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utreg:MMBTU iso4217:USD utreg:bbl amr:well

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_____________________________________

FORM 10-Q

_____________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to___

Commission file number: 001-38040

_______________________________________

ALTA MESA RESOURCES, INC.

(Exact name of registrant as specified in its charter)

_______________________________________



Delaware				81-4433840
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

15021 Katy Freeway,	Suite 400,	Houston,	Texas	77094
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code: 281-530-0991

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share	AMRQQ	OTC Pink Marketplace
Warrants to purchase one share of Class A Common Stock	AMRWQ	OTC Pink Marketplace

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☒	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 31, 2019, there were 182,755,573 shares of Class A Common Stock and 199,987,976 shares of Class C Common Stock, par value $0.0001 per share outstanding. The shares of Class A Common Stock shown as outstanding do not include 554,294 nonvested restricted stock awards outstanding as of August 31, 2019.

TABLE OF CONTENTS




	Page Number
Glossary	i
Cautionary Statement Regarding Forward-Looking Statements	1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Condensed Consolidated Statements of Operations	3
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Cash Flows	5
Condensed Consolidated Statements of Changes in Stockholders’ Equity	6
Condensed Consolidated Statement of Changes in Partners’ Capital	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures about Market Risk	50
Item 4. Controls and Procedures	51
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	51
Item 1A. Risk Factors	51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3. Defaults Upon Senior Securities	56
Item 4. Mine Safety Disclosures	56
Item 5. Other Information	56
Item 6. Exhibits	58
Signatures	59

Table of Contents

Index to Financial Statements

Glossary of Terms

The definitions and abbreviations set forth below apply to the indicated terms throughout this filing.



Company Specific Terms -
2018 10-K -	Alta Mesa Resources, Inc. Annual Report on Form 10-K for the year ended December 31, 2018.
2018 Period -	The combined Predecessor Period and Successor Period from February 9, 2018 through June 30, 2018 and January 1, 2018 through February 8, 2018.
2019 Period -	The six months ended June 30, 2019.
2024 Notes -	$500 million aggregate principal amount of 7.875% senior unsecured notes maturing December 2024.
Alta Mesa -	Alta Mesa Holdings, LP. This entity conducts our Upstream activities.
Alta Mesa GP -	Alta Mesa Holdings GP, LLC, a majority owned subsidiary of SRII Opco, LP.
Alta Mesa RBL -	Alta Mesa Eighth Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, as amended. This credit agreement is a reserve based loan or RBL.
Alta Mesa Services -	Alta Mesa Services, LP is a wholly owned subsidiary of Alta Mesa Holdings, LP.
AMH Debtors -	Alta Mesa Holdings, LP, Alta Mesa Holdings GP, LLC, OEM GP, LLC, Alta Mesa Finance Services Corp, Alta Mesa Services, LP and Oklahoma Energy Acquisitions, LP.
ARM -	ARM Energy Management, LLC, a company that marketed our oil and gas production and provided services relating to our derivatives.
Bankruptcy Code -	Chapter 11 of the United States Bankruptcy Code.
Bankruptcy Court -	United States Bankruptcy Court for the Southern District of Texas.
BCE -	BCE-STACK Development LLC, a fund advised by Bayou City Management, LLC.
Business Combination -	The acquisition by Alta Mesa Resources, Inc. of controlling interests in Alta Mesa Holdings GP, LLC, Alta Mesa Holdings, LP, and KFM Midstream, LLC.
Debtors -	Alta Mesa Resources, Inc., Alta Mesa Holdings, LP, Alta Mesa Holdings GP, LLC, OEM GP, LLC, Alta Mesa Finance Services Corp, Alta Mesa Services, LP and Oklahoma Energy Acquisitions, LP.
High Mesa -	High Mesa Holdings, LP, a partnership formed in connection with executing the Business Combination.
HMI -	High Mesa, Inc., the predecessor owner of Alta Mesa Holdings, LP.
KFM -	Kingfisher Midstream, LLC. This entity conducts our Midstream activities.
KFM Credit Facility -	Kingfisher Midstream, LLC amended and restated senior secured revolving credit facility with Wells Fargo Bank, National Association, as the administrative agent.
Midstream -	Reportable business segment representing our midstream activities.
Predecessor Period -	The period from January 1, 2018 through February 8, 2018.
PSU's -	Performance-based restricted stock units issued to employees under the Alta Mesa Resources, Inc. 2018 Long-Term Incentive Plan.
SRII Opco -	SRII Opco, LP is a subsidiary of Alta Mesa Resources, Inc. and direct owner of Alta Mesa Holdings, LP and Kingfisher Midstream, LLC.
Successor Period -	The period from February 9, 2018 through June 30, 2018, and all periods thereafter.
Upstream -	Reportable business segment representing our exploration and production activities.
Oil, Gas and Other Terms -
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 to describe volumes of crude oil, condensate or natural gas liquids.
bbld -	Barrels per day.
Bcf -	One billion cubic feet of natural gas.

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Index to Financial Statements



Bcfe -	One billion cubic feet of natural gas equivalent with one barrel of oil converted to six thousand cubic feet of natural gas. The ratio of six thousand cubic feet of natural gas to one bbl of oil or natural gas liquids is commonly used in the oil and natural gas business and represents the approximate energy equivalency of six thousand cubic feet of natural gas to one bbl of oil or natural gas liquids.
Boe -	One barrel of oil equivalent is determined using the ratio of six Mcf of natural gas to one barrel of oil, condensate or natural gas liquids. The ratio of six Mcf of natural gas to one bbl of oil or natural gas liquids is commonly used in our business and represents the approximate ratio of energy content between natural gas and oil, and does not represent the price equivalency of natural gas to oil or natural gas liquids.
Boed -	One boe per day.
Btu or British Thermal Unit -	The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Completion -	The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil.
Condensate -	A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced, is in the liquid phase at surface pressure and temperature.
Cryogenic -	The process of using extreme cold to separate NGLs from the natural gas stream.
DD&A -	Depreciation, depletion and amortization.
Development costs -	Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and natural gas.
Development project -	A development project is the means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.
Differential -	An adjustment to the market reference price of oil, natural gas or natural gas liquids from an established spot market price to reflect differences in the quality and/or location of oil or natural gas.
Dry hole -	A well found to be incapable of producing hydrocarbons in commercial quantities.
Dth -	A dekatherm is a unit of energy used primarily to measure natural gas and is equal to 1,000,000 Btu.
Dthd -	1,000,000 Btu per day.
EBITDA -	Earnings before interest, taxes, depreciation, depletion and amortization.
EBITDAX -	Earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses.
Enhanced recovery -	The recovery of oil and natural gas through the injection of liquids or gases into the reservoir, supplementing its natural energy. Enhanced recovery methods are often applied when production slows due to depletion of the natural pressure.
Exploitation -	A development or other project which may target proven or unproven reserves (such as probable or possible reserves), but which generally has a lower risk than that associated with exploration projects.
Formation -	A layer of rock which has distinct characteristics that differs from adjacent rock.
Fracing, fracture stimulation technology, hydraulic fracturing -	A well stimulation technique to improve a well’s production by pumping a mixture of fluids into the formation to create hydraulic fractures which intersect existing natural fractures. As part of this technique, sand or other material may also be injected to keep the hydraulic fracture open, so that fluids or natural gases may more easily flow through the formation.
Held by production -	Acreage covered by mineral leases that perpetuates a company’s right to operate a property usually requiring production to be maintained at a minimum economic quantity of production.
Horizontal drilling -	A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at an angle within a specified interval.
Lease operating expenses -	The expenses of lifting oil or natural gas from a producing formation to the surface, constituting part of the current operating expenses of a well. Such expenses include labor, supplies, repairs, utilities, environmental and safety, maintenance, allocated overhead costs, severance taxes, insurance and other expenses incidental to production, but excluding lease acquisition, drilling or completion expenses.

