FINANCIAL STATEMENT PRESENTATION	3 Months Ended
Mar. 31, 2019
FINANCIAL STATEMENT PRESENTATION
FINANCIAL STATEMENT PRESENTATION	1. FINANCIAL STATEMENT PRESENTATION Basis of Presentation and Principles of Consolidation Halcón Resources Corporation (Halcón or the Company) is an independent energy company focused on the acquisition, production, exploration and development of onshore liquids‑rich oil and natural gas assets in the United States. The unaudited condensed consolidated financial statements include the accounts of all majority‑owned, controlled subsidiaries. The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development. Allocation of capital is made across the Company’s entire portfolio without regard to operating area. All intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial position as of, and the results of operations for, the periods presented. During interim periods, Halcón follows the accounting policies disclosed in its Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission (SEC) on March 12, 2019. Please refer to the notes in the 2018 Annual Report on Form 10-K when reviewing interim financial results. Use of Estimates The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion relating to oil and natural gas properties, asset retirement obligations, fair value estimates, and income taxes. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s unaudited condensed consolidated financial statements. Interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these unaudited condensed consolidated financial statements. Ability to Continue as a Going Concern The Company’s strategic decision to transform into a pure-play, single basin company focused on the Delaware Basin in West Texas resulted in the Company divesting producing properties located in other areas and acquiring primarily undeveloped acreage in the Delaware Basin. The Company’s drilling activities since acquiring the assets required significant capital expenditure outlays to replace lost production and related EBITDA. These and other factors adversely impacted the Company’s ability to comply with its debt covenants under the Senior Credit Agreement. Anticipating that it might be challenging to comply with the covenants under the Senior Credit Agreement, the Company has periodically sought and obtained amendments and consents from the lenders under the Senior Credit Agreement. Most recently, on May 8, 2019, the Company entered into an amendment to the Senior Credit Agreement in which its lenders waived compliance with the Consolidated Total Net Debt to EBITDA Ratio covenant contained in the Senior Credit Agreement for the three months ended March 31, 2019, while raising the applicable margin on the Company’s borrowings and imposing certain reporting and other obligations upon the Company. The waiver extends, as to compliance at March 31, 2019, until August 1, 2019; provided that it may be terminated on July 1, 2019 by the majority lenders in their sole discretion and earlier upon the occurrence of certain other events (an Early Termination). The lenders under the Senior Credit Agreement concurrently redetermined the borrowing base to $225.0 million, a reduction from $275.0 million at December 31, 2018. At March 31, 2019, the Company had borrowings of $105.0 million outstanding under the Senior Credit Agreement. The Company’s current internal projections show that it will not be in compliance with the Consolidated Total Net Debt to EBITDA Ratio and the Current Ratio covenants in certain future periods, beginning with the three months ended June 30, 2019. The Company sought amendment of the covenants for the twelve month period following the issuance date of the unaudited condensed consolidated financial statements included in this report, which the lenders did not approve. As a consequence, if the Company fails to comply with the financial covenants under the Senior Credit Agreement for the three months ended June 30, 2019, as projected,or there is an Early Termination, it will be in default under the Senior Credit Agreement. An Event of Default (as defined in the Senior Credit Agreement) would permit the lenders to accelerate any indebtedness outstanding under the Senior Credit Agreement, making it immediately due and payable. If the indebtedness under the Senior Credit Agreement is accelerated, then an Event of Default (as defined in the indenture governing the Company’s senior notes) under the senior notes would occur, which, if continued beyond any applicable cure period, would result in the entire principal under the senior notes being due and payable immediately. If the lenders, and subsequently noteholders, accelerate the outstanding indebtedness (the aggregate principal amount of which was approximately $730.0 million as of March 31, 2019), all such indebtedness will become immediately due and payable. The Company currently does not have sufficient liquidity to repay those amounts. In addition, should amounts under the Senior Credit Agreement become due and payable, the Company’s derivatives that are in a net liability position could also become due and payable. As a result of the Company’s expected inability to comply with its Consolidated Total Net Debt to EBITDA Ratio and its Current Ratio covenants contained in its Senior Credit Agreement within one year from the issuance date of the unaudited condensed consolidated financial statements for the three months ended March 31, 2019, the Company has determined that there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern. The Company has engaged advisors to evaluate strategic and financial alternatives and is pursuing options to maintain sufficient liquidity and to address its Senior Credit Agreement covenant compliance, including (i) working with the bank syndicate to amend the Senior Credit Agreement and/or obtain waivers of covenant compliance for future periods, (ii) seeking alternative sources of capital, (iii) divesting assets, (iv) exploring strategic merger and acquisition options and (v) reducing operating costs. There can be no assurance