ITEM 1A - RISK FACTORS
Risks Related to Our Industry and Our Business
We do not have sufficient cash to continue as a going concern through May 2015, and our independent registered public accounting firm expressed substantial doubt regarding our ability to continue as a going concern in its audit opinion for our December 31, 2014 consolidated financial statements.
Our consolidated financial statements for the year ended December 31, 2014 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued their report dated March 31, 2015, in connection with the audit of our financial statements for the year ended December 31, 2014 that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern due to our liquidity. The fact that we have received this going concern qualification from our independent registered public accounting firm will likely make it more difficult for us to raise capital on favorable terms and could hinder, to some extent, our operations. Additionally, our actual prospectus for adequate liquidity in 2015 are uncertain, especially in light of the fact that beginning on March 23, 2015, any holder of the $13.9 million in aggregate principal amount of our Senior Secured Notes may elect to require us to repurchase that holder’s Senior Secured Notes within 30 days of making such an election. Although we are discussing with the holders of the Senior Secured Notes a 30-day extension (until April 22, 2015) of the earliest date that the holder of any of the Senior Secured Notes can exercise this right of repurchase, there is no assurance that we will be successful in being given such an extension. Even without considering the repurchase of any of the Senior Secured Notes, we do not anticipate having sufficient cash and cash equivalents to continue as a going concern through May 2015 without additional cash funding. If we are not able to continue as a going concern, we may have to declare, or be forced into bankruptcy and our stockholders will likely lose part or all of their investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The holders of our Senior Secured Notes currently possess a contractual right to require us to purchase all or a portion of the Senior Secured Notes and we do not have sufficient capital to purchase the Senior Secured Notes if such right is exercised.
Beginning on March 23, 2015, the holders of the Senior Secured Notes may be able to exercise the Senior Secured Notes Put Option and require us to purchase all or a portion of the 10% Senior Secured Notes due 2017 at a price equal to the principal amount of the Senior Secured Notes to be purchased, plus any accrued and unpaid interest on such notes. If any of the holders of the Senior Secured Notes were to exercise their rights under the Senior Secured Notes Put Option, we would have 30 days to purchase those Senior Secured Notes. If the holders of the Senior Secured Notes exercise the Senior Secured Notes Put Option, we will not be able to fund our commitments without access to additional liquidity and we will be in default under the Senior Secured Notes. If the default under the Senior Secured Notes is in excess of $10 million, we would also be in default under the indenture that governs the Convertible Senior Notes. Although we are discussing with the holders of the Senior Secured Notes a 30-day extension (until April 22, 2015) of the earliest date that the holder of any of the Senior Secured Notes can exercise the Senior Secured Notes Put Option, there is no assurance that we will be successful in being given such an extension. If a default occurs under the Senior Secured Notes or the Convertible Senior Notes, the holders of such debt could accelerate the indebtedness, demand immediate payment and use a variety of legal remedies to enforce their claims. If any of these defaults and the acceleration of any of our debt were to occur, it is unlikely that we would be able to continue as a going concern and we may have to declare, or be forced into bankruptcy.
Our substantial indebtedness, or debt we may incur in the future, could materially adversely affect our financial condition.
As of December 31, 2014, we had approximately $13.9 million outstanding in aggregate principal under our Senior Secured Notes, $40 million outstanding in aggregate principal under our 9% Convertible Senior Notes due 2017, and $47.3 million outstanding in aggregate principal under our Subordinated Notes, and we may incur additional indebtedness in the future. Our level of indebtedness has, or could have, important consequences to our business, because:
· a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;
· it may impair our ability to obtain additional financing in the future for acquisitions, capital expenditures or general corporate purposes;
· it may limit our flexibility in planning for, or reacting to, changes in our business and industry;
· even if we are able to refinance or modify our existing indebtedness, any such transactions may result in significant changes to the Company’s capital structure, the disposition of material assets and adjustments to its balance sheet, and these changes may adversely affect the holders of ZaZa common stock through dilution or loss in value; and
· we may be substantially more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to downturns in our business, our industry or the economy in general.
In addition, the terms of our Senior Secured Notes and our Convertible Senior Notes restrict, and the terms of any future indebtedness, including any future credit facility, may restrict our ability to incur additional indebtedness and grant liens because of
debt or financial covenants we are, or may be, required to meet. Thus, we may not be able to obtain sufficient capital to grow our business or implement our business strategy and may lose opportunities to acquire interests in oil properties or related businesses because of our inability to fund such growth.
Our ability to comply with restrictions and covenants, including those in our Senior Secured Notes, Convertible Senior Notes or in any future debt agreement, is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our Senior Secured Notes also contain restrictions on the operation of our business, such as limitations on the sale and acquisition of assets, limitations on entering into joint ventures, limitations on restricted payments, limitations on mergers and consolidations, limitations on loans and investments, and limitations on the lines of business in which we may engage, which may limit our activities. Our Convertible Senior Notes contain certain of the foregoing restrictions as well. We must obtain consent from the holders of a majority of the Senior Secured Notes for certain transactions involving oil and gas properties, with certain carveouts and requirements to apply a portion of net sales proceeds to pay down the principal amount of the Senior Secured Notes and with certain carveouts to enter into our joint ventures. Thus, we may not be able to manage our cash flow in a manner that maximizes our business opportunities. Our failure to comply with any of the restrictions and covenants could result in a default, which could permit the holders of our Senior Secured Notes and our Convertible Senior Notes to accelerate repayments and foreclose on the collateral securing the indebtedness.
Our current financial condition has adversely affected our business operations and our business prospects.
Our current financial condition and resulting uncertainty have been disruptive to our business. Management has devoted substantial time and attention to improving our financial condition, thereby reducing its focus on operating the business. We may also lose employees as a result of uncertainties related to our financial condition. Further, our current financial condition and resulting uncertainty may cause operating partners to terminate their relationships with us or to tighten credit. These developments could have a material adverse effect on our business, operations, financial condition and cash flows. Moreover, if we are unable to raise a sufficient amount of cash to pay for our portion of costs associated with drilling programs initiated by our operating partners, we would be subject to customary non-consent penalties on an individual well by well basis with respect to any wells in which we are unable to participate, which would result in the loss of a significant portion of any future revenue derived from those non-consent wells. Similarly, if the Company is unable to fund renewals of expiring leases, it could lose portions of its acreage.
Our asset carrying values have been impaired based, in part, on oil and gas prices as of December 31, 2014 and they may be further impaired if oil and gas prices continue to decline from prices in effect as of that date.
Oil prices have declined from a price of approximately $105 per barrel in June 2014 to approximately $50 per barrel as of March 1, 2015. This substantial decline in oil and gas prices has impacted our estimated net cash flows from our oil and gas reserves, which estimates are used to determine impairments of our oil and gas properties. As a result of the decline in oil and gas prices, we have revised our estimated reserves downward and have significantly reduced our estimated future cash flows. Based in part on our 2014 year-end estimates of proved reserves, we recorded an impairment charge of $3.9 million in the fourth quarter of 2014. We may be required to recognize additional impairment charges in future reporting periods if market prices for oil or natural gas continue to decline or based on other factors, including our ability to fund capital expenditures required to maintain our oil and gas reserves.
A substantial or extended decline in crude oil and/or natural gas prices could have a material adverse effect on us.
Prices for crude oil and gas (including prices for NGLs and condensate) fluctuate widely. Moreover, oil and gas prices depend on factors that are outside of our control, including:
· the level of consumer demand;
· domestic and worldwide supplies of crude oil, NGLs and natural gas;
· the price and quantity of imported and exported crude oil, NGLs and natural gas;
· weather conditions and changes in weather patterns;
· domestic and international drilling activity;
· the availability, proximity and capacity of appropriate transportation facilities, gathering, processing and compression facilities and refining facilities;
· worldwide economic and political conditions, including political instability or armed conflict in oil and gas producing regions;
· the price and availability of, and demand for, competing energy sources, including alternative energy sources;
· the nature and extent of governmental regulation, including environmental regulation, regulation of derivatives transactions and hedging activities, regulations that restrict the ability of banking entities to (x) engage in proprietary trading, or (y) invest in or sponsor certain types of ‘covered fund’ entities, tax laws and regulations and laws and regulations with respect to the import and export of crude oil, natural gas and related commodities;
· the level and effect of trading in commodity futures markets, including trading by commodity price speculators and others; and
· the effect of worldwide energy conservation measures.
If oil and gas prices continue to decline or remain at current levels, it will have a substantial negative impact on our business. Our cash flows and results of operations depend to a great extent on the prevailing prices for crude oil and gas. Prolonged or substantial declines in crude oil and/or natural gas prices may materially and adversely affect our liquidity, the amount of cash flows we have available for our capital expenditures and other operating expenses, our ability to access the credit and capital markets and our results of operations.
We require significant capital expenditures to conduct our business and we may have difficulty in obtaining such capital.
Our exploration, development, and acquisition activities require substantial capital expenditures. We have sold assets and incurred indebtedness in order to provide capital to carry out our activities. For example, we sold the Moulton acreage during the second and third quarter of 2013. Currently, our major source of income is from our joint ventures’ carried interest and production. Our cash flow from operations and access to capital are subject to a number of variables that may or may not be within our control, including:
· the level of oil and gas that is produced from existing wells on our properties;
· the prices at which our oil and gas production is sold;
· the operators in our joint venture’s ability to develop the proved and unproved reserves;
· our ability to acquire, locate and produce new economically recoverable reserves;
· global credit and securities markets; and
· the ability and willingness of lenders and investors to provide capital and the cost of that capital.
We will need to raise capital to purchase new oil and gas leases and to fully explore and analyze leases that we have already purchased. We intend to pursue various strategies to raise capital, including asset sales, debt or equity financing, and joint ventures. For example, in September 2014, we sold 6,000 net acres of undeveloped leases in our East Texas JV to an affiliate of Quantum Energy Partners for approximately $11 million in cash and the Company’s right to receive Quantum’s interest in certain future wells. If we are unable to sell assets or if financing and joint venture partnerships are not available on acceptable terms or at all, we may have limited ability to obtain the capital necessary to sustain our operations at current levels or to implement our strategy, including expanding our existing portfolio. There can be no assurance as to our ability to sell assets or as to the availability or terms of any joint ventures or other financing.
Failure to obtain the capital to fully explore our properties could lead to possible write-downs in the carrying value of our properties, a material decline in our oil and gas reserves as well as our revenues and results of operations. The failure to obtain additional capital could also materially adversely affect our operations and prospects, including potentially resulting in the reversion of certain portions of our acreage to lessors under our oil and gas leases.
Substantially all of our current operations are conducted through joint ventures, so problems with our joint ventures or our joint venture partners could have a material adverse effect on us.
We conduct substantially all of our operations through joint ventures with third parties, and as a result, the continuation of such joint ventures is vital to our continued success. We may also enter into other joint venture arrangements in the future. In many instances we depend on these third parties for elements of these arrangements that are important to the success of the joint venture, such as agreed payments of substantial development costs pertaining to the joint venture and their share of other costs of the joint venture. The performance of these third party obligations or the ability of third parties to meet their obligations under these arrangements is outside our control. If these parties do not meet or satisfy their obligations under these arrangements, the performance and success of these arrangements, and their value to us, may be adversely affected. If our current or future joint venture partners are unable to meet their obligations, we may be forced to undertake the obligations ourselves and/or incur additional expenses in order to have some other party perform such obligations. In such cases we may also be required to enforce our rights, which may cause disputes among our joint venture partners and us. If any of these events occur, they may adversely impact us, our financial performance and results of operations, these joint ventures and/or our ability to enter into future joint ventures.
Such joint venture arrangements may involve risks not otherwise present when exploring and developing properties directly, including, for example:
· our joint venture partners may share certain approval rights over major decisions, such as proceeding with subsequent phases of the development of our acreage subject to the joint venture;
· disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses, delay or terminate projects and prevent our officers and directors from focusing their time and effort on our business;
· our joint venture partners might become insolvent or bankrupt, leaving us liable for their shares of joint venture liabilities;
· we may incur liabilities as a result of an action taken by our joint venture partners;
· our joint venture partners may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
· certain joint venture arrangements may prevent either joint venture partner from controlling the venture, and an impasse could be reached which might have a negative influence on our investment in the joint venture; and
· our joint venture partners may decide to terminate their relationship with us in any joint venture or sell their interest in any of these joint ventures and we may be unable to replace such joint venture partner or raise the necessary financing to purchase such joint venture partner’s interest.
Additionally, almost all of our properties are operated by our joint venture partners. We have limited ability to influence or control the operation or future development of our non-operated properties, including the timing of drilling and other activities, compliance with environmental, safety and other regulations, or the amount of capital expenditures that we are required to fund with respect to such properties after exhaustion of our carried interests. Thus, we may experience a reduction in revenues or higher costs as a result of certain decisions made by our joint venture partners.
Our business is focused on new or emerging formations, which may be subject to more uncertainties than areas that are more developed or have a longer history of established production.
The results of our drilling in new or emerging formations, such as the Eagle Ford and Eagle Ford East trends, are more uncertain initially than drilling results in areas that are developed and have established production. Because new or emerging formations have limited or no production history, we are less able to use past drilling results in those areas to help predict future drilling results. Further, part of the strategy of our joint ventures in the Eagle Ford and Eagle Ford East trends involve the use of horizontal drilling and completion techniques that have been successful in other shale formations. Although we and our joint venture partners have experience with horizontal drilling in these areas, the oil and gas industry’s drilling and production history is limited when compared to conventional techniques. The ultimate success of these drilling and completion techniques will be better evaluated over time as more wells are drilled and production profiles are better established.
If the drilling results of our operations are less than anticipated or are impacted by capital constraints of us or our joint venture partners, lease expirations, and/or a decline of natural gas and oil prices, our investment in these areas may not be as attractive as we anticipate and we could incur material impairments of undeveloped properties and the value of our undeveloped acreage could decline in the future, which could have a material adverse effect on our business and results of operations.
Drilling for and producing oil and gas are high-risk activities with many uncertainties that we cannot control.
Our success will depend on the results of the exploration, development and production activities on our properties, and the properties that we may acquire. Oil and gas exploration, development and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or gas production. Decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data, and engineering studies, the results of which are often inconclusive or inaccurate or subject to varying interpretations or uncertainty. Costs of drilling, completing and operating wells are often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Furthermore, many factors may curtail, delay or cancel drilling, and such work stoppage may not be covered by our insurance, including:
· unexpected drilling conditions;
· pressure or irregularities in geological formations;
· equipment failures or accidents;
· title problems;
· shortages of or delays in obtaining drilling equipment, services and supplies and qualified personnel;
· compliance with, or changes in, laws and regulations; and
· the availability and timely issuance of required permits and licenses.
Additionally, because substantially all of our operations are conducted through joint venture partners, we exercise little to no control over decisions and actions that could abate such risks. Increases in the costs of the drilling operations on our properties due to any of the above factors or other factors, may materially and adversely affect our business, financial condition and results of operations.
Our estimates of oil and gas reserves involve inherent uncertainty, which could materially affect the quantity and value of our reported reserves and our financial condition.
There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and cash flows attributable to such reserves, including factors beyond our engineers’ control (or the third party preparing the reserve report). Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to such reserves, is a function of the available data, assumptions regarding future oil and gas prices, expenditures for future development and exploration activities, engineering and geological interpretation and judgment. In addition, accurately estimating reserves in shale formations such as ours can be even more difficult than estimating reserves in more traditional hydrocarbon bearing formations given the complexities of the projected decline curves and economics of shale gas wells. Additionally, “probable” and “possible” reserve estimates are estimates of unproved reserves and may be misunderstood or seen as misleading to investors that are not experts in the oil or natural gas industry.
As such, investors should not place undue reliance on these estimates. Reserves and future cash flows may be subject to material downward or upward revisions, based upon production history, development and exploration activities and prices of oil and gas. In addition, different reserve engineers may make different estimates of reserves and cash flows based on the same available data. Because of our smaller volume of reserves compared to our competitors, revisions in reserve estimate and future cash flows have a greater chance of being material to us.
The present value of future net revenues from our proved reserves referred to in any reserve report will not necessarily be the actual current market value of our estimated oil and gas reserves at such time. In accordance with SEC requirements, we base the estimated discounted future net cash flows from its proved reserves using the un-weighted arithmetic average of the first day of the month for each month within a twelve month period.
We may be unable to acquire or develop additional reserves, which would reduce our revenues and access to capital.
Producing oil and gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Decline rates are typically greatest early in the productive life of a well. Estimates of the decline rate of an oil or gas wells, and those in shale formations, in particular, are inherently imprecise, and are less precise with respect to new or emerging oil and gas formations with limited production histories than for more developed formations with established production histories. Production on our properties and the reserves that may be recovered from wells on our properties will change if production from existing wells on our properties declines in a different manner than we or our joint venture parties have estimated. Thus, our future oil and gas reserves and production and, therefore, our future cash flow and results of operations, are highly dependent upon the success in efficiently developing and exploiting our current properties and economically finding or acquiring additional recoverable reserves. We may not be able to find or acquire additional reserves or future production at acceptable costs. If we are unable to replace our current or future production, our cash flows and the value of our reserves may decrease, and have a material adverse effect on our business, financial condition and results of operations.
We may not have the ability to raise the funds necessary to purchase the Senior Secured Notes and the Convertible Senior Notes upon a fundamental change.
Holders of the Senior Secured Notes and the Convertible Senior Notes will have the right to require us to purchase the notes upon the occurrence of a fundamental change at 101% and 100%, respectively, of their principal amount plus accrued and unpaid interest. However, we may not have enough available cash or be able to obtain financing at the time we are required to make purchases of tendered Senior Secured Notes or Convertible Senior Notes. In addition, our ability to purchase the Senior Secured Notes and Convertible Senior Notes may be limited by law, by regulatory authority or by the agreements governing our then current and future indebtedness. Our failure to purchase tendered Senior Secured Notes and Convertible Senior Notes at a time when the purchase is required by the terms of the Senior Secured Notes or Convertible Senior Notes would constitute a default under those notes. A default under those notes or the fundamental change itself could also lead to a default or require a prepayment under, or result in the acceleration of the maturity or purchase of, our existing or future other indebtedness. The requirement that we offer to purchase the Senior Secured Notes and Convertible Senior Notes upon a fundamental change is limited to the transactions specified in the definition of a fundamental change, which definition may differ from the definition of a fundamental change or change of control in the agreements governing our existing or future other indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Senior Secured Notes and the Convertible Senior Notes.
We are concentrated in one geographic area, which increases our exposure to many of the risks enumerated herein.
Currently, ZaZa’s operations are highly concentrated in Texas. This concentration increases the potential impact that many of the risks stated herein may have upon our ability to perform. For example, we have greater exposure to regulatory actions impacting Texas, natural disasters in the geographic area, competition for equipment, services and materials available in the area and access to infrastructure and markets.
Drilling is a high-risk activity that could result in substantial losses for us, including liabilities under environmental laws, for which we may not be insured.
Oil and gas exploration, drilling and production activities are subject to numerous operating risks, including the possibility of:
· blowouts, fires and explosions;
· personal injuries and death;
· uninsured or underinsured losses;
· unanticipated, abnormally pressured formations;
· uncontrollable flows of oil, gas or well fluids;
· mechanical difficulties, such as stuck oil field drilling and service tools and casing collapses; and
· environmental hazards, such as uncontrollable flows of oil, gas, brine, well fluids, toxic gas or other pollution into the environment, including groundwater contamination.
Any of these operating hazards could cause damage to properties, serious injuries, fatalities, oil spills, discharge of hazardous materials, remediation and clean-up costs, and other environmental damages, which could expose us to liabilities, including strict liability, either directly or proportionately through our joint ventures. Even in the ordinary course, our operations result in the use, generation, handling and disposal of regulated wastes, petroleum hydrocarbons and other potentially hazardous materials. There is a risk of our incurring environmental costs and liabilities, or a proportionate share of such liabilities in our joint venture operations, due to the environmental risks inherent in oil and gas drilling and production activities. The payment of any of these liabilities could reduce, or even eliminate, the funds available for exploration, development, and acquisition or could result in a loss of our properties.
We are not fully insured against all risks, including development and completion risks that are generally not recoverable from third parties or insurance. In addition, our insurance policies provide limited coverage for losses or liabilities relating to sudden and accidental pollution, but not for other types of pollution. Our insurance might be inadequate to cover our liabilities. Our energy package is written on reasonably standard terms and conditions that are generally available to the exploration and production industry. The insurance market in general and the energy insurance market in particular have been difficult markets over the past several years. Insurance costs could increase in the future as the insurance industry adjusts to difficult exposures and we may decrease coverage and retain more risk to mitigate future cost increases. If we incur substantial liability and the damages are not covered by insurance or are in excess of policy limits, or if we incur a liability for a risk at a time when we do not have liability insurance, then our business, financial position, results of operations and cash flows could be materially adversely affected.
Potential legislative and regulatory actions affecting our industry could increase our costs, reduce revenues from natural gas and oil sales, reduce our liquidity or otherwise alter the way we conduct our business.
The activities of exploration and production companies operating in the U.S. are subject to extensive regulation at the federal, state and local levels. Many laws and regulations require permits for the operation of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both. These laws and regulations have increased the costs of planning, designing, drilling, installing and operating natural gas and oil facilities. The environmental laws and regulations that govern our operations have become increasingly more stringent and now cover a broader range of our operations. Increased scrutiny of our industry by federal, state and local environmental authorities, as well as more stringent regulations, have the potential to materially increase our costs of doing business or subject us or our joint venture partners to potentially significant fines and penalties for non-compliance. Changes to all such existing laws and regulations or new laws and regulations such as those described below could, if adopted, have an adverse effect on our business.
Taxation of Independent Producers
Recently, the President and certain members of Congress have proposed changes in the Internal Revenue Code to eliminate certain U.S. federal income tax deductions and credits currently available to oil and gas exploration and production companies. Such proposed changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and gas wells; (ii) the elimination of current deductions for intangible drilling and development costs; (iii) the elimination of the deduction against income derived from the production of oil and gas for certain domestic production activities; and (iv) an extension of the amortization period for certain geological and geophysical expenditures. These proposals would potentially increase and accelerate the payment of federal income taxes of independent producers of natural gas and oil.
OTC Derivatives Regulation
In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which contains measures aimed at migrating over-the-counter (“OTC”) derivative markets to exchange-traded markets and central clearinghouses. Certain companies that use derivatives to hedge commercial risk, referred to as end-users, are permitted to continue to use OTC derivatives under newly adopted regulations. We have not historically entered into hedging transactions. If we choose to do so, we will be required to comply with certain reporting, recordkeeping, clearing and trade execution requirements (or to take steps to qualify for exemptions, as applicable, to such requirements) that are set forth in the new legislation and the regulations promulgated thereunder. Such new regulatory requirements may increase our costs associated with hedging and decrease our profitability. Moreover, our counterparties may be required to comply with minimum capital requirements as well as reporting, recordkeeping and a number of other business conduct requirements, which could result in additional costs being passed on to us, thereby negatively affecting our business, results of operations and financial condition. Other aspects of the Dodd-Frank Act still remain to be finalized, and the Commodities Futures Trading Commission (“CFTC”) has temporarily delayed the compliance dates for a number of the regulations already finalized. As a result, at this time it is not possible to predict with certainty the full effects of the Dodd-Frank Act and the related CFTC rules on us and the timing of such effects.
Climate Change
Various governmental authorities and regional organizations have enacted, or are considering enacting new legislation and promulgating new regulations governing or restricting the emission of greenhouse gases from stationary sources such as our equipment and operations. At the federal level, the EPA has already made findings and issued regulations that require some oil and gas exploration and production companies to establish and report an inventory of greenhouse gas emissions and they continue to propose more stringent or more broadly applicable requirements in this regard. Other legislative and regulatory proposals for restricting greenhouse gas emissions or otherwise addressing climate change could require us to incur additional operating costs and could adversely affect demand for the natural gas and oil sold from our properties. The potential increase in our operating costs could result from new or increased costs to obtain permits, operate and maintain equipment and facilities, install new emission controls on equipment and facilities, acquire allowances to authorize greenhouse gas emissions, pay taxes related to greenhouse gas emissions and administer and manage a greenhouse gas emissions program. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and gas industry. Moreover, incentives to conserve energy or use alternative energy sources as a means of addressing climate change could reduce demand for natural gas and oil. In addition, scientific studies suggest that stronger storms may occur in areas where we operate in the future due to changing climate patterns. Adverse weather events have the potential to disrupt operations and cause physical damage to our assets and operations.
Federal and state legislation and regulatory initiatives relating to oil and gas extraction, including hydraulic fracturing, could result in increased costs and additional operating restrictions or delays and inability to book future reserves.
Hydraulic fracturing impacts and practices have been the subject of a number of governmental and private studies. The EPA is conducting an investigation of hydraulic fracturing practices and expects to issue its draft report in the near future. In April 2012, the Department of Interior, the Department of Energy and the Environmental Protection Agency issued a memorandum outlining the multi-agency collaboration on unconventional oil and gas research in response to the White House Blueprint for a Secure Energy Future and the recommendation of the Secretary of Energy Advisory Board Subcommittee on Natural Gas. The Department of Interior finalized new regulations governing hydraulic fracturing on federal and Indian lands on March 20, 2015. These ongoing studies and the newly enacted federal and Indian lands rules could lead to initiatives to further regulate hydraulic fracturing done on private lands. Additional requirements could be imposed, including permitting requirements, financial assurances, public disclosure obligations, more stringent well installation requirements, monitoring and reporting requirements. New requirements could increase operating costs and any disclosure requirements could increase the possibility of third-party or governmental legal challenges to hydraulic fracturing.
The EPA has also begun to assert regulatory authority over certain aspects of hydraulic fracturing. Recently, the EPA asserted federal regulatory authority over hydraulic fracturing involving diesel additives under the SDWA’s Underground Injection Control Program (“UIC”), and has proposed UIC permitting guidance for hydraulic fracturing activities that use diesel fuel in fracturing fluids. In addition, the EPA has issued new emission standards to reduce VOC emissions from oil and gas exploration and production operations including specific limitations for emissions associated with hydraulic fracturing. In particular, hydraulically fractured gas wells must comply with reduced emission completion (“REC”) techniques by January 1, 2015. Further, the agency has announced that one of its enforcement initiatives for its 2011 to 2013 fiscal years would be to focus on environmental compliance by the energy extraction sector. Finally, on October 20, 2011, the EPA announced its plan to propose pretreatment standards for wastewater generated during the hydraulic fracturing process and is also contemplating updated water quality criteria (planned for summer of 2014) for chlorides. These governmental studies of hydraulic fracturing impacts and practices and the EPA’s regulatory and enforcement initiatives could make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business. Congress has also considered bills which, if enacted, would repeal an exemption in the federal Safe Drinking Water Act for the underground injection of hydraulic fracturing fluids near drinking water sources and could result in additional regulatory
burdens, such as permitting, construction, financial assurance, monitoring, recordkeeping and plugging and abandonment requirements.
If extraction procedures, including hydraulic fracturing, become increasingly regulated at the federal level as a result of additional federal legislation or regulatory initiatives by the EPA, our operations could become subject to additional permitting and operational requirements and also to attendant permitting delays and potential increases in costs. If such permitting requirements delays drilling activity on our properties, our ability to present reserves, and once presented, book reserves, will be delayed as well.
In addition, some states have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, disclosure and well construction requirements on hydraulic fracturing operations as well as possible restrictions on certain air pollutants, such as methane. For example, Pennsylvania, Colorado, and Wyoming have each adopted a variety of well construction, set back, and disclosure regulations limiting how fracturing can be performed and requiring various degrees of chemical disclosure. Colorado recently proposed new air quality standards for methane emissions from oil and gas exploration operations. Texas recently passed a law requiring public disclosure of certain information about chemicals used in the hydraulic fracturing process, and the Railroad Commission of Texas has adopted rules setting forth requirements for such public disclosure. In addition, the Texas Commission on Environmental Quality recently adopted more stringent air emission and permitting requirements for oil and gas exploration operations in the Barnett Shale. More stringent air emissions and permitting requirements, as well as wastewater discharge limitations, may be imposed on the areas in which we operate sometime in the future. These regulations, if adopted, would affect our operations, increase our costs of exploration and production and limit the quantity of oil and gas that we or our joint ventures can economically produce. A major risk inherent in drilling plans for our properties is the need to obtain drilling permits from state and local authorities on a timely basis following leasing. In addition to the imposition of more stringent regulations at the state and federal level, certain local authorities have passed or are considering moratoria on oil and gas drilling and restrictions on hydraulic fracturing. Delays in obtaining regulatory approvals, drilling permits, the failure to obtain a drilling permit for a well or the receipt of a permit with unreasonable conditions or costs could have a material adverse effect on our ability to explore or develop its properties. Additionally, the oil and gas regulatory environment could change in ways that might substantially increase our financial and managerial costs to comply with the requirements of these laws and regulations and, consequently, materially adversely affect our profitability. Furthermore, these additional costs may put us at a competitive disadvantage compared to larger companies in the industry which can spread such additional costs over a greater number of wells and larger operating staff.
The marketability of our production is dependent upon gathering, transportation, and processing facilities over which we may have little or no control.
The marketing of oil and gas production depends in large part on the availability, proximity and capacity of pipelines and storage facilities, gas gathering systems and other transportation, processing and refining facilities, as well as the existence of adequate markets. If there were insufficient capacity available on these systems, or if these systems were unavailable to us, the price offered for our production could be significantly depressed, or we could be forced to shut-in some production or delay or discontinue drilling plans and commercial production following a discovery of hydrocarbons while we construct our own facility. We also rely (and expect to rely in the future) on facilities developed and owned by third parties in order to store, process, transmit and sell our oil and gas production. Our plans to develop our oil and gas reserves could be materially and adversely affected by the inability or unwillingness of third parties to provide sufficient transmission, storage or processing facilities to us, especially in areas of planned expansion where such facilities do not currently exist.
If the amount of oil, gas or condensate being produced by us and others exceeds the capacity of the various transportation pipelines and gathering systems currently available in our operating areas, it will be necessary for new transportation pipelines and gathering systems to be built. Or, in the case of oil and condensate, it will be necessary for us to rely more heavily on trucks to transport our production, which is more expensive and less efficient than transportation by pipeline. The construction of new pipelines and gathering systems is capital intensive and construction may be postponed, interrupted or cancelled in response to changing economic conditions and the availability and cost of capital. In addition, capital constraints could limit our ability to build gathering systems to transport our production to transportation pipelines. In such event, costs to transport our production may increase materially or we might have to shut-in its wells awaiting a pipeline connection or capacity and/or sell our production at much lower prices than market or than we currently project, all of which would materially adversely affect our results of operation.
