Exhibit 99.7
Tall City Exploration III LLC
and Subsidiaries
Condensed Consolidated Financial Statements
Interim Periods Ended September 30, 2023 and 2022
| Tall City Exploration III LLC and Subsidiaries |
| Consolidated Financial Statements |
| Nine months ended September 30, 2023 and 2022 |
| Index |
| Contents |
| Consolidated Financial Statements | | |
| | | |
| Consolidated Balance Sheets | | 3 |
| | | |
| Consolidated Statements of Operations | | 4 |
| | | |
| Consolidated Statements of Changes in Members’ Equity | | 5 |
| | | |
| Consolidated Statements of Cash Flows | | 5 |
| | | |
| Notes to Consolidated Financial Statements | | 7-15 |
| Tall City Exploration III LLC and Subsidiaries |
| Consolidated Balance Sheets |
| September 30, 2023 and December 31, 2022 |
| Assets | | September 30, 2023
(unaudited) | | | December 31, 2022 | |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 22,083,955 | | | $ | 9,094,962 | |
| Accounts receivable, net | | | 33,599,919 | | | | 29,231,174 | |
| Derivative assets, short term | | | — | | | | 629,979 | |
| Prepaid expenses and other current assets | | | 466,253 | | | | 380,840 | |
| Total current assets | | | 56,150,127 | | | | 39,336,955 | |
| | | | | | | | | |
| Property and Equipment | | | | | | | | |
| Proved oil and gas properties, net | | | 718,736,901 | | | | 655,830,252 | |
| Unproved oil and gas properties, not being amortized | | | 8,331,242 | | | | 13,859,247 | |
| Other property and equipment, net | | | 280,532 | | | | 276,469 | |
| Net Property and Equipment | | | 727,348,675 | | | | 669,965,968 | |
| | | | | | | | | |
| Other Assets | | | | | | | | |
| Right of use asset, net | | | 3,323,897 | | | | 4,833,335 | |
| Other non-current assets | | | 26,230 | | | | 26,230 | |
| Total non-current assets | | | 3,350,127 | | | | 4,859,565 | |
| | | | | | | | | |
| Total Assets | | $ | 786,848,929 | | | $ | 714,162,488 | |
| | | | | | | | | |
| Liabilities and Members' Equity | | | | | | | | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 44,334,935 | | | $ | 109,224,430 | |
| Revenue payable | | | 43,090,858 | | | | 41,147,988 | |
| Derivative liabilities, short term | | | 9,576,241 | | | | 5,679,076 | |
| Asset retirement obligations, current | | | 200,000 | | | | 200,000 | |
| Lease obligations, current | | | 2,065,428 | | | | 2,029,586 | |
| Note payable, net | | | 238,685,302 | | | | — | |
| Total Current Liabilities | | | 337,952,764 | | | | 158,281,080 | |
| | | | | | | | | |
| Long-Term Liabilities | | | | | | | | |
| Note payable, net | | | — | | | | 178,442,593 | |
| Lease obligations, noncurrent | | | 1,275,692 | | | | 2,818,799 | |
| Asset retirement obligations | | | 2,390,344 | | | | 2,119,026 | |
| Derivative liabilities, long term | | | 894,870 | | | | 490,227 | |
| Total Long-Term Liabilities | | | 4,560,906 | | | | 183,870,645 | |
| | | | | | | | | |
| Total Liabilities | | | 342,513,670 | | | | 342,151,725 | |
| | | | | | | | | |
| Members' Equity | | | 444,335,259 | | | | 372,010,763 | |
| | | | | | | | | |
| Total Liabilities and Members' Equity | | $ | 786,848,929 | | | $ | 714,162,488 | |
| Tall City Exploration III LLC and Subsidiaries |
| Consolidated Statements of Operations |
| Nine months ended September 30, 2023 and 2022 |
| | | September 30, 2023 | | | September 30, 2022 | |
| | | (unaudited) | | | (unaudited) | |
| Revenues: | | | | | | | | |
| Oil | | $ | 207,713,310 | | | $ | 164,406,311 | |
| Gas | | | 7,485,423 | | | | 19,328,745 | |
| Natural gas liquids | | | 18,088,869 | | | | 22,879,123 | |
| Unrealized and realized gains/(losses), net | | | (6,698,373 | ) | | | (19,754,379 | ) |
| Total Revenues | | | 226,589,229 | | | | 186,859,800 | |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| Lease operating expense | | | 70,977,311 | | | | 29,306,665 | |
| Gathering, processing, and transportation expenses | | | 7,317,874 | | | | 4,871,226 | |
| Production tax and other | | | 10,742,453 | | | | 10,399,049 | |
| General and administrative expenses | | | 8,074,920 | | | | 8,097,481 | |