Table of Contents

Index to Financial Statements



Mbbl -	One thousand barrels of crude oil, condensate, natural gas liquids, or produced water.
Mbbld -	One thousand barrels per day.
MBoe -	One thousand boe.
MBoed -	One thousand boe per day.
Mcf -	One thousand cubic feet of natural gas.
Mcfd -	One thousand cubic feet per day.
Mcfe -	One thousand cubic feet equivalent determined using the ratio of one barrel of oil, condensate or natural gas liquids to six Mcf of natural gas.
Mcfed -	Mcfe per day.
MMBbl -	One million barrels of crude oil, condensate or natural gas liquids.
MMBoe -	One million boe.
MMBtu -	One million British thermal units.
MMBtud -	One million British thermal units per day.
MMcf -	One million cubic feet of natural gas.
MMcfd -	One million cubic feet per day.
MMcfe -	Million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MMcfed -	MMcfe per day.
Net acres -	The total acres a working interest owner has attributable to a particular number of acres, or a specified tract.
Net production -	Portion of production owned by us after production attributable to royalty and other owners.
NGLs or natural gas liquids -	Natural gas liquids are a group of hydrocarbons including ethane, propane, normal butane, isobutane and natural gasoline.
Non-operated working interests -	The working interest or fraction thereof in a lease or unit, the owner of which is without operating rights by reason of an operating agreement.
NYMEX -	The New York Mercantile Exchange.
Proved properties -	Properties with proved reserves.
Proved reserves -	Quantities of oil and natural gas, which can be estimated with reasonable certainty to be economically producible from known reservoirs, and under existing economic conditions, operating methods and government regulations.
Realized price -	The cash market price less all expected quality, transportation and demand adjustments.
Recompletion -	The process of treating an existing wellbore in an attempt to establish or increase existing production.
Reserves -	Estimated remaining quantities of oil and natural gas anticipated to be economically producible from known accumulations.
Resources -	Quantities of oil and natural 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 unrecoverable.
Royalty -	An interest in an oil and natural gas lease that gives the owner the right to receive a portion of the production from the leased acreage (or of the proceeds from the sale thereof), but does not require the owner to pay any portion of the production or development costs on the leased acreage.
SEC -	United States Securities and Exchange Commission.
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, produced water disposal, water supply for injection, observation, or injection for in-situ combustion.
Spacing -	The distance between wells producing from the same reservoir. Spacing in horizontal development plays is often expressed in terms of feet, e.g., 1000 foot spacing, and is often established by regulatory agencies.

iii

Table of Contents

Index to Financial Statements



STACK -	An oilfield in the eastern portion of the Anadarko Basin; STACK is an acronym describing both its location—Sooner Trend Anadarko Basin Canadian and Kingfisher County—and the multiple, stacked productive formations present in the area.
Unproved properties -	Properties with no proved reserves.
Wellbore -	The hole drilled by the bit that is equipped for natural gas production on a completed well. Also called a well or borehole.
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.
Workover -	Operations on a producing well to restore or increase production.

Table of Contents

Index to Financial Statements

Cautionary Statement Regarding Forward-Looking Statements

The information in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our ability to continue as a going concern, the outcome or timing of our emergence from bankruptcy, strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could”, “should”, “will”, “plan”, “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project,” the negative of such terms and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” in this Quarterly Report, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 (“Q1 2019 Form 10-Q”) and our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 10-K”). These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Forward-looking statements may include statements about:


•	our ability to continue as a going concern;


•	the outcome or timing of our emergence from bankruptcy, including limitations placed upon us by the process and our ability to develop, confirm and consummate a plan under Chapter 11 or an alternative restructuring or sale transaction;


•	our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of our Chapter 11 filing;


•	decisions by the KFM Board of Directors regarding making liquidity available to us during bankruptcy proceedings and any impact of those decisions on our ability to maintain compliance with the covenants in the KFM Credit Facility;


•	the sufficiency of liquidity to fund our operations and capital expenditures;


•	our access to capital, including constraints from the cost and availability of debt and equity financing;


•	our ability to comply with, or amend the terms of, the covenants and restrictions imposed by the KFM Credit Facility;


•	our ability to execute our stated business strategy;


•	our reserve quantities and the present value of our reserves;


•	our ability to replace the reserves we produce through drilling and through acquisitions;


•	our exploration and drilling prospects, inventories, projects and programs;


•	our drilling, completion and production technology;


•	future oil and gas prices;


•	the supply and demand for our production and our midstream services;


•	the timing and amount of our future production;


•	our hedging strategy and expected results;


•	competition and government regulation;


•	our ability to obtain permits and governmental approvals;


•	expected or anticipated regulatory changes, including to the Oklahoma forced pooling system;


•	pending legal and environmental matters;


•	our future drilling plans, spacing plans and development pace;


•	our marketing of our production;


•	our leasehold or business acquisitions;


•	our costs of developing our properties;


•	our ability to hire, train or retain qualified personnel;


•	general economic conditions;


•	operating hazards and other risks incidental to transporting, storing, gathering and processing natural gas, natural gas liquids and crude oil;


•	our future operating results, including production levels, initial production rates and yields in our type curve areas;


•	the costs, terms and availability of midstream services;


•	our ability to collect receivables from High Mesa, Inc. and its subsidiaries; and


•	our plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

Table of Contents

Index to Financial Statements

We caution you that any forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, gathering and sale of oil, natural gas and natural gas liquids. Some factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements include, but are not limited to, the ability to confirm and consummate a plan of reorganization; risks attendant to the bankruptcy process, including the effects thereof on our business and on the interests of various constituents, the length of time that we might be required to operate in bankruptcy and the continued availability of operating capital during the pendency of such proceedings; risks associated with third party motions in any bankruptcy case, which may interfere with the ability to confirm and consummate a plan of reorganization; potential adverse effects on our liquidity or results of operations; increased costs to execute the reorganization; effects on the market price of our common stock and on our ability to access the capital markets; commodity price volatility, global economic conditions, including supply and demand levels for oil, gas and NGLs, inflation, increased operating costs, lack of availability of drilling and production equipment, supplies, services and qualified personnel, liabilities resulting from litigation or the SEC investigation, difficulties in obtaining necessary approvals and permits, uncertainties related to new technologies, geographical concentration of our operations, environmental risks, weather risks, security risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating oil and gas reserves and in projecting future rates of production, reductions in cash flow, lack of access to capital, our ability to satisfy future cash obligations, restrictions in our debt agreements, the timing of development expenditures, managing our growth and integration of acquisitions, cyber-attacks, failure to realize expected value creation from property acquisitions, title defects, limited control over non-operated properties, and the other risks described in Risk Factors in our 2018 10-K and in the 10-Q for the period ended March 31, 2019.

Estimating reserve quantities of oil, natural gas and NGLs is complex, inexact and relies on interpretations of geologic, geophysical, engineering and production data. The extent, quality, reliability and interpretation of these data can vary. The process also requires making a number of economic assumptions, such as sales prices, the relative mix of oil, natural gas and NGLs that will be ultimately produced, drilling and operating costs, capital expenditures, the effect of government regulation, taxes and availability of funds. Future prices received for production and costs may vary, perhaps significantly, from the assumptions used in our estimates. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of development and related production. Accordingly, reserve estimates may differ significantly from the quantities of oil and gas that are ultimately recovered.

