EX-99.2 5 tm2218194d1_ex99-2.htm EXHIBIT 99.2

EXHIBIT 99.2

Exaro Energy III LLC and Subsidiaries

Consolidated Balance Sheet

March 31, 2022 (Unaudited) 

ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	13,027,940
Accounts receivable			2,407,631
Prepaid expenses			515,656
Due from related parties			9,815
Total current assets			15,961,042
PROPERTY AND EQUIPMENT
Oil and gas properties - successful efforts method of accounting			295,049,040
Furniture, fixtures and equipment			152,865
			295,201,905
Less accumulated depletion, depreciation, amortization and impairment			(266,410,631	)
Total property and equipment, net			28,791,274
OTHER ASSETS
Gas processing deposit			1,150,000
Other			1,990
Total other assets			1,151,990
TOTAL ASSETS		$	45,904,306
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities		$	5,285,147
Short-term derivative liability			3,037,533
Long-term debt, net of deferred loan costs of $119,503			9,480,497
Interest payable			77,070
Total current liabilities			17,880,247
NON-CURRENT LIABILITIES
Asset retirement obligations			5,147,204
Total non-current liabilities			5,147,204
Total liabilities			23,027,451
MEMBERS' EQUITY			22,876,855
TOTAL LIABILITIES AND MEMBERS' EQUITY		$	45,904,306

The Notes to Consolidated Financial Statements are an integral part of this statement.

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Exaro Energy III LLC and Subsidiaries

Consolidated Statement of Operations

Three Month Period Ended March 31, 2022 (Unaudited)

REVENUES, net
Natural gas		$	7,636,992
Oil			1,003,207
Liquids, net of processing fees			317,616
Loss on derivative contracts, net			(1,473,263	)
Total revenues			7,484,552
OPERATING EXPENSES
Lease operating			2,026,937
Marketing expense			59,024
Production and ad valorem taxes			966,494
Workovers			56,600
Depreciation, depletion and amortization			558,891
Accretion			88,527
General and administrative			385,302
Total operating expenses			4,141,775
Income from operations			3,342,777
OTHER EXPENSE
Interest expense			(156,840	)
Total other expense			(156,840	)
NET INCOME		$	3,185,937

The Notes to Consolidated Financial Statements are an integral part of this statement.

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Exaro Energy III LLC and Subsidiaries

Consolidated Statement of Changes in Members’ Equity

Three Month Period Ended March 31, 2022 (Unaudited)

BALANCE, January 1, 2022		$	19,690,918
Net income			3,185,937
BALANCE, March 31, 2022		$	22,876,855

The Notes to Consolidated Financial Statements are an integral part of this statement.

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Exaro Energy III LLC and Subsidiaries

Consolidated Statement of Cash Flows

Three Month Period Ended March 31, 2022 (Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	3,185,937
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			558,891
Amortization of deferred loan costs			38,261
Accretion			88,527
Derivative gain not associated with cash settlement			(1,374,279	)
Changes in operating assets and liabilities
Accounts receivable			(67,708	)
Prepaid expenses			(99,023	)
Accounts payable and accrued liabilities			1,280,335
Interest payable			(3,296	)
Net cash provided by operating activities			3,607,645
CASH FLOWS FROM INVESTING ACTIVITIES
Disposal - oil and gas properties			62,457
Capital expenditures - oil and gas properties			(12,622	)
Net cash provided by investing activities			49,835
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt			(300,000	)
Loan costs			(9,674	)
Net cash used in financing activities			(309,674	)
Net increase in cash and cash equivalents			3,347,806
CASH AND CASH EQUIVALENTS, beginning of period			9,680,134
CASH AND CASH EQUIVALENTS, end of period		$	13,027,940
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest		$	548,010

The Notes to Consolidated Financial Statements are an integral part of this statement.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Nature of Business

Exaro Energy III LLC and Subsidiaries (the Company) is a privately-held Delaware limited liability company headquartered in Houston, Texas, with offices in Houston, Texas. The Company was formed on March 19, 2012 to pursue oil and gas exploration and production opportunities.

On April 1, 2012, the Company entered into its initial project, an Earning and Development Agreement (the Development Agreement) between the Company and Encana Oil & Gas (USA) Inc. (Encana) relating to a development drilling program within a defined area of Encana’s Jonah Field asset located in Sublette County, Wyoming. Under the terms of the Development Agreement, the Company agreed to fund up to $380,000,000 towards the costs of drilling, completing, and plugging and abandonment of wells to be drilled in the defined area of the Jonah Field. The Company was to receive up to 32.5% of Encana’s working interest in the wells drilled and funded under the agreement as well as in Encana’s existing producing wells and leases in the defined area.

