GDP Goodrich Petroleum Corporation

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—Description of Business and Significant Accounting Policies

Goodrich Petroleum Corporation (“Goodrich” and, together with its subsidiary, Goodrich Petroleum Company, L.L.C. (the “Subsidiary”), “we,” “our,” the “Company,” or the “Registrant”) is an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas on properties primarily in (i) Northwest Louisiana and East Texas, which includes the Haynesville Shale Trend, (ii) Southwest Mississippi and Southeast Louisiana, which includes the Tuscaloosa Marine Shale Trend (“TMS”), and (iii) South Texas, which includes the Eagle Ford Shale Trend.

Basis of Presentation

The consolidated financial statements of the Company included in this Quarterly Report on Form 10-Q have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“the SEC”) and accordingly, certain information normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”) has been condensed or omitted. This information should be read in conjunction with our consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020. Operating results for the three and nine months ended  September 30, 2021 are not necessarily indicative of the results that may be expected for the full year or for any interim period.

During the first nine months of 2021, the distribution of COVID-19 vaccines progressed and many government-imposed restrictions were relaxed or rescinded, although the impact of the COVID-19 pandemic and related economic, business and market disruptions remain uncertain. 

The primary impact of COVID-19 experienced by the Company was a severe decline in the demand and price of crude oil. Because we predominately produce natural gas and natural gas demand and prices were not impacted by the same market forces as crude oil, we have experienced less of an impact from COVID-19 than many of our peers. However, the scope and length of the COVID-19 pandemic and the ultimate effect on the price of natural gas and oil cannot be determined, and we could be adversely affected in future periods. Management is actively monitoring the impact on the Company’s results of operations, financial position, and liquidity in fiscal year 2021 and into 2022.

Principles of Consolidation—The consolidated financial statements include the financial statements of the Company and the Subsidiary. Intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. Certain data in prior periods’ financial statements have been adjusted to conform to the presentation of the current period. We have evaluated subsequent events through the date of this filing.

Use of Estimates— Our management has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with US GAAP.

Cash and Cash Equivalents—Cash and cash equivalents includes cash on hand, demand deposit accounts and temporary cash investments with maturities of ninety days or less at the date of purchase.

Accounts Payable—Accounts payable consisted of the following amounts as of  September 30, 2021 and December 31, 2020:

Inventory –Inventory consists of equipment, casing and tubulars that are expected to be used in our capital drilling program. Inventory is carried on the Consolidated Balance Sheets at the lower of cost or market.

Property and Equipment—Under US GAAP, two acceptable methods of accounting for oil and natural gas properties are allowed. These are the Successful Efforts Method and the Full Cost Method. Entities engaged in the production of oil and natural gas have the option of selecting either method for application in the accounting for their properties. The principle differences between the two methods are in the treatment of exploration costs, the computation of depreciation, depletion and amortization (“DD&A”) expense and the assessment of impairment of oil and natural gas properties. We have elected to adopt the Full Cost Method of accounting. We believe that the true cost of developing a “portfolio” of reserves should reflect both successful and unsuccessful attempts at exploration and development. We believe application of the Full Cost Method better reflects the true economics of exploring for and developing our oil and natural gas reserves.

Under the Full Cost Method, we capitalize all costs associated with acquisitions, exploration, development and estimated abandonment costs into a single full cost pool. We capitalize internal costs that can be directly identified with the acquisition of leasehold, as well as drilling and completion activities, but do not include any costs related to production, general corporate overhead or similar activities. Unevaluated property costs are excluded from the amortization base until we make a determination as to the existence of proved reserves on the respective property or impairment. We review our unevaluated properties at the end of each quarter to determine whether the costs should be reclassified to proved oil and natural gas properties and thereby subject to DD&A and the full cost ceiling test. For the three months ended  September 30, 2021 and 2020, we transferred less than $0.1 million from unevaluated properties to proved oil and natural gas properties. For the nine months ended September 30, 2021 and 2020, we transferred $0.3 million and less than $0.1 million, respectively, from unevaluated properties to proved oil and natural gas properties. Our sales of oil and natural gas properties are accounted for as adjustments to net proved oil and natural gas properties with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves.