Additionally, we do not own all of the land on which gathering and treating systems for our production have been constructed, and we are therefore subject to the possibility of increased costs to retain necessary land use.
ZaZa obtains the rights to construct and operate our gathering and treating systems on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations and financial condition.
We are a relatively small company and therefore may not be able to compete effectively.
Compared to many of our competitors in the oil and gas industry, we are a small company. We face difficulties in competing with larger companies. The costs of doing business in the exploration and production industry, including such costs as those required to explore new oil and gas plays, to acquire new acreage, and to develop attractive oil and gas projects, are significant. We face intense competition in all areas of our business from companies with greater and more productive assets, substantially larger staffs and greater financial and operating resources than we have. Our limited size has placed us at a disadvantage with respect to funding our operating costs, and means that we are more vulnerable to commodity price volatility and overall industry cycles, are less able to absorb the burden of changes in laws and regulations, and that poor results in any single exploration, development, or production play can have a disproportionately negative impact on us.
We also compete for people, including experienced geologists, geophysicists, engineers, and other professionals. Our limited size has placed us at a disadvantage with respect to attracting and retaining management and other professionals with the technical abilities necessary to successfully operate our business. While we have entered into employment arrangements with certain of our senior executives, and while a number of consultants have consulting agreements with us, there can be no assurances that any of them will remain with us.
Our ability to use net operating loss carryforwards to reduce future tax payments is limited.
As of December 31, 2014, we had gross U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $134 million. Use of these NOLs to offset future taxable income and thereby reduce U.S. federal income taxes otherwise payable is subject to substantial limitations resulting from changes in ownership of our stock and the expiration of NOL carryforwards 20 years from the year in which the losses giving rise to the NOLs were incurred. In light of these limitations, we do not expect to obtain material future benefits from the use of NOLs.
Our property acquisition strategy could fail or present unanticipated problems for our business in the future.
Our growth strategy includes acquiring oil and gas properties depending on the availability of capital. We may not be able to identify suitable acquisition opportunities or finance and complete any particular acquisition successfully. Furthermore, acquisitions involve a number of risks, including:
· diversion of management’s attention from our daily operations;
· an increase in our expenses and working capital requirements;
· uncertainties in the validity of our assumptions about reserves, future production, revenues, capital expenditures, and operating costs, including synergies;
· a decrease in our liquidity as a result of using a significant portion of our available cash or borrowing capacity, if any, to finance acquisitions;
· a significant increase in interest expense or financial leverage if we incur additional debt to finance acquisitions;
· the assumption of unknown liabilities, losses, or costs for which we are not indemnified or for which indemnity is inadequate; and
· the incurrence of other significant charges, such as impairment of oil and gas properties, asset devaluation, or restructuring charges.
Our decision to acquire a property will depend in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses, and seismic and other information, the results of which are often inconclusive and subject to various interpretations.
Also, our reviews of acquired properties are inherently incomplete because it generally is not feasible to perform an in-depth review of the individual properties involved in each acquisition given time constraints imposed by sellers. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to fully access their deficiencies and potential. Inspections may not always be performed on every lease or well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken.
We face risks associated with hurricanes and other natural disasters in connection with our operations near coastal areas in Texas.
A portion of our oil and gas properties are located near coastal areas of the Texas Gulf Coast. As a result, in the event of damage due to hurricanes, tropical storms, flooding or similar natural disasters, we could be subject to production curtailments in the future resulting from hurricane damage to certain fields or, even in the event that producing fields are not damaged, production could be curtailed due to damage to facilities and equipment owned by oil and gas purchasers, or vendors and suppliers.
Access to water to conduct hydraulic fracturing may not be available if water sources become scarce.
The availability of sources of water is crucial to conduct hydraulic fracturing. Approximately 80,000-100,000 gallons of water are necessary for drilling and completing one well with hydraulic fracturing in Texas. In recent years Texas has experienced severe droughts that have limited the water supplies that are necessary to conduct hydraulic fracturing. We can make no assurances that sufficient water resources will be available in the short or long term to carry out our current activities.
Hedging activities may require us to make significant payments that are not offset by sales of production and may prevent us from benefiting from increases in oil prices.
We have not historically entered into hedging transactions. However, we may in the future enter into various hedging transactions for a portion of our production in an attempt to reduce our exposure to the volatility of oil prices. In a typical hedge transaction, we will have the right to receive from the counterparty to the hedge the excess of the fixed price specified in the hedge over a floating price based on a market index, multiplied by the quantity hedged. If the floating price exceeds the fixed price, we will be required to pay the counterparty this difference multiplied by the quantity hedged. In such case, we will be required to pay the difference regardless of whether we have sufficient production to cover the quantities specified in the hedge. Significant reductions in production at times when the floating price exceeds the fixed price could require us to make payments under the hedge agreements even though such payments are not offset by sales of production. Hedging also could prevent us from receiving the full advantage of increases in oil prices above the fixed amount specified in the hedge.
Risks Related to the Ownership of Our Common Stock
The public price and trading volume of our common stock may be volatile.
The price and volume of our common stock may be volatile and subject to fluctuations. Some of the factors that could cause fluctuations in the stock price or trading volume of our common stock include:
· general market and economic conditions and market trends, including in the energy and oil industries and the financial markets generally;
· the political, economic and social situation in the United States;
· actual or expected variations in operating results;
· variations in quarterly operating results;
· our failure to meet projections in production and revenue;
· announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, or other business developments, such as oil or gas discoveries;
· adoption of new accounting standards affecting the industry in which we operate;
· operations and stock performance of competitors;
· litigation or governmental action involving or affecting us or our subsidiaries;
· changes in financial estimates and recommendations by securities analysts;
· recruitment or departure of key personnel;
· purchase or sales of blocks of our common stock; and
· operating and stock performance of the companies that investors may consider to be comparable.
There can be no assurance that the price of our common stock will not fluctuate or decline significantly. The stock market in recent years has experienced considerable price and volume fluctuations that has often been unrelated or disproportionate to the operating performance of individual companies and that could materially adversely affect the price of our common stock, regardless of our operating performance. The market prices of stock in exploration stage companies have been especially volatile. In addition, price volatility might be worse if the trading volume of shares of the common stock is low. Furthermore, stockholders may initiate securities class action lawsuits if the market price of our common stock declines significantly, which may cause us to incur substantial costs and could divert the time and attention of our management.
We may not be able to maintain compliance with NASDAQ’s continued listing requirements.
Our common stock is listed on NASDAQ. There are a number of continued listing requirements that we must satisfy in order to maintain our listing on NASDAQ. If we fail to maintain compliance with all applicable continued listing requirements and NASDAQ determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, our ability to obtain financing and our ability to fund our operations.
One continued listing requirement is for us to maintain a minimum market value of $35 million, which is calculated by multiplying the Company’s total shares of common stock outstanding by the closing bid price of the Company’s common stock. The historical market value of our common stock has fluctuated significantly, and on February 26, 2015, we received notice from the
NASDAQ that the market value of our common stock was below $35 million for the 30 consecutive trading days preceding February 26, 2015. As a result of this notice, we have 180 calendar days, or until August 25, 2015, to regain compliance, which can be achieved if our minimum market value exceeds $35 million for at least ten consecutive trading days or a longer period determined by the NASDAQ staff in their sole discretion. Failure to meet the $35 million minimum market value for the time periods specified by NASDAQ listing requirements could result in our being delisted from the NASDAQ. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock; and limiting our ability to issue additional securities in the future.
The majority of our common stock is owned by the ZaZa Founders, whose interests may not be aligned with the interests of other stockholders.
As of December 31, 2014 approximately 54% of our common stock is owned directly or indirectly by the ZaZa Founders. Under a stockholders’ agreement between the Company and the ZaZa LLC Members entered into in connection with the Combination (the “Stockholders’ Agreement”), the ZaZa Founders, during the period ending on February 21, 2015, were entitled to designate a proportional number of directors to the Board (but not more than seven) based upon the ZaZa Founders’ (and their permitted transferees’) percentage ownership of ZaZa. The remaining directors of ZaZa were nominated by a nominating committee consisting of two directors selected by the designees on the Board that were selected by Toreador prior to the closing of the Combination (and their successors) and one independent director selected by the ZaZa Founders. However, as of February 21, 2015, there is no limitation on the number of directors of ZaZa that the ZaZa Founders may nominate and elect and, as such, they may be able to nominate and elect the entire Board and remove any directors, including directors who were Toreador designees or nominated by the Board’s nominating committee.
In addition, as a result of their share ownership in ZaZa, the ZaZa Founders are able to control all matters requiring approval by ZaZa stockholders, including, but not limited to: mergers, consolidations or acquisitions; the sale of all or substantially all of ZaZa’s assets and other decisions affecting ZaZa’s capital structure; the amendment of ZaZa’s certificate of incorporation and bylaws, and ZaZa’s liquidation, winding up and dissolution.
Additionally, under the Stockholders’ Agreement, the ZaZa Founders were subject to a standstill period that expired on February 21, 2015. Thus, as of February 21, 2015, there is no contractual restriction on the ZaZa Founders’ ability to purchase additional shares of our common stock or take us private on terms that may not be favorable to the other stockholders of ZaZa. The interests of the ZaZa Founders may not be aligned with the interests of the other stockholders. This concentration of share ownership may have a material adverse effect on the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. However, with certain exceptions, the purchase by one or more ZaZa Founders that takes the total number of shares of common stock owned by the ZaZa Founders over 7,597,686 shares will cause a “fundamental change” under our Senior Secured Notes, giving those noteholders the rights to cause the Company to offer to repurchase the Senior Secured Notes for $1,010 per $1,000 principal amount.
The ZaZa Founders have economic interests in our properties and their interests may not be aligned with our interests.
The ZaZa Founders are board members and collectively, beneficially own approximately 54% of our common stock as of December 31, 2014. In addition to their interests as equity owners, each of these individuals also has a direct or indirect overriding royalty interest relating to certain of our properties. These overriding royalty interests generally entitle each of them to one percent of the net revenue interest associated with sales of oil and gas produced from these properties, without any corresponding responsibility for payment of any expenses.
Future sales of our common stock could put a downward pressure on the price of our shares and cause significant dilution.
We have several effective registration statements on file with the SEC that would allow for the sale or resale of substantial amounts of our common stock. For example, in December 2012, we filed a resale registration statement on Form S-1 for the sale of approximately 3.2 million shares of our common stock, including approximately 2.7 million shares of common stock issuable upon exercise of our Warrants at the time. A substantial majority of those shares remain unsold. Also, in October 2012, we issued $40 million in aggregate principal amount of our Convertible Senior Notes, which are convertible into 1.6 million shares of our common stock that may generally be sold by non-affiliates without restriction pursuant to Rule 144 under the Securities Act. Finally, the ZaZa Founders have demand and piggyback registration rights pursuant to the Stockholders’ Agreement with respect to their shares of common stock held. The possibility that substantial amounts of our outstanding common stock may be sold by such holders, or the perception that such sales could occur, could materially adversely affect the market price of our common stock and impair our ability to raise additional capital through the sale of equity securities in the future. In addition, this selling activity could cause significant dilution, decrease the level of public interest in our common stock, inhibit buying activity that might otherwise help support the market price of our common stock, and prevent possible upward price movements in our common stock. Furthermore, the issuances of a substantial number of shares pursuant to future or existing employee compensation arrangements could produce additional dilution.
An active public market for our common stock may not be sustained.
Although our shares of common stock are listed on the NASDAQ, an active public market for our common stock may not be sustained, which could affect the ability to sell, or depress the market price of, our common stock. We are unable to predict whether an active trading market for our common stock will be sustained.
We have the ability to issue “blank check” preferred stock, which could affect the rights of holders of our common stock.
Our certificate of incorporation allows the Board of Directors to issue up to 25 million shares of preferred stock and to set the terms of such preferred stock. The terms of such preferred stock may materially adversely impact the dividend and liquidation rights of holders of our common stock.
We are an emerging growth company and reduced disclosure requirements associated with this status could make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved and an exemption from obtaining an auditor’s attestation on internal control over financial reporting in accordance with Section 404(b) of the Sarbanes-Oxley Act. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We may remain an emerging growth company and elect to take advantage of associated exemptions until the earlier of (a) the end of a fiscal year in which our annual revenues exceed $1 billion; (b) the date on which we have, during a three-year period, issued more than $1 billion in non-convertible debt; (c) the date on which we qualify as a large accelerated filer and (d) December 31, 2017. Investors and securities analysts may find it more difficult to evaluate our common stock because we may rely on one or more of these exemptions, and, as a result, investor confidence and the market price of our common stock may be materially and adversely affected.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to companies that are not emerging growth companies but any such election to opt out is irrevocable. We have not elected to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make it difficult to compare our financial statements with those of other public companies.
Two of the ZaZa Founders are no longer subject to non-competition agreements; the third ZaZa Founder, the Company’s CEO, will not be subject to a non-compete if his employment ends.
On August 9, 2011, each of the ZaZa Founders entered into a separate non-competition agreement with ZaZa. The non-competition agreements provide that each of the ZaZa Founders and his controlled affiliates may not engage in, carry on or assist any oil or gas business in specified areas in the Eagle Ford and Eagle Ford East trends in Texas and the Paris Basin in France or acquire oil and gas interests in, or acquire interests in any businesses with oil and gas interests in, those specified areas, subject to certain exceptions. The ZaZa Founders also agreed not to advise, request, induce, attempt to induce or otherwise divert any customer, supplier, licensee or other business relation of ZaZa and its present and future subsidiaries, and further agreed not to materially curtail, limit or cease doing business with any such entities or materially interfere with the customer, supplier and other business relationships of, or oil and gas interests or the businesses of, ZaZa, and its present and future subsidiaries. The non-competition agreements do not apply to any opportunity in which the ZaZa Founders would be prohibited from participating, if such opportunity is first offered to ZaZa and a majority of the full board of directors of ZaZa, including a majority of the disinterested directors, declines to pursue such opportunity, or a majority of the disinterested directors fails to make a determination as to whether ZaZa will pursue such opportunity within ten business days following such offer.
The non-competition agreement with each ZaZa Founder lasts only until the later of the termination of the ZaZa Founder’s employment with ZaZa or February 21, 2015. As of February 21, 2015, Todd A. Brooks was the only ZaZa Founder who was still employed by ZaZa; therefore, the non-competition agreements with Gaston L. Kearby and John E. Hearn, both of whom continue to serve on our board of directors, have expired. Messrs. Hearn and Kearby, subject to their fiduciary duties as members of our board of directors, are therefore free to pursue competitive activities or corporate opportunities, which could create conflicts of interest and
limit ZaZa’s ability to acquire additional assets or pursue its businesses and could have a material adverse effect on us. Mr. Brooks will be free to pursue competitive activities or corporate opportunities upon termination of his employment as our Chief Executive Officer, or if the ZaZa board of directors declines or fails to determine whether to pursue a corporate opportunity within ten business days of it being presented to the board of directors by Mr. Brooks.
We are a “controlled company” within the meaning of the NASDAQ rules and qualify for, and may rely on, exemptions from certain corporate governance standards.
The ZaZa Founders beneficially own approximately 54% of the outstanding voting power of our capital stock as of December 31, 2014. Accordingly, the ZaZa Founders will have the ability to elect our board of directors and thereby control the management and affairs of ZaZa. Therefore, we are deemed to be a “controlled company” for purposes of Nasdaq Rule 5615(c)(2). Under this rule, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a “controlled company” and may elect to be exempt from certain corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent directors, and that (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee comprised of independent directors.
Provisions of Delaware law, our charter documents and the agreements governing the Convertible Senior Notes and the Senior Secured Notes may impede or discourage a takeover, which could cause the market price of our common stock to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a fundamental change or a change in control would be beneficial to our existing stockholders. In addition, our board of directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our board of directors to create and issue a new series of preferred stock and certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.
In addition, certain provisions of the Convertible Senior Notes and the Senior Secured Notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of a fundamental change, subject to certain conditions, holders of Senior Secured Notes and Convertible Senior Notes will have the right, at their option, to require us to purchase for cash all or any portion of their notes. We may also be required, under certain circumstances, to increase the conversion rate for the Convertible Senior Notes if a holder elects to convert its Convertible Senior Notes in connection with a make-whole fundamental change.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
From time to time, we are named as a defendant in other legal and regulatory proceedings arising in the normal course of business. In our opinion, the final judgment or settlement, if any, which may be awarded with any such suit or claim would not have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4
ITEM 4 - MINE SAFETY DISCLOSURE
None.
GLOSSARY OF OIL AND GAS TERMS
The terms defined in this section are used throughout this Annual Report on Form 10-K. For definitions of additional oil and gas terms and complete versions of certain of the definitions below, please refer to Rule 4-10(a) of Regulation S-X as promulgated by the SEC.
“3D” or “3D SEISMIC”-An exploration method of sending energy waves or sound waves into the earth and recording the wave reflections to indicate the type, size, shape, and depth of subsurface rock formations. 3D seismic lines are shot very close together. This allows for the ability for computers to generate seismic profiles in any direction and form 3D surfaces. 3D surveys are measured in square kilometers or square miles.
“Basin”-A large natural depression on the earth’s surface in which sediments generally brought by water accumulate.
“Bbl”-One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to crude oil, condensate or natural gas liquids.
“Bcf”-One billion cubic feet of natural gas.
“BOE”-Barrel of oil equivalent. Oil equivalents are determined herein using the relative energy content method, with a ratio of 1.0 Bbl of oil or natural gas liquid to 6.0 Mcf of gas.
“Btu”-British thermal unit.
“Completion”-The process of treating a drilled well followed by the installation of permanent equipment for the production of oil or natural gas, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.
“DD&A”-Depreciation, depletion, amortization and accretion.
“Developed acreage”-The number of acres that are allocated or assignable to productive wells or wells capable of production.
“Development well”-A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
“Economically producible”-As it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation.
“Estimated ultimate recovery”-The sum of reserves remaining as of a given date and cumulative production as of that date.
“Exploratory well”-A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well or a stratigraphic test well.
“Extension well”-A well drilled to extend the limits of a known reservoir.
“Field”-An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious, strata, or laterally by local geologic barriers, or by both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field.
“Formation”-A layer of rock which has distinct characteristics that differs from nearby rock.
“Gross acres” or “gross wells”-The total acres or wells, as the case may be, in which a working interest is owned.
“Horizontal drilling”-A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle within a specified interval.
“Horizontal well”-A well drilled using horizontal drilling techniques.
“Hydraulic fracturing”-A stimulation treatment routinely performed on oil and gas wells in low-permeability reservoirs. Specially engineered fluids are pumped at high pressure and rate into the reservoir interval to be treated, causing a vertical fracture to open. Commonly referred to as “fracking.”
“Identified drilling locations”-Locations specifically identified by management as an estimation of our multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves data on contiguous acreage and geologic formations. The availability of local infrastructure, drilling support assets and other factors as management may deem relevant, such as spacing requirements, easement restrictions and state and local regulations, are considered in determining such locations. The drilling locations on which we actually drill wells will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and gas prices, costs, actual drilling results and other factors.
“Liquids”-Describes oil, condensate and natural gas liquids.
“MBbl”-One thousand barrels of crude oil, condensate or natural gas liquids.
“MBOE”-One thousand barrels of oil equivalent.
“Mcf”-One thousand cubic feet of natural gas.
“MMcf”-One million cubic feet of natural gas.
“Natural gas liquid” or “NGL”-Components of natural gas that are separated from the gas state in the form of liquids, which include propane, butanes and ethane, among others.
“Net acres”-The percentage of total acres an owner has out of a particular number of acres, or a specified tract. An owner who has 50% interest in 100 acres owns 50 net acres.
“Productive well”-A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.
“Proved area”-The part of a property to which proved reserves have been specifically attributed.
“Proved developed reserves (“PDP”) -Proved reserves that can be expected to be recovered (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
“Proved reserves”-Those quantities of oil and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible -from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations-prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
“Proved undeveloped reserves or “PUD” -Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Proved undeveloped reserves on undrilled acreage are limited (i) to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances and (ii) to other undrilled locations if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time.
“PV10” - Discounted future net cash flows estimated by applying year-end prices to the estimated future production of year-end proved reserves. Future cash inflows are reduced by estimated future production and development costs based on period end costs to determine pre-tax cash inflows. Future net cash inflows after income taxes are discounted using a 10% annual discount rate.
“Reasonable certainty”-If deterministic methods are used, reasonable certainty means a high degree of confidence that that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geosciences (geological, geophysical and geochemical), engineering and economic data are made to estimated ultimate recovery (“EUR”) with time, reasonably certain EUR is much more likely to increase or remain constant than decrease.
“Reservoir”-A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs.
“Resources”-Quantities of oil and gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable, and another portion may be considered to be unrecoverable. Resources include both discovered and undiscovered accumulations.
“Service well”-A well drilled or completed for the purpose of supporting production in an existing field. Specific purposes of service wells include gas injection, water injection, steam injection, air injection, salt-water disposal, water supply for injection, observation or injection for in-situ combustion.
“Spacing”-The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres, e.g., 40-acre spacing, and is often established by regulatory agencies.
“Standardized measure”-Discounted future net cash flows estimated by applying year-end prices to the estimated future production of year-end proved reserves. Future cash inflows are reduced by estimated future production and development costs based on period end costs to determine pre-tax cash inflows. Future income taxes, if applicable, are computed by applying the statutory tax rate to the excess of pre-tax cash inflows over our tax basis in the oil and gas properties. Future net cash inflows after income taxes are discounted using a 10% annual discount rate.
“Stratigraphic test well”-A drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition. Such wells customarily are drilled without the intent of being completed for hydrocarbon production. The classification also includes tests identified as core tests and all types of expendable holes related to hydrocarbon exploration. Stratigraphic tests are classified as “exploratory type” if not drilled in a known area or “development type” if drilled in a known area.
“Undeveloped acreage”-Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether such acreage contains proved reserves.
“Unit”-The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.
“Working interest”-The right granted to the lessee of a property to explore for and to produce and own natural gas or other minerals. The working interest owners bear the exploration, development, and operating costs on a cash, penalty, or carried basis.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SHARES
Our common stock is listed on the NASDAQ Capital Market and commenced trading on February 22, 2012 under the ticker symbol “ZAZA.” Prior to that date, there was no public market for our common stock.
As of December 31, 2014, there were approximately 163 holders of record of our common stock.
The following table sets forth the high and low sale prices per share of our common stock as reported by the NASDAQ Capital Market based upon quotations that reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
On August 19, 2014, we completed a 1-for-10 reverse stock split of our outstanding common stock. The sale prices per share of our common stock presented above have been adjusted to give effect to the reverse split for all periods presented.
No dividends have ever been paid on our common stock. Our dividend policy is to retain earnings to finance the operations and expansion of our businesses. We do not anticipate paying any cash dividends on our common stock at this time. In addition, the terms of our Senior Secured Notes and Warrants prohibit the payment of dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes equity compensation plan information regarding equity securities authorized for issuance under individual stock option compensation agreements as of December 31, 2014:
Comparative Stock Performance
The following table compares the yearly change in the cumulative total stockholder return on our Common Stock during the period February 21, 2012 through December 31, 2014 with the cumulative total return of the Dow Jones U.S. Exploration and Production Index and S&P 600 Small Cap Index. The comparison assumes $100 was invested on February 21, 2012 in our Common Stock and in each of the foregoing indices and assumes reinvestment of dividends. We paid no dividends on our Common Stock during such period.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial information is summarized from ZaZa’s results of operations for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, as well as selected balance sheet data of ZaZa as of December 31, 2014, 2013, 2012, 2011, and 2010 and should be read in conjunction with the related financial statements and the notes thereto.
* Includes $195.6 million of other income related to the gain on termination of Hess agreements.
** Defined as current assets less current liabilities.
*** Amounts are net of debt discounts of $9.5 million, $15.7 million, $24.3 million, zero, and zero for 2014, 2013, 2012, 2011, and 2010 respectively.
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
ZaZa Energy Corporation is an independent oil and gas company focused on the exploration and production of unconventional and conventional oil and gas assets. We currently operate primarily through joint ventures in the Eagle Ford East trend in East Texas and the Eagle Ford trend in South Texas. Our common stock is traded on the NASDAQ Capital Market under the trading symbol ZAZA.
Our strategy is to enhance shareholder value through consistent growth in cash flows by focusing on the organic development of our existing assets within our core areas. We also look for opportunities to diversify and build upon our current portfolio through the acquisition of additional unconventional and conventional assets with a focus on Texas.
Since the third quarter of 2014, our liquidity has been an area of concern. The drop in oil prices that began at the end of 2014 and continues today has created further liquidity challenges as our revenues are directly linked to the price of oil. As further discussed below under the heading “Liquidity and Capital Resources,” our prospectus for adequate liquidity in 2015 are uncertain, especially in light of the fact that beginning on March 23, 2015, any holder of the $13.9 million in aggregate principal amount of our Senior Secured Notes may elect to require us to repurchase that holder’s Senior Secured Notes within 30 days of making such an election. Although we are discussing with the holders of the Senior Secured Notes a 30-day extension (until April 22, 2015) of the earliest date that the holder of any of the Senior Secured Notes can exercise this right of repurchase, there is no assurance that we will be successful in being given such an extension. Even without considering the repurchase of any of the Senior Secured Notes, the Company will need to access additional capital to continue as a going concern through May of 2015. Our board of directors and management are actively exploring financing and partnership alternatives while seeking to restructure our debt. We can offer no assurance that a solution will be found.
ZaZa owns producing and non-producing oil and gas acreage in proven or prospective basins that are located in South Texas and East Texas. Almost all of our assets are located within the United States. Except for an immaterial amount of cash held by our foreign subsidiaries, which we are in the process of dissolving, we have no assets or operations outside of the United States. In this Annual Report, our use of “East Texas” refers to Houston, Leon, Madison, Grimes, Walker, Trinity and Montgomery counties and the surrounding region; and our use of “South Texas” refers to DeWitt and Lavaca counties and the surrounding region.
Additionally, we have converted our natural gas reserves or production into barrel of oil equivalents in this Annual Report. For this purpose, six thousand cubic feet of natural gas is equal to one barrel of oil, which is based on the relative energy content of natural gas and oil.
Recent Developments
East Texas Joint Venture with EOG
On March 7, 2014, we entered into the Fourth Amendment (the “Fourth Amendment”) to our Joint Exploration and Development Agreement with EOG with respect to the joint development of certain of our East Texas properties. Under the Fourth Amendment, we agreed to assign to EOG approximately 9,600 net acres in East Texas representing a 75% working interest in the acreage remaining in the third and final phase of the joint development program under the JEDA. As consideration for this transfer, we received approximately $4.7 million in cash and the carry by our counterparty of our share of future drilling and completion costs in an aggregate amount up to approximately $9.2 million. As of December 31, 2014, the $9.2 million of carried costs had been fully deployed.
Also pursuant to the Fourth Amendment and effective March 7, 2014, we and EOG agreed to terminate that certain Participation Agreement, effective as of March 1, 2012, by and between the Company and Range Texas Production, LLC (“Range”) (such agreement, as amended, the “Range Agreement”). Range’s rights and obligations under the Range Agreement were assigned to, and assumed by, our counterparty pursuant to that certain Quitclaim Assignment and Bill of Sale, effective as of December 1, 2013, by and between Range and our counterparty.
In December 2014, EOG satisfied the last of its drilling obligations under the JEDA. While selected JEDA provisions survive, the joint venture is now principally governed by the Joint Operating Agreement among EOG, ZaZa, and Quantum. Pursuant to its terms, ZaZa now has the right to propose new development wells and maintain its desired minimum drilling pace.
East Texas Joint Venture with Quantum
On September 18, 2014, ZaZa entered into the Quantum Agreements with Quantum. Pursuant to the terms of the Quantum Agreements:
· ZaZa assigned to Quantum an approximately 4 percent working interest (6,000 of ZaZa’s net acres) in undeveloped leases within the East Texas joint venture. ZaZa retained its interest in all existing wells in the East Texas joint venture and is reserving the right to participate with respect to Quantum’s working interest in the next 15 East Texas JV wells that are spudded, drilled and completed after the closing of the Quantum transaction, as long as those wells are spudded, drilled and completed on or before the second anniversary of the closing of the transaction (the “Reserved Wells”).
· ZaZa received $11 million in cash as initial consideration and the right to receive Quantum’s interest in certain of the Reserved Wells.
· ZaZa will receive ongoing G&A and cost reimbursements from Quantum for providing services related to their jointly owned assets in Walker, Grimes, Madison, Trinity, and Houston counties.
· Quantum has the right to cause ZaZa to purchase Quantum’s interest in the jointly owned assets on an all or nothing basis for a cash price based on Quantum’s initial consideration paid of $11 million plus any out-of-pocket costs of acquiring and renewing leases under the Quantum Agreements on September 17, 2016 (the “Quantum Put Option”).
For more information on the Quantum Agreements, see “Item 1 - Joint Venture - East Texas Joint Venture with Quantum.”
Following the closing of the Quantum Agreements, ZaZa’s East Texas acreage holdings comprise two separate development areas, each with different operators and ownership structures:
· Madison, Walker, and Grimes Counties. The Madison-Walker-Grimes Development Area comprises approximately 147,000 gross acres of the East Texas joint venture and is operated by EOG. ZaZa holds an approximately 21% working interest, or approximately 31,000 net acres and Quantum holds an approximately 4% working interest, or 6,000 net acres in this area. During the next two years, ZaZa has the option to participate for both its and Quantum’s working interest-for a total of a 25% working interest to ZaZa-in the next 15 wells drilled within the Madison-Walker-Grimes Development Area. ZaZa also retained its full 25% working interest in all wells spudded prior to the closing of the Quantum Agreements.
· Houston, Trinity, and Leon Counties. The Houston-Trinity-Leon Development Areas comprises approximately 10,000 net acres and is operated and owned 100% by ZaZa. This acreage is not subject to the Quantum Agreements. Through the remainder of 2015 ZaZa will be preparing the acreage block in Houston and Trinity counties to be drill ready from a unit formation perspective, and the Company’s leasing is now focused on contiguous acreage additions.
