Note 1 - Basis of Presentation

6 Months Ended

Jun. 30, 2022

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

1. Basis of Presentation

The accounting policies we follow as of January 1, 2022 are set forth in the notes to our audited consolidated financial statements in the Annual Report on Form 10-K for the year ended  December 31, 2021 filed with the SEC on March 31, 2022.  The accompanying interim condensed consolidated financial statements have not been audited by our independent registered public accountants. In the opinion of management, these statements reflect all adjustments necessary for a fair presentation of the financial position and results of operations. Any and all adjustments are of a normal and recurring nature. Although management believes the unaudited interim related disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America  (“GAAP”)  have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations for the three and six month periods ended June 30, 2022  and the statement of cash flows for the six months ended June 30, 2022, are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Consolidation Principles

The terms “Abraxas,” “Abraxas Petroleum,” “we,” “us,” “our” or the “Company” refer to Abraxas Petroleum Corporation and all of its subsidiaries, including Raven Drilling, LLC (“Raven Drilling”).

Rig Accounting

In accordance with SEC Regulation S-X, no income is recognized in connection with contractual drilling services performed in connection with properties in which we or our affiliates hold an ownership, or other economic interest. Any income not recognized as a result of this limitation is credited to the full cost pool and recognized through lower amortization as reserves are produced.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock-Based Compensation, Option Plans and Cash Compensation

Stock Options

We currently utilize a standard option-pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees and directors.

The following table summarizes our stock option activity for the six months ended June 30, 2022, (in thousands):

	Number of Shares			Weighted Average Option Exercise Price Per Share		Weighted Average Grant Date Fair Value Per Share
Outstanding, December 31, 2021		55		$	53.79	$	36.95
Cancelled/Forfeited		(44	)	$	55.79	$	38.05
Expired		(4	)	$	40.43	$	29.23
Balance, June 30, 2022		7		$	48.84	$	34.41

Restricted Stock Awards

Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the recipient of the award terminates employment with us prior to the lapse of the restrictions. The fair value of such stock was determined using the closing price on the grant date and compensation expense is recorded over the applicable vesting periods.

On May 12, 2022, AG Energy Funding, LLC (“AGEF”) and our Board of Directors (the “Board”) approved grants of restricted stock to certain of our executives to incentivize their retention. The grants were made pursuant to the Abraxas Petroleum Corporation Amended and Restated 2005 Employee Long-Term Equity Incentive Plan (the “Employee LTIP”) and vest one-third on each of the first, second, and third anniversary of the grant date. The vesting schedule accelerates, and the restricted shares become fully vested, upon death or total disability of the grantee or upon a Change of Control (as defined in the Employee LTIP) of the Company. The full text of the new Form of Restricted Stock Award Agreement under the Employee LTIP as of May 2022 is attached to this Form 10-Q as Exhibit 10.1.

AGEF and the Board also granted restrict stock to one of its non-employee directors for incentivization and retention purposes. The restricted stock grant vests one-third on each of the first, second, and third anniversary of the grant date and was made pursuant to the Abraxas Petroleum Corporation Amended and Restated 2005 Non-Employee Director Long-Term Equity Incentive Plan (the “Non-Employee LTIP”). The full text of the new Form of Restricted Stock Award Agreement under the Non-Employee LTIP as of May 2022 is attached to this Form 10-Q as Exhibit 10.2.

The following table summarizes our restricted stock activity for the six months ended June 30, 2022. Grants of restricted shares included: (i) 500,000 to Robert L.G. Watson, (ii) 162,000 to Steven P. Harris, (iii) 178,000 to Kenneth W. Johnson (each of the foregoing under the Employee LTIP); and (iv) 50,000 to Brian Melton under the Non-Employee LTIP. 

	Number of Shares (thousands)			Weighted Average Grant Date Fair Value Per Share
Unvested, December 31, 2021		14		$	27.97
Granted		1,650		$	1.88
Vested/Released		(14	)		27.97
Unvested, June 30, 2022	$	1,650		$	1.88

Performance Based Restricted Stock

We issue performance-based shares of restricted stock to certain officers and employees under the Abraxas Petroleum Corporation Amended and Restated 2005 Employee Long-Term Equity Incentive Plan. The shares will vest in three years from the grant date upon the achievement of performance goals based on our Total Shareholder Return (“TSR”) as compared to a peer group of companies. The number of shares which would vest depends upon the rank of our TSR as compared to the peer group at the end of the three-year vesting period and can range from zero percent of the initial grant up to 200% of the initial grant.

The table below provides a summary of Performance Based Restricted Stock as of the date indicated

:

	Number of Shares (thousands)			Weighted Average Grant Date Fair Value Per Share
Unvested, December 31, 2021		28		$	26.80
Expired		(28	)	$	26.80
Unvested, June 30, 2022		-		$	-

Compensation expense associated with the performance based restricted stock is based on the grant date fair value of a single share as determined using a Monte Carlo Simulation model which utilizes a stochastic process to create a range of potential future outcomes given a variety of inputs. As the Compensation Committee intends to settle the performance based restricted stock awards with shares of our common stock, the awards are accounted for as equity awards and the expense is calculated on the grant date assuming a 100% target payout and amortized over the life of the awards.

