Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2014

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our business strategy is focused on enhancing value for our shareholders through the development of a well-balanced portfolio of assets in the energy industry. Currently, the majority of the value of our assets is derived from our investment in publicly-traded ordinary shares of Global Energy Development PLC (“Global”) and our wholly-owned subsidiaries, BriteWater International, Inc. (“BWI”), HKN Bakken, Inc. (“HBI”) and HTH, Inc. (“HTH”).

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and such differences could be material. Certain prior year amounts have been reclassified to conform with the 2014 presentation.

Principles of Consolidation – The consolidated financial statements include the accounts of all companies that we, through our direct or indirect ownership or shareholding, were provided the ability to control their operating policies and procedures. All significant intercompany balances and transactions have been eliminated.

As a result of the sales of our Gulf Coast oil and gas properties and the abandonment of our coalbed methane projects during 2011, any remaining Gulf Coast oil and gas and coalbed methane activities are included as discontinued operations on the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for all periods presented.

Statement of Cash Flows - For purposes of the consolidated statements of cash flows, we consider all highly liquid investments and treasury bills purchased with an original maturity of three months or less to be cash equivalents. Cash paid for interest during 2014 was $150 thousand and no interest was paid for 2013. No income taxes were paid for the years ended December 31, 2014 and 2013.

Concentrations of Credit Risk - Although our cash and cash equivalents and accounts receivable are exposed to potential credit loss, we do not believe such risk to be significant. Cash and cash equivalents include investments in money markets placed with highly rated financial institutions.

Accounts Receivable and Allowance for Doubtful Accounts – Trade accounts receivable are customer obligations due under normal trade terms. We had $131 thousand and $285 thousand in trade receivables related to oil and gas production at December 31, 2014 and 2013, respectively. We had other accounts receivable of $7 thousand and $49 thousand at December 31, 2014 and 2013, respectively.

Senior management reviews accounts receivable to determine if any receivables will potentially be uncollectible. We include provisions for any accounts receivable balances that are determined to be uncollectible in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. However, actual write-offs could exceed the recorded allowance. We recorded an allowance within our Assets of Discontinued Operations of $2 thousand for a potentially uncollectible account related to our discontinued operations during the year ended December 31, 2013. No allowance has been recognized on our accounts receivable as of December 31, 2014.

 Accumulated Other Comprehensive Income – Comprehensive income includes changes in stockholders’ equity during the periods that do not result from transactions with stockholders. Changes in our accumulated other comprehensive income during the period are as follows (in thousands): 

	Accumulated Other Comprehensive Income as of December 31, 2013		Current Period Unrealized Loss			Impairment (Gain) Loss Recognized on Investment in Global			Accumulated Other Comprehensive Income as of December 31, 2014
Investment in Global	$	7,605	$	(9,209	)	$	1,604		$	—
Foreign Currency Translation Adjustments		1,215		(548	)		(667	)		—
	$	8,820	$	(9,757	)	$	937		$	—

Fair Value of Financial Instruments – Financial instruments are stated at fair value as determined in good faith by management. Factors considered in valuing individual investments include, without limitation, available market prices, reported net asset values, marketability, restrictions on disposition, current financial position and operating results, and other pertinent information. See Note 7 – “Fair Value Measurements” for more information.

We carry our financial instruments, which include cash, restricted cash and our common stock investment in Global at their estimated fair values. Our investment in ordinary shares of Global has been designated as available for sale rather than a trading security. The associated unrealized gains and losses on our available for sale investment are recorded to other comprehensive income until realized and reclassified into earnings using specific identification. The fair value of our investment in the ordinary shares of Global is based on prices quoted in an active market. Our investment in Global is classified as a non-current asset in our accompanying consolidated balance sheets.

Translation of Non-U.S. Currency Amounts – Our investment in Global is subject to foreign currency exchange rate risk as Global’s ordinary shares are denominated in British pounds sterling. Translation adjustments are recorded to other comprehensive income until realized through sale or impairment and reclassified into earnings.

