COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

9. COMMITMENTS AND CONTINGENCIES

Commitments

Earnings & Participation Agreement. On September 14, 2016, the Company and IronHorse Resources, LLC (“IronHorse”), entered into an Earnings & Participation Agreement (the “IronHorse Agreement”), pursuant to which the Company has agreed to purchase 40% of IronHorse’s interest in five farmout agreements previously acquired by IronHorse (the “Farmout Agreements”). Thomas Bandy, a member of the Board of Directors of the Company, has an ownership interest in IronHorse. The Farmout Agreements cover oil and gas leases and interests in 21 horizontal oil and gas wells (the “Wells”) to be drilled in Weld County, Colorado, targeting the A, B, and C benches of the Niobrara and Codell formations.

Management estimates that the Company’s share of the aggregate drilling and completion costs for the Wells will be approximately $9,600. Additionally, the terms of the IronHorse Agreement provide for a finder’s fee payable to IronHorse which consists of an aggregate of 69,192 shares of the Company’s common stock to be issued in three tranches of 23,064 shares as certain property interests are assigned to the Company. The terms of the IronHorse Agreement initially provided that on or before October 10, 2016, the Company was required to provide to IronHorse reasonable evidence that it has sufficient funding for its obligations under the IronHorse Agreement; otherwise, the IronHorse Agreement would terminate and the Company would have no further rights or obligations thereunder. On October 10, 2016, the parties amended the IronHorse Agreement to extend the date to demonstrate sufficient funding until November 10, 2016, and on November 11, 2016, the parties agreed to a second extension of this date until December 11, 2016.

The IronHorse Agreement further provides for creation of an Area of Mutual Interest covering three prospect areas within Weld County, Colorado, as further described therein (the “AMI Areas”), whereby the Company and IronHorse will have the right to elect to share equally in any other oil and gas interests acquired in the AMI Areas.

Contingencies

From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the Company’s financial position or results of operations. Following is updated information related to currently pending legal matters:

Arbitration of Employment Claim. A former at-will employee has asserted a claim that a change of control occurred and he was involuntarily terminated without cause, thereby entitling him to compensation under a purported Executive Severance and Non-Compete agreement (the “Severance and Non-Compete Agreement”), which provided for cash payments if the Company experienced a change of control. The Company contends that no change of control occurred that would entitle the former at-will employee to benefits under the Severance and Non-Compete Agreement. The former employee has claimed that the Company owes up to $1,800 under the Severance and Non-Compete Agreement which requires that any disputes be submitted to binding arbitration. A request for arbitration was submitted by the former employee in March 2016 and, the arbitration proceedings are expected to be conducted during 2017.

Management does not believe there is any merit to the claim of termination without cause or that a change of control occurred. The ultimate outcome of this matter cannot presently be determined. Accordingly, adjustments, if any, that may result from the resolution of this matter have not been reflected in the accompanying consolidated financial statements.

Liability for Contingent Ownership Interests. As of September 30, 2016 and December 31, 2015, the Company had recognized a contingent liability associated with uncertain ownership interests of $4,582 and $3,108, respectively. This liability arises when the calculations of respective joint ownership interests by operators differs from the Company’s calculations. These differences relate to a variety of matters, including allocation of non-consent interests, complex payout calculations for individual wells and groups of wells, and the timing of reversionary interests. Accordingly, these matters are subject to legal interpretation and the related obligations are presented as a contingent liability in the accompanying consolidated balance sheets. While the Company has classified these amounts as current liabilities, most of these issues are expected to be resolved through arbitration, mediation or litigation; due to the complexity of the issues involved, there can be no assurance that the outcome of these contingencies will be resolved in the next year.

Contingent Gain for Joint Interest Audit Recoveries. The Company has performed joint interest audits of certain drilling, completion and operating costs charged by the Major Operator discussed in Note 13. The results of the audits indicated that $5,269 of costs incurred by the Major Operator in 2011 and 2012 were improperly charged to the accounts for all of the joint interest owners in the wells, including $1,919 related to the Company. During 2015, the Major Operator (i) agreed to issue refunds to the joint interest owners for aggregate charges of $606, (ii) denied claims for aggregate charges of $4,432, and (iii) indicated that it is continuing to review claims for aggregate charges of $231. The Company has disputed the $4,432 of denied charges, of which its share is approximately $1,600. Since the Company previously paid the full amounts billed by the Major Operator, the dispute will be resolved in accordance with the terms of the joint operating agreements. Except for the refunds issued during 2015, no amounts have been recorded in the accompanying consolidated financial statements for additional recoveries that may result from the joint interest audits.