SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

As of November ~~13, 2018,~~4, 2019, there were ~~156,332,733~~167,280,858 shares of Class A Common Stock, $0.0001 par value per share, and ~~93,346,725~~91,789,814 shares of Class B Common Stock, $0.0001 par value per share, outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Magnolia Oil & Gas Corporation

Consolidated Balance Sheets ~~(Unaudited)~~

Magnolia Oil & Gas Corporation

Consolidated and Combined Statements of Operations (Unaudited)

(inIn thousands, except per share data)



	Successor									Predecessor
	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019			July 31, 2018 Through September 30, 2018			July 1, 2018 Through July 30, 2018			January 1, 2018 Through July 30, 2018
REVENUES
Oil revenues	$	207,840		$	584,009		$	143,202		$	68,487		$	399,124
Natural gas revenues	21,243			71,208			13,414			3,646			22,135
Natural gas liquids revenues	15,716			51,215			21,547			4,754			27,927
Total revenues	244,799			706,432			178,163			76,887			449,186
OPERATING EXPENSES
Lease operating expenses	24,344			70,755			11,016			3,681			23,513
Gathering, transportation and processing	9,270			26,016			5,353			2,240			12,929
Taxes other than income	13,333			40,825			9,351			2,087			23,763
Exploration expense	3,924			10,017			11,221			40			492
Asset retirement obligation accretion	1,394			4,095			391			21			104
Depreciation, depletion and amortization	143,894			385,942			65,902			23,157			137,871
Amortization of intangible assets	3,626			10,879			2,418			—			—
General and administrative expenses	17,345			52,648			10,297			1,701			12,710
Transaction related costs	—			438			22,366			—			—
Total operating costs and expenses	217,130			601,615			138,315			32,927			211,382
OPERATING INCOME	27,669			104,817			39,848			43,960			237,804
OTHER INCOME (EXPENSE)
Income (loss) from equity method investee	92			608			309			(345		)	711
Interest expense, net	(6,896		)	(21,611		)	(4,959		)	—			—
Gain (loss) on derivatives, net	—			—			—			3,865			(18,127		)
Other income (expense), net	21			8			(7,019		)	24			(50		)
Total other income (expense)	(6,783		)	(20,995		)	(11,669		)	3,544			(17,466		)
INCOME BEFORE INCOME TAXES	20,886			83,822			28,179			47,504			220,338
Income tax expense	3,529			12,449			3,538			766			1,785
NET INCOME	17,357			71,373			24,641			46,738			218,553
LESS: Net income attributable to noncontrolling interest	6,810			29,294			18,465			—			—
NET INCOME ATTRIBUTABLE TO MAGNOLIA	10,547			42,079			6,176			46,738			218,553
LESS: Non-cash deemed dividend related to warrant exchange	2,763			2,763			—			—			—
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK	$	7,784		$	39,316		$	6,176		$	46,738		$	218,553
NET INCOME PER COMMON SHARE
Basic	$	0.05		$	0.25		$	0.04
Diluted	$	0.05		$	0.24		$	0.04
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic	166,872			160,051			151,992
Diluted	167,108			161,488			157,072

Successor Predecessor
July 31, 2018 through
September 30, 2018
July 1, 2018
through
July 30, 2018

January 1, 2018 through
July 30, 2018
Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
REVENUES:
Oil revenues $ 143,202
$ 68,487
$ 399,124
$ 72,706
$ 240,778
Natural gas revenues 14,201
3,646
22,135
6,925
19,436
Natural gas liquids revenues 21,153
4,754
27,927
6,984
18,002
Total revenues 178,556
76,887
449,186
86,615
278,216

OPERATING EXPENSES
Lease operating expenses 11,016
3,681
23,513
6,180
18,931
Gathering, transportation and processing 5,746
2,240
12,929
3,997
12,238
Taxes other than income 9,351
2,087
23,763
5,823
18,028
Exploration expense 11,221
40
492
77
383
Asset retirement obligation accretion 391
21
104
87
175
Depreciation, depletion and amortization 67,478
23,157
137,871
27,124
88,844
General & administrative expenses 10,297
1,701
12,710
4,960
13,224
Transaction related costs 22,366
—
—
—
—
Total operating costs and expenses 137,866
32,927
211,382
48,248
151,823

OPERATING INCOME 40,690
43,960
237,804
38,367
126,393

OTHER INCOME (EXPENSE):
Income (loss) from equity method investee 309
(345 ) 711
(84 ) (85 )
Interest expense (4,959 ) —
—
—
—
Gain (loss) on derivatives, net —
3,865
(18,127 ) (1,648 ) 1,041
Other income (expense), net (7,019 ) 24
(50 ) —
(20 )
Total other income (expense) (11,669 ) 3,544
(17,466 ) (1,732 ) 936

INCOME BEFORE INCOME TAXES 29,021
47,504
220,338
36,635
127,329
Income tax expense 3,538
766
1,785
630
1,967
NET INCOME 25,483
46,738
218,553
36,005
125,362
LESS: Net income attributable to noncontrolling interest 18,775
—
—
—
—
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK $ 6,708
$ 46,738
$ 218,553
$ 36,005
$ 125,362

NET INCOME PER COMMON SHARE
Basic $ 0.04

Diluted $ 0.04

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 151,992

Diluted 157,072

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

~~Magnolia Oil & Gas Corporation~~

~~Combined Statement of Changes in Parents' Net Investment (Unaudited)~~

~~(in thousands)~~

Predecessor
BALANCE, DECEMBER 31, 2017 $ 1,597,838
Parents’ contribution, net 62,641
Net income 218,553
Balance – July 30, 2018 $ 1,879,032

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

Magnolia Oil & Gas Corporation

Combined Statement of Changes in Parents’ Net Investment (Unaudited)

(In thousands)



	Predecessor
BALANCE, DECEMBER 31, 2017	$	1,597,838
Parents’ contribution, net	133,117
Net income	85,366
Balance – March 31, 2018	$	1,816,321
Parents’ distributions, net	(48,937		)
Net income	86,449
Balance – June 30, 2018	$	1,853,833
Parents’ distributions, net	(21,539		)
Net income	46,738
Balance – July 30, 2018	$	1,879,032

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

Magnolia Oil & Gas Corporation

Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)

(inIn thousands)


	Class A Common Stock				Class B Common Stock			Class F Common Stock					Additional Paid In Capital			Accumulated Deficit			Total Stockholders' Equity			Noncontrolling Interest			Total Equity			Class A Common Stock				Class B Common Stock			Class F Common Stock					Additional Paid In Capital			Retained Earnings			Total Stockholders’ Equity			Noncontrolling Interest			Total Equity
	Shares		Value		Shares	Value		Shares		Value																		Shares		Value		Shares	Value		Shares		Value
Balance, July 30, 2018	3,052		$	—	—	$	—	16,250		$	2		$	8,370		$	(3,588	)	$	4,784		$	—		$	4,784		3,052		$	—	—	$	—	16,250		$	2		$	8,370		$	(3,588	)	$	4,784		$	—		$	4,784
Class A Common Stock released from possible redemption	61,948		6		—	—		—		—			619,473			—			619,479			—			619,479			61,948		6		—	—		—		—			619,473			—			619,479			—			619,479
Class A Common Stock redeemed	(1	)	—		—	—		—		—			(9		)	—			(9		)	—			(9		)	(1	)	—		—	—		—		—			(9		)	—			(9		)	—			(9		)
Conversion of Common Stock from Class F to Class A at closing of Business Combination	16,250		2		—	—		(16,250	)	(2		)	—			—			—			—			—			16,250		2		—	—		(16,250	)	(2		)	—			—			—			—			—
Common Stock issued as part of the Business Combination	31,791		3		83,939	9		—		—			391,017			—			391,029			1,032,455			1,423,484
Class A Common Stock issuance in private placement	35,500		4		—	—		—		—			354,996			—			355,000			—			355,000
Common stock issued as part of the Business Combination																												31,791		3		83,939	9		—		—			391,017			—			391,029			1,032,455			1,423,484
Common stock issued in private placement																												35,500		4		—	—		—		—			354,996			—			355,000			—			355,000
Earnout consideration issued as part for the Business Combination	—		—		—	—		—		—			41,371			—			41,371			108,329			149,700			—		—		—	—		—		—			41,371			—			41,371			108,329			149,700
Non-compete consideration	—		—		—	—		—		—			44,400			—			44,400			—			44,400			—		—		—	—		—		—			44,400			—			44,400			—			44,400
Changes in ownership interest adjustment	—		—		—	—		—		—			206,966			—			206,966			(206,966		)	—			—		—		—	—		—		—			206,966			—			206,966			(206,966		)	—
Changes in deferred tax liability	—		—		—	—		—		—			(52,787		)	—			(52,787		)	—			(52,787		)	—		—		—	—		—		—			(52,787		)	—			(52,787		)	—			(52,787		)
Balance, July 31, 2018	148,540		15		83,939	9		—		—			1,613,797			(3,588		)	1,610,233			933,818			2,544,051			148,540		$	15	83,939	$	9	—		$	—		$	1,613,797		$	(3,588	)	$	1,610,233		$	933,818		$	2,544,051
Issuance of earnout share consideration Tranche I	1,244		—		3,256	—		—		—			—			—			—			—			—			1,244		—		3,256	—		—		—			—			—			—			—			—
Issuance of earnout share consideration Tranche II	1,244		—		3,256	—		—		—			—			—			—			—			—			1,244		—		3,256	—		—		—			—			—			—			—			—
Issuance of shares in connection with Harvest Acquisition	4,200		1.0		—	—		—		—			58,211			—			58,212			—			58,212
Common stock issued in connection with Harvest Acquisition																												4,200		1		—	—		—		—			58,211			—			58,212			—			58,212
Net income	—		—		—	—		—		—			—			6,708			6,708			18,775			25,483			—		—		—	—		—		—			—			6,176			6,176			18,465			24,641
Changes in ownership interest adjustment	—		—		—	—		—		—			(39,366		)	—			(39,366		)	39,366			—			—		—		—	—		—		—			(39,366		)	—			(39,366		)	39,366			—
Changes in deferred tax liability	—		—		—	—		—		—			15,263			—			15,263			—			15,263			—		—		—	—		—		—			15,263			—			15,263			—			15,263
Balance, September 30, 2018	155,228		$	16	90,451	$	9	—		$	—		$	1,647,905		$	3,120		$	1,651,050		$	991,959		$	2,643,009		155,228		$	16	90,451	$	9	—		$	—		$	1,647,905		$	2,588		$	1,650,518		$	991,649		$	2,642,167

Magnolia Oil & Gas Corporation

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

Magnolia Oil & Gas Corporation

Notes to Consolidated Financial Statements

(Unaudited)

1. Description of Business and Basis of Presentation

Organization and General

Magnolia Oil & Gas Corporation (formerly TPG Pace Energy Holdings Corp.) (the “Company” or ~~"Magnolia"~~“Magnolia”) was incorporated in Delaware onFebruary 14, ~~2017 (“Inception”).The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Startups Act of 2012.~~2017.

On March 15, 2018, the Company formed ~~three indirect~~3 wholly owned ~~subsidiaries;~~subsidiaries: Magnolia Oil & Gas Parent LLC ("(“Magnolia ~~LLC"~~LLC”), Magnolia Oil & Gas Intermediate LLC ("(“Magnolia ~~Intermediate"~~Intermediate”), and Magnolia Oil & Gas Operating LLC ("(“Magnolia ~~Operating"~~Operating”)~~. All three entities~~, all of which are Delaware limited liability companies ~~and were~~ formed in contemplation of the Business Combination (as defined herein).

Business Combination

On July 31, 2018 (the “Closing Date”), the Company and Magnolia LLC ~~a consolidated subsidiary~~consummated the acquisition of the ~~Company, consummated the previously announced acquisition of:~~following:

certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the ~~"Karnes~~“Karnes County ~~Assets"~~Assets” and, such business the “Karnes County Business”) pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the “Karnes County Contribution Agreement”), by and among the Company, Magnolia LLC and certain affiliates (the “Karnes County Contributors”) of EnerVest Ltd. (“EnerVest”);

certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the ~~"Giddings Assets"~~“Giddings Assets”) pursuant to that certain Purchase and Sale Agreement (the “Giddings Purchase Agreement”) by and among Magnolia LLC and certain affiliates of EnerVest (the “Giddings Sellers”); and

~~an approximately~~a 35% membership interest (the “Ironwood Interests” ~~and together with the Karnes County Assets and the Giddings Assets, the “Acquired Assets”~~) in Ironwood Eagle Ford Midstream LLC ~~("Ironwood"~~(“Ironwood”), a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement ~~(the “Ironwood MIPA” and, together~~(together with the transactions contemplated by the Karnes County Contribution Agreement and the Giddings Purchase Agreement, the “Business Combination ~~Agreements”~~Agreements,” and the transactions contemplated thereby, the “Business Combination”), by and among Magnolia LLC and certain affiliates of EnerVest (the “Ironwood Sellers”).

