disposal of fluids used or other wastes obtained in connection with operations, the valuation and payment of royalties and taxation of production, etc.production. At various times, regulatory agencies have imposed price controls and limitations on production. In order to conserve supplies of oil and natural gas, these agencies have restricted the rates of flow of oil and natural gas wells below actual production capacity, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding production. Federal, state and local laws regulate production, handling, storage, transportation and disposal of oil and natural gas, by-products from oil and natural gas and other substances and materials produced or used in connection with oil and natural gas operations. While we believe that we will be able to substantially comply with all applicable laws and regulations viathrough our strict attention to regulatory compliance, the requirements of such laws and regulations are frequently changed.amended or reinterpreted. Therefore, we are unable to predict the future costs or impact of compliance. Additional proposals and proceedings that affect the oil and natural gas industry are regularly considered by Congress, the states, Federal Energy Regulatory Commission (the "FERC") and the courts. We cannot predict the ultimate cost of compliance with these requirementswhen or their effect on our actual operations.whether any such proposals may become effective. We do not believe that we would be affected by any such action materially differently than similarly situated competitors.

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Federal Income TaxRegulation of Production of Oil and Natural Gas. Federal income tax laws significantly affect our operations.  The principal provisions that affect us are those that permit us,production of oil and natural gas is subject to certain limitations, to deduct as incurred, rather than to capitalizeregulation under a wide range of local, state and amortize/depreciate, our domestic “intangiblefederal statutes, rules, orders and regulations. Federal, state and local statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. We own interests in properties located in Texas, which regulates drilling and development costs”operating activities by requiring, among other things, permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and to claim depletion onregulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled and the plugging and abandonment of wells. The laws of Texas also govern a portionnumber of our domesticconservation matters, including provisions for the unitization or pooling of oil and natural gas properties, based on 15%the establishment of ourmaximum allowable rates of production from oil and natural gas gross incomewells, the regulation of well spacing or density, and plugging and abandonment of wells. The effect of these regulations is to limit the amount of oil and natural gas that we can produce from our wells and to limit the number of wells or the locations at which we can drill, although we can apply for exceptions to such properties (upregulations or to an aggregate of 1,000 barrels per day of domestic crudehave reductions in well spacing or density. Moreover, Texas imposes a 4.6% severance tax on oil and/or equivalent units of domesticproduction and a 7.5% severance tax on natural gas). gas production. The failure to comply with these rules and regulations can result in substantial penalties. Our competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions that affect our operations.

 

Environmental, Health, and Safety Regulations.Our operations are subject to stringent federal, state, and local laws and regulations relating to the protection of the environment and human health and safety (“EHS”). We are committed to strict compliance with these regulations and the utmost attention to EHS issues. Environmental laws and regulations may require that permits be obtained before drilling commences or facilities are commissioned, restrict the types, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities, govern the handling and disposal of waste material, and limit or prohibit drilling and exploitation activities on certain lands lying within wilderness, wetlands, and other protected areas, including areas containing threatened or endangered animal species. As a result, these laws and regulations may substantially increase the costs of exploring for, developing, or producing oil and natural gas and may prevent or delay the commencement or continuation of certain projects. In addition, these laws and regulations may impose substantial clean-up, remediation, and other obligations in the event of any discharges or emissions in violation of these laws and regulations. Further, legislative and regulatory initiatives related to global warming or climate change could have an adverse effect on our operations and the demand for oil and natural gas. See “Risk Factors—RisksFactors-Risks Relating to the Oil and Gas Industry—LegislativeIndustry-Legislative and regulatory initiatives related to global warming and climate change could have an adverse effect on our operations and the demand for oil and natural gas.”

Hydraulic fracturing The following is an importanta summary of the more significant existing and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight unconventional formations.  For additional information about hydraulic fracturingproposed environmental and related regulatory matters, see “Risk Factors—Risks Relating to the Oiloccupational health and Gas Industry.”  Federal and state legislation and regulatory initiatives related to hydraulic fracturing could result in increased costs and additional operating restrictions or delays /cancellations in the completion of oil and gas wells.

Federal and state occupational safety and health laws require us to organize and maintain information about hazardous materials used, released, or produced in our operations.  Some of this information must be provided to our employees, state and local governmental authorities, and local citizens.  We are also subject to the requirements and reporting framework set forth in the federal workplace standards.

The discharge of oil, gas or other pollutants into the air, soil or water may give rise to liabilities to the government and third parties and may require us to incur costs to remedy discharges.  Natural gas, oil or other pollutants, including salt water brine, may be discharged in many ways, including from a well or drilling equipment at a drill site, leakage from pipelines or other gathering and transportation facilities, leakage from storage tanks and sudden discharges from damage or explosion at natural gas facilities of oil and gas wells.  Discharged hydrocarbons may migrate through soil to fresh water aquifers or adjoining property, giving rise to additional liabilities.

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A variety of federal and state laws and regulations govern the environmental aspects of natural gasto which our business operations are or may be subject and oil production, transportation and processing. These laws and regulationsfor which compliance may impose liability in the event of discharges, including for accidental discharges, failure to notify the proper authorities of a discharge, and other noncompliance.  Compliance with such laws and regulations may increase the cost of oil and gas exploration, development and production; although we do not anticipate that compliance will have a material adverse effectimpact on our capital expenditures, results of operations or earnings.  Failurefinancial position. During the years ended December 31, 2017 and 2016, we incurred approximately $32,000 and approximately $182,000, respectively, related to complycompliance with the requirements of the applicableenvironmental laws for our oil and regulations could subject us to substantial civil and/or criminal penalties and to the temporary or permanent curtailment or cessation of all or a portion of our operations.natural gas properties.

 

The Comprehensive Environmental Response, CompensationResource Conservation and LiabilityRecovery Act (“CERCLA”), also known as the “superfund law,” imposes liability, regardless of fault or the legality of the original conduct, on some classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of a disposal site or sites where the release occurred and companies that transport, dispose, or arrange for disposal of the hazardous substance(s) released.  Persons who are or were responsible for releases of hazardous substances under CERCLA may be jointly and severally liable for the costs of cleaning up the hazardous substances and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.  We could be subject to liability under CERCLA, including for jointly owned drilling and production activities that generate relatively small amounts of liquid and solid waste that may be subject to classification as hazardous substances under CERCLA.

 

The Resource Conservation and Recovery Act of 1976, as amended (“RCRA”) is, and the principal federal statute governingcomparable state statutes, regulate the generation, transportation, treatment, storage, disposal and disposalcleanup of solidhazardous and hazardousnon-hazardous wastes. The RCRA imposes stringent operating requirements, and liability for failure to meet such requirements, on a person who is either a “generator” or “transporter” of hazardous waste or an “owner” or “operator” of a hazardous waste treatment, storage or disposal facility. At present, the RCRA includes an exemption that allows certain oil and natural gas exploration and production waste to be classified as nonhazardous waste. A similar exemption is contained in many of the state counterparts to RCRA. As a result, we are not required to comply with a substantial portion of RCRA’s hazardous waste requirements. At various times in the past, proposals have been made to amend the RCRA to rescind the exemption that excludes oil and natural gas exploration and production wastes from regulation as hazardous waste. For example, in 2010, a petition was filed by the Natural Resources Defense Council (“NRDC”) with the Environmental Protection Agency (“EPA”) requesting that the agency reassess its prior determination that certain exploration and production wastes are not subject to the RCRA hazardous waste requirements. The EPA has not yet acted on the petitionpetition. On May 5, 2016, moreover, the NRDC, along with other environmental organizations, commenced a lawsuit against the EPA, asking the U.S. District Court for the District of Columbia to order the agency to “revise” its RCRA regulations as they pertain to oil and gas wastes. On December 28, 2016, the court signed a consent decree, resolving the lawsuit, under which the EPA agreed that, by March 15, 2019, it remains pending.will either sign a notice of proposed rulemaking for a revision of its RCRA regulations as they pertain to oil and gas wastes (in which case it will take a final action on the proposed rulemaking by July 15, 2021) or sign a determination that no such revision is necessary. Repeal or modification of the RCRA oil and gas exemption by administrative, legislative or judicial process, or modification of similar exemptions in applicable state statutes, would increase the volume of hazardous waste we are required to manage and dispose of and would cause us to incur, perhaps significantly, increased operating expenses.

 

The Oil Pollution Act of 1990 (“OPA”), and regulations thereunder impose a variety of regulations on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in United States waters.  The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages, including natural resource damages.  While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of federal safety, construction or operating regulations.  Few defenses exist to the liability imposed by OPA. In addition, to the extent we acquire offshore leases and those operations affect state waters, we may be subject to additional state and local clean-up requirements or incur liability under state and local laws.  OPA also imposes ongoing requirements on responsible parties, including proof of financial responsibility to cover at least some costs in a potential spill.  We cannot predict whether the financial responsibility requirements under the OPA amendments will adversely restrict our proposed operations or impose substantial additional annual costs to us or otherwise materially adversely affect us.  The impact, however, should not be any more adverse to us than it will be to other similarly situated owners or operators.

The Endangered Species Act restricts activities that may affect federally identified endangered and threatened species or their habitats through the implementation of operating restrictions or a temporary, seasonal, or permanent ban in affected areas. Additionally, significant federal decisions, such as the issuance of federal permits or authorizations for certain oil and gas exploration and production activities may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major federal agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. This process has the potential to delay oil and gas development projects.

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Water Discharges

 

The federalFederal Water Pollution Control Act, also known as the Clean Water Act (the “Clean Water Act”) imposes restrictions and controls on the discharge of produced waters and other oil and natural gas wastes into navigable waters. Permits must be obtained to discharge pollutants into state and federal waters and to discharge fill and pollutants into regulated waters and wetlands. Uncertainty regarding regulatory jurisdiction over wetlands and other regulated waters of the United States has complicated, and will continue to complicate and increase the cost of, obtaining such permits or other approvals. Certain state regulations and the general permits issued under the Federal National Pollutant Discharge Elimination System program prohibit the discharge of produced waters and sand, drilling fluids, drill cuttings and certain other substances related to the crude oil and natural gas industry into certain coastal and offshore waters. Further, the EPA has adopted regulations requiring certain crude oil and natural gas exploration and production facilities to obtain permits for storm water discharges. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans. Spill Prevention, Control, and Countermeasure requirements of the Clean Water Act require appropriate secondary containment loadout controls, piping controls, berms and other measures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon spill, rupture or leak. The EPA and U.S. Army Corps of Engineers released a Connectivity Report in September 2013, which determined that virtually all tributary streams, wetlands, open water in floodplains and riparian areas are connected. This report supported the drafting of proposed rules providing updated standards for what will be considered jurisdictional waters of the United States. Those rules were finalized on May 27, 2015. Then, on October 9, 2015, in presiding over a challenge to the rules, the U.S. Court of Appeals for the Sixth Circuit stayed them, nationwide. The stay remains in place while the Sixth Circuit assesses itsIt later determined (in February of 2016) that it has jurisdiction to adjudicate the challenge and, if it determineschallenge. In January of 2017, the U.S. Supreme Court accepted an appeal of that it has such jurisdiction,determination. In the meritsmeantime, the Sixth Circuit’s stay of the challenge itself.rules remains in place. On February 28, 2017, moreover, President Trump directed the EPA to review the rules and “publish for notice and comment a proposed rule rescinding or revising the rules, as appropriate and consistent with law.” The Clean Water Act and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges of crude oil and other pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release. We believe that our operations comply in all material respects with the requirements of the Clean Water Act and state statutes enacted to control water pollution.

 

The Oil Pollution Act of 1990 (“OPA”) and regulations thereunder impose a variety of regulations on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. The OPA assigns strict liability to each responsible party for oil removal costs and a variety of public and private damages, including natural resource damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of federal safety, construction or operating regulations. Few defenses exist to the liability imposed by the OPA. In addition, to the extent we acquire offshore leases and those operations affect state waters, we may be subject to additional state and local clean-up requirements or incur liability under state and local laws. The OPA also imposes ongoing requirements on responsible parties, including proof of financial responsibility to cover at least some costs in a potential spill. We cannot predict whether the financial responsibility requirements under the OPA amendments will adversely restrict our proposed operations or impose substantial additional annual costs to us or otherwise materially adversely affect us. The impact, however, should not be any more adverse to us than it will be to other similarly situated owners or operators.

Safe Drinking Water Act

The Safe Drinking Water Act of 1974, as amended, establishes a regulatory framework for the underground injection of a variety of wastes, including bringbrine produced and separated from crude oil and natural gas production, with the main goal being the protection of usable aquifers. The primary objective of injection well operating permits and requirements is to ensure the mechanical integrity of the wellbore and to prevent migration of fluids from the injection zone into underground sources of drinking water. Class II underground injection wells, a predominant storage method for crude oil and natural gas wastewater, are strictly controlled, and certain wastes, absent an exemption, cannot be injected into such wells. Failure to abide by our permits could subject us to civil or criminal enforcement. We believe that we are in compliance in all material respects with the requirements of applicable state underground injection control programs and our permits. In Texas, the Texas Railroad Commission (“RRC”) regulates the disposal of produced water by injection well. The RRC requires operators to obtain a permit from the agency for the operation of saltwater disposal wells and establishes minimum standards for injection well operations. In response to recent seismic events near underground injection wells used for the disposal of oil and gas-related wastewaters, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have shut down or imposed moratoria on the use of such injection wells. In response to these concerns, regulators in some states are considering additional requirements related to seismic safety. For example, the RRC has adopted new permit rules for injection wells to address these seismic activity concerns within the state. Among other things, the rules require companies seeking permits for disposal wells to provide seismic activity data in permit applications, provide for more frequent monitoring and reporting for certain wells, and allow the RRC to modify, suspend, or terminate permits on grounds that a disposal well is likely to be, or determined to be, causing seismic activity. These new rules could impact the availability of injection wells for disposal of wastewater from our operations. Increased costs associated with the transportation and disposal of produced water, including the cost of complying with regulations concerning produced water disposal, may reduce our profitability; however, these costs are commonly incurred by all oil and gas producers and we do not believe that the costs associated with the disposal of produced water will have a material adverse effect on our operations.

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Air Pollutant Emissions

 

The federal Clean Air Act (the “Clean Air Act”) and comparable state and local air pollution laws adopted to fulfill its mandate provide a framework for national, state and local efforts to protect air quality. Our operations utilize equipment that emits air pollutants which may be subject to federal and state air pollution control laws. These laws generally require utilization of air emissions control equipment to achieve prescribed emissions limitations and ambient air quality standards, as well as operating permits for existing equipment and construction permits for new and modified equipment. We believe that we are in compliance in all material respects with the requirements of applicable federal and state air pollution control laws. Over the next several years, we may be required to incur capital expenditures for air pollution control equipment or other air emissions-related issues. The EPA promulgated significant New Source Performance Standards (“NSPS OOOO”) in 2012, as amended in 2013 and 2014, which have added administrative and operational costs. On September 18, 2015, the EPA published proposed regulations that would build on the NSPS OOOO standards by directly regulating methane and volatile organic compound (“VOC”) emissions from various types of new and modified oil and gas sources.  Some of those sources are already regulated under NSPS OOOO, while others, like hydraulically fractured oil wells, pneumatic pumps, and certain equipment and components at gas well sites and compressor stations, would be covered for the first time.  On March 10, 2016, moreover, the EPA announced that it is moving towards issuing performance standards for methane emissions from existing oil and gas sources.  The agency said that it will “begin with a formal process (i.e., an Information Collection Request) to require companies operating existing oil and gas sources to provide information to assist in the development of comprehensive regulations to reduce methane emissions.”

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Colorado adopted NSPS OOOO in 2014. In addition, Colorado adopted new air regulations for the oil and gas industry effective April 14, 2014, that impose control and other requirements more stringent than NSPS OOOO. These new Colorado oil and natural gas air rules will likely increase our administrative and operational costs.

 

On October 1, 2015, under the federal Clean Air Act, the EPAloweredEPA lowered the national ambient air quality standard for ozone from 75 ppb to 70 ppb. This change could result in an expansion of ozone nonattainment areas across the United States, including areas in which we operate. Oil and natural gas operations in ozone nonattainment areas would likely be subject to increaseincreased regulatory burdens in the form of more stringent emission controls, emission offset requirements, and increased permitting delays and costs.

 

Along these lines, on September 18, 2015,Regulation of “Greenhouse Gas” Emissions

In response to findings that emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”) present an endangerment to public health and the environment, the EPA, proposed Control Techniques Guidelinesunder the Clean Air Act, has adopted regulations that, among other things, establish Prevention of Significant Deterioration (“PSD”), construction, and Title V operating permit requirements for certain new and modified large stationary sources. Facilities required to comply with PSD requirements for their GHG emissions will be required to meet “best available control technology” standards for those emissions, which will be established on a case-by-case basis. EPA rulemakings related to GHG emissions could adversely affect our operations and restrict or delay our ability to obtain air permits for new or modified sources. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified onshore and offshore oil and natural gas production sources in the United States on an annual basis, which include certain of our operations. 

While Congress has from time to time considered legislation to reduce emissions fromof GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of existingstate and regional cap and trade programs have emerged that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting GHGs. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our exploration and production operations.

Hydraulic Fracturing Activities

Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight unconventional formations. For additional information about hydraulic fracturing and related regulatory matters, see “Risk Factors-Risks Relating to the Oil and Gas Industry.” Federal and state legislation and regulatory initiatives related to hydraulic fracturing could result in increased costs and additional operating restrictions or delays /cancellations in the completion of oil and gas sourceswells.

Federal and state occupational safety and health laws require us to organize and maintain information about hazardous materials used, released, or produced in our operations. Some of this information must be provided to our employees, state and local governmental authorities, and local citizens. We are also subject to the requirements and reporting framework set forth in the federal workplace standards.

The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to the government and third parties and may require us to incur costs to remedy discharges. Natural gas, oil or other pollutants, including salt water brine, may be discharged in many ways, including from a well or drilling equipment at a drill site, leakage from pipelines or other gathering and transportation facilities, leakage from storage tanks and sudden discharges from damage or explosion at natural gas facilities of oil and gas wells. Discharged hydrocarbons may migrate through soil to fresh water aquifers or adjoining property, giving rise to additional liabilities.

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Several states, including Texas, and local jurisdictions have adopted, or are considering adopting, regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For example, the Texas Legislature adopted legislation, effective September 1, 2011, requiring oil and gas operators to publicly disclose the chemicals used in the hydraulic fracturing process. The RRC adopted rules and regulations implementing this legislation that apply to all wells for which the RRC issues an initial drilling permit after February 1, 2012. The law requires that the well operator disclose the list of chemical ingredients subject to the requirements of OSHA for disclosure on an internet website and also file the list of chemicals with the RRC with the well completion report. The total volume of water used to hydraulically fracture a well must also be disclosed to the public and filed with the RRC.

Further, in May 2013, the RRC adopted new rules governing well casing, cementing and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources. Local government also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. In addition, the Texas Legislature adopted new legislation requiring oil and gas operators to publicly disclose the chemicals used in the hydraulic fracturing process, effective as of September 1, 2011. The RRC has adopted rules and regulations implementing this legislation that apply to all wells for which the RRC issues an initial drilling permit after February 1, 2012. The new law requires that the well operator disclose the list of chemical ingredients subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) for disclosure on an internet web site and also file the list of chemicals with the RRC with the well completion report. The total volume of water used to hydraulically fracture a well must also be disclosed to the public and filed with the RRC.

We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. Nonetheless, if new or more stringent federal, state, or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from drilling wells.

A variety of federal and state laws and regulations govern the environmental aspects of natural gas and oil production, transportation and processing. These laws and regulations may impose liability in the event of discharges, including for accidental discharges, failure to notify the proper authorities of a discharge, and other noncompliance. Compliance with such laws and regulations may increase the cost of oil and natural gas exploration, development and production; although we do not anticipate that compliance will have a material adverse effect on our capital expenditures or earnings. Failure to comply with the requirements of the applicable laws and regulations could subject us to substantial civil and/or criminal penalties and to the temporary or permanent curtailment or cessation of all or a portion of our operations.

Comprehensive Environmental Response, Compensation and Liability Act

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the “superfund law,” imposes joint and several liabilities, regardless of fault or the legality of the original conduct, on some classes of persons that are located in certain ozone nonattainment areasconsidered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of a disposal site or sites where the release occurred and statescompanies that transport, dispose, or arrange for disposal of the hazardous substance(s) released. Persons who are or were responsible for releases of hazardous substances under CERCLA may be jointly and severally liable for the costs of cleaning up the hazardous substances and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We could be subject to liability under CERCLA, including for jointly-owned drilling and production activities that generate relatively small amounts of liquid and solid waste that may be subject to classification as hazardous substances under CERCLA.

We generate materials in the Ozone Transport Region (whichcourse of our operations that may be regulated as hazardous substances. Despite the “petroleum exclusion” of CERCLA, which currently encompasses natural gas, we may nonetheless handle hazardous substances within the meaning of CERCLA, or similar state statutes, in the course of our ordinary operations and, as a result, may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites at which these hazardous substances have been released into the environment. In addition, we currently own, lease, or operate numerous properties that have been used for oil and natural gas exploration, production and processing for many years. Although we believe that we have utilized operating and waste disposal practices that were standard in the industry at the time, hazardous substances, wastes, or hydrocarbons may have been released on, under or from the properties owned or leased by us, or on, under or from other locations, including off-site locations, where such substances have been taken for disposal. In addition, some of our properties have been operated by third parties or by previous owners or operators whose treatment and disposal of hazardous substances, wastes, or hydrocarbons was not under our control. These properties and the substances disposed or released on, under or from them may be subject to CERCLA, RCRA and analogous state and local laws. Under such laws, we could be required to undertake investigatory, response, or corrective measures, which could include soil and groundwater sampling, the removal of previously disposed substances and wastes, the cleanup of contaminated property, or performance of remedial plugging or pit closure operations to prevent future contamination, the costs of which could be substantial.

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Endangered Species Act and Migratory Birds

The Endangered Species Act (“ESA”) restricts activities that may affect federally identified endangered and threatened species or their habitats through the implementation of operating restrictions or a temporary, seasonal, or permanent ban in affected areas. Pursuant to the ESA, if a species is comprisedlisted as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. We may conduct operations under oil and natural gas leases in areas where certain species that are listed as threatened or endangered are known to exist and where other species that potentially could be listed as threatened or endangered under the ESA may exist. The U.S. Fish and Wildlife Service (“FWS”) may designate critical habitat and suitable habitat areas that it believes are necessary for survival of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont,a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. Similar protections are offered to migratory birds under the DistrictMigratory Bird Treaty Act. The federal government has issued indictments under the Migratory Bird Treaty Act to several oil and gas companies after dead migratory birds were found near reserve pits associated with drilling activities. The identification or designation of Columbia,previously unprotected species as threatened or endangered in areas where underlying property operations are conducted could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration and Northern Virginia)production activities that could have an adverse impact on our ability to develop and produce reserves. If we were to have a portion of our leases designated as critical or suitable habitat, it could adversely impact the value of our leases.

NEPA

Additionally, significant federal decisions, such as the issuance of federal permits or authorizations for certain oil and gas exploration and production activities may be subject to the National Environmental Policy Act (“NEPA”). Those guidelines would leadThe NEPA requires federal agencies, including the Department of Interior, to evaluate major federal agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment that assesses the potential direct, regulationindirect and cumulative impacts of VOC emissionsa proposed project and, haveif necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. This process has the incidental effectpotential to delay oil and gas development projects.

OSHA

We are subject to the requirements of reducing methane emissions. Thethe OSHA and comparable state statutes whose purpose is to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the Emergency Planning and Community Right-to-Know Act and comparable state statutes and any implementing regulations would take the form of reasonably available control technology requirements.require that we organize and/or disclose information about hazardous materials used or produced in our operations and that this information be provided to employees, state and local governmental authorities and citizens. We believe that we are in substantial compliance with all applicable laws and regulations relating to worker health and safety.

State Laws

 

There are numerous state laws and regulations in the states in whichwhere we operate whichthat relate to the environmental aspects of our business. These stateSome of those laws and regulations generallyare discussed above. They relate to, among other things, requirements to remediate spills of deleterious substances associated with oil and gas activities, the conduct of salt water disposal operations, and the methods of plugging and abandonment of oil and gas wells which have been unproductive. Numerous state laws and regulations also relate to air and water quality.

 

In 2014, Colorado Governor Hickenlooper created the Task Force on State and Local Regulation of Oil and Gas Operations (“Task Force”) to provide recommendations regarding the state and local regulation of oil and gas operations. The Task Force provided its final recommendations on February 27, 2015, which include recommendations for future Colorado rulemakings or legislation to address, among others, local government collaboration with oil and gas operators, operator registration requirements with local governments and submission of operational information for incorporation into local comprehensive plans, and creation of an oil and gas information clearinghouse. We cannot predict the ultimate outcome of the Task Force’s recommendations.

Additionally, the Colorado Oil and Gas Conservation Act (“COGCA”) was amended in 2014 to increase the potential sanctions for violating the COGCA or its implementing regulations, orders, or permits. These amendments increase the maximum penalty per violation per day from $1,000 to $15,000; eliminate a $10,000 maximum penalty for violations that do not result in significant waste of oil and gas resources, damage to correlative rights, or adverse impact to public health, safety, or welfare; require the Colorado Oil and Gas Conservation Commission (“COGCC”) to assess a penalty for each day there is evidence of a violation; and authorize the COGCC to prohibit the issuance of new permits and suspend certificates of clearance for egregious violations resulting from gross negligence or knowing and willful misconduct. In 2015, the COGCC, consistent with the amendments to the COGCA, amended its regulations governing enforcement and penalties. We cannot predict how such regulatory amendments will ultimately affect the penalties assessed by the COGCC in future enforcement cases involving us.General

 

We do not believe that our environmental risks will be materially different from those of comparable companies in the oil and gas industry. We believe our present activities substantially comply, in all material respects, with existing environmental laws and regulations. Nevertheless, we cannot assure you that environmental laws will notmay result in a curtailment of production or material increase in the cost of production, development or exploration orand may otherwise adversely affect our financial condition and results of operations. Although we maintain liability insurance coverage for liabilities from pollution, environmental risks, generally are not fully insurable.

 

In addition, because we have acquired and may acquire interests in properties that have been operated in the past by others, we may be liable for environmental damage, including historical contamination, caused by such former operators. Additional liabilities could also arise from continuing violations or contamination not discovered during our assessment of the acquired properties.

 

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Natural Gas Sales and Transportation. Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties. FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC’s initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities.

Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting natural gas to point-of-sale locations.

Oil Sales and Transportation. Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future.

Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors.

Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by pro-rationing provisions set forth in the pipelines’ published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.

Federal Income Tax. Federal income tax laws significantly affect our operations. The principal provisions that affect us are those that permit us, subject to certain limitations, to deduct as incurred, rather than to capitalize and amortize/depreciate, our domestic “intangible drilling and development costs” and to claim depletion on a portion of our domestic oil and natural gas properties based on 15% of our oil and natural gas gross income from such properties (up to an aggregate of 1,000 barrels per day of domestic crude oil and/or equivalent units of domestic natural gas).

 

Federal Leases. For those operations on federal oil and natural gas leases, such operations must comply with numerous regulatory restrictions, including various non-discrimination statutes, and certain of such operations must be conducted pursuant to certain on-site security regulations and other permits issued by various federal agencies. In addition, on federal lands in the United States, the Office of Natural Resources Revenue (“ONRR”) prescribes or severely limits the types of costs that are deductible transportation costs for purposes of royalty valuation of production sold off the lease. In particular, ONRR prohibits deduction of costs associated with marketer fees, cash out and other pipeline imbalance penalties, or long-term storage fees. Further, the ONRR has been engaged in a process of promulgating new rules and procedures for determining the value of crude oil produced from federal lands for purposes of calculating royalties owed to the government. The natural gas and crude oil industry as a whole has resisted the proposed rules under an assumption that royalty burdens will substantially increase. We cannot predict what, if any, effect any new rule will have on our operations.

 

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Some of our operations are conducted on federal lands pursuant to oil and gas leases administered by the Bureau of Land Management (“BLM”).BLM. These leases contain relatively standardized terms and require compliance with detailed regulations and orders, which are subject to change. In addition to permits required from other regulatory agencies, lessees must obtain a permit from the BLM before drilling and comply with regulations governing, among other things, engineering and construction specifications for production facilities, safety procedures, the valuation of production and payment of royalties, the removal of facilities, and the posting of bonds to ensure that lessee obligations are met. Under certain circumstances, the BLM may require our operations on federal leases to be suspended or terminated.

In May 2010, the BLM adopted changes to its oil and gas leasing program that require, among other things, a more detailed environmental review prior to leasing oil and natural gas resources, increased public engagement in the development of master leasing and development plans prior to leasing areas where intensive new oil and gas development is anticipated, and a comprehensive parcel review process.  These changes have increased the amount of time and regulatory costs necessary to obtain oil and gas leases administered by the BLM. In addition, the BLM, on March 20, 2015, issued its final regulations for hydraulic fracturing on federal and tribal lands. The new regulations require, among other things, disclosure of chemicals, annulus pressure monitoring, flow back and produced water management and storage, and more stringent well integrity measures associated with hydraulic fracturing operations on public land. The new regulations become effective on June 24, 2015. BLM has also announced its intention to conduct a separate rulemaking to address venting and flaring of natural gas from oil and gas operations on public land. These hydraulic fracturing-related rulemakings may adversely affect our operations conducted on federal lands.

 

Other Laws and Regulations. Various laws and regulations require permits for drilling wells and also cover spacing of wells, the prevention of waste of natural gas and oil including maintenance of certain gas/oil ratios, rates of production and other matters. The effect of these laws and regulations, as well as other regulations that could be promulgated by the jurisdictions, in which we have production, could be to limit the number of wells that could be drilled on our properties and to limit the allowable production from the successful wells completed on our properties, thereby limiting our revenues.

 

To date we have not experienced any material adverse effect on our operations from obligations under environmental, health, and safety laws and regulations. We believe that we are in substantial compliance with currently applicable environmental, health, and safety laws and regulations, and that continued compliance with existing requirements will not have a materially adverse impact on us.

 

Seasonal Nature of Business

Generally, the demand for oil and natural gas fluctuates depending on the time of year. Seasonal anomalies such as mild winters or hot summers may sometimes lessen this fluctuation. Further, pipelines, utilities, local distribution companies, and industrial end users utilize oil and natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can also lessen seasonal demand.

Operational Hazards and Insurance

The oil business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations.

In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed.

Current Employees

 

As of December 31, 2015,2017, we had four27 full-time employees, and no part-time employees.  For the foreseeable future, we intend to onlycontinue to add additional personnel as our operational requirements grow. In the interim, we planOur employees are not represented by any labor union. We consider our relations with our employees to continue to leverage the use ofbe satisfactory and have never experienced a work stoppage or strike.

We also retain certain independent consultants and contractors to provide various professional services, including additional land, legal, engineering, geology, environmental and tax services.  We believe that by limitingservices on a contract or fee basis as necessary for our management and employee costs, we are able to better control total costs and retain flexibility in terms of project management.operations.

 

Available InformationPrincipal Executive Office

 

Our principal executive offices are located at 216 16th Street,300 E. Sonterra Blvd., Suite 1350, Denver, Colorado 80202,No. 1220, San Antonio, Texas 78258, and our telephone number is (303) 893-9000.(210) 999-5400. Our web site is www.lilisenergy.com. Additional information that mayInternet website can be obtained through our web site does not constitute part of this Annual Report on Form 10-K.found at https://www.lilisenergy.com/. Our Annual Reportsannual reports on Form 10-K, Quarterly Reportsquarterly reports on Form 10-Q, Current Reportscurrent reports on Form 8-K and amendments to those reports are accessible freefiled or furnished pursuant to Section 13(a) or 15(d) of charge atthe Exchange Act of 1934 will be available through our website.Internet website as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains an internet siteinformation on, or that contains reports, proxycan be accessed through, our website is not incorporated by reference into this Annual Report and information statements and other information regarding our filings atwww.sec.gov.should not be considered part of this Annual Report.

 

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Item 1A. Risk Factors

 

Item 1A. Risk Factors

Investing in our shares of common stock involves significant risks, including the potential loss of all or part of your investment. These risks could materially affect our business, financial condition and results of operations and cause a decline in the market price of our shares.common stock. You should carefully consider all of the risks described in this Annual Report, on Form 10-K, in addition to the other information contained in this Annual Report, on Form 10-K, before you make an investment in our shares.common stock. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business. In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors include the following:

 

Risks RelatedRelating to the Merger with BrushyOur Business

 

Our ability to complete the Merger with Brushy, is subject to various closing conditions, including the approval by our stockholders, and as a result, the closing of the merger may be delayed or not be completed, which could adversely affect our business operations and stock prices.

In order for the merger to be completed, our stockholders must approve and adopt the Merger Agreement and related transaction proposals, which requires the affirmative vote of the holders of at least a majority of the issued and outstanding shares of our Common Stock.The Merger Agreement also contains other closing conditions, which are described in the Merger Agreement. We can provide no assurance that the various closing conditions will be satisfied or waived.

The meeting at which our stockholders will vote on the transactions contemplated by the Merger Agreement may take place before all such conditions have been satisfied or waived. As a result, if stockholder approval of the transactions contemplated by the Merger Agreement is obtained at such meeting, we may make a decision after the meeting to waive a condition or approve certain actions required to satisfy a necessary condition without seeking further stockholder approval. Such actions could have an adverse effect on the combined company.

If we are unable to complete the Merger, we would be subject to a number of risks, including the following:

●we would not realize the anticipated benefits of the Merger, including, among other things, increased operating efficiencies;
●the attention of our management may have been diverted to the Merger rather than to our own operations and the pursuit of other opportunities that could have been beneficial to us;
●the potential loss of key personnel during the pendency of the Merger as employees may experience uncertainty about their future roles with the combined company;
●certain costs relating to the Merger, including certain financial advisory, legal and accounting fees and expenses, must be paid even if the Merger is not closed;
●we will have been subject to certain restrictions on the conduct of our business, which may prevent us from making certain acquisitions or dispositions or pursuing certain business opportunities while the Merger is pending; and
●the trading price of our Common Stock may decline to the extent that the current market prices reflect a market assumption that the Merger will be completed.

If the Merger is not completed on or before May 30, 2016, either we or Brushy may terminate the Merger Agreement, unless the failure to complete the Merger by that date is due to the failure of the party seeking to terminate the Merger Agreement to fulfill any material obligations under the Merger Agreement or a material breach of the Merger Agreement by such party. We are also required to pay Brushy a termination fee of $1.2 million if we terminate the Merger under certain circumstances specified in the Merger Agreement.

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The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations or the trading price our Common Stock.

The pendency of the Merger could adversely affect us.

We have agreed in the Merger Agreement to refrain from taking certain actions with respect to our business and financial affairs during the pendency of the Merger, which restrictions could be in place for an extended period of time if completion of the Merger is delayed and could adversely our financial condition, results of operations or cash flows.

We will incur significant transaction, merger-related and restructuring costs in connection with the Merger.

We expect to incur costs associated with combining the operations of the two companies, as well as transaction fees and other costs related to the Merger. The combined company also will incur restructuring and integration costs in connection with the Merger. We are still in the early stages of assessing the magnitude of these costs and additional unanticipated costs may be incurred in the integration of our and Brushy’s businesses. The costs related to restructuring will be expensed as a cost of the ongoing results of operations of either us or Brushy or the combined company. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction, Merger-related and restructuring costs over time, any net benefit may not be achieved in the near term, or at all. Many of these costs will be borne by us even if the Merger is not completed.

Risks Related to Our Company

If we are not able to access additional capital in significant amounts, we may not be able to develop our current prospects and properties, or we may forfeit our interest in certain prospects and we may not be able to continue to operate our business.

We need significant additional capital to continue to operate our properties and continue operations. Currently, a significant portion of our revenue after field level operating expenses is required to be paid to our lenders as debt service. If we are unable to access additional capital, it could negatively impact our production, our income and ultimately our ability to retain our leases.

Our principal sources of liquidity historically have been equity contributions, borrowings under our credit facilities, net cash provided by operating activities, and net proceeds from the issuance of Series A preferred, Series B preferred and Series C preferred shares. Our capital program may require additional financing above the level of cash generated by our operations to fund growth. If our expected cash flow from operations decreases as a result of lower commodity prices or otherwise, our ability to expend the capital necessary to replace our proved reserves, maintain our leasehold acreage or maintain production may be limited, resulting in significantdecreased production and proved reserves over time.

We plan to finance our capital expenditures with cash on hand, cash flow from operations and future issuances of debt and/or equity securities. Our cash flow from operations and access to capital is subject to a number of factors, including:

·our estimated proved oil and natural gas reserves;
·the amount of oil and natural gas we produce from existing wells;
·the prices at which we sell our production;
·the costs of developing and producing our oil and natural gas reserves;
·our ability to acquire, locate and produce new reserves;
·the ability and willingness of banks to lend to us; and
·our ability to access the equity and debt capital markets.

Our operations and other capital resources may not provide cash in sufficient amounts as needed,to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2018 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we have available, we could be required to seek additional sources of capital, which may include refinancing existing debt, joint venture partnerships, production payment financings, offerings of debt or equity securities or other means. We may not be able to develop any of our currentobtain debt or future prospects and properties, may have to forfeit our interest in certain prospects and may not otherwise be able to develop our business. In such an event, we may not be able to continue to operate our business and our common stock and preferred stock may not have any value. 

Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern.

Our independent registered public accounting firm included an explanatory paragraph in its reportequity financing on our financial statements included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, describing the existence of substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of our history of operating losses, along with the recent decrease in commodity prices. Further, we have incurred and expect to continue to incur significant costs in pursuit of our acquisition plans. At December 31, 2015, we had a negative working capital balance and a cash balance of approximately $15.7 million and $110,000, respectively. Our ability to continue as a going concern is subject to our ability to obtain appropriate financing from sources other than our operations. We are currently looking for additional capital, potential Merger candidates,terms favorable, or funding sources which may offer improved opportunities to obtain capital to continue our current operations, further develop our properties, acquire oil and gas properties and to cure any current liabilities deficiencies and any potential defaults in connection with our Credit Agreement with Heartland. We are also evaluating asset divestiture opportunities to provide capital to reduce our indebtedness.

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Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under our indebtedness.

As of March 30, 2016, our total outstanding debt under our Debentures and 12.0% unsecured subordinated convertible notes (“Convertible Notes”), was $6.85 million and $4.25 million, respectively. We currently have a three-year senior secured term loan with an outstanding aggregate principal amount of $2.75 million. We also have a $2.0 million mandatory redeemable preferred stock currently valued at $1.17 million. Our degree of leverage could have important consequences, including the following:

●it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, further exploration, debt service requirements, acquisitions and general corporate or other purposes;
●a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, capital expenditures and future business opportunities;
●the debt service requirements of other indebtedness in the future could make it more difficult for us to satisfy our financial obligations;
●as we have pledged most of our oil and natural gas properties and the related equipment, inventory, accounts and proceeds as collateral for the borrowings under our credit facility, they may not be pledged as collateral for other borrowings and would be at risk in the event of a default thereunder;
●it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt;
●we are vulnerable in the present downturn in general economic conditions and in our business, and we will likely be unable to carry out capital spending and exploration activities that are currently planned; and
●we may from time to time be out of compliance with covenants under our term loan agreements, which will require us to seek waivers from our lenders, which may be difficult to obtain.

We may incur additional debt, including secured indebtedness, or issue preferred stock in order to maintain adequate liquidity and develop and acquire properties to the extent desired. A higher level of indebtedness and/or preferred stock increases the risk that we may default on our obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness depends on our future performance. General economic conditions, natural gas and oil prices and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets, the number of shares of capital stock we have authorized, unissued and unreserved and our performance at the time we need capital.all.

 

Oil, and natural gas and NGL prices are highly volatile,volatile. If commodity prices experience substantial decline, our operations, financial condition, and level of expenditures for the development of our oil, natural gas and NGL reserves may be materially and adversely affected.

The prices we receive for our oil, natural gas, and NGL production heavily influence our revenue, operating results, profitability, cash flow,access to capital, future rate of growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties,properties. Oil, natural gas, and NGLs are substantially dependent on prevailingcommodities, and, therefore, their prices of oilare subject to wide fluctuations in response to relatively minor changes in supply and natural gas.  demand.

Historically, the commodities markets for oil and natural gas have been volatile.  Thesevolatile, and these markets will likely continue to be volatile in the future. If the prices of oil, natural gas, and NGLs experience a substantial decline, our operations, financial condition and level of expenditures for the development of our oil, natural gas and NGL reserves may be materially and adversely affected. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. These factorscontrol and include the following:

 

●·changes in global supply and demand for oil and natural gas;
●·the actions of the Organization of Petroleum Exporting Countries;Countries, or OPEC;
●·the price and quantity of imports of foreign oil and natural gas;
●acts of war or terrorism;
●·political conditions, and events, including embargoes, in or affecting other oil-producing activity;
●·the level of global oil and natural gas exploration and production activity;
●·the level of global oil and natural gas inventories;

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·weather conditions;
●·technological advances affecting energy consumption; and
●·the price and availability of alternative fuels; and
●market concerns about global warming or changes in governmental policies and regulations due to climate change initiatives.fuels.

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Volatile oil and natural gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and natural gas producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects.

 

Our revenues, operating results, profitability and future rate of growth depend primarily upon the prices we receive for oil and, to a lesser extent, natural gas that we sell. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raise additional capital. In addition, we may need to record asset carrying value write-downs if prices fall. A significant decline in the prices of natural gas or oil could adversely affect our financial position, financial results, cash flows, access to capital and ability to grow.

We have historically incurred lossesOur level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and may not achieve future profitability.prevent us from meeting our obligations under our indebtedness.

 

We have historically incurred losses from operations during our historyentered into the First Lien Credit Agreement in 2016, the oilSecond Lien Credit Agreement in 2017 and natural gas business.  We had a cumulative deficit of approximately $180.9 millionthe Riverstone First Lien Credit Agreement in 2018 (as such terms are hereinafter defined and $147.8 million as described in more detail herein). As of December 31, 20152017, $30.8 million was outstanding under our First Lien Credit Agreement (which was subsequently paid off with loan proceeds of the Riverstone First Lien Credit Agreement) and 2014, respectively.  Many of$155.8 million was outstanding on under our properties are in the exploration stage, and to date we have established a limited volume of proved reserves on our properties.  Our ability to be profitable in the future will depend on successfully addressing our near-term capital need to refinance our term loan indebtedness and fund our 2016 capital budget, and implementing our acquisition, exploration, development and production activities, all of which are subject to many risks beyond our control.  Even if we become profitable on an annual basis, our profitability may not be sustainable or increase on a periodic basis.Second Lien Credit Agreement.

We have limited management and staff and will be dependent upon partnering arrangements.

We had four employees as of March 30, 2016.  We leverage the services of independent consultants and contractors to perform various professional services, including engineering, oil and gas well planning and supervision, and land, legal, environmental and tax services. We also pursue alliances with partners in the areas of geological and geophysical services and prospect generation, evaluation and prospect leasing. Our dependence on third-party consultants and service providers creates a number of risks, including but not limited to:

●the possibility that such third parties may not be available to us as and when needed; and
●the risk that we may not be able to properly control the timing and quality of work conducted with respect to our projects.

 

If we experience significant delaysfurther utilize our credit facilities in obtaining the servicesfuture or obtain additional financing, our level of such third partiesindebtedness could affect our operations in several ways, including the following:

·it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, further exploration, debt service requirements, acquisitions and general corporate or other purposes;
·a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, capital expenditures and future business opportunities;
·the debt service requirements of other indebtedness in the future could make it more difficult for us to satisfy our financial obligations;
·we could be vulnerable to any downturn in general economic conditions and in our business, and we could be unable to carry out capital spending and exploration activities that are currently planned; and
·we may from time to time be out of compliance with covenants under our debt agreements, which will require us to seek waivers from our lenders, which may be difficult to obtain.

We may incur additional debt, including secured indebtedness, or poor performance by such parties,issue preferred stock in order to maintain adequate liquidity and develop and acquire properties to the extent desired. A higher level of indebtedness and/or preferred stock increases the risk that we may default on our results of operations and stock price could be materially adversely affected.obligations.

 

The lossRiverstone First Lien Credit Agreement and Second Lien Credit Agreement, guaranteed and further secured by substantially all our assets, contain restrictive covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities.

Our Riverstone First Lien Credit Agreement and Second Lien Credit Agreement contain restrictive covenants that limit our ability to, among other things:

·incur additional indebtedness;
·create additional liens;
·sell certain of our assets;
·merge or consolidate with another entity;
·pay dividends or make other distributions;
·engage in transactions with affiliates; and
·enter into certain swap agreements.

The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of anybusiness opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business.

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We may from time to time enter into alternative or additional debt agreements that contain covenant restrictions that may prevent us from taking actions that we believe would be in the best interest of our executive officersbusiness, may require us to sell assets or take other actions to reduce indebtedness to meet such covenants, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.

Värde Partners, Inc. and its affiliates (collectively, “Värde”) beneficially own a significant portion of our common stock. Värde is not limited in their ability to compete with us, and the waiver of the corporate opportunity provisions in the certificate of designation relating to our Series C Preferred Stock, may allow Värde to benefit from corporate opportunities that might otherwise be available to us. As a result, conflicts of interest could adversely affect us.arise in the future between us and Värde, including their portfolio companies concerning conflicts over our operations or business opportunities.

 

WeVärde is a family of private investment funds that beneficially owns a significant portion of our common stock as a result of the conversion rights available to them under the Second Lien Credit Agreement and the Series C Preferred Stock (as hereinafter defined and described), and it has investments in other companies in the energy industry. The Series C Preferred Stock was issued on January 30, 2018. As a result, Värde may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are dependentour customers or suppliers. As such, Värde or its portfolio companies may acquire or seek to acquire the same assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue. Any actual or perceived conflicts of interest with respect to the foregoing could have an adverse impact on the experiencetrading price of our executive officerscommon stock.

The certificate of designation governing the preferences, rights and limitations of the Series C Preferred Stock, provides that Värde (including portfolio investments of Värde) is not restricted from owning assets or engaging in businesses that compete directly or indirectly with us. In particular, subject to guide the implementationlimitations of applicable law, if Värde, or any agent, shareholder, member, partner, director, officer, employee, investment manager or investment advisor of Värde who is also one of our operational objectivesdirectors or officers, becomes aware of a potential business opportunity, transaction or other matter, they will have no duty to communicate or offer that opportunity to us.

Värde may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and growth strategy.  The lossmay direct such opportunities to other businesses in which they have invested, in which case we may not become aware of the services of any of these individuals couldor otherwise have a negative impact on our operations and ourthe ability to implementpursue such opportunity. Furthermore, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. As a result, our strategy. Our executive employment contracts include long term incentivesrenouncing our interest and expectancy in any business opportunity that may be from time to retain key personnel but retention of personnel is not guaranteed.time presented to Värde could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.

 

Our disclosure controls and procedures and internal controls over financial reporting may not detect errors or potential acts of fraudfraud..

 

Our management does not expect that our disclosure controls and procedures and internal controls willmay not prevent all possible errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable not absolute, assurance that the objectives of the control system are being met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls are evaluated relative to their costs. Because of the inherent limitations in all control systems, no evaluation of our controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part upon the likelihood of future events, and any design may not succeed in achieving its intended goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with its policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur without detection.detection, which could have a material adverse effect on our business.

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Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on our stock price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated by the SEC to implement Section 404, we are required to furnish a report by our management to include in our Annual Report on Form 10-K regarding the effectiveness of ouris responsible for establishing and maintaining adequate internal control over financial reporting. The report includes, among other things,Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we are required to conduct an assessmentevaluation of the effectiveness of our internal control over financial reporting asbased on framework of internal control issued by the Committee of Sponsoring Organizations of the endTreadway Commission (“COSO”). Because of our fiscal year, includingits inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

A material weakness is a statement as to whetherdeficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. During the audit of our internal control over financial reporting is effective. This assessment must include disclosurefor the year ended December 31, 2017, errors were identified in the Company’s computation of the full cost ceiling test limitation.For a discussion of our internal control over financial reporting and a description of the identified material weakness, see "Management's Report on Internal Control Over Financial Reporting" included in Item 9A of this report.

Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Further, the complexities of our quarter-end and year-end closing processes increase the risk that a weakness in internal controls over financial reporting may go undetected. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weaknessesweakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. We have identified by management.

Asremediation steps, including enhanced analytical analysis and improved management review of December 31, 2015, management has concluded thatthe full cost ceiling test calculation in order to remediate this material weakness. We plan to complete this remediation process as quickly as possible. However, if our remedial measures are insufficient to address the material weakness or if additional material weaknesses or significant deficiencies in our internal control over financial reporting wasare discovered or occur in the future, we may not effective. We may discover additional areasbe able to timely or accurately report our financial condition, results of our internal control over financial reporting which may require improvement.operations or cash flows or maintain effective disclosure controls and procedures. If we are unable to assert that our internal control overreport financial reporting isinformation timely and accurately or to maintain effective nowdisclosure controls and procedures, we could be subject to, among other things, regulatory or inenforcement actions by the SEC and the NYSE, including a delisting from the NYSE, securities litigation, debt rating agency downgrades or rating withdrawals, any future period, or if our auditors are unable to express an opinion onone of which could adversely affect the effectivenessvaluation of our internal controls, wecommon stock and could lose investor confidenceadversely affect our business prospects.

Decreases in oil and natural gas prices may require us to take write-downs of the accuracy and completenesscarrying values of our financial reports, which could have an adverse effect onoil and natural gas properties, potentially requiring earlier than anticipated debt repayment and negatively impacting the trading value of our stock price.securities.

 

IfAccounting rules require that we review periodically the carrying value of our oil orand natural gas prices decrease or explorationproperties for possible impairment through the performance of a ceiling test. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development efforts are unsuccessful, wells in progress are deemed unsuccessful, or major tracts of undeveloped acreage expire, orplans, production data, economics and other similar adverse events occur,factors, we may be required to write-downwrite down the carrying value of our developed properties.

We use the full cost method of accounting whereby all costs related to the acquisition and development of oil and natural gas properties are capitalized into a single cost center referred to as a full cost pool.  These costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling wells, completing productive wells, or plugging and abandoning non-productive wells, costs related to expired leases, or leases underlying  producing and non-producing wells, and overhead charges directly related to acquisition and exploration activities.  Underproperties.

We perform the full cost method of accounting, capitalized oil and natural gas property that comprise the full cost pool, less accumulated depletion and net of deferred income taxes, may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves.  This ceiling test is performed at least quarterly.  Shouldquarterly and, in the event capitalized costs of the full cost pool exceed this ceiling, we would recognize an impairment expense. During the year ended December 31, 2015, weWe recognized an impairment expense of $24.48approximately $10.5 million due toand approximately $4.7 million for the lower commodity pricesyears ended December 31, 2017 and lack of capital to develop our undeveloped oil and gas properties. As such, we currently have no proved undeveloped reserves. 2016, respectively.

Future write-downs could occur for numerous reasons, including, but not limited to continued reductions in oil and natural gas prices that lower the estimate of future net revenues from proved oil and natural gas reserves, revisions to reserve estimates, or from the addition of non-productive capitalized costs to the full cost pool that do not result in corresponding increase in oil and natural gas reserves. Impairments of plugging and abandonment of wells in progress are other areas where costs may be capitalized into the full cost pool, without any corresponding increase in reserve values; asvalues. As such, these situations could result in future additional impairment expenses.

If commodity prices stay at current early 2016 levels or decline, further, we willcould incur full cost ceiling impairments in future quarters. Because the ceiling calculation uses rolling 12-month average commodity prices, the effect of lower quarter-over-quarter prices in 2016 compared to 2015 is a lower ceiling value each quarter. This will result in ongoing impairments each quarter until prices stabilize or improve. Impairment charges would not affect cash flow from operating activities, but would adversely affectcould have a material adverse effect our net income and stockholders’ equity.

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Our estimated reserves are based on many assumptions that may prove inaccurate. Any significant inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

Oil and natural gas reserve engineering requires subjective estimates of underground accumulations of oil and natural gas and assumptions concerning future oil and natural gas prices, production levels, and operating and development costs. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions could materially affect the quantities and present value of our reserves which could adversely affect our business, results of operations, and financial condition.

In order to prepare estimates, we must project production rates and the timing of development expenditures and analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Although the reserve information contained herein is reviewed by independent reserve engineers, estimates of oil and natural gas reserves are inherently imprecise.

Further, the present value of future net cash flows from proved reserves may not be the current market value of estimated oil and natural gas reserves. In accordance with SEC requirements, we based the estimated discounted future net cash flows from proved reserves on the 12-month unweighted average of first-day-of-the-month oil and natural gas benchmark prices, adjusted for marketing and other differentials and costs in effect on the date of the estimate, holding the prices and costs constant throughout the life of the properties. Actual future prices and costs may differ materially from those used in the net present value estimate, and future net present value estimates using then current prices and costs may be significantly less than the current estimate.

If our reserve estimates or the underlying assumptions prove inaccurate, it could have a negative impact on our earnings and net income, and most likely the trading price of our securities.

 

Hedging transactions may limit our potential gains or result in losses..

 

In order to manage our exposure to price risks in the marketing of our oil and natural gas, from time to time, we may enter into derivative contracts that economically hedge our oil and gas price on a portion of our production. These contracts may limit our potential gains if oil and natural gas prices were to rise substantially over the price established by the contract. In addition, such transactions may expose us to the risk of financial loss in certain circumstances, including instances in which:

 

●·there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received;
●·our production and/or sales of oil or natural gas are less than expected;
●·payments owed under derivative hedging contracts come due prior to receipt of the hedged month’s production revenue; or
●·the other party to the hedging contract defaults on its contract obligations.

 

Hedging transactions we may enter into may not adequately protect us from declines in the prices of oil and natural gas. In addition, the counterparties under ourany future derivatives contracts may fail to fulfill their contractual obligations to us.

As of December 31, 2015,2017, we had no hedging agreements in place.place on approximately 1,000 Bbl per day, or 83% of our expected production from proved developed producing reserves for the period from January 1, 2018 through June 30, 2018, as forecast under the reserve report prepared by our independent reserve engineers dated December 31, 2017.

 

WeOur identified drilling locations are scheduled to be drilled over a period of several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of our drilling.

Our management has specifically identified and scheduled drilling locations as an estimation of future multi-year drilling activities on our existing acreage. These scheduled drilling locations represent a significant component of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including oil and natural gas prices, the availability of capital, costs, drilling results, regulatory approvals and other factors. Because of these uncertainties, we do not know if the potential drilling locations previously identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, actual drilling activities may have difficulty managing growth in our business,materially differ from those presently identified, which could adversely affect our financial condition and results of operations.

Significant growth in the size and scope of our operations would place a strain on our financial, technical, operational and management resources.  The failure to continue to upgrade our technical, administrative, operating and financial staff and control systems or the occurrences of unexpected expansion difficulties, including the failure to recruit and retain experienced managers, geologists, engineers and other professionals in the oil and gas industry could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute our business plan.business.

 

The actual quantitiesDrilling for and present value of our proved reserves may be lower than we have estimated. In addition, the present value of future net cash flow from our proved reserves will not necessarily be the same as the current market value of our estimated provedproducing oil and natural gas reserves.is a speculative activity and involves numerous risks and substantial and uncertain costs that could adversely affect us.

This Annual Report on Form 10-K contains estimates of our proved oil and natural gas reserves and the estimated future net revenues from these reserves. The reserve estimate included in this Annual Report on Form 10-K was prepared by our current reserve engineer consultant, reviewed by ourChief Financial Officer and prepared by Forrest Garb. The process of estimating oil and natural gas reserves is complex and requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering, cost basis, commodity pricing and economic data for each reservoir. Accordingly, these estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development and operating expenses, quantities of recoverable oil and natural gas reserves, capital expenditures, infrastructure, taxes and availability of funds most likely will vary from these estimates and vary over time. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, results of secondary and tertiary recovery applications, prevailing oil and natural gas prices and other factors, many of which are beyond our control. You should also not assume that the initial rates of production of our wells are representative of future overall production from other wells or over the life of the wells, or that early results suggesting lack of reservoir continuity will prove to be accurate.

 

You should not assume thatOur success will depend on the present value of future net cash flow referred to in this Annual Report on Form 10-K is the current market valuesuccess of our estimated oildrilling program. There is no way to predict in advance of drilling and natural gas reserves.  In accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves are generally based on the un-weighted average of the closing prices during the first day of each of the year preceding the end of the fiscal year.  Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate.  Any change in global markets consumption bytesting whether any particular prospect will yield oil or natural gas purchasersin sufficient quantities to recover drilling or in governmental regulationscompletion costs or taxation will also affect actual future net cash flows.to be economically viable. The timinguse of both the productionseismic data and other technologies and the expenses fromstudy of producing fields in the development and production of oursame area will not enable us to know conclusively prior to drilling whether oil andor natural gas properties will affect the timing of actual future net cash flows from proved reserves and theirbe present value.  In addition, the 10% discount factor, which is required by the SEC toor, if present, whether oil or natural gas will be usedpresent in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor nor does it necessarily reflect discount factors used in the marketplace to assess asset values for the purchase and sale of oil and natural gas.commercial quantities as such studies are merely an interpretive tool.

 

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Drilling for oil and natural gas involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be discovered. The cost of drilling, completing, and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed, or canceled as a result of a variety of factors beyond our control, including:

·unexpected or adverse drilling conditions;
·elevated pressure or irregularities in geologic formations;
·equipment failures or accidents;
·adverse weather conditions;
·compliance with governmental requirements; and
·shortages or delays in the availability of drilling rigs, crews, and equipment.

Additionally, the budgeted costs of planning, drilling, completing and operating wells are often exceeded and such costs can increase significantly due to various complications that may arise during the drilling and operating processes. Before a well is spud, we may incur significant geological and geophysical (seismic) costs, which are incurred whether a well eventually produces commercial quantities of hydrocarbons, or is drilled at all. Exploration wells endure a much greater risk of loss than development wells. If actual drilling and development costs are significantly more than the current estimated costs, we may not be able to continue operations as proposed and could be forced to modify drilling plans accordingly.

If we decide to drill a certain location, there is a risk that no commercially productive oil or natural gas reservoirs will be found or produced, or we may drill or participate in new wells that are not productive or drill wells that are productive, but that do not produce sufficient net revenues to return a profit after drilling, operating and other costs. A productive well may become uneconomical if water or other deleterious substances are encountered which impair or prevent the production of oil and/or natural gas from the well. Unsuccessful drilling activities could result in a significant decline in production and revenues and materially harm operations and financial condition by reducing available cash and resources.

Financial difficulties encountered by our oil and natural gas purchasers, third party operators or other third parties could decrease cash flow from operations and adversely affect our exploration and development activities.

We derive essentially all of our revenues from the sale of our oil, natural gas and NGLs to unaffiliated third party purchasers, independent marketing companies and mid-stream companies. Any delays in payments from such purchasers caused by financial problems encountered by them will have an immediate negative effect on our results of operations and cash flows.

Additionally, liquidity and cash flow problems encountered by our working interest co-owners or the third-party operators of our non-operated properties may prevent or delay the drilling of a well or the development of a project. Our working interest co-owners may be unwilling or unable to pay their share of the costs of projects as they become due. In the case of a working interest owner, we could be required to pay the working interest owner’s share of the project costs.

Our industry is highly competitive, which may adversely affect our operations and performance.

We operate in a highly competitive environment. In addition to capital, the principle resources necessary for the exploration and production of oil and natural gas include: leasehold prospects under which oil and natural gas reserves may be discovered; drilling rigs and related equipment to explore for such reserves; and knowledgeable personnel to conduct all phases of oil and natural gas operations. We must compete for such resources with both major oil and natural gas companies and independent operators.

Many of our competitors have financial and other resources substantially greater than ours. Such capital, materials and resources may not be available when needed. If we are unable to access capital, material and resources when needed, we risk suffering numerous consequences, including, the breach of our obligations under the oil and natural gas leases by which we hold our prospects and the potential loss of those leasehold interests; loss of reputation in the oil and gas community; inability to retain personnel or attract capital, a slowdown in our operations and decline in revenue; and a decline in the market price of our common stock.

 

Properties that we acquire may not produce oil or natural gas as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them, which could cause us to incur losses.

One of our growth strategies is to pursue selective acquisitions of undeveloped acreage potentially containing oil and natural gas reserves. If we choose to pursue an acquisition, we will perform a review of the target properties; however,properties. However, these reviews are inherently incomplete as they are based on the quality, availability and interpretation of the reviewed data and the acumen and the assumptions of the evaluation personnel. Generally, it is not feasible to review in depth every individual property, well, facility and/or file involved in each acquisition. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. We may not perform an inspection on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, we may not be able to obtain effective contractual protection against all or part of those problems, and we may assume environmental and other risks and liabilities in connection with the acquired properties. If we acquire properties with risks or liabilities that were unknown or not assessed correctly, financial condition, results of operations and cash flows could be adversely affected as claims are settled and cleanup costs related to these liabilities are incurred.

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AllWe may incur losses or costs as a result of title deficiencies in the properties in which we invest.

If an examination of the title history of a property that we purchased reveals an oil and natural gas lease has been purchased in error from a person who is not the owner of the mineral interest desired, our interest would be worthless. In such an instance, the amount paid for such oil and natural gas lease as well as any royalties paid pursuant to the terms of the lease prior to the discovery of the title defect would be lost.

Prior to the drilling of an oil and natural gas well, however, it is the normal practice in the oil and natural gas industry for the operator of the well to obtain a preliminary title review of the spacing unit within which the proposed oil and natural gas well is to be drilled to ensure there are no obvious deficiencies in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct deficiencies in the marketability of the title, and such curative work entails expense. Failure to cure any title defects may adversely impact our ability in the future to increase production and reserves. In the future, we may suffer a monetary loss from title defects or title failure. Additionally, unproved and unevaluated acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss which could adversely affect our financial condition, results of operations and cash flows.

Our producing properties and operations are located in the DJDelaware Basin, region, making us vulnerable to risks associated with operating in one major geographic area.

 

All of our estimated proved reserves at December 31, 2015, and all of our 2015 and 2014 sales2017, were generatedlocated in the DJDelaware Basin in southeastern Wyoming, northeastern ColoradoWinkler, Loving, and southwestern Nebraska.  Although the area isReeves Counties, Texas and Lea County, New Mexico. As a well-established oilfield infrastructure, as a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions of production from these wells caused by transportation capacity constraints, curtailment of production, availability of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions, plant closures for scheduled maintenance or interruption of transportation of oil or natural gas produced from the wells in this area.

In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas, such as the DJ Basin, which may cause these conditions to occur with greater frequency or magnify the effect of these conditions. Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results of operations.

 

We may not be the operator on all of our drilling locations, and, therefore, we will not be able to control the timing of exploration or development efforts, associated costs, or the rate of production of any non-operated assets.

Currently, we are the operator of approximately 90% of our acreage. As we carry out our exploration and development programs, we may enter into arrangements with respect to existing or future drilling locations that result in wells being operated by others. As a result, we may have limited ability to exercise influence over the operations of the drilling locations operated by our partners. Dependence on the operator could prevent us from realizing target returns for those locations. The success and timing of exploration and development activities operated by our partners will depend on a number of factors that will be largely outside of our control, including:

·the timing and amount of capital expenditures;
·the operator’s expertise and financial resources;
·approval of other participants in drilling wells;
·selection of technology; and
·the rate of production of reserves, if any.

Our limited ability to exercise control over the operations of any drilling locations operated by other operators may cause a material adverse effect on results of operations and financial condition.

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The marketability of our production is dependent upon transportation and processing facilities and third parties over which or whom we may have no control.

 

The marketability of our production depends in part upon the availability, proximity and capacity of pipelines, natural gas gathering systems, rail service, and processing facilities in addition to competing oil and natural gas production available to third-party purchasers. We deliver our produced crude oil and natural gas produced from these areas through trucking, gathering systems and pipelines, some of which we do not own. The lack of availability of capacity on third-party systems and facilities could reduce the price offered for our production or result in the shut-in of producing wells or the delay or discontinuance of our development plans for properties.plans. Although we have some contractual control over the transportation of our production through firm transportation arrangements, third-party systems and facilities may be temporarily unavailable due to market conditions, or mechanical reliability or other reasons, including adverse weather conditions or work-loads. Activist or other efforts may delay or halt the construction of additional pipelines or facilities. Third-party systems and facilities may not be available to us in the future at a price that is acceptable to us. Any significant change in market factors or other conditions affecting these infrastructure systems and facilities, as well as any delays in constructing new infrastructure systems and facilities, could delay production, thereby harming our business and, in turn, our results of operations, cash flows, and financial condition.

 

On August 10, 2017, we entered into a long-term agreement with Lucid relating to gas gathering, processing and associated services to support our drilling program. Pursuant to the agreement, Lucid will receive, gather and process our gas production from certain production areas located in Lea County, New Mexico and in Loving and Winkler Counties, Texas. The agreement secures incremental midstream capacity for us in the production areas committed to the new agreement. We commenced services with Lucid on our New Mexico properties in November 2017 and expect to commence services on our Texas properties in early 2018.

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Our ability to produce crude oilThe shut-in of our wells could negatively impact our production, liquidity, and, natural gas economicallyultimately, our operations, results, and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our drilling and completion operations.performance.

 

Drilling

Our production depends, in part, upon our wells that are capable of commercial production not being shut-in (i.e., suspended from production). The lack of availability of capacity on third-party systems and completion activities requirefacilities (see "Risk Factors-Risks Relating to Our Business-The marketability of our production is dependent upon transportation and processing facilities and third parties over which or whom we may have no control.”) or the useshut-in of water. For example,an oil field’s production, among other reasons, could result in the hydraulic fracturing process requires the use and disposalshut-in of significant quantitiesour wells. As of water. In certain areas, there may be insufficient local aquifer capacity to provide a source of water for drilling activities. Water must be obtained from other sources and transportedDecember 31, 2017, we had 3 gross (2.60 net) wells shut in awaiting infrastructure.

If we experience low oil production volumes due to the drilling site. Our inability to secure sufficient amountsshut-in of water, or to dispose of or recycle the water usedour wells, we would experience a reduction in our available liquidity and we may not have the ability to generate sufficient cash flows from operations and, therefore, sufficient liquidity to meet our anticipated working capital, debt service, and other liquidity needs. A significant decline in oil production due to the shut-in of our wells could adversely impactaffect our operations in certain areas.

Our success is influenced by oil, natural gas,financial position, financial results, cash flows, access to capital and NGL prices in the specific areas where we operate, and these prices may be lower than prices at major markets.  

Regional natural gas, condensate, oil and NGLs prices may move independently of broad industry price trends. Because some of our operations are located outside major markets, we are directly impacted by regional prices regardless of Henry Hub, WTI or other major market pricing.ability to grow.

 

Unless we find new oil and natural gas reserves to replace actual production, our reserves and production will decline, which would materially and adversely affect our business, financial condition, and results of operations.

 

Producing oil and natural gas reservoirs generally are characterized by declining production rates and depletion that vary depending upon reservoir characteristics subsurface and surface pressures and other factors. Thus, our future oil and natural gas reserves and production and, therefore, our cash flow and revenue are highly dependent on our success in efficiently obtaining additional reserves. We may not be able to develop, find or acquire reserves to replace our current and future production at costs or other terms acceptable to us, or at all, in which case our business, financial condition and results of operations would be materially and adversely affected.

 

Part of our strategy involves drilling in existing or emerging unconventional shale plays using available horizontal drilling and completion techniques. The results of our planned exploratory and development drilling in these plays are subject to drilling and completion execution risks, and drilling results may not meet our economic expectations for reserves or production. As a result, we may incur material write-downs and the value of our undeveloped acreage could decline if drilling results are unsuccessful.  

 

Unconventionaloperations involve utilizing drilling and completion techniques as developed by ourselvesus and our service providers. Risks that we face while drilling include, but are not limited to, not reaching the desired objective due to drilling problems, not landing our wellbore in the desired drilling zone or specific target, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the wellbore and being able to run tools and other equipment consistently through the horizontal wellbore. Risks that we face while completing our wells include, but are not limited to, mechanical integrity, being able to hydraulic fracture stimulate the planned number of stages, being able to run tools the entire length of the wellbore during completion operations, proper design and engineering vs.versus reservoir parameters, and successfully cleaning out the wellbore after completion of the final fracture stimulation stage.

 

Our experience with horizontal well applications utilizing the latest drilling and completion techniques specifically in the Niobrara and/or Codell formations where we are currently operating is limited; however, we contract with local experts in the area to design, plan and conduct our drilling and completion operations. Ultimately, the success of these drilling and completion techniques can only be developed over time as more wells are drilled and production profiles are established over a sufficiently long time period.established. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems and limited takeaway capacity or otherwise, and/or natural gas and oil prices decline, the return on our investment in these areas may not be as attractive as we anticipate and we could incur material write-downs of undeveloped properties and the value of our undeveloped acreage could decline in the future.

 

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The unavailability or high cost of drilling rigs, equipment supplies, or personnel could adversely affect our ability to execute our exploration and development plans.

The oil and gas industry is cyclical and, from time to time, there are shortages of drilling rigs, equipment, supplies or qualified personnel. During these periods, the costs of and demand for rigs, equipment and supplies may increase substantially and their availability may be limited. In addition, the demand for, and wage rates of, qualified personnel, including drilling rig crews, may rise as the number of rigs in service increases. The higher prices of oil and natural gas during the last several years have increased activity which has resulted in shortages of drilling rigs, equipment and personnel, which have resulted in increased costs and delays in the areas where we operate. If drilling rigs, equipment, supplies or qualified personnel are unavailable to us due to excessive costs or demand or otherwise, our ability to execute our exploration and development plans could be materially and adversely affected and, as a result, our financial condition and results of operations could be materially and adversely affected.

 

If we are unable to comply with the significant restrictions and covenants inTerrorist attacks aimed at energy operations could adversely affect our Credit Agreement and our Forbearance Agreement, there could be a default under the terms of either agreement, which could result in an acceleration of payment of borrowings and would impact our ability to maintain our current operations.business.

 

PursuantThe continued threat of terrorism and the impact of military and other government action have led and may lead to our Credit Agreement, we are subjectfurther increased volatility in prices for oil and natural gas and could affect these commodity markets or the financial markets used by us. In addition, the U.S. government has issued warnings that energy assets may be a future target of terrorist organizations. These developments have subjected oil and natural gas operations to both non-financial and financial covenants. Our Credit Agreement contains a number of non-financial covenants imposing significant restrictions on us, including the maximum monthly payment requirement, restrictionsincreased risks. Any future terrorist attack on our repurchasefacilities, customer facilities, the infrastructure depended upon for transportation of products, and, paymentin some cases, those of dividendsother energy companies, could have a material adverse effect on our capital stock and limitations on our ability to incur additional indebtedness, make investments, engage in transactions with affiliates, sell assets and create liens on our assets. These restrictions may affect our ability to operate our business, to take advantage of potential business opportunities as they arise and, in turn, may materially and adversely affect our business, financial conditions and results of operations.

The financial covenants, include maintaining a debt to EBITDAX ratio. EBITDAX is defined in the Credit Agreement as earnings before the pre-tax net income for such periodplus(without duplication and only to the extent deducted in determining such net income), interest expense for such period, depreciation and amortization expense, extraordinary or non-recurring items reducing net income for such period, and other non-cash expenses for such periodless gains on sales of assets and other non-cash income for such period included in the determination of net incomeplus (without duplication and only to the extent deducted in determining such net income) exploration, drilling and completion expenses or costs (EBITDAX). Specifically, the ratio requires that we maintain at all times, as determined on June 30 of each year, a ratio of (i) the aggregate amount of all debt, to (ii) EBITDAX of not less than 4.5:1, 3.5:1 and 2.5:1 for the periods ending June 30, 2015, 2016, and 2017 and thereafter, respectively. We are also required to maintain, as determined on June 30 of each year beginning June 30, 2015, a debt coverage ratio of not less than 1.0 to 1.0.

Covenant restrictions may prevent us from taking actions that we believe would be in the best interest of our business, may require us to sell assets or take other actions to reduce indebtedness to meet our covenants, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.

As a result of the current price environment and our depleting asset base, we were not able and it is possible that we will continue to be unable to meet the debt to EBITDAX and the debt coverage ratios required in the future periods, including June 30, 2016. Furthermore, a default under the Credit Agreement, constitutes an event of default pursuant to the Debentures which could result in an acceleration of the Company’s obligations at the Debenture holders’ election. We received a waiver for the June 30, 2015 period and currently have a Forbearance Agreement with Heartland. The Forbearance Agreement restricts Heartland from exercising any of its remedies until April 30, 2016 and is subject to certain conditions, including a requirement for us to make a monthly interest payment to Heartland. On April 1, 2016, we failed to make the required interest payment to Heartland for the month of March. As a result, Heartland has the right to declare an event of default under the Forbearance Agreement, terminate the remaining commitment and accelerate payment of all principal and interest outstanding. We have not yet received a notice of default and are currently in discussions with Heartland with respect to the missed interest payment. However, we cannot assure you that these discussions will be successful or that in the event Heartlanddeclares an event of default, whether with respect to the missed interest payment or a breach of any other covenant, that we will be granted a further forbearance, waiver, extension or amendment. Moreover, our Debentures also contain certain cross-default provisions with certain other debt instruments. Therefore, a default under the Credit Agreement, constitutes an event of default pursuant to the Debentures which may result in an acceleration of our obligations at the holders’ election.

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We could be required to pay liquidated damages to some of our investors due to our failure to maintain the effectiveness of a prior registration statement.

We could accrue liquidated damages under registration rights agreements covering a significant amount of shares of Common Stock if our investors declare a default, due to our failure to maintain the effectiveness of a prior registration statement as required in the agreements.  In such case, we could be required to pay monthly liquidated damages. If we do not make a monthly payment within seven days after the date payable, we are required to pay interest at an annual rate of 18% on the unpaid amount. If our investors declare a default under the registration rights agreement and accrue liquidated damages, we could be required to either raise additional outside funds through financing or curtail operations.business.

 

We are exposed to operating hazards and uninsured risks.

Our operations are subject to the risks inherent in the oil and natural gas industry,exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the risksrisk of:

 

●·fire, explosions and blowouts;
●·negligence of personnel,personnel;
●·inclement weather;
●·pipe or equipment failure;

 ●·abnormally pressured formations; and

 ●·environmental accidents such as oil spills, spills; and

·natural gas leaks, ruptures or discharges of toxic gases, brine or well fluids into the environment (including groundwater contamination).

Oil and natural gas operations are subject to particular hazards incident to the drilling and production of oil and natural gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires and pollution and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operation.

 

These events may result in substantial losses to usour company from:

 

●·injury or loss of life;
●·significantly increased costs;
●·severe damage to or destruction of property, natural resources and equipment;
●·pollution or other environmental damage;
●·clean-up responsibilities;
●·regulatory investigation;
●·penalties and suspension of operations; or
●·attorney’s fees and other expenses incurred in the prosecution or defense of litigation.

 

WeIn accordance with customary industry practices, we maintain insurance against some, but not all, of these risks. Our insurance may not be adequate to cover these losses or liabilities. We do not carry business interruption insurance. We may elect not to carry insurance if management believes that the cost of available insurance is excessive relative to the risks presented. In addition, we cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations. The impact of natural disasters or weather events in the areas where we operate has resulted in escalating insurance costs and less favorable coverage terms. Losses and liabilities arising from uninsured or underinsured events may have a material adverse effect on our financial condition and operations.operations, including the loss of our total investment in a particular prospect.

 

The producing wells in which we have an interest occasionally experience reduced or terminated production. These curtailments can result from mechanical failures, contract terms, pipeline and processing plant interruptions, market conditions, operator priorities, and weather conditions, etc. and weather conditions. These curtailments can last from a few days to many months, any of which could have an adverse effect on our results of operations.

 

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Failure to adequately protect criticalA failure of technology systems, data and technology systemsbreach or cyberattack could materially affect our operations..

 

Information technology solution failures, network disruptions, and breaches of data security and cyberattacks could disrupt our operations by causing delays or cancellation of customer orders, impeding processing of transactions and reporting financial results, resulting in the unintentional disclosure of customer, employee or our information, or damage todamaging our reputation. There can be no assurance that aA system failure, or data security breach will notor cyberattack could have a material adverse effect on our financial condition, results of operations or cash flows.

 

Our information technology systems may be vulnerable to security breaches beyond our control, including those involving cyberattacks using viruses, worms or other destructive software, process breakdowns, phishing or other malicious activities, or any combination of the foregoing. Such breaches could result in unauthorized access to information, including customer, employee, or other company confidential data. We do not carry insurance against these risks, although we do invest in security technology, perform penetration tests from time to time, and design our business processes to attempt to mitigate the risk of such breaches. However, there can be no assurance that security breaches will not occur. Moreover, the development and maintenance of these measures requires continuous monitoring as technologies change and efforts to overcome security measures evolve. We have experienced, and expect to continue to experience, cyber security threats and incidents, none of which has been material to us to date. However, a successful breach or attack could have a material negative impact on our operations or business reputation and subject us to consequences such as litigation and direct costs associated with incident response.

We may not be able to keep pace with technological developments in the industry.

The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or competitive pressures may force us to implement those new technologies at substantial costs. In addition, other oil and natural gas companies may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we are in a position to do so. We may not be able to respond to these competitive pressures and implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies used now or in the future were to become obsolete or if we are unable to use the most advanced commercially available technology, the business, financial condition, and results of operations could be materially adversely affected.

We have limited management and staff and may be dependent upon partnering arrangements.

As of December 31, 2017, we had 27 full-time employees. We leverage the services of independent consultants and contractors to perform various professional services, including engineering, oil and natural gas well planning and supervision, and land, legal, environmental and tax services. We also pursue alliances with partners in the areas of geological and geophysical services and prospect generation, evaluation and prospect leasing.

Our dependence on third-party consultants and service providers creates a number of risks, including but not limited to, the possibility that such third parties may not be available to us as and when needed and the risk that we may not be able to properly control the timing and quality of work conducted with respect to our projects. If we experience significant delays in obtaining the services of such third parties or poor performance by such parties, our results of operations and stock price could be materially adversely affected.

Our business may suffer with the loss of key personnel.

We depend to a large extent on the services of certain key management personnel, including Ron Ormand, our Executive Chairman of the Board, James (Jim) Linville, our Chief Executive Officer, Joseph Daches, our Chief Financial Officer, and other executive officers and key employees. These individuals have extensive experience and expertise in evaluating and analyzing producing oil and natural gas properties and drilling prospects, maximizing production from oil and natural gas properties, marketing oil and natural gas production and developing and executing financing and hedging strategies. The loss of any of these individuals could have a material adverse effect on operations. We do not maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to employ and retain skilled technical personnel.

We have an active board of directors that meets several times throughout the year and is intimately involved in the business and the determination of various operational strategies. Members of our board of directors work closely with management to identify potential prospects, acquisitions and areas for further development. If any directors resign or become unable to continue in their present role, it may be difficult to find replacements with the same knowledge and experience and as a result, operations may be adversely affected.

We may be subject to risks in connection with acquisitions, and the integration of significant acquisitions may be difficult.  

 

Our business strategy is based on our ability to acquire additional reserves, oil and natural gas properties, prospects and leaseholds. The successful acquisition of producing properties requires an assessment of several factors, including:

●recoverable reserves;
●future oil and natural gas prices and their appropriate differentials;
●well and facility integrity;
●development and operating costs;
●regulatory constraints and plans; and
●potential environmental and other liabilities.

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The accuracy of these assessments is inherently uncertain.  In connection with these assessments, we perform a review of the subject properties.  Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and potential recoverable reserves. Inspections may not always be performed on every well, and environmental problems are not necessarily observable even when an inspection is undertaken.  Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems.  We often are not entitled to contractual indemnification for environmental liabilities and acquire properties on an “as is” basis.

Significant acquisitions and other strategic transactions may involve other risks, including:

 

●·diversion of our management'smanagement’s attention to evaluating, negotiating and integrating significant acquisitions and strategic transactions;
●·challenge and cost of integrating acquired operations, information management and other technology systems and business cultures with those of ours while carrying on our ongoing business;
●·difficulty associated with coordinating geographically separate organizations;
●·challenge of attracting and retaining capable personnel associated with acquired operations; and
●·failure to realize the full benefit that we expect in estimated proved reserves, production volume, cost savings from operating synergies or other benefits anticipated from an acquisition, or to realize these benefits within the expected time frame.

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The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business. Members of our senior management and other staff may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our business.  If our senior management and staff are not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer.

ProspectsWe may have difficulty managing growth in our business, which we decide to participate may not yield oil or natural gas in commercially viable quantities or quantities sufficient to meet our targeted rate of return.

A prospect is a property in which we own an interest and contains what we believe, based on available reservoir, seismic and/or geological information, to be indications of commercial oil or natural gas.  Our prospects are in various stages of evaluation, ranging from a prospect that is ready to be drilled to a prospect that will require substantial additional technical assessment, data acquisition and/or seismic data processing and interpretation.  There is no definitive method to predict in advance of drilling and testing and wider-scale development whether any particular prospect will yield oil or natural gas in sufficient quantities to be economically viable.  The use of reservoir, geologic and seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities.  The analysis we perform using data from other wells, more fully explored prospects or producing fields may not be useful in predicting the characteristics and potential reserves associated with our drilling prospects.

