Notes to Consolidated Financial Statements
Note 1 Organization
Harvest
Natural Resources, Inc. (Harvest or the Company) is an independent energy company engaged in the acquisition, exploration, development, production and disposition of oil and natural gas properties since 1988, when it was
incorporated under Delaware law.
We have acquired and developed significant interests in the Bolivarian Republic of Venezuela
(Venezuela). Our Venezuelan interests are owned through Harvest-Vinccler Dutch Holding B.V., a Dutch private company with limited liability (Harvest Holding). Our ownership of Harvest Holding is through HNR Energia B.V.
(HNR Energia) in which we have a direct controlling interest. Prior to December 16, 2013, we indirectly owned 80 percent of Harvest Holding and we had one partner, Oil & Gas Technology Consultants (Netherlands)
Coöperatie U.A., (Vinccler, a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A.), which owned the remaining noncontrolling interest in Harvest Holding of 20 percent. We do not have a business
relationship with Vinccler outside of Venezuela. On December 16, 2013, Harvest and HNR Energia entered into a Share Purchase Agreement (the SPA) with Petroandina Resources Corporation N.V. (Petroandina, a wholly owned
subsidiary of Pluspetrol Resources Corporation B.V. (Pluspetrol)) and Pluspetrol to sell all of our 80 percent equity interest in Harvest Holding to Petroandina in two closings for an aggregate cash purchase price of $400.0 million. The
first closing occurred on December 16, 2013 contemporaneously with the signing of the SPA, when we sold a 29 percent equity interest in Harvest Holding for $125.0 million. This first transaction resulted in a loss on the sale of the interest in
Harvest Holding of $23.0 million in the year ended December 31, 2013. As a result of this first sale, we indirectly own 51 percent of Harvest Holding beginning December 16, 2013 and the noncontrolling interest owners hold the remaining 49
percent with Petroandina having 29 percent and Vinccler continuing to own 20 percent. The second closing did not occur during 2014 and the SPA was terminated by the Company on January 1, 2015. See
Note 5 Dispositions and Discontinued
Operations
below for further information on this transaction.
Harvest Holding owns 100 percent of HNR Finance B.V. (HNR
Finance), and HNR Finance owns a 40 percent interest in Petrodelta, S.A. (Petrodelta). Petrodelta is our cost investment in eastern Venezuela responsible for the exploration, development, production, gathering, transportation and
storage of hydrocarbons in six oil fields. Petrodelta is governed by its own charter and bylaws and the shareholders intend that the Company be self-funding and rely on internally-generated cash flows.
Corporación Venezolana del Petroleo S.A. (CVP) and PDVSA Social S.A. owns the remaining 56 percent and 4 percent,
respectively, of Petrodelta. Petroleos de Venezuela S.A. (PDVSA) owns 100 percent of CVP and PDVSA Social S.A. Through our indirect 51 percent in Harvest Holding, we indirectly own a net 20.4 percent interest in Petrodelta for
the period from December 16, 2013 to date, and prior to December 16, 2013 we indirectly owned a 32 percent interest in Petrodelta through our indirect 80 percent interest in Harvest Holding during this period.
In addition to its 40 percent interest in Petrodelta, Harvest Holding also indirectly owns 100 percent of Harvest Vinccler, S.C.A.
(Harvest Vinccler). Harvest Vincclers main business purposes are to assist us in the management of Petrodelta and in negotiations with PDVSA.
In addition to our interests in Venezuela, we also hold exploration and exploitation acreage offshore of the Republic of Gabon
(Gabon) through the Dussafu Marin Permit (Dussafu PSC). See
Note 8 Gabon
.
Purchase Agreement
On June 19, 2015, the Company and certain of its domestic subsidiaries entered into a securities purchase agreement (the Purchase
Agreement) with CT Energy Holding SRL (CT Energy), a Venezuelan-Italian
C-8
consortium organized as a Barbados Society with Restricted Liability, under which CT Energy purchased certain securities of the Company and acquired certain governance rights. Harvest immediately
received gross proceeds of $32.2 million from the sale of the securities, as described below. Key terms of the transaction include:
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CT Energy acquired a $25.2 million, five year, 15.0% non-convertible senior secured promissory note (the 15% Note). Interest is payable quarterly on the first business day of each January, April, July and
October, commencing October 1, 2015.
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CT Energy acquired a $7.0 million, five year, 9.0% convertible senior secured note (the 9% Note). The 9% Note face value of $7.0 million and associated accrued interest of $0.1 million was converted
into 2,166,900 shares of Harvest common stock at a conversion price of $3.28 per share on September 15, 2015. Immediately after the conversion, CT Energy owned approximately 16.6% of Harvests common stock.
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CT Energy also acquired a warrant to purchase up to 8,517,705 shares of Harvests common stock at an initial exercise price of $5.00 per share (the CT Warrant). The CT Warrant will become
exercisable only after the 30-day volume weighted average price of Harvests common stock equals or exceeds $10.00 per share (Stock Appreciation Date). The warrant is cash-exercisable, but CT Energy may surrender the 15% Note to pay
for a portion of the aggregate exercise price.
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CT Energy acquired a five-year 15.0% non-convertible senior secured note (the Additional Draw Note), under which CT Energy may elect to provide $2.0 million of additional funds to the Company per month for
up to six months following the one-year anniversary of the closing date of the transaction (up to $12.0 million in aggregate). If funds are loaned under the Additional Draw Note, interest will be compounded quarterly at a rate of 15.0% per
annum and is payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2016. If by June 19, 2016 (the Claim Date), the volume weighted average price of the Companys common
stock over any consecutive 30-day period has not equaled or exceeded $10.00 per share, the maturity date of the Additional Draw Note will be extended by two years and the interest rate on the Additional Draw Note will adjust to 8.0%. During an event
of default, the outstanding principal amount will bear additional interest at a rate of 2.0% per annum higher than the rate otherwise applicable.
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CT Energy also acquired 69.75 shares of the Companys newly created Series C preferred stock, par value $0.01 per share. The purpose of the Series C preferred stock was to provide the holder of the 9% Note with
voting rights equivalent to the common stock underlying the unconverted portion of the 9% Note. Upon conversion of the 9% Note, the Series C preferred stock ceased to have voting rights and was redeemed.
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CT Energy was granted certain governance rights in the transaction, including the right to appoint specified directors. Also, the Company and CT Energia Holding Ltd. (CT Energia), a Malta corporation,
entered into a Management Agreement (the Management Agreement), under which CT Energia and its representatives will manage the day-to-day operations of the Companys business as it relates to Petrodelta and Venezuela generally.
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At our annual shareholder meeting, on September 9, 2015, Harvest stockholders approved, among other proposals, 1)
certain aspects of the transaction under NYSE shareholder approval requirements and Delaware law and 2) an amendment to Harvests charter to increase the number of authorized shares of our common stock from 20,000,000 shares to 37,500,000 in
part to have sufficient shares to issue upon conversion of the 9% Note and exercise of the CT Warrant and an amendment to the 2010 Long Term Incentive Plan increasing the number shares of our common stock to satisfy of stock options, stock
appreciation rights (SARs), restricted stock, restricted stock units (RSUs) and other stock-based awards. See
Note 15 Stock-Based Compensation and Stock Purchase Plans
.
C-9
Share Purchase Agreement Delta Petroleum
On October 7, 2016, the Company, and HNR Energia, completed the sale of all of HNR Energias 51% interest in Harvest Holding, to
Delta Petroleum N.V., a limited liability company organized under the laws of Curacao (Delta Petroleum), pursuant to a share purchase agreement, dated June 29, 2016 (the Share Purchase Agreement). Harvest Holding owns,
indirectly through wholly owned subsidiaries, a 40% interest in Petrodelta, through which all of the Companys interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to
Delta Petroleum.
Delta Petroleum is an affiliate of CT Energy, which assigned all of its rights and obligations under the Share Purchase
Agreement to Delta Petroleum on September 26, 2016. For more information about CT Energy, see
Purchase Agreement
, above.
At
the closing, the Company received consideration consisting of:
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$69.4 million in cash paid after various closing adjustments;
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an 11% non-convertible senior promissory note payable by Delta Petroleum to HNR Energia six months from the closing date in the principal amount of $12.0 million, guaranteed by the sole member and sole equity-holder of
Delta Petroleum (the 11% Note);
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the return of all of the Companys common stock owned by CT Energy, consisting of 2,166,900 shares which was approximately 16.8% of all outstanding shares pre-closing, to be held by the Company as treasury shares;
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the cancellation of $30.0 million in outstanding principal under the 15% Note;
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the cancellation of the CT Warrant.
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As a result of the sale we have reclassified the results
of operations relating to Harvest Holding for the years ended December 31, 2015 and 2014 as discontinued operations and classified the assets and liabilities directly related to the sale as of December 31, 2015 and 2014 as assets and
liabilities associated with discontinued operations. See
Note 5 Dispositions and Discontinued Operations
for further information.
Reverse Stock Split
On December 2,
2015, the Company received notification from the New York Stock Exchange (NYSE) that the Company was not in compliance with the NYSEs continued listing standards, which require a minimum average closing price of $1.00 per share
over 30 consecutive trading days. In an effort to correct the deficiency, after the market closed on November 3, 2016, the Company completed a one-for-four reverse split of its issued and outstanding common stock. The Companys
common stock began trading on a split-adjusted basis at market open on November 4, 2016. In connection with the reverse stock split, the Company amended its amended and restated certificate of incorporation to reduce the authorized number
of shares of common stock from 150,000,000 to 37,500,000.
As of November 4, 2016, the closing price of the Companys common
stock had increased to $4.45 per share.
All share, warrants, options, restricted stock, stock appreciation rights, restricted stock units
and per share amounts in these consolidated financials have been adjusted to reflect the impact of the reverse stock split.
Note 2 Liquidity
and Going Concern
We expect that for 2016 we will not generate revenue, will continue to generate losses from operations, and our cash
flows will not be sufficient to cover our operating expenses. Therefore, expected continued losses from
C-10
operations, capital needs and uses of cash will be funded through debt or equity financings, farm-downs, delay of the discretionary portion of our capital spending to future periods or operating
cost reductions. Our ability to continue as a going concern depends on our ability to negotiate the management and structure of our investment in Petrodelta and the success of our planned exploration and development activities in
Gabon. There can be no guarantee of future capital acquisition, fundraising or exploration success or that we will realize the value of our exploration and exploitation acreage and suspended wells. We believe that we will continue to be
successful in securing any funds necessary to continue as a going concern. However, our current cash position and our inability to access additional capital may limit our available opportunities or not provide sufficient cash for operations.
Historically, prior to the transaction pursuant to the Purchase Agreement, our primary ongoing source of cash had been dividends from
Petrodelta, issuance of debt and the sale of oil and natural gas properties. Our primary use of cash has been to fund oil and natural gas exploration projects, principal payments on debt, interest, and general and administrative costs. We require
capital principally to fund the exploration and development of new oil and natural gas properties. We have various contractual commitments pertaining to exploration, development and production activities.
See
Note 8 Gabon
and
Note 13 Commitments and Contingencies
for our contractual commitments.
We are currently assessing alternatives for our Gabon asset, and we intend to continue our consideration of a possible sale or farm-down of
our Gabon asset if we are able to negotiate a sale or sales in transactions that our Board of Directors believes are in the best interests of the Company and its stockholders. Given that we do not currently have any operating cash inflows, we may
also decide to access additional capital through equity or debt sales; however, there can be no assurance that such financing will be available to the Company or on terms that are acceptable to the Company.
On December 2, 2015, the Company received notification from the NYSE that the Company was not in compliance with the NYSEs
continued listing standards, which require a minimum average closing price of $1.00 per share over 30 consecutive trading days. Under the NYSEs rules, Harvest has a period of six months from the date of the NYSE notice to bring its share price
and 30 trading-day average share price back above $1.00. During this period, the Companys common stock will continue to be traded on the NYSE under the symbol HNR, subject to the Companys compliance with other NYSE continued
listing requirements, but will be assigned the notation .BC after the listing symbol to signify that the Company is not currently in compliance with the NYSEs continued listing standards. As required by the NYSE, in order to maintain its
listing, Harvest has notified the NYSE that it intends to cure the price deficiency.
Failure to generate sufficient cash flow, raise
additional capital through debt or equity financings, farm-downs, or reduce operating costs could have a material adverse effect on our ability to meet our short- and long-term liquidity needs and achieve our intended long-term business objectives.
The above circumstances raise substantial doubt about our ability to continue as a going concern. While we believe the issuance of
additional equity securities, short- or long-term debt financing, farm-downs, the delay of the discretionary portion of our capital spending to future periods or operating cost reductions could be put into place which would not jeopardize our
operations and future growth plans, there can be no assurance that such financings will be successful.
Our financial statements have been
prepared under the assumption that we will continue as a going concern, which contemplates that we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course
of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that could result
should we be unable to continue as a going concern.
C-11
Note 3 Summary of Significant Accounting Policies
Principles of Consolidation
The
consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated. Third-party interests in our majority-owned subsidiaries are
presented as noncontrolling interest owners.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not
affect our consolidated financial results.
Investment in Affiliate
Through December 31, 2014, we included the results of Petrodelta in our financial statements under the equity method. We ceased recording
earnings from Petrodelta in the second quarter 2014 due to the expected sales price of the second closing purchase agreement approximating the recorded value of our investment in Petrodelta. The Company was not able to obtain approval from the
government of Venezuela during 2014 and on January 1, 2015 we terminated the SPA. Due to our failed sales attempts, lack of management influence, and actions and inactions by the majority owner, PDVSA, we believe we no longer exercise
significant influence in Petrodelta and in accordance with Accounting Standards Codification ASC 323 Investments Equity Method and Joint Ventures, we are accounting for our investment in Petrodelta under the cost method
(ASC 325 Investments Other), effective December 31, 2014. Under the cost method we dont recognize any equity in earnings from our investment in Petrodelta in our results of operations, but recognized cash
dividends in the period they are received.
We evaluate our investment in Petrodelta for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investment may be impaired. A loss is recorded in earnings in the current period if a decline in the value of the investment is determined to be other than temporary. Impairment is calculated as
the difference between the carrying value of the investment and its fair value. We recorded pre-tax impairment charges against the carrying value of our investment in Petrodelta of $164.7 million and $355.7 million during the years ended
December 31, 2015 and 2014, respectively. See
Note 6 Investment in Affiliate
and
Note 5 Dispositions and Discontinued Operations
for further information.
Use of Estimates
The preparation of
financial statements in conformity with generally accepted accounting principles in the United States (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 reporting period. Other important significant estimates are those included in the valuation of our
assets and liabilities that are recorded at fair value on a recurring and non-recurring basis. Actual results could differ from those estimates.
Reporting and Functional Currency
The
United States Dollar (USD) is the reporting and functional currency for all of our controlled subsidiaries and Petrodelta. Amounts denominated in non-USD currencies are re-measured into USD, and all currency gains or losses are recorded
in the consolidated statements of operations and comprehensive loss. There are many factors that affect foreign exchange rates and the resulting exchange gains and losses, many of which are beyond our influence.
See
Note 6 Investment in Affiliate
and
Note 7 Venezuela Other
for a discussion of currency exchange rates
and currency exchange risk on Petrodeltas and Harvest Vincclers businesses.
C-12
Cash and Cash Equivalents
Cash equivalents include money market funds and short term certificates of deposit with original maturity dates of less than three months.
Restricted Cash
Restricted cash is
classified as current or non-current based on the terms of the agreement. Restricted cash at December 31, 2014 represented $25,000 held in a U.S. bank as collateral for our foreign credit card program. There was no restricted cash as of
December 31, 2015.
Financial Instruments
Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, accounts
receivable, notes payable and derivative financial instruments. We maintain cash and cash equivalents in bank deposit accounts with commercial banks with high credit ratings, which, at times may exceed the federally insured limits. We have not
experienced any losses from such investments. Concentrations of credit risk with respect to accounts receivable are limited due the nature of our receivables, which include primarily joint venture partners receivable, and income tax
receivable. In the normal course of business, collateral is not required for financial instruments with credit risk.
Property and Equipment
The major components of property and equipment are as follows:
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As of December 31,
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2016
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2015
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(in thousands)
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Unproved property costs Dussafu PSC
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$
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28,000
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$
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50,324
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Oilfield inventories
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3,006
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3,966
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Other administrative property
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1,922
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1,629
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Total property and equipment
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32,928
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55,919
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Accumulated depreciation
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(1,483
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)
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(1,464
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)
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Total property and equipment, net
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$
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31,445
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$
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54,455
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Property and equipment are stated at cost less accumulated depreciation. Costs of improvements that
appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of property and equipment, net of the related
accumulated depreciation is removed and, if appropriate, gains or losses are recognized in investment earnings and other. We did not record any depletion expense in the years ended December 31, 2015 and 2014 as there was no production related
to proved oil and natural gas properties.
We follow the successful efforts method of accounting for our oil and natural gas properties.
Under this method, exploration costs such as exploratory geological and geophysical costs, delay rentals and exploration overhead are charged against earnings as incurred. Costs of drilling exploratory wells are capitalized pending determination of
whether proved reserves can be attributed to the area as a result of drilling the well. If management determines that proved reserves, as that term is defined in Securities and Exchange Commission (SEC) regulations, have not been
discovered, capitalized costs associated with the drilling of the exploratory well are charged to expense. Costs of drilling successful exploratory wells, all development wells, and related production equipment and facilities are capitalized and
depleted or depreciated using the unit-of-production method as oil and natural gas is produced. During the years ended December 31, 2015 and 2014, we expensed no dry hole costs.
C-13
Leasehold acquisition costs are initially capitalized. Acquisition costs of unproved leaseholds
are assessed for impairment during the holding period. Costs of maintaining and retaining unproved leaseholds are included in exploration expense. Costs of impairment of unsuccessful leases are included in impairment expense. We assess our unproved
property costs for impairment when events or circumstances indicate a possible decline in the recoverability of the carrying value of the projects. The estimated value of our unproved projects is determined using quantitative and qualitative
assessments and the carrying value of the projects is adjusted if the carrying value exceeds the assessed value of the projects.
Impairment is based on specific identification of the lease. Costs of expired or abandoned leases are charged to exploration expense, while
costs of productive leases are transferred to proved oil and natural gas properties.
Proved oil and natural gas properties are reviewed
for impairment at a level for which identifiable cash flows are independent of cash flows of other assets when facts and circumstances indicate that their carrying amounts may not be recoverable. In performing this review, future net cash flows are
determined based on estimated future oil and natural gas sales revenues less future expenditures necessary to develop and produce the reserves. If the sum of these undiscounted estimated future net cash flows is less than the carrying amount of the
property, an impairment loss is recognized for the excess of the propertys carrying amount over its estimated fair value, which is generally based on discounted future net cash flows. We did not have any proved oil and natural gas properties
in 2015 and 2014.
Costs of drilling and equipping successful exploratory wells, development wells, asset retirement liabilities and costs
to construct or acquire offshore platforms and other facilities, are depleted using the unit-of-production method based on total estimated proved developed reserves. Costs of acquiring proved properties, including leasehold acquisition costs
transferred from unproved leaseholds, are depleted using the unit-of-production method based on total estimated proved reserves. All other properties are stated at historical acquisition cost, net of impairment, and depreciated using the
straight-line method over the useful lives of the assets.
During the years ended December 31, 2015 and 2014, we recorded impairment
expense related to our Dussafu Project in Gabon of $24.2 million (including $1.0 million of oilfield inventories) and $50.3 million, respectively. During the year ended December 31, 2014, we also recorded impairment expense related to our
Budong Project in Indonesia of $7.7 million.
Other Administrative Property
Furniture, fixtures and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which
range from three to five years. Leasehold improvements are recorded at cost and amortized using the straight-line method over the life of the applicable lease. For the year ended December 31, 2015, depreciation expense in continuing operations
was $0.1 million and $0.1 million for the year ended December 31, 2014.
Other Assets
Other Assets at December 31, 2015 and 2014 include deposits, prepaid expenses which are expected to be realized in the next 12 to 24
months. During 2015 we fully reserved the blocked payment related to our drilling operations in Gabon in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by the United
States Treasury Departments Office of Foreign Assets Control (OFAC) See
Note 13 Commitments and Contingencies
. We recorded an allowance for doubtful accounts of $0.7 million and the remaining balance of the blocked
payment was reclassified to a receivable from our joint venture partners for $0.4 million. Other assets at December 31, 2014 also consisted of deferred
C-14
financing costs. Deferred financing costs relate to specific financings and are amortized over the life of the financings to which the costs relate using the interest rate method.
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As of December 31,
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2015
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2014
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(in thousands)
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Deposits and other, net
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$
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118
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$
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294
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Gabon blocked payment
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1,100
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$
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118
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$
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1,394
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Reserves
We measure and disclose oil and natural gas reserves in accordance with the provisions of the SECs Modernization of Oil and Gas Reporting
and ASC 932, Extractive Activities Oil and Gas (ASC 932). All of our reserves are owned through our investment in Petrodelta. We are accounting for our investment in Petrodelta under the cost method (ASC 325
Investments Other), effective December 31, 2014. Under the cost method, we do not have any reserves at December 31, 2015 and 2014.
Capitalized Interest
We capitalize
interest costs for qualifying oil and natural gas properties. The capitalization period begins when expenditures are incurred on qualified properties, activities begin which are necessary to prepare the property for production and interest costs
have been incurred. The capitalization period continues as long as these events occur. The average additions for the period are used in the interest capitalization calculation. During the years ended December 31, 2015 and 2014, we capitalized
interest costs for qualifying oil and natural gas property additions related to Gabon of $0.0 million and $0.5 million, respectively.
Fair Value
Measurements
We measure and disclose our fair values in accordance with the provisions of ASC 820 Fair Value Measurements and
Disclosures (ASC 820). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and
establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
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Level 1 Inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities.
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Level 2 Inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly.
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Level 3 Inputs to the valuation techniques that are unobservable for the assets or liabilities.
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Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, accounts
receivable, SARs, RSUs, debt, embedded derivatives and warrant derivative liabilities. We maintain cash and cash equivalents in bank deposit accounts with commercial banks with high credit ratings, which, at times may exceed the federally insured
limits. We have not experienced any losses from such investments. Concentrations of credit risk with respect to accounts receivable are limited due to the nature of our receivables. In the normal course of business, collateral is not required for
financial instruments with credit risk. The estimated fair value of cash and cash equivalents and accounts receivable approximates their carrying value due to their short-term nature (Level 1). The following tables set forth by level within the fair
value hierarchy our financial assets and liabilities that were accounted for at fair value as of December 31, 2015
C-15
and 2014 and assets which were assessed for impairment on a non-recurring basis. During the year ended December 31, 2015, we impaired the carrying value of our Dussafu project in Gabon by
$23.2 million and our investment in affiliate by $164.7 million. During the year ended December 31, 2014, we impaired the carrying value of our Dussafu project in Gabon by $50.3 million and our Budong project in Indonesia by $7.7 million. See
Note 5 Dispositions and Discontinued Operations, Note 6 Investment in Affiliate,
and
Note 8 Gabon
for more information.
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As of December 31, 2015
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Level 1
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Level 2
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Level 3
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Total
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(in thousands)
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Non recurring
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Assets:
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Investment in affiliate
(1)
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$
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$
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$
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$
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Dussafu PSC
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|
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28,000
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|
|
|
28,000
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|
|
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|
|
|
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|
|
|
|
|
|
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|
|
$
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|
|
|
$
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|
|
|
$
|
28,000
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|
|
$
|
28,000
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Recurring
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Assets:
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|
|
Embedded derivative asset
(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,010
|
|
|
$
|
5,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,010
|
|
|
$
|
5,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs liability
|
|
$
|
|
|
|
$
|
46
|
|
|
$
|
50
|
|
|
$
|
96
|
|
RSUs liability
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
174
|
|
Warrant derivative liability
(2)
|
|
|
|
|
|
|
|
|
|
|
5,503
|
|
|
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
220
|
|
|
$
|
5,553
|
|
|
$
|
5,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Non recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in affiliate
(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
164,700
|
|
|
$
|
164,700
|
|
Dussafu PSC
|
|
|
|
|
|
|
|
|
|
|
50,324
|
|
|
|
50,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
215,024
|
|
|
$
|
215,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs liability
|
|
$
|
|
|
|
$
|
356
|
|
|
$
|
|
|
|
$
|
356
|
|
RSUs liability
|
|
|
|
|
|
|
652
|
|
|
|
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1,008
|
|
|
$
|
|
|
|
$
|
1,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Assets associated with discontinued operations See
Note 5 Dispositions and Discontinued Operations.
|
(2)
|
Included in Liabilities associated with discontinued operations See
Note 5 Dispositions and Discontinued Operations.
|
As of December 31, 2015, the fair value of our liability awards included $0.1 million for our SARs and $0.2 million for the RSUs
which were recorded in accrued expenses and other long-term liabilities, respectively. As of December 31, 2014, the fair value of our liability awards of $0.8 million was included in accrued liabilities ($0.4 million for our SARs and $0.4
million for our RSUs) with the remaining $0.2 million fair value of our RSU liability being included in long-term liabilities.
C-16
Derivative Financial Instruments
As required by ASC 820, a financial instruments level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value liabilities and their placement within the fair value
hierarchy levels. See
Note 12 Warrant Derivative Liability
for a description and discussion of our warrant derivative liability as well as a description of the valuation models and inputs used to calculate the fair value. See
Note
11 Debt and Financing
for a description and discussion of our embedded derivatives related to our 9% Note and 15% Note as well as a description of the valuation models and inputs used to calculate the fair value. All of our embedded
derivatives and warrants are classified as Level 3 within the fair value hierarchy.
Changes in Level 3 Instruments Measured at Fair Value on a
Recurring Basis
The following table provides a reconciliation of financial assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3).
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Financial assets embedded derivative asset
(1)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
|
|
Additions fair value at issuance
|
|
|
2,504
|
|
|
|
|
|
Change in fair value
|
|
|
2,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,010
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Assets associated with discontinued operations See
Note 5 Disposition and Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Financial liabilities embedded derivative liability
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
|
|
Additions fair value at issuance
|
|
|
13,449
|
|
|
|
|
|
Change in fair value
|
|
|
(2,307
|
)
|
|
|
|
|
Conversion of debt
|
|
|
(11,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Financial liabilities warrant derivative liabilities
(2)
:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
1,953
|
|
Additions fair value at issuance
|
|
|
40,013
|
|
|
|
|
|
Change in fair value
|
|
|
(34,510
|
)
|
|
|
(1,953
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,503
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
C-17
(2)
|
Included in Liabilities associated with discontinued operations See
Note 5 Dispositions and Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Financial liabilities stock appreciation rights
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
|
|
Additions fair value at issuance
|
|
|
|
|
|
|
|
|
Change in fair value
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
50
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2015 and 2014, no transfers were made between Level 1, Level 2 and
Level 3 liabilities or assets.
Share-Based Compensation
We use the fair value based method of accounting for share-based compensation. In prior years, we utilized the Black-Scholes option pricing
model to measure the fair value of stock options and SARs. Restricted stock and RSUs were measured at their fair values. During 2015, we issued options, SARs, and RSUs with an additional market condition. To fair value these awards, a
Monte Carlo simulation was utilized. For more information about our share-based compensation, the fair value of these awards, and the additional market condition. See
Note 15 Stock-Based Compensations and Stock Purchase Plans
.
Income Taxes
Deferred income taxes
reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and
(b) operating loss and tax credit carryforwards. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.
We classify interest related to income tax liabilities and penalties as applicable, as interest expense.
Since December of 2013 we have provided deferred income taxes on undistributed earnings of our foreign subsidiaries where we are not able to
assert that such earnings were permanently reinvested, or otherwise could be repatriated in a tax free manner, as part of our ongoing business. As of December 31, 2015, the deferred tax liability provided on such earnings has been reduced to
zero due to the impairment of the underlying book investment in Petrodelta.
As the conversion feature of the 9% Note was reasonably
expected to be exercised at the time of the notes issuance due to the conversion price being in-the-money, the interest on the 9% Note paid upon its conversion is non-deductible to the Company under Internal Revenue Code (IRC)
Section 163(l). The 15% Note was issued, for income tax purposes, with original issue discount (OID). OID generally is deductible for income tax purposes. However, if the debt instrument constitutes an
applicable high-yield discount obligation (AHYDO) within the meaning of IRC Section 163(i)(1), then a portion of the OID likely would be non-deductible pursuant to IRC Section 163(e)(5). Our analysis of the 15%
Note is that the note may be an AHYDO; consequently, a portion or all of the OID likely may be non-deductible for income tax purposes.
C-18
Noncontrolling Interests
Changes in noncontrolling interest owners were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
79,152
|
|
|
$
|
243,167
|
|
Contributions by noncontrolling interest owners
|
|
|
3,382
|
|
|
|
1,208
|
|
Increase in equity held by noncontrolling interest owner
|
|
|
|
|
|
|
|
|
Dividend to noncontrolling interest owner
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest owners
|
|
|
(82,087
|
)
|
|
|
(165,223
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
447
|
|
|
$
|
79,152
|
|
|
|
|
|
|
|
|
|
|
Valuation and Qualifying Accounts
Our valuation and qualifying accounts are comprised of the deferred tax valuation allowance, investment valuation allowance and Value-Added Tax
(VAT) receivable valuation allowance. Balances and changes in these accounts are, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Year
|
|
|
Charged to
Income
|
|
|
Other
|
|
|
Deductions
From Reserves
Credited to
Income
|
|
|
Balance at End
of Period
|
|
|
|
(in thousands)
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts deducted from applicable assets in continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
84,558
|
|
|
$
|
|
|
|
$
|
4,322
|
|
|
$
|
|
|
|
$
|
88,880
|
|
Investment valuation allowance
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
VAT valuation allowance
(a)
|
|
|
2,792
|
|
|
|
|
|
|
|
(2,792
|
)
|
|
|
|
|
|
|
|
|
At December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts deducted from applicable assets in continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
56,248
|
|
|
$
|
28,310
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
84,558
|
|
Investment valuation allowance
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
VAT valuation allowance
(a)
|
|
|
2,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,792
|
|
(a)
|
Valuation allowance for the VAT receivable associated with Harvest Budong. On May 4, 2015, the Company sold the shares of Harvest Budong-Budong B.V. to Stockbridge Capital Limited and the rights to the VAT
receivable went with the entity to the buyer.
|
C-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Year
|
|
|
Charged to
Income
|
|
|
Other
|
|
|
Deductions
From Reserves
Credited to
Income
|
|
|
Balance at End
of Period
|
|
|
|
(in thousands)
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts deducted from applicable assets in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
97,347
|
|
|
$
|
|
|
|
$
|
39,692
|
|
|
$
|
|
|
|
$
|
137,039
|
|
Long-term receivable investment in affiliate
(a)
|
|
|
13,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,753
|
|
At December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts deducted from applicable assets in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
3,329
|
|
|
$
|
101,169
|
|
|
$
|
(7,151
|
)
|
|
$
|
|
|
|
$
|
97,347
|
|
Long-term receivable investment in affiliate
(a)
|
|
|
|
|
|
|
13,753
|
|
|
|
|
|
|
|
|
|
|
|
13,753
|
|
(a)
|
During the year ended December 31, 2014, we fully reserved a dividend receivable of $12.2 million and $1.6 million of long-term receivable due from our investment in affiliate, which has been reclassified to assets
associated with discontinued operations. See
Note 5 Disposition and Discontinued Operations
for further information.
|
New
Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In June 2015 the FASB issued ASU
No. 2015-15 as an amendment to this guidance to address the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements. The SEC staff stated that they would not object to an entity deferring and presenting
debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The
guidance is effective for interim periods and annual period beginning after December 15, 2015; however early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial position and will
not have an impact on our results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of
Uncertainties about an Entitys Ability to Continue as a Going Concern ASU No. 2014-15. ASU No. 2014-15 requires management to assess an entitys ability to continue as a going concern and to provide related footnote
disclosures in certain circumstances. The standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. We are currently
evaluating the provisions of ASU No. 2014-15 and assessing the impact, if any, it may have on our consolidated financial statements.
In April 2014, FASB issued ASU No. 2014-09 Revenue from Contracts with Customers which is included in ASC 606, a new topic
under the same name. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the
scope of other standards (for example, insurance contracts or lease contracts). The guidance supersedes the previous revenue recognition requirements and most industry-specific
C-20
guidance. Additionally, the update supersedes some cost guidance related to construction type and production-type contracts. In addition, the existing requirements for the recognition of a gain
or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update.
The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s)
with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or
as) the entity satisfies a performance obligation.
The new guidance also provides for additional qualitative and quantitative disclosures
related to: (1) contracts with customers, including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining
performance obligations); (2) significant judgments and changes in judgments which impact the determination of the timing of satisfaction of performance obligations (over time or at a point in time), the transaction price and amounts allocated
to performance obligations; and (3) assets recognized from the costs to obtain or fulfill a contract.
In July 2015, the FASB issued
a decision to delay related to ASU No. 2014-09 for the effective date by one year. The new guidance is effective for annual and interim periods beginning after December 15, 2017. An entity should apply the amendments either
retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application. We are currently evaluating the impact of this guidance.
In November 2015, the FASB issued ASC No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17
simplifies the balance sheet presentation of deferred income taxes by requiring all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for annual periods
beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The standard may be applied either prospectively or retrospectively to all periods presented. The Company has decided to adopt the
accounting change in its current financial statements and has adopted the change retrospectively.
In February 2016, the FASB
issued ASU No. 2016-02, Leases. It is expected to be effective for periods beginning after December 15, 2018 for public entities, and for periods beginning after December 15, 2019 for nonpublic
entities. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or
less. All other leases will fall into one of two categories: (1) Financing leases, similar to capital leases, will require the recognition of an asset and liability, measured at the present value of the lease payments. Interest on the
liability will be recognized separately from amortization of the asset. Principal repayments will be classified as financing outflows and payments of interest as operating outflows on the statement of cash flows. (2) Operating leases will also
require the recognition of an asset and liability measured at the present value of the lease payments. A single lease cost, consisting of interest on the obligation and amortization of the asset, calculated such that the amortization of the asset
will increase as the interest amount decreases resulting in a straight-line recognition of lease expense. All cash outflows will be classified as operating on the statement of cash flows. We do not believe the adoption of this guidance will have a
material impact on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-07,
Investments Equity Method and Joint Ventures (Topic 323). This amendment simplifies the accounting for equity method of investments, the amendment in the update eliminates the requirement in Topic 323 that an entity retroactively
adopt the equity method of accounting
C-21
if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the
cost of acquiring the additional interest in the investee to the current basis of the investors previously held interest and adopt equity method of accounting as of the date the investment becomes qualified for equity method accounting. The
amendment in this update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendment should be applied prospectively upon the effective date to increases in the
level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. We are currently evaluating the impact of this guidance.
Note 4 Earnings Per Share
Basic
earnings per common share (EPS) are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted into common stock.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Loss from continuing operations
|
|
$
|
(27,250
|
)
|
|
$
|
(19,396
|
)
|
Loss from discontinued operations, net of taxes
(a)
|
|
|
(71,320
|
)
|
|
|
(174,094
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Harvest
|
|
$
|
(98,570
|
)
|
|
$
|
(193,490
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and dilutive
|
|
|
11,322
|
|
|
|
10,510
|
|
Loss per basic and dilutive shares:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2.41
|
)
|
|
$
|
(1.85
|
)
|
Loss from discontinued operations
|
|
|
(6.30
|
)
|
|
|
(16.56
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(8.71
|
)
|
|
$
|
(18.41
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2.41
|
)
|
|
$
|
(1.85
|
)
|
Loss from discontinued operations
|
|
|
(6.30
|
)
|
|
|
(16.56
|
)
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(8.71
|
)
|
|
$
|
(18.41
|
)
|
|
|
|
|
|
|
|
|
|
(a)
|
Net of net loss attributable to noncontrolling interest owners.
|
The year ended
December 31, 2015 per share calculations above exclude 1.0 million options, 8.5 million warrants and 0.4 million RSUs because we are in a net loss position. The year ended December 31, 2014 per share calculations
above exclude 0.05 million unvested restricted shares, 1.1 million options and 0.6 million warrants because we were in a net loss position.
Note 5 Dispositions and Discontinued Operations
Share Purchase Agreement Petroandina
On December 16, 2013, Harvest and HNR Energia entered into the SPA with Petroandina and Pluspetrol, its parent, to sell all of our 80
percent equity interest in Harvest Holding to Petroandina in two closings. The first closing occurred on December 16, 2013 contemporaneously with the signing of the SPA, when we sold a 29 percent equity interest in Harvest Holding . As a
result of the first sale, we indirectly owned 51 percent of Harvest Holding beginning December 16, 2013 and the noncontrolling interest owners hold the remaining 49 percent, with Petroandina having 29 percent and Vinccler continuing to own
20 percent. The second closing, for the sale of a 51 percent equity interest in Harvest Holding for a cash purchase price of $275.0 million, was
C-22
subject to, among other things, approval by the holders of a majority of our common stock and approval by the Ministerio del Poder Popular de Petroleo y Mineria representing the Government of
Venezuela (which indirectly owns the other 60 percent interest in Petrodelta).
On May 7, 2014, Harvests stockholders voted to
authorize the sale of the remaining interests in Harvest Holding. Once stockholders approval was obtained, the SPA allowed for 120 days, or until September 7, 2014, for consummation of the sale, extension of the SPA or termination of the
SPA. Petroandina had the right to extend the SPA beyond the termination date in increments of one month, but not beyond December 31, 2014, in exchange for the Companys right to borrow up to $2.0 million, not to exceed $7.6 million in the
aggregate, from Petroandina per each monthly extension. Petroandina exercised this right through December 31, 2014 with the Company borrowing $7.6 million in total during this period. Repayments of these loans are subject to certain conditions,
one of which states that all outstanding loans (along with interest accrued and other amounts) would become due upon the final closing date of the SPA, with the second tranche proceeds being reduced by such outstanding amounts. If the SPA was
terminated by either party, any outstanding loans would become due one year from the date of the termination.
On January 1, 2015,
HNR Energia exercised its right to terminate the SPA in accordance with its terms as a result of the failure to obtain the necessary approval from the Government of Venezuela. As a result of the termination of the SPA, the Company retained its 51
percent equity interest in Harvest Holding, and Petroandina retained its 29 percent equity interest in Harvest Holding.
HNR Energia and
Petroandina also entered into a Shareholders Agreement (the Shareholders Agreement) on December 16, 2013, regarding the shares of Harvest Holding. The Shareholders Agreement became effective upon the termination of
the SPA.
China
On July 2,
2014, we completed the sale of our rights under a petroleum contract with China National Offshore Oil Corporation for the WAB-21 area for net proceeds of $2.9 million and recorded that amount as a gain from sale of oil and natural gas properties.
This area is located in the South China Sea and is the subject of a border dispute between China and Socialist Republic of Vietnam.
Discontinued
Operations
Oman
We have no
continuing operations in Oman. The nominal loss from discontinued operations for Oman for the year ended December 31, 2014 included general and administrative expenses.
Colombia
During 2013 the Company decided
to exit Colombia and incurred certain liabilities associated with the shut- down of our operations. In December 2014, we settled these liabilities with a payment of $2.0 million. We are in the process of closing and exiting our Colombia venture. As
we no longer have any interests in Colombia, we have reflected the results in discontinued operations. The loss from discontinued operations included $0.5 million in general and administrative expenses during the year ended December 31, 2014.
Harvest Holding
Share Purchase Agreement
Delta Petroleum
On October 7, 2016, the Company, and HNR Energia, completed the sale of all of HNR Energias
51% interest in Harvest Holding, to Delta Petroleum N.V., a limited liability company organized under the laws
C-23
of Curacao (Delta Petroleum), pursuant to a share purchase agreement, dated June 29, 2016 (the Share
Purchase
Agreement). Harvest Holding owned,
indirectly through wholly owned subsidiaries, a 40% interest in Petrodelta, through which all of the Companys interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to
Delta Petroleum. See
Note 1 Organization Share Purchase Agreement Delta Petroleum
for further information.
As a result of the sale we have reclassified the results of operations relating to Harvest Holding for the years ended December 31, 2015
and 2014 as discontinued operations and classified the assets and liabilities directly related to the sale as of December 31, 2015 and 2014 as assets and liabilities associated with discontinued operations as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Assets associated with discontinued operations
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,256
|
|
|
$
|
447
|
|
Accounts receivable
|
|
|
3
|
|
|
|
12
|
|
Prepaid costs
|
|
|
15
|
|
|
|
12
|
|
Embedded derivative asset
(1)
|
|
|
5,010
|
|
|
|
|
|
Deferred taxes
(5)
|
|
|
120
|
|
|
|
53
|
|
Investment in affiliate
(2)
|
|
|
|
|
|
|
164,700
|
|
Administrative property, net
|
|
|
16
|
|
|
|
52
|
|
Other assets
|
|
|
24
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,444
|
|
|
$
|
165,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Liabilities associated with discontinued operations
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5
|
|
|
$
|
26
|
|
Accrued expenses
|
|
|
341
|
|
|
|
432
|
|
Accrued interest payable
|
|
|
954
|
|
|
|
97
|
|
Other current liabilities
|
|
|
160
|
|
|
|
128
|
|
Note payable - non controlling interest owner
(3)
|
|
|
|
|
|
|
13,709
|
|
Long-term debt
(1)
|
|
|
214
|
|
|
|
|
|
CT Warrant liability
(4)
|
|
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,177
|
|
|
$
|
14,392
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See
Note 11 Debt and Financing
for further information.
|
(2)
|
See
Note 6 Investment in Affiliate
for further information.
|
(3)
|
See
Note 17 Related Party Transactions
for further information.
|
(4)
|
See
Note 12 Warrant Derivative Liability
for further information.
|
(5)
|
Net deferred tax assets for Harvest Holding at December 31, 2015 and 2014 include deferred tax assets related to operating loss carryforwards and investment in affiliate, substantially offset by a
valuation allowance. The deferred tax liability recognized in prior periods was decreased during 2015 to zero due to the impairment of the Companys remaining investment in Petrodelta. At December 31, 2015 we had net operating losses for
carryforward of $7.3 million available for up to three years from 2013.
|
C-24
The Results of operations for Oman, Colombia and Harvest Holding are reflected in discontinued
operations as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Loss from Discontinued Operations
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(21
|
)
|
|
$
|
(67
|
)
|
Exploration expense
|
|
|
|
|
|
|
(24
|
)
|
Impairment expense investment affiliate
|
|
|
(164,700
|
)
|
|
|
(355,650
|
)
|
Allowance for account and note receivable
|
|
|
|
|
|
|
(13,753
|
)
|
General and administrative expense
|
|
|
(3,052
|
)
|
|
|
(3,101
|
)
|
Change in fair value of warrant derivative liability
|
|
|
34,510
|
|
|
|
|
|
Change in fair value of embedded derivative asset and liabilities
|
|
|
4,813
|
|
|
|
|
|
Interest expense
|
|
|
(2,958
|
)
|
|
|
(11
|
)
|
Loss on sale of Harvest Holding
|
|
|
|
|
|
|
(1,574
|
)
|
Loss on debt conversion
|
|
|
(1,890
|
)
|
|
|
|
|
Loss on issuance of debt
|
|
|
(20,402
|
)
|
|
|
|
|
Foreign currency transaction gains/(losses)
|
|
|
320
|
|
|
|
(59
|
)
|
Income tax expense
|
|
|
(27
|
)
|
|
|
(27
|
)
|
Earnings from investment in affiliate
|
|
|
|
|
|
|
34,949
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued Operations, net of income taxes
|
|
$
|
(153,407
|
)
|
|
$
|
(339,317
|
)
|
Loss attributable to noncontrolling interests
|
|
|
(82,087
|
)
|
|
|
(165,223
|
)
|
|
|
|
|
|
|
|
|
|
Loss attributable to discontinued operations, net of income taxes
|
|
$
|
(71,320
|
)
|
|
$
|
(174,094
|
)
|
|
|
|
|
|
|
|
|
|
Note 6 Investment in Affiliate
Venezuela Petrodelta, S.A.
The
following table summarizes the changes in our investment in affiliate (Petrodelta) as of December 31, 2015 and 2014. Petrodeltas reporting and functional currency is the USD.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Investment at beginning of year
|
|
$
|
164,700
|
|
|
$
|
485,401
|
|
Equity in earnings
|
|
|
|
|
|
|
34,949
|
|
Impairment
|
|
|
(164,700
|
)
|
|
|
(355,650
|
)
|
|
|
|
|
|
|
|
|
|
Investment at end of year
|
|
$
|
|
|
|
$
|
164,700
|
|
|
|
|
|
|
|
|
|
|
Our 40 percent investment in Petrodelta is owned through our subsidiary, Harvest Holding, a Dutch private
company with limited liability. Up until December 16, 2013 we had an 80 percent interest in Harvest Holding. On December 16, 2013, Harvest entered into a share purchase agreement (SPA) with Petroandina Resources
Corporation to sell our 80 percent equity interest in Harvest Holding in two closings. The first closing occurred on December 16, 2013 when we sold a 29 percent equity interest in Harvest Holding. As a result of the first sale, we own
51 percent of Harvest Holding beginning December 16, 2013 and the non-controlling interest owners hold the remaining 49 percent. See
Note 1 Organizations Share Purchase Agreement Delta Petroleum
and
Note 5
Dispositions and Discontinued Operations
for further information.
C-25
The Company was not able to obtain approval from the government of Venezuela during 2014, which
was required to complete the second closing for our remaining 51 percent interest in Petrodelta and on January 1, 2015 we terminated the SPA. Due to our failed sales attempts, lack of management influence, and actions and inactions by the
majority owner, PDVSA, we believe we no longer exercise significant influence in Petrodelta and in accordance with Accounting Standards Codification ASC 323 Investments Equity Method and Joint Ventures, we are accounting
for our investment in Petrodelta under the cost method (ASC 325 Investments Other), effective December 31, 2014. Under the cost method we will not recognize any equity in earnings from our investment in Petrodelta
in our results of operations, but will recognize any cash dividends in the period they are received.
We performed an impairment analysis
of the carrying value of our investment of Petrodelta as of December 31, 2014. The estimated fair value of our investment was determined based on the estimated fair value of Petrodeltas oil and natural gas properties and other net
assets as of December 31, 2014, discounted by a factor for economic instability, foreign currency risks and lack of marketability. Based on this analysis, we recorded a pre-tax impairment charge against the carrying value of our investment in
Petrodelta of $355.7 million as of December 31, 2014.
We also performed an impairment analysis of the carrying value of our
investment of Petrodelta as of December 31, 2015 due to the continued decline in world oil prices and deteriorating economic conditions in Venezuela which have significantly impacted Petrodeltas operations. During 2015, Petrodeltas
operating costs exceeded the price realized from the sale of its production due to the significant rate of inflation in Venezuela and the restrictive foreign currency exchange system which Petrodelta is required to operate under. While we
believe that our relationship with CT Energy may allow us to restructure our relationship with PDVSA and Petrodelta and allow us to access the alternative foreign currency systems to companies in Venezuela, there can be no assurances that we will be
successful in these negotiations. Based on the existing economic environment in which Petrodelta is required to operate, we have concluded that the estimated fair value of our investment in Petrodelta is nil and have recorded a pre-tax
impairment charge of $164.7 million to fully impair our investment in Petrodelta as of December 31, 2015. The estimated fair value of our investment was determined based on the estimated fair value of Petrodeltas oil and natural gas
properties and other net liabilities as of December 31, 2015 which exceeded the estimated fair value of the oil and natural gas properties.
The model used in the valuation of Petrodelta was based on an income approach which considered three scenarios relating to the future
development of proved, probable and possible reserves and its other net liabilities at December 31, 2015. The three scenarios considered that Petrodelta would have varying degrees of access to foreign exchange regimes as well as our ability to
participate in and influence its operations to improve operational performance and efficiencies. Each scenario also considered three price forecasts for crude oil. The weighted average cost of capital of 26.5% was used to discount the
future cash flows from these scenarios. The expected value obtained from the income approach less net liabilities at December 31, 2015 resulted in a full impairment of the carrying value of our investment in Petrodelta.
In addition to the impairment charge, we recorded an allowance of $12.2 million to fully reserve the dividend receivable due from Petrodelta
relating to the dividend declared in 2011 during the year ended December 31, 2014.
Petrodeltas financial information is
prepared in accordance with International Financial Reporting Standards (IFRS) which we have adjusted to conform to U.S. GAAP for the years ending December 31, 2014. The year ended December 31, 2015 is excluded due to the
change to the cost method of accounting. The differences between IFRS and U.S. GAAP for which we adjusted are:
|
|
|
Deferred income tax: IFRS allows the inclusion of non-monetary temporary differences impacted by inflationary adjustments, whereas U.S. GAAP does not. In addition, we have adjusted for the impact on deferred income tax
of other adjustments to arrive at net income under U.S. GAAP.
|
C-26
|
|
|
Depletion expense: Oil and natural gas reserves used by Petrodelta in calculating depletion expense under IFRS are provided by Ministry of the Peoples Power for Petroleum and Mining (MENPET). MENPET
reserves are not prepared using the guidance on extractive activities for oil and natural gas (ASC 932). Annually at year-end, we prepare reserve reports for Petrodeltas oil and natural gas reserves using ASC 932. On a quarterly basis, we
recalculate Petrodeltas depletion using the most recent reserve report using ASC 932 adjusted as appropriate.
|
|
|
|
Under U.S. GAAP abandoned well costs are capitalized and depleted using the guidance on extractive activities for oil and natural gas under Successful Efforts accounting. To conform to U.S. GAAP we reclassified $13.9
million in abandoned wells costs expensed to lease operating costs to depletable costs as per ASC 932.
|
|
|
|
Windfall Profits Tax Credit: The April 2011 Windfall Profits Tax law included a provision wherein it considered that an exemption of the Windfall Profits Tax could be granted for the incremental production of projects
and grass root developments until the specific investments are recovered. The projects deemed to qualify for the exemption have to be considered and approved on a case by case basis by MENPET. In March 2013, PDVSA requested from MENPET a Windfall
Profits Tax exemption credit under provisions in the April 2011 Windfall Profits Tax law. The exemption was applied to several oil development projects, including Petrodelta. However, MENPET has not defined the projects qualifying for exemption or
provided the guidance necessary to calculate the exemption. PDVSA issued to Petrodelta its estimated share of the exemption credit related to 2012 of $55.2 million ($36.4 million net of tax) based on PDVSAs calculation and projects PDVSA
deemed to qualify for the exemption. In July 2014, Petrodelta received confirmation that MENPET had denied PDVSAs application for the exemption, and Petrodelta reversed its estimated share of the credit. We determined that until MENPET either
issues guidance on the exemption provisions in the law or issues payment forms including the exemption credit, or written approval from MENPET for this exemption credit is received by Petrodelta or us, we would exclude the exemption credit from our
equity earnings in Petrodelta under U.S. GAAP. In March 2013, we included an adjustment for the differences between IFRS and U.S. GAAP which reversed Petrodeltas accrual for the Windfall Profits Tax credit, and in June 2014 we recorded an
adjustment to Petrodeltas reversal of the Windfall Profits Tax credit
|
|
|
|
Petrodeltas revenues are not subject to a value-added tax (VAT). However, most of their purchases are subject to VAT. The result is that Petrodelta has $153.7 million of VAT receivables or
VAT credits. Petrodelta has recorded a corresponding valuation allowance of $38.2 million against these VAT credits. At December 2014, the valuation allowance of the VAT credits was adjusted for our U.S. GAAP presentation. Under U.S.