| Equity-based compensation expense | | | 221,783 | | | | 2,449,875 | |
| Depreciation, depletion, amortization, and impairment | | | 55,309,124 | | | | 33,364,800 | |
| Accretion of asset retirement obligations | | | 114,201 | | | | 92,715 | |
| Total Operating Expenses | | | 152,757,666 | | | | 88,581,811 | |
| | | | | | | | | |
| Gain from operations | | | 73,831,563 | | | | 98,277,989 | |
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Interest expense, net | | | (16,778,807 | ) | | | (4,627,985 | ) |
| Other non-operating income | | | 49,957 | | | | — | |
| Total other income (expense) | | | (16,728,850 | ) | | | (4,627,985 | ) |
| | | | | | | | | |
| Net Income | | $ | 57,102,713 | | | $ | 93,650,004 | |
| Tall City Exploration III LLC and Subsidiaries |
| Consolidated Statements of Cash Flows |
| Nine months ended September 30, 2023 and 2022 |
| Balance, December 31, 2021 | | $ | 270,870,470 | |
| Equity-based compensation expense | | | 2,449,875 | |
| Net income | | | 93,650,004 | |
| Balance, September 30, 2022 | | $ | 366,970,349 | |
| Balance, December 31, 2022 | | $ | 372,010,763 | |
| Members' contributions | | | 15,000,000 | |
| Equity-based compensation expense | | | 221,783 | |
| Net income | | | 57,102,713 | |
| Balance, September 30, 2023 | | $ | 444,335,259 | |
| Tall City Exploration III LLC and Subsidiaries |
| Consolidated Statements of Cash Flows |
| Nine months ended September 30, 2023 and 2022 |
| | | Nine Months Ending | |
| | | September 30, 2023 | | | September 30, 2022 | |
| | | (unaudited) | | | (unaudited) | |
| Cash flows from operating activities: | | | | | | | | |
| Net Income | | $ | 57,102,713 | | | $ | 93,650,004 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation, depletion, and amortization | | | 55,309,124 | | | | 33,364,800 | |
| Impairment | | | | | | | | |
| Accretion of asset retirement obligations | | | 114,201 | | | | 92,715 | |
| Equity-based compensation expense | | | 221,783 | | | | 2,449,875 | |
| Amortization of debt issuance costs | | | 967,893 | | | | 365,082 | |
| Unrealized (gain) loss on derivatives | | | 4,931,787 | | | | (13,088,389 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable, net | | | (4,368,745 | ) | | | (6,484,845 | ) |
| Prepaid expenses and other current assets | | | (85,413 | ) | | | 247,121 | |
| Accounts payable and accrued liabilities and other | | | 23,883,658 | | | | 29,250,510 | |
| Net cash provided by operating activities | | | 138,077,001 | | | | 139,846,873 | |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Additions to oil and gas properties | | | (199,362,824 | ) | | | (190,429,465 | ) |
| Net cash used in investing activities | | | (199,362,824 | ) | | | (190,429,465 | ) |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
| Contributions from members | | | 15,000,000 | | | | — | |
| Proceeds from note payable | | | 60,000,000 | | | | 70,000,000 | |
| Deferred financing costs | | | (725,184 | ) | | | (1,026,005 | ) |
| Net cash provided by financing activities | | | 74,274,816 | | | | 68,973,995 | |
| | | | | | | | | |
| Net change in cash and cash equivalents | | | 12,988,993 | | | | 18,391,403 | |
| Cash and cash equivalents, beginning of period | | | 9,094,962 | | | | 7,411,198 | |
| Cash and cash equivalents, end of period | | $ | 22,083,955 | | | $ | 25,802,601 | |
| | | | | | | | | |
| Supplemental Cash flow disclosures: | | | | | | | | |
| | | | | | | | | |
| Cash paid for interest | | | 13,016,555 | | | | 2,886,030 | |
| Changes in capital expenditures financed by accounts payable | | | 86,670,993 | | | | 5,263,567 | |
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
| 1. | Organization and Nature of Business |
Tall City Exploration III LLC (“TCE3”) and Subsidiaries, was organized on August 10, 2018 as a Delaware limited liability company and is governed by a Limited Liability Company Agreement (the “LLC Agreement”). TCE3 and its subsidiaries are collectively referred to in the accompanying consolidated financial statements as the “Company”.