Risks Relating to the Oil and Gas Industry

Our industry is highly competitive, which maycould adversely affect our performance,financial condition and results of operations.

Significant growth in the size and scope of our operations could place a strain on our financial, technical, operational and management resources. The failure to continue to upgrade our technical, administrative, operating and financial staff and control systems or the occurrences of unexpected expansion difficulties, including the failure to recruit and retain experienced managers, geologists, engineers and other professionals in the oil and gas industry could have a material adverse effect on our business, financial condition and results of operations and our ability to participate in ready to drill prospects intimely execute our core areas.  business plan.

We operate in a highly competitive environment. In addition to capital, the principle resources necessary for the exploration and production of oil and natural gas are: 

●leasehold prospects under which oil and natural gas reserves may be discovered;
●drilling rigs and related equipment to explore for such reserves; and
●knowledgeable personnel to conduct all phases of oil and natural gas operations.

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We must compete for such resources with both major oil and natural gas companies and independent operators. Virtually all of these competitors have financial and other resources substantially greater than ours.  Such capital, materials and resources may not be available when needed.  If we are unable to access capital, material and resources when needed, we risk suffering a number of adverse consequences, including:

●the breach of our obligations under the oil and gas leases by which we hold our prospects and the potential loss of those leasehold interests;
●loss of reputation in the oil and gas community;
●inability to retain staff;
●inability to attract capital;
●a general slowdown in our operations and decline in revenue; and
●decline in market price of our common shares.

We may face difficulties in securing and operating under authorizations and permits to drill, complete or operate our wells.

The recentcontinued growth in oil and natural gas exploration in the United States has drawn intense scrutiny from environmental and community interest groups, regulatory agencies and other governmental entities. As a result, we may face significant opposition to, or increased regulation of, our operations, that may make it difficult or impossible to obtain permits and other needed authorizations to drill, complete or operate, result in operational delays, or otherwise make oil and natural gas exploration more costly or difficult than in other countries.

Our operations are substantially dependent on the availability of water. Restrictions on our ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows.

 

Water is an essential component of deep shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Historically, we have been able to purchase water from local land owners for use in our operations. However, Texas has endured severe drought conditions over the past several years. These drought conditions have led governmental authorities to restrict the use of water subject to their jurisdiction for hydraulic fracturing to protect local water supplies. If we are unable to obtain water to use in our operations from local sources, we may be unable to produce oil and natural gas economically, which could have an adverse effect on our financial condition, results of operations and cash flows.

Risks Relating to the Oil and Natural Gas Industry

Legislative and regulatory initiatives related to global warming and climate change could have an adverse effect on our operations and the demand for oil and natural gas.

 

In December 2009, the EPA determined that emissions of carbon dioxide, methane and other “greenhouse gases” present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA, under the Clean Air Act, has begun adopting and implementing regulations to restrict emissions of greenhouse gases under existing provisions ofgases. Relatively recently, the Clean Air Act.  The EPA recently adopted two sets of rules regulating greenhouse gas emissions under the Clean Air Act, one of which requires a reduction in emissions of greenhouse gases from motor vehicles and the other of which regulates emissions of greenhouse gases from certain large stationary sources. The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States on an annual basis, including petroleum refineries, as well as certain onshore oil and natural gas production facilities.

 

Also, on September 18, 2015,May 12, 2016, EPA published proposedissued regulations (effective August 2, 2016) that would build on the NSPS40 C.F.R. Part 60, Subpart OOOO (NSPS OOOO) standards by directly regulating methane and VOC emissions from various types of new and modified oil and natural gas sources. Some of those sources are already regulated under NSPS OOOO, while others, like hydraulically fractured oil wells, pneumatic pumps, and certain equipment and components at gas well sites and compressor stations, would beare covered for the first time. On March 10, 2016, moreover, the EPA announced that it is moving towards issuing performance standards for methane emissions from existing oil and natural gas sources. The agency said that it will “begin with a formal process (i.e.i.e, an Information Collection Request) to require companies operating existing oil and natural gas sources to provide information to assist in the development of comprehensive regulations to reduce methane emissions.” On November 10, 2016, the EPA issued the Information Collection Request (“ICR”) and explained that “[r]ecipients of the operator survey (also referred to as Part 1) will have 60 days after receiving the ICR to complete the survey and submit it to EPA. Recipients of the more detailed facility survey (also referred to as Part 2) will have 180 days after receiving the ICR to complete that survey and submit it to the agency.”

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In June 2014, the United States Supreme Court’s holding inUtility Air Regulatory Group v. EPAupheld a portion of EPA’s greenhouse gas (“GHG”) stationary source permitting program, but also invalidated a portion of it. The Court held that stationary sources already subject to the Prevention of Significant Deterioration (“PSD”) or Title V permitting programs for non-GHG criteria pollutants remain subject to GHG Best Available Control Technology and major source permitting requirements, but ruled that sources cannot be subject to the PSD or Title V major source permitting programs based solely on GHG emission levels. As a result, on August 12, 2015, the EPA eliminated from its PSD and Title V regulations the provisions that subjected sources to the PSD or Title V programs based solely on GHG emission levels. The EPA likewise said that in the future, it will “further revise the PSD and Title V regulations in a separate rulemaking to fully implement” theUtility Air Regulatory Groupjudgment. On October 3, 2016, EPA published a proposed rulemaking for that purpose. TheUtility Air Regulatory Group judgment does not prevent states from considering and adopting state-only major source permitting requirements based solely on GHG emission levels.

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In addition, the U.S. Congress has from time to time considered adopting legislation to reduce GHG emissions and almost one-half of the states have already taken legal measures to reduce GHG emissions, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Most of these GHG cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and natural gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall GHG emission reduction goal.

 

The adoption of legislation or regulatory programs to reduce GHG emissions could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil, NGLs,natural gas and natural gasNGLs we produce. Consequently, legislation and regulatory programs to reduce GHG emissions could have an adverse effect on our business, financial condition and results of operations. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHG in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our financial condition and results of operations.

 

Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays in the completion of oil and natural gas wells.

 

Hydraulic fracturing is an important and common practice that is used to stimulate production of natural gas and/or oil from dense subsurface rock formations. The process involves the injection of water, sand and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production by providing and linking up induced flow paths for the oil and/or natural gas contained in the rocks. We routinely use hydraulic fracturing techniques in many of our drilling and completion programs. The process is typically regulated by state oil and natural gas commissions, but the EPA, under the federal Safe Drinking Water Act, has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel fuel under the federal Safe Drinking Water Act (“SDWA”).  In addition, legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process.  Under the proposed legislation, this information would be available to the public via the internet, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. As discussed above, the BLM, on March 20, 2015, issued its final regulations for hydraulic fracturing on federal and tribal lands. The new regulations require, among other things, disclosure of chemicals, annulus pressure monitoring, flow back and produced water management and storage, and more stringent well integrity measures associated with hydraulic fracturing operations on public land. The new regulations become effective on June 24, 2015. fuel. 

In addition, on April 7, 2015, EPA proposed a ruleJune 13, 2016, under the Clean Water Act, the EPA finalized a rule (effective August 29, 2016) that would prohibitprohibits the discharge of oil and gas wastewaters to publicly-owned treatment works.

 

The EPA intends to propose regulations in 2015 under the federal Clean Water Act to develop standards for wastewater discharges from hydraulic fracturing and other natural gas production activities. At the state level, someseveral states have adopted and other statesor are considering adopting legal requirements that could impose more stringent permitting, public disclosure orand well construction requirements on hydraulic fracturing activities. Some countiesFor example in Colorado,May 2013, the RRC adopted new rules governing well casing, cementing and other standards for instance, have amended their land use regulations to impose new requirements on oil and gas development, while other local governments have entered memoranda of agreement with oil and gas producers to accomplish the same objective. Beyondensuring that in 2012, Longmont, Colorado prohibited the use of hydraulic fracturing. The oil and gas industry filed a lawsuit challenging that ban in court. The industry prevailed on summary judgment against Longmont and the environmental intervenors. That decision is currently on appeal. In November 2013, four other Colorado cities and counties passed voter initiatives either placing a moratorium on hydraulic fracturing operations do not contaminate nearby water resources. Local government also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or banninghydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. We believe that we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. Nonetheless, if new oilor more stringent federal, state, or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development, or production activities, and gas development. These initiatives too are the subject of pending legal challenge or appeal.perhaps even be precluded from drilling wells.

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While these state and local land use initiativesrestrictions generally cover areas with little recent or ongoing oil and natural gas development, they could lead opponents of hydraulic fracturing to push for similar statewide referendums, especially in Colorado.regimes. If new or more stringent federal, state, or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from drilling wells.

 

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The White House Council on Environmental Quality is coordinating an administration-wide review of hydraulic fracturing practices and a committee of the U.S. House of Representatives has conducted an investigation of hydraulic fracturing practices. Furthermore, a

A number of federal agencies are analyzing, or have been requested to review, environmental issues associated with hydraulic fracturing. The EPA, has commencedfor example, recently completed a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. In June of 2015, the EPA released an “external review draft” of the study and, in it, said that shale development hashad not led to “widespread, systemic” problems with groundwater. TheOn August 11, 2016, however, the EPA Science Advisory Board issued comments on the external review draft, finding that “the EPA did not support quantitatively its conclusion about lack of evidence for widespread, systemic impacts of hydraulic fracturing on drinking water resources, and did not clearly describe the system(s) of interest (e.g., groundwater, surface water), the scale of impacts (i.e., local or regional), nor the definitions of ‘systemic’ and ‘widespread.’” In December of 2016, the EPA released the final version of the study, is pending.finding, among other things, that there are “certain conditions under which impacts from hydraulic fracturing activities can be more frequent or severe,” including “[i]njection of hydraulic fracturing fluids into wells with inadequate mechanical integrity, allowing gases or liquids to move to groundwater resources.” These ongoingtypes of studies, depending on their degree of pursuit and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory mechanisms.

 

The EPA has also issued an advance notice of proposed rulemaking and initiatedundertook a public participation process under the Toxic Substances Control Act to seek comment on the information that should be reported or disclosed for hydraulic fracturing chemical substances and mixtures and the mechanisms for obtaining this information. Additionally, on January 7, 2015, several national environmental advocacy groups filed a lawsuit requesting that the EPA add the oil and natural gas extraction industry to the list of industries required to report releases of certain “toxic chemicals” under the Emergency Planning and Community Right-to-Know Act’s Toxics Release Inventory, (“TRI”)or TRI, program. On October 22, 2015, the EPA took action on the Environmental Integrity Project’s October 24, 2012 petition to impose TRI reporting requirements on various oil and natural gas facilities. The EPA granted the petition in part, by proposingagreeing to propose to add natural gas processing facilities to the scope of the TRI program, but rejected the rest of the petition. On December 15, 2015, in light of that decision, the environmental advocacy groups that had commenced the lawsuit opted to voluntarily dismiss it. On January 6, 2017, EPA issued a proposed rulemaking that would add natural gas processing facilities to the scope of the TRI program.

Current water regulation relating to hydraulic fracturing, particularly water source and groundwater regulation, could result in increased operational costs, operating restrictions and delays.

Hydraulic fracturing uses large amounts of water. It can require between three to five million gallons of water per horizontal well. We may face regulatory concerns in both the sourcing and the discharge of water used in hydraulic fracturing. In addition, hydraulic fracturing produces water discharges that must be treated and disposed of in accordance with applicable regulatory requirements.

First, as to sourcing water for hydraulic fracturing, we will need to secure water from the local water supply or make alternative arrangements. In order to source water from the local water supply for hydraulic fracturing we may need to pay premium rates and be subject to a lower priority if the local area becomes subject to water restrictions. We may also seek water from alternative providers supporting the hydraulic fracturing industry. If we have an insufficient water supply, we will be unable to engage in hydraulic fracturing until such supply is located.

Second, hydraulic fracturing results in water discharges that must be treated and disposed of in accordance with applicable regulatory requirements. Environmental regulations governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing may increase operating costs and cause delays, interruptions or termination of operations, the extent of which cannot be predicted, all of which could have an adverse effect on operations and financial performance. Our ability to remove and dispose of water will affect production, and the cost of water treatment and disposal may affect profitability. The imposition of new environmental initiatives and regulations could also include restrictions on our ability to conduct hydraulic fracturing or disposal of produced water, drilling fluids and other substances associated with the exploration, development and production of oil and natural gas. 

 

We are subject to numerous U.S. federal, state, local and other laws and regulations that can adversely affect the cost, manner or feasibility of doing businessbusiness..  

 

Our operations are subject to extensive federal, state and local laws and regulations relating to the exploration, production and sale of oil and natural gas, and operating safety. Future laws or regulations, any adverse change in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may result in substantial penalties and harm to our business, results of operations and financial condition. We may be required to make large and unanticipated capital expenditures to comply with governmental regulations, such as:

 

●·land use restrictions;
●·lease permit restrictions;
●·drilling bonds and other financial responsibility requirements, such as plugging and abandonment bonds;
●·spacing of wells;
●·unitization and pooling of properties;

 ●30

·safety precautions;
●·operational reporting; and
●·taxation.

 

Under these laws and regulations, we could be liable for:

 

●·personal injuries;
●·property and natural resource damages;
●·well reclamation cost; and
●·governmental sanctions, such as fines and penalties.

32

 

Our operations could be significantly delayed or curtailed and our cost of operations could significantly increase as a result of regulatory requirements or restrictions. It is also possible that a portion of our oil and natural gas properties could be subject to eminent domain proceedings or other government takings for which we may not be adequately compensated. See “Business“Business-Regulation of the Oil and Properties—Government Regulations”Natural Gas Industry” for a more detailed description of regulatory laws covering our business.

 

Our operations may incur substantial expenses and resulting liabilities from compliance with environmental laws and regulations..  

 

Our oil and natural gas operations are subject to stringent federal, state and local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations:

 

●·require the acquisition of a permit before drilling or facility mobilization and commissioning, or injection or disposal commences;
●·restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production and processing activities, including new environmental regulations governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells;
●·limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
●·impose substantial liabilities for pollution resulting from our operations.

 

Failure to comply with these laws and regulations may result in:

 

●·the assessment of administrative, civil and criminal penalties;
●·incurrence of investigatory or remedial obligations; and
●·the imposition of injunctive relief.

 

Changes in environmental laws and regulations occur frequently and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to reach and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive position or financial condition. Under these environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination or if our operations met previous standards in the industry at the time they were performed. Our permits require that we report any incidents that cause or could cause environmental damages. See “Business“Business- Regulation of the Oil and Properties—Government Regulations”Natural Gas Industry” for a more detailed description of the environmental laws covering our business.

 

Risks RelatingShould we fail to Our Common Stock

There is a limited public market for our sharescomply with all applicable regulatory agency administered statutes, rules, regulations and an active trading market or a specific share price may not

orders, we could be established or maintained.subject to substantial penalties and fines.

 

Our Common Stock currently trades onUnder the Nasdaq Capital Market (“Nasdaq”Domenici-Barton Energy Policy Act of 2005, the FERC has civil penalty authority under Natural Gas Act (the "NGA"), generally in small volumes to impose penalties for current violations of up to $1 million per day for each day.  The valueviolation and disgorgement of profits associated with any violation. While our operations have not been regulated by FERC as a natural gas company under the NGA, FERC has adopted regulations that may subject certain of our Common Stockotherwise non-FERC jurisdictional facilities to FERC annual reporting requirements. We also must comply with the anti-market manipulation rules enforced by FERC. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Additionally, the Federal Trade Commission has regulations intended to prohibit market manipulation in the petroleum industry with authority to fine violators of the regulations civil penalties of up to $1 million per day, and U.S. Commodity Futures Trading Commission (the "CFTC") prohibits market manipulation in the markets regulated by the CFTC, including similar anti-manipulation authority with respect to crude oil swaps and futures contracts as that granted to the CFTC with respect to crude oil purchases and sales. The CFTC rules subject violators to a civil penalty of up to the greater of $1 million or triple the monetary gain to the person for each violation. Failure to comply with those regulations in the future could be affected by:subject us to civil penalty liability, as described in “Business-Regulation of the Oil and Natural Gas Industry.”

 

●actual or anticipated variations in our operating results;
●the market price for crude oil;
●changes in the market valuations of other oil and gas companies;
●announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
●adoption of new accounting standards affecting our industry;
●additions or departures of key personnel;
●sales of our Common Stock or other securities in the open market;
●actions taken by our lenders or the holders of our convertible debentures;
●changes in financial estimates by securities analysts;
●conditions or trends in the market in which we operate;
●changes in earnings estimates and recommendations by financial analysts;
●our failure to meet financial analysts’ performance expectations; and
●other events or factors, many of which are beyond our control.

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Risks Relating to Our Securities

The market price of our common stock may be volatile, which may depress the market price of our securities and result in substantial losses to investors if they are unable to sell their securities at or above their purchase price.

The market price of our securities may fluctuate substantially for the foreseeable future, primarily due to a number of factors, including:

·our status as a company with a limited operating history and limited revenues to date, which may make risk-averse investors more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the shares of a seasoned issuer in the event of negative news or lack of progress;
·announcements of technological innovations or new products by us or our existing or future competitors;
·the timing and development of our products;
·general and industry-specific economic conditions;
·actual or anticipated fluctuations in our operating results;
·liquidity;
·actions by our stockholders;
·changes in our cash flow from operations or earnings estimates;
·changes in market valuations of similar companies;
·our capital commitments; and
·the loss of any of our key management personnel.

 

In addition, market prices of the securities of energy companies, particularly companies like ours without consistent revenues and earnings, have been highly volatile and may continue to be highly volatile in the future, some of which may be unrelated to the operating performance of particular companies. Additionally, the sale or attempted sale of a volatilelarge amount of common stock into the market you may also have a significant impact on the trading price of our common stock.

Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been brought against companies that experience wide fluctuationshigh volatility in the market price of our Common Stock.  These fluctuations may have an extremely negative effect on the market price of our Common Stocktheir securities. Whether or not meritorious, litigation brought against us could result in substantial costs, divert management’s attention and may prevent you from obtaining a market price equal to your purchase price when you attempt to sell our Common Stock in the open market.  In these situations, you may be required either to sell at a market price which is lower than your purchase price, or to hold our Common Stock for a longer period of time than you planned.  An inactive market may also impair our ability to raise capital by selling shares of capital stockresources and may impair our ability to acquire other companies or oil and gas properties by using Common Stock as consideration.

Failure to comply with Nasdaq continued listing requirements, even after the proposed Stock Split, could adversely affect the liquidity of our Common Stock.

We do not currently satisfy the minimum bid price requirement for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5450(a)(1). In order to regain compliance, the minimum bid price per share of our Common Stock would needed to have been at least $1.00 for a minimum of ten consecutive business days prior to March 21, 2016. On January 21, 2016, we presented its case for an extension at a hearing before the Nasdaq Hearings panel (the “Panel”) in connection with the above as well as its failure to comply with the requirement of Nasdaq Listing Rule 5450(b)(1)(A), relating to the minimum stockholder’s equity requirements and requested a transfer to the Nasdaq Capital Market. On February 9, 2016, we were notified that the Panel had determined to grant our request to transfer the listing of our Common Stock from the Nasdaq Global Market to the Nasdaq Capital Market, effective February 11, 2016. Our continued listing on the Nasdaq Capital Market is subject to certain conditions, including our compliance with the applicable $2.5 million stockholders’ equity requirement and our continued compliance with all other applicable requirements for continued listing on that market by no later than May 23, 2016.

If we fail to regain compliance during this grace period, or the Panel does not grant us a further extension, our Common Stock will be delisted. Delisting could adversely affect the liquidity of our Common Stock. We have notified Nasdaq of our intention to cure the minimum bid price deficiency during the grace period by effecting a reverse stock split (the “Stock Split”) in connection with the proposed Merger to regain compliance. However, the Stock Split, if approved by our stockholders, may not sufficiently increase our stock price and have the desired effect of maintaining compliance with Nasdaq Listing Rules. The liquidity of our Common Stock may even be harmed by the Stock Split due to the reduced number of shares that would be outstanding after the Stock Split, particularly if the stock price does not increase as a result of the action. For more information on the proposed merger with Brushy see “Business and Properties—Pending Merger with Brushy Resources, Inc.”, and the notes toharm our financial statements.condition and results of operations. 

  

If Nasdaq determines not to continue our listing, trading of our Common Stock most likely occur in the over-the-counter market on an electronic bulletin board established for unlisted securities such as the OTC Bulletin Board or OTC Markets Group Inc. (formerly known as Pink OTC Markets Inc.). Such trading this could have significant material adverse consequences on us, including:

●we would be in violation of a closing condition and may be considered to be in breach of the Merger Agreement;

●reduced liquidity with respect to our shares;
●a determination that our Common Stock is a “penny stock” which will require brokers trading in Lilis shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares;
●a limited amount of news and analyst coverage for us resulting in potential difficulty to dispose of, or obtain accurate quotations for the price of our Common Stock; and
●a decreased ability to issue additional securities or obtain additional financing in the future.

34

Our Common Stock may be subject to penny stock rules which limit the market for our Common Stock.

Our shares of Common Stock likely qualify as “penny stock” under the SEC rules. Sales and purchases of “penny stock” generally require more disclosures by broker-dealers and satisfaction of other administrative requirements. As a result, broker-dealers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our Common Stock and cause a decline in the market value of our stock.

Sales of a substantial number of shares of our Common Stock, or the perception that such sales might occur, could have an adverse effect on the price of our Common Stock.

As of December 31, 2015, six investors each hold more than 5% beneficial ownership of our Common Stock, and together, hold beneficial ownership of approximately 77.63% of our Common Stock. Thus, any sales by our large investors of a substantial number of shares of our Common Stock into the public market, or the perception that such sales might occur, could have an adverse effect on the price of our Common Stock.

We may issue shares of our preferred stock with greater rights than our Common Stock.common stock.

 

Our articles of incorporation authorize our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from our stockholders. Any preferred stock that is issued may rank ahead of our Common Stock,common stock, in terms of dividends, liquidation rights and voting rights. We currently have twoone series of preferred stock issued and outstanding, bothwhich ranks senior to our common stock with respect to dividends and rights on the liquidation, dissolution or winding up of which provide its holders with a liquidation preference and prohibit the payment of dividends on junior securities, including our Common Stock,Company, amongst other preferences and rights.

 

There may be future dilution of our Common Stock.common stock.

 

We have a significant amount of derivative securities outstanding, which upon exercise or conversion, would result in substantial dilution. For example, in connection with the Merger and related transactions: (i) the conversiondilution of our Debentures at a conversion price of $0.50 would result in an the issuance of 13,692,930 shares of our Common Stock, (ii) the conversion of our Series A Preferred Stock at a conversion price of $0.50 would result in the issuance of 15,000,000 shares of our Common Stock, (iii) the conversion of the Convertible Notes at a conversion price of $0.50 and exercise of the warrants at an exercise price of $0.25 would result in the issuance of 25,000,000 million shares of our Common Stock, each pursuant to the receipt of requisite stockholder approval.common stock. To the extent outstanding restricted stock units, warrants or options to purchase our Common Stockcommon stock under our employee and director stock option plans2016 Omnibus Incentive Plan or our 2012 Equity Incentive Plan are exercised, the price vesting triggers under the performance shares granted to our executive officers are satisfied, or additional shares of restricted stock are issued to our employees, holders of our Common Stockcommon stock will experience dilution. Furthermore, if we sell additional equity or convertible debt securities, such sales could result in further dilution to our existing stockholders and cause the price of our outstanding securities to decline.

  

We do not expect to pay dividends on our Common Stock.common stock.

We have never paid dividends with respect to our Common Stock,common stock, and we do not expect to pay any dividends, in cash or otherwise, in the foreseeable future. We intend to retain any earnings for use in our business. In addition, our Credit Agreement prohibitscredit facilities and preferred stock prohibit us from paying any dividends and the indenture governing our senior notes restricts our ability to pay dividends. In the future, we may agree to further restrictions. Any return to stockholders will therefore be limited to the appreciation of their stock.

32

 

Securities analysts may not initiate coverage of our shares or may issue negative reports, which may adversely affect the trading price of the shares.

 

Securities analysts may not provide research reports on our company.Company. If securities analysts do not cover our company, thisCompany, the lack of coverage may adversely affect the trading price of our shares. The trading market for our shares will rely in part on the research and reports that securities analysts publish about us and our business. If one or more of the analysts who cover our companyCompany downgrades our shares, the trading price of our shares may decline. If one or more of these analysts ceases to cover our company, we could lose visibility in the market, which, in turn, could also cause the trading price of our shares to decline. Further, because of our small market capitalization, it may be difficult for us to attract securities analysts to cover our company,Company, which could significantly and adversely affect the trading price of our shares.

 

Anti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of our Company.

35

 

The existence of certain provisions under Nevada law could delay or prevent a change in control of the Company, which could adversely affect the price of our common stock. Additionally, Nevada law imposes certain restrictions on mergers and other business combinations between us and any holder of 10% or more of our outstanding common stock.

 

Item 1B. Unresolved Staff Comments

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item3.Legal Proceedings

Item 3. Legal Proceedings

 

We may from time to time be involved in various legal actions arising in the normal course of business. In the opinion of management, our liability, if any, in these pending actions wouldHowever, we do not have a material adverse effect on our financial position.  Our general and administrative expenses would include amounts incurred to resolve claims made against us.

Parker v. Tracinda Corp., Denver District Court, Case No. 2011CV561. In November 2012, we filed a motion to intervene in garnishment proceedings involving Roger Parker, our former Chief Executive Officer and Chairman. The Defendant, Tracinda Corp. (“Tracinda”), served us various writs of garnishment to enforce a judgment against Mr. Parker seeking, among other things, shares of unvested restricted stock. We asserted rights to lawful set-offs and deductions in connection with certain tax consequences, which may be material to us. The underlying judgment against Mr. Parker was appealed to the Colorado Court of Appeals and, by Order dated October 17, 2013, that Court reversed the trial court with respect to Mr. Parker’s claims of waiver, estoppel and mitigation of damages and remanded with instruction to enter judgment for Mr. Parker. The Court of Appeals also ordered the trial court to conduct further proceedings to determine the amount of damages to award Mr. Parker on his breach of contract claim. The trial court conducted a later hearing and found in its Findings of Fact, Conclusions of Law and Order dated January 9, 2015, in favor of Mr. Parker on his claim for breach of contract, awarding him $6,981,302.60. Tracinda’s Motion for Amendment of the Court’s January 9 Findings and Conclusions was the subject of an Order dated April 10, 2015, in which the Court set off the award in favor of Mr. Parker against the award in favor of Tracinda, resulting in judgment in favor of Tracinda and against Mr. Parker in the amount of $625,572.10. On April 16, 2015, Tracinda filed a Notice of Appeal in the Colorado Court of Appeals, appealing both the January 9 Order and the April 10 Order. On May 18, 2015, Parker filed a Notice of Cross-Appeal in the Colorado Court of Appeals, cross-appealing both the January 9 Order and the April 10 Order. The record is in the process of being certified. The filing of the record will trigger the parties’ briefing schedule.

In re Roger A. Parker: Tracinda Corp. v. Recovery Energy, Inc. and Roger A. Parker, United States Bankruptcy Court for the District of Colorado, Case No. 13-10897-EEB. On June 10, 2013, Tracinda filed a complaint (Adversary No. 13-011301 EEB) against us and Roger Parker in connection with the personal bankruptcy proceedings of Roger Parker, alleging that we improperly failed to remit to Tracinda certain property in connection with a writ of garnishment issued by the Denver District Court (discussed above). We filed an answer to this complaint on July 10, 2013. A trial date has not been set and, by Order dated February 2, 2015, the Bankruptcy Court ordered that the Adversary Proceeding be held in abeyance pending final resolution of the state-court action (2011CV561). We are unable to predict the timing and outcome of this matter.

Lilis Energy, Inc. v. Great Western Operating Company LLC, Eighth Judicial District Court for Clark County, Nevada, Case No. A-15-714879-B. On March 6, 2015, we filed a lawsuit against Great Western Operating Company, LLC (the “Operator”). The dispute related to our interest in certain producing wells and the Operator’s assertion that our interest was reduced and/or eliminated as a result of a default or a farm-out agreement. Underlying the dispute is the joint operating agreement (“JOA”) which provides the parties with various rights and obligations. In its complaint, we sought monetary damages and declaratory relief on claims of breach of contract, breach of the implied covenant of good faith and fair dealing, tortious breach of the implied covenant of good faith and fair dealing, unjust enrichment, conversion and declaratory judgment related to the JOA. The Operator filed a motion to dismiss on May 26, 2015 and we responded by filing an opposition motion on June 12, 2015.

On July 7, 2015, as previously reported, we entered into a Settlement Agreement (the “Settlement Agreement”) with the Operator. Due to our inability to secure financing pursuant to the Credit Agreement or another funding source, payment was not remanded to the Operator and the dispute remained unsettled.

During the year ended December 31, 2015, we were put in non-consent status. As such, the previously capitalized and accrued costs of approximately $5.20 million relating to these wells were eliminated as being placed in non-consent status relieved us of such liabilities. We have retained the right to participate in future drilling on this acreage block.

We believe there is no otherany currently pending litigation pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.

Item 4.MINE SAFETY DISCLOSURES

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 3633 

 

Part II

 

PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Recent Market Prices

 

On November 2, 2011July 24, 2017, our Common Stock begancommon stock commenced trading on the Nasdaq Global MarketNYSE American under theits symbol “RECV.“LLEX.” Between September 25, 2009 and November 1, 2011From May 9, 2017 to July 23, 2017, our common stock traded on the OTC Bulletin BoardNYSE MKT under its current symbol “LLEX.”

Prior to trading on the NYSE markets, from March 4, 2017 to May 8, 2017, our common stock traded on the NASDAQ Stock Market LLC under the symbol “RECV.OB.“LLEX”. From May 27, 2016 to March 13, 2017, our common stock was listed on the OTCQB Venture Marketplace under the symbol “LLEX”. From February 11, 2016 to May 26, 2016, our common stock traded on The Nasdaq Capital Market (“Nasdaq”) under the symbol “LLEX.” On December 1, 2013, in connection withPrior to February 11, 2016, our name changes our Common Stock began tradingcommon stock traded on the Nasdaq Global Market under the symbol “LLEX.” On February 11, 2016, our Common Stock was transferred and began trading, at the request of the Company, to the Nasdaq Capital Market.

 

The following table shows the high and low reported sales prices of our Common Stockcommon stock for the periods indicated. The prices reported in this table have been adjusted to reflect the 1-for-10 reverse split of our issued and outstanding common stock, which took effect on June 23, 2016.

 

 High  Low  High Low 
 2018 
First Quarter (through March 5, 2018) $5.44 $3.10 
 2015      
      2017 
Fourth Quarter $0.70   0.07  $5.50 $4.14 
Third Quarter $3.15   0.48  $5.25 $2.96 
Second Quarter $1.90   0.74  $5.69 $3.41 
First Quarter $1.26   0.60  $5.22 $2.90 

 

 2014 
      2016 
Fourth Quarter $2.20  $0.62  $3.75  $2.10 
Third Quarter $2.48  $1.02  $3.51  $1.08 
Second Quarter $3.30  $1.73  $2.33  $0.50 
First Quarter $3.58  $2.06  $3.70  $1.00 

 

OnAs of March 30, 2016,5, 2018, there were 89158 owners of record of our Common Stock.common stock. We estimate that there are approximately 1,705 beneficial holders of our common stock.

 

Dividend Policy

 

We have never paid any cash dividends on our Common Stockcommon stock and do not anticipate paying any dividends in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion and development of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our boardBoard of Directors may deem relevant at that time. In addition, we

We are currently restricted from declaring any dividends pursuant to the terms of our Riverstone First Lien Credit Agreement, Second Lien Credit Agreement and outstanding preferred stockstock. See Item 7. Management’s Discussion and our instruments evidencing indebtedness.Analysis of Financial Condition and Results of Operations - “Liquidity and Capital Resources” for further information.

 

Recent Sales of Unregistered Securities

 

We have previously disclosed by way of Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC all sales by us of our unregistered securities during the year ended December 31, 2015.2017.

 

34

Equity Compensation Plans

Information regarding equity compensation plans is set forth in Item 11 of this Annual Report and is incorporated herein by reference.

Item 6.Selected Financial Data

Item 6. Selected Financial Data

 

Not applicable.

37

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in Part IV of this Annual Report on Form 10-K. ThisReport. The following discussion containsincludes forward-looking statements, that involve risksincluding, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and uncertainties.resources. Our actual results could differ materially from those anticipateddiscussed in these forward-looking statements as a result of variousmany factors, including those set forthdiscussed under Part I “Item 1A. Risk Factors.”“Risk Factors” and elsewhere in this Annual Report.

 

GeneralOverview

 

We are

Lilis is an upstream independent oil and gas company engaged in the acquisition, drilling and production of oil and natural gas properties and prospects. 

Our current operating activities arecompany focused on the DJ Basin in Colorado, Wyoming and Nebraska.  We have acquired and developed a producing base of oil and natural gas proved reserves, as well as a portfolio of exploration and other undeveloped assets with conventional and non-conventional reservoir opportunities, with an emphasis on those with multiple producing horizons, in particular the Muddy “J” conventional reservoirs and the Niobrara shale and Codell resource plays. We believe these assets offer the possibility of repeatable year-over-year success and significant and cost-effective production and reserve growth. Our acquisition, development, and exploration pursuits are principally directed atproduction of conventional and unconventional oil and natural gas properties in North America.the core of the Delaware Basin in Winkler, Loving, and Reeves Counties, Texas and Lea County, New Mexico.

Our Business and Strategy

We believe our significant inventory of oil and liquids-rich drilling opportunities in the Delaware Basin provide us with a platform for continued future growth. As of December 31, 2017, we had accumulated approximately 35,200 gross (15,700 net) acres in the core of the Delaware Basin in Winkler, Loving, and Reeves Counties, Texas and Lea County, New Mexico, with approximately 33,080 gross (14,430 net) acres in Winkler, Loving, and Reeves Counties, Texas and approximately 2,120 gross (1,270 net) acres in Lea County, New Mexico. Our leasehold position is largely contiguous, which we believe will enable us to maximize development efficiency and manage our costs.

 

As of December 31, 2015 we owned interests in 8 economically producing wells2017, our proved reserves were approximately 11,453 MBOE (million barrels of oil equivalent). Our proved reserves consist of 63% oil, 23% natural gas and 16,000 net leasehold acres,14% NGL. Of those reserves, 37% of which 8,000 net acresour proved reserves are classified as undevelopedproved developed and approximately 63% are classified as proved undeveloped.

In addition, 34% of our net acreage position was held by production at December 31, 2017, and allwe operated approximately 90% of our acreage, which arewe believe gives us significant control over the pace of our development and the ability to design a more efficient and profitable drilling program to maximize recovery of oil and natural gas.

In 2017, we also entered into a long-term gas gathering, processing and purchase agreement with an affiliate of Lucid Energy Group (“Lucid”) to support our active drilling program in the Delaware Basin. Lucid will receive, gather and process our gas production from certain production areas located in Colorado, WyomingLea County, New Mexico and Nebraska withinin Loving and Winkler Counties, Texas. The agreement secures sufficient term and capacity for Lilis during our development and exploitation life cycle of the production areas committed to the new agreement.

Our focus is on the development of our oil and natural gas properties in the Delaware Basin, primarily through the drilling of horizontal wells, which we believe will provide attractive returns on a majority of our acreage positions. Our drilling program utilizes the development of new horizontal wells across several potentially productive formations in the Delaware Basin, but initially targeting the Wolfcamp formation. We completed our first horizontal well in January 2017, and have completed six additional wells since that time. On March 31, 2017, we completed the divestiture of all our oil and natural gas properties located in the DJ Basin.   WeBasin to complete our transformation to a pure play Permian Basin oil and natural gas company.

As of March 1, 2018, we have accumulated approximately 35,800 gross (16,200 net) acres in what we believe to be the core of the Delaware Basin in Winkler, Loving, and Reeves Counties, Texas and Lea County, New Mexico. Our leasehold position is largely contiguous, allowing us to maximize development efficiency and manage full cycle finding costs. Approximately 35% of our acreage position is held by production, and we are primarily focusedthe named operator on acquiring companiesnearly 100% of our producing acreage, which gives us significant control over the pace of our development and production throughout North Americaour ability to design a more efficient and developing our North and South Wattenberg Field assets, which include attractive unconventional reservoirprofitable drilling opportunities in mature development areas with low risk Niobrara and Codell formation productive potential.program that maximizes recovery of hydrocarbons.

 

We expect that substantially all of our estimated 2018 capital expenditure budget will be focused on the development and expansion of our Delaware Basin acreage and operations. We also plan to continue selectively and opportunistically pursuing strategic acreage acquisitions and organic leasing prospects in the Delaware Basin.

Our business objective is to increase stockholder value by growing our Delaware Basin leasehold position, reserves, production and cash flows at attractive rates of return on invested capital. We continue to focus on developing our existing acreage position, gaining additional operational control and expanding our core assets in the Delaware Basin. We plan to achieve our business objective by implementing a business strategy focused on the following:

·Execute our Operated, Horizontal Drilling Program to Grow Production from our Delaware Basin Leasehold .We plan to drill and develop our existing acreage base of approximately 35,800 gross (16,200 net) acres in the Delaware Basin, which we believe will maximize our resource potential and value to our stockholders. Through the development of our properties, we seek to de-risk our acreage position and substantially increase our production and cash flow, thereby increasing the value of our properties. Our current leasehold position in the Delaware Basin has significant stacked-pay potential, which we believe includes at least seven productive zones. We estimate that all productive zones within our properties may support approximately 900 future drilling locations, including over 400 longer lateral locations, and we expect that inventory to increase with the closing of our pending acquisition from OneEnergy Partners Operating, LLC. We focused our horizontal development in 2017 on the Wolfcamp B formation but intend to expand our target zones to the Wolfcamp A, Wolfcamp XY and 2ndBone Spring during 2018. Our long-term gas gathering, processing and purchase agreement with Lucid will support our active drilling program and alleviate production constraints we have experienced.

·Focus on Delineation of our Existing Acreage.We plan to focus on the delineation and de-risking of our existing acreage. We expect that our drilling activity will also grow our drilling inventory and the identified resource potential of our Delaware Basin properties. We believe that our current reserves represent only a small portion of the resource potential within our acreage. Our development plan for 2018 contemplates the continued delineation of our acreage both geographically and geologically by testing our eastern acreage and by drilling and completing wells within additional prospective benches, including the Wolfcamp A, Wolfcamp XY and the 2nd Bone Spring.

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·Leverage our Extensive Operational Expertise to Reduce Costs and Enhance Returns. As of December 31, 2017, we operated approximately 90% of our acreage position, giving us significant control over the pace of our development and allowing us to increase value through operational and cost efficiencies. We intend to obtain the highest possible returns on the capital we expend on our development projects using results from the wells we have completed and the operational expertise of our management team. We also plan to focus on operational efficiencies, including salt water disposal and midstream costs, and capital costs of our development wells in order to maximize returns to our stockholders.

·Pursue Selective Acquisitions and Organic Leasing to Grow Our Leasehold Position.Since entering the Delaware Basin in June 2016, we have grown our net acreage position approximately 376% from 3,400 net (7,200 gross) acres to approximately 16,200 net (35,800 gross) acres as of March 1, 2018. On January 30, 2018, we announced our entry into a pending Purchase and Sale Agreement with OneEnergy Partners Operating, LLC to acquire 2,798 net acres in New Mexico, which are largely overlapping or contiguous with our existing properties, for approximately $70 million (the “OEP Acquisition”).  Pro forma for the closing of the OEP Acquisition, we expect we expect our acreage position to approximately 19,000 net acres.  Our most significant acquisition in 2017 included approximately 4,400 net acres, approximately 92% of which overlapped our existing acreage position. Our acquisitions to date have added approximately 600 drilling locations with multiple stacked pay zones. In addition to our continued evaluation of strategic acquisition opportunities in the Delaware Basin, we will continue to expand our leasehold position through our organic leasing program.

·Maintain Fiscal Discipline and Financial Liquidity.We actively manage the level of our development, leasing and acquisition activity in response to commodity prices, access to capital, and to the performance of our wells. We hold significant control over the pace of our drilling activity as a result of our operatorship on approximately 90% of our properties. During 2017, we commenced an active hedging program to provide certainty regarding our cash flow and protect returns from our development activity in the event of decreases in the prices received for our production. In addition, we have structured our balance sheet with the intent to reduce our leverage profile over time. The Second Lien Term Loan (as hereinafter defined) that we primarily relied upon to finance our capital spending and operations in 2017 is convertible, and we announced the issuance of $100 million in convertible, perpetual Series C preferred stock on January 31, 2018. In addition, the closing of our recently announced OEP Acquisition, which carries a purchase price of approximately $70 million, will be funded in part with $30 million of common stock to be issued to the seller.

We expect that our 2018 capital expenditure budget will be focused on the development and expansion of our Delaware Basin acreage and operations. We also plan to continue to selectively and opportunistically pursue strategic acreage acquisitions in the Delaware Basin. 

Market Conditions and Commodity Pricing

Our financial results depend on many factors, including the price of oil, natural gas and NGLs and our ability to market our production on economically attractive terms. We generate the vast majority of our revenues from the salesales of oil, for our producing wells.natural gas and NGLs. The prices of oil and natural gasthese products are critical factors to our success. Thesuccess and volatility in the prices of oil and natural gas could be detrimental toimpact our results of operations. OurIn addition, our business requires substantial capital to acquire producing properties and develop our non-producing properties. As the price of oil declines causingDeclines in these prices would reduce our revenues to decrease, we generate lessand result in lower cash to acquire new properties or develop our existing properties and the price decline may alsoinflow which would make it more difficult for us to obtain any debt or equity financingpursue our plans to supplement our cash on hand.

Upon entering into the Credit Agreement, we believed we had secured adequate access to capital generally,acquire new properties and specifically, to fund the drillingdevelop existing properties. Declines in oil, natural gas, and development of our proved undeveloped reserves. Due to the lack of liquidity that had been expected, but unavailable to us pursuant to the Credit Agreement, we recorded a full impairment of our proved undeveloped and unproved properties during the year ended December 31, 2015.

Our financial statements for the years ended December 31, 2015 have been prepared on a going concern basis.  We have incurred net operating losses for the past five years. This history of operating losses, along with the recent decrease in commodityNGL prices may also adversely affect our ability to access capital we needobtain additional funding on favorable terms.

We believe our long-term agreement with Lucid relating to continue operations. These factors raise substantial doubt aboutgas gathering, processing and associated services to support our abilityproduction operations will enable us to continue as a going concern. The accompanying financial statements do not include any adjustmentsavoid many potential issues relating to the recoverabilitytransportation of our production. Pursuant to our agreement, Lucid will receive, gather and classificationprocess our natural gas production from certain production areas located in Lea County, New Mexico and in Loving and Winkler Counties, Texas. The agreement secures incremental midstream capacity for us in the production areas committed.

We believe we are well-positioned to manage the challenges presented in a lower pricing environment, and we can execute our planned 2018 development program and capital expenditures with a combination of recorded asset amounts,cash, cash flow, and proceeds from the exercise of outstanding warrants.

Impact of New Tax Reform

The New Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code applicable to certain items in 2017 as well as those applicable to 2018 and subsequent years.

The applicable items that will affect 2017 include but are not limited to (1) bonus depreciation that will allow for full (100%) expensing of qualified property acquired and placed in service after September 27, 2017 and (2) limitations on the deductibility of certain executive compensation under IRC Sec. 162(m) related to plans after November 2, 2017.

The Act also establishes new tax laws that will affect 2018, including but not limited to, (1) reduction of U.S. federal corporate tax rate to twenty one percent; (2) the elimination of the corporate alternative minimum tax (AMT); (3) limitation on the deduction of interest expense; (4) the repeal of the of the domestic production activity deduction (DPAD); and (5) limitations on net operating losses (NOL’s) generated after December 31, 2017 to eighty percent of taxable income. The NOL’s generated in 2018 and beyond are to be carried forward indefinitely with no carryback.

The Act preserved the deductibility of Intangible Drilling Costs (IDC’s) for federal income tax purposes. The IDC’s have recently been capitalized and amortized for tax purposes to avoid negative AMT consequences which would result in the reduction of AMT NOL’s. The Act eliminates AMT for tax years beginning on or amountsafter January 1, 2018 which provides the company latitude in its tax treatment of IDC’s for both current year and future tax planning purposes.

ASC 740 requires the recognition of the tax effects of the Act for annual periods that include December 22, 2017. At December 31, 2017, the Company has made reasonable estimates of the effects on its existing deferred tax balances. The Company has remeasured certain federal deferred tax assets and liabilities that might result from this uncertainty.based on the rates at which they are expected to reverse in the future, which is generally twenty one percent. The provisional amount recognized related to the remeasurement of its federal deferred tax balance was $9.5 million, which was subject to a valuation allowance at December 31, 2017.

 

We will needcontinue to raise additional fundsanalyze the Act and future IRS regulations, refine its calculations and gain a more thorough understanding of how individual states are implementing this new law. This further analysis could potentially affect the measurement of deferred tax balances or potentially give rise to finance continuing operations. However, we may not be successful in doing so. Without sufficient additional financing, it would be unlikely for us to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan and eventually secure other sources of financing and attain profitable operations.new deferred tax amounts.

  

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Results of Operations

Year ended December 31, 2015 compared to the year ended December 31, 2014

The following table compares operating data for the fiscal year ended December 31, 2015 to December 31, 2014:

  Year Ended
December 31,		 
  2015  2014 
       
Revenue:      
Oil sales $292,332  $2,581,689 
Gas sales  77,068   364,732 
Operating fees  26,664   182,773 
Realized gain (loss) on commodity price derivatives  -   11,143 
Total revenue  396,064   3,140,337 
         
Costs and expenses:        
Production costs  195,435   954,347 
Production taxes  27,917   269,823 
General and administrative  7,929,628   10,325,842 
Depreciation, depletion and amortization  584,203   1,337,662 
Impairment of evaluated oil and gas properties  24,478,378   - 
Total costs and expenses  33,215,561   12,887,675 
         
Loss from operations before conveyance  (32,819,497)  (9,747,338)
Loss on conveyance of oil and gas properties  -   (2,269,760)
Loss from operations  (32,819,497)  (12,017,098)
         
Other income (expenses):        
Other income  3,160   32,444 
Inducement expense  -   (6,661,275)
Change in fair value of convertible debentures conversion derivative liability  1,243,931   (5,526,945)
Change in fair value of warrant liability  394,383   571,228 
Change in fair value of conditionally redeemable 6% Preferred stock  513,585   - 
Interest expense  (1,696,899)  (4,837,025)
Net Loss $(32,361,337) $(28,438,671)

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Total Revenue

On September 2, 2014, we entered into a final settlement agreement (the “Final Settlement Agreement”) to convey our interest in 31,725 evaluated and unevaluated net acres located in the DJ Basin and the associated oil and natural gas (“Hexagon Collateral”), to our former primary lender, Hexagon, LLC (“Hexagon”), in exchange for extinguishment of all outstanding debt and accrued interest obligations owed to Hexagon in an aggregate amount of approximately $15.1 million. The conveyance assigned all assets and liabilities associated with the property, which includes PDP and PUD reserves, plugging and abandonment, and other assets and liabilities associated with the property. Pursuant to the Final Settlement Agreement, we also issued to Hexagon $2.0 million in 6% Conditionally Redeemable Preferred Stock valued at $1.69 million and considered as temporary equity for reporting purposes.

Total revenue was $396,000 for the year ended December 31, 2015, compared to $3.14 million for the year ended December 31, 2014, a decrease of $2.7 million, or 87%. The decrease in revenue was primarily due to the reduction in oil and gas revenue associated with 32,000 acres and 17 operated wells we conveyed to Hexagon pursuant to the Final Settlement Agreement and the reduction in commodity prices during the year.

 

During the year ended December 31, 20152017, we worked actively to increase our natural gas production takeaway and 2014, production amounts were 12,449processing capacity for our expanding production. We successfully brought online our fifth Wolfcamp B horizontal well located in Lea County, New Mexico. This well is our most geologically eastern well and 46,500 BOE, respectively, a decrease of 34,051 BOE, or 73%. In additionis the closest well to the conveyance,Central Basin Platform in our current acreage position. As of December 31, 2017, we have production declinedflowing from our 10 horizontal wells and 14 legacy vertical wells with an estimated productive capacity of approximately 2,494 net BOE per day, on a combined equivalent oil, natural gas and NGL basis.

Our production for the year ended December 31, 2017, was temporarily impacted by curtailments resulting from operational and equipment issues with our current gathering and processing service provider. Primarily as a result of this curtailment of approximately 39.5% of our productive capacity, our average realized production was approximately 1,576 BOE per day for the year ended December 31, 2017. This temporary curtailment is expected to be resolved with expanded available natural gas takeaway and processing capacity under our new contract with Lucid. Production takeaway under the Lucid contract began in November 2017 from our New Mexico properties and in December 2017 from a portion of our Texas properties.

The results of operations of Brushy Resources are included with those of Lilis commencing June 23, 2016. As a result, results of operations for the year ended December 31, 2017 are not necessarily comparable to the twelve-month period in 2016. Additionally, all discussion related to historical representations of common stock, unless otherwise noted, gives retroactive effect to the reverse split on June 23, 2016 for all periods presented.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

The following sets forth selected revenue and production data for the years ended December 31, 2017 and 2016:

  For the Year Ended
December 31,		    
  2017  2016  Change  %
Change		 
Net production:                
Oil (Bbls)  371,993   61,088   310,905   509%
Natural gas (Mcf)  776,164   332,643   443,521   133%
NGL (Bbl)  73,875   11,357   62,518   550%
Total (BOE)  575,229   127,863   447,366   350%
Average daily production (BOE/d)  1,576   350   1,226   350%
                 
Average realized sales price:                
Oil (Bbl) $47.92  $39.59  $8.33   21%
Natural gas (Mcf)  2.74   2.54   0.20   8%
NGL (Bbl)  22.49   15.22   7.27   48%
Total (BOE) $37.57  $26.87  $10.70   40%
                 
Oil, natural gas and NGL revenues (in thousands):                
Oil revenue $17,826  $2,418  $15,408   637%
Natural gas revenue  2,125   844   1,281   152%
NGL revenue  1,661   173   1,488   860%
Total $21,612  $3,435  $18,177   529%

Revenues

Total revenue was $21.6 million for the year ended December 31, 2017, as compared to $3.4 million for the year ended December 31, 2016, representing an increase of $18.2 million or 529%. Our increase in revenue was associated primarily with an increase in production and sales of production from our seven Delaware Basin wells placed on production during 2017.

Oil revenues increased 637% due to certain operatedan increase in oil sales volume of 509% and an increase in the average realized per barrel oil price of 21%. Natural gas revenues increased 152% due to an increase in natural gas sales volumes of 133% and an increase in the average realized per Mcf natural gas price of 8%. NGL revenues increased 860% due to an increase in NGL sales volumes of 551%, and an increase in NGL realized price of 48%.

Oil and Natural Gas Production Costs, Production Taxes, Depreciation, Depletion, and Amortization

Our production during the year ended December 31, 2017, increased from 127,863 BOE in 2016 to 575,229 BOE in 2017, an increase of 350%. This increase in production was primarily attributable to seven additional wells shut in for workoversbeing completed and non-payments to vendors. placed on production.

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The following table shows a comparison of production volumes and average prices:

  For the Year Ended
December 31,		 
  2015  2014 
Product      
Oil (Bbl.)  7,067   33,508 
Oil (Bbls)-average price (1) $41.36  $77.05 
         
Natural Gas (MCFE)-volume  32,291   77,954 
Natural Gas  (MCFE)-average price (2) $2.39  $4.68 
         
Barrels of oil equivalent (BOE)  12,449   46,500 
Average daily net production (BOE)  34   127 
Average Price per BOE (1) $29.67  $63.36 

(1)Does not include the realized price effects of hedges.
(2)Includes proceeds from the sale of NGL’s.

Oil and gas production costs production taxes, depreciation, depletion, and amortization

Production costs per BOE  15.70   20.52 
Production taxes per BOE  2.24   5.80 
Depreciation, depletion, and amortization per BOE  46.93   28.76 
Total operating costs per BOE (1) $64.87  $55.08 
Gross margin per BOE (1) $(35.20) $8.28 
Gross margin percentage  (119)%  13%

(1)Does not include the loss on conveyance.

Commodity Price Derivative Activities

Changes infor the market price of oil can significantly affect our profitability and cash flow.  In the past we have entered into various commodity derivative instruments to mitigate the risk associated with downward fluctuations in oil prices.  These derivative instruments consisted exclusively of swaps.  The duration and size of our various derivative instruments varies, and depends on our view of market conditions, available contract prices and our operating strategy.

As of December 31, 2015, we did not maintain any active commodity swaps. During 2014, we held one commodity swap which matured on January 31, 2014. Commodity price derivative realized a gain of $11,000 during the yearyears ended December 31, 2014.  2017 and 2016:

 

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  For the Year Ended
December 31,		    
  2017  2016  Change  %
Change		 
Production Costs per BOE:                
Production costs $12.21  $12.43  $(0.22)  -2%
Production taxes  2.06   (1.30)  3.36   -258%
Depreciation, depletion, amortization and accretion  12.21   12.25   (0.04)  -0%
Total (BOE) $26.48  $23.38  $3.10   13%
                 
Operating Expenses                
Production costs $7,023  $1,590  $5,433   342%
Production taxes  1,187   (167)  1,354   -811%
General and administrative  49,851   14,227   35,624   250%
Depreciation, depletion, amortization and accretion  7,025   1,698   5,327   314%
Impairment of evaluated oil and natural gas properties  10,505   4,718   5,787   123%
Total Operating Expenses $75,591  $22,066  $53,525   243%

  

Production Costs

 

Production costs were $195,000$7.0 million for the year ended December 31, 2015,2017, compared to $954,000$1.6 million for the year ended December 31, 2014, a decrease2016, an increase of $759,000,$5.4 million, or 80%342%. The decreaseincrease in production costs was primarily due to increased production volumes associated with the conveyanceaddition of 32,000 acres and 17 operatedseven wells to Hexagon discussed above and certain operated wells shutplaced on production in the Delaware Basin during the year.year ended December 31, 2017. Production costs per BOE decreased to $15.70$12.21 for the year ended December 31, 20152017, from $20.52 in 2014, a decrease of $4.80 per BOE, or 23%, primarily the result of reduced service costs realized in lower commodity environment.

Production Taxes

Production taxes were $28,000$12.43 for the year ended December 31, 2015, compared2016, a decrease of $0.22 per BOE, or -2%. The ratio change in production volume from year ended December 31, 2016 to $270,000year ended December 31, 2017 was almost the same as the ratio change in production cost for same periods resulting in the low variance of $0.22 in production cost per BOE and the high production cost per BOE despite significant increase in production during 2017.

Production Taxes

Production taxes were $1.2 million for the year ended December 31, 2014, a decrease2017, compared to $(0.2) million for the year ended December 31, 2016, an increase of $242,000, or 90%.$1.4 million. Currently, ad valorem, severance and conservation taxes range from 1% to 13% based on the state and county from which production is derived. Production taxes per BOE decreasedincreased to $2.24$2.06 per BOE during the year ended December 31, 20152017 from $5.80$(1.30) per BOE during the year ended December 31, 2016. As discussed above, the increase in 2014,production taxes corresponds to the increase in production revenues during the year ended December 31, 2017. These taxes are likely to vary in the future depending on the production volumes we generate from various states, and on the possibility that any state may raise its production tax rate. The $(0.2) million in production taxes during the year ended December 31, 2016 was due to certain ad valorem and severance tax estimates that were higher than the actual amount billed, thus resulting in a decrease of $3.56 or 61%.tax benefit to us.

 

General and Administrative Expenses

General and administrative expenses (“G&A”) were $7.93$49.9 million during the year ended December 31, 2015,2017, compared to $10.33$14.2 million during the year ended December 31, 2014, a decrease2016, an increase of $2.40$35.6 million or 23%250%. IncludedThe increase in general and administrative expenses for the year ended December 31, 2015 were $3.45G&A was primarily due to an increase in payroll of $15.6 million, ofan approximate $15.4 million increase in stock-based compensation expense compared to $3.43and an increase of approximately $4.6 million of stock-based compensation expensesin other G&A during the year ended December 31, 2014.2017. The decreaseincrease of $15.6 million in generalpayroll was primarily attributable to added employees, severance pay and administrative expensesbonuses. The $15.3 million increase in stock-based compensation during 2017 was largely attributed to a $1.0 million lump sum payment paid to Abraham “Avi” Mirmancaused in 2014 as a one-time bonus related to achievementpart by added employees and higher average prices of capital raising milestones and a decrease in professional fees incurred in 2014 relating to multiple financings and a conveyance of properties to Hexagon offset by increased compensation relating to additional employees along with higher contract services in 2015.the Company’s stock.

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Depreciation, Depletion, and Amortization

Depreciation, depletion, and amortization were $584,000 during the year ended December 31, 2015, compared to $1.34(“DD&A”) was $7.0 million during the year ended December 31, 2014, a decrease2017, compared to $1.7 million during the year ended December 31, 2016, an increase of $754,000,$5.3 million, or 56%314%. DecreaseOur DD&A rate decreased to $12.21 per BOE during the year ended December 31, 2017 from $12.25 per BOE during the year ended December 31, 2016. The DD&A expense increased due to an increase in depreciation, depletion, and amortization wasvolumes produced by 447,366 BOE or 350%, from 127,863 BOE during the result ofyear ended December 31, 2016 to 575,229 BOE during the conveyance of properties to Hexagon, lowering the depletion pool and a decrease in production amounts in 2015 from 2014.year ended December 31, 2017.

 

Impairment of Evaluated Oil and Natural Gas Properties

We recorded impairment charges of $10.5 million and $4.7 million during the years ended December 31, 2017 and 2016, respectively. Under the full cost method of accounting, capitalizedwe are required on a quarterly basis to determine whether the book value of our oil and natural gas property costsproperties is less accumulated depletion and net of deferred income taxes may not exceed an amountthan or equal to the sum“ceiling,” based upon the expected after tax present value of the present value,future net cash flows discounted at 10%, from our proved reserves. Any excess of estimated futurethe net revenues from provedbook value of our oil and natural gas properties over the ceiling must be recognized as a non-cash impairment expense. For the year ended December 31, 2017, higher capital expenditures with slower than expected development of proved reserves contributed to the excess of net book value of our oil and natural gas properties over the costceiling resulting in the recognition of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are not subject to amortization. Should capitalized costs exceed this ceiling, an impairment expense is recognized.charge of $10.5 million. For the year ended December 31, 2016, the impairment charge of $4.7 million resulted from the impact of less favorable commodity prices which adversely affected estimated proved reserve volumes and future estimated revenues.

 

  Years Ended December 31,       
  2017  2016  Variance  % 
  (In Thousands)       
Other income (expenses):                
Other income $18  $90  $(72)  -80%
Inducement expense  -   (8,307)  8,307   100%
Gain on extinguishment of debt and modification of convertible debentures  -   852   (852)  -100%
Loss from commodity derivatives, net  (1,063)  -   (1,063)  -%
Loss from fair value changes of debt conversion and warrant derivatives  (6,260)  (1,222)  (5,038)  -100%
Loss in fair value changes of conditionally redeemable 6% preferred stock  (41)  (701)  660   94%
Interest expense  (18,757)  (4,924)  (13,833)  -281%
Total other income (expenses) $(26,103) $(14,212) $(11,891)  -84%

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Inducement Expense

During the year ended December 31, 2015, the lower commodity prices and lack of capital to develop its undeveloped oil and gas properties caused us to recognize an impairment2016, inducement expense of $24.48 million. We did not recognize any impairment$8.3 million was incurred as a result of debt and equity restructuring in connection with the Brushy Resources merger. There was no inducement expense incurred during 2014.the year ended December 31, 2017.

 

InducementLoss from Commodity Derivatives

During the fourth quarter of 2017, oil price derivatives were entered into with counterparties. Upon entering into the derivative transactions, oil prices increased. As a result, for the year ended December 31, 2017, we recorded a loss of $0.2 million on settlements and a loss of $0.9 million on the unsettled position as a result of the changes in fair value of the oil commodity derivatives. During the year ended December 31, 2016, we did not participate in any commodity derivative transactions.

Loss from Fair Value Changes of Debt Conversion and Warrant Derivative

The change in fair values of derivative instruments comprised a loss of $6.3 million during the year ended December 31, 2017, as compared to a loss of $1.2 million during the year ended December 31, 2016.

·Second Lien Term Loan Derivative Liability.On April 26, 2017, we entered into the Second Lien Credit Agreement (as hereinafter defined). The Second Lien Term Loan and the Delayed Draw Term Loans (as such terms are hereinafter defined) funded thereunder during the fourth quarter of 2017 included a make-whole premium and a conversion feature, which is required to be recorded as an embedded derivative and bifurcated from its host contract. These features are therefore recorded as derivative liabilities at fair value for each reporting period based upon values determined through the use of the discounted lattice model. The embedded derivatives were recorded at closing as a derivative liability with a fair value of $65.6 million. At December 31, 2017, the fair value of the derivative liabilities associated with the loan conversion features was $72.7 million. As a result, we recorded an unrealized loss of $7.1 million on the change in fair value of derivative liabilities associated with the loan conversion features.

·SOS Warrant Liability. On June 23, 2016, in conjunction with the merger with Brushy Resources, we issued to SOS Investment LLC (“SOS”) a warrant to purchase up to 200,000 shares of our common stock at an exercise price of $25.00. The warrant contains a price protection feature that will automatically reduce the exercise price if we enter into another agreement pursuant to which warrants are issued with a lower exercise price. For the years ended December 31, 2017 and 2016, we incurred an unrealized loss of $0.04 million and an unrealized gain of $0.02 million, respectively on the SOS warrant liability.

·Heartland Warrant Liability. On January 8, 2015, we entered into a credit agreement with Heartland Bank (the “Heartland Credit Agreement”). In connection with the Heartland Credit Agreement, we issued to Heartland Bank a warrant to purchase up to 22,500 shares of our common stock at an exercise price of $25.00. The warrant contained a price protection feature that would have automatically reduced the exercise price if we entered into another agreement pursuant to which warrants were issued with a lower exercise price and would also have triggered an adjustment to the number of underlying shares of common stock. On June 14, 2017, we executed an amended and restated warrant agreement with Heartland Bank whereby we issued a warrant to purchase 160,714 of common stock at an exercise price of $3.50 to replace the original warrant to purchase 22,500 shares of common stock to settle a disagreement regarding the fair value change pursuant to the anti-dilution provisions in the original warrant. The amended and restated warrant agreement no longer contains the same anti-dilution provisions. As a result of the reissuance of the warrants, we recorded $0.04 million realized gain and $0.03 million unrealized gain in fair value of the derivative liability related to such warrants during the years ended December 31, 2017 and 2016, respectively.

·Bristol Warrant Liability. On September 2, 2014, we entered into a consulting agreement with Bristol Capital, LLC (“Bristol”), pursuant to which we issued Bristol a warrant to purchase up to 100,000 shares of our common stock at an exercise price of $20.00 (or, in the alternative, options exercisable for 100,000 shares of common stock, but in no case, both). The agreement had a price protection feature that automatically reduced the exercise price of the warrant if we entered into another consulting agreement pursuant to which warrants were issued with a lower exercise price, which was triggered in year 2016.  On March 14, 2017, we issued 77,131 shares of common stock to Bristol pursuant to a settlement agreement for a cashless exercise of the warrant.  The Bristol warrant was also revalued on March 14, 2017 resulting in a realized gain in fair value of $0.8 million and decreasing the Bristol derivative liability to $0.4 million.   As a result of the cashless exercise, we reclassified the $0.4 million of Bristol derivative liability to additional paid-in capital as of March 31, 2017.  For the years ended December 31, 2017 and 2016, we recorded $0.8 million of realized gain and $0.2 million of unrealized loss on the Bristol warrant, respectively.

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Interest Expense

 

In January 2014, we incurred an inducementInterest expense of $6.66 million. We entered into an initial conversion agreement with all offor the holders of our Debentures (“Initial Conversion Agreement”).  Under the terms of the Initial Conversion Agreement, $9.0year ended December 31, 2017, was $18.8 million, of the approximately $15.6 million in Debentures then outstanding were converted into our Common Stock at a price of $2.00 per share.  As an inducement, we issued warrantscompared to purchase one share of our Common Stock, at an exercise price equal to $2.50 per share (“Initial Conversion Warrants”), to the converting Debenture holders, for each share of our Common Stock issued upon conversion of the Debentures. We used the Lattice model to value the Initial Conversion Warrants, utilizing a volatility of 65%, and a life of 3 years, which resulted in a fair value of $6.66$4.9 million for the Initial Conversion Warrants.year ended December 31, 2016. For the year ended December 31, 2017, we incurred interest expense of $1.9 million for quarterly interest payments on notes payable and term loans, $6.6 million of paid-in-kind interest, $8.5 million related to amortized debt discount on our Second Lien Term Loans and $1.8 million of amortized debt issuance costs, as compared to the year ended December 31, 2016, when we incurred $1.7 million of interest expense and $3.2 million of non-cash interest relating to amortized debt issuance costs on debentures, convertible notes and non-convertible notes.

Liquidity and Capital Resources

Historically, our primary sources of capital have been cash flows from operations, borrowings from financial institutions and investors, the sale of equity and equity derivative securities, and asset dispositions. Our primary uses of capital have been for the acquisition, development, exploration, and exploitation of oil and natural gas properties, in addition to refinancing of debt instruments.

Based upon current commodity price expectations for 2018, we believe that with the net proceeds received on January 31, 2018, we will be able to fund our currently planned development program and operations, including our working capital requirements, with a combination of cash and cash flow. As of March 2, 2018, we have a total cash balance of approximately $83.7 million. Our Board has approved a drilling and completion capital expenditure program of $103.2 million for the year ending December 31, 2018, and a total operational capital expenditure program of $115.5 million, excluding capital expenditures for leasing activity and acquisitions. In addition, future cash flows are subject to a number of variables, including uncertainty in forecasted production volumes and commodity prices. We are the operator for 100% of our 2018 operational capital program, and as a result, the amount and timing of a substantial portion of our capital expenditures is discretionary. Accordingly, we may determine it prudent to curtail drilling and completion operations in the event of capital constraints or reduced returns on investment as a result of commodity price weakness.

Over the long term, we expect growth in our production as a result of our development program to allow us to fund an increasing portion of our capital expenditures from cash flow.  We expect that we will fund the remaining portion of our capital expenditures using proceeds from a combination of debt, preferred stock, and equity issuance.   

Information about our cash flows for the year ended December 31, 2017, are presented in the following table (in thousands):

  Year ended December 31, 
  2017  2016 
Cash provided by (used in):        
Operating activities $(7,243) $(6,309)
Investing activities  (147,502)  (19,130)
Financing activities  160,469   37,067 
Net change in cash $5,724  $11,628 

   

Operating activities.For the year ended December 31, 2017, net cash used in operating activities was $7.2 million, compared to $6.3 million for the year ended December 31, 2016. The increase of $0.9 million in cash used in operating activities was primarily attributable to higher general and administrative costs as a result of our increased operational activity during 2017.

Investing activities. For the year ended December 31, 2017, net cash used in investing activities was $147.5 million compared to $19.1 million for the year ended December 31, 2016. The $147.5 million in cash used in investing activities was primarily attributable to the following:

·An increase of $68.5 million in drilling and completion costs, including six Delaware Basin wells of which five were completed during the year ended December 31, 2017 compared to one well drilled during the prior year. There were minimal drilling activities in the DJ Basin during the year ended December 31, 2016;
·An increase of $2.2 million in workover costs associated with vertical wells to increase proved reserves;
·An increase of $78.1 million attributable to the acquisition of additional working interests in oil and natural gas leases of which $20.8 million are related to oil and natural gas leases in Winkler and Loving Counties, Texas, $49.7 million are related to oil and natural gas leases in Lea County, New Mexico, and $7.6 million are related to oil and leases in Reeves County, Texas; and
·Offset by net proceeds of $1.3 million received from the divestiture of the DJ Basin properties and non-operated properties.

Financing activities. For the year ended December 31, 2017, net cash provided by financing activities was $160.5 million compared to cash provided by financing activities of $37.1 million during the year ended December 31, 2016. The $160.5 million in net cash provided by financing activities included the following:

·

An increase of $6.7 million in net proceeds from the exercise of the accordion features of the First Lien Term Loan (as hereinafter defined);

·

An increase of $29.3 million in net proceeds from the Bridge Loan under the amended First Lien Term Loan financing transactions, including $15 million in net proceeds from the Incremental Bridge Loan (as hereinafter defined);

·An increase of $79.5 million in net proceeds from the Second Lien Term Loan (as hereinafter defined) financing transactions;

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·

An increase of $70.0 million in net proceeds from the Delayed Draw Term Loan (as hereinafter defined) under the amended Second Lien Credit Agreement financing transactions.

·An increase of $0.7 million in proceeds received from the exercise of stock warrants and stock options;
·Proceeds of $18.4 million from the March 2017 Private Placement (as hereinafter defined), net of financing costs.

These increases in proceeds were offset by the following:

·Repayment of Series B Preferred Stock (including dividends) in the amount of $2.3 million;
·Repayment of the First Lien Term Loan in the amount of $38.1 million; and
·Payments of $3.7 million relating to payment of taxes withheld on stock-based compensation.

First Lien Credit Agreement and Bridge Loans

Loss

On September 29, 2016, we entered into a first lien credit agreement by and among us and our wholly owned subsidiaries, Brushy Resources, Impetro Operating and Resources, and the lenders party thereto and T.R. Winston & Company, LLC acting as initial collateral agent (the “First Lien Credit Agreement”).

The First Lien Credit Agreement provided for a $50 million three-year senior secured term loan with initial commitments of $31 million. On February 7, 2017, pursuant to the terms of the First Lien Credit Agreement, we exercised the accordion advance feature, increasing the aggregate principal amount outstanding under the term loan from $31 million to $38.1 million (the “First Lien Term Loan”).

In connection with the exercise of the accordion advance feature for $7.1 million, we incurred $0.4 million in commitment fees and also amended certain warrants held by the lenders to purchase up to approximately 738,638 shares of common stock, such that the exercise price per share was lowered from $2.50 to $0.01. We accounted for these repriced warrants as additional debt discount for $1.0 million, to be accreted, together with the remaining $0.6 million debt discount at December 31, 2016, over the remaining term of the loan. On April 26, 2017, we fully paid off the amount outstanding of $38.1 million including accrued interest on Conveyancethe First Lien Term Loan. As a result, for the fiscal year ended December 31, 2017, we fully amortized approximately $3.0 million of Oilremaining deferred financing costs and Gas Propertiesdebt discount. This amount was recorded as a non-cash component of interest expense.

 

On September 2, 2014,April 24, 2017, and subsequently on April 26, 2017, July 25, 2017, and October 19, 2017, we entered into the Final Settlement Agreementfirst, second, third, and fourth amendments (together, the “First Lien Amendments”), respectively, to settlethe First Lien Credit Agreement. The First Lien Amendments, among other things, added Lilis Operating and Hurricane Resources as guarantors, added certain lenders, and extended further credit in the form of an initial bridge loan in an aggregate principal amount of $15.0 million (the “Initial Bridge Loan”). The Initial Bridge Loan was fully drawn on April 24, 2017, and is secured by the same first priority liens on substantially all amounts payable by usof our assets as the First Lien Term Loan. Additionally, pursuant to the thenFirst Lien Amendments, the lenders made further extensions of credit, in addition to the currently existing credit agreementsloans under the First Lien Credit Agreement (the “Bridge Loans”), in the form of an additional, incremental bridge loan in an aggregate principal amount of $15.0 million (the “Incremental Bridge Loan”, and together with Hexagon (described above)the Bridge Loans, the “First Lien Loans”). The transaction was accounted for underFirst Lien Loans, including the full cost methodIncremental Bridge Loan, were fully drawn as of accounting for oil and natural gas operations. Under the full cost method, sales or abandonments of oil and natural gas properties, whether or not being amortized, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to the cost center. The transfer to Hexagon represented greater than 25% of our proved reserves of oil and gas attributable to the full cost pool and thus we incurred a loss on the conveyance. Following this methodology, the following table represents an allocation of the transaction.

Payment of debt and accrued interest payable $15,063,289 
Add: disposition of asset retirement obligations  973,132 
Total disposition of liabilities $16,036,421 
     
Proved oil and natural gas properties $32,574,603 
Accumulated depletion  (22,148,686)
Unproved oil and natural gas properties  6,194,162 
Redeemable Preferred Stock at fair value  1,686,102 
Total conveyance of assets and preferred stock  18,306,181 
Loss on conveyance $(2,269,760)

Interest ExpenseOctober 19, 2017.

 

ForThe First Lien Credit Agreement, as amended, (a) provides that, effective as of October 1, 2017, the years ended December 31, 2015 and 2014, we incurred interest expense of approximately $1.70 million and $4.84 million, respectively, of which approximately $131,000 and $2.43 million is classified as non-cash interest expense in 2015 and 2014, respectively. The detailsunpaid principal of the non-cashFirst Lien Loans will bear (i) cash interest expense forat a rate per annum of 10% and (ii) additional interest at a rate per annum of 6%, payable only in-kind by increasing the year ended December 31, 2015 were the amortizationprincipal amount of the deferred financing costsFirst Lien Loans by the amount of $125,000,such interest due on each interest payment date and accrued interest(b) permits the loans under the Second Lien Credit Agreement to convertible debentureequal an increased amount of $7,000. The details of the non-cash interest expense for the year ended December 31, 2014 are as follows: (i) Hexagon non-payment penalty of $1 million, (ii) amortization of the deferred financing costs of $235,000, (iii) accretion of the Debentures payable discount of $849,000, (iv) Common Stock issued for interest of $1.19 million, (v) accrued interest to convertible debenture of $7,000, and (vi) amortization of forbearance fees of $250,000.

Change in Bristol Warrant Liability

On September 2, 2014 we entered into a Consulting Agreement with Bristol Capital, LLC (“Bristol”), pursuant to which we issued to Bristol a warrant to purchase up to 1,000,000 shares$175.0 million. The First Lien Loans mature on October 21, 2018 and may be repaid in whole or part at any time at our option, subject to the payment of our Common Stock at an exercise price of $2.00 per share (or, incertain specified prepayment premiums. Additionally, the alternative, 1,000,000 options, but in no case both). The agreement has a price protection feature that will automatically reduce the exercise price if we enter into another consulting agreement pursuantFirst Lien Loans are subject to which warrants are issued with a lower exercise price. The change in fair value of this warrant provision was $350,000 and $571,000 for the years ended December 31, 2015 and 2014, respectively.

Change in Credit Agreement Warrant Liability

On January 8, 2015, we entered into the Credit Agreement. In connectionmandatory prepayment with the Credit Agreement, we issuednet proceeds of certain asset sales and casualty events, subject to Heartland a warrantour right to purchase up to 225,000 sharesreinvest the net proceeds of our Common Stock at an exercise price of $2.50 with the initial advance, which contains an anti-dilution feature that will automatically reduce the exercise price if we enter into another agreement pursuant to which warrants are issued with a lower exercise price. The change in fair value valuation from issuance was $12,000 for the year ended December 31, 2015. asset sales and casualty events within 180 days.

 

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Change in Derivative Liability of Debentures

Second Lien Credit Agreement

 

For

On April 26, 2017, we entered into a Second Lien Credit Agreement by and among us and certain of our subsidiaries, as guarantors (the “Guarantors”), Wilmington Trust, National Association, as administrative agent, and the years ended Decemberlenders party thereto (the “Second Lien Credit Agreement”), comprised of convertible loans in an aggregate initial principal amount of up to $125 million. The first tranche of an $80 million term loan (the “Second Lien Term Loan”) was fully drawn and funded on April 26, 2017. The second tranche of up to $45 million in delayed-draw term loans (the “Delayed Draw Term Loan” and, together with the Second Lien Term Loan, the “Second Lien Loans”) was funded on October 4, 2017 and an additional $25 million on November 10, 2017. Each tranche of Second Lien Loans will bear interest at a rate per annum of 8.25%, compounded quarterly in arrears and payable only in-kind by increasing the principal amount of the loan by the amount of the interest due on each interest payment date.

On October 3, 2017, we entered into a first amendment to the Second Lien Credit Agreement (“Amendment No. 1 to the Second Lien Credit Agreement”). The purpose of Amendment No. 1 to the Second Lien Credit Agreement is to waive certain conditions precedent to the drawing of the Delayed Draw Term Loan under the Second Lien Credit Agreement and to provide for the funding of such Delayed Draw Term Loan upon the signing of the lease acquisition agreement with KEW Drilling, a Delaware limited partnership. We borrowed the full $45.0 million of the availability under the Delayed Draw Term Loan on October 4, 2017.

On October 19, 2017, we entered into a second amendment to the Second Lien Credit Agreement (“Amendment No. 2 to the Second Lien Credit Agreement”). Amendment No. 2 to the Second Lien Credit Agreement permits us to incur the Incremental Bridge Loan under the First Lien Credit Agreement.

On November 10, 2017, we entered into a third amendment to the Second Lien Credit Agreement (“Amendment No. 3 to the Second Lien Credit Agreement”). Amendment No. 3 to the Second Lien Credit Agreement increased by $25 million the amount of Delayed Draw Term Loans available for borrowing under the Second Lien Credit Agreement. The additional $25.0 million of Delayed Draw Term Loan was drawn on November 10, 2017. Proceeds of the additional loans may be used to fund oil and natural gas property acquisitions, subject to certain limitations, drilling and completions costs or for other general corporate purposes.

The Second Lien Loans are secured by second priority liens on substantially all of our and our Guarantors’ assets, and all of the obligations thereunder are unconditionally guaranteed by each of the Guarantors. The Second Lien Loans mature on April 26, 2021. The Second Lien Loans are subject to mandatory prepayment with the net proceeds of certain asset sales, casualty events and debt incurrences, subject to our right to reinvest the net proceeds of asset sales and casualty events within 180 days and, in the case of asset sales and casualty events, prepayment of the Bridge Loan. We may not voluntarily prepay the Second Lien Loans prior to March 31, 20152019, except (a) in connection with a Change of Control (as defined in the Second Lien Credit Agreement) or (b) if the closing price of our common stock on the principal exchange on which it is traded has been equal to or greater than 110% of the Conversion Price (as defined below) for at least 20 of the 30 trading days immediately preceding the prepayment. We are required to pay a make-whole premium in connection with any mandatory or voluntary prepayment of the Loans.

Each tranche of the Second Lien Loans is separately convertible at any time, in full and 2014,not in part, at the option of Värde Partners, Inc., the Lead Lender, as follows:

·70% of the principal amount of each tranche of Second Lien Loans, together with accrued paid-in-kind interest and a make-whole premium on such principal amount (the “Conversion Sum”), will convert into a number of newly issued shares of common stock determined by dividing the total of the Conversion Sum by $5.50 (subject to certain customary adjustments, the “Conversion Price”); and

·30% of the Conversion Sum will convert on a dollar for dollar basis into a new second lien term loan (the “Take Back Loans”).

The terms of the Take Back Loans will be substantially the same as the terms of the Second Lien Loans, except that the Take Back Loans will not be convertible and will bear interest payable in cash at a rate of LIBOR plus 9% (subject to a 1% LIBOR floor).

Additionally, we incurredwill have the option to convert the Second Lien Loans, in whole or in part, into shares of common stock at any time or from time to time if, at the time of exercise of our conversion option, the closing price of the common stock on the principal exchange on which it is traded has been at least 150% of the Conversion Price then in effect for at least 20 of the 30 immediately preceding trading days. Conversion at our option will occur on the same terms as conversion at the lender’s option.

As discussed in Note 6 to our consolidated financial statements in Item 8 of this Annual Report, we separately account for the embedded conversion features as a changederivative instrument in theaccordance with accounting guidance relating to recording embedded derivatives at fair value. The initial fair value of the derivative liability relatedembedded derivatives was recorded as a debt discount to the Debentures of approximately $1.24 million and $(5.53) million respectively. Duringconvertible Second Lien Term Loan. The debt discount is amortized over the year ended December 31, 2014, we reduced the conversion price from $4.25 to $2.00, consistent with the exercise priceterm of the warrants issued in our private placement in January 2014. The conversion resulted in a reduction of the convertible debenture liability by $5.69 million and an increase in additional paid in capital.

Liquidity and Capital Resources

 Information about our year-end financial position is presented in the following table (in thousands):

  Year ended
December 31,		 
  2015  2014 
       
Financial Position Summary      
Cash and cash equivalents $110  $510 
Working capital (deficit) $(15,695) $(6,560)
Balance outstanding on convertible debentures,
convertible notes payable and term loan		 $11,317  $6,840 
Stockholders’ equity $(14,344) $14,067 

As discussed above, our financial statements for the years ended December 31, 2015 have been prepared on a going concern basis.  As of December 31, 2015, we had a negative working capital balance and a cash balance of approximately $15.7 million and $110,000, respectively. As of March 30, 2016, our cash balance was approximately $50,000. We have historically financed our operations through the sale of debt and equity securities and borrowings under credit facilities with financial institutions.