BWI Property and Equipment – Project costs that are clearly associated with the acquisition, development and construction of a plant are capitalized as costs of that project. In addition, indirect project costs that are identified with a specific project, including selling, general and administrative expenses, are capitalized and allocated to the project to which the costs relate. Overhead costs and costs incurred after the project is ready for its intended use are charged to expense as incurred.

The BWI weathered lagoon plant within property and equipment on our consolidated balance sheets has not been depreciated as of December 31, 2014, as it has not been placed in service as of the date of these financial statements. We determined that as a result of current oil pricing and the age of the plant, we would not likely deploy and operate the BWI weathered lagoon plant for its intended purpose. As a result, we wrote down the book value of this plant to its estimated salvage value, resulting in an impairment loss of $6.1 million as a component of operating expenses within our consolidated statements of operations as of December 31, 2014. After impairment, the new cost basis of the BWI weathered lagoon plant was $79 thousand. See Note 2 – “BriteWater International, Inc.” for more information.

In addition, Construction in Progress related to the BWI Arctic Star plant under development within property and equipment on our consolidated balance sheets is not subject to depreciation until commissioning is completed and it is placed into service. Due to current oil prices, the undiscounted cash flows of the Arctic Star plant were less than its carrying value. As a result, we determined that the Arctic Star plant would be unable to recover its investment at current pricing and recognized an impairment loss of $10.3 million as a component of operating expenses within our consolidated statements of operations as of December 31, 2014. After impairment, the new cost basis of Construction in Progress is $5.7 million. See Note 2 – “BriteWater International, Inc.” for more information. Once the Arctic Star plant is fully commissioned and placed into service, assets in Construction in Progress will be subject to depreciation.

During October 2014, the Arctic Star plant fully commissioned and placed in service capital leased tanks and related modifications and were thus subject to depreciation. These assets will be depreciated over the remaining term of the capital lease. We recorded depreciation expense of $108 thousand related to these capital leased assets and their modifications for the year ended December 31, 2014. Of this depreciation expense, $87 thousand was related to capital lease assets for the year ended December 31, 2014.

Capital Leases – During the second quarter 2014, we leased equipment for the Arctic Star plant under two separate capital leases which each have two year minimum lease terms. These leases include options to renew and/or purchase the leased property. At December 31, 2014, total assets acquired under capital leases were $844 thousand. Of this amount, $354 thousand was included in Construction in Progress and $490 thousand, net of accumulated amortization of $87 thousand, was included in the Arctic Star plant in our consolidated balance sheets.

At December 31, 2014, the total capital lease obligation was $604 thousand, of which $441 thousand was classified as a short-term liability and $163 thousand was classified as a long-term liability in our consolidated balance sheets. Capital lease interest expense was $165 thousand for the year ended December 31, 2014. The following is a schedule of remaining future minimum lease payments under capital leases (in thousands):

Year Ending December 31,
2015	$	572
2016		173
Total minimum lease payments		745
Less: Amount representing interest (1)		(141	)
Present value of minimum lease payments	$	604

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(1) Amount to reduce minimum lease payments to fair value as calculated by the imputed interest rate at lease inception since the present value of the minimum lease payments as calculated by the incremental borrowing rate exceeded fair value at inception of the leases.

Oil and Gas Properties – We use the successful efforts method of accounting for our HBI oil and gas activities. The significant principles for this method are:

• Geological and geophysical evaluation costs are expensed as incurred;
• Costs incurred to drill and equip all successful wells are capitalized;
• Dry holes for exploratory wells are expensed;
• Dry holes for development wells are capitalized;
• Capitalized costs related to proved oil and gas property leasehold costs are depleted over total proved oil and gas reserves; and
• Capitalized costs related to wells and related equipment and facilities costs are depreciated over proved developed reserves.

Estimates of proved oil and gas reserves directly impact financial accounting estimates including depreciation, depletion and amortization expense, evaluation of impairment of properties and the calculation of plugging and abandonment liabilities. Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations. The process of estimating quantities of proved reserves is very complex, requiring significant subjective decisions in the evaluation of all geological, engineering and economic data for each reservoir. The data for any reservoir may change substantially over time due to results from operational activity.

Our liability for asset retirement obligations is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation.