GAAP, sufficient evidence did not exist to support Petrodeltas assumptions of recoverability at December 31, 2014. Therefore, for U.S. GAAP purposes the estimated recoverability of the VAT credits was extended to 5 years and the
discount rate was increased to 24.0%. The discount rate approximates the December 31, 2014 yield on the 20-year Venezuelan 9
3
⁄
4
%
bond. The resulting value of the VAT credits, net of Petrodeltas valuation allowance and U.S. GAAP adjustment, is $64.1 million at December 31, 2014.
|
|
|
|
Sports Law Overaccrual: The Organic Law on Sports, Physical Activity and Physical Education (Sports Law) was published in the Official Gazette on August 24, 2011. The purpose of the Sports Law is to
establish the public service nature of physical education and the promotion, organization and administration of sports and physical activity. Funding of the Sports Law is by contributions made by companies or other public or private organizations
that perform economic activities for profit in Venezuela. The contribution is one percent of annual net or accounting profit and is not deductible for income tax purposes. Per the Sports Law, contributions are to be calculated on an after-tax basis.
However, in March 2012, CVP has instructed Petrodelta to calculate the contribution on a before-tax basis contrary to the Sports Law. In addition to the adjustments to arrive at Petrodeltas net income under U.S. GAAP, earnings from affiliate
also reflect the amortization of the excess basis in affiliate using the unit-of-production method based on risk adjusted total current estimated reserves.
|
C-27
All amounts through Net Income under U.S. GAAP represent 100 percent of Petrodelta. Summary
financial information is presented for the year ended December 31, 2014 and the financial position is presented at December 31, 2014.
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Results under IFRS:
|
|
|
|
|
Revenues:
|
|
|
|
|
Oil sales
|
|
$
|
1,343,452
|
|
Natural gas sales
|
|
|
4,590
|
|
Royalty
|
|
|
(437,281
|
)
|
|
|
|
|
|
|
|
|
910,761
|
|
Expenses:
|
|
|
|
|
Operating expenses
|
|
|
303,409
|
|
Workovers
|
|
|
28,239
|
|
Depletion, depreciation and amortization
|
|
|
129,409
|
|
General and administrative
|
|
|
45,623
|
|
Windfall profits tax
|
|
|
140,816
|
|
Windfall profits (credit) and reversal of credit
|
|
|
55,168
|
|
|
|
|
|
|
|
|
|
702,664
|
|
|
|
|
|
|
Income from operations
|
|
|
208,097
|
|
Gain (loss) on exchange rate
|
|
|
(260
|
)
|
Investment earnings and other
|
|
|
7,752
|
|
Interest expense
|
|
|
137
|
|
|
|
|
|
|
Income before income tax
|
|
|
215,726
|
|
Current income tax expense
|
|
|
103,619
|
|
Deferred income tax expense (benefit)
|
|
|
(32,617
|
)
|
|
|
|
|
|
Net income under IFRS
|
|
|
144,724
|
|
Adjustments to increase (decrease) net income under IFRS:
|
|
|
|
|
Deferred income tax (expense) benefit
|
|
|
(2,841
|
)
|
Depletion expense
|
|
|
(12,437
|
)
|
Adjustment to lease operating costs to conform with GAAP
|
|
|
13,888
|
|
Windfall profits credit and (reversal) of credit
|
|
|
55,168
|
|
Adjust fair value of value added tax credits
|
|
|
(51,393
|
)
|
Sports law over accrual
|
|
|
1,322
|
|
|
|
|
|
|
Net income under U.S. GAAP
|
|
|
148,431
|
|
Interest in investment affiliate
|
|
|
40
|
%
|
|
|
|
|
|
Income before amortization of excess basis in investment in affiliate
|
|
|
59,372
|
|
Amortization of excess basis in investment in affiliate
|
|
|
(4,428
|
)
|
Earnings from investment affiliate excluded from results of operations
|
|
|
(19,995
|
)
|
|
|
|
|
|
Earnings from investment affiliate included Harvests income
|
|
$
|
34,949
|
|
|
|
|
|
|
C-28
|
|
|
|
|
|
|
As of December 31,
2014
|
|
|
|
(in thousands)
|
|
Financial Position under IFRS:
|
|
|
|
|
Current assets
|
|
$
|
1,459,676
|
|
Property and equipment
|
|
|
1,044,797
|
|
Other assets
|
|
|
241,478
|
|
Current liabilities
|
|
|
1,437,929
|
|
Other liabilities
|
|
|
147,242
|
|
Net equity
|
|
|
1,160,780
|
|
Conversion Contract
On October 25, 2007, the Venezuelan Presidential Decree which formally transferred to Petrodelta the rights to the Petrodelta Fields
subject to the conditions of the Conversion Contract was published in the Official Gazette. Petrodelta is governed by its own charter and bylaws and will engage in the exploration, production, gathering, transportation and storage of hydrocarbons
from the Petrodelta Fields for a maximum of 20 years from that date. Petrodelta operates a portfolio of properties in eastern Venezuela including large proven oil fields as well as properties with substantial opportunities for both development and
exploration. Petrodelta is to undertake its operations in accordance with Petrodeltas business plan as set forth in its conversion contract. Under its conversion contract, work programs and annual budgets adopted by Petrodelta must be
consistent with Petrodeltas business plan. Petrodeltas business plan may be modified by a favorable decision of the shareholders owning at least 75 percent of the shares of Petrodelta.
Sales Contract
The sale of oil and
natural gas by Petrodelta to the Venezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PDVSA Petroleo S.A. (PPSA) signed on January 17, 2008. The form of the agreement is set forth in the
Conversion Contract. Crude oil delivered from the Petrodelta Fields to PPSA is priced with reference to Merey 16 published prices, weighted for different markets, and adjusted for variations in gravity and sulphur content, commercialization costs
and distortions that may occur given the reference price and prevailing market conditions. Merey 16 published prices are quoted and sold in USD. Natural gas delivered from the Petrodelta Fields to PPSA is priced at $1.54 per thousand cubic feet.
Natural gas deliveries are paid in Venezuela Bolivars (Bolivars), but the pricing for natural gas is referenced to the U.S. Dollar. PPSA is obligated to make payment to Petrodelta of each invoice within 60 days of the end of the invoiced
production month by wire transfer, in USD in the case of payment for crude oil and natural gas liquids delivered, and in Bolivars in the case of payment for natural gas delivered, in immediately available funds to the bank accounts designated by
Petrodelta.
When the Sales Contract was executed, Petrodelta was producing only one type of crude, Merey 16. Beginning in October
2011, the Ministry of the Peoples Power for Petroleum and Mining (MENPET) determined that Petrodeltas production flowing through the COMOR transfer point was a heavier type of crude, Boscan. Since Petrodelta was producing
only Merey 16 when the Sales Contract was executed, the Boscan gravity and sulphur correction factors and crude pricing formula are not included in the Sales Contract. However, under the Sales Contract, PPSA is obligated to receive all of
Petrodeltas production. All production deliveries for all of Petrodeltas fields have been certified by MENPET and acknowledged by PPSA. All pricing factors to be used in the Merey 16 and Boscan pricing formulas have been provided by and
certified by MENPET to Petrodelta.
Since the Sales Contract provides for only one crude pricing formula, the Sales Contract had to be
amended to include the Boscan pricing formula to allow Petrodelta to invoice PPSA for El Salto crude oil deliveries. Petrodelta received a draft amendment to the Sales Contract from PDVSA Trade and Supply. The pricing formula in the draft amendment
has been used to accrue revenue for El Salto field deliveries from October 1,
C-29
2011 through December 31, 2014. Except for the inclusion of the Boscan pricing formula to be used in invoicing El Salto crude oil deliveries, all other terms and conditions of the Sales
Contract remain in force. On January 31, 2013, Petrodeltas board of directors endorsed the amendment to the Sales Contract. The amendment has been approved by CVPs board of directors. HNR Finance, as shareholder, has agreed to the
contract amendment. During 2015, Petrodelta completed billing PPSA for invoices for deliveries through December 2014.
CVPs board of
directors reviewed the amendment on April 30, 2013. A certificate of CVPs final board resolution approving the amendment dated April 30, 2013 was received by Petrodelta on May 23, 2013. The remaining steps for the contract
amendment are to (1) inform MENPET of the approval, (2) receive approval from Petrodeltas shareholders to amend the Sales Contract including the Boscan formula, and (3) sign the contract amendment with PDVSA Trade and
Supply. As of December 31, 2014 revenues of $1,207.2 million ($756.7 million as of December 31, 2013) for El Salto remained uninvoiced to PPSA pending execution of the amendment. The amendment was signed in November 2014 and
during January and February of 2015, Petrodelta completed billing PPSA for deliveries through November 2014. This invoicing resulted in an additional $98.6 million in revenue being recognized in the fourth quarter of 2014 due to a pricing
change in the formula included in the sales contract.
Payments to Contractors
PDVSA has failed to pay on a timely basis certain amounts owed to contractors that PDVSA has contracted to do work for Petrodelta. PDVSA,
through PPSA, purchases all of Petrodeltas oil production. PDVSA and its affiliates have reported shortfalls in meeting their cash requirements for operations and planned capital expenditures, and PDVSA has fallen behind in certain of its
payment obligations to its contractors, including contractors engaged by PDVSA to provide services to Petrodelta. In addition, PDVSA has fallen behind in certain of its payment obligations to Petrodelta, which payments Petrodelta would otherwise use
to pay its contractors, including Harvest Vinccler. As a result, Petrodelta has experienced, and is continuing to experience, difficulty in retaining contractors who provide services for Petrodeltas operations. We cannot provide any assurance
as to whether or when PDVSA will become current on its payment obligations. Inability to retain contractors or to pay them on a timely basis is having an adverse effect on Petrodeltas operations and on Petrodeltas ability to carry out
its business plan.
Harvest Vinccler has advanced certain costs on behalf of Petrodelta. These costs include consultants in engineering,
drilling, operations, seismic interpretation, and employee salaries and related benefits for Harvest Vinccler employees seconded into Petrodelta. Currently, we have three employees seconded into Petrodelta. Costs advanced are invoiced on a monthly
basis to Petrodelta. Harvest Vinccler is considered a contractor to Petrodelta, and as such, Harvest Vinccler is also experiencing the slow payment of invoices. Petrodelta and Petrodeltas board have not indicated that the advances are not
payable, or that they will not be paid. We fully reserved the outstanding receivables of $1.6 million related to these advances as of December 31, 2014, which was reflected in Harvests general and administrative costs.
Windfall Profits Tax
In April 2011, the
Venezuelan government published in the Official Gazette the Law Creating a Special Contribution on Extraordinary Prices and Exorbitant Prices in the International Hydrocarbons Market (Windfall Profits Tax). In February 2013, the
Venezuelan government published in the Official Gazette an amendment to the Windfall Profits Tax. The amended Windfall Profits Tax establishes new levels for contribution of extraordinary and exorbitant prices to the Venezuelan government.
Extraordinary prices are considered to be above $60 and equal to or lower than $80 per barrel, and exorbitant prices are considered to be over $80 per barrel.
Functional Currency
Petrodeltas
functional and reporting currency is the USD. PPSA is obligated to make payment to Petrodelta in USD in the case of payment for crude oil and in Bolivars for natural gas liquids delivered. In addition, major
C-30
contracts for capital expenditures and lease operating expenditures are denominated in USD. Any dividend paid by Petrodelta will be made in USD.
Petrodelta has currency exchange risk from fluctuations of the official prevailing exchange rate that applies to their operating costs
denominated in Bolivars. The monetary assets that are exposed to exchange rate fluctuations are cash, accounts receivable, prepaid expenses and other current assets. The monetary liabilities that are exposed to exchange rate fluctuations are
accounts payable, accruals, current and deferred income tax and other tax obligations and other current liabilities. All monetary assets and liabilities incurred at the official Bolivar exchange rate are settled at the official Bolivar exchange
rate. The official prevailing currency exchange rate was increased from 4.3 Bolivars per U.S. Dollar to 6.3 Bolivars per U.S. Dollar in February 2013. As a result of legislation enacted in December 2013 and January and February of 2014,
Venezuela now has a multiple exchange rate system. Most of Petrodeltas transactions are subject to a fixed official exchange rate of 6.3. The Venezuelan government modified the currency exchange system whereby the official exchange rate of
6.3 Bolivars per USD would only apply to certain economic sectors related to purchases of essential goods and services while other sectors of the economy would be subject to a new exchange rate, SICAD I, determined by an auction
process conducted by Venezuelas Complimentary System of Foreign Currency Administration. Participation in the SICAD I mechanism is controlled by the Venezuelan government and is limited to certain companies that operate in designated economic
sectors. In March 2014, an additional currency exchange mechanism was established by the Venezuelan government that allows companies within other economic sectors to participate in an additional auction process (SICAD II). The exchange
rate averaged approximately 50 Bolivars per USD for the re-measurement of our Bolivar denominated assets and liabilities and revenue and expenses. The financial information is prepared using the official fixed exchange rate (6.3 from February
2013 through December 2014). On February 10, 2015, the Ministry of Economy, Finance, and Public Banking, and the Central Bank of Venezuela (BCV) published in the Extraordinary Official Gazette No.6.171 Exchange Agreement No.33 with two Official
Notices. The first notice being that the SICAD II exchange rate would be no longer permitted. Secondly, a new exchange rate called the Foreign Exchange Marginal System (SIMADI) has been created. The SIMADI rate published on
December 31, 2015 is 198.70 Bolivars per USD. The SIMADIs marginal system is available in limited quantities for individuals and companies to purchase and sell foreign currency via banks and exchange houses. Currently the SIMADI marginal
system is the only mechanism available to Harvest Vinccler.
Petrodeltas results were also impacted by PDVSA changing its policy
with respect to invoicing for disbursements made in Bolivars on behalf of Petrodelta to require that such invoices be denominated in USD rather than Bolivars. This change was implemented in the fourth quarter of 2013 with retroactive application to
certain transactions occurring in 2011 and thereafter. As a result of this change, Petrodelta recorded a $14.2 million foreign currency loss in the three months ended December 31, 2013.
Collective Labor Agreement
On
February 11, 2014, the Collective Labor Agreement for the period from October 1, 2013 thru October 1, 2015, between the employees of the oil industry represented by the Venezuelan Unitary Federation of workers of the oil, gas, and
derivatives (FUTPV) and PDVSA were signed. The Collective Labor Agreement established a salary raise and payroll and retirement benefits which had a significant impact on Petrodeltas payroll cost. The most significant impact was a steep
increase of salary around 90%, with 59% retroactive from October 1, 2013, a 23% raise in effect from May 1, 2014 and finally the remaining portion adjusted on January 1, 2015.
Dividends
On November 12, 2010,
Petrodeltas board of directors declared a dividend of $30.6 million, $12.2 million net to HNR Finance. Petrodelta shareholder approval of the dividend was received on March 14, 2011. During the year ended December 31, 2014, we
recorded an allowance of $12.2 million, which is reflected in Harvests general and administrative costs, to fully reserve the dividend due from Petrodelta. This dividend has not been received as of December 31, 2015.
C-31
Note 7 Venezuela Other
Harvest Vinccler currently assists us in the oversight of our investment in Petrodelta and in negotiations with PDVSA. Harvest Vincclers
functional and reporting currency is the USD. They do not have currency exchange risk other than the official prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars (Bolivars). See
Note 1
Organizations Share Purchase Agreement Delta Petroleum
and
Note 5 Dispositions and Discontinued Operations
for further information.
In January 2014, the Venezuelan government modified the currency exchange system whereby the official exchange rate of 6.3 Bolivars per USD
would only apply to certain economic sectors related to purchases of essential goods and services while other sectors of the economy would be subject to a new exchange rate, SICAD I, determined by an auction process conducted by
Venezuelas Complimentary System of Foreign Currency Administration. Participation in the SICAD I mechanism is controlled by the Venezuelan government and is limited to certain companies that operate in designated economic sectors.
In March 2014, an additional currency exchange mechanism was established by the Venezuelan government that allows companies within other
economic sectors to participate in an additional auction process (SICAD II).
On February 10, 2015, the Ministry of
Economy, Finance, and Public Banking, and the Central Bank of Venezuela (BCV) published in the Extraordinary Official Gazette No.6.171 Exchange Agreement No.33 with two Official Notices. The first notice being that the SICAD II exchange rate would
be no longer permitted. Secondly, a new exchange rate called the Foreign Exchange Marginal System (SIMADI) has been created. The SIMADI rate published on December 31, 2015 is 198.70 Bolivars per USD. The SIMADIs marginal
system is available in limited quantities for individuals and companies to purchase and sell foreign currency via banks and exchange houses. Currently the SIMADI marginal system is the only mechanism available to Harvest Vinccler.
We have determined that Harvest Vinccler is not eligible to apply for exchanges at the official rate. We are eligible and have successfully
participated in the SIMADI during 2015 and as a result we have adopted the SIMADI exchange rate of approximately 200 Bolivars per USD for the re-measurement of our Bolivar denominated assets and liabilities and revenue and expenses, as we believe
the SIMADI rate is most representative of the economics in which Harvest Vinccler operates. Prior to this change, we were using the SICAD II rate of 50 Bolivars per USD.
During the year ended December 31, 2015, Harvest Vinccler exchanged approximately $0.1 million ($0.4 million during the year ended
December 31, 2014) and received an average exchange rate of 212.4 Bolivars (34.4 Bolivars during the year ended December 31, 2014) per U.S. Dollar. A gain on foreign currency transactions of $0.3 million was recognized during the year
ended December 31, 2015 associated with participating in the SIMADI marginal system. A loss on foreign currency transactions of $0.1 million was recognized during the year ended December 13, 2014 associated with participating in the SICAD
II auction process.
The monetary assets that are exposed to exchange rate fluctuations are cash, accounts receivable, prepaid expenses
and other current assets. The monetary liabilities that are exposed to exchange rate fluctuations are accounts payable, accruals, current and deferred income tax and other tax obligations and other current liabilities. All monetary assets and
liabilities incurred at the official Bolivar exchange rate are settled at the official 6.3 Bolivar exchange rate. At December 31, 2015, the balances in Harvest Vincclers Bolivar denominated monetary assets and liabilities accounts
that are exposed to exchange rate changes are 11.9 million Bolivars ($0.06 million) and 5.5 million Bolivars ($0.03 million), respectively.
C-32
Note 8 Gabon
We are the operator of the Dussafu PSC with a 66.667 percent ownership interest. Located offshore Gabon, adjacent to the border with the
Republic of Congo, the Dussafu PSC covers an area of 680,000 acres with water depths up to 1,650 feet.
The Dussafu PSC partners and the
Republic of Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources, entered into the third exploration phase of the Dussafu PSC with an effective date of May 28, 2012. The Ministry of Mines, Energy, Petroleum and
Hydraulic Resources agreed to lengthen the third exploration phase to four years until May 27, 2016. The Company is currently assessing extension possibilities for the exploration phase.
During 2011, we drilled our first exploratory well, Dussafu Ruche Marin-1 (DRM-1), and two appraisal sidetracks. DRM-1 and the
sidetracks are currently suspended pending further exploration and development activities.
Well planning progressed during 2012 to drill
an exploration well in the fourth quarter of 2012 on the Tortue prospect. DTM-1 well was spud November 19, 2012. DTM-1 was drilled with the Scarabeo 3 semi-submersible drilling unit. On January 4, 2013, we announced that DTM-1 had reached
the Dental Formation and discovered oil in both the Gamba and Dentale formations. The first appraisal sidetrack of DTM-1 (DTM-1ST1) was spud in January 12, 2013. DTM-1ST1 was drilled in the Dentale Formation. Due to a stuck downhole
tool, logging operations were terminated before pressure data could be collected to confirm connectivity. The downhole tool was retrieved and the DTM-1 well suspended for future re-entry.
Operational activities during 2014 included additional evaluation of development alternatives, preparation and a formal remittance of a field
development plan along with continued processing of 3D seismic. On March 26, 2014, the joint venture partners approved a resolution that the discovered fields are commercial to exploit. On June 4, 2014, a Declaration of Commerciality
(DOC) was signed with Gabon pertaining to the four discoveries on the Dussafu Project offshore Gabon. Furthermore, on July 17, 2014, the Direction Generale Des Hydrocarbures (DGH) awarded an Exclusive Exploitation
Authorization (EEA) for the development and exploitation of certain oil discoveries on the Dussafu Project and on October 10, 2014, the field development plan was approved. The Company has four years from the date of the EEA
approval to begin production.
The Company is currently assessing alternatives to farm-down or sell the Dussafu Project, while weighing
the liquidity requirements necessary to maintain ongoing Company operations.
Operational activities during the year ended
December 31, 2015, included continued evaluation of development plans, based on the 3D seismic data processed during 2014.
In
December 2014, the Company recorded a $50.3 million impairment related to the unproved costs of the Dussafu PSC based on a qualitative analysis which considered our current liquidity needs, our inability to attract additional capital and the
decrease in oil and natural gas prices. In December 2015, the Company reassessed the carrying value of the unproved costs related to the Dussafu PSC and recorded an additional impairment of $23.2 million based on its analysis of the value
of the unproved costs which considered the value of the contingent and exploration resources and the ability of the Company to develop the project given its current liquidity situation and the depressed price of crude oil. If oil and natural gas
prices continue to deteriorate or we fail to obtain adequate financing, farm-down or sell the asset, additional impairments may be required on our prospect.
In the impairment analysis in December 2015, the Company prepared a quantitative and qualitative assessment of the unproved property which
estimated the value of the estimated contingent and exploration resources based on the Companys ability to develop the project given its current liquidity situation and the depressed price of crude oil. The valuation model developed used
three price scenarios and a development decision tree model which estimated the value of three development options available to the Company. The value of the development options was determined using outputs from a Monte Carlo simulation model
which estimated
C-33
the net present value of expected future cash flow to be generated from the development of the contingent and exploratory resources in the Dussafu PSC and discounted using a weighted average cost
of capital of 21.5%. The development options considered the probability that the Company would be: a) able to farm-down 50% of their working interest; b) able to sell their working interest; and c) unable to complete either of the first 2 options.
All inputs used in the valuation process were primarily level 3 in the fair value hierarchy. The concluded fair value of the unproved property costs in our Dussafu project was $28.0 million.
We also reviewed the value of our oilfield inventories that are in the country of Gabon, of which the majority is steel conductor and casing.
We impaired the value of this inventory by approximately $1.0 million in 2015, leaving $3.0 million related to this inventory as of December 31, 2015.
See
Note 13 Commitments and Contingencies
for a discussion related to our Gabon operations.
Note 9 Indonesia
We fully
impaired our investment in the Budong Production Sharing Contract (Budong PSC) in Indonesia as of March 31, 2014. In June 2014, Harvest and our partner adopted a resolution to terminate the Budong PSC. Harvest advised the Indonesian
government of this decision and submitted a request to terminate the Budong PSC. On February 5, 2015, the Company entered into a Share Purchase Agreement to transfer shares of Harvest Budong-Budong B.V. to Stockbridge Capital Limited for a
nominal amount. On February 17, 2015, a withdrawal request of the earlier termination request was made to the Indonesian government and the withdrawal request was accepted on April 15, 2015. The transfer of shares to Stockbridge Capital
Limited was completed on May 4, 2015.
Note 10 Notes Payable to Noncontrolling Interest Owners
At December 31, 2014, HNR Energia had a note payable to Vinccler of $6.1 million. Principal and interest were payable upon the maturity
date of December 31, 2015. On March 6, 2015, Vinccler forgave the note payable and accrued interest of $6.2 million. This was reflected as a contribution to stockholders equity.
On August 28, 2014 Petroandina exercised its right to a one month extension of the termination date of the SPA. In accordance with the
extension the Company had the option to borrow $2.0 million from Petroandina, which it exercised. Petroandina again extended the SPA on September 29, and October 30, 2014, with the Company borrowing $2.0 million per extension. On
November 27, 2014, Petroandina exercised their final extension and the Company borrowed the final maximum amount allowed of $1.6 million. Quarterly interest payments began on December 31, 2014 with the principal due January 1, 2016.
The note payable with Petroandina as of December 31, 2014 was $7.6 million. Interest accrued at a rate of 11.0%. We were in default of the loan agreement with Petroandina for not making the April 1, 2015 interest payment. After default the
interest rate increased from 11.0% to 13.0%. On June 23, 2015, the Company repaid the note payable of $7.6 million plus accrued interest of $0.4 million.
Note 11 Debt and Financing
On
June 19, 2015, we issued the CT Warrant, 9% and 15% Notes, the Additional Draw Note and Series C preferred stock in connection with the Purchase Agreement with CT Energy and received proceeds of $30.6 million, net of financing fees of $1.6
million. We identified embedded derivative assets and derivative liabilities in the notes and determined that the CT Warrant did not meet the required conditions to qualify for equity classification and was required to be classified as a warrant
liability (see
Note 12 Warrant Derivative Liability
). The estimated fair value, at issuance, of the embedded derivative asset was $2.5 million, the embedded derivative liability was $13.5 million and the warrant liability was
$40.0 million. In accordance with ASC 815, the proceeds were first allocated to the fair value of the embedded derivatives and warrants, which resulted in no value being attributable to the Series C preferred stock and the 9% and 15% Notes. As
a result of the allocation, we recognized a loss on the issuance of these securities of $20.4 million from discontinued operations in our
C-34
consolidated statements of operations and comprehensive loss during the year end December 31, 2015. The following table summarizes the movement of our long-term debt due to related party net
of discount:
|
|
|
|
|
|
|
As of December 31,
2015
|
|
|
|
(in thousands)
|
|
Long-Term Debt
(1)
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
Proceeds from 9% and 15% Notes to CT Energy
|
|
|
32,200
|
|
Proceeds from note payable to CT Energy
|
|
|
1,300
|
|
Repayment of note payable to CT Energy
|
|
|
(1,300
|
)
|
Value assigned to embedded derivatives
|
|
|
(32,200
|
)
|
Conversion of 9% Note, net of unamortized discount
|
|
|
(11
|
)
|
Accretion of discount on debt
|
|
|
225
|
|
|
|
|
|
|
|
|
$
|
214
|
|
|
|
|
|
|
(1)
|
Debt and financing related to the CT Energy transaction has been reclassified to liabilities associated with discontinued operations. Please see
Note 5 Dispositions and Discontinued Operations
for further
information.
|
The face value of the 15% and 9% Notes were recorded net of the discount related to the value allocated to the
embedded derivatives and warrant. The unamortized discount of the 15% Note was $25.0 million at December 31, 2015. The Company will accrete the discount over the life of the note using the interest method. Total interest expense associated with
this note was $2.2 million, comprised of $2.0 million related to the stated rate of interest on the note and $0.2 million related to the accretion of the discount on the debt. The effective interest rate on the note is approximately
141%. The fair value of the 15% Note at December 31, 2015 was $8.8 million.
15% Non-Convertible Senior Secured Note due June 19,
2020
On June 19, 2015, in connection with the transaction with CT Energy described in
Note 1 Organization
, we
issued the five-year, 15% Note in the aggregate principal amount of $25.2 million with interest that is compounded quarterly at a rate of 15% per annum and is payable quarterly on the first business day of each January, April, July and October,
commencing October 1, 2015. If by June 19, 2016, the volume weighted average price of the Companys common stock over any consecutive 30-day period has not equaled or exceeded $10.00 per share, the maturity date of the 15% Note will
be extended by two years and the interest rates on the 15% Note will adjust to 8.0% (the 15% Note Reset Feature). During an event of default, the outstanding principal amount bears additional interest at a rate of 2.0% per annum
higher than the rate otherwise applicable.
The Company may prepay all or a portion of the note at a prepayment price equal to a
make-whole price, as of the prepayment date, with respect to the principal amount of the note being prepaid, plus accrued and unpaid interest. The make-whole price is defined as the greater of (i) 100% of such outstanding principal amount of
the 15% Note and (ii) the sum of the present values as of such date of determination of (A) such outstanding principal amount of the 15% Note, assumed, for the purpose of determining the present value thereof, to be paid on the earlier of
the stated maturity of this 15% Note or the date that is two years after the date of determination, and (B) all remaining payments of interest (excluding interest accrued to the prepayment date) scheduled to become due and payable after the
date of determination and on or before the date that is two years after the date of determination with respect to such outstanding principal amount of the 15% Note, in the case of each of the foregoing clauses (ii)(A) and (B), computed using a
discount rate equal to the Treasury Rate as of the date of determination plus 50 basis points.
If an event of default occurs (other than
an event of default related to certain bankruptcy events), holders of at least 25% of the outstanding principal of the 15% Note may declare the principal, premium, if any, and
C-35
accrued and unpaid interest of such notes immediately due and payable. If an event of default related to specified bankruptcy events occurs, an amount equal to the make-whole price for the
15% Note plus accrued and unpaid interest is immediately due and payable.
We have evaluated the 15% Note Reset Feature related to the
interest rate and maturity date using ASC 815 Derivatives and Hedging. Because the interest rate and maturity date reset are linked to achievement of a certain stock price, the feature is not considered clearly and closely related to the
debt host. In addition, the interest rate at the reset date is not tied to any approximation of the expected market rate at the date of the term extension as required by ASC 815. As a result, we are accounting for the 15% Note Reset Feature as an
embedded derivative asset that has been measured at fair value with current changes in fair value reflected in our consolidated statements of operations and comprehensive loss.
The embedded 15% Note Reset Feature in the 15% Note was valued using the with and without method. A Black-Derman-Toy
(BDT) Model, which is a binomial interest rate lattice model, was used to value the 15% Note and the incremental value attributed to the embedded option was determined based on a comparison of the value of the 15% Note with the feature
included and without the feature included. Key inputs into this valuation model are our current stock price, U.S. Treasury rate, our credit spread and the underlying yield volatility. As part of our overall valuation process, management employs
processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value
measurements and disclosures are appropriate, consistently applied, and reliable. We estimate the yield volatility for the 15% Note based on historical daily volatility of the USD denominated Venezuela Sovereign zero coupon yield over a look back
period of 6.0 years. The risk-free interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the 15% Note. The credit spread was estimated based on the option adjusted
spread (OAS) of the Venezuelan yield over the USD Treasury yield and the implied OAS for the transaction as of the date the term sheet was signed to capture the investors assessment of the risk in their investment in the Company.
This model requires Level 3 inputs (see
Note 3 Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements
) which were based on our estimates of the probability and timing of potential future
financings and fundamental transactions.
The assumptions summarized in the following table were used to calculate the fair value of the
derivative asset associated with the 15% Note at the date of issuance:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
June 19, 2015
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
7.28
|
|
Weighted Term (years)
|
|
|
|
|
|
|
5.0
|
|
Yield Volatility
|
|
|
Level 2 input
|
|
|
|
32.5
|
%
|
Risk-free rate
|
|
|
Level 1 input
|
|
|
|
1.6% to 2.0
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
Scenario probability:
|
|
|
|
|
|
|
|
|
Claim date extended with Stock Appreciation Date threshold met
|
|
|
Level 3 input
|
|
|
|
60.0
|
%
|
Claim date extended with Stock Appreciation Date threshold not met
|
|
|
Level 3 input
|
|
|
|
42.5
|
%
|
Claim date not extended with Stock Appreciation Date threshold met
|
|
|
Level 3 input
|
|
|
|
60.0
|
%
|
Claim date not extended with Stock Appreciation Date threshold not met
|
|
|
Level 3 input
|
|
|
|
40.2
|
%
|
Scenario probability (future draws/no future draws)
|
|
|
Level 3 input
|
|
|
|
50%/50
|
%
|
C-36
The embedded derivative asset related to the 15% Note contains a Level 3 input related to the
probability of our investor lending us additional funds or not lending us funds according to the terms of the loan agreement for the additional draws. We have assumed a 50/50 scenario of the draw or no draw for valuation of the embedded
derivative. Changes in this assumption have minimal impacts on the embedded derivative asset valuation as HNR stock price is the primary driver of the value.
The assumptions summarized in the following table were used to calculate the fair value of the derivative asset associated with the 15% Note
that was outstanding as of December 31, 2015 on our consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of December 31,
2015
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
1.72
|
|
Weighted Term (years)
|
|
|
|
|
|
|
4.47
|
|
Yield Volatility
|
|
|
Level 2 input
|
|
|
|
35
|
%
|
Risk-free rate
|
|
|
Level 1 input
|
|
|
|
1.6% to 2.0
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
Scenario probability:
|
|
|
|
|
|
|
|
|
Claim date extended with Stock Appreciation Date threshold met
|
|
|
Level 3 input
|
|
|
|
54.8
|
%
|
Claim date extended with Stock Appreciation Date threshold not met
|
|
|
Level 3 input
|
|
|
|
36.1
|
%
|
Claim date not extended with Stock Appreciation Date threshold met
|
|
|
Level 3 input
|
|
|
|
54.8
|
%
|
Claim date not extended with Stock Appreciation Date threshold not met
|
|
|
Level 3 input
|
|
|
|
33.4
|
%
|
Scenario probability (future draws/no future draws)
|
|
|
Level 3 input
|
|
|
|
50%/50
|
%
|
The fair value of the embedded derivative asset was $2.5 million at issuance and $5.0 million as of
December 31, 2015. We recognized $2.5 million in income from discontinued operations related to the change in fair value of this embedded derivative asset in change in fair value of derivative assets and liabilities in our consolidated
statement of operations for the year ended December 31, 2015.
15% Non-Convertible Senior Secured Additional Draw Note
On June 19, 2015, in connection with the transaction with CT Energy described in
Note 1 Organization
, the Company also
issued the Additional Draw Note which, under certain circumstances, CT Energy may elect to provide $2.0 million of additional funds to the Company per month for up to six months following the one-year anniversary of the closing date of the
transaction (up to $12.0 million in aggregate). If funds are loaned under the Additional Draw Note, interest will be compounded quarterly at a rate of 15.0% per annum and will be payable quarterly on the first business day of each January,
April, July and October, commencing October 1, 2016. If by the Claim Date, the volume weighted average price of the Companys common stock over any consecutive
30-day
period has not equaled or
exceeded $10.00 per share, the maturity date of the Additional Draw Note will be extended by two years and the interest rate on the Additional Draw Note will adjust to 8.0%. During an event of default, the outstanding principal amount will bear
additional interest at a rate of 2.0% per annum higher than the rate otherwise applicable.
The Company may prepay all or a portion
of the Additional Draw Note at a prepayment price equal to the make-whole price, as of the prepayment date, with respect to the principal amount of the Additional Draw Note
C-37
being prepaid, plus accrued and unpaid interest. The make-whole price with respect to the Additional Draw Note has the same meaning described above with respect to the 15% Note under.
If an event of default occurs (other than an event of default related to certain bankruptcy events), holders of at least 25% of the
outstanding principal of the 15% Note (including the Additional Draw Note, if outstanding) may declare the principal, premium, if any, and accrued and unpaid interest of such notes immediately due and payable. If an event of default related to
specified bankruptcy events occurs, an amount equal to the make-whole price for the Additional Draw Note plus accrued and unpaid interest is immediately due and payable.
Because we have not withdrawn any proceeds on this note at issuance and at December 31, 2015, we have assigned no value to the Additional
Draw Note, as it does not meet the definition of a derivative in ASC 815 and there is no principal amount outstanding.
9% Convertible Senior Secured
Note due June 19, 2020
On June 19, 2015, in connection with the transaction with CT Energy described in
Note 1
Organization
we issued the five-year, 9% Note in the aggregate principal amount of $7.0 million, which was immediately convertible into 2,126,525 shares of the Companys common stock, par value $0.01 per share, at an initial conversion
price of $3.28 per share (Beneficial Conversion Feature).
Interest on the 9% Note was compounded quarterly at a rate of
9.0% per annum and was payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2015. If by June 19, 2016, the volume weighted average price of the Companys common stock over
any consecutive 30-day period had not equaled or exceeded $10.00 per share, the maturity date of the 9% Note will be extended by two years and the interest rates on the 9% Note will adjust to 8.0% (the 9% Note Reset Feature).
Regarding the 9% Note Reset Feature, because the interest rate and maturity date reset were linked to achievement of a certain stock price,
the feature was not considered clearly and closely related to the debt host. In addition, the interest rate at the reset date was not tied to any approximation of the expected market rate at the date of the term extension as required by ASC 815. As
a result, we accounted for the 9% Note Reset Feature as an embedded derivative asset that was measured at fair value with current changes in fair value reflected in change of fair value of derivative assets and liabilities in our consolidated
statements of operations and comprehensive loss. The changes in the fair value of this embedded derivative asset was netted against the changes in the fair value of the embedded derivative liabilities relating to the 9% Down-Round Provision and Note
Reset Feature discussed below.
The conversion price was subject to adjustment upon the occurrence of certain events, including a stock
issuance, dividend, or stock split. If the Company completes an issuance of common stock at a price less than the current conversion price, then the conversion price will be fully reduced to the new issuance price for such below-price issuance (the
9% Down-Round Provision). This is a full ratchet down round provision that could compensate the holder for an amount greater than dilution related to a stock issuance. For example, in the event of an issuance of stock causing a 10%
dilution, the note holder could theoretically be compensated greater than 10% under certain circumstances.
The embedded 9% Down-Round
Provision and the 9% Note Reset Feature were valued using the with and without method. A Binomial Lattice Model was used to value the 9% Note and the incremental value attributed to the embedded options was determined based
on a comparison of the value of the 9% Note with the features included and without the features included. Key inputs into this valuation model were our current stock price, U.S. Treasury rate, our credit spread and the underlying stock price
volatility. As part of our overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and
results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate,
C-38
consistently applied, and reliable. We estimated the volatility of our common stock based on historical volatility that matches the expected remaining life of the longest instrument in the
transaction, seven years. The risk-free interest rate was based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the 9% Note. The credit spread was estimated based on the option
adjusted spread (OAS) of the Venezuelan yield over the USD Treasury yield and the implied OAS for the transaction as of the date the term sheet was signed to capture the investors assessment of the risk in their investment in the
Company. This model requires Level 3 inputs (see
Note 3 Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements
) which were based on our estimates of the probability and timing of potential future
draws.
We have evaluated the 9% Down-Round Provision and the 9% Note Reset Feature using ASC 815. The Convertible Down-Round Provision is
not consistent with a fixed-price-for-fixed-number of shares instrument and therefore precludes the conversion option from being indexed to the Companys own stock. As a result, the conversion option did not meet the scope exception in ASC 815
and was bifurcated as a separate liability that has been measured at fair value with current changes in fair value reflected in our consolidated statements of operations and comprehensive loss.
The fair value of the net embedded derivative liabilities was $13.5 million at issuance and $11.1 million immediately prior to the conversion
of the 9% Note. We recognized $2.3 million in income for the change in the fair value of this embedded derivative liabilities in our consolidated statement of operations for the year ended December 31, 2015.
On September 15, 2015, the 9% Note, the associated accrued interest and related derivative liabilities were converted into 2,166,900
shares of the Companys common stock. The Company recognized a $1.9 million loss on debt conversion. The $1.9 million loss on debt conversion was the result of the difference between the September 14, 2015 carrying value of the 9% Note,
including accrued interest and unamortized debt discount ($0.2 million) and the fair value of the related derivative liabilities ($11.1 million) less the fair value of the 2,166,900 shares issued upon conversion ($13.2 million) at September 15,
2015.
The assumptions summarized in the following table were used to calculate the fair value of the net embedded derivative liability
associated with the 9% Note at the date of issuance:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
June 19, 2015
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
7.28
|
|
Term (years)
|
|
|
|
|
|
|
5.0
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
90
|
%
|
Risk-free rate (base)
|
|
|
Level 1 input
|
|
|
|
0.27
|
%
|
Risk-free rate (5 year)
|
|
|
Level 1 input
|
|
|
|
2.05
|
%
|
Risk-free rate (7 year)
|
|
|
Level 1 input
|
|
|
|
2.40
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
Note 12 Warrant Derivative Liability
CT Warrant
On June 19, 2015, in
connection with the transaction with CT Energy described in
Note 1 Organization,
we issued a warrant exercisable for 8,517,705 shares of the Companys common stock at an initial exercise price of $5.00 per share (the CT
Warrant). The CT Warrant may not be exercised until the volume weighted average price of the Companys common stock over any consecutive 30-day period equals or exceeds $10.00 per share. The CT Warrant has been reclassified to liabilities
associated with discontinued operations. See
Note 5 Dispositions and Discontinued Operations
for further information.
C-39
The fair value of the CT Warrant was $40.0 million at issuance and $5.5 million as of
December 31, 2015. We recognized income from discontinued operations of $34.5 million related to the change in fair value of the warrant liability in our consolidated statement of operations and comprehensive loss for the year ended
December 31, 2015.
The CT Warrant can be exercised at the option of the investor in cash or by effecting a reduction in the
principal amount of the 15% Note (See
Note 11 Debt and Financing
). If the CT Warrant is exercised through the reduction in the principal amount of the 15% Note, the reduction will be equal to the amount obtained by multiplying the
number of shares of common stock for which the CT Warrant is exercised by (i) the exercise price then in effect divided by (ii) (A) the defined make-whole price with respect to the outstanding principal amount of such 15% Note divided
by (B) the outstanding principal amount of such 15% Note. The exercise price of the CT Warrant is subject to adjustment upon the occurrence of certain events, including stock issuance, dividend or stock split.
In addition, the holder of the CT Warrant has certain registration rights regarding the CT Warrant and the shares of common stock issuable
upon exercise of the CT Warrant.
We have analyzed the CT Warrant to determine whether it should be classified as a derivative liability
or equity instrument. Provisions of the CT Warrant agreement allow for a change in the exercise price of the CT Warrant upon the occurrence of certain corporate events. These exercise price adjustments incorporate variables other than those
used to determine the fair value of a fixed-for-fixed forward or option on equity shares therefore the CT Warrant is not considered to be indexed to the issuers own stock and does not meet the exception from derivative treatment in
ASC 815. HNR continues to account for the CT Warrant as a derivative which was marked to market as of December 31, 2015.
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are
likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Monte Carlo model) are highly volatile and sensitive to changes in the trading
market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair value, our income will reflect the volatility in these estimate and assumption changes. A Monte Carlo simulation model is used to
value the CT Warrant to determine if the Stock Appreciation Date is achieved, which is based on the average stock price over a 30 day period (21 trading days) reaching $10.00 per share. This requires Level 3 inputs (See
Note 3 Summary of
Significant Accounting Policies, Financial Instruments and Fair Value Measurements
) which are fundamentally based on market data but require complex modeling. The additional modeling is required in order to simulate future stock prices, to
determine whether the Stock Appreciation Date is achieved and to model the projected exercise behavior of the warrant holders.
C-40
The assumptions summarized in the following table were used to calculate the fair value of the
warrant derivative liability at the date of issuance:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
June 19, 2015
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
7.28
|
|
Exercise price
|
|
|
Level 1 input
|
|
|
$
|
5.00
|
|
Stock appreciation date price (hurdle)
|
|
|
Level 1 input
|
|
|
$
|
10.00
|
|
Term (warrants)
|
|
|
|
|
|
|
3.0
|
|
Term (claim date)
|
|
|
|
|
|
|
1.0
|
|
Term (claim date extended)
|
|
|
|
|
|
|
1.5
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
90.0
|
%
|
Risk-free rate (warrants)
|
|
|
Level 1 input
|
|
|
|
1.09
|
%
|
Risk-free rate (claim date)
|
|
|
Level 1 input
|
|
|
|
0.27
|
%
|
Risk-free rate (claim date extended)
|
|
|
Level 1 input
|
|
|
|
0.48
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
The assumptions summarized in the following table were used to calculate the fair value of the warrant
derivative liability that was outstanding as of the balance sheet date presented on our consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of
December 31,
2015
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
1.72
|
|
Exercise price
|
|
|
Level 1 input
|
|
|
$
|
5.00
|
|
Stock appreciation date price (hurdle)
|
|
|
Level 1 input
|
|
|
$
|
10.00
|
|
Term (warrants)
|
|
|
|
|
|
|
2.4668
|
|
Term (claim date)
|
|
|
|
|
|
|
0.4672
|
|
Term (claim date extended)
|
|
|
|
|
|
|
0.9672
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
110.0
|
%
|
Risk-free rate (warrants)
|
|
|
Level 1 input
|
|
|
|
1.27
|
%
|
Risk-free rate (claim date)
|
|
|
Level 1 input
|
|
|
|
0.55
|
%
|
Risk-free rate (claim date extended)
|
|
|
Level 1 input
|
|
|
|
0.70
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
Inherent in the Monte Carlo valuation model are assumptions related to expected stock price volatility,
expected life, risk-free interest rate and dividend yield. As part of our overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation
judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate, consistently applied, and reliable. We estimate the volatility of our common
stock based on historical volatility that matches the expected remaining life of the longest instrument in the transaction, seven years. The risk-free interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity
similar to the expected remaining life of the CT Warrant. The expected life of the CT Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which we anticipate to remain at
zero.
MSD Warrants
On
October 28, 2015, the warrants issued as inducements in connection with a $60 million term loan facility that was paid off in May 2011 (MSD Warrants) expired (461,522 warrants outstanding: December 31, 2014).
C-41
The fair value of these warrants as of December 31, 2014 and at expiration was $0.00 per warrant. The Warrant Purchase Agreement dated as of October 28, 2010 includes certain
anti-dilution provisions which adjust the number of warrants and the exercise price per warrant. The issuance of the CT Energy 9% Note, because of the initial conversion price and the CT Warrant of 8,517,705 shares triggered the anti-dilution
provisions on the MSD Warrants which resulted in the issuance of 386,935 additional warrants during the year ended December 31, 2015. In addition, the exercise price per share for all warrants was repriced to $27.88 per warrant during the
year ended December 31, 2015. The warrants had been classified as a liability on our consolidated balance sheets and marked to market. The valuation for the warrants had based primarily on our stock price of $7.24 at December 31,
2014, their remaining life of 0.83 years and their strike price of $27.88 as of December 31, 2014. We recognized $0.0 million in warrant liability income in our consolidated statement of operations and comprehensive loss year ended
December 31, 2015 for these warrants and $2.0 million for the year ended December 31, 2014. The assumptions summarized in the following table were used to calculate the fair value of the warrant derivative liability related to the MSD
warrants that were outstanding at December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of
December 31,
2014
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
7.24
|
|
Term (years)
|
|
|
|
|
|
|
0.83
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
67%
|
|
Risk-free rate
|
|
|
Level 1 input
|
|
|
|
0.21%
|
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0%
|
|
Scenario probability (fundamental change event/debt raise/equity raise)
|
|
|
Level 3 input
|
|
|
|
0%/100%/0%
|
|
Note 13 Commitments and Contingencies
We have employment contracts with five executive officers which provide for annual base salaries, eligibility for bonus compensation and
various benefits. The contracts provide for a lump sum payment as a multiple of base salary in the event of termination of employment without cause. In addition, these contracts provide for payments as a multiple of base salary and bonus, excise tax
reimbursement, outplacement services and a continuation of benefits in the event of termination without cause following a change in control. By providing one year notice, these agreements may be terminated by either party on or before May 31,
2016.
We have various contractual commitments pertaining to leasehold, training, and development costs for the Dussafu PSC totaling $4.5
million. Under the EEA granted for the Dussafu PSC on July 17, 2014, we are required to commence production within four years of the date of grant in order to preserve our rights to production under the EEA. We expect that significant capital
expenditures will be required prior to commencement of production which is expected in 2016 under the approved field development plan. These work commitments are non-discretionary; however, we do have the ability to control the pace of expenditures.
The table below consists of our contractual commitments for office space and various other commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-2 Years
|
|
|
3-4 Years
|
|
|
After 4 Years
|
|
|
|
(in thousands)
|
|
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas activities
|
|
$
|
4,520
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
Office leases
|
|
|
171
|
|
|
|
157
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
4,691
|
|
|
$
|
1,287
|
|
|
$
|
1,144
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C-42
Under the agreements with our partners in the Dussafu PSC and the Budong PSC, we are jointly and
severally liable to various third parties. As of December 31, 2015, the gross carrying amount associated with obligations to third parties which were fixed at the end of the period was $0.3 million ($2.4 million as of December 31, 2014)
and is related to accounts payable to vendors, accrued expenses and withholding taxes payable to taxing authorities. As we are the operators for the Dussafu PSC and Budong PSC, the gross carrying amount related to accounts payable and withholding
taxes and the net amount related to other accrued expenses are reflected in the consolidated balance sheet in accounts payable and accrued expenses leaving $0.1 million in fixed obligations as of December 31, 2015 ($0.3 million as of
December 31, 2014) attributable to our joint partners share which is not accrued in our balance sheet. Our partners have advanced $0.0 million ($0.5 million as of December 31, 2014) to satisfy their share of these obligations which
was $0.1 million as of December 31, 2015 ($0.8 million as of December 31, 2014). As we expect our partners will continue to meet their obligations to fund their share of expenditures, we have not recognized any additional liability related
to fixed joint interest obligations attributable to our joint interest partners.