The following is a description of our indebtedness:

Second Lien Term Loan using effective interest rate.

Debentures

Restrictive Covenants

 

As of December 31, 2015, we had $6.85 million aggregate principal amount outstanding under our Debentures.

On December 29, 2015, we entered into an agreement with2017, the holders of our Debentures, which provides for the full automatic conversion of Debentures into shares of our Common Stock at a price of $0.50 per share, upon the receipt of requisite stockholder approval and the consummation of the Merger. If the Debentures are converted on these terms, it would result in the issuance of 13,692,930 shares of our Common Stock and the elimination of $8.08 million in short-term debt obligations including accrued but unpaid interest which would be forfeited and cancelled upon conversion pursuant to the terms of the agreement.

Credit Agreement

On January 8, 2015, we entered into the Credit Agreement with Heartland. The Credit Agreement provides for a three-year senior secured term loan in an initial aggregate principal amount of $3,000,000 (“Term Loan”), which principal amount may be increased to a maximum principal amount of $50,000,000 pursuant to an accordion advance provision in the Credit Agreement subject to certain conditions, including the discretion of the lender. Funds borrowed under the Credit Agreement may be used to (i) purchase oil and gas assets, (ii) fund certain lender-approved development projects, (iii) fund a debt service reserve account, (iv) pay all costs and expenses arising in connection with the negotiation and execution of theCompany’s First Lien Credit Agreement and (v) fund our general working capital needs.Second Lien Credit Agreement contained various covenants, including restrictions on additional indebtedness, payment of cash dividends on common stock and preferred stock, and maintenance of certain financial ratios. The First Lien Credit Agreement, as amended, required that, commencing with the testing period ending at December 31, 2018, we satisfy an asset coverage ratio (“ACR”) test by maintaining an ACR of 1.00 to 1.00 or greater. In addition, the Second Lien Credit Agreement requires us to maintain, commencing with the testing period ending June 30, 2018, an ACR of 1.00 to 1.00. or greater.

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The Term Loan bears interest at

Private Placement

On February 28, 2017, we entered into a rate calculated based upon our leverage ratioSecurities Subscription Agreement (the “Subscription Agreement”) with certain institutional and the “prime rate” thenaccredited investors in effect. We also paidconnection with a nonrefundable commitment fee in the amountprivate placement (the “March 2017 Private Placement”) to sell 5.2 million units, consisting of $75,000,approximately 5.2 million shares of common stock and agreed to issue to the lenders warrants to purchase 75,000an additional approximately 2.6 million shares of common stock. Each unit consists of one share of common stock and a warrant to purchase 0.50 shares of common stock, at a price per unit of $3.85. Each warrant has an exercise price of $4.50 and may be subject to redemption by us, upon prior written notice, if the price of our common stock closes at or above $6.30 for 20 trading days during a consecutive 30 trading day period. As of December 31, 2017, we received aggregate gross proceeds of $20.0 million and issued 5,194,821 shares of common stock and warrants to purchase 2,597,420 shares of common stock.

Subsequent Events

Purchase and Sale Agreement

On January 30, 2018, we entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with OneEnergy Partners Operating, LLC (“OEP”), pursuant to which we agreed to purchase from OEP, and OEP agreed to sell to us, certain oil and gas properties and related assets for a purchase price of $70 million, subject to customary purchase price adjustments (the “OEP Acquisition”).

The unadjusted purchase price for the OEP Acquisition will consist of $40 million in cash and $30 million in shares of our Common Stock for every $1 million funded. An initial warrant to purchase up to 225,000 shares of our Common Stockcommon stock , valued at $2.50a price per share was issued atequal to (i) the closing. As of January 8, 2015, we valued the warrants at $56,000, which was accounted for as debt discount and amortized over the lifevolume-weighted average trading price of the debt.common stock on the NYSE American for the 20 consecutive trading days ending on and including the first trading day preceding the closing date of the OEP Acquisition multiplied by (ii) 1.05, but in no event may such price be less than $4.25 or greater than $5.25. We accreted $18,000intend to fund the cash portion of debt discountthe purchase price with a portion of the net proceeds from the transaction described under “Preferred Stock Issuance” below.

The properties to be acquired by us pursuant to the Purchase and Sale Agreement consist of approximately 2,798 net leasehold acres in the Delaware Basin in Lea County, New Mexico, with average daily net production for the year ended December 31, 2015.2017 of approximately 425 barrels of oil equivalent.

 

The CreditPurchase and Sale Agreement contains certain customary terms and conditions, including title and environmental due diligence provisions, representations and warranties, covenants and affirmativeindemnification provisions. The Purchase and negative covenants. The CreditSale Agreement also contains financial covenantsincludes registration rights provisions pursuant to which, among other matters, (i) we will be required to file with the SEC a registration statement under the Securities Act, registering for resale the shares of common stock issued to OEP pursuant to the Purchase and Sale Agreement and (ii) OEP will have piggyback rights to include shares of common stock in certain underwritten offerings.

We expect to close the OEP Acquisition in March 2018, subject to the satisfaction of customary closing conditions.

Preferred Stock Issuance

On January 30, 2018, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain private funds affiliated with Värde Partners, Inc. (the “Purchasers”), pursuant to which we agreed to issue and sell to the Purchasers, and the Purchasers agreed to purchase from us, 100,000 shares of a newly created series of preferred stock of the Company, designated as “Series C 9.75% Convertible Participating Preferred Stock” (the “Series C Preferred Stock”), for a purchase price of $1,000 per share, or an aggregate of $100 million. Värde Partners, Inc. is the lead lender, and certain private funds affiliated with Värde Partners, Inc. are lenders, under our Second Lien Credit Agreement.

Closing of the issuance and sale of the shares of Series C Preferred Stock pursuant to the Securities Purchase Agreement occurred on January 31, 2018. We intend to use the net proceeds from the sale of the shares of Series C Preferred Stock to fund the cash portion of the consideration for the OEP Acquisition and a portion of our 2018 capital expenditures budget.

The terms of the Series C Preferred Stock are set forth in the Certificate of Designation for the Series C Preferred Stock (the “Certificate of Designation”) filed by us with the Secretary of State of the State of Nevada on January 31, 2018. The following is a description of the material terms of the Series C Preferred Stock and the Securities Purchase Agreement.

Ranking. The Series C Preferred Stock ranks senior to our common stock with respect to our (i) debt to EBITDAX ratiodividends and (ii) debt coverage ratio. In addition, in certain situations,rights on the Credit Agreement requires mandatory prepaymentsliquidation, dissolution or winding up of the Term Loan, including in the event of certain non-ordinary course asset sales, the incurrence of certain debt, and our receipt of proceeds in connection with insurance claims. In addition, Heartland has a first priority security interest in all of our assets.

As of June 30, 2015 and September 30, 2015, we were not in compliance with the financial covenant in the Credit Agreement that relates to the total debt to EBITDAX ratio. EBITDAX is defined in the Credit Agreement as earnings before the pre-tax net income for such periodplus (without duplication and only to the extent deducted in determining such net income), interest expense for such period, depreciation and amortization expense, extraordinary or non-recurring items reducing net income for such period, and other non-cash expenses for such periodless gains on sales of assets and other non-cash income for such period included in the determination of net incomeplus(without duplication and only to the extent deducted in determining such net income) exploration, drilling and completion expenses or costs (EBITDAX). Specifically, the ratio requires that we maintain at all times, as determined on June 30 of each year, a ratio of (i) the aggregate amount of all debt, to (ii) EBITDAX of not less than 4.5:1, 3.5:1 and 2.5:1 for the periods ending June 30, 2015, 2016, and 2017 and thereafter, respectively. We are also required to maintain, as determined on June 30 of each year beginning June 30, 2015, a debt coverage ratio of not less than 1.0 to 1.0. We received a waiver from Heartland for this covenant violation, which will not be measured again until June 30, 2016.

Company.

On December 29, 2015, after a default on an interest payment and in connection with the merger transactions, we entered into the Forbearance Agreement with Heartland.The Forbearance Agreement restricts Heartland from exercising any of its remedies until April 30, 2016 and is subject to certain conditions, including a requirement for us to make a monthly interest payment to Heartland. On April 1, 2016, we failed to make the required interest payment to Heartland for the month of March. As a result, Heartland has the right to declare an event of default under the Forbearance Agreement, terminate the remaining commitment and accelerate payment of all principal and interest outstanding. We have not yet received a notice of default and are currently in discussions with Heartland with respect to the missed interest payment. However, we cannot assure you that these discussions will be successful or that in the event Heartland declares an event of default, whether with respect to the missed interest payment or a breach of any other covenant, that we will be granted a further forbearance, waiver, extension or amendment. Moreover, our Debentures also contain certain cross-default provisions with certain other debt instruments. Therefore, a default under the Credit Agreement, constitutes an event of default pursuant to the Debentures which may result in an acceleration of our obligations at the holders’ election.

We do not expect to receive any additional capital pursuant to the existing Credit Agreement. We are in the process of evaluating alternatives to address our default under the Forbearance Agreement, including seeking other capital and funding sources. If we are unable to raise significant capital or otherwise renegotiate the terms of the Forbearance Agreement with Heartland, we will be in default under the Credit Agreement in which case Heartland could exercise any remedies available to it, including initiating foreclosure procedures on all of our assets.

Convertible Notes

From December 29, 2015 to January 5, 2016, we entered into 12% Convertible Subordinated Note Purchase Agreements with various lending parties, which we refer to as the Purchasers, for the issuance of an aggregate principal amount of $3.75 million Convertible Notes, which includes the $750,002 of short-term notes exchanged for Convertible Notes by us and warrants to purchase up to an aggregate of approximately 15,000,000 shares of our Common Stock at an exercise price of $0.25 per share. The proceeds from this financing were used to pay a $2 million refundable deposit in connection with the Merger, to fund approximately $1.3 million of interest payments to our lenders and for our working capital and accounts payables.

The Convertible Notes bear interest at a rate of 12% per annum, payable at maturity on June 30, 2016. The Convertible Notes and accrued but unpaid interest thereon are convertible in whole or in part from time to time at the option of the holders thereof into shares of our Common Stock at a conversion price of $0.50. The Convertible Notes may be prepaid in whole or in part (but with payment of accrued interest to the date of prepayment) at any time at a premium of 103% for the first 120 days and a premium of 105% thereafter, so long as no senior debt is outstanding. The Convertible Notes contain customary events of default, which, if uncured, entitle each noteholder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest, subject to certain subordination provisions.

Additionally, on March 18, 2016, we issued an additional aggregate principal amount of $500,000 of Convertible Notes, which have the terms and conditions as the Convertible Notes with the exception of the maturity date, which is April 1, 2017. The proceeds from these Convertible Notes were used to make advances to Brushy for payment of operating expenses pending completion of the Merger. If the Merger is not completed, these amounts are subject to repayment by Brushy.

Our financial statements for the years ended December 31, 2015 have been prepared on a going concern basis.  We have incurred net operating losses for the past five years. This history of operating losses, along with the recent decrease in commodity prices, may adversely affect our ability to access capital we need to continue operations. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts of liabilities, that might result from this uncertainty.

We will need to raise additional funds to finance continuing operations. However, we may not be successful in doing so. Without sufficient additional financing, it would be unlikely for us to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan and eventually secure other sources of financing and attain profitable operations.

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DevelopmentStated Value. The Series C Preferred Stock has a per share stated value of $1,000, subject to increase in connection with the payment of dividends in kind as described below (the “Stated Value”).

Dividends. Holders of shares of Series C Preferred Stock will be entitled to receive cumulative preferential dividends, payable and Production

Duringcompounded quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing April 1, 2018, at an annual rate of 9.75% of the year ended December 31, 2015, we transferred $847,000 from wells-in progressStated Value until April 26, 2021, after which the annual dividend rate will increase to developed oil and natural gas properties. This included approximately $491,000 from12.00% if paid in full in cash or 15.00% if not paid in full in cash. Dividends are payable, at our option, (i) in cash, (ii) in kind by increasing the Stated Value by the amount per share of the dividend or (iii) in a well currently producingcombination thereof. We expect to pay dividends in Northern Wattenberg and approximately $356,000kind for the foreseeable future. In addition to these preferential dividends, holders of cost incurred for projects that we no longer plan to pursue.

During the year ended December 31, 2015, we entered into five joint operating agreementsshares of Series C Preferred Stock will be entitled to participate as a non-operator in any dividends paid on the drilling of five horizontal wells. We havecommon stock on an average of 2.78% working interest in each of these wells which are being drilled by reliable companies. However, due to capital constraints, we expect that we will be put into non-consent status on each of these wells unless other arrangements can be made.

Additionally, as of March 30, 2016, we were producing approximately 20 BOE a day from eight economically producing wells. Due to a decline in commodity prices, the cash generated from our production activity is not sufficient to pay our operating costs and we do not have sufficient cash to continue operations in the ordinary course.as-converted basis.

 

Proposed MergerOptional Redemption. We have the right to redeem the Series C Preferred Stock, in whole or in part at any time (subject to certain limitations on partial redemptions), at a price per share equal to (i) the Stated Value then in effect multiplied by (a) 120% if redeemed during 2018, (b) 125% if redeemed during 2019 or (c) 130% if redeemed after 2019, plus (ii) accrued and unpaid dividends thereon and any other amounts payable by us in respect thereof (the “Optional Redemption Amount”). The Series C Preferred Stock is perpetual and is not mandatorily redeemable at the option of the holders, except upon the occurrence of a Change of Control (as defined in the Certificate of Designation) as described below.

Conversion. Each share of Series C Preferred Stock is convertible at any time at the option of the holder into a number of shares of common stock equal to (i) the applicable Optional Redemption Amount divided by (ii) a conversion price of $6.15, subject to adjustment (the “Conversion Price”). The Conversion Price will be subject to proportionate adjustment in connection with Brushy Resources, Inc.

On December 29, 2015,stock splits and combinations, dividends paid in stock and similar events affecting the outstanding common stock. Additionally, the Conversion Price will be adjusted, based on a broad-based weighted average formula, if we entered intoissue, or are deemed to issue, additional shares of common stock for consideration per share that is less than the Merger Agreement, which is describedlesser of (i) $5.25 and (ii) the Conversion Price then in more detail under “Businesseffect, subject to certain exceptions and Properties—Pending Merger with Brushy Resources, Inc.” Among other conditions to the Merger, we are required to repay our Term Loan in full, convert the $6.85 million outstanding under our Debentures into our Common Stock at $0.50 and convert $7.5 million of our outstanding Series A Preferred Stock into our Common Stock at $0.50. In addition, Brushy will have to repay, refinance or negotiate alternative terms with its senior lender prior to completing the Merger. We have agreed to use our best efforts to assist Brushy with this process by possibly purchasing all or a portion of Brushy’s outstanding senior debt.Share Cap (as defined below).

 

We believe that ifhave the Merger is successfully completed, we will substantially increase our producing properties resulting in significantly greater cash flow while eliminating or refinancing our existing indebtedness. We will however be requiredright to obtain significant additional capital to pay outstanding debt obligations, pay professional fees related toforce the Merger, pay outstanding payables in the ordinary course and to fund the combined company’s working capital requirements. While we expect to raise additional capital to fund allconversion of these obligations, the current volatility in the commodity markets has made it difficult for oil and gas exploration companies, including ours, to access debt or equity financing or obtain borrowings from financial lenders.

If we are unable to complete the Merger or otherwise obtain significant capital, we will likely not be able to continue our current operations and would have to consider other alternatives to preserve value for our stockholders. These alternatives could include engaging in discussions to acquire other producing properties, selling or disposing of someany or all of the outstanding shares of Series C Preferred Stock if (i) the volume-weighted average price per share of the common stock on the principal exchange on which it is then traded has been at least 140% of the Conversion Price then in effect for at least 20 of the 30 consecutive trading days immediately preceding the exercise by us of the forced conversion right and (ii) certain trading and other conditions are satisfied.

To comply with rules of the NYSE American, the Certificate of Designation provides that the number of shares of common stock issuable on conversion of a share of Series C Preferred Stock may not exceed (i) the Stated Value divided by (ii) $4.42 (which was the closing price of the common stock on the NYSE American on January 30, 2018) (the “Share Cap”) prior to approval by our assetsstockholders of the issuance of shares of common stock in excess of the Share Cap upon conversion of shares of Series C Preferred Stock. The Securities Purchase Agreement requires us to seek such stockholders approval at our next special or a liquidationannual meeting of stockholders, which must occur within six months after the initial issuance of the Series C Preferred Stock. We intend to seek such stockholders approval at our business.2018 annual meeting of stockholders.

Change of Control. Upon the occurrence of a Change of Control (as defined in the Certificate of Designation), each holder of shares of Series C Preferred Stock will have the option to:

·cause us to redeem all of such holder’s shares of Series C Preferred Stock for cash in an amount per share equal to (i) the Optional Redemption Amount plus (ii) 2.5% of the Stated Value, in each case as in effect immediately prior to the Change of Control;

·convert all of such holder’s shares of Series C Preferred Stock into the number of shares of common stock into which such shares are convertible immediately prior to the Change of Control; or

·continue to hold such holder’s shares of Series C Preferred Stock, subject to any adjustments to the Conversion Price or the number and kind of securities or other property issuable upon conversion resulting from the Change of Control and to our or our successor’s optional redemption rights described above.

Liquidation Preference. Upon any liquidation, dissolution or winding up of the Company, holders of shares of Series C Preferred Stock will be entitled to receive, prior to any distributions on our common stock or other capital stock ranking junior to the Series C Preferred Stock, an amount per share of Series C Preferred Stock equal to the greater of (i) the Optional Redemption Amount then in effect and (ii) the amount such holder would receive in respect of the number of shares of common stock into which a share of Series C Preferred Stock is then convertible.

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Cash Flows

Cash used in operating activities duringBoard Designation Rights. The Certificate of Designation provides that holders of shares of Series C Preferred Stock will have the year ended December 31, 2015 was $3.81 million. Cash used in operating activities combined withright, voting separately as a class, to designate (i) two members of our board of directors (the “Board”) for as long as the $1.85 million used in investing activities offset byshares of common stock issuable on conversion of the $5.25 million provided by financing activities, resulted in a decrease in cashoutstanding shares of $400,000 duringSeries C Preferred Stock represent at least 15% of the year.  outstanding shares of common stock (giving effect to conversion of all outstanding shares of Series C Preferred Stock) and (ii) one member of the Board for as long as the shares of common stock issuable on conversion of the outstanding shares of Series C Preferred Stock represent at least 7.5% of the outstanding shares of common stock (giving effect to conversion of all outstanding shares of Series C Preferred Stock).

 

The following table compares cash flow items duringSecurities Purchase Agreement separately grants to the year ended December 31, 2015Purchasers substantially identical rights to December 31, 2014 (in thousands):appoint members of the Board as long as the Purchasers and their affiliates beneficially own (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) shares of common stock issued or issuable upon conversion of shares of Series C Preferred Stock representing the 15% and 7.5% thresholds of the outstanding common stock described above. However, the number of members of the Board the Purchasers have the right to designate under the Securities Purchase Agreement will be reduced by the number of directors holders of shares of Series C Preferred Stock have the right to appoint under the Certificate of Designation.

 

  Year ended
December 31,		 
  2015  2014 
       
Cash provided by (used in):      
Operating activities $(3,805) $(7,306)
Investing activities  (1,848)  (507)
Financing activities  5,254   8,157 
Net change in cash $(400) $344 

The Board members designated by holders of shares of Series C Preferred Stock pursuant to the Certificate of Designation or by the Purchasers pursuant to the Securities Purchase Agreement must be reasonably acceptable to the Board and its Nominating and Corporate Governance Committee, acting in good faith, but any investment professional of Värde Partners, Inc. or its affiliates will be deemed to be reasonably acceptable. In addition, such Board designees must satisfy applicable SEC and stock exchange requirements and comply with our corporate governance guidelines.

 

DuringIn accordance with our bylaws, the year ended December 31, 2015, net cash used in operating activities was $3.81 million, comparedBoard has increased the number of directors constituting the entire Board from seven to $7.31 million duringnine to allow for the year ended December 31, 2014,appointment of the Board members designated by the holders of shares of Series C Preferred Stock. We are required to appoint the two Board members initially designated by the holders of shares of Series C Preferred Stock within ten business days after notice to the us from the holders of the identity of such designees, subject to confirmation that such designees meet the qualifications described above. Pursuant to the terms of the Securities Purchase Agreement, Markus Specks and John Johanning were designated by the Purchasers for appointment to the Board. Mr. Specks and Mr. Johanning serve as managing directors and technical director, respectively, of Värde Partners, Inc. and/or its affiliates. On March 1, 2018, the Board approved the appointments of Mr. Specks and Mr. Johanning to the Board.

Voting Rights; Negative Covenants. In addition to the Board designation rights described above, holders of shares of Series C Preferred Stock will be entitled to vote with the holders of shares of our common stock, as a decreasesingle class, on all matters submitted for a vote of cash used in operating activitiesholders of $3.5 million,shares of common stock. When voting together with the common stock, each share of Series C Preferred Stock will entitle the holder to a number of votes equal to (i) the Stated Value as of the applicable record date or 49%other determination date divided by (ii) $4.42 (the closing price of the common stock on the NYSE American on January 30, 2018).

The Certificate of Designation provides that, as long as any shares of Series C Preferred Stock are outstanding, we may not, without the prior affirmative vote or prior written consent of the holders of a majority of the outstanding shares of Series C Preferred Stock:

·amend our articles of incorporation or bylaws in any manner that materially and adversely affects any rights, preferences, privileges or voting powers of the Series C Preferred Stock or holders of shares of Series C Preferred Stock;

·issue, authorize or create, or increase the issued or authorized amount of, the Series C Preferred Stock, any class or series of capital stock ranking senior to or in parity with the Series C Preferred Stock, or any security convertible into or evidencing the right to purchase any shares of Series C Preferred Stock or any such senior or parity stock, other than equity, the proceeds of which, are used to immediately redeem all of the outstanding shares of Series C Preferred Stock pursuant to our optional redemption rights described above;

·subject to certain exceptions, declare or pay any dividends or distributions on, or redeem or repurchase, or permit any of its controlled subsidiaries to redeem or repurchase, shares of our common stock or any other shares of our capital stock ranking junior to the Series C Preferred Stock, subject to certain exceptions;

·authorize, issue or transfer, or permit any of our controlled subsidiaries to authorize, issue or transfer, any equity (including any obligation or security convertible into, exchangeable for or evidencing the right to purchase any such equity) in any of our subsidiaries other than (i) equity issued or transferred to us or one of our wholly-owned subsidiaries or (ii) equity, the proceeds of which, are used to immediately redeem all of the outstanding shares of Series C Preferred Stock pursuant to the our optional redemption rights described above; or

·subject to certain exceptions, modify the number of directors constituting the entire Board at any time when holders of shares of Series C Preferred Stock have the right to designate a member of the Board.

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The Certificate of Designation further provides that, as long as shares of Series C Preferred Stock having an aggregate Optional Redemption Amount of at least $50,000,000 are outstanding, we may not, and may not permit any of our controlled subsidiaries to, without the prior affirmative vote or prior written consent of the holders of a majority of the outstanding shares of Series C Preferred Stock:

·subject to certain exceptions, incur indebtedness or permit to exist any liens on our or our subsidiaries’ assets or properties;

·enter into, adopt or agree to any “restricted payment” or similar provision that restricts or limits the payment of dividends on, or the redemption of, shares of Series C Preferred Stock under any credit facility, indenture or other similar instrument that would be more restrictive on the payment of dividends on, or redemption of, shares of Series C Preferred Stock than those existing as of the date on which shares of Series C Preferred Stock were first issued;

·liquidate or dissolve the Company;

·enter into any material new line of business or fundamentally change the nature of our business, including any acquisition of oil and gas properties outside the Permian Basin; or

·enter into certain transactions with our affiliates unless made on an arm’s-length basis and approved by a majority of the disinterested members of the Board.

Transfer Restrictions. The primaryCertificate of Designation provides that shares of Series C Preferred Stock and shares of common stock issued on conversion of shares of Series C Preferred Stock may not be transferred by the holder of such shares, other than to an affiliate of such holder, prior to July 31, 2018. On and after July 31, 2018, such shares will be freely transferable, subject to applicable securities laws.

Standstill. The Securities Purchase Agreement includes a customary standstill provision pursuant to which the Purchasers agreed that they will not, directly or indirectly, take certain actions with respect to us or our securities until the earlier of (i) the date on which the Purchasers and their affiliates are no longer entitled to designate any member of the Board pursuant to the Certificate of Designation or the Securities Purchase Agreement and (ii) our failure to pay dividends on the Series C Preferred Stock in full in cash on any dividend payment date occurring after April 26, 2021.

Other Terms. The Securities Purchase Agreement contains other terms, including representations, warranties and covenants, that are customary for a transaction of this sort.

Registration Rights Agreement

On January 31, 2018, in connection with the closing of the issuance of shares of Series C Preferred Stock pursuant to the Securities Purchase Agreement, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers pursuant to which, among other matters, we will be required to file with the SEC a registration statement under the Securities Act registering for resale the shares of common stock issuable upon conversion of shares of Series C Preferred Stock. The Registration Rights Agreement also grants to the Purchasers demand and piggyback rights with respect to certain underwritten offerings of our common stock and contains customary covenants and indemnification and contribution provisions.

Riverstone First Lien Credit Agreement

On January 30, 2018, we entered into an Amended and Restated Senior Secured Term Loan Credit Agreement (the “Riverstone First Lien Credit Agreement”) by and among us, our subsidiaries party thereto as guarantors, Riverstone Credit Management LLC, as administrative agent and collateral agent, and the lenders party thereto. Effective at closing under the Riverstone First Lien Credit Agreement, which occurred on January 31, 2018, the Riverstone First Lien Credit Agreement amended and restated the First Lien Credit Agreement.

Pursuant to the Riverstone First Lien Credit Agreement, the lenders thereunder agreed to make term loans to us in the aggregate principal amount of $50 million (the “Riverstone First Lien Loans”), all of which were funded in full at closing at an original issue discount of 1.0% of the principal amount. The Riverstone First Lien Credit Agreement provides the potential for additional term loans of up to $30 million, as requested by us and subject to certain conditions, which additional loans were uncommitted at closing.

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We used approximately $31.5 million of the proceeds of the Riverstone First Lien Loans to repay in full our obligations under and retire the First Lien Credit Agreement, which was scheduled to mature in October 2018. We may use the remaining proceeds for capital expenditures, acquisitions and other general corporate purposes, including payment of transaction expenses.

Amendment to Second Lien Credit Agreement

On January 31, 2018, we entered into a fourth amendment to the Second Lien Credit Agreement (“Amendment No. 4 to the Second Lien Credit Agreement”). The purpose of Amendment No. 4 to the Second Lien Credit Agreement was to, among other matters:

·permit us to enter the Riverstone First Lien Credit Agreement and incur the Riverstone First Lien Loans and related liens;

·permit us to issue the Series C Preferred Stock; and

·after the issuance of the Series C Preferred Stock pursuant to the Securities Purchase Agreement, reduce from two to one the maximum number of members of the Board the lenders under the Second Lien Credit Agreement will have the right to appoint following the conversion of the convertible loans under the Second Lien Credit Agreement.

Amendments to Riverstone First Lien Credit Agreement and Second Lien Credit Agreement

On February 20, 2018, we entered into the following amendments to our existing credit agreements: (i) Amendment No. 1 to the Riverstone First Lien Credit Agreement and (ii) Amendment No. 5 to the Second Lien Credit Agreement. Pursuant to these amendments and a consent letter received from the Purchasers, in their capacity as the holders of all of the issued and outstanding shares of Series C Preferred Stock, we have been granted the right to repurchase shares of our common stock for an aggregate purchase price up to $10 million (subject to certain exceptions and conditions).

The commencement of any repurchase of shares of our common stock will be subject to compliance with applicable law, Board approval, and market conditions.

Departure of Executive Officers

On February 16, 2018, Ariella Fuchs ceased serving as our Executive Vice President, General Counsel, and Secretary. We entered into an agreement with Ms. Fuchs pursuant to which she will receive severance and other consideration pursuant to the terms of her employment agreement and the accelerated vesting of 247,500 stock options and 198,000 shares of restricted stock under stock award agreements plus additional nominal consideration.

On March 6, 2018, Brennan Short ceased serving as our Chief Operating Officer. His responsibilities have been assumed by our current management and our existing consultants.

Effects of Inflation and Pricing

The oil and gas industry is very cyclical and the demand for goods and services of oil field companies, suppliers and others associated with the industry puts pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs. Material changes in operating cash duringprices impact the year ended December 31, 2015 was from a reductioncurrent revenue stream, estimates of future reserves, borrowing base calculations of bank loans and the value of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and natural gas revenuescompanies and our inabilitytheir ability to raise additional capital, borrow money and retain personnel. We anticipate business costs will vary in accordance with commodity prices for oil and natural gas, and the associated increase or decrease in demand for services related to fundproduction and pay for our operations. Additionally, we added a new Chief Financial Officer and General Counsel increasing salaries by $470,000, paid $343,000 for the due diligence of a potential acquisition which was not completed, $250,000 for additional investment banking firms, $650,000 in additional legal fees and approximately $670,000 of other professional fees for acquisitions and additional support during the year.

During the year ended December 31, 2015, net cash used in investing activities was $1.85 million, compared to net cash used in investing activity of $507,000 during the year ended December 31, 2014, an increase of cash used in investing activities of $1.3 million, or 264%. On December 30, 2015, we paid $1.75 million towards the required $2.0 million deposit relating to the proposed merger with Brushy described above. During 2014, we invested $496,000 of cost associated with acquisition of undeveloped leaseholds and development of assets throughout Wattenberg.

During the year ended December 31, 2015, net cash provided by financing activities was $5.3 million, compared to net cash provided by financing activities of $8.16 million during the year ended December 31, 2014, an increase of $2.9 million, or 36%. In 2015, we received $5.95 million in debt proceeds, $3.0 million in Term Loan proceeds from Heartland and $2.95 million in convertible bridge note funding relating to the proposed merger with Brushy. In 2014, we received cash proceeds of $12.0 million from two private placements offset by the repayment of debt of $3.7 million and dividend payments of $162,000.exploration.

 

Off-Balance Sheet Arrangements

 

We doAs of December 31, 2017, we did not have any off-balance sheet arrangements, and it is not anticipated that we will enter into any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

The preparation of our consolidated financial statements in conformity with GAAPgenerally accepted accounting principles in the United States (“GAAP”) requires our management to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. The following is a summary of the significant accounting policies and related estimates that affect our financial disclosures.

 

Critical accounting policies are defined as those significant accounting policies that are most critical to an understanding of a company’s financial condition and results of operation. We consider an accounting estimate or judgment to be critical if (i) it requires assumptions to be made that were uncertain at the time the estimate was made, and (ii) changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.

 

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Recently Issued Accounting Pronouncements

Various accounting standards updates are issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries, are not expected to have a material impact on our condensed financial position and, results of operations.

Use of Estimates

The financial statements included herein were prepared from our records in accordance with GAAP, and reflect all normal recurring adjustments which are, in the opinion of management, necessary to provide a fair statement of the results of operations and financial position for the interim periods.  The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of oil and gas reserves, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We evaluate our estimates on an on-going basis and base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances.  Although actual results may differ from these estimates under different assumptions or conditions, we believe that our estimates are reasonable.  

 

The preparation of financial statements in conformity with GAAP requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment.

 

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Our most significant financial estimates are associated with our estimated proved oil and natural gas reserves, assessments of impairment imbedded in the carrying value of undeveloped acreage and proven properties, as well asproperties. There are also significant financial estimates associated with the valuation of our Common Stock, options and warrants, inducement transactions, and estimated derivative liabilities.

Oil and Natural Gas Reserves

 

We follow the full cost method of accounting. All of our oil and natural gas properties are located within the United States, and therefore all costs related to the acquisition and development of oil and natural gas properties are capitalized into a single cost center referred to as a full cost pool. Depletion of exploration and development costs and depreciation of production equipment is computed using the units-of-production method based upon estimated proved oil and natural gas reserves. Under the full cost method of accounting, capitalized oil and natural gas property costs less accumulated depletion and net of deferred income taxes may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves less the future cash outflows associated with the asset retirement obligations that have been accrued on the balance sheet plus the cost, or estimated fair value if lower, of unproved properties. Should capitalized costs exceed this ceiling, impairment would be recognized. Under the SEC rules, we prepared our oil and natural gas reserve estimates as of December 31, 2015,2017, using the average, first-day-of-the-month price during the 12-month period ended December 31, 2015.2017.

 

Estimating accumulations of gasoil and oilnatural gas is complex and is not exact because of the numerous uncertainties inherent in the process. The process relies on interpretations of available geological, geophysical, engineering and production data. The extent, quality and reliability of this technical data can vary. The process also requires certain economic assumptions, some of which are mandated by the SEC, such as gasoil and oilnatural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The accuracy of a reserve estimate is a function of the quality and quantity of available data; the interpretation of that data;data, the accuracy of various mandated economic assumptions; and the judgment of the persons preparing the estimate.

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We believe estimated reserve quantities and the related estimates of future net cash flows are among the most important estimates made by an exploration and production company such as ours because they affect the perceived value of our company, are used in comparative financial analysis ratios, and are used as the basis for the most significant accounting estimates in our financial statements, including the quarterly calculation of depletion, depreciation and impairment of our proved oil and natural gas properties. Proved oil and natural gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. We determine anticipated future cash inflows and future production and development costs by applying benchmark prices and costs, including transportation, quality and basis differentials, in effect at the end of each quarter to the estimated quantities of oil and natural gas remaining to be produced as of the end of that quarter. We reduce expected cash flows to present value using a discount rate that depends upon the purpose for which the reserve estimates will be used. For example, the standardized measure calculation requires us to apply a 10% discount rate. Although reserve estimates are inherently imprecise, and estimates of new discoveries and undeveloped locations are more imprecise than those of established proved producing oil and natural gas properties, we make considerable effort to estimate our reserves, including through the use of independent reserves engineering consultants. We expect that quarterly reserve estimates will change in the future as additional information becomes available or as oil and natural gas prices and operating and capital costs change. We evaluate and estimate our oil and natural gas reserves as of December 31, and quarterly throughout the year. For purposes of depletion, depreciation, and impairment, we adjust reserve quantities at all quarterly periods for the estimated impact of acquisitions and dispositions. Changes in depletion, depreciation or impairment calculations caused by changes in reserve quantities or net cash flows are recorded in the period in which the reserves or net cash flow estimate changes.

 

Oil and Natural Gas Properties—FullProperties-Full Cost Method of Accounting

 

We use the full cost method of accounting whereby all costs related to the acquisition and development of oil and natural gas properties are capitalized into a single cost center referred to as a full cost pool. These costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling, and overhead charges directly related to acquisition and exploration activities.

 

Capitalized costs, together with the costs of production equipment, are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves as determined by independent petroleum engineers. For this purpose, we convert our petroleum products and reserves to a common unit of measure.measurement.

 

Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. This undeveloped acreage is assessed quarterly to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to the full cost poolamortization base and becomes subject to the depletion calculations.calculation.

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Proceeds from the sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless the sale would alter the rate of depletion by more than 25%. Royalties paid, net of any tax credits received, are netted against oil and natural gas sales.

 

In applying the full cost method, we perform a ceiling test on properties that restricts the capitalized costs, less accumulated depletion, from exceeding an amount equal to the estimated undiscounted value of future net revenues from proved oil and natural gas reserves, as determined by independent petroleum engineers.  The estimated future revenues are based on sales prices achievable under existing contracts and posted average reference prices in effect at the end of the applicable period, and current costs, and after deducting estimated future general and administrative expenses, production related expenses, financing costs, future site restoration costs and income taxes.  Under the full cost method of accounting, capitalized oil and natural gas property costs, less accumulated depletion and net of deferred income taxes, may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves, plus the cost, or estimated fair value if lower, of unproved properties. Should capitalized costs exceed this ceiling, we would recognize impairment.

Derivative Instruments

All derivative instruments are recorded on the consolidated balance sheet at fair value as either an asset or a liability with changes in fair value recognized currently in earnings. Although derivative instruments are used by the Company to manage the price risk attributable to its expected oil and natural gas production, those derivative instruments have not been designated as accounting hedges under the accounting guidance. All of our derivatives are accounted for as mark-to-market activities. Under ASC Topic 815, “Derivatives and Hedging,” these instruments are recorded on the consolidated balance sheets at fair value as either short term or long-term assets or liabilities based on their anticipated settlement date. The Company nets derivative assets and liabilities by commodity for counterparties where a legal right to such offset exists. Changes in the derivatives' fair values are recognized in current earnings since the Company has elected not to designate its current derivative contracts as cash flow hedges for accounting purposes.

The Company has recognized certain conversion features within its Second Lien Term Loan as embedded derivatives that have been bifurcated from the Loan, as defined in Note 4 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K, and accounted for separately from the debt. Additionally, warrants issued to SOSV Investment LLC (“SOS”) to purchase up to 200,000 shares of the Company’s common stock contain a price protection feature that will automatically reduce the exercise price should the Company enter into another agreement pursuant to which warrants are issued at a lower exercise price. The price protection feature has been recognized as an embedded derivative and accounted for separately.

  

Revenue Recognition

 

We deriverecognize revenue primarily fromwhen it is realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the saleseller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

We use the entitlements method of producedaccounting for oil, natural gas, and crude oil.  We report revenue asNGL revenues. Sales proceeds in excess of the gross amount received before taking into account production taxes and transportation costs, which are reported as separate expenses andCompany’s entitlement are included in oilother liabilities, and gas production expensethe Company’s share of sales taken by others is included in other assets in the accompanying consolidated statementsbalance sheets. We had no material oil, or NGL entitlement assets or liabilities as of operations.  Revenue is recorded in the month our production is delivered to the purchaser, but payment is generally received between 30 and 90 days after the date of production.  No revenue is recognized unless it is determined that title to the product has transferred to the purchaser.  At the end of each month, we eliminate the amount of production delivered to the purchaser and the price we will receive.  We use our knowledge of our properties, its historical performance, NYMEX and local spot market prices, quality and transportation differentials, and other factors as the basis for these estimates.December 31, 2017 or 2016.

Recently Issued Accounting Pronouncements

 

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Share Based CompensationFor a discussion of recently adopted accounting standards and recent accounting standards not yet adopted, see “Note 1 - Summary of Significant Accounting Policies” to our consolidated financial statements in Item 15 of this Annual Report.

 

We account for share-based compensation by estimating the fair value of share-based payment awards made to employees and directors, including stock options, restricted stock units, restricted stock, and employee stock purchases related to employee stock purchase plans, on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods.  

Derivative Instruments

Periodically in the past, we have entered into swaps to reduce the effect of price changes on a portion of our future oil production. We reflect the fair market value of our derivative instruments on our balance sheet.  Our estimates of fair value are determined by obtaining independent market quotes as well as utilizing a valuation model that is based upon underlying forward curve data and risk free interest rates.  Changes in commodity prices will result in substantially similar changes in the fair value of our commodity derivative agreements.  We do not apply hedge accounting to any of our derivative contracts, therefore we recognize mark-to-market gains and losses in earnings currently.

Item 7A.7A.Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 8.8.Financial Statements and Supplementary Data

 

Our financial statements appear immediately after the signature page of this Annual Report, on Form 10-K.which are incorporated herein by reference. See “Index to Financial Statements” included in this Annual Report on Form 10-K.Report.

 

Item 9.Changes in and disagreementsDisagreements with Accountants on Accounting and Financial Disclosure

Item 9A.Controls and Procedures

 

On November 7, 2014, we were notified by our independent registered public accounting firm, Hein & Associates LLP (“Hein”) that it did not wish to stand for re-election.   On November 25, 2014, we engaged Marcum LLP (“Marcum”) as our independent registered public accounting firm, which was approved by our Board of Directors and on December 10, 2015, the Board of Directors approved Marcum to continue as the Company’s independent registered public accounting firm. The reports of Hein for our consolidated financial statements as of and for the fiscal year ended December 31, 2013 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal year ended December 31, 2013 and up until its date of resignation, there were no disagreements between us and Hein on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Hein would have caused them to make reference thereto in their reports on our financial statements for such years. For more information on the change in accountants, please see our Current Reports on Form 8-K filed with the SEC on November 13, 2014 and December 2, 2014.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)pursuant to Rule 13a-15 under the Securities Exchange Act of 1934,Act. Based on that evaluation, and as amended (“Exchange Act”)) asdescribed below, management identified a material weakness in the Company’s internal control over financial reporting further discussed below. Internal control over financial reporting is an integral component of the endCompany’s disclosure controls and procedures. As a result of this material weakness, the period covered by this Annual Report on Form 10-K. Based on such evaluation, ourCompany’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report, on Form 10-K, ourthe Company’s disclosure controls and procedures were not effective to ensureas of December 31, 2017.

Management concluded that information required to be disclosedthe consolidated financial statements included in reports filed underthis Annual Report fairly present, in all material respects, the Exchange Act is recorded, processed, summarizedfinancial position of the Company at December 31, 2017 and reported within2016, and the required time periodsconsolidated results of operations and is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.cash flows for each of the two years in the period ended December 31, 2017 in conformity with U.S. GAAP.

  

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Management’s Annual Report on Internal Control overOver Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in RuleRules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilityEven an effective system of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting, may not preventno matter how well designed, has inherent limitations, including the possibility of human error, circumvention of controls or detect misstatements. Also, projectionoverriding of any evaluation of effectivenesscontrols and, therefore, can provide only reasonable assurance with respect to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As of December 31, 2015, we assessedreliable financial reporting. Furthermore, the effectiveness of oura system of internal control over financial reporting based on the criteria for effectivein future periods can change as conditions change. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting conducted based on the Internal Control—Integrated Framework issued by COSO (2013) and SEC guidance on conducting such assessments. In connection with management’s assessment of our internal control over financial reporting, we concluded that as of December 31, 2015, our internal controls and procedures were not effective to detect the inappropriate application of GAAP as more fully described below.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) while we have implemented written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements, due to limited resources, we have not conducted a formal assessment of whether the policies that have been implemented address the specific risks of misstatement; accordingly, we could not conclude whether the control activities are designed effectively nor whether they operate effectively, and (2) we do not have a fully effective mechanism for monitoring the system of internal controls.

A material weaknessthere is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihoodreasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management believes that the material weaknesses set forth above did not havedetected on a material adverse effect on our financial results for the year ended December 31, 2015.timely basis. 

 

We are committed to improvingOur management, with the participation of our financial organization. Our control weaknesses are largely a function of not having sufficient staff. As resources become available, we plan to augment our staff so that we can devote more effort to addressing our control deficiencies. Additionally, as financial resources become available, we have been engaging third-party consultants to assist with control activities.

We will continue to monitorChief Executive Officer and evaluateChief Financial Officer assessed the effectiveness of our internal control over financial reporting, as of December 31, 2017, based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework (2013)” which is issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment and those criteria, our management determined that our internal control over financial reporting was not effective as of December 31, 2017 as a result of the material weakness discussed below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. During the audit of our internal control over financial reporting for the year ended December 31, 2017, errors were identified in the Company’s computation of the full cost ceiling test limitation. Design and operating effectiveness deficiencies failed to identify the computational errors which primarily related to the treatment of wells-in-process and future income tax effects. Management has concluded these deficiencies in internal control over financial reporting constituted a material weakness. The errors did not affect the reported results of operations or disclosures in any interim or annual period.

BDO USA, LLP, an ongoing basis and are committed to taking further action by implementing additional enhancements or improvements, or deploying additional human resourcesindependent registered public accounting firm, has audited our internal control over financial reporting as may be deemed necessary.of December 31, 2017, as stated in their attestation report set forth under the caption “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.”

Changes in Internal Control overOver Financial Reporting

The Company identified a material weakness during the quarter ending June 30, 2017, as described in our Form 10-Q. The Company took measures to remediate the material weakness during the quarters ended September 30, 2017 and December 31, 2017, which included the use of comprehensive checklists to identify and review complex accounting issues, additional guidance obtained from expert accounting technical consultant with respect to the appropriate application of GAAP on non-routine and complex transactions.

Management believes that the measures described above have remediated the material weakness identified in our June 30, 2017 Form 10-Q.

 

There werehas been no changesother change in our internal control over financial reporting during our most recent fiscal quarterthe three months ended December 31, 2017 that has materially affected, or wereis reasonably likely to materially affect, our internal control over financial reporting.

 

Item9B. Other Information

Plan of Remediation of Material Weakness

Management has identified remediation steps, including enhanced analytical analysis and improved management review of the full cost ceiling test calculation in order to remediate this material weakness.

Item 9B. Other Information

 

None.

  

PART III

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Part III

Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Item 10. Directors, Executive Officers and Corporate Governance

 

The following table sets forth information regarding our executive officers, certain other officers and directors as of March 7, 2018. The Board believes that all the names, agesdirectors named below are highly qualified and positionshave the skills and experience required for effective service on the Board.  The directors’ and officers’ individual biographies below contain information about their experience, qualifications and skills that led the Board to nominate, elect or appoint them.

Name Age  Director Since Position
       
Ronald D. Ormand 59 2015 Executive Chairman of the Board of Directors
Nuno Brandolini 64 2014 Director
R. Glenn Dawson 61 2016 Director
General Merrill McPeak 82 2015 Director
Peter Benz 57 2016 Director
Mark Christensen 49 2017 Director
G. Tyler Runnels 62 2017 Director
John Johanning 32 2018 Director
Markus Specks 33 2018 Director
James Linville 52   Chief Executive Officer
Joseph C. Daches 51   Executive Vice President, Chief Financial Officer and Treasurer
Seth Blackwell 30   Executive Vice President of Land and Business Development  

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Directors hold office for a period of one year from their election at the annual meeting of stockholders and until a particular director’s successor is duly elected and qualified. Officers are elected by, and serve at the discretion of, our Board of Directors (our “Board”). None of the persons who areabove individuals has any family relationship with any other. It is expected that our Board of Directors will elect officers annually following each annual meeting of stockholders.

The following biographies describe the business experience of our directors and executive officers as of March 30, 2016:

NameAgePosition
Abraham “Avi” Mirman46Chief Executive Officer, Director
Ronald D. Ormand57Chairman of the Board of Directors
Nuno Brandolini62Director
R. Glenn Dawson59Director
General Merrill McPeak79Director
Kevin K. Nanke51Executive Vice President and Chief Financial Officer
Ariella Fuchs34General Counsel and Secretary

Abraham Mirman: Chief Executive Officer, Director.Mr. Mirman joined our Board of Directors (the “Board” or the “Board of Directors”) on September 12, 2014. He currently serves as our Chief Executive Officer and has held that position since April 21, 2014. Prior to being appointed to his current position of Chief Executive Officer, Mr. Mirman served as our President beginning in September 2013. During that same time, from April 2013 until September 2014, Mr. Mirman served as the Managing Director, Investment Banking at T.R. Winston & Company, LLC (“TRW”). Between 2012 and February 2013, Mr. Mirman served as Head of Investment Banking at John Thomas Financial. From 2011 to 2012, Mr. Mirman served as Head of Investment Banking at BMA Securities. Lastly, from 2006 to 2011, Mr. Mirman served as Chairman of the Board of Cresta Capital Strategies LLC. During Mr. Mirman’s service as Chief Executive Officer, we have completed several significant capital raising transactions and negotiated a final settlement with its senior secured lender.officers:

 

Director Qualifications:

● Leadership Experience – Chief Executive Officer of Lilis Energy, Inc.; Chairman of the Board of Cresta Capital Strategies LLC; Head of Investment Banking at BMA Securities; Head of Investment Banking at John Thomas Financial; Managing Director, Investment Banking at TRW.
●Industry Experience – Personal investment in oil and gas industry, and experience as executive officer of Lilis Energy, Inc.

Ronald D. Ormand: Executive Chairman of the Board of Directors. Mr. Ormand joined our Board of Directors in February 2015, bringing with him more than 33 years of experience as a senior executive and investment banker in energy, including extensive financing and mergers and acquisitions expertise in the oil and gas industry. During his career, he has completed more than $25 billion of capital markets and financial advisory transactions, both as a principal and as a banker. He is currentlyPrior to joining Lilis, Mr. Ormand served as the Chairman and Head of Energythe Investment Banking Group at MLV & Co. (“MLV”), which is now owned by FBR & Co., after it acquired MLV in September of 2015,2015. After the acquisition, Mr. Ormand served as Senior Managing Director and Senior Advisor at FBR & Co. until May 2016, where he focusesfocused on investment banking and principal investments in the energy sector. Prior to joining MLV in November 2013, from 2009 to 2013, heMr. Ormand was a senior executive at Magnum Hunter Resources Corporation, (“MHR”)or MHR (NYSE:MHR), an exploration and production company engaged in unconventional resource plays, as well as midstream and oilfield services operations. He was part of the management team that took over prior management and grew MHR from approximately $35 million enterprise value to over $2.5 billion enterprise value at the time he left in 2013. Mr. Ormand served on the Board of Directors and in several senior management positions for MHR, including Executive Vice President, Chief Financial Officer and Executive Vice President of Capital Markets. On March 10, 2016, in connection with his prior position as Chief Financial Officer of MHR, Mr. Ormand, without admitting or denying any of the allegations, settled with the SEC in connection with an investigation of MHR’s books and records and internal controls for financial reporting. Specifically, Mr. Ormand agreed to cease and desist from violating Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 13a-1, 13a-13 and 13-15(a) thereunder. He has also paid a penalty of $25,000. The SEC did not allege any anti-fraud violations, intentional misrepresentations or willful conduct on the part of Mr. Ormand.Mr. Ormand’s career also includes serving as Managing Director and Group Head of U.S. Oil and Gas Investment Banking at CIBC World Markets and Oppenheimer (1988-2004); Head Of North American Oil and Gas Investment Banking at West LB A.G. (2005-2007), and President and CFO of Tremisis Energy Acquisition Corp. II, an energy special purpose acquisition company from 2007-2009. Mr. Ormand has previously served as a Director of Greenhunter Resources, Inc. (2011-2013), Tremisis (2007-2009), and Eureka Hunter Holdings, Inc., a private midstream company (2010-2013). Mr. Ormand holds a B.A. in Economics, an M.B.A. in Finance and Accounting from UCLA and studied Economics at Cambridge University, England.

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Director Qualifications:

 

Mr. Ormand’s qualifications to serve as the Executive Chairman of the Board of Directors include extensive leadership and industry experience, including as a Senior Executive at Magnum Hunter Resources Corporation, Chairman and Head of Investment Banking at MLV, and Head of US Oil and Gas for CIBC.

● Leadership Experience – Chairman, Head of Energy Investment Banking Group at MLV; Senior executive at Magnum Hunter Resources Corporation and investment banker.
● Industry Experience – Extensive experience in oil and gas development and services industries at the entities and in the capacities described above.

 

Nuno Brandolini: Director. Mr. Brandolini joined our Board of Directors in February 2014, and became Chairman in April 2014. On January 13, 2016, Mr. Brandolini was replaced as Chairman of our Board of Directors by Ronald D. Ormand. Since 2014, Mr. Brandolini has served as Managing Member and Chief Executive Officer of Scorpion Capital, LLC, a private investment company. From 2004 to 2014, Mr. Brandolini served as a member of the general partner of Scorpion Capital Partners, L.P., a private equity firm organized as a small business investment company until June 2014.company. Prior to forming Scorpion Capital and its predecessor firm, Scorpion Holding, Inc., in 1995, Mr. Brandolini served as managing director of Rosecliff, Inc., a leveraged buyout fund co-founded by Mr. Brandolini in 1993. Mr. Brandolini served previously as a vice president in the investment banking department of Salomon Brothers, Inc., and a principal with the Batheus Group and Logic Capital, two venture capital firms. Mr. Brandolini began his career as an investment banker with Lazard Freres & Co. Mr. Brandolini is a director of Cheniere Energy, Inc. (NYSE MKT: LNG), a Houston-based company primarily engaged in LNG related businesses. Mr. Brandolini received a law degree from the University of Paris and an M.B.A. from the Wharton School.

 

Director Qualifications:As a result of his experience holding executive positions with several private equity firms and his experience as a member of the board of directors of Cheniere Energy, Inc., Mr. Brandolini possesses particular knowledge and experience working with oil and gas companies that strengthen the Board’s collective qualifications, skills, and experience

 

 ● 52Leadership Experience – Executive positions with several private equity firms, and Board position with Cheniere Energy, Inc.
 ● Industry Experience – Service on the Board of Cheniere Energy, Inc., as well as personal investments in the oil and gas industry.

 

R. Glenn Dawson: Director.Mr. Dawson joined our Board of Directors on January 13, 2016. Mr. Dawson has over 3036 years of experience in oil and gas exploration in North America and is currentlysince March 2016, has served as President and Chief Executive Officer of Cuda Energy, Inc., a private Canadian-based exploration and production company. Mr. Dawson’s career includes serving as President of Bakken Hunter, a division of MHR, where he managed operations and development of Bakken assets in the United States and Canada from 2011 to 2014. His principal responsibilities have involved the generation and evaluation of drilling prospects and production acquisition opportunities. In the early stages of his career, Mr. Dawson was employed as an exploration geologist by Sundance Oil and Gas, Inc., a public company located in Denver, Colorado, concentrating on theirits Canadian operations. From December 1985 to September 1998, Mr. Dawson held a variety of managerial and technical positions with Summit Resources, a then-public Canadian oil and gas exploration and production company, including Vice President of Exploration, Exploration Manager and Chief Geologist. He served as Vice President of Exploration with PanAtlas Energy Inc., a then-public Canadian oil and gas exploration and production company from 1999 until its acquisition by Velvet Exploration Ltd. in July 2000. Mr. Dawson was a co-founder and Vice President of Exploration of TriLoch Resources Inc., a then-public Canadian oil and gas exploration company from 2001 to 2005, until it was acquired by Enerplus Resources Fund. As a result of the sale of TriLoch Resources Inc. to Enerplus Resources Fund, Mr. Dawson founded and served as President and CEO of NuLoch Resources, Inc. in 2005.2005, which was acquired by MHR in 2012. Mr. Dawson graduated in 1980 from Weber State University of Utah with a Bachelor’s degree in Geology and attended the University of Calgary from 1980 to 1982 in the Masters Program for Geology.

As a result of theseMr. Dawson’s professional experiences, Mr. Dawsonexperience as the President and Chief Executive Officer of Cuda Energy, Inc. and former President of Bakken Hunter, along with his extensive experience in the oil and gas industry, he possesses particular knowledge and experience in the operations of oil and gas companies that strengthen the Board’s collective qualifications, skills, and experience.

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Director Qualifications:

● Leadership Experience – President and Chief Executive Officer of Cuda Energy, Inc.; former President of Bakken Hunter.
● Industry Experience – Extensive experience in oil and gas exploration industry; co-founded numerous oil and gas exploration companies.

General Merrill McPeak: Director. General McPeak joined our Board of Directors in January 2015. He served as the fourteenth chief of staff of the U.S. Air Force and flew 269 combat missions in Vietnam during his distinguished 37-year military career. Following retirement from active service in 1994, General McPeak launched a second career in business. He was a founding investor and chairman of Ethicspoint,Ethics Point, an ethics and compliance software and services company, which was subsequently restyled as industry leader, Navex Global, and acquired in 2011 by a private equity firm. General McPeak co-invested and remained a board member of NAVEXNava Global, which was sold again in 2014. From 2012 to 2014, General McPeak was Chairman of Coast Plating, Inc., a Los Angeles-based, privately held provider of metal processing and finishing services, primarily to the aerospace industry, which was also acquired in a private equity buyout. He remains a director of that company, now called Valence Surface Technologies. He also currently serves as a director of DGT Holdings, GenCorp, Lion BiotechnologiesAerojet Rocketdyne, Loyance Biotherapeutics and Research Solutions, Inc. Formerly, he was a director of Tektronix, TWA and ECC International, a defense subcontractor, where he served for many years as chairman of the Board. From 2010 through 2017, General McPeak served as Chairman of the American Battle Monuments Commission, an agency of the executive branch of the federal government, responsible for operating and maintaining American cemeteries in foreign countries holding the remains of 125,000 US servicemen. General McPeak has a B.A. degree in Economics from San Diego State College and an M.S. in International Relations from George Washington University. He is a graduate of the National War College and of the Executive Development Program of the University of Michigan Graduate School of Business. He spent an academic year as Military Fellow at the Council on Foreign Relations.

 

Director Qualifications:

● Leadership Experience –As a result of his professional experience, General McPeak possesses particular knowledge and experience, including, without limitation, his service as Chief of Staff of the U.S. Air Force; Founding investor and chairman of Ethicspoint (subsequently Navex Global);
● Industry Experience – Personal investments in the oil and gas industry.

Kevin K. Nanke: Executive Vice President and Chief Financial Officer.On March 6, 2015, our Board appointed Kevin Nanke to the position of Executive Vice President and Chief Financial Officer, effective immediately. Mr. Nanke served as the President of KN Consulting, Inc., a consulting firm focused on the energy, real estate and restaurant industries, from 2012 to 2015. Previously, Mr. Nanke served as the Treasurer and Chief Financial Officer of Delta Petroleum Corporation (“Delta”) from 1999 to 2012, and as its Controller from 1995 to 1999. At the same time, Mr. Nanke served as Treasurer and Chief Financial Officer of Amber Resources, an E&P subsidiary of Delta, and as Treasurer, Chief Financial Officer and Director of DHS Drilling Company, a drilling company that was 50% owned by Delta. He was instrumental in preserving a $1.3 billion tax loss carryforward when Delta successfully completed a reorganization and emerged as Par Petroleum Corporation after Delta and its subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in DecemberAir Force and position as founding investor and chairman of 2011. Prior to joining Delta,Ethicspoint (subsequently Navex Global), that strengthen the Board’s collective qualifications, skills, and experience.

Peter Benz: Director. Mr. Nanke was employed by KPMG LLP, a global audit, tax and advisory firm. Mr. Nanke received a B.A. in Accounting from the University of Northern Iowa in 1989 and is a Certified Public Accountant (inactive).

Ariella Fuchs: General Counsel and Secretary. Ariella FuchsBenz joined our company in March 2015. Prior to that, Ms. Fuchs was an associate with Baker Botts L.L.P. from April 2013 to February 2015, specializing in securities transactions and corporate governance. Prior to joining Baker Botts L.L.P, she served as an associate at White & Case LLP and Dewey and LeBoeuf LLP from January 2010 to March 2013 in their mergers and acquisitions groups. Ms. Fuchs received a J.D. from New York Law School and a B.A. in Political Science from Tufts University. 

Directors hold office for a period of one year from their election at the annual meeting of stockholders and until a particular director’s successor is duly elected and qualified. Officers are elected by, and serve at the discretion of, our Board of Directors. None of the above individuals has any family relationship with any other. It is expected that our Board of Directors will elect officers annually following each annual meetingon June 23, 2016, in connection with the completion of stockholders.the merger with Brushy Resources. Mr. Benz served on Brushy Resource’s Board of Directors since January 20, 2012. Mr. Benz serves as the Chairman and Chief Executive Officer of Viking Asset Management, LLC, and is a member of its Investment Committee. He has been affiliated with Viking Asset Management, LLC, since 2001. His responsibilities include assuring a steady flow of candidate deals, making asset allocation and risk management decisions and overseeing all business and investment operations. He has more than 25 years of experience specializing in investment banking and corporate advisory services for small growth companies in the areas of financing, merger/acquisition, funding strategy and general corporate development. Prior to founding Viking in 2001, Mr. Benz founded Bi Coastal Consulting Company where he advised hundreds of companies regarding private placements, initial public offerings, secondary public offerings and acquisitions. He has founded three public companies and served as a director for four other public companies. Prior to founding Bi Coastal Consulting, Mr. Benz was responsible for private placements and investment banking activities at Gilford Securities in New York, NY. Mr. Benz became a director of usell.com, Inc. on May 15, 2014. Mr. Benz is a graduate of Notre Dame University.

 

As a result of his professional experiences, Mr. Benz possesses particular knowledge and experience in developing companies and capital markets that strengthen our Board of Director’s collective qualifications, skills, and experience.

G. Tyler Runnels: Director. Mr. Runnels was appointed to the Board of Directors in September 2017. He is the Chairman and Chief Executive Officer of T.R. Winston & Company (“TRW”). Mr. Runnels has been with TRW since 1990 and became its Chairman and Chief Executive Officer in 2003 when he acquired control of the firm. He has over 30 years of investment banking experience and has led over $2 billion of debt and equity financings, mergers and acquisitions, initial public offerings, bridge financings, and financial restructurings across a variety of industries, including healthcare, oil and gas, business services, manufacturing, and technology. Mr. Runnels serves on the Pepperdine University President’s Campaign Cabinet. Mr. Runnels received a B.S. and MBA from Pepperdine University, and he holds FINRA Series 7, 24, 55, 63 and 79 licenses.

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As a result of his professional experience, Mr. Runnels possesses particular knowledge and experience in financing and financial services that strengthen our Board of Director’s collective qualifications, skills, and experience.

Mark Christensen: Director. Mr. Christensen was appointed to the Board of Directors in September 2017. Mr. Christensen is the Founder, President and CEO of KES 7 Capital Inc. in Toronto, Canada, and a registrant of the Ontario Securities Commission (OSC). Prior to founding KES 7, Mr. Christensen was Vice Chairman, Head of Global Sales and Trading at GMP Securities, one of Canada’s largest independent investment banks, where he served as a member of the Executive Committee, Compensation Committee and New Names Committee. Mr. Christensen has experience in a broad range of corporate and capital market transactions, from mergers and acquisitions to public and private financings, that total in the tens of billions of dollars. His background in geology and geophysics has provided him with valuable insight into the energy industry, enabling him to advise both institutional investors and energy companies from around the globe. Mr. Christensen holds a Master of Science degree from the University of Windsor in Canada and a Bachelor of Science Degree from the University of Hull in the United Kingdom.

As a result of his professional experience, Mr. Christensen possesses particular knowledge and experience in providing advisory services to numerous institutional investors and companies active in the oil and gas industry strengthen our Board of Director’s collective qualifications, skills, and experience.

John Johanning: Director. Mr. Johanning was appointed to the Board of Directors in March 2018. Mr. Johanning is the Technical Director of Värde Partners, Inc.’s (“Värde”) energy business. Mr. Johanning joined Värde in May 2017 and presides over the Petroleum Engineering and Geoscience aspects of Värde’s investments in energy. Mr. Johanning is involved in the performance of current Varde investments across active onshore US basins as well as new business decisions in both opportunity screening and asset and company valuations. Prior to joining Värde, from January 2014 until May 2017, Mr. Johanning was a Vice President at Evercore Partners (“Evercore”) in Houston, where he was influential in numerous transactions totaling over $10 billion in transaction value. While at Evercore, Mr. Johanning advised numerous energy companies and financial sponsors on value-maximizing transactions. Mr. Johanning's advisory mandates ranged over a variety of different transaction types including acquisitions and divestures of assets, corporate mergers, and capital raises. Mr. Johanning also worked across all oilfield sectors, gaining transactional experience in the upstream, midstream, downstream and oil field service sectors of the business. Mr. Johanning began his career as a Reservoir Engineer at BP from 2008 to 2014. Based in Houston, he developed oil and gas assets across several US Basins, including the Permian of West Texas and Southeast New Mexico and the Texas Gulf Coast Basin, among others. While in the South Texas Reservoir Management team, Mr. Johanning was responsible for the resource appraisal of a 400,000+ gross acre Eagle Ford Shale position that was deeply rooted in geological and well completion data. While at BP, Mr. Johanning gained a detailed technical understanding of oil and gas assets through the various facets of the business, including Production Engineering, Reservoir Engineering, Drilling and Completions, Geology and Geophysics, as well as Land, Legal and Finance functions. Mr. Johanning graduated from The University of Texas in at Austin in 2008 with a B.S. in Petroleum Engineering.

As a result of his professional experience, Mr. Johanning possesses particular knowledge and experience in the operations of oil and gas companies that strengthen our Board of Director’s collective qualifications, skills and experience.

Markus Specks: Director. Mr. Specks was appointed to the Board of Directors in March 2018. Mr. Specks is a Managing Director of Värde Partners, Inc. and Head of the firm's Houston office. Mr. Specks leads Värde's energy business, and has experience managing credit, equity, and structured asset-level investments across the energy sector. He serves on Värde 's Investment Committee, as well as several boards of private energy companies. Prior to joining Värde in 2008, Mr. Specks worked in investment banking at Lazard, focusing on middle-market M&A advisory. Mr. Specks holds a B.A. in Government from Lawrence University in Wisconsin.

As a result of his professional experience, Mr. Specks possesses particular knowledge and experience in developing companies and capital markets, particularly with oil and gas companies, that strengthen our Board of Director’s collective qualifications, skills, and experience.

James (“Jim”) Linville: Chief Executive Officer. Effective August 4, 2017, our Board appointed James Linville to the position of Chief Executive Officer. Mr. Linville was the Company’s President since June 26, 2017 until his appointment to Chief Executive Officer. Mr. Linville most recently held the position of Senior Director of Operations and Development for US Energy Development Corporation (“US Energy”) from January 2016 to June 2017, where he was a senior technical engineering, operational and resource development professional in the company. During his time at US Energy, Mr. Linville led a team of field and office staff consisting of drilling, completions, operations, engineering, reservoir, regulatory and environmental safety professionals. Additionally, Mr. Linville was a member of the Capital Committee at US Energy, tasked with deploying up to approximately $200 million annually in a portfolio of energy related investments, primarily within the Delaware Basin and Eagle Ford. Prior to US Energy, Mr. Linville was Director of Operations at American Energy Permian Basin (“AEPB”) from January 2015 to July 2015, where he managed field operations, completions, production and facilities engineering for a large Midland Basin Wolfcamp shale horizontal development program. Prior to moving into his position as Director of Operations at AEPB, Mr. Linville was Director of Acquisitions at American Energy Partners, LP (“AELP”) from February 2014 to January 2015, where he assembled and led the acquisitions team, consisting of numerous petro-professionals (Reservoir, Operations, Geoscience, Land), who were responsible for screening over 400 acquisition opportunities. While at AELP, Mr. Linville participated in and managed over 100 acquisition evaluations with aggregate value greater than $12 billion. Previously, Mr. Linville was employed at Devon Energy Corporation from January 2001 to January 2014, where he held various engineering and management roles. Prior to Devon Energy Corporation, Mr. Linville held various leadership and engineering (reservoir, production, drilling) and operational roles at Eastern American Energy, Consolidated Oil & Gas, Hallwood Petroleum, Unocal and his own firm Derrick Engineering Corporation. Mr. Linville earned his Bachelor of Science in Petroleum Engineering from New Mexico Tech and his Master of Science in Environmental Engineering from Marshall University. Throughout his career, he has held numerous leadership roles within the Society of Petroleum Engineers (SPE) and was an Industry Advisory Board member at New Mexico Tech and the Oklahoma City SPE Chapter. In addition, Mr. Linville is a Registered Professional Engineer.

Joseph C. Daches: Executive Vice President, Chief Financial Officer and Treasurer. On January 23, 2017, our Board appointed Joseph Daches to the position of Executive Vice President, Chief Financial Officer and Treasurer. Prior to joining our company, Mr. Daches most recently held the position of Chief Financial Officer and Senior Vice President of Magnum Hunter Resources Corp. (“MHR”) from July 2013 to June 2016, where he finished his tenure by successfully guiding MHR through a restructuring, and upon emergence was appointed Co-CEO by MHR’s new board of directors until his departure. Mr. Daches has over 20 years of experience and expertise in directing strategy, accounting and finance in primarily small and mid-size oil and gas companies and has helped guide several of those companies through financial strategy, capital raises and private and public offerings. Prior to joining MHR, Mr. Daches served as Executive Vice President, Chief Accounting Officer and Treasurer of Energy & Exploration Partners, Inc. from September 2012 until June 2013 and as a director of that company from April 2013 through June 2013. He previously served as a partner and Managing Director of the Willis Consulting Group, LLC, from January 2012 to September 2012. From October 2003 to December 2011, Mr. Daches served as the Director of E&P Advisory Services at Sirius Solutions, LLC, where he was primarily responsible for financial reporting, technical and oil and gas accounting and the overall management of the E&P Advisory Services practice. Mr. Daches earned a Bachelor of Science in Accounting from Wilkes University in Pennsylvania, and he is a certified public accountant in good standing with the Texas State Board of Public Accountancy.

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Seth Blackwell: Executive Vice President of Land and Business Development. Seth Blackwell joined Lilis in December 2016. Mr. Blackwell is a Certified Professional Landman with extensive knowledge and experience in all facets of land management. Prior to joining Lilis, from October 2012 to December 2016, Mr. Blackwell held the position of Vice President of Land for XOG Resources where he managed all land and business development efforts for the company. Mr. Blackwell also gained extensive experience in a wide variety of major US oil and gas plays while working for Occidental Petroleum. Mr. Blackwell started his career blocking together large acreage positions in excess of 30,000 acres throughout Central and East Texas. Mr. Blackwell is an active member of the American Association of Professional Landmen, North Houston Association of Professional Landmen and the Houston Association of Professional Landmen. Mr. Blackwell holds a bachelor’s degree in Business Management from Fort Hays State University and is currently pursuing his MBA in Energy from the University of Tulsa.

Section 16(a) Beneficial Ownership Reporting Compliance

 

Our executive officers and directors and persons who own more than 10% of our Common Stockcommon stock are required to file reports with the SEC, disclosing the amount and nature of their beneficial ownership in our Common Stock,common stock, as well as changes in that ownership. Based solely on our review of reports and written representations that we have received, we believe that all required reports were timely filed during 2015,2017 and through the date of this Annual Report, except as follows:

 

●·Abraham “Avi” Mirman

Brennan Short, our former COO, filed his Form 3 and one Form 4, reporting two transactions, subsequent to the time prescribed by Section 16(a) of the Exchange Act.

·R. Glenn Dawson filed one Form 4, reporting one transaction, late.subsequent to the time prescribed by Section 16(a) of the Exchange Act.
●·Nuno BrandoliniVertex Fund filed its Form 3 and one Form 4, reporting one transaction, subsequent to the time prescribed by Section 16(a) of the Exchange Act.
·Ronald Ormand filed one Form 4, reporting one transaction, late.
●General Merrill McPeak filed one Form 4 reporting three transactions late.
●Kevin K. Nanke filed one Form 4 reporting one transaction late and a Form 3 reporting his initial beneficial ownership late.
●Ariella S. Fuchs filed one Form 4 reporting one transaction late and a Form 3 reporting her initial beneficial ownership late.
●Eric Ulwelling filed one Form 4 reporting one transaction late.
●Tyler G. Runnels filed one Form 4 reporting one transaction late.
●Ronald D. Ormand filed a Form 3 reporting his initial beneficial ownership late.subsequent to the time prescribed by Section 16(a) of the Exchange Act.

 

The Board of Directors and Board Committees Thereof

 

Our Board of Directors conducts its business through meetings and through its committees. Our Board of Directors held fifteeneighteen meetings in 20152017 and took action by unanimous written consent on fourtwelve occasions. Each director attended at least 75% of (i) the meetings of the Board held after such director’s appointment and (ii) the meetings of the committees on which such director served, after being appointed to such committee. Our policy regarding directors’ attendance at the annual meetings of stockholders is that all directors are expected to attend, absent extenuating circumstances.

 

Affirmative Determinations Regarding Director Independence and Other Matters

 

Our Board of Directors follows the standards of independence established underin accordance with the standards for companies listed on the New York Stock Exchange, or the NYSE and the rules ofand regulations promulgated by the Nasdaq Stock Market, or the Nasdaq,SEC, as well as our Corporate Governance Guidelines on Director Independence, which was amended on December 10, 2015, a copy of which is available on our website at www.lilisenergy.com under “Investors—Corporate Governance—Highlights”“Investors-Corporate Governance-Highlights” in determining if directors are independent andthe independence of its directors. The Board has determined that foursix of our current directors, Mr. Brandolini, General McPeak, Mr. OrmandBenz, Mr. Dawson, Mr. Specks and Mr. DawsonJohanning are “independent directors” under the NasdaqNYSE standards and SEC rules and regulations referenced above.

 

No independent director receives, or has received, any fees or compensation directly as an individual from us other than compensation received in his or her capacity as a director or indirectly through their respective companies, except as described below. See “Certain Relationships and Related Transactions, and Director Independence”. There were no transactions, relationships or arrangements not otherwise disclosed that were considered by the Board of Directors in determining whether any of the directors were independent.

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Committees of the Board of Directors

 

Pursuant to our amended and restated bylaws, our Board of Directors is permitted to establish committees from time to time as it deems appropriate. To facilitate independent director review and to make the most effective use of our directors’ time and capabilities, our Board of Directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee and a reserves committee. The membership and function of these committees are described below.

 

Audit Committee

 

In 2015, our audit committee consistedDuring the year ended December 31, 2017, each of Mr. Brandolini, General McPeak and General McPeak. Mr. Ormand had alsoBenz served on our audit committee but resigned following a determination that he could not be considered independent and eligible for audit committee service pursuant to Rule 10A-3 of the Exchange Act, since he worked for an investment bank that received compensation from us in the amount of $25,000 per month. However, Mr. Ormand remains independent pursuant to the Nasdaq independence definition. Mr. Brandolini is the audit committee, chairwho are all currently serving on the audit committee. Mr. Benz is the acting as chairman of the audit committee and meets the definition of an audit committee financial expert. On January 13, 2016, ourOur Board appointed Mr. Dawson to the audit committee. Our Boardof Directors has determined that each of Mr. Brandolini, General McPeak and Mr. Dawson were independent as required by Nasdaq for audit committee members.Benz meet the independence requirements of the SEC and NYSE rules and the financial literacy requirements of the NYSE.

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The audit committee has met sixfive times since January 1, 2015 throughduring the date of this Annual Report on Form 10-K, butyear ended December 31, 2017, and acted by written consent once. The audit committee also met separately on several occasions in connection with a meetingmeetings of the full Board. The audit committee is governed by a written charter that is reviewed, and amended, if necessary, on an annual basis. A copy of the charter is available on our website at www.lilisenergy.com under “Investors—Corporate Governance—Highlights.“Investors-Corporate Governance-Highlights.”

Compensation Committee

 

Our compensation committee currently consists of Mr. Brandolini and General McPeak. Mr. Ormand had also served on the compensation committee but resigned following a determination that he should not be considered independent and eligible for compensation committee service based on the above-described compensation paid to his investment bank.

General McPeakDawson.  Mr. Dawson is the chairchairman of the compensation committee.

The compensation committee has met twice since January 1, 2015 throughseven times during the date of this Annual Report on Form 10-K, butyear ended December 31, 2017, and acted by written consent six times. The compensation committee also met separately on several occasions in connection with a meetingmeetings of the full Board. TheConsistent with the listing requirements of the NYSE, the Compensation Committee is composed entirely of independent members of our Board determined thatof Directors, as each of Mr. Brandolinimember meets the independence requirements set by the NYSE and General McPeak were independent as required by Nasdaq for compensation committee members. applicable federal securities laws.

 

The compensation committee reviews, approves and modifies our executive compensation programs, plans and awards provided to our directors, executive officers and key associates. The compensation committee also reviews and approves short-term and long-term incentive plans and other stock or stock-based incentive plans. In addition, the committee reviews our compensation and benefit philosophy, plans and programs on an as-needed basis. In reviewing our compensation and benefits policies, the compensation committee may consider the recruitment, development, promotion, retention, and compensation of our executive and senior officers, trends in management compensation and any other factors that it deems appropriate.

Under its charter, the compensation committee may create and delegate such tasks to such standing or ad hoc subcommittees as it may determine to be necessary or appropriate for the discharge of its responsibilities, as long as the subcommittee has at least the minimum number of directors necessary to meet any regulatory requirements. The compensation committee may engage consultants in determining or recommending the amount of compensation paid to our directors and executive officers. The compensation committee is governed by a written charter that is reviewed, and amended if necessary, on an annual basis. A copy of the charter is available on our website at www.lilisenergy.com under “Investors—Corporate Governance—Highlights.“Investors-Corporate Governance-Highlights.”

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee currently consists of Mr. Brandolini,Benz, General McPeak and Mr. Ormand,Brandolini, who is the chairchairman of the nominating and corporate governance committee. The nominating and corporate governance committee has met twice since January 1, 2015 throughduring the date of this Annual Report on Form 10-K,year ended December 31, 2017, but met separately on several occasions in connection with a meetingmeetings of the full Board.

 

The primary responsibilities of the nominating and corporate governance committee include identifying, evaluating and recommending, for the approval of the entire Board, of Directors, potential candidates to become members of the Board, of Directors, recommending membership on standing committees of the Board, of Directors, developing and recommending to the entire Board of Directors corporate governance principles and practices for theour Company and assisting in the implementation of such policies, and assisting in the identification, evaluation and recommendation of potential candidates to become officers of theour Company. The nominating and corporate governance committee will review our code of business conduct and ethics and its enforcement, and reviews and recommends to theour Board whether waivers should be madea mitigation plan is appropriate with respect to any exception to such code. A copy of the nominating and corporate governance committee charter may be found on our website at www.lilisenergy.com under “Investor Relations—Corporate Governance—Highlights.Relations-Corporate Governance-Highlights.” During fiscal year 2017, there have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

 

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Director Nominations ProcessReserves Committee

 

InOur reserves committee currently consists of Mr. Ormand and Mr. Dawson, who is the eventchairman of the reserves committee.

The primary responsibilities of the reserves committee include retaining and terminating independent petroleum engineering consultants (the “IPEC”) retained to assist the Company in the annual and quarterly review of hydrocarbon reserves and approving their compensation and terms of their engagement, establishing expectations of the IPEC and their accountability to the reserves committee, ensuring that vacancies onthe IPEC are independent, and reviewing the Company’s significant reserve engineering principles, policies, internal procedures and assumptions relating to the Company’s reserve estimates and disclosure.

Additionally, at the request of our Board, the reserves committee chairperson currently performs certain technical responsibilities with respect to the operational activities of the Company.

Communications with our Board of Directors arise, the nominating and corporate governance committee will consider potential candidates for director, which may come to the attention of the nominating and corporate governance committee through current directors, professional executive search firms, stockholders or other persons. The nominating and corporate governance committee and in the past, our Board does not set specific, minimum qualifications that nominees must meet in order to be recommended as directors, but believes that each nominee should be evaluated based on his or her individual merits, taking into account the needs of the Company and the composition of our Board. We do not have any formal policy regarding diversity in identifying nominees for a directorship, but consider it among the various factors relevant to any particular nominee. We do not discriminate based upon race, religion, sex, national origin, age, disability, citizenship or any other legally protected status. In the event we decide to fill a vacancy that exists or we decide to increase the size of the Board, we identify, interview and examine appropriate candidates. We identify potential candidates principally through suggestions from our Board and senior management. Our chief executive officer and Board members may also seek candidates through informal discussions with third parties. We also consider candidates recommended or suggested by stockholders.

The nominating and corporate governance committee will consider candidates recommended by stockholders if the names and qualifications of such candidates are submitted in writing in accordance with the notice provisions for stockholder proposals set forth below under the caption “Stockholder Proposals” in this Annual Report to our General Counsel, Lilis Energy, Inc., 216 16th St., Suite #1350, Denver, CO 80202, Attention: General Counsel. The Board considers properly submitted stockholder nominations for candidates for the Board of Directors in the same manner as it evaluates other nominees. Following verification of the stockholder status of persons proposing candidates, recommendations are aggregated and considered by the Board and the materials provided by a stockholder to the general counsel for consideration of a nominee for director are forwarded to the Board. All candidates are evaluated at meetings of the Board. In evaluating such nominations, the Board seeks to achieve the appropriate balance of industry and business knowledge and experience in light of the function and needs of the Board of Directors. The Board considers candidates with excellent decision-making ability, business experience, personal integrity and reputation. Our management recommended our incumbent directors for election at our 2015 annual meeting. We did not receive any other director nominations.

Communications with the Board of Directors

 

Stockholders may communicate with our Board of Directors or any of the directors by sending written communications addressed to the Board of Directors or any of the directors, Lilis Energy, Inc., 216 16th St.300 E. Sonterra Blvd., Suite #1350, Denver, CO 80202,No. 1220, San Antonio, Texas 78258, Attention: General Counsel.Chief Financial Officer. All communications are compiled by the general counselchief financial officer and forwarded to theour Board of Directors or the individual director(s) accordingly.

 

Code of Ethics

 

Our Board of Directors has adopted a code of business conduct and ethics which we refer to as the Code, that applies to all of our officers and employees, including our principalchief executive officer, principalchief financial officer, principal accounting officer or controller, and persons performing similar functions. The CodeOur code of business conduct and ethics codifies the business and ethical principles that govern all aspects of our business. A copy of the Codeour code of business conduct and ethics is available on our website at www.lilisenergy.com under “Investors—Corporate Governance—Highlights.“Investors-Corporate Governance-Highlights.” We undertake to provide a copy of the Codeour code of business conduct and ethics to any person, at no charge, upon a written request. All written requests should be directed to: Lilis Energy, Inc., 216 16th St.300 E. Sonterra Blvd., Suite #1350, Denver, CO 80202,No. 1220, San Antonio, Texas 78258, Attention: General Counsel.Chief Financial Officer. If any substantive amendments are made to the written Code,our code of business conduct and ethics, or if any waiver (including any implicit waiver) is granted from any provision of the Codecode of business conduct and ethics to our principalchief executive officer, principalchief financial officer, principal accounting officer or controller, we will disclose the nature of such amendment or waiver on our website at www.lilisenergy.com under “Investors—Corporate Governance—Highlights.“Investors-Corporate Governance-Highlights.” or, if required, in a current reportCurrent Report on Form 8-K.