that the Company will be able to comply with the covenants in its Senior Credit Agreement, that the lenders will provide any covenant relief or fail to exercise their right to Early Termination or that the Company will be able to obtain alternative financing on a timely basis and on satisfactory terms, or at all. In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet its capital needs and support its business plans while paying or refinancing the existing debt obligations. If alternative financing cannot be obtained on a timely basis and on satisfactory terms, then the Company’s operations would be materially negatively impacted. Accordingly, the Company classified outstanding borrowings under its Senior Credit Agreement as a current liability on its unaudited condensed consolidated balance sheet as of March 31, 2019. The unaudited condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material. Cash and Cash Equivalents The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. Accounts Receivable and Allowance for Doubtful Accounts The Company’s accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. Accounts receivable are recorded at the amount due, less an allowance for doubtful accounts, when applicable. The Company establishes provisions for losses on accounts receivable if it determines that collection of all or part of the outstanding balance is doubtful. The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific identification method. As of March 31, 2019 and December 31, 2018, allowances for doubtful accounts were approximately $0.1 million and $0.2 million, respectively. Other Operating Property and Equipment Other operating property and equipment additions are recorded at cost. Depreciation is calculated using the straight‑line method over the following estimated useful lives: gas gathering systems, thirty years; gas treating systems and buildings, twenty years; automobiles and computers, three years; computer software, fixtures, furniture and equipment, the lesser of lease term or five years; trailers, seven years; heavy equipment, eight to ten years and leasehold improvements, lease term. Upon disposition, the cost and accumulated depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. Material expenditures which increase the life or productive capacity of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The Company reviews its other operating property and equipment for impairment in accordance with Accounting Standards Codification (ASC) No. 360, Property, Plant, and Equipment (ASC 360). ASC 360 requires the Company to evaluate other operating property and equipment for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of its other operating property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods. Leases Effective January 1, 2019, the Company accounts for leases in accordance with ASC No. 842, Leases, (ASC 842). The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified asset for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset, and (2) the customer has the right to control the use of the identified asset. The Company leases equipment and office space pursuant to net operating leases. Operating leases where the Company is the lessee are included in "Operating lease right of use assets" and "Operating lease liabilities" on our unaudited condensed consolidated balance sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments include how the Company determined (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The Company uses the implicit rate when readily determinable. The lease term includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. Lease payments included in the measurement of the lease asset or liability comprise the following, when applicable: fixed payments (including in-substance fixed payments), variable payments that depend on index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise. The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For the Company's operating leases, the right of use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease payments associated with the Company's leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments, when applicable, are presented as "Gathering and other" or "General and administrative" in our unaudited condensed consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating leases. The Company has lease agreements which include lease and nonlease components and the Company has elected to combine lease and nonlease components, when fixed, for all lease contracts. Nonlease components include common area maintenance charges on office leases and, when applicable, services associated with equipment leases. The Company determines whether the lease or nonlease component is the predominant component on a case-by-case basis. The Company reviews its right of use assets for impairment in accordance with ASC 360. ASC 360 requires the Company to evaluate right of use assets for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. The Company monitors for events or changes in circumstances that would require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding right of use asset unless doing so would reduce the carrying amount of the right of use asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative right of use asset balance is recorded in the unaudited condensed consolidated statements of operations. The Company elected not to recognize right of use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases. Additionally, the Company applies a portfolio approach to determine the discount rate (the incremental borrowing rate for leases with similar characteristics). Restructuring During the three months ended March 31, 2019, four executives of the Company resigned from their positions. These were considered terminations without cause under their respective employment agreements, which entitled them to certain benefits. Additionally during the period, the Company had reductions in its workforce due to a decrease in drilling and developmental activities planned for 2019. Consequently, for