| Summary of Significant Accounting Policies | Note 3 – Summary of Significant Accounting Policies
Liquidation Basis of Accounting
As a result of the approval of the Plan of Dissolution, the Company adopted the Liquidation Basis of Accounting, effective January 1, 2017. This basis of accounting is considered appropriate when, among other things, liquidation of the Company is imminent, as defined in ASC 205-30 “Presentation of Financial Statements – Liquidation Basis of Accounting”. Under the Liquidation Basis of Accounting the following financial statements are no longer presented (except for periods prior to the adoption of the Liquidation Basis of Accounting): a consolidated condensed balance sheet, a consolidated condensed statement of operations and comprehensive loss and a consolidated condensed statement of cash flows. The consolidated condensed statement of net assets and the consolidated condensed statement of changes in net assets are the principal financial statements presented under the Liquidation Basis of Accounting. Although the Plan of Dissolution was approved by the stockholders on February 23, 2017, the Company is using the liquidation basis of accounting effective January 1, 2017 as a convenience date. Any activity between January 1, 2017 and February 23, 2017 would not be materially different under the going concern basis.
Under the Liquidation Basis of Accounting , all of the Company’s assets have been stated at their estimated net realizable value and are based on current contracts, estimates and other indications of sales value net of estimated selling costs. All liabilities of the Company have been stated at contractual amounts and estimated liabilities are at their estimated settlement amounts, including those estimated costs associated with implementing the Plan of Dissolution. These amounts are presented in the accompanying consolidated condensed statement of net assets. These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or amount of future distributions or our actual dissolution. The valuation of assets at their net realizable value and liabilities at their anticipated settlement amount represent estimates, based on present facts and circumstances, of the net realizable value of the assets and the costs associated with carrying out the Plan of Dissolution. The actual values and costs associated with carrying out the Plan of Dissolution are expected to differ from amounts reflected in the accompanying financial statements because of the plan’s inherent uncertainty. These differences may be material. In particular, the estimates of our costs will vary with the length of time necessary to complete the Plan of Dissolution. Accordingly, it is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to stockholders and no assurance can be given that the possible future distributions will reflect the estimate presented in the accompanying consolidated condensed statement of net assets.
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.
Basis of Presentation
The accompanying interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in conjunction with the rules and regulations of the S EC . The results for such interim periods are not necessarily indicative of the results to be expected for the year. In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the respective periods have been reflected. These consolidated condensed financial statements and accompanying notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2016.
Reclassifications
Certain reclassifications related to discontinued operations have been made to prior period amounts. These reclassifications did not affect our consolidated condensed financial results.
Use of Estimates
In preparing the consolidated condensed financial statements in conformity with GAAP including the Liquidation Basis of Accounting , management is required to make estimates and assumptions that affect the reported amounts of assets, including net assets in liquidation, and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated condensed financial statements and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates.
Discontinued Operations
Prior to the adoption of the Liquidation Basis of Accounting , the Company followed the guidance of the Presentation of Property, Plant, and Equipment Topics of the ASC, with respect to long-lived assets classified as held for sale. The ASC required that the results of operations, including impairment, gains and losses related to the properties that were sold or properties that were intended to be sold, be presented as discontinued operations in the statements of operations for all periods presented and the assets and liabilities of properties intended to be sold were to be separately classified on the balance sheet. Properties designated as held for sale were carried at the lower of cost or fair value less costs to sell and were not depreciated.
Net Loss Per Share
Prior to the adoption of the Liquidation Basis of Accounting , the Company reported basic net loss per share data by dividing net loss by the weighted average number of shares common stock outstanding during each period. Diluted net loss per share was computed by dividing net loss by the weighted average number of shares of common stock outstanding, including the dilutive effect, if any, of options and warrants. The diluted net loss per share calculation for the three months ended June 30, 2016 excluded 1.7 million options and 8.5 million warrants because we were in a loss position. The diluted net loss per share calculation for the six months ended June 30, 2016 excluded 1.7 million options and 8.5 million warrants because we were in a loss position.