Under the Full Cost Method, we amortize our investment in oil and natural gas properties through DD&A expense using the units of production method. An amortization rate is calculated based on total proved reserves converted to thousand cubic feet equivalent of natural gas (“Mcfe”) as the denominator and the net book value of evaluated oil and natural gas asset together with the estimated future development cost of the proved reserves as the numerator. The rate calculated per Mcfe is applied against the period's production also converted to Mcfe to arrive at the period's DD&A expense.

Depreciation of furniture, fixtures and equipment, consisting of office furniture, computer hardware and software and leasehold improvements, is computed using the straight-line method over their estimated useful lives, which vary from three to five years.

Full Cost Ceiling Test—The Full Cost Method requires that at the conclusion of each financial reporting period, the present value of estimated future net cash flows from proved reserves discounted at 10%, excluding cash flows related to estimated abandonment costs already recorded, net of deferred taxes (the “Ceiling”), be compared to the net capitalized costs of proved oil and natural gas properties, net of related deferred taxes. This comparison is referred to as a “ceiling test.” If the net capitalized costs of proved oil and natural gas properties net of deferred taxes exceed the Ceiling, we are required to write-down the value of our oil and natural gas properties to the value of the Ceiling. Estimated future net cash flows from proved reserves are calculated based on a trailing 12-month average pricing assumption.

The Full Cost Ceiling Test for the three months ended  September 30, 2021 and 2020 resulted in a zero and $3.0 million impairment of the oil and natural gas properties, respectively. For the nine months ended September 30, 2021 and 2020, we recorded no impairment and $17.2 million, respectively.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurement—Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, whether in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of non-performance, which includes, among other things, our credit risk.

We use various methods, including the income approach and market approach, to determine the fair values of our financial instruments that are measured at fair value on a recurring basis, which depend on a number of factors, including the availability of observable market data over the contractual term of the underlying instrument. For some of our instruments, the fair value is calculated based on directly observable market data or data available for similar instruments in similar markets. For other instruments, the fair value may be calculated based on these inputs as well as other assumptions related to estimates of future settlements of these instruments. We separate our financial instruments into three levels (levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine the fair value of our instruments. Our assessment of an instrument can change over time based on the maturity or liquidity of the instrument, which could result in a change in the classification of the instruments between levels.

Each of these levels and our corresponding instruments classified by level are further described below:

As of September 30, 2021 and December 31, 2020, the carrying amounts of our cash and cash equivalents, trade receivables and payables represented fair value because of the short-term nature of these instruments.

Asset Retirement Obligations—Asset retirement obligations are related to the abandonment and site restoration requirements that result from the exploration and development of our oil and natural gas properties. We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Accretion expense is included in “Depreciation, depletion and amortization” on our Consolidated Statements of Operations. See Note 3.

The estimated fair value of the Company’s asset retirement obligations at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligations was classified as Level 3 in the fair value hierarchy.

Revenue Recognition—Oil and natural gas revenues are generally recognized upon delivery of our produced oil and natural gas volumes to our customers. We record revenue in the month our production is delivered to the purchaser. However, settlement statements and payments for our oil and natural gas sales may not be received for up to 60 days after the date production is delivered, and as a result, we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. As of  September 30, 2021and December 31, 2020, the net liability for natural gas balancing was immaterial. Differences between actual production and net working interest volumes are routinely adjusted. See Note 2.

Derivative Instruments—We use derivative instruments such as futures, forwards, swaps, collars, and options for purposes of hedging our exposure to fluctuations in the price of crude oil and natural gas and hedging our exposure to changing interest rates. Accounting standards related to derivative instruments and hedging activities require that all derivative instruments subject to the requirements of those standards be measured at fair value and recognized as assets or liabilities in the balance sheet. We offset the fair value of our asset and liability positions with the same counter-party for each commodity type. Changes in fair value are required to be recognized in earnings unless specific hedge accounting criteria are met. All of our realized gain or losses on our derivative contracts are the result of cash settlements. We have not designated any of our derivative contracts as hedges for accounting purposes; accordingly, changes in fair value are reflected in earnings. See Note 8.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes—We account for income taxes during interim periods based on annual projections of our effective tax rate.