Kensho Sone, et al. v. Harvest Natural Resources,
Inc.
, in the United States District Court, Southern District of Texas, Houston Division. On July 24, 2013, 70 individuals, all alleged to be citizens of Taiwan, filed an original complaint and application for injunctive relief relating to
the Companys interest in the WAB-21 area of the South China Sea. The complaint alleged that the area belonged to the people of Taiwan and sought damages in excess of $2.9 million and preliminary and permanent injunctions to prevent the Company
from exploring, developing plans to extract hydrocarbons from, conducting future operations in, and extracting hydrocarbons from, and the WAB-21 area. The Company filed a motion to dismiss the suit, which was granted by the district court in August
2014. The plaintiffs appealed the dismissal. The Fifth Circuit Court of Appeals heard oral arguments on June 3, 2015 and affirmed the district courts dismissal on June 4, 2015. The plaintiffs filed a petition for writ of
certiorari with the Supreme Court of the United States. On October 13, 2015, the Supreme Court denied the petition.
The following
related class action lawsuits were filed on the dates specified in the United States District Court, Southern District of Texas:
John Phillips v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes
(March 22, 2013)
(Phillips case);
Sang Kim v. Harvest Natural Resources, Inc., James A. Edmiston, Stephen C. Haynes, Stephen D. Chesebro, Igor Effimoff, H. H. Hardee, Robert E. Irelan, Patrick M. Murray and J. Michael Stinson
(April 3,
2013);
Chris Kean v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes
(April 11, 2013);
Prastitis v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes
(April 17, 2013);
Alan Myers v.
Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes
(April 22, 2013); and
Edward W. Walbridge and the Edward W. Walbridge Trust v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes
(April 26,
2013). The complaints allege that the Company made certain false or misleading public statements and demand that the defendants pay unspecified damages to the class action plaintiffs based on stock price declines. All of these actions have been
consolidated into the Phillips case. The Company and the other named defendants have filed a motion to dismiss and intend to vigorously defend the consolidated lawsuits. We are currently unable to estimate the amount or range of any possible loss.
In May 2012, Newfield Production Company (Newfield) filed notice pursuant to the Purchase and Sale Agreement between Harvest
(US) Holdings, Inc. (Harvest US), a wholly owned subsidiary of Harvest, and Newfield dated March 21, 2011 (the PSA) of a potential environmental claim involving certain wells drilled on the Antelope Project. The claim
asserts that locations constructed by Harvest US were built on, within, or otherwise impact or potentially impact wetlands and other water bodies. The notice asserts that, to the extent of potential penalties or other obligations that might result
from potential violations, Harvest US must indemnify Newfield pursuant to the PSA. In June 2012, we provided Newfield with notice pursuant to the PSA (1) denying that Newfield has any right to indemnification from us, (2) alleging that any
potential environmental claim related to Newfields notice would be an assumed liability under the PSA and (3) asserting that Newfield indemnify us pursuant to the PSA. We dispute Newfields claims and plan to vigorously defend
against them. We are currently unable to estimate the amount or range of any possible loss.
C-43
On May 31, 2011, the United Kingdom branch of our subsidiary, Harvest Natural Resources,
Inc. (UK), initiated a wire transfer of approximately $1.1 million ($0.7 million net to our 66.667 percent interest) intending to pay Libya Oil Gabon S.A. (LOGSA) for fuel that LOGSA supplied to our subsidiary in the Netherlands, Harvest
Dussafu, B.V., for the companys drilling operations in Gabon. On June 1, 2011, our bank notified us that it had been required to block the payment in accordance with the U.S. sanctions against Libya as set forth in Executive Order
13566 of February 25, 2011, and administered by OFAC, because the payee, LOGSA, may be a blocked party under the sanctions. The bank further advised us that it could not release the funds to the payee or return the funds to us unless we
obtain authorization from OFAC. On October 26, 2011, we filed an application with OFAC for return of the blocked funds to us. Until that application is approved, the funds will remain in the blocked account, and we can give no
assurance when OFAC will permit the funds to be released. On April 23, 2014, we received a notice that OFAC had denied our October 26, 2011 application for the return of the blocked funds. During the year ended December 31, 2015
primarily due to the passage of time, we recorded a $0.7 million allowance for doubtful accounts to general and administrative costs associated with the blocked payment and $0.4 million receivable from our joint venture partner. On October 13,
2015, we filed a request that OFAC reconsider its decision and on March 8, 2016 OFAC denied our October 13, 2015 request for the return of blocked funds; however, the Company will continue attempts to recover the funds from OFAC.
Robert C. Bonnet and Bobby Bonnet Land Services vs. Harvest (US) Holdings, Inc., Branta Exploration & Production, LLC, Ute Energy
LLC, Cameron Cuch, Paula Black, Johnna Blackhair, and Elton Blackhair in the United States District Court for the District of Utah. This suit was served in April 2010 on Harvest and Elton Blackhair, a Harvest employee, alleging that the
defendants, among other things, intentionally interfered with plaintiffs employment agreement with the Ute Indian Tribe Energy & Minerals Department and intentionally interfered with plaintiffs prospective economic
relationships. Plaintiffs seek actual damages, punitive damages, costs and attorneys fees. The court administratively closed the case in 2013. The case was reopened in 2014 as a result of a Circuit Court of Appeals ruling. On
November 3, 2015, the court granted a stipulated motion to dismiss with prejudice and the lawsuit was dismissed.
Uracoa Municipality
Tax Assessments. Harvest Vinccler, a subsidiary of Harvest Holding, has received nine assessments from a tax inspector for the Uracoa municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:
|
|
|
Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by PDVSA under the Operating
Service Agreement (OSA). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims.
|
|
|
|
Two claims were filed in July 2006 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims.
|
|
|
|
Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Holding has filed a
protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim.
|
|
|
|
Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims.
|
Harvest Vinccler disputes the Uracoa tax assessments and believes it has a substantial basis for its positions based on the
interpretation of the tax code by SENIAT (the Venezuelan income tax authority), as it applies to operating service agreements, Harvest Holding has filed claims in the Tax Court in Caracas against the Uracoa Municipality for the refund of all
municipal taxes paid since 1997.
C-44
Libertador Municipality Tax Assessments. Harvest Vinccler has received five assessments from a
tax inspector for the Libertador municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:
|
|
|
One claim was filed in April 2005 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Mayors Office and a motion with the Tax Court in Barcelona,
Venezuela, to enjoin and dismiss the claim. On April 10, 2008, the Tax Court suspended the case pending a response from the Mayors Office to the protest. If the municipalitys response is to confirm the assessment, Harvest Holding
will defer to the Tax Court to enjoin and dismiss the claim.
|
|
|
|
Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated
revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims.
|
|
|
|
Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both
claims.
|
Harvest Vinccler disputes the Libertador allegations set forth in the assessments and believes it has a substantial
basis for its position. As a result of the SENIATs interpretation of the tax code as it applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in Caracas against the Libertador Municipality for the refund
of all municipal taxes paid since 2002.
On May 4, 2012, Harvest Vinccler learned that the Political Administrative Chamber of the
Supreme Court of Justice issued a decision dismissing one of Harvest Vincclers claims against the Libertador Municipality. Harvest Vinccler continues to believe that it has sufficient arguments to maintain its position in accordance with the
Venezuelan Constitution. Harvest Vinccler plans to present a request of Constitutional Revision to the Constitutional Chamber of the Supreme Court of Justice once it is notified officially of the decision. Harvest Vinccler has not received official
notification of the decision. Harvest Vinccler is unable to predict the effect of this decision on the remaining outstanding municipality claims and assessments.
On January 15, 2015, HNR Finance and Harvest Vinccler S.C.A submitted a Request for Arbitration against the Government of Venezuela
before the International Centre for Settlement of Investment Disputes (ICSID) regarding HNR Finances interest in Petrodelta. The Request for Arbitration set forth numerous claims, including (a) the failure of the Venezuelan
government to approve the Companys negotiated sale of its 51 percent interest in Harvest Holding to Petroandina on any reasonable grounds in 2013-2014, resulting in the termination of the SPA (b) the failure of the Venezuelan government
to approve the Companys previously negotiated sale of its interest in Petrodelta to PT Pertamina (Persero) on any reasonable grounds in 2012-2013, resulting in the termination of a purchase agreement entered into between HNR Energia and PT
Pertamina (Persero); (c) the failure of the Venezuelan government to allow Petrodelta to pay approved and declared dividends for 2009; (d) the failure of the Venezuelan government to allow Petrodelta to approve and declare dividends since
2010, in violation of Petrodeltas bylaws and despite Petrodeltas positive financial results between 2010 and 2013; (e) the denial of Petrodeltas right to fully explore the reserves within its designated areas; (f) the
failure of the Venezuelan government to pay Petrodelta for all hydrocarbons sales since Petrodeltas incorporation, recording them instead as an ongoing balance in the accounts of PDVSA, the Venezuelan government-owned oil company that controls
Venezuelas 60 percent interest in Petrodelta, and as a result disregarding Petrodeltas managerial and financial autonomy; (g) the failure of the Venezuelan government to pay Petrodelta in US dollars for the hydrocarbons sold to
PDVSA, as required under the mixed company contract; (h) interference with Petrodeltas operations, including PDVSAs insistence that PDVSA and its affiliates act as a supplier of materials and equipment and provider of services to
Petrodelta; (i) interference with Petrodeltas financial management, including the use of low exchange rates Bolivars/US dollars to the detriment of the Company and to the benefit of the Venezuelan government, PDVSA and its affiliates; and
(j) the forced migration of the Companys investment in Venezuela from an operating services agreement to a mixed company structure in 2007.
C-45
On January 26, 2015, Petroandina filed a complaint for breach of contract against the
Company and its subsidiary HNR Energia in Court of Chancery of the State of Delaware (Court of Chancery). The complaint states that HNR Energia breached provisions of the Shareholders Agreement between Petroandina and HNR Energia, which
provisions require HNR Energia to provide advance notice of, and deposit $5.0 million into an escrow account, before bringing any claim against the Venezuelan government. Under those provisions, if Petroandina so requests, an appraisal of
Petroandinas 29 percent interest in Harvest Holdings must be performed, and Petroandina has the right to require HNR Energia to purchase that 29 percent interest at the appraised value. Petroandinas claim requests that, among other
things, the court (a) declare that HNR Energia has breached the Shareholders Agreement by submitting the Request for Arbitration against the Venezuelan government on January 15, 2015 (which Request for Arbitration was subsequently
withdrawn without prejudice); (b) declare that the Company has breached its guaranty of HNR Energias obligations under the Shareholders Agreement; (c) direct the Company and HNR Energia to refrain from prosecuting any legal
proceeding against the Venezuelan government (including the previously filed Request for Arbitration) until such time as they have complied with the relevant provisions of the Shareholders Agreement; (d) award Petroandina costs and fees
related to the lawsuit; and (e) award Petroandina such other relief as the court deems just and proper. On January 28, 2015, the Court of Chancery issued an injunction ordering the Company and HNR Energia to withdraw the Request for
Arbitration and not take any action to pursue its claims against Venezuela until Harvest and HNR Energia have complied with the provisions of the Shareholders Agreement or otherwise reached an agreement with Petroandina. Accordingly, on
January 28, 2015, HNR Finance B.V. and Harvest Vinccler S.C.A. withdrew without prejudice the Request for Arbitration. In the Delaware proceeding, the Company and HNR Energia have until May 23, 2016 to respond to Petroandinas
complaint. We are currently unable to estimate the amount or range of any possible loss.
On February 27, 2015, Harvest (US)
Holdings, Inc. (Harvest US), a wholly owned subsidiary of Harvest, Branta, LLC and Branta Exploration & Production Company, LLC (together, Branta, and together with Harvest US, Plaintiffs) filed a
complaint against Newfield Production Company (Newfield) in the United States District Court for the District of Colorado. Plaintiffs previously sold oil and natural gas assets located in Utahs Uinta Basin to Newfield pursuant to
two Purchase and Sale Agreements, each dated March 21, 2011. In the complaint, Plaintiffs allege that, prior to the sale, Newfield breached separate confidentiality agreements with Harvest US and Branta by discussing the auction of the assets
with a potential bidder for the assets, which caused the potential bidder not to participate in the auction and resulted in a depressed sales price for the assets. The complaint seeks damages and fees for breach of contract, violation of the
Colorado Antitrust Act, violation of the Sherman Antitrust Act and tortious interference with a prospective business advantage. In September 2015, Plaintiffs amended their complaint to add Ute Energy, LLC and Crescent Point Energy Corporation as
defendants.
We are a defendant in or otherwise involved in other litigation incidental to our business. In the opinion of management,
there is no such incidental litigation that will have a material adverse effect on our financial condition, results of operations and cash flows.
C-46
Note 14 Taxes
Taxes on Income
The tax effects of
significant items comprising our net deferred income taxes related to continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Foreign
|
|
|
United States and
Other
|
|
|
Foreign
|
|
|
United States and
Other
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$
|
42,791
|
|
|
$
|
13,547
|
|
|
$
|
46,234
|
|
|
$
|
8,718
|
|
Stock-based compensation
|
|
|
|
|
|
|
3,471
|
|
|
|
|
|
|
|
6,479
|
|
Accrued compensation
|
|
|
|
|
|
|
653
|
|
|
|
|
|
|
|
376
|
|
Oil and natural gas properties
|
|
|
26,065
|
|
|
|
|
|
|
|
18,515
|
|
|
|
|
|
Alternative minimum tax credit
|
|
|
|
|
|
|
2,545
|
|
|
|
|
|
|
|
4,299
|
|
Other
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
68,856
|
|
|
|
20,305
|
|
|
|
64,749
|
|
|
|
19,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax on unremitted earnings of foreign subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,700
|
)
|
Other liabilities
|
|
|
|
|
|
|
(278
|
)
|
|
|
|
|
|
|
(141
|
)
|
Fixed assets
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
|
|
(281
|
)
|
|
|
|
|
|
|
(14,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
|
68,856
|
|
|
|
20,024
|
|
|
|
64,749
|
|
|
|
5,109
|
|
Valuation allowance
|
|
|
(68,856
|
)
|
|
|
(20,024
|
)
|
|
|
(64,749
|
)
|
|
|
(19,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) after valuation allowance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(14,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the adoption of ASU No. 2015-17 the deferred tax assets (liabilities) as of
December 31, 2015 and 2014 were included in the consolidated balance sheets as Long-term deferred tax liabilities of $0.0 and $14.7 million, respectively.
After assessing the possible actions which management may take in 2016 and the next few years during the year ended December 31, 2015, we
continued to recognize that a deferred tax liability related to income tax on undistributed earnings of our foreign subsidiaries may be appropriate. The Company is pursuing various alternatives with respect to its future operations and cannot assert
that any future earnings will not be remitted to the U.S. as operations require.
Management assesses the available positive and negative
evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets (DTAs). A significant piece of objective negative evidence evaluated was the cumulative losses incurred in our foreign
operating entities over the three-year period ended December 31, 2015. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth or future asset dispositions. We have therefore
placed a valuation allowance on all of our foreign DTAs.
Management also reviewed the earnings history of our U.S. operations and
determined that the Company is not expected to have sufficient taxable income in the U.S. due to its inability to sell the remaining equity interest in Harvest Holding and the lack of other income producing operations. Consequently, the Company
is not expected to utilize its deferred tax assets and carries a valuation allowance on these deferred tax assets.
C-47
Additionally, there was a significant increase to the valuation allowance attributable to the recognition of deferred tax assets related to the impairment of the Dussafu PSC as the deferred tax
assets are more likely than not to be unrealizable. The components of loss from continuing operations before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Income (loss) from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(14,041
|
)
|
|
$
|
(12,310
|
)
|
Foreign
|
|
|
(29,659
|
)
|
|
|
(65,403
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(43,700
|
)
|
|
$
|
(77,713
|
)
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes on continuing operations consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(1,755
|
)
|
|
$
|
(87
|
)
|
Foreign
|
|
|
5
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,750
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
United States
|
|
|
(14,700
|
)
|
|
|
(58,250
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,700
|
)
|
|
|
(58,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(16,450
|
)
|
|
$
|
(58,317
|
)
|
|
|
|
|
|
|
|
|
|
A comparison of the income tax expense (benefit) on continuing operations at the federal statutory rate to our
provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Income tax expense (benefit) from continuing operations:
|
|
|
|
|
|
|
|
|
Tax expense (benefit) at U.S. statutory rate
|
|
$
|
(10,345
|
)
|
|
$
|
(27,741
|
)
|
Effect of foreign source income and rate differentials on foreign income
|
|
|
(27,793
|
)
|
|
|
994
|
|
Non-deductible interest
|
|
|
11,397
|
|
|
|
|
|
Tax on unremitted earnings of foreign subsidiaries
|
|
|
(14,700
|
)
|
|
|
(75,200
|
)
|
Expired losses
|
|
|
25,901
|
|
|
|
2,409
|
|
Other changes in valuation allowance
|
|
|
4,323
|
|
|
|
35,464
|
|
Other permanent differences
|
|
|
(9
|
)
|
|
|
2,001
|
|
Return to accrual and other true-ups
|
|
|
8,533
|
|
|
|
3,277
|
|
Debt exchange
|
|
|
(12,079
|
)
|
|
|
|
|
Warrant derivatives
|
|
|
(1,685
|
)
|
|
|
(684
|
)
|
Liability for uncertain tax positions
|
|
|
|
|
|
|
(29
|
)
|
Other
|
|
|
7
|
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) continuing operations
|
|
$
|
(16,450
|
)
|
|
$
|
(58,317
|
)
|
|
|
|
|
|
|
|
|
|
C-48
Rate differentials for foreign income result from tax rates different from the U.S. tax rate
being applied in foreign jurisdictions.
At December 31, 2015, we have the following net operating losses available for carryforward
(in thousands):
|
|
|
|
|
|
|
United States
|
|
$
|
38,707
|
|
|
Available for up to 20 years from 2012
|
Gabon
|
|
|
22,269
|
|
|
Available for up to 3 years from 2013
|
The Netherlands
|
|
|
134,858
|
|
|
Available for up to 9 years from 2007
|
As a result of the first Petroandina closing in 2013, the Company realized a tax gain of $47.4 million which
was included in U.S. taxable income pursuant to the provisions of the Internal Revenue Code. The Company utilized $9.8 million of available losses from prior years as well as a current year tax loss of $37.6 million to offset income resulting from
the sale, leaving $9.3 million of losses available to offset taxable income in future periods. However, as a result of the alternative minimum tax provisions (AMT), we did incur AMT of $1.9 million increasing the amount of the AMT credit
carryforward. During 2014, the Company incurred a net operating loss (NOL) for AMT purposes. A portion of this AMT NOL was carried back to 2013 to offset 90% of the $1.9 million AMT liability incurred during the year. Accounts receivable
at December 31, 2015 included a tax receivable of $1.7 million which was received from the Internal Revenue Service on February 12, 2016. The AMT credit carryforward at December 31, 2015 amounts to $2.6 million.
If the U.S. operating loss carryforwards are ultimately realized, there would be no amounts credited to additional paid in capital for tax
benefits associated with deductions for income tax purposes related to stock options and convertible debt.
Accumulated Undistributed Earnings of
Foreign Subsidiaries
Under ASC 740-30-25-17, no deferred tax liability must be recorded if sufficient evidence shows that a foreign
subsidiary has invested or will invest its undistributed earnings or that the earnings will be remitted in a tax-free manner. Management must consider numerous factors in determining timing and amounts of possible future distribution of these
earnings to the parent company and whether a U.S. deferred tax liability should be recorded for these earnings. These factors include the future operating and capital requirements of both the parent company and the subsidiaries, remittance
restrictions imposed by foreign governments or financial agreements and tax consequences of the remittance, including possible application of U.S. foreign tax credits and limitations on foreign tax credits that may be imposed by the Internal Revenue
Code and regulations.
Prior to 2013, no U.S. taxes had been recorded on these earnings as it was our practice and intention to reinvest
the earnings of our non-U.S. subsidiaries into our foreign operations. During the fourth quarter of 2013, management evaluated numerous factors related to the timing and amounts of possible future distribution of foreign earnings to the parent
company, with consideration of the sale of non-U.S. assets. Because management was pursuing various alternatives with respect to the Companys future operations and disposition of any sale proceeds, a determination was made that it was
appropriate to record a deferred tax liability associated with the unremitted earnings of our foreign subsidiaries. Due primarily to the $355.7 million pre-tax impairment of Petrodelta, this deferred tax liability decreased by $75.2 million to $14.7
million at December 31, 2014.
As of December 31, 2015, the book-tax outside basis difference in our foreign subsidiary
resulting from unremitted earnings from our foreign operations was reduced to zero due to a pre-tax impairment of the Companys remaining investment in Petrodelta of $164.7 million. This benefit was recorded to continuing operations, consistent
with the Companys continued investment in foreign subsidiaries. The entire net deferred tax liability as of December 31, 2014 has been reflected as a long-term liability, a characterization consistent with the Companys adoption of
Accounting Standards Update (ASU) No. 2015-17.
C-49
Accounting for Uncertainty in Income Taxes
The FASB issued ASC 740-10 (prior authoritative literature: Financial Interpretation No. (FIN) 48, Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement No. 109 (FIN 48) to create a single model to address accounting for uncertainty in tax positions. ASC 740-10 clarifies the accounting for income taxes, by prescribing a
minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740-10 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim
periods and disclosure.
We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, we are no longer subject to tax examinations by tax authorities for years before 2010. Our primary income tax jurisdictions and their respective open audit years as of December 31, 2015 are:
|
|
|
|
|
Tax Jurisdiction
|
|
Open Audit Years
|
|
United States
|
|
|
2012 2015
|
|
The Netherlands
|
|
|
2013 2015
|
|
In January 2014, the U.S. IRS began an audit of our U.S. tax returns for 2011 and 2012. The audit was
concluded in October 2014 with an increase in tax of $0.01 million. The Company has recently received notice from the U.S. IRS that it intends to audit the Companys 2013 and 2014 tax years. The audit is expected to commence in April 2016.
The changes in our reserve for unrecognized tax benefits follow, which have been reclassified to discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Balance at beginning of year
|
|
$
|
288
|
|
|
$
|
318
|
|
Additions for tax positions of prior years
|
|
|
|
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
(168
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
120
|
|
|
$
|
288
|
|
|
|
|
|
|
|
|
|
|
The release of the reserve for uncertain tax positions of $0.03 million during the year ended December 31, 2014 was
primarily related to the resolution of a Dutch tax matter regarding treatment of certain costs charged to our Dutch affiliate. However, this amount was offset by an adjustment to the valuation allowance resulting in a nil net tax. In 2015, the
reserve was adjusted for a law change re-opening a prior closed year ($0.1 million) offset by a benefit ($0.3 million) from the expiration of the period of assessment on a tax related interest issue. The benefit was included as a reduction of
interest expense in our consolidated results of operations and comprehensive income for the year ended December 31, 2015. We believe that it is likely that remaining amount for the uncertain tax position will be resolved within the next twelve
months, and the amount of unrecognized tax benefits will significantly decrease.
There were no changes in our reserve for unrecognized
tax benefits related continuing operations.
Note 15 Stock-Based Compensation and Stock Purchase Plans
Total share-based compensation expense, which includes stock options, restricted stock, SARs, and RSUs, totaled $2.0 million for the year ended
December 31, 2015 and $1.6 million for the year ended December 31, 2014. All awards utilize the straight line method of amortization over the vesting period. The following table is a
C-50
summary of compensation expense (income) recorded in general and administrative expense in our consolidated statements of operations and comprehensive loss by type of awards:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Employee Stock-Based Compensation
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Equity based awards:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
2,003
|
|
|
$
|
2,073
|
|
Restricted stock
|
|
|
135
|
|
|
|
578
|
|
RSUs
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense related to equity based awards
|
|
|
2,271
|
|
|
|
2,651
|
|
Liability based awards:
|
|
|
|
|
|
|
|
|
SARs
|
|
|
(260
|
)
|
|
|
(1,236
|
)
|
RSUs
|
|
|
12
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Total expense related to liability based awards
|
|
|
(248
|
)
|
|
|
(1,039
|
)
|
|
|
|
|
|
|
|
|
|
Total compensation expense
|
|
$
|
2,023
|
|
|
$
|
1,612
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, we had several long term incentive plans under which stock options, restricted
stock, SARs and RSUs can be granted to eligible participants including employees, non-employee directors and consultants of our Company or subsidiaries:
|
|
|
2010 Long Term Incentive Plan, as amended (2010 Plan) Provides for the issuance of up to 1,931,250 shares of our common stock in satisfaction of stock options, SARs, restricted stock, RSUs and other
stock-based awards. No more than 606,250 shares may be granted as restricted stock and annually no individual may be granted more than 250,000 stock options or SARs. The 2010 Plan also permits the granting of performance awards to eligible employees
and consultants. In the event of a change in control, all outstanding stock options and SARs become immediately exercisable to the extent permitted by the plan, and any restrictions on restricted stock and RSUs lapse. At December 31, 2015, all
shares available under the 2010 Plan had been granted.
|
|
|
|
2006 Long Term Incentive Plan (2006 Plan) Provides for the issuance of up to 456,250 shares of our common stock in satisfaction of stock options, SARs and restricted stock. No more than
81,250 shares may be granted as restricted stock, and no individual may be granted more than 225,000 stock options or SARs and not more than 43,750 shares of restricted stock during any period of three consecutive calendar years. The 2006
Plan also permits the granting of performance awards to eligible employees and consultants. In the event of a change in control, all outstanding stock options and SARs become immediately exercisable to the extent permitted by the plan, and any
restrictions on restricted stock lapse. The termination date for the 2006 LTIP Plan is May 17, 2016. At December 31, 2015, all shares available under the 2006 Plan had been granted.
|
|
|
|
2004 Long Term Incentive Plan (2004 Plan) Provides for the issuance of up to 437,500 shares of our common stock in satisfaction of stock options, SARs and restricted stock. No more than
109,500 shares may be granted as restricted stock, and no individual may be granted more than 109,500 stock options and not more than 27,500 shares of restricted stock over the life of the plan. The 2004 Plan also permits the granting of
performance awards to eligible employees and consultants. In the event of a change in control, all outstanding stock options and SARs become immediately exercisable to the extent permitted by the plan, and any restrictions on restricted stock lapse.
With the exception of outstanding awards, the 2004 Plan terminated on May 20, 2014.
|
|
|
|
2001 Long Term Stock Incentive Plan (2001 Plan) Provides for the issuance of up to
424,250 shares of our common stock in the form of Incentive Stock Options and Non-Qualified Stock Options. No officer may be granted more than 125,000 stock options during any one fiscal year, as
|
C-51
|
adjusted for any changes in capitalization, such as stock splits. In the event of a change in control, all outstanding options become immediately exercisable to the extent permitted by the 2001
Plan. At December 31, 2015, stock option awards to purchase 21,250 common shares remain available for grant.
|
Stock Options
Stock options granted under the plans must be no less than the fair market value of our common stock on the date of grant. Stock
options granted under the plans generally vest ratably over a three year period beginning from the date of grant. Stock options granted under the plans expire five to ten years from the date of grant.
Prior to 2015, the fair value of each stock option award was estimated on the date of grant using the Black-Scholes option-pricing model which
uses assumptions for the risk-free interest rate, volatility, dividend yield and the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the
expected term of the option. Expected volatility is based on historical volatilities of our stock. We do not assume any dividend yield since we do not pay dividends. The expected term of options granted is the weighted average life of stock options
and represents the period of time that options are expected to be outstanding.
In 2015, the fair value of each stock option was estimated
on the date of grant using a Monte Carlo simulation since the options were also subject to a market condition. These options will not become exercisable until the first day on which the volume weighted average price of the common stock over any
30-day period, commencing on or after the award date, equals or exceeds $10.00 per share (VWAP condition) in addition to the ratable vesting over a three year period. The Monte Carlo simulation includes this VWAP condition and uses
assumptions for the risk-free interest rate, volatility, and dividend yield while a suboptimal exercise factor determines the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time
of grant for a period equal to the expected term of the option. Expected volatility is based on historical volatilities of our stock. We do not assume any dividend yield since we do not pay dividends. The expected term of options granted represents
the period of time that options are expected to be outstanding. The Monte Carlo simulation assumed a suboptimal exercise factor of 2.5 meaning that exercise is generally expected to occur when the share price reaches 2.5 times the awards
exercise price.
On December 31, 2015, we awarded stock options vesting over three years to purchase 211,750 of our common shares to
our employees and executive officers and 170,750 stock options were granted during the year ended December 31, 2014.
On
December 9, 2015, we additionally issued 882,050 options with a life of 4.6 years and an exercise price of $4.52 subject to the VWAP condition. These options vest one-third on July 22, 2016, one-third on July 22, 2017 and
one-third on July 22, 2018 with an expiry date of July 22, 2020. These options were issued as replacement awards for the equivalent number of SARs issued on July 22, 2015. The options were issued with the equivalent terms,
exercise price, and VWAP conditions as the SARs.
C-52
We also consider an estimated forfeiture rate for all stock option awards, and we recognize
compensation cost only for those shares that are expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. The forfeiture rate is based on historical experience.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Outstanding
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2014
|
|
|
1,134
|
|
|
$
|
31.24
|
|
|
|
2.0
|
|
|
$
|
|
|
Granted
|
|
|
1,094
|
|
|
|
4.52
|
(1)
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(442
|
)
|
|
|
(39.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2015
|
|
|
1,786
|
|
|
|
12.84
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2015
|
|
|
503
|
|
|
$
|
28.64
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These options will not become exercisable until the first day on which the volume weighted average price of the common stock over any 30-day period, commencing on or after the award date, equals or exceeds $10.00 per
share, as reported by the NYSE in addition to the ratable vesting over a three year period.
|
Of the options outstanding,
0.5 million were exercisable at a weighted-average exercise price of $28.64 as of December 31, 2015 and 0.7 million at $35.40 as of December 31, 2014.
In 2014 the value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. In 2015, the
value of each stock option grant is estimated on the date of grant using a Monte Carlo simulation. Each have the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
For options granted during:
|
|
|
|
|
|
|
|
|
Weighted average fair value
|
|
$
|
1.72
|
|
|
$
|
11.88
|
|
Weighted average expected life
|
|
|
4.7 years
|
|
|
|
5 years
|
|
Expected volatility
(1)
|
|
|
100
|
%
|
|
|
76.7
|
%
|
Risk-free interest rate
|
|
|
1.7
|
%
|
|
|
1.5
|
%
|
Suboptimal exercise factor
(2)
|
|
|
2.5
|
|
|
|
|
|
Weighted average pre-vest forfeiture rate
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
(1)
|
Expected volatilities are based on historical volatilities of our stock.
|
(2)
|
A suboptimal exercise factor of 2.5 means that exercise is generally expected to occur when the share price reaches 2.5 times the awards exercise price.
|
A summary of our unvested stock option awards as of December 31, 2015, and the changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
Unvested Stock Options
|
|
Outstanding
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
Unvested as of December 31, 2014
|
|
|
469
|
|
|
$
|
15.40
|
|
Granted
|
|
|
1,094
|
|
|
|
1.72
|
|
Vested
|
|
|
(161
|
)
|
|
|
(11.96
|
)
|
Expired
|
|
|
(119
|
)
|
|
|
(25.52
|
)
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2015
|
|
|
1,283
|
|
|
$
|
3.24
|
|
|
|
|
|
|
|
|
|
|
C-53
The total intrinsic value of stock options exercised during the year ended December 31, 2015
was $0.0 million and 2014 was $0.0 million. The total fair value of stock options that vested during the year ended December 31, 2015, was $1.9 million and $2.4 million during the year ended December 31, 2014.
As of December 31, 2015, there was $3.0 million of total future compensation cost related to unvested stock option awards that are
expected to vest. That cost is expected to be recognized over a weighted average period of 1.86 years.
Restricted Stock
Restricted stock is issued on the grant date, but cannot be sold or transferred. Restricted stock granted to directors vest one year after date
of grant. Restricted stock granted to employees vest at the third year after date of grant. Vesting of the restricted stock is dependent upon the employees continued service to Harvest.
A summary of our restricted stock awards as of December 31, 2015, and the changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Outstanding
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
Unvested as of December 31, 2014
|
|
|
22
|
|
|
$
|
19.28
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(1
|
)
|
|
|
(23.40
|
)
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2015
|
|
|
21
|
|
|
$
|
19.20
|
|
|
|
|
|
|
|
|
|
|
No restricted stock shares were awarded during the years ended December 31, 2015 and 2014. The restricted
stock is scheduled to vest at the third year after date of grant for employees and vested one year after date of grant for directors. The fair value of the restricted stock that vested during the year ended December 31, 2015 was
$11,700 and $1.9 million during the year ended December 31, 2014.
As of December 31, 2015 there was $0.1 million of total
future compensation cost related to unvested restricted stock awards that are expected to vest. That cost is expected to be recognized over a weighted average period of 0.5 years.
Stock Appreciation Rights (SARs)
All SAR awards granted to date have been granted outside of active long-term incentive plans and are held by Harvest employees. SARs granted in
2015 vest ratably over three years beginning in the first year of grant. Vesting of SARs is dependent upon the employees continued service to Harvest. SAR awards are settled either in cash or Harvest common stock if available through an equity
compensation plan. For recording of compensation, we assume the SAR award will be cash-settled and record compensation expense based on the fair value of the SAR awards at the end of each period.
C-54
The significant assumptions are summarized in the following table that were used to calculate the
fair value of the SARs granted on July 22, 2015 and amended December 9, 2015 that were outstanding as of the balance sheet date presented on our consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of
December 31,
2015
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
1.72
|
|
Exercise price
|
|
|
Level 1 input
|
|
|
$
|
4.52
|
|
Threshold price
|
|
|
Level 1 input
|
|
|
$
|
10.00
|
|
Suboptimal exercise factor
|
|
|
Level 3 input
|
|
|
|
2.5
|
|
Term (years)
|
|
|
|
|
|
|
4.56
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
105.0
|
%
|
Risk-free rate
|
|
|
Level 1 input
|
|
|
|
1.66
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
As these awards are accounted for as liabilities, the fair value of each SAR was estimated at
December 31, 2015 using a Monte Carlo simulation since the SARs were also subject to a market condition. These SARs will not become exercisable until the first day on which the volume weighted average price of the common stock over any
30-day period, commencing on or after the award date, equals or exceeds $10.00 per share (VWAP condition) in addition to the ratable vesting over a three year period. The Monte Carlo simulation includes this VWAP condition and uses
assumptions for the risk-free interest rate, volatility, and dividend yield while a suboptimal exercise factor determines the expected term of the SARs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant for a period equal to the expected term of the SAR. Expected volatility is based on historical volatilities of our stock. We do not assume any dividend yield since we do not pay dividends. The expected term of SARs granted represents the
period of time that SARs are expected to be outstanding. The Monte Carlo simulation assumed a suboptimal exercise factor of 2.5 meaning that exercise is generally expected to occur when the share price reaches 2.5 times the awards exercise
price. The suboptimal exercise factor was the Level 3 input used for the valuation of the SARs. In general, if the suboptimal exercise factor increases then the fair value of the SAR will increase or vice versa. A change in the Level 3 input
has a minimal effect on the valuation of the SARs as the primary driver is our stock price.
SAR award transactions under our employee
compensation plans are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
SARS outstanding as of December 31, 2014
|
|
|
281
|
|
|
$
|
19.80
|
|
|
|
2.2
|
|
|
$
|
|
|
Granted
|
|
|
1,266
|
|
|
|
4.52
|
(1)
|
|
|
5.0
|
|
|
|
|
|
Cancelled
|
|
|
(882
|
)
|
|
|
(4.52
|
)
(1)
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(22
|
)
|
|
|
(20.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARS outstanding as of December 31, 2015
|
|
|
643
|
|
|
|
10.68
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARS exercisable as of December 31, 2015
|
|
|
242
|
|
|
$
|
19.80
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These options will not become exercisable until the first day on which the volume weighted average price of the common stock over any 30-day period, commencing on or after the award date, equals or exceeds $10.00 per
share, as reported by the NYSE in addition to the ratable vesting over a three year period.
|
C-55
Of the SAR awards outstanding, 0.2 million were exercisable at the weighted-average exercise
price of $19.80 as of December 31, 2015, 0.3 million exercisable at the weighted-average exercise price of $19.80 as of December 31, 2014.
During the year ended December 31, 2015, there were 1.3 million SAR awards granted and nil during the year ended December 31,
2014.
On July 22, 2015, we issued 1.3 million SARs at an exercise price of $4.52 per share, vesting ratably over three years
from the date of grant and on the first day on which the volume weighted average price of the common stock over any 30-day period, commencing on or after the award date, equals or exceeds $10.00 per share, as reported by the NYSE. The dual
vesting requirements necessitated that all of these awards be valued using a Monte Carlo simulation. Since the Company had an insufficient numbers of shares available from existing long-term incentive plans, the SARs were classified as
liability awards when issued.
On December 9, 2015, our board of directors approved modifications of a portion of the July 22,
2015 awards. Of the 1.3 million SARs issued, 0.9 million were cancelled and replaced with options under the 2010 Plan. All other terms remained the same. The fair value of the vested portion of the cancelled SARs
approximated the fair value of the replacement options granted on December 9, 2015. The remaining 0.4 million SARs continue to be classified as liability awards.
A summary of our unvested SAR awards as of December 31, 2015, and the changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
Unvested SARs
|
|
Outstanding
|
|
|
Weighted-Average
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
Unvested as of December 31, 2014
|
|
|
85
|
|
|
$
|
2.04
|
|
Granted
|
|
|
1,265
|
|
|
|
1.28
|
|
Vested
|
|
|
(66
|
)
|
|
|
(0.24
|
)
|
Cancelled
|
|
|
(882
|
)
|
|
|
(1.40
|
)
|
Expired
|
|
|
(1
|
)
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2015
|
|
|
401
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
No SAR awards were exercised during the years ended December 31, 2015, and 2014. The total fair value of
SAR awards that vested during the year ended December 31, 2015, was $15,960 and $0.2 million during the year ended December 31, 2014.
Restricted Stock Units (RSUs)
RSU awards granted prior to 2015 have been granted outside of active long-term incentive plans, are held by Harvest employees and directors,
and are settled either in cash or Harvest common stock if available through an equity compensation plan and are accounted for as liability awards . RSU awards granted in 2012, 2014 and 2015 to employees vest at the third year after date of grant.
RSU awards granted in 2015 to our board of directors vest one year after the date of grant. Vesting of the RSU awards is dependent upon the employees and directors continued service to Harvest.
On September 9, 2015, we issued 80,001 RSUs vesting one year from the date of grant to our directors. These awards are classified as
liability awards. These awards are measured at their fair values based on our closing stock price at December 31, 2015.
C-56
The significant assumptions are summarized in the following table that were used to calculate the
fair value of the restricted stock units granted on July 22, 2015 and amended December 9, 2015 that were outstanding as of the balance sheet date presented on our consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of December 9,
2015
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
2.52
|
|
Threshold price
|
|
|
Level 1 input
|
|
|
$
|
10.00
|
|
Term (years)
|
|
|
|
|
|
|
10.0
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
80.0
|
%
|
Risk-free rate
|
|
|
Level 1 input
|
|
|
|
2.27
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
A summary of our RSU awards as of December 31, 2015, and the changes during the year then ended is
presented below:
|
|
|
|
|
|
|
|
|
RSUs
|
|
Outstanding
|
|
|
Weighted-Average
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
Unvested as of December 31, 2014
|
|
|
226
|
|
|
$
|
7.24
|
|
Granted
|
|
|
473
|
|
|
|
2.92
|
|
Vested
|
|
|
(81
|
)
|
|
|
(6.00
|
)
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2015
(1)
|
|
|
618
|
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
1)
|
At December 31, 2015, unvested RSUs of 0.4 million and 0.2 million were accounted for as equity and liability awards, respectively.
|
The 81,536 RSU awards, which reflected vesting in 2015, were settled for cash of $0.5 million. The 25,835 RSU awards which vested in 2014 were
settled for cash of $0.5 million. The fair value of the RSU awards that vested during the year ended December 31, 2015 and 2014 were $0.3 million and $0.2 million, respectively.
On July 22, 2015, we issued 0.4 million restricted stock units vesting at three years from the date of grant as stock based
compensation awards to certain employees. Subject to the three year vesting requirement, the RSUs awarded will not become exercisable until the first day on which the volume weighted average price of the common stock over any 30-day period,
commencing on or after the award date, equals or exceeds $10.0 per share, as reported by the NYSE. The dual vesting requirements necessitated that all of these awards be valued using a Monte Carlo simulation. Since an insufficient numbers
of shares were available from existing long-term incentive plans, the RSUs were classified as liability awards at issuance.
On
December 9, 2015, our board of directors approved a modification to share-settle the 0.4 million RSUs granted on July 22, 2015. This modification changed the classification of these awards from liability to equity awards. The
fair value of the vested portion of the initial RSUs approximated the fair value of the modified RSUs on December 9, 2015. The grant-date fair value of the modified RSUs was $2.28 per RSU.
As of December 31, 2015 there was $1.0 million of total future compensation cost related to unvested RSU awards expected to vest. That
cost is expected to be recognized over a weighted average period of 2.2 years.
C-57
Common Stock Warrants
In connection with the transaction with CT Energy on June 19, 2015, we issued a warrant exercisable for 8,517,705 shares of the
Companys common stock at an initial exercise price of $5.00 per share with an expiration date of June 19, 2018. The CT Warrant may not be exercised until the volume weighted average price of the Companys common stock over any
consecutive 30-day period equals or exceeds $10.00 per share. See
Note 1 Organization
and
Note 12 Warrant Derivative Liability
.
Note 16 Operating Segments
We
regularly allocate resources to and assess the performance of our operations by segments that are organized by unique geographic and operating characteristics. The segments are organized in order to manage regional business, currency and tax related
risks and opportunities. Operations included under the heading United States include corporate management, cash management, business development and financing activities performed in the United States and other countries, which do not
meet the requirements for separate disclosure. All intersegment revenues, other income and equity earnings, expenses and receivables are eliminated in order to reconcile to consolidated totals. Corporate general and administrative and interest
expenses are included in the United States segment and are not allocated to other operating segments. In previous years, charges for intersegment general and administrative and interest expenses were included in results for the respective operating
segments, and operating segment assets included intersegment receivables and loans. Segment loss and operating segment assets for prior periods have been adjusted to conform to the current presentation method in which intersegment items are
eliminated from each segments results and assets.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Segment Income (Loss) From Continuing Operations
|
|
|
|
|
|
|
|
|
Gabon
|
|
$
|
(28,448
|
)
|
|
$
|
(55,563
|
)
|
Indonesia
|
|
|
(43
|
)
|
|
|
(9,558
|
)
|
United States and other
|
|
|
1,241
|
|
|
|
45,725
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(27,250
|
)
|
|
$
|
(19,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Operating Segment Assets
|
|
|
|
|
|
|
|
|
Gabon
|
|
$
|
32,710
|
|
|
$
|
60,051
|
|
Indonesia
|
|
|
5
|
|
|
|
176
|
|
United States and other
|
|
|
4,622
|
|
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,337
|
|
|
|
62,680
|
|
Discontinued operations
(b)
|
|
|
10,444
|
|
|
|
165,366
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
47,781
|
|
|
$
|
228,046
|
|
|
|
|
|
|
|
|
|
|
(a)
|
See
Note 5 Dispositions and Discontinued Operations
.
|
Note 17 Related Party
Transactions
The noncontrolling interest owners in Harvest Holdings, Vinccler (currently owning 20 percent) and Petroandina (currently
owning 29 percent) are both related parties of the Company.
As of December 31, 2014, HNR Energia had a note payable to Vinccler of
$6.1 million. Principal and interest were payable upon the maturity date of December 31, 2015. Interest accrued at a rate of U.S. Dollar
C-58
based three month LIBOR plus 0.5%. On March 9, 2015, Vinccler forgave the note payable and accrued interest totaling $6.2 million. This was reflected as a contribution to stockholders
equity.
On May 11, 2015, the Company borrowed $1.3 million to fund certain corporate expenses and issued a note payable to CT Energy
bearing an interest rate of 15.0% per annum, with a maturity date of January 1, 2016. On June 19, 2015, the Company repaid the note payable and accrued interest.
On June 3, 2015, the Company entered into the note with James A. Edmiston, President and Chief Executive Officer of the Company, for
$50,000. The note carried interest at 11.0% per year and was to mature upon the earlier to occur of June 30, 2016 or the date on which the Loan Obligations (as defined in that certain Loan Agreement, dated as of September 11, 2014, by
and among the Company, HNR Energia B.V. and Petroandina Resources Corporation N.V.) are paid in full. On June 19, 2015, the Company repaid the note payable and accrued interest.
As of December 31, 2014, HNR Energia had a note payable to Petroandina of $7.6 million. Principal was due by January 1, 2016.
Interest payments were quarterly beginning on December 31, 2014. On June 23, 2015 the Company repaid the note payable of $7.6 million plus accrued interest of $0.4 million.
On June 19, 2015, Harvest sold to CT Energy the 15% Note, the 9% Note and the Series C preferred stock. Shortly after this transaction
two representatives of CT Energy were appointed to Harvests board of directors. On September 15, 2015, CT Energy converted the 9% Note, including accrued interest, into 2,166,900 shares of Harvests common stock and Harvest redeemed
the Series C preferred stock. See
Note 1 Organization
for more information about the CT Energy transaction.
On
January 4, 2016, HNR Finance made a loan to CT Energia in the amount of $5.2 million under an 11.0% promissory note due 2019 (the CT Energia Note), dated January 4, 2016, executed by CT Energia. The purpose of the loan is to
provide CT Energia with collateral to obtain funds for one or more loans to Petrodelta. The loans to Petrodelta are to assist Petrodelta in satisfying its working capital needs and discharging its obligations. Interest on the CT Energia Note is due
and payable on the first of each January and July, commencing July 1, 2016. The full amount outstanding, including any unpaid accrued interest, is due on January 4, 2019; however, HNR Finances sole recourse for payment of the
principal amount of the loan is the payments of principal and interest from loans that CT Energia has made to Petrodelta. If and when CT Energia receives any payments of principal or interest from loans it has made to Petrodelta, then those proceeds
must be used to prepay unpaid interest and principal under the CT Energia Note. The source of funds for HNR Finances $5.2 million loan to CT Energia was a capital contribution from Harvest Holding, which, in return, received the same aggregate
amount of capital contributions from its shareholders, pro rata according to their equity interests in Harvest Holding. Of that aggregate amount of capital contributions, HNR Energia contributed $2.6 million, which it had received as a capital
contribution from Harvest.
Note 18 Mezzanine Equity
In connection with the CT Energy transaction described in
Note 1 Organization
, the Company also issued CT Energy 69.75 shares of
its newly created Series C preferred stock, par value $0.01 per share. The primary purpose of the Series C preferred stock was to provide the holder of the 9% Note with voting rights equivalent to the common stock underlying the unconverted portion
of the 9% Note. The Series C preferred stock was not entitled to receive dividends, had perpetual maturity, and had a $4.00 per share liquidation preference. On September 15, 2015, upon the conversion of the 9% Note, the shares of Series C
preferred stock were redeemed.
As discussed in
Note 11 Debt and Financing
, no value was attributed to the Series C
preferred stock. Prior to its redemption on September 15, 2015, shares of the Series C preferred stock were recorded in temporary equity in accordance with ASC 480 Distinguishing Liabilities from Equity, as the redemption of the shares
was outside of the control of the Company.
