What changed in this filing

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Item 1. Financial Statements

2020-05-11 compared with 2019-11-05 · 219 added, 524 removed, 221 unchanged (77% of the section changed)

3 unchanged sentences

(In thousands)

September 30, 2019

March 31, 2020

December 31, 2019

15 unchanged sentences

CURRENT LIABILITIES

Accounts payable and accrued liabilities

Other current liabilities

Accounts payable

Other current liabilities (Note 7)

Total current liabilities

7 unchanged sentences

STOCKHOLDERS’ EQUITY

Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,260 shares issued and 167,310 shares outstanding in 2019 and 156,333 shares issued and outstanding in 2018

Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 91,790 and 93,346 shares issued and outstanding in 2019 and 2018, respectively

Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,473 shares issued and 166,473 shares outstanding in 2020 and 168,318 shares issued and 167,318 shares outstanding in 2019

Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 85,790 shares issued and outstanding in 2020 and 2019

Additional paid-in capital

Treasury Stock, at cost, 950 shares in 2019

Retained earnings

Treasury Stock, at cost, 2,000 shares and 1,000 shares in 2020 and 2019, respectively

Retained earnings (Accumulated deficit)

Noncontrolling interest

2 unchanged sentences

Magnolia Oil & Gas Corporation

Consolidated and Combined Statements of Operations (Unaudited)

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

Three Months Ended

September 30, 2019

Nine Months Ended

September 30, 2019

July 31, 2018 Through September 30, 2018

July 1, 2018 Through

July 30, 2018

January 1, 2018

July 30, 2018

March 31, 2020

Three Months Ended

March 31, 2019

Natural gas revenues

6 unchanged sentences

Exploration expense

Impairment of oil and natural gas properties

Asset retirement obligation accretion

4 unchanged sentences

Total operating costs and expenses

OPERATING INCOME

OPERATING INCOME (LOSS)

OTHER INCOME (EXPENSE)

Income (loss) from equity method investee

Income from equity method investee

Interest expense, net

Gain (loss) on derivatives, net

Other income (expense), net

Total other income (expense)

INCOME BEFORE INCOME TAXES

Income tax expense

Net income attributable to noncontrolling interest

NET INCOME ATTRIBUTABLE TO MAGNOLIA

Non-cash deemed dividend related to warrant exchange

NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK

NET INCOME PER COMMON SHARE

INCOME (LOSS) BEFORE INCOME TAXES

Income tax expense (benefit)

NET INCOME (LOSS)

Net income (loss) attributable to noncontrolling interest

NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON STOCK

NET INCOME (LOSS) PER SHARE OF CLASS A COMMON STOCK

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

1 unchanged sentence

Magnolia Oil & Gas Corporation

Combined Statement of Changes in Parents’ Net Investment (Unaudited)

(In thousands)

BALANCE, DECEMBER 31, 2017

Parents’ contribution, net

Balance – March 31, 2018

Parents’ distributions, net

Balance – June 30, 2018

Parents’ distributions, net

Balance – July 30, 2018

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

Magnolia Oil & Gas Corporation

Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands)

1 unchanged sentence

Class B Common Stock

Class F Common Stock

Additional Paid In Capital

2 unchanged sentences

Noncontrolling Interest

Balance, July 30, 2018

Class A Common Stock released from possible redemption

Class A Common Stock redeemed

Conversion of Common Stock from Class F to Class A at closing of Business Combination

Common stock issued as part of the Business Combination

Common stock issued in private placement

Earnout consideration issued as part for the Business Combination

Non-compete consideration

Changes in ownership interest adjustment

Changes in deferred tax liability

Balance, July 31, 2018

Issuance of earnout share consideration Tranche I

Issuance of earnout share consideration Tranche II

Common stock issued in connection with Harvest Acquisition

Balance, December 31, 2018

Stock based compensation expense

Changes in ownership interest adjustment

Changes in deferred tax liability

Balance, September 30, 2018

The accompanying notes are an integral part to these consolidated financial statements.

Magnolia Oil & Gas Corporation

Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)

(In thousands)

Final settlement adjustment related to Business Combination

Contributions from noncontrolling interest owner

Balance, March 31, 2019

Class A Common Stock

2 unchanged sentences

Treasury Stock

Retained Earnings

Retained Earnings/ Accumulated Deficit

Total Stockholders’ Equity

1 unchanged sentence

Balance, December 31, 2019

Stock based compensation expense

Changes in ownership interest adjustment

Final settlement adjustment related to Business Combination

Contributions from noncontrolling interest owners

Balance, March 31, 2019

Stock based compensation expense

Changes in ownership interest adjustment

Common stock issued in connection with acquisition

Offering expenses incurred in connection with warrants exchange

Distributions to noncontrolling interest owners

Balance, June 30, 2019

Stock based compensation expense

Changes in ownership interest adjustment

Common stock issued in connection with warrants exchange

Stock based compensation expense, net of forfeitures

Changes in ownership interest adjustment and in deferred tax liability

Common stock issued related to stock based compensation, net

Common stock repurchased

Class A Common Stock repurchase

Distributions to noncontrolling interest owners

Balance, September 30, 2019

Balance, March 31, 2020

The accompanying notes are an integral part to these consolidated financial statements.