Effective May 12, 2014, the Development Agreement was assigned to Jonah Energy LLC (Jonah Energy) in conjunction with their purchase of Encana’s interests in the Jonah Field. Exaro notified Jonah Energy, effective May 12, 2014, that it was electing to terminate the Development Agreement. Under the Development Agreement, there is a 90-day wind-down period once a termination notice has been given, which resulted in an August 12, 2014 formal end date for the Development Agreement. Effective August 13, 2014, Exaro is continuing to participate in additional drilling in the Jonah Field, with working interests ranging from 14.62% to 32.5%, under the terms of the Joint Operating Agreement that was also assigned by Encana to Jonah Energy.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Exaro Energy III LLC and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

Cash and Cash Equivalents

For purposes of the consolidated statement of cash flows, the Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

Accounts Receivable

Accounts receivable at March 31, 2022 primarily consists of amounts due from oil and gas purchasers. The Company’s allowance is determined based upon reviews of individual accounts, historical losses, existing economic conditions and other pertinent factors. The Company has not provided for an allowance for doubtful accounts, based on management’s expectations that all receivables at period end will be fully collected.

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas operations. Costs incurred by the Company related to the acquisition of oil and gas properties and the cost of drilling development wells and successful exploratory wells are capitalized, while the cost of unsuccessful exploratory wells are expensed when determined to be unsuccessful.

Costs incurred to maintain wells and related equipment, lease and well operating costs and other exploration costs are charged to expense as incurred. Gains and losses arising from sales of properties are generally included in income.

Capitalized acquisition costs attributable to proved oil and gas properties are depleted by field, using the unit-of-production method based on proved reserves. Capitalized well costs and development costs are amortized similarly by field, based on proved developed reserves.

Capitalized costs are evaluated for impairment in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 360 (ASC Topic 360), Accounting for the Impairment or Disposal of Long Lived Assets, whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable.

To determine if a depletable unit is impaired, the Company compares the carrying value of the depletable unit to the undiscounted future net cash flow estimates over the economic life of the property. Future net cash flows are based upon reservoir engineers' estimates of proved reserves. For a property determined to be impaired, an impairment loss equal to the difference between the carrying value and the estimated fair value of the impaired property will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of the aforementioned expected future net cash flows. The Company did not record any impairment expense for the period ended March 31, 2022.

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are stated at cost. Major improvements or betterments are capitalized, while repairs that do not improve or extend the life of the respective assets are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in the results of operations for the period. Depreciation is provided for using straight-line method over three to five years.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

Derivative Financial Instruments

Financial derivatives are used as part of the Company’s overall risk management strategy in order to reduce the effects of price fluctuations on anticipated future sales of natural gas. These derivative contracts require financial settlements with counterparties based on the differential between a fixed price and a market price for a fixed quantity of natural gas without the exchange of underlying volumes. The notional amounts of these derivative contracts are based on expected production from existing wells. As of March 31, 2022, the total notional amount of the derivative instruments was 4,979,568 mmbtu for swaps, with contract dates running from April 2022 through January 2023. As of March 31, 2022, the total notional amount of the derivative instruments was 4,979,568 mmbtu for options, with contract dates running from April 2022 through January 2023.

In accordance with FASB Accounting Standards Codification (ASC) 815-30, Accounting for Derivatives and Hedging, as amended, all derivative instruments are measured periodically and at period-end are recorded on the consolidated balance sheet at fair value. Derivative contracts that are designated as part of a qualifying cash flow hedge, per the requirements of FASB ASC 815-30, are granted hedge accounting thereby allowing the Company to treat the effective changes in the fair value of the derivative instrument in accumulated other comprehensive income, while recording the ineffective portion as an adjustment to unrealized gain (loss). Derivative contracts that are not designated as part of a valid qualifying hedge or fail to meet the requirements of the pronouncement as a highly effective hedge, are treated by recording the changes in the fair value from period-to-period, through earnings. The amounts paid or received upon each monthly settlement, are recorded as derivative gain (loss) with the offset recorded to cash. These monthly settlements are included in total revenues on the Company’s consolidated statement of operations.