Should one or more of the risks or uncertainties described in this Quarterly Report, in the 2018 10-K or the 10-Q for the period ended March 31, 2019 occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances occurring after the date of this Quarterly Report.

Table of Contents

Index to Financial Statements

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ALTA MESA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except shares outstanding and per share data)



	Successor												Predecessor
	Three Months Ended June 30, 2019			Three Months Ended June 30, 2018			Six Months Ended June 30, 2019			February 9, 2018 Through June 30, 2018			January 1, 2018 Through February 8, 2018
Revenue
Oil	$	90,668		$	75,291		$	177,031		$	115,569		$	30,972
Natural gas	12,384			7,980			30,834			13,190			4,276
Natural gas liquids	10,251			10,241			21,467			14,955			4,000
Sales of gathered production	10,439			8,924			19,999			12,797			—
Midstream revenue	6,549			6,817			13,704			10,077			—
Other	3,014			2,229			6,099			2,784			888
Operating revenue	133,305			111,482			269,134			169,372			40,136
Gain (loss) on sale of assets	—			(63		)	1,483			5,076			840
Gain (loss) on derivatives	12,412			(29,219		)	(11,365		)	(51,230		)	6,663
Total revenue	145,717			82,200			259,252			123,218			47,639
Operating expenses
Lease operating	15,114			12,679			35,058			20,996			4,408
Transportation, processing and marketing	6,837			5,396			11,440			8,755			3,725
Midstream operating	6,520			3,313			12,671			3,900			—
Cost of sales for purchased gathered production	8,720			8,902			18,415			12,711			—
Production taxes	5,117			2,606			10,600			4,021			953
Workovers	807			333			1,120			1,578			423
Exploration	3,289			8,083			5,343			9,668			7,003
Depreciation, depletion and amortization	38,009			33,934			75,908			49,613			11,670
Impairment of assets	6,500			—			6,500			—			—
General and administrative	27,172			22,456			56,690			60,208			21,234
Total operating expenses	118,085			97,702			233,745			171,450			49,416
Operating income	27,632			(15,502		)	25,507			(48,232		)	(1,777		)
Other income (expense)
Interest expense	(16,755		)	(11,779		)	(32,215		)	(17,223		)	(5,511		)
Interest income	79			824			130			1,370			172
Equity in earnings of unconsolidated subsidiaries	643			—			742			—			—
Total other income (expense), net	(16,033		)	(10,955		)	(31,343		)	(15,853		)	(5,339		)
Income (loss) from continuing operations before income taxes	11,599			(26,457		)	(5,836		)	(64,085		)	(7,116		)
Income tax provision (benefit)	—			(3,791		)	—			(7,665		)	—
Income (loss) from continuing operations	11,599			(22,666		)	(5,836		)	(56,420		)	(7,116		)
Loss from discontinued operations, net of tax	—			—			—			—			(7,746		)
Net income (loss)	11,599			(22,666		)	(5,836		)	(56,420		)	$	(14,862	)
Net income (loss) attributable to noncontrolling interests	9,354			(16,066		)	326			(36,490		)
Net income (loss) attributable to Alta Mesa Resources, Inc. stockholders	$	2,245		$	(6,600	)	$	(6,162	)	$	(19,930	)

Attributable to Alta Mesa Resources, Inc. stockholders:
Income (loss) per share - basic and diluted	$	0.01		$	(0.04	)	$	(0.03	)	$	(0.12	)
Weighted average shares outstanding - basic	180,742,049			173,345,982			180,505,318			171,908,486
Weighted average shares outstanding - diluted	180,742,049			207,965,929			180,505,318			208,112,707

The accompanying notes are an integral part of these financial statements.

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Index to Financial Statements

ALTA MESA RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except shares and per share data)

໿



	June 30, 2019		December 31, 2018
ASSETS
Current assets
Cash and cash equivalents	$	91,111	$	26,854
Restricted cash	890		1,001
Accounts receivable, net	73,776		87,842
Other receivables	3,635		6,331
Related party receivables, net	2,310		3,341
Prepaid expenses and other	5,575		1,125
Derivatives	4,727		16,423
Total current assets	182,024		142,917
Property and equipment, net
Oil and gas properties, successful efforts method	784,079		763,337
Other property and equipment	470,547		444,269
Total property and equipment, net	1,254,626		1,207,606
Other assets
Operating lease right-of-use assets, net	8,180		—
Equity method investment	1,842		1,100
Deferred financing costs, net	2,836		3,195
Deposits and other long-term assets	41		65
Derivatives	2,508		2,947
Total other assets	15,407		7,307
Total assets	$	1,452,057	$	1,357,830



	June 30, 2019			December 31, 2018
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of debt	$	1,089,162		$	690,123
Accounts payable and accrued liabilities	109,901			247,439
Advances from non-operators	1,755			5,193
Advances from related party	4,003			9,839
Asset retirement obligations, current portion	44			2,079
Current operating lease liability	1,018			—
Derivatives	840			1,710
Total current liabilities	1,206,723			956,383
Long-term liabilities
Asset retirement obligations, net of current portion	12,442			9,473
Long-term debt, net	—			174,000
Other long-term liabilities	5,096			1,667
Operating lease liabilities, net of current portion	13,962			—
Derivatives	189			180
Total long-term liabilities	31,689			185,320
Total liabilities	1,238,412			1,141,703
Preferred Stock, $0.0001 par value
Class A: 1,000,000 shares authorized; 3 shares issued; 2 outstanding	—			—
Class B: 1,000,000 shares authorized; 1 share issued and outstanding	—			—
Common stock, $0.0001 par value
Class A: 1,200,000,000 shares authorized; 182,636,433 shares issued and outstanding (180,072,227 issued and outstanding at December 31, 2018)	18			18
Class C: 280,000,000 shares authorized; 199,987,976 and 202,169,576 issued and outstanding at June 30, 2019 and December 31, 2018	20			20
Additional paid in capital	1,509,716			1,503,382
Accumulated deficit	(1,538,975		)	(1,532,813		)
Total stockholders’ equity	(29,221		)	(29,393		)
Noncontrolling interests	242,866			245,520
Total equity	213,645			216,127
Total liabilities and stockholders’ equity	$	1,452,057		$	1,357,830

The accompanying notes are an integral part of these financial statements.

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ALTA MESA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)