Board Leadership Structure

Our Board has separated the chairman and chief executive officer roles. This leadership structure permits the chief executive officer to focus his attention on managing our business and allows the chairman to function as an important liaison between management and the Board, enhancing the ability of the Board to provide oversight of our management and affairs. Our chairman provides input to the chief executive officer and is responsible for presiding over the meetings of the Board and executive sessions of the non-employee directors. Our Chief Executive Officer, who is also a member of the Board, is responsible for setting our strategic direction and for the day-to-day leadership performance of the Company. Based on the current circumstances and direction of the Company and the experienced membership of our Board, our Board believes that separate roles for our Chairman and our Chief Executive Officer, coupled with a majority of independent directors and strong corporate governance guidelines, is the most appropriate leadership structure for our Company and its stockholders at this time.

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The Board’s Role in Risk Oversight

It is management’s responsibility to manage risk and bring to the Board’s attention any material risks to the Company. The Board has oversight responsibility for our risk policies and processes relating to the financial statements and financial reporting processes and the guidelines, policies and processes for mitigating those risks.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Below is a discussion and analysis of our compensation programs as they applied to our named executive officers—or NEOs—for 2017. Our fiscal year is the calendar year.

Our NEOs for 2017 were: (1) James Linville, Chief Executive Officer; (2) Abraham “Avi” Mirman, former Chief Executive Officer; (3) Joseph C. Daches, Chief Financial Officer, Executive Vice President, and Treasurer; (4) Kevin Nanke, former Chief Financial Officer; (5) Ariella Fuchs, former Executive Vice President, General Counsel, and Secretary; (6) Brennan Short, former Chief Operating Officer; and (7) Ronald D. Ormand, Executive Chairman.

Compensation Philosophy and Objectives

Our compensation programs are designed to motivate our executives and employees and enable them to participate in the growth of our business, while also driving the creation of long-term stockholder value. We provide our executive officers with both variable and fixed compensation, including base salaries, short-term cash incentive compensation, and long-term equity incentive compensation. We strive to balance short-term awards, such as annual performance-based bonuses, with longer-term performance awards, such as equity awards, in order to provide incentives for both short- and long-term performance.

Item 11.57

Role of Our Compensation Committee

Our compensation committee is appointed by our Board of Directors—or our Board—to discharge the Board’s responsibilities relating to the compensation of our Chief Executive Officer—or our CEO—and our other executive officers. The compensation committee has overall responsibility for approving and evaluating all compensation plans, policies, and programs of the Company as they affect our executive officers.

During 2017, our compensation committee consisted of Nuno Brandolini, R. Glenn Dawson, and General Merrill A. McPeak (Chair). At least annually, the compensation committee: (1) reviews and approves the corporate goals and objectives applicable to the compensation of our CEO; (2) evaluates our CEO’s performance in light of those goals and objectives; and (3) determines and approves our CEO’s compensation level based on this evaluation. The compensation committee also, on at least an annual basis, reviews and approves the annual base salaries and annual incentive opportunities of our executive officers other than our CEO. The compensation committee also, periodically and as and when appropriate, reviews and approves the following as they affect our executive officers: (1) all other incentive awards and opportunities, including both cash-based and equity-based awards and opportunities; (2) any employment agreements and severance arrangements; (3) any change in control agreements and severance protection plans and change in control provisions affecting any elements of compensation and benefits; and (4) any special or supplemental compensation and benefits for our executive officers and former executive officers.

Our compensation committee is governed by a written charter, a copy of which is available on the Investor Relations section of our website at: http://investors.lilisenergy.com/.

Role of Our Compensation Consultant

Our compensation committee has sole authority over the selection, use, and retention of any compensation consultant or any other experts engaged to assist the compensation committee in discharging its responsibilities. In February 2017, the compensation committee engaged Longnecker & Associates (“Longnecker”) to assist with its overall compensation review and decision-making.  In May 2017, Longnecker conducted an independent, comprehensive, broad-based analysis of our executive compensation program, and the compensation committee used this analysis as one of several reference points in making decisions regarding 2017 compensation. Longnecker’s objectives were to:

·review the total direct compensation (base salary, annual incentives, and long-term incentives) for the NEOs;

·assess the competitiveness of executive compensation, based on revenue size, asset size, enterprise value and market capitalization, as compared to the peer group and published survey companies in the oil and gas industry; and

·provide conclusions and recommend considerations for total direct compensation.

Longnecker also provides guidance on industry best practices. This information assists us in developing and implementing compensation programs generally competitive with those of other companies in our industry and other companies with which we generally compete for executive talent.

Longnecker performed services solely on behalf of the compensation committee. In accordance with the rules and regulations of the SEC and the NYSE, the compensation committee assessed the independence of Longnecker and concluded that no conflicts of interest exist that would prevent Longnecker from providing independent and objective advice.  

The companies used for the executive compensation comparisons in May 2017 included the following:

SM Energy CompanyRSP Permian, Inc.
Laredo Petroleum, Inc.Matador Resources Company
Parsley Energy, Inc.Callon Petroleum Company
Carrizo Oil & Gas, Inc.Resolute Energy Corporation
Sanchez Energy CorporationSRC Energy Inc.
Gulfport Energy CorporationCentennial Resource Development, Inc.
PDC Energy, Inc.Jagged Peak Energy Inc.

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Longnecker also reviewed survey data as a reference point to compare the compensation of our executives to those of a broad range of companies. The published surveys utilized by Longnecker included the following:

·EXECUTIVE COMPENSATIONEconomic Research Institute,Executive Compensation Assessor;
·Mercer, Inc.,2016 Mercer Total Compensation Survey for the Energy Sector;
·Towers Watson,2016 CSR General Industry Top Management Compensation Survey Report; and
·Longnecker & Associates,Energy Industry Long-Term Incentive Compensation Survey.

 

ExecutiveElements of Compensation for Fiscal Year 2015

 

The compensation earned by our executive officersNEOs for the fiscal year ending December 31, 20152017 consisted of base salary, andshort-term cash incentive compensation, long-term equity incentive compensation consisting of awards of restricted shares and stock grants.options, and miscellaneous employee benefits.

 

We pay each of our NEOs a base salary, which is reviewed annually and not considered to be “at risk,” as it does not vary with the performance of the Company. This base salary is designed to compensate the NEOs for the performance of their duties and responsibilities. Our NEOs are also eligible for annual performance cash bonuses, including certain NEOs being eligible for cash bonuses pursuant to their employment agreements, as described further below under Employment Agreements.

Historically, we have provided our NEOs with both short-term and long-term incentive compensation through our 2012 Equity Incentive Plan—or 2012 EIP—and our 2016 Omnibus Incentive Plan—or 2016 Plan—both of which are described in detail below. These plans have been designed to align a meaningful portion of NEO compensation with the financial performance of the Company. Upon our 2016 Plan becoming effective, we stopped granting awards under our 2012 EIP.

Our NEOs generally participate in the same health care, disability, life insurance, and other benefit plans made available to our other employees. However, our executives receive a limited number of additional benefits and perquisites described in more detail in the All Other Compensation column of the Summary Compensation Table below. These additional benefits and perquisites generally are provided to our NEOs for their convenience and financial security.

Employment Agreements

Mr. Linville.We entered into an employment agreement with Mr. Linville dated June 26, 2017, in connection with his appointment as our President. The agreement provides, among other things, that Mr. Linville will receive a base salary of (1) $400,000 from the effective date of the agreement to the one-year anniversary of the effective date and (2) $450,000 from the one-year anniversary of the effective date of his agreement to the two-year anniversary of the effective date. Mr. Linville also received a lump sum cash signing bonus of $100,000 under the agreement. Additionally, Mr. Linville is eligible to receive a lump sum cash retention bonus equal to no less than $200,000 on the one-year anniversary of the effective date of the agreement, subject to his continued service. Mr. Linville is also eligible to receive annual bonuses and awards of equity and non-equity compensation and to participate in our annual and long-term incentive plans, in each case as determined by our Board.

On August 4, 2017, we amended our employment agreement with Mr. Linville to reflect his removal as our President and appointment as our CEO. All other terms of the employment agreement remained unchanged.

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The initial term of Mr. Linville’s agreement ended December 31, 2017, and the agreement began to renew automatically for additional one-year periods beginning on December 31, 2017. Either party may give notice of non-renewal at least 180 days before the end of the then-current term.

On June 26, 2017, Mr. Linville received a grant of 325,000 stock options under our 2016 Plan, with an exercise price of $4.84, which such grant of stock options was conditioned on stockholders’ approval, which was obtained on July 13, 2017. This grant is scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date and 33% vesting on the second anniversary of the grant date, subject to continued service. Also, on June 26, 2017, Mr. Linville received a grant of 175,000 shares of restricted stock under our 2016 Plan, with a fair value of $4.84 per share at grant date, which such grant of stock was conditioned on stockholders’ approval, which was obtained on July 13, 2017. This grant is scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to his continued service.

Under his employment agreement, upon a termination by us without cause or a termination by him for good reason, Mr. Linville will be entitled to (1) a lump sum severance payment equal to 12 months of base salary, (2) 12 months of COBRA premiums, and (3) a lump sum payment equal to $200,000 (representing an amount equal to Mr. Linville’s unpaid sign-on retention bonus). Upon a termination by us without cause or a termination by Mr. Linville for good reason within 12 months after a change in control, he will be entitled to a lump sum severance payment equal to 24 months of base salary and 24 months of COBRA premiums. Upon a termination due to disability, Mr. Linville will be entitled to a lump sum severance payment equal to six months of COBRA premiums. All severance payments under Mr. Linville’s employment agreement are subject to his execution of a release of claims against us. The severance payments are also subject to reduction in order to avoid any excise tax associated with Section 280G of the Internal Revenue Code—or the Code—but only if that reduction would result in Mr. Linville receiving a greater net after tax benefit as a result of the reduction.

All payments to Mr. Linville under his employment agreement will be subject to clawback in the event required by applicable law. Further, Mr. Linville is subject to non-competition, non-solicitation, anti-raiding, and confidentiality provisions under his employment agreement.

Mr. Daches.We entered into an employment agreement with Mr. Daches dated January 23, 2017, in connection with his appointment as our Executive Vice President, Chief Financial Officer, and Treasurer. We amended this agreement on May 5, 2017 to eliminate Mr. Daches’ eligibility to receive certain “cash incentive bonuses” that had been tied to BOE and EBITDAX production thresholds, and we replaced those bonuses with an immediate bonus paid out in a mix of cash and stock.

The agreement provides, among other things, that Mr. Daches will receive a base salary of (1) $300,000 from the effective date of the agreement to the one-year anniversary of the effective date; (2) $350,000 from the one-year anniversary of the effective date of the agreement to the two-year anniversary if the effective date; and (3) $375,000 after the two-year anniversary. Under his agreement, Mr. Daches’ base salary will be reviewed annually by our Board to determine whether it should be increased. In 2017, Mr. Daches received a $50,000 cash bonus for our Company’s timely filing of its 2016 Annual Report on Form 10-K, in accordance with his employment agreement. Mr. Daches is also eligible to receive bonuses and awards of equity and non-equity compensation and to participate in the annual and long-term compensation plans of the Company, in each case as determined by our Board. The target annual bonus for Mr. Daches set forth in his agreement is 250,000 shares of restricted stock.

The initial term of Mr. Daches’ agreement ended on December 31, 2017, and the agreement began to renew automatically for additional one-year periods beginning on December 31, 2017. Either party may give notice of non-renewal at least 180 days before the end of the then-current term.

On December 15, 2016, Mr. Daches received a grant of 750,000 stock options under our 2016 Plan, with an exercise price of $2.98. 34% of the options vested on the grant date, 33% vested on December 15, 2017, and 33% will vest on the second anniversary of the grant date, subject to continued service. On May 5, 2017, Mr. Daches received a grant of 235,000 shares of restricted stock with a fair value of $4.26 per share at grant date. 100% of the restricted stock award vested on the grant date. On October 5, 2017, Mr. Daches received a grant of 400,000 shares of restricted stock with a fair value of $5.00 per share at grant date. This grant is scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to continued service

Under his employment agreement, upon a termination by us without cause or a termination by him for good reason, Mr. Daches will be entitled to a lump sum severance payment equal to 12 months of base salary and 12 months of COBRA premiums. Upon a termination by us without cause or a termination by Mr. Daches for good reason within 12 months after a change in control, he will be entitled to a lump sum severance payment equal to 24 months of base salary and 24 months of COBRA premiums. Upon a termination due to disability, Mr. Daches will be entitled to a lump sum severance payment equal to six months of COBRA premiums. All severance payments under Mr. Daches’ employment agreement are subject to his execution of a release of claims against us. The severance payments are also subject to reduction in order to avoid any excise tax associated with Code Section 280G, but only if that reduction would result in Mr. Daches receiving a greater net after tax benefit as a result of the reduction.

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All payments to Mr. Daches under his employment agreement will be subject to clawback in the event required by applicable law. Further, Mr. Daches is subject to non-competition, non-solicitation, anti-raiding, and confidentiality provisions under his employment agreement.

Ms. Fuchs.On July 5, 2016, we entered into an employment agreement with Ms. Fuchs under which she served as our General Counsel. This agreement became effective June 24, 2016 upon the closing of our merger with Brushy. We amended this agreement on May 5, 2017 to eliminate Ms. Fuchs’ eligibility to receive certain “cash incentive bonuses” that had been tied to BOE and EBITDAX production thresholds, and we replaced those bonuses with an immediate bonus paid out in a mix of cash and stock.

The initial term of Ms. Fuchs’ agreement ended on December 31, 2017, and the agreement began to renew automatically for additional one-year periods beginning on December 31, 2017.

Ms. Fuchs’ initial base salary under her agreement was $250,000. Ms. Fuchs was entitled to, and received, a bonus under the agreement equal to $112,500, which was paid in cash on the first regular payroll date after June 24, 2016 (the closing date of the merger with Brushy). Ms. Fuchs was also eligible to receive awards of equity and non-equity compensation and to participate in our annual and long-term incentive plans, in each case as determined by our Board.

On June 24, 2016, Ms. Fuchs received a grant of 375,000 stock options under our 2016 Plan, with an exercise price of $1.34. This grant was scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to continued service. On December 15, 2016, Ms. Fuchs received an additional grant of 375,000 stock options under our 2016 Plan, with an exercise price of $2.98. This grant was scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to continued service.

On May 5, 2017, Ms. Fuchs received a grant of 150,000 shares of restricted stock with a fair value of $4.26 per share at grant date. 100% of the restricted stock award vested on the grant date. On October 5, 2017, Ms. Fuchs received a grant of 300,000 shares of restricted stock with a fair value of $5.00 per share at grant date. This grant was scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to continued service.

Under her employment agreement, Ms. Fuchs’ was entitled to a lump sum severance payment equal to six months of base salary and six months of COBRA premiums upon a termination by us without cause or a termination by her for good reason. Upon a termination by us without cause or a termination by Ms. Fuchs for good reason within 12 months after a change in control, she was entitled to a lump sum severance payment equal to 24 months of base salary and 24 months of COBRA premiums. Upon a termination due to disability, Ms. Fuchs was entitled to a lump sum severance payment equal to six months of COBRA premiums. All severance payments under Ms. Fuchs’ employment agreement were subject to her execution of a release of claims against us. The severance payments are also subject to reduction in order to avoid any excise tax associated with Code Section 280G, but only if that reduction would result in Ms. Fuchs receiving a greater net after tax benefit as a result of the reduction.

All payments to Ms. Fuchs under her employment agreement are subject to clawback in the event required by applicable law. Further, Ms. Fuchs is subject to non-competition, non-solicitation, anti-raiding, and confidentiality provisions under her employment agreement.

On February 16, 2018, Ariella Fuchs ceased serving as the Executive Vice President, General Counsel, and Secretary of the Company. Upon Ms. Fuchs’ separation, all unvested equity awards held by Ms. Fuchs vested on an accelerated basis.

Mr. Short.In connection with his appointment as our Chief Operating Officer, we entered into an employment agreement with Mr. Short dated January 27, 2017. The agreement provides, among other things, that Mr. Short will receive a base salary of $300,000 per year, to be reviewed annually by our Board to determine whether the salary should be increased. The agreement also provides for additional bonuses based on our achievement of certain performance measures. Mr. Short is also eligible to receive bonuses and awards of equity and non-equity compensation and to participate in annual and long-term compensation plans of the Company, in each case as determined by our Board.

The initial term of Mr. Short’s agreement ended on December 31, 2017, and the agreement began to renew automatically for additional one-year periods beginning on December 31, 2017. Either party may give notice of non-renewal at least 180 days before the end of the then-current term.

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On January 27, 2017, Mr. Short received a grant of 250,000 stock options under our 2016 Plan, with an exercise price of $4.35. This grant was scheduled to vest over two years, with 34% of the options vesting on the grant date, 33% vesting on January 27, 2018, and 33% to vest on the second anniversary of the grant date, subject to his continued service. Also on January 27, 2017, Mr. Short received a grant of 75,000 shares of restricted stock under our 2016 Plan. This grant was scheduled to vest over two years, with 34% of the shares vesting on the grant date, 33% vesting on January 27, 2018, and 33% to vest on the second anniversary of the grant date, subject to continued service. On May 2, 2017, Mr. Short received a grant of 500,000 stock options under our 2016 Plan, with an exercise price of $4.48; 250,000 of these options vested upon the grant date, and the remaining 250,000 options vest based on the achievement of specified performance goals (generally, 50,000 options will vest per completion of one well under our Company’s authorization for expenditures budget), 50,000 of which have vested as of March 2018. On October 5, 2017, Mr. Short received a grant of 400,000 shares of restricted stock under our 2016 Plan, with an exercise price of $5.00. This grant was scheduled to vest over two years, with 34% of the options vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to continued service.

Under his employment agreement, upon a termination by us without cause or a termination by him for good reason, Mr. Short will be entitled to a lump sum severance payment equal to 12 months of base salary and 12 months of COBRA premiums. Upon a termination by us without cause or a termination by Mr. Short for good reason within 12 months after a change in control, he will be entitled to a lump sum severance payment equal to 24 months of base salary and 24 months of COBRA premiums. Upon a termination due to disability, Mr. Short will be entitled to a lump sum severance payment equal to six months of COBRA premiums. All severance payments under Mr. Short’s employment agreement are subject to his execution of a release of claims against us. The severance payments are also subject to reduction in order to avoid any excise tax associated with Code Section 280G, but only if that reduction would result in Mr. Short receiving a greater net after tax benefit as a result of the reduction.

All payments to Mr. Short under his employment agreement will be subject to clawback in the event required by applicable law. Further, Mr. Short is subject to non-competition, non-solicitation, anti-raiding, and confidentiality provisions under his employment agreement.

On March 6, 2018, Mr. Short ceased serving as our Chief Operating Officer and, as a result of such cessation, all of Mr. Short’s unvested equity awards were relinquished.

Mr. Ormand.On July 5, 2016, we entered into an employment agreement with Mr. Ormand, under which he serves as our Executive Chairman. The initial term of the agreement ended on December 31, 2017, and the agreement began to renew automatically for additional one-year periods beginning on December 31, 2017. Either party may give notice of non-renewal at least 180 days before the end of the then-current term.

Mr. Ormand’s base salary under his agreement (which will be reviewed by our Board for adjustments) was $300,000 for the first year of the agreement, $350,000 for the second year of the agreement, and $400,000 for the third year of the agreement. Mr. Ormand will be eligible to receive a cash bonus equal to a percentage of his base salary (ranging from 0% to 400%) depending on the level of achievement of certain BOE per day, EBITDAX, and cash on hand performance measures. Mr. Ormand will also be eligible to receive awards of equity and non-equity compensation and to participate in our annual and long-term incentive plans, in each case as determined by our Board.

On July 7, 2016, Mr. Ormand received a grant of restricted stock under our 2016 Plan covering 1.25 million shares of our common stock. The restricted stock vests over two years, with 34% vesting on the date of the grant, 33% vesting on the first anniversary of the date of the grant, and 33% vesting on the second anniversary of the date of the grant, subject to continued service. On December 15, 2016, Mr. Ormand received an additional grant of 250,000 stock options under our 2016 Plan, with an exercise price of $2.98. This grant is scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to continued service.

On October 5, 2017, Mr. Ormand received a grant of 500,000 shares of restricted stock with a fair value of $5.00 per share at grant date. This grant is scheduled to vest over 2 years, with 34% vesting on the grant date, 33% vesting on the first anniversary of the grant date, and 33% vesting on the second anniversary of the grant date, subject to continued service.

Under his employment agreement, Mr. Ormand will be entitled to a lump sum severance payment equal to 12 months of base salary and 12 months of COBRA premiums upon a termination by us without cause or a termination by him for good reason. Upon a termination by us without cause or a termination by Mr. Ormand for good reason within 12 months after a change in control, he will be entitled to a lump sum severance payment equal to 24 months of base salary and 24 months of COBRA premiums. Upon a termination due to disability, Mr. Ormand will be entitled to a lump sum severance payment equal to six months of COBRA premiums. All severance payments under Mr. Ormand’s employment agreement are subject to his execution of a release of claims against us. The severance payments are also subject to reduction in order to avoid any excise tax associated with Code Section 280G, but only if that reduction would result in Mr. Ormand receiving a greater net after tax benefit as a result of the reduction.

All payments to Mr. Ormand under his employment agreement will be subject to clawback in the event required by applicable law. Further, Mr. Ormand is subject to non-competition, non-solicitation, anti-raiding, and confidentiality provisions under his employment agreement.

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Mr. Mirman. On July 5, 2016, we entered into a new employment agreement with Mr. Mirman, under which he served as our CEO. This agreement became effective June 24, 2016 upon the closing of our merger with Brushy. The initial term of Mr. Mirman’s agreement was scheduled to end on December 31, 2017. We amended this agreement on May 5, 2017 to eliminate Mr. Mirman’s eligibility to receive certain “cash incentive bonuses” that had been tied to BOE and EBITDAX production thresholds, and we replaced those bonuses with an immediate bonus paid out in a mix of cash and stock.

Mr. Mirman’s base salary under his agreement was $350,000 for the first year of the agreement, $375,000 for the second year, and $425,000 for the third year. Mr. Mirman was entitled to a bonus under the agreement equal to $175,000, payable in cash on the first regular payroll date after June 24, 2016 (the closing date of the merger with Brushy). Mr. Mirman was also eligible to receive awards of equity and non-equity compensation and to participate in our annual and long-term incentive plans, in each case as determined by our Board.

Mr. Mirman was granted stock options covering 1,250,000 shares on June 24, 2016 and 500,000 shares on December 15, 2016. To satisfy the requirements of Code Section 162(m), our 2016 Plan included an annual limit on grants of stock options and SARs to any individual participant of 10,000,000 shares, which was automatically adjusted to 1,000,000 shares as a result of our 1-for-10 reverse stock split effective June 23, 2016. The 2016 option grants to Mr. Mirman inadvertently exceeded this award limit. As a result, our compensation committee approved a rescission in June 2017 of 250,000 of the options granted in June 2016 and the entire December 2016 option grant. Our compensation committee believed these awards otherwise represented appropriate compensation opportunities for Mr. Mirman and in June 2017, our compensation committee approved options and restricted stock awards to replace the value of the rescinded option awards. On May 5, 2017, Mr. Mirman received a grant of 280,000 shares of restricted stock with a fair value of $4.26 per share at grant date. 100% of the restricted stock award vested on the grant date.

Under his employment agreement, Mr. Mirman was entitled to a lump sum severance payment equal to 12 months of base salary and 12 months of COBRA premiums upon a termination by us without cause or a termination by him for good reason. Upon a termination by us without cause or a termination by Mr. Mirman for good reason within 12 months after a change in control, he was entitled to a lump sum severance payment equal to 24 months of base salary and 24 months of COBRA premiums. Upon a termination due to disability, Mr. Mirman was entitled to a lump sum severance payment equal to six months of COBRA premiums. All severance payments under Mr. Mirman’s employment agreement were subject to his execution of a release of claims against us. The severance payments were also subject to reduction in order to avoid any excise tax associated with Code Section 280G, but only if that reduction would result in Mr. Mirman receiving a greater net after tax benefit as a result of the reduction. All payments to Mr. Mirman under his employment agreement were subject to clawback in the event required by applicable law. Further, Mr. Mirman was subject to non-competition, non-solicitation, anti-raiding, and confidentiality provisions under his employment agreement.

On August 1, 2017, the SEC filed a civil complaint against multiple parties, including our then CEO, Mr. Mirman. The allegations in the complaint are unrelated to the business of the Company, and predate Mr. Mirman’s tenure with the Company. On August 3, 2017, Abraham Mirman notified us of his resignation as our CEO, and as a member of our Board, effective as of August 4, 2017. Mr. Mirman also resigned from all positions held with our subsidiaries. Mr. Mirman’s decision to resign was not the result of any disagreement with us, our Board, or management, or any matter relating to our operations, policies, or practices.

In connection with Mr. Mirman’s resignation, we entered into a Separation and Consulting Agreement with him on August 3, 2017—the Mirman Agreement—setting forth the terms of Mr. Mirman’s separation from the Company and his prospective consulting services.

Under the Mirman Agreement, in satisfaction of all of our obligations under his employment agreement, Mr. Mirman received the following severance payments: (1) a lump-sum cash payment of $1,000,000; (2) premium payments for continuing COBRA coverage for 18 months; and (3) reimbursement of reasonable attorneys’ fees incurred in connection with his separation. Further, all unvested equity awards held by Mr. Mirman vested on August 12, 2017 as a result of his separation.

In addition, we engaged Mr. Mirman as an independent consultant to provide services of a consulting or advisory nature as we may reasonably request with respect to our business. Mr. Mirman’s consultancy commenced August 5, 2017 and is scheduled to terminate on August 5, 2018, unless terminated earlier or extended by mutual agreement in accordance with the terms of the Mirman Agreement. In consideration for his consulting services, we will pay Mr. Mirman a monthly consulting fee of $41,660.67.

The Mirman Agreement also contains restrictive covenants covering confidentiality, non-competition, non-solicitation, and non-disparagement, and a release of claims against us.

Mr. Nanke.Effective as of July 5, 2016, we entered into an employment agreement with Mr. Nanke, under which he served as our Executive Vice President and Chief Financial Officer. The initial term of Mr. Nanke’s agreement was scheduled to end on December 31, 2017. The agreement provided for a $125,000 cash bonus due upon signing and a $275,000 salary per year, to be reviewed annually by our Board. The agreement also provided for additional bonuses due based on our achievement of certain performance measures.

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On June 24, 2016, Mr. Nanke received a grant of 625,000 stock options at an exercise price of $1.34. This grant was scheduled to vest over two years, with 34% vesting on the grant date, 33% vesting on June 24, 2017, and 33% to vest on June 24, 2018.

Under his employment agreement, Mr. Nanke was entitled to a lump sum severance payment equal to 12 months of base salary and 12 months of COBRA premiums upon a termination by us without cause or a termination by him for good reason. Upon a termination by us without cause or a termination by Mr. Nanke for good reason within 12 months after a change in control, he was entitled to a lump sum severance payment equal to 24 months of base salary and 24 months of COBRA premiums. Upon a termination due to disability, Mr. Nanke was entitled to a lump sum severance payment equal to six months of COBRA premiums. All severance payments under Mr. Nanke’s employment agreement were subject to his execution of a release of claims against us. The severance payments were also subject to reduction in order to avoid any excise tax associated with Code Section 280G, but only if that reduction would result in Mr. Nanke receiving a greater net after tax benefit as a result of the reduction.

All payments to Mr. Nanke under his employment agreement were subject to clawback in the event required by applicable law. Further, Mr. Nanke was subject to non-competition, non-solicitation, anti-raiding, and confidentiality provisions under his employment agreement.

On February 13, 2017, we entered into a separation agreement with Mr. Nanke—or the Nanke Agreement—covering his termination from our Company. Mr. Nanke acknowledged that his termination was not for “good reason” (as defined in his employment agreement), but that the termination did constitute an “involuntary termination” (as defined in the employment agreement). Under the Nanke Agreement, Mr. Nanke released all claims against us related to his employment. We agreed to provide Mr. Nanke with (1) a lump sum severance payment equal to 24 months of his base salary as in effect immediately prior to his termination; (2) a lump sum payment equal to 24 months of COBRA premiums; and (3) a lump sum bonus payment of $175,000. All severance payments were subject to Mr. Nanke’s execution of release of claims against us. The Nanke Agreement also contains restrictive covenants covering confidentiality, non-competition, non-solicitation, and non-disparagement.

2012 Equity Incentive Plan (formerly the Recovery Energy, Inc. 2012 Equity Incentive Plan)

Our Board and stockholders approved our 2012 EIP in August 2012. Our 2012 EIP provided for grants of equity incentives, including stock options, stock appreciation rights—or SARs—restricted shares, RSUs, and unrestricted stock awards. Our 2012 EIP is administered by our compensation committee, subject to the ultimate authority of our Board, which has full power and authority to take all actions and to make all determinations required or provided for under our 2012 EIP. Under our 2012 EIP, 1,000,000 shares of our common stock were available for issuance. As a result of the adoption of our 2016 Plan, awards are no longer made under our 2012 EIP, as discussed below.

2016 Omnibus Incentive Plan

Background.Our 2016 Plan was approved by our Board effective April 20, 2016 and approved by our stockholders at the 2016 annual meeting on May 23, 2016. Our 2016 Plan replaced our 2012 EIP. The purposes of our 2016 Plan are to create incentives that are designed to motivate eligible directors, officers, employees, and consultants to put forth maximum effort toward our success and growth, and to enable us to attract and retain experienced individuals who by their position, ability, and diligence are able to make important contributions to our success.

Eligibility.Awards may be granted under our 2016 Plan to our officers, employees, directors, consultants, and advisors and the officers, employees, directors, consultants, and advisors of our affiliates. Tax-qualified incentive stock options may be granted only to our employees.

Administration.Our 2016 Plan may be administered by our Board or our compensation committee. Our compensation committee generally selects the individuals to whom awards may be granted, the time or times at which awards are granted, and the terms and conditions of awards.

Number of Authorized Shares.A maximum of 13,000,000 shares of our common stock are available for grant under our 2016 Plan. In addition, as of May 23, 2016, any awards then outstanding under our 2012 EIP remain subject to and will be paid under the 2012 EIP and any shares then subject to outstanding awards under the 2012 EIP that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2016 Plan. The shares issuable under our 2016 Plan will consist of authorized and unissued shares, treasury shares or shares purchased on the open market or otherwise.

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If any award is canceled, terminates, expires, or lapses for any reason prior to the issuance of shares or if shares are issued under our 2016 Plan and thereafter are forfeited to us, the shares subject to those awards and the forfeited shares will not count against the aggregate number of shares available for grant under the plan. In addition, the following items will not count against the aggregate number of shares available for grant under our 2016 Plan: (1) the payment in cash of dividends or dividend equivalents under any outstanding award; (2) any award that is settled in cash rather than by issuance of shares; (3) shares surrendered or tendered in payment of the option price or purchase price of an award or any taxes required to be withheld in respect of an award; or (4) awards granted in assumption of or in substitution for awards previously granted by an acquired company.

Limits on Awards to Nonemployee Directors.The maximum number of shares subject to awards under our 2016 Plan granted during any calendar year to any nonemployee member of our Board, taken together with any cash fees paid to the director during the year, may not exceed $500,000 in total value (calculating the value of any such awards based on the grant date fair value of such awards for financial reporting purposes).

Types of Awards.Our 2016 Plan permits the granting of any or all of the following types of awards: stock options; SARs; restricted shares; RSUs; other types of equity or equity-based awards; and performance awards.

No Repricing.Without stockholder approval, our compensation committee is not authorized under our 2016 Plan to (1) lower the exercise or grant price of a stock option or SAR after it is granted, except in connection with certain adjustments to our corporate or capital structure permitted by our 2016 Plan, such as stock splits, (2) take any other action that is treated as a repricing under generally accepted accounting principles or (3) cancel a stock option or SAR at a time when its exercise or grant price exceeds the fair market value of the underlying stock, in exchange for cash, another stock option or SAR, restricted stock, RSU, or other equity award, unless the cancellation and exchange occur in connection with a change in capitalization or other similar change.

Clawback.All awards granted under our 2016 Plan will be subject to all applicable laws regarding the recovery of erroneously awarded compensation, any implementing rules and regulations under such laws, any policies we adopt to implement such requirements, and any other compensation recovery policies we may adopt from time to time.

Transferability.Awards granted under our 2016 Plan are not transferable other than by will or the laws of descent and distribution, except that in certain instances transfers may be made to or for the benefit of designated family members of the participant for no value.

Effect of Change in Control.Under our 2016 Plan, in the event of a change in control, outstanding awards will be treated in accordance with the applicable transaction agreement. If no treatment is provided for in the transaction agreement, each award holder will be entitled to receive the same consideration that stockholders receive in the change in control for each share of stock subject to the award holder’s awards, upon the exercise, payment, or transfer of the awards, but the awards will remain subject to the same terms, conditions, and performance criteria applicable to the awards before the change in control, unless otherwise determined by our compensation committee. In connection with a change in control, outstanding stock options and SARs can be cancelled in exchange for the excess of the per share consideration paid to stockholders in the transaction, minus the applicable exercise price.

Subject to the terms and conditions of the applicable award agreement, awards granted to nonemployee directors will fully vest upon a change in control.

Subject to the terms and conditions of the applicable award agreement, for awards granted to all other service providers, vesting of awards will depend on whether the awards are assumed, converted, or replaced by the resulting entity.

For awards that are not assumed, converted, or replaced, the awards will vest fully upon the change in control. For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of our fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the change in control.

For awards that are assumed, converted, or replaced by the resulting entity, no automatic vesting will occur upon the change in control. Instead, the awards, as adjusted in connection with the transaction, will continue to vest in accordance with their terms and conditions. In addition, the awards will vest fully if the award recipient has a separation from service within two years after the change in control other than for cause or by the award recipient for good reason. For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the separation from service.

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Term, Termination and Amendment of 2016 Plan.Unless earlier terminated by our Board, our 2016 Plan will terminate, and no further awards may be granted, 10 years after the date on which it was initially approved by our stockholders. Our Board may amend, suspend, or terminate our 2016 Plan at any time, except that, if required by applicable law, regulation, or stock exchange rule, stockholder approval will be required for any amendment. The amendment, suspension, or termination of our 2016 Plan or the amendment of an outstanding award generally may not, without a participant’s consent, materially impair the participant’s rights under an outstanding award.

Equity Grants for 2017

During our fiscal year ended December 31, 2017, we granted 4,266,345 shares of restricted common stock and 3,260,000 options to purchase shares of common stock to our employees and directors. Also, during 2017, 1,606,937 stock options and 696,469 shares of restricted stock previously issued and unvested were forfeited or cancelled in connection with the termination of certain employees, the departure of certain directors and/or shares cancelled to cover tax withholding on vested restricted shares. Options issued to employees and directors generally vest in equal installments over specified time periods during the service period or upon achievement of certain performance-based operating thresholds.

Stockholder Feedback and Consideration of 2017 Say-on-Pay Vote

Our compensation committee and Board considered the results of the “say-on-pay” vote at our annual meeting of stockholders held on July 13, 2017, where the compensation of our NEOs was approved by over 99% of the stockholders that voted on the matter (not including broker non-votes). Our compensation committee believes that this stockholder vote indicates strong support for our executive compensation program and considered the strong stockholder support in determining our 2017 compensation practices. Our Board encourages stockholders to contact the Board and share any concerns about our executive compensation program, but given the strong level of stockholder support for our executive compensation program in 2017, the compensation committee did not engage in any formal outreach program to stockholders on executive compensation matters in 2017. We will hold an advisory vote on executive compensation every year until the next required advisory vote with respect to the frequency of advisory votes on executive compensation, which will occur at our annual meeting of stockholders in 2018. We are and will remain committed to being responsive to stockholder feedback, and the results of our annual “say on pay” votes inform the compensation committee’s discussions about the executive pay program.

Deductibility

Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to any one NEO in any calendar year. Under the tax rules in effect before 2018, compensation that qualified as “performance-based” under Section 162(m) was deductible without regard to this $1 million limit. However, the Tax Cuts and Jobs Act, which was signed into law December 22, 2017, eliminated this performance-based compensation exception effective January 1, 2018, subject to a special rule that “grandfathers” certain awards and arrangements that were in effect on or before November 2, 2017. As a result, compensation that our compensation committee structured in 2017 and prior years with the intent of qualifying as performance-based compensation under Section 162(m) that is paid on or after January 1, 2018 may not be fully deductible, depending on the application of the special grandfather rules. Moreover, from and after January 1, 2018, compensation awarded in excess of $1,000,000 to our NEOs generally will not be deductible. While the Tax Cuts and Jobs Act will limit the deductibility of compensation paid to our NEOs, our compensation committee will—consistent with its past practice—continue to retain flexibility to design compensation programs that are in the best long-term interests of the Company and our stockholders, with deductibility of compensation being one of a variety of considerations taken into account.

Risks Relating to our Compensation Policies and Practices

We have undertaken an analysis of our compensation policies and practices to assess whether risks arising from such policies and practices are reasonably likely to have a material adverse effect on our Company. The analysis was performed by our management with oversight by our compensation committee. We analyzed risks relating to the different components of our compensation structure, to the time horizons of our compensation components, to the goals and objectives used to determine performance-based compensation, and to any contractual obligations by us to accelerate the payment of compensation. Based on that analysis, we have concluded that the risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

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Compensation Committee Interlocks and Insider Participation

During 2017, none of the members of our compensation committee was an officer or employee of the Company or any of our subsidiaries. In addition, during the last fiscal year, none of our executive officers served as a member of the board of directors or compensation committee of any entity in which a member of our Board or compensation committee is an executive.

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Compensation Committee Report

Our compensation committee has reviewed and discussed the Compensation Discussion and Analysis above with management. Based on their review and discussions with management, the members of our compensation committee recommended to our Board that the Compensation Discussion and Analysis be included in this Annual Report.

Compensation Committee:

Nuno Brandolini

R. Glenn Dawson

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Summary Compensation Table

 

The following table below sets forthprovides information regarding compensation paid to our named executive officersNEOs for the fiscal years endingended December 31, 2017, 2016, and 2015 and 2014.(in each case only for years in which the individual was one of our NEOs).

 

Name and
Principal Position		 Year  Salary  Bonus  Stock Awards
(1)		  Option Awards
(2)		  All Other Compensation
(3)		  Total
Abraham “Avi” Mirman  2015  $325,466  $100,000(4) $90,000  $1,397,721  $31,504 $1,944,691
(president from September 2013 to April 2014; chief executive officer from April 2014 to present)  2014  $260,356  $1,000,000(5) $-  $-  $8,800 $1,269,156
                           
Kevin K. Nanke (executive vice president and chief financial officer from  2015  $200,000  $200,000(4) $99,000  $608,291  $24,634 $1,131,925
March 2015 to present)                          
                           
Ariella Fuchs (general counsel and secretary  2015  $182,083  $-  $48,000  $234,887  $10,538 $475,508
from February 2015 to present)                          
                           
Eric Ulwelling  2015  $158,542  $-  $-  $300,736  $26,242 $485,520
(principal accounting officer and controller from March 2015 to October 2015)(6)  2014  $152,667  $-  $21,125  $-  $4,896 $178,688

Name and Principal
Position		 Year  

Salary

($)(1)

  

Bonus

($)(2)

  

Stock
Awards

($)(3)

  

Option
Awards

($)(4)

  

All Other
Compensation

($)(5)

  

Total

($)

 
James Linville
(Chief Executive Officer)		  2017   207,576   100,000   847,000   861,250   12,438   2,028,340 
Abraham “Avi” Mirman
(Former CEO)(6)		  2017   323,782   1,932,200   2,804,313   ─   1,269,608   6,329,903 
   2016   350,000   175,000   ─   4,295,894   22,484   4,843,378 
   2015   325,466   100,000   90,000   1,397,721   31,504   1,944,691 
Joseph C. Daches
(Chief Financial Officer)		  2017   383,333   1,248,900   3,001,100   ─   25,788   4,659,121 
Kevin Nanke
(Former CFO)(7)		  2017   17,804   ─   ─   ─   776,179   793,983 
   2016   257,500   225,000   ─   815,216   32,373   1,330,089 
   2015   200,000   200,000   99,000   608,291   24,634   1,131,925 
Brennan Short
(Former COO) (8)		  2017   345,128   637,500   2,326,250   1,880,000   23,638   5,212,516 
Ronald D. Ormand
(Executive Chairman) (9)		  2017   379,167   625,000   2,500,000   ─   25,788   3,529,955 
   2016   150,000   ─   1,875,000   533,092   69,502   2,627,594 
Ariella Fuchs
(Former EVP, General Counsel, & Secretary) (10)		  2017   300,000   1,148,500   1,500,000   ─   17,687   2,966,187 
   2016   240,000   112,500   ─   1,288,768   8,417   1,649,685 
   2015   182,083   ─   48,000   234,887   10,538   475,508 

  

(1)Represents restrictedThe base salary amounts in this column represent actual base compensation paid or earned through the end of the applicable year.
(2)The amounts in this column include annual bonuses paid for the applicable year. See Employment Agreements in the Compensation Discussion and Analysis above for more information on individual bonuses paid for 2017.
(3)The amounts in this column represent the aggregate grant date fair value of stock awards under our 2012 Equity Incentive Plan (“EIP”).granted during the applicable year. The grant date fair values for restricted stock awards were computed in accordance with FASB ASC Topic 718. The amounts reported in this column reflect the accounting cost for the stock awards and do not necessarily correspond to the actual economic value that may be received for the stock awards.
(2)Awards The amounts in this column for 2017 are reported atdetailed below under Grants of Plan-Based Awards.
(4)

The amounts in this column represent the grant date fair value if awardedof stock options granted in the period, and at incremental fair value, if modified in the period, in each caseapplicable year computed in accordance with FASB ASC Topic 718.  The grant date fair values for options granted during the year ended December 31, 2015 to Mr. Nanke, Ms. Fuchs and Mr. Ulwelling were $0.8111, $0.7830, and $0.7830, respectively.  The incremental fair value for options modified in the year ended December 31, 2015 for Mr. Mirman was $0.6989. The amounts reported in this column reflect the accounting cost for the options and do not correspond to the actual economic value that may be received for the options. The assumptions used to calculate the fair value of options are set forth in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. (3) Reflects reimbursementReport. The amounts in this column for 2017 are detailed below under Grants of health insurance premiums and employer contributions to our 401(k) plan.Plan-Based Awards.

(4)Reflects a sign-on bonus.
(5)

ReflectsThe amounts in this column for 2017 consist of the following:

Name Reimbursement of
Health Insurance
Premiums
($)		  Company
Contribution to
401(k) Plan
($)		  Severance Benefits
($)		  Total
($)		 
James Linville  12,438   -   -   12,438 
Avi Mirman  25,788   -   1,243,820   1,269,608 
Joseph Daches  25,788   -   -   25,788 
Kevin Nanke  -   -   

776,179

   

776,179

 
Brennan Short  23,638   -   -   23,638 
Ronald Ormand  25,788   -   -   25,788 
Ariella Fuchs  17,687   -   -   17,687 

(6)Effective August 4, 2017, Mr. Mirman resigned as our CEO, and as a bonus paidmember of our Board. See Employment Agreements in the Compensation Discussion and Analysis above for more information regarding Mr. Mirman’s resignation.
(7)

Effective February 13, 2017, we entered into a separation agreement with Mr. Nanke in connection with his termination from our Company. See Employment Agreements in the Compensation Discussion and Analysis above for more information regarding Mr. Nanke’s separation.

(8)On March 6, 2018, Brennan Short ceased serving as the Chief Operating Officer of the Company.

(9)Effective July 11, 2016, Mr. Ormand began to serve as Executive Chairman of our Board, which is an officer position. Prior to July 11, 2016, Mr. Ormand was a nonemployee director of our Board and his compensation from January 1 to July 10, 2016 is reflected under All Other Compensation for 2016.

(10)On February 16, 2018, Ariella Fuchs ceased serving as the Executive Vice President, General Counsel, and Secretary of the Company.

69

Grants of Plan-Based Awards

The following table provides information regarding awards granted to our NEOs under our 2016 Plan during 2017.

     Estimated Future Payouts Under
Equity Incentive Plan Awards
(1)		                 
Name Grant Date  Threshold
(#)		   Target
(#)		   Maximum
(#)		   All Other 
Stock 
Awards:
Number of
Shares of
Stock or
Units
(#)(2)		   All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(3)		   Exercise 
or Base
Price of
Option
Awards
($/Sh)		   Grant Date 
Fair Value
of Stock 
and Option 
Awards
($)		 
James Linville 6/26/2017  ─   ─   ─   ─   325,000   4.84   861,250 
  6/26/2017  ─   ─   ─   175,000   ─   ─   847,000 
Avi Mirman 5/5/2017  ─   ─   ─   280,000   ─   ─   1,192,800 
  6/16/2017  ─   ─   ─   389,657   750,000   5.31   6,051,579 
Joseph Daches 5/5/2017  ─   ─   ─   235,000   ─   ─   1,001,100 
  10/5/2017  ─   ─   ─   400,000   ─   ─   2,000,000 
Kevin Nanke ─  ─   ─   ─   ─   ─   ─   ─ 
Brennan Short 1/27/2017  ─   ─   ─   ─   250,000   4.35   1,087,500 
  1/27/2017  ─   ─   ─   75,000   ─   4.35   326,250 
  5/2/2017  ─   ─   ─   ─   250,000   4.48   1,120,000 
  5/2/2017  ─   ─   250,000   ─   ─   4.48   1,120,000 
  10/5/2017  ─   ─   ─   400,000   ─   5.00   2,000,000 
Ronald Ormand 10/5/2017  ─   ─   ─   500,000   ─   5.00   2,500,000 
Ariella Fuchs 5/5/2017  ─   ─   ─   150,000   ─   4.26   639,000 
  10/5/2017  ─   ─   ─   300,000   ─   ─   1,500,000 

(1)

For the stock options granted to Mr. MirmanShort on May 2, 2017, 250,000 vested immediately and the remainder were scheduled to vest upon the achievement of specified performance goals (50,000 options were scheduled to vest per completion of each well under our Company’s authorization for expenditures budget, until all of the options are vested or forfeited). All such unvested options have been relinquished in 2014. See Item 13—Certain Relationships and Related Transactions, and Director Independence—Abraham Mirman.connection with Mr. Short’s separation of employment with the Company in March 2018.

(6)(2)Mr. Ulwelling served asThis column shows the number of RSAs granted in 2017 to our Principal Accounting Officer and Controller until he was appointed to the position of Acting Chief Financial Officer in May 2014 and then to the position of Chief Financial Officer in October 2014. In March of 2015, Mr. Ulwelling returned to his position as Principal Accounting Officer and Controller. He subsequently resigned from all positions with us on October 15, 2015.NEOs under our 2016 Plan.

-For the RSAs granted to Mr. Linville on June 26, 2017, 34% vested and settled immediately and the remainder will vest and settle in two equal installments, subject to continued services, on the first two anniversaries of the grant date.

-For the RSAs granted to Mr. Mirman, Mr. Daches, and Ms. Fuchs on May 5, 2017, 100% vested and settled immediately.

-For the RSAs granted to Mr. Mirman on June 16, 2017, 66% vested and settled immediately and the remainder vested and settled on August 12, 2017 on an accelerated basis under the terms of the Mirman Agreement.

-For the RSAs granted to Mr. Daches, Mr. Short, Mr. Ormand, and Ms. Fuchs on October 5, 2017, 34% vested and settled immediately and the remainder will vest and settle in two equal installments, subject to acceleration provisions and continued services, on the first two anniversaries of the grant date. The unvested RSAs granted to Ms. Fuchs vested and settled in connection with her separation of employment with the Company in February 2018. 

-For the RSAs granted to Mr. Short on January 27, 2017, 34% vested and settled immediately and the remainder were scheduled to vest and settle in two equal installments, subject to acceleration provisions and continued services, on the first two anniversaries of the grant date. The unvested RSAs granted to Mr. Short were relinquished in connection with the separation of his employment with the Company in March 2018.

(3)This column shows the number of stock options granted in 2017 to our NEOs under our 2016 Plan.

-For the stock options granted to Mr. Linville on June 26, 2017, 34% vested immediately and the remainder will vest in two equal installments, subject to continued services, on the first two anniversaries of the grant date.

-All of Mr. Mirman’s stock options vested August 12, 2017 upon his separation under the terms of the Mirman Agreement.

-For the stock options granted to Mr. Short on January 27, 2017, 34% vested immediately and the remainder were scheduled to vest in two equal installments, subject to acceleration provisions and continued services, on the first two anniversaries of the grant date. The unvested stock options granted to Mr. Short were relinquished in connection with the separation of his employment with the Company in March 2018.

 

 5770 

 

 

Outstanding Equity Awards at Fiscal Year-End

The following table provides information regarding all outstanding equity awards held by our NEOs as of December 31, 2017.

 

  Option Awards  Stock Awards 
Name Number of securities underlying unexercised options exercisable  Number of securities underlying options unexercisable  Equity incentive plan awards; Number of securities underlying unexercised unearned options  Option exercise price  Option expiration date  Number of shares or units of stock that have not vested  Market value of shares of units of stock that have not vested(3)  Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested  Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested 
  (#)  (#)  (#)  ($)     (#)  ($)  (#)  ($) 
Abraham “Avi” Mirman (1)  666,667   1,333,333(2)  -  $0.90   3/10/2025   -   -   -   - 
   600,000   -   -  $2.11   9/6/2018                 
                                     
Kevin K. Nanke  -   750,000(3)  -  $0.99   3/6/2018   -   -   -   - 
                                     
Ariella Fuchs  -   300,000(4)  -  $0.96   3/16/2018   -   -   -   - 
                                     
Eric Ulwelling (5)  100,000   -   -  $2.50   2/19/2016   -   -   -   - 

  Option Awards Stock Awards 
Name Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable		  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable		  Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)		  Option
Exercise
Price
($)		  Option
Expiration
Date		 Number of
Shares of
Stock That
Have Not
Vested
(#)		  Market Value
of Shares of
Stock That
Have Not
Vested
($)(1)		 
James Linville  110,500   214,500(2)  ─   4.84  6/26/2027  115,500(3)   590,205 
Avi Mirman(4)  1,000,000   ─   ─   1.34  6/24/2026  ─   ─ 
   750,000   ─   ─   5.31  6/16/2027  ─   ─ 
Joseph Daches  502,500   247,500(5)  ─   2.98  12/15/2026  264,000(6)  1,349,040 
Kevin Nanke(7)  625,000   ─   ─   1.34  6/24/2026  ─   ─ 
Brennan Short  85,000   165,000(8)  ─   4.35  1/27/2027  313,500(10)   1,601,985 
   250,000   ─   250,000(9)  4.48  5/2/2027  ─   ─ 
Ronald Ormand  31,667   ─   ─   16.50  4/20/2025  742,500(11)   3,794,175 
   167,500   82,500(5)  ─   2.98  12/15/2026  ─   ─ 
Ariella Fuchs  251,250   123,750(12)  ─   1.34  6/24/2026  198,000(6)   1,011,780 
   251,250   123,750(5)  ─   2.98  12/15/2026  ─   ─

 

Vesting of options and stock awards reflected in this table is subject to continuous service with our Company, except that unvested awards may vest upon termination by us without cause, termination by the officer for good reason, or termination due to the officer’s disability or death (in each case as set forth in the applicable award agreement or employment agreement).

(1)During 2015, Mr. Mirman entered into an amended and restated employment agreement. Pursuant to this agreement, Mr. Mirman forfeited 2,000,000 options with an exercise

The market value of the stock awards is based on the closing price per share of $2.45. The 2,000,000 options outstanding included inour common stock on the table represent options granted under the amended and restated employment agreement.NYSE on December 31, 2017, which was $5.11.

(2)

Options vest in equal installments on each of June 26, 2018 and 2019, subject to continued service.

(3)Restricted stock vests on June 26, 2018 and 2019 in equal installments, subject to continued service.
(4)For Mr. Mirman, effective August 12, 2017, all unvested options and restricted stock accelerated under the Mirman Agreement.
(5)

Options vest on December 15, 2018, subject to acceleration provisions and continued service. The unvested options granted to Ms. Fuchs were subject to accelerated vesting in connection with her separation from the Company in February 2018. 

(6)

Restricted stock vests on October 5, 2018 and 2019 in equal installments, subject to acceleration provisions and continued service. The unvested restricted stock granted to Ms. Fuchs was subject to accelerated vesting in connection with her separation from the Company in February 2018. 

(7)For Mr. Nanke, effective February 13, 2017, all unvested options and restricted stock accelerated under the Nanke Agreement.
(8)

Options vest in equal installments on January 27, 2018 and 2019, subject to acceleration provisions and continued service. The unvested options granted to Mr. Short were relinquished in connection with his separation of employment with the Company in March 30, 20162018. 

(9)Options vest upon the achievement of specified performance goals (50,000 options will vest per completion of each well under our Company’s authorization for expenditures budget, until all options are vested or forfeited). The unvested options granted to Mr. Short were relinquished in connection with his separation of employment with the Company in March 2018.
(10)

49,500 shares of restricted stock vest in equal installments on January 27, 2018 and 2019, subject to acceleration provisions and continued service. 264,000 shares of restricted stock vest on October 5, 2018 and 2019 in equal installments, subject to acceleration provisions and continued service. The unvested shares of restricted stock granted to Mr. Short were relinquished in connection with his separation of employment with the Company in March 30, 2017,2018. 

(11)412,500 shares of restricted stock vest in equal installments on June 24, 2018, subject to acceleration provisions and continued service. 330,000 shares of restricted stock vest on October 5, 2018 and 2019 in equal installments, subject to acceleration provisions and continued service.

(3)(12)

Options vest in equal installment on each of March 6, 2016, 2017June 24, 2018, subject to acceleration provisions and 2018.

(4)Options vest in equal installments on each of March 16, 2016, 2017 and 2018.
(5)Mr. Ulwelling served as our Principal Accounting Officer and Controller until he was appointed to the position of Acting Chief Financial Officer in May 2014 and then to the position of Chief Financial Officer in October 2014. In March of 2015, Mr. Ulwelling returned to his position as Principal Accounting Officer and Controller. He subsequently resigned from all positions with us on October 15, 2015 and forfeited anycontinued service. The unvested options granted to Ms. Fuchs were subject to accelerated vesting in connection with her separation from the Company in February 2018. 

 

 5871 

 

 

Employment AgreementsOption Exercises and Other Compensation ArrangementsStock Vested

The following table provides information regarding the exercise of stock options by our NEOs and the vesting of restricted stock during 2017.

  Option Awards  Stock Awards 
Name Number of Shares
Acquired on Exercise
(#)		  Value Realized on
Exercise
($)		  Number of Shares
Acquired on Vesting
(#)		  Value Realized on
Vesting
($)		 
James Linville  -   -   59,500   287,980 
Avi Mirman  -   -   669,657   3,261,879 
Joseph Daches  -   -   371,000   1,681,100 
Kevin Nanke  -   -   -   - 
Brennan Short  -   -   161,500   764,150 
Ronald Ormand  -   -   170,000   850,000 
Ariella Fuchs  -   -   252,000   1,149,000 

 

2012 Equity Incentive Plan (“EIP”)

Our Board and stockholders approved our EIP in August 2012. The EIP provides for grants of equity incentives to attract, motivate and retain the best available personnel for positions of substantial responsibility; to provide additional incentives to our employees, directors and consultants; and to promote the success and growth of our business. Equity incentives that may be granted under our EIP include: (i) incentive stock options qualified as such under U.S. federal income tax laws; (ii) stock options that do not qualify as incentive stock options; (iii) stock appreciation rights (“SARs”); (iv) restricted stock awards; (v) restricted stock units; and (vi) unrestricted stock awards.

Our compensation committee believes long-term incentive-based equity compensation is an important component of our overall compensation program because it:

●rewards the achievement of our long-term goals;
●aligns our executives’ interests with the long-term interests of our stockholders;
●aligns compensation with sustained long-term value creation;
●encourages executive retention with vesting of awards over multiple years; and
●conserves our cash resources.

Our EIP is administered by our compensation committee, subject to the ultimate authority of our Board, which has full power and authority to take all actions and to make all determinations required or provided for under the EIP, including designation of grantees, determination of types of awards, determination of the number of shares of Common Stock subject an award and establishment of the terms and conditions of awards.

Under our EIP, originally 900,000 shares of our Common Stock were available for issuance. At the annual meeting of stockholders held on June 27, 2013, our stockholders approved an amendment to the EIP to increase the number of common shares available for grant under the EIP from 900,000 shares to 1,800,000 shares. At a special meeting of stockholders held on November 13, 2013, the stockholders approved an amendment to the EIP to increase the number of common shares available for grant under the EIP from 1,800,000 shares to 6,800,000 shares. At the annual meeting of stockholders held on December 29, 2015, our stockholders approved an amendment to the EIP to increase the number of common shares available for grant under the EIP from 6,800,000 shares to 10,000,000 shares. The number of shares issued or reserved pursuant to our EIP is subject to adjustment as a result of certain mergers, exchanges or other changes in our Common Stock. Each member of the Board of Directors and the management team has been periodically awarded stock options and/or restricted stock grants and restricted stock units, and in the future may be awarded such grants under the terms of the EIP.

 59

During the year ended December 31, 2015, the Company granted 1,145,013 shares of restricted Common Stock and 4,800,000 options to purchase shares of Common Stock, to employees and directors. Also during the year ended December 31, 2015, the Company forfeited or cancelled 807,414 shares of restricted Common Stock and 2,300,000 stock options previously issued in connection with the termination of certain employees and directors. As a result, as of December 31, 2015, the Company had 1,009,373 restricted shares of Common Stock and 6,083,333 options to purchase shares of Common Stock outstanding to employees and directors.Options issued to employees and directors vest in equal installments over specified time periods during the service period or upon achievement of certain performance based operating thresholds. During the year ended December 31, 2015, the Company also issued 75,000 shares of Common Stock to consultants for professional services which was not pursuant to an equity compensation plan.

Employment Agreements

Mr. Mirman

In connection with his appointment as the Company’s President, we entered into an employment agreement with Mr. Mirman, dated September 16, 2013. The agreement provided, among other things, that Mr. Mirman would receive an annual salary of $240,000 which was deferred until we successfully consummated a financing of any kind of not less than $2.0 million in gross proceeds. Additionally, he was granted 100,000 shares of Common Stock, which vested immediately and were fully paid and non-assessable as an inducement for joining the Company. Mr. Mirman was granted an option to purchase 600,000 shares of our Common Stock, at a strike price equal to the Company’s closing share price on the September 16, 2013, to become exercisable upon the date we achieved certain conditions specified in the agreement. The Board determined in September 2014 that those criteria had been met and consequently the options vested. Mr. Mirman was also provided an incentive bonus package and an additional stock option grant contingent on our achievement of certain additional performance conditions. We engaged a third-party to complete a valuation of this incentive bonus and not having been paid out, has been recorded as a liability and valued at each reporting period.

Effective as of March 30, 2015, we entered into an amended and restated employment agreement with Mr. Mirman, which replaced the prior agreement. The agreement has a three year term and provides for a $100,000 cash bonus due upon signing, base compensation of $350,000 per year, plus 2,000,000 options to purchase shares of our Common Stock where one-third of the options vest immediately and two-thirds vest in two annual installments on each of the next two anniversaries of the grant date, which we refer to as the Unvested Shares. The Unvested Shares were subject to the approval of the stockholders of an increase in the number of shares available for grant under the Plan, which was approved on December 29, 2015. The agreement also provides for additional bonuses due based on our achievement of certain performance thresholds, which are described in further detail in the agreement as filed with the SEC.

Mr. Nanke

In connection with the appointment of Mr. Nanke as the Company’s Executive Vice President and Chief Financial Officer, we entered into an executive employment agreement with Mr. Nanke, dated March 6, 2015. Pursuant to the terms of the agreement, Mr. Nanke will serve as our Executive Vice President and Chief Financial Officer until his employment is terminated in accordance with the terms of the agreement. The agreement provides, among other things, that Mr. Nanke will receive an annual salary of $240,000. Additionally, as of the effective date of the agreement, Mr. Nanke was granted (i) 100,000 restricted shares of our Common Stock; (ii) paid a cash signing bonus of $100,000; and (iii) an incentive stock option to purchase up to 750,000 shares of our Common Stock, which vests in equal installments on each of the next three anniversaries of the effective date of the agreement. Mr. Nanke will also receive a cash incentive bonus if we achieve certain production thresholds, which are described in further detail in the agreement as filed with the SEC, and a performance bonus of $100,000 if we achieve certain goals set forth in the agreement.

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Ms. FuchsPension Benefits

 

InWe do not maintain any plans that provide for payments or other benefits at, following, or in connection with the appointment of Ms. Fuchs as the Company’s General Counsel, we entered into an executive employment agreement with Ms. Fuchs dated March 16, 2015. Pursuant to the termsretirement, of the agreement, Ms. Fuchs will servesort that would otherwise require us to include a Pension Benefits table as the Company’s General Counsel until her employment is terminated in accordance with the terms of the agreement. The agreement provides, among other things, that Ms. Fuchs will receive an annual salary of $230,000. Additionally, as of the effective date of the agreement, Ms. Fuchs was granted (i) 50,000 restricted shares of our Common Stock and (ii) an incentive stock option to purchase up to 300,000 shares of our Common Stock, which vests in equal installments on each of the next three anniversaries of the effective date of the agreement. Ms. Fuchs will also receive a cash incentive bonus if we achieve certain production thresholds, which are described in further detail in the agreement as filed with the SEC.contemplated by SEC rules.

 

Mr. UlwellingNonqualified Deferred Compensation

 

In connection with his original positionWe do not maintain any defined contribution or other plans that provide for the deferral of Principal Accounting Officer and Controller, Mr. Ulwelling entered into an employment agreement, dated as of January 19, 2012, which provided forcompensation on a minimum base salary of $110,000 per year, a $15,000 signing bonus in 2012, an automatic increase of $15,000 upon achievement of specified performance targets and a grant of 25,000 shares of common stock to vest in equal installments over three years.

Upon his appointment to Interim Chief Financial Officer in May of 2014, Mr. Ulwelling didbasis that is not immediately enter into a new employment agreement and his original employment agreement remained in effect until February of 2015, when an executive employment agreement was entered into, dated as of February 19, 2015, appointing him as our Chief Financial Officer. That agreement remained in effect as to his role of Principal Accounting Officer and Controller through the date of his resignation on October 15, 2015.

Pursuant to the termstax-qualified, of the agreement, Mr. Ulwelling servedsort that would otherwise require us to include a Nonqualified Deferred Compensation table as our Principal Accounting Officer and Controller until his employment terminated. The agreement provided, among other things, that Mr. Ulwelling would receive an annual salary of $175,000. Additionally, as of the effective date of the agreement, Mr. Ulwelling was (i) granted an option to purchase 400,000 shares of our Common Stock, with an exercise price equal to the greater of fair market value on the effective date or $2.50 per share, of which one-fourth of the option vested immediately, and the remainder of the option was to vest in equal installments on each of the next three anniversaries of the effective date. Mr. Ulwelling had the opportunity to receive a discretionary annual bonus equal to 50% of his base salary, based on achievement of annual target performance goals establishedcontemplated by our compensation committee. In addition, the agreement provided for the payment of severance to Mr. Ulwelling in connection with termination of his employment in certain circumstances, including termination by the Company without “cause” or upon Mr. Ulwelling’s resignation for “good reason,” in each case subject to Mr. Ulwelling’s execution, non-revocation and delivery of a release agreement, described further below.

In October 2015, in connection with his resignation from all positions with the Company, Mr. Ulwelling forfeited 28,333 unvested restricted stock awards and 300,000 stock option awards.

Potential Payments Upon Termination or Change-In-Control

Each of the named executive officers’ employment agreements provides for the payment of severance to the executive in connection with termination of employment in certain circumstances, including termination by the Company without “cause” or upon the executive resignation for “good reason,” equal to (i) a lump sum payment of twelve months base salary, in the case of Mr. Mirman, and six months base salary, in the case of Mr. Nanke and Ms. Fuchs, in effect immediately prior to the executive’s last date of employment ($350,000, $125,000 and $115,000 for each of Mr. Mirman, Mr. Nanke and Ms. Fuchs, respectively) less applicable withholdings and deductions and (ii) immediate and full vesting of and lifting of restrictions on any unvested shares included in the EIP, in each case subject to the executive’s execution, non-revocation and delivery of a release agreement.

Upon a “change in control,” as defined in the agreements, each executive is entitled to a severance payment equal to a lump sum payment of twenty-four months base salary in effect immediately prior to the executive’s last date of employment ($700,000, $500,000 and $460,000 for each of Mr. Mirman, Mr. Nanke and Ms. Fuchs, respectively) less applicable withholdings and deductions; and (ii) immediate and full vesting of and lifting of restrictions on any unvested shares included in the EIP, in each case subject to the executive’s execution, non-revocation and delivery of a release agreement.

61

In each case referenced above, Mr. Nanke is also entitled to a pro rata portion of the $100,000 cash bonus referenced above, adjusted for the number of days of service of the applicable 12 month period in which the termination occurs. Additionally, each executive and his or her eligible dependents are also entitled to continue to be covered by all medical, vision and dental benefit plans maintained by the Company under which the executive was covered immediately prior to the date of his or her termination of employment at the same active employee premium cost as a similarly situated active employee; provided, however, that in the event that the executive’s employment is terminated without “cause” or as the result of a “change in control,” we must pay all such expenses on behalf of that executive and his or her eligible dependents during the entire eighteen-month period following the date of the termination of employment.

Narrative Disclosure to Summary Compensation Table

Overview

The following Compensation Discussion and Analysis describes the material elements of compensation for the named executive officers identified in the Summary Compensation Table above. As more fully described below, our compensation committee reviews and recommends to our full Board of Directors the total direct compensation programs for our named executive officers. Our chief executive officer also reviews the base salary, annual bonus and long-term compensation levels for the other named executive officers. Neither our compensation committee nor management, nor any other person on behalf of our company, retained any compensation consultant for the fiscal year ending December 31, 2015.

Compensation Philosophy and Objectives

Our compensation philosophy has been to encourage growth in our oil and natural gas reserves and production, encourage growth in cash flow, and enhance stockholder value through the creation and maintenance of compensation opportunities that attract and retain highly qualified executive officers. To achieve these goals, the compensation committee believes that the compensation of executive officers should reflect the growth and entrepreneurial environment that has characterized our industry in the past, while ensuring fairness among the executive management team by recognizing the contributions each individual executive makes to our success.

Based on these objectives, the compensation committee has recommended an executive compensation program that includes the following components:

● a base salary at a level that is competitive with the base salaries being paid by other oil and natural gas exploration and production enterprises that have characteristics similar to ours and could compete with the Company for executive officer level employees;
●annual incentive compensation to reward achievement of the our objectives, individual responsibility and productivity, high quality work, reserve growth, performance and profitability and that is competitive with that provided by other oil and natural gas exploration and production enterprises that have some characteristics similar to ours; and
●long-term incentive compensation in the form of stock-based awards that is competitive with that provided by other oil and natural gas exploration and production enterprises that have some characteristics similar to ours.

As described below, the compensation committee periodically reviews data about the compensation of executives in the oil and gas industry. Based on these reviews, we believe that the elements of our executive compensation program have been comparable to those offered by our industry competitors.

Elements of Our Compensation Program

The three principal components of our compensation program for our executive officers, base salary, annual incentive compensation and long-term incentive compensation in the form of stock-based awards, are discussed in more detail below.SEC rules.

 

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Base SalaryPotential Payments Upon Termination or Change-In-Control

Base salaries (paid in cash) for our executive officers have been established based on the scope of their responsibilities, taking into account competitive market compensation paid by our peer companies for similar positions. We have reviewed our executives’ base salaries in comparison to salaries for executives in similar positions and with similar responsibilities at companies that have certain characteristics similar to ours. Base salaries are reviewed annually, and typically are adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance, experience and other criteria.

 

The compensation committee reviewsfollowing table provides information regarding the payments and benefits to which each of our NEOs would be entitled to in the event of termination of such executive’s employment with our Company and in the chief executive officer his recommendationsevent of a change in control of our Company. Except as otherwise noted, the amounts shown (1) are estimates only and (2) assume that the applicable termination of employment was effective, or that the change in control occurred, as of December 31, 2017.

For further information regarding the agreements that provide for base salaries for the named executive officers, other than himself, each year. New base salary amounts have historically been based on an evaluation of individual performance and expected future contributions to ensure competitive compensation against the external market, including the companies in our industry with which we compete. The compensation committee has targeted base salaries for executive officers, including the chief executive officer, to be competitive with the base salaries being paid by other oil and natural gas exploration and production enterprises that have some characteristics similar to ours. We believe this is criticalpayment(s) to our ability to attract and retain top level talent.

Long Term Incentive Compensation

We believe the use of stock-based awards creates an ownership culture that encourages the long-term performance of our executive officers. Our named executive officers generally receiveNEOs at, following, or in connection with any service termination, or a stock grant upon becoming an employeechange in control of the Company. These grants vest over time.

RetirementCompany, see Employment Agreements in the Compensation Discussion and Other Benefits

All employees may participate in our 401(k) retirement savings plan (“401(k) Plan”). Each employee may make before tax contributions in accordance with the Internal Revenue Service limits. We provide this 401(k) Plan to help our employees save a portion of their cash compensation for retirement in a tax efficient manner. We make a matching contribution in an amount equal to 100% of the employee’s elective deferral contribution below 3% of the employee’s compensation and 50% of the employee’s elective deferral that exceeds 3% of the employee’s compensation but does not exceed 5% of the employee’s compensation.

All full time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.Analysis section above.

 

Compensation of Non-Employee Directors

Name  Fees Earned orPaid in Cash
Compensation 		  Stock
Awards
(1)(2)		   Option Awards
(3)   		   All OtherCompensation    Total 
G. Tyler Runnels* (4) $81,667  $225,000  $577,634  $-  $884,301 
Nuno Brandolini (5) $168,750  $124,500  $-  $-  $293,250 
General Merrill McPeak (6) $92,556  $165,000  $577,634  $-  $835,190 
Ronald D. Ormand (7) $76,056  $165,000  $577,634  $-  $818,690 
R. Glenn Dawson (8) $-  $-  $-  $-  $- 

Name Cash
($)		  Equity
($)(1)		  Perquisites/Benefits
($)		  Total
($)		 
James Linville                
Death  400,000   677,955   ─   1,077,955 
Disability  ─   677,955   11,400(2)  689,355 
By Lilis without Cause or by NEO for Good Reason (No CIC)  600,000(3)  677,955   22,800(4)  1,300,755 
CIC with Involuntary Termination  1,000,000(5)  677,955   45,600(6)  1,723,555 
Avi Mirman(7)                
Joseph Daches                
Death  400,000   2,946,540   ─   3,346,540 
Disability  ─   2,946,540   11,400(2)  2,957,940 
By Lilis without Cause or by NEO for Good Reason  400,000(8)  2,946,540   22,800(4)  3,369,340 
CIC with Involuntary Termination  800,000(9)  2,946,540   45,600(6)  3,792,140 
Kevin Nanke(10)                
Ariella Fuchs (11)                
Brennan Short (12)                
Ronald Ormand                
Death  500,000   3,675,082   ─   4,465,988 
Disability  ─   3,675,082   11,400(2)  3,977,388 
By Lilis without Cause or by NEO for Good Reason  500,000(8)  3,675,082   22,800(4)  4.488,788 
CIC with Involuntary Termination  1,000,000(9)  3,670,082   45,600(6)  5,011,588 

* No longer a director of the Company.

  

(1)(1)Represents the value of accelerated vesting of option awards and stock awards. Amounts reflected assume that all applicable performance targets for any performance-vesting awards are achieved.
(2)Reflects an amount equal to 6 months of COBRA premiums.
(3)Represents a lump sum severance payment equal to 12 months of base salary plus acceleration of a $200,000 sign-on retention bonus.
(4)Reflects an amount equal to 12 months of COBRA premiums.
(5)Represents a lump sum severance payment equal to 24 months of base salary plus acceleration of a $200,000 sign-on retention bonus.
(6)Reflects an amount equal to 24 months of COBRA premiums.
(7)Pursuant to his resignation on August 3, 2017, we entered into a separation and consulting agreement with Mr. Mirman. Under the terms of the agreement, Mr. Mirman was provided with (1) a lump sum cash payment of $1,000,000; (2) premium payments for continuing COBRA coverage for 18 months with a value of approximately $34,000; and (3) reimbursement of reasonable attorneys’ fees incurred in connection with his separation with a value of approximately $156,000. In addition, all of Mr. Mirman’s unvested options and restricted stock accelerated pursuant to the terms of his separation and consulting agreement, valued at approximately $4.4 million. 
(8)Represents a lump sum severance payment equal to 12 months of base salary.
(9)Represents a lump sum severance payment equal to 24 months of base salary.
(10)Pursuant to his termination on February 13, 2017, we entered into a separation agreement with Mr. Nanke. Under the terms of the agreement, he was provided with (1) a lump sum severance payment equal to 24 months of his base salary ($275,000); (2) a lump sum payment equal to 24 months of COBRA payments ($51,000); and (3) a lump sum payment bonus payment of $175,000. Mr. Nanke also held 418,750 unexercised stock option grants with an exercise price of $1.34, which vested at the time of his separation.

(11)In connection with her separation from the Company in February 2018, we entered into an agreement with Ms. Fuchs pursuant to which she will receive severance and other consideration pursuant to the terms of her employment agreement and stock award agreements plus additional nominal consideration.

(12)

In connection with his separation of employment with the Company in March 2018, in accordance with the terms of his employment agreement and stock award agreements, Mr. Short did not receive severance or other consideration.

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DIRECTOR COMPENSATION

The following table shows the total compensation for our nonemployee directors for their service to our Board during 2017. All references to “directors” in this Director Compensation section are to nonemployee members of our Board.

Name Fees Earned
or Paid in
Cash
($)		  Stock Awards
($)(1)		  Option Awards
($)		  All Other
Compensation
($)		  Total
($)		 
G. Tyler Runnels(2)  19,076   ─   ─   ─   19,076 
Nuno Brandolini(3)  60,000   171,825   ─   ─   231,825 
General Merrill McPeak(4)  85,000   171,825   ─   ─   256,825 
R. Glenn Dawson(5)  85,000   415,000       ─   500,000 
Peter Benz(6)  85,000   171,825       ─   256,825 
Mark Christensen(7)  19,076   ─   ─   ─   19,076 

(1)

Represents restricted stock awards under our EIP. Theawards. Awards in this column are reported at grant date fair values for restricted stock awards were determinedvalue in accordance with FASB ASC Topic 718. The amounts reported reflect the accounting cost for the awards and do not correspond to the actual economic value that may be received for the awards. AtOn January 31, 2017, Mr. Brandolini, General McPeak, and Mr. Benz were each granted 15,000 shares of restricted stock and Mr. Dawson was granted 103,750 shares of restricted stock. These awards all vested in full immediately. On October 17, 2017, Mr. Brandolini, General McPeak, and Mr. Benz were each granted 22,500 shares of restricted stock, which all vested in full immediately.

(2)Mr. Runnels was appointed to our Board on September 6, 2017.
(3)Mr. Brandolini was appointed to our Board on February 13, 2014.
(4)General McPeak was appointed to our Board on January 29, 2015.
(5)Mr. Dawson was appointed to our Board on January 13, 2016.
(6)Mr. Benz was appointed to our Board on June 23, 2016.
(7)Mr. Christensen was appointed to our Board on September 6, 2017.

Nonemployee Director Compensation Program. Our nonemployee Board members are paid a base annual cash retainer that is intended to compensate the directors for (1) attendance at all meetings to which the director has been assigned; (2) voluntary attendance at meetings to which the director has not been assigned; (3) time spent by the director to continue to improve industry knowledge and Board skills; and (4)ad hoc discussions and telephone calls by the director—these include discussions and calls that do not have a formal agenda noticed in accordance with the Company’s Bylaws and for which minutes are not kept.

Our compensation committee administers our director compensation program. In addition to the services Longnecker provided to the compensation committee on executive compensation, Longnecker reviewed market data from the Company’s compensation peer group for director compensation, including annual cash retainers, meeting fees and/or equity retainers. The peer group consisted of the same companies utilized to evaluate executive compensation. Longnecker developed recommendations for the compensation committee to consider that were designed to align the Company near the 50th percentile of the peer group.

Annual Cash Retainers.Directors will be paid an additional annual retainer for holding the position of Board Chairperson (in the case of a non-executive chairperson), Board Committee Chairperson, or Board Committee Member. The base annual cash retainer and committee member annual cash retainers are as follows:

Retainer Type Annual Retainer Amount 
Director $60,000 
Board Chair (non-executive) $50,000 
Audit Committee Chair $25,000 
Audit Committee Member $12,500 
Reserves Committee Chair $240,000(1) 
Compensation Committee Chair $25,000 
Compensation Committee Member $10,000 
Nominating and Corporate Governance Chair $10,000 
Nominating and Corporate Governance Committee Member $7,500 

(1)The current annual retainer amount paid to the dateReserves Committee Chair is in consideration for additional technical responsibilities currently being performed by such Chair at the request of separation from the Board all unvested shares are forfeited and any compensation expense previously recorded for unvested shares will be reversed.is subject to monthly review and termination or reduction by the Board in the event that it determines that the performance by such Chair of such responsibilities is no longer advisable and in the best interests of the Company.

All cash retainers will be paid in quarterly installments, in the first week of each calendar quarter. All annual cash retainers may be prorated based on active status of the director.

Initial Restricted Stock Grant.Each new director will receive an initial grant of 10,000 restricted shares of common stock, which will be granted on the first Annual Equity Date (as defined below) for which the director serves on our Board and will vest in the following increments on the specified dates, so long as the director remains a member of our Board through the vesting date:

3,334 shares on the first anniversary of the director’s first Annual Equity Date;

 

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(2)For the year ended December 31, 2015, each director elected to take restricted stock instead of cash for a portion of their fees in the following amounts: Runnels (37,749), Brandolini (84,934), McPeak (53,478), Ormand (18,875).
(3)Awards in this column are reported at grant date fair value in accordance with FASB ASC Topic 718. The amounts reported reflect the accounting cost for the options and do not correspond to the actual economic value that may be received for the options. The assumptions used to calculate the fair value of options are set forth in the notes to our consolidated financial statements included in this Annual Report on Form 10-K.
(4)Mr. Runnels served as a director from November 21, 2014, through January 13, 2016. Compensation includes $81,667 in director fees (of which a portion was taken as stock in lieu of cash), 100,000 and 315,789 shares of restricted stock awards granted on April 20, 2015 and November 23, 2015, respectively, and 450,000 options to purchase shares of Common Stock granted on April 20, 2015.
(5)Mr. Brandolini has served as a director since February 13, 2014. Compensation includes $168,750 in director fees (of which a portion was taken as stock in lieu of cash) and 34,188 and 50,000 shares of restricted stock granted on February 13, 2015 and May 15, 2015, respectively.
(6)General McPeak was appointed to the board on January 29, 2015. Compensation includes $92,556 in director fees (of which a portion was taken as stock in lieu of cash), 100,000 shares of restricted stock granted on April 20, 2015 and 450,000 options to purchase shares of Common Stock granted on April 20, 2015.
(7)Mr. Ormand was appointed to the Board on February 25, 2015 and became Chairman of the Board of Directors on January 13, 2016. Compensation includes $76,056 in director fees (of which a portion was taken as stock in lieu of cash), 100,000 shares of restricted stock granted on April 20, 2015 and 450,000 options to purchase shares of Common Stock.
(8)Mr. Dawson was appointed to the Board on January 13, 2016 and received no compensation during the year ended December 31, 2015.
3,333 shares on the second anniversary of the director’s first Annual Equity Date; and
3,333 shares on the third anniversary of the director’s first Annual Equity Date.

 

On April 16, 2015,Initial Option Award Grant. Each new director will receive an initial grant of 45,000 options to purchase shares of common stock, which will be granted on the first Annual Equity Date for which the director serves on our Board adopted an amended non-employeeand will vest in the following increments on the specified dates, so long as the director compensation program. Our non-employee director compensation program is comprisedremains a member of our Board through the vesting date:

25,000 options on the date of the following components:grant;
6,667 options on the first anniversary of the director’s first Annual Equity Date;
6,667 options on the second anniversary of the director’s first Annual Equity Date; and
6,666 options on the third anniversary of the director’s first Annual Equity Date.

Annual Equity Grants. The “Annual Equity Date” will be the first business day on or after January 31 of each year. On each Annual Equity Date, so long as the director remains a member of our Board on such date, the Company will issue to the director a number of fully vested shares of common stock equal to $150,000 (or, in the event the director has not served a full calendar year by that date, a prorated amount) divided by the most recent per share closing price of the common stock.