Working interests in 6,000 net acres were sold and assigned to Quantum on September 18, 2014. U.S. generally accepted accounting principles (“U.S. GAAP”) prevents sale accounting due to the Quantum Put Option. Accordingly, the related oil and gas properties continue to be included in the consolidated balance sheet, and a liability was recorded, the Quantum Put Option, equal to Quantum’s initial cash payment of $11 million. Quantum’s out of pocket costs that are incurred subsequent to the initial $11 million represent contingent liabilities and will be recorded as a liability when and if payment becomes probable. As of December 31, 2014, this contingent liability totaled approximately $0.1 million. The Quantum transaction did not have any impact on revenue, income from continuing operations, net income, or income per share.
South Texas Joint Venture with Sabine
In South Texas, our joint venture partner - Sabine South Texas LLC (“Sabine”), a subsidiary of Sabine Oil & Gas Corporation, completed two fully carried commitment wells during the first quarter of 2014. In exchange for Sabine fulfilling its obligations with respect to our South Texas joint venture, ZaZa transferred a 75% working interest in approximately 5,700 net acres and a well known as the Boening well. Participating interests in any additional wells drilled or lease acreage acquired under an area of mutual interest will be shared 75% by Sabine and 25% by ZaZa (assuming affirmative elections to participate in such lease acreage acquisition(s)). The area of mutual interest expires on September 15, 2015.
Balance Sheet Initiatives
Senior Secured Notes with a current principal amount of $13.9 million were issued under the Securities Purchase Agreement, dated February 21, 2012 (as amended, the “Securities Purchase Agreement”) and will mature on February 21, 2017 (subject to earlier call provisions as discussed below). On February 24, 2015, the Company entered into Amendment No. 7 to the Securities Purchase Agreement. Prior to Amendment No. 7, the Securities Purchase Agreement provided that each holder of Senior Secured Notes had the right, beginning on February 21, 2015, to give notice to the Company, requiring the Company to repurchase up to 100% of such Purchaser’s Senior Secured Notes at par plus accrued and unpaid interest (the “Senior Secured Notes Put Option”). The Company would have had 60 days after such notice to repurchase any such Senior Secured Notes. Amendment No. 7 amended the Securities
Purchase Agreement to delay the earliest date that any noteholder could exercise the Senior Secured Notes Put Option by 30 days (from February 21, 2015 to March 23, 2015). Amendment No. 7 also contains a corresponding decrease from 60 days to 30 days of the time period afforded to the Company to complete the repurchase of the Senior Secured Notes of any holder that exercises its rights in accordance with the terms of Senior Secured Notes Put Option. As of March 31, 2015, we had entered into discussions with the holders of our Senior Secured Notes for an Amendment No. 8 to the Securities Purchase Agreement that would again delay the earliest date that any noteholder could exercise the Senior Secured Notes Put Option by 30 days (from March 23, 2015 to April 22, 2015). As of March 31, 2015, the holders of a majority of the principal amount of the Senior Secured Notes at the time outstanding had agreed to the additional 30-day delay contained in Amendment No. 8. However, for Amendment No. 8 to become effective, it must be approved by all holders of the Senior Secured Notes. The Company is continuing to work to get approval of Amendment No. 8 from all holders, but there can be no assurance that the Company will be successful in doing so.
Our board of directors and management are continuing to pursue further restructuring of our debt and additional cash funding for the 2015 drilling program. On February 24, 2015, we initiated a process to evaluate broader transactions, such as new partnerships and joint ventures. ZaZa has retained Seaport Global Securities LLC (who merged with Global Hunter Securities LLC) as financial advisor to assist in evaluating such broader alternatives.
On February 24, 2014, the Company entered into the Exchange Agreements to exchange an aggregate of $47.3 million in 8.00% Subordinated Notes due 2017 for a combination of shares of common stock of the Company and shares of a new series of preferred stock of the Company. The Exchange Agreements were amended and superseded by the Subordinated Note Modification Agreements with each of the Subordinated Note Holders on January 19, 2015. The Modification Agreements provide that, instead of exchanging the Subordinated Notes for common stock and preferred stock of the Company, all interest payments to the Subordinated Note Holders will be paid in kind. On January 19, 2015 each Subordinated Note Holder exchanged its Subordinated Note for the First Amended and Restated Subordinated Note to provide that interest payments will be paid in kind as additional principal beginning with the first interest payment due with respect to interest that accrues beginning January 1, 2015. Interest will continue to accrue at a rate of 8.00% per annum, and the maturity date will remain August 21, 2017. For more information on the Modification Agreements, see “Item 1 - Balance Sheet Initiatives and Other Transactions.”
On July 21, 2014, we closed a capital markets transaction for $4.5 million net proceeds in exchange for ZaZa common stock of $8.30 per share and 0.6 warrants for every share of ZaZa common stock with a strike price of $11.20 per share (the “2019 Warrants”). On November 18, 2014, the Company and the investor entered into an agreement stipulating the number of shares issuable upon exchange of the warrants. Pursuant to its terms, the Company issued 1 million shares of common stock in the fourth quarter of 2014 in exchange for the warrants.
Financial Summary
For the year ended December 31, 2014:
· Production was 232 MBOE of which 86 MBOE was oil production (37 %).
· Revenues were $11.5 million.
· Operating losses were $22.1 million, including $7.0 million of asset impairments.
· Net loss was $8.2 million.
At December 31, 2014, we had:
· Cash and cash equivalents of $6.3 million.
· Current ratio (current assets/current liabilities) of 0.4 to 1.
RESULTS OF OPERATIONS
The following is a discussion of our consolidated results of operations, financial condition and capital resources. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Annual Report on Form 10-K.
The following table presents our production, average prices obtained for our production and average production cost for the years ended December 31, 2014 and 2013:
Revenue
Oil and gas revenue
Oil and gas revenue for the years ended December 31, 2014 and 2013 were $11.5 million and $8.9 million, respectively. This increase is primarily due to production increases from our joint ventures in East Texas ($6.5 million) and South Texas production ($0.7 million), partially offset by production decreases from the divestment of non-core assets in South Texas in 2013 ($4.6 million).
The above table of production and average prices compares both volumes and prices received for our oil and gas production. The results of our operations are highly dependent upon the prices received from our oil production, which are dependent on numerous factors beyond our control. Accordingly, significant changes to oil prices are likely to have a material impact on our financial condition, results of operation, cash flows and revenue.
Operating costs and expenses
The following table presents our lease operating expense for the referenced geographical areas for the periods indicated (in thousands):
Lease operating expenses
Lease operating expenses were $3.6 million, or $15.70 per BOE produced, for the year ended December 31, 2014, compared to $2.1 million, or $16.21 per BOE produced, for the year ended December 31, 2013. Lease operating expenses increased primarily due to the higher expenses in our joint venture in East Texas ($2.9 million) partially offset by decreases from the divestment in of non-core assets in South Texas in 2013 (the Moulton properties - $0.6 million). Additionally, our joint venture partner in East Texas carried us for part of the lease operating expenses ($0.8 million) for the year ended December 31, 2014.
Depreciation, depletion, amortization, and accretion
Depreciation, depletion, amortization, and accretion for the years ended December 31, 2014 and 2013 was $7.3 million and $3.6 million, respectively. This increase is primarily driven by higher production volumes.
Impairments
For the year ended December 31, 2014, we impaired non-producing leasehold costs by $3.6 million and producing oil and gas properties by $3.4 million - for a total impairment of $7.0 million.
In 2014, non-producing leasehold costs in South Texas with carrying values of $4.0 million were written down to their fair value of $0.4 million, resulting in pretax impairment charges of $3.6 million. The decline in fair value of these non-producing leases is driven by the expiration of existing leases in South Texas. Producing oil and gas properties with carrying values of $4.7 million were also written down to their fair values of $1.4 million, resulting in pretax impairment charges of $3.4 million. The decline in fair value of these oil and gas properties is driven by the lower commodity price environment.
For the year ended December 31, 2013, we impaired non-producing leasehold costs by $66.6 million, producing oil and gas properties by $37.8 million and inventory by $0.2 million for a total impairment of $104.6 million.
In the second quarter of 2013, non-producing leasehold costs and producing oil and gas properties with combined carrying values of $145.5 million were written down to their fair values of $52.4 million, resulting in pretax impairment charges of $93.1 million. Included in the $93.1 million non-cash impairment charge were non-producing leasehold cost impairments of $56.9 million and producing oil and gas properties impairments of $36.2 million. The impairments of producing oil and gas properties related to one well in South Texas and two wells in East Texas.
In the third quarter of 2013, non-producing leasehold costs with carrying values of $13.1 million were written down to their fair values of $4.1 million. Additionally, we wrote down the carrying value of our inventory by $0.2 million. This resulted in pre-tax impairment charges totaling $9.2 million. The decline in fair value of the non-producing leases was driven by the expiration of leases in South Texas.
In the fourth quarter of 2013, non-producing leasehold costs with carrying values of $1.3 million were written down to their fair values of $0.8 million, resulting in pretax impairment charges of $0.5 million. The impairment of non-producing leasehold costs were triggered by lease expirations in our Sweet Home Prospect. Additionally, oil and gas properties with carrying values of $2.0 million were written down to their fair values of $0.3 million, resulting in pretax impairment charges of $1.7 million. The impairment of producing oil and gas properties relate to three wells in South Texas.
General and administrative
General and administrative expense for the years ended December 31, 2014 totaled $19.7 million compared to $29.4 million in 2013, a decrease of 33%. This decrease of $9.7 million is primarily due to lower professional fees of $4.2 million, lower salaries and bonus expenses of $2.7 million, lower severance expenses of $2.0 million, and lower office expenses of $0.8 million.
In April 2013, we initiated a cost reduction plan and set a goal to reduce G&A by 35%. We successfully completed this transition process in the second quarter of 2014 and achieved reductions in adjusted G&A (see Non-GAAP Financial Measures and Reconciliation) of 48%, in headcount of 47% and in guaranteed executive compensation of $3.5 million. Adjusted G&A for 2014 was $15.6 million, a decrease of $6.9 million, or 31%, compared to $22.5 million in 2013. The difference between adjusted G&A for 2014 of $15.6 million and reported GAAP G&A of $19.7 million are non-cash compensation expenses of $5.1 million and severance payments of $1.7 million partially offset by litigation settlements of $2.7 million. Adjusted G&A is a non-GAAP measure - please see our reconciliation of Adjusted G&A to GAAP G&A below under “Non-GAAP Financial Measures and Reconciliation”.
Gain (loss) on asset divestitures
Gain on asset divestitures for the years ended December 31, 2014 and 2013 is $4.1 million and $24.4 million, respectively. In the first quarter of 2014, we recorded a gain on asset divestitures totaling $4.1 million related to the Fourth Amendment to the East
Texas joint venture with EOG. The $24.4 million gain includes a gain of $25.3 million related to asset divestments in East Texas in the fourth quarter partially offset by a $0.5 million loss related to the sale of our Moulton assets in South Texas.
Other expenses
Loss on extinguishment of debt
Loss on extinguishment of debt for the years ended December 31, 2014 and 2013 was $1.9 million and $16.6 million, respectively. The loss for the year ended December 31, 2014 related to prepayments of our Senior Secured Notes from a principal amount of $26.8 million to $13.9 million resulting in a $1.5 million write-off of the original issuance discount and $0.4 million in prepayment fees. The loss for the year ended December 31, 2013 primarily related to an amendment to the Senior Secured Notes dated March 28, 2013 that triggered debt extinguishment accounting treatment. It consisted of a $10.9 million loss from the modification of the terms of our warrants issued in association with the Senior Secured Notes (the “2020 Warrants”) and a difference between the fair value and book value of debt of $4.2 million. The remaining $1.5 million loss is related to prepayments of our Senior Secured Notes resulting in a $1.2 million write-off of the original issuance discount and $0.3 million in prepayment fees.
Interest expenses, net
For the year ended December 31, 2014 and 2013, we recorded $14.0 million and $14.3 million, respectively, in net interest expense. Lower outstanding principal in 2014 resulted in lower interest expense but was fully offset by higher amortization expense on issuance discounts. Additionally, $0.3 million in interest was capitalized in 2013 versus zero in 2014 contributing to the difference year over year.
Settlement of 2019 Warrants in excess of initial carrying value
On July 21, 2014, we closed a capital markets transaction for $4.5 million net proceeds in exchange for ZaZa common stock of $8.30 per share and 0.6 warrants for every share of ZaZa common stock with a strike price of $11.20 per share (the “2019 Warrants”) and recognized the fair value of the warrants as of that date as a liability on the balance sheet. In the fourth quarter of 2014, following a dispute over the number of shares issuable under the warrants, the Company and the investor entered into an agreement to stipulate the number of exchangeable shares at 1 million. For the year ended December 31, 2014, we recorded a loss of $1.8 million related to the exchange of the 2019 Warrants as a settlement in excess of the warrant’s initial carrying value.
Unrealized gain on valuation of warrants and embedded derivatives
For the years ended December 31, 2014 and 2013, we recorded gains in fair value of the 2020 Warrants of $12.6 million and $23.4 million, respectively, and gains in fair value of the embedded derivatives associated with our Convertible Senior Notes of $4.4 million and $16.4 million, respectively. The variances are mainly a result of fluctuations in our stock price and shorter remaining duration of the instruments.
Income tax benefit
The income tax benefit of $33.0 million in 2013 was driven by pre-tax losses primarily as a result of impairments of $104.6 million. We recorded income tax benefits in 2014 to the extent the net operating losses that can be carried towards our unrecognized tax benefits. As of December 31, 2014, we had gross unrecognized tax benefits of $16.4 million, all of which has been recorded as a reduction of our deferred tax assets ($2.1 million was previously netted against deferred tax assets in 2013).
Capital expenditures
For the year ended December 31, 2014, we deployed $10.6 million of cash capital expenditures and $16.2 million of carried costs for a total of $26.8 million. For the year ended December 31, 2013, we deployed $47.4 million of cash capital expenditures and $7.8 million of carried costs for a total of $55.2 million.
Non-GAAP Financial Measures and Reconciliations
In an effort to provide investors with additional information regarding our results as determined by U.S. GAAP, we disclose certain non-GAAP financial measures in our earnings press releases and other public disclosures. The primary non-GAAP financial measure we focus on is adjusted general and administrative expenses. This financial measure excludes the impact of certain expenses and benefits and therefore has not been calculated in accordance with U.S. GAAP. A reconciliation of this non-GAAP financial measure to its most comparable U.S. GAAP financial measure is included below.
We use this non-GAAP financial measure internally to evaluate and manage the Company’s operations because we believe it provides useful supplemental information regarding the Company’s on-going economic performance which may not be comparable to
similar measures used by other companies. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results and as a means to emphasize the results of on-going operations.
The following table sets forth the reconciliation of this non-GAAP financial measure to its most comparable U.S. GAAP financial measures (in thousands):
LIQUIDITY AND CAPITAL RESOURCES
This section should be read in conjunction with “Note 1 - Basis of Presentation”, “Note 2 - Going Concern” and “Note 9 - Long-Term Debt” in the Notes to the consolidated financial statements included in this Annual Report on Form 10-K and Item 1A “Risk Factors”. Our independent registered public accounting firm for the year ended December 31, 2014 issued their report dated March 31, 2015, that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern due to our dependency on obtaining appropriate financing and the success of our 2015 drilling program with our joint-venture partners to generate sufficient cash flows to maintain positive liquidity.
Liquidity and cash flow
We ended 2014 with a cash balance of approximately $6.3 million, and our prospects for adequate liquidity in 2015 are uncertain. Our primary cash requirements are for principal and interest payments on indebtedness, operating expenses, and capital expenses. Additionally, beginning March 23, 2015, the holders of the Senior Secured Notes may require us to purchase all or a portion of the Senior Secured Notes at a price equal to the principal amount of the Senior Secured Notes to be purchased, plus any accrued and unpaid interest on such notes. Noteholders can exercise the put beginning on March 23, 2015, and the Company would have up to 30 days after receiving notice of any put exercises in order to repurchase the notes. Although we are discussing with the holders of the Senior Secured Notes a 30-day extension (until April 22, 2015) of the earliest date that the holder of any of the Senior Secured Notes can exercise this right of repurchase, there is no assurance that we will be successful in being given such an extension. As our primary sources of liquidity are cash generated by operations, we do not currently anticipate that we will have sufficient cash to fund a repurchase of the Senior Secured Notes or our primary cash requirements. Thus, we will be required to attempt to fund our cash requirements through other means, such as through debt and equity financing activities or asset monetization, or the curtailment of capital expenditures or we will be unable to continue as a going concern.
Because of the repurchase requirements described above, we reclassified the outstanding amount of Senior Secured Notes of $13.6 million with a principal amount of $13.9 million as current liabilities. Without access to additional liquidity, we will not be able to fund our commitments to the holders of the Senior Secured Notes if they require us to purchase all or a portion of the Senior Secured Notes and we will be in default under the Senior Secured Notes. If a default under the Senior Secured Notes involves an amount in excess of $10 million, we would also be in default under the indenture that governs our Convertible Senior Notes. If a default occurs under the Senior Secured Notes or the Convertible Senior Notes, the holders of such debt could accelerate the indebtedness, demand immediate payment and use a variety of legal remedies to enforce their claims. If any of these defaults and the acceleration of any of our debt were to occur, it is unlikely that we would be able to continue as a going concern.
We have entered into discussions with some of the holders of the Senior Secured Notes for a refinancing of that debt to avoid a possible default if the Senior Secured Notes Put Option is exercised. Although we have no assurance regarding our ability to successfully negotiate a refinancing of the Senior Secured Notes, any such modification may result in significant changes to the Company’s capital structure, the disposition of material assets, and adjustments to its balance sheet. These changes may adversely affect the holders of ZaZa common stock through dilution or loss in value.
Even without the possibility of a required prepayment of the Senior Secured Notes, we do not currently generate sufficient cash flows to maintain positive liquidity to fund operating and debt service requirements throughout the next year. As of December 31, 2014, we had $6.3 million in cash and cash equivalents and working capital deficit of $13.3 million. Over the next year, we anticipate monthly cash general and administrative expenses and cash interest payments to average $1.3 million per month and capital
expenditures of $0.5 million per month. Without additional cash funding, and considering our current forecasts for cash generated by operations, we anticipate exhausting our cash and cash equivalents in May 2015.
Our only anticipated methods of fully funding our cash requirements are through changes to our debt arrangements, debt and equity financing activities, asset monetization or the curtailment of capital expenditures. Specifically, the Company’s Board of Directors is examining financing alternatives and access to capital markets. On February 24, 2015, we also initiated a process to evaluate broader transactions, such as new partnerships and joint ventures. ZaZa has retained Seaport Global Securities LLC as financial advisor to assist in evaluating such broader alternatives. We will continue to search for possible financing transactions, but no assurances can be given that such transactions can be consummated on terms that are acceptable to the Company, or at all. Additionally, our ability to enter into a financing transaction, or to successfully implement any of the other liquidity saving measures described in this paragraph, will be largely dependent upon factors outside of our control, such as prevailing market conditions and the actions of third parties.
Future capital requirements
Because of our limited amount of cash, in the absence of a debt or equity raise, we plan to limit our capital expenditures to available cash on hand. Additionally, we have fully deployed our carried costs to drill and complete wells, and carried costs that can be allocated to wells, infrastructure, lease extensions and operating costs in East Texas, and our joint venture counter parties have the ability to accelerate the pace of drilling starting in 2015. Thus, we would be required to pay cash for our portion of the costs incurred in connection with the drilling program.
Beginning in 2015, ZaZa has the right to propose new development wells in specific locations and maintain its desired minimum drilling pace. Following its technical evaluation and an internal acreage high-grading campaign focused on vertical commingled development (Buda-Rose “stack and fracs”), the Company has identified approximately 800 well locations on the basis of 80-acre spacing. ZaZa has proposed two Buda-Rose vertical wells to be located in Madison and Walker Counties. Each proposed well is estimated to cost approximately $3.5 million and deliver an internal rate of return of approximately 40% at February 2015 commodity prices. ZaZa expects the production results of the newly proposed wells to be similar to those achieved by the Company’s previous Toby #1V (cumulative one-year production of approximately 181 Mboe), Grisham #1V (cumulative one-year production of approximately 191 Mboe), and Laura Unit #1V (cumulative one-year production of approximately 136 Mboe) wells. Depending on our joint-venture partners’ elections to participate in these two proposals, our capital expenditures will range between $4 million and $7 million.
ZaZa’s ability to fund its drilling program, operations, and lease maintenance costs, however, is dependent upon securing additional financing. If we are unable to raise a sufficient amount of cash to pay for our portion of costs associated with the drilling program, we would be subject to customary non-consent penalties on an individual well by well basis with respect to any wells in which we are unable to participate, which would result in the loss of a significant portion of any future revenue derived from such non-consent wells. Similarly, if the Company is unable to fund renewals of expiring leases, it could lose portions of its acreage.
Long-term debt
We have $91.8 million in total debt, of which $13.6 million is classified as current, consisting of the following (in thousands):
10.00% Senior Secured Notes due 2017
The Senior Secured Notes were issued under the Securities Purchase Agreement, dated February 21, 2012 and will mature on February 21, 2017. The Senior Secured Notes are guaranteed by all of our subsidiaries and secured by a first-priority lien on substantially all of our assets and of our domestic subsidiaries. Subject to certain adjustments set forth in the Securities Purchase Agreement, interest on the Senior Notes accrues at 10% per annum as of March 1, 2014, payable quarterly in cash. Amendment No. 5 to the Securities Purchase Agreement, dated March 28, 2013 (“Amendment No. 5”), stated that the interest rate would increase from 8% per annum to 10% per annum effective March 1, 2014 if the Senior Notes were not prepaid to zero by February 28, 2014. The balance outstanding on the Senior Secured Notes was $15 million as of February 28, 2014 and therefore the interest rate increased to 10% per annum.
Effective as of February 24, 2015, the Company entered into Amendment No. 7 to the Securities Purchase Agreement. Prior to Amendment No. 7, the Securities Purchase Agreement provided that each holder of Senior Secured Notes had the right, beginning on February 21, 2015, to give notice to the Company, requiring the Company to repurchase up to 100% of such Purchaser’s Senior Secured Notes at par plus accrued and unpaid interest (the “Senior Secured Notes Put Option”). The Company would have had 60 days after such notice to repurchase any such Senior Secured Notes. Amendment No. 7 amended the Securities Purchase Agreement to delay the earliest date that any noteholder could exercise the Senior Secured Notes Put Option by 30 days (from February 21, 2015 to March 23, 2015). Amendment No. 7 also contains a corresponding decrease from 60 days to 30 days of the time period afforded to the Company to complete the repurchase of the Senior Secured Notes of any holder that exercises its rights in accordance with the terms of Senior Secured Notes Put Option. See “Liquidity and cash flow” above for a discussion of the status of the Senior Secured Notes Put Option.
9.00% Convertible Senior Notes due 2017
The Company has $40,000,000 aggregate principal amount of Convertible Senior Notes. The Convertible Senior Notes are the senior, unsecured obligations of the Company, bear interest at a fixed rate of 9.0% per year, payable semiannually in arrears and mature August 1, 2017 unless earlier converted, redeemed or repurchased. The Convertible Senior Notes are convertible, at the option of the holder, at any time prior to the third trading day immediately preceding the maturity date, into shares of the Company’s common stock, par value $0.01 per share (the “Conversion Shares”), and cash in lieu of fractional shares of common stock. The reverse stock split adjusted conversion rate is 40.0052 shares per $1,000 Convertible Senior Notes which equated to an initial conversion price of $25.00 per share.
The Company may not redeem the Convertible Senior Notes prior to August 1, 2015. Beginning August 1, 2015, the Company may redeem for cash all or part of the Convertible Senior Notes if the last reported sale price of its common stock equals or exceeds 150% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date on which the Company delivers the notice of the redemption. The redemption price will equal 100% of the principal amount of the Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
8.00% Subordinated Notes due 2017
In February 2012, we issued the Subordinated Notes in an aggregate amount of $47.33 million to Todd A. Brooks (President and Chief Executive Officer of the Company) and Blackstone Oil & Gas, LLC (an entity controlled by Mr. Brooks) (together, the “Brooks Note Holders”), (b) John E. Hearn, Jr. (a Director of the Company) and Lara Energy, Inc. (an entity controlled by Mr. Hearn) (together, the “Hearn Note Holders”) and (c) Gaston L. Kearby (a Director of the Company) and Omega Energy Corp. (an entity controlled by Mr. Kearby) (together, the “Kearby Note Holders,” and collectively with the Brooks Note Holders and the Hearn Note Holders, the “Subordinated Note Holders”). The Subordinated Notes accrue interest at a rate of 8% per annum payable monthly in cash, and mature on August 17, 2017.
On February 24, 2014, the Company entered into Exchange Agreements (the “Exchange Agreements”) to exchange an aggregate of $47.3 million in 8.00% Subordinated Notes due 2017 for a combination of shares of common stock of the Company and shares of a new series of preferred stock of the Company. The Exchange Agreements were amended and superseded by the Subordinated Note Modification Agreements with each of the Subordinated Note Holders (the “Modification Agreements”) on January 19, 2015. The Modification Agreements provide that, instead of exchanging the Subordinated Notes for common stock and preferred stock of the Company, all interest payments to the Subordinated Note Holders will be paid in kind.
See “Note 9 - Long-Term Debt” for more details.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Dividends
Dividends on our common stock may be declared and paid out of funds legally available when and as determined by our Board of Directors, subject to certain loan covenants. Our policy is to hold and invest corporate funds on a conservative basis, and, thus, we do not anticipate paying cash dividends on our common stock in the foreseeable future.
Recent Accounting Standards
The adoption of recent accounting standards had no significant impact on our financial position, results of operations, cash flows or disclosures. See “Note 3 - Summary of Significant Accounting Policies” in the consolidated financial statements for additional details.
Related Party Transactions
We have significant related party transactions. See “Note 13 - Related Party Transactions” in the consolidated financial statements.
Critical Accounting Policies
See “Note 3 - Summary of Significant Accounting Policies” in the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its oil and gas revenue primarily from the sale of produced oil and gas. The Company uses the sales method of accounting for the recognition of gas revenue whereby revenues, net of royalties are recognized as the production is sold to the purchaser. The amount of gas sold may differ from the amount to which the Company is entitled based on its working interest or net revenue interest in the properties. Revenue is recorded when title is transferred based on our nominations and net revenue interests. Pipeline imbalances occur when production delivered into the pipeline varies from the gas we nominated for sale. Pipeline imbalances, which have historically been and currently continue to be immaterial, are settled with cash approximately 30 days from date of production and are recorded as a reduction of revenue or increase of revenue depending upon whether we are over-delivered or under-delivered. Settlements of oil and gas sales occur after the month in which the product was produced. We estimate and accrue for the value of these sales using information available at the time financial statements are generated. Differences are reflected in the accounting period during which payments are received from the purchaser.
Successful Efforts Method of Accounting for Oil and Gas Activities
The Company accounts for its oil and gas exploration and production activities under the successful efforts method of accounting. Oil and gas lease acquisition costs are capitalized when incurred. Lease rentals are expensed as incurred. Oil and gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved reserves. Exploratory drilling costs are capitalized when drilling is complete if it is determined that there is economic producibility supported by either actual production or a conclusive formation test. If proved reserves are not discovered, such drilling costs are expensed. In some circumstances, it may be uncertain whether proved reserves have been found when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of natural gas and crude oil, are capitalized. Unproved properties with individually significant acquisition costs are analyzed on a property-by-property basis for any impairment in value. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and gas properties.
The Company’s third party engineers estimate proved oil and gas reserves, which directly impact financial accounting estimates, including depreciation, depletion, and amortization and impairment considerations. Our proved reserves represent estimated quantities of oil and condensate, natural gas liquids and gas that geological and engineering data demonstrate, with reasonable
certainty, to be recovered in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is very complex requiring significant subjective decisions in the evaluation of all available geological, engineering, and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving producing history, and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time.
Depreciation, depletion, and amortization of the cost of proved oil and gas properties are calculated using the unit-of-production method. The reserve base used to calculate depreciation, depletion, and amortization for leasehold acquisition costs is the sum of proved developed reserves and proved undeveloped reserves. With respect to lease and well equipment costs, which include development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. Estimated future dismantlement, restoration, and abandonment costs, net of salvage values are taken into account.
Unit-of-production rates are revised whenever there is an indication of a need, but at least annually. When circumstances indicate that an asset may be impaired, the Company compares expected undiscounted future cash flows at a producing field level to the net book value of the asset. If the future undiscounted cash flows, based on the Company’s estimate of future natural gas and crude oil prices, operating costs, anticipated production from proved reserves, and other relevant data, are lower than the net book value, the capitalized cost is reduced to fair value. Fair value is calculated by discounting the future cash flows at an appropriate risk-adjusted discount rate.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to the differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted change.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Management periodically assesses, by tax jurisdiction, the probability of recovery of recorded deferred tax assets based on its assessment of future earnings estimates. The Company considers estimates of future production, commodity prices and expenditures, and future taxable income in determining the need for a valuation allowance. Such estimates are inherently imprecise since many assumptions utilized in the assessments are subject to revision in the future. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. In the event we were to determine that it is more likely than not that we will be unable to realize all or part of our deferred tax assets in the future, we would increase the valuation allowance and recognize a corresponding charge to earnings and comprehensive income in the period in which we make such a determination. Likewise, if we later determine that we are more likely than not to realize the deferred tax assets, we would reverse the applicable portion of the previously recognized valuation allowance. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.
The Company is required to make judgments, including estimating reserves for potential adverse outcomes regarding tax positions that the Company has taken. The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. Determining the income tax expense for potential assessments and recording the related effects requires management judgments and estimates. The amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and, therefore, could have a material impact on our tax provision, net income and cash flows.
Stock-based Compensation
Stock-based compensation cost is measured at the date of grant, based on the fair value of the award, and is recognized as expense, generally on a straight line basis over the vesting period of the award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Awards subject to vesting requirements for non-employees are fair valued each reporting period, final fair value being determined at the vesting date.