	Successor						Predecessor
	Six Months Ended June 30, 2019			February 9, 2018 Through June 30, 2018			January 1, 2018 Through February 8, 2018
Cash flows from operating activities:
Net loss	$	(5,836	)	$	(56,420	)	$	(14,862	)
Adjustments to reconcile net loss to cash from operating activities:
Depreciation, depletion and amortization	75,908			49,613			12,554
Non-cash lease expense	1,675			—			—
Provision for uncollectible receivables	1,177			—			—
Impairment of assets	6,500			—			5,560
Amortization of deferred financing costs	368			152			171
Amortization of debt premium	(2,462		)	(2,051		)	—
Equity-based compensation expense	3,519			7,729			—
Non-cash exploration expense	388			7,288			4,575
(Gain) loss on derivatives	11,365			51,230			(6,663		)
Cash settlements of derivatives	909			(18,334		)	(2,296		)
Premium paid on derivatives	(1,000		)	—			—
Interest converted into debt	—			—			103
Interest added to notes receivable from affiliate	—			(417		)	(85		)
Deferred tax provision (benefit)	—			(7,665		)	—
Loss on sale of fixed assets	114			63			1,923
Equity in earnings of unconsolidated subsidiaries	(742		)	—			—
Impact on cash from changes in:
Accounts receivable	13,744			(9,143		)	(21,184		)
Other receivables	2,696			996			(662		)
Related party receivables	179			(6,260		)	(117		)
Prepaid expenses and other assets	(4,426		)	8,116			(591		)
Advances from related party	(154		)	(10,371		)	24,116
Settlement of asset retirement obligations	(5,835		)	(806		)	(63		)
Accounts payable, accrued liabilities and other liabilities	(12,123		)	(78,542		)	23,857
Operating lease obligations	(1,376		)	—			—
Cash from operating activities	84,588			(64,822		)	26,336
Cash flows from investing activities:
Capital expenditures	(247,942		)	(340,631		)	(36,695		)
Acquisitions, net of cash acquired	—			(791,819		)	(1,218		)
Proceeds withdrawn from trust account	—			1,042,742			—
Investment in equity affiliate and other, net	—			(6,945		)	—
Cash from investing activities	(247,942		)	(96,653		)	(37,913		)
Cash flows from financing activities:
Proceeds from long-term debt borrowings	227,500			80,000			60,000
Repayments of long-term debt	—			(193,565		)	(43,000		)
Deferred financing costs paid	—			(3,670		)	—
Capital distributions	—			—			(68		)
Proceeds from issuance of Class A shares	—			400,000			—
Repayment of sponsor note	—			(2,000		)	—
Repayment of deferred underwriting compensation	—			(36,225		)	—
Redemption of Class A common shares	—			(33		)	—
Cash from financing activities	227,500			244,507			16,932
Net increase in cash, cash equivalents and restricted cash	64,146			83,032			5,355
Cash, cash equivalents and restricted cash, beginning of period	27,855			388			4,990
Cash, cash equivalents and restricted cash, end of period	$	92,001		$	83,420		$	10,345

The accompanying notes are an integral part of these financial statements.

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ALTA MESA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Successor)

(in thousands)




	Common Stock																				Total
	Class A				Class B					Class C					Paid-In			Accumulated			Stockholders’			Noncontrolling			Total
	Shares		Amount		Shares		Amount			Shares		Amount			Capital			Deficit			Equity			Interests			Equity
Balance at February 8, 2018	3,862		$	—	25,875		$	3		—		$	—		$	3,106		$	(8,114	)	$	(5,005	)	$	—		$	(5,005	)
Conversion of common shares from Class B to Class A at closing of Business Combination	25,875		3		(25,875	)	(3		)	—		—			—			—			—			—			—
Class A common shares released from possible redemption	99,638		10		—		—			—		—			996,374			—			996,384			—			996,384
Class A common shares redeemed	(3	)	—		—		—			—		—			(33		)	—			(33		)	—			(33		)
Sale of Class A common shares	40,000		4		—		—			—		—			399,996			—			400,000			—			400,000
Class C common shares issued in connection with the closing of the Business Combination	—		—		—		—			213,402		21			(21		)	—			—			—			—
Noncontrolling interest in SRII Opco issued in the Business Combination	—		—		—		—			—		—			—			—			—			2,058,635			2,058,635
Balance at February 9, 2018	169,372		17		—		—			213,402		21			1,399,422			(8,114		)	1,391,346			2,058,635			3,449,981
Equity based compensation expense	—		—		—		—			—		—			3,466			—			3,466			—			3,466
Net loss	—		—		—		—			—		—			—			(13,330		)	(13,330		)	(20,424		)	(33,754		)
Balance at March 31, 2018	169,372		17		—		—			213,402		21			1,402,888			(21,444		)	1,381,482			2,038,211			3,419,693
Additional Class C common shares issued in connection with the settlement of the purchase consideration in the business combination	—		—		—		—			1,109		—			—			—			—			—			—
Noncontrolling interest in SRII Opco assumed in the business combination	—		—		—		—			—		—			—			—			—			8,758			8,758
Redemption of noncontrolling interests and Class C common shares for Class A common shares	9,589		1		—		—			(9,589	)	(1		)	90,872			—			90,872			(91,309		)	(437		)
Restricted stock awards vested	98		—		—		—			—		—			—			—			—			—			—
Equity based compensation expense	—		—		—		—			—		—			4,263			—			4,263			—			4,263
Net loss	—		—		—		—			—		—			—			(6,600		)	(6,600		)	(16,066		)	(22,666		)
Balance at June 30, 2018	179,059		$	18	—		$	—		204,922		$	20		$	1,498,023		$	(28,044	)	$	1,470,017		$	1,939,594		$	3,409,611

The accompanying notes are an integral part of these financial statements.

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ALTA MESA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Successor)

(in thousands)




	Common Stock																Total
	Class A			Class B			Class C				Paid-In			Accumulated			Stockholders’			Noncontrolling			Total
	Shares	Amount		Shares	Amount		Shares		Amount		Capital			Deficit			Equity			Interests			Equity
Balance at January 1, 2019	180,072	$	18	—	$	—	202,170		$	20	$	1,503,382		$	(1,532,813	)	$	(29,393	)	$	245,520		$	216,127
Restricted stock awards vested, net of taxes	338	—		—	—		—		—		67			—			67			(209		)	(142		)
Equity-based compensation expense	—	—		—	—		—		—		2,679			—			2,679			—			2,679
Net loss	—	—		—	—		—		—		—			(8,407		)	(8,407		)	(9,028		)	(17,435		)
Balance at March 31, 2019	180,410	18		—	—		202,170		20		1,506,128			(1,541,220		)	(35,054		)	236,283			201,229
Conversion of commons shares from Class C shares to Class A	2,182	—		—	—		(2,182	)	—		2,756			—			2,756			(2,756		)	—
Restricted stock awards vested, net of taxes	44	—		—	—		—		—		(8		)	—			(8		)	(15		)	(23		)
Equity-based compensation	—	—		—	—		—		—		840			—			840			—			840
Net income	—	—		—	—		—		—		—			2,245			2,245			9,354			11,599
Balance at June 30, 2019	182,636	$	18	—	$	—	199,988		$	20	$	1,509,716		$	(1,538,975	)	$	(29,221	)	$	242,866		$	213,645

The accompanying notes are an integral part of these financial statements.

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ALTA MESA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL (Unaudited)

(in thousands)

໿



	Predecessor
Balance, December 31, 2017	$	154,445
Distribution of non-STACK oil and gas assets, net of associated liabilities	43,482
Net loss	(14,862		)
Balance, February 8, 2018	$	183,065

The accompanying notes are an integral part of these financial statements.

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Index to Financial Statements

ALTA MESA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Alta Mesa Resources, Inc., together with its consolidated subsidiaries (“we” or “the Company”), is an independent exploration and production company focused on the acquisition, development, exploration and production of unconventional onshore oil and natural gas reserves in the eastern portion of the Anadarko Basin in Oklahoma. We operate in two reportable business segments - Upstream and Midstream. Alta Mesa Holdings, LP (“Alta Mesa”) conducts our Upstream activities and owns our proved and unproved oil and gas properties located in an area of the Anadarko Basin commonly referred to as the STACK. We generate upstream revenue principally by the production and sale of oil, gas and NGLs. We also operate in the Midstream segment through Kingfisher Midstream, LLC (“KFM”). KFM has a gas and oil gathering network, a cryogenic gas processing plant with offtake capacity, field compression facilities and a produced water disposal system in the Anadarko Basin that generate revenue primarily through long-term, fee-based contracts. The KFM midstream assets are integral to our Upstream operations, which we conduct in the same region, and they are strategically positioned to provide similar services to other producers in the area.