Magnolia Oil & Gas Corporation

Consolidated and Combined Statements of Cash Flows (Unaudited) ( In thousands)

Nine Months Ended

September 30, 2019

July 31, 2018 Through

September 30, 2018

January 1, 2018 Through

July 30, 2018

Consolidated Statements of Cash Flows (Unaudited)

( In thousands)

Three Months Ended

March 31, 2020

Three Months Ended

March 31, 2019

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net income to net cash provided by operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation, depletion and amortization

1 unchanged sentence

Exploration expense, non-cash

Impairment of oil and natural gas properties

Asset retirement obligations accretion expense

Amortization of deferred financing costs

Loss on derivatives, net

Cash settlements of matured derivative contracts

Deferred taxes

Contingent consideration change in fair value

Deferred tax expense (benefit)

Stock based compensation

1 unchanged sentence

Accounts receivable

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Accrued liabilities

Accounts payable

Drilling advances

2 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds withdrawn from Trust Account

Acquisition of EnerVest properties

1 unchanged sentence

Additions to oil and natural gas properties

Payment of Contingent Consideration

Other investing

1 unchanged sentence

CASH FLOW FROM FINANCING ACTIVITIES

Parents’ contribution, net

Contributions from noncontrolling interest owners

Distributions to noncontrolling interest owners

Issuance of common stock

Proceeds from issuance of long term debt

Repayments of deferred underwriting compensation

Cash paid for debt issuance costs

Common stock repurchased

Class A Common Stock repurchase

Other financing activities

3 unchanged sentences

Cash and cash equivalents – End of period

SUPPLEMENTAL CASH FLOW INFORMATION:

Supplemental non-cash operating activity:

Cash paid for interest

Supplemental non-cash investing and financing activity:

Accruals or liabilities for capital expenditures

Supplemental non-cash lease operating activity:

Right-of-use assets obtained in exchange for operating lease obligations

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

2 unchanged sentences

Description of Business and Basis of Presentation

Organization and General

Magnolia Oil & Gas Corporation (formerly TPG Pace Energy Holdings Corp.) (the “Company” or “Magnolia”) was incorporated in Delaware on February 14, 2017.

On March 15, 2018, the Company formed three wholly owned subsidiaries:

Magnolia Oil & Gas Parent LLC (“Magnolia LLC”), Magnolia Oil & Gas Intermediate LLC (“Magnolia Intermediate”), and Magnolia Oil & Gas Operating LLC (“Magnolia Operating”), all of which are Delaware limited liability companies formed in contemplation of the Business Combination (as defined herein).

Business Combination

On July 31, 2018 (the “Closing Date”), the Company and Magnolia LLC consummated the acquisition of the following:

certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the “Karnes County Assets” and, such business the “Karnes County Business”) pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the “Karnes County Contribution Agreement”), by and among the Company, Magnolia LLC and certain affiliates (the “Karnes County Contributors”) of EnerVest Ltd.

(“EnerVest”);

certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the “Giddings Assets”) pursuant to that certain Purchase and Sale Agreement (the “Giddings Purchase Agreement”) by and among Magnolia LLC and certain affiliates of EnerVest (the “Giddings Sellers”);

a 35 % membership interest (the “Ironwood Interests”) in Ironwood Eagle Ford Midstream LLC (“Ironwood”), a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement (together with the transactions contemplated by the Karnes County Contribution Agreement and the Giddings Purchase Agreement, the “Business Combination Agreements,” and the transactions contemplated thereby, the “Business Combination”), by and among Magnolia LLC and certain affiliates of EnerVest (the “Ironwood Sellers”).

The Company consummated the Business Combination for an aggregate consideration of approximately $ 1.2 billion in cash, 31.8 million shares of the Company’s Class A Common Stock, par value $ 0.0001 per share (the “Class A Common Stock”), and 83.9 million shares of the Company’s Class B Common Stock, par value $ 0.0001 per share (the “Class B Common Stock”), and a corresponding number of units in Magnolia LLC (the “Magnolia LLC Units”), as well as certain earnout rights payable in a combination of cash and additional equity securities in the Company.

In connection with the Business Combination, Magnolia issued and sold 35.5 million shares of Class A Common Stock in a private placement to certain qualified institutional buyers and accredited investors for gross proceeds of $ 355.0 million (the “PIPE Investment”).

In addition, Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating (“Finance Corp.” and, together with Magnolia Operating, the “Issuers”), issued and sold $ 400.0 million aggregate principal amount of 6.0 % Senior Notes due 2026 (the “2026 Senior Notes”).