C-59
Note 19 Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(amounts in thousands, except for per share data)
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
$
|
(6,119
|
)
|
|
|
(4,765
|
)
|
|
|
(6,078
|
)
|
|
$
|
(27,161
|
)
|
Non-operating gain (loss)
|
|
|
(234
|
)
|
|
|
191
|
|
|
|
477
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(6,353
|
)
|
|
|
(4,574
|
)
|
|
|
(5,601
|
)
|
|
|
(27,172
|
)
|
Income tax expense (benefit)
|
|
|
(384
|
)
|
|
|
1,591
|
|
|
|
(1,857
|
)
|
|
|
(15,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(5,969
|
)
|
|
|
(6,165
|
)
|
|
|
(3,744
|
)
|
|
|
(11,372
|
)
|
Income (loss) discontinued operations
(1)
|
|
|
(1,002
|
)
|
|
|
(18,520
|
)
|
|
|
9,162
|
|
|
|
(143,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(6,971
|
)
|
|
|
(24,685
|
)
|
|
|
5,418
|
|
|
|
(154,419
|
)
|
Less: Net loss attributable to noncontrolling interest owners
|
|
|
(352
|
)
|
|
|
(262
|
)
|
|
|
(294
|
)
|
|
|
(81,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Harvest
|
|
$
|
(6,619
|
)
|
|
$
|
(24,423
|
)
|
|
$
|
5,712
|
|
|
$
|
(73,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.56
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.88
|
)
|
Income (loss) discontinued operations
|
|
|
(0.06
|
)
|
|
|
(1.71
|
)
|
|
|
0.86
|
|
|
|
(4.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Harvest
|
|
$
|
(0.62
|
)
|
|
$
|
(2.29
|
)
|
|
$
|
0.52
|
|
|
$
|
(5.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.56
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.88
|
)
|
Income (loss) discontinued operations
|
|
|
(0.06
|
)
|
|
|
(1.71
|
)
|
|
|
0.86
|
|
|
|
(4.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Harvest
|
|
$
|
(0.62
|
)
|
|
$
|
(2.29
|
)
|
|
$
|
0.52
|
|
|
$
|
(5.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(amounts in thousands, except for share data)
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
$
|
(11,822
|
)
|
|
|
(9,057
|
)
|
|
|
(4,134
|
)
|
|
$
|
(52,549
|
)
|
Non-operating gain (loss)
|
|
|
(4,888
|
)
|
|
|
(48
|
)
|
|
|
2,771
|
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(16,710
|
)
|
|
|
(9,105
|
)
|
|
|
(1,363
|
)
|
|
|
(50,535
|
)
|
Income tax expense (benefit)
|
|
|
(961
|
)
|
|
|
(94
|
)
|
|
|
2,354
|
|
|
|
(59,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(15,749
|
)
|
|
|
(9,011
|
)
|
|
|
(3,717
|
)
|
|
|
9,081
|
|
Discontinued operations
(2)
|
|
|
16,342
|
|
|
|
15,025
|
|
|
|
(696
|
)
|
|
|
(369,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
593
|
|
|
|
6,014
|
|
|
|
(4,413
|
)
|
|
|
(360,907
|
)
|
Less: Net income (loss) attributable to noncontrolling interest owners
|
|
|
8,601
|
|
|
|
7,665
|
|
|
|
(273
|
)
|
|
|
(181,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Harvest
|
|
$
|
(8,008
|
)
|
|
$
|
(1,651
|
)
|
|
$
|
(4,140
|
)
|
|
$
|
(179,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(1.51
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
0.85
|
|
Discontinued operations
|
|
|
0.74
|
|
|
|
0.70
|
|
|
|
(0.04
|
)
|
|
|
(17.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Harvest
|
|
$
|
(0.77
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(16.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(1.51
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
0.85
|
|
Discontinued operations
|
|
|
0.74
|
|
|
|
0.70
|
|
|
|
(0.04
|
)
|
|
|
(17.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Harvest
|
|
$
|
(0.77
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(16.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C-60
(1)
|
Includes $164.7 million impairment during the quarter ended December 31, 2015 related to our investment in Petrodelta and $24.2 million impairment of oil and natural gas properties (including oilfield inventory)
for Dussafu PSC. See
Note 6 Investment in Affiliate
and
Note 8- Gabon
.
|
(2)
|
Includes $355.7 million impairment during the quarter ended December 31, 2014 related to our investment in Petrodelta, $13.8 million allowance for doubtful accounts for long-term receivable investment in
affiliate, and $50.3 million impairment of oil and natural gas properties for Dussafu PSC. See
Note 6 Investment in Affiliate
and
Note 8- Gabon
.
|
Note 20 Subsequent Events
On
January 4, 2016, Harvest entered into transactions to amend its existing 15.0% non-convertible note due 2020 and to make a loan, via one of its subsidiaries, to a third party. The parties involved in the transactions are HNR Energia,
Harvest Holding, HNR Finance, CT Energy and CT Energia Holding Ltd., a Malta corporation (CT Energia) that is the service provider under the June 19, 2015 management agreement with Harvest and HNR Finance. Harvest and CT Energy
executed a first amendment of Harvests 15% non-convertible promissory note due 2020 (the Original Note), dated June 19, 2015, payable to CT Energy in the original principal amount of $25.2 million. The amendment increases the
principal amount of the Original Note to $26.1 million to reflect a loan back to Harvest equal to the amount of interest that otherwise would have been due to CT Energy on January 1, 2016, less withholding tax due as a result of the interest
that was owed at January 1, 2016.
On January 4, 2016, HNR Finance provided a loan to CT Energia in the amount of $5.2 million
under an 11.0% promissory note due 2019 (the CT Energia Note), dated January 4, 2016, executed by CT Energia. The purpose of the loan is to provide CT Energia with collateral to obtain funds for one or more loans to Petrodelta that
is 40% owned by HNR Finance and through which Harvests Venezuelan oil and natural gas interests are held. The loans to Petrodelta are to assist Petrodelta in satisfying its working capital needs and discharging its obligations. Interest on the
CT Energia Note is due and payable on the first of each January and July, commencing July 1, 2016. The full amount outstanding, including any unpaid accrued interest, is due on January 4, 2019; however, HNR Finances sole recourse for
payment of the principal amount of the loan is the payments of principal and interest from loans that CT Energia has made to Petrodelta. If and when CT Energia receives any payments of principal or interest from loans it has made to Petrodelta, then
those proceeds must be used to prepay unpaid interest and principal under the CT Energia Note. All payments made by CT Energia to HNR Finance under the CT Energia Note must be made in USD. The source of funds for HNR Finances $5.2 million
loan to CT Energia was a capital contribution from Harvest Holding, which, in return, received the same aggregate amount of capital contributions from its shareholders, pro rata according to their equity interests in Harvest Holding. Of that
aggregate amount of capital contributions, HNR Energia contributed $2.6 million, which it had received as a capital contribution from Harvest.
On March 9, 2016, Venezuela Vice President for Economic Area announced a new exchange agreement No. 35 (the Exchange Agreement
No. 35). Exchange Agreement No. 35 was published in Venezuelas Official Gazette No. 40865 dated March 9, 2016, and became effective on March 10, 2016. Exchange Agreement No. 35 will have a dual exchange rate
for a controlled rate (named DIPRO) fixed at 10 USD/Bolivars for priority goods and services and a complimentary rate (named DICOM) starting at 206.92 USD/Bolivars for travel and other non-essential goods. We are evaluating the impact Exchange
Agreement No. 35 has on Harvest Vinccler and Petrodelta.
Supplemental Information on Oil and Natural Gas Producing Activities (unaudited)
The following tables summarize our proved reserves, drilling and production activity, and financial operating data at the end of each
year. Tables I through III provide historical cost information pertaining to costs incurred in exploration, property acquisitions and development; capitalized costs; and results of operations. Tables IV through VI present information on our
estimated proved reserve quantities, standardized measure of estimated discounted future net cash flows related to proved reserves, and changes in estimated discounted future net cash flows.
C-61
TABLE I Total costs incurred in oil and natural gas acquisition, exploration and development
activities (in thousands):
|
|
|
|
|
|
|
Gabon
|
|
|
|
(in thousands)
|
|
Year Ended December 31, 2015
|
|
|
|
|
Unproved exploration costs
(a)
|
|
$
|
894
|
|
|
|
|
|
|
|
|
$
|
894
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
|
Unproved exploration costs
(a)
|
|
$
|
1,202
|
|
|
|
|
|
|
|
|
$
|
1,202
|
|
|
|
|
|
|
(a)
|
See
Note 8 Gabon
for additional information.
|
TABLE II Capitalized
costs related to oil and natural gas producing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gabon
(a)
|
|
|
Indonesia
|
|
|
Total
|
|
|
|
(in thousands)
|
|
As of December 31, 2015, net of impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
Unproved property costs
|
|
$
|
28,000
|
|
|
$
|
|
|
|
$
|
28,000
|
|
Oilfield Inventories
|
|
|
3,006
|
|
|
|
|
|
|
|
3,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,006
|
|
|
$
|
|
|
|
$
|
31,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014, net of impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
Unproved property costs
|
|
$
|
50,324
|
|
|
$
|
|
|
|
$
|
50,324
|
|
Oilfield Inventories
|
|
|
3,966
|
|
|
|
|
|
|
|
3,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,290
|
|
|
$
|
|
|
|
$
|
54,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
During 2013, we announced that Dussafu Ruche Marin-1 (DRM-1) had reached a vertical depth of 11,260 feet within the Dentale Formation. Log evaluation and pressure data indicate that we had an oil
discovery of approximately 42 feet of pay in a 72-foot column within the Gamba Formation and 123 feet of pay in stacked reservoirs within the Dentale Formation. The first appraisal sidetrack of DTM-1 (DTM-1ST1) was spud in
January 12, 2013. DTM-1ST1 was drilled to a total depth of 11,385 feet in the Dentale Formation, approximately 1,800 feet from DTM-1 wellbore and found 65 feet of pay in the primary Dentale reservoir. Several other stacked sands with oil shows
were encountered; however, due to a stuck downhole tool, logging operations were terminated before pressure data could be collected to confirm connectivity. The downhole tool was retrieved and the DTM-1 well suspended for future re-entry. Work on
DRM-1 and the sidetracks are currently suspended pending further exploration and development activities. Since approval of the Field Development Plan (FDP) in October 2014, Harvest has continued to move toward development of the Ruche
Exclusive Exploitation Area. A tender for all the subsea equipment was concluded in January 2015 where prices exceeded the costs employed in the FDP. Efforts continue to negotiate with the lowest priced vendors and to revise the development scheme
to bring the projected cost back to the FDP levels. The depth volume from the 2013 3D seismic acquisition over the discovered fields and the outboard area of the license has been received and interpreted. This new data was incorporated into our
reservoir models and optimization of well trajectories to maximize oil recovery is ongoing. In addition, the prospect inventory was updated and several prospects have been high graded for drilling in the first half of 2016. To accommodate the
drilling schedule, a site survey, including bathymetry and geophysical data gathering with respect to prospects A/B, 6/7 and 8/9, was completed in August 2015. A tender for a drilling rig for the planned well was completed in November 2015 and a
tender for well testing and other services were concluded in January 2016.
|
C-62
|
In December 2014, the Company recorded a $50.3 million impairment related to the unproved costs of the Dussafu PSC based on a qualitative analysis. In December 2015, the Company recorded an additional impairment of
$24.2 million related based on its analysis of the value of the unproved costs (including oilfield inventory) which considered the value of the contingent and exploration resources and the ability of the Company to develop the project given its
current liquidity situation and the depressed price of crude oil.
|
TABLE III Results of operations for oil and natural
gas producing activities:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Exploration expense
|
|
$
|
3,900
|
|
|
$
|
6,267
|
|
Impairment of oil and natural gas properties costs
|
|
|
24,178
|
|
|
|
57,994
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
28,078
|
|
|
|
64,261
|
|
|
|
|
|
|
|
|
|
|
Results of operations from oil and natural gas producing activities.
|
|
$
|
(28,078
|
)
|
|
$
|
(64,261
|
)
|
|
|
|
|
|
|
|
|
|
TABLE IV Quantities of Oil and Natural Gas Reserves
Estimating oil and natural gas reserves is a very complex process requiring significant subjective decisions in the evaluation of all available
geological, engineering and economic data for each reservoir. This data may change substantially over time as a result of numerous factors such as production history, additional development activity and continual reassessment of the viability of
production under various economic and political conditions. Consequently, material upward or downward revisions to existing reserve estimates may occur from time to time; although, every reasonable efforts is made to ensure that reported results are
the most accurate assessment available. We ensure that the data provided to our external independent experts, and their interpretation of that data, corresponds with our development plans and managements assessment of each reservoir. The
significance of subjective decisions required and variances in available data make estimates generally less precise than other estimates presented in connection with financial statement disclosures.
We measure and disclose oil and natural gas reserves in accordance with the provisions of the SECs Modernization of Oil and Gas
Reporting and ASC 932, Extractive Activities Oil and Gas (ASC 932).
The process for preparation of our oil
and natural gas reserves estimates is completed in accordance with our prescribed internal control procedures, which include verification of data provided for, management reviews and review of the independent third party reserves report. The
technical employee responsible for overseeing the process for preparation of the reserves estimates has a Bachelor of Arts in Engineering Science, a Master of Science in Petroleum Engineering, has more than 25 years of experience in reservoir
engineering and is a member of the Society of Petroleum Engineers.
All reserve information in this report is based on estimates prepared
by Ryder Scott Company L.P. (Ryder Scott), independent petroleum engineers. The technical personnel responsible for preparing the reserve estimates at Ryder Scott meet the requirements regarding qualifications, independence, objectivity
and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Ryder Scott is an independent firm of petroleum engineers, geologists,
geophysicists and petrophysicists; they do not own an interest in our properties and are not employed on a contingent fee basis.
C-63
See the following section
Additional Supplemental Information on Oil and Natural Gas Producing
Activities (unaudited) for Venezuela Investment in Affiliate as of December 31, 2014, TABLE IV Quantities of Oil and Natural Gas Reserves
for Petrodeltas reserves.
TABLE V Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantities
The standardized measure of discounted future net cash flows is presented in accordance with the provisions of the accounting standard on
disclosures about oil and natural gas producing activities. In preparing this data, assumptions and estimates have been used, and we caution against viewing this information as a forecast of future economic conditions.
Future cash inflows are estimated by applying the average price during the 12-month period, determined as an unweighted arithmetic average of
the first-day-of-the-month price for each month within such period, adjusted for fixed and determinable escalations provided by the contract, to the estimated future production of year-end proved reserves. Future cash inflows are reduced by
estimated future production and development costs to determine pre-tax cash inflows. Future income taxes are estimated by applying the year-end statutory tax rates to the future pre-tax cash inflows, less the tax basis of the properties involved,
and adjusted for permanent differences and tax credits and allowances. The resultant future net cash inflows are discounted using a ten percent discount rate.
As of December 31, 2015 and 2014, we did not have a direct interest in any proved reserves. See the following section
Additional
Supplemental Information on Oil and Natural Gas Producing Activities (unaudited) for Venezuela Investment in Affiliate as of December 31, 2014, TABLE V Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and
Natural Gas Reserve Quantities
for Petrodeltas reserves.
Additional Supplemental Information on Oil and Natural Gas Producing Activities
(unaudited) for Petrodelta S.A.
We no longer exercise significant influence in Petrodelta and in accordance with Accounting Standards
Codification ASC 323 Investments Equity Method and Joint Ventures, we are accounting for our investment in Petrodelta, which is reflected in discontinued operations, under the cost method (ASC 325 Investments
Other), effective December 31, 2014. Under the cost method we will not recognize any equity in earnings from our investment in Petrodelta in our results of operations, but will recognize any cash dividends in the period they
are received. Due to the change in accounting method from equity method to cost method of accounting for our investment in Petrodelta, additional supplemental information on oil and natural gas producing activities for 2015 have been excluded.
The following tables summarize the proved reserves, drilling and production activity, and financial operating data at the end of each year for
our net interest in Petrodelta. Tables I through III provide historical cost information pertaining to costs incurred in exploration, property acquisitions and development; capitalized costs; and results of operations. Tables IV through VI present
information on our estimated proved reserve quantities, standardized measure of estimated discounted future net cash flows related to proved reserves, and changes in estimated discounted future net cash flows.
TABLE I Total costs incurred in oil and natural gas acquisition, exploration and development activities (in thousands):
|
|
|
|
|
|
|
Year ended
December 31
|
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Development costs
|
|
$
|
88,498
|
|
|
|
|
|
|
C-64
TABLE II Capitalized costs related to oil and natural gas producing activities (in thousands):
|
|
|
|
|
|
|
Year ended
December 31
|
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Proved property costs
|
|
$
|
291,967
|
|
Unproved property costs
|
|
|
|
|
Oilfield inventories
|
|
|
26,712
|
|
Less accumulated depletion and impairment
|
|
|
(100,591
|
)
|
|
|
|
|
|
|
|
$
|
218,088
|
|
|
|
|
|
|
TABLE III Results of operations for oil and natural gas producing activities (in thousands):
|
|
|
|
|
|
|
Year ended
December 31
|
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
Oil and natural gas revenues
|
|
$
|
274,999
|
|
Royalty
|
|
|
(89,177
|
)
|
|
|
|
|
|
|
|
|
185,822
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Operating, selling and distribution expenses and taxes other than on income
(1)
|
|
|
117,120
|
|
Depletion
|
|
|
27,668
|
|
Income tax expense
|
|
|
20,517
|
|
|
|
|
|
|
Total expenses
|
|
|
165,305
|
|
|
|
|
|
|
Results of operations from oil and natural gas producing activities
|
|
$
|
20,517
|
|
|
|
|
|
|
(1)
|
Expenses include operating expenses, production taxes and Windfall Profits Tax. Net to our percent interest, Windfall Profits Tax for December 31, 2014 was $40.0 million.
|
TABLE IV Quantities of Oil and Natural Gas Reserves
We measure and disclose oil and natural gas reserves in accordance with the provisions of the SECs Modernization of Oil and Gas Reporting
and ASC 932, Extractive Activities Oil and Gas (ASC 932).
Petrodelta is producing from, and continuing to
develop, the Petrodelta Fields. Petrodelta has both developed and undeveloped oil and natural gas reserves identified in all six fields. Petrodelta produces the fields in accordance with a business plan originally defined by its Conversion Contract
executed in late 2007. Proved Undeveloped (PUD) oil and natural gas reserves are drilled in accordance with Petrodeltas business plan, but can be revised where drilling results indicate a change is warranted.
During 2014, Petrodelta drilled and completed 13 production wells. Eight of the wells were previously identified Proved Undeveloped
(PUD) locations and five wells were previously classified Probable, Possible or undefined locations. In 2014, an additional 26 PUD locations were identified through drilling activity; however, 101 PUD locations which are scheduled to be
drilled five years after the wells were originally identified have been reclassified as Probable reserves. At December 31, 2015, Petrodelta had a total of 66 PUD (7.5 MM barrels
C-65
of oil equivalent (BOE) locations identified. Since the implementation of its 2007 business plan, Petrodelta has drilled 93 gross production wells (2008 9 wells [1.4 MMBOE], (2009 15
wells [2.0 MMBOE], 2010 16 wells [2.0 MMBOE], 2011 15 wells [2.1 MMBOE], 2012 12 wells [2.2 MMBOE], 2013 13 wells [1.2 MMBOE]) and 2014 13 wells [1.3MMBOE] which have moved to the proved developed producing (PDP) category.
Petrodelta has a track record of identifying, executing and converting its PUD locations to PDP locations in accordance with the business plan
defined by the conversion contract executed in 2007 and subsequent updates. However, the timing and pace of the development is controlled by the majority owner, PDVSA through CVP, although we have substantial negative control provisions as a
noncontrolling interest shareholder. In 2010, Petrodelta submitted a revised business plan to PDVSA which substantially increases the total projected drilling activity and production volumes compared to the 2007 business plan, but which is otherwise
consistent with the 2007 business plan. The 2010 business plan, as approved by PDVSA, contemplates sustained drilling activities through the year 2024 to fully develop the El Salto and Temblador fields. As a noncontrolling interest shareholder in
Petrodelta, HNR Finance has limited ability to control the development plans that are periodically prepared or approved by the Venezuelan government. Since this constraint represents a hindrance to development not experienced by typical
operations, the PUD locations which are now scheduled to be drilled five years after they were originally identified have been reclassified as Probable reserves.
As of December 31, 2014, proved undeveloped reserves of 7.5 MMBOE from 66 gross PUD locations are all scheduled to be drilled within the
period from 2015 to 2019 and within five years from when these locations were first identified.
All above MMBOE represent our net 20.4
percent interest, net of a 33.33 percent royalty.
The tables shown below represent HNR Finances 40 percent ownership interest and
our net percent ownership interest, both net of a 33.33 percent royalty, in Venezuela in each of the years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HNR Finance
|
|
|
Minority
Interest in
Venezuela
|
|
|
20.4% Net
Total
|
|
|
|
(in thousands)
|
|
Proved Reserves-Crude oil, condensate, and natural gas liquids (MBbls)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014 (20.4% net interest)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Reserves at January 1, 2014
|
|
|
36,420
|
|
|
|
(17,846
|
)
|
|
|
18,574
|
|
Revisions
|
|
|
(5,259
|
)
|
|
|
2,577
|
|
|
|
(2,682
|
)
|
Extensions
|
|
|
3,728
|
|
|
|
(1,827
|
)
|
|
|
1,901
|
|
Production
|
|
|
(4,150
|
)
|
|
|
2,034
|
|
|
|
(2,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Reserves at end of the year
|
|
|
30,739
|
|
|
|
(15,062
|
)
|
|
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014 (20.4% net interest)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
16,459
|
|
|
|
(8,065
|
)
|
|
|
8,394
|
|
Undeveloped
|
|
|
14,280
|
|
|
|
(6,997
|
)
|
|
|
7,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proved
|
|
|
30,739
|
|
|
|
(15,062
|
)
|
|
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C-66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HNR Finance
|
|
|
Minority
Interest in
Venezuela
|
|
|
20.4% Net
Total
|
|
|
|
(in thousands)
|
|
Proved Reserves-Natural gas (MMcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014 (20.4% net interest)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Reserves at January 1, 2014
|
|
|
24,797
|
|
|
|
(12,150
|
)
|
|
|
12,647
|
|
Revisions
|
|
|
(12,131
|
)
|
|
|
5,944
|
|
|
|
(6,187
|
)
|
Extensions
|
|
|
1,014
|
|
|
|
(497
|
)
|
|
|
517
|
|
Production
|
|
|
(1,504
|
)
|
|
|
737
|
|
|
|
(767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Reserves at end of the year
|
|
|
12,176
|
|
|
|
(5,966
|
)
|
|
|
6,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014 (20.4% net interest)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
9,582
|
|
|
|
(4,695
|
)
|
|
|
4,887
|
|
Undeveloped
|
|
|
2,594
|
|
|
|
(1,271
|
)
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proved
|
|
|
12,176
|
|
|
|
(5,966
|
)
|
|
|
6,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE V Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve
Quantities
The standardized measure of discounted future net cash flows is presented in accordance with the provisions of the
accounting standard on disclosures about oil and natural gas producing activities. In preparing this data, assumptions and estimates have been used, and we caution against viewing this information as a forecast of future economic conditions.
Future cash inflows are estimated by an applying the average price during the 12-month period, determined as an unweighted arithmetic average
of the first-day-of-the-month price for each month within such period, adjusted for fixed and determinable escalations provided by the contract, to the estimated future production of year-end proved reserves. Our average prices used for 2014 were
$78.04 per barrel for oil for the El Salto field and $86.56 per barrel for the other fields, and $1.54 per Mcf for natural gas. Future cash inflows were reduced by estimated future production and development costs to determine pre-tax cash inflows.
Future income taxes were estimated by applying the year-end statutory tax rates to the future pre-tax cash inflows, less the tax basis of the properties involved, and adjusted for permanent differences and tax credits and allowances. The resultant
future net cash inflows are discounted using a ten percent discount rate.
The table shown below represents HNR Finances net
interest in Petrodelta.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HNR Finance
|
|
|
Minority
Interest in
Venezuela
|
|
|
20.4% Net
Total
|
|
|
|
(in thousands)
|
|
As of December 31, 2014 (20.4% net interest)
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash inflows from sales of oil and natural gas
|
|
$
|
2,507,395
|
|
|
$
|
(1,228,624
|
)
|
|
$
|
1,278,771
|
|
Future production costs
(1)
|
|
|
(740,295
|
)
|
|
|
362,745
|
|
|
|
(377,550
|
)
|
Future development costs
|
|
|
(118,595
|
)
|
|
|
58,112
|
|
|
|
(60,483
|
)
|
Future income tax expenses
|
|
|
(637,378
|
)
|
|
|
312,315
|
|
|
|
(325,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future net cash flows
|
|
|
1,011,127
|
|
|
|
(495,452
|
)
|
|
|
515,675
|
|
Effect of discounting net cash flows at 10%
|
|
|
(329,294
|
)
|
|
|
161,354
|
|
|
|
(167,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows
|
|
$
|
681,833
|
|
|
$
|
(334,098
|
)
|
|
$
|
347,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C-67
(1)
|
Future production costs include operating costs, production taxes and Windfall Profits Tax. For 2014, Windfall Profits Tax equates to $347 million, or 47 percent, of the $ 740 million of undiscounted future
production costs.
|
TABLE VI Changes in the Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves (in
thousands):
|
|
|
|
|
|
|
Year ended
December 31, 2014
|
|
Standardized Measure at January 1
|
|
$
|
322,065
|
|
Sales of oil and natural gas, net of related costs
|
|
|
(68,702
|
)
|
Revisions to estimates of proved reserves:
|
|
|
|
|
Net changes in prices, net of production taxes
|
|
|
21,045
|
|
Quantities
|
|
|
(142,136
|
)
|
Extensions, discoveries and improved recovery, net of future costs
|
|
|
59,039
|
|
Accretion of discount
|
|
|
50,794
|
|
Net change in income taxes
|
|
|
37,049
|
|
Development costs incurred
|
|
|
88,498
|
|
Changes in estimated development costs
|
|
|
(19,545
|
)
|
Timing differences and other
|
|
|
(373
|
)
|
|
|
|
|
|
Standardized Measure at December 31
|
|
$
|
347,734
|
|
|
|
|
|
|
C-68
Managements Discussion and Analysis of Financial Condition and
Results of Operations
Operations
We had a net loss from continuing operations of $27.3 million, or $2.41 per diluted share, for the year ended December 31, 2015 compared
to a net loss from continuing operations of $19.4 million, or $1.85 per diluted share, for the year ended December 31, 2014. Net loss from continuing operations for the year ended December 31, 2015 includes $3.9 million of exploration
expense, $24.2 million of impairment expense unproved property costs and oilfield inventories and $16.4 million of income tax benefit. The net loss continuing operations for the year ended December 31, 2014 includes $6.3 million of
exploration expense, $58.0 million of impairment expense unproved property costs and $58.3 million of income tax benefit.
Dussafu Project
Gabon
We have a 66.667 percent ownership interest in the Dussafu PSC through two separate acquisitions, and we are the
operator. The Dussafu PSC partners and Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources, is in the third exploration phase of the Dussafu PSC which was extended to May 27, 2016. The Company is currently
assessing extension possibilities for the exploration phase.
During 2011, we drilled our first exploratory well, Dussafu Ruche Marin-1
(DRM-1), and two appraisal sidetracks. DRM-1 and sidetracks discovered oil of approximately 149 feet of pay within the Gamba and Middle Dentale Formations. DRM-1 and the sidetracks are currently suspended pending further exploration and
development activities.
During the fourth quarter of 2012, our second exploration well on the Tortue prospect to target stacked pre-salt
Gamba and Dentale reservoirs commenced. DTM-1 was spud on November 19, 2012 in a water depth of 380 feet. On January 4, 2013, we announced that DTM-1 had reached a vertical depth of 11,260 feet within the Dentale Formation. Log
evaluation and pressure data indicate that we have an oil discovery of approximately 42 feet of pay in a 72-foot column within the Gamba Formation and 123 feet of pay in stacked reservoirs within the Dentale Formation. The first appraisal
sidetrack of DTM-1 (DTM-1ST1) was spud in January 12, 2013. DTM-1ST1 was drilled to a total depth of 11,385 feet in the Dentale Formation, approximately 1,800 feet from DTM-1 wellbore and found 65 feet of pay in the primary Dentale
reservoir. Several other stacked sands with oil shows were encountered; however, due to a stuck downhole tool, logging operations were terminated before pressure data could be collected to confirm connectivity. The downhole tool was retrieved and
the DTM-1 well was suspended for future re-entry. We have met all funding commitments for the third exploration phase of the Dussafu PSC.
Central/inboard 3D seismic data acquired in 2011 has been processed and interpreted to review prospectivity. We have begun processing data
from the 1,260 Sq Km of 3D seismic survey performed during the fourth quarter of 2013. This survey provides 3D coverage over the outboard portion of the block where significant pre-salt prospectivity has been recognized on 2D seismic data. The
new 3D seismic data also covers the Ruche, Tortue and Moubenga discoveries and is expected to enhance the placement of future development wells in the Ruche and Tortue development program as well as provide improved assessment of the numerous
undrilled structures already identified on older 2D seismic surveys.
On March 26, 2014, the joint venture partners approved a
resolution that the discovered fields are commercial to exploit. On June 4, 2014, a Declaration of Commerciality (DOC) was signed with Gabon pertaining to the four discoveries on the Dussafu Project offshore Gabon. Furthermore,
on July 17, 2014, the Direction Generale Des Hydrocarbures (DGH) awarded an Exclusive Exploitation Authorization (EEA) for the development and exploitation of certain oil discoveries on the Dussafu Project and on
October 10, 2014, the field development plan was approved. The Company has four years from the date of the EEA approval to begin production.
C-69
Since approval of the Field Development Plan (FDP) in October 2014, Harvest has
continued to move toward development of the Ruche Exclusive Exploitation Area. A tender for all the subsea equipment was concluded in January 2015 where prices exceeded the costs employed in the FDP. Efforts continue to negotiate with the lowest
priced vendors and to revise the development scheme to bring the projected cost back to the FDP levels. The depth volume from the 2013 3D seismic acquisition over the discovered fields and the outboard area of the license has been received and
interpreted. This new data was incorporated into our reservoir models and optimization of well trajectories to maximize oil recovery is ongoing. In addition, the prospect inventory was updated and several prospects have been high graded for drilling
in the first half of 2016. To accommodate the drilling schedule, a site survey, including bathymetry and geophysical data gathering with respect to prospects A/B, 6/7 and 8/9, was completed in August 2015. A tender for a drilling rig for the planned
well was completed in November 2015 and a tender for well testing and other services were concluded in January 2016.
Harvest and its
joint venture partner engaged a contractor to undertake a fixed-price, geophysical site survey over multiple potential well locations in the Dussafu block in August 2015. The survey is a pre-requisite for siting mobile drilling units and other
installations required for continuing exploration and development activities over the license. The survey will provide information about the seabed and shallow geological conditions, essential for the safe siting and operation of these
installations.
During the year ended December 31, 2015, we had cash capital expenditures of $0.9 million for site survey ($1.2
million for well costs during the year ended December 31, 2014). The 2016 budget for the Dussafu PSC is $3.6 million.
The Company is
considering options to develop, sell or farm-down its interest in the Dussafu Project in order to obtain the maximum value from the asset, while maintaining the required liquidity to continue our current operations.
In December 2014, the Company recorded a $50.3 million impairment related to the unproved costs of the Dussafu PSC based on a qualitative
analysis which considered our current liquidity needs, our inability to attract additional capital and the decrease in oil and natural gas prices. In December 2015, the Company reassessed the carrying value of the unproved costs related to the
Dussafu PSC and recorded an additional impairment of $23.2 million based on its analysis of the value of the unproved costs which considered the value of the contingent and exploration resources and the ability of the Company to develop the
project given its current liquidity situation and the depressed price of crude oil.
We reviewed the value of our oilfield inventories
that are in the country of Gabon, of which the majority is steel conductor and casing. We impaired the value of this inventory by approximately $1.0 million, leaving $3.0 million related to this inventory as of December 31, 2015.
Colombia
Discontinued Operations
In February 2013, we signed farm-down agreements on Block VSM14 and Block VSM15 in Colombia. Under the terms of the farm-down agreements, we
had a 75 percent beneficial working interest and our partners had a 25 percent carried interest for the minimum exploratory work commitments on each block. We requested the legal assignment of the interest by the Agencia Nacional de Hidrocarburos
(ANH), Colombias oil and natural gas regulatory authority, and approval of us as operator.
For both blocks, phase one
of the contract began on December 15, 2012 and expired on December 15, 2015. We have received notices of default from our partners for failing to comply with certain terms of the farm-down agreements for Block VSM14 and Block VSM15,
followed by notices of termination on November 27, 2013. Our partners filed for arbitration of claims related to these agreements. After evaluating these circumstances, we determined that it was appropriate to fully impair the costs associated
with these interests, and we recorded an impairment charge of $3.2 million during the year ended December 31, 2013 which included an accrual of
C-70
$2.0 million related to this matter. On December 14, 2014 we paid our partners $2.0 million to settle the arbitration. As we no longer have any interests in Colombia, we have reflected
the results in discontinued operations. We are in the process of closing and exiting our Colombia venture. See
Note 5 Dispositions and Discontinued Operations
for further information on this project.
Harvest Holding Discontinued Operations
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia BV (HNR Energia), completed the sale of all of
HNR Energias 51% interest in Harvest-Vinccler Dutch Holding B.V., a Netherlands company (Harvest Holding), to Delta Petroleum N.V., a limited liability company organized under the laws of Curacao (Delta Petroleum),
pursuant to a share purchase agreement, dated June 29, 2016 (the Share Purchase Agreement). Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40% interest in Petrodelta, S.A., a mixed company organized under
Venezuelan law (Petrodelta), through which all of the Companys interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to Delta Petroleum.
Delta Petroleum is an affiliate of CT Energy, which assigned all of its rights and obligations under the Share Purchase Agreement to Delta
Petroleum on September 26, 2016. For more information about CT Energy, see
Note 1 Organization Purchase Agreement
, for more information.
At the closing, the Company received consideration consisting of:
|
|
|
$69.4 million in cash paid after various closing adjustments;
|
|
|
|
an 11% non-convertible senior promissory note payable by Delta Petroleum to HNR Energia six months from the closing date in the principal amount of $12.0 million, guaranteed by the sole member and sole equity-holder of
Delta Petroleum (the 11% Note);
|
|
|
|
the return of all of the Companys common stock owned by CT Energy, consisting of 2,166,900 shares which was approximately 16.8% of all outstanding shares pre-closing, to be held by the Company as treasury shares;
|
|
|
|
the cancellation of $30.0 million in outstanding principal under the 15% Note;
|
|
|
|
the cancellation of the CT Warrant.
|
As a result of the sale we have reclassified the results
of operations relating to Harvest Holding for the years ended December 31, 2015 and 2014 as discontinued operations and classified the assets and liabilities directly related to the sale as of December 31, 2015 and 2014 as assets and
liabilities associated with discontinued operations.
Petrodelta
Our 40 percent investment in Petrodelta is owned through our subsidiary, Harvest Vinccler-Dutch Holding B.V. (Harvest Holding), a
Dutch private company with limited liability. Up until December 16, 2013 we had an 80 percent interest in Harvest Holding. On December 16, 2013, Harvest entered into a share purchase agreement (SPA) with Petroandina
Resources Corporation to sell our 80 percent equity interest in Harvest Holding in two closings for an aggregate cash purchase price of $400.0 million. The first closing occurred on December 16, 2013 when we sold a 29 percent equity
interest in Harvest Holding for $125.0 million. As a result of the first sale, we own 51 percent of Harvest Holding beginning December 16, 2013 and the non-controlling interest owners hold the remaining 49 percent. See
Note 1-
Organization Share Purchase Agreement Delta Petroleum
for further information.
The Company was not able to obtain
approval from the government of Venezuela during 2014, which was required to complete the second closing for our remaining 51 percent interest in Petrodelta and on January 1, 2015 we terminated the SPA. Due to our failed sales attempts,
lack of management influence, and actions and
C-71
inactions by the majority owner, PDVSA, we believe we no longer exercise significant influence in Petrodelta and in accordance with Accounting Standards Codification ASC 323
Investments Equity Method and Joint Ventures, we are accounting for our investment in Petrodelta under the cost method (ASC 325 Investments Other), effective December 31, 2014. Under the cost method
we will not recognize any equity in earnings from our investment in Petrodelta in our results of operations, but will recognize any cash dividends in the period they are received.
We performed an impairment analysis of the carrying value of our investment of Petrodelta as of December 31, 2014. The estimated
fair value of our investment was determined based on the estimated fair value of Petrodeltas oil and natural gas properties and other net assets as of December 31, 2014, discounted by a factor for economic instability, foreign currency
risks and lack of marketability. Based on this analysis, we recorded a pre-tax impairment charge against the carrying value of our investment in Petrodelta of $355.7 million as of December 31, 2014, which has been reclassified to Discontinued
Operations.
We also performed an impairment analysis of the carrying value of our investment of Petrodelta as of December 31, 2015
due to the continued decline in world oil prices and deteriorating economic conditions in Venezuela, which have significantly impacted Petrodeltas operations. During 2015, Petrodeltas operating costs exceeded the price realized from the
sale of its production due to the significant rate of inflation in Venezuela and the restrictive foreign currency exchange system which Petrodelta is required to operate under. While we believe that our relationship with CT Energy may allow us
to restructure our relationship with PDVSA and Petrodelta and allow us to access the alternative foreign currency systems available to companies in Venezuela, there can be no assurances that we will be successful in these negotiations. Based on
the existing economic environment in which Petrodelta is required to operate, we have concluded that the estimated fair value of our investment in Petrodelta is nil and have recorded a pre-tax impairment charge of $164.7 million to fully impair our
investment in Petrodelta as of December 31, 2015, which has been reclassified to Discontinued Operations. The estimated fair value of our investment was determined based on the estimated fair value of Petrodeltas oil and natural gas
properties and other net liabilities as of December 31, 2015, which exceeded the estimated fair value of the oil and natural gas properties.
Certain operating statistics for the years ended December 31, 2015 and 2014 for the fields operated by Petrodelta are set forth below.
This information is provided at 100 percent.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Thousand barrels of oil sold
|
|
|
14,761
|
|
|
|
15,561
|
|
Million cubic feet of natural gas sold
|
|
|
3,934
|
|
|
|
2,981
|
|
Total thousand BOE
|
|
|
15,417
|
|
|
|
16,058
|
|
Average BOE per day
|
|
|
42,237
|
|
|
|
43,994
|
|
Average price per barrel
(a)
|
|
$
|
36.92
|
|
|
$
|
86.33
|
|
Average price per thousand cubic feet
|
|
$
|
1.54
|
|
|
$
|
1.54
|
|
Operating costs (inclusive of U.S. GAAP adjustment) (thousands)
|
|
|
|
(b)
|
|
$
|
289,521
|
|
Capital expenditures (thousands)
|
|
|
|
(b)
|
|
$
|
430,629
|
|
(a)
|
Includes additional pricing adjustments related to the approved El Salto contract of $60.4 million for previous years that were invoiced in 2014. Excluding these pricing adjustments, the average crude oil sales
price for 2014 was $82.45.
|
(b)
|
Due to the change in accounting method from equity method to cost method of accounting for our investment in Petrodelta as of December 31, 2014 certain operating statistics for 2015 have been excluded.
|
C-72
Results of Operations
The following discussion on results of operations for each of the years in the two-year period ended December 31, 2015 should be read in
conjunction with our consolidated financial statements and related notes thereto.
Years Ended December 31, 2015 and 2014
We reported a net loss from continuing operations of $27.3 million, or $2.41 diluted earnings per share, for the year ended December 31,
2015, compared with a net loss from continuing operations of $19.3 million, or $1.85 diluted earnings per share, for the year ended December 31, 2014.
Loss From Continuing Operations
Expenses
and other non-operating (income) expense from continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
Depreciation and amortization
|
|
$
|
87
|
|
|
$
|
131
|
|
|
$
|
(44
|
)
|
Exploration expense
|
|
|
3,900
|
|
|
|
6,267
|
|
|
|
(2,367
|
)
|
Impairment expense unproved property costs and oilfield inventories
|
|
|
24,178
|
|
|
|
57,994
|
|
|
|
(33,816
|
)
|
General and administrative
|
|
|
15,958
|
|
|
|
13,170
|
|
|
|
2,788
|
|
Gain on sale of oil and natural gas properties
|
|
|
|
|
|
|
(2,865
|
)
|
|
|
2,865
|
|
Change in fair value of warrant derivative liability
|
|
|
|
|
|
|
(1,953
|
)
|
|
|
1,953
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
4,749
|
|
|
|
(4,749
|
)
|
Foreign currency transaction losses
|
|
|
59
|
|
|
|
162
|
|
|
|
(103
|
)
|
Other non-operating (income) expense
|
|
|
(482
|
)
|
|
|
58
|
|
|
|
(540
|
)
|
Income tax benefit
|
|
|
(16,450
|
)
|
|
|
(58,317
|
)
|
|
|
41,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
27,250
|
|
|
$
|
19,396
|
|
|
$
|
7,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our accounting method for oil and natural gas properties is the successful efforts method. During the year
ended December 31, 2015, we incurred $3.5 million of exploration costs for the processing and reprocessing of seismic data related to ongoing operations and $0.4 million related to other general business development activities. During the year
ended December 31, 2014, we incurred $5.7 million of exploration costs for the processing and reprocessing of seismic data related to ongoing operations and $0.6 million related to other general business development activities.
During the years ended December 31, 2015 and 2014, we recorded impairment expense, related to our Dussafu Project in Gabon, of $24.2
million (including $1.0 million relating to oilfield inventories) and $50.3 million, respectively, which reflect managements estimate of the decreased value of the project given our current liquidity situation and the decline in global
crude oil prices. During 2014, we also recognized impairments related to our Budong Project in Indonesia of $7.7 million.
The
increase in general and administrative costs in the year ended December 31, 2015 from the year ended December 31, 2014, was primarily due to higher employee related costs ($0.7 million), general operations and overhead ($1.5 million),
contract services and other professional fees ($1.2 million) offset by lower taxes other than income ($0.6 million). Employee related costs were higher primarily related to certain stock based compensation that was impacted by a 60% decrease in
company stock price during 2014. General operations and overhead is higher primarily due to recording an allowance on doubtful accounts for $0.7 million blocked
C-73
payment related to our drilling operations in Gabon in 2015 and lower billings to our joint venture partners. See
Note 3 Summary of Significant Accounting Policies, Other Assets
.
Professional fees are higher due to higher litigation and consulting costs offset by lower audit fees in 2015 compared to 2014.
The $2.9
million gain on sale of oil and natural gas properties during the year ended December 31, 2014 relates to the sale of our rights under a petroleum contract with China National Offshore Oil Corporation. The Company fully impaired this property
in 2012.
The change in the fair value of the derivative assets and liabilities of $2.0 million during year ended December 31, 2014
was related to the change in fair value of 461,522 warrants issued as inducements under the warrant agreements dated October 2010 in connection with the $60.0 million term loan facility that was repaid in May 2011. On October 28, 2015, the
461,522 warrants expired.
During the year ended December 31, 2014, we incurred a loss on extinguishment of debt of $4.7 million in
connection with the repayment of the 11% senior unsecured notes due in 2014 (11% Senior Notes).
We recognized a loss on
foreign currency transactions for the year ended December 31, 2015 of $0.1 million as compared to $0.2 million loss on foreign currency transactions for the year ended December 31, 2014. The losses in 2015 and 2014 were primarily
associated with a unfavorable change in converting USD to Euros.
The non-operating income of $0.5 million for the year ended
December 31, 2015 was primarily related to the reduction of estimated final settlement costs associated with prior financings compared to non-operating expense of $0.1 million for the year ended December 31, 2014 for costs related to our
strategic alternative process and evaluation.
We had an income tax benefit in the year ended December 31, 2015 of $16.4 million as
compared to an income tax benefit of $58.3 million in the year ended December 31, 2014. The benefit for the year ended December 31, 2015 was primarily attributable to a reduction in the valuation allowance against the Companys
deferred tax assets for a claim for refund of 2013 taxes and a decrease in the deferred tax liability associated with the Companys undistributed earnings from its foreign subsidiaries. In the fourth quarter of 2014, we reinstated a valuation
allowance against the Companys U.S. deferred tax assets as we determined that we would not have sufficient taxable income in the U.S. after the termination of the sale of the remaining equity interest in Harvest Holding. We have not recognized
a tax benefit on the Companys losses arising during the year ended December 31, 2015; although the valuation allowance was reduced by an expected refund of alternative minimum tax from the carryback of 2014 losses to 2013.
Discontinued Operations
We reported a
net loss from discontinuing operations of $153.4 million, or $6.30 diluted earnings per share, for the year ended December 31, 2015, compared with a net loss from continuing operations of $339.3 million, or $16.56 diluted earnings per share,
for the year ended December 31, 2014.
C-74
There were no revenues applicable to discontinued operations during the years ended
December 31, 2015 and 2014. Losses from discontinued operations for Oman, Colombia and Harvest Holding were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
Loss from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
21
|
|
|
$
|
67
|
|
|
$
|
(46
|
)
|
Exploration expense
|
|
|
|
|
|
|
24
|
|
|
|
(24
|
)
|
Impairment expense investment affiliate
|
|
|
164,700
|
|
|
|
355,650
|
|
|
|
(190,950
|
)
|
Allowance for account and note receivable
|
|
|
|
|
|
|
13,753
|
|
|
|
(13,753
|
)
|
General and administrative expense
|
|
|
3,052
|
|
|
|
3,101
|
|
|
|
(49
|
)
|
Change in fair value of warrant derivative liability
|
|
|
(34,510
|
)
|
|
|
|
|
|
|
(34,510
|
)
|
Change in fair value of embedded derivative asset and liabilities
|
|
|
(4,813
|
)
|
|
|
|
|
|
|
(4,813
|
)
|
Interest expense
|
|
|
2,958
|
|
|
|
11
|
|
|
|
2,947
|
|
Loss on sale of Harvest Holding
|
|
|
|
|
|
|
1,574
|
|
|
|
(1,574
|
)
|
Loss on debt conversion
|
|
|
1,890
|
|
|
|
|
|
|
|
1,890
|
|
Loss on issuance of debt
|
|
|
20,402
|
|
|
|
|
|
|
|
20,402
|
|
Foreign currency transaction gains/(losses)
|
|
|
(320
|
)
|
|
|
59
|
|
|
|
(379
|
)
|
Income tax expense
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
Earnings from investment in affiliate
|
|
|
|
|
|
|
(34,949
|
)
|
|
|
34,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations, net of income taxes
|
|
$
|
153,407
|
|
|
$
|
339,317
|
|
|
$
|
(185,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oman
As
a result of the decision to not request an extension of the first phase or enter the second phase of the EPSA A1 Ghubar / Qarn Alam license (Block 64 EPSA), Block 64 was relinquished effective May 23, 2013. The carrying value of
Block 64 EPSA of $6.4 million was written off to impairment expense at December 31, 2012. Operations in Oman were terminated, and the field office was closed May 31, 2013. We have no continuing involvement in Oman. The nominal loss from
discontinued operations for Oman for the year ended December 31, 2014 included general and administrative expenses for legal and other professional fees.
Colombia
We received notices of default
from our partners for failing to comply with certain terms of the farm-down agreements for Block VSM14 and Block VSM15 in Colombia, followed by notices of termination on November 27, 2013. In 2013, our partners filed for arbitration
of claims related to these agreements. We accrued $2.0 million as of December 31, 2013 related to obligations under the farm-down agreements. After evaluating these circumstances, we determined that it was appropriate to fully impair the costs
associated with these interests. On December 14, 2014 we settled all arbitration claims for a payment of $2.0 million and the arbitration was dismissed. As we no longer have any interests in Colombia, we have reflected the results in
discontinued operations. We are in the process of closing and exiting our Colombia venture. The loss from discontinued operations included $0.5 million in general and administrative expenses during the year ended December 31, 2014.
Harvest Holding
As a result of the sale
we have reclassified the results of operations relating to Harvest Holding for the years ended December 31, 2015 and 2014 as discontinued operations.
We recorded an allowance on doubtful accounts for dividend and accounts receivables from our investment affiliate of $13.8 million in 2014.
C-75
The change in fair value of the warrant liability of $34.5 million during the year ended
December 31, 2015 was related to the decrease in fair value of the CT Warrant issued to CT Energy on June 19, 2015. See
Note 11 Debt and Financing and Note 12 Warrant Derivative Liabilities
for further information.
The change in the fair value of the derivative assets and liabilities of $4.8 million during year ended December 31, 2015 was
related to the increase in the fair value of the embedded derivative asset of $1.0 million and the decrease in fair value of the derivative liability related to the 9% Note which was converted on September 15, 2015. See
Note12 Warrant
Derivative Liabilities
The increase in interest expense in the year ended December 31, 2015 from the year ended
December 31, 2014 was primarily due to higher outstanding debt balances and higher rates of interest during the year ended December 31, 2015.
The $1.6 million loss on the sale of interest in Harvest Holding in the year ended December 31, 2014 relates to costs incurred during the
period in connection to the failed second closing of our remaining 51 percent in Harvest Holding.
On September 15, 2015, the 9%
Note, the associated accrued interest and related derivative liability were converted into 2,166,899 shares of the Companys common stock. The Company recognized a $1.9 million loss on debt conversion. The $1.9 million loss on debt conversion
was the result of the difference between the September 14, 2015 carrying value of the 9% Note, including accrued interest and unamortized debt discount ($0.2 million) and the fair value of the related derivative liability ($11.1 million) less
the fair value of the 2,166,899 shares issued upon conversion ($13.2 million) at September 15, 2015.
On June 19, 2015, we
issued the CT Warrant, 9% and 15% Notes, Additional Draw Note and Series C preferred stock in connection with the Purchase Agreement with CT Energy and received proceeds of $30.6 million, net of financing fees of $1.6 million. We identified embedded
derivative assets and liabilities in the notes and determined that the CT Warrant did not meet the required conditions to qualify for equity classification and is required to be classified as a warrant liability (See
Note 11 Warrant
Derivative Liabilities
). The estimated fair value, at issuance, of the embedded derivative asset was $2.5 million, the embedded derivative liability was $13.5 million and the CT Warrant was $40.0 million. In accordance with ASC 815,
the fair value of the financial instruments was first allocated to the embedded derivatives and warrants, which resulted in no value being attributable to the Series C preferred stock, the 9% and 15% Notes and the Additional Draw Note. As a result
of the allocation we recognized a loss on the issuance of these securities of $20.4 million during the year ended December 31, 2015.
We recognized a gain on foreign currency transactions for the year ended December 31, 2015 of $0.3 million as compared to $0.1 million
loss on foreign currency transactions for the year ended December 31, 2014. The gain in 2015 was primarily associated with a favorable change in the Bolivar denominated liabilities. The loss in 2014 is primarily related to converting USD to
Bolivars from participating in the SICAD II auctions.
Earnings from Investment in Affiliate
Our 40 percent investment in Petrodeltas financial information is prepared in accordance with International Financial Reporting
Standards (IFRS) which we have adjusted to conform to U.S. GAAP. See
Note 6 Investment in Affiliate.
Through
December 31, 2014, we included the results of Petrodelta in our financial statements under the equity method. We ceased recording earnings from Petrodelta in the second quarter of 2014 due to the expected sales price of the second tranche
purchase agreement approximating the recorded value of our investment in Petrodelta. During the year ended December 31, 2014 we recognized $34.9 million of equity in earnings from our investment in Petrodelta. Accordingly we do not summarize
revenue and operational results associated with
C-76
our investment in affiliate for 2015 or provide analysis of the reported variances of the revenues and operational expenses for Petrodelta. We believe we no longer exercise significant influence
in Petrodelta and in accordance with Accounting Standards Codification ASC 325 Investments Other
, we began reporting the results of our Venezuelan operations using the cost method of accounting effective
December 31, 2014.
Net Loss Attributable to Noncontrolling Interest Owners
Net loss attributable to noncontrolling interest owners was $82.1 million for year ended December 31, 2015 compared to net loss
attributable to noncontrolling interest owners of $165.2 million year ended December 31, 2014. The net loss attributable to noncontrolling interest owners in 2015 was related to the impairment of our investment in Petrodelta as well as to our
ongoing operations at Harvest Vinccler as they continue oversight of our investment in Petrodelta. The net loss attributable to noncontrolling interest owners in 2014 was related to the impairment of our investment in Petrodelta and our decision to
cease recording earnings from Petrodelta in the second quarter due to the expected sales price of the second tranche purchase agreement approximating the recorded value of our investment in Petrodelta.
