EXHIBIT 99.3

 

 

 

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RAM ENERGY HOLDINGS LLC

ANDSUBSIDIARIES

 

 

Consolidated Financial Statements

As of and for the Year Ended 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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RAM Energy Holdings LLC and Subsidiaries

Contents

 

 

 

 

 

|                                                                                                |   | Page   |
|-----------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                |   |   |
| IndependentAuditor’sReport                                                                    |   | 3      |
|                                                                                                |   |   |
| Consolidated Financial Statements                                                                   |   |   |
|                                                                                                |   |   |
| Consolidated Balance Sheet as of September30,2019                                                   |   | 5-6    |
|                                                                                                |   |   |
| Consolidated Statement of Operations 

   for the Year Ended September30, 2019            |   | 7      |
|                                                                                                |   |   |
| Consolidated Statement of Member’s Deficit

   for the Year Ended September30, 2019 |   | 8      |
|                                                                                                |   |   |
| Consolidated Statement of Cash Flows

   for the Year Ended September30, 2019             |   | 9      |
|                                                                                                |   |   |
| Notes to ConsolidatedFinancialStatements                                                            |   | 10-19  |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

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|  | Tel:   713-960-1706

Fax:   713-960-9549

www.bdo.com | 2929 Allen Parkway, 20th Floor 

Houston, TX 77019 |
|--|---------------------------------------------------------------------------|----------------------------------------------------|

 

 

Independent Auditor’s Report

To the Board of Directors 

RAM Energy Holdings LLC 

Tulsa, Oklahoma

We have audited the accompanying consolidated financial statements of RAM Energy Holdings LLC and its subsidiaries (the “Company”), which comprise the consolidated balance sheet as of September30,2019,andtherelatedconsolidatedstatementsofoperations,member’sdeficit,and cashflowsfortheyearthenended,andtherelatednotestotheconsolidatedfinancialstatements.

Management’s Responsibility for the Consolidated Financial Statements

Managementisresponsibleforthepreparationandfairpresentationoftheseconsolidatedfinancial statements in accordance with accounting principles generally accepted in the United States of America;thisincludesthedesign,implementation,andmaintenanceofinternalcontrolrelevantto the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud orerror.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheentity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimatesmadebymanagement,aswellasevaluatingtheoverallpresentationoftheconsolidated financialstatements.

Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasis for our auditopinion.

Opinion

Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterial respects,thefinancialpositionofRAMEnergyHoldingsLLCanditssubsidiariesasofSeptember30, 2019,andtheresultsoftheiroperationsandtheircashflowsfortheyearthenended,inaccordance with accounting principles generally accepted in the United States ofAmerica.

 

 

November 15, 2019

 

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

 

BDO is the brand name for the BDO network and for each of the BDO Member Firms.

 

 

3

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Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

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RAM Energy Holdings LLC andSubsidiaries

Consolidated Balance Sheet

 

 

 

| September 30,                                                                                 |   | 2019    |        |
|-----------------------------------------------------------------------------------------------|--------|---------|-------------|
|                                                                                          |   |    |        |   |
|                                                                                          |   |    |        |   |
| Assets                                                                                        |   |    |        |   |
|                                                                                          |   |    |        |   |
|                                                                                          |   |    |        |   |
| Current Assets                                                                                |   |    |        |   |
| Cash and cash equivalents                                                                     |   | $       | 3,192,507   |   |
| Accounts receivable, net                                                                      |   |    | 7,826,569   |   |
| Prepaid expenses                                                                              |   |    | 225,395     |   |
|                                                                                          |   |    |        |   |
| Total Current Assets                                                                          |   |    | 11,244,471  |   |
|                                                                                          |   |    |        |   |
| Property and Equipment, at Cost                                                               |   |    |        |   |
| Proved oil and natural gas properties and equipment,

   using full cost accounting |   |    | 91,207,852  |   |
| Unproved oil and natural gas properties                                                       |   |    | 7,351,669   |   |
| Gas gathering and processing equipment                                                        |   |    | 10,253,833  |   |
| Other property and equipment                                                                  |   |    | 527,606     |   |
|                                                                                          |   |    | 109,340,960 |   |
| Less: accumulated depreciation, depletion,

   amortization and impairment          |   |    | (43,455,219 | ) |
|                                                                                          |   |    |        |   |
| Net Property and Equipment                                                                    |   |    | 65,885,741  |   |
|                                                                                          |   |    |        |   |
| Other Assets                                                                                  |   |    |        |   |
| Restricted cash                                                                               |   |    | 732,682     |   |
| Other                                                                                         |   |    | 65,334      |   |
|                                                                                          |   |    |        |   |
|                                                                                          |   |    |        |
| Total Other Assets                                                                            |   | 798,016 |        |
|                                                                                          |   |    |        |
| Total Assets                                                                                  |   | $       | 77,928,228  |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5