We were originally incorporated in Delaware in November 2016 as a special purpose acquisition company under the name Silver Run Acquisition Corporation II for the purpose of effecting a merger, exchange, acquisition, purchase, reorganization or similar business combination involving it and one or more businesses. On February 9, 2018 we acquired interests in Alta Mesa, Alta Mesa Holdings GP, LLC (“Alta Mesa GP”) and KFM through a newly formed subsidiary, SRII Opco, LP (“SRII Opco”) in a transaction referred to as the “Business Combination”, and changed our name from “Silver Run Acquisition Corporation II” to “Alta Mesa Resources, Inc.” As a result of our failure to comply with the continued listing requirements of the NASDAQ Capital Market (“NASDAQ”), trading in our Class A Common Stock and public warrants was suspended on September 24, 2019, and they are now traded over the counter under the trading symbols “AMRQQ” and “AMRWQ,” respectively.

In connection with the closing of the Business Combination, Alta Mesa distributed its non-STACK oil and gas assets and associated liabilities to its prior owner, High Mesa Holdings, LP (“High Mesa”). The non-STACK assets and liabilities are reflected as discontinued operations in the Predecessor portion of our financial statements.

All intercompany transactions and accounts have been eliminated. These interim condensed consolidated financial statements are unaudited, but we believe these statements reflect all adjustments necessary for a fair presentation of the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. These financial statements and disclosures have been prepared in accordance with the SEC’s rules for interim financial statements and do not include all the information and disclosures required by generally accepted accounting principles (“GAAP”) for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2018 10-K. The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year. We have no items of other comprehensive income during any period presented. Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern

We are required to evaluate our ability to continue as a going concern for a period of one year following the date of issuance of our financial statements. As part of that evaluation, we took into consideration a number of factors that were previously disclosed in our 2018 10-K. Most significantly, we have seen significant reductions to our borrowing base under the Alta Mesa RBL in 2019. On April 1, 2019, our borrowing base under the Alta Mesa RBL was reduced by $30 million to $370.0 million leaving us with no meaningful remaining capacity available thereunder at that time. In August 2019, the Alta Mesa RBL lenders exercised their ability to make an optional redetermination of our borrowing base ahead of the regular redetermination scheduled in October 2019, and via this redetermination our borrowing base was reset to $200.0 million, effective August 13, 2019. As our combined borrowings and letters of credit outstanding exceeded the new borrowing base amount by $162.4 million, we had five months, beginning September 2019, to make ratable monthly payments of $32.5 million to cause utilization to be less than or equal to the borrowing base. Our Upstream business had cash on hand at August 31, 2019 of $63.0 million.

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If by September 12, 2019, we had not made the first payment of $32.5 million, we would have been in default. Despite taking various actions to decrease our indebtedness and maintain our liquidity at sufficient levels to meet our commitments, on September 11, 2019, the Company, Alta Mesa, Alta Mesa GP, OEM GP, LLC, Alta Mesa Finance Services Corp, Alta Mesa Services and Oklahoma Energy Acquisitions, LP (the “AMH Debtors” and together with the Company, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Bankruptcy Court has granted a motion seeking joint administration of the Chapter 11 cases under the caption In re Alta Mesa Resources, Inc., et. al., Case No. 19-35133. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

Certain of the Company’s other subsidiaries, including SRII Opco GP, LLC, SRII Opco, KFM and its subsidiaries Kingfisher STACK Oil Pipeline, LLC and Oklahoma Produced Water Solutions, LLC are not part of the Chapter 11 cases at this time.

On September 12, 2019, the Bankruptcy Court entered various orders requested by the Debtors in order to stabilize their businesses and operations as they entered into Chapter 11 bankruptcy proceedings, including orders authorizing the Debtors to honor certain obligations to employees, vendors, and holders of royalty interests. In addition, the AMH Debtors were authorized by the Bankruptcy Court to use cash collateral of the lenders under the Alta Mesa RBL. The cash collateral order permits the AMH Debtors to use their cash and proceeds of their collateral for an initial four week period on the terms and conditions agreed by the AMH Debtors and the lenders under the Alta Mesa RBL and set forth in the order. The terms and conditions include, without limitation, adherence to a budget with an agreed upon variance and meeting certain milestones. The ability to have continued access to the cash collateral will also be dependent upon the Bankruptcy Court’s approval of future versions of the cash collateral order and the related terms and conditions provided therein.

The Debtors have begun a marketing process to sell their assets, which may also include KFM’s midstream assets. Certain of the AMH Debtors have also filed a complaint seeking a Bankruptcy Court determination that the crude oil, gas, and water gathering agreements between Debtor Oklahoma Energy Acquisitions LP, an Alta Mesa subsidiary, and non-Debtors KFM and its subsidiaries can be rejected by the Debtors.

We have no meaningful cash available to us to meet our obligations apart from cash held by our subsidiaries. As a result of Alta Mesa’s bankruptcy and the limitations imposed under the approved cash collateral agreement, our only remaining source of liquidity is through KFM and SRII Opco. At August 31, 2019, SRII Opco had cash on hand of $5.7 million and KFM had cash on hand of $13.3 million, as well as remaining borrowing capacity of $74.0 million. Access to the remaining capacity under the KFM Credit Facility requires adherence to the terms and covenant compliance on a pro forma basis for any new borrowings. We believe that KFM will exhaust its borrowing capacity and fail to meet the maintenance covenants as early as the first quarter of 2020. On September 23, 2019, KFM received a letter from the Administrative Agent whereby the lenders under the KFM Credit Facility allege a potential event of default in respect of liens placed on KFM’s assets. Accordingly, we may not have access to the remaining borrowing capacity unless or until this matter is resolved, which could materially impact our ability to meet our financial obligations. These factors raise substantial unmitigated doubt about our ability to continue as a going concern.

Recently Issued Accounting Standards Applicable to Us

Adopted

Effective January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires that lessees recognize a lease liability, which is a lessee’s discounted obligation to make payments under a lease, and a right-of-use asset, arising from a lessee’s right to use an asset over the lease term. Upon adoption, we used the modified retrospective method to apply the standard as of January 1, 2019 for existing leases with terms in excess of 12 months entered into prior to January 1, 2019.

Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard requires the use of a new “expected credit loss” impairment model rather than the “incurred loss” model we use today. With respect to our trade and notes receivables and certain other financial instruments,

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we may be required to (i) maintain and use lifetime loss information rather than annual loss data and (ii) forecast future economic conditions and quantify the effect of those conditions on future expected losses. The standard, including related amendments, which will be effective for us no earlier than January 2020, also requires additional disclosures regarding the credit quality of our trade and notes receivables and other financial instruments. No determination has yet been made of the impact of this new standard on our financial position or results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The amendments in this standard align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). Under this new standard, a customer in a hosting arrangement that is a service contract is required to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as a prepaid asset related to the service contract and which costs to expense. The capitalized implementation costs are to be expensed over the term of the hosting arrangement and reflected in the same line in the consolidated statement of operations as the fees associated with the hosting element of the arrangement. Similarly, capitalized implementation costs are to be presented in the statement of cash flows in the same line as payments made for fees associated with the hosting element. We will adopt this new standard no earlier than January 1, 2020, although early adoption is permitted. We are currently evaluating the impact of this new standard on our consolidated financial position and results of operations and have not yet determined whether to apply the new standard retrospectively or prospectively to implementation costs incurred after the date of adoption.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for us no earlier than January 2020. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. We do not expect the adoption of this standard to impact our financial position or results of operations.

