| COMMITMENTS AND CONTINGENCIES | Joint
Development Agreement On
March 27, 2017, the Company entered into a Joint Development Agreement (“JDA”) with two privately held companies,
both unaffiliated entities, covering an area of approximately 52 square miles (33,280 acres) in the Permian Basin of Yoakum County,
Texas. In connection with the JDA, the Company now holds a 62.5% working interest in approximately 4,626 acres (3,192 net acres)
as of June 30, 2019. As the operator of the property covered by the JDA, the Company is committed as of June 30, 2019 to spend
an additional $241,104 by March 2020. Throughput
Commitment Agreement On
August 1, 2014, Crimson Energy Partners IV, LLC, as operator of the Company’s Chalktown properties, in which the Company
has a working interest, entered into a throughput commitment (the “Commitment”) with ETC Texas Pipeline, Ltd. effective
April 1, 2015 for a five-year throughput commitment. In connection with the Commitment, the operator and the Company failed to
reach the volume commitments in year two, and the Company anticipates that a shortfall will exist through the expiration of the
five-year term, which expires in March 2020. Accordingly, the Company is accruing the expected volume commitment shortfall amounts
of approximately $29,000 per month to lease operating expense (“LOE”) based on production, which represents the maximum
amounts that could be owed based upon the Commitment. As of June 30, 2019, $86,082 has been recorded in accrued expense for the
volume commitment shortfall. Lease
Agreements The
Company determines if an arrangement is a lease at inception of the arrangement. To the extent that the Company determines an
arrangement represents a lease, that lease is classified as an operating lease or a finance lease. The Company currently does
not have any finance leases. In accordance with ASC Topic 842, operating leases are capitalized on the Company’s Consolidated
Balance Sheet through an asset and a corresponding lease liability. Recorded assets represent the Company’s right to use
an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the
lease. Short-term leases that have an initial term of one year or less are not capitalized. The
Company’s operating leases are reflected as right-of-use lease assets, accrued liabilities-current and operating lease liabilities
on its Consolidated Balance Sheet. Operating lease assets and liabilities are recognized at the commencement date of an arrangement
based on the present value of lease payments over the lease term. In addition to the present value of lease payments, the operating
lease asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives and initial
direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Nature
of Leases The
Company leases certain office space, field and other equipment under cancelable and non-cancelable leases to support its operations.
A more detailed description of significant lease types is included below. Office
Agreements The
Company rents office space from third parties, structured with non-cancelable terms. The Company has concluded its office agreements
represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary
term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist
under the rental agreements subsequent to the primary term. Field
Equipment and Compressors The
Company rents compressors and other equipment from third parties in order to facilitate the downstream movement of its production
from its drilling operations to market, typically structured with a non-cancelable primary term of one to two years, and continuing
thereafter on a month-to-month basis subject to termination by either party. These compressors and other equipment are critical
to the Company’s ability to sell its production. The Company has therefore concluded that its compressor and other equipment
rental agreements represent operating leases with a lease term that extends through the expected life of the field reserves (as
opposed to the primary non-cancelable contract term). The
Company enters into daywork contracts for drilling/completion/workover rigs with third parties to support its activities. The
Company has concluded that these arrangements represent short-term operating leases. The accounting guidance requires the Company
to make an assessment at contract commencement if it is reasonably certain that it will exercise the option to extend the term.
The Company has determined that it cannot conclude with reasonable certainty if it will choose to extend the contract beyond its
original term. Significant
Judgments Discount
Rate The
Company’s leases typically do not provide an implicit rate. Accordingly, it is required to use its incremental borrowing
rate in determining the present value of lease payments based on the information available at commencement date. The Company’s
incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over
a similar term an amount equal to the lease payments in a similar economic environment. Practical
Expedients and Accounting Policy Elections Certain
of the Company’s lease agreements include lease and non-lease components. For all existing asset classes with multiple component
types, the Company has utilized the practical expedient that exempts it from separating lease components from non-lease components.
Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component. In
addition, for all of its existing asset classes, the Company has made an accounting policy election not to apply the lease recognition
requirements to its short-term leases (that is, a lease that, at commencement, has a lease term of twelve months or less and does
not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, the Company
recognizes lease payments related to its short-term leases in its statement of operations on a straight-line basis over the lease
term, which has not changed from the prior recognition. To the extent that there are variable lease payments, the Company recognizes
those payments in its Statement of Operations in the period in which the obligation for those payments is incurred. The
total lease expense for the three and six months ended June 30, 2019, which is included in general and administrative expense
and lease operating expense, was $232,922 and $454,895, respectively. Supplemental
cash flow information related to the Company’s operating leases is included in the table below:
Six
Months Ended
June
30, 2019
Cash
paid for amounts included in the measurement of lease liabilities $ 454,895 Supplemental
balance sheet information related to operating leases is included in the table below:
June
30, 2019
Right-of-use
lease assets $ 4,135,773
Accrued
liabilities - current (838,418 )
Operating
lease liabilities - long-term $ 3,297,355 The
weighted average remaining lease term for the Company’s operating leases is 6.8 years as of June 30, 2019, with a weighted
average discount rate of 10.5%. Lease
liabilities with enforceable contract terms that are greater than one-year mature as follows:
Operating
Right-of-use
Leases
Remainder
of 2019 $ 443,946
2020 865,350
2021 839,613
2022 847,208
2023 751,701
Thereafter 2,344,570
Total
lease payments 6,092,388
Less
imputed interest (1,956,615 )
Total
lease liability $ 4,135,773 Certain
Legal Proceedings From
time to time, the Company is party to various legal proceedings arising in the ordinary course of business. The Company expenses
or accrues legal costs as incurred. A summary of the Company’s legal proceedings is as follows: Yuma
Energy, Inc. v. Cardno PPI Technology Services, LLC Arbitration On
May 20, 2015, counsel for Cardno PPI Technology Services, LLC (“Cardno”) sent a notice of the filing of liens totaling
$304,209 on the Company’s Crosby 14 No. 1 Well and Crosby 14 SWD No. 1 Well in Vernon Parish, Louisiana. The Company disputed
the validity of the liens and of the underlying invoices, and notified Cardno that applicable credits had not been applied. The
Company invoked mediation on August 11, 2015 on the issues of the validity of the liens, the amount due pursuant to terms of the
parties’ Master Service Agreement (“MSA”), and PPI Cardno’s breaches of the MSA. Mediation was held on
April 12, 2016; no settlement was reached. On
May 12, 2016, Cardno filed a lawsuit in Louisiana state court to enforce the liens; the Court entered an Order Staying Proceeding
on June 13, 2016, ordering that the lawsuit “be stayed pending mediation/arbitration between the parties.” On June
17, 2016, the Company served a Notice of Arbitration on Cardno, stating claims for breach of the MSA billing and warranty provisions.
On July 15, 2016, Cardno served a Counterclaim for $304,209 plus attorneys’ fees. The parties selected an arbitrator, and
the arbitration hearing was held on March 29, April 12 and April 13, 2018. The parties submitted closing statements on April 30,
2018, and the arbitrator issued a Final Arbitration Award (the “Award”) on April 4, 2019. The
Award granted the Company a $62,923 credit for Cardno’s improper billing of insurance charges, and a $127,100 credit for
Cardno’s billing in excess of the contractual prices. After the credits were applied, Cardno was awarded $114,186 on its
claim. The arbitrator also awarded Cardno $23,676 in prejudgment interest. On June 29, 2019, Cardno filed its First Amended Petition
to Enforce Liens and on Open Account in the Louisiana proceeding. The amended pleading seeks, among other things, a judgment on
the arbitration award. The
Parish of St. Bernard v. Atlantic Richfield Co., et al On
October 13, 2016, two subsidiaries of the Company, Yuma Exploration and Production Company, Inc. (“Exploration”) and
Yuma Petroleum Company (“YPC”), were named as defendants, among several other defendants, in an action by the Parish
of St. Bernard in the Thirty-Fourth Judicial District of Louisiana. The petition alleges violations of the State and Local Coastal
Resources Management Act of 1978, as amended, in the St. Bernard Parish. The Company has notified its insurance carrier
of the lawsuit. Management intends to defend the plaintiffs’ claims vigorously. The case was removed to federal
district court for the Eastern District of Louisiana. A motion to remand was filed and the Court officially remanded the case
on July 6, 2017. Exceptions for Exploration, YPC and the other defendants were filed; however, the hearing for such exceptions
was continued from the original date of October 6, 2017 to November 22, 2017. The November 22, 2017 hearing was continued without
date because the parties agreed the case will be de-cumulated into subcases, but the details of this are yet to be determined.