 

Company Equity Compensation Plans.All director equity awards will be granted under, and subject to the terms and conditions of, the Company’s equity compensation plan in effect at the time the award is granted.

● Initial Grant: Each non-employee director will receive 100,000 restricted shares of Common Stock on the first anniversary of the date of the director’s appointment, which vest in three equal installments over a three-year period, (subject to the continued service of the director and certain accelerated vesting provisions);
Annual Stock Award: Each non-employee director will receive an annual stock award equal to $60,000 divided by the most recent per share closing price of the Common Stock on the national securities exchange on which the Common Stock is traded prior to the date of each annual grant, payable on each anniversary of the date an independent director was initially appointed to our Board, and subject to certain accelerated vesting provisions;
●Annual Cash Retainer: Each non-employee director will receive an annual cash retainer fee of $60,000, paid quarterly, which at the election of the director is payable in cash or stock (calculated by dividing the value of cash compensation (or a portion thereof), by the most recent per share closing price of the Common Stock on the national securities exchange on which the Common Stock is traded prior to the date of the grant; and
●Option Award: Each non-employee director will receive a one-time initial grant of 250,000 stock options, which vest immediately and 200,000 options that vest in equal installments over a three year period beginning on the first anniversary of the grant date; and
●Committee Fees: On a quarterly basis, beginning at the end of the first full quarter following the appointment of the non-employee director to Chairman of the Board, Chairman of the Audit Committee or Chairman of the Compensation Committee, the director will receive $12,500, $6,250 and $6,250, respectively, in cash compensation, which at the election of the director is payable in cash or stock (calculated by dividing the value of cash compensation (or a portion thereof), by the most recent per share closing price of the Common Stock on the national securities exchange on which the Common Stock is traded prior to the date of the grant).

 

Change in Control. In the event of a change in control (as defined in the Company’s equity compensation plan then in effect), the Board will consider awards to directors for their service from the most recent Annual Equity Date through the change in control, in order to compensate the directors for the missed opportunity to receive an award on the next scheduled Annual Equity Date.

Additional Payments.Any additional cash or equity retainer may be granted by our Board based on active status of assignments of the director.

Annual Limits on Awards to Nonemployee Directors. The maximum number of shares subject to Company equity compensation plan awards granted during any calendar year to any director, taken together with any cash fees paid to the director during the year, may not exceed $500,000 in total value (calculating the value of any Company equity compensation plan awards based on the grant date fair value of such awards for financial reporting purposes).

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In connectionCEO PAY RATIO

As required by applicable SEC rules, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of James Linville, our CEO on December 31, 2017. The pay ratio included in this information is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K.

For 2017, the Annual Stock Award, so longmedian of the annual total compensation of all our employees (other than our CEO) was $0.5 million (inclusive of stock based compensation); and the annual total compensation of our CEO, as such director continuesreported in the Summary Compensation Table included above (adjusted as noted below), and then annualized for purposes of this pay ratio disclosure, was $2.2 million. Based on this information, for 2017 the ratio of the annual total compensation of our CEO to be a non-employee director on such date, we issuethe median of the annual total compensation of all our employees was 4 to such director1.

We took the following steps to identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of our median employee and our CEO.

1.We determined that, as of December 31, 2017, our employee population consisted of approximately 27 individuals. This population consisted of our full-time, part-time, and temporary employees employed with us as of the determination date.
2.To identify the “median employee” from our employee population, we used the amount of “gross wages” for the identified employees as reflected in our payroll records for 2017. For gross wages, we generally used the total amount of compensation the employees were paid before any taxes, deductions, insurance premiums, and other payroll withholding. We did not use any statistical sampling techniques.
3.For the annual total compensation of our median employee, we identified and calculated the elements of that employee’s compensation for 2017 in accordance with the requirements of Item 402(c)(2)(x).
4.For the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2017 Summary Compensation Table, adjusted as follows.
a)As noted elsewhere above, Mr. Linville began serving as our CEO effective August 4, 2017, upon the resignation of Abraham “Avi” Mirman, our former CEO. We identified Mr. Linville as our CEO for this pay ratio disclosure because he was serving in that position on December 31, 2017, the date that we selected to identify our median employee.
b)As Mr. Linville served as our CEO for only a portion of 2017, in accordance with applicable SEC rules, we annualized the amount reported in the Summary Compensation Table above. This resulted in annual total compensation for purposes of determining the ratio in the amount of $2.2 million, which exceeds the amount reported for Mr. Linville in the Summary Compensation Table by $0.2 million.
c)To maintain consistency between the annual total compensation of our CEO and the median employee, we also added the estimated value of our CEO’s health care benefits on an annualized basis (estimated for our CEO and our CEO’s eligible dependents at $0.02 million) to the amount reported in the Summary Compensation Table, as annualized as described in b) immediately above.

77

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2017 regarding the number of shares of our Common Stock equal to $60,000 divided by the most recent closing price per share prior to the date of each annual grant on the anniversary of the date an independent director was initially appointed tocommon stock that may be issued under our Board (February 13, 2014 for Mr. Brandolini, November 24, 2014 for Mr. Runnels, January 29, 2015 for General McPeak, February 25, 2015 for Mr. Ormand, and January 13, 2016 for Mr. Dawson), These grants are fully vested upon issuance. Accordingly, we granted Mr. Brandolini 34,188 shares on February 13, 2015 and Mr. Runnels, 315,789 shares on November 21, 2015.equity compensation plans:

Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights
(1)		  Weighted-average exercise price of outstanding options, warrants and rights
(2)		  Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
(1))		 
Equity compensation plans approved by security holders  7,301,899   $3.74   607,186 
Equity compensation plans not approved by security holders  ─   ─   ─ 
Total  7,301,899   $3.74   607,186 

(1)Includes stock options and RSUs outstanding under our 2016 Plan and our 2012 EIP as of December 31, 2017. Does not include shares of restricted stock issued pursuant to our 2016 Plan or our 2012 EIP.

(2)Represents the weighted average exercise price of outstanding options issued pursuant to our 2016 Plan and our 2012 EIP as of December 31, 2017. Does not take into account outstanding RSUs.

Other Equity Compensation

 

We have entered into various services agreements for which compensation has been paid with equity securities, including (i) a consulting agreement with Bristol pursuant to which we issued to Bristol a five year warrant to purchase up to 641,026 shares of common stock at an exercise price of $3.12 per share (or, in the alternative, 641,026 options, but in no case both), (ii) consulting agreements with eachMarket Development Consulting Group, Inc. pursuant to which we issued five year warrants to purchase up to an aggregate of our directors that permit500,000 shares of common stock ,with an exercise price of $2.33 for the directorwarrant to engage in other business activitiespurchase 250,000 shares of common stock and an exercise price of $2.00 for the warrant to purchase 250,000 shares of common stock; (iii) an investment banking agreement with TRW pursuant to which we issued 900,000 warrants at an exercise price of $4.25 per share; and (iv) various agreements pursuant to which issued an aggregate amount of 150,000 and 300,000 five year warrants to purchase shares of common stock at an exercise price of $2.50 and $2.00, respectively. With respect to the warrants awarded to Bristol, we recorded the warrants as a derivative due to the price reset provision encompassed in the energy industry, some of which may be in conflict with the best interests of our company, and that also provide that if the director becomes aware of a business opportunity, he has no affirmative duty to present or make such opportunity available to us, except as may be required by his fiduciary duty as a director or by applicable law.warrants.

 

Indemnification of Directors and Officers

 

Pursuant to our certificate of incorporation we provide indemnification of our directors and officers to the fullest extent permitted under Nevada law. We believe that this indemnification is necessary to attract and retain qualified directors and officers.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance under Equity Compensation Plans

Please see “Item 11 – Equity Compensation Plan Information” above.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance under Equity Compensation Plans

The following table represents the securities authorized for issuance under our equity compensation plans as of December 31, 2015.

Equity Compensation Plan Information
Plan category  Number of securitiesto beissued upon exercise of outstanding options,warrants and rights
(1)		  Weighted-average  exercise price of outstanding options, warrants and rights  Number of securities remaining available for future issuance under equity compensation plans 
Equity compensation plans approved by security holders  7,952,333   1.40(2)  1,038,294 
Equity compensation plans not approved by security holders  -   -   - 
Total  7,952,333   1.40(2)  1,038,294 

(1)Includes stock options and restricted stock units outstanding under our EIP as of December 31, 2015. Does not include 1,009,373 shares of restricted stock issued pursuant to our EIP.
(2)Represents the weighted average exercise price of outstanding options issued pursuant to our EIP as of December 31, 2015.

Other Equity Compensation

We have entered into various services agreements for which compensation has been paid with equity securities, including (i) a consulting agreement with Bristol Capital LLC pursuant to which we issued to Bristol a five year warrant to purchase up to 1,000,000 shares of Common Stock at an exercise price of $2.00 per share (or, in the alternative, 1,000,000 options, but in no case both), (ii) consulting agreements with Market Development Consulting Group, Inc. pursuant to which we issued five year warrants to purchase up to 500,000 shares of Common Stock at an exercise price of $2.33 for a warrant to purchase 250,000 shares of Common Stock and $2.00 for the warrant to purchase 250,000 shares of Common Stock; (iii) an investment banking agreement with TRW pursuant to which the Company issued 900,000 warrants at an exercise price of $4.25 per share; and (iv) various agreements pursuant to which issued an aggregate amount of 150,000 and 300,000 five year warrants to purchase shares of Common Stock at an exercise price of $2.50 and $2.00, respectively. With respect to the warrants awarded to Bristol Capital, the Company recorded the warrants as a derivative due to the ratchet down provision encompassed in the warrants. 

65

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information with respect to beneficial ownership of our Common Stockcommon stock as of March 30, 20165, 2018, by each of our executive officers and directors and each person known to be the beneficial owner of 5% or more of the outstanding Common Stock. common stock.

This table is based upon the total number of shares outstanding as of March 30, 20165, 2018 of 29,166,590.53,496,205. Unless otherwise indicated, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder’s name. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended.Act. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our Common Stockcommon stock subject to options or warrants currently exercisable or exercisable within 60 days after the date hereofMarch 5, 2018 are deemed outstanding by such person or group, but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. All share amounts that appear in this report have been adjusted to reflect a 1-for-10 reverse stock split of our outstanding common stock effected on June 23, 2016. Unless otherwise indicated, the address of each stockholder listed in the table is c/o Lilis Energy, Inc., 216 16th St., Suite #1350, Denver, CO 80202.300 E. Sonterra Blvd. Ste. 1220, San Antonio, Texas 78258.

 

Name and Address of Beneficial Owner Common Stock Held Directly  Common Stock Acquirable Within 60 Days  Total Beneficially Owned  Percent of Class Beneficially Owned 
             
Directors and Executive Officers            
             
Abraham Mirman,
Chief Executive Officer		   310,861(1)   1,599,797(2)  1,910,658   6.21%
                 
Eric Ulwelling,
Former Chief Financial Officer;
Principal Accounting Officer and Controller		  -    100,000(3)  100,000    * 
                 
Kevin Nanke,
Chief Financial Officer		  100,000    250,000(4)  350,000   1.19%
                 
Ariella Fuchs,
General Counsel and Secretary		  -    150,000(5)  150,000    * 
                 
Nuno Brandolini,
Director		  906,205    570,575(6)   1,476,780(7)  4.97%
                 
G. Tyler Runnels,
Former Director		   3,069,904(8)   316,667(9)   3,386,571(10)  11.49%
                 
General Merrill McPeak Director  606,864    572,267(11)   1,179,131(12)  3.96%
                 
Ronald D. Ormand Chairman of the Board  93,875    594,536(13)  688,411(14)  2.31%
                 
R. Glenn Dawson Director  -    250,000(15)   250,000(16)  * 
                 
Directors and Officers as a Group (9 persons)  5,087,709   4,403,842   9,491,551   31.83%
                 
Pierre Caland
Rutimatstrasse 16, 3780
Gstadd, Switzerland Tortola,
British Virgin Islands		   4,317,129(17)   2,254,359(18)   6,571,488(19)  20.91%
                 
Scott J. Reiman
730 17th Street, Suite 800
Denver, CO 80202		   1,558,471(20)   1,000,000(21)  2,558,471   8.48%
                 
Hexagon, LLC
730 17th Street, Suite 800
Denver, CO 80202		   1,250,000(22)   1,000,000(23)  2,250,000   7.46%
                 
Steven B. Dunn and Laura
Dunn Revocable Trust DTD
10/28/10 16689 Schoenborn Street
North Hills, CA 91343		   2,567,294(24)  -(25)  2,567,294   8.80%

 6678 

 

  Series C Preferred Stock  Common Stock 
Name and Address of Beneficial Owner Shared
Beneficially
Owned		  % of
Class		  Lilis
common
stock
Held
Directly		  Lilis
common
stock
Acquirable
Within 60
Days(1)		  Total
Beneficially
Owned(1)		  Percent of
Class
Beneficially
Owned(1)		 
                   
Directors and Named Executive Officers                        
Ronald D. Ormand, Executive Chairman of the Board  —   —   4,002,253(2)  199,167(3)  4,201,420   7.8%(4)
James Linville, Chief Executive Officer  —   —   159,352   110,500(5)  269,852   * 
Joseph Daches, Chief Financial Officer  —   —   578,676   502,500(6)  1,081,176   2.0%
Peter Benz, Director  —   —   132,384   31,667(7)  164,051   * 
Nuno Brandolini, Director  —   —   499,445   119,575(8)  619,020   1.2%
R. Glenn Dawson, Director  —   —   650,578   183,335(9)  833,913   1.6%
General Merrill McPeak, Director  —   —   466,922   150,157(10)  617,109   1.2%
G. Tyler Runnels, Director  —   —   2,121,790(11)  128,325(12)  2,250,115   4.2%
Mark Christensen, Director          1,215,843(13)  1,043,052(14)  2,258,895   4.1%
Markus Specks, Director  —   —   —   —   —   * 
John Johanning, Director  —   —   —   —   —   * 
Directors and Officers as a Group (12 persons)  —   —   10,188,207   2,702,308(15)  12,890,335   22.9%(16)
                         
5% Stockholders                        
Abraham Mirman (Former Chief Executive Officer and Former Director)
20 Broad Hollow Road, Suite 3011B
Melville, NY 11747		  —   —   2,384,522(17)  1,810,000(18)  4,194,522   7.6%
Bryan Ezralow,
23622 Calabasas Road, Suite 200,
Calabasas, CA 913012		  —   —   3,486,676(19)  272,731(20)  3,759,407   7.0%
Marc Ezralow,
23622 Calabasas Road, Suite 200,
Calabasas, CA 913012		  —   —   2,783,559(21)  220,783(22)  3,004,342   5.6%
J. Steven Emerson,
1522 Ensley Avenue,
Los Angeles, CA 90024		  —   —   4,064,074(23)  324,678(24)  4,388,752   8.2%
Rosseau Asset Management Ltd.
181 Bay Street, Suite 2920, Box 736
Toronto, Ontario M5J 2T3		  —   —   2,712,334(25)  —(26)   2,712,334   5.1%
Investor Company 5J5505D
Vertex One Asset Management
1021 West Hastings Street, Suite 3200
Vancouver, BC V6E 0C3		  —   —   7,189,480(27)  —   7,189,480   13.4%
Vӓrde Partners, Inc.
901 Marquette Avenue South
Suite 330, Minneapolis, MN 55402		  100,000   100%  —   43,592,196(28)  43,592,196   44.9%

(1)*Includes: (i) 110,861 shares of Common Stock held by The Bralina Group, LLC, in which Mr. Mirman has voting and dispositive power.
(2)Includes: (i) 110,861 shares of Common Stock issuable to The Bralina Group, LLC, in which Mr. Mirman has voting and dispositive power upon the exercise of a warrant to purchase Common Stock; (ii) 103,734 shares issuable upon conversion of Series A 8% Convertible Preferred Stock purchased in May 30, 2014 Private Placement; (iii) 51,868 shares issuable upon exercise of warrants purchased in the May 30, 2014 Private Placement; (iv) options to purchase 600,000 shares of Common Stock that vested upon achievement of criteria specified in Mr. Mirman's initial employment agreement and (vi) 1,333,334 options to purchase shares of Common Stock issued pursuant to Mr. Mirman’s amended and restated employment agreement. Does not include (i) the additional 666,667 options to purchase Common Stock that are subject to vesting upon the second anniversary of the effective date of Mr. Mirman’s amended and restated employment agreement (March 30, 2017) or (ii) 1,000,000 and 2,000,000 shares of Common Stock issuable upon the conversion of convertible notes and exercise of warrants, respectively, each of which are subject to stockholder approval. Each of the warrants contain conversion caps that prevent an exercise that would result in more than a 4.99%Represents beneficial ownership of less than 1% of the Company’s Common Stock
(3)Includes vested options to purchase 100,000outstanding shares of Common Stock.common stock.

(4)(1)Does not include options to purchase 500,000 shares of Common Stock subject to future vesting.
(5)Does not include options to purchase 200,000 shares of Common Stock subject to future vesting.
(6)Includes (i) 125,000 shares of Common Stock underlyingExcluding the outstanding warrants purchased in the January 2014 Private Placement, (ii) 41,494 shares of Common Stock underlying the Series A 8% Convertible Preferred Stock (iii) 20,747 shares of Common Stock underlying the accompanying warrants to purchase Common Stock purchased by Mr. Brandolini in the May 30, 2014 Private Placement, (iv) options to purchase 250,0000 shares of Common Stock that vested immediately on October 1, 2014 pursuant to director compensation, (v) options to purchase 133,333 shares of Common Stock that vested on Mr. Brandolini’s anniversaries of his appointment to the Board pursuant to his non-employee director award agreement.
(7)Does not include options to purchase 66,667 shares of Common Stock subject to future vesting, (ii) 41,667 restricted stock units granted in connection with director compensation or (iii) 300,000 and 600,000 shares of Common Stock issuable upon the conversion of convertible notes and exercise of warrants, respectively, each of which are subject to stockholder approval. Each of the warrants contain conversion caps that prevent an exercise that would result in more than a 4.99% beneficial ownership of the Company’s Common Stock
(8)Based upon a Form 4 filed with the SEC on April 22, 2015, a Schedule 13D filed with the SEC on October 10, 2014 and additional information received from a representative of Mr. Runnels. Includes (i) 157,565 shares of Common Stock held by the Runnels Family Trust DTD 1-11-2000 (the “Runnels Family Trust”), of which Mr. Runnels, with Jasmine N. Runnels, is trustee issued in connection with interest payments onour March 2017 Private Placement, the terms of the Company’s Debentures; (ii) 866,414 shares of Common Stock held byoutstanding warrants, (the “Blocker Securities”) contain a provision prohibiting the Runnels Family Trust; (iiii) 906,610 shares of Common Stock held by TRW, of which Mr. Runnels is the majority owner (iv) 122,991 shares held by High Tide, LLC (“High Tide”), of which Mr. Runnels is the manager; (vi) 4,025 shares of Common Stock held by Pangaea Partners, LLC, of which Mr. Runnels is the manager; (v) 5,250 shares of Common Stock held by TR Winston Capital Management, LLC, of which Mr. Runnels is the chairman; (vi) 575,795 shares of Common Stock held by Golden Tiger, LLC, of which Mr. Runnels is the manager; (ix) 25 shares of Common Stock held by Mr. Runnels through SEP IRA Pershing LLC Custodian; (vi) 15,000 shares of Common Stock held by Mr. Runnels through G. Tyler Runnels 401k; (viii) 112,309 shares of Common Stock transferred to accredited investors for services rendered in connection with an investment banking agreement on May 29, 2015, (ix) 461,872 shares of Common Stock issued in connection with Mr. Runnels’ director compensation.
(9)Includes options to purchase 316,667 shares of Common Stock issued in connection with Mr. Runnels’ director compensation. In connection with Mr. Runnels’ resignation from the Board on January 13, 2016, he forfeited 133,333 options to purchase shares of Common Stock subject to future vesting and 66,667 restricted stock units subject to future vesting.
(10)Based upon Schedule 13D filed with the SEC on October 10, 2014 and additional information received from a representative of Mr. Runnels. Does not include (i) shares issuable to the Runnels Family Trust upon (a) conversion of outstanding debentures (427,164 shares of Common Stock), (b) conversion of outstanding preferred stock (103,734 shares of Common Stock), and (c)the exercise of outstanding warrants to purchase Common Stock (220,682 sharesinto common stock of Common Stock); (ii) shares issuable to TRW upon (a) conversion of outstanding preferred stock (219,502 shares of Common Stock) and (b) exercise of outstanding warrants to purchase Common stock (2,550,699 shares of Common Stock), and (iii) 16,667 shares of Common Stock issuable to High Tidethe Company if, upon exercise, of outstanding warrants to purchase Common Stock. These shares are excluded due to conversion caps that exist on Mr. Runnels’ holdings that prevent any conversion thatas applicable, the holder thereof would result inbeneficially own more than a 9.9% beneficial ownershipcertain percentage of the Company’s Common Stock.then outstanding common stock (the “Blocker Limitation”). This percentage limitation is 4.99%. Accordingly, the share numbers in the above table represent ownership after giving effect to the beneficial ownership limitations described in this footnote. However, the foregoing restrictions do not prevent such holder from exercising, as applicable, some of its holdings, selling those shares, and then exercising, as applicable, more of its holdings, while still staying below the percentage limitation. As a result, the holder could sell more than any applicable ownership limitation while never actually holding more shares than the applicable limitations allow. Thus, while the ownership percentages are also given with regard to this beneficial ownership limitation, specific footnotes indicate what the ownership would be as of August 24, 2017, without giving effect to limitation

 (11)79Includes

(2)Consists of: (i) 103,7341,583,555 shares of Common Stock issuable upon conversion of Series A 8% Convertible Preferred Stock purchased in the May 30, 2014 Private Placement;common stock held directly by Mr. Ormand; (ii) 51,8672,378,698 shares of Common Stock issuable upon exercise of warrants purchased in the May 30, 2014 Private Placement;common stock held by Perugia Investments L.P. (“Perugia”); and (iii) options to purchase 316,66740,000 shares of Common Stock in connection with General McPeak’s appointment and anniversary of his appointment to the Board.
(12)This does not include (i) 66,667 shares of restrictedcommon stock units subject to future vesting, (ii) options to purchase 133,335 shares of Common Stock subject to future vesting or (iii) 500,004 and 1,000,008 shares of Common Stock issuable upon the conversion of convertible notes and exercise of warrants, respectively, each of which are subject to stockholder approval. Each of the warrants contain conversion caps that prevent an exercise that would result in more than a 4.99% beneficial ownership of the Company’s Common Stock
(13)Includes (i) 207,469 shares of Common Stock issuable upon conversion of Series A 8% Convertible Preferred Stock purchased in the May 30, 2014 Private Placement; (ii) 103,734 shares of Common Stock issuable upon exercise of warrants purchased in the May 30, 2014 Private Placement, each indirectly held by Mr. Ormand as the manager of Perugia Investments L.P., (iii) 33,334 vested restricted stock units and (iv) options to purchase 316,667 shares of Common Stock directly held by Mr. Ormand.
(14)Does not include (i) 66,666 restricted stock units, two-thirds of which are subject to future vesting, (ii) options to purchase 133,333 shares of Common Stock subject to future vesting or (iii) 2.3 million and 4.6 million shares of Common Stock issuable upon the conversion of convertible notes and exercise of warrants, respectively, each of which are subject to stockholder approval, each indirectly held by Mr. Ormand in connection with his affiliation with The Bruin Trust, an irrevocable trust managed by an independentJerry Ormand, Mr. Ormand’s brother, as trustee and whose beneficiaries include the adult children of Mr. Ormand. Mr. Ormand does not haveis the manager of Perugia and has sole voting orand dispositive power over these securities. Additionally, eachthe securities held by Perugia.

(3)Represents shares of common stock subject to options exercisable within 60 days.

In addition, Mr. Ormand beneficially owns an aggregate of 993,102 additional shares of common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, Mr. Ormand’s percentage ownership is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from the table. These Blocker Securities consist of the following: (i) 533,102 shares of common stock issuable upon exercise of warrants held by Perugia; and (ii) 460,000 shares of common stock issuable upon exercise of warrants held by The Bruin Trust.

(4)Including the Blocker Securities, and ignoring the Blocker Limitation, Mr. Ormand beneficially owns a total of 5,194,522 shares of common stock, which represents 9.5% of our currently issued and outstanding common stock.

(5)Represents shares of common stock subject to options exercisable within 60 days.

(6)Represents shares of common stock subject to options exercisable within 60 days.

(7)Represents shares of common stock subject to options exercisable within 60 days.

(8)Represents shares of common stock subject to options exercisable within 60 days.

(9)Represents shares of common stock subject to options exercisable within 60 days.

(10)Represents shares of common stock subject to options exercisable within 60 days.

(11)Consists of: (i) 71,744 shares of common stock held directly by Mr. Runnels; (ii) 267,436 shares of common stock held by T.R. Winston & Company, LLC (“TRW”); (iii) 534,899 shares of common stock held by TRW Capital Growth Fund, LP; (iv) 1,218,005 shares of common stock held by Runnels Family Trust DTD 1-11-2000 (“Runnels Family Trust”), for which Mr. Runnels acts as trustee with Jasmine N. Runnels, who share voting and dispositive power; (v) 29,300 shares of common stock held by High Tide, LLC (“High Tide”); (vi) 402 shares of common stock held by Pangaea Partners, LLC; and (vii) 3 shares of common stock held by SEP IRA Pershing LLC Custodian (“SEP IRA”). Mr. Runnels is the natural person with ultimate voting and dispositive power over the securities held by TRW, TRW Capital Grown Fund, LP, High Tide, Pangaea Partners, LLC and SEP IRA.

(12)Represents shares of common stock subject to options and warrants contain conversion caps that prevent an exercise that would result in more than a 4.99% beneficialexercisable within 60 days.

In addition, Mr. Runnels beneficially owns an aggregate of 1,011,406 additional shares of common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, Mr. Runnels’ percentage ownership is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from the table. These Blocker Securities consist of the following: (i) 636,046 shares of common stock issuable upon exercise of warrants held by TRW; and (ii) 375,360 shares of common stock issuable upon exercise of warrants held by Runnels Family Trust.

(13)Consists of: (i) 23,954 shares of common stock held directly by Mr. Christensen; (ii) 1,103,362 shares of common stock held by Trace Capital Inc. (“Trace”), for which Mr. Christensen’s wife is the Company’s Common Stocknatural person with ultimate voting and dispositive power; and (ii) 88,527 shares of common stock held by GM&P Holding Corp., for which Mr. Christensen is the natural person with ultimate voting and dispositive power.

(14)Represents shares of common stock subject to options and warrants exercisable within 60 days.

(15)Includes (i) 250,000 optionsAs indicated in the above footnotes, this amount excludes an aggregate of 2,004,508 additional shares of common stock acquirable within 60 days, which are subject to Blocker Limitations.

(16)Including the Blocker Securities, and ignoring the Blocker Limitation, the directors and officers as a group beneficially own a total of 14,894,843 shares of common stock, which represents 25.6% of our currently issued in connection with Mr. Dawson’s appointment.and outstanding common stock.

 6780 

 

(16)Does not include (i) 200,000 options to purchase Common Stock subject to vesting in equal installments on each appointment anniversary, (ii) 100,000 shares of restricted stock units subject to future vesting and (iii) 100,000 and 200,000 shares of Common Stock issuable upon the conversion of convertible notes and exercise of warrants, respectively, each of which are subject to stockholder approval. The warrants contain conversion caps that prevent an exercise that would result in more than a 4.99% beneficial ownership of the Company’s Common Stock
(17)Consists of: (i) 1,203,087 shares of common stock held by The Bralina Group, LLC; and (ii) 1,181,435 shares of common stock held directly by Mr. Mirman. Mr. Mirman has shared voting and dispositive power over the securities held by The Bralina Group, LLC with Susan Mirman.

(18)Represents shares of common stock subject to options exercisable within 60 days.

In addition, Mr. Mirman beneficially owns an aggregate of 850,641 additional shares of common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, Mr. Mirman’s percentage ownership is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from the table. These Blocker Securities consist of the following: (i) 545,454 shares of common stock issuable upon exercise of warrants held by the Bralina Group, LLC and (ii) 305,187 shares of common stock issuable upon exercise of warrants held directly by Mr. Mirman.

(19)Based uponsolely on a Schedule 13D jointly13G filed withby Bryan Ezralow on February 13, 2018. Collectively, the SEC on April 15, 2015 by Mr. Caland, Wallington Investment Holdings, Ltd. (“Wallington”) and Silvercreek Investment Limited Inc. and certain information maintained by the Company. Includes: (i) 5,963,119 shares of Common Stock owned directly by Wallington Investment Holdings, Ltd. and indirectly by Mr. Pierre Caland, the holder of solecommon stock reported herein in which Bryan Ezralow has shared voting and dispositive power over such shares (ii) 608,369is an aggregate of 2,092,723 shares. Such shares of Common Stock ownedare held directly by Silvercreek Investment Limited Inc. and indirectly by Mr. Caland,(a) the holderEzralow Family Trust u/t/d 12/9/1980 (the “Family Trust”) in the amount of sole94,106 shares, where Bryan Ezralow as a co-trustee of the Family Trust shares voting and dispositive power over such shares, and (iii) 385,537thus, may be deemed to beneficially own such shares; (b) the Ezralow Marital Trust u/t/d 1/12/2002 (the “Marital Trust”) in the amount of 101,571 shares, of Common stock issued to Wallington in connection with interest payments made on the Company’s Debentures.
(18)Based uponwhere Bryan Ezralow as a Schedule 13D filed with the SEC on April 15, 2015. Includes 2,254,359 shares of Common Stock issuable to Wallington upon the exercise of warrants and (ii) 51,868 shares of Common Stock issuable to Wallington upon conversionco-trustee of the Company's Series A 8% Convertible Preferred Stock.
(19)Does not include (i) 1,027,508Marital Trust shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; (c) Elevado Investment Company, LLC, a Delaware limited liability company (“Elevado Investment”), in the amount of Common Stock issuable to Wallington upon the conversion416,252 shares, where Bryan Ezralow as a co-trustee and manager, respectively, of the remaining Debentures or (ii) 600,000two trusts and 1,200,000limited liability company that comprise the managing members of Elevado Investment, shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; (d) EMSE LLC (“EMSE”), a Delaware limited liability company, in the amount of Common Stock issuable upon495,674 shares, where Bryan Ezralow, as a manager of EMSE, shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; (e) EZ Colony Partners, LLC, a Delaware limited liability company (“EZ Colony”), in the conversionamount of convertible notes985,117 shares, where Bryan Ezralow as the sole trustee of one of the trusts that is a manager of EZ Colony, shares voting and exercisedispositive power over such shares, and thus, may be deemed to beneficially own such shares; and (f) EZ MM&B Holdings, LLC, a Delaware limited liability company (“EZ MM&B”), in the amount of warrants,3 shares, where Bryan Ezralow as the sole trustee of one of the trusts that is a manager of EZ MM&B, and as a co-trustee and manager, respectively, each of which are subjectthe two trusts and limited liability company that comprise the managing members of one of the other managers of EZ MM&B, shares voting and dispositive power over such shares, and thus, may be deemed to stockholder approval..beneficially own such shares.

81

Collectively, the shares of common stock reported herein in which Bryan Ezralow has sole voting and dispositive power over such shares are 1,393,953 shares. Such shares are held directly by (a) the Bryan Ezralow 1994 Trust u/t/d/12/22/1994, Bryan Ezralow, Trustee (the “Bryan Trust”) in the amount of 1,258,098 shares, where Bryan Ezralow as sole trustee of the Bryan Trust has sole voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; and (b) the Marc Ezralow Irrevocable Trust u/t/d 6/1/2004 (the “Irrevocable Trust”) in the amount of 135,855 shares, where Bryan Ezralow as sole trustee of the Irrevocable Trust has sole voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares. 

(20)Based upon a Schedule 13D filed with the SEC on September 5, 2014. Includes (i) 1,250,000Represents shares of Common Stock owned by Hexagon, LLC, (ii) 129,008 shares of Common Stock owned by Labyrinth Enterprises LLC, which is controlled by Scott J. Reiman, (iii) 129,463 shares of Common Stock owned by Reiman Foundation, which is controlled by Scott J. Reiman, and (iv) 50,000 shares of Common Stock owned by Scott J. Reiman. Mr. Reiman is President of Hexagon.common stock subject to warrants exercisable within 60 days.

In addition, Bryan Ezralow beneficially owns an aggregate of 836,712 additional shares of common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, the percentage ownership by Bryan Ezralow is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from the table. These Blocker Securities consist of the following: (i) 295,455 shares of common stock issuable upon the exercise of warrants, held by the Bryan Trust; (ii) 43,182 shares of common stock issuable upon the exercise of warrants, held by the Irrevocable Trust; (iii) 125,889 shares of common stock issuable upon the exercise of warrants, held by Elevado; (iv) 266,088 shares of common stock issuable upon the exercise of warrants, held by EZ Colony; (v) 43,912 shares of common stock issuable upon the exercise of warrants, held by the Marital Trust; (vi) 41,285 shares of common stock issuable upon the exercise of warrants, held by the Family Trust; and (vii) 20,899 shares of common stock issuable upon the exercise of warrants, held by EMSE.

(21)Based uponsolely on a Schedule 13D13G filed withby Marc Ezralow on February 14, 2018. Collectively, the SEC on September 5, 2014. Includes 1,000,000 shares of Common Stock underlying warrantscommon stock reported herein in which Marc Ezralow has shared voting and dispositive power over such shares are an aggregate of 2,092,723 shares. Such shares are held directly by Hexagon.(a) the Ezralow Family Trust u/t/d 12/9/1980 (the “Family Trust”) in the amount of 94,106 shares, where Marc Ezralow, as a co-trustee of the Family Trust, shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; (b) the Ezralow Marital Trust u/t/d 1/12/2002 (the “Marital Trust”) in the amount of 101,571 shares, where Marc Ezralow, as a co-trustee of the Marital Trust, shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; (c) Elevado Investment Company, LLC, a Delaware limited liability company (“Elevado Investment”), in the amount of 416,252 shares, where Marc Ezralow as a co-trustee and manager, respectively, of the two trusts and limited liability company that comprise the managing members of Elevado Investment, shares voting and dispositive power over such shares, and thus, be deemed to beneficially own such shares; (d) EMSE LLC (“EMSE”), a Delaware limited liability company, in the amount of 495,674 shares, where Marc Ezralow, as a manager of EMSE shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; (e) EZ Colony Partners, LLC, a Delaware limited liability company (“EZ Colony”), in the amount of 985,117 shares, where Marc Ezralow as the sole trustee of one of the trusts that is a manager of EZ Colony, shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; and (f) EZ MM&B Holdings, LLC, a Delaware limited liability company (“EZ MM&B”) in the amount of 3 shares, where Marc Ezralow as the sole trustee of one of the trusts that is a manager of EZ MM&B, and as a co-trustee and manager, respectively, of the two trusts and limited liability company that comprise the managing members of one of the other managers of EZ MM&B, shares voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares.

Collectively, the shares of common stock reported herein in which Marc Ezralow has sole voting and dispositive power over said common stock are 690,836 shares. Such shares are held directly by (a) the Marc Ezralow 1997 Trust u/t/d/11/26/1997, Marc Ezralow, Trustee (the “Marc Trust”) in the amount of 554,981 shares, where Marc Ezralow as sole trustee of the Marc Trust has sole voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares; and (b) the SPA Trust u/t/d 9/13/2004 (the “SPA Trust”), in the amount of 135,855 shares, where Marc Ezralow as sole trustee of the SPA Trust has sole voting and dispositive power over such shares, and thus, may be deemed to beneficially own such shares.

(22)Based upon a Schedule 13D filed with the SEC on September 5, 2014.Represents shares of common stock subject to warrants exercisable within 60 days.

In addition, Marc Ezralow beneficially owns an aggregate of 711,710 additional shares of common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, the percentage ownership by Marc Ezralow is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from the table. These Blocker Securities consist of the following: (i) 43,182 shares of common stock issuable upon exercise of warrants, held the SPA Trust; (ii) 170,455 shares of common stock issuable upon exercise of warrants, held by the 1997 Trust; (iii) 125,889 shares of common stock issuable upon the exercise of warrants, held by Elevado; (iv) 266,088 shares of common stock issuable upon the exercise of warrants, held by EZ Colony; (v) 43,912 shares of common stock issuable upon the exercise of warrants, held by the Marital Trust; (vi) 41,285 shares of common stock issuable upon the exercise of warrants, held by the Family Trust; and (vii) 20,899 shares of common stock issuable upon the exercise of warrants, held by EMSE..

(23)Based upon aon the Schedule 13D filed with the SEC on September 5, 2014. The Company entered into a settlement agreement with Hexagon pursuant to which the Company issued 2,000May 19, 2017, this consists of: (i) 1,630,652 shares of Conditionally Redeemable 6% Preferred Stock, which pays a dividend on a quarterly basis in cash. The preferredcommon stock does not have anyheld by J. Steven Emerson Roth IRA Pershing LLC as Custodian (“Roth IRA Pershing”); (ii) 1,371,067 shares of common stock held by J. Steven Emerson IRA Rollover II Pershing LLC as Custodian (“IRA Rollover II Pershing”); (iii) 430,945 shares of common stock held by Emerson Partners (“Emerson”); (iv) 583,237 shares of common stock held directly by J. Steven Emerson; (v) 48,173 shares of common stock held by the Emerson Family Foundation. J. Steven Emerson is the natural person with ultimate voting rightsor investment control over the shares of common stock held by each of Roth IRA Pershing, IRA Rollover II Pershing, Emerson and cannot be converted to Common Stock.the Emerson Family Foundation.

(24)Based upon information received from a representative of Steven B. Dunn and Laura Dunn and company records. Includes (i) 187,608Represents shares of Common Stock issued in connection with interest payments made on the Company’s Debentures; (ii) 2,205,768 shares of Common Stock owned by Steven B. Dunn and Laura Dunn Revocable Trust (the “Trust”), (iii) 86,959 shares of Common Stock owned by Beau 8, LLC; and (iv) 86,959 shares of Common Stock owned by Winston 8, LLC. Steven B. Dunn and Laura Dunn are trustees of the Trust and also share voting and dispositive power with respectcommon stock subject to the shares owned by the LLCs.warrants exercisable within 60 days.

(25)Based upon information received from a representative of Steven B. Dunn and Laura Dunn. Does not include (i) 500,000on the Schedule 13G/A filed on February 14, 2018. The natural person with ultimate voting or investment control over the shares of Common Stockcommon stock held is Warren Irwin.

(26)Rosseau Asset Management (“Rosseau”) beneficially owns an aggregate of 1,136,364 additional shares of common stock acquirable within 60 days, each of which is subject to a Blocker Limitation. However, Rosseau’s percentage ownership is currently in excess of such Blocker Limitations, and as a result, such Blocker Securities have been excluded from the table. These Blocker Securities consist of 1,136,364 shares of common stock issuable upon exercise of warrants.

(27)Based on the Schedule 13G filed on February 9, 2018. The natural person with ultimate voting or investment control over the shares of common stock held is John Thiessen.

(28)Based on the Schedule 13D/A filed on February 5, 2018. This represents shares of common stock which may be issued pursuant to the conversion of term loans under the remaining Debentures, with the right to convert being subject to stockholder approval or (ii) 925,223Second Lien Credit Agreement and shares of CommonSeries C Preferred Stock issuable towithin 60 days as if such term loans and Series C Preferred Stock had been converted on the Steven B. Dunn and Laura Dunn Revocable Trust upon the exercisedate of warrants, some of which are subject to conversion caps and some of which are not yet exercisable by their terms.borrowing or issuance, as applicable.

​Värde Partners, Inc. is the ultimate owner of the general partners (the “General Partners”), of each of The Värde Fund XI (Master), L.P., The Värde Fund XII (Master), L.P.; The Värde Master Skyway Fund, L.P., The Värde Fund VI-A, L.P., Värde Investment Partners, L.P., and Värde Investment Partners (Offshore) Master, L.P. (the “Värde Entities”), or of the General Partners’ managing members. Mr. George Hicks is the chief executive officer of Värde Partners, Inc. As such each of Värde Partners, Inc. and Mr. Hicks may be deemed to have beneficial ownership of the shares owned by each of the Värde Entities. Each of Värde Partners, Inc. and Mr. Hicks disclaims beneficial ownership of the securities held indirectly through the Värde Entities except to the extent of their pecuniary interest therein, and this disclosure shall not be deemed an admission that any such reporting person is the beneficial owner for purposes of this Annual Report or for any other purpose.

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To our knowledge, except as noted above, no person or entity is the beneficial owner of more than 5% of the voting poweror more of our Common Stock.common stock.

 

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Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCECertain Relationships and Related Transactions, and Director Independence

 

DuringTransactions with Related Parties

We describe below transactions and series of similar transactions, since January 1, 2017, to which we were a party, in which:

·The amounts involved exceeded or will exceed the lesser of $120,000 or one percent (1%) of our average total assets at year-end for the last two completed fiscal years; and
·Any of our directors, executive officers, or holders of more than 5% of our capital stock, or any member of the immediate family of, or person sharing the household with, any of the foregoing persons, who had or will have a direct or indirect material interest.

All share and per share amounts applicable to our common stock from transactions that occurred prior to the fiscal years ended December 31, 2015 and 2014, we have engagedJune 23, 2016 reverse split in the following summaries of related party transactions with related parties:have not been adjusted to reflect the 1-for-10 reverse split of our issued and outstanding common stock, unless specifically described below.

 

Debenture Conversion AgreementSeries B Preferred Stock Private Placement

 

On December 29, 2015,June 15, 2016, we entered into the Series B Purchase Agreement with certain institutional and accredited investors (the “Series B Purchasers”) in connection with the Series B Preferred Stock offering.

On June 6, 2016, we entered into a Debenture ConversionTransaction Fee Agreement, (the “Conversion Agreement”) between us and all of the remaining holders of our Debentures. The terms of the Conversion Agreement provide that the entire amount of approximately $6.85 million in outstanding Debentures are automatically converted into our Common Stock upon the closing of the proposed mergerwhich was subsequently amended on June 8, 2016, with Brushy, which we refer to as the Conversion Date, provided that we obtain the requisite stockholder approval as required by the Nasdaq Marketplace Rules, which we plan to seek at the next stockholders’ meeting to be held in connection with approving the proposed merger with Brushy. Pursuant to the terms of the Conversion Agreement, the Debentures will be converted at a price of $0.50, which will result in the issuance of an aggregate of 13,692,930 shares of our Common Stock upon conversion of the Debentures. Holders of the Debentures have waived and forfeited any and all rights to receive accrued but unpaid interest. Upon the conversion of the Debentures, the holders’ security interest will also be extinguished.

Certain parties to the Conversion Agreement include related parties of our company, such as the Steven B. Dunn and Laura Dunn Revocable Trust dated 10/28/10, of which its respective Debenture amount to be converted on the Conversion Date is $1,017,111.11, and Wallington Investment Holdings, Ltd., of which its respective Debenture amount to be converted on the Conversion Date is $2,090,180.12. Each of the Steven B. Dunn and Laura Dunn Revocable Trust dated 10/28/10 and Wallington Investment Holdings, Ltd. areTRW, a more than 5% shareholderstockholder of our company.

FromCompany during the year ended December 29, 201531, 2016, in connection with the Series B Preferred Stock offering to January 5, 2016, we entered into 12% Convertible Subordinated Note Purchase Agreementsact as co-broker dealers along with various lending parties, which we refer toKES 7, and as the Purchasers, for the issuanceadministrative agent. TRW received a cash fee of an aggregate principal amount of $3.75 million Convertible Notes, which includes the $750,002 of short-term notes exchanged for Convertible Notes by us$500,000 and broker warrants to purchase up to an aggregate of approximately 15,000,000452,724 shares of our Common Stockcommon stock, at an exercise price of $0.25 per share. The proceeds from this financing$1.30, exercisable on or after September 17, 2016, for a period of two years. Of the cash fee paid to TRW, $150,000 was used to pay a $2 million refundable depositreinvested into the Series B Preferred Stock offering in connection with the Merger, to fund approximately $1.3 million of interest payments to certain of our lenders andexchange for our working capital and accounts payables.

The Convertible Notes bear interest at a rate of 12% per annum, payable at maturity on June 30, 2016. The Convertible Notes and accrued but unpaid interest thereon are convertible in whole or in part from time to time at the option of the holders thereof into150 shares of ourSeries B Preferred Stock and the related warrants to purchase 68,182 shares of common stock at a conversionan exercise price of $0.50. The Convertible Notes may be prepaid in whole or in part by paying all or$2.50. These fees were recorded as a portion of the principal amountreduction to be prepaid together with accrued interest thereon to the date of prepayment at a premium of 103% for the first 120 days and a premium of 105% thereafter, so long as no Senior Debt is outstanding. The Convertible Notes contain customary events of default, which, if uncured, entitle each noteholder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest, subject to certain subordination provisions.equity.

 

TheCertain other Series B Purchasers in the Series B Preferred Stock offering include certainthe following related parties of us, includingparties: (i) Abraham Mirman, our former Chief Executive Officer and a memberdirector, purchased $1.65 million of our Board of Directors ($750,000 includingSeries B Preferred Stock through the short-term note exchange investment), the Bruin Trust, an irrevocable trust managed by an independent trusteeBralina Group, LLC for which Mr. Mirman holds shared voting and whose beneficiaries include the adult children ofdispositive power; (ii) Ronald D. Ormand, the Chairman of our Board of Directors, ($1.15 million)purchased $1.0 million of Series B Preferred Stock through Perugia Investments LP for which Mr. Ormand holds sole voting and Pierre Calanddispositive power; (iii) Kevin Nanke, the Company’s former Executive Vice President and Chief Financial Officer during the year ended December 31, 2016, purchased $200,000 of Series B Preferred Stock through Wallington InvestmentKKN Holdings Ltd. ($300,000), whoLLC, for which Mr. Nanke holds more than 5% of our Common Stock.

Certain of our officers, directorssole voting and consultants who entered into short-term note agreements with us in 2015, also entered into note exchange agreements, whereby the short-term noteholder agreed to exchange all of our outstanding obligations under such short-term notes, which as of December 29, 2015 had outstanding obligations of $750,002, into the Convertible Notes at a rate, expressed in principal amount of Convertible Notes equal to $1.00 for $1.00, in exchange for the cancellation of the short-term notes, with all amounts due thereunder being cancelled and deemed to have been paid in full, including any accrued but unpaid interest.

The short-term noteholders include certain related parties of the Company, including Abraham Mirman, the Chief Executive Officer and a director of the Company ($250,000), General Merrill McPeak, a director of the Company ($250,000), and Nuno Brandolini, a director of the Company ($150,000).

Additionally, on March 18, 2016, we issued an additional aggregate principal amount of $500,000 in Convertible Notes and warrants to purchase up to 2.0 million shares of our Common Stock. The terms and conditions of the Convertible Notes are identical to those of the Convertible Notes with the exception of the maturity date, which is April 1, 2017.

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The Purchasers include a related party of the Company,dispositive power; (iv) R. Glenn Dawson, a director of theour Company, ($50,000). purchased $125,000 of Series B Preferred Stock; and (v) Bryan Ezralow and Marc Ezralow, who are each a more than 5% stockholder of our Company, purchased $1.3 million of Series B Preferred Stock through various entities beneficially owned by them.

 

Abraham Mirman

Abraham Mirman,On April 25, 2017, the Chief Executive Officer and a director of our company, is an indirect owner of a group which converted approximately $220,000 of Debentures in connection with the $9.00 million of Debentures converted in January 2014, and was paid $10,000 in interest at the time of the Debenture conversion.

During the January 2014 private placement, Mr. MirmanCompany entered into a subscription agreement with us to invest $500,000, for which Mr. Mirman will receive 250,000 shares of stock and 250,000 warrants. The subscription agreement will not be consummated until a shareholder meeting is conducted to receive the required approval to allow executives and Board directors the ability to participate in the offering.

Additionally, as discussed below, on January 31, 2014, we entered into the FirstSeries B 6.0% Convertible Preferred Stock Conversion Agreement with the holders of the Debentures, which also included The Bralina Group, LLC, in which Mr. Mirman has voting and dispositive power,

In April 2014, we appointed Abraham Mirman to serve as the Company’s Chief Executive Officer. Prior to joining us, Mr. Mirman was employed by TRW, as its Managing Director of Investment Banking and until September 2014 continued to devote a portion of his time to serving in that role. In connection with the appointment of Mr. Mirman, we and TRW amended the investment banking agreement in place between the us and TRW at that time to provide that, upon our receipt of gross cash proceeds or drawing availability of at least $30.00 million, measured on a cumulative basis and including certain restructuring transactions, subject to the Company’s continued employment of Mr. Mirman, TRW would receive from the Company a lump sum payment of $1.00 million. Mr. Mirman’s compensation arrangements with TRW provided that upon TRW’s receipt from the Company of the lump sum payment, TRW would make a payment of $1 million to Mr. Mirman. The Board determined in September 2014 that the criteria for the lump sum payment had been met. Mr. Mirman also received, as part of his compensation arrangement with TRW, the 100,000 common shares of the Company that were issued to TRW in conjunction with the investment banking agreement.

G. Tyler Runnels and T.R. Winston

We have participated in several transactions with TRW, of which G. Tyler Runnels, a former member of our Board of Directors, is chairman and majority owner. Mr. Runnels also beneficially holds more than 5% of our Common Stock, including the holdings of TRW and his personal holdings, and has personally participated in certain transactions with us.

On January 22, 2014, we paid TRW a commission equal to $486,000 (equal to 8% of gross proceeds at the closing of the January 2014 private placement). Of this $486,000 commission, $313,750 was paid in cash and $172,250 was paid in 86,125 Units. In addition, we paid TRW a non-accountable expense allowance of $182,250 (equal to 3% of gross proceeds at the closing of the January 2014 private placement) in cash. If the participation of certain of our current and former officers and directors, who remain committed, is approved by our shareholders, we will pay TRW an additional commission. The Units issued to TRW were the same Units sold in the January 2014 private placement and were invested in the January 2014 private placement.

On January 31, 2014, we entered into a debenture conversion agreement(the “Conversion Agreement”), with all of the holders of the Debentures,outstanding Series B Preferred Stock (the “Series B Holders”) to convert any outstanding shares of Series B Preferred Stock including TRWan increase in the stated value of to reflect dividends that would have accrued through December 31, 2017 in the amount of approximately 14.3 million shares of common stock. On the same date, the Series B Holders further agreed to adopt the Amended and Mr. Runnels’ personal trust, which we referRestated Certificate of Designation of Preferences, Rights and Limitations of Series B 6% Convertible Preferred Stock (“A&R COD”) in order to asremove certain restrictions contained therein with respect to beneficial ownership limitations, a condition of the First Conversion Agreement. UnderThe A&R COD became effective on April 26, 2017, resulting in the termsautomatic conversion of all outstanding Series B Preferred Stock. As a result of the First Conversion Agreement, $9.0 millionautomatic conversion, certain of the approximately $15.6 million in Debentures outstanding as of January 30, 2014 immediately converted to shares of Common Stock at a price of $2.00 per common share. As additional inducement for the conversions, we issued warrants to the converting Debenture holders to purchase one share of Common Stock, at an exercise price equal to $2.50 per share, for each share of Common Stock issued upon conversion of the Debentures. TRW acted as the investment banker for the First Conversion Agreement and was compensated by being issued 225,000our related parties received shares of our Common Stockcommon stock: (i) Abraham Mirman received 1,639,000 shares of common stock valued at a market price of $3.05 per share. During$8.4 million through the year ended December 31, 2014, we valued the investment banker compensation at $686,000.

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On May 19, 2014, weBralina Group, LLC for which Mr. Mirman holds shared voting and the holders of the Debentures agreed to extend the maturity date under the Debentures until August 15, 2014, and on June 6, 2014, they agreed to further extend the maturity date under the Debentures from August 15, 2014 to January 15, 2015. In January 2015, we entered into an extension agreement which extends the maturity date of the Debentures until January 8, 2018. Upon completion of the conversion of the remaining Debentures, TRW will be entitled to an additional commission.

On October 6, 2014, we entered into a letter agreement, or the Waiver, with the holders of our Debentures, including TRW and Mr. Runnels’ personal trust. Pursuant to the Waiver, the holders of the Debentures agreed to waive any Event of Default (as that term is defined in the Debentures) that may have occurred prior to the date of the Waiver, including any default in connection with the Hexagon term loan, and to rescind and annul any acceleration or right to acceleration that may have been triggered thereby. In exchange for the Waiver, we agreed that TRW, as representative for the holders of the Debentures, would have the right to nominate two qualified individuals to serve on our Board. Mr. Runnels is one of the qualified nomination designees which TRW has elected to place on the Board.

On March 28, 2014, we entered into a Transaction Fee Agreement with TRW in connection the May private placement, which we refer to as the Transaction Fee Agreement. Pursuant to the Transaction Fee Agreement, we agreed to compensate TRW 5% of the gross proceeds of the May private placement, plus a $25,000 expense reimbursement. On April 29, 2014, we and TRW amended the Transaction Fee Agreement to increase TRW’s compensation to 8% of the gross proceeds, plus an additional 1% of the gross proceeds as a non-accountable expense reimbursement in addition to the $25,000 originally contemplated. All fees were netted against gross proceeds from the May private placement.

On May 30, 2014, we paid TRW a commission equal to $600,000 (equal to 8% of gross proceeds at the closing of the May private placement). Of this $600,000 commission, $51,850 was paid in cash to TRW, $94,150 was paid in cash to other brokers designated by TRW, and remaining $454,000 was invested by TRW into shares of Series A 8% Convertible Preferred Stock. In addition, we paid TRW a non-accountable expense allowance of $75,000 (equal to 1% of gross proceeds at the closing of the May private placement) in cash.

On June 6, 2014, TRW executed a commitment to purchase or affect the purchase by third parties of an additional $15 million in Series A 8% Convertible Preferred Stock, to be consummated within ninety (90) days thereof. The agreement was subsequently extended and expired on February 22, 2015. On February 25, 2015, we and TRW agreed in principal to a replacement commitment, pursuant to which TRW has agreed that, at the request of our Board, TRW would purchase or effect the purchase by third parties of an additional $7.5 million in Series A 8% Convertible Preferred Stock, to be consummated no later than February 23, 2016, with all other terms substantially the same as those of the original commitment, which has not yet occurred.

Ronald D. Ormand

On March 20, 2014, we entered into an Engagement Agreement, or the MLV Engagement Agreement, with MLV. Pursuant to the MLV Engagement Agreement, MLV acted as our exclusive financial advisor.dispositive power; (ii) Ronald D. Ormand directorreceived 993,334 shares of thecommon stock valued at $5.1 million through Perugia Investments LP for which Mr. Ormand holds sole voting and dispositive power; (iii) Kevin Nanke received 198,667 shares of common stock valued at $1.0 million; (iv) R. Glenn Dawson received 117,822 shares of common stock valued at $0.6 million; (v) Bryan Ezralow received 894,001 shares of common stock valued at $4.6 million through various entities beneficially owned by him; (vi) Marc Ezralow received 745,001 shares of common stock valued at $3.8 million through various entities beneficially owned by him; (vii) Rosseau Asset Management Ltd received 1,986,667 shares of common stock valued at $10.2 million; (viii) Investor Company since February 20155J5505D received 3,925,654 shares of common stock valued at $20.1 million; (ix) J. Steven Emerson received 1,490,000 shares of common stock valued at $7.6 million through various entities beneficially owned by him; and Chairman(x) G. Tyler Runnels received 472,827 shares of our Board of Directors as of January 2016, was the former Managing Director and Head of the Energy Investment Banking Groupcommon stock valued at MLV until January 2016. The MLV Engagement Agreement provided for a fee of $25,000 to be paid monthly to MLV, subject to certain adjustments and other specific fee arrangements in connection with the nature of financial services being provided. The term of the MLV Engagement Agreement expired on October 31, 2015.$2.4 million through various entities beneficially owned by him.

We expensed $150,000 and $50,000 for the years ended December 31, 2015 and 2014, respectively. A total of $150,000 was paid to MLV for the year ended December 31, 2014. On May 27, 2015, MLV agreed to take $150,000 of its accrued fees Common Stock and was issued 75,000 shares in lieu of cash payment. The closing share price on May 27, 2015 was $1.56.

 

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Hexagon, LLCFor more information on the Series B Preferred Stock offering see Note 11 Stockholders Equity to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

Hexagon, LLC, which we refer to as Hexagon, our former primary lender, still holds over 5% of our Common Stock.First Lien Credit Agreement, Drawdown, Repayment and Amendment.

We were a party to three term loan credit agreements dated as of January 29, 2010, March 25, 2010, and April 14, 2010, respectively, which collectively, we refer to as the credit agreements with Hexagon. On April 15, 2013, Hexagon agreed to amend the credit agreements to extend their maturity dates to May 16, 2014. Pursuant to the amendment, Hexagon agreed to (i) reduce the interest rate under the credit agreements from 15% to 10% beginning retroactively with March 2013, (ii) permit us to make interest only payments for March, April, May, and June 2013, after which time the minimum secured term loan payment became $0.23 million, and (iii) forbear from exercising its rights under the term loan credit agreements for any breach that may have occurred prior to the amendment. In consideration for the extended maturity date, the reduced interest rate and minimum loan payment under the secured term loans, we provided Hexagon an additional security interest in 15,000 acres of our undeveloped acreage.

In addition, Hexagon and its affiliates had interests in certain of our wells independent of Hexagon’s interests under the term loans, for which Hexagon or its affiliates receive revenue and joint-interest billings.

On September 2, 2014, we entered into the Final Settlement Agreement with Hexagon, to settle all amounts payable by us pursuant to existing credit agreements with Hexagon that were secured by mortgages against the Hexagon Collateral. Pursuant to the Final Settlement Agreement, in exchange for full extinguishment of all amounts payable ($15.1 million in principal and interest) pursuant to the credit agreements and related promissory notes, we agreed to assign to Hexagon all of the Hexagon Collateral, and issued to Hexagon $2.0 million in a new series of 6% Redeemable Preferred Stock. The Final Settlement Agreement also prohibited Hexagon from selling or otherwise disposing of any shares of our Common Stock held by Hexagon until February 29, 2016. In addition, pursuant to the Final Settlement Agreement, we and Hexagon each mutually released and discharged all known and unknown claims against the other and their respective representatives that they had or may have, including claims relating to the credit agreements.

Officers and Directors

As discussed above, on January 31, 2014,2016, we entered into the First ConversionLien Credit Agreement. Certain parties to the First Lien Credit Agreement included our related parties: (i) TRW, acting as collateral agent, (ii) Bryan Ezralow through certain of his investment entities, (iii) Marc Ezralow through certain of his investment entities, (iv) J. Steven Emerson through certain of his investment entities, and (v) Investor Company 5J5505D.

On February 7, 2017, pursuant to the terms of the First Lien Credit Agreement, we exercised the accordion advance feature, increasing the aggregate principal amount outstanding under the term loan from $31 million to $38.1 million (the “First Lien Term Loan”). Certain parties that participated in the upsize of the First Lien Term Loan included our related parties: (i) Rosseau Asset Management Ltd ($2 million), (ii) Trace Capital Inc. ($1.6 million), and (iii) LOGiQ Capital 2016 ($1 million).

On April 24, 2017, we entered into an amendment to the First Lien Credit Agreement, in which the balance of the first lien credit facility in an aggregate amount of $38.1 million plus accrued and unpaid interest thereon was paid down and we extended further credit in the form of an initial bridge loan in an aggregate principal amount of $15.0 million.

Certain parties that were paid down pursuant to the First Lien Amendments included certain of our related parties such as TRW, acting as collateral agent, Bryan Ezralow and Marc Ezralow, through certain of their investment entities ($2.4 million), J. Steven Emerson through certain of his investment entities ($6.0 million), Rosseau Asset Management Ltd ($2.0 million), LOGiQ Capital 2016 ($1.0 million), and Investor Company 5J5505D ($20.1 million). Certain parties to the bridge loan and the incremental bridge loan included certain of our related parties such as: (i) Investor Company 5J5505D ($3.3 million), and (ii) Trace Capital Inc ($2.95 million).

In addition, on October 19, 2017, pursuant to the First Lien Amendments, the lenders made further extensions of credit, in addition to the currently existing loans under the First Lien Credit Agreement, in the form of an additional, incremental bridge loan in an aggregate principal amount of $15,000,000.

Second Lien Credit Agreement

On April 26, 2017, we entered into the Second Lien Credit Agreement with the holderslenders party thereto. Värde Partners, Inc. is the lead lender under the Second Lien Credit Agreement and, as a result of its conversion rights thereunder, it beneficially owns over 5% of our securities that are acquirable within 60 days. For more information about the Second Lien Credit Agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Second Lien Credit Agreement” under Item 7 of this report.

March 2017 Private Placement

On February 28, 2017, we entered into a Securities Purchase Agreement in connection with the March 2017 Private Placement. As of December 31, 2017, we received aggregate gross proceeds of $20 million and issued 5,194,821 shares of common stock and warrants to purchase 2,597,420 shares of common stock.

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The subscribers include the following related parties: (i) Bryan Ezralow, the beneficial owner of 5% or more of our common stock, through the Bryan Ezralow 1994 Trust u/t/d 12/22/1994, EMSE LLC, Elevado Investment Company, LLC and the Marc Ezralow Irrevocable Trust u/t/d 6/1/2004, (ii) Marc Ezralow, the beneficial owner of 5% or more of our common stock, through the Marc Ezralow 1997 Trust u/t/d 11/26/1997, EMSE LLC, Elevado Investment Company, LLC and the SPA Trust u/t/d 9/13/2004, (iii) J. Steven Emerson, through J. Steven Emerson Roth IRA Pershing LLC as Custodian and J. Steven Emerson IRA Rollover II Pershing LLC as Custodian, (iv) G. Tyler Runnels, through TRW and the Runnels Family Trust DTD 1-11-2000, and (v) Mark Christensen, through Trace Capital Inc.. The approximate dollar value of the Debentures,amount of (i) the interest of Bryan Ezralow, through the Bryan Ezralow 1994 Trust u/t/d 12/22/1994, EMSE LLC, Elevado Investment Company, LLC and the Marc Ezralow Irrevocable Trust u/t/d 6/1/2004, in the March 2017 Private Placement was $1.4 million; (ii) the interest of Marc Ezralow, through the Marc Ezralow 1997 Trust u/t/d 11/26/1997, EMSE LLC, Elevado Investment Company, LLC and the SPA Trust u/t/d 9/13/2004, in the March 2017 Private Placement was $1.2 million, (iii) the interest of J. Steven Emerson, through J. Steven Emerson Roth IRA Pershing LLC as Custodian and J. Steven Emerson IRA Rollover II Pershing LLC as Custodian, in the March 2017 Private Placement was $2.5 million, (iv) the interest of G. Tyler Runnels, through TRW and the Runnels Family Trust DTD 1-11-2000, in the March 2017 Private Placement was $0.8 million and (v) the interest of Mark Christensen, through Trace Capital Inc., in the March 2017 Private Placement was $1.0 million.

Additionally, on February 28, 2017, we entered into a Subscription Agreement in connection with the March 2017 Private Placement, for which also included W. Phillip Marcum, our thenTRW acted as placement agent and received a fee of $459,060.

For more information on the March 2017 Private Placement see Management’s Discussion and Analysis-Liquidity and Capital Resources-March 2017 Private Placement.

G. Tyler Runnels and T.R. Winston

On November 1, 2016, we entered into a sublease agreement with TRW to sublease office space in New York, for which we pay $10,000 per month on a month-to-month basis. The Company terminated this office lease on October 31, 2017.

Mark Christensen, Trace Capital Inc. and KES 7 Capital Inc.

Since January 1, 2016, Mr. Christensen has been involved in the following related party transactions with the Company, through Trace Capital Inc. (“Trace”), an entity owned by Mr. Christensen’s wife, and KES 7 Capital Inc. (“KES 7”) for which he serves as Chief Executive Officer and A. Bradley Gabbard,100% owner. Trace has participated in the following transactions with the Company: (i) the offering of Series B Preferred Stock in June 2016 pursuant to which Trace purchased 500 shares of Series B Preferred Stock and warrants to purchase up to 227,274 shares of common stock with an exercise price of $2.50 (the “Series B Warrants”) for aggregate consideration of $500,000; (ii) the Company’s first lien credit facility entered into in September 2016, which had initial aggregate principal commitments of approximately $31 million and a maximum facility size of $50 million, and the upsize of that facility in February 2017, of which Trace held indebtedness in an aggregate amount of $2.6 million, and which resulted in the repricing of the Series B Warrants to $0.01 that were exercised in full on April 25, 2017; (iii) the Company’s March 2017 private placement of units comprised of common stock and warrants raising net proceeds of approximately $20 million pursuant to which Trace purchased units for an aggregate purchase price of approximately $1 million; (iv) the conversion of shares of Series B Preferred Stock that Trace held plus accrued dividends, which resulted in the issuance of 467,348 shares of the common stock to Trace (valued at approximately $1,495,514 based on the $3.20 closing trading price of the common stock on December 9, 2016); and (v) the amendment to the Company’s first lien credit facility on April 24, 2017 and related matters, in which the balance of the first lien credit facility in an aggregate amount of $38.1 million plus accrued and unpaid interest thereon was paid down (including the $2.6 million of indebtedness held by Trace) and in which $1.45 million was reinvested by Trace in the form of bridge loans with an aggregate amount of $15 million outstanding. Each of the initial lenders that participated in the first lien credit facility also waived their right to any prepayment premium, including Trace. Additionally, KES 7 has acted as an advisor and placement agent in connection with certain of the Company’s financing transactions resulting in aggregate fees paid by the Company of approximately $2.4 million in cash and the issuance of warrants to purchase 820,000 shares of common stock with an exercise price of $1.30 to KES 7.

MMZ Consulting

From August 15, 2016 through April 15, 2017, we engaged MMZ Consulting LLC (“MMZ”) as a third-party consultant to support our thenfull cycle drilling & completions engineering needs. On January 29, 2017, Brennan Short, the president and owner of MMZ was hired to be our Chief FinancialOperating Officer. Since the beginning of this fiscal year, we have paid approximately $205,000 to MMZ in exchange for services rendered. Mr. Short is the sole member of MMZ.

Series C Preferred Stock Issuance

Employment AgreementsOn January 30, 2018, we entered into a Securities Purchase Agreement with Officerscertain private funds affiliated with Värde Partners, Inc. (the “Series C Purchasers”), pursuant to which, on January 31, 2018, the Series C Purchasers purchased 100,000 shares of our newly created series of preferred stock of the Company, designated as “Series C 9.75% Convertible Participating Preferred Stock” (the “Series C Preferred Stock”), for a purchase price of $1,000 per share, or an aggregate of $100,000,000. Värde Partners, Inc. is the lead lender, and certain private funds affiliated with Värde Partners, Inc. are lenders, under the Company’s Second Lien Credit Agreement. Värde Partners, Inc. and its applicable affiliated funds beneficially own over 5% of our common stock as a result of their respective conversion rights under the Second Lien Credit Agreement and the Series C Preferred Stock.

VPD Acquisition

On February 28, 2018, pursuant to an agreement we entered into with VPD Texas, L.P. (“VPD”) dated that date, we acquired from VPD a 50% undivided leasehold interest in certain oil and gas properties and assets in Loving and Winkler Counties, Texas for a purchase price of approximately $10.5 million. VPD is affiliated with Värde Partners, Inc., which is the lead lender under the Second Lien Credit Agreement, and Värde Partners, Inc. and certain affiliated funds hold all of the issued and outstanding shares of Series C Preferred Stock. As such, Värde Partners, Inc. and its applicable affiliated funds beneficially own over 5% of our common stock as a result of their respective conversion rights under the Second Lien Credit Agreement and the Series C Preferred Stock.

Compensation of Directors

 

See “Employment Agreements and Other Arrangements”“Executive Compensation-Compensation of Nonemployee Directors” above.

 

Compensation of Directors

See “Compensation of Directors” above.

Conflict of Interest Policy

 

Our Board of Directors has recognized that transactions between us and certain related persons present a heightened risk of conflicts of interest. We have a corporate conflict of interest policy that prohibits conflicts of interests unless approved by our Board of Directors.Board. Our Board of Directors has established a course of conduct whereby it considers in each case, whether the proposed transaction is on terms as favorable or more favorable to us than would be available from a non-related party. Our Board of Directors also looks at whether the transaction is fair and reasonable to us, taking into account the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to us. Each of the related party transactions described above was presented to our Board of Directors for consideration and each of these transactions was unanimously approved by our Board of Directors after reviewing the criteria set forth in the preceding two sentences.

  

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Director Independence

 

Our Board of Directors has determined that each of Nuno Brandolini, General Merrill McPeakSee “Directors, Executive Officers and Ronald D. Ormand qualifies as an independent director under rules promulgated by the SECCorporate Governance-Affirmative Determinations Regarding Director Independence and Nasdaq listing standards, and has concluded that none of these directors has a material relationship with us that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.Other Matters” above.

Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Hein & Associates LLP (“Hein”) became our independent registered public accounting firm on January 19, 2010. On November 7, 2014, we were notified by Hein that it did not wish to stand for re-election. On November 25, 2014, we engaged Marcum LLP (“Marcum”) as our independent registered public accounting firm, which was approved by our Board.

There were no disagreements in 2014 or 2015 on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedures.Item 14. Principal Accounting Fees and Services

 

The following table sets forth fees billed by our principal accounting firm offirms, BDO USA, LLP and Marcum LLP, for (i) the yearyears ended December 31, 20152017 and from November 25, 2014 through December 31, 2014 and (ii) Hein from January 1, 2014 through November 7, 2014:2016, respectively:

  

 Year Ended December 31,  Year Ended December 31, 
Fee Category 2015  2014  2017  2016 
    Marcum  Hein  (In thousands) 
Audit Fees $264,000  $294,000  $111,254  $

1,616

  $    358 
Audit-Related Fees $5,200   —   —   

11

   341 
Tax Fees $—   —   66,920 
All Other Fees $—   —   —   

-

   - 
Total Fees $269,200  $294,000  $178,174  $

1,627

  $699 

 

Audit Feesconsist of the aggregate fees for professional services rendered for the audit of our annual consolidated financial statements, our internal controls over financial reporting, and the reviews of the consolidated financial statements included in our quarterly reportsQuarterly Reports on Forms 10-Q and for any other services that were normally provided by our auditors in connection with our statutory and regulatory filings or engagements.

 

Audit-Related Feesconsist of the aggregate fees billed or reasonably expected to be billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.

 

Tax Feesconsist of the aggregate fees billed for professional services rendered for tax consulting. Included in such Tax Fees were fees for consultancy, review, and advice related to our income tax provision and the appropriate presentation on our financial statements of the income tax related accounts.

All Other Feesconsist of the aggregate fees billed for products and services provided by our auditors and not otherwise included in Audit Fees, Audit-Related Fees or Tax Fees.

 

Audit Committee Pre-Approval Policy

 

Our independent registered public accounting firm may not be engaged to provide non-audit services that are prohibited by law or regulation to be provided by it, nor may our independent registered public accounting firm be engaged to provide any other non-audit service unless it is determined that the engagement of the principal accountant provides a business benefit resulting from its inherent knowledge of our companyCompany while not impairing its independence. Our audit committee must pre-approve permissible non-audit services. During the fiscal year ended December 31, 2015,2017, we had no non-audit services.services provided by our independent registered public accounting firm.

 

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PartGLOSSARY

In this Annual Report, the following abbreviation and terms are used:

Bbl. Stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude, condensate or natural gas liquids.

Bcf. Billion cubic feet of natural gas.

Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one barrel of crude oil or condensate.

BLM. The Bureau of Land Management of the United States Department of the Interior.

BOE. One barrel of crude oil equivalent, determined using the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or natural gas liquids.

BOE/d. Barrels of oil equivalent per day.

BO/d. Barrel of oil per day.

BTU or British Thermal Unit. The quantity of heat required to raise the temperature of one pound mass of water by 28.5 to 59.5 degrees Fahrenheit.

Completion. Installation of permanent equipment for production of oil or natural gas.

Condensate. A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure but that, when produced, is in the liquid phase at surface pressure and temperature.

Development well. A well drilled within the proved area of a natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive.

Drilling locations. Total gross locations specifically quantified by management to be included in our multi-year drilling activities on existing acreage. Our actual drilling activities may change depending on the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, drilling results and other factors.

Dry well or dry hole. A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Exploratory well. A well drilled to find a new field or to find a new reservoir. Generally, an exploratory well in any well that is not a development well, an extension well, a service well or a stratigraphic well.

FERC. The Federal Energy Regulatory Commission.

Field. An area consisting of either a single reservoir or multiple reservoirs all grouped on or related to the same geological structural feature and/or stratigraphic condition.

Formation. An identifiable layer of subsurface rocks named after its geographical location and dominant rock type.

Gross acres, gross wells, or gross reserves. A well, acre or reserve in which we own a working interest, reported at the 100% or 8/8ths level. For example, the number of gross wells is the total number of wells in which we own a working interest.

Lease. A legal contract that specifies the terms of the business relationship between an energy company and a landowner or mineral rights holder on a particular tract of land.

Leasehold. Mineral rights leased in a certain area to form a project area.

MBBLs. One thousand barrels of crude oil or other liquid hydrocarbons.

MBOE. One thousand barrels of crude oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

87

Mcf. One thousand cubic feet of natural gas.

Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

MMbtu. One million British Thermal Units.

MMcf. One million cubic feet of natural gas.

Net acres or net wells. The sum of fractional ownership working interests in gross acres or gross wells. The number of net acres or wells is the sum of the fractional working interests owned in gross acres or wells expressed as whole numbers and fractions of whole numbers.

NGL. Natural gas liquids, or liquid hydrocarbons found as a by-product of natural gas.

Overriding royalty interest. Is similar to a basic royalty interest except that it is created out of the working interest. For example, an operator possesses a standard lease providing for a basic royalty to the lessor or mineral rights owner of 1/8 of 8/8. This then entitles the operator to retain 7/8 of the total oil and natural gas produced. The 7/8 in this case is the 100% working interest the operator owns. This operator may assign his working interest to another operator subject to a retained 1/8 overriding royalty. This would then result in a basic royalty of 1/8, an overriding royalty of 1/8 and a working interest of 3/4. Overriding royalty interest owners have no financial or other obligation or responsibility for developing and operating the property. The only expenses borne by the overriding royalty owner are a share of the production or severance taxes and sometimes costs incurred to make the oil or gas salable.

Plugging and abandonment. Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells.

Production. Natural resources, such as oil or gas, flowed or pumped out of the ground.

Productive well. A producing well or a well that is mechanically capable of production.

Proved developed oil and natural gas reserves. Proved developed oil and natural gas reserves are proved reserves that can be expected to be recovered (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Proved reserves. Those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible - from a given date forward, from known reservoirs, under existing economic conditions, operating methods, and government regulations - prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

Proved undeveloped reserves. Proved undeveloped oil and natural gas reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

Project. A targeted development area where it is probable that commercial oil and/or natural gas can be produced from new wells.

Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Recompletion. The process of re-entering an existing well bore that is either producing or not producing and modifying the existing completion and/or completing new reservoirs in an attempt to establish new production or increase or re-activate existing production.

Reserves. Estimated remaining quantities of oil, natural gas and natural gas liquids anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.

Reservoir. A subsurface formation containing a natural accumulation of producible natural gas and/or oil that is naturally trapped by impermeable rock or other geologic structures or water barriers and is individual and separate from other reservoirs.

88

Secondary Recovery. A recovery process that uses mechanisms other than the natural pressure or fluid drive of the reservoir, such as gas injection or water flooding, to produce residual oil and natural gas remaining after the primary recovery phase.

Shut-in. A well suspended from production or injection but not abandoned.

Standardized measure. The present value of estimated future cash flows from proved oil and natural gas reserves, less future development, abandonment, production and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes.

Successful. A well is determined to be successful if it is producing oil or natural gas in paying quantities.

Undeveloped acreage. Leased acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or natural gas regardless of whether such acreage contains proved reserves.

Water-flood. A method of secondary recovery in which water is injected into the reservoir formation to maintain or increase reservoir pressure and displace residual oil and enhance hydrocarbon recovery.

Working interest. The operating interest that gives the lessees/owners the right to drill, produce and conduct operating activities on the property, and to receive a share of the production revenue, subject to all royalties, overriding royalties and other burdens, all development costs, and all risks in connection therewith.

89

PART IV

Item 15. Exhibits, Financial Statement Schedules

 

Item15.Exhibits anda)Index to Financial Statement SchedulesStatements

 

INDEX TO FINANCIAL STATEMENTS

a)

ReportReports of Independent Registered Public Accounting FirmFirmsF-191
Consolidated Balance Sheets as of December 31, 20152017 and 20142016F-294
Consolidated Statements of Operations for the years ended December 31, 20152017 and 20142016F-495
Consolidated Statements of Stockholders’ Equity (Deficit)/Equity for the years ended December 31, 20152017 and 2014.2016F-596
Consolidated Statements of Cash Flows for the years ended December 31, 20152017 and 20142016F-697
Notes to Consolidated Financial StatementsF-798
Supplementary Information on Oil and Natural Gas Exploration, Development and Production Activities (unaudited)132

 

b)Financial statement schedules

Not applicable.

c) Exhibits

b)Exhibits

 

The information required by this Item is set forth on the exhibit index that follows the signature page to this Annual Report onand is incorporated herein by reference.

c)Financial Statement Schedules

Not applicable.

Item 16. Form 10-K.10-K Summary

None.

 

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SIGNATURESReport of Independent Registered Public Accounting Firm

 

Pursuant

Board of Directors and Stockholders

Lilis Energy, Inc. and Subsidiaries

San Antonio, Texas

Opinion on Internal Control over Financial Reporting

We have audited Lilis Energy, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective plans and actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2017, the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes and our report dated March 9, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the requirements of Section 13 or 15(d) ofCompany in accordance with U.S. federal securities laws and the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LILIS ENERGY, INC.
Date: April 14, 2016By:/s/ Abraham Mirman
Abraham Mirman

Chief Executive Officer

(Authorized Signatory)

Pursuant to the requirementsapplicable rules and regulations of the Securities and Exchange ActCommission and the PCAOB.

We conducted our audit of 1934,internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain controls over the ceiling test has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report has been signed below bydoes not affect our report dated March 9, 2018 on those consolidated financial statements.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the following persons on behalfreliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the registrantassets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the capacitiescompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the dates indicated.consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

SignatureTitleDate
/s/ BDO USA, LLP 
/s/ Abraham MirmanChief Executive Officer, DirectorApril 14, 2016
Abraham Mirman(Principal Executive Officer)Dallas, Texas 
March 9, 2018 
/s/ Kevin K. NankeExecutive Vice President and Chief Financial OfficerApril 14, 2016
Kevin Nanke(Principal Financial and Accounting Officer)
/s/ Ronald D. OrmandChairman of the BoardApril 14, 2016
Ronald D. Ormand

/s/ Nuno Brandolini

 Director

April 14, 2016
Nuno Brandolini
/s/ R. Glenn DawsonDirector  April 14, 2016
R. Glenn Dawson
/s/ General Merrill McPeakDirectorApril 14, 2016
General Merrill McPeak

75

Exhibit Index

The following exhibits are either filed herewith or incorporated herein by reference

2.1Asset Purchase Agreement (incorporated herein by reference to Exhibit 2.1 to the Company’s current report on Form 8-K filed on May 5, 2015).
2.2First Amendment to the Asset Purchase Agreement (incorporated herein by reference to Exhibit 2.2 to the Company’s current report on Form 8-K filed on June 11, 2015).

2.3

Second Amendment to the Asset Purchase Agreement, dated June 30, 2015 (incorporated herein by reference to Exhibit 2.3 to the Company’s quarterly report on Form 10-Q filed on August 19, 2015).
2.4Agreement and Plan of Merger, dated as of December 29, 2015 between Lilis Energy, Inc., Lilis Merger Sub, Inc. and Brushy Resources, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s current report on Form 8-K filed on January 5, 2016).
2.5First Amendment to Agreement and Plan of Merger, dated January 20, 2016, by and among Lilis Energy, Inc., Lilis Merger Sub, Inc. and Brushy Resources, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s current report on Form 8-K filed on January 20, 2016).
2.6Second Amendment to the Agreement and Plan of Merger, dated March 24, 2016, by and among Lilis Energy, Inc., Lilis Merger Sub, Inc. and Brushy Resources, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s current report on Form 8-K filed on March 24, 2016).
3.1Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 from the Company’s current report on Form 8-K filed on October 20, 2011).
3.2Certificate of Amendment to the Articles of Incorporation of Recovery Energy, Inc. (incorporated herein by reference to Exhibit 3.1 from the Company’s current report on Form 8-K filed on November 19, 2013).
3.3Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to the Company’s current report on Form 8-K filed on June 18, 2010).
3.4Certificate of Designation of Preferences, Rights, and Limitations, dated May 30, 2014 (incorporated herein by reference to Exhibit 3.1 from the Company’s current report on Form 8-K filed on June 4, 2014).
3.5Amendment to Certificate of Designations of Preferences, Rights, and Limitations, dated June 12, 2014 (incorporated herein by reference to Exhibit 3.1 from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2014, filed on June 17, 2014).
3.6Certificate of Designation of 6% Redeemable Preferred Stock, dated August 29, 2014 (incorporated by reference to Exhibit 3.3 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2014, filed on November 26, 2014).
4.1Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on January 28, 2014).
4.2Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on February 6, 2014).
4.3Five Year Warrant to David Castaneda dated January 17, 2014 (incorporated herein by reference to Exhibit 4.1 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
4.4Five Year Warrant (Anniversary Warrant) to David Castaneda dated January 17, 2014 (incorporated herein by reference to Exhibit 4.2 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
4.6Form of Warrant dated May 30, 2014 (incorporated herein by reference to Exhibit 10.2 from the Company’s current report on Form 8-K filed on June 4, 2014).
4.7Warrant to Purchase Common Stock issued to Bristol Capital (incorporated herein by reference to Exhibit 4.3 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2014, filed on November 26, 2014).