The proceeds of the PIPE Investment and the offering of 2026 Senior Notes were used to fund a portion of the cash consideration required to effect the Business Combination.

Business Operations and Strategy

Magnolia is an independent oil and natural gas company engaged in the acquisition, development, exploration and production of oil, natural gas, and NGL reserves.

Organization and Nature of Operations

Magnolia is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas liquid (“NGL”) reserves.

The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings Field in South Texas where the Company targets the Eagle Ford Shale and Austin Chalk formations.

1 unchanged sentence

Basis of Presentation

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company was the acquirer in the Business Combination and the Karnes County Business, the Giddings Assets, and the Ironwood Interests were the acquirees.

The Karnes County Business including, as applicable, its ownership of the Ironwood Interests, was deemed the “Predecessor” for periods prior to the Business Combination, and does not include the consolidation of the Company and the Giddings Assets.

Although the Karnes County Contributors are not under common control, each were managed by the same managing general partner, EnerVest, and as such, these Predecessor financial statements have been presented on a combined basis for financial reporting purposes.

For the periods on or after the Business Combination, the Company, including the combination of the Karnes County Business, the Giddings Assets, and the Ironwood Interests, is the “Successor.” The financial statements and certain footnote presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the Business Combination, which includes the period from January 1, 2018 to July 30, 2018 (the “Predecessor Period”) and the period after the Business Combination, which includes the period from July 31, 2018 to September 30, 2018 (the “2018 Successor Period”), and the three and nine months ended September 30, 2019 (the “2019 Successor Period”).

The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting that is based on the fair value of assets acquired and liabilities assumed.

As a result of the inclusion of the Giddings Assets, the new basis of accounting, and certain other items that affect comparability, the Company’s financial information prior to the Business Combination is not comparable to its financial information subsequent to the Business Combination.

The assets, liabilities, revenues, expenses, and cash flows related to the Karnes County Business were not previously separately accounted for as a standalone legal entity and have been carved out of the overall assets, liabilities, revenues, expenses and cash flows from the Karnes County Contributors as appropriate.

In addition, Parents’ Net Investment represents the Karnes County Contributors’ interest in the recorded net assets of the Karnes County Business and represents the cumulative net investment of the Karnes County Contributors’ in the Karnes County Business through the dates presented, inclusive of cumulative operating results.

The Karnes County Contributors utilized EnerVest’s centralized processes and systems for its treasury services and the Karnes County Business’ cash activity was commingled with other oil and gas assets that were not part of the Business Combination.

As such, the net results of the cash transactions between the Karnes County Business and the Karnes County Contributors are reflected as Parents’ contributions and distributions in the accompanying Combined Statement of Changes in Parents’ Net Investment.

The Predecessor financial statements also include a portion of indirect costs for salaries and benefits, rent, accounting, legal services, and other expenses.

In addition to the allocation of indirect costs, the financial statements reflect certain agreements executed by the Karnes County Contributors for the benefit of the Karnes County Business, including price risk management instruments.

The allocations methodologies for significant allocated items include:

Corporate G&A - EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting, and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors’ investor commitments, which were used, in part, to acquire the Karnes County Business as well as other oil and natural properties that were not part of the Business Combination.

As such, the management fee was allocated to the Karnes County Business using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors, for the Predecessor Period.

Derivatives - Certain Karnes County Contributors entered into financial instruments to manage the Karnes County Business’ exposure to changes in commodity prices for the Karnes County Business as well as other oil and natural gas properties that were not part of the Business Combination, on a combined basis.

The commodity derivative activity was allocated to the Karnes County Business using a ratio of expected crude oil and condensate, natural gas liquids (“NGLs”), and natural gas volumes produced, on an equivalents basis, by the Karnes County Business to the Karnes County Contributors’ total expected crude oil and condensate, NGLs, and natural gas produced, on an equivalents basis, for the Predecessor Period.

Indebtedness - The Karnes County Business did not historically have outstanding indebtedness, but its oil and natural gas properties were collateral to various credit facilities held by the Karnes County Contributors and/or EnerVest.

Amounts outstanding on these credit facilities have not been allocated to the Karnes County Business as they were not directly attributable to the Karnes County Business.

Management believes the allocation methodologies used are reasonable and result in an allocation of the indirect costs and other items to operate the Karnes County Business as if it were a stand-alone entity.

These allocations, however, may not be indicative of the cost of future operations or the amount of future allocations.

Direct costs were included at the historical amounts related to each reported period.

The accompanying unaudited interim consolidated and combined financial statements have been prepared in accordance with GAAP and in accordance with the rules and regulations of the SEC.

Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted.

Certain amounts have been reclassified to conform to the current period presentation resulting from the adoption of ASU No.

2014-09, Revenue from Contracts with Customers.

See Note 3 - Revenue Recognition for additional information.

In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation have been included.

Interim results are not necessarily indicative of results for the full year or any future periods.