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RAM Energy Holdings LLC andSubsidiaries

Consolidated Balance Sheet

 

 

| September 30,                                        |   | 2019        |        |
|------------------------------------------------------|--------|-------------|-------------|
|                                                 |   |        |        |   |
| Liabilities and Member's Deficit                     |   |        |        |   |
|                                                 |   |        |        |   |
| Current Liabilities                                  |   |        |        |   |
| Trade accounts payable                               |   | $           | 26,150,721  |   |
| Revenue payable                                      |   |        | 4,722,982   |   |
| Accrued liabilities                                  |   |        | 1,521,400   |   |
| Drilling advances                                    |   |        | 2,226,283   |   |
| Current portion of asset retirement obligations      |   |        | 492,957     |   |
|                                                 |   |        |        |   |
| Total Current Liabilities                            |   | 35,114,343  |        |
|                                                 |   |        |        |   |
| Asset Retirement Obligations, net of current portion |   |        | 4,990,953   |   |
|                                                 |   |        |        |   |
| Long-Term Debt - Affiliate                           |   |        | 75,000,000  |   |
|                                                 |   |        |        |   |
| Total Liabilities                                    |   | 115,105,296 |        |
|                                                 |   |        |        |   |
| Commitments and Contingencies (Note 7)               |   |        |        |   |
|                                                 |   |        |        |   |
| Member's Deficit                                     |   |        | (37,177,068 | ) |
|                                                 |   |        |        |   |
| Total Liabilities and Member's Deficit               |   | $           | 77,928,228  |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6

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RAM Energy Holdings LLC andSubsidiaries

Consolidated Statement of Operations

 

 

| Year Ended September 30,                                                                               |   | 2019       |       |
|--------------------------------------------------------------------------------------------------------|--------|------------|------------|
|                                                                                                   |   |       |       |   |
| Operating Revenues                                                                                     |   |       |       |   |
| Crude oil sales                                                                                        |   | $          | 13,614,137 |   |
| Natural gas sales                                                                                      |   |       | 6,357,124  |   |
| Natural gas liquids sales                                                                              |   |       | 4,358,603  |   |
| Water supply services                                                                                  |   |       | 800,322    |   |
| Gathering fees                                                                                         |   |       | 2,811,356  |   |
|                                                                                                   |   |       |       |   |
| Total Revenues                                                                                         |   |       | 27,941,542 |   |
|                                                                                                   |   |       |       |   |
| Operating Expenses                                                                                     |   |       |       |   |
| Oil and natural gas operating expenses                                                                 |   | 13,974,739 |       |
| Oil and natural gas production taxes                                                                   |   |       | 683,131    |   |
| Water usage                                                                                            |   |       | 115,908    |   |
| Depreciation, depletion and amortization                                                               |   |       | 9,581,200  |   |
| Accretion of asset retirement obligations                                                              |   |       | 642,791    |   |
| Bad debt expense                                                                                       |   |       | 29,840     |   |
| General and administrative, overhead and other

   expenses, net of operator's overhead fees |   |       | 4,828,700  |   |
|                                                                                                   |   |       |       |   |
| Total Operating Expenses                                                                               |   |       | 29,856,309 |   |
|                                                                                                   |   |       |       |   |
| Loss from Operations                                                                                   |   |       | (1,914,767 | ) |
|                                                                                                   |   |       |       |   |
| Other Income (Expense)                                                                                 |   |       |       |   |
| Interest expense                                                                                       |   |       | (5,212,222 | ) |
| Interest income                                                                                        |   |       | 133,544    |   |
| Gains on sales of assets                                                                               |   |       | 14,796     |   |
| Other income, net                                                                                      |   |       | 637,562    |   |
|                                                                                                   |   |       |       |   |
| Total Other Expense                                                                                    |   |       | (4,426,320 | ) |
|                                                                                                   |   |       |       |   |
| Net Loss                                                                                               |   | $          | (6,341,087 | ) |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

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RAM Energy Holdings LLC andSubsidiaries

Consolidated Statement of Member’s Deficit

 

 

|                        |   | Units  |   |   | Member's

Deficit |   |
|-----------------------------|--------|--------|--------|--------|-------------------|--------|
|                        |   |   |   |   |              |   |   |   |
| Balance, October 1, 2018    |   |   | 84,747 |   |              | $      | (30,835,981 | ) |
|                        |   |   |   |   |              |   |   |   |
| Net loss                    |   |   | -      |   |              |   | (6,341,087 | ) |
|                        |   |   |   |   |              |   |   |   |
| Balance, September 30, 2019 |   |   | 84,747 |   |              | $      | (37,177,068) |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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RAM Energy Holdings LLC andSubsidiaries