The Company consummated the Business Combination for an aggregate consideration of approximately $1.2 billion in cash, 31.8 million shares of the ~~Company's~~Company’s Class A Common Stock, par value $0.0001 per share (the ~~"Class~~“Class A Common ~~Stock"~~Stock”), and 83.9 million shares of the ~~Company's~~Company’s Class B Common Stock, par value $0.0001 per share (the ~~"Class~~“Class B Common ~~Stock"~~Stock”), and a corresponding number of units in Magnolia LLC (the ~~"Magnolia~~“Magnolia LLC ~~Units"~~Units”), as well as certain earnout rights payable in a combination of cash and additional equity securities in the Company. In connection with the Business Combination, Magnolia issued and sold 35.5 million shares of Class A Common Stock in a private placement to certain qualified institutional buyers and accredited investors for gross proceeds of $355.0 million (the “PIPE Investment”). In addition, Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating ("(“Finance Corp."” and, together with Magnolia Operating, the ~~"Issuers"~~“Issuers”), issued and sold $400.0 million aggregate principal amount of 6.0% Senior Notes due 2026 (the “2026 Senior Notes”). The proceeds of the PIPE Investment and the offering of 2026 Senior Notes were used to fund a portion of the cash consideration required to effect the Business Combination.

Business Operations and Strategy

Magnolia is an independent oil and natural gas company engaged in the acquisition, development, exploration and production of oil, natural gas, and NGL ~~reserves from~~reserves. The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings Field in South Texas, where the Company targets the Eagle Ford Shale and Austin Chalk ~~formations in South Texas. Magnolia's~~formations. Magnolia’s objective is to generate stock market value over the long term through consistent organic production growth, high full cycle operating margins, an efficient capital program with short economic paybacks, significant free cash flow after capital expenditures, and effective reinvestment of free cash flow.

Basis of Presentation

~~As a result~~In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company was the acquirer in the Business Combination ~~the Company is the acquirer for accounting purposes~~ and the Karnes County Business, the Giddings Assets, and the Ironwood Interests ~~are~~were the acquirees. The Karnes County Business including, as applicable, its ownership of the Ironwood Interests, was deemed the ~~"Predecessor"~~“Predecessor” for periods prior to the Business Combination, and does not include the consolidation of the Company and the Giddings Assets. The assets, liabilities, revenues, expenses and cash flows related to the Karnes County Business were not previously separately accounted for as a standalone legal entity and have been carved out of the overall assets, liabilities, revenues, expenses and cash flows fromAlthough the Karnes County Contributors are not under common control, each were managed by the same managing general partner, EnerVest, and as ~~appropriate.~~ such, these Predecessor financial statements have been presented on a combined basis for financial reporting purposes.

For the ~~period~~periods on or after the Business Combination, the Company, including the ~~consolidation~~combination of the Karnes County Business, the Giddings Assets, and the Ironwood Interests, is the ~~"Successor".~~“Successor.” The financial statements and certain footnote presentations separate the ~~Company's~~Company’s presentations into two distinct periods, the period before the consummation of the Business Combination, which includes the period from January 1, 2018 to July 30, 2018 (the ~~"2018 Predecessor Period"~~“Predecessor Period”) and the period after the Business Combination, which includes the period from July 31, 2018 to September 30, 2018 (the “2018 Successor Period”), and the three and nine months ended September 30, ~~2017 ("2017 Predecessor Period") and the period on and after the consummation of the Business Combination, which is from July 31, 2018 to September 30, 2018~~2019 (the ~~"Successor Period"~~“2019 Successor Period”). The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting that is based on the fair value of ~~net~~ assets acquired and liabilities assumed. As a result of the inclusion of the Giddings Assets, the new basis of accounting, and certain other items that affect comparability, the Company’s financial information prior to the Business Combination is not comparable to its financial information subsequent to the Business Combination.

The assets, liabilities, revenues, expenses, and cash flows related to the Karnes County Business were not previously separately accounted for as a standalone legal entity and have been carved out of the overall assets, liabilities, revenues, expenses and cash flows from the Karnes County Contributors as appropriate. In addition, Parents’ Net Investment represents the Karnes County Contributors’ interest in the recorded net assets of the Karnes County Business and represents the cumulative net investment of the Karnes County Contributors’ in the Karnes County Business through the dates presented, inclusive of cumulative operating results.

The Karnes County Contributors utilized EnerVest’s centralized processes and systems for its treasury services and the Karnes County Business’ cash activity was commingled with other oil and gas assets that were not part of the Business Combination. As such, the net results of the cash transactions between the Karnes County Business and the Karnes County Contributors are reflected as Parents’ contributions and distributions in the accompanying Combined Statement of Changes in Parents’ Net Investment.

The Predecessor financial statements also include a portion of indirect costs for salaries and benefits, rent, accounting, legal services, and other expenses. In addition to the allocation of indirect costs, the financial statements reflect certain agreements executed by the Karnes County Contributors for the benefit of the Karnes County Business, including price risk management instruments. The allocations methodologies for significant allocated items include:

Corporate G&A - EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting, and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors’ investor commitments, which were used, in part, to acquire the Karnes County Business as well as other oil and natural properties that were not part of the Business Combination. As such, the management fee was allocated to the Karnes County Business using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors, for the Predecessor Period.

Derivatives - Certain Karnes County Contributors entered into financial instruments to manage the Karnes County Business’ exposure to changes in commodity prices for the Karnes County Business as well as other oil and natural gas properties that were not part of the Business Combination, on a combined basis. The commodity derivative activity was allocated to the Karnes County Business using a ratio of expected crude oil and condensate, natural gas liquids (“NGLs”), and natural gas volumes produced, on an equivalents basis, by the Karnes County Business to the Karnes County Contributors’ total expected crude oil and condensate, NGLs, and natural gas produced, on an equivalents basis, for the Predecessor Period.

Indebtedness - The Karnes County Business did not historically have outstanding indebtedness, but its oil and natural gas properties were collateral to various credit facilities held by the Karnes County Contributors and/or EnerVest. Amounts outstanding on these credit facilities have not been allocated to the Karnes County Business as they were not directly attributable to the Karnes County Business.

Management believes the allocation methodologies used are reasonable and result in an allocation of the indirect costs and other items to operate the Karnes County Business as if it were a stand-alone entity. These allocations, however, may not be indicative of the cost of future operations or the amount of future allocations. Direct costs were included at the historical amounts related to each reported period.

The accompanying unaudited interim consolidated and combined financial statements have been prepared in accordance with ~~accounting principles generally accepted in the United States of America (“U.S. GAAP”)~~GAAP and in accordance with the rules and regulations of the SEC. Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with US GAAP have been ~~condensed or~~ omitted. Certain amounts have been reclassified to conform to the current period presentation resulting from the adoption of ASU No. 2014-09, Revenue from Contracts with Customers. See Note 3 - Revenue Recognition for additional information. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for the full year or any future periods. The unaudited interim consolidated financial statements, including the Predecessor financial statements, should be read in conjunction with the information included in or incorporated by reference from the Company’s ~~Definitive Proxy Statement~~Annual Report on ~~Schedule 14A filed with~~Form 10-K for the ~~SEC on July 2, 2018, including the Karnes County Business annual financial statements.~~fiscal year ended December 31, 2018.

2. Summary of Significant Accounting Policies

~~Principles~~As of ~~Consolidation~~

~~The~~September 30, 2019, the Company’s significant accounting policies are consistent with those discussed in Note 2 - Summary of Significant Accounting Policies of its consolidated financial statements ~~have been prepared~~contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, with the exception of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and as noted below.

Leases

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company elected the package of transition practical expedients provided by the new standard that allow the Company to not reassess under the new standard its prior conclusions about lease identification, classification related to contracts that commenced prior to adoption, and to apply the standard prospectively to all new or modified land easements and rights-of-way. The Company has also elected a policy to not recognize right of use assets and lease liabilities related to short-term leases. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

Magnolia adopted this standard on January 1, 2019 and recognized right of use assets and lease liabilities for certain commitments primarily related to real estate, vehicles, and field equipment, while prior reporting periods are presented in accordance with ~~US GAAP. Certain reclassifications~~historical accounting treatment under ASC Topic 840, Leases (“ASC 840”). The Company determines if an arrangement is a lease at inception. Operating leases are included in other long-term assets, other current liabilities, and other long-term liabilities in Magnolia’s consolidated balance sheet as of ~~prior period~~September 30, 2019. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Magnolia’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. For more information, refer to Note 10 - Leases.

Recent Accounting Pronouncements

In June 2016 the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standards update requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model. This standard is effective for the Company in the first quarter of 2020. The Company is currently evaluating the new standard and does not believe the adoption will have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The Company early adopted ASU 2018-15 effective April 1, 2019, with prospective application. The adoption did not have a material impact on the Company’s consolidated financial statements.

3. Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU and the associated subsequent amendments (collectively, “ASC 606”), superseded virtually all of the revenue recognition guidance in GAAP by requiring companies to recognize revenue using a five-step model. The core principle of the five-step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Magnolia adopted this standard on December 31, 2018 for all Successor Periods using a modified retrospective approach.

There were no significant changes to the timing of revenue recognized for sales of production as a result of ASC 606. However, the new guidance resulted in certain changes to the classification of processing and other fees between revenue and gathering, transportation, and processing expense. The change also resulted in an increase to the production volumes and depreciation, depletion and amortization. The amounts included in the accompanying unaudited interim consolidated financial statements ~~have been made~~for the 2018 Successor Period were reclassified in order to conform to the current ~~reporting practices.~~period presentation resulting from the adoption of ASC 606 and are considered immaterial. The ~~consolidated financial statements~~Predecessor Period has not been restated and continues to be reported under the accounting standards in effect for that period.

Oil, Natural Gas, and NGL Revenues

Magnolia’s revenues include the ~~accounts~~sale of crude oil, natural gas, and NGLs. Oil, natural gas, and NGL sales are recognized as revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of oil, natural gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million Btu of natural gas, gallon of NGLs, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated.

The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, the Company generally records sales based on the net amount received.

For natural gas contracts, the Company generally records wet gas sales (which consists of natural gas and NGLs based on end products after processing) at the wellhead or inlet of the gas processing plant (i.e., the point of control transfer) as revenues net of gathering, transportation, and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company at the tailgate of the plant. Conversely, the Company generally records residual natural gas and ~~its subsidiaries after elimination~~NGL sales at the tailgate of ~~intercompany transactions~~the plant (i.e., the point of control transfer) on a gross basis along with the associated gathering, transportation, and ~~balances.~~ processing expenses if the processor is a service provider and there is redelivery of one or several commodities to the Company at the tailgate of the plant. The facts and circumstances of an arrangement are considered and judgment is often required in making this determination. For processing contracts that require noncash consideration in exchange for processing services, the Company recognizes revenue and an equal gathering, transportation, and processing expense for commodities transferred to the service provider.

Contract Balances

Customers are invoiced once the Company’s performance obligations have been satisfied. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no judgments that significantly affect the amount or timing of revenue from contracts with customers. Accordingly, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

The Company’s ~~interests in~~receivables consist mainly of receivables from oil and natural gas ~~exploration~~purchasers and ~~production ventures and partnerships are proportionately consolidated. The Company reflects a noncontrolling~~from joint interest representing the interest owned by the Karnes County Contributors through their ownership of Magnolia LLC Units in the unaudited consolidated financial statements. The noncontrolling interest is presented as a component of equity. See ~~Note 10—Stockholders' Equity and Parents' Net Investment~~ ~~for further discussion of noncontrolling interest.~~

~~Variable Interest Entities~~

~~Magnolia LLC is a variable interest entity (“VIE”). The Company determined that it is the primary beneficiary of Magnolia LLC as~~owners on properties the Company ~~is the sole managing member and has the power to direct the activities most significant to Magnolia LLC’s economic performance~~operates. Receivables from contracts with customers totaled $113.2 million as ~~well as the obligation to absorb losses and receive benefits that are potentially significant. At~~of September 30, ~~2018, the Company had an approximate 63.2% economic interest in Magnolia LLC~~2019 and ~~100%~~$100.1 million as of Magnolia LLC’s assets and liabilities and results of operations are consolidated in the Company’s unaudited consolidated financial statements contained herein. At September 30, 2018, the Karnes County Contributors had approximately 36.8% economic interest in Magnolia LLC; however, the Karnes County Contributors have disproportionately fewer voting rights, and are shown as noncontrolling interest holders of Magnolia LLC. See ~~Note 10—Stockholders' Equity and Parents' Net Investment~~ ~~for further discussion of noncontrolling interest.~~

~~Use of Estimates~~

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and changes in these estimates are recorded when known. Significant estimates with regard to these financial statements include the fair value determination of acquired assets and liabilities, the assessment of asset retirement obligations, the estimate of proved oil and gas reserves and related present value estimates of future net cash flows, and the estimates of fair value for long-lived assets.