Subsidiaries to TCE3 include: Tall City Operations III LLC (“TCO3” – owned 100% by TCE3) which operates TCE3’s oil and gas properties, Tall City Property Holdings III LLC (“TCPH3” – owned 100% by TCE3) which owns all of the oil and gas property interests for TCE3, Mucaro Minerals LLC (“Mucaro” – owned 100% by TCE3) which holds the mineral and royalty interests for TCE3, and Tall City Management Holdings III LLC (“Holdings” – owned 100% by TCE3) which is a holding company organized as a corporation to hold the interest of Tall City Management III LLC (“TCM3” – owned 99.99% by TCE3 and 0.01% by Holdings) which has all of the employees of TCE3.
The Company is primarily engaged in the domestic exploration, acquisition, development, production and sale of oil and gas. All of the Company’s operations are conducted in the United States within the Permian Basin of West Texas. The Company is substantially owned (98%) by entities controlled by Warburg Pincus LLC (“Warburg”). In accordance with the Company’s LLC Agreement, Warburg, along with the Company’s other owners, agreed to contribute up to $500 million of equity financing, subject to certain terms and conditions. As of September 30, 2023, Warburg and the Company’s other owners had contributed approximately $369,233,100.
On September 13, 2023, the Company entered into a purchase and sale agreement, pursuant to which it agreed to sell all of its oil and gas assets and related assets and contracts, comprising substantially all of the Company's operations, for consideration comprising (i) $300 million in cash and (ii) approximately 2.27 million shares of Vital Energy, Inc. common stock, each subject to purchase price adjustments. The transaction is expected to close during the fourth quarter of 2023, subject to customary closing conditions.
In the opinion of management, the unaudited interim consolidated financial statements of the Company as of September 30, 2023 and for the nine months ended September 30, 2023 and 2022 include all adjustments and accruals, consisting of normal, recurring adjustments and accruals necessary for a fair presentation of the results of the interim periods in conformity with U.S. GAAP. The operating results for the nine months ended September 30, 2023 are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements in accordance with U.S. GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read together with the audited consolidated financial statements and notes for the year ended December 31, 2022.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of September 30, 2023, the Company was not in compliance with its current ratio covenant as defined in its credit facility. This noncompliance has given rise to substantial doubt as to the Company’s ability to continue as a going concern one year from the issuance of the financial statements, absent addressing this matter.
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
As discussed above, the Company has signed a purchase and sale agreement. The credit facility is planned to be paid off in conjunction with this sale. Furthermore, in the event that the sale does not close, the Company intends to pursue options available with its lenders to cure the current ratio default through the mechanisms of the credit agreement.
While management believes that implementation of the foregoing plans will sufficiently address its liquidity matters, the Company’s ability to successfully achieve this objective is subject to a numbers of risks outside of its control. There can be no assurance that the sale transaction will close or that the cure period requirements will be met. If such plans do not materialize, the Company may not be able to satisfy its credit facility obligations as they come due.
| (c) | Recent accounting pronouncements |
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASU 2016-13") which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. It requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. On January 1, 2023, we adopted ASC 326 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASC 326") using the prospective transition approach. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
The preparation of the Company’s consolidated financial statements requires the Company to make estimates, judgments, and assumptions that affect the accompanying consolidated financial statements and disclosures. Items subject to such estimates and assumptions include (1) cash flow estimates used in impairment tests of long-lived assets; (2) depreciation, depletion, and accretion; (3) evaluation of asset retirement obligations; (4) valuation of derivative instruments; (5) accrued oil and gas sales and other receivables; (6) accrued expenses and related payables; and (7) the grant date fair value of equity-based awards. Actual results could differ from the estimates.