 

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4.8Warrant to Purchase Common Stock issued to Heartland Bank (incorporated herein by reference to Exhibit 4.3 to the Company’s quarterly report on Form 10-Q, filed on February 26, 2015).
4.9Form of Convertible Note (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on January 5, 2016).
4.10Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on January 5, 2016).
10.1Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 4, 2010).
10.2Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on June 4, 2010).
10.3Form of Convertible Debenture Securities Purchase Agreement dated February 2, 2011 (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on February 3, 2011). 
10.4Form of Convertible Debenture (incorporated herein by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on February 3, 2011).
10.5Amendment to 8% Senior Secured Convertible Debentures dated December 16, 2011 (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on December 19, 2011).
10.6Second Amendment to 8% Senior Secured Convertible Debentures dated March 19, 2012 (incorporated herein by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 21, 2012).
10.7Securities Purchase Agreement for additional 8% Senior Secured Convertible Debentures dated March 19, 2012 (incorporated herein by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 21, 2012).
10.8Form of 8% Senior Secured Convertible Debentures dated March 19, 2012 (incorporated herein by reference to Exhibit 10.58 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 21, 2012).
10.9Amendment to 8% Senior Secured Convertible Debenture and Waiver under Securities Purchase Agreement, dated July 23, 2012 (incorporated herein by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on June 11, 2014).
10.10Amendment to Securities Purchase Agreement dated August 7, 2012 (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on August 9, 2012).
10.11Amendment to Securities Purchase Agreement dated August 7, 2012 (incorporated herein by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on August 9, 2012).
10.12Amendment to 8% Senior Secured Convertible Debentures due February 8, 2014, dated April 15, 2013 (incorporated herein by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on June 11, 2014).
10.13Letter Agreement with Debenture Holder dated April 16, 2013 (incorporated herein by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on June 11, 2014).
10.14Securities Purchase Agreement dated June 18, 2013 (incorporated herein by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2013, filed on August 15, 2013).
10.15Form of Convertible Debenture (incorporated herein by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2013, filed on August 15, 2013).
10.16Letter Agreement dated June 18, 2013 regarding 8% Senior Secured Debentures (incorporated herein by reference to Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2013, filed on August 15, 2013).
10.17Debenture Conversion Agreement, dated as of January 31, 2014 (incorporated herein by reference to Exhibit 10.1 from the Company’s current report on Form 8-K filed on February 6, 2014).
10.18Form of Subscription Agreement, dated January 22, 2014 (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on January 28, 2014.
10.19Form of Hexagon Replacement Note (incorporated herein by reference to Exhibit 10.4 from the Company’s current report on Form 8-K filed on June 4, 2014).
10.20Letter Agreement dated May 19, 2014 with holders of the 8% Senior Secured Convertible Debentures (incorporated herein by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).

77

10.21Amendment to Debentures dated June 6, 2014 (incorporated herein by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
10.22Transaction Fee Agreement with T.R. Winston dated as of March 28, 2014 (incorporated herein by reference to Exhibit 10.6 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
10.23Amendment to Transaction Fee Agreement with T.R. Winston dated as of April 29, 2014 (incorporated herein by reference to Exhibit 10.7 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
10.24Engagement Agreement for Financial Advisory Services with MLV & Co. LLC dated as of February 21, 2014 (incorporated herein by reference to Exhibit 10.8 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
10.25†Consulting Agreement with Market Development Consulting Group, Inc. dated January 17, 2014 (incorporated herein by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on June 11, 2014).
10.26†Market Development Consulting Group, Inc. Termination letter, dated August 1, 2014 (incorporated herein by reference to Exhibit 10.15 to the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).
10.27†Consulting Agreement with Bristol Capital dated September 2, 2014 (incorporated herein by reference to Exhibit 10.11 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2014, filed on November 26, 2014).
10.28Form of Securities Purchase Agreement dated May 30, 2014 (incorporated herein by reference to Exhibit 10.1 from the Company’s current report on Form 8-K filed on June 4, 2014).
10.29Hexagon Settlement Agreement, dated May 30, 2014 (incorporated herein by reference to Exhibit 10.3 from the Company’s current report on Form 8-K filed on June 4, 2014).
10.30Settlement Agreement with Hexagon dated September 2, 2014 (incorporated herein by reference to Exhibit 10.10 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2014, filed on November 26, 2014).
10.31Letter Agreement with holders of the Company’s 8% Senior Secured Convertible Debentures, dated October 6, 2014 (incorporated herein by reference to Exhibit 99.1 from the Company’s current report on Form 8-K filed on October 7, 2014).
10.32Credit Agreement, dated January 8, 2015, among Lilis Energy, Inc., Heartland Bank, as administrative agent, and the other lender parties thereto (incorporated herein by reference to Exhibit 10.1 from the Company’s current report on Form 8-K filed on January 13, 2015).
10.33Security Agreement, dated as of January 8, 2015, by and between Lilis Energy, Inc. and Heartland Bank, as collateral agent (incorporated herein by reference to Exhibit 10.12(a) from the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).
10.34Form of Promissory Note from Lilis Energy, Inc. as Borrower to Heartland Bank as Payee, dated as of January 8, 2015 (incorporated herein by reference to Exhibit 10.12(b) from the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).
10.35Subordination Agreement, dated as of January 8, 2015 (incorporated herein by reference to Exhibit 10.12(c) from the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).
10.36Form of Mortgage from Lilis Energy, Inc. as Mortgagor to Heartland Bank as Mortgagee (Colorado Oil and Gas Properties) (incorporated herein by reference to Exhibit 10.12(d) from the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).
10.37Form of Mortgage from Lilis Energy, Inc. as Mortgagor to Heartland Bank as Mortgagee (Nebraska Oil and Gas Properties) (incorporated herein by reference to Exhibit 10.12(e) from the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).
10.38Form of Mortgage from Lilis Energy, Inc. as Mortgagor to Heartland Bank as Mortgagee (Wyoming Oil and Gas Properties) (incorporated herein by reference to Exhibit 10.12(f) from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2014, filed on February 26, 2015).
10.39Letter Agreement with holders of the Company’s 8% Senior Secured Convertible Debentures (incorporated herein by reference to Exhibit 10.13 to the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).

78

10.40†Separation Agreement with W. Phillip Marcum dated April 24, 2014 (incorporated herein by reference to Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
10.41†Employment Agreement with Robert A. Bell dated May 1, 2014 (incorporated herein by reference to Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
10.42†Independent Director Appointment Agreement with Robert A. Bell effective March 1, 2014 (incorporated herein by reference to Exhibit 10.55 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on June 11, 2014).
10.43†Separation Agreement with Robert A. Bell dated August 1, 2014 (incorporated herein by reference to Exhibit 10.9 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2014, filed on November 26, 2014).
10.44†Employment Agreement with Eric Ulwelling, dated as of February 19, 2015 (incorporated herein by reference to Exhibit 10.14 to the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014, filed on February 26, 2015).
10.45†Stock Option Award Agreement with Eric Ulwelling, dated April 14, 2015 (incorporated herein by reference to Exhibit 10.81 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on April 15, 2015).
10.46†Employment Agreement with Kevin Nanke, dated March 6, 2015 (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on March 12, 2015).
10.47†Stock Option Award Agreement with Kevin Nanke, dated April 14, 2015 (incorporated herein by reference to Exhibit 10.83 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on April 15, 2015).
10.48†Employment Agreement with Ariella Fuchs, dated March 16, 2015 (incorporated herein by reference to Exhibit 10.84 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on April 15, 2015).
10.49†Stock Option Award Agreement with Ariella Fuchs, dated April 14, 2015 (incorporated herein by reference to Exhibit 10.85 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on April 15, 2015).
10.50†Amended and Restated Employment Agreement between the Company and Abraham Mirman, dated March 30, 2015 (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on April 2, 2015).
10.51†Stock Option Award Agreement with Abraham Mirman, dated April 14, 2015 (incorporated herein by reference to Exhibit 10.87 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on April 15, 2015).
10.52†Form of Non-Employee Director Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2015, filed on August 19, 2015)
Form of Non-Employee Director Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the period ended June 30, 2015, filed on August 19, 2015)
10.53†Recovery Energy, Inc. 2012 Equity Incentive Plan dated August 31, 2012, as amended (incorporated by reference to Annex A to the Company’s definitive proxy filed on December 15, 2015).
10.54Voting Agreement, dated as of December 29, 2015 between Lilis Energy, Inc., Lilis Merger Sub, Inc., Brushy Resources, Inc. and SOSventures, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on January 5, 2016).
10.55Voting Agreement, dated as of December 29, 2015 between Lilis Energy, Inc., Lilis Merger Sub, Inc., Brushy Resources, Inc. and Longview Marquis Fund LP, LMIF Investments LLC and SMF investments, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on January 5, 2016).
10.56Debenture Conversion Agreement, dated as of December 29, 2015 between Lilis Energy, Inc., T.R. Winston and Company acting as placement agent and each Debenture holder (incorporated herein by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed on January 5, 2016).

79

10.57Forbearance Agreement, dated as of December 29, 2015, between Lilis Energy, Inc. and Heartland Bank, as administrative agent (incorporated herein by reference to Exhibit 10.4 to the Company’s current report on Form 8-K filed on January 5, 2016).
10.58First Amendment to the Forbearance Agreement, dated as of March 1, 2016 between Lilis Energy, Inc. and Heartland Bank, as administrative agent (incorporated herein by reference to Exhibit 10.4 to the Company’s current report on Form 8-K filed on March 7, 2016)
10.59Form of Convertible Note Purchase Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s current report on Form 8-K filed on January 5, 2016).
10.60Form of Note Exchange Agreement (incorporated herein by reference to Exhibit 10.6 to the Company’s current report on Form 8-K filed on January 5, 2016).

21.1List of subsidiaries of the registrant.
23.1Consent of Marcum LLP.
23.2Consent of Forrest A Garb & Associates, Inc.
31.1Certifications Pursuant to Section 302 of Sarbanes Oxley Act of 2002.
31.2Certifications Pursuant to Section 302 of Sarbanes Oxley Act of 2002.
32.1Certifications Pursuant to Section 906 of Sarbanes Oxley Act of 2002.
32.2Certifications Pursuant to Section 906 of Sarbanes Oxley Act of 2002.
99.1Report of Forrest A Garb & Associates, Inc.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document

† Indicates a management contract or any compensatory plan, contract or arrangement.

80

Report of Independent Registered Public Accounting Firm

To the Audit Committee of the 

Board of Directors and Stockholders

of Lilis Energy, Inc. and Subsidiaries

San Antonio, Texas

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheetssheet of Lilis Energy, Inc. (the “Company”) and subsidiaries as of December 31, 2015 and 2014, and2017, the related consolidated statements of operations, changes in stockholders’ equity (deficit)/equity, and cash flows for the yearsyear then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 9, 2018 expressed an adverse opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2017.

Dallas, Texas

March 9, 2018

92

Report of Independent Registered Public Accounting Firm

To the Audit Committee of the
Board of Directors and Shareholders
of Lilis Energy, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Lilis Energy, Inc. and Subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.audit.

 

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditsaudit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lilis Energy, Inc., and Subsidiaries, as of December 31, 20152016, and 2014, and the consolidated results of its operations and its cash flows for the yearsyear then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant accumulated deficit, working capital deficit, incurred significant net losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty

/s/ Marcum LLP

Marcumllp

New York, NY
April 14, 2016

/s/ Marcum LLP
New York, NY
March 3, 2017

 

 F-193 

 

 

LILIS ENERGY, INC.Lilis Energy, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

  December 31,  December 31, 
  2015  2014 
       
Assets        
Current assets:        
Cash $110,022  $509,628 
Restricted cash  3,777   183,707 
Accounts receivable (net of allowance of $80,000 at December 31, 2015 and 2014)  951,645   831,706 
Prepaid assets  75,233   54,064 
Total current assets  1,140,677   1,579,105 
         
Oil and gas properties (full cost method), at cost:        
Evaluated properties  50,096,063   46,268,756 
Unevaluated acreage, excluded from amortization  -   2,885,758 
Wells in progress, excluded from amortization  -   6,041,743 
Total oil and gas properties, at cost  50,096063   55,196,257 
Less accumulated depreciation, depletion, amortization, and impairment  (49,573,439)  (24,550,217)
Oil and gas properties at cost, net  522,624   30,646,040 
         
Other assets:        
Office equipment net of accumulated depreciation $137,149 and $107,712 at December 31, 2015 and 2014, respectively.  44,386   73,823 
Deferred financing costs, net  220,020   60,000 
Restricted cash and deposits  2,000,406   215,541 
Total other assets  2,264,812   349,364 
         
Total Assets $3,928,113  $32,574,509 

  December 31, 
  2017  2016 
ASSETS        
Current assets:        
Cash and cash equivalents $17,462  $11,738 
Accounts receivables, net of allowance of $39 and $106, respectively  7,426   2,247 
Prepaid expenses and other current assets  584   767 
Total current assets  25,472   14,752 
Oil and natural gas properties, full cost method of accounting        
Unproved  101,771   24,461 
Proved  141,717   69,809 
Less: accumulated depreciation, depletion, amortization and impairment  (73,183)  (55,771)
Total oil and natural gas properties, net  170,305   38,499 
         
Other property and equipment, net  76   52 
Other assets  91   216 
Total other assets  167   268 
Total assets $195,944  $53,519 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)        
Current liabilities:        
Accounts payable $10,488  $5,166 
Accrued liabilities  13,857   2,706 
Derivative instruments  853   - 
Dividends payable  -   808 
Asset retirement obligations  226   338 
Current portion of long-term debt  11   17 
Total current liabilities  25,435   9,035 
Asset retirement obligations  726   919 
Long-term debt  127,794   30,226 
Derivative instruments  72,937   1,400 
Total liabilities  226,892   41,580 
Commitments and contingencies (Note 8)        
Conditionally redeemable 6% preferred stock, $0.0001 par value, 7,000 shares authorized, 2,000 shares issued and outstanding with a liquidation preference of $2,240 at December 31, 2016  -   1,874 
Stockholders’ equity (deficit):        
Series B Preferred stock, $0.0001 par value; stated value of $1,000; 20,000 shares authorized; 16,828 shares issued and outstanding at December 31, 2016, with a liquidation preference of $20,627 at December 31, 2016  -   13,432 
Common stock, $0.0001 par value per share; 150,000,000 shares authorized, 53,368,331 and 20,918,901 shares issued and outstanding as of December 31, 2017 and 2016, respectively.  5   2 
Additional paid-in capital  272,335   219,837 
Accumulated deficit  (303,288)  (223,206)
Total stockholders’ equity (deficit)  (30,948)  10,065 
Total liabilities, redeemable preferred stock and stockholders’ equity $195,944  $53,519 

 

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

 

 F-294 

 

 

LILIS ENERGY, INC.Lilis Energy, Inc. and Subsidiaries

BALANCE SHEETSConsolidated Statements of Operations

(In thousands, except share and per share data)

  

  December 31,  December 31, 
  2015  2014 
       
       
Liabilities, Redeemable Preferred Stock and Stockholders' (Deficit)/Equity
Current liabilities:      
Dividends accrued on preferred stock $720,000   180,000 
Accrued expenses for drilling activity  535,938   5,734,131 
Accounts payable  1,331,963   975,749 
Accrued expenses  2,955,419   1,248,995 
Convertible bridge notes, net of discount  673,739   - 
Convertible bridge notes – related parties, net of discount  1,054,552   - 
Term loan – Heartland, net of discount  2,712,089   - 
Convertible debentures, net of discount  6,846,465   - 
Convertible debentures conversion derivative liability  5,511   - 
Total current liabilities  16,835,676   

8,138,875

 
         
Long term liabilities:        
Asset retirement obligation  207,953   200,063 
Warranty liability  55,655   393,788 
Convertible debentures, net of discount  -   6,840,076 
Convertible debentures conversion derivative liability  -   1,249,442 
Total long-term liabilities  263,608   8,683,369 
         
Total liabilities  17,099,284   16,822,244 
         
Commitments and contingencies        
         
Conditionally redeemable 6% preferred stock, $0.0001 par value: 7,000 shares authorized, 2,000 shares issued and outstanding with a liquidation preference of $2,150,000 as of December 31, 2015.  1,172,517   1,686,102 
         
Stockholders’ (deficit)/equity        
Series A Preferred stock, $0.0001 par value; stated rate $1,000:10,000,000 shares authorized, 7,500 issued and outstanding with a liquidation preference of $8,040,000 as of December 31, 2015.  6,794,000   6,794,000 
Common stock, $0.0001 par value: 100,000,000 shares authorized; 27,858,255 and 26,988,240 shares issued and outstanding as of December 31, 2015 and December 31, 2014, respectively  2,786   2,699 
Additional paid in capital  159,769,184   155,097,785 
Accumulated deficit  (180,909,658)  (147,828,321)
Total stockholders' (deficit)/equity  (14,343,688)  14,066,163 
         
Total Liabilities, Redeemable Preferred Stock and Stockholders’ (Deficit)/Equity $3,928,113  $32,574,509 
  Year Ended December 31, 
  2017  2016 
       
Revenues:        
Oil sales $17,826  $2,418 
Natural gas sales  2,125   844 
Natural gas liquid sales  1,661   173 
   21,612   3,435 
         
Operating expenses:        
Production costs  7,023   1,590 
Production taxes  1,187   (167)
General and administrative  49,851   14,227 
Depreciation, depletion, accretion and amortization  7,025   1,698 
Impairment of evaluated oil and natural gas properties  10,505   4,718 
Total operating expenses  75,591   22,066 
         
Loss from operations  (53,979)  (18,631)
         
Other income (expense):        
Other income  18   90 
Inducement expense  -   (8,307)
Gain on extinguishment of debt and modification of convertible debentures  -   852 
Loss from commodity derivatives, net  (1,063)  - 
Loss from fair value changes of debt conversion and warrant derivatives  (6,260)  (1,222)
Loss from fair value changes of conditionally redeemable 6% preferred stock  (41)  (701)
Interest expense  (18,757)  (4,924)
Total other income (expense)  (26,103)  (14,212)
         
Net loss before income taxes  (80,082)  (32,843)
         
Income tax expense  -   - 
         
Net loss  (80,082)  (32,843)
Dividends on redeemable preferred stock  (122)  (407)
Loss on extinguishment of Series A convertible preferred stock  -   (540)
Dividend and deemed dividends on Series B convertible preferred stock  (4,635)  (8,506)
Net loss attributable to common stockholders $(84,839) $(42,296)
         
Net loss per common share-basic and diluted $(2.00) $(3.73)
Weighted average common shares outstanding:        
Basic and diluted  42,428,148   11,328,252 

  

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

 

 F-395 

 

 

LILIS ENERGY, INC.Lilis Energy, Inc. and Subsidiaries

Consolidated Statements of OperationsChanges in Stockholders’ Equity (Deficit)

Years Ended December 31, 2015(In thousands, except share and 2014per share data)

 

  2015  2014 
       
Revenue:      
Oil sales $292,332  $2,581,689 
Gas sales  77,068   364,732 
Operating fees  26,664   182,773 
Realized gain on commodity price derivatives  -   11,143 
Total revenue  396,064   3,140,337 
         
Costs and expenses:        
Production costs  195,435   954,347 
Production taxes  27,917   269,823 
General and administrative  7,929,628   10,325,842 
Depreciation, depletion and amortization  584,203   1,337,662 
Impairment of evaluated oil and gas properties  24,478,378   - 
Total costs and expenses  33,215,561   12,887,675 
         
Loss from operations before conveyance  (32,819,497)  (9,747,338)
Loss on conveyance of oil and gas properties  -   (2,269,760)
Loss from operations  (32,819,497)  (12,017,098)
         
Other income (expenses):        
Other income  3,160   32,444 
Inducement expense  -   (6,661,275)
Change in fair value of convertible debentures conversion derivative liability  1,243,931   (5,526,945)
Change in fair value of warrant liability  394,383   571,228 
Change in fair value of conditionally redeemable 6% Preferred stock  513,585   - 
Interest expense  (1,696,899)  (4,837,025)
Total other income (expenses)  458,160   (16,421,573)
         
Net loss  (32,361,337)  (28,438,671)
Dividend on Preferred stock  (120,000)  (341,848)
Deemed dividend Series A Convertible Preferred stock  (600,000)  (3,519,370)
Net loss attributable to common stockholders $(33,081,337) $(32,299,889)
         
Net loss per common share basic and diluted $(1.21) $(1.23)
Weighted average shares outstanding:        
Basic and diluted  27,267,749   26,333,161 

  Series A Preferred  Series B Preferred     Additional       
  Shares  Shares  Common Shares  Paid In  Accumulated    
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                            
Balance, December 31, 2015  7,500  $6,794   -  $-   2,786,275  $-  $159,773  $(180,910) $(14,343)
Stock based compensation  -   -   -   -   711,667   -   7,078   -   7,078 
Exercise of warrants  -   -   -   -   420,707   -   187   -   187 
Fair value of warrants issued for financing costs  -   -   -   -   -   -   713   -   713 
Issuance and repricing of warrants to induce conversion  -   -   -   -   -   -   8,307   -   8,307 
Gain on modification of convertible debentures  -   -   -   -   -   -   (602)  -   (602)
Fair value of warrants issued for debt discount  -   -   -   -   -   -   1,479   -   1,479 
Common stock issued for conversion of convertible notes and accrued interest  -   -   -   -   6,778,115   1   14,871   -   14,872 
Common stock and warrants issued in connection with the Brushy merger  -   -   -   -   5,785,119   -   7,111   -   7,111 
Series B Preferred stock issued for cash, net of fees  -   -   20,000   18,195   -   -   -   -   18,195 
Warrants issued for Series B Preferred Stock offering fees  -   -   -   (1,591)  -   -   1,591   -   - 
Conversion of Series A Preferred Stock and dividends to common stock  (7,500)  (6,794)  -   -   1,500,000   1   7,681   -   888 
Loss on extinguishment of Series A Preferred Stock  -   -   -   -   -   -   540   (540)  - 
Conversion of Series B Preferred Stock and dividends  -   -   (3,172)  (3,172)  2,937,018   -   3,229   -   57 
Dividends and deemed dividends for Preferred Stock  -   -   -   -   -   -   7,879   (8,913)  (1,034)
Net loss  -   -   -   -   -   -   -   (32,843)  (32,843)
Balance, December 31, 2016  -   -   16,828   13,432   20,918,901   2   219,837   (223,206)  10,065 
Stock based compensation  -   -   -   -   -   -   21,538   -   21, 538 
Common stock for restricted stock and stock options  -   -   -   -   5,859,383   -   524   -   524 
Common stock withheld for taxes on stock-based compensation  -   -   -   -   (786,081)  -   (3,709)  -   (3,709)
Exercise of warrants  -   -   -   -   5,580,281   1   592   -   593 
Conversion of Series B Preferred Stock and dividends  -   -   (16,828)  (13,432)  16,601,026   2   14,863   -   1,433 
Sale of common stock in private placement, net  -   -   -   -   5,194,821   -   18,649   -   18,649 
Warrants repriced for term loan  -   -   -   -   -   -   1,031   -   1,031 
Dividends and deemed dividends on preferred stock  -   -   -   -   -   -   (990)  -   (990)
Net loss  -   -   -   -   -   -   -   (80,082)  (80,082)
Balance, December 31, 2017  -  $-   -  $-   53,368,331  $5  $272,335  $(303,288) $(30,948)

  

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

 

 F-496 

 

 

LILIS ENERGY, INC.Lilis Energy, Inc. and Subsidiaries

Consolidated Statements of STOCKHolders’ (DEFICIT)/EquityCash Flows

Years Ended December 31, 2015 and 2014(In thousands)

  Year Ended December 31, 
  2017  2016 
Cash flows from operating activities:        
Net loss $(80,082) $(32,843)
Adjustments to reconcile net loss to net cash used in operating activities:        
Equity instruments issued for services and compensation  21,538   7,078 
Inducement expense  -   8,307 
Bad debt expense  22   494 
Amortization of debt issuance cost and debt discount  10,371   3,185 
Paid-in-kind interest  6,559   - 
Loss on commodity derivatives  1,063   - 
Cash settlement paid for commodity derivatives  (96)  - 
Loss in fair value of debt conversion and warrant derivatives  6,260   1,222 
Loss in fair value of conditionally redeemable 6% preferred stock  41   701 
Depreciation, depletion, amortization and accretion of asset retirement obligation  7,025   1,698 
Impairment of evaluated oil and natural gas properties  10,505   4,718 
Gain on extinguishment of debt and modification of convertible debentures  -   (852)
Changes in operating assets and liabilities:        
Accounts receivable  (5,204)  (1,264)
Other assets  309   1,554 
Accounts payable, accrued expenses and other liabilities  14,446   (307)
Net cash used in operating activities  (7,243)  (6,309)
         
Cash flows from investing activities:        
Cash consideration for Brushy merger, net of cash acquired  -   (2,302)
Net proceeds from sale of DJ Basin and non-operated properties  1,282   - 
Capital expenditures  (148,784)  (16,828)
Net cash used in investing activities  (147,502)  (19,130)
         
Cash flows from financing activities:        
Net proceeds from issuance of Series B Preferred Stock  -   18,195 
Proceeds from issuance of convertible notes  -   2,863 
Proceeds from issuance of First Lien Term Loan, net of financing costs  -   29,701 
Proceeds from exercise of accordion feature of the First Lien Term Loan, net of financing costs  6,706   - 
Proceeds from Bridge Loan and Second Lien Term Loan, net of financing costs  178,722   - 
Repayment of the First Lien Term Loan  (38,100)  - 
Repayment of conditionally redeemable 6% preferred stock including dividends  (2,277)  - 
Proceeds from exercise of stock options and warrants  745   187 
Payment for tax withholding on stock-based compensation  (3,709)  - 
Proceeds from private placement, net of financing costs  18,399   - 
Repayment of notes payable  (17)  (13,879)
Net cash provided by financing activities  160,469   37,067 
Increase in cash and cash equivalents  5,724   11,628 
Cash and cash equivalents at beginning of period  11,738   110 
Cash and cash equivalents at end of period $17,462  $11,738 
Supplemental disclosure:        
Cash paid for interest $2,292  $762 

 

              Additional       
  Preferred Stock  Common Stock  Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                      
Balance, January 1, 2014  -  $-   19,671,901  $1,967  $121,451,232  $(115,528,432) $5,924,767 
                             
Common stock issued in connection with January 2014 private placement  -   -   2,959,125   296   3,557,107   -   3,557,403 
Fair value of warrants issued in connections with January 2014 private placement including placement warrants  -   -   -   -   1,678,596   -   1,678,596 
Common stock issued in connection with January 2014 conversion of convertible debt  -   -   4,366,726   437   8,733,001   -   8,733,438 
Common stock issued for placement fees in connection with January 2014 conversion of convertible debt  -   -   225,000   23   686,227   -   686,250 
Fair value of inducement expense in connection with debenture conversion  -   -   -   -   6,661,275   -   6,661,275 
Reclassification of conversion liability in connection with January 2014 conversion of convertible debt      -   -   -   4,882,815   -   4,882,815 
Preferred stock issued in connection with May 2014 private placement, net  7,500   6,794,000   -   -   -   -   6,794,000 
Fair value of warrant and beneficial conversion feature in connection with May 2014 private placement  -   -   -   -   3,519,370   (3,519,370)  - 
Common stock issued for interest in connection with convertible debt outstanding  -   -   1,396,129   140   1,188,299   -   1,188,439 
Common shares issued for restricted stock vested  -   -   327,901   32   (32)  -   - 
Stock based compensation for issuance of restricted stock  -   -   -   -   514,804   -   514,804 
Stock based compensation for issuance of stock options  -   -   -   -   1,242,256   -   1,242,256 
Common stock issued for professional services  -   -   90,000   9   305,040   -   305,049 
Fair value of warrants issued for professional services  -   -   -   -   677,590   -   677,590 
Adjustment for restricted stock not vested  -   -   (2,048,542)  (205)  205   -   - 
Dividend Preferred stockholders  -   -   -   -   -   (341,848)  (341,848)
Net Loss  -   -   -   -   -   (28,438,671)  (28,438,671)
                             
Balance, December 31, 2014  7,500   6,794,000   26,988,240   2,699   155,097,785   (147,828,321)  14,066,163 
                             
Common stock issued for professional services  -   -   75,000   7   149,993   -   150,000 
Common stock issued for officer and board compensation  -   -   795,015   80   214,922   -   215,002 
Fair value of warrants issued for professional services  -   -   -   -   424,636   -   424,636 
Fair value of warrants issued for bridge term loan  -   -   -   -   476,261   -   476,261 
Fair value of warrants issued for bridge term loan – related parties  -   -   -   -   745,450   -   745,450 
Stock based compensation for issuance of stock options  -   -   -   -   2,191,274   -   2,191,274 
Stock based compensation for issuance of restricted stock  -   -   -   -   468,863   -   468,863 
Dividend Preferred stockholders  -   -   -   -   -   (120,000)  (120,000)
Deemed dividend Series A Convertible Preferred stock  -   -   -   -   -   (600,000)  (600,000)
Net loss  -   -   -   -   -   (32,361,337)  (32,361,337)
Balance, December 31, 2015  7,500  $6,794,000   27,858,255  $2,786  $159,769,184  $(180,909,658) $(14,343,688)

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

 

 F-597 

 

 

LILIS ENERGY, INC.Lilis Energy, Inc. and Subsidiaries

Notes to Consolidated Financial Statements of Cash Flows

Years Ended December 31, 2015 and 2014

 

  Year ended December 31, 
  2015  2014 
       
Cash flows from operating activities:      
Net loss $(32,361,337) $(28,438,671)
Adjustments to reconcile net loss to net cash used in operating activities:        
Inducement expense  -   6,661,275 
Common stock issued to investment bank for fees related to conversion of convertible debentures  -   686,250 
Equity instruments issued for services and compensation  3,449,775   2,739,699 
Reserve on bad debt expense  -   30,000 
Loss on conveyance of property  -   2,269,760 
Loss from hedge settlements  -   11,143 
Change in fair value of price derivative      (4,464)
Change in fair value of executive incentive bonus  33,508   (105,000)
Amortization of deferred financing cost  27,391   234,699 
Common stock issued for convertible note interest  -   1,188,439 
Change in fair value of convertible debenture conversion derivative  (1,243,931)  5,526,945 
Change in fair value of warrant liability  (394,383)  (571,228)
Change in fair value of conditionally redeemable 6% Preferred stock  (513,585)  965,016 
Depreciation, depletion, amortization and accretion of asset retirement obligation  584,203   1,337,662 
Impairment of evaluated oil and gas properties  24,478,378   - 
Accretion of debt discount  24,728   849,147 
Changes in operating assets and liabilities:        
Accounts receivable  (119,939)  (394,369)
Restricted cash  145,065   320,916 
Other assets  57,728   141,652 
Accounts payable and other accrued expenses  2,027,098   (755,108)
Net cash used in operating activities  (3,805,301)  (7,306,237)
         
Cash flows from investing activities:        
Acquisition of undeveloped acreage  -   (305,000)
Drilling capital expenditures  (97,999)  (190,786)
Additions of office equipment  -   (10,815)
Deposit on potential merger  (1,750,000)  - 
Net cash used in investing activities  (1,847,999)  (506,601)
         
Cash flows from financing activities:        
Net proceeds from issuance of Common Stock  -   5,236,000 
Proceeds from issuance of debt  5,950,002   - 
Net proceeds from issuance of Series A Convertible Preferred Stock  -   6,794,000 
Debt issuance cost  (266,308)  - 
Dividend payments on Preferred stock  (180,000)  (161,848)
Repayment of debt  (250,000)  (3,711,051)
Net cash provided by financing activities  5,253,694   8,157,101 
         
Increase (decrease) in cash  (399,606)  344,263 
Cash at beginning of year  509,628   163,365 
         
CASH AT END OF YEAR $110,022  $509,628 
Supplemental disclosure:        
Cash paid for interest $365,303  $1,324,988 
Cash paid for income taxes $-  $- 
         
Non-cash transactions:        
Fair value of warrants issued as debt discount $1,221,711  $- 
Disposition of oil and gas assets for elimination of accrued expenses for drilling $5,198,193  $- 
Common stock issued for accrued convertible debenture interest $-  $1,188,439 
Acquisition of oil and gas assets for accounts payable and accrued interest $-  $5,466,405 
Transfer from derivative liability to equity $-  $4,882,815 
Issuance of Common Stock for payment of convertible debentures $-  $8,733,438 
Issuance of redeemable preferred stock for payment of term notes payable $-  $1,686,102 
Conveyance of oil and gas properties for payment of term notes payable $-  $15,063,289 
Conveyance of oil and gas properties for reduction in asset retirement obligation $-  $973,132 

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

F-6

LILIS ENERGY, INC.

Notes to THE Financial Statements

NOTE 1 – ORGANIZATIONOrganization and Business

On September 21, 2009, Universal Holdings, Inc. (“Universal”), a Nevada corporation, completed the acquisition of Coronado Acquisitions, LLC (“Coronado”). Under the terms of the acquisition, Coronado was merged into Universal. On October 12, 2009, Universal changed its name to Recovery Energy, Inc. On December 1, 2013, Recovery Energy, Inc. changed its name to

Lilis Energy, Inc. (“Lilis”, “Lilis Energy”, “we”, “our”, and or the “Company”). The acquisition was accounted for as a reverse acquisition with Coronado being treated asincorporated in the acquirer for accounting purposes. Accordingly, the financial statementsState of Coronado and Recovery Energy have been adopted as the historical financial statements of Lilis.

Nevada in 2007. The Company is an independent oil and natural gas company focused on the acquisition, development, and production of conventional and unconventional oil and natural gas properties in the core of the Delaware Basin in Winkler, Loving, and Reeves Counties, Texas and Lea County, New Mexico. The Company has only one reportable operating segment, which is oil and natural gas exploration and production company focusedin the Delaware Basin.

On June 23, 2016, the Company completed a merger transaction with Brushy Resources, Inc. (“Brushy Resources”). The merger resulted in the acquisition of our properties in the Delaware Basin and the majority of our current operating activity. In connection with the merger with Brushy Resources, the Company effected a 1-for-10 reverse stock split. As a result of the reverse split, every ten shares of issued and outstanding common stock were automatically converted into one newly issued and outstanding share of common stock, without any change in the par value per share; however, the number of authorized shares of common stock remained unchanged.

Shortly after the merger with Brushy Resources, the Company began to develop and implement a development program focusing on the Denver-Julesburg Basindrilling of new horizontal wells across multiple potentially productive formations in the Delaware Basin. The Company drilled its first horizontal well in late 2016 and completed it in January 2017. The Company intends to grow its business through generating cash flow from new production of oil, natural gas and natural gas liquid (“DJ Basin”NGL”) where it holds 16,000 net acres. Lilis drills for, operates and produces, as well as through de-risking the development profile of our portfolio of properties in order to add overall value.

On March 31, 2017, the Company completed the divestiture of all our oil and natural gas wells through the Company’s land holdingsproperties located in Wyoming, Colorado, and Nebraska.

All referencesthe DJ Basin completing its transformation to production, sales volumes and reserves quantities are net to the Company’s interest unless otherwise indicated.

NOTE 2 – GOING CONCERN AND MANAGEMENT PLANS

The Company’s financial statements for the year ended December 31, 2015 have been prepared on a going concern basis.  The Company has reported net operating losses during the year ended December 31, 2015 and for the past five years. This history of operating losses, along with the recent decrease in commodity prices, may adversely affect the Company’s ability to access capital it needs to continue operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts of liabilities, that might result from this uncertainty.

We will need to raise additional funds to finance continuing operations. However, we may not be successful in doing so. Without sufficient additional financing, it would be unlikely for us to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan and eventually secure other sources of financing and attain profitable operations.

Information about our year-end financial position is presented in the following table (in thousands):

  Year ended December 31, 
  2015  2014 
       
Financial Position Summary      
Cash and cash equivalents $110  $510 
Working capital (deficit) $(15,695) $(6,560)
Balance outstanding on convertible debentures,
convertible notes payable and term loan		 $11,317  $6,840 
Stockholders’ (deficit)/equity $(14,344) $14,067 

As of December 31, 2015, the Company had a negative working capital balance and a cash balance of approximately $15.7 million and $110,000, respectively. As of March 30, 2016, the Company’s cash balance was approximately $50,000. The Company has historically financed its operations through the sale of debt and equity securities and borrowings under credit facilities with financial institutions.

For a complete description of the Company’s indebtedness, see Note 7 — Loan Agreements.

F-7

Development and Production

During the year ended December 31, 2015, the Company transferred $847,000 from wells-in progress to developedpure play Delaware Basin oil and natural gas properties. This included approximately $491,000 from a well currently producing in Northern Wattenbergcompany.

NOTE 2 – Basis of Presentation and approximately $356,000Summary of cost incurred for projects thatSignificant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company no longer plans to pursue.and its wholly owned subsidiaries which includes Brushy Resources, ImPetro Operating, LLC (“ImPetro Operating”), ImPetro Resources, LLC (“ImPetro”), Lilis Operating Company, LLC (“Lilis Operating”), and Hurricane Resources LLC (“Hurricane”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

During the year ended December 31, 2015, the Company entered into five joint operating agreements to participate as a non-operator in the drillingUse of five horizontal wells. The Company has an average of 2.78% working interest in each of these wells which are being drilled by reliable companies. However, due to capital constraints, the Company expects that it will be put into non-consent status on each of these wells unless other arrangements can be made.Estimates

 

Additionally, as of March 30, 2016, the Company was producing approximately 20 BOE a day from eight economically producing wells. Due to a decline in commodity prices, the cash generated from the Company’s production activity is not sufficient to pay its operating costs and the Company does not have sufficient cash to continue operations in the ordinary course.

Proposed Merger with Brushy Resources

On December 29, 2015, the Company entered into the Merger Agreement, which is described in more detail under “Business and Properties—Pending Merger with Brushy Resources.” Among other conditions to the Merger, the Company is required to repay its Term Loan in full, convert the $6.85 million outstanding under its Debentures into Common Stock at $0.50 and convert $7.5 million of its outstanding Series A Preferred Stock into Common Stock at $0.50. In addition, Brushy will have to repay, refinance or negotiate alternative terms with its senior lender prior to completing the Merger.

The Company believes that if the Merger is successfully completed, it will substantially increase its producing properties resulting in significantly greater cash flow while eliminating or refinancing its existing indebtedness. The Company will however be required to obtain significant additional capital to pay outstanding debt obligations, pay professional fees related to the Merger, pay outstanding payables in the ordinary course and to fund the combined company’s working capital requirements. While the Company expects to raise additional capital to fund all of these obligations, the current volatility in the commodity markets has made it difficult for oil and gas exploration companies, including the Company, to access debt or equity financing or obtain borrowings from financial lenders.

If the Company is unable to complete the Merger or otherwise obtain significant capital, it will likely not be able to continue its current operations and would have to consider other alternatives to preserve value for the Company’s stockholders. These alternatives could include engaging in discussions to acquire other producing properties, selling or disposing of some or all of the Company’s assets or a liquidation of its business.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Basis of Presentation

The accompanying consolidated financial statements wereare prepared by the Company in accordanceconformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to provide a fair statement of the results of operations and financial position.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and theliabilities; disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.period; and the quantities and values of proved oil, natural gas and natural gas liquid (“NGL”) reserves used in calculating depletion and assessing impairment of its oil and natural gas properties. The most significant estimates pertain to the evaluation of unproved properties for impairment, proved oil and natural gas reserves and related cash flow estimates used in the depletion and impairment of oil and natural gas properties, the timing and amount of transfers of our unevaluated properties into our amortizable full cost pool, the fair value of embedded derivatives and commodity derivative contracts, accrued oil and natural gas revenues and expenses valuation of options and warrants, inducement transactions and common stock, and the allocation of general administrative expenses. Actual results could differ significantly from thosethese estimates. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment. Although actual results may differ from these estimates under different assumptions or conditions, the Company believes that its estimates are reasonable. 

 F-898 

 

The most significant financial estimates are associated with the Company’s estimated volumes of proved oil and natural gas reserves, asset retirement obligations, assessments of impairment imbedded in the carrying value of undeveloped acreage and undeveloped properties, fair value of financial instruments, including derivative liabilities, depreciation and accretion, income taxes and contingencies.

 

Restricted Cash and DepositsReclassifications

 

Short term restricted cash consistsCertain reclassifications have been made to the prior year financial statements to conform to the 2017 presentation. These reclassifications have no effect on the Company’s previously reported results of severance and ad valorem tax proceeds which are payable to various tax authorities. As ofoperations. For the year ended December 31, 20152016, the income from operator’s overhead recovery of $0.3 million has been reclassified from production costs to general and 2014, the short-term deposits were approximately $4,000 and $184,000, respectively. At December 31, 2015 and 2014, the Company had $215,000 of non-current restricted cash for plugging bonds. Long term restricted cash and deposits consist of a $1.75 million deposit for the proposed merger with Brushy described in more detail below, plugging bonds and other deposits.  As of December 31, 2015 and 2014 the long-term deposits were approximately $2.0 million and $216,000, respectively.administrative expenses.

 

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid instruments with an original maturity of three months or less are stated at cost, which approximates fair value.

Accounts Receivable

 

The Company records actual and estimated oil and gas revenuehas accounts receivable from third parties at its net revenue interest. The Company also reflects costs incurred on behalf of joint interest partners.owners of properties operated by the Company. The Company typically has the right to withhold future revenue disbursements to recover outstandingany non-payment of related joint interest billings on outstanding receivables from joint interest owners.billings. Management periodically reviewsroutinely assesses accounts receivable amounts forto determine their collectability and records itsaccrues an allowance for uncollectible receivables using the allowance methodwhen, based on past experience. Allowance for doubtful accounts are based primarily on joint interest billings for expenses related tothe judgment of management, it is probable that a receivable will not be collected. The Company records actual and estimated oil and natural gas wells. Receivables which deriverevenue receivable from third parties at its net revenue interest. In addition, the Company has receivables derived from sales of certain oil and natural gas production which are collateral under the Company’s Credit Agreement.credit agreements.

 

ConcentrationFair Value of Credit RiskFinancial Instruments

 

The Company's cash is invested at major financial institutions primarily within the United States. AtAs of December 31, 20152017 and 2014,2016, the Company’scarrying value of cash was maintained inand cash equivalents, accounts that are insured upreceivable, accounts payable, accrued expenses, interest payable and advances from joint interest partners approximates fair value due to the limit determined by the federal governmental agency.short-term nature of such items. The Company may at times have balances in excess of the federally insured limits. Periodically, the Company evaluates the creditworthy of the financial institutions, and has not experienced any losses in such accounts.

Significant Customers

The Company’s major customers include, Shell Trading (US), PDC Energy and Noble Energy. These customers accounted for approximately 43%, 26% and 21% for the year ended December 31, 2015 and approximately 63%, 14% and 9% for the year ended December 31, 2014, respectively. 

However, the Company does not believe that the loss of a single purchaser would materially affect the Company’s business because there are numerous other purchasers in the area in which the Company sells its production.

Reserves

All of the reserves data included herein are estimates.  Estimatescarrying value of the Company’s crude oil and natural gas reserves are prepared in accordance with guidelines established bysecured debt is carried at cost which approximates the SEC, including rule revisions designed to modernize the oil and gas company reserves reporting requirements, which the Company implemented effective December 31, 2010.  Reservoir engineering is a subjective process of estimating underground accumulations of crude oil and natural gas. There are numerous uncertainties inherent in estimating quantities of proved crude oil and natural gas reserves. Uncertainties include the projection of future production rates and the expected timing of development expenditures.  The accuracy of any reserves estimate is a functionfair value of the quality ofdebt as the related interest rates approximates interest rates currently available data and of engineering and geological interpretation and judgment.  As a result, reserves estimates may be different fromto the quantities of crude oil and natural gas that are ultimately recovered. In addition, the ability to produce economic reserves is dependent on the oil and gas prices used in the reserves estimate. The Company’s reserves estimates are based on 12-month average commodity prices, unless contractual arrangements otherwise designate the price to be used, in accordance with the SEC rules.  However, oil and gas prices are volatile and, as a result, the Company’s reserves estimates may change in the future.

F-9

Estimates of proved crude oil and natural gas reserves significantly affect the Company’s depreciation, depletion, and amortization “DD&A” expense. For example, if estimates of proved reserves decline, the DD&A rate will increase, resulting in a decrease in net income. A decline in estimates of proved reserves could also result in an impairment charge, which would reduce earnings.Company.

 

Oil and Natural Gas Producing ActivitiesProperties

 

The Company followsuses the full cost method of accounting for oil and natural gas operations whereby alloperations. Under this method, costs related to the exploration, non-production related development and acquisition of oil and natural gas reserves are capitalized. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling, developing and completing productive wells and/or plugging and abandoning non-productive wells, and any other costs directly related to acquisition and exploration activities. Proceeds from property sales are generally applied as a credit against capitalized exploration and development costs, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of proved reserves.

 

The Company accounts for its unproven long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05,Accounting for the Impairment or Disposal of Long-Lived Assets. ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.

 

Depletion of exploration and development costs and depreciation of wells and tangible production assets is computed using the units-of-production method based upon estimated proved oil and natural gas reserves. Costs included in the depletion base to be amortized include (a) all proved capitalized costs including capitalized asset retirement costs net of estimated salvage values, less accumulated depletion, (b) estimated future development cost to be incurred in developing proved reserves; and (c) estimated decommissioning and abandonment/restoration costs, net of estimated salvage values, that are not otherwise included in capitalized costs.

 

The costs ofCosts associated with undeveloped acreage are withheldexcluded from the depletion base until it is determined whether or not proved reserves can be assigned to the properties. When proved reserves are assigned to such properties or one or more specific properties are deemed to be impaired, the cost of such properties or the amount of the impairment is added to the full cost pool which is subject to depletion calculations.depletions.

  

Under the full cost method of accounting, capitalized oil and natural gas property costs less accumulated depletion and net of deferred income taxes may not exceed an amount equal to the sum of the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves and the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are not subject to amortization. Should capitalized costs exceed this ceiling, an impairment expense is recognized. DuringFor the year ended December 31, 2015,2017, higher capital expenditures with lower than expected development of proved reserves contributed to the Company recordedexcess of net book value of our oil and natural gas properties over the ceiling resulting in the recognition of an impairment charge of $10.5 million. During 2016, commodity prices continued to trade in a $24.5low range. With low commodity prices sustained for the majority of 2016 in the DJ Basin, some of the Company’s properties became uneconomic triggering an impairment charge of $4.7 million impairment. No impairment was recorded in 2014.for the year ended December 31, 2016.

99

 

The present value of estimated future net cash flows was computed by applying: a flat oil price to forecast revenues from estimated future production of proved oil and natural gas reserves as of period-end, less estimated future expenditures to be incurred in developing and producing the proved reserves (assuming the continuation of existing economic conditions), less any applicable future taxes.

Effective as of December 31, 2014, the Company completed an assessment of its inventory of unevaluated acreage, which resulted in a transfer of $9.90 million from unevaluated acreage to evaluated properties. In assessing the unevaluated acreage, the Company analyzed the expiration dates during the years ended December 31, 2014 and 2015 of leases that are not otherwise renewable, and transferred such acreage in the amount of $6.99 million. In addition to the transfer of near and intermediate term expirations, the Company assessed the carrying value of its remaining acreage, and concluded that an additional transfer of $2.91 million was necessary. No proved reserves were associated with the transferred acreage.

F-10

Due to the decline in commodity prices, the Company incurred a full cost ceiling impairment in the year ended December 31, 2015. Because the ceiling calculation uses rolling 12-month average commodity prices, lower quarter-over-quarter prices in 2015 compared to 2014 resulted in a lower ceiling value each quarter. Impairment charges do not affect cash flow from operating activities, but have and could continue to adversely affect the Company’s net income and stockholders’ equity.

 

During the year ended December 31, 2015, the Company transferred its remaining inventory of unevaluated acreage of $2.9 million to evaluated properties. 

Wells in Progress

 

Wells in progress connotes wells that are currently in the process of being drilled or completed or otherwise under evaluation as to their potential to produce oil and natural gas reserves in commercial quantities. Such wells continue to be classified as wells in progress and withheld from the depletion calculation and the ceiling test until such time as either proved reserves can be assigned, or the wells are otherwise abandoned. Upon either the assignment of proved reserves or abandonment, the costs for these wells are then transferred to the full cost pool and become subject to both depletion and the ceiling test calculations in accordance with full cost accounting under Rule 4-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended.

 

Deferred Financing CostsCapitalized Interest

 

For significant oil and natural gas investments in unproved properties, and significant exploration and development projects that have not commenced production, interest is capitalized as part of the historical cost of developing and constructing assets. Capitalized interest is determined by multiplying the Company’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depreciation or impairment. As of December 31, 20152017, there were no significant exploratory projects on unproved properties and 2014, the Company recorded unamortized deferred financing costs of $220,000 and $60,000, respectively, related to the closing of its term loans and credit agreements. Deferred financing costs include origination (cash and warrants), legal and engineering fees incurred in connection with the Company's term notes, which are being amortized using the straight-line method, which approximated interest rate method, over the termnone of the loans. The Company recorded amortization expensedevelopment projects exceeded the interest capitalization qualifying asset limit. As a result, no interest was capitalized as of approximately $27,000 and $295,000, respectively, in the years ended December 31, 20152017 and 2014.2016.

 

Other Property and Equipment

 

Property and equipment include vehicles, office equipment and furniture which are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property and equipment range from onethree to seven years. The Company recorded approximately $29,000 and $28,000$0.04 million of depreciation for each of the years ended December 31, 20152017 and 2014,2016, respectively.

 

Impairment of Long-lived AssetsAccrued Liabilities

The Company accounts for long-lived assets (other than oil and gas properties) at cost. Other long-lived assets consist principally of property and equipment and identifiable intangible assets with finite useful lives (subject to amortization, depletion, and depreciation). The Company may impair these assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Recoverability is measured by comparing the carrying amount of an asset to the expected undiscounted future net cash flows generated by the asset. If it is determined that the asset may not be recoverable, and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge is recognized to the extent of the difference.

Fair Value of Financial Instruments

 

As of December 31, 20152017 and 2014,2016, the carrying value of cash and cash equivalents, accounts receivable, accounts payable,Company’s accrued expenses, interest and dividends payable and customer deposits approximates fair value due to the short-term nature of such items. The carrying valueliabilities consisted of the Company’s secured debt is carried at cost as the related interest rate are at the terms approximates rates currently available to the Company.following:

F-11

  December 31, 
  2017  2016 
  ($ in thousands) 
Accrued bonus $3,000  $- 
Accrued drilling costs  3,615   1,331 
Revenue payable  6,460   1,313 
Other accrued liabilities  782   62 
Total accrued liabilities $13,857  $2,706 

Commodity Derivative Instrument

The Company utilizes swaps to reduce the effect of price changes on a portion of its future oil production. On a monthly basis, a swap requires the Company to pay the counterparty if the settlement price exceeds the strike price and the same counterparty is required to pay the Company if the settlement price is less than the strike price. The objective of the Company's use of derivative financial instruments is to achieve more predictable cash flows in an environment of volatile oil and gas prices and to manage its exposure to commodity price risk. While the use of these derivative instruments limits the downside risk of adverse price movements, such use may also limit the Company's ability to benefit from favorable price movements. The Company may, from time to time, add incremental derivative contracts to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of the Company's existing positions.

The use of derivatives involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts. The Company's derivative contracts have typically been arranged with one counterparty. The Company has netting arrangements with this counterparty that provide for the offset of payables against receivables from separate derivative arrangements with the counterparty in the event of contract termination. The derivative contracts may be terminated by a non-defaulting party in the event of default by one of the parties to the agreement. The Company periodically enters into various commodity derivative financial instruments intended to hedge against exposure to market fluctuations of oil prices. As of December 31, 2015 and 2014, the Company did not have any commodity derivative instruments outstanding.

Revenue Recognition

The Company records revenues from the sales of crude oil, natural gas and natural gas liquids when the product is delivered at a fixed or determinable price, title has transferred and collectability is reasonably assured.

  

Oil and Natural Gas Revenue

Sales of oil and natural gas, net of any royalties, are recognized when persuasive evidence of a sales arrangement exists, oil and natural gas have been delivered to a custody transfer point, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable. Virtually all of the Company’s contracts’ oil and natural gas pricing provisions are tied to a NYMEX market index, with certain local differential adjustments based on, among other factors, whether a well delivers oil or natural gas to a gathering, refinery, marketing company, or transmission line and prevailing local supply and demand conditions. The price of the oil and natural gas fluctuates to remain competitive with other local oil suppliers.

Asset Retirement Obligations

 

The Company incurs retirement obligations for certain assets at the time they are placed in service. The fair values of these obligations are recorded as liabilities on a discounted basis. The costs associated with these liabilities are capitalized as part of the related assets and depreciated. Over time, the liabilities are accreted for the change in their present value.

For purposes of depletion, calculations, the Company also includes estimated dismantlement and abandonment costs,cost, net of salvage values, associated with future development activities that have not yet been capitalized as asset retirement obligations.

Asset retirement obligations incurred are classified as Level 3 (unobservable inputs) fair value measurements. The asset retirement liability is allocated to operating expense using a systematic and rational method. As of December 31, 2015 and 2014, the Company recorded a related liability of approximately $208,000 and $200,000, respectively.

  

 F-12100 

 

 

The information below reconciles the value of the asset retirement obligation for the periods presented (in thousands):

  For the years ended
December 31,		 
  2015  2014 
Balance, beginning of year $200  $1,105 
Liabilities incurred  -   4 
Accretion expense  10   64 
Conveyance of liability with oil and gas properties conveyance  -   (973)
Change in estimate  (2)  - 
Balance, end of year $208  $200 

Stock Based CompensationRevenue Recognition

 

The Company measuresrecognizes revenue when it is realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

The Company uses the entitlements method of accounting for oil, natural gas and NGL revenues. Should sales proceeds be in excess of the Company's entitlement, these amounts will be included in accrued liabilities and the Company's share of sales taken by others will be included in other assets in the accompanying consolidated balance sheets. The Company had no material oil, natural gas or NGL entitlement assets or liabilities as of December 31, 2017 and 2016.

All revenue proceeds relating to third-party royalty owners not remitted by the end of a reporting period are recorded as revenue payable, a component of accrued liabilities. As of December 31, 2017, and 2016, the Company had approximately $6.5 million and $1.3 million, respectively, of such revenue proceeds recorded in accrued liabilities.

Stock Based Compensation

The Company applies a fair value method of accounting for stock-based compensation, which requires recognition in the financial statements of the cost of services received in exchange for equity awards. For equity awards, compensation expense is based on the fair value on the grant date or modification date and is recognized in the Company’s financial statements over the vesting period. The Company utilizes the Black-Scholes Merton option-pricing model to measure the fair value of stock-based compensation expense awards made to employees and directors, including stock options restricted stock units, restricted stock and employee stock purchases related to employee stock purchase plans, on the date of grant using a Black-Scholes model. Restricted stock awards are recorded at the fair market value of the stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. The measurement of share-based compensation expense is based on several criteria, including but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate, dividend rate and award cancellation rate. These inputs are subjective and are determined using management’s judgment. If differences arise between the assumptions used in determining share-basedstock-based compensation expense and the actual factors, which become known over time. Thetime, the Company may change the input factors used in determining future share-basedstock-based compensation expense. The Company recognizes forfeitures as and when the stock awards are forfeited.

 

The Company accounts for warrant grants to non-employeesnonemployees whereby the fair values of such warrants are determined using the option pricing model at the earlier of the date at which the non-employee’snonemployee’s performance is complete or a performance commitment is reached.

Warrant Modification Expense

The Company accounts for the modification of warrants as an exchange of the old award for a new award. The incremental value is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before modification, and is either expensed as a period expense or amortized over the performance or vesting date. The Company estimates the incremental value of each warrant using the Black-Scholes option pricing model. The Black-Scholes model is highly complex and dependent on key estimates by management. The estimate with the greatest degree of subjective judgment is the estimated volatility of the Company’s stock price.

Net Loss per Common Share

Earnings (losses) per share are computed based on the weighted average number of common shares outstanding during the period presented. Diluted earnings per share are computed using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares.

Potentially dilutive securities, such as shares issuable upon the conversion of debt or preferred stock, and exercise of stock purchase warrants and options, are excluded from the calculation when their effect would be anti-dilutive. As of December 31, 2015 and 2014 shares underlying options, warrants, preferred stock and convertible debentures have been excluded from the diluted share calculations as they were anti-dilutive as a result of net losses incurred.

F-13

The Company had the following Common Stock equivalents at December 31, 2015 and 2014:

  December 31,
2015		  December 31,
2014		 
Stock Options 6,083,333  3,583,333 
Restricted Stock Units (employees/directors)  1,869,000   1,630,667 
Series A Preferred Stock  3,112,033   3,112,033 
Stock Purchase Warrants  24,383,161   17,007,065 
Convertible Debentures  3,423,233   3,423,233 
Convertible Bridge Notes  5,900,004   - 
   44,770,764   28,756,311 

Income Taxes

 

The Company uses the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities, and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.

 

The Company recognizes its tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed that do not meet these recognition and measurement standards. As of December 31, 20152017 and 2014,2016, the Company has determined that no liability is required to be recognized.

 

The Company’s policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax expense. No interest or penalties were required to be accrued at December 31, 20152017 and December 31, 2014.2016. Further, the Company does not expect that the total amount of unrecognized tax benefits will significantly increase or decrease during the next 12 months.

Recently Issued Accounting PronouncementsLoss Per Share

 

In May 2014,

Basic loss per share was calculated by dividing net income or loss applicable to common shares by the FASB issued ASU No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representingweighted average number of common shares outstanding during the transferperiods presented. The calculation of promised goodsdiluted loss per share should include the potential dilutive impact of shares issuable upon the conversion of debt or services to customers in an amount that reflectspreferred stock, warrants and options during the consideration whichperiod, unless their effect is anti-dilutive. At December 31, 2017 and 2016, common stock equivalents including shares underlying conversion of the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timingSecond Lien Term Loan, restricted stock units, restricted stock, options, warrants, preferred stock and uncertainty of revenues and cash flows arisingdebentures have been excluded from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us on January 1, 2018. Early application is only permitteddiluted share calculations as they were anti-dilutive as a result of January 1, 2017.net losses incurred. The Company is currently evaluatingincluded 3,522,735 warrants, with an exercise price of $.01, in its earnings per share calculation for the effect that ASU 2014-09 will have on its financial statements and related disclosures.year ended December 31, 2016. There were no warrants exercisable at a price of $0.01 per share for the year ended December 31, 2017.

In June 2014, the FASB issued ASU No. 2014-12 (“ASU 2014-12”), “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 states that the performance target should not be reflected in estimating the grant date fair value of the award. ASU 2014-12 clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the periods for which the requisite service has already been rendered. The new standard is effective for us on January 1, 2016. The Company does not expect adoption of ASU 2014-12 to have a significant impact on its financial statements.

In August 2014, the FASB issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.” ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective for us on January 1, 2017. The Company does not expect the adoption of ASU 2014–15 to have a significant impact on its financial statements.

 

 F-14101 

 

 

The Company excluded the following shares from the diluted loss per share calculations because they were anti-dilutive at December 31, 2017 and 2016:

  December 31, 
  2017  2016 
Stock Options  7,305,000   5,956,833 
Restricted Stock Units  9,999   149,584 
Restricted Stock  2,475,266   1,068,305 
Series B Preferred Stock  -   15,454,545 
Stock Purchase Warrants(1)  11,882,800   12,392,776 
Conversion of Term Loan  24,202,016   - 
   45,875,081   35,022,043 

(1)Excludes warrants exercisable for 3,522,735 shares of common stock at an exercise price of $0.01 for the year ended December 31, 2016 since these warrants are not anti-dilutive. There were no warrants exercisable at $0.01 per share for the year ended December 31, 2017.

Concentration of Credit Risk

The Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payment for costs associated with the property and seeks reimbursement from the other joint interest owners in the property for their portion of those costs. When warranted, prepayments are required from joint interest owners for drilling and completion projects. Joint interest owners consist primarily of independent oil and natural gas producers whose ability to reimburse the Company could be negatively impacted by adverse market conditions.

The purchasers of the Company’s oil, natural gas and NGL production consist primarily of independent marketers, major oil and gas companies, refiners and gas pipeline companies. Credit evaluations are performed on the Company’s purchasers of its production and their financial condition is monitored on an ongoing basis. Based on those evaluations and monitoring, the Company may obtain letters of credit or parental guarantees from some purchasers.

All of the Company’s oil and natural gas derivative transactions are carried out in the over-the-counter market and are not typically subject to margin-deposit requirements. The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. The Company monitors the credit ratings of its derivative counterparties on an ongoing basis. If a counterparty were to default on its obligations to the Company under the derivative contracts or seek bankruptcy protection, it could have a material adverse effect on its ability to fund planned activities and could result in a larger percentage of our future production being subject to commodity price volatility. In November 2014,addition, in poor economic environments and tight financial markets, the risk of a counterparty default is heightened and fewer counterparties may participate in derivative transactions, which could result in greater concentration of exposure to any one counterparty or a larger percentage of the Company’s future production being subject to commodity price changes.

Major Customers

During the years ended December 31, 2017 and 2016, the Company’s major customers, as a percentage of total revenue, consisted of the following:

  Year Ended December 31, 
  2017  2016 
Texican Crude & Hydrocarbon, LLC  85%  38%
ETC Field Services LLC  14%  16%
Noble Energy  -%  41%
All others  1%  5%
   100%  100%

102

Derivative Instruments

All derivative instruments are recorded on the consolidated balance sheet at fair value as either an asset or a liability with changes in fair value recognized currently in earnings. Although derivative instruments are used by the Company to manage the price risk attributable to its expected oil and natural gas production, those derivative instruments have not been designated as accounting hedges under the accounting guidance. All of our derivatives are accounted for as mark-to-market activities. Under ASC Topic 815, “Derivatives and Hedging,” these instruments are recorded on the consolidated balance sheets at fair value as either short term or long-term assets or liabilities based on their anticipated settlement date. The Company nets derivative assets and liabilities by commodity for counterparties where a legal right to such offset exists. Changes in the derivatives' fair values are recognized in current earnings since the Company has elected not to designate its current derivative contracts as cash flow hedges for accounting purposes.

The Company has recognized certain conversion features within its Second Lien Term Loan as embedded derivatives that have been bifurcated from the Loan, as defined in Note 4, and accounted for separately from the debt. Additionally, warrants issued to SOSV Investment LLC (“SOS”) to purchase up to 200,000 shares of the Company’s stock contain a price protection feature that will automatically reduce the exercise price should the Company enter into another agreement pursuant to which warrants are issued at a lower exercise price. The price protection feature has been recognized as an embedded derivative and accounted for separately.

Recently Issued Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). The ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position and/or results of operations.

On August 28, 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (“ASC”) Topic 815. The new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in income. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods therein. Early adoption as of the date of issuance is permitted. The new standard does not impact accounting for derivatives that are not designated as accounting hedges. The Company does not currently account for any of its derivative position as accounting hedges. The Company may consider designating certain derivative contracts as accounting hedges in the future, but currently has no plans to do so.

On July 13, 2017, the FASB issued a two-part ASU No. 2014-16 (“2017-11,(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Redeemable Noncontrolling Interests with a Scope Exception.Part I of the ASU 2014-16”), “Derivative and Hedging (Topic 815).” ASU 2014-16 addressessimplifies the accounting for certain financial instruments with down round features by requiring companies to disregard the down round feature when assessing whether the host contract in a hybridinstrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (that is, when the exercise price of the related equity-linked financial instrument issued inis adjusted downward because of the formdown round feature) and will also recognize the effect of share should be accountedthe trigger within equity. Part II of the ASU is not applicable to the Company since it addresses concerns relating to an indefinite deferral available to private companies with mandatorily redeemable financial instruments and certain noncontrolling interests. The provisions of this new ASU related to down rounds are effective for as debt or equity. ASU 2014-16 is effectivepublic business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect the adoption of ASU 2014–16 to have a significant impact on its financial statements.

In April 2015, the FASB issued ASU No. 2015-03 (“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for us on January 1, 2016. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents a change in accounting principle.2018. Early adoption is permitted for financial statements that have not been previously issued.all organizations. The Company does not expectexpects to adopt this ASU at its effective date. The Company’s SOS Warrant Liability (as defined in Note 4) is a derivative solely because of its down round feature. Any outstanding SOS Warrants as of the date of adoption will be reclassified to equity and gains or losses on changes in fair value will no longer be recognized. No other derivatives instruments outstanding as of ASU 2015-03 to have a significant impact on its financial statements.December 31, 2017 would be affected.

 

InOn May 2015,17, 2017, the FASB issued ASU No. 2015-07 (“2015-07”)2017-09,Scope of Modification Accounting, “Fair Value Measurement.” ASU 2015-07 removesclarifies Topic 718,Compensation – Stock Compensation, such that an entity must apply modification accounting to changes in the requirement to categorize withinterms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value hierarchy all investments for whichof the modified award is the same as the fair value of the original award immediately before the modification and the ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is measured usingnot required to estimate the net asset value per share practical expedient. The amendments also removeimmediately before and after the requirement to make certain disclosures for all investments thatmodification; (2) the vesting conditions of the modified award are eligible to be measured at fair value using the net asset value per share practical expedient.same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification; the ASU 2015-07 is effective for us on January 1, 2016.all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted.permitted, including adoption in an interim period. The Company does not expect the adoption ofadopted this ASU 2015–07 to have a significant impact on its financial statements.

In September 2015, the FASB issued ASU No. 2015-16 (“ASU 2015-16”), “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments”. The update requires that the acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined (not retrospectively as with prior guidance). Additionally, the acquirer must record in the same period’s financial statements the effect on earnings of changes in depreciation, amortization or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the time of acquisition. The acquiring entity is required to disclose, on the face of the financial statements or in the footnotes to the financial statements, the portion of the amount recorded in current period earnings, by financial statement line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for us on January 1, 2016. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In November 2015, the FASB has issued an update to ASU No. 2015-17 (“ASU 2015-17”) “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The update requires a company to classify all deferred tax assets and liabilities as noncurrent. The update of ASU 2015-17 is effective for us on January 1, 2018. The Company does not expectexpects the adoption of the update ofthis ASU 2015–17 to have a significantwill only impact on its financial statements.

In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), “Financial Instruments – Overall (Subtopic 825-10)”.  ASU 2016-01 updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance is effective for us on January 1, 2018. The Company does not expect the adoption of ASU 2016–01 to have a significant impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02), “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for us on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2016-02 will have on itsconsolidated financial statements as and related disclosures.when there is a modification to its share-based award agreements.

 

 F-15103 

 

 

In March 2016,On January 5, 2017, the FASB issued ASU No. 2016-06 (“ASU 2016-06”), “Contingent Put2017-01Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and Call Option in Debt Instruments”.  ASU 2016-06clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options. The amendments in ASU 2016-06 clarify that an entity is required to assess the embedded call or put options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to initially assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issuedeffective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted this ASU on January 1, 2018, and expects that the adoption of this ASU could have a material impact on future consolidated financial statements as there may be acquisitions that are no longer considered to be business combinations.

On November 17, 2016, the FASB issued ASU 2016-18,Restricted Cash (Topic 230), to clarify the presentation of restricted cash in the statement of cash flows. The amendments require that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents. In addition, changes in cash and cash equivalents, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. As a result, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing section of the cash flow statement. The amendments are effective for public entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU on January 1, 2018 and since the Company has no restricted cash, there is no current impact to the consolidated statement of cash flows.

 On August 26, 2016, the FASB issued ASU No. 2016-15,Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under ASC 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted this ASU on January 1, 2018. The Company does not expectanticipate the adoption of this ASU 2016–01 to have a significant impact on its financial statements.

Management does not believe that these or any other recently issued, but not yet effective accounting pronouncements, if adopted, wouldwill have a material effect on its consolidated financial statements and related disclosures.

On March 30, 2016, the accompanying condensedFASB issued ASU 2016-09,Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU will simplify 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 ASU is effective for annual and interim periods beginning in 2017 with early adoption permitted. The Company adopted this ASU on January 1, 2017. The Company grants primarily qualified incentive stock options which do not require the Company to withhold any income taxes when these options are exercised. As of December 31, 2017, none of the four employees who have non-qualified stock options have exercised their vested options. During the year ended December 31, 2017, the Company withheld income taxes for vested restricted shares but these tax withholdings were processed by a third-party payroll service company. The tax withholding payments were received from the employees who elected to pay cash within 30 days following the Company’s payment to the third-party payroll service company. As a result, these funds flowed through the operating section of the Company’s consolidated statement of cash flows and had no impact on its consolidated statement of operations.

On March 14, 2016, the FASB issued ASU 2016-06,Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This new standard simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or credit risks. This new standard was effective for the Company on January 1, 2017. The Company has identified the conversion feature of its debt instrument as an embedded derivative which meets the criteria to be bifurcated from its host contract, the Second Lien Credit Agreement (as defined below), and accounted for at fair value as derivative liabilities.

On February 25, 2016, the FASB issued ASU 2016-02,Leases (Topic 842), which requires companies to recognize the assets and liabilities for the rights and obligations created by long-term leases of assets on the balance sheet. The guidance requires adoption by application of a modified retrospective transition approach for existing long-term leases and is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Oil and natural gas leases are scoped out of the new ASU. As of December 31, 2017, the Company currently has only one operating lease within the scope of this standard that expires in less than 2 years. The effect of this guidance relating to the Company’s existing long-term leases is expected to require additional disclosures, and the Company is currently evaluating the impact that this ASU would have on the Company’s consolidated financial statements.

 

104

On May 28, 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers, its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers and requires significantly expanded disclosures about revenue recognition. ASU 2014-09 has been amended several times with subsequent ASUs including ASU 2015-14Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.ASU 2014-09 will be effective for the Company on January 1, 2018, with early adoption permitted, but not earlier than January 1, 2017. The guidance under these standards is to be applied using a full retrospective method or a modified retrospective method. The Company has adopted the standard on January 1, 2018 using the modified retrospective approach. The Company has a small number of contracts with customers and has identified transactions within the scope of the standard. The Company has reviewed each of the contracts and transactions within the scope of the new standard.  Based on the Company’s assessment, the adoption of the new standard will not have a material impact on the Company’s consolidated financial statements. As a result of adoption of ASU 2014-09, the Company has changed its method of recording certain natural gas gathering and processing charges that were previously recorded as expenses and will now be recorded as a reduction of revenues under the new standard. The Company has also changed its method of recording gas balancing arrangements to recognize revenues from gas balancing arrangements only when a transaction with a customer has occurred.  As of the date of adoption, the Company did not have any outstanding gas balancing arrangements.  Such changes are not expected to result in a material change in the Company’s controls and processes.

NOTE 4 –3 - OIL AND NATURAL GAS PROPERTIES & OIL AND GAS PROPERTIES ACQUISITIONS AND DIVESTITURES

 

The following table sets forth a summary of oil and natural gas property costs (net of divestitures) not being amortized as ofat December 31, 20152017 and 2014 (in thousands):

  As of December 31, 
  2015  2014 
Undeveloped unevaluated acreage      
Beginning Balance $2,886  $18,664 
Lease purchases  -   305 
Assets Conveyed  -   (6,194)
Transfer and other reclassification to evaluated properties  (2,886)  (9,889)
Total undeveloped acreage $-  $2,886 
         
Wells in progress:        
Beginning Balance $6,042  $1,146 
Additions  -   5,412 
Disposition of wells in progress for elimination of accrued expenses for drilling  (5,198)  - 
Reclassification to evaluated properties  (844)  (516)
Total wells in progress and not subject to DD&A $-  $6,042 

During the year ended December 31, 2015, the Company did not buy or sell any of its oil and gas properties.2016:

  

Upon entering into the Credit Agreement,

  December 31, 
  2017  2016 
  (In thousands) 
Unproved acreage:        
Beginning Balance $24,461  $- 
Lease purchases  78,110   546 
Assets conveyed  -   23,915 
Transfer and other reclassification to properties  (800)  - 
Total unproved acreage $101,771  $24,461 
         
Wells in progress:        
Beginning Balance $7,453  $- 
Additions  -   7,453 
Reclassification to proved properties  (7,453)  - 
Total wells in progress not subject to DD&A $-  $7,453 

At December 31, 2017 and 2016, the Company believed we had secured adequate access to capital generally, and specifically, to fund the drilling and developmentcompleted an assessment of its inventory of unproved acreage for impairment, which resulted in no transfers from unproved acreage to proved undeveloped reserves. Due to the lack of liquidity that had been expected, but unavailable to the Company pursuant to the Credit Agreement, the Company recorded a $24.5 million impairment of its proved undeveloped and unproved properties during the year ended December 31, 2015. No impairment was recorded in the year ended December 31, 2014.properties.

  

Depreciation, depletion and amortization (“DD&A”) expensesexpense related to the proved properties werewas approximately $555,000$7.0 million and $1.24$1.7 million for the years ended December 31, 20152017, and 2014,2016, respectively.

  

During the year ended December 31, 2015, the Company was put in non-consent status on three wells it agreed to participate in within the Northern Wattenberg field which includes eachDivestiture of two Wattenberg horizontal wells (1 NiobraraOil and 1 Codell), and a third well (Niobrara) that are described further below in connection with the Great Western Operating Company, LLC litigation. As such, the previously capitalized and accrued costs of approximately $5.20 million relating to these wells were eliminated since being placed in non-consent status relieved the Company of such liabilities. The Company has retained the right to participate in future drilling on this acreage block.Natural Gas Properties

F-16

 

On September 2, 2014,March 31, 2017, the Company entered into a final settlementpurchase and sale agreement orwith Nanke Energy LLC for the Final Settlement Agreement to convey its interest in 31,725 evaluated and unevaluated net acres located in the DJ Basin and the associated oil and natural gas, which we refer to as the Hexagon Collateral to the Company’s primary lender, Hexagon, LLC, which we refer to as Hexagon, in exchange for extinguishmentdivestiture of all outstanding debt and accrued interest obligations owed to Hexagon in an aggregate amount of approximately $15.1 million. The conveyance assigned all assets and liabilities associated with the property, which includes PDP and PUD reserves, plugging and abandonment, and other assets and liabilities associated with the property. Pursuant to the Final Settlement Agreement, we also issued to Hexagon $2.0 million in 6% Conditionally Redeemable Preferred Stock valued at $1.69 million and considered as temporary equity for reporting purposes.

The Hexagon transaction was accounted for under the full cost method of accounting for oil and natural gas operations. Under the full cost method, sales or abandonments ofits oil and natural gas properties whether orlocated in the Denver-Julesburg Basin (the “DJ Basin”) for consideration of $2 million, subject to customary post-closing purchase price adjustments. The sale of the Company’s DJ Basin assets did not being amortized, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves, of oil and gas attributableas such, all proceeds were recorded as adjustments to the cost center. The transfer to Hexagon represents greater than 25% of the Company’s proved reserves of oil and gas attributable to the full cost pool with no gain or loss recognized. The DJ Basin assets were sold to an entity owned by the Company’s former chief financial officer and thustherefore the divestiture is considered a related party transaction. See Note 9 -Related Party Transactions. The net proceeds of $1.08 million received on March 31, 2017 included an offset against $0.7 million of severance pay and $0.22 million of net sales adjustments due to the purchaser. In addition, the Company incurred a loss onreceived $0.2 million in proceeds from the conveyance. Following this methodology, the following table represents an allocationsale of the transaction.

Payment of debt and accrued interest payable $15,063,289 
Add: disposition of asset retirement obligations  973,132 
Total disposition of liabilities $16,036,421 
     
Proved oil and natural gas properties $32,574,603 
Accumulated depletion  (22,148,686)
Unproved oil and natural gas properties  6,194,162 
Net oil and natural gas conveyed at cost  16,620,079 
Redeemable Preferred Stock at fair value  1,686,102 
Total conveyance of assets and preferred stock  18,306,181 
Loss on conveyance $(2,269,760)

As of December 31, 2015 and 2014, the Company completed an assessment of its inventory of unevaluated acreage, which resultednon-operated properties sold in a transfer of $2.89 million and $9.90 million, respectively from unevaluated acreage to evaluated properties.2017.

 

NOTE 5 - DERIVATIVES

Acquisition of Unproved Properties

On October 3, 2017, the Company entered into a lease acquisition agreement (the “Acquisition Agreement”) with KEW Drilling, a Delaware limited partnership (“KEW”), pursuant to which the Company acquired from KEW unproved acreage in Winkler County, Texas for an aggregate purchase price of $48.9 million pursuant to the terms set forth in the Acquisition Agreement (collectively, the “Leases”). The Company periodically enters into various commodity derivative financial instruments intendedfunded the purchase price for the leases with borrowings drawn under the Delayed Draw Term Loans pursuant to hedge against exposure to market fluctuations of oil prices. As of December 31, 2015 and 2014, the Company did not have any commodity derivative instruments. The Company had an active commodity swap for 100 barrels of oil per day through January 31, 2014 at a price of $99.25 per barrel and realized a gain on that contract of $11,000 during the year ended December 31, 2014.

Realized gains and losses are recordedSecond Lien Credit Agreement as individual swaps mature and settle. These gains and losses are recorded as income or expensesdescribed in the periods during which applicable contracts settle. Swaps which are unsettled as of a balance sheet date are carried at fair market value, either as an asset or liability. Unrealized gains and losses result from mark-to-market changes in the fair value of these derivatives between balance sheet dates.Note 7 - Long-term Debt below.

 

 F-17105 

 

 

NOTE 64 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company measures fair value of its financial assets on a three-tier value hierarchy, which prioritizes the inputs, used in the valuation methodologies in measuring fair value:

 

●Level 1 –- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
●Level 2 –- Other inputs that are directly or indirectly observable in the marketplace.
●Level 3 –- Unobservable inputs which are supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The determination of the fair values of our derivative contracts incorporates various factors, which include not only the impact of our non-performance risk on our liabilities but also the credit standing of the counterparties involved. We utilize counterparty rate of default values to assess the impact of non- performance risk when evaluating both our liabilities to, and receivables from, counterparties.

Recurring Fair Value Measurements

  Fair Value Measurement Classification    
  Quoted Prices in
Active Markets for
Identical Assets or
Liabilities		  Significant Other
Observable Inputs		  Significant
Unobservable
Inputs		    
  (Level 1)  (Level 2)  (Level 3)  Total 
 (in thousands) 
As of December 31, 2017                
Oil and natural gas derivative swap contracts $-  $(706) $-  $(706)
Oil and natural gas derivative collar contracts  -   (147)  -   (147)
Warrant liabilities  -   -   (223)  (223)
Second Lien Term Loan conversion features  -   -   (72,714)  (72,714)
Total $-  $(853) $(72,937) $(73,790)
As of December 31, 2016                
Warrant liabilities  -   -   (1,400)  (1,400)
Total $-  $-  $(1,400) $(1,400)

The Company’s interest ratederivative liability associated with the Second Lien Term Loan and Debentureswarrants are measured using Level 3 inputs.inputs as follows:

 

Derivative InstrumentsSecond Lien Term Loan Conversion Features:

The Company determines its estimate of Under the fair value of derivative instruments using a market approach based on several factors, including quoted market prices in active markets, quotes from third parties, and the credit rating of its counterparty. The Company also performs an internal valuation to ensure the reasonableness of third-party quotes.

The types of derivative instruments utilized by the Company included commodity swaps. The oil derivative markets are highly active. Although the Company’s economic hedges are valued using public indices, the instruments themselves are traded with third-party counterparties and are not openly traded on an exchange. As such, the Company classifies these instruments as Level 2.

In evaluating counterparty credit risk, the Company assessed the possibility of whether the counterparty to the derivative would default by failing to make any contractually required payments. The Company considered that the counterparty is of substantial credit quality and has the financial resources and willingness to meet its potential repayment obligations associated with the derivative transactions.

The Company has no such derivative instruments at December 31, 2015 and 2014.