We account for income taxes on an annual basis, as required, under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We recognize, as required, the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. See Note 7.

Net Income or Net Loss Per Common Share—Basic net income (loss) per common share is computed by dividing net income (loss) applicable to common stock for each reporting period by the weighted-average shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) applicable to common stock for each reporting period by the weighted average shares of common stock outstanding during the period, plus the effects of potentially dilutive restricted stock calculated using the treasury stock method and the potential dilutive effect of the conversion or exercise of other securities, such as warrants and convertible notes, into shares of our common stock. See Note 6.

Commitments and Contingencies—Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Recoveries from third parties, when probable of realization, are separately recorded and are not offset against the related environmental liability. See Note 9.

Share-Based Compensation—We account for our share-based transactions using the fair value as of the grant date and recognize compensation expense on a straight-line basis over the requisite service period.

Guarantee—As of September 30, 2021, our Subsidiary was the Subsidiary Guarantor of our 2023 Second Lien Notes (as defined below). Goodrich has no independent assets or operations, the guarantee is full and unconditional and Goodrich has no subsidiaries other than the Subsidiary.

Debt Issuance Cost—The Company records debt issuance costs associated with its 2023 Second Lien Notes (and previously with its 2021/2022 Second Lien Notes), (both as defined below) as a contra balance to long term debt, net in our Consolidated Balance Sheets, which is amortized straight-line over the life of the respective notes as this method is not materially different from the effective interest method. Debt issuance costs associated with our revolving credit facility debt are recorded in other assets in our Consolidated Balance Sheets, which are amortized straight-line over the life of such debt.

New Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by ASU 2020-04 do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. Currently, the Company's only existing contract with potential impact from reference rate reform is the 2019 Senior Credit Facility, which utilizes LIBOR as a benchmark rate. In October 2020, the Third Amendment of the 2019 Senior Credit Facility included provisions for alternate benchmark rates should LIBOR be discontinued due to reference rate reform. We will continue to evaluate the expected impact these amendments and reference rate reform will have on our consolidated financial statements and various contracts.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments in ASU 2020-06 primarily affect convertible instruments issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements of ASU 2020-06. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. Also affected is the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in ASU 2020-06 affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in ASU 2020-06 are effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The FASB has also decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact of these amendments on our accounting for, and disclosure of, our convertible notes.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2—Revenue Recognition

In accordance with Accounting Standards Codification (“ASC”) Topic 606, revenue is generally recognized upon delivery of our produced oil and natural gas volumes to our customers. Our customer sales contracts include oil and natural gas sales. Under Topic 606, each unit (Mcf or barrel) of commodity product represents a separate performance obligation which is sold at variable prices, determinable on a monthly basis. The pricing provisions of our contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, product quality and prevailing supply and demand conditions in the geographic areas in which we operate. We allocate the transaction price to each performance obligation and recognize revenue upon delivery of the commodity product when the customer obtains control. Control of our produced natural gas volumes passes to our customers at specific metered points indicated in our natural gas contracts. Similarly, control of our produced oil volumes passes to our customers when the oil is measured either by a trucking oil ticket or by a meter when entering an oil pipeline. The Company has no control over the commodities after those points and the measurement at those points dictates the amount on which the customer's payment is based. Our oil and natural gas revenue streams include volumes burdened by royalty and non-operated working interests. Our revenues are recorded and presented on our financial statements net of the royalty and non-operated working interests. Our revenue stream does not include any payments for services or ancillary items other than sale of oil and natural gas.

We record revenue in the month our production is delivered to the purchaser. However, settlement statements and payments for our oil and natural gas sales may not be received for up to 60 days after the date production is delivered, and as a result, we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. We record any differences, which historically have not been significant, between the actual amounts ultimately received and the original estimates in the period they become finalized. As of  September 30, 2021 and December 31, 2020, receivables from contracts with customers were $24.6 million and $10.2 million, respectively.

The following table presents our oil and natural gas revenues disaggregated by revenue source and by operated and non-operated properties for the three and nine months ended  September 30, 2021 and 2020:

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

⁽¹⁾ The carrying amount for the 2019 Senior Credit Facility represents fair value as its variable interest rate approximates market rates.