~~Accounts Receivable and Allowance for Doubtful Accounts~~

December 31, 2018. Accounts receivable are stated at the historical carrying amount net of write-offs and an allowance for doubtful accounts. ~~The carrying amount of the Company’s accounts receivable approximates fair value because of the short-term nature of the instruments.~~ The Company routinely assesses the collectability of all material trade and other receivables. The Company’s receivables consist mainly of receivables from oil and natural gas purchasers and from joint interest owners on properties the Company operates. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. The Company had no0 allowance for doubtful accounts as of September 30, ~~2018 (Successor),~~2019 or December 31, ~~2017 (Predecessor).~~2018.

~~Oil and Natural Gas Properties~~

Disaggregation of Revenue

The Company ~~follows~~has concluded that disaggregating revenue by product type appropriately depicts how the ~~successful efforts method~~nature, amount, timing, and uncertainty of ~~accounting for its oil~~revenue and ~~gas properties. Under~~cash flows are affected by economic factors and has reflected this ~~method~~disaggregation of accounting, exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead, and similar activities are expensed as incurred. If an exploratory well provides evidence to justify potential development of reserves, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. At the end of each quarter, management reviews the status of all suspended exploratory well costs in light of ongoing exploration activities; in particular, whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.

Unproved properties are assessed for impairment at least annually and are transferred to proved oil and gas properties to the extent the costs are associated with successful exploration activities. Unproved properties are assessed for impairment basedrevenue on the Company’s ~~current exploration plans. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oil~~consolidated and ~~gas properties. Costs of maintaining and retaining unproved properties, as well as impairment of unsuccessful leases, are included in exploration costs in the consolidated statements of operations.~~

Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized. Depreciation of the cost of proved oil and gas properties is calculated using the unit-of-production method ("UOP"). The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the carrying value of those reserves. The reserve base used to calculate depreciation for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. The reserve base used to calculate the depreciation for capitalized costs for exploratory and development wells is the sum of proved developed reserves only. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are included in the depreciable cost.

Oil and gas properties are grouped for depreciation in accordance with the Accounting Standards Codification ("ASC") ASC 932 "Extractive Activities—Oil and Gas” ("ASC 932"). The basis for grouping is a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.

When circumstances indicate that proved oil and gas properties may be impaired, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on the Company’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally estimated using the income approach described in the ASC 820, "Fair Value Measurements" ("ASC 820"). If applicable, the Company utilizes prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a discount rate believed to be consistent with those applied by market participants.

~~Asset Retirement Costs and Obligations~~

Asset retirement obligations represent the present value of the estimated cash flows expected to be incurred to plug, abandon and remediate producing properties, excluding salvage values, at the end of their productive lives in accordance with applicable laws. The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free rate. The inputs are calculated based on historical data as well as current estimates. When the liability is initially recorded, the carrying amount of the related long-lived asset is increased. Over time, accretion of the liability is

recognized each period, and the capitalized cost is amortized over the useful life of the related asset and is included in "Depreciation, depletion and amortization" in the Company’s consolidated statements of operations.

To estimate the fair value of an asset retirement obligation, the Company employs a present value technique, which reflects certain assumptions, including its credit‑adjusted risk‑free interest rate, inflation rate, the estimated settlement date of the liability and the estimated current cost to settle the liability. Changes in timing or to the original estimate of cash flows will result in change to the carrying amount of the liability and related long lived asset.

~~Intangible Asset (Successor)~~

Concurrent with the closing of the Business Combination, the Company and EnerVest entered into a Non-Compete (the "Non-Compete") pursuant to which EnerVest and certain of its affiliates are restricted from competing with the Company in certain counties comprising the Eagle Ford Shale. The Company recorded an estimated cost of $44.4 million for the Non-Compete as an intangible asset on the consolidated balance sheet of the Successor. This intangible asset has a definite life and is subject to amortization utilizing straight line method over its economic life, currently estimated to be two and a half to four years. Magnolia assesses intangible assets for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized in the consolidatedcombined statements of operations if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. For the period ended September 30, 2018, no impairment was recorded. For more discussion on the Non-Compete, refer to ~~Note 6 - Intangible Asset.~~

~~Fair Value Measurements~~

ASC 820 establishes a fair value hierarchy that prioritizes and ranks the level of observability of inputs used to measure investments at fair value. The observability of inputs is impacted by a number of factors, including the type of investment, characteristics specific to the investment, market conditions and other factors. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). Investments with readily available quoted prices or for which fair value can be measured from quoted prices in active markets will typically have a higher degree of input observability and a lesser degree of judgment applied in determining fair value.

~~The three levels of the fair value hierarchy under ASC 820 are as follows:~~

~~Level I—Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used.~~

Level II—Pricing inputs are other than quoted prices included within Level I that are observable for the investment, either directly or indirectly. Level II pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level III—Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of fair value require significant judgment and estimation.

In some cases, the inputs used to measure fair value might fall within different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the investment is categorized in its entirety is determined based on the lowest level input that is significant to the investment. Assessing the significance of a particular input to the valuation of an investment in its entirety requires judgment and considers factors specific to the investment. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the perceived risk of that investment.

~~Equity Method Investment~~

As part of the Business Combination, the Company acquired the Ironwood Interests . The Company accounts for its investment in Ironwood using the equity method of accounting. Accordingly, the Company recognizes its proportionate share of Ironwood’s net income in the consolidated statements of operations as “Income from equity method investee”. Any distributions by Ironwood would decrease the Company’s investment in Ironwood. The Company evaluates its investment in Ironwood for potential impairment whenever events or changes in circumstances indicate that there may be a loss in the value of Ironwood that was other than temporary.

~~Income Taxes (Successor)~~

Under ASC 740, “Income Taxes,” deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to net operating losses, tax credits, and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date. Valuation allowances are established when it is more likely than not that some or all ~~of the deferred tax assets will not be realized.~~

The Company reports a liability or a reduction of deferred tax assets for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. When applicable, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.

~~Purchase Price Allocation~~

Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets and liabilities of the acquired business and recording deferred taxes for any differences between the allocated values and tax basis of assets and liabilities. Any excess of the purchase price over the amounts assigned to assets and liabilities is recorded as goodwill.

The purchase price allocation is accomplished by recording each asset and liability at its estimated fair value. Estimated deferred taxes are based on available information concerning the tax basis of the acquired company’s assets and liabilities and tax-related carryforwards at the merger date, although such estimates may change in the future as additional information becomes known. The amount of goodwill recorded in any particular Business Combination can vary significantly depending upon the values attributed to assets acquired and liabilities assumed relative to the total acquisition cost.

When estimating the fair values of assets acquired and liabilities assumed, the Company must apply various assumptions. The most significant assumptions relate to the estimated fair values assigned to proved and unproved crude oil and natural gas properties. To estimate the fair values of these properties, the Company prepares estimates of crude oil and natural gas reserves. Estimated fair values assigned to assets acquired can have a significant effect on results of operations in the future.

~~Commitments and Contingencies~~

Accruals for loss contingencies arising from claims, assessments, litigation, environmental and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Refer to ~~Note 13 - Commitments and Contingencies~~ ~~for additional information.~~

~~Revenue Recognition~~

Oil and gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. Cash received relating to future revenues is deferred and recognized when all revenue recognition criteria are met.

The Company follows the sales method of accounting for crude oil and natural gas production imbalances and would recognize a liability if Magnolia's existing proved reserves were not adequate to cover an imbalance. Imbalances have not been significant in the periods presented.

~~Net Income Per Share of Common Stock~~

Performance Obligations

Basic earnings per common share is calculated by dividing net income attributable to Class A Common Stock by the weighted average number of shares of Class A Common Stock outstanding each period. Diluted earnings per share adds to those shares the incremental shares that would have been outstanding assuming exchangesPerformance obligations are satisfied at a point in time once control of the ~~Company's outstanding Class B Common Stock and warrants for Class A Common Stock. An anti-dilutive impact is an increase in earnings per share or a reduction in net loss per share resulting from~~product has been transferred to the ~~conversion, exercise, or contingent issuance of certain securities.~~

customer. The Company ~~uses~~considers a variety of facts and circumstances in assessing the ~~"if-converted" method to determine~~point of control transfer, including but not limited to: whether the ~~potential dilutive effect of conversions of its outstanding Class B Common Stock and~~purchaser can direct the ~~treasury stock method to determine the potential dilutive effect of its outstanding warrants exercisable for shares of Class A Common Stock. Refer to~~ ~~Note 11 - Earnings Per Share~~ ~~for additional information and the calculation of net earnings per share.~~

~~Recent Accounting Pronouncements (Successor)~~

~~In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016–02, Leases (Topic 842), which will require lessees to recognize a right of~~ use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. Currently the guidance would be applied using a modified retrospective transition method, which requires applying the new guidance to leases that exist or are entered into after the beginning of the ~~earliest period in~~hydrocarbons, the ~~financial statements. However, in July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions~~transfer of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required,significant risks and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The standard will be effective for interim and annual periods beginning after December 15, 2018 for public companies and annual periods beginning after December 15, 2019 for all other entities, with earlier adoption permitted. It is expected that the Company will cease to be an emerging growth company by December 31, 2018 and will adopt the standard on January 1, 2019, using the optional transition method provided by ASU 2018-11. The Company is the lessee under various agreements for real estate, vehicles, and field equipment that are currently accounted for as operating leases. The Company has preliminarily determined its portfolio of leased assets and is reviewing all related contracts to determine the impact the adoption will have on its consolidated financial statements. While the Company has yet to finalize the estimated impact this standard will have on the consolidated financial statements, the adoption is anticipated to result in an increase in both assets and liabilities related to the Company's leases.

In May 2014, the FASB issued ASU No. 2014–09, Revenue from Contracts with Customers. This ASU, as amended, superseded virtually all of the revenue recognition guidance in generally accepted accounting principles in the United States. The core principle of the five–step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. It is expected that the Company will cease to be an emerging growth company by December 31, 2018 and will adopt the standard on December 31, 2018, using a modified retrospective approach. Upon initial evaluation of contracts in each ofrewards, the Company’s ~~revenue streams, the~~right to payment, and transfer of legal title.

The Company does not ~~expect~~disclose the adoption of this ASU to have a material impact on its consolidated financial statements. The Company continues to evaluate contracts against the requirements of the standard and is evaluating the disclosure requirements and assessing changes to the relevant business processes and the control activities within them as a result of the provisions of this ASU.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows: Classification of Certain Cash". Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statements of cash flows. ASU 2016-15 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017 for public companies and for fiscal years beginning after December 15, 2018 for all other entities. It is expected that the Company will cease to be an emerging growth company by December 31, 2018 and will adopt the standard on December 31, 2018. The adoption of this guidance will not impact the Company's financial position or results of operations but could result in presentation changes on Magnolia's consolidated statements of cash flows.

In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"), which clarifies the definition of a business to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 provides a screen to determine when a set of assets is not a business, requiring that when substantially all fair value of ~~gross assets acquired (or disposed of)~~unsatisfied performance obligations for contracts as all contracts have either an original expected length of one year or less, or the entire future consideration is ~~concentrated in~~variable and allocated entirely to a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. A framework is provided to assist in evaluating whether both an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for interim and annual periods after December 15, 2017 for public companies and annual periods beginning after December 15, 2018 for all other entities. No disclosures are required at transition. The Company early adopted ASU 2017-01 upon the closing of the Business Combination. There was no material impact to the Company's financial statements as a result of this adoption, however the new standard may result in more transactions being accounted for as acquisitions (and dispositions) of assets rather than businesses in the future.

wholly unsatisfied performance obligation.