NOTE 3 — ADOPTION OF ASU NO. 2016-02, LEASES

ASU No. 2016-02 requires us to recognize a right-of-use (“ROU”) asset and a discounted lease liability on our balance sheet for all leases with a term longer than one year. We adopted ASU No. 2016-02 and related guidance using the modified retrospective method as of January 1, 2019, and this adoption had no effect on the earlier comparative periods presented. At adoption, we recognized operating lease ROU assets and operating lease liabilities totaling $15.4 million each. There was no adjustment to beginning retained earnings.

We lease office space, office equipment and field equipment, including compressors. Many of our leases include both lease and non-lease components which are primarily management services performed by the lessors for the underlying assets. All of our leases of office space and office equipment were classified as operating leases upon adoption. Our leases of field equipment had remaining terms of less than one year at the date of adoption and were not recognized as operating leases on our balance sheet due to our election of the short term lease practical expedient described below. Our leases do not contain any residual value guarantees or restrictive covenants. We do not currently sublease any of our ROU assets, although we may sublease our unused office lease space in the future.

Operating fixed lease expenses are recognized on a straight-line basis over the lease term. Variable lease payments, which cannot be determined at the lease commencement date, are not included in ROU assets or lease liabilities and are expensed as incurred.

Upon adoption, we selected the following practical expedients:

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Practical expedient package		We did not reassess whether any expired or existing contracts are, or contain, leases.
		We did not reassess the lease classification of any expired or existing leases.
		We did not reassess initial direct costs of any expired or existing leases.

Hindsight practical expedient		We did not elect to use the hindsight practical expedient which allows for the use of hindsight when determining lease term, including option periods, and impairment of operating assets.

Easement expedient		We elected to maintain the current accounting treatment of existing contracts and not reassess whether those contracts met the definition of a lease.

Combining lease and non-lease components expedient		We elected to account for lease and non-lease components as a single component.

Short-term lease expedient		We elected the short-term lease recognition exemption for all classes of underlying assets. Expense for short-term leases is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less and that do not include an option to purchase the underlying asset that is reasonably certain to be recognized are not recorded on the balance sheet.

As most leases do not have readily determinable implicit rates, we estimated the incremental borrowing rates for our future lease payments based on prevailing financial market conditions at the later of date of adoption or lease commencement, credit analysis of comparable companies and management judgments to determine the present values of our lease payments. We also apply the portfolio approach to account for leases with similar terms. At June 30, 2019, the weighted-average remaining lease term of our operating leases was approximately 8.1 years and the weighted-average discount rate applied was 14.3%.

Lease Costs



(in thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost	$	828	$	1,675
Variable lease cost	478		849
Short-term lease cost	1,071		3,686
Total lease cost	$	2,377	$	6,210

Reported in:
Lease operating expense	$	1,029	$	3,675
General and administrative expense	1,348		2,535
Total lease cost	$	2,377	$	6,210

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Operating Lease Liability Maturities as of June 30, 2019



Fiscal year	(in thousands)
Remainder of 2019	$	1,528
2020	3,081
2021	3,048
2022	3,108
2023	2,718
Thereafter	12,647
Total lease payments	26,130
Less: imputed interest	(11,150		)
Present value of operating lease liabilities	$	14,980

Current portion of operating lease liabilities	$	1,018
Operating lease liabilities, net of current portion	13,962
Present value of operating lease liabilities	$	14,980

As described further in our 2018 10-K, our minimum future contractual lease payments under ASC 840 at December 31, 2018 were $2.8 million for 2019, $2.9 million for 2020, $2.9 million for 2021, $3.1 million for 2022, $3.0 million for 2023 and $12.2 million thereafter.

Right-of-Use Asset Impairment

During the second quarter of 2019, we consolidated employees in existing leased office space in Houston, Texas and Oklahoma City, Oklahoma. We sought to sublease the unused office space within three buildings but we were unable to fully recover the cash due to the lessor under the existing operating lease obligations in those three buildings with proceeds from subleases. As a result, we recognized a $6.5 million impairment of our existing right-of-use lease assets in those buildings during the three months ended June 30, 2019. This impairment had no impact to our lease liability.

We also expect to attempt to reject certain of the leases pursuant to our Bankruptcy filing which could decrease our lease liability if we are successful with the rejection.

NOTE 4 - EARNINGS (LOSS) PER SHARE

The following table reflects the net income attributable to common stockholders and earnings per share for the periods indicated based on a weighted average number of common shares outstanding for the period:

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	Three Months Ended June 30, 2019		Three Months Ended June 30, 2018			Six Months Ended June 30, 2019			February 9, 2018 Through June 30, 2018
	(in thousands, except shares and per share data)
Net income (loss) attributable to AMR Class A common stockholders	$	2,245	$	(6,600	)	$	(6,162	)	$	(19,930	)
Effect of dilutive Class C securities:
Net loss attributable to noncontrolling interests assumed to be redeemed for Class A Common Stock, net of tax	—		(2,157		)	—			(4,914		)
Net income (loss) attributable to AMR Class A common stockholders after assumed redemption	$	2,245	$	(8,757	)	$	(6,162	)	$	(24,844	)

Weighted average Class A common shares outstanding (Basic)	180,742,049		173,345,982			180,505,318			171,908,486
Effect of dilutive securities:
Class A shares assumed issued to holders of noncontrolling interests upon redemption	—		34,619,947			—			36,204,221
Weighted average common shares outstanding (Diluted)	180,742,049		207,965,929			180,505,318			208,112,707

Income (loss) per common share attributable to AMR common stockholders:
Basic	$	0.01	$	(0.04	)	$	(0.03	)	$	(0.12	)
Diluted	$	0.01	$	(0.04	)	$	(0.03	)	$	(0.12	)

NOTE 5 — SUPPLEMENTAL CASH FLOW INFORMATION



	Successor						Predecessor
(in thousands)	Six Months Ended June 30, 2019			February 9, 2018 Through June 30, 2018			January 1, 2018 Through February 8, 2018
Supplemental cash flow information:
Cash paid for interest	$	29,513		$	22,996		$	1,145
Cash paid for income taxes, net of refunds	706			1,573			—
Non-cash investing and financing activities:
Increase in asset retirement obligations	634			877			—
Increase (decrease) in accruals or payables for capital expenditures	(127,875		)	(25,798		)	4,896
Increase in withholding tax accruals for share-based compensation	165			—			—
Distribution of non-STACK assets, net of liabilities	—			—			43,482
Equity issued in Business Combination	—			2,067,393			—
Release of common stock from possible redemption	—			966,384			—
Tax effect of redemption of noncontrolling interests in SRII Opco for Class A common shares and other	—			(437)			—

We aggregate cash, cash equivalents and restricted cash in the statements of cash flows.

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NOTE 6 — RECEIVABLES

Accounts Receivable



(in thousands)	June 30, 2019			December 31, 2018
Production and processing sales and fees	$	41,844		$	51,004
Joint interest billings	20,836			18,147
Pooling interest⁽¹⁾	11,506			18,786
Allowance for doubtful accounts	(410		)	(95		)
Total accounts receivable, net	$	73,776		$	87,842

_________________


(1)	Pooling interest relates to Oklahoma’s forced pooling process which permits mineral interest owners the option to participate in the drilling of proposed wells. The pooling interest listed above represents unbilled costs for wells where the option remains pending. Depending upon the mineral owner’s decision, these costs will be billed to them or added to oil and gas properties.

