Acquisitions

6 Months Ended

Jun. 30, 2019

Business Combinations [Abstract]

ACQUISITIONS

NOTE 3 – ACQUISITIONS

Majority Control of Carbon Appalachia

On December 16, 2016, Carbon Appalachia was formed by us, entities managed by Yorktown and entities managed by Old Ironsides to acquire producing assets in the Appalachian Basin in Kentucky, Tennessee, Virginia and West Virginia. Carbon Appalachia began substantial operations on April 3, 2017 and is engaged primarily in acquiring, developing, exploiting, producing, processing, marketing, and transporting oil and natural gas in the Appalachian Basin.

On April 3, 2017, Carbon, Yorktown and Old Ironsides entered into a limited liability company agreement (the "Carbon Appalachia LLC Agreement"), with an initial equity commitment of $100.0 million, of which $37.0 million had been contributed as of December 31, 2018. Carbon Appalachia (i) issued Class A Units to us, Yorktown and Old Ironsides for an aggregate cash consideration of $12.0 million, (ii) issued Class B Units to us, and (iii) issued Class C Units to us. Additionally, Carbon Appalachia Enterprises, LLC, formerly known as Carbon Tennessee Company, LLC ("Carbon Appalachia Enterprises"), a subsidiary of Carbon Appalachia, entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank (the "Revolver") with an initial borrowing base of $10.0 million.

In connection with Carbon entering into the Carbon Appalachia LLC Agreement, and Carbon Appalachia engaging in the transactions described above, Carbon received 1,000 Class B Units and issued to Yorktown a warrant to purchase approximately 408,000 shares of our common stock at an exercise price dictated by the warrant agreement (the "Appalachia Warrant"). The Appalachia Warrant was payable exclusively with Class A Units of Carbon Appalachia held by Yorktown. On November 1, 2017, Yorktown exercised the Appalachia Warrant, resulting in us acquiring 2,940 Class A Units from Yorktown. 

On August 15, 2017, the Carbon Appalachia LLC Agreement was amended and, as a result, we agreed to contribute an initial commitment of future capital contributions as well as Yorktown's, and Yorktown would not participate in future capital contributions. Carbon Appalachia issued Class A Units to us and Old Ironsides for an aggregate cash consideration of $14.0 million. The borrowing base of the Revolver increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million under the Revolver. 

On September 29, 2017, Carbon Appalachia issued Class A Units to us and Old Ironsides for an aggregate cash consideration of $11.0 million.

Prior to the closing of the OIE Membership Acquisition, Old Ironsides held 27,195 Class A Units, which equated to a 72.76% aggregate share ownership of Carbon Appalachia and we held (i) 9,805 Class A Units, (ii) 1,000 Class B Units and (iii) 121 Class C Units, which equated to a 27.24% aggregate share ownership of Carbon Appalachia.

On December 31, 2018, we acquired all of Old Ironsides' Class A Units of Carbon Appalachia for approximately $58.1 million, subject to customary and standard closing adjustments. We paid $33.0 million in cash and delivered promissory notes in the aggregate original principal amount of approximately $25.1 million to Old Ironsides (the "Old Ironsides Notes"). The Old Ironsides Notes bear interest at 10.0% per annum and have a term of five years, the first three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31, 2019. At the end of the three-year interest-only period, the then current outstanding principal balance and interest is to be paid in 24 equal monthly payments. The Old Ironsides Notes also provide for mandatory prepayments upon the occurrence of certain subsequent liquidity events. A mandatory, one-time principal reduction payment in the aggregate amount of $2.0 million was made to Old Ironsides on February 1, 2019.

The OIE Membership Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. We recognized 100% of the identifiable assets acquired and liabilities assumed at their respective fair value as of the date of the acquisition. The $58.1 million purchase price, consisting of $33.0 million in cash and $25.0 million of Old Ironsides Notes, was paid for Old Ironsides' outstanding interest, representing approximately 72.76% interest in Carbon Appalachia.

The Company, utilizing the assistance of third-party valuation specialists, considered various factors in its estimate of fair value of the acquired assets and liabilities including (i) reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices, including price differentials, (v) future cash flows, (vi) a market participant-based weighted average cost of capital, and (vii) real estate market conditions.