⁽²⁾ The debt discount was being amortized using the effective interest rate method based upon a maturity date of May 31, 2022. The principal included $2.8 million of paid in-kind interest as of  December 31, 2020. The carrying value included $0.9 million of unamortized debt discount and $0.2 million of unamortized issuance cost as of  December 31, 2020. 

⁽³⁾ The debt discount is being amortized using the effective interest rate method based upon a maturity date of May 31, 2023. The principal includes $2.3 million of paid in-kind interest as of  September 30, 2021. The carrying value includes $0.9 million of unamortized debt discount and $0.3 million of unamortized issuance cost as of  September 30, 2021.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the total interest expense (contractual interest expense, amortization of debt discount, accretion and financing costs) and the effective interest rate on the liability component of debt for the three and nine months ended  September 30, 2021 and 2020 (amounts in thousands, except effective interest rates):

⁽¹⁾ The 2021/2022 Second Lien Notes had a coupon interest rate of 13.50%; however, the discount recorded due to the convertibility of the notes increased the effective interest rate to 18.6% and 20.1%, respectively, for the three and nine months ended September 30, 2020 and 19.1% for the nine months ended September 30, 2021 until exchanged on March 9, 2021. Interest expense for the three months ended September 30, 2020 included $0.1 million of debt discount amortization and $0.5 million of accrued interest to be paid in-kind, and interest expense for the nine months ended September 30, 2020 included $0.4 million of debt discount amortization and $1.4 million of paid in-kind interest. Interest expense for the nine months ended September 30, 2021 until exchanged on March 9, 2021 included $0.1 million of debt discount amortization and $0.4 million of paid in-kind interest.

⁽²⁾ The 2023 Second Lien Notes have a coupon interest rate of 13.50%; however, the discount recorded due to the convertibility of the notes increased the effective interest rate to 15.7% and 16.1% for the three and nine months ended September 30, 2021, respectively. Interest expense for the three months ended September 30, 2021 included $0.1 million of debt discount and issuance cost amortization and $1.1 million of accrued interest to be paid in-kind, and interest expense for the nine months ended  September 30, 2021 included $0.4 million of debt discount and issuance cost amortization and $2.3 million of accrued interest to be paid in-kind.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2019 Senior Credit Facility

On May 14, 2019, the Company entered into a Second Amended and Restated Senior Secured Revolving Credit Agreement (the “2019 Credit Agreement”) among the Company, the Subsidiary, as borrower (in such capacity, the “Borrower”), Truist Bank, as administrative agent (the “Administrative Agent”), and certain lenders that are party thereto, which provides for revolving loans of up to the borrowing base then in effect (the “2019 Senior Credit Facility”).

The 2019 Senior Credit Facility matures on the earlier of (a)  May 14, 2024 or (b) December 2, 2022, if the 2023 Second Lien Notes (as defined below) have not been voluntarily redeemed, repurchased, refinanced or otherwise retired by December 2, 2022, which is the date that is 180 days prior to the May 31, 2023 “Maturity Date” of the 2023 Second Lien Notes. The 2019 Senior Credit Facility provides for a maximum credit amount of $500 million subject to a borrowing base limitation, which was $120.0 million as of September 30, 2021 and was increased to $150.0 million during the Fall 2021 borrowing base redetermination. The borrowing base is redetermined in March and September of each calendar year, and is subject to additional adjustments from time to time, including, without limitation, for asset sales, elimination or reduction of hedge positions and incurrence of other debt. Additionally, each of the Borrower and the Administrative Agent may request one unscheduled redetermination of the borrowing base between scheduled redeterminations. The amount of the borrowing base is determined by the lenders in their sole discretion and consistent with their oil and gas lending criteria at the time of the relevant redetermination. Under the Fifth Amendment to 2019 Credit Agreement entered into on November 5, 2021, the Company is permitted to make restricted payments under the 2019 Credit Agreement so long as (i) no borrowing base deficiency, default or event of default exists or would result therefrom, (ii) after giving pro forma effect to such restricted payment, availability is no less than 20% of the aggregate amount of the available commitments under the 2019 Credit Agreement and (iii) after giving pro forma effect to such restricted payment, the ratio of net funded debt of the Company to EBITDAX shall not be greater than 1.50 to 1.00. The Fifth Amendment to 2019 Credit Agreement also permits the Company to make redemptions of the Second Lien Debt (as defined in the 2019 Credit Agreement) and payments of interest on the 2023 Second Lien Notes so long as each such redemption and interest payment would be permitted as a restricted payment. The Borrower may also request the issuance of letters of credit under the 2019 Credit Agreement in an aggregate amount up to $10 million, which reduce the amount of available borrowings under the borrowing base in the amount of such issued and outstanding letters of credit.