Risks, Uncertainties, Capital Resources and Liquidity
The following discussion on risks, uncertainties, capital resources and liquidity should be read in conjunction with our consolidated financial
statements and related notes thereto.
Liquidity
Our financial statements for the year ended December 31, 2015 have been prepared under the assumption that we will continue as a going
concern. We expect that in 2016 we will not generate revenues, we will continue to generate losses from operations, and that our operating cash flows will not be sufficient to cover our operating expenses. While we believe that we may be able to
raise additional capital through issuances of debt or equity or through sales of assets, our circumstances at such time raise substantial doubt about our ability to continue to operate as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Our current capital resources may not be sufficient to
support our liquidity requirements through 2016. However, we believe certain cost reduction measures could be put into place which would not jeopardize our operations and future growth plans. In addition, we could delay the discretionary portion of
our capital spending to future periods or sell or farm-down our interest in our Gabon asset as necessary to maintain the liquidity required to run our operations, as warranted. There are no assurances that we will be successful in selling or
farming-down this asset.
Our ability to continue as a going concern depends upon the success of our planned exploration and development
activities and the ability to secure additional financing as needed to fund our current operations. There can be no guarantee of future capital acquisition, fundraising or exploration success or that we will realize the value of our unevaluated
exploratory well costs. We believe that we will continue to be successful in securing any funds necessary to continue as a going concern. However, our current cash position and our inability to access additional capital may limit our available
opportunities or not provide sufficient cash for operations.
The long-term continuation of our business plan through 2016 and beyond is
dependent upon the generation of sufficient cash flow to offset expenses. We will be required to obtain additional funding through public or private financing, farm-downs, further reduce operating costs, or possible sales of
assets. Failure to generate sufficient cash flow by raising additional capital through debt or equity financings, reducing operating costs, or by farm-downs or selling of assets further could have a material adverse effect on our ability to
meet our short- and long-term liquidity needs and achieve our intended long-term business objectives.
C-77
Historically, prior to the transaction pursuant to the Purchase Agreement with CT Energy, our
primary ongoing source of cash had been dividends from Petrodelta, issuance of debt and the sale of oil and natural gas properties. Our primary use of cash has been to fund oil and natural gas exploration projects, principal payments on debt,
interest, and general and administrative costs. We require capital principally to fund the exploration and development of new oil and natural gas properties. As is common in the oil and natural gas industry, we have various contractual commitments
pertaining to exploration, development and production activities.
The Company is assessing alternatives to farm-down or sell our interest
in the Dussafu Project, while weighing the liquidity requirements necessary to maintain ongoing Company operations. The development of, or a transaction regarding, the Dussafu project and the success of negotiations between PDVSA, CT Energy,
and HNR Finance for the management of Petrodelta will directly impact our future earnings, cash flows, and balance sheet. Without these transactions or additional financings or other sources of cash, we may not have sufficient liquidity for
operations or capital requirements. There can be no guarantee of realizing the value of our exploration and exploitation acreage or suspended wells in the Dussafu project or our investment in Petrodelta or that we can obtain further financings
or sources of cash.
On June 19, 2015, CT Energy purchased from the Company 9% and 15% Notes and the CT Warrant. The Company
immediately received gross proceeds of $32.2 million from the sale of the securities. The Company used $9.7 million of these proceeds to repay its existing debt plus accrued interest and certain financing fees. The remaining proceeds will be
used to position the Company for long-term growth, both in Venezuela and Gabon as well as to fund general and administrative costs. On September 15, 2015, the 9% Note and associated accrued interest was converted into 2,166,900 shares of
Harvest common stock. See
Note 1 Organization
for further information.
As of December 31, 2014, HNR Energia had a note
payable to Petroandina of $7.6 million. Principal was due by January 1, 2016. Interest payments were to be paid quarterly beginning on December 31, 2014. On June 23, 2015 the Company repaid the note payable of $7.6 million plus
accrued interest of $0.4 million.
At December 31, 2014, HNR Energia had a note payable to Vinccler of $6.1 million. Principal and
interest were payable upon the maturity date of December 31, 2015. On March 6, 2015, Vinccler forgave the note payable and accrued interest of $6.2 million. This was reflected as a contribution to stockholders equity.
Accumulated Undistributed Earnings of Foreign Subsidiaries
Under ASC 740-30-25-17, no deferred tax liability must be recorded if sufficient evidence shows that a foreign subsidiary has invested or will
invest its undistributed earnings or that the earnings will be remitted in a tax-free manner. Management must consider numerous factors in determining timing and amounts of possible future distribution of these earnings to the parent company and
whether a U.S. deferred tax liability should be recorded for these earnings. These factors include the future operating and capital requirements of both the parent company and the subsidiaries, remittance restrictions imposed by foreign governments
or financial agreements and tax consequences of the remittance, including possible application of U.S. foreign tax credits and limitations on foreign tax credits that may be imposed by the Internal Revenue Code and regulations.
Prior to 2013, no U.S. taxes had been recorded on these earnings as it was our practice and intention to reinvest the earnings of our non-U.S.
subsidiaries into our foreign operations. During the fourth quarter of 2013, management evaluated numerous factors related to the timing and amounts of possible future distribution of foreign earnings to the parent company, with consideration of the
sale of non-U.S. assets. Because management was pursuing various alternatives with respect to the Companys future operations and disposition of any sale proceeds, a determination was made that it was appropriate to record a deferred tax
liability associated with the unremitted earnings of our foreign subsidiaries of $89.9 million in the fourth quarter of 2013. However, due primarily to the $355.7 million pre-tax impairment of Petrodelta, this balance decreased by $75.2 million to
$14.7 million at December 31, 2014.
C-78
As of December 31, 2015, the book-tax outside basis difference in our foreign subsidiary
resulting from unremitted earnings from our foreign operations was reduced to zero due to a pre-tax impairment of the Companys remaining investment in Petrodelta of $164.7 million. This benefit was recorded to continuing operations, consistent
with the Companys continued investment in foreign subsidiaries. The entire net deferred tax liability as of December 31, 2014 has been reflected as a long-term liability, a characterization consistent with the Companys adoption of
Accounting Standards Update (ASU) No. 2015-17. See
New Accounting Pronouncements
for further information.
Working Capital
and Cash Flows
The net funds raised or used in each of the operating, investing and financing activities from continuing
operations are summarized in the following table and discussed in further detail below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Cash flows from operations:
|
|
|
|
|
|
|
|
|
Net cash used in continuing operating activities
|
|
$
|
(19,361
|
)
|
|
$
|
(38,573
|
)
|
Net cash used in continuing investing activities
|
|
|
(1,285
|
)
|
|
|
(1,367
|
)
|
Net cash used in continuing financing activities
|
|
|
|
|
|
|
(78,879
|
)
|
Net cash provided by discontinued operations
|
|
|
17,013
|
|
|
|
4,304
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
$
|
(3,633
|
)
|
|
$
|
(114,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands, except ratios)
|
|
Working capital
|
|
$
|
2,418
|
|
|
$
|
970
|
|
Current ratio
|
|
|
1.7
|
|
|
|
1.2
|
|
Total cash
|
|
$
|
2,505
|
|
|
$
|
6,138
|
|
The decrease in working capital of $1.4 million between December 31, 2014 and 2015 was primarily due
to cash used to fund our loss from operations and capital expenditures.
Cash Flow from Continuing Operating Activities
During the year ended December 31, 2015, net cash used in operating activities was approximately $19.4 million ($38.6 million during
the year ended December 31, 2014). The $19.2 million decrease in use of cash from operations was primarily to fund our loss from operations.
Cash
Flow from Continuing Investing Activities
Our cash capital expenditures for property and equipment are summarized in the following
table:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Budong PSC
|
|
$
|
|
|
|
$
|
3,152
|
|
Dussafu PSC
|
|
|
947
|
|
|
|
1,194
|
|
Other administrative property
|
|
|
338
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total additions of property and equipment
|
|
$
|
1,285
|
|
|
$
|
4,355
|
|
|
|
|
|
|
|
|
|
|
C-79
In addition to cash capital expenditures, during the year ended December 31, 2014 we:
|
|
|
Received $2.9 million net of associated costs related to the sale of leasehold WAB-21 area;
|
|
|
|
Had $0.1 million in restricted cash returned to us related to the Dussafu PSC.
|
Our budgeted
capital expenditures of $4.0 million for 2016 for U.S. and Gabon operations will be funded through our existing cash balances, accessing equity and debt markets, and cost reductions. In addition, we could delay the discretionary portion of our
capital spending to future periods or sell assets as necessary to maintain the liquidity required to run our operations, as warranted.
Cash Flow from
Continuing Financing Activities
During the year ended December 31, 2014, we:
|
|
|
Repaid $79.8 million of our 11% Senior Notes;
|
|
|
|
Incurred $0.8 million in debt extinguishment costs;
|
|
|
|
Incurred $0.3 million in legal fees associated with financings;
|
|
|
|
Incurred $0.1 million in treasury stock purchases;
|
|
|
|
Received $2.0 million in net proceeds from issuance of 163,458 shares of common stock from the at-the-market offerings.
|
Cash Flow from Discontinued Operations
Net cash flow from discontinued operations was $17.0 million and $4.3 million for the years ended December 31, 2015 and 2014,
respectively. During the year ended December 31, 2015, the cash flow from discontinued operations was generated primarily from financing activities related to the proceeds from 15% Note and the CT Warrant and contributions from the
noncontrolling interests offset by financing costs and the net loss during the period. During the year ended December 31, 2014, the cash flow from discontinued operations was generated primarily from net proceeds from issuance of note payable
from noncontrolling interest and contributions from the noncontrolling interests offset by the net loss during the period.
Contractual Obligations
At December 31, 2015, we had the following lease commitments for office space in Houston, Texas and regional office in Caracas,
Venezuela.
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Date Lease Signed
|
|
|
Term
|
|
|
Annual Expense
|
|
Houston, Texas
|
|
|
December 2014
|
|
|
|
1.8 years
|
|
|
|
81,100
|
|
Caracas, Venezuela
|
|
|
December 2015
|
|
|
|
1.0 years
|
|
|
|
83,100
|
|
C-80
At December 31, 2015, we had the following contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-2 Years
|
|
|
3-4 Years
|
|
|
After
4 Years
|
|
|
|
(in thousands)
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15% Note with related party
(1)
|
|
$
|
25,225
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
25,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
(1)
|
|
|
17,494
|
|
|
|
3,923
|
|
|
|
3,913
|
|
|
|
3,913
|
|
|
|
5,745
|
|
Oil and natural gas activities
(2)
|
|
|
4,520
|
|
|
|
1,130
|
|
|
|
1,130
|
|
|
|
1,130
|
|
|
|
1,130
|
|
Office leases
|
|
|
171
|
|
|
|
157
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other obligations
|
|
|
22,185
|
|
|
|
5,210
|
|
|
|
5,057
|
|
|
|
5,043
|
|
|
|
6,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
47,410
|
|
|
$
|
5,210
|
|
|
$
|
5,057
|
|
|
$
|
5,043
|
|
|
$
|
32,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1)
|
The carrying value of the 15% Note at December 31, 2015 was $0.2 million, net of $25.0 million of unamortized discount On January 4, 2016, the outstanding principal amount of the 15% Note increased to $26.1
million as a result of the capitalization of accrued interest of $0.8 million. Debt and interest payments have been reclassified to liabilities associated with discontinued operations.
|
|
2)
|
Oil and natural gas activities in the table above includes various contractual commitments pertaining to leasehold, training and development costs.
|
15% Non-Convertible Senior Secured Note due June 19, 2020
On June 19, 2015, in connection with the transaction with CT Energy described in
Note 1 Organization
, we issued the
five-year, 15% Note in the aggregate principal amount of $25.2 million with interest that is compounded quarterly at a rate of 15.0% per annum and is payable quarterly on the first business day of each January, April, July and October,
commencing October 1, 2015. If by June 19, 2016, the volume weighted average price of the Companys common stock over any consecutive 30-day period has not equaled or exceeded $2.50 per share, the maturity date of the 15% Note will be
extended by two years and the interest rates on the 15% Note will adjust to 8.0% (the 15% Note Reset Feature). During an event of default, the outstanding principal amount bears additional interest at a rate of 2.0% per annum higher
than the rate otherwise applicable. See
Note 11 Debt and Financing.
Effects of Changing Prices, Foreign Exchange Rates and Inflation
Our results of operations and cash flow are affected by changing oil prices. Fluctuations in oil prices may affect our total planned
development activities and capital expenditure program.
Our net foreign exchange gain attributable to our international operations was
$0.3 million for the year ended December 31, 2015 compared to $0.2 million loss on foreign currency transactions for the year ended December 31, 2014. The gains in 2015 are primarily associated with favorable changes in the Bolivar
denominated liabilities. The loss in 2014 is primarily related to converting USD to Bolivars from participating in the SICAD II auctions and USD to Euros. There are many factors affecting foreign exchange rates and resulting exchange gains and
losses, most of which are beyond our control. Petrodelta, our investment in affiliate, is required to follow the foreign exchange controls placed on PDVSA which requires them to use a 6.3 Bolivars per USD exchange rate. Harvest Vinccler is able to
bring money into the country using the SIMADI foreign exchange system which is at a 200 Bolivars per USD exchange rate. The foreign exchange gains and losses referred to here are generated from activity of Harvest Vinccler and not Petrodelta. It is
not possible for us to predict the extent to which we may be affected by future changes in exchange rates and exchange controls.
C-81
On March 9, 2016, Venezuela Vice President for Economic Area announced a new exchange
agreement No. 35 (the Exchange Agreement No. 35). Exchange Agreement No. 35 was published in Venezuelas Official Gazette No. 40865 dated March 9, 2016, and became effective on March 10, 2016. Exchange
Agreement No. 35 will have a dual exchange rate for a controlled rate (named DIPRO) fixed at 10 USD/Bolivars for priority goods and services and a complimentary rate (named DICOM) starting at 206.92 USD/Bolivars for travel and other
non-essential goods. We are evaluating the impact Exchange Agreement No. 35 has on Harvest Vinccler and Petrodelta.
Harvest
Vincclers functional and reporting currency is the USD. They do not have currency exchange risk other than the official prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars (Bolivars)
(198.70 Bolivars per USD).
Within the United States and other countries in which we conduct business, inflation has had a minimal effect
on us, but it is an important factor with respect to certain aspects of the results of operations in Venezuela. The 2015 annual inflation rate in Venezuela provided by the Central Bank of Venezuela (BCV) through December 2015 was 180.9 percent.
Critical Accounting Policies
Reporting and
Functional Currency
USD is the reporting and functional currency for all of our controlled subsidiaries and Petrodelta. Amounts
denominated in non-USD currencies are re-measured into USD, and all currency gains or losses are recorded in the consolidated statements of operations and comprehensive loss. There are many factors that affect foreign exchange rates and the
resulting exchange gains and losses, many of which are beyond our influence.
Investment in Affiliate
We evaluate our investments in unconsolidated companies under ASC 323 Investments Equity Method and Joint Ventures
and ASC 325 Investments Other. In accordance with ASC 323, investments in which we have significant influence were accounted for under the equity method of accounting. Under the equity method, our Investment in Affiliate
was increased by additional investments and earnings and decreased by dividends and losses. We review our Investment in Affiliate for impairment whenever events and circumstances indicate a loss in investment value is other than a temporary decline.
Once an event is identified that is other than temporary, a loss is recognized and the Investment in Affiliate is reduced to fair value.
Investments where we do not have significant influence are accounted for in accordance with ASC 325. Under this method we will not recognize
any equity in earnings from our investments in our results of operations, but will recognize any cash dividends in the period they are received. We review our Investment in Affiliate for impairment whenever events and circumstances indicate a loss
in investment value is other than a temporary decline. Once an event is identified that is other than temporary, a loss is recognized and the Investment in Affiliate is reduced to fair value.
Through December 31, 2014, we included the results of Petrodelta in our financial statements under the equity method. We ceased recording
earnings from Petrodelta in the second quarter 2014 due to the expected sales price of the second closing purchase agreement approximating the recorded value of our investment in Petrodelta. The Company was not able to obtain approval from the
government of Venezuela during 2014 and on January 1, 2015 we terminated the SPA. Due to our failed sales attempts, lack of management influence, and actions and inactions by the majority owner, PDVSA, we believe we no longer exercise
significant influence in Petrodelta and in accordance with Accounting Standards Codification ASC 323 Investments Equity Method and Joint Ventures, we are accounting for our investment in Petrodelta under the cost
method (ASC 325 Investments Other), effective December 31, 2014. Under the cost method we will not recognize any equity in earnings from our investment in Petrodelta in our results of operations, but will
recognize any cash dividends in the period they are received.
C-82
Capitalized Interest
We capitalize interest costs for qualifying oil and natural gas properties. The capitalization period begins when expenditures are incurred on
qualified properties, activities begin which are necessary to prepare the property for production and interest costs have been incurred. The capitalization period continues as long as these events occur. The average additions for the period are used
in the interest capitalization calculation.
Property and Equipment
We follow the successful efforts method of accounting for our oil and natural gas properties. Under this method, oil and natural gas lease
acquisition costs are capitalized when incurred. Unproved properties are assessed quarterly on a property-by-property basis, and any impairment in value is recognized. We assess our unproved property costs for impairment when events or circumstances
indicate a possible decline in the recoverability of the carrying value of the projects. The estimated value of our unproved projects is determined using quantitative and qualitative assessments and the carrying value of the projects is
adjusted if the carrying value exceeds the assessed value of the projects.
During the years ended December 31, 2015 and 2014, we
recorded impairment expense, related to our Dussafu Project in Gabon, of $24.2 million (including $1.0 million relating to oilfield inventories) and $50.3 million, respectively, which reflect managements estimate of the decreased value of
the project given our current liquidity situation and the decline in global crude oil prices. During 2014, we recognized impairments related to our Budong Project in Indonesia of $7.7 million. If the unproved properties are determined to be
productive, the appropriate related costs are transferred to proved oil and natural gas properties. Lease rentals are expensed as incurred. Oil and natural gas exploration costs, other than the costs of drilling exploratory wells, are charged to
expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether the wells have discovered proved reserves. Exploratory drilling costs are capitalized when drilling is completed if it is determined that
there is economic producibility supported by either actual production, conclusive formation tests or by certain technical data. If proved reserves are not discovered, such drilling costs are expensed. Costs to develop proved reserves, including the
costs of all development wells and related equipment used in production of crude oil and natural gas, are capitalized.
Depletion,
depreciation, and amortization (DD&A) of the cost of proved oil and natural gas properties are calculated using the unit of production method. The reserve base used to calculate DD&A for leasehold acquisition costs and the cost
to acquire proved properties is proved reserves. With respect to lease and well equipment costs, which include development costs and successful exploration drilling costs, the reserve base is proved developed reserves. Estimated future
dismantlement, restoration and abandonment costs, net of salvage values, are taken into account. Certain other assets are depreciated on a straight-line basis.
Assets are grouped based upon a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition,
such as a reservoir or field.
Amortization rates are updated to reflect: 1) the addition of capital costs, 2) reserve revisions (upwards
or downwards) and additions, 3) property acquisitions or property dispositions and 4) impairments.
We account for impairments of proved
properties under the provisions of ASC 360, Property, Plant, and Equipment. When circumstances indicate that an asset may be impaired, we compare expected undiscounted future cash flows at a producing field level to the amortized
capitalized cost of the asset. If the future undiscounted cash flows, based on our estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the
amortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is calculated by discounting the future cash flows at an appropriate risk-adjusted discount rate.
C-83
Income Taxes
Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts
attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carry forwards. A valuation allowance for deferred tax assets is recorded when it is
more likely than not that the benefit from the deferred tax asset will not be realized.
Since December 31, 2013, we have provided
deferred income taxes on undistributed earnings of our foreign subsidiaries where we are not able to assert that such earnings were permanently reinvested, or otherwise could be repatriated in a tax free manner, as part of our ongoing business. As
of December 31, 2015, the deferred tax liability provided on such earnings has been reduced to zero due to the impairment of the underlying book investment in Petrodelta.
As the conversion feature of the 9% Note was reasonably expected to be exercised at the time of the notes issuance due to the conversion
price being in-the-money, the interest on the 9% Note paid upon its conversion is non-deductible to the Company under Internal Revenue Code (IRC) Section 163(l). The 15% Note was issued, for income tax purposes, with original
issue discount (OID). OID generally is deductible for income tax purposes. However, if the debt instrument constitutes an applicable high-yield discount obligation (AHYDO) within the meaning of IRC
Section 163(i)(1), then a portion of the OID likely would be non-deductible pursuant to IRC Section 163(e)(5). Our analysis of the 15% Note is that the note may be an AHYDO; consequently, a portion or all of the OID likely may be
non-deductible for income tax purposes.
New Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-03, Simplifying the Presentation
of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In June 2015 the FASB issued ASU No. 2015-15 as an amendment to this guidance to address the absence of
authoritative guidance for debt issuance costs related to line-of-credit arrangements. The SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred
debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance is effective for interim periods and annual period beginning
after December 15, 2015; however early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial position and will not have an impact on our results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going
Concern. ASU No. 2014-15 requires management to assess an entitys ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The standard is effective for annual periods ending after
December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of ASU No. 2014-15 and assessing the impact, if any, it may have
on our consolidated financial statements.
In April 2014, FASB issued ASU No. 2014-09 Revenue from Contracts with
Customers which is included in ASC 606, a new topic under the same name. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of
nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance supersedes the previous revenue recognition requirements and most industry-specific guidance.
Additionally, the update supersedes some cost guidance related to construction type and production-type contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of
C-84
nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update.
The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s)
with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or
as) the entity satisfies a performance obligation.
The new guidance also provides for additional qualitative and quantitative disclosures
related to: (1) contracts with customers, including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining
performance obligations); (2) significant judgments and changes in judgments which impact the determination of the timing of satisfaction of performance obligations (over time or at a point in time), the transaction price and amounts allocated
to performance obligations; and (3) assets recognized from the costs to obtain or fulfill a contract.
In July 2015, the FASB issued
a decision to delay related to ASU No. 2014-09 for the effective date by one year. The new guidance is effective for annual and interim periods beginning after December 15, 2017. An entity should apply the amendments either
retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application. We are currently evaluating the impact of this guidance.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17
simplifies the balance sheet presentation of deferred income taxes by requiring all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for annual periods
beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The standard may be applied either prospectively or retrospectively to all periods presented. The Company has decided to adopt the
accounting change in its current financial statements and has adopted the change retrospectively.
In February 2016, the FASB
issued ASU No. 2016-02, Leases. It is expected to be effective for periods beginning after December 15, 2018 for public entities, and for periods beginning after December 15, 2019 for nonpublic
entities. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or
less. All other leases will fall into one of two categories: (1) Financing leases, similar to capital leases, will require the recognition of an asset and liability, measured at the present value of the lease payments. Interest on the
liability will be recognized separately from amortization of the asset. Principal repayments will be classified as financing outflows and payments of interest as operating outflows on the statement of cash flows. (2) Operating leases will also
require the recognition of an asset and liability measured at the present value of the lease payments. A single lease cost, consisting of interest on the obligation and amortization of the asset, calculated such that the amortization of the asset
will increase as the interest amount decreases resulting in a straight-line recognition of lease expense. All cash outflows will be classified as operating on the statement of cash flows. We do not believe the adoption of this guidance will have a
material impact on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-07,
Investments Equity Method and Joint Ventures (Topic 323). This amendment simplifies the accounting for equity method investments; the amendment in the update eliminates the requirement in Topic 323 that an entity retroactively
adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the cost of
acquiring the
C-85
additional interest in the investee to the current basis of the investors previously held interest and adopt equity method of accounting as of the date the investment becomes qualified for
equity method accounting. The amendment in this update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendment should be applied prospectively upon the
effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. We are currently evaluating the impact of this guidance.
Off-Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements.
C-86
Appendix D
Unaudited Consolidated Financial Statements of Harvest Natural Resources, Inc. and Subsidiaries
D-1
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,546
|
|
|
$
|
2,505
|
|
Accounts receivable
|
|
|
259
|
|
|
|
2,458
|
|
Assets associated with discontinued operations
|
|
|
11,013
|
|
|
|
10,444
|
|
Prepaid expenses and other
|
|
|
810
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
14,628
|
|
|
|
16,218
|
|
PROPERTY AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Oil and natural gas properties (successful efforts method)
|
|
|
29,626
|
|
|
|
31,006
|
|
Other administrative property, net
|
|
|
671
|
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
TOTAL PROPERTY AND EQUIPMENT, net
|
|
|
30,297
|
|
|
|
31,445
|
|
OTHER ASSETS, net of allowance for $0.7 million (2016 and 2015)
|
|
|
149
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
45,074
|
|
|
$
|
47,781
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable, trade and other
|
|
$
|
735
|
|
|
$
|
365
|
|
Accrued expenses
|
|
|
7,037
|
|
|
|
2,991
|
|
Liabilities associated with discontinued operations
|
|
|
34,435
|
|
|
|
7,177
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
42,207
|
|
|
|
10,533
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
42,207
|
|
|
|
10,575
|
|
COMMITMENTS AND CONTINGENCIES (
Note 10
)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share; authorized 5,000 shares; issued and outstanding,
none
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; shares authorized 37,500 (2016 and 2015); shares issued
14,497 (2016 and 2015); shares outstanding 12,848 shares (2016) and 12,854 shares (2015)
|
|
|
145
|
|
|
|
145
|
|
Additional paid-in capital
|
|
|
304,490
|
|
|
|
302,708
|
|
Accumulated deficit
|
|
|
(233,832
|
)
|
|
|
(199,778
|
)
|
Treasury stock, at cost, 1,649 shares (2016) and 1,643 shares (2015)
|
|
|
(66,331
|
)
|
|
|
(66,316
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL HARVEST STOCKHOLDERS EQUITY
|
|
|
4,472
|
|
|
|
36,759
|
|
NONCONTROLLING INTEREST OWNERS
|
|
|
(1,605
|
)
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY
|
|
|
2,867
|
|
|
|
37,206
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
45,074
|
|
|
$
|
47,781
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
D-2
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in
thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
11
|
|
|
$
|
21
|
|
|
$
|
41
|
|
|
$
|
67
|
|
Exploration expense
|
|
|
581
|
|
|
|
831
|
|
|
|
1,720
|
|
|
|
3,338
|
|
Impairment expense oilfield inventories
|
|
|
1,324
|
|
|
|
540
|
|
|
|
1,452
|
|
|
|
540
|
|
General and administrative
|
|
|
3,630
|
|
|
|
4,686
|
|
|
|
12,535
|
|
|
|
13,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,546
|
|
|
|
6,078
|
|
|
|
15,748
|
|
|
|
16,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(5,546
|
)
|
|
|
(6,078
|
)
|
|
|
(15,748
|
)
|
|
|
(16,962
|
)
|
OTHER NON-OPERATING INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs related to sale of Harvest Holding
|
|
|
(1,814
|
)
|
|
|
|
|
|
|
(3,365
|
)
|
|
|
|
|
Other non-operating income (expense)
|
|
|
(3
|
)
|
|
|
477
|
|
|
|
(10
|
)
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,817
|
)
|
|
|
477
|
|
|
|
(3,375
|
)
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(7,363
|
)
|
|
|
(5,601
|
)
|
|
|
(19,123
|
)
|
|
|
(16,528
|
)
|
INCOME TAX BENEFIT
|
|
|
|
|
|
|
(1,857
|
)
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(7,363
|
)
|
|
|
(3,744
|
)
|
|
|
(19,123
|
)
|
|
|
(15,878
|
)
|
DISCONTINUED OPERATIONS, net of taxes
|
|
|
96
|
|
|
|
9,162
|
|
|
|
(18,204
|
)
|
|
|
(10,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(7,267
|
)
|
|
|
5,418
|
|
|
|
(37,327
|
)
|
|
|
(26,238
|
)
|
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST OWNERS
|
|
|
(207
|
)
|
|
|
(294
|
)
|
|
|
(3,273
|
)
|
|
|
(908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HARVEST
|
|
$
|
(7,060
|
)
|
|
$
|
5,712
|
|
|
$
|
(34,054
|
)
|
|
$
|
(25,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.56
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(1.39
|
)
|
Discontinued operations
|
|
|
0.01
|
|
|
|
0.83
|
|
|
|
(1.42
|
)
|
|
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
(0.55
|
)
|
|
$
|
0.52
|
|
|
$
|
(2.65
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.56
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(1.39
|
)
|
Discontinued operations
|
|
|
0.01
|
|
|
|
0.83
|
|
|
|
(1.42
|
)
|
|
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
(0.55
|
)
|
|
$
|
0.52
|
|
|
$
|
(2.65
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
D-3
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(19,123
|
)
|
|
$
|
(15,878
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
41
|
|
|
|
67
|
|
Amortization of debt financing costs
|
|
|
|
|
|
|
200
|
|
Impairment expense - oilfield inventories
|
|
|
1,452
|
|
|
|
540
|
|
Allowance for long-term receivable
|
|
|
|
|
|
|
550
|
|
Share-based compensation-related charges
|
|
|
2,425
|
|
|
|
2,202
|
|
Deferred income tax benefit
|
|
|
|
|
|
|
(655
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,199
|
|
|
|
(1,790
|
)
|
Prepaid expenses and other
|
|
|
|
|
|
|
(542
|
)
|
Other assets
|
|
|
(31
|
)
|
|
|
1
|
|
Accounts payable
|
|
|
370
|
|
|
|
(1,035
|
)
|
Accrued expenses
|
|
|
3,354
|
|
|
|
(477
|
)
|
Other current liabilities
|
|
|
107
|
|
|
|
(1
|
)
|
Deferred tax liabilities
|
|
|
|
|
|
|
1,755
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN CONTINUING OPERATING ACTIVITIES
|
|
|
(9,206
|
)
|
|
|
(15,063
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions of property and equipment, net
|
|
|
(360
|
)
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(360
|
)
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Treasury stock
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
Cash used in operating activities in discontinued operations
|
|
|
(2,420
|
)
|
|
|
(2,758
|
)
|
Cash provided by (used in) investing activities in discontinued operations
|
|
|
(179
|
)
|
|
|
323
|
|
Cash provided by financing activities in discontinued operations
|
|
|
12,221
|
|
|
|
23,537
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
|
|
|
9,622
|
|
|
|
21,102
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
41
|
|
|
|
5,548
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
2,505
|
|
|
|
6,138
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
2,546
|
|
|
$
|
11,686
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
D-4
Supplemental Schedule of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
|
|
|
$
|
|
|
Cash paid during the period for income taxes
|
|
|
8
|
|
|
|
6
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
|
|
|
|
|
615
|
|
Supplemental Schedule of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
(Increase) decrease in current liabilities related to additions of property and equipment
|
|
$
|
(15
|
)
|
|
$
|
384
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Decrease in current liabilities related to additions of property and equipment
|
|
|
22
|
|
|
|
|
|
Increase in Stockholders Equity from forgiveness of note payable and accrued interest -
related party
|
|
|
|
|
|
|
6,157
|
|
Accrued interest paid in-kind
|
|
|
2,704
|
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements.
D-5
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
Note 1 Organization
Organization
Harvest Natural Resources, Inc. (Harvest or the Company) is a petroleum exploration and production company incorporated
under Delaware law in 1988.
We hold exploration acreage offshore of the Republic of Gabon (Gabon) through the Dussafu Marin
Permit (Dussafu PSC). See
Note 7 Gabon
. We currently are evaluating the continued development or possible sale of our Gabon interests.
We previously owned significant interests in the Bolivarian Republic of Venezuela (Venezuela). We sold these interests in a
transaction that closed on October 7, 2016. See
Share Purchase Agreement
, below, for more information.
Interim Reporting
In our opinion, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are of a normal recurring
nature, necessary to present fairly the financial position as of September 30, 2016, results of operations for the three and nine months ended September 30, 2016 and 2015, and the cash flows for the nine months ended September 30,
2016 and 2015. The December 31, 2015 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by United States of America generally accepted accounting principles (U.S.
GAAP). The unaudited consolidated condensed financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by U.S. GAAP. The consolidated condensed financial statements
included in this report should be read with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, which include certain definitions and a summary of significant
accounting policies. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year.
Reverse Stock Split
On December 2,
2015, the Company received notification from the New York Stock Exchange (NYSE) that the Company was not in compliance with the NYSEs continued listing standards, which require a minimum average closing price of $1.00 per share
over 30 consecutive trading days. In an effort to correct the deficiency, after the market closed on November 3, 2016, the Company completed a one-for-four reverse split of its issued and outstanding common stock. The Companys
common stock began trading on a split-adjusted basis at market open on November 4, 2016. In connection with the reverse stock split, the Company amended its amended and restated certificate of incorporation to reduce the authorized number
of shares of common stock from 150,000,000 to 37,500,000.
All share, warrants, options, restricted stock, stock appreciation rights,
restricted stock units and per share amounts in these consolidated financials have been reported on a post-split basis.
Securities Purchase Agreement
On June 19, 2015, the Company and certain of its domestic subsidiaries entered into a securities purchase agreement (the
Securities Purchase Agreement) with CT Energy Holding SRL (CT Energy), a private investment firm organized as a Barbados Society with Restricted Liability, under which CT Energy purchased certain securities of the Company and
acquired certain governance rights. Harvest immediately received gross
D-6
proceeds of $32.2 million from the sale of the securities, as described below. Key terms of the transaction include:
|
|
|
CT Energy acquired a $25.2 million, five year, 15.0% non-convertible senior secured promissory note (the 15% Note).
|
|
|
|
CT Energy acquired a $7.0 million, five year, 9.0% convertible senior secured note (the 9% Note). The 9% Note and associated accrued interest of $0.1 million was converted into 2,166,900 shares of
Harvest common stock at a conversion price of $3.28 per share on September 15, 2015.
|
|
|
|
CT Energy acquired a warrant to purchase up to 8,517,705 shares of Harvests common stock at an initial exercise price of $5.00 per share (the CT Warrant), subject to certain conditions set forth in the
CT Warrant.
|
|
|
|
CT Energy acquired a five-year 15.0% non-convertible senior secured note (the Additional Draw Note), under which CT Energy could elect to provide $2.0 million of additional funds to the Company per month for
up to six months following the one-year anniversary of the closing date of the transaction.
|
|
|
|
CT Energy was granted certain governance rights in the transaction, including the right to appoint specified directors.
|
|
|
|
CT Energia Holding Ltd. (CT Energia), a Malta corporation and the Company, entered into a Management Agreement (the Management Agreement), under which CT Energia and its representatives provided
management services with respect to the operations of the Companys business as it relates to Petrodelta and Venezuela generally.
|
The securities sold to CT Energy under the Securities Purchase Agreement, as well as CT Energys governance rights, the Management
Agreement and the Companys relationship with CT Energy generally, were terminated on October 7, 2016 upon the closing of the sale of all of the Companys Venezuelan interests to an affiliate of CT Energy. See
Share Purchase
Agreement
, below, for more information.
Share Purchase Agreement
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia BV (HNR Energia), completed the sale of all of
HNR Energias 51% interest in Harvest-Vinccler Dutch Holding B.V., a Netherlands company (Harvest Holding), to Delta Petroleum N.V., a limited liability company organized under the laws of Curacao (Delta Petroleum),
pursuant to a share purchase agreement, dated June 29, 2016 (the Share Purchase Agreement). Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40% interest in Petrodelta, S.A., a mixed company organized under
Venezuelan law (Petrodelta), through which all of the Companys interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to Delta Petroleum.
Delta Petroleum is an affiliate of CT Energy, which assigned all of its rights and obligations under the Share Purchase Agreement to Delta
Petroleum on September 26, 2016. For more information about CT Energy, see
Securities Purchase Agreement
, above.
At the
closing, the Company received consideration consisting of:
|
|
|
$69.4 million in cash paid after various closing adjustments;
|
|
|
|
an 11% non-convertible senior promissory note payable by Delta Petroleum to HNR Energia six months from the closing date in the principal amount of $12.0 million, guaranteed by the sole member and sole equity-holder of
Delta Petroleum (the 11% Note );
|
D-7
|
|
|
the return of all of the Companys common stock owned by CT Energy, consisting of 2,166,900 shares which was approximately 16.8% of all outstanding shares pre-closing, to be held by the Company as treasury shares;
|
|
|
|
the cancellation of $30.0 million in outstanding principal under the 15% Note;
|
|
|
|
the cancellation of the CT Warrant.
|
At the closing, the outstanding principal and accrued
interest totaling $38.9 million and $1.4 million, respectively, under both the 15% Note and the Additional Draw Note, were repaid, net of withholding tax, as a closing adjustment to cash, and the 15% Note and Additional Draw Note were terminated.
(The $69.4 million in cash referenced above takes these adjustments into account.) To fund Harvests transaction expenses and operations until the closing under the Share Purchase Agreement, CT Energy had loaned Harvest $2.0 million on each of
June 21, 2016, July 20, 2016, August 24, 2016 and September 21, 2016 under the Additional Draw Note.
The
relationship between the Company and CT Energy effectively terminated upon the closing under the Share Purchase Agreement. In addition to the termination or relinquishment of all Company securities held by CT Energy, Oswaldo Cisneros and Alberto
Sosa resigned as CT Energys non-independent designees to the Companys board of directors. Additionally, the Securities Purchase Agreement and certain agreements related to the Securities Purchase Agreement, including the Management
Agreement, terminated. Finally, all liens securing Company debt formerly owed to CT Energy were released at the closing. Upon the closing, the Companys primary assets were cash from the proceeds of the transaction and the Companys oil
and gas interests in Gabon.
Long-Term Receivable CT Energia
On January 4, 2016, HNR Finance B.V., a wholly owned subsidiary of Harvest Holding (HNR Finance), provided a loan to CT
Energia of $5.2 million under an 11.0% promissory note due 2019 (the CT Energia Note). The purpose of the loan was to provide CT Energia with collateral to obtain funds for one or more loans to Petrodelta, which is 40% owned by HNR
Finance. HNR Finances sole recourse for payment of the principal amount of the loan was the payments of principal and interest from loans that CT Energia has made to Petrodelta.
The source of funds for HNR Finances $5.2 million loan to CT Energia was a capital contribution from Harvest Holding, which, in return,
received the same aggregate amount of capital contributions from its shareholders, pro rata according to their equity interests in Harvest Holding. Of that aggregate amount of capital contributions, HNR Energia contributed $2.6 million, which was a
capital contribution from Harvest. During the three months ended March 31, 2016, we recorded a $5.2 million allowance to fully reserve the CT Energia Note due to concerns related to the continued deteriorating economic conditions in Venezuela
and our assessment relating to the probability that the CT Energia Note will be collected. As of September 30, 2016, the CT Energia Note remained fully reserved and we had not accrued any interest with respect to this note receivable.
As discussed above under
Share Purchase Agreement
, the Company sold its 51% interest in Harvest Holding, the parent company of HNR
Finance, which holds the CT Energia Note), to an affiliate of CT Energy on October 7, 2016.
Note 2 Liquidity
We expect the net proceeds from the sale of our Venezuelan interests on October 7, 2016 will be adequate to meet our short-term liquidity
requirements.
In January, April and July 2016, due to our liquidity position, the Company amended the 15% Note to increase the principal
amount of the note equal to the amount of the accrued interest, less withholding tax, which was due to CT Energy. On May 3, 2016, the Company increased the principal amount of the 15% Note by $3.0 million. Taking these increases into
account, the principal amount outstanding under the 15% Note was $30.9 million as of September 30, 2016. As of September 30, 2016, we had capitalized interest payments, less withholding tax, totaling $2.7 million.
D-8
As discussed above in
Note 1 Organization Share Purchase Agreement
, the
outstanding principal under the Additional Draw Note was $8.0 million at September 30, 2016. The Additional Draw Note was cancelled on October 7, 2016 upon the closing of the sale of our Venezuelan interests.
Our primary tangible asset is our oil and gas interests in Gabon. We have received two proposals for the purchase of our Gabon interests and
are in discussions with both potential buyers; however, there can be no assurances that these discussions or either proposal will lead to a definitive transaction. We currently are evaluating the continued development or possible sale of our Gabon
interests, potential distributions of cash to our stockholders, and possible dissolution of the Company.
The Company completed a
one-for-four reverse split of its issued and outstanding common stock on November 3, 2016. See
Note 1 Organization Reverse Stock Split
, above, for more information. All share and per share amounts in this report have
been reflected on a post-split basis in these financial statements.
On April 25, 2016, the Company received a notice from the NYSE
stating that the Company was not in compliance with a second NYSE continued listing requirement, which provides that a company is not in compliance if its average global market capitalization over a consecutive 30 trading-day period is less than
$50 million and, at the same time, its stockholders equity is less than $50 million. The Company believes that the sale of its Venezuelan interests on October 7, 2016 ultimately will allow it to regain compliance with this listing
standard by increasing its stockholders equity. However, the Company must demonstrate compliance for two consecutive financial quarters before the deficiency can be cured.
Upon the closing of the sale of the Companys 51 percent interest in Harvest Holding, the Company received, among other consideration,
$69.4 million in net cash proceeds and a $12.0 million note due from Delta Petroleum, due six months after closing. A portion of the proceeds from the sale have been and will be used to fund costs associated with the either the sale or
development of the Companys Gabon prospect, to pay certain severance costs, to fund capital expenditures, to pay tax obligations related to the sale, to fund any potential future dividends declared and to maintain ongoing general operating and
administrative expenses.
Note 3 Summary of Significant Accounting Policies
Principles of Consolidation
The
consolidated condensed financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated. Third-party interests in our majority-owned subsidiaries
are presented as noncontrolling interests owners.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not
affect our consolidated condensed financial results.
Note Receivable
A loan is considered impaired if it is probable, based on current information and events, that the Company will be unable to collect all
amounts due according to the contractual terms of the loan. Loans are reviewed for impairment and include loans that are past due, non-performing or in bankruptcy. Recognition of interest income is suspended and the loan is placed on non-accrual
status when management determines that collection of future interest income is not probable. Accrual is resumed, and previously suspended interest income is recognized, when the loan becomes contractually current and/or collection doubts are
removed. Cash receipts on impaired loans are recorded first against the receivable and then to any unrecognized interest income.
D-9
Investment in Affiliate
Until the October 7, 2016 sale of our interests in Venezuela, we accounted for the investment in Petrodelta under Accounting Standards
Codification (ASC) 325 Investments Other (the cost method). Under the cost method we did not recognize any equity in earnings from the investment in Petrodelta in our results of operations, but would have
recognized any cash dividends in the period they were received.
As of December 31, 2015, we fully impaired the carrying value of the
investment in Petrodelta and effective with the October 7, 2016 closing of the CT Energy transaction, we no longer have an ownership interest in Petrodelta. See
Note 1 Organization
and
Note 5 Investment in
Affiliate
for further information.
Use of Estimates
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 reporting period. Other important significant
estimates are those included in the valuation of our assets and liabilities that are recorded at fair value on a recurring and non-recurring basis. Actual results could differ from those estimates.
Oil and Natural Gas Properties
The major
components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
December 31,
2015
|
|
|
|
(in thousands)
|
|
Unproved property costs Dussafu PSC
|
|
$
|
28,072
|
|
|
$
|
28,000
|
|
Oilfield inventories
|
|
|
1,554
|
|
|
|
3,006
|
|
Other administrative property
|
|
|
2,192
|
|
|
|
1,922
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
31,818
|
|
|
|
32,928
|
|
Accumulated depreciation
|
|
|
(1,521
|
)
|
|
|
(1,483
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
30,297
|
|
|
$
|
31,445
|
|
|
|
|
|
|
|
|
|
|
Other Administrative Property
Furniture, fixtures and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which
range from three to five years. Leasehold improvements are recorded at cost and amortized using the straight-line method over the life of the applicable lease. For the three and nine months ended September 30, 2016, depreciation expense from
continuing operations was $11 thousand and $41 thousand, respectively. For the three and nine months ended September 30, 2015, depreciation expense from continuing operations was $21 thousand and $67 thousand, respectively.
Other Assets
Other assets at
September 30, 2016 and December 31, 2015 include deposits and retainers. During 2015 we fully reserved the $1.1 million blocked payment related to our drilling operations in Gabon. The payment was blocked in accordance with the U.S.
sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by the United States Treasury Departments Office of Foreign Assets Control (OFAC). See
Note 10 Commitments and
Contingencies
. At December 31, 2015, we recorded an allowance for doubtful accounts of $0.7 million and the remaining balance of the blocked payment was reclassified to a receivable from our joint venture partner for $0.4 million.
D-10
Capitalized Interest
We capitalize interest costs for qualifying oil and natural gas properties. The capitalization period begins when expenditures are incurred on
qualified properties, activities begin which are necessary to prepare the property for production and interest costs have been incurred. The capitalization period continues as long as these events occur. The average additions for the period are used
in the interest capitalization calculation. During the three and nine months ended September 30, 2016 and 2015, we did not capitalize interest costs due to insufficient on-going activity related to our oil and natural gas activities.
Fair Value Measurements
We measure and
disclose our fair values in accordance with the provisions of ASC 820 Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
|
|
|
Level 1 Inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly.
|
|
|
|
Level 3 Inputs to the valuation techniques that are unobservable for the assets or liabilities.
|
Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, accounts
receivable, stock appreciation rights (SARs), restricted stock units (RSUs), debt, embedded derivatives and warrant derivative liability. We maintain cash and cash equivalents in bank deposit accounts with commercial banks,
which at times may exceed the federally insured limits. We have not experienced any losses from such investments. Concentrations of credit risk with respect to accounts receivable are limited due to the nature of our receivables. In the normal
course of business, collateral is not required for financial instruments with credit risk. The estimated fair value of cash and cash equivalents and accounts receivable, prepaid costs, accounts payable and other current liabilities approximate their
carrying value due to their short-term nature (Level 1). The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value as of September 30, 2016 and
December 31, 2015. During the year ended December 31, 2015, we impaired the carrying value of our Dussafu project in Gabon by $23.2 million and our investment in affiliate by $164.7 million. See
Note 5 Investment in Affiliate
and
Note 7 Gabon
for more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative asset 15% Note
(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,391
|
|
|
$
|
8,391
|
|
Embedded derivative asset Additional Draw Note
(a)
|
|
|
|
|
|
|
|
|
|
|
2,170
|
|
|
|
2,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,561
|
|
|
$
|
10,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs liability
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
286
|
|
|
$
|
350
|
|
RSUs liability
|
|
|
|
|
|
|
424
|
|
|
|
|
|
|
|
424
|
|
Warrant derivative liability
(a)
|
|
|
|
|
|
|
|
|
|
|
14,879
|
|
|
|
14,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
488
|
|
|
$
|
15,165
|
|
|
$
|
15,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-11
(a)
|
See
Note 8 Debt and Financing
,
Note 9 Warrant Derivative Liability
and
Note 13 Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Non recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dussafu PSC
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative asset
(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,010
|
|
|
$
|
5,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,010
|
|
|
$
|
5,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs liability
|
|
$
|
|
|
|
$
|
46
|
|
|
$
|
50
|
|
|
$
|
96
|
|
RSUs liability
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
174
|
|
Warrant derivative liability
(a)
|
|
|
|
|
|
|
|
|
|
|
5,503
|
|
|
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
220
|
|
|
$
|
5,553
|
|
|
$
|
5,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
See
Note 8 Debt and Financing, Note 9 Warrant Derivative Liability and Note 13 Discontinued Operations
|
As of September 30, 2016, the fair value of our liability awards included $0.4 million for our SARs and $0.4 million for the RSUs
both of which were recorded in accrued expenses. As of December 31, 2015, the fair value of our liability awards included $0.1 million for our SARs which were recorded in accrued expenses and $0.2 million for our RSUs which were recorded in
accrued expenses and other long-term liabilities.
Derivative Financial Instruments
As required by ASC 820, a financial instruments level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the
fair value hierarchy levels. See
Note 9 Warrant Derivative Liability
for a description and discussion of our warrant derivative liability as well as a description of the valuation models and inputs used to calculate the fair value. See
Note 8 Debt and Financing
for a description and discussion of our embedded derivatives related to our 15% Note as well as a description of the valuation models and inputs used to calculate the fair value. All of our embedded
derivatives included in our assets associated with discontinued operations and warrants included in liabilities associated with discontinued operations are classified as Level 3 within the fair value hierarchy. See
Note 13 Discontinued
Operations
for discussion of our discontinued operations.
D-12
Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
The following table provides a reconciliation of financial liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Financial assets embedded derivative asset
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
7,144
|
|
|
$
|
2,627
|
|
|
$
|
5,010
|
|
|
$
|
|
|
Additions
|
|
|
2,692
|
|
|
|
|
|
|
|
3,139
|
|
|
|
2,504
|
|
Change in fair value
|
|
|
725
|
|
|
|
854
|
|
|
|
2,412
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,561
|
|
|
$
|
3,481
|
|
|
$
|
10,561
|
|
|
$
|
3,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
See
Note 8 Debt and Financing
and
Note 13 Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Financial liabilities embedded derivative liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
13,015
|
|
|
$
|
|
|
|
$
|
|
|
Additions fair value at issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,449
|
|
Change in fair value
|
|
|
|
|
|
|
(1,873
|
)
|
|
|
|
|
|
|
(2,307
|
)
|
Conversion of debt
|
|
|
|
|
|
|
(11,142
|
)
|
|
|
|
|
|
|
(11,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Financial liabilities warrant derivative liability
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
16,417
|
|
|
$
|
37,595
|
|
|
$
|
5,503
|
|
|
$
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,013
|
|
Change in fair value
|
|
|
(1,538
|
)
|
|
|
(9,982
|
)
|
|
|
9,376
|
|
|
|
(12,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
14,879
|
|
|
$
|
27,613
|
|
|
$
|
14,879
|
|
|
$
|
27,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
See
Note 9 Warrant Derivative Liability
and
Note 13 Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Financial liabilities stock appreciation rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
241
|
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
|
|
Change in fair value
|
|
|
45
|
|
|
|
312
|
|
|
|
236
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
286
|
|
|
$
|
312
|
|
|
$
|
286
|
|
|
$
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During three and nine months ended September 30, 2016 and 2015, no transfers were made between
Level 1, Level 2 and Level 3 liabilities or investments.