The Company elected not to designate any of its derivative contracts as qualifying hedges for financial reporting purposes, therefore all of the derivative instruments are categorized as standalone derivatives and are being marked-to-market with unrealized gains and losses recorded in the consolidated statement of operations. At March 31, 2022, the following contracts were outstanding:

						Average				Average				Average				Asset /
Period		Volume				Call Price				Put Price				Contract Price				(Liability)
Natural gas			MMBTU
Swap - sell
01/01/22 - 12/31/22			4,498,708			$	-			$	-			$	2.03			$	(2,744,209	)
01/01/23 - 01/31/23			480,860				-				-				2.03				(293,324	)
Total swaps			4,979,568																(3,037,533	)
Options
04/01/22 - 12/31/22			4,498,708				3.13				2.45				-				-
01/01/23 - 01/31/23			480,860				3.13				2.45				-				-
Total options			4,979,568																-
Total			9,959,136															$	(3,037,533	)

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

The following table summarizes the fair value and classification of the Company’s derivative instruments, all of which have not been designated as hedging instruments under FASB ASC 815 at March 31, 2022:

		Consolidated			Fair Value at
		Balance Sheet Location			March 31, 2022
Natural gas swaps and options		Derivative liability - current		$	(3,037,533	)

The following table summarizes the effect of the Company’s derivative instruments in the consolidated statement of operations:

Derivatives not Designated
as Hedging Instruments		Location of		Period ending
Under ASC 815		Gain (Loss)		March 31, 2022
Natural gas swaps and options		Realized loss on derivative contracts		$	(2,847,542	)
Natural gas swaps and options		Unrealized gain on derivative contracts		$	1,374,279

Revenue Recognition

Effective January 1,2019, the Company adopted Accounting Standards Update (ASU)2014-09, Revenue from Contracts with Customers ( referred to as Topic 606) with the underlying principle that an entity will recognize revenue to reflect amounts expected to be received in exchange for the provision of goods and services to customers upon the transfer of control of those goods and services. The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. The Company recognizes revenue from its interests in the sales of oil and natural gas in the period that its performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of product, when the Company has no further obligations to perform related to the sale, when the transaction price has been determined and when collectability is probable. The sales of oil are made under contracts which the third-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The sales of gas are made under contracts made by the Company (through its marketing agent) with its customers. These contracts also include variable pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and natural gas production from one to three months after delivery. At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in trade receivables, net in the balance sheet. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received, however, differences have been and are insignificant. Accordingly, the variable consideration is not constrained.

The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with ASC 606. The exemption, as described in ASC 606-10-50-14(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

The Company’s oil is typically sold at delivery points under contracts terms that are common in its industry. The Company’s natural gas produced is delivered to various purchasers at agreed upon delivery points under a limited number of contract types that are also common in the industry. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil at specified prices, and then the well operators will remit payment to the Company for its share in the value of the oil. The customers will remit payment to the Company directly for the value of gas sold.

The Company’s disaggregated revenue has three revenue sources which are oil sales, natural gas and NGL sales and only operates in one geographic area, the Jonah Field in Wyoming.

Income Taxes

A limited liability company is not subject to the payment of federal income taxes as components of its income and expenses flow through directly to the members. Accordingly, no provision for federal income taxes has been reflected in these consolidated financial statements. However, the Company may be subject to certain state income taxes.

Effective March 12, 2012, the date of inception, the Company implemented the provisions of FASB ASC Topic 740, Income Taxes (ASC Topic 740) regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.

The income tax position taken by the Company for any years open under the various statutes of limitations is that the Company continues to be exempt from federal income taxes by virtue of being a limited liability company pass-through entity. Management believes this tax position meets the more-likely-than-not threshold and, accordingly, the tax benefits of this income tax position (no income tax expense or liability) have been recognized for the period ended March 31, 2022.

The Company records income tax related interest and penalties as a component of the provision for income tax expense. No interest and penalties were recognized in the statement of operations for the period ended March 31, 2022.

The Company believes that there are no tax positions taken or expected to be taken that would significantly increase or decrease unrecognized tax benefits within 12 months of the reporting date.

None of the Company’s federal or state income tax returns are currently under examination by the Internal Revenue Service (IRS) or state authorities. However, fiscal year 2017 and forward remain subject to examination by the IRS and respective states.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas reserves, amortization relating to oil and natural gas properties, impairment of proved oil and gas properties, asset retirement obligations and valuations of derivatives. The Company evaluates its estimates and assumptions on a regular basis. Estimates are based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In addition, alternatives can exist among various accounting methods. In such cases, the choice of accounting method can have a significant impact on reported amounts.

Concentrations of Credit Risk

The Company maintains cash balances at financial institutions in the United States of America, which exceed federally insured amounts. The Company has not experienced any losses in such accounts.

The Company had sales to five customers which accounted for 100% of both oil and gas revenues and oil and gas receivables as of March 31, 2022. All of the Company’s production is located in Wyoming.

Environmental

The Company’s operations are subject to risks normally incident to the exploration for and the production of oil and gas, including blowouts, fires, and environmental risks such as oil spills or gas leaks that could expose the Company to liabilities associated with these risks.