Asset Retirement Obligation

The fair valueterms of the Company’s asset retirement obligation liabilitysecond lien credit agreement, dated as of April 26, 2017, by and among the Company, certain subsidiaries of the Company, as guarantors (the “Guarantors”), Wilmington Trust, National Association, as administrative agent (the “Agent”), and the lenders party thereto (the “Lenders”), including Värde Partners, Inc., as lead lender (the “Lead Lender”), as amended (the “Second Lien Credit Agreement”), the Lead Lender has the option to convert 70% of the principal amount of each tranche of the Second Lien Term Loan (the “Loan”) under the Second Lien Credit Agreement, together with accrued paid-in-kind interest and the make-whole premium on such principal amount (together, the “Conversion Sum”), into shares of common stock. The make-whole premium is calculatedthe cash amount representing the excess of (a) the present value at such repayment, prepayment or acceleration date or the pointdate the obligations otherwise become due and payable in full of inception by taking into account,(1) the costsum of abandoning oil and gas wells, which isthe principal amount repaid, prepaid or acceleratedplus(2) the interest accruing on such principal amount from the date of such repayment, prepayment or acceleration through the maturity date (excluding accrued but unpaid paid-in-kind interest to the date of such repayment, prepayment or acceleration), such present value to be computed using a discount rate equal to the Treasury Rate plus 50 basis points discounted to the repayment, prepayment or acceleration date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months), over (b) the principal amount of the Loan repaid, prepaid or accelerated. The number of shares issued will be based on the Company’s and/or Industry’s historical experience for similar work, or estimates from independent third-parties; the economic livesdivision of its properties, which are based on estimates from reserve engineers; the inflation rate; and the credit adjusted risk-free rate, which takes into account the Company’s credit risk and the time value of money. Given the unobservable nature70% of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.

Impairment.

The Company estimates the expected undiscounted future cash flows of its oil and natural gas properties and compares such amounts to the carrying amount of the oil and natural gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will adjust the carrying amount of the oil and natural gas properties to fair value. The factors used to determine fair value are subject to management’s judgement and expertise and include, but are not limited to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated operating and development costs using estimates or proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected. These assumptions represent Level 3 inputs. Impairment of oil and gas assets for the year ended December 31, 2015 was $24.5 million. No impairment charges on proved oil and natural gas properties were recorded for the years ended December 31, 2014.

Executive Compensation

In September 2013, the Company announced the appointment of Abraham Mirman as its new president. In connection with Mr. Mirman’s appointment, the Company entered into an employment agreement with Mr. Mirman (the “Mirman Agreement”). The Mirman Agreement provides for an incentive bonus package that, depending upon the relative performance of the Company’s Common Stock compared to the performance of stocks of certain peer group companies as measured from Mr. Mirman’s initial date of employment through December 31, 2014, may result in a cash bonus payment to Mr. Mirman of up to 3.0 times his base salary. The incentive bonus is recorded as a liability and valued at each reporting period. The Company engaged a valuation firm (“VFIRM”) to complete a valuation of this incentive bonus. As of December 31, 2014, the Company recorded a liability of $40,000 for accrued compensation. As previously announced, on March 30, 2015, the Company entered into an amended and restated employment agreement, which we refer to as the Mirman CEO Agreement with Mr. Mirman. The Mirman CEO Agreement also provides for Mr. Mirman to receive a cash incentive bonus if certain production thresholds are achievedConversion Sum by the Company. Mr. Mirman’s new incentive bonus liability was valued by VFIRM at $104,000 at December 31, 2015. As of December 31, 2015, the Company provided for $87,000 of the bonus liability which represents the amount earned as of December 31, 2015.conversion price then in effect.

 

 F-18106 

 

 

On March 6, 2015,

The Company also has the option to cause the Loan to convert if, at the time of exercise of the Company’s conversion option, the closing price of the Company’s common stock has been at least 150% of the Conversion Price (as defined below) then in effect for at least 20 of the 30 immediately preceding trading days. The features of the make-whole premium in the Loan require the conversion features to be recorded as embedded derivatives and bifurcated from its host contracts, the Loan, and accounted for separately from the debt. The conversion features contained in the Loan are recorded as a derivative liability at fair value each reporting period based upon values determined through the use of discounted lattice models of the Loan under the Second Lien Credit Agreement. Change in fair value is accounted for in the consolidated statement operations. The embedded derivatives under the Second Lien Credit Agreement including the delayed draw term loans were recorded at closing as a derivative liability with a fair value of approximately $65.6 million. At December 31, 2017, the fair value of the derivative liabilities associated with the Loan conversion features was approximately $72.7 million. As a result, the Company announced the appointmentrecorded an unrealized loss of Kevin Nanke as its new Executive Vice President and Chief Financial Officer. Mr. Nanke will also receive a cash incentive bonus if certain production thresholds are achieved by the Company and a performance bonus of $100,000 if the Company achieves certain goals set forth in Mr. Nanke’s employment agreement. Mr. Nanke’s new incentive bonus liability was valued by VFIRM at $83,000 at December 31, 2015. As of December 31, 2015, provided for $69,000 of the liability which represents the amount earned as of that date.  

On March 16, 2015, the Company entered into an employment agreement with Ariella Fuchs for services to be performed as General Counsel to the Company. Ms. Fuchs will also receive a cash incentive bonus if certain production thresholds are achieved by the Company. Ms. Fuchs’ new incentive bonus liability was valued by VFIRM at $80,000 at December 31, 2015. As of December 31, 2015, the Company has provided for $67,000 of the liability which represents the amount earned as of that date.

Change in Warrant Liability

On September 2, 2014, the Company entered into a Consulting Agreement with Bristol Capital, LLC, pursuant to which the Company issued to Bristol a warrant to purchase up to 1,000,000 shares of Common Stock at an exercise price of $2.00 per share (or, in the alternative, 1,000,000 options, but in no case both). The agreement has a price protection feature that will automatically reduce the exercise price if the Company enters into another consulting agreement pursuant to which warrants are issued with a lower exercise price. On December 31, 2014, the Company revalued the warrants/option using the following variables: (i) 1,000,000 total warrants/options issued (as stated above, the Company will only issue a total of 1,000,000 shares of Common Stock under the option or the warrant, but no more than 1,000,000 shares in the aggregate); (ii) stock price of $0.72; (iii) exercise price of $2.00; (iv) expected life of 4.67 years; (v) volatility of 96.78%; (vi) risk free rate of 1.10% for a total value of $394,000, which adjusted$7.1 million on the change in fair value valuationof derivative liabilities associated with the Loan conversion features.

The fair value of the derivative by $571,000.

On December 31, 2015,holder conversion features was determined using a binomial lattice model based on certain assumptions including (i) the Company revalued the warrants/options using the following variables: (i) 1,000,000 total warrants/options issued (as stated above, the Company will only issue a total of 1,000,000 shares of Common Stock under the option or the warrant, but no more than 1,000,000 shares in the aggregate); (ii)Company’s stock price, of $0.20;(ii) risk-free rate, (iii) exercise price of $2.00;expected volatility, (iv) expected life of 3.7 years;the Company’s implied credit rating, and (v) volatility of 100%; risk free rate of 1.5% for a total value of $44,000, which adjusted the change in fair value valuationimplied credit yield of the derivative by $350,000 for the year ended December 31, 2015.Loan.

Heartland Warrant Liability.On January 8, 2015, the Company entered into thea credit agreement with Heartland Bank (the “Heartland Credit Agreement.Agreement”). In connection with the Heartland Credit Agreement, the Company issued to Heartland a warrant to purchase up to 225,00022,500 shares of Common Stockthe Company’s common stock at an exercise price of $2.50$25.00. The warrant contained a price protection feature that would have automatically reduced the exercise price if the Company entered into another agreement pursuant to which warrants were issued with a lower exercise price and would also have triggered an adjustment to the number of underlying shares of common stock. On June 14, 2017, the Company and Heartland executed an amended and restated warrant agreement whereby the Company issued a warrant to purchase 160,714 shares of common stock at an exercise price of $3.50 to replace the original warrant to purchase 22,500 shares of common stock to settle a disagreement regarding the impact of the anti-dilutive price protection provisions in the original warrant. The amended and restated warrant agreement no longer contains any anti-dilutive price protection provisions and the warrant is no longer accounted for as a derivative. As a result of the issuance of the amended and restated warrant, the Company recorded approximately $0.02 million of realized gain on the Heartland warrant liability during the year ended December 31, 2017. For the year ended December 31, 2016, the Company recorded an unrealized loss of approximately $0.04 million on the Heartland warrant liability.

SOS Warrant Liability.On June 23, 2016, in conjunction with the initial advance, whichmerger with Brushy in June 2016, the Company issued to SOS a warrant to purchase up to 200,000 shares of the Company’s common stock at an exercise price of $25.00. The warrant contains an anti-dilutiona price protection feature that will automatically reduce the exercise price if the Company enters into another agreement pursuant to which warrants are issued with a lower exercise price.

On The fair value of the warrants was approximately $0.2 million at December 31, 2015,2017. For the Company revalued the warrants using the following variables: (i) 225,000 warrants issued; (ii) stock price of $0.20; (iii) exercise price of $ 2.50; (iv) expected life of 4.0 years; (v) volatility of 100%; (vi) risk free rate of 1.5% for a total value of $12,000, which adjusted the change in fair value valuation of the derivative by $12,000 for the yearyears ended December 31, 2015. 

Debentures Conversion Derivative Liability

2017, and 2016, the Company incurred an unrealized loss of approximately $0.1 million and an unrealized gain of $0.02 million, respectively, on the SOS warrant liability. As of December 31, 2015,2017 and 2016, the Company had $6.85 million in remaining Debentures, which, subject to stockholder approval, were convertible at any time at the holders’ option into shares of Common Stock at $2.00 per share, or 3,423,233 underlying conversion shares prior to the executionfair value of the Debenture Conversion Agreement. The Debentures have elements of a derivative due to the potential for certain adjustments, including both the conversion optionSOS warrant liability was approximately $0.2 million and the price protection embedded in the Debentures. The conversion option allows the Debenture holders to convert their Debentures to underlying Common Stock at a conversion price of $2.00 per share, subject to certain adjustments, including the requirement to reset the conversion for any subsequent offering at a lower price per share amount. The Company values this conversion liability at each reporting period using a Monte Carlo pricing model.$0.1 million, respectively.

 

F-19

At December 31, 2015 andBristol Capital, LLC Warrant Liability. On September 2, 2014, the Company valuedentered into a consulting agreement with Bristol Capital, LLC (“Bristol”), pursuant to which the conversion feature associated with the Debentures at $6,000 and $1.25 million, respectively. The Company used the following inputsissued to calculate the valuationBristol a warrant to purchase up to 100,000 shares of the derivative as of December 31, 2015: (i) volatility of 100%; (ii) conversionCompany’s common stock at an exercise price of $2.00; (iii)$20.00 (or, in the alternative, options exercisable for 100,000 shares of common stock, but in no case, both). The agreement had a price protection feature that automatically reduced the exercise price if the Company entered into another consulting agreement pursuant to which warrants were issued with a lower exercise price, which was triggered in year 2016.  On March 14, 2017, the Company issued 77,131 shares of $0.20; and (iv) present valuecommon stock to Bristol pursuant to a settlement agreement for a cashless exercise of conversion feature of $0.0016 per convertible share and as of December 31, 2014: (i) volatility of 70%; (ii) conversion price of $2.00; (iii) stock price of $0.72; and (iv) present value of conversion feature of $0.47 per convertible share.the warrant.  The changeBristol warrant was also revalued on March 14, 2017 resulting in a realized gain in fair value valuation of the derivative was $1.24$0.8 million for the year ended December 31, 2015.

The following table provides2017 and decreasing the Bristol derivative liability to $0.4 million.   As a summaryresult of the fair valuescashless exercise, the Company reclassified the $0.4 million of assets and liabilities measured at fair value:

December 31, 2015: 

  Level 1  Level 2  Level 3  Total 
             
Liability            
Executive employment agreements $-  $-  $(223,000) $(223,000)
Warrant liabilities  -   -   (56,000)  (56,000)
Convertible debenture conversion derivative liability  -   -   (6,000)  (6,000)
Total liability, at fair value $-  $-  $(285,000) $(285,000)

December 31, 2014: 

  Level 1  Level 2  Level 3  Total 
             
Liability            
Executive employment agreement $-  $-  $(40,000) $(40,000)
Warrant liabilities  -   -   (394,000)  (394,000)
Convertible debenture conversion derivative liability  -   -   (1,249,000)  (1,249,000)
Total liability, at fair value $-  $-  $(1,683,000) $(1,683,000)

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets and liabilitiesBristol derivative liability to additional paid-in capital as of DecemberMarch 31, 2015 and 2014: 

  Conversion derivative liability  Bristol/
Heartland warrant liability		  Incentive bonus  Total 
             
Balance at January 1, 2015 $1,249,000  $394,000  $40,000  $1,683,000 
Additional liability  -   56,000   149,000   205,000 
Change in fair value of liability  (1,243,000)  (394,000)  34,000   (1,603,000)
Balance at December 31, 2015 $6,000  $56,000  $223,000  $285,000 

F-20

  Conversion derivative liability  Bristol warrant liability  Incentive bonus  Total 
             
Balance at January 1, 2014 $605,000  $-  $145,000  $750,000 
Additional liability  -   965,000   -   965,000 
Change in fair value of liability  5,527,000   (571,000)  (105,000)  4,851,000 
Reclassification from liability to equity  (4,883,000)  -   -   (4,883,000 
Balance at December 31, 2014 $1,249,000  $394,000  $40,000  $1,683,000 

The Company did not have any transfers of assets or liabilities between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the years ended December 31, 2015 and 2014.

NOTE 7 - LOAN AGREEMENTS

Credit Agreement

  As of
December 31,
2015		 
    
Term loan - Heartland (due January  8, 2018) $2,750,000 
Unamortized debt discount  (37,911)
Term loan - Heartland, net  2,712,089 
Less: amount due within one year  (2,712,089)
Term loan - Heartland due after one year $- 

On January 8, 2015, the Company entered into the Credit Agreement with Heartland Bank, as administrative agent and the Lenders party thereto. The Credit Agreement provides for a three-year senior secured term loan in an initial aggregate principal amount of $3,000,000, or the Term Loan, which principal amount may be increased to a maximum principal amount of $50,000,000 at the request of the Company pursuant to an accordion advance provision in the Credit Agreement subject to certain conditions, including the discretion of the lender. Funds borrowed under the Credit Agreement may be used by the Company to (i) purchase oil and gas assets, (ii) fund certain Lender-approved development projects, (iii) fund a debt service reserve account, (iv) pay all costs and expenses arising in connection with the negotiation and execution of the Credit Agreement, and (v) fund the Company’s general working capital needs.

The Term Loan bears interest at a rate calculated based upon the Company’s leverage ratio and the “prime rate” then in effect. In connection with its entry into the Credit Agreement, the Company also paid a nonrefundable commitment fee in the amount of $75,000, and agreed to issue to the Lenders 75,000 5-year warrants for every $1 million funded. An initial warrant to purchase up to 225,000 shares of the Company’s common stock at $2.50 per share was issued in connection with closing. As of January 8, 2015, the Company valued the 225,000 warrants at $56,000, which was accounted for as debt discount and amortized over the life of the debt. The Company accreted $18,000 of debt discount for2017. For the year ended December 31, 2015.

The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants. The Credit Agreement also contains financial covenants with respect to the Company’s (i) debt to EBITDAX ratio and (ii) debt coverage ratio. In addition, in certain situations, the Credit Agreement requires mandatory prepayments of the Term Loans, including in the event of certain non-ordinary course asset sales, the incurrence of certain debt, and the Company’s receipt of proceeds in connection with insurance claims.

As previously disclosed, as of June 30, 2015 and September 30, 2015,2016, the Company was not in compliance withrecorded an unrealized loss of approximately $1.2 million on the financial covenant in the Credit Agreement that relates to the total debt to EBITDAX ratio. EBITDAX is defined in the Credit Agreement as, for any period of determination, determined in accordance with GAAP, the pre-tax net income for such period plus (without duplication and only to the extent deducted in determining such net income), interest expense for such period, depreciation and amortization expense, extraordinary or non-recurring items reducing net income for such period, and other non-cash expenses for such period less gains on sales of assets and other non-cash income for such period included in the determination of net incomeplus (without duplication and only to the extent deducted in determining such net income) exploration, drilling and completion expenses or costs. Specifically, the ratio requires that the Company maintain at all times, as determined on June 30 of each year, a ratio of (i) the aggregate amount of all Debt (as defined in the Credit Agreement), to (ii) EBITDAX of not less than 4.5:1, 3.5:1 and 2.5:1 for the periods ending June 30, 2015, 2016, and 2017 and thereafter, respectively. Prior to the filing of our quarterly report for the period ended June 30, 2015, the Company received a waiver from Heartland for this covenant violation, which will not be measured again until June 30, 2016. The Company will need to raise additional capital and acquire and/or successfully develop its oil and gas assets to meet this covenant.Bristol warrant liability. 

 

 F-21107 

 

 

The following table sets forth a reconciliation of changes in the fair value of the Company’s financial assets and liabilities classified as Level 3 in the fair value hierarchy, except for the commodity derivatives classified as Level 2 as disclosed in Note 6, as of December 31, 2017 and 2016:

On

  Second Lien Term
Loan Conversion
Features		  

Warrant

Liabilities

  Total 
  (in thousands) 
Balance at January 1, 2017 $-  $(1,400) $(1,400)
Issuance  (65,647)  -   (65,647)
Cashless exercise of warrants  -   370   370 
Change in fair value of derivative liabilities  (7,067)  807   (6,260)
Balance at December 31, 2017 $(72,714) $(223) $(72,937)

  

Convertible
Debenture
Derivative

Liability

  

Warrant

Liabilities

  

Incentive

Bonus

  Total 
  (in thousands) 
Balance at January 1, 2016 $(6) $(56) $(223) $(285)
Additional liability  -   (164)  (393)  (557)
Reversal of accrued bonus  -   -   718   718 
Converted to equity  (54)  -   -   (54)
Change in fair value of derivative liabilities  60   (1,180)  (102)  (1,222)
Balance at December 31, 2016 $-  $(1,400) $-  $(1,400)

NOTE 5 - ASSET RETIREMENT OBLIGATIONS (ARO)

The information below reconciles the value of the asset retirement obligation for the periods presented:

  Year Ended December 31, 
  2017  2016 
  (In thousands) 
Balance at January 1 $1,257  $208 
Liabilities assumed from merger  -   777 
Liabilities incurred  20   311 
Accretion expense  82   132 
Settlements  (288)  (92)
Change in estimate  (119)  (79)
Balance at December 31  952   1,257 
Less: current portion of ARO at December 31  (226)  (338)
Total Long-term ARO at end of year $726  $919 

NOTE 6 - DERIVATIVES

As discussed in Note 4, the Second Lien Term Loan contains conversion features that are exercisable at the option of the Lead Lender or the Company. The conversion features have been identified as embedded derivatives which (i) contain economic characteristics that are not clearly and closely related to the host contract, the Second Lien Term Loan, and (ii) separate, stand-alone instruments with similar terms would qualify as derivative instruments. As such, the conversion features were bifurcated and accounted for separately from the Second Lien Term Loan. The conversion features are recorded at fair value for each reporting period with changes in fair value included in the consolidated statement of operations for the year ended December 29, 2015, after a default on an interest payment and in connection31, 2017. The Company recorded derivative liabilities associated with the merger transactions,Second Lien Term Loan at an original fair value of approximately $65.6 million at issuance. As of December 31, 2017, the Company entered intofair value of the Forbearance Agreement with Heartland.The Forbearance Agreement restricts Heartland from exercising any of its remedies until April 30, 2016 and is subject to certain conditions, including a requirement for the Company to make a monthly interest payment to Heartland. On April 1, 2016, the Company failed to make the required interest payment to Heartland for the month of March.derivative liability was approximately $72.7 million. As a result, Heartland has the rightCompany recognized unrealized gains of approximately $7.1 million in its consolidated statement of operations for the year ended December 31, 2017. There were no derivative liabilities associated with convertible debt instruments for the year ended December 31, 2016. In addition, as of December 31, 2017 and 2016, the Company’s outstanding derivative liabilities included the fair value of the derivative liabilities associated with the SOS warrants totaled $0.2 million and $0.2 million, respectively.

To reduce the impact of fluctuations in oil and natural gas prices on the Company’s revenues, or to declare an eventprotect the economics of default underproperty acquisitions, the Forbearance Agreement, terminate the remaining commitment and accelerate payment of all principal and interest outstanding. The Company has not yet received a notice of default and is currently in discussions with Heartlandperiodically enters into derivative contracts with respect to a portion of its projected oil and natural gas production through various transactions that fix or modify the missed interest payment. Moreover,future prices to be realized. The derivative contracts may include fixed-for-floating price swaps (whereby, on the Debentures also contain certain cross-default provisions with certain other debt instruments. Therefore,settlement date, the Company will receive or pay an amount based on the difference between a default underpre-determined fixed price and a variable market price for a notional quantity of production), put options (whereby the Company pays a cash premium in order to establish a fixed floor price for a notional quantity of production and, on the settlement date, receives the excess, if any, of the fixed price floor over a variable market price), and costless collars (whereby, on the settlement date, the Company receives the excess, if any, of a variable market price over a fixed floor price up to a fixed ceiling price for a notional quantity of production).

108

These hedging activities, which are governed by the terms of our Second Lien Credit Agreement, constitutes an event of default pursuantare intended to the Debentures which may result in an accelerationsupport oil and natural gas prices at targeted levels and manage exposure to oil and natural gas price fluctuations. It is our policy to enter into derivative contracts only with counterparties that are creditworthy and competitive market makers. All of our obligations atderivatives are with non-lender counterparties and are designated as unsecured. Certain of our derivative counterparties may require the holders’ election.posting of cash collateral under certain conditions. It is never the Company’s intention to enter into derivative contracts for speculative trading purposes.

 

All of our derivatives are accounted for as mark-to-market activities. Under ASC Topic 815, “Derivatives and Hedging,” these instruments are recorded on the consolidated balance sheets at fair value as either short term or long-term assets or liabilities based on their anticipated settlement date. The Company nets derivative assets and liabilities by commodity for counterparties where a legal right to such offset exists. Changes in the derivatives’ fair values are recognized in current earnings since the Company has elected not to designate its current derivative contracts as cash flow hedges for accounting purposes.

The following table presents the Company’s derivative positions as of December 31, 2017:

  

As of

December 31,

 
  2017 
  (In thousands) 
Oil positions:    
Fixed-for-floating price swaps (NYMEX WTI):    
Hedged Volume (Bbls)  75,070 
Average price ($/Bbl) $50.74 
     
Put Options (NYMEX WTI):    
Hedged Volume (Bbls)  105,930 
Average price ($/Bbl) $52.50 
     
Call Options (NYMEX WTI):    
Hedged Volume (Bbls)  105,930 
Average price ($/Bbl) $60.80 

  Year Ended
December 31,		 
  2017 
  (In thousands) 
Beginning fair value of commodity derivatives $— 
Net losses on crude oil derivatives  (1,063)
Net settlement paid on crude oil derivative contracts  96 
Net settlement unpaid on crude oil derivative contracts  114 
Ending fair value of commodity derivatives $(853)

The Company’s derivatives are presented on a net basis under fair value of derivative instruments on the consolidated balance sheets. The following information summarizes the gross fair values of derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on the Company’s consolidated balance sheets:

  December 31, 2017 
  Gross Amount of
Recognized Assets
and Liabilities		  

Gross Amounts
Offset in the
Consolidated
Balance Sheets

  Net Amounts
Presented in the
Consolidated
Balance Sheets		 
  (in thousands) 
Offsetting Derivative Assets:            
Current asset $-  $-  $- 
Long-term asset  -   -   - 
Total asset $-  $-  $- 
Offsetting Derivative Liabilities:            
Current liability $853  $-  $853 
Long-term liability  -   -   - 
Total liability $853  $-  $853 

109

The Company had no hedging activities as of December 31, 2016.

NOTE 7 - LONG-TERM DEBT

  As of December 31, 
  2017  2016 
  (In thousands) 
6% Bridge Loans associated with the amended First Lien Term Loan, due 2019, net of debt issuance costs $30,363  $- 
6% Senior Secured Term Loan, due 2019, net of debt issuance costs  -   29,214 
8.25% Second Lien Term Loans, due 2021, net of debt issuance costs and debt discount  96,431   - 
6% note payable to SOS Investment, LLC, due 2019  1,000   1,000 
Other notes payable, due 2018  11   29 
Total Long-term debt $127,805  $30,243 
Less: current portion  (11)  (17)
Total Long-term debt, net of current portion $127,794  $30,226 

Total principal amount of debt maturities related to borrowings for the five years ending December 31, 2022 include: $0.01 million in 2018, $31.0 million in 2019, and $150.0 million in 2021. There will be no payments due in 2020 and 2022.

At December 31, 2017 and 2016, the carrying amounts of term loans were as follows:

  Principal
Amount		  Paid-in-
kind
Interest		  Unamortized
Debt
Issuance
Costs & Debt
Discount		  Carrying
Amount		 
December 31, 2017:                
Bridge Loans associated with the amended First Lien Term Loan, due September 2019 $30,000  $807  $(444) $30,363 
Second Lien Term Loan, due April 2021  150,000   5,752   (59,321)  96,431 
Total: $180,000  $6,559  $(59,765) $126,794 
                 
December 31, 2016:                
Senior Secured Term Loan, due 2019 $31,000  $-  $(1,786) $29,214 
Total: $31,000  $-  $(1,786) $29,214 

Convertible NotesFirst Lien Credit Agreement

  Related
Party		  Non Related Party 
Convertible notes $1,800,002  $1,150,000 
Unamortized debt discount  (745,450)  (476,261)
Convertible notes, net  1,054,552   673,739 
Less: amount due within one year  (1,054,552)  (673,739)
Convertible notes due after one year $-  $- 

From DecemberOn September 29, 2015 to January 5, 2016, the Company entered into 12% Convertible Subordinated Note Purchase Agreementsa first lien credit agreement by and among the Company and its wholly owned subsidiaries, Brushy, Impetro Operating and Resources (the “Initial Guarantors”), and the lenders party thereto (each a “Lender” and together, the “Lenders”) and T.R. Winston & Company, LLC (“TRW”) acting as initial collateral agent (the “First Lien Credit Agreement”).

��

The First Lien Credit Agreement provided for a $50 million three-year senior secured term loan with various lending parties, which we referinitial commitments of $31 million. On February 7, 2017, pursuant to as the Purchasers, forterms of the issuance of anFirst Lien Credit Agreement, the Company exercised the accordion advance feature, increasing the aggregate principal amount outstanding under the term loan from $31 million to $38.1 million (the “First Lien Term Loan”).

In connection with the exercise of $3.75the accordion advance feature for $7.1 million, unsecured subordinated convertible notes, or the Convertible Notes, which includes the $750,002 of short-term notes exchanged for Convertible NotesCompany incurred $0.4 million in commitment fees and also amended certain warrants held by the Company and warrantslenders to purchase up to an aggregate of approximately 15,000,000738,638 shares of Common Stock at ancommon stock, such that the exercise price of $0.25 per share.share was lowered from $2.50 to $0.01. The proceeds from this financing were usedCompany accounted for these repriced warrants as additional debt discount to pay a $2the First Lien Term Loan for $1.0 million, refundable deposit in connectionto be accreted, together with the Merger, to fundremaining $0.6 million debt discount at December 31, 2016, over the remaining term of the loan. On April 26, 2017, the Company fully paid off the amount outstanding of $38.1 million including accrued interest on the First Lien Term Loan. As a result, for the year ended December 31, 2017, the Company fully amortized approximately $1.3$1.4 million of debt discount and approximately $1.6 million of deferred financing costs, respectively. These amounts were recorded as a non-cash component of interest payments to our lenders and for our working capital and accounts payables.expense.

 

The Convertible Notes bear interest at a rate of 12% per annum, payable at maturity on June 30, 2016. The Convertible Notes and accrued but unpaid interest thereon are convertible in whole or in part from time to time at the option of the holders thereof into shares of our Common Stock at a conversion price of $0.50. The Convertible Notes may be prepaid in whole or in part (but with payment of accrued interest to the date of prepayment) at any time at a premium of 103% for the first 120 days and a premium of 105% thereafter, so long as no Senior Debt is outstanding. The Convertible Notes contain customary events of default, which, if uncured, entitle each noteholder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest, subject to certain subordination provisions.

Additionally, on March 18, 2016, the Company issued an additional aggregate principal amount of $500,000 of Convertible Notes, which have the terms and conditions as the Convertible Notes with the exception of the maturity date, which is April 1, 2017. The proceeds from these Convertible Notes were used to make advances to Brushy for payment of operating expenses pending completion of the Merger. If the Merger is not completed, these amounts are subject to repayment by Brushy.

 F-22110 

 

 

DebenturesAmendments to First Lien Credit Agreement

  As of
December 31,
2015		  As of
December 31,
2014		 
       
8% Convertible debentures, net (due 2018; 8% weighted average interest rate) $6,846,465  $6,846,465 
Unamortized debt discount  -   (6,389)
8% Convertible debenture, net  6,846,465   6,840,076 
Less: amount due within one year  (6,846,465)  - 
8% Convertible debenture due after one year $-  $6,840,076 

 

In numerous separate private placement transactions between February 2011On April 24, 2017, and subsequently on April 26, 2017, and July 25, 2017, and October 2013, the Company issued an aggregate of approximately $15.6 million of Debentures, secured by mortgages on several of its properties. On January 31, 2014,19, 2017 the Company entered into a debenture conversionthe first, second, third and fourth amendments (together, the “First Lien Amendments”), respectively, to the Company’s First Lien Credit Agreement. The First Lien Amendments, among other things, added Lilis Operating and Hurricane Resources as guarantors under the credit agreement, added certain lenders, and extended further credit in the form of an initial bridge loan in an aggregate principal amount of $15.0 million (the “First Conversion Agreement”“Initial Bridge Loan”) with. The Initial Bridge Loan was fully drawn on April 24, 2017, and is secured by the same first priority liens on substantially all of the holdersCompany’s assets as the First Lien Term Loan. Additionally, pursuant to the First Lien Amendments, the lenders made further extensions of credit, in addition to the currently existing loans under the First Lien Credit Agreement (the “Bridge Loans”), in the form of an additional, incremental bridge loan in an aggregate principal amount of $15,000,000 (the “Incremental Bridge Loan”, and together with the Bridge Loans, the “First Lien Loans”). The First Lien Loans, including the Incremental Bridge Loan, were fully drawn as of October 19, 2017. As of December 31, 2017, the unamortized portion of the Debentures.debt issuance costs associated with the First Lien Loans were approximately $0.3 million.

 

Pursuant toThe First Lien Credit Agreement, as amended, (a) provides that, effective as of October 1, 2017, the termsunpaid principal of the First Conversion Agreement, $9.0 million in Debentures (approximately $8.73 million of principal and $270,000 in interest) was converted by the holders to shares of Common StockLien Loans will bear (i) cash interest at a conversion pricerate per annum of $2.0010% and (ii) additional interest at a rate per share. In addition,annum of 6%, payable only in-kind by increasing the Company issued warrants to the Debenture holders to purchase one share of Common Stock for each share issued in connection with the conversion of the Debentures, at an exercise price equal to $2.50 per share.

Under the termsprincipal amount of the First ConversionLien Loans by the amount of such interest due on each interest payment date and (b) permits the loans under the Second Lien Credit Agreement to equal an increased amount of up to $175.0 million. The First Lien Loans mature on October 21, 2018 and may be repaid in whole or part at any time at the balanceoption of the Debentures may be converted to Common Stock on the terms provided therein (including the terms relatedCompany, subject to the warrants) atpayment of certain specified prepayment premiums. Additionally, the electionFirst Lien Loans are subject to mandatory prepayment with the net proceeds of certain asset sales and casualty events, subject to the right of the holder, subjectCompany to receiptreinvest the net proceeds of stockholder approvalasset sales and casualty events within 180 days. The Company subsequently used approximately $31.5 million of the proceeds of the Riverstone First Lien Loans (hereinafter defined) to repay in full our obligations under and retire the First Lien Credit Agreement. As the First Lien Loans were fully repaid subsequent to December 31, 2017, these loans were classified as required by Nasdaq continued listing requirements.long-term.

Second Lien Credit Agreement

 

On December 29, 2015,April 26, 2017, the Company entered into the Second Lien Credit Agreement comprised of convertible loans in an aggregate initial principal amount of up to $125 million in two tranches. The first tranche consists of an $80 million term loan (the “Second Lien Term Loan”), which was fully drawn and funded on April 26, 2017. The second tranche consists of up to $45 million in delayed-draw term loans (the “Delayed Draw Term Loan” and, together with the Second Lien Term Loan, the “Second Lien Loans”) to be funded on or before February 28, 2019, at the request of the Company, subject to certain conditions, in a single draw or in multiple draws. Each tranche of Second Lien Loans will bear interest at a rate per annum of 8.25%, compounded quarterly in arrears and payable only in-kind by increasing the principal amount of the loan by the amount of the interest due on each interest payment date.

On October 3, 2017, the Company, certain subsidiaries of the Company, as guarantors (the “Guarantors”), Wilmington Trust, National Association, as administrative agent and the lenders party thereto, entered into Amendment No. 1 to the Second Lien Credit Agreement (“Amendment No. 1 to the Second Lien Credit Agreement”). The purpose of Amendment No. 1 to the Second Lien Credit Agreement is to waive certain conditions precedent to the drawing of the Delayed Draw Term Loan under the Second Lien Credit Agreement and to provide for the funding of such Delayed Draw Term Loan upon the signing of the lease acquisition agreement with KEW Drilling, a Delaware limited partnership. The Company borrowed the full $45.0 million of the availability under the Delayed Draw Term Loan on October 4, 2017.

On October 19, 2017, the Company entered into a second agreement withamendment to the holders of its Debentures, which provides forSecond Lien Credit Agreement (“Amendment No. 2 to the full automatic conversion of Debentures into shares ofSecond Lien Credit Agreement”), by and among the Company’s Common Stock at a price of $0.50 per share, uponCompany, the receipt of requisite stockholder approvalGuarantors, the Agent and the consummation ofLenders, including the Merger. If the Debentures are converted on these terms, it would result in the issuance of 13,692,930 shares of Common Stock and the elimination of $8.08 million in short-term debt obligations including accrued but unpaid interest which would be forfeited and cancelled upon conversion pursuantLead Lender. Amendment No. 2 to the terms of the agreement.

As of December 31, 2015 and 2014,Second Lien Credit Agreement permits the Company had $6.85 million and $6.84 million, net, remaining Debentures, respectively, which prior to December 29, 2015, were convertible at any time atincur the holders’ option into shares of Common Stock at a conversion price of $2.00 per share, subject to certain standard adjustments. IfIncremental Bridge Loan under the Merger is not successful or the stockholders do not approve the conversion of the Debentures at the Company’s special meeting to be held in the second quarter of 2016, the Debentures will no longer be subject to the terms of current debenture conversion agreement.

The debt discount amortization on the Debentures was approximately $6,000 and $472,000 for the years ended December 31, 2015 and 2014, respectively.

10% Term LoansFirst Lien Credit Agreement.

 

On May 30, 2014,November 10, 2017, the Company entered into a third amendment to the First SettlementSecond Lien Credit Agreement with Hexagon, which provided(“Amendment No. 3 to the Second Lien Credit Agreement”), by and among the Company, the Guarantors, the Agent and the Lenders, including the Lead Lender. Amendment No. 3 to the Second Lien Credit Agreement increased by $25.0 million the amount of delayed draw term loans available for the settlement of all amounts outstandingborrowing under the term loans. In connection with the executionSecond Lien Credit Agreement. The additional $25.0 million of the First Settlement Agreement, the Company made an initial cash paymentDelayed Draw Term Loan was drawn on November 10, 2017. The $25.0 million of $5.0 million reducing the total principalproceeds from these loans may be used to fund oil and interest due under the term loan from $19.83 millionnatural gas property acquisitions, subject to $14.83 million. The First Settlement Agreement required the Companycertain limitations, to make an additional cash payment of $5.0 million (the “Second Cash Payment”) by August 15, 2014,fund drilling and at that time issue to Hexagon (i) a two-year $6.0 million unsecured note (the “Replacement Note”), bearing interest at an annual rate of 8%, requiring principal and interest payments of $90,000 per month, and (ii) 943,208 shares of unregistered Common Stock (the “Shares”). The parties also agreed that if the Second Cash Payment was not made by June 30, 2014, an additional $1.0 million in principal would be added to the Replacement Note, and if the Replacement Note was not retired by December 31, 2014, the Company would issue an additional 1.0 million shares of Common Stock to Hexagon. The First Settlement Agreement was superseded by the Final Settlement Agreement which is discussed below.completion costs or for other general corporate purposes.

 

 F-23111 

 

 

On September 2, 2014, the Company entered into the Final Settlement Agreement with Hexagon which replaced the First Settlement Agreement, pursuant to which, in exchange for full extinguishment ofThe Second Lien Loans are secured by second priority liens on substantially all amounts outstanding under the term loans (approximately $15.06 million in principal and interest as of the settlement date),Company’s and the Company assigned Hexagon the collateral securing the term loans, which consisted of approximately 32,000 net acresGuarantors’ assets, including 17 producing wells that consisted of several economic wells which secured properties with PDP reserves and PUD reserves with a carrying value of approximately $16.62 million. The Company also conveyed $973,000 in asset retirement obligations (“ARO”) for the 17 active and several non-producing wells. In addition to the conveyance oftheir oil and natural gas property,properties located in the Delaware Basin, and all of the obligations thereunder are unconditionally guaranteed by each of the Guarantors. The Second Lien Loans mature on April 26, 2021. The Loans are subject to mandatory prepayment with the net proceeds of certain asset sales, casualty events and debt incurrences, subject to the right of the Company issued to Hexagon 2,000 sharesreinvest the net proceeds of 6% Conditionally Redeemable Preferred Stockasset sales and casualty events within 180 days and, in the case of asset sales and casualty events, prepayment of the Bridge Loan. The Company may not voluntarily prepay the Loans prior to March 31, 2019 except (a) in connection with a par valueChange of $0.0001, stated valueControl (as defined in the Second Lien Credit Agreement) or (b) if the closing price of $1,000our common stock on the principal exchange on which it is traded has been equal to or greater than 110% of the Conversion Price (as defined below) for at least 20 of the 30 trading days immediately preceding the prepayment. The Company will be required to pay a make-whole premium in connection with any mandatory or voluntary prepayment of the Loans.

Each tranche of the Second Lien Loans is separately convertible at any time, in full and dividends paid on a quarterly basis valuednot in part, at approximately $1.69 million at December 31, 2014. As a resultthe option of this conveyance, the Company recorded a loss on conveyance of property of $2.27 million.Lead Lender, as follows:

·70% of the principal amount of each tranche of Second Lien Loans, together with accrued and unpaid interest and the make-whole premium on such principal amount (the “Conversion Sum”), will convert into a number of newly issued shares of common stock determined by dividing the total of such principal amount, accrued and unpaid interest and make-whole premium by $5.50 (subject to certain customary adjustments, the “Conversion Price”); and

·30% of the principal amount of the Conversion Sum will convert on a dollar for dollar basis into a new term loan (the “Take Back Loans”).

 

The 2,000 shares of Conditionally Redeemable 6% Preferred Stock were issued on September 2, 2014 with a stated rate of $1,000 per share, par $0.0001. The shares were valued using the Monte Carlo projection model to determine the valueterms of the preferred stock. The Company usedTake Back Loans will be substantially the following inputs to calculate the valuation of the preferred stock at conveyance. The inputs consisted of a maturity range from 13.91 to 17.29 percent, redemption probability rate of 50%, and other probability weighted projected inputs including acquisitions, production, and other criteria that trigger a mandatory redemption.

Inducement Expense

On January 31, 2014,same as discussed above, the Company entered into the Initial Conversion Agreement with all of the holders of the Debentures. Under the terms of the Initial Conversion Agreement, $9.0 millionSecond Lien Loans, except that the Take Back Loans will not be convertible and will bear interest payable in cash at a rate of LIBOR plus 9% (subject to a 1% LIBOR floor).

Additionally, the Company will have the option to convert the Second Lien Loans, in whole or in part, into shares of common stock at any time or from time to time if, at the time of exercise of the approximately $15.6 million in Debentures outstanding as of January 30, 2014 immediately converted to shares of Common Stock at aCompany’s conversion option, the closing price of $2.00 perthe common share. stock on the principal exchange on which it is traded has been at least 150% of the Conversion Price then in effect for at least 20 of the 30 immediately preceding trading days. Conversion at the Company’s option will occur on the same terms as conversion at the Lender’s option.

As additional inducementdiscussed in Note 4,Fair Value of Financial Instruments, above and Note 6,Derivatives, above, the Company separately accounts for the conversions,embedded conversion features as a derivative instrument in accordance with accounting guidance relating to recording embedded derivatives at fair value. The initial fair value of the embedded derivatives is recorded as a debt discount to the Second Lien Term Loan. The debt discount is amortized over the term of the Second Lien Term Loan using the effective interest method.

Restrictive Covenants

As of December 31, 2017, the Company’s First Lien Credit Agreement and Second Lien Credit Agreement contain various covenants, including restrictions on additional indebtedness, payment of cash dividends on common stock and preferred stock, and maintenance of certain financial ratios. The First Lien Credit Agreement, as amended, requires that, commencing with the testing period ending at December 31, 2018, we satisfy an asset coverage ratio (“ACR”) test by maintaining an ACR of 1.00 to 1.00 or greater. In addition, the Second Lien Credit Agreement requires us to maintain, commencing with the testing period ending June 30, 2018, an ACR of 1.00 to 1.00. or greater. At December 31, 2017, the Company issued warrantswas in compliance with all restricted covenants.

SOS Note

On June 30, 2016, pursuant to the converting Debenture holdersmerger agreement with Brushy and as a condition of the fourth amendment to purchase one sharesuch merger agreement, the Company was required to make a cash payment of Common Stock,$500,000 to SOS, and also executed a subordinated promissory note with SOS, for $1 million, at an interest rate of 6% per annum which matures on June 30, 2019. In conjunction with the cash payment and the note, the Company also issued 200,000 warrants at an exercise price equal to $2.50 per share (the “Warrants”),of $25.00. The Company accounted for each sharethe cost of Common Stock issued upon conversionwarrants of $0.2 million as part of the Debentures. The Company utilized a Black Scholes option price model, with a 3 year life and 65% volatility, risk free rate of 0.2%, and the market price of $3.05. The Company recorded an inducement expense of $6.66 millionBrushy merger transaction costs during the year ended December 31, 2014 for the Warrants. TRW acted as the investment banker for the Initial Conversion Agreement and2016. The SOS note was compensated with 225,000 shares of Common Stock valued at a market price of $3.05 per share. During the year ended December 31, 2014, the Company valued that compensation at $686,000, which was expensed immediately.fully paid on January 22, 2018.

 

Interest Expense

For the year ended December 31, 2015 and 2014, the Company incurredThe components of interest expense of approximately $1.70 million and $4.84 million, respectively, of which approximately $131,000 and $2.43 million, respectively, were non-cash interest expense conveyed through property, amortization of the deferred financing costs, accretion of the Debentures payable discount, and Debentures interest paid in Common Stock.are as follows:

 

Debenture Interest – Non Cash

  Years Ended December 31, 
  2017  2016 
       
Interest on term loans $1,774  $446 
Interest on notes payable  53   412 
Interest on convertible notes and debentures(1)  -   880 
Paid-in-kind interest on term loans  6,559   - 
Amortization of debt financing costs on term loans  1,886   328 
Amortization of discount on term loans  8,485   2,858 
Total: $18,757  $4,924 

   

During the year ended December 31, 2014, the Company elected to fund its interest payment for its Debentures with stock and issued 1,396,129 shares valued at approximately $1.19 million which is an add back to accrued expense in the cash flow and further disclosed in the supplemental disclosure. The interest was accrued for the period from November 15, 2013 to December 29, 2014.

(1)These convertible notes and debentures including accrued interest were fully converted into the Company’s common stock upon closing of the Brushy merger on June 23, 2016.

 

 F-24112 

 

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Environmental and Governmental Regulation

 

At December 31, 2015,2017, there were no known environmental or regulatory matters which are reasonably expected to result in a material liability to the Company. Many aspects of the oil and natural gas industry are extensively regulated by federal, state, and local governments in all areas in which the Company has operations. Regulations govern such things as drilling permits, environmental protection and air emissions/pollution control, spacing of wells, the unitization and pooling of properties, reports concerning operations, land use, and various other matters including taxation. Oil and natural gas industry legislation and administrative regulations are periodically changed for a variety of political, economic, and other reasons. As of December 31, 20152017, the Company had not been fined or cited for any violations of governmental regulations that would have a material adverse effect upon the financial condition of the Company.

 

Legal Proceedings

 

The Company may from time to time be involved in various legal actions arising in the normal course of business. In the opinion of management, the Company’s liability, if any, in these pending actions would not have a material adverse effect on the financial position of the Company. The Company’s general and administrative expenses would include amounts incurred to resolve claims made against the Company.

 

Parker v. Tracinda Corporation, Denver District Court, Case No. 2011CV561. In November 2012, the Company filed a motion to intervene in garnishment proceedings involving Roger Parker, the Company’s former Chief Executive Officer and Chairman. The Defendant, Tracinda, served various writs of garnishment on the Company to enforce a judgment against Mr. Parker seeking, among other things, shares of unvested restricted stock. The Company asserted rights to lawful set-offs and deductions in connection with certain tax consequences, which may be material to the Company. The underlying judgment against Mr. Parker was appealed to the Colorado Court of Appeals and, by Order dated October 17, 2013, that Court reversed the trial court with respect to Mr. Parker’s claims of waiver, estoppel and mitigation of damages and remanded with instruction to enter judgment for Mr. Parker. The Court of Appeals also ordered the trial court to conduct further proceedings to determine the amount of damages to award Mr. Parker on his breach of contract claim. The trial court conducted a later hearing and found in its Findings of Fact, Conclusions of Law and Order dated January 9, 2015, in favor of Mr. Parker on his claim for breach of contract, awarding him $6,981,302.60.Tracinda’s Motion for Amendment of the Court’s January 9 Findings and Conclusions was the subject of an Order dated April 10, 2015, in which the Court set off the award in favor of Mr. Parker against the award in favor of Tracinda, resulting in judgment in favor of Tracinda and against Mr. Parker in the amount of $625,572. On April 16, 2015, Tracinda filed a Notice of Appeal in the Colorado Court of Appeals, appealing both the January 9 Order and the April 10 Order. On May 18, 2015, Parker filed a Notice of Cross-Appeal in the Colorado Court of Appeals, cross-appealing both the January 9 Order and the April 10 Order. The record is in the process of being certified. The filing of the record will trigger the parties' briefing schedule.

In re Roger A. Parker: Tracinda Corp. v. Recovery Energy, Inc. and Roger A. Parker, United States Bankruptcy Court for the District of Colorado, Case No. 13-10897-EEB. On June 10, 2013, Tracinda Corp. (“Tracinda”) filed a complaint (Adversary No. 13-011301 EEB) against the Company and Roger Parker in connection with the personal bankruptcy proceedings of Roger Parker, alleging that the Company improperly failed to remit to Tracinda certain property in connection with a writs of garnishment issued by the Denver District Court (discussed above). The Company filed an answer to this complaint on July 10, 2013. A trial date has not been set and, by Order dated February 2, 2015, the Bankruptcy Court ordered that the Adversary Proceeding be held in abeyance pending final resolution of the state-court action (2011CV561). The Company is unable to predict the timing and outcome of this matter.

Lilis Energy, Inc. v. Great Western Operating Company LLC, Eighth Judicial District Court for Clark County, Nevada, Case No. A-15-714879-B. On March 6, 2015, the Company filed a lawsuit against Great Western Operating Company, LLC, or the Operator. The dispute related to the Company’s interest in certain producing wells and the Operator’s assertion that the Company’s interest was reduced and/or eliminated as a result of a default or a farm-out agreement. Underlying the dispute is the JOA which provides the parties with various rights and obligations. In its complaint, the Company sought monetary damages and declaratory relief on claims of breach of contract, breach of the implied covenant of good faith and fair dealing, tortious breach of the implied covenant of good faith and fair dealing, unjust enrichment, conversion and declaratory judgment related to the JOA. The Operator filed a motion to dismiss on May 26, 2015 and the Company responded by filing an opposition motion on June 12, 2015.

F-25

On July 7, 2015, as previously reported, the Company entered into a settlement agreement with the Operator. Due to the Company’s inability to secure financing pursuant to the Credit Agreement or another funding source, payment was not remanded to the Operator and the dispute remained unsettled.

During the year ended December 31, 2015, the Company was put in non-consent status. As such, the previously capitalized and accrued costs of approximately $5.20 million relating to these wells were eliminated since being placed in non-consent status relieved the Company of such liabilities. The Company has retained the right to participate in future drilling on this acreage block.

The Company believes there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition.

 

Operating Leases

 

The Company leases anhas a two-year operating lease for office space underin San Antonio, Texas and various other operating leases on a two year operating leasemonth-to-month basis which include office leases in Denver, ColoradoFort Worth and a one year operating leaseHouston, Texas and corporate apartment leases in Melville, New York expiring in November 2017.San Antonio, Texas. Rent expense for the years ended December 31, 20152017 and 2014, were $73,0002016, was approximately $0.6 million and $109,000,$0.2 million, respectively. As of December 31, 2015,2017, the Company has approximately $90,000$0.2 million of minimum lease payments on its existing operating leases. lease which consists of annual minimum lease payments of approximately $0.2 million in 2018.

 

NOTE 9 - RELATED PARTY TRANSACTIONS

 

During the fiscal years ended December 31, 20152017 and 2014,2016, the Company has engaged in the following transactions with related parties:

Debenture Conversion Agreement

    Year Ended December 31, 
Related Party Transactions 2017  2016 
    ($ in thousands) 
Greater than 10% Shareholder:          

   

On December 29, 2015, the Company entered into a Debenture Conversion Agreement between with all of the remaining holders of its Debentures. The terms of the Agreement provide that the entire amount of approximately $6.85 million in outstanding Debentures are automatically converted into the Company’s Common Stock upon the closing of the proposed merger with Brushy Resources, Inc., or the Conversion Date, provided that the Company obtains the requisite stockholder approval as required by the Nasdaq Marketplace Rules, which it plans to seek at the next stockholders’ meeting to be held in connection with approving the proposed merger with Brushy Resources, Inc. Pursuant to the terms of the Debenture Conversion Agreement, the Debentures will be converted at a price of $0.50, or the Conversion Price, which will result in the issuance of an aggregate of 13,692,930 shares of Common Stock upon conversion of the Debentures. Holders of the Debentures have waived and forfeited any and all rights to receive accrued but unpaid interest. Upon the conversion of the Debentures, the holders’ security interest will also be extinguished.

Certain parties to the Debenture Conversion Agreement include related parties of our the Company, such as the Steven B. Dunn and Laura Dunn Revocable Trust dated 10/28/10, of which its respective Debenture amount to be converted on the Conversion Date is $1,017,111, and Wallington Investment Holdings, Ltd., of which its respective Debenture amount to be converted on the Conversion Date is $2,090,180. Each of the Steven B. Dunn and Laura Dunn Revocable Trust dated October 28, 2010 and Wallington Investment Holdings, Ltd. are a more than 5% shareholder of our company.

From December 29, 2015 to January 5, 2016, the Company entered into 12% Convertible Subordinated Note Purchase Agreements with various lending parties, or the Purchasers, for the issuance of an aggregate principal amount of $3.75 million unsecured subordinated convertible notes, or the Convertible Notes, which includes the $750,002 of short-term notes exchanged for Convertible Notes by the Company and warrants to purchase up to an aggregate of approximately 15,000,000 shares of Common Stock at an exercise price of $0.25 per share. As of December 31, 2015, $2.95 million Convertible Notes were outstanding. The proceeds from this financing was used to pay a $2 million refundable deposit in connection with the Merger, to fund approximately $1.3 million of interest payments to certain of our lenders and for the Company’s working capital and accounts payables.

The Convertible Notes bear interest at a rate of 12% per annum, payable at maturity on June 30, 2016. The Convertible Notes and accrued but unpaid interest thereon are convertible in whole or in part from time to time at the option of the holders thereof into shares of our common stock at a conversion price of $0.50. The Convertible Notes may be prepaid in whole or in part by paying all or a portion of the principal amount to be prepaid together with accrued interest thereon to the date of prepayment at a premium of 103% for the first 120 days and a premium of 105% thereafter, so long as no Senior Debt is outstanding. The Convertible Notes contain customary events of default, which, if uncured, entitle each noteholder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest, subject to certain subordination provisions.

 F-26113

    Year Ended December 31, 
Related Party Transactions 2017  2016 
    ($ in thousands) 
Bryan Ezralow (Ezralow as a family has >10% ownership in the Company) Participated in Series B Preferred Stock offering in 2016 and converted into common stock during the year ended December 31, 2017. $628  $1,300 
  Participated in the September 29, 2016 $50 million credit facility which was fully paid off during the year ended December 31, 2017.  1,356   1,450 
  Converted the holdings of Debentures entered into on December 29, 2015 into common stock through EZ Colony Partners, LLC owned by Bryan Ezralow upon the closing of the Brushy merger on June 23, 2016.  -   1,540 
  Warrants exercised at $0.01 per share during the year ended December 31, 2017  21   - 
  Participated in private placement transaction on February 28, 2017  1,400   - 
  Total: $3,405  $4,290 
           
Mark Ezralow Participated in Series B Preferred Stock offering in 2016 and converted into common stock during the nine months ended September 30, 2017. $574  $- 
  Participated in the September 29, 2016 $50 million credit facility which was fully paid off during the year ended December 31, 2017.  1,055   950 
  Warrants exercised at $0.01 per share during the year ended December 31, 2017.  18   - 
  Participated in private placement transaction on February 28, 2017.  1,200   - 
  Total: $2,847  $950 
           

114

    Year Ended December 31, 
Related Party Transactions 2017  2016 
    ($ in thousands) 
           
Investor Company Participated in Series B Preferred Stock offering in 2016 and converted into common stock during the year ended December 31, 2017. $4,318  $- 
  Participated in the September 29, 2016 $50 million credit facility which was repaid during the year ended December 31, 2017  20,093     
  Participated in the amendment to the Company’s first lien credit facility in April 2017 by reinvesting its principal amount that was paid down in the form of bridge loan including paid and accrued interest  2,188   - 
  Participated in the amendment to the Company’s first lien credit facility in October 2017 by an investment in the form of incremental bridge loan including paid and accrued interest  1,368   - 
  Warrants exercised at $0.01 per share during the year ended December 31, 2017.  23   - 
  Total: $27,990  $- 
           
           
Directors and Officers:          
G. Tyler Runnels,
(Director)		 Received advisory fee for Series B Preferred Stock offering fees and warrants to purchase up to 452,724 shares of common stock, at an exercise price of $1.30 per share, exercisable on or after September 17, 2016 through T.R. Winston & Company, LLC (“TRW”)(1).   $-  $500 

115 

 

 

The Purchasers include certain related parties of the Company, including Abraham Mirman, our Chief Executive Officer and a member of the Board of Directors ($750,000 including the short-term note exchange investment), the Bruin Trust, an irrevocable trust managed by an independent trustee and whose beneficiaries include the adult children of Ronald D. Ormand, Chairman of the Company’s Board of Directors ($1.15 million) and Pierre Caland through Wallington Investment Holdings, Ltd. ($300,000), who holds more than 5% of our Common Stock.

    Year Ended December 31, 
Related Party Transactions 2017  2016 
    ($ in thousands) 
  Reinvested advisory fee for 150 shares of Series B Preferred Stock and 68,182 warrants at exercise price of $2.50 per share through TRW.  -   150 
  Converted shares of Series A Preferred Stock into common stock upon the closing of the Brushy merger on June 23, 2016 through TRW and Runnels Family Trust DTD 1-11-2000(2).    -   779 
  Cash paid for advisory fee on Convertible Notes which was reinvested in 350 shares of Series B Preferred Stock through TRW.  -   350 
  Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017 through TRW, which were fully converted into common stock upon closing of the Brushy merger on June 23, 2016.  -   400 

  

Certain of the Company’s officers, directors and consultants who the Company entered into short-term note agreements with in 2015, also entered into note exchange agreements, whereby the short-term noteholder agreed to exchange all of the Company’s outstanding obligations under such short-term notes, which as of December 29, 2015 had outstanding obligations of $750,002, into the Convertible Notes at a rate, expressed in principal amount of Convertible Notes equal to $1.00 for $1.00, in exchange for the cancellation of the short-term notes, with all amounts due thereunder being cancelled and deemed to have been paid in full, including any accrued but unpaid interest.

The short-term noteholders include certain related parties of the Company, including Abraham Mirman, the Chief Executive Officer and a director of the Company ($250,000), General Merrill McPeak, a director of the Company ($250,000), and Nuno Brandolini, a director of the Company ($150,000).

Additionally, on March 18, 2016, the Company issued an additional aggregate principal amount of $500,000 in Convertible Notes and warrants to purchase up to 2.0 million shares of our Common Stock. The terms and conditions of the Convertible Notes are identical to those of the Convertible Notes issued previously with the exception of the maturity date, which is April 1, 2017.

The Purchasers include a related party of the Company, R. Glenn Dawson, a director of the Company ($50,000). 

Abraham Mirman

Abraham Mirman, the Chief Executive Officer and a director of the Company, is an indirect owner of a group which converted approximately $220,000 of Debentures in connection with the $9.00 million of Debentures converted in January 2014, and was paid $10,000 in interest at the time of the Debenture conversion.

During the January 2014 private placement, Mr. Mirman entered into a subscription agreement with the Company to invest $500,000, for which Mr. Mirman will receive 250,000 shares of stock and 250,000 warrants. The subscription agreement will not be consummated until a shareholder meeting is conducted to receive the required approval to allow executives and Board directors the ability to participate in the offering.

Additionally, as discussed below, on January 31, 2014, the Company entered into the First Conversion Agreement with the holders of the Debentures, which also included The Bralina Group, LLC, in which Mr. Mirman has voting and dispositive power,

In April 2014, the Company appointed Abraham Mirman to serve as the Company’s Chief Executive Officer. Prior to joining the Company, Mr. Mirman was employed by T.R. Winston & Company, LLC, or TRW, as its Managing Director of Investment Banking and until September 2014 continued to devote a portion of his time to serving in that role. In connection with the appointment of Mr. Mirman, the Company and TRW amended the investment banking agreement in place between the Company and TRW at that time to provide that, upon our receipt of gross cash proceeds or drawing availability of at least $30.00 million, measured on a cumulative basis and including certain restructuring transactions, subject to the Company’s continued employment of Mr. Mirman, TRW would receive from the Company a lump sum payment of $1.00 million. Mr. Mirman’s compensation arrangements with TRW provided that upon TRW’s receipt from the Company of the lump sum payment, TRW would make a payment of $1 million to Mr. Mirman. The Board determined in September 2014 that the criteria for the lump sum payment had been met. Mr. Mirman also received, as part of his compensation arrangement with TRW, the 100,000 shares of Common Stock that were issued to TRW in conjunction with the investment banking agreement.

 F-27116 

 

 

G. Tyler Runnels and T.R. Winston

    Year Ended December 31, 
Related Party Transactions 2017  2016 
    ($ in thousands) 
  Participated in Series B Preferred Stock offering in 2016 through TRW and Runnels Family Trust DTD 1-11-2000 and converted into common stock during the year ended December 31, 2017.  520   - 
  Participated in private placement transaction on February 28, 2017 through TRW and Runnels Family Trust DTD 1-11-2000.  796   - 
  Warrants exercised at $0.10 per share during the year ended December 31, 2017 through Runnels Family Trust DTD 1-11-2000 and TRW Capital Growth Fund, LP(3).     17   - 
  Sublet office space through TRW in New York to the Company for rent of $10,000 per month from January 1, 2017 through October 31, 2017.  80   15 
  Total: $1,413  $2,194 

   

The Company has participated in several transactions with TRW, of which G. Tyler Runnels, a former member of the Board of Directors, is chairman and majority owner. Mr. Runnels also beneficially holds more than 5% of Common Stock, including the holdings of TRW and his personal holdings, and has personally participated in certain transactions with the Company.

On January 22, 2014, the Company paid TRW a commission equal to $486,000 (equal to 8% of gross proceeds at the closing of the January 2014 private placement). Of this $486,000 commission, $313,750 was paid in cash and $172,250 was paid in 86,125 Units. In addition, the Company paid TRW a non-accountable expense allowance of $182,250 (equal to 3% of gross proceeds at the closing of the January 2014 private placement) in cash. If the participation of certain of the Company’s current and former officers and directors, who remain committed, is approved by stockholders, the Company will pay TRW an additional commission. The Units issued to TRW were the same Units sold in the January 2014 private placement and were invested in the January 2014 private placement.

On January 31, 2014, the Company entered into a conversion agreement with all of the holders of the Debentures, including TRW and Mr. Runnels’ personal trust, or the First Conversion Agreement. Under the terms of the First Conversion Agreement, $9.0 million of the approximately $15.6 million in Debentures outstanding as of January 30, 2014 immediately converted to shares of Common Stock at a price of $2.00 per common share. As additional inducement for the conversions, the Company issued warrants to the converting Debenture holders to purchase one share of Common Stock, at an exercise price equal to $2.50 per share, for each share of Common Stock issued upon conversion of the Debentures. TRW acted as the investment banker for the First Conversion Agreement and was compensated by being issued 225,000 shares of Common Stock valued at a market price of $3.05 per share. During the year ended December 31, 2014, the Company valued the investment banker compensation at $686,000.

On May 19, 2014, the Company and the holders of the Debentures agreed to extend the maturity date under the Debentures until August 15, 2014, and on June 6, 2014, they agreed to further extend the maturity date under the Debentures from August 15, 2014 to January 15, 2015. In January 2015, the Company entered into an extension agreement which extends the maturity date of the Debentures until January 8, 2018. Upon completion of the conversion of the remaining Debentures, TRW will be entitled to an additional commission.

On October 6, 2014, the Company entered into a letter agreement, or the Waiver, with the holders of the Debentures, including TRW and Mr. Runnels’ personal trust. Pursuant to the Waiver, the holders of the Debentures agreed to waive any Event of Default (as that term is defined in the Debentures) that may have occurred prior to the date of the Waiver, including any default in connection with the Hexagon term loan, and to rescind and annul any acceleration or right to acceleration that may have been triggered thereby. In exchange for the Waiver, the Company agreed that TRW, as representative for the holders of the Debentures, would have the right to nominate two qualified individuals to serve on the Board. Mr. Runnels is one of the qualified nomination designees which TRW had elected to place on the Board.

On March 28, 2014, the Company entered into a Transaction Fee Agreement with TRW in connection with the May private placement, or the Transaction Fee Agreement. Pursuant to the Transaction Fee Agreement, the Company agreed to compensate TRW 5% of the gross proceeds of the May private placement, plus a $25,000 expense reimbursement. On April 29, 2014, the Company and TRW amended the Transaction Fee Agreement to increase TRW’s compensation to 8% of the gross proceeds, plus an additional 1% of the gross proceeds as a non-accountable expense reimbursement in addition to the $25,000 originally contemplated. All fees were netted against gross proceeds from the May private placement.

On May 30, 2014, the Company paid TRW a commission equal to $600,000 (equal to 8% of gross proceeds at the closing of the May private placement). Of this $600,000 commission, $51,850 was paid in cash to TRW, $94,150 was paid in cash to other brokers designated by TRW, and remaining $454,000 was invested by TRW into shares of Series A 8% Convertible Preferred Stock. In addition, the Company paid TRW a non-accountable expense allowance of $75,000 (equal to 1% of gross proceeds at the closing of the May private placement) in cash.

 F-28117 

 

 

On June 6, 2014, TRW executed a commitment to purchase or affect the purchase by third parties of an additional $15 million in Series A 8% Convertible Preferred Stock, to be consummated within ninety (90) days thereof. The agreement was subsequently extended and expired on February 22, 2015. On February 25, 2015, the Company and TRW agreed in principal to a replacement commitment, pursuant to which TRW has agreed that, at the request of the Board, TRW would purchase or effect the purchase by third parties of an additional $7.5 million in Series A 8% Convertible Preferred Stock, to be consummated no later than February 23, 2016, with all other terms substantially the same as those of the original commitment, which has not occurred.

    Year Ended December 31, 
Related Party Transactions 2017  2016 
    ($ in thousands) 
Nuno Brandolini
(Director)		 Participated in Convertible Notes maturing on September 30, 2016 and April 1, 2017.  These notes were fully converted into common stock upon closing of the Brushy merger on June 23, 2016. $-  $250 
  Converted shares of Series A Preferred Stock into common stock upon the closing of the Brushy merger on June 23, 2016.  -   100 
  Warrants exercised at $0.10 per share during the year ended December 31, 2017.  4   - 
  Total: $4  $350 
           
General Merrill McPeak
(Director)		 Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017.  These notes were fully converted into common stock upon closing of the Brushy merger on June 23, 2016. $-  $250 

Ronald D. Ormand

On March 20, 2014, the Company entered into an Engagement Agreement, or the MLV Engagement Agreement, with MLV in September of 2015. Pursuant to the Engagement Agreement, MLV acted as the Company’s exclusive financial advisor. Ronald D. Ormand, director of the Company since February 2015 and chairman of the Board of Directors as of January 2016, was the former Managing Director and Head of the Energy Investment Banking Group at MLV until January 2016. The Engagement Agreement provided for a fee of $25,000 to be paid monthly to MLV, subject to certain adjustments and other specific fee arrangements in connection with the nature of financial services being provided. The term of the MLV Engagement Agreement expired on October 31, 2015.

 

The Company expensed $150,000 and $50,000 for the years ended December 31, 2015 and 2014, respectively. A total of $150,000 was paid to MLV for the year ended December 31, 2014. On May 27, 2015, MLV agreed to take $150,000 of its accrued fees Common Stock and was issued 75,000 shares in lieu of cash payment. The closing share price on May 27, 2015 was $1.56.

Hexagon, LLC

Hexagon, LLC, or Hexagon, our former primary lender, still holds over 5% of the Company’s Common Stock.

The Company was a party to three term loan credit agreements dated as of January 29, 2010, March 25, 2010, and April 14, 2010, respectively, which collectively, are referred to as the credit agreements with Hexagon. On April 15, 2013, the Company and Hexagon agreed to amend the credit agreements to extend their maturity dates to May 16, 2014. Pursuant to the amendment, Hexagon agreed to (i) reduce the interest rate under the credit agreements from 15% to 10% beginning retroactively with March 2013, (ii) permit the Company to make interest only payments for March, April, May, and June 2013, after which time the minimum secured term loan payment became $0.23 million, and (iii) forbear from exercising its rights under the term loan credit agreements for any breach that may have occurred prior to the amendment. In consideration for the extended maturity date, the reduced interest rate and minimum loan payment under the secured term loans, the Company provided Hexagon an additional security interest in 15,000 acres of its undeveloped acreage.

In addition, Hexagon and its affiliates had interests in certain of the Company’s wells independent of Hexagon’s interests under the term loans, for which Hexagon or its affiliates receive revenue and joint-interest billings.

On September 2, 2014, the Company entered into the Final Settlement Agreement with Hexagon, to settle all amounts payable by the Company pursuant to existing credit agreements with Hexagon that were secured by the Hexagon Collateral. Pursuant to the Final Settlement Agreement, in exchange for full extinguishment of all amounts payable ($15.1 million in principal and interest) pursuant to the credit agreements and related promissory notes, the Company agreed to assign to Hexagon all of the Hexagon Collateral, and issued to Hexagon $2.0 million in a new series of 6% Redeemable Preferred Stock. The Final Settlement Agreement also prohibited Hexagon from selling or otherwise disposing of any shares of Common Stock held by Hexagon until February 29, 2016. In addition, pursuant to the Final Settlement Agreement, the Company and Hexagon each mutually released and discharged all known and unknown claims against the other and their respective representatives that they had or may have, including claims relating to the credit agreements.

 F-29118 

 

 

Officers and Directors

    Year Ended December 31, 
Related Party Transactions 2017  2016 
    ($ in thousands) 
  Converted shares of Series A Preferred Stock into common stock upon the closing of the Brushy merger on June 23, 2016.  -   250 
  Total: $-  $500 
           
R. Glenn Dawson
(Director)		 Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017.  These notes were fully converted into common stock upon closing of the Brushy merger on June 23, 2016. $-  $50 
  Participated in Series B Preferred Stock offering in 2016 and converted into common stock during the year ended December 31, 2017.  130   125 
  Total: $130  $175 

  

119

As discussed above, on January 31, 2014, the Company entered into the First Conversion Agreement with the holders of the Debentures, which also included W. Phillip Marcum, the Company’s then Chief Executive Officer, and A. Bradley Gabbard, the Company’s then Chief Financial Officer.

Mark Christensen (Director) Participated in the Company’s accordion advance of the first lien facility in February 2017 through Trace Capital Inc. (“Trace Capital”)(4) $1,600  $- 
  Participated in private placement transaction on February 28, 2017 through Trace Capital.  1,000   - 
  Participated in the amendment to the Company’s first lien credit facility in April 2017 through Trace Capital by reinvesting its principal amount that was paid down in the form of bridge loans plus paid and accrued interest  1,586   - 
  Participated in the September 29, 2016 $50 million credit facility and February 7, 2017 accordion advance of the first lien facility which were repaid during the year ended December 31, 2017  2,612     
  Participated in the amendment to the Company’s first lien credit facility in October 2017 by an investment in the form of incremental bridge loan including paid and accrued interest  1,578   - 
  Exercise of warrants  2   - 
  Received fees through KES 7 Capital Inc.(5) for acting as an advisor on certain of the Company’s financing transactions.  905   - 
  Total: $9,283  $- 
           
Ronald D. Ormand (Executive Chairman) Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017 through the Bruin Trust.(6)  These notes were fully converted into common stock upon closing of the Brushy merger on June 23, 2016. $-  $1,150 
  Participated in Series B Preferred Stock offering in 2016 and converted into common stock in 2017 through Perugia Investment LP(7)during the year ended December 31, 2017.  1,093   1,000 
  Exercise of warrants  4   - 
  Converted shares of Series A Preferred Stock into common stock through Perugia Investment LP upon the closing of the Brushy merger on June 23, 2016.  -   500 
  Consulting fee paid to MLV & Co. LLC for which Mr. Ormand was the Managing Director and Head of the Energy Investment Banking Group  -   100 
  Accounts receivable due for federal tax withholding on vested restricted shares. This amount was deducted from bonus payment in February 2018.  107   - 
  Total: $1,204  $2,750 
           
Joseph C. Daches (Chief Financial Officer) Accounts receivable due for federal tax withholding on vested restricted shares. This amount was deducted from bonus payment in February 2018. $100   - 
  Total: $100  $- 
           

Brennan Short (former Chief Operating Officer)

 Consulting fees paid to MMZ Consulting, Inc. which is owned by Mr. Short.  Mr. Short is the sole member of the corporation. $283  $- 
  Total: $283  $- 
           
Abraham Mirman (former Chief Executive Officer and Director) Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017 through The Bralina Group, LLC.(8)  These notes were fully converted into common stock upon closing of the Brushy merger on June 23, 2016. $-  $750 
  Participated in Series B Preferred Stock offering in 2016 and converted into common stock in 2017 through the Bralina Group, LLC.  1,803   1,650 
  Converted shares of Series A Preferred Stock into common stock upon the closing of the Brushy merger on June 23, 2016.  -   250 
  Total: $1,803  $2,650 
           
Kevin Nanke (former Chief Financial Officer) Participated in Convertible Notes maturing on June 30, 2016 and April 1, 2017.  These notes were converted into the Company’s common stock upon the closing of the Brushy merger on June 23, 2016. $-  $100 
  Participated in Series B Preferred Stock offering in 2016 and converted into common stock in 2017 through KKN Holdings LLC during the year ended December 31, 2017.  219   200 
  Warrants exercised at $0.01 per share during the year ended December 31, 2017.  4   - 
  Purchased the DJ Basin properties from the Company through Nanke Energy, LLC on January 31, 2017.  2,000   - 
  Total: $2,223  $300 

Employment Agreements with Officers

 

See Note 12—Share Based and Other Compensation.

120

 

Compensation of Directors

 

See Note 12—Share Based and Other Compensation.

(1)Mr. Runnels has sole voting and dispositive power over all securities held by T.R. Winston & Company, LLC.
(2)Mr. Runnels acts as a trustee with Jasmine N. Runnels for the Runnels Family Trust DTD 1-11-2000 and has shared voting and dispositive power.
(3)Mr. Runnels has sole voting and dispositive power over all securities held by TRW Capital Growth Fund, LP.
(4)Trace Capital Inc. is an entity controlled by Mr. Christensen’s wife, who has sole voting and dispositive power over the securities held by Trace Capital Inc.
(5)Mr. Christensen has sole voting and dispositive power over all securities held by KES 7 Capital Inc.
(6)An irrevocable trust managed by Jerry Ormand, Mr. Ormand's brother, as trustee and whose beneficiaries are the adult children of Ronald Ormand.
(7)Mr. Ormand has sole voting and dispositive power over the securities held by Perugia Investment LP.
(8)Mr. Mirman has shared voting and dispositive power over the securities held by The Bralina Group, LLC with Susan Mirman.

 

NOTE 10 - INCOME TAXES

The income tax provision (benefit) for the years ended December 31, 20152017 and 20142016 consisted of the following:

 

  December 31, 
  2015  2014 
U.S. Federal:      
Current $-  $- 
Deferred  (10,559,507)  (5,279,080)
         
State and local:        
Current  -   - 
Deferred  (914,239)  (337,066)
   (11,473,746)  (5,616,146)
Change in valuation allowance  11,473,746   5,616,146 
Income tax provision $-  $- 

  December 31, 
  2017  2016 
  (in thousands) 
U.S. Federal:        
Current $-  $- 
Deferred  32,579   (2,971)
         
State and local:        
Current  -   - 
Deferred  1,059   (124)
   33,638   (3,095)
Change in valuation allowance  (33,638)  3,095 
Income tax provision $-  $- 

 

The tax effects of temporary differences that give rise to the Company’s deferred tax asset as of December 31, 20152017 and 20142016 consisted of the following:

 

  December 31, 
  2015  2014 
Deferred tax assets:      
Oil and gas properties and equipment $3,448,288  $- 
Net operating loss carry-forward  41,375,037   37,857,532 
Share based compensation  1,278,948   1,290,482 
Abandonment obligation  76,826   72,365 
Derivative instruments  20,561   142,434 
Accrued liabilities  36,944   132,574 
Debt conversion costs  502,048   477,439 
Other  29,555   28,937 
Total deferred tax asset  47,168,207   40,001,763 
Valuation allowance  (47,168,207)  (35,694,459)
Deferred tax asset , net of valuation allowance $-  $4,307,304 
         
Deferred tax liabilities:        
Oil and gas properties and equipment $-  $(4,307,304)
Total deferred tax liability  -   (4,307,304)
Net deferred tax asset (liability) $-  $- 

  December 31, 
  2017  2016 
  (In thousands) 
Deferred tax assets:        
Oil and natural gas properties and equipment $-  $5,156 
Net operating loss carry-forward  15,653   42,017 
Share based compensation  784   2,135 
Abandonment obligation  212   445 
Derivative instruments  191   - 
Accrued liabilities  43   - 
Debt conversion costs  -   482 
Other  9   28 
Total deferred tax asset  16,892   50,263 
Valuation allowance  (16,624)  (50,263)
Deferred tax asset, net of valuation allowance $268  $- 
         
Deferred tax liabilities:        
Oil and natural gas properties and equipment $268  $- 
Total deferred tax liability  268   - 
Net deferred tax asset (liability) $-  $- 

 

 F-30121 

 

Reconciliation of the Company’s effective tax rate to the expected U.S. federal tax rate is:

 

  For the Year Ended
December 31,		 
  2015  2014 
Effective federal tax rate  34.00%  34.00%
State tax rate, net of federal benefit  2.94%  2.17%
Change in fair value derivative liability  1.42%  -7.03%
Conversion inducement expense  -%  -8.47%
Debt discount amortization  -0.01%  -1.08%
Share based compensation differences and forfeitures  -4.18%  -%
Change in rate  0.01%  -1.28%
Other permanent differences  -1.06%  1.44%
Valuation allowance  -35.46%  -19.75%
Net  -%  -%

  

Year Ended

December 31,

 
  2017  2016 
Effective federal tax rate  34.00%  34.00%
State tax rate, net of federal benefit  1.11%  1.42%
Effect of the Tax Cuts and Jobs Act  -11.22%  -%
Change in fair value derivative liability  -2.59%  -1.32%
Debt discount amortization  -3.51%  -4.11%
Share based compensation differences and forfeitures  0.91%  -2.28%
Change in rate  -0.05%  -5.90%
Other permanent differences  -4.61%  -12.29%
NOL true-up - §382 limitation  -47.22%  -0.00%
Other  -6.47%  -0.10%
Valuation allowance  39.65%  -9.42%
Net  -%  -%

 

The Company is in the process of filing its federal and state tax returns for the years ended April 30, 2011, December 31, 2011, December 31, 2012, December 31, 2013, December 31, 2014 and December 31, 2015. The net operating losses for these years will not be available to reduce future taxable income until the returns are filed. Assuming these returns are filed, as

As of December 31, 20152017 and 2014,2016, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $112.0$70.1 million and $106.8$118.6 million, respectively, available to offset future taxable income. To the extent not utilized, the net operating loss carry-forwards as of December 31, 20152017 will expire beginning in 2027 through 2035. The net operating loss carryovers may be subject to reduction or limitation by application of Internal Revenue Code Section 382 from the result of ownership changes.2036. A full Section 382 analysis has not beenwas prepared andin 2017 resulting in a true-up of the Company'sCompany’s net operating losses could be subject to limitation under Section 382.382 from $118.6 million to $9.1 million as of December 31, 2016. The net operating loss of $70.1 million as of December 31, 2017 could be subject to Section 382 limitation due to potential ownership changes of more than 50% which may have occurred during the current tax year.

 

In assessing the need for a valuation allowance on ourthe Company’s deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon whether future book income is sufficient to reverse existing temporary differences that give rise to deferred tax assets, as well as whether future taxable income is sufficient to utilize net operating loss and credit carryforwards. Assessing the need for, or the sufficiency of, a valuation allowance requires the evaluation of all available evidence, both positive and negative. Management had no positive evidence to consider. Negative evidence considered by management includes cumulative book and tax losses in recent years, forecasted book and tax losses, no taxable income in available carryback years, and no tax planning strategies contemplated to realize the valued deferred tax assets.

 

As of December 31, 20152017, and 2014,2016, management assessed the available positive and negative evidence to estimate if sufficient future taxable income would be generated to use the Company’s deferred tax assets and determined that it is not more-likely-than-not that the deferred tax assets would be realized in the near future. Therefore, the Company recorded a full valuation allowance of approximately 47.2$16.6 million and $35.7$50.0 million on its deferred tax assets as of December 31, 20152017 and 2014,2016, respectively.

The New Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code applicable to certain items in 2017 as well as those applicable to 2018 and subsequent years.

ASC 740 requires the recognition of the tax effects of the Act for annual periods that include December 22, 2017. At December 31, 2017, the Company has made reasonable estimates of the effects on its existing deferred tax balances. The Company has remeasured certain federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally twenty one percent. The provisional amount recognized related to the remeasurement of its federal deferred tax balance was $9.5 million, which was subject to a valuation allowance at December 31, 2017.

The Company will continue to analyze the Act and future IRS regulations, refine its calculations, gain a more thorough understanding of how individual states are implementing this new law and evaluate other provisions of the tax reform. This further analysis could potentially affect the measurement of deferred tax balances or potentially give rise to new deferred tax amounts.

   

NOTE 11 - STOCKHOLDERS’ EQUITY

 

AsAuthorized Shares of December 31, 2015,Common Stock

On May 2, 2017, the Board of Directors authorized the amendment of the Company’s certificate of incorporation to increase the number of authorized shares of common stock by 50 million from the prior level of 100 million. This amendment was also approved by the Company’s stockholders on July 13, 2017. There was no change in the stated par value of the shares as a result of this amendment.

Conditionally Redeemable 6% Preferred Stock

In August 2014, the Company has 100,000,000designated 2,000 shares of Common Stockits authorized 10,000,000 shares of Series A Preferred Stock, and 7,000 shares ofpreferred stock as Conditionally Redeemable 6% Preferred Stock, authorized. Of the shares authorized, 29,166,590 shares of Common Stock, 7,500,000 shares of Series A Preferred Stock, andor (the “Redeemable Preferred”). All 2,000 shares of Conditionally Redeemable 6% Preferred Stock were issued in September 2014, pursuant to the Settlement Agreement with Hexagon, LLC (f/k/a Hexagon Investments, LLC) (“Hexagon”). The Redeemable Preferred had a par value and outstanding.stated value $1,000 per share.

 

During the year ended December 31, 2014, the Company issued 9,348,213 shares of Common Stock including 2,959,125 issued in connection with the January 2014 Private Placement, 4,366,726 shares issued in connection with the January 2014 conversion of Debentures, 225,000 shares issued for placement fees in connection with the January 2014 Debenture conversion, 1,396,129 shares issued for interest owed in connection with outstanding Debentures, 327,901 shares issued for the vesting of restricted stock grants to employees, board members, or consultants, and 90,000 shares issued to consultants for professional services received.