Our policy is to issue new shares for the exercise of stock options, when restricted stock awards are granted, and at vesting of restricted stock units. Stock grants are approved by the Compensation Committee. To date, both restricted stock awards and restricted stock options have been granted under the ZaZa Energy Corporation 2012 Long Term Incentive Plan (the “Plan”). Unless otherwise provided in the award agreement, each restricted stock award and restricted stock option granted under the Plan shall vest such that one-third of the original number of shares of common stock granted shall vest as of each anniversary of the date of grant. Stock awards granted as Short term Incentive awards can vest anywhere between immediately and one year. The maximum term of any award is three years.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Registered Public Accounting Firms and Consolidated Financial Statements are set forth beginning on page of this Annual Report on Form 10-K and are included herein.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our President and Chief Executive Officer and our Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this Form 10-K, that our disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act, are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that our disclosure controls and procedures are effective to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The management of ZaZa is responsible for establishing and maintaining adequate internal control over financial reporting. ZaZa’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ZaZa’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment management has concluded that, as of December 31, 2014, the Company’s internal control over financial reporting is effective at a reasonable assurance level based on those criteria.
During the three month period ended December 31, 2014, there has been no change to our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect these controls.
This annual report does not include an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for emerging growth companies.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our board of directors is elected at each of our annual meetings by a plurality of the votes present in person or represented by proxy. Each director is elected to hold office for a one year term and thereafter until his successor has been elected and qualified, or until his earlier death, resignation or removal.
Pursuant to the stockholders’ agreement (the “Stockholders’ Agreement”) entered into as part of the Combination on February 21, 2012 and our amended and restated bylaws, our board of directors consisted of nine members, and the three former members of ZaZa LLC (the “ZaZa LLC Members”) were entitled to designate a proportional number of directors to the board of directors (but not more than seven) based upon the ZaZa LLC Members’ (and their permitted transferees’) percentage ownership of ZaZa. The ZaZa LLC Members also agreed to vote their common shares to uphold the provisions of the Stockholders’ Agreement. These nominating and voting requirements ceased on February 21, 2015 in accordance with the Stockholders’ Agreement. There are currently three vacancies on the board of directors.
Directors
The following information summarizes, for each of our directors, his or her principal occupations and other public company directorships for at least the last five years and information regarding the specific experiences, qualifications, attributes and skills of such director:
Todd A. Brooks, age 40. Mr. Brooks has led the Company and its predecessors for five years, serving as the Company’s President & Chief Executive Officer (from July 2012), Executive Director (from February 2012) and Managing Partner of ZaZa LLC (from March 2009 to February 2012). He co-founded ZaZa LLC with personal capital contributions in 2009 and originated its first-mover strategy of identifying new unconventional shale trends. This strategy has resulted in ZaZa LLC and the Company entering into shale joint ventures with several of the largest exploration and production companies in the United States. Mr. Brooks also is the principal of Neuhaus Brooks Investments, LLC, a company focused on making energy investments in multiple geographic regions.
Mr. Brooks graduated from Vanderbilt University in 1997 with a degree in Economics. Immediately thereafter, he earned a Doctor of Jurisprudence from South Texas College of Law in 2000. From 2000 to 2003, Mr. Brooks worked as a Production Analyst for L.J. Melody and Co., a Houston-based investment bank. Prior to founding ZaZa LLC, Mr. Brooks worked in the field as a land man for OGM Land from 2004 until 2006, where he delivered title work and negotiated oil & gas leases on behalf of OGM’s clients in East Texas, Arkansas, and the Gulf Coast. In 2006, Mr. Brooks became trustee for his family’s mineral trusts. Mr. Brooks brings to the board and executive team his experience of leading the Company through multiple shale JVs over the last five years and the capability to originate new ventures through an early mover strategy informed by his experience in shale play evaluations, lease acquisitions, and capital markets.
Travis H. Burris, age 53. Mr. Burris has served as a director of ZaZa since the Combination. From April 2008 to the present, Mr. Burris has been a director of Forbes Energy Services, an oilfield services company, where he has served as a member of the Audit Committee and as the Chairman of the Compensation Committee of the board of directors. Mr. Burris also serves as the Chairman of the Board for several private companies, including: Agrow Credit Corporation, Inc., where he has been a director since 1995; Cash Box Pawn, Inc., where he has been a director since 2000; Producers Ag Finance, where he has been a director since 2001; and Resonant Finance, where he has been a director since 2007. Mr. Burris’ past service on boards of director includes service as the Chairman of the Board of Falfurrias State Bank from 2001 to 2010, as a director of Mesquite Helicopter Service, Inc. from 1994 to 2008, as a director of Mesquite Aviation from 1998 to 2008, as a director of Resonant Technology since 2006, and, from 1990 to 2007, as the founder and Chairman of the Board of Alice Loan Company, a real estate development company. In addition, as a serial entrepreneur, Mr. Burris has been President, Chief Executive Officer and a director of Texas Champion Bank since 1987, Founder, and President of G. and G. Loan Company since 1991, and has significant ownership stakes in various ranching and real estate investment businesses. Mr. Burris received a Bachelor of Business Administration degree in Finance from Texas A&M University in 1983. Mr. Burris’ experience as a director at numerous businesses including those in the oilfield services and banking industries provides him with valuable expertise as a director of ZaZa. Mr. Burris has been appointed by the board of directors to serve as the chairman of the Audit Committee and as the chairman of the Compensation Committee of our board of directors.
John E. Hearn, Jr., age 56. Mr. Hearn has served as a director of ZaZa since the Combination. From 1984 until 1990, Mr. Hearn was a staff geologist and then a member of the Major Play Exploration Team with Texas Oil & Gas in Corpus Christi. Mr. Hearn founded Lara Energy Inc. in 1991. Mr. Hearn formed ZaZa LLC in 2009 with Messrs. Brooks and Kearby. Mr. Hearn managed ZaZa LLC’s technical team and evaluated drilling during development for ZaZa LLC in the Eagle Ford shale. Mr. Hearn received a Bachelor of Science Degree in Geology in 1980 from the University of Houston. Mr. Hearn brings to the board of directors more than 30 years of technical background and experience in the oil and gas industry.
Gaston L. Kearby, age 53. Mr. Kearby has served as a director of ZaZa since the Combination. Mr. Kearby founded Omega Energy Corp. in 1988 (currently named Omega Energy, LLC) and today serves as its President and Chief Executive Officer. Omega is a privately held, Corpus Christi-based oil and gas company that owns a portfolio of interests in operated and non-operated oil and gas properties in Texas and adjoining states. Mr. Kearby began his career in the oil and gas industry in 1984, buying and selling drilling pipe to oil well operators in south Texas. Over time, his business expanded to include capping, salvaging and reselling drilling pipe reclaimed from unproductive wells, as well as purchasing and operating existing wells. In 2009, Mr. Kearby founded ZaZa with Messrs. Brooks and Hearn to pursue opportunities in the emerging Eagle Ford shale and elsewhere. While Mr. Kearby’s experience has been primarily focused in oil and gas operations in south Texas, his experience includes overseeing production operations spanning a large part of North America. Mr. Kearby’s depth of experience in evaluating, acquiring, enhancing and operating existing production wells is valuable to the board of directors of ZaZa.
A. Haag Sherman, age 49. Mr. Sherman has served as a director of ZaZa since his appointment on December 7, 2012. Mr. Sherman has served as Chief Executive Officer and Chief Investment Officer of Tectonic Advisors LLC, a registered investment advisor, and affiliates since February 2015. In addition, Mr. Sherman is a private investor and co-owner of an energy services company and serves on the boards of directors of the following public companies: Hilltop Holdings, Inc. (NYSE:HTH) and Miller Energy Resources, Inc. (NYSE: MILL). Prior thereto, Mr. Sherman co-founded and served in various executive positions (including Chief Executive Officer and Chief Investment Officer) of Salient Partners, L.P., a Houston based investment firm. In addition, he previously served as an executive officer and partner of The Redstone Companies where he, among other things, managed a private equity portfolio. Mr. Sherman is a cum laude graduate of Baylor University and is an honors graduate of the University of Texas School of Law, where he currently serves as an adjunct professor of law. Mr. Sherman previously practiced corporate law at Akin, Gump, Strauss, Hauer & Feld, LLP and was an auditor at Price Waterhouse, a public accounting firm. Mr. Sherman is an attorney and certified public accountant, in each case licensed in the State of Texas.
Herbert C. Williamson, III, age 66. Mr. Williamson has served as a director of ZaZa since the Combination and previously served as a director of Toreador from January 2006 until the Combination. He is a private investor and has significant oil and gas experience with a strong focus on international activities. From July 2001 to June 2002, he was a part-time consultant to Petrie Parkman and Company for new business development. From April 1999 through July 2001 he was a Director and Interim Chief Financial Officer of Merlon Petroleum Company. From October 1998 through April 1999 he was a Director and Chief Financial Officer of Seven Seas Petroleum. From 1995 through 1998 he was a Director in the Energy Group of Credit Suisse. From 1985 until 1995, he was Vice Chairman and Executive Vice President at Parker & Parsley Petroleum Company. Mr. Williamson was awarded an MBA degree from Harvard Business School in 1977 and a BA degree from Ohio Wesleyan University in 1970. He also serves as a director of Merlon International, a private oil and gas exploration company with primary operations in onshore Egypt, and as a director of Eagle Rock Energy Partners, LLC, a domestic U.S. midstream and upstream oil and gas company. Mr. Williamson brings to the Board of Directors extensive industry experience as an executive and a consultant with a focus on finance, investment banking and general management. Mr. Williamson has been elected as non-executive chairman of our board of directors and appointed by the board of directors to serve as the chairman of the Nominating and Corporate Governance Committee and as a member of the Audit Committee of our board of directors.
CORPORATE GOVERNANCE
Management of ZaZa Energy Corporation
Our directors and officers manage our operations and activities. Other than through their ability to elect our directors as described below, stockholders will not be entitled to directly or indirectly participate in our management or operation.
Our amended and restated bylaws currently provide for a board of directors containing nine members. We currently have three vacancies on our board of directors. The board of directors believes that its current composition puts the Company in a position to achieve its goals and does not currently intend to seek to fill these vacancies.
We do not have a staggered board. Our stockholders are entitled to annually elect all of our directors. Directors hold office until the earlier of their death, resignation, removal or disqualification or until their successors have been elected and qualified.
Meetings of the Board of Directors
During the fiscal year ended December 31, 2014, our board of directors held 28 meetings. Each of our directors attended at least 75% of the total number of meetings of the board of directors and the total number of meetings held by all committees of the Board on which such member served. It is the policy of our board of directors to encourage directors to attend each meeting of stockholders.
Director Independence
Our board of directors has an Audit Committee of three directors who meet the independence and experience standards established by the NASDAQ Capital Market, or NASDAQ, and the Securities Exchange Act of 1934, as amended, or Exchange Act. The Audit Committee Charter sets forth the responsibilities of the Audit Committee, which include: (i) selecting, evaluating and reviewing the independence of and approving services provided by our independent registered public accounting firm, (ii) reviewing the conduct of the audit, (iii) resolving disagreements between our management and our independent registered public accounting firm, (iv) reviewing critical accounting policies and practices and any proposed changes thereto, (v) reviewing annual reports on Form 10-K and quarterly reports on Form 10-Q prior to filing, and overseeing ZaZa’s procedures with respect to press releases containing information regarding financial performance, (vi) overseeing ZaZa’s internal audit function, (vii) reviewing and assessing the adequacy of ZaZa’s internal control systems, (viii) reviewing and approving (if appropriate) related-party transactions, and (ix) preparing the annual Audit Committee Report.
Three members of our board of directors serve on the Nominating and Corporate Governance Committee. The functions of the Nominating and Corporate Governance Committee include: (i) identifying and assessing persons qualified to become members of the board of directors; (ii) recommending to the board of directors a slate of director nominees for election or reelection at the annual meeting of stockholders, subject to the provisions of our stockholders’ agreement; (iii) recommending to the board of directors persons to fill board of directors and committee vacancies; and (iv) developing and recommending to the board of directors a set of corporate governance principles and making other recommendations to the board of directors relative to corporate governance issues.
Three members of our board of directors serve on the Compensation Committee. The purpose of the Compensation Committee is to assist the board of directors in discharging its responsibilities relating to executive compensation. Pursuant to its charter, the specific functions of the Compensation Committee include: (i) overseeing the compensation of our executive officers; and (ii) overseeing the administration of our compensation and benefit plans with respect to all eligible participants, including stock incentive plans and predecessor and related plans, pension, retirement and profit sharing plans, and any other plans that require or provide for approval or administration by the board of directors.
The board annually reviews all relevant business relationships any director may have with the Company and the independence standards established by the NASDAQ. As a result of its annual review and nomination process, the board has determined that none of Messrs. Burris, Sherman and Williamson has a material relationship with the Company and, as a result, such directors are determined to be independent.
Independent members of the board of directors serve as the members of the Audit (Messrs. Burris (chairman), Sherman and Williamson), Compensation (Messrs. Burris (chairman), Sherman and Williamson) and Nominating and Corporate Governance (Messrs. Williamson (chairman), Sherman and Burris) Committees.
The Audit Committee met five times, the Compensation Committee met five times, and the Nominating and Corporate Governance Committee met four times during 2014.
Leadership Structure of the Board
The functions performed by the chief executive officer and chairman of the board are currently performed by separate individuals. Todd A. Brooks, chief executive officer, is responsible for the development of the long-term strategies of the Company for board consideration and approval; for the implementation of such strategies; and for all aspects of managing our operations and profitability. Mr. Williamson, chairman of the board, focuses his attention on board and committee matters, including setting the board’s agenda with Mr. Brooks, and is the principal liaison between the independent directors and Mr. Brooks.
As prescribed by our amended and restated bylaws, the chairman of the board of directors has the power to preside at all meetings of the board. Mr. Williamson serves as Chairman of our board.
The Nominating and Corporate Governance Committee believes that Mr. Williamson’s extensive industry experience as an executive and consultant with a focus on finance, investment banking and general management makes him the appropriate leader of the board.
Risk Oversight
While it is the job of management to assess and manage our risk on a day-by-day basis, the board and its Audit Committee (each where applicable) discuss the guidelines and policies that govern the process by which risk assessment and management is undertaken and evaluate reports from various functions with the management team on risk assessment and management. The board interfaces regularly with management and receives periodic reports that include updates on operational, financial, legal and risk management matters. The Audit Committee assists the board in oversight of the integrity of our financial statements and our
compliance with legal and regulatory requirements including those related to the health, safety and environmental performance of the Company. The Audit Committee also reviews and assesses the performance of our internal audit function and our independent auditors. The board receives regular reports from the Audit Committee. We do not believe that the board’s role in risk oversight has an effect on the board’s leadership structure.
Evaluation of Compensation Risk
Our Compensation Committee has reviewed our employee compensation programs and overall compensation structure and internal controls. There are several design features of our compensation policy that reduce the likelihood of excessive risk-taking:
· our compensation policy is designed to provide a balanced mix of cash and equity and short and long-term incentives;
· the potential payouts pursuant to our annual equity incentives are subject to reasonably set maximum limits;
· internal controls are in place to assure that payments and awards are consistent with actions approved by the Compensation Committee.
Taking into consideration the factors above, the Compensation Committee does not believe that there is a reasonable likelihood that the Company’s compensation policy could have a material adverse effect on the Company.
Audit Committee
The Audit Committee is currently composed of Messrs. Burris (Chairman), Sherman and Williamson. The board has determined that each of Messrs. Burris, Sherman and Williamson is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. Please see the biographies for Messrs. Burris and Williamson in this Proxy Statement for information on their experience and education which qualifies them as “audit committee financial experts.”
A copy of the Audit Committee Charter is available on our website at www.zazaenergy.com.
The purpose of the Audit Committee is to (i) oversee our accounting and financial reporting processes, (ii) oversee the audit of our financial statements, (iii) review our compliance with legal and regulatory requirements, (iv) review our independent auditor’s qualifications and independence, and (v) review the performance of our independent auditors.
Compensation Committee
The Compensation Committee is currently composed of Messrs. Burris (Chairman), Sherman and Williamson.
A copy of the Compensation Committee Charter is available on our website at www.zazaenergy.com.
The purpose of the Compensation Committee is to assist the board of directors in discharging its responsibilities relating to executive compensation. Pursuant to its charter, the specific functions of the Compensation Committee include: (i) overseeing the compensation of our executive officers; and (ii) overseeing the administration of our compensation and benefit plans with respect to all eligible participants, including stock incentive plans and predecessor and related plans, pension, retirement and profit sharing plans, and any other plans that require or provide for approval or administration by the board of directors.
Nominating and Corporate Governance Committee
Membership
The Nominating and Corporate Governance Committee is currently composed of Messrs. Burris, Sherman and Williamson (Chairman).
A copy of the Nominating and Corporate Governance Committee Charter is available on our website at www.zazaenergy.com.
The functions of the Nominating and Corporate Governance Committee include: (i) identifying and assessing persons qualified to become members of the board of directors; (ii) recommending to the board of directors a slate of director nominees for election or reelection at the annual meeting of stockholders, subject to the provisions of our stockholders’ agreement; (iii) recommending to the board of directors persons to fill board of directors and committee vacancies; and (iv) developing and recommending to the board of directors a set of corporate governance principles and making other recommendations to the board of directors relative to corporate governance issues.
Code of Conduct
Our code of ethics, entitled the ZaZa Energy Corporation Code of Conduct (the “Code of Conduct”), applies to all of our directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer. The Code of Conduct is publicly available on our website at www.zazaenergy.com. If we make any amendment to our Code of Conduct, other than a technical, administrative or non-substantive amendment, or if we grant any waiver, including any implicit waiver, from a provision of the Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, we will disclose the nature of the amendment or waiver on our website at the same location. Also, we may elect to disclose the amendment or waiver in a current report on Form 8-K filed with the SEC.
MANAGEMENT
Executive Officers
The following table shows information for our current executive officers.
Todd A. Brooks, age 40. Mr. Brooks has led the Company and its predecessors for five years, serving as the Company’s President & Chief Executive Officer (from July 2012), Executive Director (from February 2012) and Managing Partner of ZaZa LLC (from March 2009 to February 2012). He co-founded ZaZa LLC with personal capital contributions in 2009 and originated its first-mover strategy of identifying new unconventional shale trends. This strategy has resulted in ZaZa LLC and the Company entering into shale joint ventures with several of the largest exploration and production companies in the United States. Mr. Brooks also is the principal of Neuhaus Brooks Investments, LLC, a company focused on making energy investments in multiple geographic regions.
Mr. Brooks graduated from Vanderbilt University in 1997 with a degree in Economics. Immediately thereafter, he earned a Doctor of Jurisprudence from South Texas College of Law in 2000. From 2000 to 2003, Mr. Brooks worked as a Production Analyst for L.J. Melody and Co., a Houston-based investment bank. Prior to founding ZaZa LLC, Mr. Brooks worked in the field as a land man for OGM Land from 2004 until 2006, where he delivered title work and negotiated oil & gas leases on behalf of OGM’s clients in East Texas, Arkansas, and the Gulf Coast. In 2006, Mr. Brooks became trustee for his family’s mineral trusts. Mr. Brooks brings to the board and executive team his experience of leading the Company through multiple shale JVs over the last five years and the capability to originate new ventures through an early mover strategy informed by his experience in shale play evaluations, lease acquisitions, and capital markets.
S. Scott Gaille, age 45. Mr. Gaille is the Chief Compliance Officer, General Counsel & Corporate Secretary for ZaZa Energy Corporation. He has served as the Chief Compliance Officer of ZaZa since March of 2012. In that capacity, he is the chief legal officer of the corporation and is responsible for the Company’s legal matters. Mr. Gaille also is Adjunct Professor of Management at Rice University’s Graduate School of Business and Lecturer in Law at the University of Chicago Law School.
Mr. Gaille founded his family office, The Gaille Group, in 2007 and serves as a director and/or executive with several of its investments and ventures. Mr. Gaille was Co-Founder, Managing Director & General Counsel of Sequent Asset Management, LLC (from July 2008 to December 2012) and a principal of Sequent Petroleum Management, LLC (from February 2011 to August 2012). He served as President of Brenham Oil & Gas Corp. (OTC:BRHM) from February 2010 to September 2012 (and also of its holding company, American International Industries, from June 2011 to September 2012). With ZaZa’s consent, he continues to serve as a Director of Brenham. From August 2007 to December 2010, Mr. Gaille was President of West & East Africa Development, LLC, a company that acquired and divested oil and gas exploration concessions in Africa.
Prior to starting his family office in 2007, Mr. Gaille was Director-Business Development for Occidental Oil & Gas Corporation, having held a series of legal and business development positions of increasing responsibility during his tenure at Oxy. Previously, Mr. Gaille practiced law in the Energy Section of Vinson & Elkins LLP and as a Judicial Clerk to the Honorable J. Harvie Wilkinson, III, Chief Judge of the United States Court of Appeals for the Fourth Circuit. He holds a Doctor of Law with High Honors from the University of Chicago and a Bachelor of Arts degree in Government with High Honors from the University of Texas at Austin, where he was elected to Phi Beta Kappa.
Paul F. Jansen, age 36. Mr. Jansen joined the Company on March 27, 2013 and currently serves as the Company’s Chief Financial Officer. Mr. Jansen leads the financial, accounting, planning, treasury, tax, investor relations, marketing and information technology functions. Prior to joining the Company, Mr. Jansen served as Controller and Chief Accounting Officer for Crimson
Exploration Inc. between January 2012 and March 2013. Mr. Jansen was with PricewaterhouseCoopers LLP serving clients in the oil and gas industry in the United States and Europe from 2002 to 2012, most recently as a Senior Manager.
Mr. Jansen is a contributing editor to the 7th Edition of the “Petroleum Accounting: Principles, Procedures & Issues” text book and co-publisher of “A note on transition stock return behavior” (Applied Economics Letters 2004).
Mr. Jansen received a Master of Science degree in Economics from Maastricht University in Maastricht, the Netherlands, and is a Certified Public Accountant in the State of Texas and the equivalent of a Certified Public Accountant in the Netherlands.
Employment Agreements
Todd A. Brooks
On September 11, 2012, the Company entered into an employment agreement with Mr. Brooks. On June 24, 2014, the Company and Mr. Brooks entered into an amendment to his employment agreement. Under his employment agreement, as amended, Mr. Brooks receives an annual salary of $1.00 until June 2, 2016 at which point it will revert to $525,000 (the “2016 Base Salary”). Mr. Brooks also receives reimbursement of business expenses, health benefits, eligibility to participate in retirement plans, and certain benefits available to other senior executives of the Company, including paid time off and coverage under the Company’s D&O insurance policy. Mr. Brooks is also entitled to receive an annual short term incentive payment based upon the accomplishment of certain achievement goals determined annually and a long term incentive payment based upon the accomplishment of certain achievement goals for each fiscal year. Criteria for Mr. Brooks’ short-term incentive payments and long-term incentive payments are further described under the section titled “Executive Compensation.”
Under Mr. Brooks’ employment agreement, as amended, upon the occurrence of a “Change of Control,” the Company shall pay to Mr. Brooks an amount in cash equal to three times his target short-term incentive award and any unvested long-term incentive option award will become immediately vested, and a long-term incentive bonus will be paid, using the share price as of the Change of Control for calculation purposes. If Mr. Brooks is terminated within one year of a “Change of Control” (i) without “Cause,” (ii) in connection with the expiration of his employment agreement, or if Mr. Brooks terminates his employment agreement with or without Good Reason, Mr. Brooks shall be entitled to the benefits described in the preceding sentence plus (a) his “Accrued Obligations,” which consist of any unpaid base salary, unpaid expenses, and certain other benefits, (b) a lump-sum equal to two times his 2016 Base Salary, (c) a long-term incentive award the target level for any year(s) for which an LTI Award has not yet been determined and awarded, including a pro-rated LTI Award for such partial year at the target level and (d) the continuation of health benefits for Mr. Brooks and his family during the severance term.
If Mr. Brooks’ employment is terminated due to his death or disability, Mr. Brooks or his estate or beneficiaries shall be entitled to receive: (i) the Accrued Obligations, (ii) the payment in cash of any unpaid target short-term incentive award, including the pro-rated portion of any target short-term incentive award for the portion of the year he worked for the Company prior to his termination, (iii) immediate vesting of any unvested long-term incentive option award and in exchange for such options, a cash payment by the Company equal to the greater of (A) the dollar value of the unexercised options on the date of termination using the Black-Scholes assumptions set forth in the employment agreement or (B) the dollar value of the number of unexercised options on the date of termination multiplied by the difference between the closing share price of the Common Stock of the Company on NASDAQ on the date of termination and the applicable strike price; (iv) immediate vesting of any unvested long-term incentive plan bonus, the value of which will be determined as of the date of death or disability and will be the greater of the target long-term incentive plan bonus or the value of the long-term incentive plan bonus as calculated by applying the terms, conditions, performance metrics, and multipliers described in the employment agreement as of the date of termination due to death or disability; (v) long-term incentive plan award at target level for any year(s) for which an award has not yet been determined, including a pro-rated long-term incentive plan award for such partial year at target level and that is immediately vested upon issuance and (vi) continuation and/or payment of Mr. Brooks and his dependents’ medical insurance premiums for 18 months following termination.
If Mr. Brooks is terminated by the Company for Cause, he shall be entitled to receive only the Accrued Obligations. Any previously awarded but unvested nonqualified stock options, common shares and cash portion of any long-term incentive bonus as of the date of termination shall be cancelled.
If Mr. Brooks’ employment agreement expires or if he is terminated without Cause, or if Mr. Brooks terminates his employment with “Good Reason,” he shall be entitled to receive: (i) the Accrued Obligations, (ii) the payment of any short-term incentive payment due to Mr. Brooks, including the pro-rated portion of any short term incentive payment due to him during the portion of the year he worked for the Company prior to his termination, (iii) immediate vesting of any unvested long-term incentive option award and in exchange for such options, a payment by the Company equal to the greater of (A) the value of the unexercised options on the date of termination using the Black-Scholes assumptions set forth in the employment agreement or (B) the value of the number of unexercised options on the date of termination multiplied by the difference between the closing share price of the Common Stock of the Company on the date of termination and the applicable strike price; (iv) immediate vesting of any unvested long-term incentive plan bonus, the value of which will be the greater of the target long-term incentive plan bonus or the value of the long-term incentive plan bonus as calculated by applying the terms, conditions, performance metrics, and multipliers described in the
employment agreement as of the date of termination; (v) long-term incentive plan award at target level for any year(s) for which an award has not yet been determined, including a pro-rated long-term incentive plan award for such partial year at target level and that is immediately vested upon issuance; (vi) payment of the 2016 Base Salary and target short-term incentive awards payable in cash in equal installments during the severance term; (vii) continuation and/or payment of Mr. Brooks and his dependents’ medical insurance premiums during the severance term plus any tax gross-up payments that may be required and (viii) up to $20,000 in outplacement expenses for the employee.
If Mr. Brooks terminates his employment without Good Reason, he will be entitled to receive only the Accrued Obligations. Any previously awarded but unvested nonqualified stock options, common shares and cash portion of any long-term incentive bonus as of the date of termination shall be cancelled.
Scott Gaille
On October 3, 2012, the Company entered into an employment agreement with Mr. Gaille and amended the employment agreement on November 8, 2013 and August 12, 2014. Under his employment agreement, as amended, Mr. Gaille receives an annual salary of $360,500 with a 3% annual cost of living adjustment. Mr. Gaille also receives reimbursement of business expenses, health benefits, eligibility to participate in retirement plans, and certain benefits available to other senior executives of the Company, including paid time off and coverage under the Company’s D&O insurance policy. Additionally, the Chief Executive Officer of the Company will have the ability to defer payment of all of Mr. Gaille’s base salary for up to a year during times of fiscal need of the Company at an interest rate of 8%. Mr. Gaille is also entitled to receive an annual short term incentive payment and a long term incentive payment as further described under the section titled “Executive Compensation.”
Under Mr. Gaille’s employment agreement, as amended, upon the occurrence of a “Change of Control,” the Company shall pay to Mr. Gaille an amount in cash equal to three times his target short-term incentive award and immediately vest any unvested long-term incentive award. If Mr. Gaille is terminated within one year of a “Change of Control” (i) without “Cause,” (ii) in connection with the expiration of his employment agreement, or if Mr. Gaille terminates his employment agreement with or without Good Reason, Mr. Gaille shall be entitled to the benefits described in the preceding sentence plus (i) his “Accrued Obligations,” which consist of any unpaid base salary, unpaid expenses, and certain other benefits, (ii) a lump-sum equal to two times his base salary, (iii) a long-term incentive award the target level for any year(s) for which an LTI Award has not yet been determined and awarded, including a pro-rated LTI Award for such partial year at the target level and (iv) continuation or payment of Mr. Gaille and his dependents’ medical insurance premiums during the 24-month severance term.
If Mr. Gaille’s employment is terminated due to his death or disability, Mr. Gaille or his estate or beneficiaries shall be entitled to receive: (i) the Accrued Obligations, (ii) the payment, in cash or shares of common stock, of any short term incentive payment due to Mr. Gaille, including the pro-rated portion of any short term incentive payment due to him during the portion of the year he worked for the Company prior to his termination, (iii) immediate vesting of any unvested long-term incentive award; (iv) long-term incentive plan award at target level for any year(s) for which an award has not yet been determined, including a pro-rated long-term incentive plan award for such partial year at target level and that is immediately vested upon issuance and (vi) continuation and/or payment of Mr. Gaille and his dependents’ medical insurance premiums for 18 months following termination.
If Mr. Gaille is terminated by the Company for “Cause,” he shall be entitled to receive only the Accrued Obligations. Any previously awarded but unvested nonqualified stock options and common shares as of the date of termination shall be cancelled.
If Mr. Gaille’s employment agreement expires or if he is terminated without Cause, or if Mr. Gaille terminates his employment with “Good Reason,” he shall be entitled to receive: (i) the Accrued Obligations; (ii) the payment (in cash or common shares) of any unpaid target short-term incentive award, including the pro-rated portion of any target short-term incentive award for the portion of the year he worked for the Company prior to his termination; (iii) immediate vesting of any unvested long-term incentive award; (iv) long-term incentive plan award at target level for any year(s) for which an award has not yet been determined and awarded, including a pro-rated long-term incentive plan award for such partial year at target level and that is immediately vested upon issuance; (v) payment of the base salary and target short-term incentive awards payable in cash or common shares in equal installments during the 24-month severance term; (vii) continuation or payment of Mr. Gaille and his dependents’ medical insurance premiums during the 24-month severance term plus any tax gross-up payments that may be required and (viii) up to $20,000 in outplacement expenses for the employee.