Reportable Segments
We previously allocated resources to and assessed the performance of our operations by segments that were organized by unique geographic and operating characteristics. The segments were organized in order to manage regional business, currency and tax related risks and opportunities. Operations included under the heading “United States” included corporate management, cash management, business development and financing activities performed in the United States and other countries, which did not meet the requirements for separate disclosure. All intersegment revenues, other income and equity earnings, expenses and receivables were eliminated in order to reconcile to consolidated totals. Corporate general and administrative and interest expenses were included in the United States segment and are not allocated to other operating segments.
As of December 31, 2016
(in thousands)
Segment Assets
United States and other
$ 76,210
Assets held for sale (a)
30,887
Total assets
$ 107,097
(a) See Note 6 - Assets and Liabilities Held for Sale and Discontinued Operations for further information.
Three Months Ended June 30, 2016
Six Months Ended June 30, 2016
(in thousands)
Segment Loss Attributable to Harvest
United States and other
$ (4,101)
$ (9,186)
Loss from continuing operations
(4,101)
(9,186)
Discontinued operations (a)
(8,797)
(17,808)
Net loss attributable to Harvest (b)
$ (12,898)
$ (26,994)
(a) See Note 6 - Assets and Liabilities Held for Sale and Discontinued Operations for further information.
(b) Net of net loss attributable to noncontrolling interest owners.
Other Administrative Property
Prior to adoption of Liquidation Basis of Accounting , furniture, fixtures and equipment were recorded at cost and depreciated using the straight-line method over their estimated useful lives, which ranged from three to five years. Leasehold improvements were recorded at cost and amortized using the straight-line method over the life of the applicable lease. For the three and six months ended June 30, 2016, depreciation expense was $10 thousand and $30 thousand in continuing operations, respectively.
Other Assets
Other assets at June 30, 2017 include deposits and at December 31, 2016 include deposits and long-term prepaid insurance.
Capitalized Interest
Prior to adoption of Liquidation Basis of Accounting , we capitalized 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 six months ended June 30, 2016, 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 and stock appreciation rights (“SARs”). 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, accrued expenses and other current liabilities approximate their carrying value due to their short-term nature (Level 1). The following table set forth by level within the fair value hierarchy our financial liabilities that were accounted for at fair value as of December 31, 2016 .
As of December 31, 2016
Level 1
Level 2
Level 3
Total
(in thousands)
Recurring
Liabilities:
SARs liability
$
—
$ 1,903
$
—
$ 1,903
$
—
$ 1,903
$
—
$ 1,903
As of June 30, 2017, no SARs liability was included on our consolidated condensed statement of net assets. During the three months ended June 30, 2017 and the six months ended June 30, 2017, SARs were exercised resulting in payments of $0.6 million and $1.0 million, respectively. As of December 31, 2016 , the fair value of our liability awards included $ 1.9 million for our SARs which were recorded in accrued expenses.
Derivative Financial Instruments
Prior to adoption of Liquidation Basis of Accounting and as required by ASC 820, a financial instrument’s 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. As of June 30, 2017 and December 31, 2016, we did not have derivative instruments.
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).
Three Months Ended June 30, 2016
Six Months Ended June 30, 2016
(in thousands)
(in thousands)
Financial assets - embedded derivative asset (a) :
Beginning balance
$ 5,001
$ 5,010
Additions
447
447
Change in fair value
1,696
1,687
Ending balance
$ 7,144
$ 7,144
(a) See Note 6 - Assets and Liabilities Held for Sale and Discontinued Operations
Three Months Ended June 30, 2016
Six Months Ended June 30, 2016
(in thousands)
(in thousands)
Financial liabilities - warrant derivative liability (a) :
Beginning balance
$ 9,564
$ 5,503
Change in fair value
6,853
10,914
Ending balance
$ 16,417
$ 16,417
(a) See Note 6 - Assets and Liabilities Held for Sale and Discontinued Operations
Three Months Ended June 30, 2016
Six Months Ended June 30, 2016
(in thousands)
(in thousands)
Financial liabilities - stock appreciation rights
Beginning balance
$ 120
$ 50
Change in fair value
121
191
Ending balance
$ 241
$ 241
During three and six months ended June 30, 2016, no transfers were made between Level 1, Level 2 and Level 3 assets or liabilities.