4. Acquisitions

Acquisitions (Successor)

EnerVest Business Combination

As discussed in Note 1 - Description of Business and Basis of Presentation, on July 31, 2018, the Company consummated the Business Combination contemplated by the Business Combination Agreements. The Business Combination Agreements and the Business Combination were approved by the Company’s stockholders on July 17, 2018. At the closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of the ~~Company's~~Company’s Class B Common Stock and an equivalent number of Magnolia LLC Units, which, together, are exchangeable on a ~~one-for-one~~1-for-one basis for shares of the ~~Company's~~Company’s Class A Common ~~Stock;~~Stock, subject to certain conditions; 31.8 million shares of Class A Common Stock; and approximately $911.5 million in cash. The ~~sales price per the Karnes County Contribution Agreement was adjusted for customary purchase price adjustments to reflect the economic activity from the effective date of January 1, 2018 to June~~

30, 2018. The Company is entitled to an additional cash purchase price adjustment for the revenues after expenses (and other purchase price adjustments) attributable to the Acquired Assets from July 1 through July 31. The Giddings Sellers received approximately $282.7 million in ~~cash, after customary purchase price adjustments.~~cash. The Ironwood Sellers received $25.0 million in cash in exchange for the Ironwood Interests. ~~The~~On March 29, 2019, Magnolia and EnerVest consummated the final ~~adjustments~~settlement pursuant to the ~~respective purchase price agreements have not yet been made.~~Contribution and Merger Agreement and as otherwise agreed to by the parties, with Magnolia receiving a net cash payment of $4.3 million and the Karnes County Contributors forfeiting to Magnolia 0.5 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock (and forfeiting a corresponding number of Magnolia LLC Units to Magnolia LLC).

The Business Combination has been accounted for using the acquisition method. The acquisition method of accounting is based on ASC 805 ~~"Business Combination" ("ASC 805"),~~“Business Combinations,” and uses the fair value concepts defined in ASC 820. ASC 805 requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company.

Contingent Consideration

Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Karnes County Contributors ~~will be~~were entitled to receive an aggregate of up to 13.0 million additional shares of Class A Common Stock or shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) based on certain EBITDA and free cash flow or stock price thresholds. As of ~~September 30,~~December 31, 2018, the Company had met the defined stock price thresholds ~~for two of~~and, as a result, the ~~three tranches as defined in the Karnes County Contribution Agreement and~~Company had issued an aggregate of ~~2.5~~3.6 million additional shares of Class A Common Stock and ~~6.5~~9.4 million additional shares of Class B Common Stock ~~to the Karnes County Contributors. Additionally, on October 4, 2018, the Company met the stock price threshold for the third and final tranche and subsequently issued 1.1 million additional shares~~(and a corresponding number of ~~Class A Common Stock and 2.9 million additional shares of Class B Common Stock~~Magnolia LLC Units) to the Karnes County Contributors.

Pursuant to the Giddings Purchase Agreement, until December 31, 2021, the Giddings Sellers were entitled to receive an aggregate of up to $47.0 million in cash earnout payments based on certain net revenue thresholds. On September 28, 2018, the Company paid the Giddings Sellers a cash payment of $26.0 million to fully settle the earnout obligation. ~~In conjunction with this payment, Magnolia recognized a loss of $6.7 million included in Other income (expense) in the Consolidated Statement of Operations.~~

The purchase consideration for the Business Combination was as follows:


	At July 31, 2018 (in thousands)
Preliminary Purchase Consideration:
(In thousands)
Purchase Consideration:
Cash consideration	$	1,219,217	$	1,214,966
Stock consideration ⁽¹⁾	1,423,483		1,398,238
Fair value of contingent earnout purchase consideration⁽²⁾	169,000		169,000
Total purchase price consideration	$	2,811,700	$	2,782,204

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed on the acquisition date:

Oil and natural gas properties ⁽¹⁾

The Company incurred $24.8 million in transaction costs associated with the Business Combination. The Company also incurred a total of $23.5 million of debt issuance costs in connection with the consummation of the Business Combination related to the establishment of the RBL Facility (as defined herein) and the issuance of the 2026 Senior Notes.

Unaudited Pro Forma Operating Results

The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of the Company’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma net income attributable to Class A Common Stock excludes $34.3 million of transaction related costs, $11.0 million related to a one-time purchase of a seismic license continuation, and a $6.7 million loss related to the settlement of the Giddings earnout obligation.

The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.

On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”) restricting EnerVest and certain of its affiliates from competing with the Company in certain counties comprising the Eagle Ford Shale following the Closing Date. An affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock issuable in 2 tranches of 2.0 million shares in two and one half and four years from the Closing Date provided EnerVest does not compete with Magnolia in the Eagle Ford Shale until the later of July 31, 2022 or the date the Services Agreement with EnerVest Operating, LLC (“EVOC”), a wholly owned subsidiary of EnerVest, (the “Services Agreement”), is terminated. For more discussion on the Non-Compete, refer to Note 7 - Intangible Assets.

On August 31, 2018, the Company completed the acquisition of substantially all of Harvest Oil & Gas Corporation’s South Texas assets for approximately $133.3 million in cash and 4.2 million shares of Class A Common Stock for a total consideration of $191.5 million. The acquisition added an undivided working interest across a portion of Magnolia’s existing Karnes County Assets and all of the Company’s existing Giddings Assets. On March 14, 2019, Magnolia consummated the final settlement with Harvest receiving a cash payment of $1.4 million. The transaction was accounted for as a business combination.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed:

Oil & gas properties ⁽¹⁾

Oil and natural gas properties ⁽¹⁾

The total purchase consideration and the related purchase consideration allocation above are preliminary as the Company has not yet completed all the necessary fair value assessments, including the assessments of property, plant and equipment, intangibles, contingent consideration and the related tax impacts on these items. Any changes within the measurement period in the estimated fair values of the assets acquired and liabilities assumed and the working capital adjustments may change the allocation of the purchase consideration. The fair value and related tax impact assessments are to be completed within twelve months of the Closing Date and could have a material impact on the components of the total purchase consideration and the purchase consideration allocation.Certain Other Acquisitions

Transaction costs incurred by the Company associated with the Business Combination were $22.4 million for the Successor Period. The Company also incurred a total of $23.5 million of debt issuance costs in connection with the consummation of the Business Combination related to the establishment of the RBL Facility (as defined herein) and the issuance of the 2026 Senior Notes.

On the Closing Date, the Company and EnerVest entered into the Non-Compete restricting EnerVest and certain of its affiliates from competing with the Company in certain counties comprising the Eagle Ford Shale following the Closing Date. An affiliate of EnerVest will have the right to receive up to 4,000,000 shares of Class A Common Stock issuable in two and half to four years provided EnerVest does not compete. For more discussion on the Non-Compete, refer to ~~Note 6 - Intangible Asset~~.

~~Unaudited Pro Forma Operating Results~~

~~The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.~~

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of the Company’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma net income attributable to Class A Common Stock excludes $34.3 million of transaction related costs, $11.0 million related to a one time purchase of a seismic license continuation, and a $6.7 million loss related to the settlement of the Giddings earnout obligation.

~~Harvest Acquisition~~

Oil & Gas, LLC. Highlander paid cash consideration of ~~$191.5 million. The acquisition added an undivided working interest across~~$50.9 million, for such interests. MGY Louisiana LLC, a ~~portion~~wholly owned subsidiary of ~~Magnolia's existing Karnes County Assets and all~~Magnolia Operating, holds approximately 85% of the ~~Company's existing Giddings Assets.~~units in Highlander. The transaction was accounted for as an asset acquisition.

~~The following table summarizes the allocation of the purchase consideration to the assets and liabilities assumed:~~

The total purchase consideration and the related purchase consideration allocation above are preliminary as the Company has not yet completed all the necessary fair value assessments, including the assessments of property, plant and equipment. Any changes within the measurement period in the estimated fair values of the assets acquired and liabilities assumed and the working capital adjustments may change the allocation of the purchase consideration. The fair value assessments are to be completed within twelve months of the closing date and could have a material impact on the components of the total purchase consideration and the purchase consideration allocation.

Acquisitions (Predecessor)

Subsequent GulfTex Acquisition

On March 1, 2018, the Predecessor acquired certain oil and natural gas properties located in the Eagle Ford Shale from GulfTex Energy III, L.P. and GulfTex Energy IV, L.P. for an adjusted purchase price of approximately $150.1 million, net of customary closing adjustments (the “Subsequent GulfTex Acquisition”).

The recognized fair value of identifiable assets and acquired liabilities assumed in connection with the Subsequent GulfTex Acquisition, is as follows:



(In thousands)
Purchase price allocation:
Accounts receivable	$	10,501
Proved oil and natural gas properties	118,572
Unproved oil and natural gas properties	22,802
Accounts payable and accrued liabilities	(1,679		)
Asset retirement obligations	(57		)
	$	150,139

(In thousands)
Total consideration $ 150,139

Purchase price allocation:
Accounts receivable 10,501
Proved oil and natural gas properties 118,572
Unproved oil and natural gas properties 22,802
Accounts payable and accrued liabilities (1,679 )
Asset retirement obligations (57 )
$ 150,139

~~BlackBrush Acquisition~~

On January 31, 2017, the Predecessor acquired assets from BlackBrush Karnes Properties, LLC for aggregate consideration of approximately $58.7 million, net of customary closing adjustments (the “Subsequent BlackBrush Acquisition”).

~~The recognized fair value of identifiable assets and acquired liabilities assumed in connection with the Subsequent BlackBrush Acquisition, is as follows:~~

The Predecessor accounted for these acquisitions as Business Combinations. The assets acquired and the liabilities assumed have been measured at fair value based on various estimates. These estimates are based on key assumptions related to the Business Combination, including reviews of publicly disclosed information for other acquisitions in the industry, historical experience of the companies, data that was available through the public domain and due diligence reviews of the acquired business. Any acquisition related transaction costs are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred.

~~The results of operations for these acquisitions are included in the Predecessor combined financial statements from the date of closing of each acquisition.~~

4.5. Derivative Instruments and Hedging Activities (Predecessor)

The ~~Company's~~Company’s activities expose it to risks associated with changes in the market price of oil, natural gas, and ~~natural gas liquids.~~NGLs. As such, future earnings are subject to fluctuation due to changes in the market price of oil, natural gas, and ~~natural gas liquids.~~NGLs. The Company ~~does~~has not ~~engage~~engaged in any hedging activities and does not expect to engage in any hedging activities with respect to the market risk to which the Company is exposed. The Karnes County Contributors, on behalf of the Predecessor, used derivatives to reduce ~~its~~the risk of volatility in the prices of oil, natural gas, and ~~natural gas liquids~~NGLs and ~~its~~their policies did not permit the use of derivatives for speculative purposes.

The Predecessor elected not to designate any of its derivatives as hedging instruments. Accordingly, changes in the fair value of the Predecessor's derivatives ~~are~~were recorded immediately to earnings as “Gain (loss) on derivatives, net” in the ~~consolidated~~combined statements of operations. During the ~~period~~periods from July 1 through July 30, 2018 and January 1 ~~2018~~ through July 30, 2018, the Predecessor ~~terminated substantially all~~incurred a gain on derivatives of ~~its derivative contracts which, together with regular monthly settlements, resulted in total cash settlement payments~~$3.9 million and a loss on derivatives of ~~approximately $27.6 million.~~$18.1 million, respectively.

~~The following table sets forth the fair values and classification of the outstanding derivatives entered into by the Karnes County Contributors, on behalf of the Predecessor, as of December 31, 2017:~~

Offset in the Balance Sheet

Gross Amounts Offset in the

The Predecessor entered into master netting arrangements with its counterparties. The amounts above are presented on a net basis in the Predecessor's unaudited consolidated balance sheet when such amounts are with the same counterparty. In addition, the Predecessor has recorded accounts payable and receivable balances related to settled derivatives that are subject to the master netting agreements. These amounts are not included in the above table; however, under the master netting agreements, the Predecessor has the right to offset these positions against forward exposure related to outstanding derivatives.

5.6. Fair Value Measurements

Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or non-recurring basis. The ~~Company's~~Company’s fair value measurements are based either on actual market data or assumptions that other market participants would use in pricing an asset or liability in an orderly transaction, using the valuation hierarchy prescribed by ~~GAAP. See~~ ~~Note 2~~GAAP under ASC 820.