If Mr. Gaille terminates his employment without Good Reason, he will be entitled to receive only the Accrued Obligations. Any previously awarded but unvested nonqualified stock options and common shares as of the date of termination shall be cancelled.
Paul F. Jansen
On March 13, 2013, the Company entered into an employment agreement with Mr. Jansen and amended the employment agreement on August 12, 2014. Under his employment agreement, Mr. Jansen receives an annual salary of $365,000 and reimbursement of business expenses, health benefits, eligibility to participate in retirement plans, and certain benefits available to other senior executives of the Company, including paid time off and coverage under the Company’s D&O insurance policy.
Mr. Jansen is also entitled to receive an annual short term incentive payment and a long term incentive payment as further described under the section titled “Executive Compensation.”
Under Mr. Jansen’s employment agreement, as amended, upon the occurrence of a “Change of Control,” the Company shall pay to Mr. Jansen an amount in cash equal to three times his target short-term incentive award and immediately vest any unvested long-term incentive award. If Mr. Jansen is terminated within one year of a “Change of Control” (i) without “Cause,” or (ii) or if Mr. Jansen terminates his employment agreement with or without Good Reason, Mr. Jansen shall be entitled to the benefits described in the preceding sentence plus (a) his “Accrued Obligations,” which consist of any unpaid base salary, unpaid expenses, and certain other benefits, (b) a lump-sum equal to two times his base salary, (b) a long-term incentive award the target level for any year(s) for which an LTI Award has not yet been determined and awarded, including a pro-rated LTI Award for such partial year at the target level and (c) continuation or payment of Mr. Jansen and his dependents’ medical insurance premiums during the 24-month severance term.
If Mr. Jansen’s employment is terminated due to his death or disability, Mr. Jansen or his estate or beneficiaries shall be entitled to receive: (i) the Accrued Obligations, (ii) the payment of any short term incentive payment due to Mr. Jansen, including the pro-rated portion of any short term incentive payment due to him during the portion of the year he worked for the Company prior to his termination, (iii) immediate vesting of any unvested long-term incentive award; (iv) long-term incentive plan award at target level for any year(s) for which an award has not yet been determined, including a pro-rated long-term incentive plan award for such partial year at target level and that is immediately vested upon issuance and (vi) continuation and/or payment of Mr. Jansen and his dependents’ medical insurance premiums for 18 months following termination.
If Mr. Jansen is terminated by the Company for “Cause,” he shall be entitled to receive only the Accrued Obligations. Any previously awarded but unvested common shares as of the date of termination shall be cancelled.
If Mr. Jansen is terminated without Cause, or if Mr. Jansen terminates his employment with “Good Reason,” he shall be entitled to receive: (i) the Accrued Obligations; (ii) the payment (in cash or common shares) of any unpaid target short-term incentive award, including the pro-rated portion of any target short-term incentive award for the portion of the year he worked for the Company prior to his termination; (iii) immediate vesting of any unvested long-term incentive award; (iv) long-term incentive plan award at target level for any year(s) for which an award has not yet been determined and awarded, including a pro-rated long-term incentive plan award for such partial year at target level and that is immediately vested upon issuance; (v) payment of the base salary and target short-term incentive awards payable in cash or common shares in equal installments during the 24-month severance term; (vii) continuation or payment of Mr. Jansen and his dependents’ medical insurance premiums during the 24-month severance term plus any tax gross-up payment that may be required and (viii) up to $20,000 in outplacement expenses for the employee.
If Mr. Jansen terminates his employment without Good Reason, he will be entitled to receive only the Accrued Obligations. Any previously awarded but unvested common shares as of the date of termination shall be cancelled.
Severance and Change in Control Arrangements
As described above, the employment agreements provide certain benefits and compensation to our NEOs in the event of certain terminations from employment, including in connection with a change in control. These benefits are described in greater detail above.
On December 18, 2014, Kevin Schepel notified the Company of his decision to resign as the Chief Geoscience and Technology Officer of the Company in order to pursue an opportunity with one of EnCap Investments’ portfolio companies. Mr. Schepel continued to perform his duties as Chief Geoscience and Technology Officer of the Company until January 27, 2015. Until the date of his termination of employment, Mr. Schepel had an effective employment agreement with the Company that was entered into on April 22, 2013 and amended on August 14, 2014. Under Mr. Schepel’s employment agreement, as amended, he was not entitled to receive, and did not receive, any termination or severance benefits because he terminated his employment without “Good Reason.” Mr. Schepel only received his unpaid base salary, unpaid expenses, and certain other accrued benefits through February 6, 2015. Because of his voluntary termination of employment, Mr. Schepel will not be eligible to receive any STI Award or LTI Award.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the directors, executive officers and persons who own more than 10% of our common stock (collectively “Section 16 Persons”) to file initial reports of ownership (Forms 3) and reports of changes in ownership of common stock (Forms 4 and Forms 5) with the SEC as well as provide copies of the reports to the Company. To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and representations from each Section 16 Person, except as disclosed below, during the fiscal year ended December 31, 2014, all Section 16(a) filing requirements applicable to its Section 16 Persons were met.
Scott Gaille failed to timely file one Statement of Changes in Beneficial Ownership on Form 4. Mr. Gaille filed the Form 4 on January 22, 2014.
Kevin J. Schepel failed to timely file one Statement of Changes in Beneficial Ownership on Form 4. Mr. Schepel filed the Form 4 on August 18, 2014.
Paul F. Jansen failed to timely file one Statement of Changes in Beneficial Ownership on Form 4. Mr. Jansen filed the Form 4 on February 17, 2015.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Executive Compensation
The following table summarizes the compensation of the named executive officers for the year ending December 31, 2014. The named executive officers are the Company’s chief executive officer and two other most highly compensated officers in the table below:
Summary Compensation Table
(1) For a discussion of assumptions made in the valuation of stock awards, please read “Note 4-Summary of Significant Accounting Policies-Stock-Based Compensation” to our Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.
(2) Includes auto reimbursement $15,000, 401(k) employer matching contribution $15,300, and insurance premiums $26,869.
(3) Includes auto reimbursement $13,750, 401(k) employer matching contribution $15,300, infant care reimbursement $56,955, pay-out of unused vacation $93,263 and insurance premiums $24,279.
(4) Includes auto reimbursement $15,000, insurance premiums $26,869, and 401(k) employer matching contribution $15,600.
(5) Includes a portion of Mr. Gaille’s STI Award, which was paid in an award of common shares.
(6) Includes auto reimbursement $15,000, child care reimbursement $5,350, pay-out of unused vacation $43,666, insurance premiums $18,484, and 401(k) employer matching contribution $15,300.
(7) Includes housing reimbursement $13,584, auto reimbursement $2,400, insurance premiums $26,869, and 401(k) employer matching contribution $15,600.
(8) Includes auto reimbursement $2,400, insurance premiums $24,921, and 401(k) employer matching contribution $15,300.
Annual Short-Term Incentive Awards
We have historically utilized, and expect to continue to utilize, performance-based annual cash incentive awards (“STI Awards”) to reward achievement of specified performance goals for the company as a whole with a time horizon of one year or less. We include an annual performance-based cash incentive award as part of our compensation program because we believe this element of compensation helps to:
· Motivate key employees to achieve key short-term corporate performance objectives, and
· Align the executives’ interests with our stockholders’ interests.
2014 Short-Term Incentive Metrics
The funding levels for 2014 STI Awards are calculated as a percentage of the individual officer’s base salary. Funding levels for Messrs. Brooks, Jansen and Gaille were targeted as set forth below:
(1) Mr. Brook’s annual base salary for 2014 was reduced to $1 effective September 11, 2012, but his STI Award is based upon a base salary of $525,000.
Mr. Gaille’s STI Award will be earned based upon an annual performance rating by the Company’s Chief Executive Officer. The STI Award for Messrs. Brooks and Jansen are determined by the following performance metrics:
· the Company must maintain, or maintain access to, a $5 million minimum cash balance as of the last day of the fiscal year; and
· the Company’s production or reserves must grow over the preceding year by the following amounts to obtain the threshold, target or maximum STI, as appropriate:
Any STI Awards to Mr. Brooks are only paid in shares common stock of the Company. STI Awards to Messrs. Gaille and Jansen may be paid in cash or shares of common stock of the Company, at the election of the Company.
Messrs. Brooks, Jansen and Gaille received their $1,334,813, $412,450 and $561,973 awards as a result of their performance for 2014. STI Award performance metrics are the same for 2015 as they were in 2014.
Long-Term Equity-Based Incentives
We believe a formal long-term equity incentive program is important and consistent with the compensation programs of the companies in our peer group. We maintain a Long-Term Incentive Plan, or “LTIP”, which permits the grant of our stock, options, restricted stock, restricted stock units, phantom stock, stock appreciation rights and other awards, any of which may be designated as performance awards or be made subject to other conditions, to our NEOs and all other eligible employees. We believe that long-term equity-based incentive compensation is an important component of our overall compensation program because it:
· Balances short and long-term objectives;
· Aligns the executives’ interests with the long-term interests of our stockholders;
· Rewards long-term performance relative to industry peers;
· Makes our compensation program market competitive from a total remuneration standpoint within the industry;
· Encourages executive retention; and
· Gives executives the opportunity to share in our long-term value creation.
Our Compensation Committee has the authority under the LTIP to award incentive equity compensation to our executive officers in such amounts and on such terms as the committee determines appropriate. Our Compensation has approved the following arrangements for Messrs. Brooks, Jansen and Gaille.
Mr. Brooks’ long-term incentive award is divided into two components. The first component consisted of a $625,000 grant (based on the Black-Scholes value at the grant date) of non-qualified stock options that will potentially vest ratably over a three-year
period. These options were granted on June 12, 2014. The second component consists of a long-term incentive bonus (the “Brooks LTI Bonus”), with the target for the Brooks LTI Bonus set at $1,875,000 and the maximum amount of such bonus being $3,750,000, that will be adjusted based on the performance of the Company’s common stock. The Brooks LTI Bonus for a given year is earned (or lost) over a three-year period depending on the Company’s production or reserves growth during each year of the three-year period. In the first and second years of the three-year period of a given Brooks LTI Bonus, Mr. Brooks would earn the following bonuses for the corresponding production or reserve growth:
In the third year of the three-year period of a given Brooks LTI Bonus, Mr. Brooks would earn the following bonuses for the corresponding production or reserve growth:
In each year that Mr. Brooks is eligible to earn a Brooks LTI Bonus, the amount of the Brooks LTI Bonus based on production or reserve growth will be adjusted by the ratio of the volume weighted average share price of the Company’s common stock (a) on the date the one-third portion of the Brooks LTI Bonus is earned and (b) on the date such bonus was granted. The total Brooks LTI Bonus for a given year will be the sum of the amounts earned over the three-year period covered by the Brooks LTI Bonus. At the discretion of the Compensation Committee, the LTI Bonus, or any portion thereof, will be paid in either cash or common stock.
Messrs. Jansen and Gaille are eligible for awards under the LTIP (“LTI Awards”) based upon equally-weighted performance ratings from the Chief Executive Officer of the Company and the Company’s Compensation Committee. The funding levels for the LTI Award for each of Messrs. Jansen and Gaille are calculated as a percentage of the individual officer’s base salary. Funding levels for Messrs. Jansen and Gaille are set forth below
Performance ratings are based on a scale of A, B, C, D or F with two “C” ratings resulting in the target LTI Award, two “A” ratings resulting in the maximum LTI Award and two “F” ratings resulting in no LTI Award. Performance ratings in between any of the preceding shall result in an LTI Award that is pro-rated accordingly.
No LTI Award has been awarded yet for 2014 performance to Messrs. Jansen and Gaille as the compensation committee has not yet determined such award.
Setting Executive Officer Compensation
Our Compensation Committee makes all compensation decisions related to our NEOs. For each fiscal year, the President and Chief Executive Officer, along with other members of management, together review our NEOs’ current compensation and make a recommendation to our Compensation Committee on overall compensation structure and individual compensation levels for each executive officer, including themselves.
Our Compensation Committee met numerous times during 2014 to review and discuss executive compensation matters with respect to fiscal years 2014 and 2015. Our Compensation Committee generally intends to target the market 50th percentile for base salary within our peer group and to provide our executive officers with an opportunity to earn up to the market 50th percentile for total compensation, subject to target performance metrics being satisfied. Although our Compensation Committee reviews survey and peer group information from time to time as a frame of reference, ultimately the compensation decisions are qualitative, not quantitative, and take into consideration factors such as the age of the data in the survey, the particular officer’s contribution to our financial performance and condition, as well as such officer’s qualifications, skills, experience and responsibilities. Our Compensation
Committee considers outside factors as well, such as industry shortages of qualified employees for such positions, recent experience in the marketplace, and the elapsed time between the surveys used and when compensation decisions are made. In light of these qualitative and other considerations, the base salary of a particular officer may be greater than or less than the market 50th percentile and total direct compensation may be greater than or less than the market 50th percentile and, in any event, the Compensation Committee recognizes that the compensation of certain of our executive officers continues to build to these targeted levels. The Compensation Committee reviews our executive compensation program on an annual basis.
Benchmarking and Peer Group
Prior to approving compensation for the NEOs in 2014, members of our management team met with our Compensation Committee and selected a group of companies that they consider a “peer group” for executive and director compensation analysis purposes. This peer group was then used for purposes of developing the recommendations presented to our Board of Directors for employment agreements with our NEOs and non-employee Director compensation. The oil and gas companies that comprise this peer group were selected for, among other reasons, because they potentially compete with ZaZa for executive level talent.
The 2014 peer group for compensation purposes consists of:
Abraxas Petroleum Corp
Magnum Hunter Resources Corp.
Approach Resources, Inc.
Matador Resources Company
Carrizo Oil & Gas Inc.
Penn Virginia Corporation
Comstock Resources, Inc.
PetroQuest Energy, Inc.
Crimson Exploration, Inc.
Quicksilver Resources Inc.
Forest Oil Corporation
Rosetta Resources, Inc.
Goodrich Petroleum Corporation
Sanchez Energy Corp.
Halcón Resources Corp.
Swift Energy Co.
Management and the Compensation Committee have compiled compensation data for the peer group from a variety of sources. This compensation data was then used to compare the compensation of our NEOs to the market, generally targeting base salaries for our NEOs at the market 75th percentile of our peer group, and targeting annual cash and long-term incentives so that our NEOs will have the opportunity to realize in future years total compensation up to the 75th percentile of our peer group based on company performance. We continue to use this peer group for 2015 but expect to update it from time to time.
Role of the Compensation Consultant
The Compensation Committee’s charter grants the committee the sole authority to retain, at our expense, outside, independent consultants or experts to assist it in its duties. In 2014, the Compensation Committee did not receive advice from a compensation consultant with respect to compensation in 2014. However, in August 2013, as part of cost-cutting measures, management engaged BDO USA LLP (“BDO”) to advise it with respect to possible methods of reducing the cash portion of executive compensation by increasing the equity component of executive compensation. As a result of this review, which continued into 2014, the Compensation Committee entered into an amendment to the employment agreement of Todd A. Brooks, our Chief Executive Officer and President (the “Brooks Amendment”). As a result of the Brooks Amendment, the annual salary of Mr. Brooks was reduced to $1 and the short-term and long-term incentives to Mr. Brooks were increased. For more information on Mr. Brooks’ compensation structure under the Brooks Amendment, see “Management - Employment Agreements - Todd A. Brooks.”
Role of Management in Compensation Process
The Compensation Committee evaluates the performance of Todd A. Brooks, our Chief Executive Officer and President. Mr. Brooks evaluates the performance of our other executive officers and makes recommendations to the Compensation Committee regarding all aspects of their compensation. Scott Gaille, our Chief Compliance Officer, General Counsel and Secretary, and Paul F. Jansen, our Chief Financial Officer, act pursuant to delegated authority to fulfill various administrative functions of the Compensation Committee, such as providing legal, compliance and other updates to the committee and overseeing the documentation of equity awards as approved by the committee. No executive has the authority to establish or modify executive officer compensation.
Outstanding Equity Awards at Fiscal Year-End 2014
The following table shows unvested equity awards outstanding for the named executive officers as of December 31, 2014. Market value is based on the closing market price of ZaZa’s common stock on December 31, 2014 ($2.52 per common share) and all values have been adjusted for the 1-for-10 reverse stock split on August 19, 2014.
(1) On April 16, 2014, Mr. Brooks became vested in 21,213 restricted common shares with respect to his award for the 2012 calendar year. An additional 21,212 restricted common shares will vest on April 16, 2015.
(2) On March 15, 2014, Mr. Brooks became vested in 18,717 restricted common shares with respect to his award for the 2013 calendar year. An additional 17,647 restricted common shares will vest on March 15, 2015.
(3) On May 28, 2014, Mr. Brooks was granted 377,250 restricted common shares under the Long-Term Incentive Plan. 125,750 of the restricted common shares will vest on May 28, 2015, 125,750 shares will vest on May 28, 2016 and 125,750 shares will vest on May 28, 2017.
(4) On June 12, 2014, Mr. Brooks was awarded options to purchase 316,713 shares of common stock. The options vest in three annual installments as follows: 105,571 options vest on June 12, 2015, 105,571 options vest on June 12, 2016 and 105,571 options vest on June 12, 2017.
(5) On August 13, 2014, Mr. Schepel was granted 155,956 restricted common shares under the Long-Term Incentive Plan. 51,985 of the restricted shares vest on August 13, 2015, 51,985 of the restricted shares vest on August 13, 2016 and 51,986 of the restricted shares vest on August 13, 2017. Because Mr. Schepel departed the Company effective February 6, 2015, he forfeited all awards.
(6) Mr. Gaille received a grant of 15,909 restricted common shares on April 11, 2013 with respect to calendar year 2012 and a grant of 14,039 restricted common shares on April 11, 2013 with respect to calendar year 2013.
(7) On April 16, 2014, Mr. Gaille became vested in 5,303 restricted common shares with respect to his award for the 2012 calendar year. An additional 5,303 restricted common shares will vest on April 16, 2015.
(8) On March 15, 2014, Mr. Gaille became vested in 4,680 restricted common shares with respect to his award for the 2013 calendar year. An additional 4,680 and 4,679 restricted common shares will each vest on March 15, 2015 and March 15, 2016 respectively.
(9) On May 28, 2014, Mr. Gaille was granted 155,956 restricted common shares under the Long-Term Incentive Plan. 51,985 of the restricted common shares will vest on May 28, 2015, 51,985 shares will vest on May 28, 2016 and 51,986 shares will vest on May 28, 2017.
DIRECTOR COMPENSATION
Officers or employees of the Company who also serve on our board of directors did not receive additional compensation for their board service in 2014. In accordance with this policy, Todd A. Brooks received no compensation for his service as a director in 2014. Each non-employee director and independent director was entitled to receive an annual retainer of $62,000, other than the non-employee Chairman of the Board, who received an annual retainer of $110,000. In March 2015, the board modified the cash component of the non-employee director compensation. As a result of the modification, any non-employee director cash compensation would be accrued but not paid until the Company’s liquidity situation stabilizes. This modification does not affect the equity component of non-employee director compensation.
Each independent non-employee director receives an annual grant of stock valued at $88,000 ($90,000 for the non-employee Chairman of the Board) generally corresponding to the service period between each annual election of the board members. In accordance with this policy, on August 20, 2014, the board approved grants of 12,055 shares of restricted stock to Mr. Burris and
Mr. Sherman and 12,329 shares of restricted stock to each of Mr. Williamson, the Chairman, with one-third vesting on the grant date, and an additional one-third vesting on each of August 20, 2014 and 2015.
The following table sets forth the aggregate compensation awarded to, earned by or paid to our directors during 2014 except for Mr. Brooks whose compensation is included in the executive compensation summary compensation table.
Director Compensation for the 2014 Fiscal Year
(a) For 2014, Mr. Burris received $25,000 as chairman of the Audit Committee and Compensation Committee and Mr. Williamson received $7,500 for his service as chairman of the Nominating and Corporate Governance Committee.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of our common shares as of February 28, 2015 for:
· each person known by us to be a beneficial owner of 5% or more of our outstanding common stock;
· each of our directors;
· each named executive officer; and
· all directors and executive officers as a group.
The amounts and percentage of common shares beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days of February 28, 2015. Under these rules, more than one person may be deemed a beneficial owner of the same securities, and a person may be deemed a beneficial owner of securities as to which he has no economic interest.
Except as indicated by footnote, to our knowledge the persons named in the table below have sole voting and investment power with respect to all common shares shown as beneficially owned by them, subject to community property laws where applicable. Percentage of total common shares beneficially owned is based on 13,291,714 common shares outstanding as of February 28, 2015. Unless otherwise specified, the business address for the beneficial owners listed below is 1301 McKinney Street, Suite 2800, Houston, Texas 77010.
(1) Todd A. Brooks is the general partner of FT Trading & Management, LP, which is the direct owner of 5,000 common shares listed in the table above. Todd A. Brooks is also the Trustee of the Todd Alan Brooks Non Exempt Trust, which is the sole member of Blackstone Oil & Gas, LLC (“Blackstone”). Blackstone is the direct owner of 2,082,020 common shares listed in the table above.
(2) John E. Hearn, Jr. is the sole stockholder of Hearn Family Holding, Ltd., which is the direct owner of the 2,067,020 common shares listed in the table above.
(3) Gaston L. Kearby is the sole member of Omega Energy, LLC, which is the direct owner of the 2,082,020 common shares listed in the table above.
(4) Based solely on publicly available filings as of February 28, 2015 and Company records.
(5) Each of Mr. Brooks, Mr. Hearn and Mr. Kearby is a party to the Stockholders Agreement. Although the voting agreement provisions of the Stockholders Agreement expired on February 21, 2015, each of Mr. Brooks, Mr. Hearn and Mr. Kearby have informed the Company that they intend to vote common shares beneficially owned by them together on certain matters. Thus, each of Mr. Brooks, Mr. Hearn and Mr. Kearby may be considered a group for purposes of Section 13(d) of the Exchange Act and may be deemed to be the beneficial owner of each other’s shares such that each individual may be considered to hold 7,224,245 common shares, or 54% of our common shares.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes equity compensation plan information regarding equity securities authorized for issuance under individual stock option compensation agreements as of December 31, 2013:
(1) All values are with respect to restricted common shares and options.
(2) Includes options to purchase 316,713 shares of common stock awarded to Mr. Todd Brooks on June 12, 2014.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related-Party Transactions
At the closing of the Combination, ZaZa issued subordinated promissory notes in accordance with the terms of the Merger Agreement to the ZaZa LLC Members equal to approximately $38 million in the aggregate and to Todd A. Brooks, John E. Hearn, Jr. and Gaston L. Kearby in respect of their unpaid compensation in respect of their compensation agreements equal to approximately $9 million in the aggregate (collectively, the “Subordinated Notes”). The Subordinated Notes bear interest at eight percent per annum, are unsecured, mature on August 21, 2017 and are subordinated to up to $150,000,000 in senior indebtedness, including the $100,000,000 in outstanding senior notes issued by ZaZa at the closing of the Combination and the convertible notes issued by the Company in October 2012.
On February 24, 2014, the Company entered into Exchange Agreements (the “Exchange Agreements”) to exchange an aggregate of $47.3 million in 8.00% Subordinated Notes due 2017 for a combination of shares of common stock of the Company and shares of a new series of preferred stock of the Company. The Exchange Agreements were amended and superseded by the
Subordinated Note Modification Agreements with each of the Subordinated Note Holders (the “Modification Agreements”) on January 19, 2015. The Modification Agreements provide that, instead of exchanging the Subordinated Notes for common stock and preferred stock of the Company, all interest payments to the Subordinated Note Holders will be paid in kind. These changes occurred immediately upon execution of the Modification Agreements and, unlike the Exchange Agreements, were not subject to the refinancing of the Senior Secured Notes.
On December 19, 2014, Blackstone Oil & Gas, LLC (“Blackstone”) entered into a lease agreement for 3,992 square feet of office space in Houston that is occupied by the Company. On January 1, 2015, the Company entered into a sublease agreement with Blackstone to occupy this space. The Company will pay the landlord directly for lease expenses. There were no payments made to Blackstone in 2014 or 2015. The Company paid the landlord $43,154 in 2015 under the sublease agreement on behalf of Blackstone.
On December 3, 2014, the Company entered into a letter agreement with the KLR Group, LLC (“KLR”) to serve as the exclusive advisor and placement agent for an offer and placement of the Company’s securities. Mr. Gaston L. Kearby, one of our board members, indirectly owns a 25% interest in KLR. We did not pay KLR any fees in 2014 or 2015 in connection with their engagement. On February 12, 2015, we terminated our engagement with KLR, but under the engagement letter, KLR retains a right, for 12 months following termination of its engagement, to be paid a customary placement agent’s fee if the Company consummates any public or private offering of securities with an investor introduced to the Company by KLR.
On August 21, 2013, the Company entered into a stock purchase agreement with Todd A. Brooks, the President and Chief Executive Officer of the Company. Under the stock purchase agreement, Mr. Brooks agreed to purchase from the Company 150,000 (as adjusted for the reverse stock split) shares of the Company’s common stock at a price of $9.20 per share, which was the closing bid price of the common stock on the NASDAQ on August 21, 2013, for total consideration of $1,380,000. The shares of common stock were sold to Mr. Brooks in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933.
Prior to the Combination, the ZaZa LLC Members had helped finance the operations of ZaZa LLC by making capital contributions and loans to ZaZa LLC. In 2010, the ZaZa LLC Members lent ZaZa LLC $3.0 million in the aggregate, with each of ZaZa LLC Members lending $1.0 million through notes (the “member notes”). The member notes accrued interest at 8% per annum. No payments were made on account of the member notes in 2011, and the member notes were paid in full at the closing of the Combination in February 2012.
Prior to the Combination, ZaZa LLC entered into assignments of overriding royalty interests (the “ORRI Assignments”) with each of the “ZaZa Founders” (which includes our Chief Executive Officer and President Todd A. Brooks and directors Gaston L. Kearby and John E. Hearn Jr.). The ORRI Assignments granted each of the ZaZa Founders a direct or indirect interest in an overriding royalty interest generally equal to one percent (for a total of three percent) in any interests that ZaZa LLC acquires within select counties in Texas, Louisiana, Mississippi, Alabama and Florida that generally make up the upper cretaceous shale across the southern Gulf Coast of the United States. The overriding royalty interests obligations expire on April 29, 2016. The table below shows an estimate of the approximate dollar value of the overriding royalty interest conveyed to each of the ZaZa Founders in each of 2012, 2013 and 2014 under the ORRI Assignments. With respect to leases that ZaZa acquired, we calculated the following values by using the total acquisition cost of the lease and allocating one and one-third percent of such value to the ZaZa Founder to represent a one percent interest in the net revenue interest for such lease. Additionally, if the ZaZa Founders were entitled to one percent of certain oil and gas reserves that ZaZa acquired through its joint ventures, the following values also include the estimated value of the standardized measure of such reserves.
One of ZaZa LLC’s designees to the board of directors, Travis H. Burris, currently owns a 45% interest in, and serves as Chairman and President of, Texas Champion Bank. On September 26, 2011, ZaZa LLC borrowed $5 million under a revolving line of credit with Texas Champion Bank. The line of credit beared interest at 5.5%, was scheduled to mature on September 25, 2012, and was secured by a first lien on ZaZa LLC’s interests in certain of its oil and gas properties. This loan was repaid in full at the closing of the Combination in February 2012.
Effective May 1, 2010, ZaZa LLC and its members entered into a compensation agreement in which base salary, discretionary bonus and incentive compensation were defined. Incentive compensation was based on the fulfillment of certain performance metrics and the occurrence of a “Company liquidity event,” defined therein as an initial public offering, merger, reverse merger, financing or other availability of capital deemed financially beneficial to ZaZa. For the year ended December 31, 2012, ZaZa
paid deferred compensation of $10.8 million and bonuses of $6.7 million. These compensation agreements were terminated in connection with the Combination on February 21, 2012.
In March 2011, ZaZa entered into a management agreement (the “Management Agreement”) with Sequent Petroleum Management, LLC (“SPM”) pursuant to which SPM provided ZaZa with contractors and consultants and their related benefits programs in exchange for a monthly fee for managing such personnel. Scott Gaille, who was appointed ZaZa Energy Corporation’s Chief Compliance Officer as of March 2012 was a principal of SPM until September 6, 2012, when he disposed of all of his interests in SPM. ZaZa reimbursed SPM for the costs of the personnel under the Management Agreement, including for the costs of their insurance and other benefits. SPM handled all payroll, tax, accounting and benefit services for the contractors and consultants provided under the Management Agreement. For the years ended December 31, 2012, ZaZa paid SPM $18.3 million (including $52 thousand in management fees) under this agreement. Effective November 1, 2012, 100% of the units and ownership in SPM was assigned to ZaZa LLC.
Lot-A-Go 5 (“LG5”) is an airplane rental company in which Todd A. Brooks and Gaston Kearby hold partnership interest. From time to time, ZaZa will rent aircraft for business travel reasons and be charged for the pilots’ time, hanger fees and fuel. During the year ended December 31, 2014, 2013 and 2012 ZaZa was charged and paid $0, $2,000 and $115,000, respectively, for such services.
In connection with but following consummation of the Combination, the three former members of ZaZa LLC, Todd A. Brooks, Gaston L. Kearby, and John E. Hearn Jr. (together, the “ZaZa Founders”), each determined to transfer to certain service providers approximately 170,000 shares (as adjusted for the reverse stock split) of restricted common stock of the Company, par value $0.01 per share (the “Restricted Stock”), held by entities controlled by the ZaZa Founders. Because such transfers are expected to give rise to a compensation expense deduction to the Company upon vesting of the grants, as opposed to giving rise to a deduction to the ZaZa Founders, the Company has agreed to pay in cash to the ZaZa Founders the economic value of any tax deduction the Company receives as a result of these grants by the ZaZa Founders.