During the year ended December 31, 2015, the Company granted 870,015 shares of Common Stock including 795,015 shares issued for restricted stock to employees and board members and 75,000 issued to consultants for professional services valued at $365,002.

 F-31122 

 

Effective as of April 24, 2017, the Company redeemed, in full, the Company’s Redeemable Preferred pursuant to a Settlement and Release Agreement (the “Settlement Agreement”) between the Company and Hexagon, which sets forth the terms of the redemption. In addition, the Settlement Agreement resolves certain other issues related to liability reimbursements on certain oil and natural gas properties that had previously been alleged by Hexagon.

 

January 2014 Private PlacementSeries B 6% Convertible Preferred Stock

In January 2014,On June 15, 2016, the Company entered into and closed a series of subscription agreements with accredited investors, pursuant to which the Company issued an aggregate of 2,959,125 units, with each unit consisting of (i) one share of Common Stock for $2.00 a share and (ii) one three-year warrant to purchase one share of Common Stock at an exercise price equal to $2.50 per share (together, the “Units”), for a purchase price of $2.00 per Unit,agreement for aggregate gross proceeds of $5.24 million (the “January Private Placement”).  The warrants became exercisable in July 2014. As of February 23, 2015, neither the Common Stock issued in the January Private Placement nor the Common Stock underlying the warrants has been registered for resale. The Company intends to file a resale registration statement during the year 2015 that will cover the Common Stock issued in the private placement and the Common Stock underlying the warrants. The Company valued the warrants within the Unit, utilizing a Black Scholes Option Pricing Model using a volatility calculation of 65%, risk free rate at the date of grant, and a 3 year term, the relative fair value allocated to warrants were approximately $1.68 million. The Company paid TRW 243,000 warrants valued using the Black Scholes option model at $203,000 and cash of approximately $668,000 million in financing fees to TRW, of which approximately $172,000 was reinvested into the private placement.

May 2014 Private Placement - Series A 8% Convertible Preferred Stock

On May 30, 2014, the Company consummated a private placement of 7,50020,000 shares of its Series AB Preferred Stock, along with detachable warrants to purchase up to 1,556,0179,090,926 shares of Common Stock, at an exercise price of $2.89$2.50 per share, for aggregate gross proceeds of $7.50$20 million. The

Each share of Series AB Preferred Stock has a par valuewas convertible, at the option of $0.0001 per share, a stated valuethe holder, subject to adjustment under certain circumstances into shares of $1,000 per share,Common Stock of the Company at a conversion price of $2.41 per share, and a liquidation preference to any junior securities. Except as otherwise required by law, holders of Series A Preferred Stock shall not be entitled to voting rights, except with respect to proposals to alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock, authorize or create any class of stock ranking senior to the Series A Preferred Stock as to dividends, redemption or distribution of assets upon liquidation, amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Preferred Stock holder, or increase the number of authorized Series A Preferred Stock. The holders of the Series A Preferred Stock are entitled to receive a dividend payable, at the election of the Company (subject to certain conditions as set forth in the Certificate of Designations), in cash or shares of Common Stock, at a rate of 8% per annum payable a day after the end of each quarter.$1.10. The Series AB Preferred Stock is convertible at any time, subject to certain conditions, at the option of the holders, or at the Company’s discretion when the Company’s Common Stock trades above $7.50$10.00 (subject to any reverse or forward stock splits and the like) for ten consecutive days with a daily dollar trading volume above $300,000.days. In addition, the Company has the right to redeem the shares of Series AB Preferred Stock, along with any accrued and unpaid dividends, at any time, subject to certain conditions as set forth in the Certificate of Designations. In addition,Designation. The holders of the Series AB Preferred Stock can requireare entitled to receive a dividend payable (subject to certain conditions as set forth in the Company to redeem the Series A Preferred upon the occurrenceCertificate of certain triggering events, including (i) failure to timely deliverDesignation), in cash or shares of Common Stock after valid delivery of a notice of conversion by the holder; (ii) failure to have available a sufficient number of authorized and unreserved shares of Common Stock to issue upon conversion; (iii) the occurrence of certain change of control transactions; (iv) the occurrence of certain events of insolvency; and (v) the ineligibility of the Company, to electronically transfer its shares viaat the Depository Trustelection of the Company, or another established clearing corporation.at a rate of 6% per annum.

 

The Series AB Preferred Stock iswas classified as equity based on the following criteria: i) the redemption of the instrument at the control of the Company; ii) the instrument is convertible into a fixed amount of shares at a conversion price of $2.41;$1.10; iii) the instrument is closely related to the underlying Company’s Common Stock; iv) the conversion option is indexed to the Company’s stock; v) the conversion option cannot be settled in cash and only can be redeemed at the discretion of the Company; and vi) and the Series AB Preferred Stock is not considered convertible debt.

 

F-32

In connection with the issuanceShares of the Series A Preferred Stock, the Company also issued a warrant for 50% of the amount of shares of Common Stock into which the Series A Preferred Stock is convertible.

In connection with issuance of the Series A Preferred Stock, the beneficial conversion feature (“BCF”) was valued at $2.21 million and the fair value of the warrant was valued at $1.35 million. The aggregate value of the Series AB Preferred Stock and warrant,related warrants were valued at $3.56 million, was considered a deemed dividend andusing the full amount was expensed immediately.relative fair value method. The Company determined the transaction created a beneficial conversion feature of $7.9 million, which iswas expensed immediately and was calculated by taking the net proceeds of $6.79approximately $15.2 million and valuing the warrants as of May 2014,June 15, 2016, utilizing a Black ScholesBlack-Scholes Merton option pricing model. The inputs for the pricing model are: $2.48$1.20 market price per share; exercise price of $2.89$2.50 per share; expectedcontractual life of 32 years; volatility of 70%238%; and risk freerisk-free rate of 0.20%0.78%. The Company calculated the total consideration given to be $8.40 million comprised of $6.80 million for the Series A Preferred and $1.6 million for the warrants. The Company deemed the value of the beneficial conversion feature to be $2.21 million and immediately accreted that amount as a deemed dividend. As of December 31, 2015,2016, the Company has accrued a cumulative dividend for $600,000. 

Conditionally Redeemable 6% Preferred Stock

In August 2014,total value of the Company designated 2,000issued and outstanding shares of its authorized preferred stock as Conditionally Redeemable 6%Series B Preferred Stock or the Redeemable Preferred. All 2,000 shares of Redeemable Preferred were issued in September 2014, pursuant to the Settlement Agreement with Hexagon. The Redeemable Preferred has the same par value and stated value characteristics as the Series A Preferred Stock, yet the Conditionally Redeemable 6% Preferred Stock is not convertible into Common Stock or any other securities of the Company. Except as otherwise required by law, holders of the Redeemable Preferred shall not be entitled to voting rights.

The Redeemable Preferred Stock bears a 6% dividend per annum, payable quarterly, and is redeemable at face value (plus any accrued and unpaid dividends) at any time at the Company’s option, or at the Holders option upon the Company’s achievement of certain production and reserves thresholds. These thresholds include, the Company’s annualized gross production average for 90 consecutive days at 2,500 BOE per day or higher or the Company’s PV-10 value of its producing developed properties filed with the Securities and Exchange Commission exceeds $50was approximately $13.4 million. As of December 31, 2015,2017, all shares of Series B Preferred Stock were fully converted into the Company’s shares of common stock.

On April 25, 2017, the Company hasentered into a Series B 6.0% Convertible Preferred Stock Conversion Agreement (the “Conversion Agreement”), with all of the holders of the outstanding Series B Preferred Stock (the “Series B Holders”) to convert any outstanding shares of Series B Preferred Stock including an increase in the stated value to reflect dividends that would have accrued a cumulative dividend of $120,000. The total outstanding Redeemable Preferred was valued at approximately $1.17 million atthrough December 31, 2015.

Debenture Interest

During2017 into approximately 14.3 million shares of common stock. On the same date, the Series B Holders further agreed to adopt the Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series B 6% Convertible Preferred Stock (“A&R COD”) in order to remove certain restrictions contained therein with respect to beneficial ownership limitations, a condition of the Conversion Agreement. The A&R COD became effective on April 26, 2017, resulting in the automatic conversion of all outstanding Series B Preferred Stock. As a result of the automatic conversion, the Company recognized $4.6 million of dividends and deemed dividends on the Series B Preferred Stock during the year ended December 31, 2014,2017.

The Conversion Agreement contained customary representations and warranties by the Series B Holders and other agreements and obligations of the parties.

Private Placement

On February 28, 2017, the Company issued 1,396,129entered into a Securities Subscription Agreement (the “Subscription Agreement”) with certain institutional and accredited investors in connection with a private placement (the “March 2017 Private Placement”) to sell 5.2 million units, consisting of approximately 5.2 million shares of Common Stockcommon stock and warrants to purchase approximately an additional 2.6 million shares of common stock. Each unit consisted of one share of common stock and a warrant to purchase 0.50 shares of common stock, at a price per unit of $3.85. Each warrant has an exercise price of $4.50 and may be subject to redemption by the Company, upon prior written notice, if the price of the Company’s common stock closes at or above $6.30 for paymenttwenty trading days during a consecutive thirty trading day period. As of yearly interest expense onDecember 31, 2017, the Debentures valued at $1.19 million.  The interest option price is calculated using a 10 day VWAP discounted by 5%Company received aggregate gross proceeds of $20.0 million and appliedissued 5,194,821 shares of common stock and warrants to the outstanding interest.purchase 2,597,420 shares of common stock.

123

 

Warrants

 

AThe following table provides a summary of warrant activity for the twelve monthsyears ended December 31, 20152017 and 2014:2016:

 

  Warrants  Weighted- Average Exercise Price 
Outstanding at January 1, 2014  6,773,913   5.24 
Warrants issued in connection with conversion of debt  4,500,011   2.50 
Warrants issued in connection with January 2014 private placement  2,959,124   2.50 
Warrants issued to TR Winston as placement fee in January 2014 private placement  243,000   2.50 
Warrants issued with Series A Preferred shares in May 2014  1,556,017   2.89 
Warrants issued to Bristol (consultant)  1,000,000   2.00 
Warrants issued to MDC (consultant)  100,000   2.00 
Warrants issued to MDC (consultant)  250,000   2.33 
Exercised, forfeited, or expired  (375,000)  (2.50)
Outstanding at December 31, 2014  17,007,065  $3.59 
Warrants issued to consultants  600,000   1.63 
Warrants issued to Heartland  225,000   2.50 
Warrants issued with Convertible Notes  11,800,008   .25 
Exercised, forfeited, or expired  (4,848,912)  (6.13)
Outstanding at December 31, 2015  24,783,161  $1.48 

F-33

  Warrants  Weighted-
Average
Exercise
Price		  Expiration Date
Outstanding at January 1, 2016  2,478,316  $14.80  12/31/2018 to 02/04/2020
Warrants issued to Series B Preferred Stock  9,090,926   1.54  06/22/2018
Warrants issued for fees  1,272,727   1.30  06/22/2018
Warrants issued with Convertible Notes  1,145,238   2.47  12/31/2018 to 05/04/2019
Warrants issued to amend Convertible Notes  1,648,267   2.50  08/03/2019
Additional warrants issued to Bristol  541,026   3.12  05/29/2017
Warrants issued to SOS in connection with the Merger  200,000   2.50  06/22/2018
Exercised, forfeited, or expired  (460,989)  (34.74)  
Outstanding at December 31, 2016  15,915,511  $3.34   
Warrants issued in connection with private placement  2,597,420   4.50  03/06/2022
Warrants issued to Heartland  160,714   3.50  01/08/2020
Exercised  (6,144,176)  (0.30)  
Forfeited or expired  (646,669)  (25.70)  
Outstanding at December 31, 2017  11,882,800  $3.46   

 

The aggregate intrinsic value associated with outstanding warrants was zeroapproximately $19.6 million and $18.3 million at December 31, 20152017 and 2014,2016, respectively, as the strike price of all warrants exceeded the market price for Common Stock, based on the Company’s closing Common Stock price of $0.21$5.11 and $.72,$3.10, respectively. The weighted average remaining contractcontractual life was 2.131.66 years and 1.711.64 years as of December 31, 20152017 and 2014.2016.

 

During the year ended December 31, 20152016, the Company issued approximately 13.2 million warrants to purchase shares of Common Stock to Purchasers of the Convertible Notes, Purchasers of Series B Preferred Stock and placement agent fees in connection with the Series B Preferred Stock Offering. The Company also issued a warrant to purchase 200,000 shares of Common Stock to Brushy's subordinated lender in exchange for extinguishment of certain debt owed by Brushy.

In connection with the May 2016 Financing, in exchange for additional consideration in the form of participation in the May 2016 Convertible Notes offering, certain Purchasers received amended and restated warrants to purchase approximately 620,000 shares of Common Stock, which reduced the exercise price of the warrants issued to these Purchasers in each of the prior two Convertible Notes issuances from $2.50 to $0.10, 80,000 of which were subsequently exercised. Additionally, during the year ended June 30, 2016, in exchange for several offers to immediately exercise a portion of each investor’s outstanding warrants issued between 2013 and 2014, the Company issuedreduced the exercise price on warrants to purchase a total of 416,454 shares of Common Stock for professional services.ranging from $42.50 to $25.00 per share to $0.10 per share, of which a total of 315,990 were subsequently exercised, resulting in the issuance of an aggregate amount of 300,706 shares of Common Stock due to certain cashless exercises. The warrants were valued using a Black -Scholes option pricing model and $425,000 and $678,000 were expensed immediatelyCompany accounted for the years endedreduction in the exercise price as an inducement expense and recognized $1.7 million in other income (expense).

Additionally, in connection with the Credit and Guarantee Agreement, as partial consideration to the Lenders, the Company also amended certain warrants issued in the Series B private placement held by the Lenders to purchase up to an aggregate amount of approximately 3.5 million shares of Common Stock, such that the exercise price per share was lowered from $2.50 to $0.01 on such warrants. The number of warrants amended for each Lender was based on the amount of each Lender’s respective participation in the initial Term Loan relative to the amount invested in the Series B private placement. All of the amended warrants are exercisable through June 22, 2017, subject to certain conditions. As of December 31, 2015 and 2014, respectively. For a discussion2017, these warrants with an exercise price of $0.01 per share were fully exercised, resulting in the assumptions used to value the warrants see Note 6 —Fair Valueissuance of Financial Instruments.an aggregate of 4,441,836 shares of Common Stock.

124

 

NOTE 12 - SHARE BASEDSHARE-BASED AND OTHER COMPENSATION

 

Share-BasedOn April 20, 2016, the Company’s Board and the Compensation

In September 2012, Committee of the Company adoptedBoard approved the 2012 EquityCompany’s 2016 Omnibus Incentive Plan (the “EIP”“2016 Plan”). The EIP was amended byOn November 3, 2016 the Company’s stockholders June 27, 2013, Novembervoted to increase number of shares of Common Stock authorized for issuance under the 2016 Plan to 10 million. At the 2017 Annual Meeting of Stockholders of the Company held on July 13, 2013 and December 29, 2015.2017, the Company’s stockholders approved the second amendment to its 2016 Plan to increase the number of shares of common stock available for grant under the 2016 Plan from 10 million to 13 million shares. As of December 31, 2015, up to 10,000,0002017, 607,186 shares of Common Stock arethe 13 million shares of the Company’s common stock authorized for grant pursuantawards under the 2016 Plan remained available for future issuances. The Company generally issues new shares to the EIP. Each membersatisfy awards under employee share-based payment plans.

  2017  2016 
(in thousands) 

Stock

Options

  

Restricted

Stock

  Total  

Stock

Options

  

Restricted

Stock

  Total 
Stock-based compensation expensed $7,255  $14,283  $21,538  $4,475  $2,398  $6,873 
Unamortized stock-based compensation costs $4,267  $8,669  $12,936  $5,200  $1,249  $6,449 
Weighted average amortization period remaining (years)  0.70   0.82       1.68   1.45     

Summary of the Board of Directors and the management team has been periodically awarded stock options and/or restricted stock grants, andnon-cash compensation in the future may be awarded such grants under the termsStatement of the EIP.Changes in Stockholders’ Equity:

 

The value of employee services received in exchange for an award of equity instruments are based on the grant-date fair value of the award, recognized over the period during which an employee is required to provide services in exchange for such award.  

During the year ended December 31, 2015, the Company granted 1,145,013 shares of restricted Common Stock and 4,800,000 options to purchase shares of Common Stock, to employees and directors. Also during the year ended December 31, 2015, the Company forfeited or cancelled 807,414 shares of restricted Common Stock and 2,300,000 stock options previously issued in connection with the termination of certain employees and directors. For the year ended December 31, 2015, stock based compensation was valued at $2.66 million. As a result, as of December 31, 2015, the Company had 1,009,373 restricted shares of Common Stock and 6,083,333 options to purchase shares of Common Stock outstanding to employees and directors.Options issued to employees and directors vest in equal installments over specified time periods during the service period or upon achievement of certain performance based operating thresholds. During the year ended December 31, 2015, the Company also issued 75,000 shares of Common Stock to consultants for professional services which was not pursuant to an equity compensation plan.

During the year ended December 31, 2014, the Company granted 324,860 shares of restricted Common Stock and 2,150,000 stock options, to employees, directors and consultants. Also during the year ended December 31, 2014, the Company forfeited 390,667 shares of restricted Common Stock and 2,366,667 stock options previously issued in connection with the termination of certain employees, directors and consultants. As a result, as of December 31, 2014, the Company had 1,630,667 restricted shares and 3,583,333 options to purchase common shares outstanding to employees and directors.Options issued to employees vest in equal installments over specified time periods during the service period or upon achievement of certain performance based operating thresholds.

  December 31, 
  2017  2016 
  (In thousands) 
       
Common stock issued for directors’ fees $-  $85 
Common stock issued for officer and Board compensation  -   120 
Stock based compensation for issuance of stock options  7,255   4,475 
Stock based compensation for issuance of restricted stock  14,186   2,398 
Common stock issued for professional services  97   - 
Total non-cash compensation in the Statement of Changes in Stockholders’ Equity $21,538  $7,078 

F-34

Compensation Costs

  As of December 31, 2015  As of December 31, 2014 
(Dollar amounts in thousands) Stock
Options		  Restricted
 Stock		  Total  Stock
Options		  Restricted
 Stock		  Total 
Stock-based compensation expensed $2,191  $469  $2,660  $1,242  $515  $1,757 
Unamortized stock-based compensation costs $2,091  $266  $2,357  $243  $107  $350 
Weighted average amortization period remaining*  2.18   1.05       2.75   1.01     

* Only includes directors and employees which the options vest over time instead of performance criteria which the performance criteria has not been met as of December 31, 2015 and 2014, respectively.

  As of December 31, 
Statement of Cash Flows: 2015  2014 
Common stock issued to investment bank for fees related to conversion of convertible debentures $-  $686,250 
Equity instruments issued for services and compensation  3,449,775   2,739,699 
Non-equity (derivative) Bristol Warrant  -   965,016 
Total non-cash compensation in Statement of Cash Flows  3,449,775   4,390,965 
Fair value of warrants issued with convertible Bridge financing  1,221,711   - 
Total non-cash $4,671,486  $4,390,965 
         
Statement of Stockholder’s Equity :        
Common stock issued for BOD fees $215,002  $- 
Common stock issued for placement fees in connection with January 2014 conversion of convertible debt  -   686,250 
Stock based compensation for vesting of restricted stock  468,863   514,804 
Stock based compensation for issuance of stock options  2,191,274   1,242,256 
Common stock issued for professional services  150,000   305,049 
Fair value of warrants issued for professional services  424,636   677,590 
Fair value of warrants issued with bridge financing  1,221,711   - 
Total non-cash compensation in Statement of Stockholders’ Equity  4,671,486   3,425,949 
Non-equity (derivative ) Bristol Warrant  -   965,016 
Total non-cash $4,671,486  $4,390,965 

 

Restricted Stock

Employees may be granted restricted stock in the form of restricted stock awards or restricted stock units. Restricted stock is subject to forfeiture restrictions and cannot be sold, transferred, or disposed of during the restriction period. The holders of restricted stock awards have the same rights as a stockholder of the Company with respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to the shares. A restricted stock unit is equivalent to a restricted stock award except that unit holders do not have the right to vote. Restricted stock vests over service periods ranging from the date of grant generally up to two or three years.

 

A summary of restricted stock grant activity pursuant to the 2016 Plan for the years ended December 31, 20152017 and 20142016 is presented below:

 

  Number of Shares  Weighted Average Grant Date Price 
Outstanding at January 1, 2014  2,024,375   2.30 
         
Granted  324,860   2.66 
Issued  (327,901)  1.88 
Forfeited  (390,667)  2.27 
Outstanding at December 31, 2014  1,630,667   2.44 
         
Granted  1,145,013   0.90 
Issued  (778,346)  0.66 
Forfeited  (128,333)  2.45 
Outstanding at December 31, 2015  1,869,000   1.23 
  Number of
Shares		  Weighted
 Average Grant
Date Price		 
Outstanding at January 1, 2016  -  $- 
Granted  1,780,052   1.54 
Vested and issued  (711,747)  (1.75)
Forfeited  -   - 
Outstanding at December 31, 2016  1,068,305  $1.55 
Granted  4,266,345   4.84 
Vested and issued  (2,162,915)  (3.78)
Forfeited  (696,469)  (4.26)
Outstanding at December 31, 2017  

2,475,266

  $4.22 

 

 F-35125 

 

 

As of December 31, 2015, the Company had 1,519,001 shares vested but unissued and total unrecognized compensation cost related to the 349,999 unvested sharesA summary of restricted stock wasunit grant activity pursuant to the 2012 Plan for the years ended December 31, 2017 and 2016 is presented below. The Company no longer grants any awards under previous plans.

  Number of
Shares		  Weighted
 Average Grant
Date Price		 
Outstanding at January 1, 2016  186,900  $12.29 
Granted  -   - 
Vested and issued  (10,834)  (18.75)
Forfeited  (26,482)  (16.15)
Outstanding at December 31, 2016  149,584   10.56 
Granted  -   - 
Vested and issued  (139,585)  (4.77)
Forfeited  -   - 
Outstanding at December 31, 2017 $9,999  $6.57 

Stock Options

Employees may be granted incentive stock options to purchase shares of the Company’s common stock with an exercise price equal to, or greater than, the fair market value of the Company’s common stock on the date of grant. These stock options generally vest over two years from the date of grant and terminate at the earlier of the date of exercise or ten years from the date of grant. During the year ended December 31, 2017, the Company received cash proceeds of approximately $266,000, which$0.5 million from the exercise of vested stock options.

The fair value of stock option awards is determined using the Black-Sholes-Merton option-pricing model based on several assumptions. These assumptions are based on management’s best estimate at the time of grant. The Company used the following weighted average of each assumption based on the grants in each fiscal year:

  2017  2016 
Expected Term in Years     2 years   4 years 
Expected Volatility  101%  152%
Expected Dividends  0%  0%
Risk-Free Interest Rate  1.38%  1.08%

The Company estimates expected volatility based on an analysis of its historical stock prices since the IPO date in 2007. The Company estimates the expected term of its option awards based on the vesting period. The Company uses this method to be recognized overprovide a weighted-average remaining service periodreasonable basis for estimating its expected term due to the lack of 1.05 years. sufficient historical employee exercise data on stock option awards.

A summary of stock option activity for the years ended December 31, 2017 and 2016 is presented below:

        Stock Options Outstanding and
 Exercisable		 
  Number
of Options		  Weighted
Average
Exercise
Price		  Number
of Options
Vested/
Exercisable		  Weighted
Average
Remaining
Contractual Life
(Years)		 
Outstanding at January 1, 2016  608,333  $14.60   296,666   4.1 
Granted  5,683,500   2.14         
Forfeited or cancelled  (335,000)  (5.34)        
Outstanding at December 31, 2016  5,956,833  $2.04   2,208,757   9.6 
Granted  3,260,000   4.74         
Exercised  (304,896)  (2.01)        
Forfeited or cancelled  (1,606,937)  (3.06)        
Outstanding at December 31, 2017  7,305,000  $3.74   3,534,484   8.9 

 

During the year ended December 31, 2015 and 2014, the Company issued restricted stock for professional services. The restricted stock issued was valued at the fair market value at the date of grant and vested over the useful life2017, options to purchase 3,260,000 shares of the service contract. DuringCompany’s common stock were granted under the years ended December 31, 2015 and 2014 the Company amortized $469,000 and $515,000, respectively relating to2016 Plan. The weighted average fair value of these contracts.

Stock Options

A summary of stock options activity for the years ended December 31, 2015 and 2014 is presented below:

        Stock Options Outstanding and Exercisable 
  Number
 of Options		  Weighted
Average
Exercise
 Price		  Number
of Options
Vested/ Exercisable		  Weighted
Average
Remaining
 Contractual Life
 (Years)		 
Outstanding at January 1, 2014  3,800,000  $2.02         
                 
Granted  2,150,000  $2.68         
Exercised  -   -         
Forfeited or cancelled  (2,366,667)  (2.39)        
Outstanding at December 31, 2014  3,583,333  $2.16   1,383,333  $4.24 
                 
Granted  4,800,000  $1.26         
Exercised  -             
Forfeited or cancelled  (2,300,000) $(2.46)        
Outstanding at December 31, 2015  6,083,333  $1.46   2,966,666  $4.10 

As of December 31, 2015, total unrecognized compensation costs relating to the outstanding options was $3.74 million, which is expected to be recognized over the remaining vesting period of approximately 3.58 years.$4.74.

 

The outstanding options do not have any intrinsic value at year end, as their weighted average price is greater than the trading price at December 31, 2015. The average life of the options is 3 years and has no intrinsic value as of December 31, 2014.

During the year ended December 31, 2015 and 2014, the Company issued options to purchase 3,260,000 shares of Common Stock to certain officers and directors. The options are valued using a Black Scholes model and amortized over the life ofCompany’s common stock include the option. During the years ended December 31, 2015 and 2014 the Company amortized $2.19 million and $515,000, respectively relating to options outstanding.

Employment and Separation Agreementsfollowing:

 

Mr. Mirman

(i)Options granted to employees of the Company to purchase 2,510,000 shares of the Company’s common stock during the year ended December 31, 2017; and
(ii)On June 16, 2017, the Company cancelled 250,000 of the options granted in June 2016 and all of the 500,000 options granted in December 2016 to an executive due to option grants that were in excess of the 2016 Plan individual limits. Additional options to purchase 750,000 shares of the Company’s common stock, 389,657 restricted shares and cash in an amount of $87,922 were awarded and paid to the executive to replace the cancelled option grants. The Company accounted for the replacement award as a modification of the terms of the cancelled award in accordance with ASC 718-20-35-8 “Cancellation of an award accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuation consideration.” As a result, during the year ended December 31, 2017, the Company recorded incremental compensation of approximately $1.6 million which was the excess of the fair value of the vested replacement award over the fair value of the cancelled awards. The incremental fair value of the unvested replacement awards was to be amortized over the remaining vesting period.  As a result of the resignation of the executive in August 2017, the remaining unvested replacement awards were fully vested and expensed totaling approximately $3.2 million during the year ended December 31, 2017.

 

In connection with his appointment as the Company’s President, the Company entered into an Employment Agreement with Mr. Mirman, dated September 16, 2013. The agreement provides, among other things, that Mr. Mirman would receive an annual salary of $240,000 which was deferred until the Company successfully consummated a financing of any kind of not less than $2 million in gross proceeds. Additionally, he was granted 100,000 shares of Common Stock, which vested immediately and were fully paid and non-assessable as an inducement for joining the Company. Mr. Mirman was granted an option to purchase 600,000 shares of Common Stock, at a strike price equal to the Company’s closing share price on the September 16, 2013, to become exercisable upon the date the Company achieved certain conditions specified in the agreement. The Board determined in September 2014 that those criteria had been met and consequently the options vested. Mr. Mirman was also provided an incentive bonus package and an additional stock option grant contingent on the Company’s achievement of certain additional performance conditions. The Company engaged a third-party to complete a valuation of this incentive bonus and not having been paid out, has been recorded as a liability and valued at each reporting period.

 

 F-36

Effective as of March 30, 2015, the Company entered into an amended and restated employment agreement with Mr. Mirman, which replaced the prior agreement. The agreement has a three year term and provides for a $100,000 cash bonus due upon signing, base compensation of $350,000 per year, plus 2,000,000 options to purchase shares of Common Stock where one-third of the options vest immediately and two-thirds vest in two annual installments on each of the next two anniversaries of the grant date (the “Unvested Shares”). The Unvested Shares were subject to the approval of the stockholders of an increase in the number of shares available for grant under the Plan, which was approved on December 29, 2015. The agreement also allows for additional bonuses due based on the Company’s achievement of certain performance thresholds.

Mr. Nanke

In connection with the appointment of Mr. Nanke as the Company’s Executive Vice President and Chief Financial Officer, the Company entered into an executive employment agreement with Mr. Nanke, dated March 6, 2015. Pursuant to the terms of the agreement, Mr. Nanke will serve as the Company’s Executive Vice President and Chief Financial Officer until his employment is terminated in accordance with the terms of the agreement. The agreement provides, among other things, that Mr. Nanke will receive an annual salary of $240,000. Additionally, as of the effective date of the agreement, Mr. Nanke was granted (i) 100,000 restricted shares of Common Stock; (ii) paid a cash signing bonus of $100,000; and (iii) an incentive stock option to purchase up to 750,000 shares of Common Stock, which vests in equal installments on each of the next three anniversaries of the effective date of the agreement. Mr. Nanke will also receive a cash incentive bonus if certain production thresholds are achieved by the Company and a performance bonus of $100,000 if the Company achieves certain goals set forth in the agreement. In addition, the agreement provides for the payment of severance to Mr. Nanke in connection with termination of his employment in certain circumstances, including termination by the Company without “cause” or upon Mr. Nanke’s resignation for “good reason,” in each case subject to Mr. Nanke’s execution, non-revocation and delivery of a release agreement.

Ms. Fuchs

In connection with the appointment of Ms. Fuchs as the Company’s General Counsel, the Company entered into an executive employment agreement with Ms. Fuchs dated March 16, 2015. Pursuant to the terms of the agreement, Ms. Fuchs will serve as the Company’s General Counsel until her employment is terminated in accordance with the terms of the agreement. The agreement provides, among other things, that Ms. Fuchs will receive an annual salary of $230,000. Additionally, as of the effective date of the agreement, Ms. Fuchs was granted (i) 50,000 restricted shares of Common Stock and (ii) an incentive stock option to purchase up to 300,000 shares of Common Stock, which vests in equal installments on each of the next three anniversaries of the effective date if the agreement. Ms. Fuchs will also receive a cash incentive bonus if certain production thresholds are achieved by the Company. In addition, the agreement provides for the payment of severance to Ms. Fuchs in connection with termination of her employment in certain circumstances, including termination by the Company without “cause” or upon Ms. Fuchs’s resignation for “good reason,” in each case subject to Ms. Fuchs’s execution, non-revocation and delivery of a release agreement.

Mr. Ulwelling

In connection with his original position of Principal Accounting Officer and Controller, Mr. Ulwelling entered into an employment agreement, dated as of January 19, 2012, which provided for a minimum base salary of $110,000 per year, a $15,000 signing bonus in 2012, an automatic increase of $15,000 upon achievement of specified performance targets and a grant of 25,000 shares of Common Stock to vest in equal installments over three years.

F-37

Upon his appointment to Interim Chief Financial Officer in May of 2014, Mr. Ulwelling did not immediately enter into a new employment agreement and his original employment agreement remained in effect until February of 2015, when an executive employment agreement was entered into, dated as of February 19, 2015, appointing him as the Company’s Chief Financial Officer. That agreement remained in effect as to his role of Principal Accounting Officer and Controller through the date of his resignation on October 15, 2015.

Pursuant to the terms of the agreement, Mr. Ulwelling served as the Company’s Principal Accounting Officer and Controller until his employment terminated. The agreement provided, among other things, that Mr. Ulwelling would receive an annual salary of $175,000. Additionally, as of the effective date of the agreement, Mr. Ulwelling was (i) granted an option to purchase 400,000 shares of Common Stock, with an exercise price equal to the greater of fair market value on the effective date or $2.50 per share, of which one-fourth of the option vested immediately, and the remainder of the option was to vest in equal installments on each of the next three anniversaries of the effective date. Mr. Ulwelling had the opportunity to receive a discretionary annual bonus equal to 50% of his base salary, based on achievement of annual target performance goals established by the Company’s compensation committee. In addition, the agreement provided for the payment of severance to Mr. Ulwelling in connection with termination of his employment in certain circumstances, including termination by the Company without “cause” or upon Mr. Ulwelling’s resignation for “good reason,” in each case subject to Mr. Ulwelling’s execution, non-revocation and delivery of a release agreement.

In October 2015, in connection with his resignation from all positions with the Company, Mr. Ulwelling forfeited 28,333 unvested restricted stock awards and 300,000 stock option awards.

W. Phillip Marcum

In April 2014, the Company entered into a separation agreement (the “Marcum Agreement”) with W. Phillip Marcum, its former Chief Executive Officer, in connection with his resignation from his positions with the Company. The Marcum Agreement provides, among other things, that, consistent with his resignation for good reason under his Employment Agreement, the Company would pay him 12 months of severance through payroll continuation, in the gross amount of $220,000, less all applicable withholdings and taxes, that all stock options held by Mr. Marcum as of the time of his termination would immediately vest, and that Mr. Marcum would remain eligible to receive any performance bonus granted by the Company to its senior executives with respect to Company and/or executive performance in 2013. In addition, the Marcum Agreement provides that the Company would pay Mr. Marcum $150,000 in accrued base salary for his service in 2013, less all applicable withholdings and taxes, in exchange for Mr. Marcum’s forfeiture of the 93,750 shares of unvested restricted Common Stock of the Company that was issued to Marcum in June 2013 in lieu of such base salary. Mr. Marcum may elect to apply amounts payable under the Marcum Agreement against his commitment to invest $125,000 in the Company’s previously disclosed private offering, upon stockholder approval of the participation of the Company’s officers and directors in that offering. The Marcum Agreement also contains certain mutual non-disparagement covenants, as well as certain mutual confidentiality, non-solicitation and non-compete covenants. In addition, Mr. Marcum and the Company each mutually released and discharged all known and unknown claims against the other and their respective representatives that they had or presently may have, including claims relating to Mr. Marcum’s employment. The Marcum Agreement effectively terminated the previously disclosed Employment Agreement entered into between Mr. Marcum and the Company, dated as of June 25, 2013, and all items were immediately accrued.

In connection with the Marcum Agreement, the Company reversed the 200,000 unvested options previously issued to Mr. Marcum valued at approximately $0.07 million, and reissued fully vested options, which it valued utilizing the Black Scholes option pricing model at $0.42 million. The Company used a Black Scholes option pricing model to value the 200,000 options which Mr. Marcum retained using the following variables: i) 200,000 options; ii) stock price $ 3.50; iii) strike price $1.60; volatility 65%; and a total value of approximately $420,000 which was expensed immediately since under the terms of the Marcum Agreement, the Company was not to be provided any additional services.

F-38

Robert A. Bell

On May 1, 2014, Robert A. Bell entered into an employment agreement with the Company, pursuant to which he became the President and Chief Operating Officer. On August 1, 2014, the Company entered into a separation agreement with Mr. Bell (the “Separation Agreement”). The Separation Agreement provides, among other things, that the Company would pay to Mr. Bell an aggregate of $100,000 in cash and issue to Mr. Bell 66,667 shares of Common Stock, in addition to satisfying the Company’s obligation to pay Mr. Bell $100,000 in cash and issue to Mr. Bell 33,333 shares of Common Stock. The Separation Agreement also contains certain mutual covenants, and reaffirms the survival of certain confidentiality provisions contained in Mr. Bell’s employment agreement. In addition, Mr. Bell and the Company each mutually released and discharged all known and unknown claims against the other and their respective representatives that they had or presently may have, including claims relating to Mr. Bell’s employment. The total amount of $206,000 was expensed in 2014.

In connection with the termination of his employment, Mr. Bell forfeited the 1,500,000 stock options that were unvested at the time of his termination and the Company reversed $108,000.

A .Bradley Gabbard

In May 2014, in connection with his resignation as CFO of the Company, A. Bradley Gabbard forfeited the 200,000 options that were unvested at the time of his termination, in accordance with the terms of the EIP. At the date of his resignation, the Company recorded a credit of approximately $0.07 million into the stockholder employee compensation expense account. Additionally, Mr. Gabbard forfeited his 52,084 shares of unvested restricted stock, for which the Company recorded a reversal of approximately $59,000.

Board of Directors

For the year ended December 31, 2015, in connection with the execution of amended non-employee director award agreements each non-employee director was issued 100,000 shares of restricted Common Stock for a value of $165,000 and a total of 545,013 shares of restricted Common Stock 20were issued as stock in lieu of cash fees and director appointment anniversary awards.

For the year ended December 31, 2015, the Company granted 1.35 million options to purchase Common Stock to certain directors, net of 2,000,000 million options granted and forfeited in 2015, described in more detail above. Additionally, the Company cancelled 300,000 options for a certain officer that is no longer with the Company.

For the year ended December 31, 2014, in connection with the execution of amended independent award agreements, each director was issued 31,250 shares of restricted Common Stock in lieu of a portion of their cash salaries, a total of 93,750 shares for three directors, for a value of $150,000.

For the year ended December 31, 2014, the Company granted 650,000 options to purchase Common Stock to certain officer and directors, net of 1,500,000 million options granted and forfeited in 2014, described in more detail above. Additionally, the Company cancelled 867,000 options for certain officers and directors that are no longer with the Company.

NOTE 12 SUBSEQUENT EVENTS

Convertible Notes

In January, the Company issued an additional $800,000 in Convertible Notes. The aggregate principal amount of Convertible Notes issued from December 29, 2015 through January 5, 2016, was $3.75 million.

Additionally, on March 18, 2016, the Company issued an additional aggregate principal amount of $500,000 of Convertible Notes, which have the same terms and conditions as the Convertible Notes with the exception of the maturity date, which is April 1, 2017. The proceeds were used to make advances to Brushy for payment of operating expenses pending completion of the Merger. If the Merger is not completed, these amounts are subject to repayment by Brushy.

F-39

Director Fees.

In connection with certain of the non-employee director appointment anniversaries and quarterly Board fees pursuant to each non-employee director award agreement, the Company issued an additional 1,308,335 shares of restricted stock subsequent to year end.

NOTE 13- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)

The following table sets forth information for the years ended December 31, 2015 and 2014 with respect to changes in the Company's proved (i.e. proved developed and undeveloped) reserves: 

  Crude Oil
(Bbls)		  Natural Gas (Mcf) 
December 31, 2013  842,719   2,564,277 
Purchase of reserves  -   - 
Revisions of previous estimates  (127,574)  (862,412)
Extensions, discoveries  579,991   2,715,870 
Sale/conveyance of reserves  (361,901)  (102,540)
Production  (33,508)  (77,954)
December 31, 2014  899,727   4,237,241 
Purchase of reserves  -   - 
Revisions of previous estimates  (859,230)  (4,063,500)
Extensions, discoveries  -   - 
Sale of reserves  -   - 
Production  (7,067)  (32,291)
December 31, 2015  33,430   141,450 
         
Proved Developed Reserves, included above:        
Balance, December 31, 2013  170,531   313,358 
Balance, December 31, 2014  50,185   197,146 
Balance, December 31, 2015  33,430   141,450 
Proved Undeveloped Reserves, included above:        
Balance, December 31, 2013  672,188   2,250,920 
Balance, December 31, 2014  849,542   4,040,095 
Balance, December 31, 2015  -   - 

As of December 31, 2015 and December 31, 2014, the Company had estimated proved reserves of 33,430 and 899,727 barrels of oil, respectively and 141,450 and 4,237,241 thousand cubic feet ("MCF") of natural gas converted to BOE, respectively.  The Company’s reserves are comprised of 59% and 56% crude oil and 41% and 44% natural gas on an energy equivalent basis, as of December 31, 2015 and December 31, 2014, respectively.

The following values for the December 31, 2015 and December 31, 2014 oil and gas reserves are based on the 12 month arithmetic average first of month price January through December 31; resulting in a natural gas price of $2.79 and $6.70 per MMBtu (NYMEX price), respectively, and crude oil price of $42.59 and $82.77 per barrel (West Texas Intermediate price), respectively. All prices are then further adjusted for transportation, quality and basis differentials.

F-40126 

 

 

The outstanding options had an intrinsic value of approximately $10.1 million and $12.3 million at December 31, 2017 and 2016, respectively.

NOTE 13 - Supplemental Cash Flow Information

The following summary setstable summarizes information on non-cash investing and financing activities for the years ended December 31, 2017 and 2016(in thousands):

  2017  2016 
Non-cash investing and financing activities excluded from the statement of cash flows:        
Conversion of Series B Preferred Stock and accrued dividends to common stock $14,865  $- 
Common stock issued for Brushy’s common stock  -   7,111 
Common stock issued for Series A Preferred Stock and accrued dividends  -   7,682 
Common stock issued for convertible notes and accrued interest  -   14,872 
Common stock issued for Series B Preferred Stock and accrued dividends   -   3,229 
Warrants issued for fees associated with Series B Preferred Stock issuance  -   1,591 
Warrants issued for Series B Preferred Stock issuance and recorded as a deemed dividend  -   7,879 
Fair value of warrants issued for financing costs and debt discount  1,031   2,192 
Common stock issued for commitment fees associated with Private Placement  250   - 
Cashless exercise of warrants  370   - 
Issuance of common stock for drilling services  97   - 
Accrued drilling costs  3,615   1,331 

NOTE 14 - SUBSEQUENT EVENTS

Purchase and Sale Agreement

On January 30, 2018, the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) by and between the Company and OneEnergy Partners Operating, LLC (“OEP”), pursuant to which the Company agreed to purchase from OEP, and OEP agreed to sell to the Company, certain oil and natural gas properties and related assets for a purchase price of $70 million, subject to customary purchase price adjustments (the “Acquisition”).

The unadjusted purchase price for the Acquisition will consist of $40 million in cash and $30 million in shares of the Company’s Common Stock, valued at a price per share equal to (i) the volume-weighted average trading price of the Common Stock on the NYSE American for the 20 consecutive trading days ending on and including the first trading day preceding the closing date of the Acquisition multiplied by (ii) 1.05, but in no event may such price be less than $4.25 or greater than $5.25. The Company intends to fund the cash portion of the purchase price with a portion of the net proceeds from the transaction described under “Preferred Stock Issuance” below.

The properties to be acquired by the Company pursuant to the Purchase and Sale Agreement consists of leasehold acreage in the Delaware Basin in Lea County, New Mexico.

The Purchase and Sale Agreement contains customary terms and conditions, including title and environmental due diligence provisions, representations and warranties, covenants and indemnification provisions. The Purchase and Sale Agreement also includes registration rights provisions pursuant to which, among other matters, (i) the Company will be required to file with the Securities and Exchange Commission (the “SEC ”) a registration statement under the Securities Act of 1933, as amended (the “Securities Act ”), registering for resale the shares of Common Stock issued to OEP pursuant to the Purchase and Sale Agreement and (ii) OEP will have piggyback rights to include shares of Common Stock in certain underwritten offerings.

The Company expects to close the Acquisition in March 2018, subject to the satisfaction of customary closing conditions.

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Preferred Stock Issuance

On January 30, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement ”) by and among the Company and certain private funds affiliated with Värde Partners, Inc. (the “Purchasers ”), pursuant to which the Company agreed to issue and sell to the Purchasers, and the Purchasers agreed to purchase from the Company, 100,000 shares of a newly created series of preferred stock of the Company, designated as “Series C 9.75% Convertible Participating Preferred Stock”(the“Series C Preferred Stock ”), for a purchase price of $1,000 per share, or an aggregate of $100,000,000. Värde Partners, Inc. is the lead lender, and certain private funds affiliated with Värde Partners, Inc. are lenders, under the Company’s Second Lien Credit Agreement (as defined above).

Closing of the issuance and sale of the shares of Series C Preferred Stock pursuant to the Securities Purchase Agreement occurred on January 31, 2018.

The terms of the Series C Preferred Stock are set forth in the Certificate of Designation for the Series C Preferred Stock (the “Certificate of Designation”) filed by the Company with the Secretary of State of the State of Nevada on January 31, 2018. The following is a description of the material terms of the Series C Preferred Stock and the Securities Purchase Agreement.

Ranking. The Series C Preferred Stock ranks senior to the Common Stock with respect to dividends and rights on the liquidation, dissolution or winding up of the Company.

Stated Value. The Series C Preferred Stock has a per share stated value of $1,000, subject to increase in connection with the payment of dividends in kind as described below (the “Stated Value”).

Dividends. Holders of shares of Series C Preferred Stock will be entitled to receive cumulative preferential dividends, payable and compounded quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing April 1, 2018, at an annual rate of 9.75% of the Stated Value until April 26, 2021, after which the annual dividend rate will increase to 12.00% if paid in full in cash or 15.00% if not paid in full in cash. Dividends are payable, at the Company’s option, (i) in cash, (ii) in kind by increasing the Stated Value by the amount per share of the dividend or (iii) in a combination thereof. The Company expects to pay dividends in kind for the foreseeable future. In addition to these preferential dividends, holders of shares of Series C Preferred Stock will be entitled to participate in any dividends paid on the Common Stock on an as-converted basis.

Optional Redemption. The Company has the right to redeem the Series C Preferred Stock, in whole or in part at any time (subject to certain limitations on partial redemptions), at a price per share equal to (i) the Stated Value then in effect multiplied by (a) 120% if redeemed during 2018, (b) 125% if redeemed during 2019 or (c) 130% if redeemed after 2019, plus (ii) accrued and unpaid dividends thereon and any other amounts payable by the Company in respect thereof (the “Optional Redemption Amount”). The Series C Preferred Stock is perpetual and is not mandatorily redeemable at the option of the holders, except upon the occurrence of a Change of Control (as defined in the Certificate of Designation) as described below.

Conversion. Each share of Series C Preferred Stock is convertible at any time at the option of the holder into a number of shares of Common Stock equal to (i) the applicable Optional Redemption Amount divided by (ii) a conversion price of $6.15, subject to adjustment (the “Conversion Price”). The Conversion Price will be subject to proportionate adjustment in connection with stock splits and combinations, dividends paid in stock and similar events affecting the outstanding Common Stock. Additionally, the Conversion Price will be adjusted, based on a broad-based weighted average formula, if the Company issues, or is deemed to issue, additional shares of Common Stock for consideration per share that is less than the lesser of (i) $5.25 and (ii) the Conversion Price then in effect, subject to certain exceptions and to the Share Cap (as defined below).

The Company has the right to force the conversion of any or all of the outstanding shares of Series C Preferred Stock if (i) the volume-weighted average price per share of the Common Stock on the principal exchange on which it is then traded has been at least 140% of the Conversion Price then in effect for at least 20 of the 30 consecutive trading days immediately preceding the exercise by the Company of the forced conversion right and (ii) certain trading and other conditions are satisfied.

To comply with rules of the NYSE American, the Certificate of Designation provides that the number of shares of Common Stock issuable on conversion of a share of Series C Preferred Stock may not exceed (i) the Stated Value divided by (ii) $4.42 (which was the closing price of the Common Stock on the NYSE American on January 30, 2018) (the “Share Cap”) prior to approval by the Company’s stockholders of the issuance of shares of Common Stock in excess of the Share Cap upon conversion of shares of Series C Preferred Stock. The Securities Purchase Agreement requires the Company to seek such stockholder approval at its next special or annual meeting of stockholders, which must occur within six months after the initial issuance of the Series C Preferred Stock. The Company intends to seek such stockholders approval at its 2018 annual meeting of stockholders.

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Change of Control. Upon the occurrence of a Change of Control (as defined in the Certificate of Designation), each holder of shares of Series C Preferred Stock will have the option to:

·cause the Company to redeem all of such holder’s shares of Series C Preferred Stock for cash in an amount per share equal to (i) the Optional Redemption Amount plus (ii) 2.5% of the Stated Value, in each case as in effect immediately prior to the Change of Control;

·convert all of such holder’s shares of Series C Preferred Stock into the number of shares of Common Stock into which such shares are convertible immediately prior to the Change of Control; or

·continue to hold such holder’s shares of Series C Preferred Stock, subject to any adjustments to the Conversion Price or the number and kind of securities or other property issuable upon conversion resulting from the Change of Control and to the Company’s or its successor’s optional redemption rights described above.

Liquidation Preference. Upon any liquidation, dissolution or winding up of the Company, holders of shares of Series C Preferred Stock will be entitled to receive, prior to any distributions on the Common Stock or other capital stock of the Company ranking junior to the Series C Preferred Stock, an amount per share of Series C Preferred Stock equal to the greater of (i) the Optional Redemption Amount then in effect and (ii) the amount such holder would receive in respect of the number of shares of Common Stock into which a share of Series C Preferred Stock is then convertible.

Board Designation Rights. The Certificate of Designation provides that holders of shares of Series C Preferred Stock will have the right, voting separately as a class, to designate (i) two members of the Company’s board of directors (the “Board”) for as long as the shares of Common Stock issuable on conversion of the outstanding shares of Series C Preferred Stock represent at least 15% of the outstanding shares of Common Stock (giving effect to conversion of all outstanding shares of Series C Preferred Stock) and (ii) one member of the Board for as long as the shares of Common Stock issuable on conversion of the outstanding shares of Series C Preferred Stock represent at least 7.5% of the outstanding shares of Common Stock (giving effect to conversion of all outstanding shares of Series C Preferred Stock).

The Securities Purchase Agreement separately grants to the Purchasers substantially identical rights to appoint members of the Board as long as the Purchasers and their affiliates beneficially own (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) shares of Common Stock issued or issuable upon conversion of shares of Series C Preferred Stock representing the 15% and 7.5% thresholds of the outstanding Common Stock described above. However, the number of members of the Board the Purchasers have the right to designate under the Securities Purchase Agreement will be reduced by the number of directors holders of shares of Series C Preferred Stock have the right to appoint under the Certificate of Designation.

The Board members designated by holders of shares of Series C Preferred Stock pursuant to the Certificate of Designation or by the Purchasers pursuant to the Securities Purchase Agreement must be reasonably acceptable to the Board and its Nominating and Corporate Governance Committee, acting in good faith, but any investment professional of Värde Partners, Inc. or its affiliates will be deemed to be reasonably acceptable. In addition, such Board designees must satisfy applicable SEC and stock exchange requirements and comply with the Company’s corporate governance guidelines.

In accordance with the Company’s bylaws, the Board has increased the number of directors constituting the entire Board from seven to nine to allow for the appointment of the Board members designated by the holders of shares of Series C Preferred Stock. The Company will be required to appoint the two Board members initially designated by the holders of shares of Series C Preferred Stock within ten business days after notice to the Company from the holders of the identity of such designees, subject to confirmation that such designees meet the qualifications described above.

Voting Rights; Negative Covenants. In addition to the Board designation rights described above, holders of shares of Series C Preferred Stock will be entitled to vote with the holders of shares of Common Stock, as a single class, on all matters submitted for a vote of holders of shares of Common Stock. When voting together with the Common Stock, each share of Series C Preferred Stock will entitle the holder to a number of votes equal to (i) the Stated Value as of the applicable record date or other determination date divided by (ii) $4.42 (the closing price of the Common Stock on the NYSE American on January 30, 2018).

The Certificate of Designation provides that, as long as any shares of Series C Preferred Stock are outstanding, the Company may not, without the prior affirmative vote or prior written consent of the holders of a majority of the outstanding shares of Series C Preferred Stock:

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·amend the Company’s articles of incorporation or bylaws in any manner that materially and adversely affects any rights, preferences, privileges or voting powers of the Series C Preferred Stock or holders of shares of Series C Preferred Stock;

·issue, authorize or create, or increase the issued or authorized amount of, the Series C Preferred Stock, any class or series of capital stock ranking senior to or in parity with the Series C Preferred Stock, or any security convertible into or evidencing the right to purchase any shares of Series C Preferred Stock or any such senior or parity stock, other than equity, the proceeds of which, are used to immediately redeem all of the outstanding shares of Series C Preferred Stock pursuant to the Company’s optional redemption rights described above;

·subject to certain exceptions, declare or pay any dividends or distributions on, or redeem or repurchase, or permit any of its controlled subsidiaries to redeem or repurchase, shares of Common Stock or any other shares of capital stock of the Company ranking junior to the Series C Preferred Stock, subject to certain exceptions;

·authorize, issue or transfer, or permit any of its controlled subsidiaries to authorize, issue or transfer, any equity (including any obligation or security convertible into, exchangeable for or evidencing the right to purchase any such equity) in any subsidiary of the Company other than (i) equity issued or transferred to the Company or another wholly-owned subsidiary of the Company or (ii) equity, the proceeds of which, are used to immediately redeem all of the outstanding shares of Series C Preferred Stock pursuant to the Company’s optional redemption rights described above; or

·subject to certain exceptions, modify the number of directors constituting the entire Board at any time when holders of shares of Series C Preferred Stock have the right to designate a member of the Board.

The Certificate of Designation further provides that, as long as shares of Series C Preferred Stock having an aggregate Optional Redemption Amount of at least $50,000,000 are outstanding, the Company may not, and may not permit any of its controlled subsidiaries to, without the prior affirmative vote or prior written consent of the holders of a majority of the outstanding shares of Series C Preferred Stock:

·subject to certain exceptions, incur indebtedness or permit to exist any liens on the assets or properties of the Company or its subsidiaries;

·enter into, adopt or agree to any “restricted payment” or similar provision that restricts or limits the payment of dividends on, or the redemption of, shares of Series C Preferred Stock under any credit facility, indenture or other similar instrument of the Company that would be more restrictive on the payment of dividends on, or redemption of, shares of Series C Preferred Stock than those existing as of the date on which shares of Series C Preferred Stock were first issued;

·liquidate or dissolve the company;

·enter into any material new line of business or fundamentally change the nature of the Company’s business, including any acquisition of oil and gas properties outside the Permian Basin; or

·enter into certain transactions with affiliates of the Company unless made on an arm’s-length basis and approved by a majority of the disinterested members of the Board.

Transfer Restrictions. The Certificate of Designation provides that shares of Series C Preferred Stock and shares of Common Stock issued on conversion of shares of Series C Preferred Stock may not be transferred by the holder of such shares, other than to an affiliate of such holder, prior to July 31, 2018. On and after July 31, 2018, such shares will be freely transferable, subject to applicable securities laws.

Standstill. The Securities Purchase Agreement includes a customary standstill provision pursuant to which the Purchasers agreed that they will not, directly or indirectly, take certain actions with respect to the Company or its securities until the earlier of (i) the date on which the Purchasers and their affiliates are no longer entitled to designate any member of the Board pursuant to the Certificate of Designation or the Securities Purchase Agreement and (ii) the failure of the Company to pay dividends on the Series C Preferred Stock in full in cash on any dividend payment date occurring after April 26, 2021.

Other Terms. The Securities Purchase Agreement contains other terms, including representations, warranties and covenants, that are customary for a transaction of this sort.

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Registration Rights Agreement

On January 31, 2018, in connection with the closing of the issuance of shares of Series C Preferred Stock pursuant to the Securities Purchase Agreement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement ”) by and between the Company and the Purchasers pursuant to which, among other matters, the Company will be required to file with the SEC a registration statement under the Securities Act registering for resale the shares of Common Stock issuable upon conversion of shares of Series C Preferred Stock. The Registration Rights Agreement also grants to the Purchasers demand and piggyback rights with respect to certain underwritten offerings of Common Stock and contains customary covenants and indemnification and contribution provisions. 

Riverstone First Lien Credit Agreement

On January 30, 2018, the Company entered into an Amended and Restated Senior Secured Term Loan Credit Agreement (the “Riverstone First Lien Credit Agreement”) by and among the Company, the subsidiaries of the Company party thereto as guarantors, Riverstone Credit Management LLC, as administrative agent and collateral agent, and the lenders party thereto. Effective at closing under the Riverstone First Lien Credit Agreement, which occurred on January 31, 2018, the Riverstone First Lien Credit Agreement amended and restated the First Lien Credit Agreement.

Pursuant to the Riverstone First Lien Credit Agreement, the lenders thereunder agreed to make term loans to the Company in the aggregate principal amount of $50 million (the “Riverstone First Lien Loans”), all of which were funded in full at closing at an original issue discount of 1.0% of the principal amount. The Riverstone First Lien Credit Agreement provides the potential for additional term loans of up to $30 million, as requested by the Company and subject to certain conditions, which additional loans were uncommitted at closing.

The Company used approximately $31.5 million of the proceeds of the Riverstone First Lien Loans to repay in full its obligations under and retire the First Lien Credit Agreement during the first quarter of 2018.

Amendment to Second Lien Credit Agreement

On January 31, 2018, the Company entered into a fourth amendment to the Second Lien Credit Agreement, among the Company, the guarantors party thereto, the lenders party thereto, including Värde Partners, Inc., as lead lender, and Wilmington Trust, National Association, as administrative agent (“Amendment No. 4 to the Second Lien Credit Agreement”).

The purpose of Amendment No. 4 to the Second Lien Credit Agreement was to, among other matters:

·permit the Company to enter the Riverstone First Lien Credit Agreement and incur the Riverstone First Lien Loans and related liens;

·permit the Company to issue the Series C Preferred Stock; and

·after the issuance of the Series C Preferred Stock pursuant to the Securities Purchase Agreement, reduce from two to one the maximum number of members of the Board the lenders under the Second Lien Credit Agreement will have the right to appoint following the conversion of the convertible loans under the Second Lien Credit Agreement.

Amendments to Riverstone First Lien Credit Agreement and Second Lien Credit Agreement

On February 20, 2018, Lilis Energy, Inc. (the “Company”) entered into the following amendments to its existing credit agreements (collectively, the “Amendments”): (i) Amendment No. 1 to the Riverstone First Lien Credit Agreement and (ii) Amendment No. 5 to the Second Lien Credit Agreement. Pursuant to the Amendments and a consent letter received from the Purchasers , in their capacity as the holders of all of the issued and outstanding shares of Series C Preferred Stock, the Company has been granted the right to repurchase shares of its Common Stock for an aggregate purchase price up to $10,000,000 (subject to certain exceptions and conditions).

The commencement of any repurchase of shares of Common Stock is subject to compliance with applicable law, Board approval, and market conditions.

Departure of Executive Officers

On February 16, 2018, Ariella Fuchs ceased serving as the Company's Executive Vice President, General Counsel and Secretary. The Company entered into an agreement with Ms. Fuchs pursuant to which she will receive severance and other consideration pursuant to the terms of her employment agreement and the accelerated vesting of 247,500 stock options and 198,000 shares of restricted stock under stock award agreements plus additional nominal consideration.

On March 6, 2018, Brennan Short ceased serving as our Chief Operating Officer. His responsibilities have been assumed by our current management and our existing consultants.

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 Lilis Energy, Inc. and Subsidiaries

Supplementary Information on Oil and Natural Gas Exploration,

Development and Production Activities

(Unaudited)

The Company’s oil and natural gas reserves are attributable solely to properties within the United States, which constitutes one cost center.

Costs Incurred for Oil and Natural Gas Producing Activities

 
  December 31, 
  2017  2016 
  (In thousands) 
Acquisition costs:        
Unproved properties $78,111  $4,798 
Proved properties  2,245   3,346 
Exploration costs  42,033   7,136 
Development costs  28,113   1,478 
Total $150,502  $16,758 

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Reserve Quantity Information

The following table provides a roll forward of the total proved reserves for the years ended December 31, 2017 and 2016, as well as proved developed and proved undeveloped reserves at the beginning and end of each respective year:  

  

Crude Oil

(Bbls)

  

Natural Gas

(Mcf)

  

NGLs

(Mcf)

 
January 1, 2016  33,430   141,450   - 
Extensions and discoveries  -   -   - 
Purchase of reserves  413,780   2,333,200   - 
Sale of reserves  -   -   - 
Revisions of previous estimates  164,583   1,729,499   14,566 
Production  (61,088)  (332,643)  (11,355)
December 31, 2016  550,705   3,871,506   3,211 
Extensions and discoveries  6,791,945   14,438,471   1,455,620 
Purchase of reserves  -   -   - 
Sale of reserves  (92,293)  (364,712)  (3,211)
Revisions of previous estimates  292,975   (1,109,174)  222,825 
Production  (371,993)  (776,165)  (73,875)
December 31, 2017  7,171,339   16,059,926   1,604,570 
             
Proved Developed Reserves, included above:            
Balance, January 1, 2016  33,430   141,450   - 
Balance, December 31, 2016  550,705   3,871,506   3,211 
Balance, December 31, 2017  2,531,397   6,594,446   644,102 
Proved Undeveloped Reserves, included above:            
Balance, January 1, 2016  -   -   - 
Balance, December 31, 2016  -   -   - 
Balance, December 31, 2017  4,639,942   9,465,480   960,468 

Extensions and discoveries of 10,653 MBOE during the year ended December 31, 2017, resulted primarily from the drilling of new wells during the year and from new proved undeveloped locations added during the year.

Standardized Measure of Discounted Future Net Cash Flows

The standardized measure of discounted future net cash flows does not purport to be, nor should it be interpreted to present, the fair value of the oil and natural gas reserves of the properties. An estimate of fair value would take into account, among other things, the recovery of reserves not presently classified as proved, the value of unproved properties and consideration of expected future economic and operating conditions.

The estimates of future cash flows and future production and development costs as of December 31, 2017 and 2016 are based on the unweighted arithmetic average first-day-of-the-month price for the preceding 12-month period. Estimated future production of proved reserves and estimated future production and development costs of proved reserves are based on current costs and economic conditions which are held constant throughout the life of the properties. All wellhead prices are held flat over the forecast period for all reserve categories. The estimated future net cash flows are then discounted at a rate of 10%

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The standardized measure of discounted future net cash flows relating to proved oil, natural gas and gas reserves:NGL reserves is as follows:

 

 For the Year Ended
December 31,		  As of December 31, 
 (in thousands)  2017  2016 
 2015  2014  (In thousands) 
Future oil and gas sales $1,819  $96,165 
Future cash inflows $397,531  $28,514 
Future production costs  (983)  (22,895)  (151,456)  (15,939)
Future development costs  -   (28,388)  (113,727)  (3,388)
Future income tax expense (1)  -   -   -   - 
Future net cash flows  836   44,882   132,348   9,187 
10% annual discount  (375)  (21,628)
Standardized measure of discounted future net cash flows $608  $23,254 
10% discount to reflect timing of cash flows  (63,536)  (2,531)
Total $68,812  $6,656 

In the foregoing determination of future cash inflows, sales prices used for oil, natural gas and NGLs for December 31, 2017 and 2016, were estimated using the average price during the 12-month period, determined as the unweighted arithmetic average of the first-day-of-the-month price for each month. Prices were adjusted by lease for quality, transportation fees and regional price differentials. Future costs of developing and producing the proved gas and oil reserves reported at the end of each year shown were based on costs determined at each such year-end, assuming the continuation of existing economic conditions.

 

The principal sourcesCompany cautions that the disclosures shown are based on estimates of changeproved reserve quantities and future production schedules which are inherently imprecise and subject to revision and the 10% discount rate is arbitrary. In addition, costs and prices as of the measurement date are used in the determinations and no value may be assigned to probable or possible reserves.

Changes in the standardized measure of discounted future net cash flows relating to proved oil, natural gas and NGL reserves are (in thousands):as follows:

 

  2015  2014 
Balance at beginning of period $23,254  $23,342 
Sales of oil and gas, net  (146)  (1,722)
Net change in prices and production costs  (26,115)  (262)
Net change in future development costs  20,626   2,781 
Extensions and discoveries  -   16,137 
Acquisition of reserves  -   - 
Sale / conveyance of reserves  -   (11,514)
Revisions of previous quantity estimates  (19,336)  (7,842)
Previously estimated development costs incurred  -   - 
Net change in income taxes  -   - 
Accretion of discount  2,325   2,334 
Balance at end of period $608  $23,254 

  Year Ended December 31, 
  2017  2016 
  (In thousands) 
Standardized measure of discounted future net cash flows, beginning of the year $6,656  $608 
Sales of oil and natural gas, net of production costs and taxes  (13,402)  (1,989)
Extensions and discoveries, net of future development costs  57,163   - 
Purchase of minerals in place  -   7,919 
Sales of minerals in place  (1,296)  - 
Net changes in prices and production costs  8,311   (309)
Previously estimated development costs incurred during the period  4,968   (8,942)
Changes in estimated future development costs  (1,580)  4,617 
Revisions of previous quantity estimates  1,683   1,087 
Net change in income taxes  -   - 
Accretion of discount  666   35 
Net changes in timing of production and other  5,643   3,630 
Standardized measure of discounted future net cash flows at the end of the year $68,812  $6,656 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(1)Calculations of the standardized measure of discounted future net cash flows include the effect of estimated future income tax expenses for all years reported. The Company expects that all of its Net Operating Loss’ (“NOL”) will be realized within future carry forward periods. All of the Company's operations, and resulting NOLs, are attributable to its oil and gas assets. There were no taxes in any year as the tax basis and NOLs exceeded the future net revenue.LILIS ENERGY, INC.
Date: March 9, 2018By:/s/ James L. Linville
James L. Linville

Chief Executive Officer

(Authorized Signatory)

 

A varietyPursuant to the requirements of methodologiesthe Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

SignatureTitleDate
/s/ James L. LinvilleChief Executive Officer, DirectorMarch 9, 2018
James L. Linville(Principal Executive Officer)
/s/ Joseph C. DachesExecutive Vice President and Chief Financial OfficerMarch 9, 2018
Joseph C. Daches(Principal Financial and Accounting Officer)
/s/ Ronald D. OrmandExecutive Chairman of the BoardMarch 9, 2018
Ronald D. Ormand
/s/ Peter BenzDirectorMarch 9, 2018
Peter Benz
/s/ Mark ChristensenDirectorMarch 9, 2018
Mark Christensen
/s/ Nuno BrandoliniDirectorMarch 9, 2018
Nuno Brandolini
/s/ R. Glenn DawsonDirectorMarch 9, 2018
R. Glenn Dawson
/s/ General Merrill McPeakDirectorMarch 9, 2018
General Merrill McPeak
/s/ G. Tyler RunnelsDirectorMarch 9, 2018
G. Tyler Runnels
DirectorMarch 9, 2018
Markus Specks 
DirectorMarch 9, 2018
John Johanning

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Exhibit Index

The following exhibits are used to determine the Company’s proved reserve estimates. The principal methodologies employed are reservoir simulation, decline curve analysis, volumetric, material balance, advance production type curve matching, petro-physics/log analysis and analogy. Some combination of these methods is used to determine reserve estimates in substantially all of our fields.either filed herewith or incorporated herein by reference

2.1Agreement and Plan of Merger, dated as of December 29, 2015, among Lilis Energy, Inc., Lilis Merger Sub, Inc. and Brushy Resources, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
2.2First Amendment to Agreement and Plan of Merger, dated as of January 20, 2016, among Lilis Energy, Inc., Lilis Merger Sub, Inc. and Brushy Resources, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 20, 2016).
2.3Second Amendment to Agreement and Plan of Merger, dated as of March 24, 2016, among Lilis Energy, Inc., Lilis Merger Sub, Inc. and Brushy Resources, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 24, 2016).
2.4Third Amendment to Agreement and Plan of Merger, dated as of June 22, 2016, among Lilis Energy, Inc., Lilis Merger Sub, Inc. and Brushy Resources, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 28, 2016).
2.5Purchase and Sale Agreement, dated as of January 30, 2018, by and between Lilis Energy, Inc. and OneEnergy Partners Operating, LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 1, 2018).
3.1Amended and Restated Articles of Incorporation of Recovery Energy, Inc., dated as of October 10, 2011 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 20, 2011).
3.2Certificate of Amendment to the Amended and Restated Articles of Incorporation of Recovery Energy, Inc., dated as of November 18, 2013 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2013).
3.3Certificate of Designation of Preferences, Rights, and Limitations of Series A 8% Convertible Preferred Stock, dated as of May 30, 2014 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 4, 2014).
3.4Amendment to Certificate of Designation of Preferences, Rights, and Limitations of Series A 8% Convertible Preferred Stock, dated as of June 12, 2014 (incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed on June 17, 2014).
3.5Certificate of Designation of Preferences, Rights and Limitations of 6% Redeemable Preferred Stock, dated as of August 29, 2014 (incorporated herein by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, filed on November 26, 2014).
3.6Certificate of Designation of Preferences, Rights and Limitations of Series B 6% Convertible Preferred Stock, dated as of June 15, 2016 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 16, 2016).
3.7Certificate of Change of Lilis Energy, Inc., dated as of June 21, 2016 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 28, 2016).
3.8Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 18, 2010).
3.9Amended and Restated Certificate of Designations of Preferences, Rights and Limitations of Series B 6% Convertible Preferred Stock, dated April 25, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 27, 2017).
3.10Certificate of Designation of Preferences, Rights and Limitations of Series C 9.75% Convertible Participating Preferred Stock, dated January 31, 2018 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 1, 2018).
4.1Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 28, 2014).
4.2Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 6, 2014).
4.3Five Year Warrant to David Castaneda dated January 17, 2014 (incorporated herein by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
4.4Five Year Warrant (Anniversary Warrant) to David Castaneda dated January 17, 2014 (incorporated herein by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, filed on June 17, 2014).
4.5Form of Warrant dated May 30, 2014 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 4, 2014).

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4.6Warrant to Purchase Common Stock issued to Bristol Capital (incorporated herein by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, filed on November 26, 2014).
4.7Warrant to Purchase Common Stock issued to Heartland Bank (incorporated herein by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q, filed on February 26, 2015).
4.8Form of Convertible Note (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
4.9Form of Warrant (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
4.10Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 16, 2016).
4.11Common Stock Purchase Warrant issued to SOSV Investments, LLC on June 23, 2016. (incorporated herein by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed on August 25, 2016).
4.12Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed on September 16, 2016).
4.13Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 2, 2017).
4.14†Lilis Energy, Inc. 2016 Omnibus Incentive Plan and forms of agreement thereunder (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed on June 28, 2016).
4.15†First Amendment to the Lilis Energy, Inc. 2016 Omnibus Incentive Plan, approved on November 3, 2016 (incorporated herein by reference to Annex C to the Company’s Definitive Proxy filed on September 30, 2016).
4.16†Second Amendment to the Company’s 2016 Omnibus Incentive Plan, dated July 13, 2017 (incorporated herein by reference to Annex A of the Company’s Definitive Proxy Statement on Schedule 14A, filed on June 19, 2017).
10.1†Employment Agreement with Kevin Nanke, dated as of March 6, 2015 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2015).
10.2†Employment Agreement with Ariella Fuchs, dated as of March 16, 2015 (incorporated herein by reference to Exhibit 10.84 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on April 15, 2015).
10.3†Amended and Restated Employment Agreement between the Company and Abraham Mirman, dated as of March 30, 2015 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 2, 2015).
10.4Recovery Energy, Inc. 2012 Equity Incentive Plan dated August 31, 2012, as amended (incorporated herein by reference to Appendix B to the Company’s definitive proxy filed on December 15, 2015).
10.5Voting Agreement, dated as of December 29, 2015, among Lilis Energy, Inc., Lilis Merger Sub, Inc., Brushy Resources, Inc. and SOSventures, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
10.6Voting Agreement, dated as of December 29, 2015, among Lilis Energy, Inc., Lilis Merger Sub, Inc., Brushy Resources, Inc. and Longview Marquis Fund LP, LMIF Investments LLC and SMF investments, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
10.7Debenture Conversion Agreement, dated as of December 29, 2015, among Lilis Energy, Inc., T.R. Winston & Company, acting as placement agent, and each Debenture holder (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
10.8Form of Convertible Note Purchase Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
10.9Form of Note Exchange Agreement (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on January 5, 2016).
10.10Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 16, 2016).
10.11Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 16, 2016).
10.12Convertible Subordinated Promissory Note Conversion Agreement, dated as of June 23, 2016, among Lilis Energy, Inc. and the parties signatory thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 28, 2016).
10.13First Amendment to the Convertible Subordinated Promissory Notes, dated as of August 3, 2016, among Lilis Energy, Inc. and the parties signatory thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 5, 2016).
10.14†Employment Agreement with Michael Pawelek, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 8, 2016).

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10.15†Employment Agreement with Edward Shaw, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 8, 2016).
10.16†Employment Agreement with Abraham Mirman, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 8, 2016).
10.17†Employment Agreement with Kevin Nanke, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on July 8, 2016).
10.18†Employment Agreement with Ariella Fuchs, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on July 8, 2016).
10.19†Employment Agreement with Ronald Ormand, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on July 8, 2016).
10.20Transaction Fee Agreement, dated as of June 6, 2016, between Lilis Energy, Inc. and T.R. Winston & Company, LLC (incorporated herein by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 25, 2016).
10.21First Amendment to Transaction Fee Agreement, dated as of June 8, 2016, between Lilis Energy, Inc. and T.R. Winston & Company, LLC (incorporated herein by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 25, 2016).
10.22Escrow Deposit Agreement, dated as of May 26, 2016, by and among Lilis Energy, Inc., T.R. Winston & Company, LLC and Signature Bank (incorporated herein by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 25, 2016).
10.23Texican Crude & Hydrocarbon LLC Purchase Contract, dated as of February 3, 2016, between Texican Crude & Hydrocarbon, LLC and Impetro Operating LLC (incorporated herein by reference to Exhibit 10.65 to Brushy Resources, Inc.’s Registration Statement on Form S-1 filed on September 16, 2016).
10.24DCP Midstream, LP Gas Purchase Agreement (incorporated herein by reference to Exhibit 10.8 to Brushy Resources, Inc.’s Form 10/A filed on July 26, 2013, which became effective August 6, 2013).
10.25Credit and Guarantee Agreement, dated as of September 29, 2016 by and among Lilis Energy, Inc., Brushy Resources, Inc., ImPetro Operating, LLC, ImPetro Resources, LLC, the Lenders party thereto and T.R. Winston & Company, LLC acting as collateral agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on October 26, 2016).
10.26†Employment Agreement with Joseph C. Daches, dated as of January 23, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 25, 2017).
10.27†Employment Agreement with Brennan Short, dated as of January 27, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 31, 2017).
10.28†Employment Agreement with Seth Blackwell, dated as of December 1, 2016 (incorporated herein by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed on March 3, 2017).
10.29†Separation and Release Agreement, dated February 13, 2017, between Kevin Nanke and Lilis Energy, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on February 17, 2017).
10.30Securities Subscription Agreement, dated February 28, 2017, by and among the Company and the Purchasers thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 2, 2017).
10.31Registration Rights Agreement, dated February 28, 2017, by and among the Company and the Purchasers thereto (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 2, 2017).
10.32†First Amendment to Employment Agreement with Abraham Mirman, dated as of March 9, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 10, 2017).
10.33†First Amendment to Employment Agreement with Ronald D. Ormand, dated as of March 9, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 10, 2017).
10.34†First Amendment to Employment Agreement with Ariella Fuchs, dated as of March 9, 2017 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 10, 2017).
10.35First Amendment to Credit and Guarantee Agreement, dated April 24, 2017 by and among Lilis Energy, Inc., Brushy Resources, Inc., ImPetro Operating, LLC, ImPetro Resources, LLC, the Lenders party thereto and T.R. Winston & Company, LLC acting as collateral agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 27, 2017).
10.36Second Amendment to Credit and Guarantee Agreement, dated April 26, 2017 by and among Lilis Energy, Inc., Brushy Resources, Inc., ImPetro Operating, LLC, ImPetro Resources, LLC, the Lenders party thereto and Deans Knight Capital Management Ltd. acting as collateral agent (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 27, 2017).

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10.37Third Amendment to Credit and Guarantee Agreement, dated July 25, 2017 by and among the Company, Brushy Resources, Inc., ImPetro Operating, LLC, ImPetro Resources, LLC, Lilis Operating Company, LLC, the Lenders party thereto and Deans Knight Capital Management Ltd., as collateral agent  (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed August 14, 2017).
10.38Credit Agreement, dated April 26, 2017 by and among Lilis Energy, Inc., the Guarantors party thereto, the Lenders party thereto and Wilmington Trust, National Association acting as administrative agent (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed April 27, 2017).
10.39Registration Rights Agreement, dated April 26, 2017 by and among the Lender party thereto (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed April 27, 2017).
10.40Series B 6.0% Convertible Preferred Stock Conversion Agreement, dated April 25, 2017, by and among the Holders party thereto (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed April 27, 2017).
10.41†Second Amendment to Employment Agreement with Abraham Mirman, dated as of May 5, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 8, 2017)
10.42†First Amendment to Employment Agreement with Joseph Daches, dated as of May 5, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 8, 2017)
10.43†Second Amendment to Employment Agreement with Ariella Fuchs, dated as of May 5, 2017 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 8, 2017)
10.44†Employment Agreement with James Linville, dated as of June 26, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 26, 2017).
10.45†Separation and Consulting Agreement, dated August 3, 2017, by and between Lilis Energy, Inc. and Abraham Mirman (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 4, 2017).
10.46†First Amendment of Executive Employment Agreement, dated August 4, 2017, by and between Lilis Energy, Inc. and Jim Linville (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 4, 2017).
10.47Letter Agreement dated August 12, 2017 between the Company and Värde Partners, Inc. (incorporated herein by reference to Exhibit 10.14 on the Company’s Quarterly Report on Form 10-Q filed on August 14, 2017).
10.48Gas Gathering, Processing and Purchase Agreement, dated August 10, 2017 by and among the Company and Lucid Energy Delaware (incorporated herein by reference to Exhibit 10.5 to the Company’s quarterly report on Form 10-Q filed on November 14, 2017). Specific items in this exhibit have been redacted, as marked by two asterisks (**), because confidential treatment for those items has granted. The redacted material has been separately filed with the SEC.
10.49*Amendment No. 1 to the Gas Gathering, Processing and Purchase Agreement, dated October 1, 2017 by and among the Company and Lucid Energy Delaware.
10.50Amendment No. 1 to Second Lien Credit Agreement, dated October 3, 2017 by and among Lilis Energy, Inc., the Guarantors party thereto, the Lenders party thereto and Wilmington Trust, National Association, as administrative agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 10, 2017).
10.51Amendment No. 4 and Joinder to Credit and Guarantee Agreement, dated October 19, 2017 by and among the Company, the Guarantors party thereto, the Lenders party thereto and Deans Knight Capital Management Ltd., as collateral agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 24, 2017).
10.52Amendment No. 2 to Second Lien Credit Agreement, dated October 19, 2017 by and among Lilis Energy, Inc., the Guarantors party thereto, the Lenders party thereto and Wilmington Trust, National Association, as administrative agent (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 24, 2017).
10.53Amendment No. 3 to Second Lien Credit Agreement, dated November 10, 2017 by and among Lilis Energy, Inc., the Guarantors party thereto, the Lenders party thereto and Wilmington Trust, National Association, as administrative agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 14, 2017).
10.54Securities Purchase Agreement, dated as of January 30, 2018, by and among Lilis Energy, Inc. and the Purchasers party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 1, 2018).
10.55Registration Rights Agreement, dated as of January 31, 2018, by and among Lilis Energy, Inc. and the Purchasers party thereto (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 1, 2018).
10.56Amended and Restated Senior Secured Term Loan Credit Agreement, dated as of January 30, 2018, by and among Lilis Energy, Inc., the subsidiaries of the Company party thereto as guarantors, Riverstone Credit Management LLC, as administrative agent and collateral agent, and the lenders party thereto (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 1, 2018).

 

 

F-41

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10.57Amendment No. 4 to Second Lien Credit Agreement, dated as of January 31, 2018, by and among Lilis Energy, Inc., the guarantors party thereto, the lenders party thereto and Wilmington Trust, National Association, as administrative agent (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 1, 2018).
10.58*Amendment No. 5 to Second Lien Credit Agreement, dated as of February 20, 2018, by and among Lilis Energy, Inc., the guarantors party thereto, the lenders party thereto and Wilmington Trust, National Association, as administrative agent.
10.59*Amendment No. 1 to the Amended and Restated Senior Secured Term Loan Credit Agreement, dated as of February 20, 2018, by and among Lilis Energy, Inc., the subsidiaries of the Company party thereto as guarantors, Riverstone Credit Management LLC, as administrative agent and collateral agent, and the lenders party thereto.
16.1Letter from Marcum LLP dated April 14, 2017 (incorporated herein by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed April 14, 2017).
21.1*List of Subsidiaries of the Company.
23.1*Consent of BDO USA, LLP for the Company.
23.2*Consent of Marcum LLP for the Company.
23.3*Consent of Cawley, Gillespie & Associates, Inc., independent petroleum engineers for the Company.
31.1*Certifications Pursuant to Section 302 of Sarbanes Oxley Act of 2002.
31.2*Certifications Pursuant to Section 302 of Sarbanes Oxley Act of 2002.
32.1*Certifications Pursuant to Section 906 of Sarbanes Oxley Act of 2002.
32.2*Certifications Pursuant to Section 906 of Sarbanes Oxley Act of 2002.
99.1*Report of Cawley, Gillespie & Associates, Inc., dated January 10, 2018, for the Company.
101.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.
†Indicates management contract or compensatory plan.
+To be filed by amendment.

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