the three months ended March 31, 2019, the Company incurred approximately $11.3 million in severance costs which were recorded in “Restructuring” on the unaudited condensed consolidated statements of operations. Related Party Transactions Crude Oil Gathering Agreement On July 27, 2018, a subsidiary of the Company entered into a crude oil gathering agreement with SCM Crude, LLC (SCM) pursuant to which the Company agreed to dedicate, for a term of 15 years, production of crude oil from its currently owned, or later acquired acreage in designated areas in Ward and Winkler Counties, Texas (excluding certain specific wells) for the receipt, gathering and transportation on a gathering system to be designed, engineered and constructed by SCM. In the fourth quarter of 2018, the Company began selling its crude oil to SCM while the gathering system was under construction. The gathering system was completed and placed into service in March 2019. For the three months ended March 31, 2019, the Company earned $39.2 million from SCM under the crude oil gathering agreement and as of March 31, 2019 recorded an $11.2 million receivable from SCM for its crude oil sales. Certain funds under the control of Ares Management LLC (Ares) are the majority owners and controlling parties of SCM. Ares also controls other funds which own in excess of ten percent (10%) of the common stock of the Company. No Ares fund that is a stockholder of the Company has an interest in SCM but one of the Company’s directors, who is employed by Ares, also serves on the board of directors of SCM’s parent company. Gas Purchase and Processing Agreement On November 16, 2017, a subsidiary of the Company entered into a gas purchase and processing agreement with Salt Creek Midstream, LLC (Salt Creek) pursuant to which the Company agreed to dedicate for a term of 15 years, all production from its acreage in Ward County, Texas (that is not otherwise previously dedicated) and certain sections in Winkler County, Texas to a natural gas gathering pipeline and processing facilities to be constructed by Salt Creek. The facilities were completed and placed in service in May 2018. For the three months ended March 31, 2019, the Company earned $0.2 million from Salt Creek under the gas purchase and processing agreement and as of March 31, 2019 recorded a $0.8 million receivable from Salt Creek for its natural gas sales. Certain funds under the control of Ares are the majority owners and controlling parties of Salt Creek. Ares also controls other funds which own in excess of ten percent (10%) of the stock of the Company. No Ares fund that is a stockholder of the Company has an interest in Salt Creek but one of the Company’s directors, who is employed by Ares, and is a director of the Company, also serves on the board of directors of Salt Creek. Pipeline Testing Services In February 2019, the Company entered into an agreement with Cima Inspection LLC (Cima), a company specializing in advanced, non-destructive methods of testing pipes and tubing, pursuant to which Cima will inspect various Company gathering and transportation assets. One of the Company's directors owns a minority interest in Cima and currently serves, without compensation, as its chief executive officer. The engagement of Cima was the result of a lengthy process during which Halcón investigated the most cost-effective method of conducting testing on its gathering and transportation assets. Halcón considered the performance and cost of various alternatives and solicited proposals from third parties before determining that Cima's proposal offered the most timely cost efficient solution to the Company's needs. As a result of the relationship of one of the Company's directors with Cima, the process by which the Company determined Cima's proposal to be superior to others, as well as the terms of the agreement, were evaluated and approved by the Audit Committee and the disinterested members of Halcón's board, in a vote that excluded that director in accordance with applicable Company policies, including its Code of Conduct and Corporate Governance Guidelines (copies of which are available through the Company's website at www.halconresources.com), and the Company's procedures for the review and approval of transactions with related parties. For the three months ended March 31, 2019, the Company incurred charges of approximately $0.3 million for services provided by Cima. As of March 31, 2019, the Company recorded a $0.2 million payable to Cima. The payable is recorded in “Accounts payable and accrued liabilities,” on the Company’s unaudited condensed consolidated balance sheet. Charter of Aircraft In the ordinary course of business, Halcón occasionally chartered a private aircraft for business use. Floyd C. Wilson, Halcón’s former Chairman, Chief Executive Officer and President, indirectly owns an aircraft which the Company chartered from time to time. During 2019, fees for the use of Mr. Wilson's aircraft by the Company were based upon comparable costs that the Company would have incurred in chartering the same type and size of aircraft from an independent third party utilizing data from several independent third party aircraft leasing companies. The terms for this use were evaluated and approved by the Audit Committee, and subsequently by the disinterested members of the Company's board upon the recommendation of the Audit Committee, in accordance with the Company's procedures for the review and approval of transactions with related parties. During the three months ended March 31, 2019, the Company paid approximately $0.2 million related to use of the aircraft indirectly owned by Mr. Wilson during 2018. In 2019, the Company terminated all charter arrangements with Mr. Wilson relating to the use of his aircraft. Recently Issued Accounting Pronouncements In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02). For public business entities, ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach as of the adoption date. See "Leases" above and Note 2, “Leases,” below for further details.