Consolidated Statement of Cash Flows

 

|                                                                              |   |   |        |
|-----------------------------------------------------------------------------------|--------|--------|-------------|
| Year Ended September 30,                                                          |   | 2019   |        |
|                                                                              |   |   |        |   |
| Cash Flows from Operating Activities                                              |   |   |        |   |
| Net loss                                                                          |   | $      | (6,341,087  | ) |
| Adjustments to reconcile net loss to net cash

 provided by operating activities: |   |   |        |   |
| Depreciation, depletion and amortization                                          |   |   | 9,581,200   |   |
| Accretion of asset retirement obligations                                         |   |   | 642,791     |   |
| Bad debt expense                                                                  |   |   | 29,840      |   |
| Gains on sales of assets                                                          |   |   | (14,796     | ) |
| Changes in operating assets and liabilities:                                      |   |   |        |   |
| Accounts receivable                                                               |   |   | (4,786,246  | ) |
| Prepaid expenses and other assets                                                 |   |   | 13,484      |   |
| Accounts payable and revenue payable                                              |   |   | 20,944,181  |   |
| Drilling advances                                                                 |   |   | 3,441,260   |   |
| Settlements of asset retirement obligations                                       |   |   | (400,446    | ) |
| Accrued liabilities                                                               |   |   | 707,942     |   |
|                                                                              |   |   |        |   |
| Net Cash Provided by Operating Activities                                         |   |   | 23,818,123  |   |
|                                                                              |   |   |        |   |
| Cash Flows from Investing Activities                                              |   |   |        |   |
| Payments for oil and natural gas properties and

   equipment           |   |   | (53,780,398 | ) |
| Proceeds from sales of oil and natural gas properties                             |   |   | 588,000     |   |
| Proceeds from sales of other property and equipment                               |   |   | 26,000      |   |
| Deposit and other assets                                                          |   |   | (41,500     | ) |
|                                                                              |   |   |        |   |
| Net Cash Used in Investing Activities                                             |   |   | (53,207,898 | ) |
|                                                                              |   |   |        |   |
| Cash Flows from Financing Activities                                              |   |   |        |   |
| Proceeds from borrowings on long-term debt                                        |   |   | 30,000,000  |   |
|                                                                              |   |   |        |   |
| Net Cash Provided by Financing Activities                                         |   |   | 30,000,000  |   |
|                                                                              |   |   |        |   |
| Net Increase in Cash, Cash Equivalents and Restricted Cash                        |   |   | 610,225     |   |
|                                                                              |   |   |        |   |
| Cash, Cash Equivalents and Restricted Cash - Beginning of Year                    |   |   | 3,314,964   |   |
|                                                                              |   |   |        |   |
| Cash, Cash Equivalents and Restricted Cash - End of Year                          |   | $      | 3,925,189   |   |
|                                                                              |   |   |        |   |
| Supplemental Cash Flow Information                                                |   |   |        |   |
| Cash paid for interest                                                            |   | $      | 5,217,778   |   |
|                                                                              |   |   |        |   |
| Non-Cash Investing and Financing Activities                                       |   |   |        |   |
| Oil and natural gas properties accrued                                            |   | $      | 2,102,034   |   |
| Asset retirement obligations                                                      |   | $      | (483,851    | ) |

The accompanying notes are an integral part of these consolidated financial statements.

 

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

1.Nature of Operations andOrganization

 

RAMEnergyHoldingsLLC(“Holdings”),formerlynamedPNNTRAMEnergyLLC,isaDelawarelimited liabilitycompany,wholly-ownedbyPennantParkInvestmentCorporation(“PennantPark”),andwas formed in July 2014 as a holding company for interest ownership in RAM Energy LLC (“RAM”). RAM Fayette LLC (“Fayette”) was formed in September 2017 and Fayette Service Company LLC (“Service”) was formed in June 2018. As of September 30, 2019, both subsidiaries were wholly- owned by RAM. Holdings, RAM and its subsidiaries are herein referred to as the“Company.”

 

RAMwasformedinApril2012asaprivatelyheld,independentoilandnaturalgascompanyengaged in the acquisition, exploration, exploitation, development and production of oil and naturalgas.

 

In August 2015, RAM became a wholly-owned and consolidated subsidiary of Holdings. 