Oil, natural gas, and NGL reserve estimates, which are the basis for unit-of-production depletion and the impairment analysis, have a number of inherent uncertainties. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil, natural gas, and NGLs that are ultimately recovered. In addition, reserve estimates are vulnerable to changes in prices of crude oil, natural gas, and NGLs. Such prices have been volatile in the past and can be expected to be volatile in the future.
| 3. | Accounts Receivable, net |
The following table presents the components of accounts receivable, net as of September 30, 2023 and December 31, 2022:
| | | 2023 | | | 2022 | |
| Accounts receivable - trade | | | 31,708,362 | | | | 20,737,763 | |
| Joint interest billing receivable | | | 1,891,557 | | | | 8,493,411 | |
| Total accounts receivable, net | | | 33,599,919 | | | | 29,231,174 | |
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
Property and equipment, net consisted of the following:
| | | 2023 | | | 2022 | |
| Oil and natural gas properties | | | | | | | | |
| Proved oil and natural gas properties | | $ | 968,259,209 | | | $ | 850,054,541 | |
| Unproved oil and natural gas properties, not being amortized | | | 8,331,242 | | | | 13,859,247 | |
| Accumulated depletion | | | (157,804,306 | ) | | | (102,506,287 | ) |
| Accumulated impairment | | | (91,718,002 | ) | | | (91,718,002 | ) |
| Oil and natural gas properties, full cost method, net | | | 727,068,143 | | | | 669,689,499 | |
| | | | | | | | | |
| Other property and equipment | | | | | | | | |
| Other property and equipment | | | 527,959 | | | | 512,791 | |
| Accumulated depreciation | | | (247,427 | ) | | | (236,322 | ) |
| Other property and equipment, net | | | 280,532 | | | | 276,469 | |
| | | | | | | | | |
| Net property and equipment | | $ | 727,348,675 | | | $ | 669,965,968 | |
The total transfers from unproved oil and natural gas properties to proved oil and natural gas properties was $9,138,735 and $15,296,000 for the nine months ended September 30, 2023 and 2022, respectively.
The following tables presents gross derivative balances prior to applying netting adjustments and net balances as recorded in the consolidated balance sheet as of September 30, 2023 and December 31, 2022:
| | | September 30, 2023 | |
| | | Asset | | | Liability | | | Net Position | |
| Current | | | 3,740 | | | | (9,579,981 | ) | | | (9,576,241 | ) |
| Long Term | | | — | | | | (894,870 | ) | | | (894,870 | ) |
| | | December 31, 2022 | |
| | | Asset | | | Liability | | | Net Position | |
| Current | | | 629,979 | | | | (5,679,076 | ) | | | (5,049,097 | ) |
| Long Term | | | - | | | | (490,227 | ) | | | (490,227 | ) |
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
For the nine months ended September 30, 2023, the amount of the derivative instrument gains and losses reported on the consolidated statements of operations as losses on derivatives, net was $6,698,373, comprised of unrealized losses of approximately $4,931,787 and realized losses of $1,766,586. For the nine months ended September 30, 2022, the amount of the derivative instrument gains and losses reported on the consolidated statements of operations as losses on derivatives, net was $19,754,379, comprised of unrealized gains of $13,088,388 and realized losses of $32,842,767. The following tables presents the Company’s outstanding future commodity derivative positions as of September 30, 2023 and December 31, 2022, respectively:
| | | | | September 30, 2023 | |
| Wells Fargo | | | | | | | Weighted | | | |
| | | | | | | | Average | | Asset / | |
| Period | | Contract Type | | Volume BBLS | | | Contract Price | | (Liability) | |
| Crude Oil | | | | | | | | | | | | | |
| 10/01/23 - 12/31/23 | | Collar | | | 92,000 | | | $ | 55.00 - 63.55 | | | (2,255,369 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 73,200 | | | $ | 57.50 - 70.50 | | | (884,614 | ) |
| 10/01/23 - 12/31/23 | | Collar | | | 36,800 | | | $ | 60.00 - 75.00 | | | (500,478 | ) |
| 10/01/23 - 12/31/23 | | Collar | | | 55,200 | | | $ | 70.00 - 84.85 | | | (293,676 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 292,800 | | | $ | 65.00 - 78.80 | | | (1,670,898 | ) |