1. FINANCIAL STATEMENT PRESENTATION

Basis of Presentation and Principles of Consolidation

Halcón Resources Corporation (Halcón or the Company) is an independent energy company focused on the acquisition, production, exploration and development of onshore liquids‑rich oil and natural gas assets in the United States. The unaudited condensed consolidated financial statements include the accounts of all majority‑owned, controlled subsidiaries. The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development. Allocation of capital is made across the Company’s entire portfolio without regard to operating area. All intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial position as of, and the results of operations for, the periods presented. During interim periods, Halcón follows the accounting policies disclosed in its Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission (SEC) on March 12, 2019. Please refer to the notes in the 2018 Annual Report on Form 10-K when reviewing interim financial results.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion relating to oil and natural gas properties, asset retirement obligations, fair value estimates, and income taxes. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s unaudited condensed consolidated financial statements.

Interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these unaudited condensed consolidated financial statements.

Ability to Continue as a Going Concern

The Company’s strategic decision to transform into a pure-play, single basin company focused on the Delaware Basin in West Texas resulted in the Company divesting producing properties located in other areas and acquiring primarily undeveloped acreage in the Delaware Basin. The Company’s drilling activities since acquiring the assets required significant capital expenditure outlays to replace lost production and related EBITDA. These and other factors adversely impacted the Company’s ability to comply with its debt covenants under the Senior Credit Agreement. Anticipating that it might be challenging to comply with the covenants under the Senior Credit Agreement, the Company has periodically sought and obtained amendments and consents from the lenders under the Senior Credit Agreement. Most recently, on May 8, 2019, the Company entered into an amendment to the Senior Credit Agreement in which its lenders waived compliance with the Consolidated Total Net Debt to EBITDA Ratio covenant contained in the Senior Credit Agreement for the three months ended March 31, 2019, while raising the applicable margin on the Company’s borrowings and imposing certain reporting and other obligations upon the Company. The waiver extends, as to compliance at March 31, 2019, until August 1, 2019; provided that it may be terminated on July 1, 2019 by the majority lenders in their sole discretion and earlier upon the occurrence of certain other events (an Early Termination). The lenders under the Senior Credit Agreement concurrently redetermined the borrowing base to $225.0 million, a reduction from $275.0 million at December 31, 2018. At March 31, 2019, the Company had borrowings of $105.0 million outstanding under the Senior Credit Agreement. The Company’s current internal projections show that it will not be in compliance with the Consolidated Total Net Debt to EBITDA Ratio and the Current Ratio covenants in certain future periods, beginning with the three months ended June 30, 2019. The Company sought amendment of the covenants for the twelve month period following the issuance date of the unaudited condensed consolidated financial statements included in this report, which the lenders did not approve. As a consequence, if the Company fails to comply with the financial covenants under the Senior Credit Agreement for the three months ended June 30, 2019, as projected,or there is an Early Termination, it will be in default under the Senior Credit Agreement. An Event of Default (as defined in the Senior Credit Agreement) would permit the lenders to accelerate any indebtedness outstanding under the Senior Credit Agreement, making it immediately due and payable. If the indebtedness under the Senior Credit Agreement is accelerated, then an Event of Default (as defined in the indenture governing the Company’s senior notes) under the senior notes would occur, which, if continued beyond any applicable cure period, would result in the entire principal under the senior notes being due and payable immediately. If the lenders, and subsequently noteholders, accelerate the outstanding indebtedness (the aggregate principal amount of which was approximately $730.0 million as of March 31, 2019), all such indebtedness will become immediately due and payable. The Company currently does not have sufficient liquidity to repay those amounts. In addition, should amounts under the Senior Credit Agreement become due and payable, the Company’s derivatives that are in a net liability position could also become due and payable. As a result of the Company’s expected inability to comply with its Consolidated Total Net Debt to EBITDA Ratio and its Current Ratio covenants contained in its Senior Credit Agreement within one year from the issuance date of the unaudited condensed consolidated financial statements for the three months ended March 31, 2019, the Company has determined that there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern.