On September 11, 2012, the Company entered into separate Reimbursement Agreements with each of Blackstone, Omega Energy Corp. (“Omega”), and Lara Energy, Inc. (“Lara”) (together, the “Reimbursement Agreements”). Blackstone, Omega, and Lara are respectively controlled by Todd A. Brooks, who serves as the Company’s President and Chief Executive Officer and also as a Director, Gaston L. Kearby, who is the former Executive Director-Operations and currently serves as a Director of the Company, and John E. Hearn Jr., former Chief Operating Officer and a current Director of the Company. Pursuant to the Reimbursement Agreements, the Company will reimburse each of Blackstone, Lara, and Omega for the value of the tax benefit(s) received by the Company due to the transfers of Restricted Stock within 30 days of such time(s) when the Company is able to make use of the expense(s) relating thereto to reduce its federal income tax withholding or payments (the “Reimbursements”). If Blackstone, Lara, and Omega together cease to control a majority of the common stock of the Company prior to the time that the Company is able to make use of any or all of such expenses to reduce its federal income tax withholding or payments, then the Company will pay to each of Blackstone, Lara, and Omega an amount equal to 35% of the value of the common shares of the Restricted Stock (determined at the time of vesting) transferred by each such grantor.
The Company estimates that the Reimbursements total $4.1 million (included in Long-term payable - related parties on the consolidated balance sheet) or $1.4 million for each of Blackstone, Lara, and Omega. No payments have been made during the years ended December 31, 2014 and 2013. The tax characterization of the Reimbursements and their reporting shall be determined by a third party tax advisor to the Company, which advisor must be reasonably acceptable to the ZaZa Founders. Each of Blackstone, Lara, and Omega will be responsible and liable for any tax consequences (including, but not limited to, any interest or penalties) as a result of the Reimbursements.
Policy Regarding Transactions with Related Persons
Pursuant to our Code of Conduct, directors, employees, agents, and other personnel (and their family members) are required to refrain from entering into any activity that is in conflict with the interests of the Company as a whole, that would make it difficult to perform his or her work for the Company objectively and effectively or that would result in the individual receiving an improper personal benefit as a result of his or her position in the Company. If there is any possibility that a particular activity, investment or association could create, or reasonably appear to create, such a conflict of interest, that person is required to consult with our Chief Compliance Officer or the Audit Committee to assess whether such a conflict of interest exists. The charter of the Audit Committee provides that the Audit Committee will review all transactions with related persons (as defined by Item 404 of SEC Regulation S-K) for potential conflicts of interest and that the Audit Committee has oversight over all such transactions.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee has selected BDO USA LLP (“BDO”) as independent registered public accountants of the Company to audit the Company’s consolidated financial statements for the fiscal year ending December 31, 2014 and the board of directors has determined that it would be desirable to request that the stockholders ratify such appointment.
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, and other services. Pre-approval is detailed as to the specific service or category of service and is subject to a specific approval.
Before selecting BDO, the Audit Committee considered the firm’s qualifications as independent registered public accountants and concluded that based on BDO’s prior performance and its reputation for integrity and competence, it was qualified. The Audit Committee also considered whether any non-audit services performed for the Company by BDO would impair BDO’s independence and concluded that they did not. Although the selection of the auditors is ratified by the board of directors, the Audit Committee, in its sole discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.
The aggregate fees for professional services rendered by our principal accountants, BDO, for the year ended December 31, 2014 was:
(1) Consists of federal and state income tax consulting ($62,113) and compliance ($77,180).
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms, Balance Sheets as of December 31, 2014 and 2013, Statements of Operations and Comprehensive Loss and Changes in Stockholders’ Deficit and Cash Flows for each of the two years in the period ended December 31, 2014 and Notes to the Financial Statements for ZaZa Energy Corporation.
2. The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements.
3. Exhibits: The exhibits required to be filed by this Item 15 are set forth in the Index to Exhibits accompanying this report.
Exhibit
Number
Description
2.1
Agreement and Plan of Merger and Contribution, dated August 9, 2011, by and among Toreador Resources Corporation, ZaZa Energy, LLC, ZaZa Energy Corporation and Thor Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to Toreador Resources Corporation’s Current Report on Form 8-K filed August 10, 2011).
2.2
Amendment No. 1 to the Agreement and Plan of Merger and Contribution, dated November 10, 2011, by and among Toreador Resources Corporation, ZaZa Energy, LLC, ZaZa Energy Corporation and Thor Merger Sub Corporation (incorporated by reference to Exhibit 2.4 to ZaZa Energy Corporation’s Form S-4/A (333-177264) filed November 21, 2011).
2.3
Amendment No. 2 to the Agreement and Plan of Merger and Contribution, dated February 21, 2012, by and among Toreador Resources Corporation, ZaZa Energy, LLC, ZaZa Energy Corporation and Thor Merger Sub Corporation (incorporated by reference to Exhibit 2.3 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
2.4
Contribution Agreement, dated August 9, 2011, by and among Blackstone Oil & Gas, LLC, Omega Energy Corp., Lara Energy, Inc. and ZaZa Energy Corporation (incorporated by reference to Exhibit 2.2 to Toreador Resources Corporation’s Current Report on Form 8-K filed August 10, 2011).
2.5
Amendment No. 1 to the Contribution Agreement, dated November 10, 2011, by and among Blackstone Oil & Gas, LLC, Omega Energy Corp., Lara Energy, Inc. and ZaZa Energy Corporation, and consented to and agreed to by Toreador Resources Corporation (incorporated by reference to Exhibit 2.4 to ZaZa Energy Corporation’s Form S-4/A (333-177264) filed November 21, 2011).
2.6
Net Profits Interests Contribution Agreement, dated August 9, 2011, by and among the holders of net profits interests of ZaZa Energy, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 2.3 to Toreador Resources Corporation’s Current Report on Form 8-K filed August 10, 2011).
2.7
Purchase and Sale Agreement, dated August 21, 2014 (incorporated by reference to Exhibit 2.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed September 24, 2014).
2.8
Amendment No. 1 to Purchase and Sale Agreement, dated September 16, 2014 (incorporated by reference to Exhibit 2.2 of ZaZa Energy Corporation’s Current Report on Form 8-K filed September 24, 2014).
3.1
Restated Certificate of Incorporation of ZaZa Energy Corporation (incorporated by reference to Exhibit 3.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
3.2
Amended and Restated Bylaws of ZaZa Energy Corporation (incorporated by reference to Exhibit 3.2 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
3.3
Certificate of Amendment to the Restated Certificate of Incorporation of ZaZa Energy Corporation, effective 5:00 p.m. Eastern Time, August 19, 2014 (incorporated by reference to Exhibit 3.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed August 25, 2014).
4.1
Securities Purchase Agreement, dated as of February 21, 2012, by and among ZaZa Energy Corporation and purchasers thereunder, including MSDC ZEC Investments, LLC and Senator Sidecar Master Fund LP (incorporated
by reference to Exhibit 4.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
4.2
Amendment and Waiver, dated June 8, 2012, to the Securities Purchase Agreement, dated February 21, 2012, among ZaZa Energy Corporation and the purchasers party thereto (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
4.3
Waiver and Amendment No. 2, dated July 25, 2012, to the Securities Purchase Agreement, dated February 21, 2012, among ZaZa Energy Corporation and the purchasers party thereto, as amended (incorporated by reference to Exhibit 10.7 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
4.4
Waiver and Amendment No. 3, dated October 16, 2012, to the Securities Purchase Agreement, dated February 21, 2012, among ZaZa Energy Corporation and the purchasers party thereto, as amended (incorporated by reference to Exhibit 4.4 of ZaZa Energy Corporation’s Current Report on Form 8-K filed October 22, 2012).
4.5
Amendment No. 4, dated December 17, 2012, to the Securities Purchase Agreement, dated February 21, 2012, among ZaZa Energy Corporation and the purchasers party thereto, as amended (incorporated by reference to Exhibit 4.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed December 21, 2012).
4.6
Amendment No. 5, dated March 28, 2013, to the Securities Purchase Agreement, dated February 21, 2012, among ZaZa Energy Corporation and the purchasers party thereto, as amended (incorporated by reference to Exhibit 10.6 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed May 15, 2013).
4.7
Amendment No. 6, dated March 14, 2014, to the Securities Purchase Agreement, dated February 21, 2012, among ZaZa Energy Corporation and the purchasers party thereto, as amended (incorporated by reference to Exhibit 10.6 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
4.8
Amendment No. 7, dated February 24, 2015, to the Securities Purchase Agreement, dated February 21, 2012, among ZaZa Energy Corporation and the purchasers party thereto, as amended (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 27, 2015).
4.9
Form of Secured Notes issued pursuant to the Securities Purchase Agreement, dated as of February 21, 2012, by and among ZaZa Energy Corporation and purchasers thereunder, including MSDC ZEC Investments, LLC and Senator Sidecar Master Fund LP (incorporated by reference to Exhibit 4.2 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
4.10
Form of Warrant to Purchase Shares of Common Stock of ZaZa Energy Corporation, dated February 21, 2012 (incorporated by reference to Exhibit 4.3 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
4.11
Form of Amended Warrant issued in replacement of warrants originally issued February 21, 2012 to the purchasers under the Securities Purchase Agreement, dated February 21, 2012, as amended (incorporated by reference to Exhibit 4.5 of ZaZa Energy Corporation’s Current Report on Form 8-K filed October 22, 2012).
4.12
Common Stock Purchase Warrant issued in replacement of warrants originally issued February 21, 2012 to the purchasers under the Securities Purchase Agreement, dated February 21, 2012, as amended (incorporated by reference to Exhibit 10.7 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed May 15, 2013).
4.13
Form of Registration Rights Letter, dated February 22, 2012, by and among ZaZa Energy Corporation and certain purchasers (incorporated by reference to Exhibit 4.5 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
4.14
Restricted Stock Agreement, dated September 17, 2012, between ZaZa Energy Corporation and Ian H. Fay (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation Current Report on Form 8-K filed on September 21, 2012).
4.15
Form of Note Purchase Agreement, dated as of October 16, 2012, by and among ZaZa Energy Corporation and purchasers thereunder (incorporated by reference to Exhibit 4.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed October 22, 2012).
4.16
Indenture, dated as of October 22, 2012, by and among ZaZa Energy Corporation, the Guarantors named therein, and Wilmington Trust, National Association, as trustee thereunder (incorporated by reference to Exhibit 4.2 of ZaZa Energy Corporation’s Current Report on Form 8-K filed October 22, 2012).
4.17
Form of 9% Convertible Senior Notes due 2017 of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.3 of ZaZa Energy Corporation’s Current Report on Form 8-K filed October 22, 2012).
4.18
Form of Restricted Stock Award Agreement, by and between Blackstone Oil and Gas, LLC, Omega Energy, LLC, Lara Energy Inc., and certain employees of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.1 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.19
Form of Restricted Stock Award Agreement, by and between Blackstone Oil and Gas, LLC, Omega Energy, LLC, Lara Energy Inc., and certain consultants of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.2 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.20
Form of Stock Award Agreement, by and between Blackstone Oil and Gas, LLC, Omega Energy, LLC, Lara Energy Inc., and certain employees of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.3 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.21
Form of Amendment to Stock Award Agreement, by and between Blackstone Oil and Gas, LLC, Omega Energy, LLC, Lara Energy Inc., and certain employees of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.4 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.22
Restricted Stock Award, dated July 30, 2012, by and among Blackstone Oil & Gas, LLC, Omega Energy LLC, Lara Energy, Inc., and Craig McKenzie (incorporated by reference to Exhibit 4.5 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.23
Form of Director Restricted Stock Award Agreement, by and between ZaZa Energy Corporation and certain directors of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.6 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.24
Form of Stock Award Agreement, by and between ZaZa Energy Corporation and certain consultants that are former directors of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.7 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.25
Form of Stock Award Agreement, by and between ZaZa Energy Corporation and certain employees of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.9 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.26
Form of Stock Award Agreement, by and between ZaZa Energy Corporation and certain consultants of ZaZa Energy Corporation (incorporated by reference to Exhibit 4.10 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
4.27
Form of Senior Indenture between ZaZa Energy Corporation and the trustee (incorporated by reference to Exhibit 4.26 of ZaZa Energy Corporation’s Form S-3/A (333-192257) filed on February 12, 2014).
4.28
Form of Subordinated Indenture between ZaZa Energy Corporation and the trustee (incorporated by reference to Exhibit 4.27 of ZaZa Energy Corporation’s Form S-3/A (333-192257) filed on February 12, 2014).
4.29
Form of Warrant issued pursuant to the Securities Purchase Agreement, dated as of July 21, 2014, by and between ZaZa Energy Corporation and Crede CG III, Ltd. (incorporated by reference to Exhibit 4.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on July 21, 2014).
10.1
Exploration and Development Agreement, Hackberry Creek Project Area, dated March 26, 2010, by and between Hess Corporation and ZaZa Energy, LLC (incorporated by reference to Exhibit 10.15 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed on October 12, 2011).
10.2
Exploration and Development Agreement, Eagle Ford Shale Area, dated April 28, 2010, by and between Hess Corporation and ZaZa Energy, LLC (incorporated by reference to Exhibit 10.14 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed on October 12, 2011).
10.3
Amendment, dated June 8, 2012, to Exploration and Development Agreement, Eagleford Shale Area dated April 28, 2010, as amended, between ZaZa Energy Corporation and Hess Corporation (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.4
Investment Agreement, dated May 20, 2010, between Toreador Energy France S.C.S. and Hess Oil France S.A.S. (incorporated by reference to Exhibit 10.1 to Toreador Resources Corporation’s Current Report on Form 8-K filed on May 10, 2010).
10.5
Amendment to the Investment Agreement, dated May 18, 2011, between Toreador Energy France S.C.S. and Hess Oil France S.A.S. (incorporated by reference to Exhibit 10.1 to Toreador Resources Corporation’s Current Report on Form 8-K filed on May 23, 2011).
10.6
Paris Basin Purchase and Sale Agreement, dated July 25, 2012, among ZaZa Energy France S.A.S. (f/k/a Toreador Energy France S.A.S.) and Hess Oil France S.A.S. (incorporated by reference to Exhibit 10.6 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.7
Share Purchase Agreement, dated November 13, 2012, by and between ZaZa France SAS and Vermillion REP SAS (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation Current Report on Form 8-K filed on November 19, 2012).
10.8
Texas Division of Assets Agreement, dated July 25, 2012, among ZaZa Energy Corporation, ZaZa Energy, LLC, and Hess Corporation (incorporated by reference to Exhibit 10.5 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.9
First Amendment to Texas Division of Assets Agreement, dated February 6, 2014, by and among Hess Corporation, ZaZa Energy Corporation and ZaZa Energy, LLC (incorporated by reference to Exhibit 10.8 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.10
Settlement and Release Agreement, dated February 6, 2014, by and among Hess Corporation, Hess Oil France, ZaZa Energy Corporation, ZaZa Energy, LLC, ZaZa France S.A.S. and ZaZa International Holding LLC (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.11
Letter Agreement, dated August 9, 2011, by and among Todd A. Brooks, ZaZa Energy, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.7 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed October 12, 2011).
10.12
Amendment No. 1 to Letter Agreement, dated November 10, 2011, by and among Todd A. Brooks, ZaZa Energy, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.17 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed on October 12, 2011).
10.13
Letter Agreement, dated August 9, 2011, by and among John E. Hearn, Jr., ZaZa Energy, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.8 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed October 12, 2011).
10.14
Amendment No. 1 to Letter Agreement, dated November 10, 2011, by and among John E. Hearn, Jr., ZaZa Energy, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.18 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed on October 12, 2011).
10.15
Letter Agreement, dated August 9, 2011, by and among Gaston L. Kearby, ZaZa Energy, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.9 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed October 12, 2011).
10.16
Amendment No. 1 to Letter Agreement, dated November 10, 2011, by and among Gaston L. Kearby, ZaZa Energy, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.19 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed on October 12, 2011).
10.17
Stockholders’ Agreement, dated August 9, 2011, by and among ZaZa Energy Corporation, Blackstone Oil & Gas, LLC, Omega Energy Corp. and Lara Energy, Inc. (incorporated by reference to Exhibit 2.4 to Toreador Resources Corporation’s Current Report on Form 8-K filed August 10, 2011).
10.18
Non-Competition Agreement, dated August 9, 2011, between ZaZa Energy Corporation and Todd A. Brooks (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed October 12, 2011).
10.19
Non-Competition Agreement, dated August 9, 2011, between ZaZa Energy Corporation and John E. Hearn, Jr. (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed October 12, 2011).
10.20
Non-Competition Agreement, dated August 9, 2011, between ZaZa Energy Corporation and Gaston L. Kearby (incorporated by reference to Exhibit 10.4 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed October 12, 2011).
10.21
Amended and Restated Management Agreement, dated November 18, 2011, by and between Sequent Petroleum Management, LLC and ZaZa Energy, LLC (incorporated by reference to Exhibit 10.20 of ZaZa Energy Corporation’s Form S-4 (333-177264) filed on October 12, 2011).
10.22
Form of Indemnity Agreement between ZaZa Energy Corporation and each executive officer and director (incorporated by reference to Exhibit 10.22 of ZaZa Energy Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011).
10.23
Form of Subordinated Promissory Note, dated February 21, 2012, issued to Blackstone Oil & Gas, LLC, Omega Energy Corp., Lara Energy, Inc., Todd A. Brooks, John E. Hearn, Jr., and Gaston L. Kearby (incorporated by reference to Exhibit 4.4 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).
10.24
Form of First Amended and Restated Promissory Note, effective as of January 19, 2015, by and between the Subordinated Note Holders (as defined therein) and ZaZa Energy Corporation (incorporated by reference to Exhibit 4.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on January 23, 2015).
10.25
Guaranty Agreement, dated as of February 21, 2012, among ZaZa Holdings Inc., ZaZa Energy, LLC and Toreador Resources Corporation in favor of MSDC ZEC Investments, LLC, Senator Sidecar Master Fund LP, the other purchasers of the secured notes and U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on February 22, 2012).
10.26
Lock-Up Agreement, dated as of February 21, 2012, by and between the Restricted Stockholders (as defined therein) and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.4 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on February 22, 2012).
10.27
Amended and Restated Lock-Up Agreement, dated as of March 28, 2013, by and between the Restricted Stockholders (as defined therein) and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.8 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on May 15, 2013).
10.28
Collateral Agency Agreement, dated as of February 21, 2012, among U.S. Bank National Association, as collateral agent, and MSDC ZEC Investments, LLC, Senator Sidecar Master Fund LP and the other purchasers of secured notes (incorporated by reference to Exhibit 10.19 of ZaZa Energy Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011).
10.29
Subordination Agreement, dated as of February 21, 2012, by and among Blackstone Oil & Gas, LLC, Omega Energy Corp., Lara Energy, Inc., Todd A. Brooks, John E. Hearn, Jr., and Gaston L. Kearby, U.S. Bank National Association, as collateral agent, the Purchasers of the Notes and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on February 22, 2012).
10.30
Amended and Restated Subordination Agreement, dated June 8, 2012, among ZaZa Energy Corporation, the purchasers party to the Securities Purchase Agreement dated February 21, 2012, Todd A. Brooks, John E. Hearn, Jr., Gaston L. Kearby, Omega Energy, LLC, Blackstone Oil & Gas, LLC, and Lara Energy, Inc. (incorporated by reference to Exhibit 10.4 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.31
Security Agreement, dated as of March 22, 2012, by and among ZaZa Energy Corporation, ZaZa Energy, LLC, ZaZa Holdings, Inc., Toreador Resources Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
10.32
Pledge Agreement, dated as of March 22, 2012, by and among ZaZa Energy Corporation, ZaZa Holdings, Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
10.33
Form of Deed of Trust, dated April 10, 2012, between ZaZa Energy, LLC and U.S. Bank National Association (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.34
Participation Agreement, dated March 28, 2012, by and between ZaZa Energy Corporation and Range Texas Production, LLC, a subsidiary of Range Resources Corporation (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012)
10.35
Amendment No. 5 to the Participation Agreement, effective as of January 16, 2013 (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on January 28, 2013).
10.36
Amendment No. 6 to the Participation Agreement, effective as of March 25, 2013 (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on May 15, 2013).
10.37
Joint Exploration & Development Agreement Walker, Grimes, Madison, Trinity and Montgomery Counties, Texas, effective March 1, 2013 (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on June 25, 2013).
10.38
First Amendment of Joint Exploration & Development Agreement Walker, Grimes, Madison, Trinity and Montgomery Counties, Texas, effective March 1, 2013 (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on November 12, 2013).
10.39
Second Amendment and First Restatement of Joint Exploration & Development Agreement Walker, Grimes, Madison, Trinity and Montgomery Counties, Texas, effective March 1, 2013 (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on November 12, 2013).
10.40
Third Amendment and Second Restatement of Joint Exploration & Development Agreement Walker, Grimes, Madison, Trinity and Montgomery Counties, Texas, effective March 1, 2013 (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on November 12, 2013).
10.41
Fourth Amendment of Joint Exploration and Development Agreement, dated March 7, 2014, by and among ZaZa Energy Corporation, ZaZa Energy, LLC and EOG Resources, Inc. (incorporated by reference to Exhibit 10.5 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.42
Operating Agreement, effective March 1, 2013, by and between EOG Resources, Inc. and ZaZa Energy, LLC (incorporated by reference to Exhibit 10.5 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on May 15, 2013).
10.43
Purchase and Sale Agreement, dated March 22, 2013, by and between ZaZa Energy, LLC and BEP Moulton, LLC (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on May 15, 2013).
10.44
Sale and Purchase Agreement, dated June 28, 2013, between ZaZa Energy Corporation and SN Marquis, LLC (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on July 31, 2013).
10.45
Separation Agreement and General Release, dated July 30, 2012, between ZaZa Energy Corporation and Craig M. McKenzie (incorporated by reference to Exhibit 10.8 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.46
Form of Reimbursement Agreement, dated September 11, 2012, between ZaZa Energy Corporation and each of Blackstone Oil & Gas, LLC, Omega Energy Corp., and Lara Energy, Inc. (incorporated by reference to Exhibit 10.9 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.47
Side Letter dated September 11, 2012 regarding the Subordinated Notes with holders thereof (incorporated by reference to Exhibit 10.10 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.48
Form of Employment Agreement dated September 11, 2012 between ZaZa Energy Corporation and Todd A. Brooks (incorporated by reference to Exhibit 10.12 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.49
First Amendment to Employment Agreement with Todd Alan Brooks, dated June 12, 2014 (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
10.50
Form of Employment Agreement dated September 11, 2012 between ZaZa Energy Corporation and Ian H. Fay (incorporated by reference to Exhibit 10.13 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.51
Separation and Consulting Agreement, dated May 19, 2014, by and between ZaZa Energy Corporation and Ian H. Fay (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
10.52
Amendment to Separation and Consulting Agreement, dated November 13, 2014, by and between the Company and Ian H. Fay (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on November 14, 2014).
10.53
Form of Employment Agreement dated September 11, 2012 between ZaZa Energy Corporation and John E. Hearn, Jr. (incorporated by reference to Exhibit 10.14 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
10.54
Form of Employment Agreement dated October 3, 2012 between ZaZa Energy Corporation and S. Scott Gaille (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation Current Report on Form 8-K filed on October 5, 2012).
10.55
First Amendment to Employment Agreement, dated November 8, 2013, between ZaZa Energy Corporation and Scott Gaille (incorporated by reference to Exhibit 10.4 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q filed on November 12, 2013).
10.56
Second Amendment to Employment Agreement with Scott Gaille, dated August 12, 2014 (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
10.57
Employment Agreement, dated March 13, 2013, between ZaZa Energy Corporation and Paul F. Jansen (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on April 8, 2013).
10.58
First Amendment to Employment Agreement with Paul Jansen, dated August 12, 2014 (incorporated by reference to Exhibit 99.2 of ZaZa Energy Corporation’s Current Report on Form 8-K/A filed on August 13, 2014).
10.59
Employment Agreement with Kevin Schepel, dated April 22, 2013 (incorporated by reference to Exhibit 10.4 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
10.60
First Amendment to Employment Agreement with Kevin Schepel, dated August 12, 2014 (incorporated by reference to Exhibit 10.5 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
10.61
Consulting Agreement between ZaZa Energy Corporation and Adam Kroloff, dated December 7, 2012 (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation Current Report on Form 8-K filed on December 7, 2012).
10.62
Consulting Agreement between ZaZa Energy Corporation and Bernard de Combret, dated December 7, 2012 (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation Current Report on Form 8-K filed on December 7, 2012).
10.63
Stock Purchase Agreement between ZaZa Energy Corporation and Todd A. Brooks (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on August 22, 2013).
10.64
Assignment of Overriding Royalty Interest, dated effective April 29, 2010, by ZaZa Energy, LLC in favor of Jubalee LTD (incorporated by reference to Exhibit 10.53 of ZaZa Energy Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013).
10.65
Assignment of Overriding Royalty Interest, dated effective April 29, 2010, by ZaZa Energy, LLC in favor of Gaston Kearby (incorporated by reference to Exhibit 10.54 of ZaZa Energy Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013).
10.66
Assignment of Overriding Royalty Interest, dated effective April 29, 2010, by ZaZa Energy, LLC in favor of Sandra Brooks 2003 Family Trust (incorporated by reference to Exhibit 10.55 of ZaZa Energy Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013).
10.67
ZaZa Energy Corporation Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 of ZaZa Energy Corporation’s Form S-8 (333-185586) filed December 20, 2012).
10.68
First Amendment to ZaZa Energy Corporation 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.57 of ZaZa Energy Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013).
10.69
Form of Amendment to ZaZa Energy Corporation Long-Term Incentive Plan Second Amendment to ZaZa Energy Corporation 2012 Long-Term Incentive Plan (incorporated by reference to Annex A of ZaZa Energy Corporation’s Definitive Proxy Statement filed on Schedule 14A filed April 17, 2014).
10.70
ZaZa Energy Corporation Long-Term Incentive Plan, as amended and restated on February 6, 2015 (incorporated by reference to Exhibit 4.4 of ZaZa Energy Corporation’s Form S-8 (333-201951) filed February 6, 2015).
10.71
At-The Market Issuance Sales Agreement, dated as of March 31, 2014, by and between ZaZa Energy Corporation and MLV & Co. LLC (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on March 31, 2014).
10.72
Exchange Agreement, dated February 24, 2014, by and among Todd A. Brooks, Blackstone Oil & Gas, LLC and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.2 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.73
Exchange Agreement, dated February 24, 2014, by and among John E. Hearn, Jr., Lara Energy, Inc. and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.3 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.74
Exchange Agreement, dated February 24, 2014, by and among Gaston L. Kearby, Omega Energy Corp. and ZaZa Energy Corporation (incorporated by reference to Exhibit 10.4 of ZaZa Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).
10.75
Form of Subordinated Note Modification Agreement, effective January 19, 2015 (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on January 23, 2015).
10.76
Securities Purchase Agreement, dated as of July 21, 2014, by and between ZaZa Energy Corporation and Crede CG III, Ltd. (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on July 21, 2014).
10.77
Settlement Agreement, dated November 18, 2014, by and between ZaZa Energy Corporation and Crede CG III, Ltd. (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on November 19, 2014).
10.78
East Texas Development Agreement, dated September 18, 2014 (incorporated by reference to Exhibit 10.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed September 24, 2014).
10.79*
Sublease Agreement, dated January 1, 2015, between Blackstone Oil and Gas, LLC and ZaZa Energy Development, LLC.
16.1
Letter from KPMG LLP, to the Securities and Exchange Commission, dated October 12, 2011 (incorporated by
reference to Exhibit 16.1 of ZaZa Energy Corporation’s registration statement on Form S-4 (Registration No. 333-177264) filed October 12, 2011).
16.2
Letter from Ernst & Young LLP dated June 13, 2014, addressed to the Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed on June 13, 2014).
21.1*
Subsidiaries of ZaZa Energy Corporation.
23.1*
Consent of BDO USA, LLP.
23.2*
Consent of Ernst & Young, LLP.
23.3*
Consent of Ryder Scott.
24.1
Power of Attorney (included as part of the signature page).
31.1*
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1*
Report of Ryder Scott, dated January 19, 2015.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Schema Document
101.CAL*
XBRL Calculation Linkbase Document
101.LAB*
XBRL Label Linkbase Document
101.PRE*
XBRL Presentation Linkbase Document
101.DEF*
XBRL Definition Linkbase Document
* Filed herewith
 Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 31, 2015.
Signature
Title
/s/ Todd A. Brooks
Director, President and Chief Executive
(principal executive officer)
Todd A. Brooks
/s/ Travis H. Burris
Director
Travis H. Burris
/s/ A. Haag Sherman
Director
A. Haag Sherman
/s/ Gaston L. Kearby
Director
Gaston L. Kearby
/s/ John E. Hearn Jr.
Director
John E. Hearn, Jr.
/s/ Herbert C. Williamson III
Director
Herbert C. Williamson III
/s/ Paul F. Jansen
Chief Financial Officer
(principal financial officer and principal accounting officer)
Paul F. Jansen
Index to
ZaZa Energy Corporation
Financial Statements
Page
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
ZaZa Energy Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheet of ZaZa Energy Corporation (the “Company”) as of December 31, 2014 and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZaZa Energy Corporation at December 31, 2014 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company has a working capital deficiency and does not expect to generate sufficient cash flows to fund its operating and debt service requirements throughout 2015, which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO USA, LLP
Houston, Texas
March 31, 2015
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
ZaZa Energy Corporation
We have audited the accompanying consolidated balance sheet of ZaZa Energy Corporation (the Company) as of December 31, 2013, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ZaZa Energy Corporation at December 31, 2013, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Houston, Texas
March 31, 2014, except for the effects of the reverse stock split as described in the footnote 1, as to which the date is March 31, 2015.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ZAZA ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
ZAZA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
ZAZA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ZAZA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ZAZA ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
ZaZa Energy Corporation is an independent oil and gas company focused on the exploration and production of unconventional and conventional oil and gas assets. In this Annual Report on Form 10-K, unless the context provides otherwise, the “Company”, “we”, “our”, “us” and like references refer to ZaZa Energy Corporation and its subsidiaries. We currently operate primarily through joint ventures in the Eagle Ford East trend in East Texas and the Eagle Ford trend in South Texas. Our common stock is traded on the NASDAQ Capital Market under the trading symbol ZAZA.
The Company operates in one segment, crude oil and gas development, exploitation and exploration. The Company’s oil and gas properties are managed as a whole rather than through discrete operating segments or business units. Operational information is tracked by geographic area; however, financial performance is assessed as a single enterprise and not on a geographic basis. Allocation of resources is made on a project basis across the Company’s entire portfolio without regard to geographic areas.
The consolidated financial statements include the accounts of the Company and its subsidiaries after eliminating all significant intercompany balances and transactions. The leasehold acreage quantity information disclosed throughout these consolidated financial statements is unaudited.