The unaudited interim consolidated financial statements, including the Predecessor financial statements, should be read in conjunction with the information included in or incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting.

Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been omitted.

The consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated and combined financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.

Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.

In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results, have been included.

Operating results for the periods presented are not necessarily indicative of expected results for the full year.

Certain reclassifications of prior period financial statements have been made to conform to current reporting practices.

The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany transactions and balances.

The Company’s interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated.

The Company reflects a noncontrolling interest representing primarily the interest owned by the Karnes County Contributors through their ownership of Magnolia LLC Units in the consolidated financial statements.

The noncontrolling interest is presented as a component of equity.

See Note 11—Stockholders’ Equity for further discussion of the noncontrolling interest.

Summary of Significant Accounting Policies

As of September 30, 2019 , the Company’s significant accounting policies are consistent with those discussed in Note 2 - Summary of Significant Accounting Policies of its consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, with the exception of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and as noted below.

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No.

2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months.

In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements.

Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption.

The Company elected the package of transition practical expedients provided by the new standard that allow the Company to not reassess under the new standard its prior conclusions about lease identification, classification related to contracts that commenced prior to adoption, and to apply the standard prospectively to all new or modified land easements and rights-of-way.

The Company has also elected a policy to not recognize right of use assets and lease liabilities related to short-term leases.

The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

Magnolia adopted this standard on January 1, 2019 and recognized right of use assets and lease liabilities for certain commitments primarily related to real estate, vehicles, and field equipment, while prior reporting periods are presented in accordance with historical accounting treatment under ASC Topic 840, Leases (“ASC 840”).

The Company determines if an arrangement is a lease at inception.

Operating leases are included in other long-term assets, other current liabilities, and other long-term liabilities in Magnolia’s consolidated balance sheet as of September 30, 2019 .

Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Magnolia’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Lease expenses for lease payments are recognized on a straight-line basis over the lease term.

For more information, refer to Note 10 - Leases.

Recent Accounting Pronouncements

As of March 31, 2020 , the Company’s significant accounting policies are consistent with those discussed in Note 2 - Summary of Significant Accounting Policies of its consolidated and combined financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, with the exception of Accounts Receivable and Allowance for Expected Credit Losses .

Accounts Receivable and Allowance for Expected Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

The standards update requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model.

This standard is effective for the Company in the first quarter of 2020.

The Company is currently evaluating the new standard and does not believe the adoption will have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 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 the update 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.

The Company early adopted ASU 2018-15 effective April 1, 2019, with prospective application.

The adoption did not have a material impact on the Company’s consolidated financial statements.

“Measurement of Credit Losses on Financial Instruments.” For public business entities, the new standard became effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period.

Magnolia adopted this standard on January 1, 2020.

The standard changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires entities to use a new forward-looking expected loss model that will result in earlier recognition of allowance for losses.

The Company’s receivables consist mainly of trade receivables from commodity sales and joint interest billings due from owners on properties the Company operates.

The majority of these receivables have payment terms of 30 days or less.

For receivables due from joint interest owners, the Company generally has the ability to withhold future revenue disbursements to recover non-payment of joint interest billings.

From an evaluation of the Company’s existing credit portfolio, historical credit losses have been de minimis and are expected to remain so in the future assuming no substantial changes to the business or creditworthiness of Magnolia’s business partners.

As expected, there was no material impact on the Company’s unaudited consolidated financial statements or disclosures upon adoption of this ASU.

Revenue Recognition

In May 2014, the FASB issued ASU No.

2014-09, Revenue from Contracts with Customers.

This ASU and the associated subsequent amendments (collectively, “ASC 606”), superseded virtually all of the revenue recognition guidance in GAAP by requiring companies to recognize revenue using a five-step model.

The core principle of the five-step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

Magnolia adopted this standard on December 31, 2018 for all Successor Periods using a modified retrospective approach.

There were no significant changes to the timing of revenue recognized for sales of production as a result of ASC 606.

However, the new guidance resulted in certain changes to the classification of processing and other fees between revenue and gathering, transportation, and processing expense.

The change also resulted in an increase to the production volumes and depreciation, depletion and amortization.

The amounts included in the accompanying unaudited interim consolidated financial statements for the 2018 Successor Period were reclassified in order to conform to the current period presentation resulting from the adoption of ASC 606 and are considered immaterial.

The Predecessor Period has not been restated and continues to be reported under the accounting standards in effect for that period.

Oil, Natural Gas, and NGL Revenues

Magnolia’s revenues include the sale of crude oil, natural gas, and NGLs.

8 unchanged sentences

For processing contracts that require noncash consideration in exchange for processing services, the Company recognizes revenue and an equal gathering, transportation, and processing expense for commodities transferred to the service provider.

Contract Balances

Customers are invoiced once the Company’s performance obligations have been satisfied.