The three levels of the fair value hierarchy under ASC 820 are as follows:

Level I - ~~Summary~~Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used.

Level II - Pricing inputs are other than quoted prices included within Level I that are observable for the investment, either directly or indirectly. Level II pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level III - Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of ~~Significant Accounting Policies~~ ~~for more information regarding the valuation hierarchy.~~ fair value require significant judgment and estimation.

Fair Values - Recurring (Predecessor)

The ~~Predecessor~~Predecessor’s derivatives ~~consist~~consisted of over-the-counter ~~(“OTC”)~~ contracts ~~which are~~that were not traded on a public exchange. As the fair value of these derivatives iswas based on inputs using market prices obtained from independent brokers or determined using quantitative models that ~~use~~used as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including ~~third party~~third-party pricing services, brokers and market transactions, the Predecessor categorized these derivatives as Level 2. The Predecessor valued these derivatives using the income approach using inputs such as the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves. Estimates of fair value ~~have been~~were determined at discrete points in time based on relevant market data. Furthermore, fair values ~~are~~were adjusted to reflect the credit risk inherent in the transaction, which may ~~include~~have included amounts to reflect counterparty credit quality and/or the effect of the Predecessor’s creditworthiness. ~~These assumed credit risk adjustments are based on published credit ratings, public bond yield spreads and credit default swap spreads.~~

~~The following table presents the fair value hierarchy table for the Predecessor’s assets and liabilities that are required to be measured at fair value on a recurring basis:~~

Fair Values - Nonrecurring

The fair value measurements of assets acquired and liabilities assumed in a business combination are measured on a nonrecurring basis on the acquisition date using an income valuation technique based on inputs that are not observable in the market, and therefore, represent Level 3 inputs. Significant inputs to the valuation of acquired oil and gas properties includes estimates of: (i) reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices, including price differentials; (v) future cash flows; and (vi) a market participant-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the ~~Company's~~Company’s management at the time of the valuation. Refer to Note 34 - Acquisitions for additional information.

In July 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its warrants. The difference in fair value between the Class A Common Stock issued and the warrants exchanged was recorded as a non-cash deemed dividend for the incremental value provided to the holders of the warrants. The fair value of the non-cash deemed dividend related to the warrant exchange was determined based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy. Refer to Note 11 - Stockholders’ Equity for additional information.

Debt ~~obligations~~Obligations

~~Carrying values~~The carrying value and fair ~~values~~value of the financial ~~instruments~~instrument that ~~are~~is not carried at fair value in the accompanying consolidated balance ~~sheets~~sheet as of September 30, ~~2018~~2019 is as follows:

September 30, 2018
(In thousands) Carrying Value Fair Value
Long-term debt $ 388,343
$ 399,000

The fair value of the 2026 Senior Notes at September 30, ~~2018~~2019 was based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

The Company has other financial instruments consisting primarily of receivables, payables, and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in the ~~Business Combination~~business combinations and asset retirement obligations.

6.7. Intangible ~~Asset~~Assets

Non-Compete Agreement

On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into the Non-Compete, which prohibits EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) ~~following~~until the ~~Closing Date.~~later of July 31, 2022 or the date the Services Agreement is terminated. Under the Non-Compete, an affiliate of EnerVest will have the right to receive ~~up to~~ 4.0 million shares of Class A Common Stock ~~subject to the achievement~~in 2 tranches of ~~certain stock price thresholds that were met by October 4, 2018. The~~2.0 million shares ~~are issuable~~ in two and aone half toand four years from the Closing Date provided EnerVest does not compete in the Market Area.

The Company recorded an estimated cost of $44.4 million for the Non-Compete as an intangible ~~asset~~assets on the Company’s consolidated balance ~~sheet of the Successor. This~~sheet. These intangible ~~asset has~~assets have a definite life and isare subject to amortization utilizing the ~~straight line~~straight-line method over ~~its~~their economic life, currently estimated to be two and aone half to four years. The Company includes the amortization in ~~depreciation, depletion and amortization expenses~~“Amortization of intangible assets” on the Company’s consolidated ~~statements~~statement of operations.



(In thousands)	September 30, 2019
Non-compete intangible assets	$	44,400
Accumulated amortization	(16,923		)
Intangible assets, net	$	27,477
Weighted average amortization period (in years)	3.25

(In thousands) September 30, 2018 (Successor)
Non-Compete Intangible Asset $ 44,400
Accumulated amortization (2,417 )
Intangible, net $ 41,983
Weighted average amortization (years) 3.25

7.~~Asset Retirement Obligation~~

~~A summary of the changes in asset retirement obligations is included in the table below:~~

The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which Magnolia ~~operates.~~and its subsidiaries operate. The tax effects of statutory rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred tax assets are excluded from the determination of the ~~Company's~~Company’s annual effective tax rate as such items are recognized as discrete items in the ~~quarter~~period in which they occur.

Income tax expense recorded infor the ~~Successor Period~~period is based on applying an estimated annual effective income tax rate to the net income from ~~July 31, 2018~~January 1, 2019 through September 30, ~~2018.~~2019. There were no significant unusual or infrequently occurring items that are required to be recorded as discrete items ~~in the Successor Period.~~as of September 30, 2019. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the ~~Successor’s~~Company’s expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, the effect of noncontrolling interest, permanent and temporary differences, and the likelihood of recovering deferred tax assets in the current year. The accounting estimates used to compute the income tax ~~benefit~~expense may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes. For the ~~Successor Period,~~three and nine months ended September 30, 2019, the Company incurred ~~United States~~U.S. federal income tax expense of approximately ~~$3.5 million.~~$3.1 million and $11.6 million, respectively. The ~~Company's~~Company’s annual effective tax rate ~~as of~~for the three and nine months ended September 30, ~~2018~~2019 was ~~12.2%.~~16.9% and 14.9%, respectively. The primary differences between the annual effective tax rate and the statutory rate of ~~21% were~~21.0% are income attributable to noncontrolling interest and state ~~taxes, and non-deductible expenses.~~taxes.

The ~~Company's~~Company’s income tax provision ~~(benefit) consisted~~consists of the following components:



	Successor						Predecessor
(In thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019		July 31, 2018 Through September 30, 2018		July 1, 2018 Through July 30, 2018		January 1, 2018 Through July 30, 2018
Current:
Federal	$	—	$	—	$	—	$	—	$	—
State	115		684		45		631		1,461
	115		684		45		631		1,461
Deferred:
Federal	3,135		11,588		3,493		—		—
State	279		177		—		135		324
	3,414		11,765		3,493		135		324
Total provision	$	3,529	$	12,449	$	3,538	$	766	$	1,785

(In thousands) Successor Predecessor
July 31, 2018 through September 30, 2018
July 1, 2018
through
July 30, 2018

January 1, 2018 through
July 30, 2018
Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
Current:
    Federal $ —
$ —
$ —
$ —
$ —
    State 45
631
1,461
81
848
45
631
1,461
81
848
Deferred:
    Federal 3,493
—
—
—
—
    State —
135
324
549
1,119
3,493
135
324
549
1,119
Total provision $ 3,538
$ 766
$ 1,785
$ 630
$ 1,967

The Company is subject to U.S. federal income tax, ~~as well as~~ the margin tax in the state of ~~Texas. No~~Texas, and Louisiana corporate income tax. NaN amounts have been accrued for income tax uncertainties or interest and penalties as of September 30, ~~2018.~~2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The ~~Company is open~~Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities ~~since Inception.~~for all periods.

9. Long Term Debt ~~(Successor)~~

The ~~Company's~~Company’s debt is comprised of the following:

(In thousands) Successor September 30, 2018
Revolving credit facility $ —
6.0% Senior Notes due 2026 400,000
Total long-term debt 400,000

Less: unamortized deferred financing cost (11,657 )
Total debt, net $ 388,343

In connection with the consummation of the Business Combination, Magnolia Operating entered into a senior secured reserve-based revolving credit facility (the “RBL Facility”) among Magnolia Operating, as borrower, Magnolia Intermediate, as ~~holdings,~~its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank and swingline lender, providing for maximum commitments in an aggregate principal amount of $1.0 billion with a letter of credit facility with a $100.0 million sublimit. The borrowing base as of September 30, ~~2018~~2019 was ~~$550~~$550.0 million. The RBL Facility is guaranteed by certain parent companies and subsidiaries of Magnolia LLC and is collateralized by certain of ~~our~~Magnolia Operating’s oil and natural gas properties and has a borrowing base subject to semi-annual redetermination.

Borrowings under the RBL Facility bear interest, at Magnolia Operating’s option, at a rate per annum equal to either the ~~adjusted~~ LIBOR rate or the alternative base rate plus the applicable margin. Additionally, Magnolia Operating is required to pay a commitment fee quarterly in arrears in respect of unused commitments under the RBL Facility. The applicable margin and the commitment fee rate are calculated based upon the utilization levels of the RBL Facility as a percentage of the borrowing base then in effect.

The RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 4.00 to 1.00 and, if the leverage ratio is in excess of 3.00 to 1.00, a current ratio of greater than 1.00 to 1.00. As of September 30, ~~2018,~~2019, the Company was in compliance with all covenants ~~(including the financial covenants)~~ under the RBL Facility.

Deferred financing costs incurred in connection with securing the RBL Facility were $11.7 million, which ~~will be~~ are amortized on a straight-line basis over a period of five years and included in ~~"Interest expense"~~“Interest expense, net” in the ~~Company's~~Company’s consolidated ~~statements~~statement of operations. During the ~~Successor Period~~three and nine months ended September 30, ~~2018,~~2019, the Company recognized interest expense of ~~$0.8~~$1.1 million and $3.4 million, respectively, related to the RBL

Facility. The unamortized portion of the deferred financing costs are included in ~~"Deferred~~“Deferred financing costs, ~~net"~~net” on the accompanying unaudited consolidated balance sheet as of September 30, ~~2018.~~2019.

The Company did ~~not~~0t have any outstanding borrowings under its RBL Facility as of September 30, ~~2018.~~2019.

On the Closing Date, the Issuers ~~closed the previously announced private offering of~~issued and sold $400.0 million aggregate principal amount of 2026 Senior Notes. The 2026 Senior Notes were issued under the Indenture, dated as of the Closing Date (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as ~~trustee (the “Trustee”).~~trustee. The 2026 Senior Notes are guaranteed on a senior unsecured basis by the Company, Magnolia Operating, and Magnolia Intermediate and may be guaranteed by certain future subsidiaries of the Company.

The 2026 Senior Notes will mature on August 1, ~~2026. The Notes~~2026 and bear interest at the rate of 6.0% per ~~annum, payable semi-annually in arrears on each February 1st and August 1st, commencing February 1, 2019.~~annum.

At any time prior to August 1, 2021, the Issuers may, on any one or more occasions, redeem all or a part of the 2026 Senior Notes at a redemption price equal to 100% of the principal amount of the 2026 Senior Notes redeemed, plus a “make whole” premium on accrued and unpaid interest, if any, to, but excluding, the date of redemption. After August 1, 2021, the Issuers may redeem all or a part of the Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest.

~~Deferred~~The Company incurred $11.8 million of deferred financing costs ~~incurred in connection with securing~~related to the issuance of the 2026 Senior Notes, ~~were $11.8 million~~ which were capitalized, ~~and will be~~are amortized using the effective interest method over the term of the 2026 Senior Notes, and are included in ~~"Interest expense"~~“Interest expense, net” in the ~~Company's~~Company’s consolidated statement of operations. The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as Long-term debt, net on the consolidated balance sheet as of September 30, ~~2018.~~2019. During the ~~Successor Period,~~three and nine months ended September 30, 2019, the Company recognized interest expense of ~~$4.2~~$6.3 million and $18.9 million, respectively, related to the 2026 Senior Notes.

Affiliate Guarantors

~~All~~Certain subsidiaries of the ~~Company's wholly owned subsidiaries~~Company are guarantors under the terms of its Senior Notes and RBL Facility. The parent guarantees may be released upon the request of Magnolia Operating. ~~Magnolia's~~Magnolia’s consolidated financial statements reflect the financial position of these subsidiary guarantors. As the parent company, Magnolia has no independent ~~operations, assets, or liabilities.~~operations. The guarantees are full and unconditional (except for customary release provisions) and joint and several. There are restrictions on dividends, distributions, loans, or other transfers of funds from the subsidiary guarantors to the Company.