The case was removed again on other grounds on May 23, 2018. On May 25, 2018, a Motion was filed on behalf of certain defendants
with the United States Judicial Panel for Multi District Litigation (“JPMDL”) for consolidated proceedings for all
41 pending cases filed in Louisiana with claims that are substantially the same as those in this case. A 42nd case has been added
as a “tag-along”. In the interim, plaintiffs timely filed their Motion to Remand in the case. Hearing on the Motion
before the JPMDL was held on July 26, 2018 in Santa Fe, New Mexico, and the JPMDL denied centralization by Order dated July 31,
2018. The Order indicates Plaintiffs may be willing to consolidate all cases pending in the Western District with those in the
Eastern District, although Defendants may not be amenable to same. That did not occur and this case remained stayed. In the interim,
an Order was issued in another of the coastal cases pending in the Eastern District of Louisiana lifting the stay and setting
a schedule for briefing for plaintiffs’ motion to remand ( Parish of Plaquemines v. Riverwood Production Company, et al.,
No. 2:18-cv-05217, Eastern District of Louisiana Riverwood Riverwood
Riverwood Cameron
Parish vs. BEPCO LP, et al & Cameron Parish vs. Alpine Exploration Companies, Inc., et al The
Parish of Cameron, Louisiana, filed a series of lawsuits against approximately 190 oil and gas companies alleging that the defendants,
including Davis Petroleum Acquisition Corp. (“Davis”), have failed to clear, revegetate, detoxify, and restore the
mineral and production sites and other areas affected by their operations and activities within certain coastal zone areas to
their original condition as required by Louisiana law, and that such defendants are liable to Cameron Parish for damages under
certain Louisiana coastal zone laws for such failures; however, the amount of such damages has not been specified. Two of these
lawsuits, originally filed February 4, 2016 in the 38th Judicial District Court for the Parish of Cameron, State of Louisiana,
name Davis as defendant, along with more than 30 other oil and gas companies. Both cases have been removed to federal district
court for the Western District of Louisiana. The Company denies these claims and intends to vigorously defend them. Davis has
become a party to the Joint Defense and Cost Sharing Agreements for these cases. Motions to remand were filed and the Magistrate
Judge recommended that the cases be remanded. The Company was advised that the new District Judge assigned to these cases is Judge
Terry A. Doughty, and on May 9, 2018, Judge Doughty agreed with the Magistrate Judge’s recommendation and the cases were
remanded to the 38th Judicial District Court, Cameron Parish, Louisiana. The cases were removed again on other grounds on May
23, 2018. On May 25, 2018, a Motion was filed on behalf of certain defendants with the United States Judicial Panel for Multi
District Litigation (“JPMDL”) for consolidated proceedings for all 41 pending cases filed in Louisiana with claims
that are substantially the same as those in these cases. A 42nd case has been added as a “tag-along”. In the interim,
plaintiffs timely filed their Motion to Remand in the cases. Hearing on the Motion before the JPMDL was held on July 26, 2018
in Santa Fe, New Mexico, and the JPMDL denied centralization by Order dated July 31, 2018. The Order indicates Plaintiffs may
be willing to consolidate all cases pending in the Western District with those in the Eastern District, although Defendants may
not be amenable to same. That did not occur. On October 1, 2018, all of the coastal cases pending in the Western District of Louisiana,
including these cases, were re-assigned to the newly appointed District Judge, Judge Robert R. Summerhays. On August 29, 2018,
Magistrate Judge Kay signed an Order providing for staged briefing on the plaintiffs’ motion(s) to remand in all the coastal
cases pending in the Western District, with the lowest numbered case (Parish of Cameron v. Auster, No. 18-677, Western District