| 10/01/23 - 12/31/23 | | Collar | | | 27,600 | | | $ | 80.00 - 94.25 | | | (4,784 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 73,200 | | | $ | 75.00 - 84.68 | | | (10,942 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 109,800 | | | $ | 70.00 - 85.25 | | | (161,237 | ) |
| 10/01/23 - 12/31/23 | | Collar | | | 82,800 | | | $ | 70.00 - 82.20 | | | (601,644 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 183,000 | | | $ | 65.00 - 79.15 | | | (1,010,011 | ) |
| 10/01/23 - 12/31/23 | | Swap | | | 46,000 | | | $ | 75.10 | | | (598,704 | ) |
| 01/01/24 - 03/31/24 | | Swap | | | 45,500 | | | $ | 73.80 | | | (435,833 | ) |
| 07/01/24 - 09/30/24 | | Swap | | | 18,400 | | | $ | 71.40 | | | (134,856 | ) |
| 10/01/24 - 12/31/24 | | Swap | | | 9,200 | | | $ | 70.45 | | | (62,649 | ) |
| Total Wells Fargo, Crude Oil | | | | | | | | | | | $ | (8,625,694 | ) |
| Fifth Third | | | | | | | Weighted | | | | |
| | | | | | | | Average | | | Asset / | |
| Period | | Contract Type | | Volume BBLS | | | Contract Price | | | (Liability) | |
| Crude Oil | | | | | | | | | | | | | | |
| 10/01/23 - 12/31/23 | | Collar | | | 27,600 | | | $ | 80.00 - 95.50 | | | | 3,740 | |
| 04/01/24 - 06/30/24 | | Swap | | | 27,300 | | | $ | 72.53 | | | | (221,210 | ) |
| Total Fifth Third, Crude Oil | | | | | | | | | | | | $ | (217,470 | ) |
| Comerica | | | | | | | Weighted | | | | |
| | | | | | | | Average | | | Asset / | |
| Period | | Contract Type | | Volume BBLS | | | Contract Price | | | (Liability) | |
| Crude Oil | | | | | | | | | | | | | | |
| 10/01/23 - 12/31/23 | | Collar | | | 61,000 | | | $ | 70.00 - 79.00 | | | | (453,649 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 183,000 | | | $ | 65.00 - 77.60 | | | | (1,174,298 | ) |
| Total Comerica, Crude Oil | | | | | | | | | | | | $ | (1,627,947 | ) |
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
| | | | December 31, 2022 |
| Wells Fargo | | | | | | | Weighted | | | | |
| | | | | | | | Average | | | Asset / | |
| Period | | Contract Type | | Volume BBLS | | | Contract Price | | | (Liability) | |
| Crude Oil | | | | | | | | | | | | | | |
| 01/01/23 - 12/31/23 | | Collar | | | 365,000 | | | $ | 55.00 - 63.55 | | | | (6,092,621 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 73,200 | | | $ | 57.50 - 70.50 | | | | (597,200 | ) |
| 01/01/23 - 12/31/23 | | Collar | | | 146,000 | | | $ | 60.00 - 75.00 | | | | (1,210,918 | ) |
| 01/01/23 - 12/31/23 | | Collar | | | 219,000 | | | $ | 70.00 - 84.85 | | | | (268,956 | ) |
| 01/01/24 - 12/31/24 | | Collar | | | 292,800 | | | $ | 65.00 - 78.80 | | | | (526,425 | ) |
| 01/01/23 - 12/31/23 | | Collar | | | 109,500 | | | $ | 80.00 - 94.25 | | | | 602,202 | |
| 01/01/24 - 12/31/24 | | Collar | | | 73,200 | | | $ | 75.00 - 84.68 | | | | 347,432 | |
| 01/01/24 - 12/31/24 | | Collar | | | 109,800 | | | $ | 70.00 - 85.25 | | | | 285,966 | |
| Total Crude Oil | | | | | | | | | | | | $ | (7,460,520 | ) |
| Wells Fargo | | | | | | | Weighted | | | |
| | | | | | | | Average | | Asset / | |
| Period | | Contract Type | | Volume MCF | | | Contract Price | | (Liability) | |
| Natural Gas | | | | | | | | | | | | | |
| 01/01/23 - 03/31/23 | | Collar | | | 225,000 | | | $ | 3.95 - 5.23 | | | 16,952 | |
| 01/01/23 - 03/31/23 | | Collar | | | 450,000 | | | $ | 7.25 -10.85 | | | 1,274,265 | |
| Total Natural Gas | | | | | | | | | | | | 1,291,217 | |
| | | | | | | | | | | | | | |
| Total Wells Fargo Derivatives, net | | | | | | | | | | | $ | (6,169,303 | ) |
| | | | | December 31, 2022 | |
| Fifth Third Bank | | | | | | | Weighted | | | |
| | | | | | | | Average | | Asset / | |
| Period | | Contract Type | | Volume BBLS | | | Contract Price | | (Liability) | |
| Crude Oil | | | | | | | | | | | | | |
| 01/01/23 - 12/31/23 | | Collar | | | 109,500 | | | $ | 80.00 - 95.50 | | | 629,979 | |
| Total Crude Oil | | | | | | | | | | | | 629,979 | |
| | | | | | | | | | | | | | |
| Total Fifth Third Derivatives, net | | | | | | | | | | | $ | 629,979 | |
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
| 6. | Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then ranks the estimated values based on the reliability of the inputs used following the fair value hierarchy.