All amounts outstanding under the 2019 Senior Credit Facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the alternative base rate plus an applicable margin ranging from 1.50% to 2.50%, depending on the percentage of the borrowing base that is utilized, or (ii) adjusted LIBOR plus an applicable margin from 2.50% to 3.50%, depending on the percentage of the borrowing base that is utilized. Undrawn amounts under the 2019 Senior Credit Facility are subject to a commitment fee ranging from 0.375% to 0.50%, depending on the percentage of the borrowing base that is utilized. To the extent that a payment default exists and is continuing, all amounts outstanding under the 2019 Senior Credit Facility will bear interest at 2.0% per annum above the rate and margin otherwise applicable thereto. As of September 30, 2021, the weighted average interest rate on the borrowings from the 2019 Senior Credit Facility was 3.4%. The obligations under the 2019 Credit Agreement are guaranteed by the Company and secured by a first lien security interest in substantially all of the assets of the Company and the Borrower.

The 2019 Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the 2019 Senior Credit Facility to be immediately due and payable.

The 2019 Credit Agreement also contains certain financial covenants, including the maintenance of (i) a ratio of net funded debt to EBITDAX not to exceed 3.50 to 1.00 as of the last day of any fiscal quarter, (ii) a current ratio (based on the ratio of current assets to current liabilities as defined in the 2019 Credit Agreement) not to be less than 1.00 to 1.00 and (iii) until no 2023 Second Lien Notes remain outstanding, a ratio of total proved PV-10 attributable to the Company’s and the Borrower’s proved reserves to total secured debt (net of any unrestricted cash not to exceed $10 million) not to be less than 1.50 to 1.00 and minimum liquidity requirements. On November 5, 2021, we entered into a Fifth Amendment to 2019 Credit Agreement with Subsidiary, the Administrative Agent and the lenders party thereto, pursuant to which, among other things, the lenders made certain changes to the restricted payments and redemption covenants.

As of September 30, 2021, the Company had a borrowing base of $120.0 million with $90.4 million of borrowings outstanding and no outstanding letters of credit. The Company also had $1.4 million of unamortized debt issuance costs recorded as of  September 30, 2021 related to the 2019 Senior Credit Facility.

As of September 30, 2021, the Company was in compliance with all covenants within the 2019 Senior Credit Facility.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Convertible Second Lien Notes

In October 2016, the Company issued $40.0 million aggregate principal amount of the Company’s 13.50% Convertible Second Lien Senior Secured Notes due 2019 (the “2019 Second Lien Notes”) along with 10-year costless warrants to acquire 2.5 million shares of common stock. Holders of the 2019 Second Lien Notes had a second priority lien on all assets of the Company, and holders of such warrants had a right to appoint two members to our Board of Directors (the “Board”) as long as such warrants were outstanding.

The 2019 Second Lien Notes were scheduled to mature on August 30, 2019 or six months after the maturity of our current revolving credit facility but in no event later than March 30, 2020. The 2019 Second Lien Notes bore interest at the rate of 13.50% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The Company also had the option under certain circumstances to pay all or any portion of interest in-kind on the then outstanding principal amount of the 2019 Second Lien Notes by increasing the principal amount of the outstanding 2019 Second Lien Notes or by issuing additional second lien notes.