of Louisiana) to proceed first. In response to Defendants’ request for oral argument in the Auster case, Judge Kay issued
an electronic Order on October 18, 2018, denying that request and further stating, “The issues have been thoroughly briefed
and we do not find at this time that oral argument would be helpful.” As noted above, Magistrate Judge Kay previously recommended
remand of these cases, which recommendation was adopted by the District Judge then assigned to the cases. Magistrate Judge Kay
issued her Report and Recommendations recommending remand based on the timeliness of the second removal. Objections and replies
were filed to the same and the District Judge now assigned to the cases granted and held oral argument on the objections to Magistrate
Judge Kay’s Report and Recommendations on January 16, 2019. The District Judge has not yet ruled. In the interim, this Court
was apprised by Plaintiffs of Judge Feldman’s Opinion remanding the Riverwood Louisiana,
et al Escheat Tax Audits During
2015, the States of Louisiana, Texas, Minnesota, North Dakota and Wyoming have notified the Company that they will examine
the Company’s books and records to determine compliance with each of the examining state’s escheat laws. The
review is being conducted by Discovery Audit Services, LLC and is related to the years 2000 through 2015. The Company has
engaged Ryan, LLC to represent it in this matter. The exposure related to the audits is not currently determinable and
therefore, no liability has been recorded on the Company’s consolidated financial statements. Louisiana
Severance Tax Audit The State
of Louisiana, Department of Revenue, notified Exploration that it was auditing Exploration’s calculation of its
severance tax relating to Exploration’s production from November 2012 through March 2016. The audit relates to the
Department of Revenue’s recent interpretation of long-standing oil purchase contracts to include a disallowable
“transportation deduction,” and thus to assert that the severance tax paid on crude oil sold during the contract
term was not properly calculated. The Department of Revenue sent a proposed assessment in which they sought to impose
$476,954 in additional state severance tax plus associated penalties and interest. Exploration engaged legal
counsel to protest the proposed assessment and request a hearing. Exploration then entered a Joint Defense Group of
operators challenging similar audit results. Since the Joint Defense Group is challenging the same legal theory, the
Board of Tax Appeals proposed to hear a motion brought by one of the taxpayers (Avanti) that would address the rule for all
through a test case. Exploration’s case has been stayed pending adjudication of the test case. The hearing for
the Avanti test case was held on November 7, 2017, and on December 6, 2017, the Board of Tax Appeals rendered judgment in
favor of the taxpayer in the first of these cases. The Department of Revenue filed an appeal to this decision on January 5,
2018. The Board of Tax Appeals case record has been lodged at the Louisiana Third Circuit Court of Appeal in the Avanti test
case. Oral argument was held at the Third Circuit on February 26, 2019. On April 17, 2019, the Louisiana Third Circuit Court
of Appeal rendered a unanimous decision in the Avanti case affirming the Board of Tax Appeals decision for the taxpayer. The
Louisiana Department of Revenue did not appeal the Avanti case, which is now a final decision. The Department of Revenue has
dropped its opposition to the normal standard methodology crude oil producers were using in reporting their Louisiana
severance taxes. This assessment for Exploration, to the extent it involves only the crude oil pricing issue (i.e., the
transportation deduction issue), is expected to be vacated, and the appeal by Exploration can be dismissed. Louisiana
Department of Wildlife and Fisheries The
Company received notice from the Louisiana Department of Wildlife and Fisheries (“LDWF”) in July 2017 stating that