Capital amounts attributable to developed oil and gas properties are depleted by the unit-of-production method over proved reserves using the unit conversion ratio for gas of six Mcf of gas to one barrel of oil equivalent (“BOE”), and one barrel of NGLs to one BOE. Unproved properties are excluded from this calculation. Due to decreased oil prices, resulting in uneconomic conditions for certain wells in the Bakken play, and decreased investments anticipated in new wells, we recognized impairment losses of $1.4 million and $314 thousand on proved and unproved Bakken properties, respectively, in our consolidated statements of operations at December 31, 2014. After impairment, the new gross cost basis of the oil and gas properties is $2.8 million. Depreciation, depletion and amortization expense for oil and gas producing properties and related equipment was $411 thousand and $479 thousand for the years ended December 31, 2014 and 2013, respectively.

We use the sales method to recognize our oil and gas revenues. Under this method, revenues are recognized based on our interests in the actual volumes of gas and oil sold to purchasers.

Other Property and Equipment – Other property and equipment, which includes computer equipment, computer hardware and software, furniture and fixtures, leasehold improvements and automobiles, is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from 3 to 5 years. We recorded depreciation expense related to other property and equipment of $83 thousand and $59 thousand for the years ended December 31, 2014 and 2013, respectively.

Intangible Assets – Our intangible assets consist of patents acquired in connection with our investment in BWI. Our patents were valued at $2.6 million on their acquisition date and are amortized on a straight-line basis over a period of 6-21 years, based on their respective contractual lives. Accumulated amortization in the amount of $1.1 million has been recorded on these patents to date. We have recorded amortization expense related to these patents of $205 thousand for both the years ended December 31, 2014 and 2013, respectively. Patent annuity fees and legal fees related to the renewal of our existing patents are expensed as incurred and recorded within selling, general and administrative expenses in our consolidated statements of operations. The estimated future annual amortization of our patents over the next five years is as follows (in thousands):

Year		Amount
	2015	$	191
	2016		183
	2017		170
	2018		75
	2019		75
	Thereafter		768
	Total	$	1,462

Investment in Global – We do not account for our investment in Global as an equity method investment in spite of our 35% ownership. We are unable to obtain U.S. GAAP financial statements quarterly to perform equity method accounting due to the semi-annual reporting requirements Global follows under the AIM exchange rules. As a result, we account for Global as an available for sale investment.

Our policy is to review our investment in Global semi-annually or more often if any indicators of impairment become known. We continuously monitor macroeconomic indicators and track Global’s stock price volatility for any downward trends in the market. We also review public financial information including Global’s issued financial statements and investor presentations, as well as financial analysts’ reviews and recommendations for any indicators of an other than temporary impairment in our carrying value. We also assess internally our ability and intent to hold our investment in Global should the fair value drop below our cost. Any resulting other than temporary impairment would be immediately recognized in earnings. We recognized an other than temporary impairment of $937 thousand in our consolidated statements of operations at December 31, 2014. No such impairments were recognized during 2013.

Other Assets – At December 31, 2014, other assets included $289 thousand in prepaid drilling costs related to the drilling and completion of wells held by HBI, $20 thousand in deposits related to the Arctic Star site lease and facility and restricted cash of $50 thousand for a Letter of Credit required for the Arctic Star plant site lease.

Notes Receivable – Our notes receivable are stated at their outstanding principal balance, less any allowance for doubtful accounts and deferred transaction fees. Interest income is recognized as earned at the stated interest rate over the life of the loan. Transaction fees related to the notes are deferred and amortized using the effective interest method over the life of the loan and are recognized in interest income from related parties within our consolidated statements of operations. As of December 31, 2014 we had no notes receivable outstanding.

Stock-Based Compensation – We measure all stock-based compensation awards using a fair value method on the date of grant and recognize such expense in our consolidated financial statements over the requisite service period on a straight-line basis. We use the Black-Scholes formula to determine the fair value of stock-based compensation awards on the date of grant. The Black-Scholes formula requires management to make assumptions regarding the option lives, expected volatility, and risk free interest rates. Please see Note 11 – “BWI Stock Compensation” for additional information on our stock-based compensation plan.