The following table summarizes stock-based compensation from the various forms of compensation utilized by the Company (in thousands) as of the dates indicated.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Options	$	-	$	1	$	-	$	(22	)
Restricted stock		138		116		246		315
Performance shares		-		79		79		214
	$	138	$	196	$	325	$	507

As of  June 30, 2022, all expense related to stock-based compensation related to stock options and performance shares has been fully amortized. 

Cash Compensation for Non-Employee Directors

On May 12, 2022, AGEF and the Board approved cash compensation in the amount of $10,000 per calendar quarter to each non-employee member of the Board for the purpose of attracting and retaining qualified individuals to serve as Board members.

Management Incentive Plan

On May 12, 2022, AGEF and the Board approved the Abraxas Petroleum Corporation Management Incentive Plan (the “MIP”), pursuant to which participants (“Eligible Employees”), including our named executive officers (“NEOs”), earn a bonus payment (a “Bonus”) upon a Change of Control (as defined in the MIP) of the Company. Under the MIP, any such Bonus is payable (i) in cash and securities in the same ratio as the consideration received by the Company and/or its stockholders in connection with such Change of Control, and (ii) in an amount equal to (x) such Eligible Employee’s MIP Allocation (shown in Table A below for our NEOs, expressed as a percentage of the MIP shares owned by such NEO compared to the total MIP shares available under the MIP) multiplied by (y) the MIP value calculation (shown in Table B below).

The aggregate MIP payout is capped at $12.0 million. The Board’s Compensation Committee will determine in good faith the Change of Control value of the MIP Bonus pool based on the consideration received by Abraxas in any asset sale or the equity value of Abraxas implied by the consideration received by the stockholders of Abraxas in any merger or similar transaction. Any MIP payout is subject to adjustment as set forth in the MIP based on the timing of the Change of Control following the adoption of the MIP. The full text of the MIP and the Abraxas Petroleum Corporation Management Incentive Plan Bonus Agreement are attached to this Form 10-Q as Exhibits 10.3 and 10.4, respectively.

Table A –Eligible NEOs

Eligible Employee	Allocation of MIP Value %
Robert Watson		45.00	%
Kenny Johnson		9.50	%
Steve Harris		8.60	%

Table B – Aggregate Bonus Amount Calculation

Tier	Change of Control Value Range	MIP Pool Enhancement			Accreted Amount
I	$0-100 million		0	%
II	$100-110 million		50	%	$	5,000,000
III	$110-140 million		5	%	$	1,500,000
IV	$140-180 million		10	%	$	4,000,000
V	$180+ million		15	%	up to $1,500,000

Oil and Gas Properties

We follow the full cost method of accounting for oil and gas properties.  Under this method, all direct costs and certain indirect costs associated with the acquisition of properties and successful and unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized oil and gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.  Net capitalized costs of oil and gas properties, less related deferred taxes, are limited by country, to the lower of unamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on unescalated prices discounted at 10%, plus the cost of properties not being amortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related income taxes. Costs in excess of the present value of estimated net revenue from proved reserves discounted at 10% are charged to proved property impairment expense.  No gain or loss is recognized upon sale or disposition of oil and gas properties for full cost accounting companies with proceeds accounted for as an adjustment of capitalized cost. An exception to this rule occurs when the adjustment to the full cost pool results in a significant alteration of the relationship between capitalized cost and proved reserves. We apply the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented.  At June 30, 2022, the net capitalized costs of oil and gas properties did not exceed the cost ceiling of our estimated proved reserves.

Restoration, Removal and Environmental Liabilities

We are subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum substances at various sites.  Environmental expenditures are expensed or capitalized depending on their future economic benefit.  Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed.

Liabilities for expenditures of a non-capital nature are recorded when environmental assessments and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component is fixed or reliably determinable.

We account for future site restoration obligations based on the guidance of ASC 410 which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value of a liability for an asset’s retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. For all periods presented, we have included estimated future costs of abandonment and dismantlement in our full cost amortization base and amortize these costs as a component of our depletion expense in the accompanying condensed consolidated financial statements.

The following table summarizes our future site restoration obligation transactions for the six months ended June 30, 2022 and the year ended December 31, 2021 (in thousands):

	June 30, 2022			December 31, 2021
Beginning future site restoration obligation	$	4,708		$	7,360
New wells placed on production and other		-			1
Deletions related to property sales		(1,839	)		(2,845	)
Deletions related to plugging costs		-			(342	)
Accretion expense		85			330
Revisions and other		-			204
Ending future site restoration obligation	$	2,954		$	4,708