On August 19, 2014, we completed a 1-for-10 reverse stock split of our outstanding common stock. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented. In addition, we filed a Certificate of Amendment to the Company’s Restated Certificate of Incorporation, which provides that our authorized capital stock remains 250 million shares of common stock, $0.01 par value per share following the reverse stock split.
East Texas Joint Venture with EOG
On March 21, 2013, we entered into a Joint Exploration and Development Agreement (the “JEDA”) with EOG Resources, Inc. (“our counterparty” or “EOG”) for the joint development of certain of our East Texas properties located in Walker, Grimes, Madison, Trinity, and Montgomery Counties, Texas. As of December 31, 2014, approximately 147,000 gross acres of the joint venture in East Texas were subject to this agreement and its subsequent amendments. Our counterparty acts as the operator, has paid us certain cash amounts, has borne 100% of the drilling and completion costs of certain specified wells, and has paid a portion of our share of additional seismic or well costs in order to earn its interest in these properties per the JEDA terms. Initially, ZaZa has retained a 25% working interest and our counterparty has earned a 75% working interest in the acreage. This joint development was divided into three phases.
The first phase commenced on April 2, 2013 and has been completed. In this phase, we transferred approximately 20,000 net acres to our counterparty in exchange for a cash payment by our counterparty to us of $10 million and an obligation of our counterparty to drill and pay 100% of the drilling and completion costs of three wells, the last of which was completed on December 20, 2013.
On September 25, 2013, ZaZa and its counterparty amended and restated the JEDA, which resulted in the following transactions being closed on October 15, 2013:
· Phase II Acceleration. Our counterparty accelerated Phase II of the joint venture, and we assigned approximately 20,000 net acres to our counterparty in exchange for (i) cash consideration of $17 million and (ii) approximately $3 million of interests (based on an independent reserves report) in 15 producing wells of our counterparty located outside of the Area of Mutual Interest or “AMI” (established by the JEDA). Also, during Phase II, our counterparty agreed to drill two horizontal wells and one vertical well in the parties’ AMI, carry ZaZa’s interests in those wells and provide a miscellaneous work and land carry of up to $1.25 million. On August 7, 2014, we announced that our counterparty had completed drilling the second well that was required to be drilled as part of Phase II of the joint development program. The third and final Phase II well has reached target depth and is in the process of being recompleted.
· Phase III Acceleration. ZaZa assigned approximately 7,800 net acres from the former Phase III acreage for which ZaZa received approximately $11 million of interests (based on an independent reserves report) in the 15 producing wells of our counterparty (part of Phase II and referenced above). In addition, our counterparty was given the option, until January 31, 2014, to acquire an interest in the remaining approximately 12,300 former Phase III net acres from ZaZa. As described below, our counterparty elected to acquire an interest in all of the remaining Phase III net acres.
· Exchange of Leases and Wells. Our counterparty acquired approximately 19,000 additional net acres and interests in related wells in the parties’ Area of Mutual Interest, and assigned to ZaZa a 25% interest in the interests acquired
by the counterparty in these leases and wells. In consideration for ZaZa’s participation in our counterparty’s leases and producing wells, ZaZa assigned to our counterparty approximately 13,875 additional net acres and paid approximately $700,000 in cash.
On March 7, 2014, ZaZa entered into a further amendment to the JEDA pursuant to which we agreed to assign to the counterparty approximately 9,600 net acres, which represents a 75% working interest in our remaining Phase III acreage, in exchange for cash consideration of approximately $4.7 million and the carry by the counterparty of our share of future drilling and completion costs in an aggregate amount up to approximately $9.2 million. As of December 31, 2014, the $9.2 million of carried costs have been fully deployed.
Also pursuant to the amendment and effective March 7, 2014, we and our counterparty agreed to terminate that certain Participation Agreement, effective as of March 1, 2012, by and between the Company and Range Texas Production, LLC (“Range”) (such agreement, as amended, the “Range Agreement”). Range’s rights and obligations under the Range Agreement were assigned to, and assumed by, the counterparty pursuant to that certain Quitclaim Assignment and Bill of Sale, effective as of December 1, 2013, by and between Range and the counterparty.
In December 2014, EOG satisfied the last of its drilling obligations under the JEDA. While selected JEDA provisions survive, the joint venture is now principally governed by the Joint Operating Agreement among EOG, ZaZa, and Quantum. Pursuant to its terms, ZaZa now has the right to propose new development wells and maintain its desired minimum drilling pace.
East Texas Joint Venture with Quantum
On September 18, 2014, ZaZa and an affiliate of Quantum Energy Partners (“Quantum”) closed the Purchase and Sale Agreement originally entered into on August 21, 2014 (the “Quantum Purchase and Sale Agreement”). The Quantum Purchase and Sale Agreement was amended by Amendment No. 1 to Quantum Purchase and Sale Agreement, dated September 16, 2014 (“Quantum Amendment No.1”), to allow Quantum to assign its rights under the Purchase and Sale Agreement to a different affiliate and to address other technical matters. The Company also entered into an East Texas Development Agreement, dated September 18, 2014, by and between ZaZa and Quantum (the “Quantum Development Agreement”). The Quantum Development Agreement establishes an area of mutual interest for future acreage acquisitions in Walker, Grimes, Madison, Trinity and Houston counties in Texas. The Quantum Purchase and Sale Agreement, Quantum Amendment No.1 and the Quantum Development Agreement are collectively referred to as the “Quantum Agreements”. Pursuant to the terms of the Quantum Agreements:
· ZaZa assigned to Quantum an approximately 4 percent working interest (6,000 of ZaZa’s net acres) in undeveloped leases within ZaZa’s East Texas joint venture. ZaZa retained its interest in all existing wells in the East Texas joint venture and is reserving the right to participate with respect to Quantum’s working interest in the next 15 East Texas joint venture wells that are spudded, drilled and completed after the closing of the Quantum transaction, as long as those wells are spudded, drilled and completed on or before the second anniversary of the closing of the transaction (the “Reserved Wells”).
· ZaZa received $11 million in cash as initial consideration and the right to receive Quantum’s interest in certain of the Reserve Wells.
· ZaZa will receive ongoing G&A and cost reimbursements from Quantum for providing services related to their jointly owned assets in Walker, Grimes, Madison, Trinity, and Houston counties.
· Quantum has the right to cause ZaZa to purchase Quantum’s interest in the jointly owned assets on an all or nothing basis for a cash price based on Quantum’s initial consideration paid of $11 million plus any out-of-pocket cost of acquiring and renewing leases under the Quantum Agreements on September 17, 2016 (the “Quantum Put Option”).
Following the closing of these Quantum Agreements, ZaZa’s East Texas acreage holdings comprise two separate development areas, each with different operators and ownership structures:
· Madison, Walker, and Grimes Counties. The Madison-Walker-Grimes Development Area comprises approximately 147,000 gross acres of the East Texas joint venture and is operated by EOG. ZaZa holds an approximately 21% working interest, or approximately 31,000 net acres and Quantum holds and approximately 4% working interest, or 6,000 net acres in this area. During the next two years, ZaZa has the option to participate for both its and Quantum’s working interest-for a total of a 25% working interest to ZaZa-in the next 15 wells drilled within the Madison-Walker-Grimes Development Area. ZaZa also retained its full 25% working interest in all wells spudded prior to the closing of the Quantum Agreements.
· Houston, Trinity, and Leon Counties. The Houston-Trinity-Leon Development Areas comprises approximately 10,000 net acres and is operated and owned 100% by ZaZa. This acreage is not subject to the Quantum Agreements. Through
the remainder of 2014 ZaZa will be preparing the acreage block in Houston and Trinity counties to be drill ready from a unit formation perspective, and the Company’s leasing is now focused on contiguous acreage additions.
Working interests in 6,000 net acres were sold and assigned to Quantum on September 18, 2014. U.S. generally accepted accounting principles (“U.S. GAAP”) prevents sale accounting due to the Quantum Put Option. Accordingly, the related oil and gas properties continue to be included in the consolidated balance sheet, and a liability was recorded, the Quantum Put Option, equal to Quantum’s initial cash payment of $11 million. Quantum’s out of pocket costs that are incurred subsequent to the initial $11 million represent contingent liabilities and will be recorded as a liability when and if payment becomes probable. As of December 31, 2014, this contingent liability totaled approximately $0.1 million. The Quantum transaction did not have any impact on revenue, income from continuing operations, net income, or income per share.
South Texas Joint Venture with Sabine
On September 17, 2013, ZaZa entered into an agreement with Sabine South Texas LLC (“Sabine”), a subsidiary of Sabine Oil & Gas LLC, for the joint development of a prospect in the Eagle Ford shale formation located in Lavaca and DeWitt Counties, Texas. Under this agreement, Sabine agreed to jointly develop with us up to approximately 7,600 gross acres that we owned and that comprised a portion of our interest in South Texas. Sabine agreed to bear 100% of the drilling and completion costs of two commitment wells and up to $750,000 of construction costs related to gathering and infrastructure in order to earn a 75% working interest in 7,600 acres in the “Sweet Home Prospect,” which is in DeWitt and Lavaca Counties, and a well that we refer to as the “Boening well.” Sabine also agreed to carry up to $300,000 of ZaZa’s expenses related to the extension and renewal of certain leases in the Sweet Home Prospect.
Sabine completed the first commitment well on February 14, 2014 and ZaZa transferred to Sabine a 75% working interest in approximately 3,200 net acres and the Boening well. Sabine completed the second commitment well on March 11, 2014, and ZaZa transferred to Sabine a 75% working interest in the remaining net acres. Sabine carried us for the $300,000 of expenses related to extension and renewal of leases in connection with drilling the second well. Participating interests in any additional wells drilled or lease acreage acquired in the Sweet Home prospect will be shared 75% by Sabine and 25% by ZaZa under an area of mutual interest that will expire on September 15, 2015 (assuming affirmative elections to participate in such lease acreage acquisition(s)).
Sale of Moulton Properties
On April 5, 2013, the Company closed a purchase and sale agreement and sold certain of its properties in the Eagle Ford trend located in Fayette, Gonzalez and Lavaca Counties, Texas, which we refer to as our “Moulton properties”, for approximately $9.2 million. Net proceeds from the sale, after closing purchase price adjustments and expenses were approximately $8.8 million. We used approximately $4.6 million of the proceeds to pay down our 10.00% Senior Secured Notes due 2017.
We also entered into an agreement on June 27, 2013 to sell approximately 10,000 net acres of our properties in the Eagle Ford trend located in Fayette, Gonzalez and Lavaca Counties, Texas, including seven producing wells located on the Moulton properties, for approximately $28.8 million. We closed this transaction on July 26, 2013 and received cash proceeds of $29.3 million. We used approximately $1.8 million of the proceeds to pay down our Senior Secured Notes.
Crede Securities Purchase Agreement
On July 21, 2014, we entered into a Securities Purchase Agreement (the “Crede Securities Purchase Agreement”) with Crede CG III, Ltd. (“Crede”). Under the terms of the Crede Securities Purchase Agreement, the Company sold and issued to Crede 602,410 shares of common stock, at $8.30 per share, and warrants to purchase 361,493 shares of Common Stock with an exercise price of $11.2036 for no additional consideration (the “2019 Warrants”). Net proceeds of the offering, after expenses, were approximately $4.5 million.
We estimated the 2019 Warrants’ fair value at issuance was approximately $1.3 million and in accordance with U.S. GAAP allocated the remaining residual amount of $3.2 million, calculated as the difference between the $4.5 million net proceeds and the $1.3 million fair value attributed to the 2019 Warrants, to common stock and additional paid-in capital.
On October 21, 2014, Crede attempted to exchange warrants received in the first investment for 1,422,908 shares of common stock. The Company believes the contractual provisions of the 2019 Warrants limit their exchange to a maximum of 361,493 shares of common stock. On November 18, 2014, the Company and Crede entered into a settlement agreement (the “Settlement Agreement”) to resolve their disagreement regarding the number of shares issuable upon exchange of the warrants. Under the Settlement Agreement and in exchange for all of the warrants, the Company immediately issued 787,530 shares of common stock and an additional 212,470 shares of common stock on December 31, 2014. The Company and Crede have also agreed to release each other from all further obligations under the Crede Securities Purchase Agreement and with respect to the 2019 Warrants. For the year ended December 31, 2014, we recorded a loss of $1.8 million related to the settlement of the 2019 Warrants in excess of the initial carrying value of the 2019 Warrants of $1.3 million.
NOTE 2 - GOING CONCERN
Our independent registered public accounting firm for the year ended December 31, 2014 issued their report dated March 31, 2015, that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern due to our dependency on the success of executing strategic alternatives or access to capital markets to fund our commitments and to generate sufficient cash flows to maintain positive liquidity.
Beginning on March 23, 2015, the holders of the Senior Secured Notes are able to require us to purchase all or a portion of the 10% Senior Secured Notes due 2017 at a price equal to the $13.9 million in principal amount of the Senior Secured Notes to be purchased, plus any accrued and unpaid interest on such notes (the “Senior Secured Notes Put Option”). If the holders of the Senior Secured Notes exercise the Senior Secured Notes Put Option, we will not be able to fund our commitments without access to additional liquidity and we will be in default under the Senior Secured Notes. If any of the holders of the Senior Secured Notes were to exercise their rights under the Senior Secured Notes Put Option, we would have 30 days to purchase those Senior Secured Notes. If this default occurs, we will be unable to continue as a going concern.
Even without the exercise of the Senior Secured Put Option, we do not currently generate sufficient cash flows to maintain positive liquidity to fund operating and debt service requirements throughout the next year. As of December 31, 2014, we had $6.3 million in cash and cash equivalents and working capital deficit of $13.3 million. Over the next year, we anticipate monthly cash general and administrative expenses and cash interest payments to average $1.3 million per month and capital expenditures of $0.5 million per month (2015 anticipated amounts are unaudited). Without additional cash funding, and considering our current forecasts for cash generated by operations, we anticipate exhausting our cash and cash equivalents in May 2015.
These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s Board of Directors and management team continue to take steps to try to strengthen the Company’s balance sheet. We intend to execute strategic alternatives and access the capital markets to fund our cash needs. Any decision regarding a strategic alternative or financing transaction, and our ability to complete such a transaction, will depend on prevailing market conditions and other factors. No assurances can be given that such transactions can be consummated on terms that are acceptable to the Company, or at all.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers investments in all highly liquid instruments with original maturities of three months or less at date of purchase to be cash equivalents.
Restricted Cash
Restricted cash primarily consisted of funds held in escrow accounts relating to our Hess joint venture dissolution.
Concentration of Credit Risk
The Company maintains its cash balances at several financial institutions, which are insured by the Federal Deposit Insurance Corporation. The Company’s cash balances typically are in excess of the insured limit. This concentration may impact the Company’s overall credit risk, either positively or negatively, in that this entity may be similarly affected by changes in economic or other conditions. The Company has incurred no losses related to these accounts.
Accounts Receivable
Accounts receivable include oil and gas revenues and joint interest billings. Management periodically assesses the Company’s accounts receivable and establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company usually does not require collateral.
Revenue Recognition
The Company derives its oil and gas revenue primarily from the sale of produced oil and gas. The Company uses the sales method of accounting for the recognition of gas revenue whereby revenues, net of royalties are recognized as the production is sold to the purchaser. The amount of gas sold may differ from the amount to which the Company is entitled based on its working interest or
net revenue interest in the properties. Revenue is recorded when title is transferred based on our nominations and net revenue interests. Pipeline imbalances occur when production delivered into the pipeline varies from the gas we nominated for sale. Pipeline imbalances, which have historically been and currently continue to be immaterial, are settled with cash approximately 30 days from date of production and are recorded as a reduction of revenue or increase of revenue depending upon whether we are over-delivered or under-delivered. Settlements of oil and gas sales occur after the month in which the product was produced. We estimate and accrue for the value of these sales using information available at the time financial statements are generated. Differences are reflected in the accounting period during which payments are received from the purchaser.
Successful Efforts Method of Accounting for Oil and Gas Activities
The Company accounts for its oil and gas exploration and production activities under the successful efforts method of accounting. Oil and gas lease acquisition costs are capitalized when incurred. Lease rentals are expensed as incurred. Oil and gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved reserves. Exploratory drilling costs are capitalized when drilling is complete if it is determined that there is economic producibility supported by either actual production or a conclusive formation test. If proved reserves are not discovered, such drilling costs are expensed. In some circumstances, it may be uncertain whether proved reserves have been found when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of natural gas and crude oil, are capitalized. Unproved properties with individually significant acquisition costs are analyzed on a property-by-property basis for any impairment in value. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and gas properties.
The Company’s third party engineers estimate proved oil and gas reserves, which directly impact financial accounting estimates, including depreciation, depletion, and amortization and impairment considerations. Our proved reserves represent estimated quantities of oil and condensate, natural gas liquids and gas that geological and engineering data demonstrate, with reasonable certainty, to be recovered in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is very complex requiring significant subjective decisions in the evaluation of all available geological, engineering, and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving producing history, and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time.
Depreciation, depletion, and amortization of the cost of proved oil and gas properties are calculated using the unit-of-production method. The reserve base used to calculate depreciation, depletion, and amortization for leasehold acquisition costs is the sum of proved developed reserves and proved undeveloped reserves. With respect to lease and well equipment costs, which include development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. Estimated future dismantlement, restoration, and abandonment costs, net of salvage values are taken into account.
Unit-of-production rates are revised whenever there is an indication of a need, but at least annually. When circumstances indicate that an asset may be impaired, the Company compares expected undiscounted future cash flows at a producing field level to the net book value of the asset. If the future undiscounted cash flows, based on the Company’s estimate of future natural gas and crude oil prices, operating costs, anticipated production from proved reserves, and other relevant data, are lower than the net book value, the capitalized cost is reduced to fair value. Fair value is calculated by discounting the future cash flows at an appropriate risk-adjusted discount rate.
Asset Retirement Obligations
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.
Furniture and Fixtures
Furniture and fixtures are stated at cost. Depreciation is calculated using the straight-line method over the assets’ estimated useful lives as follows:
Other Assets
Other assets consist primarily of debt issuance costs and fair values associated with our joint venture carried wells. At December 31, 2014 and 2013, debt issuance costs were $2.5 million and $2.5 million, and accumulated amortization was $0.9 million and $0.5 million, respectively. The costs are being amortized over the life of the associated debt. At December 31, 2014 and 2013, fair values associated with our joint venture carried wells were zero and $5.8 million, respectively.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to the differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted change.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Management periodically assesses, by tax jurisdiction, the probability of recovery of recorded deferred tax assets based on its assessment of future earnings estimates. The Company considers estimates of future production, commodity prices and expenditures, and future taxable income in determining the need for a valuation allowance. Such estimates are inherently imprecise since many assumptions utilized in the assessments are subject to revision in the future. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. In the event we were to determine that it is more likely than not that we will be unable to realize all or part of our deferred tax assets in the future, we would increase the valuation allowance and recognize a corresponding charge to earnings and comprehensive income in the period in which we make such a determination. Likewise, if we later determine that we are more likely than not to realize the deferred tax assets, we would reverse the applicable portion of the previously recognized valuation allowance. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.
The Company is required to make judgments, including estimating reserves for potential adverse outcomes regarding tax positions that the Company has taken. The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. Determining the income tax expense for potential assessments and recording the related effects requires management judgments and estimates. The amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and, therefore, could have a material impact on our tax provision, net income and cash flows.
The Company recognizes accrued interest related to uncertain tax positions in Interest Expense and accrued penalties related to such positions in General and Administrative expense in the Consolidated Statements of Operations.
Stock-based Compensation
Stock-based compensation cost is measured at the date of grant, based on the fair value of the award, and is recognized as expense, generally on a straight line basis over the vesting period of the award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Awards subject to vesting requirements for non-employees are fair valued each reporting period, final fair value being determined at the vesting date.
Our policy is to issue new shares for the exercise of stock options, when restricted stock awards are granted, and at vesting of restricted stock units. Stock grants are approved by the Compensation Committee. To date, both restricted stock awards and restricted stock options have been granted under the Amended and Restated Long Term Incentive Plan (the “Plan”). Unless otherwise provided in the award agreement, each restricted stock award and restricted stock option granted under the Plan shall vest such that one-third of the original number of shares of common stock granted shall vest as of each anniversary of the date of grant. Stock awards granted as Short term Incentive awards can vest anywhere between immediately and one year. The maximum term of any award is three years.
Income (Loss) Per Common Share
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period.
Diluted income (loss) per share reflects the potential dilutive effect of unvested share-based payments, warrants and debt instruments that can be converted into common stock. We use the treasury stock method to compute potential common shares from unvested share-based payments and warrants and the if-converted method to compute potential common shares from convertible notes. When a net loss occurs, potential common shares have an anti-dilutive effect on loss per share and are excluded from the diluted loss per share calculations.
Recent Accounting Standards
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”. This update raised the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other
material disposal transactions that do not meet the revised definition of discontinued operations. Under the updated standard, a disposal of a component or group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components of the entity (1) has been disposed of by a sale, (2) has been disposed of other than by sale or (3) is classified as held for sale. This accounting standards update is effective for annual periods beginning on or after December 15, 2014 and is applied prospectively. Early adoption is permitted but only for disposals (or classifications that are held for sale) that have not been reported in financial statements previously issued or available for use. We adopted the new standard for our fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2014. The adoption of this had no impact on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective beginning in fiscal year 2017 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows and has not yet determined the transition method it will use.
In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (Topic 718)”. This update amends current guidance for stock compensation tied to performance targets. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. ASU 2014-12 will be effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40)”. This update defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures in the financial statement footnotes. ASU 2014-15 will be effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. We are currently evaluating the provisions of this ASU and assessing the impact, if any, it may have on our financial statement footnotes.
In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815)”. This update clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. ASU 2014-16 will be effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. The adoption of ASU 2014-16 is not expected to have an impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 4 - LOSS PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic and diluted income (loss) per common share computation (in thousands, except per share data):
For the year ended December 31, 2014, the calculations of basic and diluted loss per common share were the same as we did not include the anti-dilutive effects attributable to the following: (a) 0.3 million options, (b) 0.9 million unvested restricted common stock outstanding, (c) 1.6 million common equivalent shares from the embedded convertible options associated with the Convertible Senior Notes, and (d) 3.2 million warrants.
For the year ended December 31, 2013, the calculations of basic and diluted loss per common share were the same as we did not include the anti-dilutive effects attributable to the following: (a) 2.7 million warrants, (b) 1.6 million common equivalent shares from the embedded convertible options associated with the Convertible Senior Notes, and (c) 0.2 million unvested restricted common stock outstanding.
NOTE 5 -INCOME TAXES
We are subject to income taxes primarily in the United States. The provision for taxes on income consists primarily of income taxes based on the tax laws and rates of the countries in which operations were conducted during the periods presented. We paid approximately $44,000 in 2014 related to 2013 U.S. alternative minimum tax that had been previously accrued. Additionally, we also paid approximately $0.5 million in 2014 related to 2013 Texas franchise taxes that had been previously accrued. We paid approximately $2.4 million in 2013 related to capital gains taxes from the wind up of our foreign subsidiaries that had been previously accrued.
The following table summarizes income tax expense (benefit) from continuing operations (in thousands):
The following table reconciles income tax benefit at the U.S. federal statutory rate to the benefit for income taxes (in thousands):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2014 and 2013 is as follows (in thousands):
Deferred income tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or liability in the consolidated balance sheet except for deferred tax assets related to net operating loss carryforwards which is classified as current or noncurrent based on the periods the carryforwards are expected to be utilized. By taxing jurisdiction, all current deferred tax assets and liabilities are offset and presented as a net current deferred tax asset or liability and all noncurrent deferred tax assets and liabilities are offset and presented as a net noncurrent deferred tax asset or liability. At December 31, 2014 and 2013, the net deferred income tax asset (liability) is classified as follows (in thousands):
We have approximately $134 million in gross net operating losses (“NOL”) expiring between 2026 and 2034 that have been offset against our uncertain tax position as currently presented on our balance sheet. Use of NOLs, however, may be limited if we undergo an ownership change. Generally, an ownership change occurs if certain persons or groups, increase their aggregate ownership in us by more than 50 percentage points looking back over a rolling three-year period. If an ownership change occurs, our ability to use our NOLs to reduce income taxes is limited to an annual amount, or the Section 382 limitation, equal to the fair market value of our common stock immediately prior to the ownership change multiplied by the long term tax-exempt interest rate, which is published monthly by the Internal Revenue Service. In the event of an ownership change, NOLs can be used to offset taxable income for years within a carryforward period subject to the Section 382 limitation. Any excess NOLs that exceed the Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period. Whether or not an ownership change occurs, the carryforward period for NOLs is 20 years from the year in which the losses giving rise to the NOLs were incurred. If the carryforward period for any NOL were to expire before that NOL had been fully utilized, the unused portion of that NOL would be lost. Our use of new NOLs arising after the date of an ownership change would not be affected by the Section 382 limitation (unless there is another ownership change after the new NOLs arise).
Realization of our deferred tax assets, specifically our net operating loss carryforwards also depends on our ability to generate taxable income within the carryforward period. Due to uncertainty related to the Company’s ability to generate taxable income sufficient to realize all of our deferred tax assets we have recorded the following valuation allowances on our deferred tax assets as of December 31, 2014 and 2013 (in thousands):
The following is a tabular reconciliation of the total amounts of gross unrecognized tax benefits (in thousands):
As of December 31, 2014, the Company has NOLs available for carryback that exceed the $16.4 million of unrecognized tax benefit. As such, the unrecognized tax benefit is presented as a reduction of the NOLs, resulting in no liability on the consolidated balance sheet as of December 31, 2014. As of December 31, 2013, $2.1 million of NOL was available for carryback, so that portion of the unrecognized tax benefit was presented as a reduction of NOL. The remaining $14.3 million of unrecognized tax benefit was separately recorded as a liability as of December 31, 2013 and is included in long-term accrued liabilities. At December 31, 2014, we are not able to reasonable estimate the period in which settlement related to the $16.4 million of uncertain tax positions could occur, if at all.
The total amounts of interest and penalties recognized in the statement of operations and the total amounts of interest and penalties recognized in the statement of financial position are not material for the years ended December 31, 2014 and 2013. Amounts of income tax expense or benefit related to components of other comprehensive income, including reclassifications within other comprehensive income, are not material for the years ended December 31, 2014 and 2013.
NOTE 6 - FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The guidance requires disclosure that establishes a framework for measuring fair value expands disclosure about fair value measurements and requires that fair value measurements be classified and disclosed in one of the following categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or supported by observable levels at which transactions are executed in the market place.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our valuation models for derivative contracts are primarily industry-standard models that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, (c) volatility factors, (d) counterparty credit risk and (e) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Level 3 instruments primarily include warrants, embedded conversion options and debt. Although we utilize third-party broker quotes to assess the reasonableness of our prices and valuation techniques, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value, due to the short-term nature or maturity of the instruments.
The Senior Secured Notes and Subordinated Notes were valued under the income approach using discounted cash flows. The Convertible Senior Notes and embedded conversion option were valued using a Binomial Lattice Model designed to capture incremental value attributed to the conversion options in addition to the value of the note. The warrants issued in association with the Senior Secured Notes (the “2020 Warrants”) were valued as written call options using a Binomial Lattice Model. The 2019 Warrants were valued using a weighted probability allocation between a Binomial Lattice Model and Black Scholes Option Pricing Model.
Cash flows were discounted utilizing the U.S. Treasury rate and our credit spread to estimate the appropriate risk adjusted rate. A Binomial Lattice Model was used to estimate our credit spread by solving for a premium to the U.S. Treasury rate that
produces a value of the Convertible Senior Notes. The fair value measurements are considered Level 3 measurements within the fair value hierarchy.
The following tables summarize the valuation of our liabilities measured on a recurring basis at levels of fair value at December 31, 2014 and 2013 (in thousands):
The following is a reconciliation of changes in fair value of our liabilities classified as Level 3 during the years ended December 31, 2014 and 2013 (in thousands):
(A) For further information regarding the Crede matter relating to the 2019 Warrants, see “Note 1 - Basis of Presentation - Crede Securities Purchase Agreement”.
On December 31, 2014, the Senior Secured Notes, which had a book value of $13.6 million (net of unamortized discount of $0.3 million), had a fair value of approximately $13.9 million. An increase in the credit spread by 500 basis points results in a $0.1 million decrease in the fair value of the note.
On December 31, 2014, the Convertible Senior Notes, which had a book value of $30.9 million (net of unamortized discount of $9.1 million), had a fair value of approximately $31.3 million. An increase in the credit spread by 500 basis points results in a $2.6 million decrease in the fair value of the note.
On December 31, 2014, Subordinated Notes, which had a book value of $47.3 million, had a fair value of approximately $32.0 million. An increase in the credit spread by 500 basis points results in a $2.7 million decrease in the fair value of the note.
As of December 31, 2014, an increase in the volatility by 5% results in a $0.4 million and $0.1 million increase in the fair values of the 2020 Warrants and embedded conversion option, respectively.
NOTE 7 - IMPAIRMENT OF ASSETS
The Company reviews non-producing leasehold costs and proved oil and gas properties on a field-by-field basis for impairment when events or circumstances indicate a possible decline in the recoverability of the carrying value of such property. We compare the carrying value of the property to its estimated undiscounted future cash flows. If the carrying value of the property exceeds its estimated undiscounted future cash flows, the carrying value is reduced to its estimated fair value and any impairment is charged to expense in the period incurred. Fair value is estimated using comparable market data, a discounted future cash flow method, or a combination of the two. Significant Level 3 assumptions are used in the fair value determination and include management’s expectations of future production, commodity prices, operating and development costs, risk-adjusted discount rate and other relevant data.
For the year ended December 31, 2014, we impaired non-producing leasehold costs by $3.6 million and producing oil and gas properties by $3.4 million - for a total impairment of $7.0 million.
In 2014, non-producing leasehold costs in South Texas with carrying values of $4.0 million were written down to their fair value of $0.4 million, resulting in pretax impairment charges of $3.6 million. The decline in fair value of these non-producing leases is driven by the expiration of existing leases in South Texas. Producing oil and gas properties with carrying values of $4.7 million were also written down to their fair values of $1.4 million, resulting in pretax impairment charges of $3.4 million. The decline in fair value of these oil and gas properties is driven by the lower commodity price environment.