Related Party Receivables



(in thousands)	June 30, 2019			December 31, 2018
Related party receivables	$	12,197		$	12,375
Allowance for doubtful accounts	(9,887		)	(9,034		)
Related party receivables, net	2,310			3,341

Notes receivable from related parties	13,403			13,403
Allowance for doubtful accounts	(13,403		)	(13,403		)
Notes receivable from related parties, net	—			—
Related party receivables, net	$	2,310		$	3,341

Management Services Agreement with High Mesa



(in thousands)	June 30, 2019
High Mesa related party receivable at December 31, 2018	$	10,066
Additions	894
Payments	(1,073		)
High Mesa related party receivable at June 30, 2019	9,887
Allowance for uncollectibility⁽¹⁾	(9,887		)
Balance at June 30, 2019, net	$	—

_________________


(1)	$9.0 million of the allowance was recognized during the 2018 Successor Period.

Our management services agreement with HMI (“the High Mesa Agreement”) was terminated effective January 31, 2019. Through April 1, 2019, we were obligated to take all actions that HMI reasonably requested to effect the transition of the services to a successor service provider. During the transition period, HMI agreed to pay us (i) for all services performed, (ii) an amount equal to our costs and expenses incurred in connection with providing the services as provided for in the approved budget and (iii) an amount equal to our costs and expenses reimbursable pursuant to the High Mesa Agreement. As of June 30, 2019, and December 31, 2018, approximately $9.9 million and $10.1 million, respectively, were due from HMI for reimbursement of costs and expenses which are recorded as “Related party receivables, net” in the balance sheets. HMI has disputed certain of the amounts we billed. We are pursuing remedies under applicable law in connection with repayment of this receivable. There is no guarantee that HMI will pay the amounts it owes. In addition, our ability to collect these amounts or future amounts that may become due pursuant to indemnification obligations may be adversely impacted by liquidity and solvency issues at HMI. As a result of these circumstances, we have recognized an allowance for uncollectible accounts of $9.9

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million and $9.0 million as of June 30, 2019 and December 31, 2018, respectively, to fully provide for the unremitted balances. We may also be subject to future contingent liabilities for the non-STACK assets for which we should have been indemnified, including liabilities associated with litigation relating to the non-STACK assets. As of June 30, 2019 and December 31, 2018, we have established no liabilities for contingent obligations associated with non-STACK assets owned by High Mesa.

Promissory notes receivable

High Mesa Services, LLC (“HMS”), a subsidiary of HMI, defaulted under the terms of a promissory note with us when it did not pay us on February 28, 2019, and HMS has failed to cure such default. We subsequently declared all amounts owed under the note immediately due and payable and we have fully reserved the promissory note balance, including interest paid-in-kind, totaling $1.7 million as of June 30, 2019 and December 31, 2018.

In addition, we have a note receivable from HMS which matures on December 31, 2019, and bears interest at 8% per annum, which may be paid-in-kind and added to the principal amount. HMI disputes its obligations under the note. As of June 30, 2019, and December 31, 2018, the note receivable balance, including interest paid-in-kind, amounted to $11.7 million, for each respective period. This balance was fully reserved at the end of both periods.

We oppose HMI’s claims and believe HMI’s obligations under the notes to be valid assets and that the full amount is payable to us. We are pursuing remedies under applicable law in connection with repayment of the promissory notes. As a result of the potential conflict of interest from certain of AMR’s directors who are also controlling holders of HMI, AMR’s disinterested directors will address any potential conflicts of interest with respect to this matter.

NOTE 7 — PROPERTY AND EQUIPMENT



(in thousands)	June 30, 2019			December 31, 2018
Oil and gas properties
Unproved properties	$	76,665		$	74,217

Proved oil and gas properties	2,196,605			2,110,346
Accumulated depletion and impairment	(1,489,191		)	(1,421,226		)
Proved oil and gas properties, net	707,414			689,120
Total oil and gas properties, net	784,079			763,337
Other property and equipment
Land	5,600			5,600
Fresh water wells	27,373			27,366
Produced water disposal system	106,467			104,498
Gas processing plant and gathering lines	412,193			380,470
Office furniture, equipment and vehicles	3,755			3,703
Accumulated depreciation and impairment	(84,841		)	(77,368		)
Other property and equipment, net	470,547			444,269
Total property and equipment, net	$	1,254,626		$	1,207,606

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Depletion and Depreciation Expense



	Successor								Predecessor
(in thousands)	Three Months Ended June 30, 2019		Three Months Ended June 30, 2018		Six Months Ended June 30, 2019		February 9, 2018 Through June 30, 2018		January 1, 2018 Through February 8, 2018
Oil and gas properties depletion	$	33,923	$	26,086	$	67,965	$	36,859	$	11,021
Midstream tangible asset depreciation	3,504		2,010		6,724		3,132		—
Other property and equipment depreciation	341		423		749		586		609
Total depletion and depreciation	$	37,768	$	28,519	$	75,438	$	40,577	$	11,630

Impairment

During the three months ended June 30, 2019, we evaluated the qualitative market conditions and other factors impacting our business and concluded that there were no indicators of impairment of our long-lived assets. Therefore, we did not conduct further analysis on the recognition of additional impairment.

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NOTE 8 — DISCONTINUED OPERATIONS (Predecessor)

The results of operations of the non-STACK oil and gas assets and related liabilities distributed to High Mesa immediately prior to the Business Combination and presented as discontinued operations during the Predecessor Period were as follows:



	Predecessor
(in thousands)	January 1, 2018 Through February 8, 2018
Revenue
Oil	$	1,617
Natural gas	1,023
Natural gas liquids	236
Other	16
Operating revenue	2,892
Loss on sale of assets	(1,923		)
Total revenue	969
Operating expenses
Lease operating	1,770
Transportation and marketing	83
Production taxes	167
Workovers	127
Depreciation, depletion and amortization	884
Impairment of assets	5,560
General and administrative	21
Total operating expenses	8,612
Other expense
Interest expense	(103		)
Loss from discontinued operations, net of tax	$	(7,746	)



	Predecessor
(in thousands)	January 1, 2018 Through February 8, 2018
Total operating cash flows of discontinued operations	$	2,974
Total investing cash flows of discontinued operations	(601		)

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NOTE 9 — DERIVATIVES

The following summarizes the fair value and classification of our derivatives:



	June 30, 2019
Balance sheet location	Gross fair value of assets		Gross liabilities offset against assets in the Balance Sheet			Net fair value of assets presented in the Balance Sheet
	(in thousands)
Derivatives, current assets	$	13,855	$	(9,128	)	$	4,727
Derivatives, long-term assets	11,977		(9,469		)	2,508
Total	$	25,832	$	(18,597	)	$	7,235



Balance sheet location	Gross fair value of liabilities		Gross assets offset against liabilities in the Balance Sheet			Net fair value of liabilities presented in the Balance Sheet
	(in thousands)
Derivatives, current liabilities	$	9,968	$	(9,128	)	$	840
Derivatives, long-term liabilities	9,658		(9,469		)	189
Total	$	19,626	$	(18,597	)	$	1,029



	December 31, 2018
Balance sheet location	Gross fair value of assets		Gross liabilities offset against assets in the Balance Sheet			Net fair value of assets presented in the Balance Sheet
	(in thousands)
Derivatives, current assets	$	22,512	$	(6,089	)	$	16,423
Derivatives, long-term assets	7,910		(4,963		)	2,947
Total	$	30,422	$	(11,052	)	$	19,370



Balance sheet location	Gross fair value of liabilities		Gross assets offset against liabilities in the Balance Sheet			Net fair value of liabilities presented in the Balance Sheet
	(in thousands)
Derivatives, current liabilities	$	7,799	$	(6,089	)	$	1,710
Derivatives, long-term liabilities	5,143		(4,963		)	180
Total	$	12,942	$	(11,052	)	$	1,890

The following table summarizes the effect of our derivatives in the consolidated statements of operations (in thousands):



	Successor											Predecessor
Derivatives not designated as hedges	Three Months Ended June 30, 2019		Three Months Ended June 30, 2018			Six Months Ended June 30, 2019			February 9, 2018 Through June 30, 2018			January 1, 2018 Through February 8, 2018
Gain (loss) on derivatives -
Oil	$	5,134	$	(28,712	)	$	(16,535	)	$	(50,656	)	$	4,796
Natural gas	7,278		(507		)	5,170			(574		)	1,867
Total gain (loss) on derivatives	$	12,412	$	(29,219	)	$	(11,365	)	$	(51,230	)	$	6,663

Other receivables at June 30, 2019 and December 31, 2018 include $1.4 million and $1.3 million, respectively, of derivative positions scheduled to be settled in the next month.