2 unchanged sentences

Accordingly, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

The Company’s receivables consist mainly of receivables from oil and natural gas purchasers and from joint interest owners on properties the Company operates.

Receivables from contracts with customers totaled $ 113.2 million as of September 30, 2019 and $ 100.1 million as of December 31, 2018.

Accounts receivable are stated at the historical carrying amount net of write-offs and allowance for doubtful accounts.

The Company routinely assesses the collectability of all material trade and other receivables.

The Company’s receivables consist mainly of receivables from oil and natural gas purchasers and from joint interest owners on properties the Company operates.

The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated.

The Company had no allowance for doubtful accounts as of September 30, 2019 or December 31, 2018.

Disaggregation of Revenue

The Company has concluded that disaggregating revenue by product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors and has reflected this disaggregation of revenue on the Company’s consolidated and combined statements of operations for all periods presented.

Performance Obligations

The Company’s receivables consist mainly of trade receivables from commodity sales and joint interest billings due from owners on properties the Company operates.

Receivables from contracts with customers totaled $ 68.7 million as of March 31, 2020 and $ 100.4 million as of December 31, 2019.

See Note 2 - Summary of Significant Accounting Policies for more information on the Company’s allowance for expected credit losses policy.

The Company has concluded that disaggregating revenue by product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors and has reflected this disaggregation of revenue on the Company’s consolidated statements of operations for all periods presented.

Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer.

2 unchanged sentences

The Company does not disclose the value of unsatisfied performance obligations for contracts as all contracts have either an original expected length of one year or less, or the entire future consideration is variable and allocated entirely to a wholly unsatisfied performance obligation.

Acquisitions (Successor)

EnerVest Business Combination

As discussed in Note 1 - Description of Business and Basis of Presentation , on July 31, 2018, the Company consummated the Business Combination contemplated by the Business Combination Agreements.

The Business Combination Agreements and the Business Combination were approved by the Company’s stockholders on July 17, 2018.

At the closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of the Company’s Class B Common Stock and an equivalent number of Magnolia LLC Units, which, together, are exchangeable on a one -for-one basis for shares of the Company’s Class A Common Stock, subject to certain conditions;

31.8 million shares of Class A Common Stock;

and approximately $ 911.5 million in cash.

The Giddings Sellers received approximately $ 282.7 million in cash.

The Ironwood Sellers received $ 25.0 million in cash in exchange for the Ironwood Interests.

On March 29, 2019, Magnolia and EnerVest consummated the final settlement pursuant to the Contribution and Merger Agreement and as otherwise agreed to by the parties, with Magnolia receiving a net cash payment of $ 4.3 million and the Karnes County Contributors forfeiting to Magnolia 0.5 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock (and forfeiting a corresponding number of Magnolia LLC Units to Magnolia LLC).

The Business Combination has been accounted for using the acquisition method.

The acquisition method of accounting is based on ASC 805 “Business Combinations,” and uses the fair value concepts defined in ASC 820.

ASC 805 requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company.

Contingent Consideration

Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Karnes County Contributors were entitled to receive an aggregate of up to 13.0 million additional shares of Class A Common Stock or shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) based on certain EBITDA and free cash flow or stock price thresholds.

As of December 31, 2018, the Company had met the defined stock price thresholds and, as a result, the Company had issued an aggregate of 3.6 million additional shares of Class A Common Stock and 9.4 million additional shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) to the Karnes County Contributors.

Pursuant to the Giddings Purchase Agreement, until December 31, 2021, the Giddings Sellers were entitled to receive an aggregate of up to $ 47.0 million in cash earnout payments based on certain net revenue thresholds.

On September 28, 2018, the Company paid the Giddings Sellers a cash payment of $ 26.0 million to fully settle the earnout obligation.

The purchase consideration for the Business Combination was as follows:

(In thousands)

Purchase Consideration:

Cash consideration

Stock consideration (1)

Fair value of contingent earnout purchase consideration (2)

Total purchase price consideration

At closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) and 31.8 million shares of Class A Common Stock.

On March 29, 2019, Magnolia and EnerVest consummated the final settlement pursuant to the Contribution and Merger Agreement as agreed to by the parties, with the Karnes County Contributors forfeiting an aggregate of 2.1 million shares of Class A and Class B Common Stock to Magnolia (and a corresponding number of Magnolia LLC Units).

Pursuant to ASC 805, ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815, “Derivatives and Hedging,” the Karnes County earnout consideration was valued at fair value as of the Closing Date and was classified in stockholders’ equity.

The Giddings earnout was valued at fair value as of the Closing Date and was classified as a liability.

The fair value of the earnouts was determined using the Monte Carlo simulation valuation method based on Level 3 inputs in the fair value hierarchy.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed on the acquisition date:

(In thousands)

Fair value of assets acquired

Accounts receivable

Other current assets

Oil and natural gas properties (1)

Ironwood equity investment

Total fair value of assets acquired

Fair value of liabilities assumed

Accounts payable and other current liabilities

Asset retirement obligations

Deferred tax liability

Fair value of net assets acquired

The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs.