 

In September 2017, Holdings issued PennantPark 61,606 common units in satisfaction of the $88 million of outstanding debt that RAM owed to PennantPark. Holdings then entered into a new $35 million term loan. In June 2018, the credit agreement was amended to add a $15 million revolving loan. The credit agreement was amended in January 2019 and May 2019 to increase the revolving loan to $40 million, and further amended in October 2019 to increase the revolving loan to $50 million. See Notes 6 and 9.

 

In July 2018, the Company began a drilling program in the Austin Chalk formation. Fayette was formed to be an owner in the new wells drilled, and Service was formed to invest in gathering and facilities infrastructure.

 

RAM operates exclusively in the upstream segment of the oil and gas industry with activities including the drilling, completion, and operation of oil and natural gas wells. RAM conducts the majority of its operations in the state of Texas, with minor operations in the states of Arkansas, New Mexico and Oklahoma.

 

2.Liquidity

 

TheCompanyhadamember’sdeficitof$37.2millionandaworkingcapitaldeficitof$23.9million at September 30, 2019. The working capital deficit is largely due to the new drillingprogram.

 

On October 16, 2019, RAM, in conjunction with Fayette and Service as co-borrowers, secured and closed a first-lien multi-draw $70 million term loan facility with Macquarie Investments US Inc. (“Macquarie”).Atclosing,RAMborrowed$30.5millionfromMacquarie(“TrancheA”).TheTranche A use of proceeds was for working capital, for the completion of the four wells mentioned above and for fees and expenses of thefacility.

 

At closing, Pennant Park invested an additional $10 million of equity, funded as an additional revolving advance to Holdings, for additional working capital support. Tranche B availability of $16 million, if utilized, along with cash flow from operations, is expected to be applied towards the drilling and completion costs of the Ranger Pad. Tranche B will become available when certain production targets are met by existing assets and the four wells currently being completed. The Company fully expects to meet Tranche B production targets. Tranche C is documented as $23.5 million and conditions of its draw and use of proceeds is to be determined at a later date.

 

The Macquarie term loan has a LIBOR plus 8% interest rate, payable monthly. Further, there is a variable amortization schedule with the first amortization payment due at the end of November 2019 with additional amortization payments after the Tranche B draw, to the extent it becomes available and is drawn. This debt facility has typical affirmative and negative covenant for a first- lien oil and gas credit facility. Management believes that each of the agreed covenants will be met through November 2020.

 

10

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

3.Summary of Significant AccountingPolicies

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of Holdings, its wholly- owned subsidiary, RAM, and RAM’s wholly-owned subsidiaries, Fayette and Service. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Property and Equipment

 

The Company follows the full cost method of accounting for oil and natural gas properties. Under this method, all productive and nonproductive costs incurred in connection with the acquisition, exploration,anddevelopmentofoilandnaturalgasreservesarecapitalized.Nogainsorlosses are recognizeduponthesaleorotherdispositionofoilandnaturalgaspropertiesexceptintransactions that would significantly alter the relationship between capitalized costs and proved reserves. The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has been determined that such properties are impaired. As properties become evaluated, the related costs are transferred to proved oil and natural gasproperties.

 

Underthefullcostmethod,thenetbookvalueofoilandnaturalgaspropertiesmaynotexceedthe estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the “Ceiling Limitation”). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related and ad valorem taxes are deducted.

 

In calculating future net revenues, prices and costs are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the Ceiling Limitation and the excess, if any, of the net book value above the Ceiling Limitation is charged to expense in the period in which it occurs and is not subsequently reinstated. At September 30, 2019, the net book value of the Company’s oil and natural gas properties did not exceed the Ceiling Limitation.

 

The costs directly associated with unevaluated oil and natural gas properties are not initially includedintheamortizationbaseandrelatetounprovedleaseholdacreage,seismicdata,wellsand production facilities in progress and wells pending determination. Unevaluated leasehold costs are transferred to the amortization base once determination has been made or upon expiration of a lease. Geological and geophysical costs and cumulative drilling costs to date associated with a specific unevaluated property are transferred to the amortization base with the associated leaseholdcostsonaspecificprojectbasis.Costsassociatedwithwellsinprogressandwellspending determination are transferred to the amortization base once a determination is made whether or not proved reserves can be assigned to the property. All costs included in the Company’s unevaluatedpropertybalanceareassessedonaperiodicbasisforpossibleimpairmentorreduction in value. The assessment includes consideration of numerous factors, including intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, assignment of proved reserves and economic viability of development if proved reserves are assigned.Anyimpairmentsofunevaluatedpropertiesaretransferredtotheamortizationbase.The Company did not have any impairment of its unproved oil and gas properties for the year ended September 30,2019.