Upon issuance of the 2019 Second Lien Notes in October 2016, in accordance with accounting standards related to convertible debt instruments that may be settled in cash upon conversion as well as warrants on the debt instrument, we recorded a debt discount of $11.0 million, thereby reducing the $40.0 million carrying value upon issuance to $29.0 million and recorded an equity component of $11.0 million. The debt discount was amortized using the effective interest rate method based upon an original term through August 30, 2019. The 2019 Second Lien Notes were redeemed in full on May 29, 2019 for $56.7 million, using borrowings under the 2019 Senior Credit Facility. In connection with the redemption of the 2019 Second Lien Notes, we recorded a $1.6 million loss on early extinguishment of debt related to the remaining unamortized debt discount and debt issuance costs.

On May 14, 2019, the Company and the Subsidiary entered into a purchase agreement with certain purchasers pursuant to which the Company issued to such purchasers $12.0 million aggregate principal amount of the Company’s 13.50% Convertible Second Lien Senior Secured Notes due 2021 (the “2021/2022 Second Lien Notes”). Proceeds from the sale of the 2021/2022 Second Lien Notes were primarily used to pay down outstanding borrowings under the 2019 Senior Credit Facility. In May 2020, the maturity date of the 2021/2022 Second Lien Notes was extended to May 31, 2022.

Upon issuance of the 2021/2022 Second Lien Notes on May 31, 2019, in accordance with accounting standards related to convertible debt instruments that may be settled in cash upon conversion, we recorded a debt discount of $1.4 million, thereby reducing the $12.0 million carrying value upon issuance to $10.6 million and recorded an equity component of $1.4 million. The fair value of the debt instrument without the conversion feature and the resulting equity component was valued using a binomial lattice model. The debt discount was amortized using the effective interest rate method based upon an original term through May 31, 2021. Upon the maturity extension in May 2020, an additional $0.3 million of debt discount was recorded, and the debt discount began to be amortized using the effective interest rate method based upon the maturity date of May 31, 2022. 

On March 9, 2021, the Company and the Subsidiary entered into a note purchase and exchange agreement (“the Note Purchase and Exchange Agreement”) with certain purchasers (each such purchaser, together with its successors and assigns, a “2023 Second Lien Notes Purchaser”) pursuant to which the Company issued to the 2023 Second Lien Notes Purchasers (A) $15.2 million aggregate principal amount of the Company’s 13.50% Convertible Second Lien Senior Secured Notes due 2023 (the “2023 Second Lien Notes”) in exchange for an equal amount of 2021/2022 Second Lien Notes and (B) $15.0 million of the 2023 Second Lien Notes in exchange for cash. Proceeds from the sale of the 2023 Second Lien Notes were used to pay down outstanding borrowings under the 2019 Senior Credit Facility. In connection with the Note Purchase and Exchange Agreement, we recorded a $0.9 million loss on early extinguishment of debt related to the remaining unamortized debt discount and debt issuance costs from the 2021/2022 Second Lien Notes.

The 2023 Second Lien Notes, as set forth in the indenture governing the 2023 Second Lien Notes (the “2023 Second Lien Notes Indenture”), are scheduled to mature on May 31, 2023. The 2023 Second Lien Notes bear interest at the rate of 13.50% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The Company may elect to pay all or any portion of interest in-kind on the then outstanding principal amount of the 2023 Second Lien Notes by increasing the principal amount of the outstanding 2023 Second Lien Notes.

The 2023 Second Lien Notes Indenture contains certain covenants pertaining to us and our Subsidiary, including delivery of financial reports; environmental matters; conduct of business; use of proceeds; operation and maintenance of properties; collateral and guarantee requirements; indebtedness; liens; dividends and distributions; limits on sales of assets and stock; business activities; transactions with affiliates; and changes of control. The 2023 Second Lien Notes Indenture also contains a financial covenant that requires the maintenance of a ratio of Total Proved PV-10 attributable to the Company's and Subsidiary's Proved Reserves (as defined in the 2023 Second Lien Notes Indenture) to Total Secured Debt (net of any Unrestricted Cash not to exceed $10.0 million) not to be less than 1.50 to 1.00.

The 2023 Second Lien Notes are convertible into the Company’s common stock at the conversion rate, which is the sum of the outstanding principal amount of 2023 Second Lien Notes to be converted, including any accrued and unpaid interest, divided by the conversion price, which shall initially be $21.33, subject to certain adjustments as described in the 2023 Second Lien Notes Indenture. Upon conversion, the Company must deliver, at its option, either (1) a number of shares of its common stock determined as set forth in the 2023 Second Lien Notes Indenture, (2) cash or (3) a combination of shares of its common stock and cash; however, the Company’s ability to redeem the 2023 Second Lien Notes with cash is subject to the terms of the 2019 Credit Agreement.