We followed the fair value method to allocate the consideration transferred to the identifiable net assets acquired on a preliminary basis as follows:

	Amount  (in thousands)
Cash consideration	$	33,000
Old Ironsides Notes		25,030
Fair value of previously held equity interest		14,158
Fair value of business acquired	$	72,188

Assets acquired and liabilities assumed are as follows:

	Amount (in thousands)
Cash	$	12,283
Accounts receivable:
Revenue		12,834
Trade receivable		1,941
Commodity derivative asset		198
Inventory		900
Prepaid expenses, deposits, and other current assets		456
Oil and gas properties:
Proved		108,816
Unproved		1,869
Other property, plant and equipment, net		15,626
Other non-current assets		514
Accounts payable and accrued liabilities		(20,466	)
Due to related parties		(458	)
Firm transportation contract obligations		(18,724	)
Asset retirement obligations		(5,626	)
Notes payable		(37,975	)
Total net assets acquired	$	72,188

The preliminary fair value of the assets acquired and liabilities assumed were determined using various valuation techniques, including an income approach.

On the date of the acquisition, we derecognized our equity investment in Carbon Appalachia and recognized a gain of approximately $1.3 million based on the fair value of our previously held interest compared to its carrying value.

For assets and liabilities accounted for as business combinations, including the OIE Membership Acquisition, to determine the fair value of the assets acquired, the Company primarily used the income approach and made market assumptions as to projections of estimated quantities of oil and natural gas reserves, future production rates, future commodity prices including price differentials as of the date of closing, future operating and development costs, a market participant weighted average cost of capital, and the condition of vehicles and equipment. The Company used the income approach and made market assumptions as to projections of utilization, future operating costs and a market participant weighted average cost of capital to determine the fair value of the firm transportation obligations as well as the plant facilities. The determination of the fair value of accounts payable and accrued liabilities assumed required significant judgement, including estimates relating to production assets.

Consolidation of Carbon Appalachia and OIE Membership Acquisition Unaudited Pro Forma Results of Operations

Below are unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2018 as though the OIE Membership Acquisition had been completed as of January 1, 2018. Results for the three and six months ended June 30, 2019 are reflected in the unaudited condensed consolidated statements of operations.

	Three Months Ended June 30,			Six Months Ended June 30,
(in thousands, except per share amounts)	2018			2018
Revenue	$	23,682		$	54,841
Net (loss) income before non-controlling interests	$	(2,758	)	$	3,046
Net loss attributable to non-controlling interests	$	(3,619	)	$	(2,505	)
Net income attributable to controlling interests before preferred shares	$	861		$	5,551
Net income per share, basic	$	0.11		$	0.76
Net income per share, diluted	$	(0.04	)	$	0.54

Consolidation of Carbon California Unaudited Pro Forma Results of Operations

On February 1, 2018, Yorktown exercised the California Warrant resulting in the issuance of 1,527,778 shares of our common stock in exchange for Yorktown's Class A Units of Carbon California representing approximately 46.96% of the outstanding Class A Units of Carbon California (a profits interest of approximately 38.59%). After giving effect to the exercise on February 1, 2018, we owned 56.40% of the voting and profits interests of Carbon California.

Below are unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2018 as though the Carbon California Acquisition had been completed as of January 1, 2018. The Carbon California Acquisition closed February 1, 2018, and accordingly, the Company's unaudited condensed consolidated statements of operations for the six months ended June 30, 2018, includes the results of operations for the period February 1, 2018, through June 30, 2018. Results for the three and six months ended June 30, 2019 are reflected in the unaudited condensed consolidated statements of operations.

	Three Months Ended June 30,			Six Months Ended June 30,
(in thousands, except per share amounts)	2018			2018
Revenue	$	8,180		$	20,283
Net (loss) income before non-controlling interests	$	(3,013	)	$	4,256
Net loss attributable to non-controlling interests	$	(3,619	)	$	(2,504	)
Net income attributable to controlling interests before preferred shares	$	607		$	7,739
Net income per share, basic	$	0.27		$	1.01
Net income per share, diluted	$	0.09		$	0.84