 

Other property and equipment consists principally of furniture and equipment and leasehold improvements. Other property and equipment and related accumulated depreciation and amortization are relieved upon retirement or sale and the gain or loss is included in operations. Renewals and replacements that extend the useful life of property and equipment are treated as capital additions. Depreciation expense of other property and equipment for the year ended September 30, 2019 was approximately $34 thousand.

 

11

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

 

Depreciation, Depletion and Amortization

 

Allcapitalizedcostsofoilandnaturalgaspropertiesandequipment,includingtheestimatedfuture coststodevelopprovedreserves,areamortizedusingtheunit-of-productionmethodbasedontotal proved reserves. Depreciation of gathering assets and related facilities, and other equipment is computed on the straight-line method over the estimated useful lives of the assets, generally ranging from 3 to 30 years. Amortization of leasehold improvements is computed based on the straight-line method over the term of the associated lease or estimated useful life, whichever is shorter.

 

Cash and Cash Equivalents

 

All highly liquid unrestricted investments with a maturity of three months or less when purchased are considered to be cash equivalents.

 

Restricted Cash

 

At September 30, 2019, the Company had approximately $733 thousand in certificates of deposit held as collateral for letters of credit for the beneficiary of states for the purpose of plugging and abandonment costs of the wells in which the Company has an interest. Such amounts are classified as restricted cash in the accompanying consolidated balance sheet.

 

Thefollowingtableprovidesareconciliationofcash,cashequivalents,andrestrictedcashreported withinthestatementoffinancialpositionthatsumtothetotalofthesamesuchamountsshownin the statement of cash flows (inthousands):

 

| September 30,                                                                           |   | 2019   |   |
|-----------------------------------------------------------------------------------------|--------|--------|--------|
| Cash and cash equivalents                                                               |   | $      | 3,192  |   |
| Restricted cash included in other long-term assets                                      |   |   | 733    |   |
| Total cash, cash equivalents, and restricted cash

shown in the statement of cash flows |   | $      | 3,925  |   |

 

Concentrations of Credit Risk

 

The Company sells oil and natural gas to various customers and participates with other parties in thedrilling,completionandoperationofoilandnaturalgaswells.Jointinterestandoilandnatural gas sales receivables related to these operations are generally unsecured. For the year ended September 30, 2019, over 83% of total revenues and total receivables were from two customers. The Company provides an allowance for doubtful accounts for certain purchasers and certain joint interest owners’ receivable balances when the Company believes the receivable balance may not becollected.Accountsreceivablearepresentednetoftherelatedallowancefordoubtfulaccounts. At September 30, 2019, the allowance for doubtful accounts was $8thousand.

 

In 2019, the Company had cash deposits in certain banks that at times exceeded the maximum insuredbytheFederalDepositInsuranceCorporation.TheCompanymonitorsthefinancialcondition of the banks and has experienced no losses on theseaccounts.

 

12

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

General and Administrative Expenses

 

The Company receives fees for the operation of jointly owned oil and natural gas properties and records such reimbursements as reductions of general and administrative expenses. Such fees totaled approximately $0.7 million for the year ended September 30, 2019.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetsandliabilitiesatthedateoftheconsolidatedfinancialstatementsandthereportedamounts of revenues and expenses during the reporting period. Estimates and assumptions that, in the opinionofmanagementaresignificant,includeoilandnaturalgasreserves,depreciation,depletion and amortization related to oil and natural gas properties, asset retirement obligations and derivativeinstrumentvaluations.TheCompanyevaluatesitsestimatesandassumptionsonaregular basis.Estimatesarebasedonhistoricalexperienceandvariousotherassumptionsthatarebelieved to be reasonable under the circumstances. Actual results may differ from theseestimates.

 

Oil and Natural Gas Reserves Estimates

 

IndependentpetroleumandgeologicalengineersprepareestimatesoftheCompany’soilandnatural gas reserves. Proved reserves and the estimated future net revenues are estimated based upon a combination of historical data and estimates of future activity. Consistent with Topic 932 of the Codification,atSeptember30,2019,theCompanycalculateditsestimateofprovedreservesusing atwelvemonthaverageprice,calculatedastheunweightedarithmeticaverageofthefirst-day-of- the-month price for each period within the twelve-month period prior to the end of the reporting period.ThereserveestimatesareusedintheassessmentoftheCompany’sceilinglimitationandin calculating depreciation, depletion and amortization. Significant assumptions are required in the valuationofprovedoilandnaturalgasreserveswhich,asdescribedherein,mayaffecttheamount at which oil and natural gas properties are recorded. Actual results could differ materially from theseestimates.