Exploration has open Coastal Use Permits (“CUPs”) located within the Louisiana Public Oyster Seed Grounds dating back
from as early as November 1993 and through a period ending in November 2012. The majority of the claims relate to permits
that were filed from 2000 to 2005. Pursuant to the conditions of each CUP, LDWF is alleging that damages were caused to
the oyster seed grounds and that compensation of an aggregate amount of approximately $500,000 is owed by the Company. The
Company is currently evaluating the merits of the claim, is reviewing the LDWF analysis, and has now requested that the LDWF revise
downward the amount of area their claims of damages pertain to. At this point in the regulatory process, no evaluation of the
likelihood of an unfavorable outcome or associated economic loss can be made; therefore no liability has been recorded on the
Company’s consolidated financial statements. Miami
Corporation – South Pecan Lake Field Area P&A The
Company, along with several other exploration and production companies in the chain of title, received letters in June 2017 from
representatives of Miami Corporation demanding the performance of well plugging and abandonment, facility removal and restoration
obligations for wells in the South Pecan Lake Field Area, Cameron Parish, Louisiana. Apache is one of the other companies in the
chain of title, and after taking a field tour of the area, has sent to the Company, along with BP and other companies in the chain
of title, a proposed work plan to comply with the Miami Corporation demand. The Company is currently evaluating the merits of
the claim and awaiting further information. At this point in the process, no evaluation of the likelihood of an unfavorable outcome
or associated economic loss can be made; therefore no liability has been recorded on the Company’s consolidated financial
statements. John
Hoffman v. Yuma Exploration & Production Company, Inc., et al This
lawsuit, filed on June 15, 2018 in Livingston Parish, Louisiana, against the Company, Precision Drilling and Dynamic Offshore
relates to a slip and fall injury to Mr. Hoffman that occurred on August 28, 2017. Mr. Hoffman was apparently an employee of a
subcontractor of a contractor performing services for the Company. Precision has made demand for defense and indemnity against
the Company based on a contract entered into between the parties. The defense and indemnity demand is being contested, primarily
on the grounds that the defense and indemnity obligation is barred by the Louisiana Anti-Indemnity Act. The Company believes that
its contractor is responsible for injuries to employees of the contractor or subcontractor and that their insurance coverage,
or insurance coverage maintained by the Company, should cover damages awarded to Mr. Hoffman. The Company has notified its insurance
carrier of the lawsuit. Counsel believes that the claim will be successfully defended, but even if the defense and indemnity claim
is legally enforceable, there is sufficient insurance in place to cover the exposure. Accordingly, the defense and indemnity claim
does not represent any direct material exposure to the Company. Hall-Degravelles,
L.L.C. v. Cockrell Oil Corporation, et al Avalon
Plantation, Inc., et al v. Devon Energy Production Company, L.P., et al Avalon
Plantation, Inc., et al v. American Midstream, et al The
Company, as a successor in interest from another company years ago, along with 41 other companies in the chain of title, was named
as a defendant in these lawsuits brought in St. Mary Parish, Louisiana. The substance of each of the petitions is virtually identical.
In each case, the plaintiff(s) are seeking to recover damages to their property resulting from “oil and gas exploration
and production activities.” The cited grounds for these actions include La. R.S. 30:29 (providing for restoration of property
affected by oilfield contamination) and C.C. art. 2688 (notification by the lessee to the lessor when leased property is damaged).