10. ~~Stockholders'~~Leases

Magnolia’s leases primarily consist of real estate, vehicles, and field equipment. The Company’s leases have remaining lease terms of up to 8 years, some of which include options to renew or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. Magnolia’s lease agreements do not contain any residual value guarantees or restrictive covenants.

As most of Magnolia’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.



(In thousands)	September 30, 2019
Operating Leases
Operating lease assets	$	4,772

Operating lease liabilities - current	$	2,724
Operating lease liabilities - long-term	2,039
Total operating lease liabilities	$	4,763

Weighted average remaining lease term (in years)	2.0
Weighted average discount rate	3.8		%

For the three and nine months ended September 30, 2019, respectively, the Company incurred $0.9 million and $2.1 million of lease costs for operating leases included on the Company’s balance sheet, $5.9 million and $21.1 million for short-term lease costs and $0.6 million and $2.5 million for variable lease costs. Cash paid for amounts included in the measurement of lease liabilities in operating cash flows from operating leases for the nine months ended September 30, 2019 is $2.0 million.

Maturities of lease liabilities as of September 30, 2019 under the scope of ASC 842 are as follows:



(In thousands)
Maturity of Lease Liabilities⁽¹⁾	Operating Leases
2019 (remaining)	$	771
2020	2,653
2021	1,170
2022	165
2023	98
After 2023	91
Total lease payments	$	4,948
Less: Interest	(185		)
Present value of lease liabilities	$	4,763

11. Stockholders’ Equity ~~and Parents' Net Investment~~

~~Stockholders' Equity (Successor)~~

Class A Common Stock

In connection with the closing of the Business Combination, the Company increased the number of authorized shares of Class A Common Stock to 1.3 billion. At September 30, ~~2018,~~2019, there were ~~155.2~~168.3 million shares issued and 167.3 million shares outstanding of Class A Common ~~Stock issued and outstanding.~~Stock. The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters and are entitled ~~one~~1 vote for each share held.

There is no cumulative voting with respect to the election of directors, which results in the holders of more than 50% of the shares being able to elect all of the ~~directors.~~directors, subject to voting obligations under the Stockholder Agreement (defined below). In the event of a liquidation, dissolution, or winding up of the Company, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The ~~Company's common stockholders~~holders of the Class A Common Stock have no preemptive or other subscription ~~rights. There~~rights, and there are no sinking fund provisions applicable to ~~the common stock.~~such shares.

Class B Common Stock

In connection with the closing of the Business Combination, the Company authorized 225.0 million shares of Class B Common Stock. At September 30, ~~2018,~~2019, there were ~~90.5~~91.8 million shares of Class B Common Stock issued and outstanding. Holders of Class B Common Stock ~~will~~ vote together as a single class with holders of Class A Common Stock on all matters properly submitted to a vote of the stockholders. The holders of Class B Common Stock generally have the right to exchange all or a portion of their Class B Common Stock, together with an equal number of Magnolia LLC Units, for the same number of shares of Class A Common Stock or, at Magnolia LLC’s option, an equivalent amount of cash. Upon the future redemption or exchange of Magnolia LLC Units held by any holder of

Class B Common Stock, a corresponding number of shares of Class B Common Stock held by such holder of Class B Common Stock will be canceled. In the event of a liquidation, dissolution, or winding up of the Company, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The ~~Company's common stockholders~~holders of the Class B Common Stock have no preemptive or other subscription ~~rights. There~~rights, and there are no sinking fund provisions applicable to ~~the common stock.~~such shares.

~~As of September 30, 2018,~~On June 7, 2019, the Company ~~had 31.7 million~~commenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”), pursuant to which the Company (1) offered to holders of its warrants ~~outstanding, consisting~~the opportunity to receive 0.29 shares of ~~21.7 million public~~Class A Common Stock in exchange for each warrant validly tendered and (2) solicited the consent from the holders of its warrants ~~originally sold as part~~to approve an amendment to the Company’s existing warrant agreement, by and between the Company and Continental Stock Transfer & Trust Company, to amend the agreement to provide the Company with the right to require any holder of the ~~units sold in the initial public offering (the "IPO")~~Company’s warrants to exchange their warrants for Class A Common Stock at an exchange ratio of TPG Pace Energy Holdings Corp., a Delaware corporation ("TPGE") that later became Magnolia after the completion of the Business Combination, and 10.0 million warrants (the "Private Placement Warrants") sold in a private placement concurrently with the IPO to the TPG Pace Energy Sponsor LLC, a Delaware limited liability company (the "Sponsor"). Each whole warrant entitles the holder to purchase one whole share0.261 shares of Class A Common Stock for ~~$11.50 per share.~~ each whole warrant (the “Warrant Amendment”). Pursuant to the Offer, certain of the Company’s warrantholders, including directors and executive officers, agreed to tender their warrants and provide the corresponding consent to the Warrants Amendment in the Consent Solicitation by entering into the Tender and Support Agreement (as defined below).

The ~~warrants became exercisable on August 30, 2018~~Offer and ~~will expire~~Consent Solicitation expired on July ~~31, 2023 or earlier upon redemption or liquidation. The~~5, 2019.In connection with the closing of the Offer on July 10, 2019 and the subsequent exercise of the Company’s right to exchange all remaining warrants on July 25, 2019, the Company ~~may redeem the outstanding warrants at a price~~issued an aggregate of ~~$0.01 per existing warrant, if the last sale price~~9.2 million shares of ~~Magnolia's~~ Class A Common Stock ~~equals or exceeds $18.00 per share~~in exchange for ~~any 20 trading days within~~all of its 31.7 million warrants outstanding, which consisted of 21.7 million public warrants and 10.0 million private placement warrants.

As the fair value of the warrants exchanged in the Offer was less than the fair value of the Class A Common Stock issued, the company recorded a ~~30 trading day period ending on~~non-cash deemed dividend of $2.8 million for the ~~third business day before Magnolia sends the notice of redemption~~incremental value provided to the warrant holders. The ~~Private Placement Warrants, however, are non-redeemable so long as they are held by~~fair value of warrants and the ~~Sponsor or its permitted transferees.~~Class A Common Stock was determined using unadjusted quoted prices in an active market, a Level 1 fair value input. The Company capitalized $2.2 million of expenses related to the Offer within additional paid-in capital.

Share Repurchase Program

On August 5, 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares. The program does not require purchases to be made within a particular timeframe. As of September 30, 2019, the Company had repurchased 950 thousand shares of Class A Common Stock at a weighted average price of $10.23, for a total cost of approximately $9.7 million.

Noncontrolling Interest

~~The noncontrolling~~Noncontrolling interest ~~relates~~in Magnolia’s consolidated subsidiaries include amounts attributable to Magnolia LLC Units that were issued to the Karnes County Contributors in connection with the Business Combination. The noncontrolling interest percentage is affected by various equity transactions such as issuances of Class A Common Stock ~~exercise of warrants~~ and the conversion of Class B Common Stock to Class A Common Stock. As of September 30, ~~2018, the Company~~2019, Magnolia owned approximately ~~63.2%~~64.6% of the interest in Magnolia LLC and the noncontrolling interest was ~~36.8%~~35.4%. ~~Net income~~In the first quarter of 2019, Magnolia Operating formed a joint venture, in which MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85% of the units, with the remaining 15% attributable to noncontrolling interest.

12. Supplemental Cash Flow Information

Supplemental cash flow disclosures are presented below:

13. Stock Based Compensation

On October 8, 2018, the Company’s board of directors adopted the “Magnolia Oil & Gas Corporation Long Term Incentive Plan” (the “Plan”), effective as of July 17, 2018. A total of 11.8 million shares of Class A Common Stock have been authorized for issuance under the Plan. The Company granted employees stock based compensation awards in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) to enhance the Company and its affiliates’ ability to attract, retain and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities. Shares issued as a result of awards granted under the Plan are generally new shares of Class A Common Stock.

Stock based compensation expense is recognized within general and administrative expense on the consolidated statement of operations and was $2.8 million and $8.4 million for the ~~Successor Period includes all~~three and nine months ended September 30, 2019. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.

Restricted Stock Units

The Company grants service-based RSU awards to employees and non-employee directors, which generally vest ratably over a three-year service period. RSUs represent the right to receive shares of Class A Common Stock at the end of the ~~one-time transaction costs~~vesting period equal to the number of ~~$22.4 million incurred in connection with Business Combination as well as all~~RSUs granted. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient is no longer an employee or director of the ~~federal income tax~~Company for any reason prior to vesting of the award. Compensation expense for the service-based RSU awards is based upon the grant date market value of ~~$3.5 million.~~the award and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards. Unrecognized compensation expense related to unvested restricted shares at September 30, 2019 was $12.0 million, which the Company expects to recognize over a weighted average period of 2.1 years.

The table below summarizes restricted stock unit activity for the nine months ended September 30, 2019.

Weighted Average Grant Date

Performance Stock Units

During the nine months ended September 30, 2019, the Company granted PSUs to certain employees, with each PSU representing the contingent right to receive 1 share of Class A Common Stock. The number of shares of Class A Common Stock issuable upon vesting, however, ranges from 0 to 150% of the number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over an approximate three-year performance period, the last day of which is also the vesting date. Unrecognized compensation expense related to unvested PSUs at September 30, 2019 was $7.0 million, which the Company expects to recognize over a weighted average period of 2.1 years.

The table below summarizes performance stock award and unit activity for the nine months ended September 30, 2019.

The grant date fair value of the PSUs granted during the nine months ended September 30, 2019 was $3.7 million, calculated using a Monte Carlo simulation. The following table summarizes the assumptions used to calculate the grant date fair value of these PSUs.

14. Earnings Per Share

A reconciliation of the numerators and denominators of the basic and diluted per share computations follows. No such computation is necessary for the Predecessor ~~periods~~Period as the Predecessor was not previously accounted for as a standalone legal entity and did not have publicly traded ~~shares.~~securities.

Successor
(In thousands)
July 31, 2018 through
September 30, 2018

Basic:
Net Income attributable to Class A Common Stock $ 6,708
Weighted average number of common shares outstanding during the period 151,992
Net income per common share - basic $ 0.04

Diluted:
Net Income attributable to Class A Common Stock $ 6,708
Basic weighted average number of common shares outstanding during the period 151,992
Add: Dilutive effect of warrants 5,080
Diluted weighted average number of common shares outstanding during the period 157,072
Net income per common share - diluted $ 0.04

The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding. ~~For the period presented, the~~The Company excluded 91.8 million, 92.3 million, and 87.6 million of weighted average shares of Class A Common Stock issuable upon conversion of the ~~Company’s~~ Class B Common Stock (and the corresponding Magnolia LLC Units) for the three and nine months ended September 30, 2019 and for the period from July 31, 2018 through September 30, 2018, respectively, as the effect was anti-dilutive. In addition, for the three months ended September 30, 2019 the effect of warrants were excluded because their inclusion would be anti-dilutive.

~~12.~~15. Related Party Transactions

As of September 30, ~~2018,~~2019, EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership, both ~~entities~~of which are part of the Karnes County Contributors, ~~group as~~

~~defined in~~ ~~Note 1 - Description of Business and Basis of Presentation~~, each held more than 10% of the ~~Company's~~Company’s common stock and qualified as principal owners of the Company, as defined in ASC 850, ~~"Related~~“Related Party Disclosures.~~" In addition, the Sponsor had a beneficial ownership of approximately 10% and also qualified as a principal owner of the Company.~~”

Amended and Restated Limited Liability Company Agreement of Magnolia LLC

On the Closing Date, the Company, Magnolia LLC, and certain of the Karnes County Contributors entered into Magnolia LLC’s amended and restated limited liability company agreement, , which sets forth, among other things, the rights and obligations of the holders of units in Magnolia LLC. Under the Magnolia LLC Agreement, the Company ~~became~~is the sole managing member of Magnolia LLC.

Registration Rights Agreement

At the closing of the Business Combination, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with TPG Pace Energy Sponsor LLC, a Delaware limited liability company (“TPG Pace”), the Karnes County Contributors, ~~the Sponsor,~~ and the Company’s ~~four~~4 independent directors prior to the Business Combination (collectively, the “Holders”), pursuant to which the Company ~~will be~~is obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act all or any portion of the shares of Class A Common Stock that the Holders ~~hold~~held as of July 31, 2018 and that they may have acquired or might acquire thereafter, including upon conversion, exchange, or redemption of any other security therefor. Under the ~~New~~ Registration Rights Agreement, Holders also have “piggyback” registration rights exercisable at any time that allow them to include the shares of Class A Common Stock that they own in certain registrations initiated by the Company.