D-13
Share-Based Compensation
We use the fair value based method of accounting for share-based compensation. We utilized the Black-Scholes option pricing model to measure
the fair value of stock options and SARs on their grant dates in years prior to 2015. Restricted stock and RSUs were measured at their fair values. During 2015, we issued options, SARs and RSUs with an additional market condition. To fair
value these awards, we utilized a Monte Carlo simulation.
The following table is a summary of compensation expense recorded in general
and administrative expense in our consolidated condensed statements of operations and comprehensive income (loss) by type of awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Employee Stock-Based Compensation
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Equity based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
372
|
|
|
$
|
444
|
|
|
$
|
1,485
|
|
|
$
|
1,364
|
|
Restricted stock
|
|
|
5
|
|
|
|
33
|
|
|
|
73
|
|
|
|
101
|
|
RSUs
|
|
|
75
|
|
|
|
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense related to equity based awards
|
|
|
452
|
|
|
|
477
|
|
|
|
1,782
|
|
|
|
1,465
|
|
Liability based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
|
17
|
|
|
|
93
|
|
|
|
255
|
|
|
|
370
|
|
RSUs
|
|
|
42
|
|
|
|
141
|
|
|
|
388
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense related to liability based awards
|
|
|
59
|
|
|
|
234
|
|
|
|
643
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense
|
|
$
|
511
|
|
|
$
|
711
|
|
|
$
|
2,425
|
|
|
$
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions summarized in the following table were used to calculate the fair value of the SARs classified
as Level 3 instruments that were outstanding as of the balance sheet date:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of
September 30,
2016
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Exercise price
|
|
|
Level 1 input
|
|
|
$
|
4.52
|
|
Threshold price
|
|
|
Level 1 input
|
|
|
$
|
10.00
|
|
Suboptimal exercise factor
|
|
|
Level 3 input
|
|
|
|
2.5
|
|
Term (years)
|
|
|
Level 1 input
|
|
|
|
3.81
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
114
|
%
|
Risk-free rate
|
|
|
Level 1 input
|
|
|
|
0.98
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
Income Taxes
Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible and taxable amounts
attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carryforwards. A valuation allowance for deferred tax assets is recorded when it is
more likely than not that the benefit from the deferred tax asset will not be realized.
We classify interest related to income tax
liabilities and penalties as applicable, as interest expense. We recorded no penalties during the three and nine months ended September 30, 2016 and 2015.
D-14
Since December 2013, we have provided deferred income taxes on undistributed earnings of our
foreign subsidiaries where we are not able to assert that such earnings were permanently reinvested, or otherwise could be repatriated in a tax free manner, as part of our ongoing business. As of December 31, 2015 and through the third quarter
of 2016, the deferred tax liability provided on such earnings was zero due to the impairment of the underlying book investment in Petrodelta.
The 15% Note was issued, for income tax purposes, with original issue discount (OID). OID generally is deductible for income
tax purposes. However, if the debt instrument constitutes an applicable high-yield discount obligation (AHYDO) within the meaning of IRC Section 163(i)(1), then a portion of the OID likely would be non-deductible
pursuant to IRC Section 163(e)(5). Our analysis of the 15% Note is that the note may be an AHYDO; consequently, a portion or all of the OID likely may be non-deductible for income tax purposes.
The Internal Revenue Service (IRS) has audited the Companys 2013 and 2014 tax years. The audit commenced in April 2016 and
the IRS issued a no change report on August 16, 2016.
Noncontrolling Interest Owners
Changes in noncontrolling interest owners were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
(1,695
|
)
|
|
$
|
78,701
|
|
|
$
|
447
|
|
|
$
|
79,152
|
|
Contributions by noncontrolling interest owners
|
|
|
297
|
|
|
|
380
|
|
|
|
1,221
|
|
|
|
543
|
|
Net loss attributable to noncontrolling interest owners
|
|
|
(207
|
)
|
|
|
(294
|
)
|
|
|
(3,273
|
)
|
|
|
(908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(1,605
|
)
|
|
$
|
78,787
|
|
|
$
|
(1,605
|
)
|
|
$
|
78,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2016-02, Leases. It is expected to be effective for periods beginning after December 15, 2018 for public entities. Early application is permitted. Under the new provisions, all lessees will report a right-of-use
asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (1) Financing leases, similar to capital
leases, will require the recognition of an asset and liability, measured at the present value of the lease payments. Interest on the liability will be recognized separately from amortization of the asset. Principal repayments will be classified as
financing outflows and payments of interest as operating outflows on the statement of cash flows. (2) Operating leases will also require the recognition of an asset and liability measured at the present value of the lease payments. A single
lease cost, consisting of interest on the obligation and amortization of the asset, calculated such that the amortization of the asset will increase as the interest amount decreases resulting in a straight-line recognition of lease expense. All cash
outflows will be classified as operating on the statement of cash flows. We do not believe the adoption of this guidance will have a material impact on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815: Contingent Put and Call Options in Debt
Instruments). This amendment addresses how an entity should assess whether contingent call (put) options that can accelerate the payment of debt instruments that are clearly and closely related to the debt hosts. This assessment is necessary
to determine if the option(s) must be separately accounted for as a derivative. The ASU clarifies that an entity is required to assess the embedded call (put) options solely in accordance with the specific four-step decision sequence. This means
entities are not also required to assess whether the contingency for exercising the option(s) is indexed to interest rates or credit risk. For example, when
D-15
evaluating debt instruments puttable upon a change in control, the event triggering the change in control is not relevant to the assessment. Only the resulting settlement of debt is subject to
the four-step decision sequence. The amendment is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. However, if an entity early adopts
the amendment in an interim period, any adjustments should be reflected as of the beginning of that fiscal year. We do not believe the adoption of this guidance will have a material impact on our financial position, results of operations or cash
flows.
In March 2016, the FASB issued ASU No. 2016-07, Investments Equity Method and Joint Ventures (Topic 323).
This amendment simplifies the accounting for equity method of investments, the amendment in the update eliminates the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of
the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the
investors previously held interest and adopt equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendment in this update is effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2016. The amendment should be applied prospectively upon the effective date to increases in the level of ownership interest or degree of influence that result in the adoption of
the equity method. Earlier application is permitted. We are currently evaluating the impact of this guidance.
In March 2016, the FASB
issued ASU No 2016-09, Compensation Stock Compensation (Topic 718). It introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically the ASU requires all excess tax benefits and tax
deficiencies to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize
excess tax benefits, and assesses the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits
would no longer be required and instead such net operating losses would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain
and track an Additional Paid In Capital pool. The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. The amendment is effective for public entities
for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this guidance.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. The new guidance is related to the calculation of credit losses on financial instruments. All financial instruments not accounted for at fair value will be impacted, including our trade and partner receivables. Allowances are
to be measured using a current expected credit loss model as of the reporting date which is based on historical experience, current conditions and reasonable and supportable forecasts. This is significantly different from the current model which
increases the allowance when losses are probable. This change is effective for all public companies for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years and will be applied with a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the provisions of this guidance and are assessing its potential impact on our
financial position, results of operations, cash flows and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. ASU 2016-15 provides specific guidance on eight cash flow classification issues not specifically addressed by GAAP: debt
prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies;
distributions from equity method investees; beneficial interests in securitization transactions; and separately
D-16
identifiable cash flows and application of the predominance principle. The amendments in ASU 2016-15 are effective for interim and annual periods beginning after December 15,
2017. ASU 2016-15 should be applied using a retrospective transition method, unless it is impracticable to do so for some of the issues. In such case, the amendments for those issues would be applied prospectively as of the earliest date
practicable. Early adoption is permitted. We are currently evaluating the provisions of ASU 2016-15 but do not expect ASU 2016-15 to have a significant impact on the presentation of cash receipts and cash payments within our
consolidated statements of cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of
Assets Other than Inventory, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. We
will be required to adopt the amendments in this ASU in the annual and interim periods beginning January 1, 2018, with early adoption permitted at the beginning of an annual reporting period for which financial statements (interim or annual)
have not been issued or made available for issuance. The application of the amendments will require the use of a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.
We are evaluating the standard and the impact it will have on our consolidated financial statements.
Note 4 Earnings Per Share
Basic earnings per common share (EPS) are computed by dividing loss from continuing operations available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Loss from continuing operations
(a)
|
|
$
|
(7,156
|
)
|
|
$
|
(3,450
|
)
|
|
$
|
(15,850
|
)
|
|
$
|
(14,970
|
)
|
Discontinued operations, net of taxes
|
|
|
96
|
|
|
|
9,162
|
|
|
|
(18,204
|
)
|
|
|
(10,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Harvest
|
|
$
|
(7,060
|
)
|
|
$
|
5,712
|
|
|
$
|
(34,054
|
)
|
|
$
|
(25,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,849
|
|
|
|
11,019
|
|
|
|
12,852
|
|
|
|
10,785
|
|
Weighted average common shares, diluted
|
|
|
12,849
|
|
|
|
11,019
|
|
|
|
12,852
|
|
|
|
10,785
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
(a)
|
|
$
|
(0.56
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(1.39
|
)
|
Discontinued operations
|
|
|
0.01
|
|
|
|
0.83
|
|
|
|
(1.42
|
)
|
|
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
(a)
|
|
$
|
(0.55
|
)
|
|
$
|
0.52
|
|
|
$
|
(2.65
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
(a)
|
|
$
|
(0.56
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(1.39
|
)
|
Discontinued operations
|
|
|
0.01
|
|
|
|
0.83
|
|
|
|
(1.42
|
)
|
|
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
(a)
|
|
$
|
(0.55
|
)
|
|
$
|
0.52
|
|
|
$
|
(2.65
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
|
Net of net loss attributable to noncontrolling interests.
|
During the three months ended
September 30, 2016 per share calculations above excluded 1.6 million options and 8.5 million warrants because we had a loss from continuing operations. During the three months ended September 30, 2015 per share
calculations above excluded 1.0 million options and 9.5 million warrants because we had a loss from continuing operations.
During the nine months ended September 30, 2016 per share calculations above excluded 1.7 million options and 8.5 million
warrants because we had a loss from continuing operations. During nine months ended
D-17
September 30, 2015 per share calculations above excluded 1.0 million options and 9.5 million warrants because we had a loss from continuing operations.
Note 5 Investment in Affiliate
Venezuela
Petrodelta
Prior to the October 7, 2016 sale of our interests in Venezuela, our 40 percent investment in Petrodelta was
indirectly owned through our subsidiary, Harvest Holding, which was sold in the transaction. Prior to the sale, we accounted for our investment in Petrodelta under the cost method as we did not exercise significant influence over the operations
of Petrodelta.
Under the cost method we did not recognize any equity in earnings from our investment in Petrodelta in our results of
operations, but would have recognized any cash dividends as income in the period they were received.
The carrying value of our investment
in Petrodelta at September 30, 2016 and December 31, 2015 was nil. For more information about the sale of our interests in Venezuela, see
Note 1 Organization Share Purchase Agreement
.
Note 6 Venezuela Other
Prior to the October 7, 2016 sale of our Venezuelan interests, Harvest Vinccler, S.C.A, a wholly owned subsidiary of Harvest Holding
(Harvest Vinccler) assisted in the oversight of the investment in Petrodelta and in negotiations with PDVSA. Harvest Vincclers functional and reporting currency was the United States Dollar (USD). They did not have
currency exchange risk other than the official prevailing exchange rate that applied to their operating costs denominated in Venezuelan Bolivars (Bolivars).
On March 9, 2016, the Venezuelan government announced a new exchange agreement No. 35 (the Exchange Agreement
No. 35). Exchange Agreement No. 35 was published in Venezuelas Official Gazette No. 40865 dated March 9, 2016, and became effective on March 10, 2016. Exchange Agreement No. 35 will have a dual exchange rate
for a controlled rate (named DIPRO) fixed at DIPRO 10 Bolivars/USD for priority goods and services and a complementary rate (named DICOM) starting at 206.92 Bolivars per USD for travel and other non-essential goods. During the three and nine months
ended September 30, 2016, Harvest Vinccler exchanged approximately $0.1 million and $0.2 million, respectively, and received 660.16 Bolivars and 518.57 Bolivars, respectively, per USD.
The monetary assets that were exposed to exchange rate fluctuations were cash, accounts receivable and prepaid expenses. The monetary
liabilities that were exposed to exchange rate fluctuations are accounts payable, accruals, current and deferred income tax and other tax obligations and other current liabilities. All monetary assets and liabilities incurred at the DIPRO exchange
rate were settled at the 10 Bolivar/USD exchange rate. At September 30, 2016, the balances in Harvest Vincclers Bolivar denominated monetary assets and liabilities accounts that were exposed to exchange rate changes were 47.6 million
Bolivars ($0.09 million) and 59.3 million Bolivars ($0.11 million), respectively.
On October 7, 2016, the Company, and its
wholly owned subsidiary, HNR Energia, completed the sale of all of HNR Energias 51% interest in Harvest Holding, to Delta Petroleum, pursuant to Share Purchase Agreement. See
Note 1 Organization
for more information.
Note 7 Gabon
Following the
October 7, 2016 sale of our interests in Venezuela, our interests in Gabon represent our primary operating asset. We have received two proposals for the purchase of our Gabon interests and are in discussions with both potential buyers; however,
there can be no assurances that these discussions or either proposal will lead to a definitive transaction.
D-18
We are the operator of the Dussafu PSC with a 66.667 percent ownership interest. Located offshore
Gabon, adjacent to the border with the Republic of Congo, the Dussafu PSC covers an area of 680,000 acres with water depths up to 1,650 feet.
The Dussafu PSC partners and the Republic of Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources, entered
into the third exploration phase of the Dussafu PSC with an effective date of May 28, 2012. The third exploration phase expired May 27, 2016. Expiration of the exploration phase has no effect on the discovered fields under the Exclusive
Exploitation Authorization (EEA) as discussed below.
On March 26, 2014, the joint venture partners approved a resolution
that the discovered fields are commercial to exploit. On June 4, 2014, a Declaration of Commerciality (DOC) was signed with Gabon pertaining to four discoveries on the Dussafu Project offshore Gabon. Furthermore, on
July 17, 2014, the Direction Generale Des Hydrocarbures (DGH) awarded an EEA for the development and exploitation of certain oil discoveries on the Dussafu Project and on October 10, 2014, the field development plan was
approved. The Company has four years from the date of the EEA approval to begin production.
Operational activities during the nine months
ended September 30, 2016, included continued evaluation of development plans, based on the 3D seismic data acquired in late 2013 and processed during 2014.
In September 2016, the Company assessed the need for impairment related to the unproved properties of the Dussafu PSC. The primary
factors considered were the current bids received for the project which substantiated the carrying value at September 30, 2016. Other factors considered were price forecasts, drilling costs and the remaining time on the EEA; none of which
currently indicated a need for impairment. Based on our September 2016 review, it is the opinion of the Company that no impairment is needed for the Dussafu prospect for the three months ending September 30, 2016.
We also reviewed the value of our oilfield inventories that are in the country of Gabon, of which the majority is steel conductor and casing.
At March 31, 2016, based on contemporaneous market prices, we impaired the value of this inventory by $0.1 million. At September 30, 2016, we determined that an additional $1.3 million impairment was necessary after review of
condition of equipment leaving the value related to the inventory at $1.6 million.
See
Note 10 Commitments and
Contingencies
for additional information regarding our Gabon operations.
The Dussafu PSC represents $29.6 million of unproved oil and
natural gas properties including inventory on our September 30, 2016 balance sheet ($31.0 million at December 31, 2015).
Note 8 Debt
and Financing
As described in
Note 1 Organization Securities Purchase Agreement,
on June 19, 2015, we issued
the CT Warrant, the 9% Note, the 15% Note and the Additional Draw Note to CT Energy and received proceeds of $30.6 million, net of financing fees of $1.6 million. As described in
Note 1 Organization Share Purchase Agreement
,
these securities were cancelled, paid off or relinquished by CT Energy on October 7, 2016 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
We previously identified embedded derivative assets and derivative liabilities in the 9% Note and 15% Note and determined that the CT Warrant
did not meet the required conditions to qualify for equity classification and was required to be classified as a warrant derivative liability (see
Note 9 Warrant Derivative Liability
). The estimated fair value, at issuance, of the
embedded derivative asset, described below, was $2.5 million, the embedded derivative liability, described below, was $13.5 million and the warrant derivative liability was $40.0 million. In accordance with ASC 815, the proceeds were first
allocated to the fair value of the embedded derivatives and CT Warrant, which resulted in no value being attributable to the 9% Note and the 15% Note.
D-19
The following table summarizes the changes in our long-term debt due to related party, net of
discount currently included in liabilities associated with discontinued operations in the balance sheet:
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
|
(in thousands)
|
|
Long-Term Debt
|
|
|
|
|
Beginning balance January 1, 2016
|
|
$
|
214
|
|
Capitalization of accrued interest
|
|
|
2,704
|
|
Additional borrowings under the 15% Note
|
|
|
3,000
|
|
Additional Draw Note borrowings
|
|
|
8,000
|
|
15% Note and Additional Draw Note premiums
|
|
|
3,139
|
|
Accretion of discount on debt
|
|
|
823
|
|
Amortization of premium on debt
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
$
|
17,817
|
|
|
|
|
|
|
At September 30, 2016, the amended face value of the 15% Note was $30.9 million. The unamortized discount
of the 15% Note was $23.0 million at September 30, 2016 and $25.0 million at December 31, 2015. The Company accreted the discount over the life of the 15% Note using the interest method. Total interest expense for the three months
ended September 30, 2016 associated with the 15% Note from CT Energy, a related party, was $1.7 million, comprised of $1.4 million related to the stated rate of interest on the note, $0.4 million related to the accretion of the discount on the
debt and $(0.1) million related to amortization of premium on debt. Total interest expense for the nine months ended September 30, 2016 associated with the 15% Note from CT Energy, a related party, was $4.0 million, comprised of $3.3
million related to the stated rate of interest on the note, $0.8 million related to the accretion of the discount on the debt and $(0.1) million amortization of premium on debt. The fair value of the 15% Note at September 30, 2016 was
$13.9 million, calculated using a Monte Carlo simulation.
CT Energy agreed to lend Harvest $2.0 million per month for up to five months
at 15% interest beginning on July 19, 2016, until the earlier of the closing under or the termination of the Share Purchase Agreement. These loans were made under the Additional Draw Note. See
Additional Draw Note
below for more
information.
15% Note
On
June 19, 2015, we issued the 15% Note to CT Energy. As described in
Note 1 Organization Share Purchase Agreement
, the 15% Note was cancelled on October 7, 2016 upon the closing of the sale of all of our interests in
Venezuela to an affiliate of CT Energy.
The 15% Note was a five-year note in the aggregate principal amount of $25.2 million with
interest that compounded quarterly at a rate of 15% per annum. The 15% Note was payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2015. If the Stock Appreciation Date had not
occurred by the Claim Date, the maturity date of the 15% Note could have been extended by two years and the interest rate on the 15% Note would have been adjusted to 8.0% (the 15% Note Reset Feature). The lending of funds under of the
Additional Draw Note extended the Claim Date and 15% Note Reset Feature. See
Additional Draw Note
below for additional details.
On
January 4, April 1, and May 3, 2016, Harvest entered into first, second and third amendments, respectively, to the 15% Note. Each amendment converted an interest payment and increased the principal amount of the 15% Note by the
amount of the converted interest payment, less applicable withholding tax of $0.1 million for January 4 and April 1. Additionally, the third amendment also increased the principal amount of the 15% Note by $3.0 million in connection
with additional funds received from CT Energy. After taking into account the third amendment, the outstanding principal amount of the 15% Note was $30.9 million effective as of July 1, 2016.
D-20
We evaluated the 15% Note Reset Feature related to the interest rate and maturity date using
ASC 815 Derivatives and Hedging. Because the interest rate and maturity date reset were linked to achievement of a certain stock price, the feature was not considered clearly and closely related to the debt host. In addition, the
interest rate at the reset date was not tied to any approximation of the expected market rate at the date of the term extension as required by ASC 815. As a result, we accounted for the 15% Note Reset Feature as an embedded derivative asset that had
been measured at fair value with current changes in fair value reflected in our consolidated condensed statements of operations and comprehensive loss.
The embedded 15% Note Reset Feature in the 15% Note was valued using the with and without method. A Black-Derman-Toy
(BDT) Model, which is a binomial interest rate lattice model, was used to value the 15% Note and the incremental value attributed to the embedded option was determined based on a comparison of the value of the 15% Note with the feature
included and without the feature included. Key inputs into this valuation model are the U.S. Treasury rate, our credit spread and the underlying yield volatility. As part of our overall valuation process, management employs processes to evaluate and
validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are
appropriate, consistently applied, and reliable. We estimate the yield volatility for the 15% Note based on historical daily volatility of the USD denominated Venezuela Sovereign zero coupon yield over a look back period of 3.97 years. The risk-free
interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the 15% Note. The credit spread was estimated based on the option adjusted spread (OAS) of the
Venezuelan yield over the USD Treasury yield and the implied OAS for the transaction as of the date the term sheet was signed to capture the investors assessment of the risk in their investment in the Company. This model requires Level 3
inputs (see
Note 3 Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements
) which were based on our estimates of the probability and timing of potential future financings and fundamental
transactions.
The embedded derivative asset related to the 15% Note contains a Level 3 input related to the probability of our investor
lending us additional funds or not lending us funds according to the terms of the loan agreement for the additional draws, as discussed below. We have assumed a 10/90 scenario (50/50 scenario at December 31, 2015) of the draw or no draw
for valuation of the embedded derivative asset.
The assumptions summarized in the following table were used to calculate the fair value of
the derivative asset associated with the 15% Note and the Additional Draw Notes that were outstanding as of September 30, 2016 included in liabilities associated with discontinued operations on our consolidated condensed balance sheet:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of
September 30,
2016
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Weighted Term (years)
|
|
|
|
|
|
|
3.72
|
|
Yield Volatility
|
|
|
Level 2 input
|
|
|
|
40
|
%
|
Risk-free rate
|
|
|
Level 1 input
|
|
|
|
1.0% to 1.2
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
Scenario probability:
|
|
|
|
|
|
|
|
|
Claim Date extended with Stock Appreciation Date threshold met
|
|
|
Level 3 input
|
|
|
|
72.2
|
%
|
Claim Date extended with Stock Appreciation Date threshold not met
|
|
|
Level 3 input
|
|
|
|
46.0
|
%
|
Claim Date not extended with Stock Appreciation Date threshold met
|
|
|
Level 3 input
|
|
|
|
72.2
|
%
|
Claim Date not extended with Stock Appreciation Date threshold not met
|
|
|
Level 3 input
|
|
|
|
44.9
|
%
|
Scenario probability (future draws/no future draws)
|
|
|
Level 3 input
|
|
|
|
10%/90
|
%
|
D-21
The fair value of the embedded derivative asset related to the 15% Note Reset Feature was $8.4
million at September 30, 2016 and $5.0 million at December 31, 2015. We recognized $0.5 million and $2.2 million, respectively, in changes in fair value of embedded derivative asset in discontinued operations in our consolidated condensed
statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2016. We recognized $2.7 million and $3.3 million, respectively, in derivative expense related to this embedded derivative asset and
liabilities in discontinued operations in our consolidated condensed statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015.
Additional Draw Note
On June 19,
2015, the Company also issued the Additional Draw Note, under which CT Energy could elect to provide $2.0 million of additional funds to the Company per month for up to six months following the one-year anniversary of the closing date of the
transaction (up to $12.0 million in aggregate). The outstanding principal under the Additional Draw Note was $8.0 million at September 30, 2016, consisting of loans of $2.0 million by CT Energy on each of June 21,
2016, July 20, 2016, August 24, 2016 and September 21, 2016. As described in
Note 1 Organization Share Purchase Agreement
, the Additional Draw Note was cancelled on October 7, 2016 upon the closing
of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
Interest under the Additional Draw Note was to be
compounded quarterly at a rate of 15.0% per annum and payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2016. If the Stock Appreciation Date had not occurred by the Claim Date, the
maturity date of the Additional Draw Note could have been extended by two years and the interest rate on the Additional Draw Note would have adjusted to adjust to 8.0%, (the Additional Draw Note Reset Feature). However, while CT Energy
was making the monthly $2.0 million loans under the Additional Draw Note, the Claim Date was to be extended.
At June 30, 2016, due
to the $2.0 million loaned under the Additional Draw Note on June 20, 2016, we evaluated the Additional Draw Note Reset Feature related to the interest rate and maturity date using ASC 815 Derivatives and Hedging. We
determined to account for the Additional Draw Note Reset Feature as an embedded derivative asset measured at fair value with current changes in fair value reflected in our consolidated condensed statements of operations and comprehensive
loss. The embedded Additional Draw Note Reset Feature in the Additional Draw Note was valued using the same methods and assumptions as the 15% Note Reset Feature discussed above.
The assumptions summarized in the table above for the 15% Note were used to calculate the fair value of the derivative asset associated with
the Additional Draw Notes that were outstanding as of September 30, 2016 included in liabilities associated with discontinued operations on our consolidated condensed balance sheet
The fair value of the embedded derivative asset related to the Additional Draw Note Reset Feature was $2.2 million at September 30,
2016. We recognized $0.2 million for the three and nine months ended September 30, 2016 in change in fair value of embedded derivative assets in our consolidated condensed statement of operations and comprehensive income (loss) related to
the Additional Draw Note Reset Feature.
Note 9 Warrant Derivative Liability
CT Warrant
On June 19, 2015, we
issued CT Energy the CT Warrant, which was exercisable for 8,517,705 shares of the Companys common stock at an initial exercise price of $5.00 per share. The CT Warrant could not be exercised until the volume weighted average price of the
Companys common stock over any consecutive 30-day period equaled or exceeded $10.00 per share (the Stock Appreciation Date). As described in
Note 1 Organization Share Purchase Agreement
, the CT Warrant was
cancelled on October 7, 2016 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
D-22
We analyzed the CT Warrant to determine whether it should be classified as a derivative liability
or equity instrument. Provisions of the CT Warrant agreement allowed for a change in the exercise price of the CT Warrant upon the occurrence of certain corporate events. These exercise price adjustments incorporated variables other than those used
to determine the fair value of a fixed-for-fixed forward or option on equity shares; therefore, the CT Warrant was not considered to be indexed to the issuers own stock and did not meet the exception from derivative treatment in
ASC 815. We continued to account for the CT Warrant as a derivative which was marked to market as of September 30, 2016.
A Monte
Carlo simulation model is used to value the CT Warrant to estimate if the Stock Appreciation Date is achieved, which is based on the average stock price over a 30 day period (21 trading days) reaching $10.00 per share. This requires Level 3 inputs
(see
Note 3 Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements
) which are fundamentally based on market data but require complex modeling. The additional modeling is required in order to
simulate future stock prices, to determine whether the Stock Appreciation Date is achieved and to model the projected exercise behavior of the warrant holders.
The assumptions summarized in the following table were used to calculate the fair value of the warrant derivative liability that was
outstanding as of the balance sheet date included in liabilities associated with discontinued operations on our consolidated condensed balance sheet:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
Level
|
|
|
As of
September 30,
2016
|
|
Significant assumptions (or ranges):
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
Level 1 input
|
|
|
$
|
3.24
|
|
Exercise price
|
|
|
Level 1 input
|
|
|
$
|
5.00
|
|
Stock appreciation date price (hurdle)
|
|
|
Level 1 input
|
|
|
$
|
10.00
|
|
Term (warrants)
|
|
|
Level 1 input
|
|
|
|
1.7162
|
|
Term (Claim Date)
|
|
|
Level 1 input
|
|
|
|
0.0574
|
|
Term (Claim Date extended)
|
|
|
Level 1 input
|
|
|
|
0.2240
|
|
Volatility
|
|
|
Level 2 input
|
|
|
|
140.0
|
%
|
Risk-free rate (warrants)
|
|
|
Level 1 input
|
|
|
|
0.77
|
%
|
Risk-free rate (Claim Date)
|
|
|
Level 1 input
|
|
|
|
0.44
|
%
|
Risk-free rate (Claim Date extended)
|
|
|
Level 1 input
|
|
|
|
0.48
|
%
|
Dividend yield
|
|
|
Level 2 input
|
|
|
|
0.0
|
%
|
We estimate the volatility of our common stock based on historical volatility that matches the expected
remaining life of the longest instrument in the transaction, seven years. The risk-free interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the CT Warrant. The
expected life of the CT Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which we anticipate to remain at zero.
The fair value of the CT Warrant was $14.9 million at September 30, 2016 and $5.5 million at December 31, 2015. We recognized $1.5
million and $9.4 million, respectively, in change in fair value of warrant liabilities in discontinued operations in our consolidated condensed statement of operations and comprehensive income (loss) for the three and nine months ended
September 30, 2016. We recognized income of $10.0 million and $12.4 million, respectively, in change in fair value of warrant liabilities in discontinued operations in our consolidated condensed statement of operations and comprehensive income
(loss) for the three and nine months ended September 30, 2015.
Note 10 Commitments and Contingencies
We have various contractual commitments pertaining to leasehold, training, and development costs for the Dussafu PSC totaling $4.5 million.
Under the EEA granted for the Dussafu PSC on July 17, 2014, we are
D-23
required to commence production within four years of the date of grant in order to preserve our rights to production under the EEA. We expect that significant capital expenditures will be
required prior to commencement of production. These work commitments are non-discretionary; however, we do have the ability to control the pace of expenditures.
Under the agreements with our partner in the Dussafu PSC, we are jointly and severally liable to various third parties. As of
September 30, 2016, the gross carrying amount associated with obligations to third parties which were fixed at the end of the period was $37 thousand ($0.3 million as of December 31, 2015) and is related to accounts payable to vendors,
accrued expenses and withholding taxes payable to taxing authorities. As we are currently the operator for the Dussafu PSC, the gross carrying amount related to accounts payable and withholding taxes are reflected in the consolidated condensed
balance sheet in accounts payable. The net amount related to other accrued expenses is reflected in accrued expenses in the consolidated condensed balance sheet. Our partners have obligations totaling $12 thousand as of September 30, 2016 ($0.1
million as of December 31, 2015) to us for these liabilities. As we expect our partners will continue to meet their obligations to fund their share of expenditures, we have not recognized any additional liability related to fixed joint interest
obligations attributable to our joint interest partners.
The following related class action lawsuits were filed on the dates specified in
the United States District Court, Southern District of Texas: John Phillips v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (March 22, 2013) (the Phillips Case); Sang Kim v. Harvest Natural Resources, Inc.,
James A. Edmiston, Stephen C. Haynes, Stephen D. Chesebro, Igor Effimoff, H. H. Hardee, Robert E. Irelan, Patrick M. Murray and J. Michael Stinson (April 3, 2013); Chris Kean v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C.
Haynes (April 11, 2013); Prastitis v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 17, 2013); Alan Myers v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 22, 2013); and Edward W.
Walbridge and the Edward W. Walbridge Trust v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 26, 2013). The complaints alleged that the defendants made certain false or misleading public statements and demanded that
the defendants pay unspecified damages to the class action plaintiffs based on stock price declines. All of these actions were consolidated into the Phillips Case. On August 25, 2016, the court granted the defendants motion to dismiss the
Phillips Case and entered a final judgment dismissing the Phillips Case in its entirety. The plaintiffs declined to file an appeal, and the time for the filing an appeal expired on September 26, 2016.
In May 2012, Newfield Production Company (Newfield) filed notice pursuant to the Purchase and Sale Agreement between Harvest (US)
Holdings, Inc. (Harvest US), a wholly owned subsidiary of Harvest, and Newfield dated March 21, 2011 (the PSA) of a potential environmental claim involving certain wells drilled on the Antelope Project. The claim asserts
that locations constructed by Harvest US were built on, within, or otherwise impact or potentially impact wetlands and other water bodies. The notice asserts that, to the extent of potential penalties or other obligations that might result from
potential violations, Harvest US must indemnify Newfield pursuant to the PSA. In June 2012, we provided Newfield with notice pursuant to the PSA (1) denying that Newfield has any right to indemnification from us, (2) alleging that any
potential environmental claim related to Newfields notice would be an assumed liability under the PSA and (3) asserting that Newfield indemnify us pursuant to the PSA. We dispute Newfields claims and plan to vigorously defend
against them. We are currently unable to estimate the amount or range of any possible loss.
On February 27, 2015, Harvest (US)
Holdings, Inc. (Harvest US), a wholly owned subsidiary of Harvest and Branta, LLC and Branta Exploration & Production Company, LLC filed a complaint against Newfield in the United States District Court for the District of
Colorado. The plaintiffs previously sold oil and natural gas assets located in Utahs Uinta Basin to Newfield pursuant to two Purchase and Sale Agreements, each dated March 21, 2011. In the complaint, the plaintiffs allege that, prior to
the sale, Newfield breached separate confidentiality agreements with Harvest US and Branta by discussing the auction of the assets with a potential bidder for the assets, which caused the potential bidder not to participate in the auction and
resulted in a depressed sales price for the assets. The complaint seeks damages and fees for breach of contract, violation of the Colorado Antitrust Act, violation of the
D-24
Sherman Antitrust Act and tortious interference with a prospective business advantage. In September 2015, plaintiffs amended their complaint to add Ute Energy, LLC and Crescent Point Energy
Corporation as defendants. Subsequently, plaintiffs agreed to dismiss with prejudice all claims against Ute Energy, LLC and Crescent Point Energy Corporation. On August 12, 2016, the court denied Newfields motion to dismiss the claim.
On May 31, 2011, the United Kingdom branch of our subsidiary, Harvest Natural Resources, Inc. (UK), initiated a wire transfer of
approximately $1.1 million ($0.7 million net to our 66.667 percent interest) intending to pay Libya Oil Gabon S.A. (LOGSA) for fuel that LOGSA supplied to our subsidiary in the Netherlands, Harvest Dussafu, B.V., for the companys
drilling operations in Gabon. On June 1, 2011, our bank notified us that it had been required to block the payment in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and
administered by OFAC, because the payee, LOGSA, may be a blocked party under the sanctions. The bank further advised us that it could not release the funds to the payee or return the funds to us unless we obtain authorization from OFAC. On
October 26, 2011, we filed an application with OFAC for return of the blocked funds to us. Until that application is approved, the funds will remain in the blocked account, and we can give no assurance when OFAC will permit the funds to be
released. On April 23, 2014, we received a notice that OFAC had denied our October 26, 2011 application for the return of the blocked funds. During the year ended December 31, 2015 primarily due to the passage of time, we
recorded a $0.7 million allowance for doubtful accounts to general and administrative costs associated with the blocked payment and $0.4 million receivable from our joint venture partner. On October 13, 2015, we filed a request that OFAC
reconsider its decision and on March 8, 2016 OFAC denied our October 13, 2015 request for the return of blocked funds; however, the Company will continue attempts to recover the funds from OFAC.
Uracoa Municipality Tax Assessments. Harvest Vinccler, a subsidiary of Harvest Holding, has received nine assessments from a tax inspector for
the Uracoa municipality in which part of the Uracoa, Tucupita and Bombal fields are located. Harvest Holding had filed claims in the Tax Court in Caracas against the Uracoa Municipality for the refund of all municipal taxes paid since 1997. Any
potential liability for these tax assessments was transferred by the Company upon the closing of the sale of the Companys 51% interest in Harvest Holding on October 7, 2016, and remains the responsibility of Harvest Vinccler.
Libertador Municipality Tax Assessments. Harvest Vinccler has received five assessments from a tax inspector for the Libertador municipality
in which part of the Uracoa, Tucupita and Bombal fields are located. Harvest Vinccler had filed claims in the Tax Court in Caracas against the Libertador Municipality for the refund of all municipal taxes paid since 2002. Any potential liability for
these tax assessments was transferred by the Company upon the closing of the sale of the Companys 51% interest in Harvest Holding on October 7, 2016, and remains the responsibility of Harvest Vinccler.
On January 26, 2015, Petroandina Resources Corporation N.V. (Petroandina), which owns a 29% interest in Harvest Holding,
filed a complaint for breach of contract against the Company and its subsidiary, HNR Energia, in the Court of Chancery of the State of Delaware (Court of Chancery). The complaint alleged a January 15, 2015 Request for Arbitration
filed by HNR Finance and Harvest Vinccler against the Government of Venezuela before the International Centre for Settlement of Investment Disputes regarding HNR Finances investment in Petrodelta (the Request for Arbitration)
constituted a breach of the Shareholders Agreement, dated December 16, 2013, which governed the rights of HNR Energia and Petroandina as shareholders of Harvest Holding (the Shareholders Agreement). Specifically, the
Shareholders Agreement required HNR Energia to provide advance notice of, and deposit $5.0 million into an escrow account, before bringing any claim against the Venezuelan government. On January 28, 2015, the Court of Chancery issued an
injunction ordering the Company and HNR Energia to withdraw the Request for Arbitration and not take any action to pursue its claims against Venezuela until Harvest and HNR Energia have complied with the provisions of the Shareholders
Agreement or otherwise reached an agreement with Petroandina. Accordingly, on January 28, 2015, HNR Finance B.V. and Harvest Vinccler withdrew without prejudice the Request for Arbitration. On October 11, 2016, as described in the
following paragraph, the Court of Chancery dismissed this claim with prejudice pursuant to a settlement agreement among the Company, HNR Energia, CT Energy and Petroandina.
D-25
On July 12, 2016, Petroandina filed a second claim against the Company and HNR Energia in
the Court of Chancery. The claim alleged that, by entering into the Share Purchase Agreement to sell its Venezuelan interests to CT Energy, the Company and HNR Energia breached the Shareholders Agreement. The claim requested an injunction to
prevent the Company and HNR Energia from completing the proposed transaction with CT Energy. On August 16, 2016, the Court of Chancery granted Petroandinas motion for a preliminary injunction. On September 8, 2016, the Company, HNR
Energia, CT Energy and Petroandina entered into a settlement agreement (the
Settlement Agreement
) intended to resolve the claim. On September 8, 2016, the Court of Chancery granted an order amending its August 16, 2016
order and permitting Harvest and HNR Energia to effect the HNR Energia transaction, provided that the parties complied with the Settlement Agreement. On October 7, 2016, as contemplated in the Settlement Agreement, Petroandina completed the
sale of its 29% interest in Harvest Holding to Delta Petroleum, the assignee of CT Energys rights and obligations under the Settlement Agreement (the Petroandina Sale). On October 11, 2016, in accordance with the Settlement
Agreement, the Court of Chancery issued an order dismissing with prejudice Petroandinas claims against the Company and HNR Energia. As part of the Settlement Agreement and effective upon closing of the Petroandina Sale, HNR Energia agreed to
pay Petroandina $1,000,000 accrued as of September 30, 2016 and the cost as reimbursement for expenses incurred by Petroandina in connection with the litigation related to the Shareholders Agreement. This was recorded to Transaction Costs
Related to Sale of Harvest Holding on our consolidated condensed statement of operations and comprehensive income (loss) during the nine months ended September 30, 2016. Additionally, effective upon the closing of the Petroandina Sale, the
Company, HNR Energia and CT Energy released Petroandina and its affiliates, and Petroandina released the Company, HNR Energia, CT Energy and their respective affiliates, from all claims or liabilities in connection with the Shareholders
Agreement, the Share Purchase Agreement or the sale of the Companys interests in Venezuela arising up to the date of the Settlement Agreement.
On August 9, 2016, Robert Garfield, a stockholder of the Company, filed a lawsuit in the 215th Civil District Court of Harris County,
Texas against the members of the Companys board of directors (the Board) and CT Energy (and the Company, as a nominal defendant). The lawsuit asserts several class action and derivative claims, including that (i) the Board
members breached their fiduciary duties to the Companys stockholders by negotiating and causing the execution of the Share Purchase Agreement, (ii) CT Energy aided and abetted the Board members in breaching their fiduciary duties and
(iii) the Proxy Statement contained inadequate disclosures about the proposed transaction. Among other relief, the lawsuit requests that the court grant an injunction to prevent the completion of the proposed transaction, in addition to
unspecified rescissory and compensatory damages and attorneys fees and other costs. The Company intends to vigorously defend the lawsuit. We are unable to estimate the amount or range of any possible loss. On September 14, 2016
plaintiffs motion for a temporary injunction was denied. On November 3, 2016, we learned that the plaintiff will dismiss this lawsuit without prejudice.
On October 14, 2016, Saltpond Offshore Producing Co., Ltd. (Saltpond) filed a petition in the 334th Judicial District Court
of Harris County, Texas under Rule 202 of the Texas Rules of Civil Procedure to take a pre-suit deposition of the Companys general counsel. The petition alleges that Alessandro Bazzoni, a representative of CT Energy, obtained proceeds from oil
allegedly misappropriated from Saltpond and used these funds to consummate the June 19, 2015 Securities Purchase Agreement between CT Energy and the Company. The petition seeks information to pursue a claim [against the Company] under the
Uniform Fraudulent Transfer Act. The Company denies the allegations in the petition and intends to mount a vigorous defense. Because the petition is in its preliminary stages, it is not possible to estimate the likelihood or magnitude of any
potential liability at this time.
We are a defendant in or otherwise involved in other litigation incidental to our business. In the
opinion of management, there is no such incidental litigation that will have a material adverse effect on our financial condition, results of operations and cash flows.
D-26
Note 11 Operating Segments
We regularly allocate resources to and assess the performance of our operations by segments that are organized by unique geographic and
operating characteristics. The segments are organized in order to manage regional business, currency and tax related risks and opportunities. Operations included under the heading United States include corporate management, cash
management, business development and financing activities performed in the United States and other countries, which do not meet the requirements for separate disclosure. All intersegment revenues, other income and equity earnings, expenses and
receivables are eliminated in order to reconcile to consolidated totals. Corporate general and administrative and interest expenses are included in the United States segment and are not allocated to other operating segments. Segment loss and
operating segment assets for prior periods have been adjusted to conform to the current presentation method in which intersegment items are eliminated from each segments results and assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Segment Income (Loss) Attributable to Harvest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gabon
|
|
$
|
(1,718
|
)
|
|
$
|
(1,293
|
)
|
|
$
|
(2,741
|
)
|
|
$
|
(4,141
|
)
|
Indonesia
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
(42
|
)
|
United States and other
|
|
|
(5,645
|
)
|
|
|
(2,464
|
)
|
|
|
(16,382
|
)
|
|
|
(11,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,363
|
)
|
|
|
(3,744
|
)
|
|
$
|
(19,123
|
)
|
|
$
|
(15,878
|
)
|
Discontinued operations
(a)
|
|
|
303
|
|
|
|
9,456
|
|
|
|
(14,931
|
)
|
|
|
(9,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Harvest
|
|
$
|
(7,060
|
)
|
|
$
|
5,712
|
|
|
$
|
(34,054
|
)
|
|
$
|
(25,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
|
Net of net loss attributable to noncontrolling interest owners. See
Note 13 Discontinued Operations
.
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
December 31,
2015
|
|
|
|
(in thousands)
|
|
Operating Segment Assets
|
|
|
|
|
|
|
|
|
Gabon
|
|
$
|
30,051
|
|
|
$
|
32,710
|
|
Indonesia
|
|
|
|
|
|
|
5
|
|
United States and other
|
|
|
4,010
|
|
|
|
4,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,061
|
|
|
|
37,337
|
|
Discontinued operations
(b)
|
|
|
11,013
|
|
|
|
10,444
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
45,074
|
|
|
$
|
47,781
|
|
|
|
|
|
|
|
|
|
|
b)
|
See
Note 13 Discontinued Operations
|
As described in
Note 1
Organization Share Purchase Agreement
, we sold all of our interests in Venezuela to an affiliate of CT Energy in a transaction that closed on October 7, 2016.
Note 12 Related Party Transactions
The noncontrolling interest owners in Harvest Holdings, Oil & Gas Technology Consultants (Netherlands) Cooperatie V.A.
(Vinccler) (currently owning 20 percent) and Petroandina (currently owning 29 percent) were both related parties of the Company prior to the sale of our interests in Venezuela on October 7, 2016.
On January 4, April 1, and May 3, 2016, Harvest entered into first, second and third amendments, respectively, to the 15% Note.
Each amendment converted an interest payment and increased the principal
D-27
amount of the 15% Note by the amount of the converted interest payment, less applicable withholding tax of $0.1 million for January 4 and April 1, 2016. Additionally, the third
amendment also increased the principal amount of the 15% Note by $3.0 million in connection with additional funds received from CT Energy. After taking into account the third amendment, the outstanding principal amount of the 15% Note was $30.9
million as of July 1, 2016. The 15% Note was cancelled upon the closing of the sale of our Venezuelan interests to an affiliate of CT Energy on October 7, 2016.
On January 4, 2016, HNR Finance B.V., a wholly owned subsidiary of Harvest Holding (HNR Finance), provided a loan to CT
Energia in the amount of $5.2 million under an 11.0% promissory note due 2019 (the CT Energia Note). The purpose of the loan was to provide CT Energia with collateral to obtain funds for one or more loans to Petrodelta, which is 40%
owned by HNR Finance. HNR Finances sole recourse for payment of the principal amount of the loan is the payments of principal and interest from loans that CT Energia has made to Petrodelta. The source of funds for HNR Finances $5.2
million loan to CT Energia was a capital contribution from Harvest Holding, which, in return, received the same aggregate amount of capital contributions from its shareholders, pro rata according to their equity interests in Harvest Holding. Of that
aggregate amount of capital contributions, HNR Energia contributed $2.6 million, which was a capital contribution from Harvest. During the three months ended March 31, 2016, we recorded a $5.2 million allowance to fully reserve the CT Energia
Note due to concerns related to the continued deteriorating economic conditions in Venezuela and our assessment relating to the probability that the CT Energia Note will be collected. As of September 30, 2016, the CT Energia Note remained fully
reserved and we had not accrued any interest with respect to this note receivable. As described under
Note 1 Organization Share Purchase Agreement
, the Company sold its 51% interest in Harvest Holding (the parent company of HNR
Finance, which holds the CT Energia Note) to an affiliate of CT Energy on October 7, 2016.
On each of June 21,
July 20, August 24, and September 21, 2016, CT Energy loaned $2.0 million to the Company pursuant to the Additional Draw Note. These loans were secured by substantially all of the Companys assets, including equity in
certain of Harvests subsidiaries. As described in
Note 1 Organization Share Purchase Agreement
, the Additional Draw Note was cancelled on October 7, 2016 upon the closing of the sale of all of our interests in
Venezuela to an affiliate of CT Energy.
Note 13 Discontinued Operations
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia BV, completed the sale of all of HNR Energias 51%
interest in Harvest Holding, to Delta Petroleum, pursuant to a share purchase agreement, dated June 29, 2016 (the Share Purchase Agreement). Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40% interest in
Petrodelta, through which all of the Companys interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to Delta Petroleum and we do not have any continuing involvement in
Venezuela. See
Note 1 Organization Share Purchase Agreement
for further information.
D-28
The Companys 51% interest in Harvest Holding and the assets and liabilities directly
related to the sale have been reclassified to assets and liabilities associated with discontinued operations as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
December 31,
2015
|
|
|
|
(in thousands)
|
|
Assets associated with discontinued operations
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
230
|
|
|
$
|
5,256
|
|
Accounts receivable
|
|
|
49
|
|
|
|
3
|
|
Prepaid costs
|
|
|
7
|
|
|
|
15
|
|
Embedded derivative asset
|
|
|
10,561
|
|
|
|
5,010
|
|
Deferred taxes
|
|
|
85
|
|
|
|
120
|
|
Long-term note receivable, net
|
|
|
|
|
|
|
|
|
Administrative property, net
|
|
|
69
|
|
|
|
16
|
|
Other assets
|
|
|
12
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,013
|
|
|
$
|
10,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
December 31,
2015
|
|
|
|
(in thousands)
|
|
Liabilities associated with discontinued operations
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2
|
|
|
$
|
5
|
|
Accrued Expenses
|
|
|
279
|
|
|
|
341
|
|
Accrued interest payable
|
|
|
1,351
|
|
|
|
954
|
|
Other current liabilities
|
|
|
107
|
|
|
|
160
|
|
15% Note and Additional Draw Note, net
|
|
|
17,817
|
|
|
|
214
|
|
CT Warrant liability
|
|
|
14,879
|
|
|
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,435
|
|
|
$
|
7,177
|
|
|
|
|
|
|
|
|
|
|
D-29
Harvest Holdings effect on results of operations and other items directly related to
discontinued operations have been reported in discontinued operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Income (Loss) from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Harvest Holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(5
|
)
|
|
$
|
(6
|
)
|
|
$
|
(15
|
)
|
|
$
|
(16
|
)
|
Reserve for note receivable - related party
|
|
|
|
|
|
|
|
|
|
|
(5,160
|
)
|
|
|
|
|
General and administrative expense
|
|
|
(497
|
)
|
|
|
(683
|
)
|
|
|
(2,114
|
)
|
|
|
(2,027
|
)
|
Change in fair value of warrant derivative liability
|
|
|
1,538
|
|
|
|
9,982
|
|
|
|
(9,376
|
)
|
|
|
12,400
|
|
Change in fair value of embedded derivative asset and liabilities
|
|
|
725
|
|
|
|
2,727
|
|
|
|
2,412
|
|
|
|
3,284
|
|
Interest expense
|
|
|
(1,674
|
)
|
|
|
(1,057
|
)
|
|
|
(4,143
|
)
|
|
|
(1,909
|
)
|
Loss on debt conversion
|
|
|
|
|
|
|
(1,890
|
)
|
|
|
|
|
|
|
(1,890
|
)
|
Loss on issuance of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,402
|
)
|
Foreign currency transaction gains
|
|
|
16
|
|
|
|
96
|
|
|
|
215
|
|
|
|
220
|
|
Income tax expense
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
(23
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes
|
|
$
|
96
|
|
|
$
|
9,162
|
|
|
$
|
(18,204
|
)
|
|
$
|
(10,360
|
)
|
Loss attributable to noncontrolling interests
|
|
|
(207
|
)
|
|
|
(294
|
)
|
|
|
(3,273
|
)
|
|
|
(908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to discontinued operations, net of taxes
|
|
$
|
303
|
|
|
$
|
9,456
|
|
|
$
|
(14,931
|
)
|
|
$
|
(9,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14 Subsequent Events
On October 7, 2016, the Company and its wholly owned subsidiary, HNR Energia, closed the sale of the Companys Venezuelan interests
to an affiliate of CT Energy. See
Note 1 Organization Share Purchase Agreement
for more information.