Upon issuance of the 2023 Second Lien Notes on March 9, 2021, in accordance with accounting standards related to convertible debt instruments that may be settled in cash upon conversion, we recorded a debt discount of $1.2 million, thereby reducing the $30.2 million carrying value upon issuance to $29.0 million and recorded an equity component of $1.2 million. The fair value of the debt instrument without the conversion feature and the resulting equity component was valued using a binomial lattice model. The debt discount is amortized using the effective interest rate method based upon an original term through May 31, 2023. In connection with the extinguishment of the 2021/2022 Second Lien Notes, we recorded a loss on early extinguishment of debt of $0.9 million consisting of $0.8 million of remaining unamortized debt discount and $0.1 million of remaining unamortized debt issuance costs on the 2021/2022 Second Lien Notes.

As of September 30, 2021, $0.9 million of debt discount and $0.3 million of debt issuance costs remained to be amortized on the 2023 Second Lien Notes.

As of September 30, 2021, the Company was in compliance with all covenants with respect to the 2023 Second Lien Notes Indenture.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5—Equity

During the three and nine months ended  September 30, 2021, the Company had vestings of its share-based compensation units representing a total fair value of less than $0.1 million, which resulted in the issuance of approximately 6,000 common stock shares. The Company withheld shares for payment of taxes due upon vesting and unrestriction of share-based compensation, which resulted in 4,035 shares held in treasury as of September 30, 2021. During the three and nine months ended September 30, 2020, the Company had vestings of its share-based compensation units upon the retirement of certain employees representing a total fair value of less than $0.1 million and $1.0 million, respectively, which resulted in the issuance of approximately 6,000 and 136,000 common stock shares, respectively. The Company withheld shares for payment of $0.3 million in taxes due upon vesting resulting in 39,700 shares held in treasury as of September 30, 2020.

During the three and nine months ended  September 30, 2021, certain holders of costless unsecured claim (“UCC”) warrants exercised such warrants into approximately 780,000 and 790,000 common stock shares, respectively. The UCC warrants, held by certain past unsecured creditors, became exercisable when the required equity strike price (as defined per the warrant agreement) of $230.0 million was achieved on July 14, 2021.

In connection with the issuance of the 2023 Second Lien Notes, we recorded an equity component of $1.2 million in March 2021. The equity component recorded for the 2023 Second Lien Notes is not remeasured as long as it continues to meet the condition for equity classification. For further details, see Note 4.

NOTE 6—Net Income (Loss) Per Common Share

Net loss applicable to common stock was used as the numerator in computing basic and diluted net loss per common share for the three and nine months ended  September 30, 2021 and 2020. The Company used the treasury stock method in determining the effects of potentially dilutive restricted stock. The following table sets forth information related to the computations of basic and diluted net loss per common share:

** Common shares issuable on assumed vesting of share-based compensation assumes a payout of the Company's performance share awards at 100% of the initial units granted (or a ratio of one unit to one common share). The range of common stock shares which may be earned ranges from zero to 200% of the initial performance units granted.

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7—Income Taxes

We recorded no income tax expense or benefit for the three and nine months ended  September 30, 2021 and 2020. We maintained a valuation allowance at September 30, 2021, which resulted in no net deferred tax asset or liability appearing on our consolidated balance sheets. We continued to maintain this valuation allowance after an evaluation of all available evidence led to a conclusion that based upon the more-likely-than-not standard of the accounting literature our deferred tax assets are unrecoverable. The valuation allowance was $86.7 million as of December 31, 2020. The valuation allowance has no impact on our ability to utilize our net operating losses for tax purposes. However, we are subject to IRC Section 382, which  may limit our ability to utilize net operating losses to offset future taxable income.

As of September 30, 2021, we have no unrecognized tax benefits. There were no significant changes to our tax position since December 31, 2020.