 

Asset Retirement Obligations

 

Thefairvalueofaliabilityforanassetretirementobligationisrecognizedintheperiodinwhichit is incurred if a reasonable estimate of fair value can be made, and the associated asset retirement costsarecapitalizedaspartofthecarryingamountofthelong-livedasset.TheCompanydetermines itsassetretirementobligationsonitsoilandnaturalgaspropertiesbycalculatingthepresentvalue oftheestimatedcashflowsrelatedtotheestimatedliability.Periodicaccretionofthediscountof the estimated liability associated with the Company’s oil and natural gas properties is recorded in the consolidated statement ofoperations.

 

13

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

The  Company  recorded  the  following  activity  related  to  the  asset  retirement  obligations  (in thousands):

 

| Year Ended September 30,                                                    |   | 2019   |   |
|-----------------------------------------------------------------------------|--------|--------|--------|
|                                                                        |   |   |   |   |
| Liability for Asset Retirement Obligations,

   Beginning of Year |   | $      | 5,325  |   |
| Accretion expense                                                           |   |   | 643    |   |
| Additions                                                                   |   |   | 173    |   |
| Obligations for wells sold                                                  |   |   | (257   | ) |
| Settlements                                                                 |   |   | (400   | ) |
| Changes in estimates                                                        |   | -      |   |
|                                                                        |   |   |   |   |
| Liability for Asset Retirement Obligations,

   End of Year       |   |   | 5,484  |   |
|                                                                        |   |   |   |   |
| Less: current asset retirement obligations                                  |   |   | 493    |   |
|                                                                        |   |   |   |   |
| Long-Term Asset Retirement Obligations                                      |   | $      | 4,991  |   |

 

Revenue Recognition

 

Oil and natural gas sales are recognized when production is sold to a purchaser at a fixed or determinableprice,deliveryhasoccurred,titlehastransferred,andcollectabilityoftherevenue is probable. Delivery occurs and title is transferred when production has been delivered to a pipeline,railcarortruck.Thesalesmethodofaccountingisusedforoilandnaturalgassalessuch that revenues are recognized based on the Company’s share of actual proceeds from the oil and natural gas sold to purchasers. Oil and natural gas imbalances are generated on properties for whichtwoormoreownershavethe righttotakeproduction“in-kind”and,indoingsotakemore or less than their respective entitled percentage. As of September 30, 2019, there were no significant oil and natural gasimbalances.

 

Income Taxes

 

RAM and its subsidiaries are disregarded subsidiaries of Holdings. As Holdings has elected to be classified as a corporation, a tax benefit has been calculated for the year ended September 30, 2019.

 

Thebenefitforincometaxesdiffersfromtheamountcomputedbyapplyingthestatutoryfederal incometaxratetolossbeforeprovisionforincometaxes.FortheyearendedSeptember30,2019, the Company had a benefit for income taxes of $26 thousand, which was completely offset by a valuation allowance. The significant differences between pre-tax book income and taxable book income relate to non-deductible expenses, state income taxes, change in valuation allowance, and other adjustments to deferred taxbalances.

 

14

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

The sources and tax effects of the differences are as follows (in thousands):

 

| Year Ended September 30,                               |   | 2019   |   |
|--------------------------------------------------------|--------|--------|--------|
|                                                   |   |   |   |   |
| Income tax benefit at the federal statutory rate (21%) |   | $      | (1,332 | ) |
| Return to provision adjustments                        |   |   | 1,380  |   |
| State income tax expense, net of federal benefit       |   |   | (78    | ) |
| Other                                                  |   |   | 4      |   |
| Change in valuation allowance                          |   |   | 26     |   |
|                                                   |   |   |   |   |
| Income tax benefit                                     |   | $      | -      |   |

 

The Company’s income tax benefit was computed based on the federal statutory rate and the averagestatestatutoryrates,netoftherelatedfederalbenefit.Deferredincometaxesreflectthe net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxpurposes.

 

Significant components of the company’s deferred tax assets and liabilities are as follows (in thousands):

 

| Year Ended September 30,                             |   | 2019   |    |
|------------------------------------------------------|--------|--------|---------|
|                                                 |   |   |    |   |
| Depreciable/depletable property, plant and equipment |   | $      | 6,595   |   |
| Asset retirement obligation                          |   |   | 1,874   |   |
| Interest expense                                     |   |   | 1,129   |   |
| Derivative assets                                    |   |   | 472     |   |
| Reserves and other                                   |   |   | 19      |   |
| Net operating loss carryforward                      |   |   | 12,752  |   |
| Total noncurrent deferred tax assets                 |   |   | 22,841  |   |
| Valuation allowance                                  |   |   | (22,841 | ) |
|                                                 |   |   |    |   |
| Net noncurrent deferred tax assets                   |   | $      | -       |   |

 