In the Company’s acquisition of existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. The Company and the operator of the properties maintain comprehensive insurance coverage that the Company believes is adequate to mitigate the risk of any adverse financial effects associated with these risks.

However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure such a violation could still fall upon the Company. No claim has been made, nor is the Company aware of any liability which the Company may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations relating thereto.

In addition, the Company is subject to extensive regulation at the federal and state levels that may materially affect its operations.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

Asset Retirement Obligations

The Company follows ASC 410, Asset Retirement and Environmental Obligations. ASC 410 requires that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized ARO is depreciated such that the cost of ARO is recognized over the useful life of the asset. The ARO is recorded at fair value, and accretion expense will be recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate.

Inherent in the fair value calculation of ARO are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance.

The following table is a roll-forward of the asset retirement obligations for the period ended March 31, 2022:

Asset retirement obligations, January 1, 2022		$	5,058,677
Accretion expense			88,527
Asset retirement obligations, March 31, 2022		$	5,147,204

Deferred Loan Costs

Debt issuance costs consist of fees incurred to secure debt financing and are amortized over the life of the related loans using the straight-line method. Amortization of debt issuance costs is recorded in interest expense in the consolidated statement of operations. The Company recognized amortization expense of $38,261 for the period ended March 31, 2022. Debt issuance costs are presented with the term loan facility, net, on the consolidated balance sheet, as a reduction of the carrying amount of the debt facility.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Oil and Gas Operations

Capitalized costs related to the Company’s producing activities and the related amounts of accumulated depreciation, depletion, amortization and impairment as of March 31, 2022, are as follows:

Oil and gas properties Proved		$	295,049,040
Less accumulated depreciation, depletion, amortization and impairment			(266,257,766	)
Net oil and gas property costs		$	28,791,274

Depreciation, depletion and amortization expense for oil and gas properties was $558,891 for the three month period ended March 31, 2022.

Note 4. Fair Value Disclosure

The Company follows FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

ASC Topic 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. ASC Topic 820 provides a framework for measuring fair value, establishes a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.

Level 1 inputs: Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 inputs: Inputs, other than quoted prices in active markets that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 inputs: Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of March 31, 2022:

		Level 1				Level 2				Level 3				Total
March 31, 2022
Current assets (liability) - Derivative contracts		$	-			$	(3,037,533	)		$	-			$	(3,037,533	)

Fair Value on a Nonrecurring Basis

Asset Retirement Obligations

The asset retirement obligation estimates are derived from historical costs and management's expectation of future cost environments and, therefore, the Company has designated these liabilities as Level 3 measurements. The significant inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk free rate. See Note 2 for a reconciliation of the beginning and ending balances of the liability for the Company's asset retirement obligations.

Impairment expense is derived from a two-step process as discussed in Note 2. The inputs to the two-step process are based on oil and gas reserves which are calculated by a third party reserve engineer. Impairment to oil and gas properties are recognized on a nonrecurring basis as calculated using the two-step process.

Note 5. Long-Term Debt

On January 31, 2019, the Company refinanced its previous loan with another bank (New Loan). The New Loan bears interest at 5.18%, matures January 31, 2023, and is secured by all of the oil and gas properties. At March 31, 2022, the New Loan had an outstanding balance of $9,600,000 with a borrowing base of $9,900,000. The full amount of the loan was repaid subsequent to the period ended March 31, 2022.

The average interest rate was 4.75% for the period ended March 31, 2022.

Note 6. Commitments and Contingencies

As of March 31, 2022, there are no known environmental or other regulatory matters related to the Company’s operations that are reasonably expected to result in a material liability to the Company. Compliance with environmental laws and regulations has not had, and is not expected to have, a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Since the Company’s major products are commodities, changes in the prices of oil and natural gas could have a significant impact on the Company’s results of operations in any particular year. The Company’s liquidity is dependent on its operating performance, which is closely related to market conditions in the oil and gas industry, and its source of financing.

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Exaro Energy III LLC and Subsidiaries

Notes to Consolidated Financial Statements

In the event that market conditions deteriorate, causing a decrease in operating profits, and the Company is unable to secure additional financing sources to fund its operations, additional development of oil and gas properties and other activities may be curtailed.

Note 7. Management Incentive Units

The Company has a Management Incentive Plan (the Incentive Plan) to award management incentive units (MIU’s) to key employees and independent contractors of the Company, its Subsidiaries and Affiliates. The Incentive Plan is administered by the Company’s Board of Managers (the Board) and is subject to termination, at any time, as determined by the Board. The maximum number of authorized MIUs under the Plan is 1,000,000. As of March 31, 2022, 650,000 MIUs have been issued. These MIUs vest and are conditioned upon a contingency event, in accordance with the terms of the Incentive Plan.

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