The three input levels of the fair value hierarchy are as follows:
Level 1: Observable inputs, such as quoted market prices for identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices in active markets that are either directly or indirectly observable. Instruments categorized in Level 2 include non-exchange traded derivatives, such as over-the-counter swaps.
Level 3: Unobservable inputs in which little or no market data exists.
A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes observable requires significant judgment by the Company. The Company considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. Unobservable inputs reflect the assumptions of the Company with regard to what assumptions a market participant would use to price an asset or liability based on the best information available under the circumstances. The guidance requires the evaluator to maximize the use of observable inputs.
Recurring Fair Value Measurements
The Company’s recurring financial assets and liabilities measured at fair value as of September 30, 2023 and December 31, 2022 are comprised of commodity derivatives that consist of privately negotiated OTC swap contracts that are valued based on a specific market index and are classified as Level 2. See footnote 5. Changes in market values represent gains or losses that occur due to fluctuations in commodity prices. Specifically, as of September 30, 2023, commodity derivatives are valued using NYMEX values. The Company has a master netting arrangement with each counterparty which supports the netting of derivative positions on the consolidated financial statements. The estimated fair value of cash and cash equivalents, prepaid expenses, accounts receivable, and accounts payable approximate the carrying amounts due to the relatively short maturity of these instruments. The fair value of the Company’s debt obligations is considered to approximate carrying value due to its variable interest rates. None of these instruments are held for trading purposes.
| 7. | Asset Retirement Obligations |
The Company’s asset retirement obligations represent the present value of estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable local, state and federal laws. The Company follows FASB ASC Topic 410, “Asset Retirement and Environmental Obligations”. The offsetting amount associated with the asset retirement costs are capitalized as part of the carrying amount of proved properties and are reflected in oil and gas properties, full cost method on the consolidated balance sheets. Revisions in estimated liabilities can result from changes in estimated inflation, changes in service and equipment costs and changes in the estimated timing of an asset’s retirement. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period over the estimated productive life of the related assets.
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
The following table provides a reconciliation of the Company’s asset retirement obligations for the nine months ended September 30, 2023:
| Asset retirement obligations as of December 31, 2022 | | $ | 2,319,026 | |
| Additions | | | 157,117 | |
| Accretion | | | 114,201 | |
| Asset retirement obligations as of September 30, 2023 | | $ | 2,590,344 | |
Note payable, net consisted of the following as of September 30, 2023:
| | | September 30, 2023 | |
| Note payable | | $ | 240,000,000 | |
| Deferred financing costs | | | (1,314,698 | ) |
| Note payable, net | | $ | 238,685,302 | |
On March 21, 2019, the Company entered into a credit agreement with Wells Fargo Bank for an initial lender commitment of $60 million with a maturity date of March 21, 2024. As of September 30, 2023, the lender increased the borrowing base to $250 million along with an increase in the commitment to $240 million and extended the maturity date to March 21, 2025. The interest rate charged on the loan is calculated the applicable Interest Period on the day (such day, the “Periodic Term SOFR Determination Day”) that is two (2) U.S. Government Securities Business Days prior to the first day of such Interest Period, as such rate is published by the Term SOFR Administrator; provided that, if as of 5:00 p.m. (New York City time) on any Periodic Term SOFR Determination Day the Term SOFR Reference Rate for the applicable tenor has not been published by the Term SOFR Administrator and a Benchmark Replacement Date with respect to the Term SOFR Reference Rate has not occurred, then Term SOFR will be the Term SOFR Reference Rate for such tenor as published by the Term SOFR Administrator on the first preceding U.S. Government Securities Business Day for which such Term SOFR Reference Rate for such tenor was published by the Term SOFR Administrator so long as such first preceding U.S. Government Securities Business Day is not more than three (3) U.S. Government Securities Business Days prior to such Periodic Term SOFR Determination Day. The Company’s obligations under the credit agreement are secured by a pledge of the majority of the Company’s proved oil and gas properties.