The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount.

Significant inputs to the valuation of oil and natural gas properties included estimates of:

(i) recoverable reserves;

(ii) production rates;

(iii) future operating and development costs;

(iv) future commodity prices;

and (v) a market-based weighted average cost of capital rate.

The Company incurred $ 24.8 million in transaction costs associated with the Business Combination.

The Company also incurred a total of $ 23.5 million of debt issuance costs in connection with the consummation of the Business Combination related to the establishment of the RBL Facility (as defined herein) and the issuance of the 2026 Senior Notes.

Unaudited Pro Forma Operating Results

The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of the Company’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments.

Additionally, pro forma net income attributable to Class A Common Stock excludes $ 34.3 million of transaction related costs, $ 11.0 million related to a one-time purchase of a seismic license continuation, and a $ 6.7 million loss related to the settlement of the Giddings earnout obligation.

The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2017;

furthermore, the financial information is not intended to be a projection of future results.

(Unaudited Pro Forma)

(In thousands)

Three Months Ended

September 30, 2018

Nine Months Ended

September 30, 2018

Total revenues

Net income attributable to Class A Common Stock

Net income per share - basic

Net income per share - diluted

On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”) restricting EnerVest and certain of its affiliates from competing with the Company in certain counties comprising the Eagle Ford Shale following the Closing Date.

An affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock issuable in two tranches of 2.0 million shares in two and one half and four years from the Closing Date provided EnerVest does not compete with Magnolia in the Eagle Ford Shale until the later of July 31, 2022 or the date the Services Agreement with EnerVest Operating, LLC (“EVOC”), a wholly owned subsidiary of EnerVest, (the “Services Agreement”), is terminated.

For more discussion on the Non-Compete, refer to Note 7 - Intangible Assets .

Harvest Acquisition

On August 31, 2018, the Company completed the acquisition of substantially all of Harvest Oil & Gas Corporation’s South Texas assets for approximately $ 133.3 million in cash and 4.2 million shares of Class A Common Stock for a total consideration of $ 191.5 million .

The acquisition added an undivided working interest across a portion of Magnolia’s existing Karnes County Assets and all of the Company’s existing Giddings Assets.

On March 14, 2019, Magnolia consummated the final settlement with Harvest receiving a cash payment of $ 1.4 million .

The transaction was accounted for as a business combination.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed:

(In thousands)

Fair value of assets acquired

Other current assets

Oil and natural gas properties (1)

Total fair value of assets acquired

Fair value of liabilities assumed

Asset retirement obligations and other current liabilities

Fair value of net assets acquired

The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs.

The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount.

Significant inputs to the valuation of oil and natural gas properties included estimates of:

(i) recoverable reserves;

(ii) production rates;

(iii) future operating and development costs;

(iv) future commodity prices;

and (v) a market-based weighted average cost of capital rate.

These inputs required significant judgments and estimates by management at the time of the valuation.

Certain Other Acquisitions

On May 31, 2019, the Company completed the acquisition of certain oil and gas assets located in the Company’s Karnes County Assets for approximately $ 36.3 million in cash, subject to customary closing adjustments, and approximately 3.1 million shares of the Company’s Class A Common Stock.

2020 Acquisitions

On February 21, 2020, the Company completed the acquisition of certain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas, for approximately $ 71.3 million in cash, subject to customary closing adjustments.

The transaction was accounted for as an asset acquisition.

2019 Acquisitions

On May 31, 2019, the Company completed the acquisition of certain oil and natural gas assets located in the Company’s Karnes County Assets for approximately $ 36.3 million in cash and approximately 3.1 million shares of the Company’s Class A Common Stock.

The transaction was accounted for as an asset acquisition.

On February 5, 2019, Magnolia Operating formed a joint venture, Highlander Oil & Gas Holdings LLC (“Highlander”), to complete the acquisition of a 72 % working interest in the Eocene-Tuscaloosa Zone, Ultra Deep Structure gas well located in St.

Martin Parish, Louisiana and 31.1 million royalty trust units in the Gulf Coast Ultra Deep Royalty Trust from McMoRan

Oil & Gas, LLC.

Martin Parish, Louisiana and 31.1 million royalty trust units in the Gulf Coast Ultra Deep Royalty Trust from McMoRan Oil & Gas, LLC.

Highlander paid cash consideration of $ 50.9 million for such interests.

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The transaction was accounted for as an asset acquisition.

Acquisitions (Predecessor)

Subsequent GulfTex Acquisition

On March 1, 2018, the Predecessor acquired certain oil and natural gas properties located in the Eagle Ford Shale from GulfTex Energy III, L.P.

and GulfTex Energy IV, L.P.

for an adjusted purchase price of approximately $ 150.1 million , net of customary closing adjustments (the “Subsequent GulfTex Acquisition”).