For the year ended December 31, 2013, we impaired non-producing leasehold costs by $66.6 million, producing oil and gas properties by $37.8 million and inventory by $0.2 million for a total impairment of $104.6 million.
In the second quarter of 2013, non-producing leasehold costs and producing oil and gas properties with combined carrying values of $145.5 million were written down to their fair values of $52.4 million, resulting in pretax impairment charges of $93.1 million. Included in the $93.1 million non-cash impairment charge were non-producing leasehold cost impairments of $56.9 million and producing oil and gas properties impairments of $36.2 million. The impairments of producing oil and gas properties related to one well in South Texas and two wells in East Texas.
In the third quarter of 2013, non-producing leasehold costs with carrying values of $13.1 million were written down to their fair values of $4.1 million. Additionally, we wrote down the carrying value of our inventory by $0.2 million. This resulted in pre-tax impairment charges totaling $9.2 million. The decline in fair value of the non-producing leases was driven by the expiration of leases in South Texas.
In the fourth quarter of 2013, non-producing leasehold costs with carrying values of $1.3 million were written down to their fair values of $0.8 million, resulting in pretax impairment charges of $0.5 million. The impairment of non-producing leasehold costs were triggered by lease expirations in our Sweet Home Prospect. Additionally, oil and gas properties with carrying values of $2.0 million were written down to their fair values of $0.3 million, resulting in pretax impairment charges of $1.7 million. The impairment of producing oil and gas properties relate to three wells in South Texas.
NOTE 8 - ASSET RETIREMENT OBLIGATIONS
The following table summarizes the changes in our asset retirement liability during the years ended December 31, 2014 and 2013 (in thousands):
NOTE 9 - LONG-TERM DEBT
Our long-term debt includes Senior Secured Notes, Convertible Senior Notes, and Subordinated Notes. The fair market values of debt, warrants associated with the Senior Secured Notes and embedded conversion option associated with Convertible Senior Notes are disclosed in “Note 6 - Fair Value Measurement”. At December 31, 2014 and 2013, gross debt issuance costs were $2.5 million and $2.5 million, and accumulated amortization was $0.9 million and $0.5 million, respectively. The costs are being amortized over the life of the associated debt.
Our long-term debt consisted of the following (in thousands):
(1)
The Senior Secured Notes original issuance discount is amortized to the principal amount through the date of the first put right on April 21, 2015 using the effective interest rate method and a rate of 19.2%.
(2)
The Convertible Senior Notes original issuance discount is amortized to the principal amount through maturity on August 1, 2017 using the effective interest rate method and a rate of 17.8%.
(3)
We classified $13.6 million of our Senior Secured Notes as current as of December 31, 2014 pursuant to the Securities Purchase Agreement described below, which gives the holders of the Senior Secured Notes the right to require us to purchase all or a portion of the Senior Secured Notes beginning March 23, 2015. We classified $10.2 million of our Senior Secured Notes as current as of December 31, 2013 pursuant to Amendment No. 5 to the Securities and Purchase Agreement, which required the principal balance to be reduced to $15 million by February 28, 2014.
10.00% Senior Secured Notes due 2017 and 2020 Warrants
The Senior Secured Notes were issued under a Securities Purchase Agreement, dated February 21, 2012 (as amended, the “Securities Purchase Agreement”) and will mature on February 21, 2017 (subject to an early put option as described below). The Senior Secured Notes are guaranteed by all of our subsidiaries and secured by a first-priority lien on substantially all of our assets and of our domestic subsidiaries. To the extent such assets include stock of any foreign subsidiaries, only 65% of such foreign subsidiary stock is to be pledged as security for the Senior Secured Notes. The Senior Secured Notes rank senior to all of our other debt and obligations. We are permitted to have up to $50 million in additional reserves-based secured lending (including, but not limited to, pre-paid swaps); such borrowings may be secured by liens that come ahead of the liens securing the Senior Secured Notes. We are subject to certain affirmative and negative covenants pursuant to the Senior Secured Notes, including, without limitation, restrictions on our and our subsidiaries’ abilities to incur additional debt, pay dividends or make other distributions, redeem stock, make investments, incur liens, enter into transactions with affiliates, merge or consolidate and transfer or sell assets, in each case subject to certain baskets and carve-outs.
On February 6, 2014, we received $11.5 million from an escrow account as a result of a settlement of disputes with the Hess Corporation and these proceeds, combined with approximately $1.1 million of cash on hand, were used to reduce the outstanding aggregate principal amount of our Senior Secured Notes from $26.8 million to $15.0 million. On September 17, 2014, as part of the Quantum Agreements, we received $11 million in cash and used $1.1 million to reduce the outstanding principal amount on our Senior Secured Notes from $15.0 million to $13.9 million.
Subject to certain adjustments set forth in the Securities Purchase Agreement, interest on the Senior Notes accrues at 10% per annum as of March 1, 2014, payable quarterly in cash. Amendment No. 5 to the Securities Purchase Agreement, dated March 28, 2013 (“Amendment No. 5”), stated that the interest rate would increase from 8% per annum to 10% per annum effective March 1, 2014 if the Senior Notes were not prepaid to zero by February 28, 2014. The balance outstanding on the Senior Secured Notes was $15 million as of February 28, 2014 and therefore the interest rate increased to 10% per annum.
Effective as of February 24, 2015, the Company entered into Amendment No. 7 to the Securities Purchase Agreement. Prior to Amendment No. 7, the Securities Purchase Agreement provided that each holder of Senior Secured Notes had the right, beginning on February 21, 2015, to give notice to the Company, requiring the Company to repurchase up to 100% of such Purchaser’s Senior Secured Notes at par plus accrued and unpaid interest (the “Senior Secured Notes Put Option”). The Company would have had 60 days after such notice to repurchase any such Senior Secured Notes. Amendment No. 7 amended the Securities Purchase Agreement to delay the earliest date that any noteholder could exercise the Senior Secured Notes Put Option by 30 days (from February 21, 2015 to March 23, 2015). Amendment No. 7 also contains a corresponding decrease from 60 days to 30 days of the time period afforded to the Company to complete the repurchase of the Senior Secured Notes of any holder that exercises its rights in accordance with the terms of Senior Secured Notes Put Option. As of March 31, 2015, we had entered into discussions with the holders of our Senior Secured Notes for an Amendment No. 8 to the Securities Purchase Agreement that would again delay the earliest date that any noteholder could exercise the Senior Secured Notes Put Option by 30 days (from March 23, 2015 to April 22, 2015). As of March 31, 2015, the holders of a majority of the principal amount of the Senior Secured Notes at the time outstanding had agreed to the additional 30-day delay contained in Amendment No. 8 (unaudited). However, for Amendment No. 8 to become effective, it must be approved by all holders of the Senior Secured Notes. The Company is continuing to work to get approval of Amendment No. 8 from all holders, but there can be no assurance that the Company will be successful in doing so. In anticipation of our independent registered public accounting firm for the year ended December 31, 2014 including in their report an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern as described in “Note 2 - Going Concern”, the Company also obtained in Amendment No. 7 relief from the “going concern” requirements for the Company’s 2014 consolidated financial statements.
With respect to overdue interest payments or during periods in which an event of default under the Securities Purchase Agreement has occurred and is continuing, the annual rate of interest will increase to the greater of 3% per annum in excess of the non-default interest rate and 8% over the yield to maturity for 10-Year United States treasury securities. In addition, the annual interest rate payable on the Senior Secured Notes will increase by 0.5% per annum for certain periods if a shelf registration statement with respect to the shares of Common Stock that are issuable upon exercise of the Warrants is no longer effective or otherwise becomes unavailable to holders of the Warrants. In addition, if we authorize the issuance and sale of any equity interests in the Company, we will use our commercially reasonable efforts to offer each Purchaser an opportunity to purchase up to such Purchaser’s pro rata portion of the offered securities on the terms set forth in the Securities Purchase Agreement.
Pursuant to the Securities Purchase Agreement, the purchasers of our Senior Secured Notes were also issued the 2020 Warrants, which were originally exercisable for 26,315,789 shares of our common stock at an exercise price of $3.15 per share. Due to various transactions in prior periods having triggered anti-dilution adjustments in the 2020 Warrants and considering the impact of the reverse stock split, as of December 31, 2014, the number of outstanding shares of Common Stock represented by the 2020 Warrants is 3,268,980 with an exercise price of $16.62 per share. The Warrants also contain a cashless exercise provision and became exercisable at the option of the holder at any time beginning August 21, 2012. We can force exercise of the Warrants at any time beginning February 21, 2015 if the daily volume weighted average price (the “VWAP”) of Common Stock is, at the time of such conversion, greater than or equal to $100.00 per share for the prior 45 consecutive trading day period, and if for each of those 45 consecutive trading days, an average of at least 5,000 shares of Common Stock are traded per day during such period. The Warrants expire on August 21, 2020. The Warrants also prohibit the payment of cash dividends for as long as the Warrants remain outstanding.
At December 31, 2014 and December 31, 2013, the unamortized issuance discount related to Senior Secured Notes was $0.3 million and $3.6 million, respectively. The outstanding principal of the Senior Secured Notes was $13.9 million and $26.8 million at December 31, 2014 and December 31, 2013, respectively.
Amendment No.5 was considered an extinguishment of debt. Accordingly, in the first quarter of 2013, for accounting purposes we extinguished the Senior Secured Notes and associated discounts and debt issuance costs of $33.2 million, $9.1 million and $1.2 million, respectively. We recognized a loss on extinguishment of debt of $15.1 million consisting of a loss from the modification of the terms of the 2020 Warrants of $10.9 million and a difference between the fair value and book value of debt of $4.2 million. We recorded the modified debt at its fair market value of $27.1 million, consisting of a principal amount of $33.2 million and discount of $6.1 million. Additionally, we recognized losses on the extinguishment of debt associated with interest and prepayment penalties on the prepayment of principal on our Senior Secured Notes totaling approximately $2.0 and $1.5 million respectively in 2014 and 2013.
9.00% Convertible Senior Notes due 2017
The Company has $40,000,000 aggregate principal amount of Convertible Senior Notes. The Convertible Senior Notes are the senior, unsecured obligations of the Company, bear interest at a fixed rate of 9.0% per year, payable semiannually in arrears and mature August 1, 2017 unless earlier converted, redeemed or repurchased. The Convertible Senior Notes are convertible, at the option of the holder, at any time prior to the third trading day immediately preceding the maturity date, into shares of the Company’s common stock, par value $0.01 per share (the “Conversion Shares”), and cash in lieu of fractional shares of common stock. The reverse stock split adjusted conversion rate is 40.0052 shares per $1,000 Convertible Senior Notes which equated to an initial conversion price of $25.00 per share.
In certain circumstances, after the occurrence of a fundamental change, the conversion rate shall be increased (according to the date of such fundamental change) for holders who convert their Convertible Senior Notes on or after the effective date of such fundamental change. In addition, upon the occurrence of a fundamental change, holders may require the Company to repurchase for cash of all or a portion of such holder’s Convertible Senior Notes at a purchase price equal to 100% of the principal amount of the Convertible Senior Notes to be purchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
If a holder converts some or all of its Convertible Senior Notes on or after May 1, 2013 but prior to August 1, 2017, in addition to the Conversion Shares, such holder will receive a coupon make-whole payment for the Convertible Senior Notes being converted. The coupon make-whole payment will be equal to the sum of the present values of the lesser of five semi-annual interest payments or the number of semi-annual interest payments that would have been payable on such converted Convertible Senior Notes from the last day through which interest was paid on the Convertible Senior Notes through July 31, 2017. The Company may elect to pay such make-whole payment in either cash or, subject to shareholder approval if required under applicable stock exchange rules, shares of common stock, and if paid in shares of common stock, then the stock will be valued at 95% of the simple average of the daily volume weighted average prices for the common stock for the 10 trading days ending on and including the trading day immediately preceding the conversion date.
The Company may not redeem the Convertible Senior Notes prior to August 1, 2015. Beginning August 1, 2015, the Company may redeem for cash all or part of the Convertible Senior Notes if the last reported sale price of its common stock equals or exceeds 150% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date on which the Company delivers the notice of the redemption. The redemption price will equal 100% of the principal amount of the Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
The Convertible Senior Notes contains covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to, with certain exceptions, incur additional indebtedness or guarantees of indebtedness, and to dispose of assets, except under certain conditions and with certain exceptions, including contributions of assets to specified joint venture transactions. In addition, the terms of the Convertible Senior Notes Indenture require that the Company file all reports customarily
filed with the SEC within the time frames required by SEC rules and provide information to permit the trading of the Convertible Senior Notes pursuant to SEC Rule 144A, and that all current and future domestic restricted subsidiaries (as defined in the Convertible Senior Notes) of the Company, except for immaterial subsidiaries, jointly and severally guarantee the Convertible Senior Notes on a senior unsecured basis. The Company will be able to designate a restricted subsidiary as an unrestricted subsidiary under specified conditions. The Company designated its foreign subsidiaries as unrestricted. These subsidiaries had no business operations as of December 31, 2014.
The Convertible Senior Notes contain customary events of default, including failure to pay interest after a 30 day grace period, failure to pay principal when due, failure to comply with certain covenants, such as the offer to repurchase upon a fundamental change, failure to comply with other covenants after a customary grace period, cross-defaults, judgment defaults and certain bankruptcy events. If an event of default on the Convertible Senior Notes has occurred and is continuing, the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest, may become immediately due and payable. Upon the occurrence of certain events of default, these amounts automatically become due and payable.
At December 31, 2014 and 2013, the unamortized issuance discount related to Convertible Senior Notes was $9.1 million and $12.0 million, respectively.
8.00% Subordinated Notes due 2017
In February 2012, we issued the Subordinated Notes in an aggregate amount of $47.33 million to Todd A. Brooks (President and Chief Executive Officer of the Company) and Blackstone Oil & Gas, LLC (an entity controlled by Mr. Brooks) (together, the “Brooks Note Holders”), (b) John E. Hearn, Jr. (a Director of the Company) and Lara Energy, Inc. (an entity controlled by Mr. Hearn) (together, the “Hearn Note Holders”) and (c) Gaston L. Kearby (a Director of the Company) and Omega Energy Corp. (an entity controlled by Mr. Kearby) (together, the “Kearby Note Holders,” and collectively with the Brooks Note Holders and the Hearn Note Holders, the “Subordinated Note Holders”). Until modified by the Modification Agreements described below, the Subordinated Notes accrued interest at a rate of 8% per annum payable monthly in cash, and matured on August 17, 2017.
On February 24, 2014, the Company entered into Exchange Agreements (the “Exchange Agreements”) to exchange an aggregate of $47.3 million in 8.00% Subordinated Notes due 2017 for a combination of shares of common stock of the Company and shares of a new series of preferred stock of the Company. The Exchange Agreements were amended and superseded by the Subordinated Note Modification Agreements with each of the Subordinated Note Holders (the “Modification Agreements”) on January 19, 2015. The Modification Agreements provide that, instead of exchanging the Subordinated Notes for common stock and preferred stock of the Company, all interest payments to the Subordinated Note Holders will be paid in kind.
Simultaneously with the execution of the Modification Agreements, each Subordinated Note Holder surrendered his or its Subordinated Note effective as of January 19, 2015 in exchange for a replacement subordinated note (each, a “First Amended and Restated Subordinated Note”). The First Amended and Restated Subordinated Notes provide that interest payments will be paid in kind as additional principal beginning with the first interest payment due with respect to interest that accrues beginning January 1, 2015, and the payment-in-kind interest will continue as long as those notes remain outstanding. Interest will continue to accrue at a rate of 8.00% per annum, and the maturity date will remain August 21, 2017.
Under the terms of the Company’s 10.00% Senior Secured Notes due 2017, the holders of the Senior Secured Notes may require the Company to repurchase up to 100% of the Senior Secured Notes at par plus accrued and unpaid interest. Holders of Senior Secured Notes can exercise the put beginning on March 23, 2015, and the Company would have up to 30 days after receiving notice of any put exercises in order to repurchase the Senior Secured Notes. Accordingly, the Company has been attempting to either refinance the Senior Secured Notes or to amend the terms of the Senior Secured Notes to delay the date on which the put right becomes exercisable. In order to facilitate the refinancing of the Senior Secured Notes, the Subordinated Note Holders have also agreed in the Modification Agreements to negotiate in good faith any inter-creditor agreement that may be requested by any senior lender in connection with the refinancing of the Senior Secured Notes or a deferral of the put right. Also, the First Amended and Restated Subordinated Note establishes as an event of default thereunder any acceleration of the indebtedness associated with the Senior Secured Notes or other senior indebtedness. However exercise of the Senior Secured Notes Put Option does not constitute an event of default.
The First Amended and Restated Subordinated Notes also eliminated the Company’s obligation to use 20% of the proceeds from equity financing after February 21, 2015, or 20% of the proceeds from subordinated debt financing at any time, to prepay a portion of the Subordinated Notes. The Subordination Agreement currently overrides that requirement, but the Modification Agreements makes it clear that the Company will not be subject to that requirement if the Senior Secured Notes are repaid in full.
Interest expense
For the years ended December 31, 2014 and 2013, interest expense consisted of the following (in thousands):
NOTE 10 - STOCK-BASED COMPENSATION
Long Term Incentive Plan (the “Plan”)
We had 2.3 million shares authorized for issuance under the Plan of which approximately 0.7 million shares were available for future grants under the Plan as of December 31, 2014.
Stock-based compensation costs for the years ended December 31, 2014 and 2013 were $3.4 million and $3.7 million, respectively.
The following table presents the changes in unvested stock awards pursuant to the Plan (in thousands except per share data):
The following table presents the changes in unvested stock options pursuant to the Plan (in thousands except per share data):
The total vest date intrinsic value of awards vested in 2014 and 2013 was $1.2 million and $2.2 million respectively. On December 31, 2014 and 2013, we had $5.6 million and $2.6 million, respectively, of total unrecognized compensation costs related to unvested awards which are expected to be recognized over a weighted average period of 2.3 years and 1.75 years, respectively.
NOTE 11 - SEVERANCE COSTS
In May 2014, ZaZa announced the resignation of Ian H. Fay as Chief Financial Officer of the Company. In connection with Mr. Fay’s resignation, the Company recognized severance costs totaling approximately $2.8 million in the second quarter of 2014 which are included in general and administrative expenses. In November 2014, the Company reached an agreement with Mr. Fay and recognized a benefit of $1.2 million related to a reduction in severance payments. The Company will have no further obligations to Mr. Fay. For the year ended December 31, 2014, we paid or otherwise settled $3.1 million related to severance and restructuring expenses. As of December 31, 2014, we have a remaining liability of $0.4 million which is recorded in current accrued liabilities.
In April 2013, ZaZa announced a significant reduction in workforce and terminated approximately 37 employees and contractors, and closed offices in Corpus Christi and Dallas. In the second quarter of 2013, we recognized $3.9 million in severance
expense and $0.7 million in onerous contracts for a total expense of $4.6 million included in general and administrative expenses. For the year ended December 31, 2013, we paid or otherwise settled $3.2 million related to severance and restructuring expenses. As of December 31, 2013, we had a remaining liability of $1.4 million of which $1.0 million was recorded in current accrued liabilities and $0.4 million was recorded in non-current accrued liabilities.
NOTE 12 - OPERATING LEASES
ZaZa has non-cancelable office leases in Houston and Huntsville, Texas, with lease terms until March 2017. Rent expense for the years ended December 31, 2014 and 2013 totaled $0.9 million and $1.8 million, respectively, after reimbursements from subleases of $0.6 million and $0.4 million, respectively.
Future minimum rental payments under all non-cancelable operating leases as of December 31, 2014 were as follows (in thousands):
The above future minimum rental payments under non-cancelable operating leases also include future obligations to Blackstone Oil & Gas, LLC (“Blackstone”) for the sublease of 3,992 square feet entered into on January 1, 2015 as disclosed in “Note 13 - Related Party Transactions.” Future minimum rental payments for 2015, 2016, and 2017 attributable to the Blackstone sublease are $0.2 million, $0.2 million, and $0.04 million respectively.
NOTE 13 - RELATED PARTY TRANSACTIONS
On December 19, 2014, Blackstone Oil & Gas, LLC (“Blackstone”) entered into a lease agreement for 3,992 square feet of office space in Houston that is occupied by the Company. On January 1, 2015, the Company entered into a sublease agreement with Blackstone to occupy this space. The Company will pay the landlord directly for lease expenses. There were no payments made to Blackstone in 2014.
On February 24, 2014, the Company entered into Exchange Agreements to exchange an aggregate of $47.3 million in 8.00% Subordinated Notes due 2017 for a combination of shares of common stock of the Company and shares of a new series of preferred stock of the Company. The Exchange Agreements were amended and superseded by Modification Agreements on January 19, 2015. The Modification Agreements provide that, instead of exchanging the Subordinated Notes for common stock and preferred stock of the Company, all interest payments to the Subordinated Note Holders will be paid in kind.
On August 21, 2013, the Company entered into a stock purchase agreement with Todd A. Brooks, the President and Chief Executive Officer of the Company. Under the stock purchase agreement, Mr. Brooks agreed to purchase from the Company 150,000 (as adjusted for the reverse stock split) shares of the Company’s common stock at a price of $9.20 per share, which was the closing bid price of the common stock on the NASDAQ on August 21, 2013, for total consideration of $1,380,000. The shares of common stock were sold to Mr. Brooks in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933.
Prior to the Combination, ZaZa LLC entered into assignments of overriding royalty interests (the “ORRI Assignments”) with each of the ZaZa Founders (which includes our Chief Executive Officer and President Todd A. Brooks and directors Gaston L. Kearby and John E. Hearn Jr.). The ORRI Assignments granted each of the ZaZa Founders a direct or indirect interest in an overriding royalty interest generally equal to one percent (1%) (for a total of three percent (3%)) in any interests that ZaZa LLC acquires within select counties in Texas, Louisiana, Mississippi, Alabama and Florida that generally make up the upper cretaceous shale across the southern Gulf Coast of the United States. The ORRI Assignments expire on April 29, 2016.
Lot-A-Go 5 (“LG5”) is an airplane rental company in which Todd A. Brooks and Gaston L. Kearby hold partnership interest. From time to time, ZaZa will rent aircraft for business travel reasons and be charged for the pilots’ time, hanger fees and fuel. During the year ended December 31, 2014 and 2013 ZaZa was charged and paid zero and $2,000, respectively, for such services.
On December 3, 2014, the Company entered into a letter agreement with the KLR Group, LLC (“KLR”) to serve as the exclusive advisor and placement agent for an offer and placement of the Company’s securities. Mr. Gaston L. Kearby, one of our board members, indirectly owns a 25% interest in KLR. We did not pay KLR any fees in 2014 or 2015 in connection with their
engagement. On February 12, 2015, we terminated our engagement with KLR, but under the engagement letter, KLR retains a right, for 12 months following termination of its engagement, to be paid a customary placement agent’s fee if the Company consummates any public or private offering of securities with an investor introduced to the Company by KLR.
Entry into Reimbursement Agreements
In connection with but following consummation of the combination of Toreador and ZaZa LLC, the ZaZa Founders, each determined to transfer to certain service providers approximately 170 thousand (reverse split adjusted) shares of restricted common stock of the Company (the “Restricted Stock”), held by entities controlled by the ZaZa Founders. Because such transfers were expected to give rise to a compensation expense deduction to the Company upon vesting of the grants, as opposed to giving rise to a deduction to the ZaZa Founders, the Company agreed to pay in cash to the ZaZa Founders the economic value of any tax deduction the Company receives as a result of these grants by the ZaZa Founders.
On September 11, 2012, the Company entered into separate Reimbursement Agreements with each of Blackstone Oil & Gas, LLC (“Blackstone”), Omega Energy Corp. (“Omega”), and Lara Energy, Inc. (“Lara”) (together, the “Reimbursement Agreements”). Blackstone, Omega, and Lara are respectively controlled by Todd A. Brooks, who serves as the Company’s President and Chief Executive Officer and also as a Director, Gaston L. Kearby, who is the former Executive Director-Operations and currently serves as a Director of the Company, and John E. Hearn Jr., who is the former Chief Operating Officer and a Director of the Company. Pursuant to the Reimbursement Agreements, the Company will reimburse each of Blackstone, Lara, and Omega for the value of the tax benefit(s) received by the Company due to the transfers of Restricted Stock within thirty (30) days of such time(s) when the Company is able to make use of the expense(s) relating thereto to reduce its federal income tax withholding or payments (the “Reimbursements”). If Blackstone, Lara, and Omega together cease to control a majority of the common stock of the Company prior to the time that the Company is able to make use of any or all of such expenses to reduce its federal income tax withholding or payments, then the Company will pay to each of Blackstone, Lara, and Omega an amount equal to thirty-five percent (35%) of the value of the shares of the Restricted Stock (determined at the time of vesting) transferred by each such grantor.
The Company estimates that the Reimbursements total $4.1 million (included in Long-term payable - related parties on the consolidated balance sheet) or $1.4 million for each of Blackstone, Lara, and Omega. No payments have been made during the years ended December 31, 2014 and 2013. The tax characterization of the Reimbursements and their reporting shall be determined by a third party tax advisor to the Company, which advisor must be reasonably acceptable to the ZaZa Founders. Each of Blackstone, Lara, and Omega will be responsible and liable for any tax consequences (including, but not limited to, any interest or penalties) as a result of the Reimbursements.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
From time to time, we are named as a defendant in legal proceedings arising in the normal course of business. In our opinion, the final judgment or settlement, if any, which may be awarded with any such suit or claim would not have a material adverse effect on our financial position, results of operations or cash flows.
Under the Quantum Agreements, we could also be required to repay Quantum for their proportionate interest in any additional interests and option acreage acquired outside the original $11 million investment between the date of the Quantum Agreements and two year anniversary. Quantum’s out of pocket costs that are incurred for additional interests and option acreage are contingent liabilities and only recorded as a liability when and if payment becomes probable. The Quantum Put Option cannot be enacted until the period beginning on the second anniversary of the Quantum Agreements and the 90th day following the second anniversary. As of December 31, 2014, this contingent liability totaled approximately $0.1 million.
NOTE 15 - DISCLOSURE OF MAJOR CUSTOMERS
For the years ended December 31, 2014 and 2013, customers who accounted for more than 10% of revenues included (in thousands):
NOTE 16 - SUBSEQUENT EVENTS
As disclosed in “Note 9 - Long Term Debt” in more detail, effective as of January 19, 2015, the Company entered into Modification Agreements that amended and superseded the Exchange Agreements. The Modification Agreements provide that, instead of exchanging the Subordinated Notes for common stock and preferred stock of the Company, all interest payments to the Subordinated Note Holders will be paid in kind. These changes occurred immediately and, unlike the Exchange Agreements, are not subject to the refinancing of the Senior Secured Notes.
As disclosed in “Note 9 - Long Term Debt”, effective as of February 24, 2015, the Company entered into Amendment No. 7 to the Securities Purchase Agreement.
ZAZA ENERGY CORPORATION
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OIL AND GAS PRODUCING ACTIVITIES
Users of this information should be aware that the process of estimating quantities of proved and proved developed oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir also may change substantially over time as a result of numerous factors, including additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various reservoirs make these estimates generally less precise than other estimates included in the financial statement disclosures.
Estimates of proved reserves in this annual report are prepared by independent engineering firms and are the responsibility of management. The preparation of our oil and gas reserve estimates is completed in accordance with our prescribed internal control procedures, which include verification of data input into reserves forecasting and economics evaluation software, as well as multi-discipline management reviews.
No major discovery or other favorable or unfavorable event after December 31, 2014, is believed to have caused a material change in the estimates of proved or proved developed reserves as of that date.
Capitalized Costs Related to Oil and Gas Producing Activities. The following table presents the capitalized costs relating to ZaZa’s oil and gas producing activities at December 31, 2014 and 2013.
As of December 31, 2014 and 2013, we carried capitalized exploratory well costs of $3.8 million and $1.6 million, respectively, pending the determination of proved reserves. We did not capitalize any exploratory well cost for a period greater than one year.
Costs Incurred. The following table presents the cash costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed for the years ended December 31, 2014 and 2013:
Total costs incurred during the years ended December 31, 2014 and 2013, include capitalized interest of zero and $0.3 million respectively.
Proved Reserves. The following table presents ZaZa’s proved reserves at December 31, 2014, 2013, and 2012, along with changes in proved reserves for years ended December 31, 2014 and 2013.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves. The following information was developed utilizing procedures prescribed by FASB Accounting Standards Codification Topic 932, Extractive Industries-Oil and Gas (Topic 932). The information is based on estimates prepared by our independent engineering firm. The “standardized measure of discounted future net cash flows” should not be viewed as representative of the current value of our proved oil reserves. It and the other information contained in the following tables may be useful for certain comparative purposes, but should not be solely relied upon in evaluating us or our performance.
In reviewing the information that follows, we believe that the following factors should be taken into account:
· future costs and sales prices will probably differ from those required to be used in these calculations;
· actual production rates for future periods may vary significantly from the rates assumed in the calculations; and
· a 10% discount rate may not be reasonable relative to risk inherent in realizing future net oil revenues.
Under the standardized measure, future cash inflows were estimated by applying the prices used in estimating our proved oil and gas reserves to the year-end quantities of those reserves. Future cash inflows were reduced by estimated future development, abandonment and production costs based on year-end costs in order to arrive at net cash flows before tax. The standardized measure is derived from using a discount rate of 10% a year to reflect the timing of future net cash flows relating to proved oil and gas reserves.
In general, management does not rely on the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable as well as proved reserves and varying price and cost assumptions considered more representative of a range of possible outcomes.
The following table presents the standardized measure of discounted future net cash flows from production of ZaZa’s oil and gas reserves for the years ended December 31, 2014 and 2013:
The prices of oil and gas at December 31, 2014 and 2013, used to estimate reserves in the table shown above, were approximately $92.76 per Bbl and approximately $96.97 per Bbl, of oil, respectively, and approximately $4.12 per Mcf and approximately $3.64 per Mcf of gas, respectively. The price utilized was the proceeding twelve month average price based on closing prices on the first day of each month for the year and adjusted for differentials such as gravity, quality and geographical location.
Future income tax expense included in the standardized measure of discounted future net cash flows for the year ended December 31, 2014 above is zero due to sufficient net operating loss carryforwards thereby reducing our expected income tax expense to zero.
Changes in Standardized Measure of Discounted Future Net Cash Flows. The following table presents the changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2014 and 2013 (in thousands)