The plaintiffs have attempted to have these three cases consolidated. A hearing on motion to consolidate was held on January 15,
2019. At that time, Judge Sigur stated from the bench that he did not have sufficient information to order consolidation. A judgment
to that effect has been signed by the judge. These cases are in the very early stages. At this point, not all of the named defendants
have filed responsive pleadings. All of the defendants who have responded at this point have, inter alia, filed exceptions of
vagueness due to the lack of specificity in the petitions which makes it impossible to determine what action(s) any individual
defendant may have performed which would result in liability to the plaintiffs. None of these exceptions are currently set for
hearing. The plaintiffs recently filed amended petitions which do not change the substance of their claims. The plaintiffs requested
that service of these amended petitions be withheld. The Company sold the leases that appear to be involved in this litigation
to Hilcorp Energy I, L.P. (“Hilcorp”), with an effective date of September 1, 2016. The conveyance includes an indemnity
provision which appears to transfer liability for this type of damage to Hilcorp, and at some point it necessary to invoke this
indemnity. The Company has notified its insurance carrier of the claim but believes that the suit is without merit. No evaluation
of the likelihood of an unfavorable outcome or associated economic loss can be made at this early stage, therefore no liability
has been recorded on the Company’s consolidated financial statements. Vintage
Assets, Inc. v. Tennessee Gas Pipeline, L.L.C., et al On
September 10, 2018, the Company received a Demand for Defense and Indemnity from High Point Gas Gathering, L.P. (HPGG) pursuant
to the 2010 Purchase and Sale Agreement between Texas Southeastern Gas Gathering Company, et al and HPGG, et al. The demand related
to a judgment and permanent injunction entered against HPGG and three other defendants on May 4, 2018 in the above referenced
matter in the U.S. District Court in the Eastern District of Louisiana. The Company received a letter dated October 30, 2018 from
HPGG informing it that the May 4, 2018 judgment had been vacated. No evaluation of the likelihood of an unfavorable outcome or
associated economic loss can be made at this early stage, therefore, no liability has been recorded on Company’s consolidated
financial statements. Texas
General Land Office (“GLO”) On
February 21, 2019, the GLO notified the Company that it would be conducting an audit of oil and gas production and royalty revenue
for the period of September 2012 to August 2017 related to three of the Company’s leases located in Chambers County, Texas
and four of the Company’s leases located in Jefferson County, Texas. The exposure related to the audit is not currently
determinable and therefore, no liability has been recorded on the Company’s consolidated financial statements. Sam
Banks v. Yuma Energy, Inc. By
letter dated March 27, 2019, the Company’s Board of Directors notified Sam L. Banks that it was terminating him as Chief
Executive Officer of the Company pursuant to the terms of his amended and restated employment agreement dated April 20, 2017 (the
“Employment Agreement”). On April 22, 2019, Mr. Banks submitted his resignation from the board of directors of the
Company. On March 28, 2019, Mr. Banks, through his legal counsel, filed a petition (the “Petition”) in the 189th Judicial
District Court of Harris County, Texas, naming the Company as defendant. The Petition alleges a breach of the Employment Agreement
and seeks severance benefits in the amount of approximately $2.15 million. The Company denies his allegations. The Company’s
retained counsel has engaged in early settlement discussions with Plaintiff’s counsel, but at this time, a settlement has
not been reached. Counsel for the Company has filed an answer in response to Mr. Banks’ lawsuit, and discovery is proceeding.
The Company intends to vigorously defend the lawsuit. No evaluation of the likelihood of an unfavorable outcome or associated
economic loss can be made at this early stage; therefore, no liability has been recorded on the Company’s consolidated financial
statements. Allison
Renee Romero and M.A. Domatti Management Trust v. Yuma Energy, Inc. and Davis Petroleum Corp . This
lawsuit, filed on May 21, 2019 in Cameron Parish, Louisiana against Yuma and Davis Petroleum Corp. (“DPC”), alleges
that Yuma and DPC contaminated and otherwise damaged two 80-acre parcels owned by the plaintiffs as the result of Yuma’s
and DPC’s activities related to an oil and gas intrastate field flowline located on the parcels. The suit alleges that Yuma’s
and DPC’s operation of the flowline, and its ruptures, caused extensive soil and groundwater contamination of the two parcels.
The suit asks for the costs of restoration, damages for diminution of the properties’ value and punitive damages, among
other things. This
matter has been referred to the Company’s insurance company. The Company believes, and has so informed the insurance company’s
counsel handling the case, that it has already remediated the contamination complained of, in accordance
with the State of Louisiana regulations. Because the matter is in a very preliminary stage, the Company cannot evaluate the likelihood
of an unfavorable outcome or whether any liability would be covered by its insurance policy; as a result, no liability has been
recorded on the Company’s consolidated financial statements. |