The Company has engaged advisors to evaluate strategic and financial alternatives and is pursuing options to maintain sufficient liquidity and to address its Senior Credit Agreement covenant compliance, including (i) working with the bank syndicate to amend the Senior Credit Agreement and/or obtain waivers of covenant compliance for future periods, (ii) seeking alternative sources of capital, (iii) divesting assets, (iv) exploring strategic merger and acquisition options and (v) reducing operating costs. There can be no assurance that the Company will be able to comply with the covenants in its Senior Credit Agreement, that the lenders will provide any covenant relief or fail to exercise their right to Early Termination or that the Company will be able to obtain alternative financing on a timely basis and on satisfactory terms, or at all. In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet its capital needs and support its business plans while paying or refinancing the existing debt obligations. If alternative financing cannot be obtained on a timely basis and on satisfactory terms, then the Company’s operations would be materially negatively impacted.

Accordingly, the Company classified outstanding borrowings under its Senior Credit Agreement as a current liability on its unaudited condensed consolidated balance sheet as of March 31, 2019. The unaudited condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. Accounts receivable are recorded at the amount due, less an allowance for doubtful accounts, when applicable. The Company establishes provisions for losses on accounts receivable if it determines that collection of all or part of the outstanding balance is doubtful. The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific identification method. As of March 31, 2019 and December 31, 2018, allowances for doubtful accounts were approximately $0.1 million and $0.2 million, respectively.

Other Operating Property and Equipment

Other operating property and equipment additions are recorded at cost. Depreciation is calculated using the straight‑line method over the following estimated useful lives: gas gathering systems, thirty years; gas treating systems and buildings, twenty years; automobiles and computers, three years; computer software, fixtures, furniture and equipment, the lesser of lease term or five years; trailers, seven years; heavy equipment, eight to ten years and leasehold improvements, lease term. Upon disposition, the cost and accumulated depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. Material expenditures which increase the life or productive capacity of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.

The Company reviews its other operating property and equipment for impairment in accordance with Accounting Standards Codification (ASC) No. 360, Property, Plant, and Equipment (ASC 360). ASC 360 requires the Company to evaluate other operating property and equipment for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of its other operating property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Leases

Effective January 1, 2019, the Company accounts for leases in accordance with ASC No. 842, Leases, (ASC 842). The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified asset for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset, and (2) the customer has the right to control the use of the identified asset.

The Company leases equipment and office space pursuant to net operating leases. Operating leases where the Company is the lessee are included in "Operating lease right of use assets" and "Operating lease liabilities" on our unaudited condensed consolidated balance sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

Key estimates and judgments include how the Company determined (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The Company uses the implicit rate when readily determinable. The lease term includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. Lease payments included in the measurement of the lease asset or liability comprise the following, when applicable: fixed payments (including in-substance fixed payments), variable payments that depend on index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.

The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For the Company's operating leases, the right of use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Variable lease payments associated with the Company's leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments, when applicable, are presented as "Gathering and other" or "General and administrative" in our unaudited condensed consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating leases.

The Company has lease agreements which include lease and nonlease components and the Company has elected to combine lease and nonlease components, when fixed, for all lease contracts. Nonlease components include common area maintenance charges on office leases and, when applicable, services associated with equipment leases. The Company determines whether the lease or nonlease component is the predominant component on a case-by-case basis.

The Company reviews its right of use assets for impairment in accordance with ASC 360. ASC 360 requires the Company to evaluate right of use assets for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value.

The Company monitors for events or changes in circumstances that would require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding right of use asset unless doing so would reduce the carrying amount of the right of use asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative right of use asset balance is recorded in the unaudited condensed consolidated statements of operations.

The Company elected not to recognize right of use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases.

Additionally, the Company applies a portfolio approach to determine the discount rate (the incremental borrowing rate for leases with similar characteristics).

Restructuring

During the three months ended March 31, 2019, four executives of the Company resigned from their positions. These were considered terminations without cause under their respective employment agreements, which entitled them to certain benefits. Additionally during the period, the Company had reductions in its workforce due to a decrease in drilling and developmental activities planned for 2019. Consequently, for the three months ended March 31, 2019, the Company incurred approximately $11.3 million in severance costs which were recorded in “Restructuring” on the unaudited condensed consolidated statements of operations.