The recognized fair value of identifiable assets and acquired liabilities assumed in connection with the Subsequent GulfTex Acquisition, is as follows:

(In thousands)

Purchase price allocation:

Accounts receivable

Proved oil and natural gas properties

Unproved oil and natural gas properties

Accounts payable and accrued liabilities

Asset retirement obligations

Derivative Instruments and Hedging Activities (Predecessor)

The Company’s activities expose it to risks associated with changes in the market price of oil, natural gas, and NGLs.

As such, future earnings are subject to fluctuation due to changes in the market price of oil, natural gas, and NGLs.

The Company has not engaged in any hedging activities and does not expect to engage in any hedging activities with respect to the market risk to which the Company is exposed.

The Karnes County Contributors, on behalf of the Predecessor, used derivatives to reduce the risk of volatility in the prices of oil, natural gas, and NGLs and their policies did not permit the use of derivatives for speculative purposes.

The Predecessor elected not to designate any of its derivatives as hedging instruments.

Accordingly, changes in the fair value of the Predecessor's derivatives were recorded immediately to earnings as “Gain (loss) on derivatives, net” in the combined statements of operations.

During the periods from July 1 through July 30, 2018 and January 1 through July 30, 2018, the Predecessor incurred a gain on derivatives of $ 3.9 million and a loss on derivatives of $ 18.1 million , respectively.

Fair Value Measurements

Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or non-recurring basis.

Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or nonrecurring basis.

The Company’s fair value measurements are based either on actual market data or assumptions that other market participants would use in pricing an asset or liability in an orderly transaction, using the valuation hierarchy prescribed by GAAP under ASC 820.

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The inputs used in determination of fair value require significant judgment and estimation.

Fair Values - Recurring (Predecessor)

The Predecessor’s derivatives consisted of over-the-counter contracts that were not traded on a public exchange.

As the fair value of these derivatives was based on inputs using market prices obtained from independent brokers or determined using quantitative models that used as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions, the Predecessor categorized these derivatives as Level 2.

The Predecessor valued these derivatives using the income approach using inputs such as the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves.

Estimates of fair value were determined at discrete points in time based on relevant market data.

Furthermore, fair values were adjusted to reflect the credit risk inherent in the transaction, which may have included amounts to reflect counterparty credit quality and/or the effect of the Predecessor’s creditworthiness.

Fair Values - Nonrecurring

The fair value measurements of assets acquired and liabilities assumed in a business combination are measured on a nonrecurring basis on the acquisition date using an income valuation technique based on inputs that are not observable in the market, and therefore, represent Level 3 inputs.

Significant inputs to the valuation of acquired oil and gas properties includes estimates of:

(i) reserves;

(ii) production rates;

(iii) future operating and development costs;

(iv) future commodity prices, including price differentials;

(v) future cash flows;

and (vi) a market participant-based weighted average cost of capital rate.

These inputs require significant judgments and estimates by the Company’s management at the time of the valuation.

Refer to Note 4 - Acquisitions for additional information.

Deemed Dividend

In July 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its warrants.

The difference in fair value between the Class A Common Stock issued and the warrants exchanged was recorded as a non-cash deemed dividend for the incremental value provided to the holders of the warrants.

The fair value of the non-cash deemed dividend related to the warrant exchange was determined based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

Refer to Note 11 - Stockholders’ Equity for additional information.

Fair Value of Financial Instruments

Debt Obligations

The carrying value and fair value of the financial instrument that is not carried at fair value in the accompanying consolidated balance sheet as of September 30, 2019 is as follows:

September 30, 2019

The carrying value and fair value of the financial instrument that is not carried at fair value in the accompanying consolidated balance sheet at March 31, 2020 and December 31, 2019 is as follows:

March 31, 2020

December 31, 2019

(In thousands)

Carrying Value

Long-term debt

The fair value of the 2026 Senior Notes at September 30, 2019 was based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

The fair value of the 2026 Senior Notes at March 31, 2020 and December 31, 2019 was based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

The Company has other financial instruments consisting primarily of receivables, payables, and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities.

Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in the business combinations and asset retirement obligations.

Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in business combinations and asset retirement obligations.

Nonrecurring Fair Value Measurements

The Company applies the provisions of the fair value measurement standard on a nonrecurring basis to its non-financial assets and liabilities, including oil and natural gas properties.

These assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments when facts and circumstances arise that indicate a need for remeasurement.

During the first quarter of 2020, Magnolia recorded impairments of $ 1.9 billion related to proved and unproved properties as a result of the sharp decline in commodity prices.

Proved property impairment of $ 1.4 billion is included in “Impairment of oil and natural gas properties” and unproved property impairment of $ 0.6 billion is included in “Exploration expense” on the Company’s consolidated statement of operations for the three months ended March 31, 2020.