As of September 30, 2019, the Company has a net operating loss carryforward of approximately $57.4millionforfederalincometaxreportingpurposes.Ofthisamount,$31.4millionwillbeginto expire in 2036 and $26 million has an indefinite carryforward period, but only has the availability to offset future income of up to 80% in any single year. The 2018 Tax Cuts and Jobs Act changed the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Based on the history of losses of the predecessor entity and the continued depression of oil and gas prices, the Company concluded it was not more likely than not that the net operating losses would be utilized; accordingly, a valuation allowance was recorded. In addition, the Company has generated a net operating loss carryforward for state income tax purposes, which the Company believes will not be realized during the relevant carryforward periods; however, such amounts have not been separately disclosed in the consolidated financial statements as the Company does not believe that these net operating losses are material to the amounts presentedherein.

 

15

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

A valuation allowance has been established with respect to the portion of the deferred tax asset associatedwithtaxbasisinexcessofcarryingvalueoftheCompany’sassetsforwhichtheCompany currently does not reasonably believe under the deferred tax asset realization criteria set forth in Topic740thatitwillmorelikelythannotrealizeabenefitinfutureperiods.Duringtheyearended September 30, 2019, the Company recorded a valuation allowance of $22.8million.

 

Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technicalmerits,uponexaminationbythetaxingauthorities.Iftheincometaxpositionisexpected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50 percent likely to be realized upon its ultimate settlement. The Company had no uncertain tax positions as of September 30,2019.

 

The Company’s federal and state tax returns from its inception remain subject to examination by the applicable tax authorities.

 

4.Fair ValueMeasurements

 

There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

 

Level 1 - inputs to the valuation methodology are quoted prices  (unadjusted)  for identical assets or liabilities in activemarkets.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financialinstrument.

Level 3 - inputs to the valuation methodology are unobservable  and  significant  to the fair valuemeasurement.

 

Afinancialinstrument’scategorizationwithinthevaluationhierarchyisbaseduponthelowestlevel of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset orliability.

 

The Company had no assets or liabilities measured at fair value on a recurring basis, by level, as of September 30, 2019.

 

At September 30, 2019, the carrying value of cash, restricted cash, receivables and payables reflected in the Company’s consolidated financial statements approximates fair value due to their short-term nature. Additionally, we believe that the carrying value of the Company’s long-term debtunderthecreditfacilityapproximatesfairvaluebecausethecreditfacilitycarriesaninterest rate that approximates current market rates. The long-term debt is classified as Level2.

 

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

5.Acquisitions and Divestitures

McMullen County Disposition

 

In January 2019, the Company closed on the sale of certain oil and natural gas properties located in McMullen County, Texas for $260 thousand. The full cost pool was reduced by the net proceeds.

 

Lavaca County Disposition

 

In April 2019, the Company closed on the sale of certain oil and natural gas properties located in Lavaca County, Texas. The Company received no proceeds but was relieved of $193 thousand of plugging liability.

 

6.Long-Term Debt - Affiliate

 

Long-term debt - affiliate consists of the following (in thousands):

 

| September 30,       |   | 2019   |   |
|---------------------|--------|--------|--------|
|                |   |   |   |   |
| 2017 Term Loan      |   | $      | 35,000 |   |
| 2018 Revolving Loan |   |   | 40,000 |   |
|                |   | $      | 75,000 |   |

 

OnSeptember29,2017,theCompanyenteredintoatermloanof$35millionunderaloanagreement withPennantPark.TheloanagreementwasmadeeffectiveJuly1,2017andmaturesonJuly2,2022. Thetermloancarriesaninterestrateof8%witha50%paid-in-kindinterestoption.

 

OnJune5,2018,theloanagreementwasamendedtoaddarevolvingloanwithatotalcommitment of $15 million. The loan agreement was further amended on January 7, 2019 and May 10, 2019, to increase the revolving loan commitment to $35 million and $40 million, respectively. The loan agreement was amended a fourth time in October 2019, as discussed in Note 9. Borrowings on the revolving loan must be at a minimum of $1 million and in $1 million increments, and carries an interest rate of8%.

 

The loan agreement includes representations, warranties, and customary covenants, including certain financial covenants for minimum liquidity and maximum annual capital expenditures. As of September 30, 2019, the Company was in compliance with its financial covenants.

 

7.Commitments andContingencies

 

From time to time the Company may be involved in claims and litigation arising in the ordinary courseofbusiness.Intheopinionofmanagement,theoutcomeofallexistingmatterswillnothave a material adverse effect on the Company’s financial position or results ofoperations.