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We had the following call and put derivatives at June 30, 2019:

OIL



	Volume	Weighted		Range
Settlement Period and Type of Contract	in bbls	Average		High		Low
2019
Price Swap Contracts	92,000	$	63.03	$	63.03	$	63.03
Collar Contracts
Short Call Options	1,361,600	66.31		75.20		56.50
Long Put Options	1,453,600	53.80		62.00		50.00
Short Put Options	1,453,600	42.72		52.00		37.50
2020
Collar Contracts
Short Call Options	1,017,600	63.95		73.80		59.55
Long Put Options	1,566,600	56.81		62.50		50.00
Short Put Options	1,566,600	42.81		50.00		37.50
2021
Collar Contracts
Short Call Options	279,750	63.51		63.75		63.35
Long Put Options	659,850	46.94		55.00		41.00
Short Put Options	279,750	43.00		43.00		43.00

NATURAL GAS



	Volume	Weighted			Range
Settlement Period and Type of Contract	in MMBtu	Average			High			Low
2019
Price Swap Contracts	7,980,000	$	2.67		$	2.72		$	2.64
Basis Swap Contracts	9,680,000	(0.72		)	(0.49		)	(0.93		)
Collar Contracts
Short Call Options	1,525,000	3.19			3.20			3.17
Long Put Options	1,525,000	2.70			2.70			2.70
Short Put Options	1,525,000	2.20			2.20			2.20
2020
Price Swap Contracts	1,284,000	2.54			2.54			2.54
Basis Swap Contracts	910,000	(0.49		)	(0.49		)	(0.50		)
Collar Contracts
Short Call Options	3,874,500	3.19			3.69			2.77
Long Put Options	10,749,500	2.59			3.00			2.50
Short Put Options	9,696,000	2.10			2.50			2.00
2021
Collar Contracts
Short Call Options	540,000	3.25			3.25			3.25
Long Put Options	2,790,000	2.62			2.65			2.50
Short Put Options	2,250,000	2.15			2.15			2.15

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We had the following basis swaps at June 30, 2019:



Total Gas Volumes in MMBtu⁽¹⁾over Remaining Term	Reference Price 1 ⁽¹⁾	Reference Price 2 ⁽¹⁾	Period			Weighted Average Spread ($ per MMBtu)
460,000	OneOK	NYMEX Henry Hub	Jul '19	—	Dec '19	$	(0.93	)
7,990,000	Tex/OKL Panhandle Eastern Pipeline	NYMEX Henry Hub	Jul '19	—	Dec '19	(0.70		)
910,000	Tex/OKL Panhandle Eastern Pipeline	NYMEX Henry Hub	Jan '20	—	Mar '20	(0.49		)
1,230,000	San Juan	NYMEX Henry Hub	Jul '19	—	Oct '19	(0.81		)

________________


(1)	Represents short swaps that fix the basis differentials between OneOK, Tex/OKL Panhandle Eastern Pipeline (“PEPL”), San Juan and NYMEX Henry Hub.

During September 2019, we closed out all open derivative positions resulting in net proceeds of approximately $4 million, which we applied against our outstanding borrowings under the Alta Mesa RBL.

NOTE 10 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

໿



(in thousands)	June 30, 2019		December 31, 2018
Accounts payable	$	12,526	$	20,422

Accruals for capital expenditures	22,669		139,904
Revenue and royalties payable	41,304		50,241
Accruals for operating expenses	14,853		21,830
Accrued interest	6,922		2,477
Derivative settlements	743		109
Other	10,884		12,456
Total accrued liabilities	97,375		227,017
Accounts payable and accrued liabilities	$	109,901	$	247,439

NOTE 11 — ASSET RETIREMENT OBLIGATIONS



	Successor						Predecessor
(in thousands)	Six Months Ended June 30, 2019			February 9, 2018 Through June 30, 2018			January 1, 2018 Through February 8, 2018
Balance, beginning of period	$	11,552		$	—		$	10,469
Liabilities assumed in Business Combination	—			5,998			—
Liabilities incurred	634			877			—
Liabilities settled	(162		)	(806		)	(63		)
Liabilities transferred in sale of properties	—			(20		)	—
Revisions to estimates	(8		)	665			63
Accretion expense	470			263			40
Balance, end of period	12,486			6,977			10,509
Less: current portion	44			538			33
Long-term portion	$	12,442		$	6,439		$	10,476

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NOTE 12 — DEBT

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(in thousands)	June 30, 2019		December 31, 2018
Alta Mesa RBL	$	344,500	$	161,000
KFM Credit Facility	218,000		174,000
2024 Notes	500,000		500,000
Unamortized premium on 2024 Notes	26,662		29,123
Total debt, net	1,089,162		864,123
Less: Current portion	1,089,162		690,123
Long-term debt, net	$	—	$	174,000

Alta Mesa RBL

In April 2019, our borrowing base under the Alta Mesa RBL was reduced from $400.0 million to $370.0 million, leaving us with no meaningful remaining capacity available thereunder at that time. In August 2019, the Alta Mesa RBL lenders exercised their ability to make an optional redetermination of our borrowing base ahead of the regular redetermination scheduled in October 2019, and via this redetermination, our borrowing base was reset to $200.0 million, effective August 13, 2019. As our combined borrowings and letters of credit outstanding exceeded the new borrowing base amount by $162.4 million, we had five months, beginning September 2019, to make ratable monthly payments of $32.5 million to cause utilization to be less than or equal to the borrowing base. As indicated in our discussion of going concern, we and the AMH Debtors filed for bankruptcy protection prior to making these payments.

The Alta Mesa RBL has two covenants that are tested quarterly:


•	a ratio of Alta Mesa’s current assets to current liabilities, inclusive of specified adjustments, of not less than 1.0 to 1.0; and


•	a ratio of Alta Mesa’s consolidated debt to its consolidated Adjusted EBITDAX (the “leverage ratio”) of not greater than 4.0 to 1.0.

Alta Mesa’s filing of the Bankruptcy Petitions constituted an event of default under the Alta Mesa RBL that accelerated Alta Mesa’s obligations thereunder. Under the Bankruptcy Code, the lenders under the Alta Mesa RBL are stayed from taking any action against the AMH Debtors as a result of an event of default.

KFM Credit Facility

The KFM Credit Facility, as amended, provides for an aggregate committed borrowing capacity of $300.0 million.

There are two maintenance covenants under the KFM Credit Facility that are tested quarterly:


•	a ratio of KFM’s total debt to its consolidated adjusted EBITDA of not greater than 4.5 to 1.0, (which increases to 4.75

Alta Mesa Resources, Inc. /DE 10-Q