NOTE 8—Commodity Derivative Activities

We use commodity and financial derivative contracts to manage fluctuations in commodity prices. We are currently not designating our derivative contracts for hedge accounting. All derivative gains and losses are from our oil and natural gas derivative contracts and have been recognized in “Other income (expense)” on our Consolidated Statements of Operations.

The following table summarizes gains and losses we recognized on our oil and natural gas derivatives for the three and nine months ended  September 30, 2021 and 2020:

Commodity Derivative Activity

We enter into swap contracts, costless collars or other derivative agreements from time to time to manage commodity price risk for a portion of our production. Our policy is that all derivatives are approved by the Hedging Committee of our Board, and reviewed periodically by the Board.

Despite the measures taken by us to attempt to control price risk, we remain subject to price fluctuations for natural gas and crude oil sold in the spot market. Prices received for natural gas sold on the spot market are volatile due primarily to seasonality of demand and other factors beyond our control. Decreases in domestic crude oil and natural gas spot prices will have a material adverse effect on our financial position, results of operations and quantities of reserves recoverable on an economic basis. We routinely exercise our contractual right to net realized gains against realized losses when settling with our financial counter-parties. Neither our counter-parties nor we require any collateral upon entering into derivative contracts. We would have been at risk of loss of $0.9 million had ARM Energy been unable to fulfill their obligations as of September 30, 2021.

The following table summarizes the fair values of our derivative financial instruments that are recorded at fair value classified in each Level as of  September 30, 2021 (in thousands). We measure the fair value of our commodity derivative contracts by applying the income approach. See Note 1—“Description of Business and Significant Accounting Policies” for our discussion regarding fair value, including inputs used and valuation techniques for determining fair values.

We enter into commodity derivative contracts under which we have netting arrangements with each counter-party. The following table discloses and reconciles the gross amounts to the amounts as presented on the Consolidated Balance Sheets as of  September 30, 2021 and December 31, 2020:

GOODRICH PETROLEUM CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9—Commitments and Contingencies

We are party to various lawsuits from time to time arising in the normal course of business, including, but not limited to, royalty, contract, personal injury, and environmental claims. We have established reserves as appropriate for all such proceedings and intend to vigorously defend these actions. Management believes, based on currently available information, that adverse results or judgments from such actions, if any, would not have been material to our consolidated financial position, results of operations or liquidity for the three and nine months ended  September 30, 2021 and 2020.

Pursuant to a purchase and sale agreement related to acreage acquired in September 2021, the Company has an unrecorded commitment to drill and complete eight producing wells over a four year time period, no later than September 2025. In the event the Company fails to perform this obligation, each of the eight wells is subject to liquidated damages of $0.6 million, or $4.5 million in total as of September 30, 2021. The Company anticipates satisfying this drilling obligation within the required timeframe.

NOTE 10—Leases

We determine if an arrangement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheets. We lease our corporate office building in Houston, Texas. We recognize lease expense for this lease on a straight-line basis over the lease term. This operating lease is included in furniture, fixtures and equipment and other capital assets, accrued liabilities and other non-current liabilities on our Consolidated Balance Sheets. The operating lease asset and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As this lease did not provide an implicit rate, we used a collateralized incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. The operating lease asset includes any lease payments made but excludes annual operating charges. Operating lease expense is recognized on a straight-line basis over the lease term and reported in general and administrative operating expense on our Consolidated Statements of Operations. We have also entered into leases for other equipment which are immaterial to our financial statements and/or have lease terms less than 12 months and have therefore not been recorded on our Consolidated Balance Sheets.

The lease cost components for the three and nine months ended  September 30, 2021 and 2020 are classified as follows:

⁽¹⁾ Includes building operating expenses.

The following are additional details related to our lease portfolio as of  September 30, 2021 and December 31, 2020:

As of September 30, 2021, our office building operating lease has a weighted-average remaining lease term of 5.6 years and a weighted-average discount rate of 8.8 percent. We have the option to terminate our building operating lease effective May 1, 2024 upon prior written notice and the payment of $0.1 million as an early termination fee. Cash paid for amounts included in the measurement of operating lease liabilities was $0.2 million and $0.8 million for the three and nine months ended  September 30, 2021, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $0.4 million and $1.2 million for the three and nine months ended September 30, 2020, respectively.