Share-Based Compensation
We used the fair value based method of accounting for share-based compensation. We utilized the Black-Scholes option pricing model or a Monte Carlo simulation, as appropriate based on the attributes of the instrument, to measure the fair value of stock options and SARs on their grant dates. At June 30, 2017, no outstanding SARs or options have economic value.
In March 2017, stock options were exercised for 727,671 common shares resulting in cash proceeds to Harvest of $0.1 million. From the common shares issued, 528,681 shares were surrendered as treasury shares to pay the exercise price and for taxes.
In April 2017, stock options were exercised for 366,131 common shares resulting in cash proceeds to Harvest of $1.1 million. From the common shares issued, 87,761 shares were surrendered as treasury shares to pay the exercise price and for taxes.
The following table is a summary of compensation expense recorded in general and administrative expense in our consolidated condensed statements of operations and comprehensive loss by type of awards:
Employee Stock-Based Compensation
Six Months Ended June 30, 2016
(in thousands)
Equity based awards:
Stock options
$ 1,113
Restricted stock
68
RSUs
149
Total expense related to equity based awards
1,330
Liability based awards:
SARs
238
RSUs
346
Total expense related to liability based awards
584
Total compensation expense
$ 1,914
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 June 30, 2016:
Fair Value
Hierarchy
Level
As of June 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
2.50
Term (years)
Level 1 input
4.06
Volatility
Level 2 input
110.00
%
Risk-free rate
Level 1 input
0.87
%
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.
Prior to adoption of Liquidation Basis of Accounting, we classified interest related to income tax liabilities and penalties as applicable, as interest expense. We recorded an immaterial late filing penalty during the three and six months ended June 30, 2017 and no penalties during the three and six months ended June 30, 2016.
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, 2016, a deferred tax liability of $0.1 million was recorded based on the unremitted earnings of our foreign subsidiaries that would be repatriated to the U.S. pursuant to our overall Plan of Dissolution. With the Plan of Dissolution, the foreign subsidiaries will be dissolved and the previously unremitted earnings will be repatriated in 2017. The income tax event will be a current year item and no longer represent a deferred tax liability. In the first quarter of 2017, the deferred tax liability of $0.1 million was reversed resulting in a deferred tax benefit. For the current year, the Company expects to generate a net tax loss even with the inclusion of the previously unremitted earnings in taxable income. Consequently, no current income tax liability has been recorded during the three and six months ended June 30, 2017.
Noncontrolling Interest Owners
Changes in noncontrolling interest owners were as follows:
Three Months Ended June 30, 2016
Six Months Ended June 30, 2016
(in thousands)
Balance at beginning of period
$ (1,920)
$ 447
Contributions by noncontrolling interest owners
383
924
Net loss attributable to noncontrolling interest owners
(158)
(3,066)
Balance at end of period
$ (1,695)
$ (1,695)
On October 7, 2016, the Company, and its wholly owned subsidiary, HNR Energia, completed the sale of all of HNR Energia’s 51% interest in Harvest Vinccler Dutch Holding, B.V. (“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. With the sale and subsequent deconsolidation of Harvest Holding, we do not have any continuing involvement in Venezuela and no longer have non-controlling interest owners.
New Accounting Pronouncements
As a result of adopting Liquidation Basis of Accounting , we believe no new accounting pronouncements will have a material impact on our net assets in liquidation or changes in net assets in liquidation. |