On
November 3, 2016, a one-for-four reverse split of the Companys common stock became effective. See
Note 1 Organization Reverse Stock Split
for more information. All share and per share amounts in this report have been
reflected on a post-split basis in these financial statements.
D-30
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Harvest Natural Resources, Inc. (Harvest or the Company) cautions that any forward-looking statements
as such term is defined in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) contained in this report
or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. When used in this report, the words budget, forecast, expect,
believes, goals, projects, plans, anticipates, estimates, should, could, assume and similar expressions are intended to identify
forward-looking statements. In accordance with the provisions of the Securities Act and the Exchange Act, we caution you that important factors could cause actual results to differ materially from those in any forward-looking statements. These
factors, among other factors, our ability, or our Boards decision, to keep our common stock listed on the New York Stock Exchange; the risk that our stockholders will not receive any of the proceeds from the sale of our Venezuelan interests in
the form of dividends; difficult global economic and commodity and capital markets conditions; changes in the legal and regulatory environment; political and economic risks associated with international operations; anticipated future development
costs for undeveloped reserves; drilling risks; risk that actual results may vary considerably from reserve estimates; the dependence on the abilities and continued participation of our key employees; risks normally incident to the exploration,
operation and development of oil and natural gas properties; permitting and drilling of oil and natural gas wells; availability of materials and supplies necessary to projects and operations; prices for oil and natural gas and related financial
derivatives; changes in interest rates; our ability to acquire oil and natural gas properties that meet our objectives; availability and cost of drilling rigs and seismic crews; political stability; civil unrest; acts of terrorism; currency and
exchange risks; currency controls; changes in existing or potential tariffs, duties or quotas; changes in taxes; changes in governmental policy; lack of liquidity; availability of sufficient financing; estimates of amounts and timing of sales of
securities; changes in weather conditions; our ability to continue as a going concern; and other risks, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K), which
includes certain definitions and a summary of significant accounting policies and should be read in connection with this report, and other public filings.
Executive Summary
Recent Developments
Effective as of April 1, 2016, the Company and CT Energy Holding SRL, a Barbados Society with Restricted Liability (CT
Energy), executed and delivered a second amendment (the Second Amendment) to the 15% Note, dated June 19, 2015, as amended by the First Amendment, effective as of December 31, 2015, payable by Harvest to CT Energy in the
principal amount of $26.1 million. The Second Amendment converted the $1.0 million interest payment that was due and payable on April 1, 2016 and converted such amount, less applicable withholding tax, into additional principal, such that the
current principal amount of the 15% Note as of April 1, 2016, was $27.0 million.
On December 2, 2015, the Company received
notification from the New York Stock Exchange (NYSE) that the Company was not in compliance with the NYSEs continued listing standards, which require a minimum average closing price of $1.00 per share over 30 consecutive trading
days. As required by the NYSE, in order to maintain its listing, Harvest notified the NYSE that it intended to cure the price deficiency. On October 25, 2016, the Company announced that it would conduct a one-for-four reverse split of its
issued and outstanding common stock. The one-for-four reverse stock split became effective after the market closed on November 3, 2016, and the Companys common stock began trading on a split-adjusted basis at market open on
November 4, 2016. Given the increase in the Companys common stock price (with a closing price of $4.45 per share as of November 4, 2016), the Company expects that it will regain compliance with the NYSEs minimum price listing
standard on December 19, 2016.
D-31
On April 25, 2016, the Company received a notice from the NYSE stating that the Company was
not in compliance with a second NYSE continued listing requirement, which provides that a company is not in compliance if its average global market capitalization over a consecutive 30 trading-day period is less than $50 million and, at the
same time, its stockholders equity is less than $50 million. The Company believes that the sale of its Venezuelan interests on October 7, 2016 ultimately will allow it to regain compliance with this listing standard by increasing its
stockholders equity. However, the Company must demonstrate compliance for two consecutive financial quarters before the deficiency can be cured.
Effective as of May 3, 2016, the Company and CT Energy, executed and delivered a third amendment (the Third Amendment) to the
15% Note, dated June 19, 2015, as amended by the First Amendment, effective as of December 31, 2015, and the Second Amendment, effective as of April 1, 2016 payable by Harvest to CT Energy in the principal amount of $27.0 million. The
Third Amendment increased the principal amount of the 15% Note to $30.0 million to reflect an additional loan of $3.0 million by CT Energy to Harvest and converted the $1.1 million interest payment that was due and payable on July 1, 2016,
less applicable withholding tax, into additional principal, such that the current principal amount of the 15% Note as of July 1, 2016 was $30.9 million.
To fund Harvests transaction expenses and operations until the closing under the Share Purchase Agreement (as discussed in the following
section), CT Energy loaned Harvest, under the Additional Draw Note, $2.0 million on each of June 21, 2016, July 20, 2016, August 24, 2016 and September 21, 2016 for a total outstanding balance of $8.0 million at
September 30, 2016.
Share Purchase Agreement
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia BV (HNR Energia), completed the sale of all of
HNR Energias 51% interest in Harvest-Vinccler Dutch Holding B.V., a Netherlands company (Harvest Holding ), to Delta Petroleum N.V., a limited liability company organized under the laws of Curacao (Delta Petroleum),
pursuant to a share purchase agreement, dated June 29, 2016 (the Share Purchase Agreement). Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40% interest in Petrodelta, S.A., a mixed company organized under
Venezuelan law ( Petrodelta ), through which all of the Companys interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to Delta Petroleum. Delta Petroleum is
an affiliate of CT Energy, which assigned all of its rights and obligations under the Share Purchase Agreement to Delta Petroleum on September 26, 2016. For more information about the sale of our interests in Venezuela, see
Note 1
Share Purchase Agreement
.
Operations
Venezuela
As described in
Note 1
Organization Share Purchase Agreement
, we sold all of our interests in Venezuela to an affiliate of CT Energy in a transaction that closed on October 7, 2016. Prior to the sale, our 40 percent investment in Petrodelta was
owned through our subsidiary, Harvest Holding, which was sold in the transaction. We accounted for our investment in Petrodelta under the cost method as we did not exercise significant influence over the operations of Petrodelta. Under the cost
method we did not recognize any equity in earnings from our investment in Petrodelta in our results of operations, but would have recognize any cash dividends as income in the period they were received.
We performed an impairment analysis of the carrying value of our investment of Petrodelta as of December 31, 2015 due to the continued
decline in world oil prices and deteriorating economic conditions in Venezuela which have significantly impacted Petrodeltas operations. During 2015, Petrodeltas operating costs exceeded the price realized from the sale of its production
due to the significant rate of inflation in Venezuela and the restrictive foreign currency exchange system which Petrodelta is required to operate under. Based on the
D-32
economic environment in which Petrodelta was required to operate, we concluded that the estimated fair value of our investment in Petrodelta was nil and recorded a pre-tax impairment charge of
$164.7 million to fully impair our investment in Petrodelta as of December 31, 2015. The estimated fair value of our investment was determined based on the estimated fair value of Petrodeltas oil and natural gas properties and other net
liabilities as of December 31, 2015 which exceeded the estimated fair value of the oil and natural gas properties.
Dussafu Project
Gabon
Following the October 7, 2016 sale of our interests in Venezuela, our interests in Gabon represent our
primary tangible asset. We have received two proposals for the purchase of our Gabon interests and are in discussions with both potential buyers; however, there can be no assurances that these discussions or either proposal will lead to a definitive
transaction.
We have a 66.667 percent ownership interest in the Dussafu PSC through two separate acquisitions, and we are the operator.
The third exploration phase of the Dussafu PSC expired on May 27, 2016. The expiration of the exploration phase has no effect on the discovered fields under the Exclusive Exploitation Authorization (EEA) as discussed below. All
expenditure commitments on this exploration phase have been completed.
On March 26, 2014, the joint venture partners approved a
resolution that the discovered fields are commercial to exploit. On June 4, 2014, a Declaration of Commerciality (DOC) was signed with Gabon pertaining to four discoveries on the Dussafu Project offshore Gabon. Furthermore, on
July 17, 2014, the Direction Generale Des Hydrocarbures (DGH) awarded an EEA for the development and exploitation of certain oil discoveries on the Dussafu Project and on October 10, 2014, the field development plan was
approved. The Company has four years from the date of the EEA approval to begin production. In order to begin production by July 2018, the current project plan is to develop the area surrounding our Ruche well first, followed by the development
of the other fields and drilling selected high quality exploration prospects identified on 3D seismic.
Operational activities during the
nine months ended September 30, 2016, included continued evaluation of development plans, based on the 3D seismic data acquired in late 2013 and processed during 2014.
Central/Inboard 3D seismic data acquired in 2011 has been processed and interpreted to evaluate prospectivity. We have also completed
processing data from the 1,260 sq. km 3D seismic survey acquired during the fourth quarter of 2013. This survey provides 3D coverage over the outboard portion of the block and has confirmed significant pre-salt prospectivity which had been inferred
from 2D seismic data. The new 3D seismic data also covers the Ruche, Tortue and Moubenga discoveries and we expect will facilitate the effective placement of future development wells in the Ruche and Tortue development program, as well as
allowing improved assessment of the numerous undrilled structures already identified on older 3D seismic surveys.
During the nine months
ended September 30, 2016, we had cash capital expenditures of $0.1 million for a site survey ($0.4 million for facility design costs during the nine months ended September 30, 2015
Since approval of the Field Development Plan (FDP) in October 2014, Harvest has continued the development of the Ruche Exclusive
Exploitation Area. A tender for all necessary subsea equipment was concluded in January 2015 where prices exceeded the costs employed in the FDP. We continue to negotiate with the lowest priced vendors and continue to revise the development scheme
to bring the projected cost back to the FDP levels. The depth volume from the 2013 3D seismic acquisition over the discovered fields and the outboard area of the license was received and interpreted. This data was incorporated into our reservoir
models and optimization of well trajectories to maximize oil recovery continues. In addition, the prospect inventory was updated and several prospects have been high graded for drilling. To accommodate the drilling schedule, a site survey, including
bathymetry and geophysical data gathering with respect to prospects A/B, 6/7 and 8/9, was completed in August 2015. A tender for a drilling rig and services were completed in March 2016.
D-33
Harvest and its joint venture partner engaged a third-party contractor to undertake a
fixed-price, geophysical site survey over multiple potential well locations in the Dussafu block in August 2015. The survey was a pre-requisite for siting mobile drilling units and other installations required for continuing exploration and
development activities over the license. The survey provided information regarding the seabed and shallow geological conditions, which is essential for safe siting and operation of these installations.
In September 2016, the Company assessed the need for impairment related to the unproved properties of the Dussafu PSC. The primary
factors considered were the current bids received for the project which substantiated the carrying value at September 30, 2016. Other factors considered were price forecasts, drilling costs and the remaining time on the EEA; none of which
currently indicated a need for impairment. Based on our September 2016 review, it is the opinion of the Company that no impairment is needed for the Dussafu prospect for the three months ending September 30, 2016.
In September 2016, the Company conducted an inventory analysis and based on the condition of the equipment, we lowered the value of inventory
by $1.3 million leaving a balance of $1.6 million in oilfield inventory.
Results of Operations
The following discussion on results of operations for the three and six months ended September 30, 2016 and 2015 should be read in
conjunction with our consolidated condensed financial statements and related notes thereto.
Three Months Ended September 30, 2016 and 2015
We reported a net loss attributable to Harvest of $7.1 million, or $0.55 per basic and diluted loss per share, for the three
months ended September 30, 2016, compared with a net income attributable to Harvest of $5.7 million, or $0.52 per basic and diluted earnings per share, for the three months ended September 30, 2015.
(Income) Loss From Continuing Operations
Expenses and other non-operating (income) expense from continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
Depreciation and amortization
|
|
$
|
11
|
|
|
$
|
21
|
|
|
$
|
(10
|
)
|
Exploration expense
|
|
|
581
|
|
|
|
831
|
|
|
|
(250
|
)
|
Impairment expense oilfield inventories
|
|
|
1,324
|
|
|
|
540
|
|
|
|
784
|
|
General and administrative
|
|
|
3,630
|
|
|
|
4,686
|
|
|
|
(1,056
|
)
|
Transaction costs related to sale of Harvest Holding
|
|
|
1,814
|
|
|
|
|
|
|
|
1,814
|
|
Other non-operating (income) expense
|
|
|
3
|
|
|
|
(477
|
)
|
|
|
480
|
|
Income tax benefit
|
|
|
|
|
|
|
(1,857
|
)
|
|
|
1,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
7,363
|
|
|
$
|
3,744
|
|
|
$
|
3,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our accounting method for oil and natural gas properties is the successful efforts method. During the three
months ended September 30, 2016, we incurred $0.4 million of exploration costs for the processing and reprocessing of seismic data related to ongoing operations in Gabon and $0.2 million related to other general business development activities.
During the September 30, 2015, we incurred $0.7 million of exploration costs for the processing and reprocessing of seismic data related to ongoing operations in Gabon and $0.1 million related to other general business development activities.
D-34
During the three months ended September 30, 2016, we incurred $1.3 million of impairment
expense for the oilfield inventory related to the Dussafu PSC. During the three months ended September 30, 2015, we incurred $0.5 million of impairment expense for the oilfield inventory related to the Dussafu PSC.
The decrease in general and administrative costs for the three months ended September 30, 2016 compared to the three months ended
September 30, 2015 were primarily due to lower employee related costs ($0.5 million), general business and overhead ($0.1 million) professional fees and contract services ($0.4 million) and public relations ($0.1 million). Employee related
costs were lower between periods primarily due to lower salaries driven by lower employee head count ($0.2 million), lower stock options and restricted stock expense ($0.1 million), certain stock-based compensation expense impacted by the
change in the Companys stock price ($0.1 million) and other compensation for directors fees ($0.1 million). Contract services were lower primarily related to lower legal and accounting professional fees incurred for general corporate
legal expense.
We incurred $1.8 million of transaction costs associated with the Share Purchase Agreement with CT Energy for the three
months ended September 30, 2016. See
Note 1 Organization Share Purchase Agreement
for further information.
The
increase in non-operating income of $0.5 million for the three months ended September 30, 2015 was primarily due to the reduction of estimated final settlement costs associated to prior financings.
We had no income tax expense for the three months ended September 30, 2016 compared to an income tax benefit of $1.9 million for the
three months ended September 30, 2015. The benefit during the three months ended September 30, 2015 was primarily attributable to a reduction in the valuation allowance against the Companys deferred tax assets and a decrease in the
deferred tax liability associated with the Companys undistributed earnings from its foreign subsidiaries. In the fourth quarter of 2014, we reinstated a valuation allowance against the Companys U.S. deferred tax assets as we determined
that we would not have sufficient taxable income in the U.S. after the termination of the sale of the remaining equity interest in Harvest Holding. We have not recognized a tax benefit on the Companys losses arising during the three months
ended September 30, 2016.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests was $0.2 million for the three months ended September 30, 2016 compared to net loss
attributable to noncontrolling interests of $0.3 million for the three months ended September 30, 2015. The net losses attributable to noncontrolling interests during the three months ended September 30, 2016 and 2015 were related to
operations at Harvest Vinccler as they provided oversight of the investment in Petrodelta.
Discontinued Operations
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia BV, completed the sale of all of HNR Energias 51%
interest in Harvest Holding, to Delta Petroleum, pursuant to the June 29, 2016 Share Purchase Agreement. Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40% interest in Petrodelta, through which all of the Companys
interests in Venezuela were owned. Thus, under the Share Purchase Agreement, the Company sold all of its interests in Venezuela to Delta Petroleum and we do not have any continuing involvement of our interest in Venezuela. See
Note 1 Share
Purchase Agreement
for further information.
D-35
Harvest Holdings effect on results of operation and the effect of the change in fair value
of the CT Warrant and embedded derivative asset and liabilities have been reported in discontinued operations. Expenses and other non-operating income (expense) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
Depreciation
|
|
$
|
(5
|
)
|
|
$
|
(6
|
)
|
|
$
|
1
|
|
General and administrative expense
|
|
|
(497
|
)
|
|
|
(683
|
)
|
|
|
186
|
|
Change in fair value of warrant derivative liability
|
|
|
1,538
|
|
|
|
9,982
|
|
|
|
(9,257
|
)
|
Change in fair value of embedded derivative asset and liabilities
|
|
|
725
|
|
|
|
2,727
|
|
|
|
(1,189
|
)
|
Interest expense
|
|
|
(1,674
|
)
|
|
|
(1,057
|
)
|
|
|
(617
|
)
|
Loss on debt conversion
|
|
|
|
|
|
|
(1,890
|
)
|
|
|
1,890
|
|
Foreign currency transaction gains
|
|
|
16
|
|
|
|
96
|
|
|
|
(80
|
)
|
Income tax expense
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain from discontinued operations, net of taxes
|
|
$
|
96
|
|
|
$
|
9,162
|
|
|
$
|
(9,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in fair value of warrant liabilities of $1.5 million during the three months ended
September 30, 2016, is primarily related to the change in our stock price. The $10.0 million gain in 2015 was driven by a 26% increase in stock price; whereas, the $1.5 million gain in 2016 was driven by only a 4% increase in stock price.
See
Note 9 Warrant Derivative Liability
for further information.
The change in fair value of embedded derivative assets of
$0.7 million is directly related to the assumptions surrounding the commencement of the interest rate reset features in both the 15% Note and the Additional Draw Notes. The interest rate reset features both lowers the interest rate and extends
the due date of the 15% Note and the Additional Draw Notes. At September 30, 2016, the probability of the interest rate reset feature date being delayed was lowered to 10% and the value of the embedded derivative asset related to the
Additional Draw Note was included. Both of these changes increased the value of the embedded derivative assets for the three months ended September 30, 2016. See
Note 8 Debt and Financing
for further information.
The increase in interest expense for the three months ended September 30, 2016 compared to the three months ended September 30, 2015
was primarily due to higher outstanding debt balances and accretion of debt discount.
The $1.9 million loss on debt conversion during the
three months ended September 30, 2015 was the result of the difference between the September 14, 2015 fair value of the 9.0% convertible note with embedded derivative liability of $11.1 million, plus the accrued interest and amortized debt
discount of $0.2 million less the fair value of the 2,166,900 shares issued upon conversion at September 15, 2015.
Nine Months Ended
September 30, 2016 and 2015
We reported a net loss attributable to Harvest of $34.1 million, or $2.65 per basic and diluted
loss per share, for the nine months ended September 30, 2016, compared with a net loss attributable to Harvest of $25.3 million, or $2.35 per basic and diluted loss per share, for the nine months ended September 30, 2015.
D-36
Loss From Continuing Operations
Expenses and other non-operating (income) expense from continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
Depreciation and amortization
|
|
$
|
41
|
|
|
$
|
67
|
|
|
$
|
(26
|
)
|
Exploration expense
|
|
|
1,720
|
|
|
|
3,338
|
|
|
|
(1,618
|
)
|
Impairment expense oilfield inventories
|
|
|
1,452
|
|
|
|
540
|
|
|
|
912
|
|
General and administrative
|
|
|
12,535
|
|
|
|
13,017
|
|
|
|
(482
|
)
|
Transaction costs related to sale of Harvest Holding
|
|
|
3,365
|
|
|
|
|
|
|
|
3,365
|
|
Other non-operating (income) expense
|
|
|
10
|
|
|
|
(434
|
)
|
|
|
444
|
|
Income tax benefit
|
|
|
|
|
|
|
(650
|
)
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
19,123
|
|
|
$
|
15,878
|
|
|
$
|
3,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our accounting method for oil and gas properties is the successful efforts method. During the nine months
ended September 30, 2016, we incurred $1.2 million of exploration costs for the processing and reprocessing of seismic data related to ongoing operations in Gabon and $0.5 million related to other general business development activities. During
the nine months ended September 30, 2015, we incurred $3.0 million of exploration costs for the processing and reprocessing of seismic data related to ongoing operations in Gabon and $0.3 million related to other general business development
activities.
During the nine months ended September 30, 2016, we incurred $1.5 million of impairment expense for the oilfield
inventory related to the Dussafu PSC. During the nine months ended September 30, 2015, we incurred $0.5 million of impairment expense for the oilfield inventory related to the Dussafu PSC.
The decrease in general and administrative costs for the nine months ended September 30, 2016 compared to the nine months ended
September 30, 2015 was primarily due to lower professional fees and contract services ($0.5 million), public relations and travel ($0.1 million) offset by higher employee related costs ($0.1 million). Contract services were lower primarily
related to lower legal incurred for general corporate legal expense and accounting professional fees. Employee related costs were higher between periods primarily due to higher certain stock-based compensation expense impacted by the change in the
Companys stock price ($0.2 million), stock options expense ($0.1 million) and vacation expense accrual ($0.1 million) offset by lower salaries driven by lower employee head count ($0.3 million).
We incurred $3.4 million of transaction costs associated with the Share Purchase Agreement with CT Energy for the nine months ended
September 30, 2016. See
Note 1 Organization Share Purchase Agreement
for further information.
The increase in
non-operating income of $0.4 million for the nine months ended September 30, 2015 was primarily due to the reduction of estimated final settlement costs associated to prior financings.
We had no income tax expense for the nine months ended September 30, 2016 compared to an income tax expense of $0.7 million for the nine
months ended September 30, 2015. The benefit for the nine months ended September 30, 2015 was primarily attributable to a reduction in the valuation allowance against the Companys deferred tax assets offset by an increase in the
deferred tax liability associated with the Companys undistributed earnings from its foreign subsidiaries. In the fourth quarter of 2014, we reinstated a valuation allowance against the Companys U.S. deferred tax assets as we determined
that we would not have sufficient taxable income in the U.S. after the termination of the sale of the remaining equity interest in Harvest Holding. We have not recognized a tax benefit on the Companys losses arising during the nine months
ended September 30, 2016.
D-37
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests was $3.3 million for the nine months ended September 30, 2016 compared to net loss
attributable to noncontrolling interests of $0.9 million for the nine months ended September 30, 2015. The net losses attributable to noncontrolling interests during the nine months ended September 30, 2016 and 2015 were related to the
operations at Harvest Vinccler as they provided oversight of the investment in Petrodelta. The net loss during 2016 was primarily due to the 49% interest in the $5.2 million allowance to fully reserve the CT Energia Note.
Discontinued Operations
Harvest
Holdings results of operation has been reported in discontinued operations. Expenses and other non-operating income (expense) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
Depreciation
|
|
$
|
(15
|
)
|
|
$
|
(16
|
)
|
|
$
|
1
|
|
Reserve for note receivable related party
|
|
|
(5,160
|
)
|
|
|
|
|
|
|
(5,160
|
)
|
General and administrative expense
|
|
|
(2,114
|
)
|
|
|
(2,027
|
)
|
|
|
(87
|
)
|
Change in fair value of warrant derivative liability
|
|
|
(9,376
|
)
|
|
|
12,400
|
|
|
|
(21,776
|
)
|
Change in fair value of embedded derivative asset and liabilities
|
|
|
2,412
|
|
|
|
3,284
|
|
|
|
(872
|
)
|
Interest expense
|
|
|
(4,143
|
)
|
|
|
(1,909
|
)
|
|
|
(2,234
|
)
|
Loss on debt conversion
|
|
|
|
|
|
|
(1,890
|
)
|
|
|
1,890
|
|
Loss on issuance of debt
|
|
|
|
|
|
|
(20,402
|
)
|
|
|
20,402
|
|
Foreign currency transaction gains
|
|
|
215
|
|
|
|
220
|
|
|
|
(5
|
)
|
Income tax expense
|
|
|
(23
|
)
|
|
|
(20
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations, net of taxes
|
|
$
|
(18,204
|
)
|
|
$
|
(10,360
|
)
|
|
$
|
(7,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2016, we recorded a $5.2 million allowance to fully reserve
the CT Energia Note due to concerns related to the continued deteriorating economic conditions in Venezuela and our assessment relating to the probability that the CT Energia Note will be collected.
The change in fair value of warrant liabilities of $9.4 million during the nine months ended September 30, 2016, is primarily related to
the change in our stock price. The $12.4 million gain in 2015 was driven by a 23% decrease in stock price during the nine months ended September 30, 2015; whereas, the $9.4 million loss in 2016 was driven by only a 91% increase in stock
price during the nine months ended September 30, 2016. See
Note 9 Warrant Derivative Liability
for further information.
The change in fair value of embedded derivative assets of 2.4 million is directly related to the assumptions surrounding the commencement
of the interest rate reset features in both the 15% Note and the Additional Draw Notes. The interest rate reset features both lowers the interest rate and extends the due date of the 15% Note and the Additional Draw Notes. At
September 30, 2016, the probability of the interest rate reset feature date being delayed was lowered to 10% and the value of the embedded derivative asset related to the Additional Draw Note was included. Both of these changes increased
the value of the embedded derivative assets for the nine months ended September 30, 2016. See
Note 8 Debt and Financing
for further information.
The increase in interest expense for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015
was primarily due to higher outstanding debt balances and accretion of debt discount during the nine months ended September 30, 2016.
D-38
The $1.9 million loss on debt conversion was the result of the difference between the
September 14, 2015 fair value of the 9.0% convertible note with embedded derivative liability of $11.1 million, plus the accrued interest and amortized debt discount of $0.2 million less the fair value of the 2,166,900 shares issued upon
conversion at September 15, 2015.
As discussed in
Note 1 Organization Securities Purchase Agreement
, on
June 19, 2015, we issued the 15% Note, the 9% Note, the CT Warrant and the Additional Draw Note in connection with the Securities Purchase Agreement with CT Energy and received proceeds of $30.6 million, net of financing fees of
$1.6 million. We identified embedded derivative asset and liabilities in the notes and determined that the warrant did not meet the required conditions to qualify for equity classification and is required to be classified as a warrant liability
(see
Note 11 Warrant Derivative Liabilities
). The estimated fair value, at issuance, of the embedded derivative asset was $2.5 million, the embedded derivative liability was $13.5 million and the warrant was $40.0 million. In
accordance with ASC 815, the fair value of the financial instruments was first allocated to the embedded derivatives and warrants, the 9% Note and 15% Note. As a result of the allocation we recognized a loss on the issuance of these securities of
$20.4 million in our consolidated condensed statements of operations and comprehensive income (loss) for the nine months ended September 30, 2015.
Risks, Uncertainties, Capital Resources and Liquidity
The following discussion on risks, uncertainties, capital resources and liquidity should be read in conjunction with our consolidated condensed
financial statements and related notes thereto.
Liquidity
We expect the net proceeds from the sale of our Venezuelan interests will be adequate to meet our short-term liquidity requirements.
Our primary tangible asset is our oil and gas interests in Gabon. We have received two proposals for the purchase of our Gabon interests and
are in discussions with both potential buyers; however, there can be no assurances that these discussions or either proposal will lead to a definitive transaction. We currently are evaluating the possible sale of our Gabon interests, distributions
of cash to our stockholders, and possible dissolution of the Company.
Other than the proceeds from the sale of our Venezuelan
interests, our primary ongoing sources of cash are issuances of debt and the sale of oil and natural gas properties in Gabon. Our primary use of cash has been to fund oil and natural gas exploration projects, principal payments on debt, interest
payments, and general and administrative costs. We require capital principally to fund the exploration and development of new oil and natural gas properties. We have various contractual commitments pertaining to exploration, development and
production activities. See
Note 10 Commitments and Contingencies
for a description of our contractual commitments.
On
January 4, April 1, and May 3, 2016, Harvest entered into first, second and third amendments, respectively, to the 15% Note. Each amendment eliminated an interest payment and increased the principal amount of the 15% Note by the
amount of the eliminated interest payment, less applicable withholding tax of $0.1 million for January 4 and April 1. Additionally, the third amendment also increased the principal amount of the 15% Note by $3.0 million in connection with
additional funds received from CT Energy. After taking into account the third amendment, the outstanding principal amount of the 15% Note was $30.9 million effective as of July 1, 2016. As described in
Note 1 Organization Share
Purchase Agreement
, the 15% Note was cancelled on October 7, 2016 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
D-39
CT Energy loaned the Company $2.0 million on each of June 21, 2016, July 20,
2016, August 24, 2016 and September 21, 2016 under the Additional Draw Note, which the Company originally sold to CT Energy under the Securities Purchase Agreement. Amounts outstanding under the Additional Draw Note were secured by
substantially all of Harvests assets, including equity in certain of Harvests subsidiaries, as further described in the security agreement that was executed in connection with the Securities Purchase Agreement. As described in
Note 1
Organization Share Purchase Agreement
, the Additional Draw Note was cancelled on October 7, 2016 upon the closing of the sale of all of our interests in Venezuela to an affiliate of CT Energy.
On December 2, 2015, the Company received notification from the NYSE that the Company was not in compliance with the NYSEs
continued listing standards, which require a minimum average closing price of $1.00 per share over 30 consecutive trading days. As required by the NYSE, in order to maintain its listing, Harvest notified the NYSE that it intended to cure the price
deficiency. On October 25, 2016, the Company announced that it would conduct a one-for-four reverse split of its issued and outstanding common stock. The one-for-four reverse stock split became effective after the market closed on
November 3, 2016, and the Companys common stock began trading on a split-adjusted basis at market open on November 4, 2016. Given the increase in the Companys common stock price (with a closing price of $4.45 per share as of
November 4, 2016), the Company expects that it will regain compliance with the NYSEs minimum price listing standard on December 19, 2016.
On April 25, 2016, the Company received a notice from the NYSE stating that the Company was not in compliance with a second NYSE
continued listing requirement, which provides that a company is not in compliance if its average global market capitalization over a consecutive 30 trading-day period is less than $50 million and, at the same time, its stockholders equity
is less than $50 million. The Company believes that the sale of its Venezuelan interests on October 7, 2016 ultimately will allow it to regain compliance with this listing standard by increasing its stockholders equity. However, the
Company must demonstrate compliance for two consecutive financial quarters before the deficiency can be cured.
Upon the October 7,
2016 closing of the sale of the Companys 51 percent interest in Harvest Holding, the Company received, among other consideration, $69.4 million in net cash proceeds and a $12.0 million note payable from Delta Petroleum, due six months after
closing. A portion of the proceeds from the sale have been and will be used to fund costs associated with either the sale or development of the Companys Gabonese prospect, to pay certain severance costs, to fund capital expenditures, to
pay tax obligations related to the sale, to fund any potential future dividends declared and to maintain ongoing general operating and administrative expenses. We expect the net proceeds from the sale after the discussed expenditures to be adequate
to meet our short-term liquidity requirements.
Accumulated Undistributed Earnings of Foreign Subsidiaries
Under Accounting Standards Codification 740-30-25-17, no deferred tax liability should be recorded if sufficient evidence shows that the
subsidiary has invested or will invest these undistributed earnings or that these earnings will be remitted in a tax-free manner. Management must consider numerous factors in determining timing and amounts of possible future distribution of these
earnings to the parent company and whether a U.S. deferred tax liability should be recorded for these earnings. These factors include the future operating and capital requirements of both the parent company and the subsidiaries, remittance
restrictions imposed by foreign governments or financial agreements, and tax consequences of the remittance, including possible application of U.S. foreign tax credits and limitations on foreign tax credits that may be imposed by the Internal
Revenue Code and regulations.
As of September 30, 2016, the book-tax outside basis difference in our foreign subsidiary resulting
from unremitted earnings was zero due to the pre-tax impairment of the Companys remaining investment in Petrodelta of $164.7 million during the year ended December 31, 2015. Consequently, the Company has not recorded a deferred tax
liability associated with these foreign earnings.
D-40
Working Capital and Cash Flows
The net funds raised or used in each of the operating, investing and financing activities are summarized in the following table and discussed
in further detail below:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Net cash used in continuing operating activities
|
|
$
|
(9,206
|
)
|
|
$
|
(15,063
|
)
|
Net cash used in continuing investing activities
|
|
|
(360
|
)
|
|
|
(491
|
)
|
Net cash used in continuing financing activities
|
|
|
(15
|
)
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
9,622
|
|
|
|
21,102
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
41
|
|
|
$
|
5,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
December 31,
2015
|
|
|
|
(in thousands, except ratios)
|
|
Working (deficit) capital
|
|
$
|
(4,157
|
)
|
|
$
|
2,418
|
|
Current ratio
|
|
|
0.5
|
|
|
|
1.7
|
|
Total cash
|
|
$
|
2,546
|
|
|
$
|
2,505
|
|
Working Capital
The decrease in working capital of $6.6 million between December 31, 2015 and September 30, 2016 was primarily due to cash used
to fund our loss from operations and capital expenditures offset by the receipt of $1.7 million Internal Revenue Service (IRS) income tax receivable accrued in prior periods.
Cash Flow from Continuing Operating Activities
During the nine months ended September 30, 2016, net cash used in operating activities was approximately $9.2 million ($15.1 million
during the nine months ended September 30, 2015). The $5.9 million decrease in use of cash was primarily due to decrease in accounts receivable offset by an increase in accrued expense. The $1.7 million IRS income tax refund was received
in February 2016. We paid no cash for interest expense during 2016 ($0.6 million during 2015).
Cash Flow from Continuing Investing
Activities
Our cash capital expenditures for property and equipment are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Dussafu PSC
|
|
$
|
112
|
|
|
$
|
403
|
|
Other administrative property
|
|
|
248
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
Total additions of property and equipment
|
|
$
|
360
|
|
|
$
|
491
|
|
|
|
|
|
|
|
|
|
|
D-41
Cash Flow from Discontinued Operations
Net cash flow from discontinued operations was $9.6 million and $21.1 million for the nine months ended September 30, 2016 and 2015,
respectively. During the nine months ended September 30, 2016, the cash flow from discontinued operations was generated primarily from financing activities related to the proceeds from 15% Note and the Additional Draw Note and contributions
from the noncontrolling interests offset by the net loss during the period. During the nine months ended September 30, 2015, the cash flow from discontinued operations was generated primarily from net proceeds from issuance of debt offset by
financing costs and the net loss during the period.
Effects of Changing Prices, Foreign Exchange Rates and Inflation
Our results of operations and cash flow are affected by changing oil prices. Fluctuations in oil prices may affect our total planned
development activities and capital expenditure program.
Harvest Vincclers functional and reporting currency was the U.S. Dollar.
They did not have currency exchange risk other than the official prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars (Bolivars).
Within the United States and other countries in which we conduct business, inflation has had a minimal effect on us, but it is an important
factor with respect to certain aspects of the results of operations in Venezuela. The inflation rate in Venezuela for the year ended December 31, 2015 was 180.9 percent.
Off-Balance Sheet Arrangements
On
January 4, 2016, HNR Finance B.V., a wholly owned subsidiary of Harvest Holding (HNR Finance), provided a loan to CT Energia in the amount of $5.2 million under an 11.0% promissory note due 2019 (the CT Energia
Note). The purpose of the loan was to provide CT Energia with collateral to obtain funds for one or more loans to Petrodelta, which is 40% owned by HNR Finance. HNR Finances sole recourse for payment of the principal amount of the loan
is the payments of principal and interest from loans that CT Energia has made to Petrodelta. The source of funds for HNR Finances $5.2 million loan to CT Energia was a capital contribution from Harvest Holding, which, in return, received the
same aggregate amount of capital contributions from its shareholders, pro rata according to their equity interests in Harvest Holding. Of that aggregate amount of capital contributions, HNR Energia contributed $2.6 million, which was a capital
contribution from Harvest. During the three months ended March 31, 2016, we recorded a $5.2 million allowance to fully reserve the CT Energia Note due to concerns related to the continued deteriorating economic conditions in Venezuela and our
assessment relating to the probability that the CT Energia Note will be collected. As of September 30, 2016, the CT Energia Note remained fully reserved and we had not accrued any interest with respect to this note receivable. As described
under
Note 1 Organization Share Purchase Agreement
, the Company sold its 40% interest in Harvest Holding (the parent company of HNR Finance, which holds the CT Energia Note) to an affiliate of CT Energy on October 7,
2016.
D-42
Appendix E
Unaudited Financial Statements of Harvest Dussafu B.V.
|
|
|
|
|
Balance Sheets at September 30, 2016, December
31, 2015 and 2014
|
|
|
E-2
|
|
Statements of Operations for the Nine Months ended September
30, 2016, and for the Years Ended December 31, 2015 and 2014
|
|
|
E-3
|
|
Statements of Shareholders Equity for the Nine Months ended September 30,
2016, and for the Years Ended December 31, 2015 and 2014
|
|
|
E-4
|
|
Statements of Cash Flows for the Nine Months ended September
30, 2016, and for the Years Ended December 31, 2015 and 2014
|
|
|
E-5
|
|
Notes to Financial Statements
|
|
|
E-6-13
|
|
E-1
HARVEST DUSSAFU B.V.
UNAUDITED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
215
|
|
|
$
|
912
|
|
|
$
|
3,623
|
|
Accounts receivable and other
|
|
|
203
|
|
|
|
786
|
|
|
|
1,034
|
|
Prepaid expenses and other
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
418
|
|
|
|
1,703
|
|
|
|
4,657
|
|
OTHER ASSETS
|
|
|
6
|
|
|
|
|
|
|
|
1,100
|
|
OIL AND NATURAL GAS PROPERTIES, net
|
|
|
29,626
|
|
|
|
31,007
|
|
|
|
54,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
30,050
|
|
|
$
|
32,710
|
|
|
$
|
60,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
34
|
|
|
$
|
1,950
|
|
Accrued expenses
|
|
|
27
|
|
|
|
197
|
|
|
|
349
|
|
Accrued expenses related party
|
|
|
19
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
46
|
|
|
|
231
|
|
|
|
2,310
|
|
LONG-TERM DEBT RELATED PARTY
|
|
|
22,200
|
|
|
|
21,710
|
|
|
|
18,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
22,246
|
|
|
|
21,941
|
|
|
|
20,658
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (See Note 6 )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, Class A, par value 1 Euro a share; 90,000 shares authorized; 18,000 shares
issued and outstanding
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
Additional paid-in capital
|
|
|
125,594
|
|
|
|
125,594
|
|
|
|
125,594
|
|
Accumulated deficit
|
|
|
(117,816
|
)
|
|
|
(114,851
|
)
|
|
|
(86,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
7,804
|
|
|
|
10,769
|
|
|
|
39,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
30,050
|
|
|
$
|
32,710
|
|
|
$
|
60,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
E-2
HARVEST DUSSAFU B.V.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
Years Ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Impairment unproved oil and natural gas property and oilfield inventories
|
|
|
1,452
|
|
|
|
24,178
|
|
|
|
50,325
|
|
Exploration expense
|
|
|
1,240
|
|
|
|
3,465
|
|
|
|
5,159
|
|
General and administrative related party
|
|
|
41
|
|
|
|
53
|
|
|
|
45
|
|
General and administrative
|
|
|
42
|
|
|
|
774
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,775
|
|
|
|
28,471
|
|
|
|
55,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(2,775
|
)
|
|
|
(28,471
|
)
|
|
|
(55,583
|
)
|
OTHER NON-OPERATING INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense related party
|
|
|
(182
|
)
|
|
|
(147
|
)
|
|
|
(268
|
)
|
Foreign currency transaction loss
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190
|
)
|
|
|
(152
|
)
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS BEFORE INCOME TAXES
|
|
|
(2,965
|
)
|
|
|
(28,623
|
)
|
|
|
(55,876
|
)
|
INCOME TAX EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(2,965
|
)
|
|
$
|
(28,623
|
)
|
|
$
|
(55,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
E-3
HARVEST DUSSAFU B.V.
UNAUDITED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common
Shares
Issued
|
|
|
Share
Capital
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
Shareholders
Equity
|
|
Balance at January 1, 2014
|
|
|
18,000
|
|
|
$
|
26
|
|
|
$
|
1,593
|
|
|
$
|
(30,352
|
)
|
|
$
|
(28,733
|
)
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
124,001
|
|
|
|
|
|
|
|
124,001
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,876
|
)
|
|
|
(55,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
|
18,000
|
|
|
|
26
|
|
|
|
125,594
|
|
|
|
(86,228
|
)
|
|
|
39,392
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,623
|
)
|
|
|
(28,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
18,000
|
|
|
|
26
|
|
|
|
125,594
|
|
|
|
(114,851
|
)
|
|
|
10,769
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,965
|
)
|
|
|
(2,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
18,000
|
|
|
$
|
26
|
|
|
$
|
125,594
|
|
|
$
|
(117,816
|
)
|
|
$
|
7,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
E-4
HARVEST DUSSAFU B.V.
UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
Years Ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,965
|
)
|
|
$
|
(28,623
|
)
|
|
$
|
(55,876
|
)
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Impairment expense unproved oil and natural gas properties and oilfield
inventories
|
|
|
1,452
|
|
|
|
24,178
|
|
|
|
50,325
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other
|
|
|
583
|
|
|
|
248
|
|
|
|
157
|
|
Prepaid expenses and other
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
53
|
|
Other assets
|
|
|
(6
|
)
|
|
|
1,100
|
|
|
|
(366
|
)
|
Accounts payable
|
|
|
(35
|
)
|
|
|
(1,916
|
)
|
|
|
(2,636
|
)
|
Accrued expenses
|
|
|
(112
|
)
|
|
|
(99
|
)
|
|
|
(7,515
|
)
|
Other current liabilities
|
|
|
|
|
|
|
(11
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(1,078
|
)
|
|
|
(5,127
|
)
|
|
|
(15,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions of property and equipment
|
|
|
(109
|
)
|
|
|
(946
|
)
|
|
|
(1,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(109
|
)
|
|
|
(946
|
)
|
|
|
(1,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans from shareholder
|
|
|
490
|
|
|
|
3,362
|
|
|
|
18,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
490
|
|
|
|
3,362
|
|
|
|
18,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(697
|
)
|
|
|
(2,711
|
)
|
|
|
1,166
|
|
CASH AND CASH EQUAVALENTS AT BEGINNING OF PERIOD
|
|
|
912
|
|
|
|
3,623
|
|
|
|
2,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
215
|
|
|
$
|
912
|
|
|
$
|
3,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
223
|
|
|
$
|
143
|
|
|
$
|
257
|
|
Supplemental Schedule of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accrued capital expenditures
|
|
$
|
39
|
|
|
$
|
54
|
|
|
$
|
|
|
See accompanying notes to financial statements.
E-5
HARVEST DUSSAFU B.V.
Notes to Unaudited Financial Statements
Note 1 Organization
Harvest
Dussafu B.V. (the Company or We) is a Dutch private company with limited liability. As of September 30, 2016 the Company is 100 percent owned by HNR Energia, B.V. (HNR Energia). Harvest Dussafu holds oil and
gas exploration and exploitation acreage offshore of the Republic of Gabon (Gabon) through the Dussafu Marin Permit (Dussafu PSC). We are the operator of the Dussafu PSC with a 66.67 percent ownership interest. Located
offshore Gabon, adjacent to the border with the Republic of Congo, the Dussafu PSC covers an area of 680,000 acres with water depths up to 1,650 feet. See
Note 5 Gabon
.
Note 2 Liquidity and Going Concern
The Companys primary ongoing use of cash has been to fund exploration and development costs of the Dussafu PSC as well as general and
administrative costs. The Companys primary source of cash has been advances and contributions from its shareholder. The Company expects that cash requirements will be met either through capital contributions or loans from its shareholder.
The Companys operations are subject to various risks inherent in foreign operations. These risks may include, among other things, loss
of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection, civil unrest, strikes and other political risks, increases in taxes and governmental royalties, being subject to foreign laws, legal
systems and the exclusive jurisdiction of foreign courts or tribunals, renegotiation of contracts with governmental entities, changes in laws and policies, including taxes, governing operations of foreign-based companies, currency restrictions and
exchange rate fluctuations and other uncertainties arising out of foreign government sovereignty over our international operations. Our international operations may also be adversely affected by the U.S. Foreign Corrupt Practices Act and similar
worldwide anti-corruption laws, laws and policies of the United States affecting foreign policy, foreign trade, taxation and the possible inability to subject foreign persons to the jurisdiction of the courts in the United States.
For the nine months ended September 30, 2016, the Company had net loss of $3.0 million and had negative cash flows from operations of
$1.1 million. At September 30, 2016, the Company had an accumulated deficit of approximately $117.8 million and working capital of approximately $400 thousand. The Company currently does not have any source of revenue or operating
cash inflows.
The Company expects that for the remainder of 2016 it will not generate revenue, will continue to generate losses from
operations, and its cash flows will not be sufficient to cover its operating expense; therefore, expected continued losses from operations and use of cash will be funded through capital contributions or advances from its shareholder and/or operating
cost reductions.
Failure to generate sufficient cash flow from additional capital through capital contributions or advances from its
shareholder could have a material adverse effect on its ability to meet short- and long-term liquidity needs and achieve its intended long-term business objectives.
The Companys financial statements have been prepared under the assumption that it will continue as a going concern, which contemplates
that it will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business. The accompanying unaudited financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that could result should it be unable to continue as a going concern.
The Company is currently assessing alternatives to farm-down or sell the Dussafu Project, while weighing the liquidity requirements necessary
to maintain ongoing Company operations.
E-6
Note 3 Summary of Significant Accounting Policies
Use of Estimates
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 reporting period. The most significant estimates pertain to the valuation of the Companys
investment in the Dussafu block. These valuations are impacted by estimates of unproved oil and natural gas reserve volumes and future development costs of Dussafu. Actual results could differ from those estimates.
Reporting and Functional Currency
The
United States Dollar (U.S. Dollar) is the reporting and functional currency for Harvest Dussafu. Amounts denominated in non-U.S. Dollar currencies are re-measured into U.S. Dollars, and all currency gains or losses are recorded in
the statements of operations. There are many factors that affect foreign exchange rates and the resulting exchange gains and losses, many of which are beyond the Companys influence.
Cash and Cash Equivalents
Cash
equivalents include money market funds and short term certificates of deposit with original maturity dates of less than three months.
Financial
Instruments
Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash and
cash equivalents, and accounts receivable. The Company maintains cash and cash equivalents in bank deposit accounts with commercial banks with high credit ratings, which, at times may exceed the federally insured limits. The Company has not
experienced any losses from such investments. Concentrations of credit risk with respect to accounts receivable are limited due the nature of the receivables, which include primarily income tax receivables. In the normal course of business,
collateral is not required for financial instruments with credit risk.
Oil and Natural Gas Properties
The major components of oil and natural gas properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30
2016
|
|
|
As of December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Unproved property costs Dussafu PSC
|
|
$
|
28,072
|
|
|
$
|
28,000
|
|
|
$
|
50,324
|
|
Oilfield inventories
|
|
|
1,554
|
|
|
|
3,006
|
|
|
|
3,967
|
|
Other administrative property
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas properties
|
|
|
29,626
|
|
|
|
31,009
|
|
|
|
54,294
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas properties, net
|
|
$
|
29,626
|
|
|
$
|
31,007
|
|
|
$
|
54,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties are stated at cost less accumulated depreciation. Costs of improvements that
appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of oil and natural
E-7
gas properties, net of the related accumulated depreciation is removed and, if appropriate, gains or losses are recognized in investment earnings and other. We did not record any depletion
expense in 2016 and for the years ended December 31, 2015 and 2014 as there was no production related to proved oil and natural gas properties.
We follow the successful efforts method of accounting for our oil and natural gas properties. Under this method, exploration costs such as
exploratory geological and geophysical costs, delay rentals and exploration overhead are charged against earnings as incurred. Costs of drilling exploratory wells are capitalized pending determination of whether proved reserves can be attributed to
the area as a result of drilling the well. If management determines that proved reserves, as that term is defined in Securities and Exchange Commission (SEC) regulations, have not been discovered, capitalized costs associated with the
drilling of the exploratory well are charged to expense. Costs of drilling successful exploratory wells, all development wells, and related production equipment and facilities are capitalized and depleted or depreciated using the unit-of-production
method as oil and natural gas is produced. During the nine months ended September 30, 2016, and the years ended December 31, 2015 and 2014, no dry hole costs were expensed.
Leasehold acquisition costs are initially capitalized. Acquisition costs of unproved leaseholds are assessed for impairment during the holding
period. Costs of maintaining and retaining unproved leaseholds are included in exploration expense. Costs of impairment of unsuccessful leases are included in impairment expense. We assess our unproved property costs for impairment when events or
circumstances indicate a possible decline in the recoverability of the carrying value of the projects. The estimated value of our unproved projects is determined using quantitative and qualitative assessments and the carrying value of the
projects is adjusted if the carrying value exceeds the assessed value of the projects.
Impairment is based on specific identification of
the lease. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oil and natural gas properties.
Proved oil and natural gas properties are reviewed for impairment at a level for which identifiable cash flows are independent of cash flows
of other assets when facts and circumstances indicate that their carrying amounts may not be recoverable. In performing this review, future net cash flows are determined based on estimated future oil and natural gas sales revenues less future
expenditures necessary to develop and produce the reserves. If the sum of these undiscounted estimated future net cash flows is less than the carrying amount of the property, an impairment loss is recognized for the excess of the propertys
carrying amount over its estimated fair value, which is generally based on discounted future net cash flows. We did not have any proved oil and natural gas properties in 2016, 2015 and 2014.
Costs of drilling and equipping successful exploratory wells, development wells, asset retirement liabilities and costs to construct or
acquire offshore platforms and other facilities, are depleted using the unit-of-production method based on total estimated proved developed reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from
unproved leaseholds, are depleted using the unit-of-production method based on total estimated proved reserves. All other properties are stated at historical acquisition cost, net of impairment, and depreciated using the straight-line method over
the useful lives of the assets.
During the nine months ended September 30, 2016 we recorded impairment expense of $1.5 million
related to our oilfield inventories. During the year ended December 31, 2015, we recorded impairment expense related to our Dussafu Project of $24.2 million (including $1.0 million related to oilfield inventories). During the year ended
December 31, 2014, we recorded impairment expense related our Dussafu Project of $50.3 million.