Provisions for Asset Impairments - Assets that are used in our operations and not held for sale, are carried at cost, less accumulated depreciation and amortization. We review our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When evidence indicates that operations will not produce sufficient cash flows to cover the carrying amount of the related asset, and when the carrying amount of the related asset cannot be realized through sale, a permanent impairment is recorded and the asset is written down to fair value.

Proved crude oil and natural gas properties are reviewed for impairment on a reservoir basis annually, or when events and circumstances indicate a possible decline in the recoverability of the carrying value of such reservoir. The estimated future cash flows expected in connection with the reservoir are compared to the carrying amount of the reservoir to determine if the carrying amount is recoverable. If the carrying amount of the reservoir exceeds its estimated undiscounted future cash flows, the carrying amount of the field is reduced to its estimated fair value.

Impairment losses totaling $18.1 million were recognized on long-lived assets used in our operations during the year ended December 31, 2014. Of this, $10.3 million was related to impairment of the Arctic Star plant, $6.1 million was related to the write down of the BWI weathered lagoon plant to its salvage value and $1.7 million was related to our oil and gas properties held by HBI. Please see Note 7 – “Fair Value Measurements” for more information on these impairments and related assumptions. No such impairments were recognized during 2013.

Accrued Liabilities and Other – At December 31, 2014, accrued liabilities and other included approximately $414 thousand in accrued capital costs related to the construction, installation and commissioning of the Arctic Star plant and approximately $121 thousand in accrued capital costs related to the drilling and completion of HBI wells under development.

Notes Payable – We had notes payable of $63 thousand at December 31, 2014 as a result of the purchase of a generator and insurance premiums for the Arctic Star plant, both of which were financed. The note payable for the generator has a two year term at zero percent interest. The note payable related to the insurance premiums has a ten month term and bears interest at approximately 2.4% of the initial note amount. Interest expense on the insurance premiums note was negligible for the year ended December 31, 2014.

Income Taxes – We account for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. We measure and record income tax contingency accruals in accordance with guidance related to uncertain tax positions.

We recognize liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.

We classify interest related to income tax liabilities as income tax expense, and if applicable, penalties are recognized as a component of income tax expense. The income tax liabilities and accrued interest and penalties that are anticipated to be due within one year of the balance sheet date are presented as current liabilities in our consolidated balance sheets.

Loss Contingencies – Management continuously reviews with legal counsel the status of regulatory matters and pending or threatened litigation. With respect to all significant litigation matters, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome is probable and the amount of the loss can be reasonably estimated as of the date of the financial statements, we record an estimated loss for the expected outcome of the litigation. If the likelihood of a negative outcome is reasonably possible and we are able to determine an estimate of the possible loss or range of loss, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is often difficult to predict the outcome or estimate a possible loss or range of loss because litigation is subject to inherent uncertainties, particularly when plaintiffs allege substantial or indeterminate damages. Such is also the case when the litigation is in its early stages or when the litigation is highly complex or broad in scope. In these cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss. We expense legal costs related to such loss contingencies as they are incurred.

Recent Accounting Pronouncements – In April 2014, FASB issued the Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This standard revises the definition of a discontinued operation to limit the circumstances under which a disposal or classification as held for sale qualifies for presentation as a discontinued operation. Amendments in this standard require expanded disclosures concerning a discontinued operation and the disposal of an individually-material component of an entity not qualifying as a discontinued operation. The standard is effective for annual and interim periods beginning on or after December 15, 2014 and should be applied prospectively, with early adoption permitted. We currently do not expect this standard to have any impact on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 on revenue from contracts with customers. Under this new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. The standard is effective for interim and annual periods beginning after December 16, 2016, and early adoption is not permitted. Adoption is allowed by either the full retrospective or modified retrospective approach. We are currently evaluating which approach we will apply and the impact, if any, that this standard will have on our consolidated financial statements.

In January 2015, FASB issued the Accounting Standards Update No. 2015-1, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Item. This standard eliminates from GAAP the concept of extraordinary items. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We currently do not expect this standard to have any impact on our consolidated financial statements.