~~On August 10, 2018,~~Pursuant to the Registration Rights Agreement, the Company has filed ~~a Registration Statement~~and taken effective 2 registration statements on Form S-3, ~~(subsequently amended~~each of which registered, among others, the offering by ~~Amendment No. 1 on August 28, 2018,~~ the ~~“Registration Statement”) to register the Private Placement Warrants and shares~~Holders of the ~~Company’s Class A Common Stock, including all of~~ shares of Class A Common Stock ~~held by Holders as of July 31, 2018. The Registration Statement was declared effective by the Securities and Exchange Commission on August 30, 2018.~~ included therein.

Stockholder Agreement

On the Closing Date, the Company, ~~Sponsor,~~TPG Pace, and the Karnes County Contributors entered into the Stockholder Agreement (the “Stockholder Agreement”)~~. Under the Stockholder Agreement,~~, under which the Karnes County Contributors ~~were~~are entitled to nominate ~~two~~2 directors, one of whom shall be independent under the listing rules of the New York Stock Exchange, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002, for appointment to the board of directors of the Company (the “Board”) so long as they collectively own at least 15% of the outstanding shares of Class A Common Stock and Class B Common Stock, (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis), and ~~one~~1 director so long as they ~~owned~~collectively own at least 2% of the outstanding shares of Class A Common Stock and Class B Common Stock (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis). Sponsor is entitled to nominate two directors for appointment to the Board so long as it owns at least 60% of the voting common stock that it owns at the Closing Date (including any shares of common stock issuable upon the exercise of any Private Placement Warrants held by Sponsor), and one director so long as it owns at least 25% of the voting common stock that it owns at the Closing Date (including any shares of common stock issuable upon the exercise of any Private Placement Warrants held by Sponsor). The Karnes County Contributors ~~and Sponsor~~ are ~~each~~collectively entitled to appoint ~~one~~1 director to each committee of the Board (subject to applicable ~~law~~laws and stock exchange rules). Furthermore, TPG Pace was entitled to certain director nomination rights under the Stockholder Agreement, but those rights ceased following a distribution by TPG Pace of its shares in August 2019.

Contingent Consideration

Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Company agreed to issue or cause to be issued to the Karnes County Contributors ~~up to 13.0 million~~ additional ~~shares of~~equity in the ~~Company's stock~~Company and Magnolia LLC upon satisfaction of certain EBITDA and free cash flow or stock price thresholds in ~~three~~3 tranches. As of ~~September 30,~~December 31, 2018, the Company had met the defined stock price thresholds ~~required for two of the three tranches~~ and ~~thus~~ had issued an aggregate of ~~2.5~~3.6 million additional shares of Class A Common Stock and ~~6.5~~9.4 million additional shares of Class B Common Stock to the Karnes County ~~Contributors. The effect of this share issuance is included in Magnolia's basic share count as of September 30, 2018. Additionally, on October 4, 2018,~~Contributors and had caused Magnolia ~~met the stock price threshold for the third and final tranche and subsequently issued 1.1~~LLC to issue 9.4 million additional ~~shares of Class A Common Stock and 2.9 million additional shares of Class B Common Stock~~Magnolia LLC Units to the Karnes County Contributors. ~~The effect of this share issuance is not reflected in these financial statements.~~

~~Sponsor Loan~~Tender and Support Agreement

AtPursuant to the ~~closing~~Offer, certain of the ~~Business Combination,~~Company’s warrantholders, including directors and executive officers, agreed to tender their warrants by entering into the tender and support agreement, dated as of June 7, 2019, by and between the Company ~~repaid in full $1.0 million unsecured promissory note to the Sponsor.~~and such holders (the “Tender and Support Agreement”). See Note 11 - Stockholders’ Equity for more information.

Predecessor Transactions

~~Related Party (Predecessor)~~

EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors' investor commitments. The management fees incurred ~~have been~~were allocated to the Predecessor using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors. The management fees and other costs allocated to the Predecessor and included in "General and administrative expenses" in the combined statements of operations were ~~$1.5~~$1.6 million and ~~$3.9~~$11.6 million for the ~~period~~periods of July 1 ~~2018~~ through July 30, 2018 and ~~three months ended September 30, 2017, respectively, and $9.8 million and $11.3 million for the period of~~ January 1 ~~2018~~ through July 30, 2018, ~~and nine months ended September 30, 2017,~~ respectively.

The Karnes County Contributors also entered into operating agreements with ~~EnerVest Operating, LLC (“EVOC”), a wholly-owned subsidiary of EnerVest,~~EVOC to act as contract operator of the ~~Predecessors’~~Predecessor’s oil and natural gas wells. The Predecessor reimbursed EVOC for direct expenses incurred. A majority of such expenses ~~are~~were charged on an actual basis (i.e., no mark-up or subsidy ~~is charged or received by~~to EVOC). These costs are included in ~~lease~~“Lease operating ~~expenses~~expenses” in the ~~consolidated~~combined statements of operations in the Predecessor ~~period.~~Period. Additionally, in its role as contract operator, EVOC ~~also~~ collected proceeds from oil, natural gas, and ~~natural gas liquids~~NGL sales and distributed them to the Predecessor and other working interest owners. ~~Accounts receivable from EVOC and other related parties was $13.7 million as of December 31, 2017.~~

~~13.~~16. Commitments and Contingencies

The Company is involved in disputes or legal actions in the ordinary course of business. For example, certain of the Karnes County Contributors and the Company have been named as defendants in a lawsuit where the plaintiffs claim to be entitled to a minority working interest in certain Karnes County Business properties. The litigation is in the discovery stage. The exposure related to this litigation is currently not reasonably estimable. The Karnes County Contributors retained all such liability in connection with the Business Combination. ~~In the 2018 Successor Period,~~At September 30, 2019, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its ~~unaudited financial statements. No amounts were accrued with respect to outstanding litigation during the 2017~~consolidated statement of operations, balance sheet, or ~~2018 Predecessor Periods or during the Successor Period.~~cash flows.

Environmental Matters

The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state, local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other

things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks.

~~At September 30, 2018, contractual obligations for long-term operating leases and purchase obligations are as follows:~~

Net Minimum Commitments

Purchase obligations ⁽¹⁾

Operating lease obligations ⁽²⁾

Service fee commitment ⁽³⁾

Risks and Uncertainties

The Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments, and competition from other energy sources. Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future.

~~14. Subsequent Events~~

The Company has evaluated subsequent events through November 13, 2018 and has determined, other than those disclosed, there are no events that required disclosure or recognition in these unaudited consolidated financial statements.

On October 4, 2018, the Company met the stock price threshold for the third and final tranche of the Karnes County earnout consideration and subsequently issued 1.1 million additional shares of Class A Common Stock and 2.9 million additional shares of Class B Common Stock to the Karnes County Contributors. The effect of this share issuance will be included in the Company's year end filing.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the ~~Company's~~Company’s future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” or “continue” or similar terminology. Although Magnolia believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the ~~Company's~~Company’s expectations include, but are not limited to, ~~Magnolia's~~Magnolia’s assumptions about:

All of ~~Magnolia's~~Magnolia’s forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors

and the timing of any of those risk factors identified in the Company’s ~~Definitive Proxy Statement~~Annual Report on ~~Schedule 14A~~Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on ~~July 2, 2018.~~February 27, 2019.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with ~~our~~the Company’s unaudited consolidated financial statements and the related notes thereto.

Magnolia Oil & Gas Corporation (the "Company" or "Magnolia") is a Delaware ~~limited liability company~~corporation formed in February 2017 as a special purpose acquisition company under the name TPG Pace Energy Holdings Corp. for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.

Magnolia’s business model was designed with a primary objective to generate stock market value over the long term. The Company’s strategy is to establish a company whose characteristics would demonstrate a certain basic set of criteria that appeal to generalist investors and to generate growing earnings per share over time, high operating and full cycle margins, and maintain a very strong balance sheet with a low amount of leverage.

On July 31, 2018, the Company and Magnolia Oil & Gas Parent LLC ~~a Delaware limited liability company and a consolidated subsidiary of the Company,~~(“Magnolia LLC”), as applicable, consummated the ~~previously announced~~ acquisition of: (i) certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the "Karnes County Assets") pursuant to that certain Contribution and Merger Agreement (as subsequently amended, ~~the"Karnes~~the "Karnes County Contribution Agreement"), by and among the Company, Magnolia ~~Oil & Gas Parent~~ LLC and certain affiliates (the "Karnes County Contributors") of EnerVest Ltd. ("EnerVest"); (ii) certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the "Giddings Assets") pursuant to that certain Purchase and Sale Agreement (the "Giddings Purchase Agreement") by and among Magnolia ~~Oil & Gas Parent~~ LLC and certain affiliates of EnerVest (the "Giddings Sellers"); and (iii) ~~an approximately~~a 35% membership interest (the “Ironwood Interests”) in Ironwood Eagle Ford Midstream, LLC, a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement, (the “Ironwood MIPA” and, together with the transactions contemplated by the Karnes County Contribution Agreement and the Giddings Purchase Agreement, the "Business Combination Agreements"), and the transactions contemplated thereby, the "Business Combination"), by and among Magnolia ~~Oil & Gas Parent~~ LLC and certain affiliates of EnerVest (the "Ironwood Sellers") (collectively, the “Business Combination”).

In connection with the consummation of the Business Combination, on July 31, 2018, the Karnes County Contributors received 83.9 million shares of Class B Common ~~Stock;~~Stock, par value $0.0001 per share (“Class B Common Stock”), 31.8 million shares of Class A Common ~~Stock;~~Stock, par value $0.0001 per share (“Class A Common Stock”), and approximately $911.5 million in ~~cash. The~~cash; the Giddings Sellers received approximately $282.7 million in ~~cash~~cash; and the Ironwood Sellers received $25.0 million in cash.



Delaware		81-5365682
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~1001 Fannin Street,~~Nine Greenway Plaza, Suite ~~400~~ ~~Houston, TX~~1300		~~77002~~77046
Houston,	Texas	~~77002~~77046
(Address of principal executive offices)		(Zip Code)



Securities registered pursuant to section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.0001	MGY	New York Stock Exchange



Large accelerated filer	¨☒	Accelerated filer	¨ ☐

Non-accelerated filer	x ☐	~~Small~~Smaller reporting company	¨☐

		Emerging growth company	x☐



		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets (unaudited)	1
	Consolidated and Combined Statements of Operations (unaudited)	2
	Combined Statement of Changes in Parents' Net Investment (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity ~~(Deficit)~~ (unaudited)	4
	Consolidated and Combined Statements of Cash Flows (unaudited)	5
	~~Notes to Consolidated Financial Statements (unaudited)~~	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2524
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3637
Item 3.	Defaults Upon Senior Securities	3637
Item 4.	Mine Safety Disclosures	3637
Item 5.	Other Information	37
Item 6.	Exhibits	3738
Signatures		3938


							Successor
	Successor September 30, 2018			Predecessor December 31, 2017			September 30, 2019			December 31, 2018
ASSETS							(Unaudited)			(Audited)
CURRENT ASSETS:
CURRENT ASSETS
Cash and cash equivalents	$	36,715		$	—		$	164,489		$	135,758
Accounts receivable	167,174			100,512			120,664			140,284
Accounts receivable - related party	—			13,692
Drilling advances	5,791			—			2,055			12,259
Other current assets	2,033			332			5,047			4,058
Total current assets	211,713			114,536			292,255			292,359
PROPERTY, PLANT AND EQUIPMENT
Oil and natural gas properties	3,081,740			1,731,696			3,741,357			3,250,742
Other							2,710			360
Accumulated depreciation, depletion and amortization	(65,069		)	(166,159		)	(563,901		)	(177,898		)
Total property, plant and equipment, net	3,016,671			1,565,537			3,180,166			3,073,204
OTHER ASSETS
Deferred financing costs, net	11,321			—			8,980			10,731
Equity method investment, net	18,409			8,901
Intangibles, net	41,983			—
Equity method investment							19,482			18,873
Intangible assets, net							27,477			38,356
Other long-term assets							4,773			—
TOTAL ASSETS	$	3,300,097		$	1,688,974		$	3,533,133		$	3,433,523