Other Administrative Property
Furniture, fixtures and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which
range from three to five years. Leasehold improvements are recorded at cost and amortized using the straight-line method over the life of the applicable lease. For the year ended
E-8
December 31, 2015, depreciation expense was $0.1 million and $0.1 million for the year ended December 31, 2014. During the nine months ended September 30, 2016 no depreciation
expense was recorded as all of our assets were fully depreciated.
Other Assets
Other Assets at December 31, 2014 include deposits and prepaid expenses which are expected to be realized in the next 12 to 24 months,
including a blocked payment related to our drilling operations which was blocked in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by the United States Treasury
Departments Office of Foreign Assets Control (OFAC). See
Note 6 Commitments and Contingencies
. During 2015, we fully reserved the blocked payment and recorded an allowance for doubtful accounts of $0.7 million and the
remaining balance of the blocked payment was reclassified to a receivable from our joint venture partners for $0.4 million.
Capitalized Interest
We capitalize interest costs for qualifying oil and natural gas properties. The capitalization period begins when expenditures are
incurred on qualified properties, activities begin which are necessary to prepare the property for production and interest costs have been incurred. The capitalization period continues as long as these events occur. The average additions for the
period are used in the interest capitalization calculation. During the nine months ended September 30,2016 and the year ended December 31, 2015, we did not capitalize interest costs as there were no qualifying oil and natural gas property
additions and capitalized $0.5 million during the year ended December 31, 2014.
Fair Value Measurements
We measure and disclose our fair values in accordance with the provisions of ASC 820 Fair Value Measurements and Disclosures
(ASC 820). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a
three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
|
|
|
Level 1 Inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly.
|
|
|
|
Level 3 Inputs to the valuation techniques that are unobservable for the assets or liabilities.
|
Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents and accounts
receivable. We maintain cash and cash equivalents in bank deposit accounts with commercial banks with high credit ratings, which, at times may exceed the federally insured limits. We have not experienced any losses from such investments.
Concentrations of credit risk with respect to accounts receivable are limited due to the nature of our receivables. In the normal course of business, collateral is not required for financial instruments with credit risk. The estimated fair value of
cash and cash equivalents and accounts receivable approximates their carrying value due to their short-term nature (Level 1). We had no recurring assets or liabilities accounted for at fair value as of September 30, 2016, December 31,
2015 and December 31, 2014. During the years ended December 31, 2015 and December 31, 2014, we impaired the carrying value of our Dussafu project by $23.2 million and $50.3 million, respectively based upon our estimated fair value of
the project. See
Note 5 Gabon
for more information.
E-9
The following tables are set forth by level, within the fair value hierarchy, for our Dussafu
project as of December 31, 2015 and December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Non recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dussafu PSC
|
|
|
|
|
|
|
|
|
|
|
28,000
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Non recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dussafu PSC
|
|
|
|
|
|
|
|
|
|
|
50,324
|
|
|
|
50,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,324
|
|
|
$
|
50,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 Taxes
Taxes on Income
The Company is subject to
corporate income tax in the Netherlands, its country of incorporation, as well as in Gabon.
Deferred income taxes reflect the net tax
effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and
tax credit carryforwards. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the
existing deferred tax assets (DTAs). A significant piece of objective negative evidence evaluated was the cumulative losses incurred in our foreign operating entities over the three-year period ended December 31, 2015. Such
objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. We have therefore placed a valuation allowance (VA) on all of our DTAs.
The components of loss from operations before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended
September 30
2016
|
|
|
Year ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Loss before income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands
|
|
$
|
(262
|
)
|
|
$
|
(346
|
)
|
|
$
|
(355
|
)
|
Gabon
|
|
|
(2,703
|
)
|
|
|
(28,277
|
)
|
|
|
(55,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,965
|
)
|
|
$
|
(28,623
|
)
|
|
$
|
(55,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-10
As of December 31, 2015, the Company has not generated any revenue and has the following net
operating losses available for carryforward (in thousands):
|
|
|
|
|
|
|
The Netherlands
|
|
$
|
11,858
|
|
|
Expiring over the period 2016 through 2020
|
Gabon
|
|
$
|
22,269
|
|
|
Expiring over the period 2016 through 2018
|
We file income tax returns in The Netherlands and in Gabon. With few exceptions, we are no longer subject to
Netherlands tax examinations by tax authorities for years before 2013. Our primary income tax jurisdictions and their respective open audit years are:
|
|
|
|
|
Tax Jurisdiction
|
|
Open Audit Years
|
|
The Netherlands
|
|
|
2013 2015
|
|
Gabon
|
|
|
2008 2015
|
|
Note 5 Gabon
The Dussafu PSC partners and the Republic of Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources, entered
into the third exploration phase of the Dussafu PSC with an effective date of May 28, 2012. The Ministry of Mines, Energy, Petroleum and Hydraulic Resources agreed to lengthen the third exploration phase to four years until May 27, 2016.
The Company is currently assessing extension possibilities for the exploration phase.
During 2011, we drilled our first exploratory well,
Dussafu Ruche Marin-1 (DRM-1), and two appraisal sidetracks. DRM-1 and the sidetracks are currently suspended pending further exploration and development activities.
Well planning progressed during 2012 to drill an exploration well in the fourth quarter of 2012 on the Tortue prospect. DTM-1 well was spud
November 19, 2012. DTM-1 was drilled with the Scarabeo 3 semi-submersible drilling unit. On January 4, 2013, we announced that DTM-1 had reached the Dental Formation and discovered oil in both the Gamba and Dentale formations. The first
appraisal sidetrack of DTM-1 (DTM-1ST1) was spud in January 12, 2013. DTM-1ST1 was drilled in the Dentale Formation. Due to a stuck downhole tool, logging operations were terminated before pressure data could be collected to confirm
connectivity. The downhole tool was retrieved and the DTM-1 well suspended for future re-entry.
Operational activities during 2014
included additional evaluation of development alternatives, preparation and a formal remittance of a field development plan along with continued processing of 3D seismic acquired in 2013. On March 26, 2014, the joint venture partners approved a
resolution that the discovered fields are commercial to exploit. On June 4, 2014, a Declaration of Commerciality (DOC) was signed with Gabon pertaining to the four discoveries on the Dussafu Project offshore Gabon. Furthermore,
on July 17, 2014, the Direction Generale Des Hydrocarbures (DGH) awarded an Exclusive Exploitation Authorization (EEA) for the development and exploitation of certain oil discoveries on the Dussafu Project and on
October 10, 2014, the field development plan was approved. The Company has four years from the date of the EEA approval to begin production.
The Company is currently assessing alternatives to farm-down or sell the Dussafu Project, while weighing the liquidity requirements necessary
to maintain ongoing Company operations.
Operational activities during the nine months ended September 30, 2016, included continued
evaluation of development plans, based on the 3D seismic data acquired in late 2013 and processed during 2014.
E-11
In December 2014, the Company recorded a $50.3 million impairment related to the unproved costs
of the Dussafu PSC based on a qualitative analysis which considered our current liquidity needs, our inability to attract additional capital and the decrease in oil and natural gas prices. In December 2015, the Company reassessed the carrying
value of the unproved costs related to the Dussafu PSC and recorded an additional impairment of $23.2 million based on its analysis of the value of the unproved costs which considered the value of the contingent and exploration resources and
the ability of the Company to develop the project given its current liquidity situation and the depressed price of crude oil.
In the
impairment analysis in December 2015, the Company prepared a quantitative and qualitative assessment of the unproved property which estimated the value of the estimated contingent and exploration resources based on the Companys ability to
develop the project given its current liquidity situation and the depressed price of crude oil. The valuation model developed used three price scenarios and a development decision tree model which estimated the value of three development
options available to the Company. The value of the development options was determined using outputs from a Monte Carlo simulation model which estimated the net present value of expected future cash flow to be generated from the development of
the contingent and exploratory resources in the Dussafu PSC and discounted using a weighted average cost of capital of 21.5%. The development options considered the probability that the Company would be: a) able to farm-down 50% of their working
interest; b) able to sell their working interest; and c) unable to complete either of the first 2 options. All inputs used in the valuation process were primarily level 3 in the fair value hierarchy. The concluded fair value of the unproved property
costs in our Dussafu project was $28.0 million.
In September 2016, the Company assessed the need for impairment related to the unproved
properties of the Dussafu PSC. The primary factors considered were the current bids received which substantiated the carrying value at September 30, 2016. Other factors considered were price forecasts, drilling costs and the remaining
time on the EEA; none of which currently indicated a need for impairment. Based on our September 2016 review, it is the opinion of the Company that no impairment was needed as of September 30, 2016.
We also reviewed the value of our oilfield inventories that are in Gabon, of which the majority is steel conductor and casing. We impaired the
value of this inventory by approximately $1.0 million during the year ended December 31, 2015 and $1.4 million during the nine months ended September 30, 2016, leaving $1.6 million related to this inventory as of September 30,
2016.
Note 6 Commitments and Contingencies
We have various contractual commitments pertaining to leasehold, training, and development costs for the Dussafu PSC. Under the EEA granted for
the Dussafu PSC on July 17, 2014, we are required to commence production within four years of the date of grant in order to preserve our rights to production under the EEA. We expect that significant capital expenditures will be required prior
to commencement of production under the approved field development plan. These work commitments are non-discretionary; however, we do have the ability to control the pace of expenditures. The table below consists of our contractual commitments for
office space and various other commitments as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-2 Years
|
|
|
3-4 Years
|
|
|
After
4 Years
|
|
|
|
(in thousands)
|
|
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas activities
|
|
$
|
4,520
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
Office leases
|
|
|
99
|
|
|
|
85
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
4,619
|
|
|
$
|
1,215
|
|
|
$
|
1,144
|
|
|
$
|
1,130
|
|
|
$
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-12
Under the agreements with our partners in the Dussafu PSC, we are jointly and severally liable to
various third parties. As of September 30, 2016, December 31, 2015 and 2014, the gross carrying amount associated with obligations to third parties which were fixed at the end of each period was $37 thousand, $0.3 million and
$2.4 million, respectively, and is related to accounts payable to vendors, accrued expenses and withholding taxes payable to taxing authorities. As we are the operators for the Dussafu PSC, the gross carrying amount related to accounts payable
and withholding taxes and the net amount related to other accrued expenses are reflected in the balance sheet in accounts payable and accrued expenses leaving $12 thousand at September 30, 2016, $0.1 million in fixed obligations as of
December 31, 2015 and $0.3 million as of December 31, 2014 attributable to our joint partners share which is not accrued in our balance sheet. As we expect our partner will continue to meet their obligations to fund their share of
expenditures, we have not recognized any additional liability related to fixed joint interest obligations attributable to our joint interest partner.
Note 7 Long Term Debt Related Party
On January 15, 2009 HNR Energia entered into a Credit Facility Agreement (the Loan) with the Company, which has been amended
several times since that time. Under the current amendment, HNR Energia agrees to lend to the Company, on a revolving basis, a maximum aggregate principal amount not to exceed $130 million. The proceeds under this agreement shall be used in
connection with the Companys activities in the business of oil and gas exploration and production as well as general administration and office expenses. The interest rate is based upon the London Interbank Offered Rate for three-month deposits
in dollars of the United States of America in effect on the first business day in London for the relevant calendar quarter plus 0.5 percent. Interest expense under this loan was $0.2 million for the nine months ended September 30, 2016, $0.1
million for the year ended December 31, 2015, and $0.3 for the year ended December 31, 2014.
Note 8 Related Party Transactions
The Company is billed certain costs (primarily labor) from HNR Energia related to support for the Gabon operations. These costs
totaled $0.9 million, $3.4 million and $5.8 million for the nine months ended September 30, 2016 and the years ended December 31, 2015 and 2014, respectively. Amounts borrowed from HNR Energia amounted to $22.2 million, $21.7 million and
$18.3 million as of September 30, 2016 and as of December 31, 2015 and 2014, respectively and are shown as related party loans in the respective balance sheet.
Note 9 Subsequent Events
The
Company evaluates events and transactions occurring after the balance sheet date but before the financial statements are available to be issued. The Company evaluated such events and transactions through January 13, 2017, the date the unaudited
financial statements were available for issuance.
On December 21, 2016, Harvest Natural Resources, Inc. (Harvest, the
parent company of HNR Energia) and HNR Energia, entered into a Share Purchase Agreement with BW Energy Gabon Pte. Ltd, a private Singapore company (
BW Energy
) to sell Harvest Dussafu which holds all of Harvests interests in
Gabon. Under the terms of the Share Purchase Agreement (
the Gabon Transaction
), BW Energy will acquire 100% of the outstanding shares of Harvest Dussafu from HNR Energia for $32.0 million, subject to closing adjustments. After the
closing of the Gabon Transaction, Harvest and Harvest Energia would cease to have a presence in Gabon.
Harvests Board unanimously
determined the Gabon Transaction is in the best interests of Harvests stockholders and has approved the Share Purchase Agreement. Closing of the Gabon Transaction is subject to approval by stockholders representing a majority of outstanding
shares of Harvest common stock and approval by the Government of Gabon.
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Appendix F
HARVEST NATURAL RESOURCES, INC.
PLAN OF COMPLETE LIQUIDATION, DISSOLUTION, WINDING UP AND
DISTRIBUTION
This Plan of
Complete Liquidation, Dissolution, Winding Up and Distribution (this Plan) is intended to describe and govern the implementation of the complete liquidation, dissolution and winding up of Harvest Natural Resources, Inc., a Delaware
corporation (the Company), and the distribution of all of its assets available for distribution to its stockholders under the Delaware General Corporation Law (the DGCL), all in accordance with the applicable provisions of
the DGCL and Section 331 of the Internal Revenue Code of 1986, as amended.
1. Authorization of Complete Liquidation and
Dissolution by the Board and the Companys Stockholders
.
The board of directors of the Company (the Board) has deemed it advisable that the Company be dissolved, has adopted a resolution authorizing the dissolution of the
Company, and has approved and adopted this Plan. This Plan shall become effective, shall constitute the authorized plan of complete liquidation and dissolution of the Company, and shall evidence the authority of the Company to take all actions
described in this Plan beginning on the date that the holders of a majority of the outstanding common stock of the Company authorize the Companys complete liquidation and dissolution.
2. Certificate of Dissolution and Effective Time
.
Following authorization of the complete liquidation and dissolution of the
Company by the Companys stockholders, and at such time as the Board deems appropriate, the Company shall execute, acknowledge and file with the Secretary of State of the State of Delaware a certificate of dissolution in accordance with the
DGCL and ensure that all taxes (including franchise taxes) and fees required by the State of Delaware are tendered to the appropriate office or agency of the State of Delaware. The Company shall be dissolved at the time (the Effective
Time) that the certificate of dissolution is filed with the Office of the Secretary of State of the State of Delaware or such later time as may be stated in the certificate of dissolution.
3. Survival Period
.
For three years after the Effective Time (or such longer period as the Delaware Court of Chancery may
direct) (the Survival Period), the Company shall be continued as a body corporate for the purpose of prosecuting and defending lawsuits (civil, criminal or administrative) by or against the Company; settling and closing its business;
disposing of and conveying its property; discharging its liabilities; and distributing its remaining assets to its stockholders. However, after the Effective Time, the Company shall not engage in any business for which the Company was organized,
including business activities related to the petroleum exploration and production industry, except to the extent necessary, appropriate or incidental to preserving the value of its assets and winding up its business affairs in accordance with this
Plan.
4. General Liquidation, Winding Up and Distribution Process
.
Unless the Company chooses to follow the procedures
described in Section 5 of this Plan, as soon as practicable after the Effective Time, the Company shall generally pay or make reasonable provision to pay all claims and obligations of the Company, including contingent, conditional or unmatured
contractual claims known to the Company; make such provision as will be reasonably likely to be sufficient to provide compensation for any claim against the Company that is the subject of a pending action, suit or proceeding to which the Company is
a party; and make such provisions as will be reasonably likely to be sufficient to provide compensation for claims that have not been made known to the Company or that have not arisen but that, based on facts known to the Company, are likely to
arise or to become known to the Company within ten years following the Effective Time. Any remaining assets shall be distributed to the Companys stockholders. Unless the Board otherwise determines to be necessary or advisable, the Company
shall liquidate all of its assets into cash before using any assets to satisfy claims, pay costs and expenses or make any distributions to its stockholders. To the extent that the Company has insufficient assets to satisfy claims or pay costs and
expenses, it shall pay those claims, costs and expenses according to their priority
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under applicable law, and, among claims of equal priority, ratably to the extent of available assets. Unless otherwise prohibited by the DGCL, before or after the Effective Time, the Company may
make distributions to its stockholders in any amount from time to time in accordance with applicable law.
5. Safe Harbor Liquidation,
Winding Up and Distribution Process
.
(a)
Procedures
. At the discretion of the Board, the Company may seek to
comply with the procedures set forth in Section 280 of the DGCL (sometimes referred to as safe harbor procedures) regarding notices to claimants and filing of claims. These procedures include, without limitation, giving notice of
the Companys dissolution to all claimants and publishing that notice, in such manner and containing such information as required by the DGCL, including a requirement that any claimant (other than parties to existing lawsuits) must present a
claim in writing to the Company; accepting or rejecting all or any part of the claim made in writing and informing any claimant making a rejected claim that if the claimant does not commence an action, suit or proceeding with respect to the claim
within the time period described by the DGCL, the claim will be barred; offering security or compensation to claimants under contracts if any claim is contingent, conditional or unmatured; and petitioning the Delaware Court of Chancery to make any
necessary determinations of the amount and form of security (i) that will be reasonably likely to be sufficient to provide compensation for any claim that is the subject of a pending action, suit or proceeding, (ii) that will be sufficient
to provide compensation to any claimant under a contract who has rejected the Companys offer for security and (iii) that will be reasonably likely to be sufficient to provide compensation for claims that have not been made known or have
not arisen, but are likely to arise based on facts known to the Company within the time periods described by the DGCL.
(b)
Steps To
Be Taken
. If the Board elects to comply with the safe harbor dissolution procedures described in Section 5(a) of this Plan, then the Company shall pay the claims made and not rejected in accordance with those procedures, post the
security offered and not rejected pursuant to those procedures, post any security ordered by the Delaware Court of Chancery in any proceeding under those procedures and pay or make provision for all other claims that are mature, known and
uncontested or that have been finally determined to be owing by the Company, all in accordance with the requirements of the DGCL. Any remaining assets shall be distributed to the Companys stockholders; provided, however, that after the
Effective Time, no distribution may be made to the Companys stockholders until 150 days after the date of the last notice of rejection given by the Company pursuant to those procedures.
6. Back-Up Liquidation, Winding Up and Distribution Process
.
If for any reason the Board deems it inadvisable or impracticable
to comply with the safe harbor procedures described in Section 5 of this Plan, then the Board shall comply with the general procedures described in Section 4 of this Plan and in the DGCL. The Company may commence compliance with the safe
harbor procedures described in Section 5 of this Plan and then, based on the Boards decision, abandon compliance with those procedures at any time.
7. Directors and Personnel
.
Each director of the Company before the Effective Time shall continue to act as a director of the
Company during the Survival Period or until his earlier resignation, incapacity or death. Vacancies in the Board shall be filled in accordance with the DGCL, unless the Board shall determine that the number of directors shall be reduced after the
incurrence of a vacancy, in accordance with the Companys bylaws. The Board may increase the number of directors in accordance with the Companys bylaws and fill the vacancies so created in accordance with the DGCL. During the Survival
Period, the powers and authority of the Board shall continue in accordance with the DGCL. Each officer of the Company before the Effective Time shall continue to act as an officer of the Company during the Survival Period or until his earlier
resignation, incapacity, death or removal. An officer or a director may resign from his duties at any time, upon giving written notice to the Board. Each employee of the Company before the Effective Time shall continue to be an employee of the
Company during the Survival Period or until his or her earlier resignation, incapacity, death or termination of employment. Nothing contained in this Section 7 shall be deemed to prohibit a person who is or was a director, officer or employee
of the Company and has ceased to serve in that capacity from entering into agreements or arrangements to provide the Company with services during the Survival Period. During the
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Survival Period, the Company may select, retain, hire, employ or contract with such employees, consultants, agents, trustees, independent professional advisors (including legal counsel,
accountants and financial advisors) and others, as the Board may determine, from time to time, to be necessary or advisable to effect the liquidation, winding up and distribution of assets described in this Plan.
8. Costs and Expenses
.
Generally, during the Survival Period, the Company shall pay all costs and expenses that the Board may
determine from time to time to be necessary or advisable to effect the Companys liquidation and winding up in accordance with this Plan and as may be necessary or advisable to continue the Companys existence and operations. These costs
and expenses may include, without limitation, brokerage, agency, professional, consulting and other fees and expenses of persons rendering services to the Company in connection with the matters described in this Plan and costs incurred to comply
with contracts to which the Company is a party. During the Survival Period, the Companys directors shall be entitled to continue to receive the fees, reimbursements and other benefits afforded to them immediately before the Effective Time,
except as those fees and benefits may be adjusted from time to time by the Board. Until an employees employment by the Company has terminated, the Company shall continue to provide the employee with such salary and other compensation,
reimbursements, and other employee benefits as were paid or payable by the Company immediately before the Effective Time, except as may otherwise be specifically provided by any employee benefit plan, arrangement or agreement relating to the
employees employment, in which case the Company shall pay or otherwise provide the employee such amounts and benefits as provided by any such benefit plan, arrangement or agreement. At the discretion of the Board, the Company may increase the
compensation of any officer, director, employee, agent or representative in recognition of the extraordinary efforts any of them may be required to undertake, or actually undertake, in connection with the implementation of this Plan.
9. Contracts in General
.
During the Survival Period, the Company shall, at the discretion of the Board, maintain such contracts
as were existing before the Effective Time or enter into new contracts (including without limitation, leases, contracts for services and insurance policies) from time to time, as may be necessary or advisable to effect the Companys liquidation
and winding up and distribution of its assets. The Company shall comply with all material requirements of each contract to which it is a party, whether existing before the Effective Time or entered into after the Effective Time, until such time as
the contract is terminated in accordance with its own terms, by agreement of the parties to the contract, or by order of the Delaware Court of Chancery.
10. Indemnification
.
The Company shall continue to indemnify its officers, directors, employees and agents in accordance with,
and to the extent required or permitted by, the DGCL, the Companys certificate of incorporation, the Companys bylaws and any contractual arrangements, whether these arrangements existed before the dissolution or were entered into after
the dissolution, and shall continue to maintain the Companys existing directors and officers liability insurance policy. During the Survival Period, acts and omissions of any indemnified or insured person in connection with the
implementation of this Plan shall be covered to the same extent that they were covered before the Effective Time.
11. Compliance with
Laws
.
During the Survival Period, the Company shall comply in all material respects with all laws, rules, regulations, orders, judgments or decrees promulgated by any governmental authority, whether local, state, federal or foreign,
applicable to the Company or any subsidiary of the Company. Nothing contained in the foregoing sentence shall prohibit the Company, at the discretion of the Board, from seeking any exemption, exception or waiver with respect to any such applicable
laws in view of the Companys pending liquidation, dissolution and winding up. Without limiting either of the foregoing two sentences in this Section 11, subject to the advice of the Companys outside counsel and accounts, and
recognizing that compliance with certain applicable securities laws and regulations may be unduly costly for a corporation that is in the dissolution process, the Company may seek relief from the U.S. Securities and Exchange Commission or its staff
(whether in the form of a no-action letter or otherwise) from certain reporting and other requirements of applicable securities laws and regulations for periods or events ending on or occurring during the Survival Period.
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12. Implied Stockholder Consent
.
Authorization of the Companys complete
liquidation and dissolution by the holders of a majority of the outstanding common stock of the Company shall constitute approval of all matters described in this Plan. Without limiting the foregoing sentence, authorization of the Companys
complete liquidation and dissolution by the holders of a majority of the outstanding common stock of the Company shall constitute the authorization of the sale, exchange or other disposition in liquidation of all of the remaining property and assets
of the Company after the Effective Time, whether the sale, exchange or other disposition occurs in one transaction or a series of transactions, and shall constitute ratification of any and all contracts for sale, exchange or other disposition that
are conditioned on stockholder approval. More particularly, and without further limitation, if the Companys sale of its Gabon interests described in the Companys definitive proxy statement to which this Plan is attached as an exhibit is
not consummated for any reason, either because the Companys stockholders do not approve the sale as proposed in the definitive proxy statement, because the parties to the transaction decide not to proceed or do not proceed with the sale, or
the conditions to the sale are not or cannot be satisfied, then authorization of the Companys dissolution by the holders of a majority of the outstanding common stock of the Company shall constitute authorization of the sale of the
Companys Gabon interests, or any part of the Companys Gabon interests, in one or more transactions that are approved by the Board, and the Company shall have no obligation to seek further approval, ratification or authorization from its
stockholders or to delay the complete liquidation, dissolution or winding up of the Company because of the failure to sell the Gabon interests as originally proposed in the definitive proxy statement.
13. Subsidiaries
.
As part of its liquidation and winding up, the Company shall take actions with respect to each of its direct
and indirect subsidiaries, based on the advice and counsel of its legal and other advisors and in accordance with the requirements of the laws and charter documents governing each subsidiary, with the intent to ensure that each subsidiary is
liquidated, dissolved and wound up, and its assets distributed, appropriately.
14. Legal Claims
.
The Company shall defend
any claims against it, its officers or directors or its subsidiaries, whether a claim exists before the Effective Time or is brought during the Survival Period, based on advice and counsel of its legal and other advisors and in such manner, at such
time and with such costs and expenses as the Board may approve from time to time. During the Survival Period, the Company may continue to prosecute any claims that it had against others before the Effective Time and may institute any new claims
against any person as the Board may determine necessary or advisable to protect the Company and its assets and rights or to implement this Plan. At the Boards discretion, the Company may defend, prosecute or settle any lawsuits, as applicable.
15. Stock of the Company
.
From and after the close of business on the date of the Effective Time, and subject to applicable
law, each holder of shares of the Companys common stock shall cease to have any rights in respect of that stock, except the right to receive distributions, if any, pursuant to and in accordance with this Plan and the DGCL. After the Effective
Time, the Companys stock transfer records shall be closed, and the Company will not record or recognize any transfer of the Companys common stock occurring after the close of business on the date of the Effective Time, except, in the
Companys sole discretion, such transfers occurring by will, intestate succession or operation of law as to which the Company has received adequate written notice. As a condition to receipt of any distribution to any holder of the
Companys common stock represented by a certificate, the Board may require the holder to surrender all certificates evidencing shares of common stock to the Company or furnish the Company with evidence satisfactory to the Board of the loss,
theft or destruction of any certificate, together with such surety bond or other security or indemnity as may be required by and satisfactory to the Board. As a condition to receipt of any distribution to any holder of the Companys common
stock that is not represented by a certificate, the Board may require the holder to provide such evidence of ownership of the stock as the Company may require. The record date for determining the stockholders who are entitled to receive any
distributions after the Effective Time, shall be the close of business on the date of the Effective Time. The sole right of a holder of record of the Companys common stock at the close of business on the date of the Effective Time shall be to
receive distributions in accordance with this Plan and the DGCL; no stockholder shall have any appraisal rights in connection with the Companys liquidation, dissolution and winding up.
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16. Unclaimed Distributions
.
If any distribution to a stockholder cannot be made,
whether because the stockholder cannot be located, has not surrendered a certificate evidencing the Companys common stock or provided other evidence of ownership as required in this Plan or by the Board or for any other reason, the
distribution to which the stockholder is otherwise entitled shall be transferred, at such time as the final liquidating distribution is made by the Company, or as soon as practicable after that distribution, to the official of such state or other
jurisdiction authorized by applicable law to receive the proceeds of the distribution. The proceeds of the distribution will thereafter be held solely for the benefit of and for ultimate distribution to the stockholder as the sole equitable owner of
the distribution and shall be treated as abandoned property and escheat to the applicable state or other jurisdiction in accordance with applicable law. The proceeds of any such distribution will not revert to or become the property of the Company
or any other stockholder.
17. Liquidating Trust
.
If deemed necessary, appropriate or desirable by the Board in furtherance
of this Plan, and based on advice of the Companys legal, tax and accounting advisors, the Company may transfer to one or more liquidating trustees, for the benefit of the Companys stockholders under a liquidating trust, all or a portion
of the assets of the Company. If assets are so transferred, each holder of the Companys common stock may receive an interest in the trust pro rata to its, his or her interest in the assets of the Company. All distributions from the trust will
be made pro rata in accordance with the interests of the stockholders in the common stock held by them. The interests in the trust will not be transferrable except by operation of law or on death of the recipient. The Board is authorized to appoint
one or more individuals, corporations, partnerships or other persons, or any combination, to act as a trustee or trustees for the benefit of the Companys stockholders and to receive assets of the Company. Any past or current officer, director,
employee, agent or representative of the Company may act as a trustee. Any trustee appointed will succeed to all right, title and interest of the Company of any kind or character with respect to the transferred assets and, to the extent of the
assets so transferred and solely in the capacity as a trustee, shall assume all of the liabilities and obligations of the Company relating to those assets, including without limitation any unsatisfied claims and unascertained or contingent
liabilities. Any conveyance of assets to a trustee shall be deemed to be a distribution of property and assets by the Company to the Companys stockholders. Any conveyance by the Company to a trustee shall be in trust for the Companys
stockholders. The Company, as authorized by the Board, may enter in to a liquidating trust agreement with one or more trustees, on such terms and conditions as the Board may deem necessary, appropriate or desirable.
18. Abandonment, Exceptions, Modifications, Clarifications and Amendments
.
Notwithstanding authorization of the complete
liquidation and dissolution of the Company by its stockholders, at any time before the Effective Time the Board may abandon the dissolution of the Company without further action by the stockholders of the Company and terminate this Plan. Without
further action by the Companys stockholders, at any time before or after the Effective Time, the Board may waive, modify or amend any aspect of this Plan and may provide for exceptions to or clarifications of the terms of this Plan. The Board
(and any other person or body authorized by the Board) shall also have the power and authority to interpret this Plan and to make any and all determinations necessary or advisable to apply this Plan to any event, fact or circumstance.
19. The Companys Certificate of Incorporation and Bylaws and the DGCL
.
The Companys certificate of incorporation and
bylaws shall continue to govern the Companys Survival Period operations, insofar as their terms apply and insofar as necessary or appropriate to implement this Plan. To any extent that the provisions of the Companys certificate of
incorporation or the Companys bylaws conflict with the terms of this Plan, the terms of this Plan shall prevail, and the adoption of this Plan shall be deemed to be an amendment to the applicable governing document, but only to the extent
necessary to resolve the conflict. The Board shall continue to have the authority to amend the Companys bylaws as it may deem necessary or advisable from time to time. To any extent that the provisions of this Plan conflict with any provision
of the DGCL, the provisions of the DGCL shall prevail, and the Board may, in its sole discretion, amend, modify or clarify this Plan, in accordance with Section 18 of this Plan, to reflect the resolution of the conflict.
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20. Jurisdiction
.
The Delaware Court of Chancery shall have exclusive jurisdiction
of any claims or questions arising in connection with the Companys liquidation, dissolution and winding up and the distribution of its assets. Pursuant to the DGCL, if, among other reasons, there shall be no member of the Board remaining, or
the Board does not or cannot exercise its authority and duties in accordance with the provisions of this Plan and the DGCL, then any creditor or stockholder of the Company, or any other person showing good cause, may apply to the Delaware Court of
Chancery to appoint one or more persons to be receivers of and for the Company, to take charge of the Companys property and to collect the debts and property due and belonging to the Company, with power to prosecute and defend, in the name of
the Company, or otherwise, all such lawsuits as may be necessary or proper, and to appoint an agent or agents under the receiver or receivers, and to do all other acts that might be done by the Company, as may be necessary for the final settlement
of the unfinished business of the Company, all in accordance with the determination of the Court of Chancery.
21. Plenary
Authorization of the Board
.
The Board is authorized, without further action by the Companys stockholders, to do and perform, or cause the officers, employees, agents and representatives of the Company, subject to approval by the
Board, to do and perform, any and all acts, and to make, execute, deliver and adopt any and all agreements, resolutions, conveyances, certificates and other documents of every kind that are deemed necessary, appropriate or desirable to implement
this Plan and the transactions contemplated by this Plan, including without limitation all filings or acts required by any local, state, federal or foreign law or regulation, to liquidate and wind up the affairs of the Company, and to distribute the
Companys remaining assets to its stockholders. All determinations and decisions to be made by the Board, and all actions to be taken by the Board, pursuant to this Plan shall be at the absolute and sole discretion of the Board. In the absence
of fraud, the judgment of the Board as to all matters in connection with the implementation of this Plan shall be conclusive.
APPROVED
AND ADOPTED by the Board of Directors of Harvest Natural Resources, Inc. on January 12, 2017.
The undersigned, being the Corporate
Secretary of Harvest Natural Resources, Inc., a Delaware corporation (the Company), hereby certifies that this Plan of Complete Liquidation, Dissolution, Winding Up and Distribution has been duly adopted by the Companys board of
directors on the above-stated date.
|
/s/ Keith L. Head
|
Keith L. Head
|
Corporate Secretary
|
Harvest Natural Resources, Inc.
|
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Appendix G
Sections 278 283 of the Delaware General Corporation Law
§ 278 Continuation of corporation after dissolution for purposes of suit and winding up affairs.
All corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of 3 years from such
expiration or dissolution or for such longer period as the Court of Chancery shall in its discretion direct, bodies corporate for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against them, and of
enabling them gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities and to distribute to their stockholders any remaining assets, but not for the purpose of continuing the business for
which the corporation was organized. With respect to any action, suit or proceeding begun by or against the corporation either prior to or within 3 years after the date of its expiration or dissolution, the action shall not abate by reason of the
dissolution of the corporation; the corporation shall, solely for the purpose of such action, suit or proceeding, be continued as a body corporate beyond the 3-year period and until any judgments, orders or decrees therein shall be fully executed,
without the necessity for any special direction to that effect by the Court of Chancery.
Sections 279 through 282 of this title shall apply to any
corporation that has expired by its own limitation, and when so applied, all references in those sections to a dissolved corporation or dissolution shall include a corporation that has expired by its own limitation and to such expiration,
respectively.
8 Del. C. 1953, § 278; 56 Del. Laws, c. 50; 66 Del. Laws, c. 136, § 36; 77 Del. Laws, c. 290, § 26.;
§ 279 Trustees or receivers for dissolved corporations; appointment; powers; duties.
When any corporation organized under this chapter shall be dissolved in any manner whatever, the Court of Chancery, on application of any creditor, stockholder
or director of the corporation, or any other person who shows good cause therefor, at any time, may either appoint 1 or more of the directors of the corporation to be trustees, or appoint 1 or more persons to be receivers, of and for the
corporation, to take charge of the corporations property, and to collect the debts and property due and belonging to the corporation, with power to prosecute and defend, in the name of the corporation, or otherwise, all such suits as may be
necessary or proper for the purposes aforesaid, and to appoint an agent or agents under them, and to do all other acts which might be done by the corporation, if in being, that may be necessary for the final settlement of the unfinished business of
the corporation. The powers of the trustees or receivers may be continued as long as the Court of Chancery shall think necessary for the purposes aforesaid.
8 Del. C. 1953, § 279; 56 Del. Laws, c. 50; 66 Del. Laws, c. 136, § 37.;
§ 280 Notice to claimants; filing of claims.
(a)(1)
After a corporation has been dissolved in accordance with the procedures set forth in this chapter, the corporation or any successor entity may give notice of the dissolution, requiring all persons having a claim against the corporation other than a
claim against the corporation in a pending action, suit or proceeding to which the corporation is a party to present their claims against the corporation in accordance with such notice. Such notice shall state:
a. That all such claims must be presented in writing and must contain sufficient information reasonably to inform the corporation or successor entity of the
identity of the claimant and the substance of the claim;
b. The mailing address to which such a claim must be sent;
c. The date by which such a claim must be received by the corporation or successor entity, which date shall be no earlier than 60 days from the date thereof;
and
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d. That such claim will be barred if not received by the date referred to in paragraph (a)(1)c. of this section;
and
e. That the corporation or a successor entity may make distributions to other claimants and the corporations stockholders or persons interested
as having been such without further notice to the claimant; and
f. The aggregate amount, on an annual basis, of all distributions made by the corporation
to its stockholders for each of the 3 years prior to the date the corporation dissolved.
Such notice shall also be published at least once a week for 2
consecutive weeks in a newspaper of general circulation in the county in which the office of the corporations last registered agent in this State is located and in the corporations principal place of business and, in the case of a
corporation having $10,000,000 or more in total assets at the time of its dissolution, at least once in all editions of a daily newspaper with a national circulation. On or before the date of the first publication of such notice, the corporation or
successor entity shall mail a copy of such notice by certified or registered mail, return receipt requested, to each known claimant of the corporation including persons with claims asserted against the corporation in a pending action, suit or
proceeding to which the corporation is a party.
(2) Any claim against the corporation required to be presented pursuant to this subsection is barred if a
claimant who was given actual notice under this subsection does not present the claim to the dissolved corporation or successor entity by the date referred to in paragraph (a)(1)c. of this section.
(3) A corporation or successor entity may reject, in whole or in part, any claim made by a claimant pursuant to this subsection by mailing notice of such
rejection by certified or registered mail, return receipt requested, to the claimant within 90 days after receipt of such claim and, in all events, at least 150 days before the expiration of the period described in § 278 of this title; provided
however, that in the case of a claim filed pursuant to § 295 of this title against a corporation or successor entity for which a receiver or trustee has been appointed by the Court of Chancery the time period shall be as provided in § 296
of this title, and the 30-day appeal period provided for in § 296 of this title shall be applicable. A notice sent by a corporation or successor entity pursuant to this subsection shall state that any claim rejected therein will be barred
if an action, suit or proceeding with respect to the claim is not commenced within 120 days of the date thereof, and shall be accompanied by a copy of §§ 278-283 of this title and, in the case of a notice sent by a court-appointed receiver
or trustee and as to which a claim has been filed pursuant to § 295 of this title, copies of §§ 295 and 296 of this title.
(4) A claim
against a corporation is barred if a claimant whose claim is rejected pursuant to paragraph (a)(3) of this section does not commence an action, suit or proceeding with respect to the claim no later than 120 days after the mailing of the rejection
notice.
(b)(1) A corporation or successor entity electing to follow the procedures described in subsection (a) of this section shall also give
notice of the dissolution of the corporation to persons with contractual claims contingent upon the occurrence or nonoccurrence of future events or otherwise conditional or unmatured, and request that such persons present such claims in accordance
with the terms of such notice. Provided however, that as used in this section and in § 281 of this title, the term contractual claims shall not include any implied warranty as to any product manufactured, sold, distributed or
handled by the dissolved corporation. Such notice shall be in substantially the form, and sent and published in the same manner, as described in paragraph (a)(1) of this section.
(2) The corporation or successor entity shall offer any claimant on a contract whose claim is contingent, conditional or unmatured such security as the
corporation or successor entity determines is sufficient to provide compensation to the claimant if the claim matures. The corporation or successor entity shall mail such offer to the claimant by certified or registered mail, return receipt
requested, within 90 days of receipt of such claim and, in all events, at least 150 days before the expiration of the period described in § 278 of this title. If the claimant offered such security does not deliver in writing to the corporation
or successor entity a notice rejecting the offer
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within 120 days after receipt of such offer for security, the claimant shall be deemed to have accepted such security as the sole source from which to satisfy the claim against the corporation.
(c)(1) A corporation or successor entity which has given notice in accordance with subsection (a) of this section shall petition the Court of
Chancery to determine the amount and form of security that will be reasonably likely to be sufficient to provide compensation for any claim against the corporation which is the subject of a pending action, suit or proceeding to which the corporation
is a party other than a claim barred pursuant to subsection (a) of this section.
(2) A corporation or successor entity which has given notice in
accordance with subsections (a) and (b) of this section shall petition the Court of Chancery to determine the amount and form of security that will be sufficient to provide compensation to any claimant who has rejected the offer for
security made pursuant to paragraph (b)(2) of this section.
(3) A corporation or successor entity which has given notice in accordance with subsection
(a) of this section shall petition the Court of Chancery to determine the amount and form of security which will be reasonably likely to be sufficient to provide compensation for claims that have not been made known to the corporation or that
have not arisen but that, based on facts known to the corporation or successor entity, are likely to arise or to become known to the corporation or successor entity within 5 years after the date of dissolution or such longer period of time as the
Court of Chancery may determine not to exceed 10 years after the date of dissolution. The Court of Chancery may appoint a guardian ad litem in respect of any such proceeding brought under this subsection. The reasonable fees and expenses of such
guardian, including all reasonable expert witness fees, shall be paid by the petitioner in such proceeding.
(d) The giving of any notice or making of any
offer pursuant to this section shall not revive any claim then barred or constitute acknowledgment by the corporation or successor entity that any person to whom such notice is sent is a proper claimant and shall not operate as a waiver of any
defense or counterclaim in respect of any claim asserted by any person to whom such notice is sent.
(e) As used in this section, the term successor
entity shall include any trust, receivership or other legal entity governed by the laws of this State to which the remaining assets and liabilities of a dissolved corporation are transferred and which exists solely for the purposes of
prosecuting and defending suits, by or against the dissolved corporation, enabling the dissolved corporation to settle and close the business of the dissolved corporation, to dispose of and convey the property of the dissolved corporation, to
discharge the liabilities of the dissolved corporation and to distribute to the dissolved corporations stockholders any remaining assets, but not for the purpose of continuing the business for which the dissolved corporation was organized.
(f) The time periods and notice requirements of this section shall, in the case of a corporation or successor entity for which a receiver or trustee has
been appointed by the Court of Chancery, be subject to variation by, or in the manner provided in, the Rules of the Court of Chancery.
(g) In the case of
a nonstock corporation, any notice referred to in the last sentence of paragraph (a)(3) of this section shall include a copy of § 114 of this title. In the case of a nonprofit nonstock corporation, provisions of this section regarding
distributions to members shall not apply to the extent that those provisions conflict with any other applicable law or with that corporations certificate of incorporation or bylaws.
8 Del. C. 1953, § 280; 56 Del. Laws, c. 50; 66 Del. Laws, c. 136, § 38; 67 Del. Laws, c. 376, §§ 21-25; 69 Del. Laws, c. 266, §§
1-17; 70 Del. Laws, c. 186, § 1; 77 Del. Laws, c. 253, § 61.;
G-3
§ 281 Payment and distribution to claimants and stockholders.
(a) A dissolved corporation or successor entity which has followed the procedures described in § 280 of this title:
(1) Shall pay the claims made and not rejected in accordance with § 280(a) of this title,
(2) Shall post the security offered and not rejected pursuant to § 280(b)(2) of this title,
(3) Shall post any security ordered by the Court of Chancery in any proceeding under § 280(c) of this title, and
(4) Shall pay or make provision for all other claims that are mature, known and uncontested or that have been finally determined to be owing by the
corporation or such successor entity.
Such claims or obligations shall be paid in full and any such provision for payment shall be made in full if there
are sufficient assets. If there are insufficient assets, such claims and obligations shall be paid or provided for according to their priority, and, among claims of equal priority, ratably to the extent of assets legally available therefor. Any
remaining assets shall be distributed to the stockholders of the dissolved corporation; provided, however, that such distribution shall not be made before the expiration of 150 days from the date of the last notice of rejections given pursuant to
§ 280(a)(3) of this title. In the absence of actual fraud, the judgment of the directors of the dissolved corporation or the governing persons of such successor entity as to the provision made for the payment of all obligations under paragraph
(a)(4) of this section shall be conclusive.
(b) A dissolved corporation or successor entity which has not followed the procedures described in § 280
of this title shall, prior to the expiration of the period described in § 278 of this title, adopt a plan of distribution pursuant to which the dissolved corporation or successor entity (i) shall pay or make reasonable provision to pay all
claims and obligations, including all contingent, conditional or unmatured contractual claims known to the corporation or such successor entity, (ii) shall make such provision as will be reasonably likely to be sufficient to provide
compensation for any claim against the corporation which is the subject of a pending action, suit or proceeding to which the corporation is a party and (iii) shall make such provision as will be reasonably likely to be sufficient to provide
compensation for claims that have not been made known to the corporation or that have not arisen but that, based on facts known to the corporation or successor entity, are likely to arise or to become known to the corporation or successor entity
within 10 years after the date of dissolution. The plan of distribution shall provide that such claims shall be paid in full and any such provision for payment made shall be made in full if there are sufficient assets. If there are insufficient
assets, such plan shall provide that such claims and obligations shall be paid or provided for according to their priority and, among claims of equal priority, ratably to the extent of assets legally available therefor. Any remaining assets shall be
distributed to the stockholders of the dissolved corporation.
(c) Directors of a dissolved corporation or governing persons of a successor entity which
has complied with subsection (a) or (b) of this section shall not be personally liable to the claimants of the dissolved corporation.
(d) As
used in this section, the term successor entity has the meaning set forth in § 280(e) of this title.
(e) The term priority,
as used in this section, does not refer either to the order of payments set forth in paragraph (a)(1)-(4) of this section or to the relative times at which any claims mature or are reduced to judgment.
(f) In the case of a nonprofit nonstock corporation, provisions of this section regarding distributions to members shall not apply to the extent that those
provisions conflict with any other applicable law or with that corporations certificate of incorporation or bylaws.
8 Del. C. 1953, § 281; 56
Del. Laws, c. 50; 66 Del. Laws, c. 136, § 39; 67 Del. Laws, c. 376, §§ 26-28; 68 Del. Laws, c. 163, § 1; 69 Del. Laws, c. 266, §§ 18-21; 70 Del. Laws, c. 299, § 4; 71 Del. Laws, c. 120, §§ 17, 18; 77 Del.
Laws, c. 253, § 62.;
G-4
§ 282 Liability of stockholders of dissolved corporations.
(a) A stockholder of a dissolved corporation the assets of which were distributed pursuant to § 281(a) or (b) of this title shall not be liable for
any claim against the corporation in an amount in excess of such stockholders pro rata share of the claim or the amount so distributed to such stockholder, whichever is less.
(b) A stockholder of a dissolved corporation the assets of which were distributed pursuant to § 281(a) of this title shall not be liable for any claim
against the corporation on which an action, suit or proceeding is not begun prior to the expiration of the period described in § 278 of this title.
(c) The aggregate liability of any stockholder of a dissolved corporation for claims against the dissolved corporation shall not exceed the amount distributed
to such stockholder in dissolution.
8 Del. C. 1953, § 282; 56 Del. Laws, c. 50; 66 Del. Laws, c. 136, § 40; 71 Del. Laws, c. 339, §§
57, 58.;
§ 283 Jurisdiction.
The Court of
Chancery shall have jurisdiction of any application prescribed in this subchapter and of all questions arising in the proceedings thereon, and may make such orders and decrees and issue injunctions therein as justice and equity shall require.
66 Del. Laws, c. 136, § 41.;
G-5
HARVEST
NATURAL RESOURCES, INC. 1177 ENCLAVE PARKWAY, SUITE 300 HOUSTON, TX 77077 Investor Address Line 1 Investor Address Line 2 Investor Address Line 3 Investor Address Line 4 Investor Address Line 5 John Sample 1234 ANYWHERE STREET ANY CITY, ON A1A
1A1 NAME THE COMPANY NAME INC.COMMON THE COMPANY NAME INC.CLASS A THE COMPANY NAME INC.CLASS B THE COMPANY NAME INC.CLASS C THE COMPANY NAME INC.CLASS D THE COMPANY NAME INC.CLASS E THE
COMPANY NAME INC.CLASS F THE COMPANY NAME INC.401 K VOTE BY INTERNETwww.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M.
Eastern Time the day before the
cut-off
date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting
instruction form. ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports
electronically via
e-mail
or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access
proxy materials electronically in future years. VOTE BY
PHONE1-800-690-6903
Use any touch-tone telephone to transmit your
voting instructions up until 11:59 P.M. Eastern Time the day before the
cut-off
date or meeting date. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and
date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. CONTROL # ? SHARES 123,456,789,012.12345
123,456,789,012.12345 123,456,789,012.12345 123,456,789,012.12345 123,456,789,012.12345 123,456,789,012.12345 123,456,789,012.12345 123,456,789,012.12345 PAGE
1 OF 2 TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: KEEP THIS PORTION FOR YOUR RECORDS DETACH
AND RETURN THIS PORTION ONLY THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. The Board of Directors recommends a vote FOR Items 1, 2, 3, 4 and 5 For Against Abstain 1. To authorize the sale by us, indirectly through a
subsidiary, of all of our interests in Gabon upon the terms 0 0 0 and conditions set forth in the Purchase Agreement (as defined in the accompanying proxy statement). 2. To approve, on an advisory basis,
compensation that will or may become payable by us to our named executive 0 0 0 officers in connection with the sale of our Gabon interests. 3. To authorize the dissolution and complete liquidation of
Harvest Natural Resources, Inc. 0 0 0 4. To approve an adjournment of the meeting, if necessary or appropriate in the judgment of the Board of 0 0 0 Directors, for any reason,
including to solicit additional proxies in favor of the foregoing proposals. 5. To conduct such other business as may properly come before the meeting by or at the direction of the Board of 0 0
0 Directors. For address change/comments, mark here. (see reverse for instructions) Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor,
administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name by authorized
officer. JOB # Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date SHARES CUSIP # SEQUENCE # 0000306346_1 R1.0.1.29
Important
Notice Regarding the Availability of Proxy Materials for the Special Meeting: The Notice & Proxy Statement is available at www.proxyvote.com Harvest Natural Resources, Inc. SPECIAL MEETING OF STOCKHOLDERS [ ], 2017
8:30 AM, central time at our offices 1177 Enclave Parkway, Houston, Texas 77077 This proxy is solicited by the Board of Directors for use at the Special Meeting on [ ], 2017. The shares of stock you hold in your account will
be voted as you specify on the reverse side. If no choice is specified, the proxy will be voted FOR Items 1, 2, 3, 4 and 5. By signing the proxy, you revoke all prior proxies and appoint Stephen C. Haynes and Keith L. Head, and each of
them, with full power of substitution, to vote these shares on the matters shown on the reverse side. Address change/comments: (If you noted any Address Changes and/or Comments above, please mark
corresponding box on the reverse side.) Continued and to be signed on reverse side 0000306346_2 R1.0.1.29