Related Party Transactions

Crude Oil Gathering Agreement

On July 27, 2018, a subsidiary of the Company entered into a crude oil gathering agreement with SCM Crude, LLC (SCM) pursuant to which the Company agreed to dedicate, for a term of 15 years, production of crude oil from its currently owned, or later acquired acreage in designated areas in Ward and Winkler Counties, Texas (excluding certain specific wells) for the receipt, gathering and transportation on a gathering system to be designed, engineered and constructed by SCM. In the fourth quarter of 2018, the Company began selling its crude oil to SCM while the gathering system was under construction. The gathering system was completed and placed into service in March 2019. For the three months ended March 31, 2019, the Company earned $39.2 million from SCM under the crude oil gathering agreement and as of March 31, 2019 recorded an $11.2 million receivable from SCM for its crude oil sales.

Certain funds under the control of Ares Management LLC (Ares) are the majority owners and controlling parties of SCM. Ares also controls other funds which own in excess of ten percent (10%) of the common stock of the Company. No Ares fund that is a stockholder of the Company has an interest in SCM but one of the Company’s directors, who is employed by Ares, also serves on the board of directors of SCM’s parent company.

Gas Purchase and Processing Agreement

On November 16, 2017, a subsidiary of the Company entered into a gas purchase and processing agreement with Salt Creek Midstream, LLC (Salt Creek) pursuant to which the Company agreed to dedicate for a term of 15 years, all production from its acreage in Ward County, Texas (that is not otherwise previously dedicated) and certain sections in Winkler County, Texas to a natural gas gathering pipeline and processing facilities to be constructed by Salt Creek. The facilities were completed and placed in service in May 2018. For the three months ended March 31, 2019, the Company earned $0.2 million from Salt Creek under the gas purchase and processing agreement and as of March 31, 2019 recorded a $0.8 million receivable from Salt Creek for its natural gas sales.

Certain funds under the control of Ares are the majority owners and controlling parties of Salt Creek. Ares also controls other funds which own in excess of ten percent (10%) of the stock of the Company. No Ares fund that is a stockholder of the Company has an interest in Salt Creek but one of the Company’s directors, who is employed by Ares, and is a director of the Company, also serves on the board of directors of Salt Creek.

Pipeline Testing Services

In February 2019, the Company entered into an agreement with Cima Inspection LLC (Cima), a company specializing in advanced, non-destructive methods of testing pipes and tubing, pursuant to which Cima will inspect various Company gathering and transportation assets. One of the Company's directors owns a minority interest in Cima and currently serves, without compensation, as its chief executive officer. The engagement of Cima was the result of a lengthy process during which Halcón investigated the most cost-effective method of conducting testing on its gathering and transportation assets. Halcón considered the performance and cost of various alternatives and solicited proposals from third parties before determining that Cima's proposal offered the most timely cost efficient solution to the Company's needs. As a result of the relationship of one of the Company's directors with Cima, the process by which the Company determined Cima's proposal to be superior to others, as well as the terms of the agreement, were evaluated and approved by the Audit Committee and the disinterested members of Halcón's board, in a vote that excluded that director in accordance with applicable Company policies, including its Code of Conduct and Corporate Governance Guidelines (copies of which are available through the Company's website at www.halconresources.com), and the Company's procedures for the review and approval of transactions with related parties. For the three months ended March 31, 2019, the Company incurred charges of approximately $0.3 million for services provided by Cima. As of March 31, 2019, the Company recorded a $0.2 million payable to Cima. The payable is recorded in “Accounts payable and accrued liabilities,” on the Company’s unaudited condensed consolidated balance sheet.

Charter of Aircraft

In the ordinary course of business, Halcón occasionally chartered a private aircraft for business use. Floyd C. Wilson, Halcón’s former Chairman, Chief Executive Officer and President, indirectly owns an aircraft which the Company chartered from time to time. During 2019, fees for the use of Mr. Wilson's aircraft by the Company were based upon comparable costs that the Company would have incurred in chartering the same type and size of aircraft from an independent third party utilizing data from several independent third party aircraft leasing companies. The terms for this use were evaluated and approved by the Audit Committee, and subsequently by the disinterested members of the Company's board upon the recommendation of the Audit Committee, in accordance with the Company's procedures for the review and approval of transactions with related parties. During the three months ended March 31, 2019, the Company paid approximately $0.2 million related to use of the aircraft indirectly owned by Mr. Wilson during 2018. In 2019, the Company terminated all charter arrangements with Mr. Wilson relating to the use of his aircraft.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02). For public business entities, ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach as of the adoption date. See "Leases" above and Note 2, “Leases,” below for further details.