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	178,072		$	74,536		$	186,627		$	196,357
Derivative liability	—			6,764
Other current liabilities							3,684			1,004
Total current liabilities	178,072			81,300			190,311			197,361
LONG-TERM LIABILITIES:
LONG-TERM LIABILITIES
Long-term debt, net	388,343			—			389,528			388,635
Asset retirement obligations, net of current	43,437			3,929			93,102			84,979
Long-term derivative liability	—			3,052
Deferred taxes, net	47,236			2,724			74,200			54,593
Other long term liabilities	—			131
Other long-term liabilities							2,039			—
Total long-term liabilities	479,016			9,836			558,869			528,207

COMMITMENTS AND CONTINGENCIES (Note 13)
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS’ EQUITY
Class A Common stock, $0.0001 par value, 1,300,000,000 shares authorized, 155,227,284 shares issued and outstanding	16			—
Class B Common stock, $0.0001 par value, 225,000,000 shares authorized, 90,452,174 shares issued and outstanding	9			—
Additional paid in capital	1,647,905			—
Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,260 shares issued and 167,310 shares outstanding in 2019 and 156,333 shares issued and outstanding in 2018							17			16
Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 91,790 and 93,346 shares issued and outstanding in 2019 and 2018, respectively							9			9
Additional paid-in capital							1,704,652			1,641,237
Treasury Stock, at cost, 950 shares in 2019							(9,722		)	—
Retained earnings	3,120			—			74,823			35,507
Noncontrolling interest	991,959			—			1,014,174			1,031,186
PARENTS’ NET INVESTMENT	—			1,597,838
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,300,097		$	1,688,974
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY							$	3,533,133		$	3,433,523


x	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~


¨	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~



	Successor			Predecessor
	July 31, 2018 through September 30, 2018			July 1, 2018 through July 30, 2018			January 1, 2018 through July 30, 2018			Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
REVENUES:
Oil revenues	$	143,202		$	68,487		$	399,124		$	72,706		$	240,778
Natural gas revenues	14,201			3,646			22,135			6,925			19,436
Natural gas liquids revenues	21,153			4,754			27,927			6,984			18,002
Total revenues	178,556			76,887			449,186			86,615			278,216

OPERATING EXPENSES
Lease operating expenses	11,016			3,681			23,513			6,180			18,931
Gathering, transportation and processing	5,746			2,240			12,929			3,997			12,238
Taxes other than income	9,351			2,087			23,763			5,823			18,028
Exploration expense	11,221			40			492			77			383
Asset retirement obligation accretion	391			21			104			87			175
Depreciation, depletion and amortization	67,478			23,157			137,871			27,124			88,844
General & administrative expenses	10,297			1,701			12,710			4,960			13,224
Transaction related costs	22,366			—			—			—			—
Total operating costs and expenses	137,866			32,927			211,382			48,248			151,823

OPERATING INCOME	40,690			43,960			237,804			38,367			126,393

OTHER INCOME (EXPENSE):
Income (loss) from equity method investee	309			(345		)	711			(84		)	(85		)
Interest expense	(4,959		)	—			—			—			—
Gain (loss) on derivatives, net	—			3,865			(18,127		)	(1,648		)	1,041
Other income (expense), net	(7,019		)	24			(50		)	—			(20		)
Total other income (expense)	(11,669		)	3,544			(17,466		)	(1,732		)	936

INCOME BEFORE INCOME TAXES	29,021			47,504			220,338			36,635			127,329
Income tax expense	3,538			766			1,785			630			1,967
NET INCOME	25,483			46,738			218,553			36,005			125,362
LESS: Net income attributable to noncontrolling interest	18,775			—			—			—			—
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK	$	6,708		$	46,738		$	218,553		$	36,005		$	125,362

NET INCOME PER COMMON SHARE
Basic	$	0.04
Diluted	$	0.04
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic	151,992
Diluted	157,072



(In thousands)
Fair value of assets acquired
Accounts receivable	$	61,790
Other current assets	2,853
Oil and natural gas properties ⁽¹⁾	2,813,140
Ironwood equity investment	18,100
Total fair value of assets acquired	2,895,883
Fair value of liabilities assumed
Accounts payable and other current liabilities	(65,908		)
Asset retirement obligations	(34,132		)
Deferred tax liability	(13,639		)
Fair value of net assets acquired	$	2,782,204



	(Unaudited Pro Forma) (In thousands)
	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Total revenues	$	267,659	$	723,768
Net income attributable to Class A Common Stock	57,891		151,316
Net income per share - basic	0.39		1.02
Net income per share - diluted	0.38		0.98



	At July 31, 2018 (in thousands)
Estimated fair value of assets acquired
Account receivable	$	89,674
Other current assets	2,853
Oil & gas properties ⁽¹⁾	2,800,258
Ironwood equity investment	18,100
Total fair value of assets acquired	2,910,885
Estimated fair value of liabilities assumed
Accounts payable and other current liabilities	(56,315		)
Asset retirement obligation	(34,132		)
Deferred tax liability	(8,738		)
Fair value of net assets acquired	$	2,811,700



	(Unaudited Pro Forma) (in thousands)
	Three Months Ended September 30, 2018		Three Months Ended September 30, 2017		Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
Total Revenues	$	267,659	$	110,294	$	723,768	$	356,254
Net income attributable to Class A Common Stock	57,891		6,531		151,316		26,257
Income per share - basic	0.39		0.04		1.02		0.21
Income per share - diluted	0.38		0.04		0.98		0.20



	At August 31, 2018 (in thousands)
Estimated fair value of assets acquired
Other current assets	$	1,290
Oil & gas properties ⁽¹⁾	200,035
Total fair value of assets acquired	201,325
Estimated fair value of liabilities assumed
Asset retirement obligation and other current liabilities	(9,812		)
Fair value of net assets acquired	$	191,513



(In thousands)
Total consideration	$	150,139

Purchase price allocation:
Accounts receivable	10,501
Proved oil and natural gas properties	118,572
Unproved oil and natural gas properties	22,802
Accounts payable and accrued liabilities	(1,679		)
Asset retirement obligations	(57		)
	$	150,139



(In thousands)
Total consideration	$	58,653

Purchase price allocation:
Accounts receivable	2,193
Proved oil and natural gas properties	57,263
Unproved oil and natural gas properties	1,552
Accounts payable and accrued liabilities	(2,244		)
Asset retirement obligations	(111		)
	$	58,653



(In thousands)	Gross Amounts of Recognized Assets		Gross Amounts of Offset in the Balance Sheet			Net Amounts Of Assets Presented in the Balance Sheet
Derivatives
As of December 31, 2017 (Predecessor):
Derivative asset	$	180	$	(180	)	$	—
Long-term derivative asset	48		(48		)	—
Total	$	228	$	(228	)	$	—

	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet			Net Amounts Of Liabilities Presented in the Balance Sheet
Derivatives
As of December 31, 2017 (Predecessor):
Derivative liability	$	6,944	$	(180	)	$	6,764
Long-term derivative liability	3,100		(48		)	3,052
Total	$	10,044	$	(228	)	$	9,816



(In thousands)	Level 1		Level 2		Level 3		Total Fair Value
As of December 31, 2017 (Predecessor):
Assets:
Oil, natural gas and natural gas liquids derivatives	$	—	$	228	$	—	$	228
Liabilities:
Oil, natural gas and natural gas liquids derivatives	$	—	$	10,044	$	—	$	10,044



	September 30, 2019
(In thousands)	Carrying Value		Fair Value
Long-term debt	$	389,528	$	404,000



	September 30, 2018
(In thousands)	Carrying Value		Fair Value
Long-term debt	$	388,343	$	399,000



(In thousands)	September 30, 2018 (Successor)
Non-Compete Intangible Asset	$	44,400
Accumulated amortization	(2,417		)
Intangible, net	$	41,983
Weighted average amortization (years)	3.25



(In thousands)	2018
Balance, as of January 1 (Predecessor)	$	3,929
Liabilities incurred and assumed through acquisitions	553
Liabilities settled	(85		)
Accretion expense	104
Balance, as of July 30 (Predecessor)	$	4,501

Balance, as of July 31 (Successor)	$	—
Liabilities incurred and assumed through acquisitions	43,930
Liabilities settled	—
Accretion expense	391
Balance, as of September 30 (Successor)	44,321
Less: Current portion	(884		)
Long-term portion	$	43,437



(In thousands)	September 30, 2019
Revolving credit facility	$	—
6.0% Senior Notes due 2026	400,000
Total long-term debt	400,000

Less: Unamortized deferred financing cost	(10,472		)
Total debt, net	$	389,528


(1)	As of December 31, 2018, minimum future contractual payments for long-term operating leases under the scope of ASC 840 were $881 thousand in 2019, $646 thousand in 2020, $198 thousand in 2021, $14 thousand in 2022, $15 thousand in 2023 and $63 thousand thereafter.



	Restricted Stock Units	Weighted Average Grant Date Fair Value
Unvested restricted stock units, beginning of period	807,431	$	13.97
Granted	585,659	$	12.33
Vested	237,702	$	14.58
Forfeited	—	—
Unvested restricted stock units, end of period	1,155,388	$	13.06



	Performance Stock Units	Weighted Average Grant Date Fair Value
Unvested performance stock units, beginning of period	475,312	$	14.58
Granted	267,482	$	13.87
Vested	33,333	$	14.58
Forfeited	—	—
Unvested performance stock units, end of period	709,461	$	14.31



	Grant Date Fair Value Assumptions
Expected term (in years)	2.85 - 2.67
Expected volatility	33.61% - 31.58%
Risk-free interest rate	2.48% - 2.29%



(In thousands, except per share data)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019		July 31, 2018 Through September 30, 2018
Basic:
Net Income attributable to Class A Common Stock	$	7,784	$	39,316	$	6,176
Weighted average number of common shares outstanding during the period - basic	166,872		160,051		151,992
Net income per common share - basic	$	0.05	$	0.25	0.04

Diluted:
Net Income attributable to Class A Common Stock	$	7,784	$	39,316	$	6,176
Weighted average number of common shares outstanding during the period - basic	166,872		160,051		151,992
Add: Dilutive effect warrants and stock based compensation	236		1,437		5,080
Weighted average number of common shares outstanding during the period - diluted	167,108		161,488		157,072
Net income per common share - diluted	$	0.05	$	0.24	$	0.04



Net Minimum Commitments (in thousands)	Remainder of 2018		2019		2020		2021		2022		Thereafter		Total
Purchase obligations ⁽¹⁾	$	7,977	$	14,641	$	2,346	$	131	$	131	$	241	$	25,467
Operating lease obligations ⁽²⁾	109		436		274		44		—		—		863
Service fee commitment ⁽³⁾	5,891		23,564		13,745		—		—		—		43,200
Total Net Minimum Commitments	$	13,977	$	38,641	$	16,365	$	175	$	131	$	241	$	69,530


~~(1)~~	Amounts represent any agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. These include minimum commitments associated with firm transportation contracts and frac sand commitments.


~~(2)~~	~~Amounts include long-term lease payments for compressors, vehicles and office space.~~


•	On August 31, 2018, the Company acquired substantially all of the South Texas assets of Harvest Oil & Gas Corporation (the “Harvest Acquisition”) for approximately $133.3 million in cash and 4.2 million shares of the Company’s Class A Common Stock. The Harvest Acquisition added an undivided working interest across a portion of the Karnes County Assets and all of the Giddings Assets;


•	The financial results for the Successor Period reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, which the Company adopted on December 31, 2018 and applied to all periods presented in the Successor Period. The Predecessor Period continues to be reported under the accounting standards in effect for that period.



(In thousands)	Nine Months Ended September 30, 2019
Drilling and completion	$	344,179
Leasehold acquisition costs	8,556
Total capital expenditures	$	352,735



Contractual Obligations (in thousands)	Note Reference	Total		Remainder of 2018		2019-2020		2021-2022		2023 & Beyond
On-Balance Sheet:
Debt, at face value	Note 9	$	400,000	$	—	$	—	$	—	$	400,000
Interest payments⁽¹⁾	Note 9	202,112		527		52,188		52,182		97,215
Off-Balance Sheet:
Purchase obligation ⁽²⁾	Note 13	$	25,467	$	7,977	16,986		263		$	241
Operating lease obligations ⁽³⁾	Note 13	863		109		710		44		—
Service fee commitment ⁽⁴⁾	Note 13	43,200		5,891		37,309		—		—
Total Contractual Obligations		$	671,642	$	14,504	$	107,193	$	52,489	$	497,456


~~(1)~~	~~Interest payments include cash payments and estimated commitments fees on long-term debt obligations.~~