Basis of Presentation

6 Months Ended

Jun. 30, 2015

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

(1)         BASIS OF PRESENTATION

Our accompanying consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to these rules and regulations, although we believe that the disclosures made are adequate to prevent the information presented from being misleading. In our opinion, these consolidated condensed financial statements contain all adjustments necessary to present fairly our financial position as of June 30, 2015 and December 31, 2014, the results of our operations for the three and six months ended June 30, 2015 and 2014 and changes in our cash flows for the six months ended June 30, 2015 and 2014. The December 31, 2014 consolidated condensed balance sheet information is derived from audited financial statements. All adjustments represent normal recurring items. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014. Certain prior year amounts have been reclassified to conform to the 2015 presentation.

The preparation of financial statements in conformity with 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 these estimates. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.

Principles of Consolidation – The consolidated condensed 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 during 2011, any remaining Gulf Coast oil and gas activities are included as discontinued operations on the consolidated condensed balance sheets, consolidated condensed statements of operations and consolidated condensed statements of cash flows for all periods presented.

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, 2014		Current Period Unrealized Loss			Accumulated Other Comprehensive Loss as of June 30, 2015
Investment in Global	$	—	$	(3,000	)	$	(3,000	)
Foreign Currency Translation Adjustments		—		(32	)		(32	)
	$	—	$	(3,032	)	$	(3,032	)

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 5 – “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 (loss) 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 condensed 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 (loss) until realized through sale or impairment and reclassified into earnings.

Property and Equipment – We recorded depreciation expense related to other property and equipment of $19 thousand and $21 thousand for the three months and $40 thousand for both the six months ended June 30, 2015 and 2014, respectively. Depreciation, depletion and amortization expense for oil and gas producing properties and related equipment was $42 thousand and $121 thousand for the three months and $89 thousand and $184 thousand for the six months ended June 30, 2015 and 2014, respectively. During January 2015, the Arctic Star plant was fully commissioned and subject to depreciation. We recorded depreciation expense of $156 thousand related to the Arctic Star plant for the three months and $316 thousand for the six months ended June 30, 2015. Of this depreciation expense, assets under capital lease at June 30, 2015 accounted for $32 thousand for the three months and $65 thousand for the six months ended June 30, 2015.

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. During May 2015, we purchased rig mats which were previously capital lease assets for $103 thousand and reversed the corresponding capital lease obligation of $220 thousand, with the offset reducing the asset carrying value of the rig mats. At June 30, 2015, total assets acquired under capital lease was $490 thousand, net of accumulated amortization of $151 thousand, and was included in the Arctic Star plant in our consolidated condensed balance sheets.

At June 30, 2015, the total capital lease obligation was $218 thousand, all of which was classified as a short-term liability in our consolidated condensed balance sheets. Capital lease interest expense was $24 thousand and $63 thousand for the three months and $66 thousand and $63 thousand for the six months ended June 30, 2015 and 2014, respectively.

Intangible Assets – Our intangible assets consist of patents acquired in connection with our investment in BriteWater International, Inc. (“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 $1.2 million has been recorded on these patents to date. We have recorded amortization expense related to these patents of $47 thousand and $52 thousand for the three months and $99 thousand and $103 thousand for the six months ended June 30, 2015 and 2014. Patent annuity fees and legal fees related to the maintenance of our existing patents are expensed as incurred and recorded within selling, general and administrative expenses in our consolidated condensed statements of operations.

Investment in Global – 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 did not recognize any other-than-temporary impairment for the six months ended June 30, 2015. See Note 4 – “Investment in Global” for further discussion.

Other Assets – At June 30, 2015, other assets included $101 thousand in prepaid drilling costs related to the drilling and completion of wells held by HKN Bakken, Inc. (“HBI”), $12 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.

Accrued Liabilities and Other – At June 30, 2015, accrued liabilities and other included approximately $68 thousand and $36 thousand in accrued capital and operating costs related to the Arctic Star plant and oil and gas properties, respectively.

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 had a two year term at zero percent interest. The note payable related to the insurance premiums had a ten month term and bore interest at approximately 2.4% of the initial note amount. Both notes were repaid in full during the first quarter 2015. Interest expense on the insurance premiums note was negligible for the six months ended June 30, 2015.

Asset Retirement Obligations – We recognize the present value of asset retirement obligations beginning in the period in which they are incurred if a reasonable estimate of a fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Our asset retirement obligation is a non-recurring Level 3 fair value measurement and was $2 thousand at June 30, 2015 and December 31, 2014. Changes to the liability during the six months ended June 30, 2015 were negligible.

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 condensed 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.

We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from estimates as a cumulative adjustment in the period of revision. Stock compensation is recorded only for those awards that are expected to vest. No forfeiture rate was applied during the six months ended June 30, 2015, as no further forfeitures were expected. However, in the first quarter 2015, a total of 18 thousand shares were forfeited and stock compensation expense of $130 thousand was reversed for those shares.

Total stock-based compensation recognized within selling, general and administrative expenses in the Company’s consolidated condensed statements of operations was an expense of $33 thousand for the three months and a benefit of $59 thousand for the six months ended June 30, 2015 as a result of the forfeitures during the first quarter 2015, and an expense of $53 thousand for the three months and $106 thousand for the six months ended June 30, 2014.

Recently Issued Accounting Pronouncements – In April 2015, FASB issued the Accounting Standards Update No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Entities can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. We have evaluated our current cloud computing arrangements and determined that this standard does not have any impact on our consolidated financial statements.