 

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

Leases

 

RAM leases office space and certain equipment under non-cancelable operating lease agreements that expire on various dates through 2024. Approximate future minimum lease payments as of September 30, 2019 are as follows (in thousands):

 

| Year Ending September 30, |   |   |   |   |
|---------------------------|--------|--------|--------|--------|
| 2020                      |   | $      | 347    |   |
| 2021                      |   |   | 214    |   |
| 2022                      |   |   | 215    |   |
| 2023                      |   |   | 20     |   |
| 2024                      |   |   | 2      |   |
|                      |   | $      | 798    |   |

 

Rentexpenseofapproximately$0.5millionwasincurredunderoperatingleasesfortheyearended September 30,2019.

 

8.Related PartyTransactions

 

RAMmadecertainpaymentsonbehalfofanofficertotaling$53thousandin2019,whicharedueto the Company as of September 30, 2019. LEL Energy, a company owned by an officer of RAM, made paymentsonbehalfofRAMtotaling$18thousandin2019,whicharepayablesonRAM’sbooksasof September 30,2019.

 

9.SubsequentEvents

 

The Company evaluates events and transactions occurring after the balance sheet date and before theconsolidatedfinancialstatementsareavailableforissuance.Sucheventsandtransactionshave been evaluated through November 15, 2019, the date the consolidated financial statements were available to beissued.

 

OnOctober11,2019,theloanagreementwithPennantParkwasamendedtoincreasetherevolving loancommitmentto$50million.TheCompanyborrowedanadditional$10millionontherevolving loan, bringing the total borrowings on the revolving loan to $50million.

 

Macquarie Credit Facility

 

On October 16, 2019, RAM, Fayette and Service, as co-borrowers, entered into a $70 million credit facility with Macquarie Investments US Inc. (“Macquarie”) as Administrative Agent for itself. The amountfundedatclosingwas$30.5million,netofdeferredloancosts.Thefacilityincludesa$30.5 millionTrancheAtermloan,a$16millionTrancheBtermloananda$23.5millionTrancheCterm loan. Wells that are currently drilling are identified as Tranche A wells. Tranche B and Tranche C wells are identified in RAM’s future development plan. Tranche A was funded at closing, and will be used to pay a working capital deficit and other development and operating costs of Tranche A wells. Tranches B and C will be available when certain wells satisfy production targets and other conditions aremet.

 

The Tranche A term loan provides for monthly payments of interest and principal during its term. InterestischargedatLIBORplustheApplicableMarginof8.0%.TheTrancheAmonthlyamortization payments vary based on production of the new Fayette wells. The first principal repayment is due November 30, 2019. The Tranche B term loan provides for incremental monthly amortization payments, upon such date the Tranche B loan should becomeavailable.

 

 

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RAM Energy Holdings LLC andSubsidiaries

Notes to Consolidated Financial Statements

 

 

The facility is secured by liens on substantially all properties and assets of the borrowers. The loan agreement contains representations, warranties and covenants customary in transactions of this nature, including financial covenants relating to a current ratio, a maximum leverage ratio and a PDP coverage ratio. The facility further provides for certain hedging requirements, and the Company entered into hedging agreements during October 2019.

 

Hedging contracts entered during October 2019 are summarized below:

 

|       |   | Start Date |   | End Date   |   | Commodity                     |   | Notional

Quantity |       |   |   |   | Average

Strike Price |
|------------|--------|------------|--------|------------|--------|-------------------------------|--------|--------------------|------------|--------|--------|--------|-----------------------|
| Contract 1 |   | 11/1/2019  |   | 10/31/2022 |   | Crude Oil                     |   |               | 378,996    |   |   | BBL    |                  | $51.097 |
| Contract 2 |   | 11/1/2019  |   | 10/31/2020 |   | Natural Gas                   |   |               | 1,816,546  |   |   | MMBTU  |                  | $2.304 |
| Contract 3 |   | 12/1/2019  |   | 3/31/2020  |   | Natural Gas                   |   |               | 976,000    |   |   | MMBTU  |                  | $2.556 |
| Contract 4 |   | 11/1/2020  |   | 3/31/2021  |   | Natural Gas                   |   |               | 1,208,000  |   |   | MMBTU  |                  | $2.601 |
| Contract 5 |   | 4/1/2021   |   | 10/31/2022 |   | Natural Gas                   |   |               | 1,679,051  |   |   | MMBTU  |                  | $2.367 |
| Contract 6 |   | 11/1/2019  |   | 10/31/2022 |   | Natural Gas Liquids |   |               | 17,166,450 |   |   | GAL    |                  | $0.170 |
| Contract 7 |   | 11/1/2019  |   | 10/31/2022 |   | Natural Gas Liquids |   |               | 7,125,846  |   |   | GAL    |                  | $0.450 |

 

The facility matures October 16, 2022.

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