The Company is subject to certain financial covenants as a result of the credit agreement described above. These financial covenants consist of a consolidated total leverage ratio not to exceed 3.00 to 1.00 and a current ratio, which includes the remaining capacity on the credit facility, not to be less than 1.0 to 1.0. As of September 30, 2023, the Company was not in compliance with the financial covenant related to its current ratio. As such, and due to factors described in the Liquidity section above, the Company has classified its obligations outstanding under its credit facility as a current liability on its consolidated balance sheets.
The LLC Agreement provides for two classes of membership interests referred to as “Series A Units” and “Series B Units,” collectively referred to as “Members”. As of September 30, 2023 and December 31, 2022, the Company had issued 36,923,310 Series A Units and 9,575,000 Series B Units and 35,423,310 Series A Units and 9,575,000 Series B Units, respectively. The LLC Agreement provides for the issuance of up to 10,000,000 Series B Units. Series B Units are intended to constitute profit interests.
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
Per the Company’s LLC Agreement, available cash may be distributed as declared by the Board of Directors and is allocated first to Series A Units in accordance with their respective class sharing percentages until they have received an amount equal to an internal rate of return of 8% from the date of contributions and, thereafter, split between Series A and Series B Units in accordance with certain agreed-upon threshold sharing ratios.
Cumulative net earnings and losses are allocated among the holders of Series A Units and Series B Units in accordance with the distribution provisions described above. Under this approach, cumulative losses are allocated to Series A Units and cumulative earnings are allocated either entirely to Series A Units or between Series A Units and Series B Units in proportion to their entitled share of the liquidated earnings. In addition, available cash may be distributed to each Member in respect of the Members’ assumed tax liability as of each tax distribution date. If, as of any tax distribution date, the Company has insufficient available cash to make distributions in an amount equal to the aggregate of the Members’ assumed tax liabilities, the Company may make distributions to the Members, pro rata, in proportion to the Members’ assumed tax liabilities. No Member has any obligation to make any capital contribution to fund any distributions described above. Any such distribution is treated as an advance against the next distribution payable.
The Company received a contribution of $15,000,000 during the nine months ended September 30, 2023 and has made no distributions as of September 30, 2023 and December 31, 2022.
Equity-Based Compensation
Equity-based compensation expense recorded for the nine months ended September 30, 2023 and 2022 was approximately $221,783 and $2,449,875, respectively.
Total unrecognized compensation expense expected to be recognized in the future related to Series B Units awards was $6.3 million and $6.8 million as of September 30, 2023 and December 31, 2022, respectively. The portion of this expense related to the vesting upon the occurrence of the final exit event was $5.6 million and $5.6 million as of September 30, 2023 and December 31, 2022, respectively. The compensation expense related to the remaining 25% of the awards that vest upon a final exit event will be recognized upon consummation of the event.
| 10. | Related Party Transactions |
The Company entered into agreements with affiliates owned by the Company’s Chief Executive Officer (“CEO”) and other parties for the Company’s Midland headquarters office space. Rental expense under these agreements was $294,923 for the nine months ended September 30, 2023 and $314,392 during the nine months ended September 30, 2022, which has been included in general and administrative expenses in the accompanying consolidated statements of operations.
On January 1, 2022, the Company adopted ASC 842, “Leases” with an effective date of January 1, 2022 using the modified retrospective approach for all leases that existed at the date of adoption.
At September 30, 2023, the weighted average remaining lease term for operating leases was 19 months and the weighted average discount rate was 2.10%. Total operating lease expense for the nine months ended September 30, 2023 and 2022 was $1,583,352, including approximately $294,900 paid to related parties and $1,078,478, including approximately $314,400 paid to related parties, respectively. These amounts are recorded in general and administrative expenses in the accompanying consolidated statements of operations.
| Tall City Exploration III LLC and Subsidiaries |
| Notes to Consolidated Financial Statements |
| September 30, 2023 and 2022 (unaudited) |
| 12. | Commitments and Contingencies |
In the course of its operations, the Company is subject to possible loss contingencies arising from federal, state and local environmental, health and safety laws and regulations and third-party litigation. There are no matters pending that, in the opinion of the Company, will have a material adverse effect on the consolidated financial position, results of operations, or cash flows of the Company.
Other than those described above, the Company has evaluated and not identified any subsequent events that require additional disclosure through November 2, 2023 the date that these consolidated financial statements were available to be issued.