Proved and unproved properties that were impaired had aggregate fair values as of the most recent date of impairment for the three months ended March 31, 2020, of $ 0.8 billion and $ 0.3 billion , respectively.

The fair values of oil and natural gas properties were measured using the income approach based on inputs that are not observable in the market, and therefore, represent Level 3 inputs.

The Company calculated the estimated fair values of its oil and natural gas properties using a discounted future cash flow model.

Significant inputs associated with the calculation of discounted future net cash flows include estimates of future commodity prices based on NYMEX strip pricing adjusted for price differentials, estimates of proved oil and natural gas reserves and risk adjusted probable and possible reserves, estimates of future expected operating and capital costs, and a market participant based weighted average cost of capital of 10 % for proved property impairments and 12 % for unproved property impairments.

Intangible Assets

Non-Compete Agreement

On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into the Non-Compete, which prohibits EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) until the later of July 31, 2022 or the date the Services Agreement is terminated.

Under the Non-Compete, an affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock in two tranches of 2.0 million shares in two and one half and four years from the Closing Date provided EnerVest does not compete in the Market Area.

On July 31, 2018, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”), which prohibits EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) until the later of July 31, 2022 or the date the Services Agreement is terminated.

Under the Non-Compete, an affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock in two tranches of 2.0 million shares in two and one half and four years from July 31, 2018 provided EnerVest does not compete in the Market Area.

The Company recorded an estimated cost of $ 44.4 million for the Non-Compete as intangible assets on the Company’s consolidated balance sheet.

These intangible assets have a definite life and are subject to amortization utilizing the straight-line method over their economic life, currently estimated to be two and one half to four years .

The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statement of operations.

The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statements of operations.

(In thousands)

September 30, 2019

March 31, 2020

December 31, 2019

Non-compete intangible assets

2 unchanged sentences

Weighted average amortization period (in years)

The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which Magnolia and its subsidiaries operate.

The tax effects of statutory rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred tax assets are excluded from the determination of the Company’s annual effective tax rate as such items are recognized as discrete items in the period in which they occur.

Income tax expense recorded for the period is based on applying an estimated annual effective income tax rate to the net income from January 1, 2019 through September 30, 2019.

There were no significant unusual or infrequently occurring items that are required to be recorded as discrete items as of September 30, 2019 .

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the Company’s expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, the effect of noncontrolling interest, permanent and temporary differences, and the likelihood of recovering deferred tax assets in the current year.

The accounting estimates used to compute the income tax expense may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes.

For the three and nine months ended September 30, 2019 , the Company incurred U.S.

federal income tax expense of approximately $ 3.1 million and $ 11.6 million , respectively.

The Company’s annual effective tax rate for the three and nine months ended September 30, 2019 was 16.9 % and 14.9 % , respectively.

The primary differences between the annual effective tax rate and the statutory rate of 21.0% are income attributable to noncontrolling interest and state taxes.

The Company’s income tax provision consists of the following components:

Other Current Liabilities

The following table provides detail of the Company’s other current liabilities for the periods presented:

(In thousands)

Three Months Ended

September 30, 2019

Nine Months Ended

September 30, 2019

July 31, 2018

September 30, 2018

July 30, 2018

January 1, 2018 Through

July 30, 2018

Total provision

The Company is subject to U.S.

federal income tax, the margin tax in the state of Texas, and Louisiana corporate income tax.

No amounts have been accrued for income tax uncertainties or interest and penalties as of September 30, 2019 .

The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position.

The Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities for all periods.

March 31, 2020

December 31, 2019

Accrued capital expenditures

Total other current liabilities

Long Term Debt

1 unchanged sentence

(In thousands)

September 30, 2019

March 31, 2020

December 31, 2019

Revolving credit facility

4 unchanged sentences

Credit Facility

In connection with the consummation of the Business Combination, Magnolia Operating entered into a senior secured reserve-based revolving credit facility (the “RBL Facility”) among Magnolia Operating, as borrower, Magnolia Intermediate, as its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank and swingline lender, providing for maximum commitments in an aggregate principal amount of $ 1.0 billion with a letter of credit facility with a $ 100.0 million sublimit.

The borrowing base as of September 30, 2019 was $ 550.0 million .

In connection with the consummation of the Business Combination, Magnolia Operating entered into the RBL Facility among Magnolia Operating, as borrower, Magnolia Intermediate, as its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank, and swingline lender, providing for maximum commitments in an aggregate principal amount of $ 1.0 billion with a letter of credit facility with a $ 100.0 million sublimit.

The borrowing base as of March 31, 2020 was $ 550.0 million .

In April 2020, the borrowing base capacity was reduced to $ 450.0 million .

The RBL Facility is guaranteed by certain parent companies and subsidiaries of Magnolia LLC and is collateralized by certain of Magnolia Operating’s oil and natural gas properties and has a borrowing base subject to semi-annual redetermination.

3 unchanged sentences

The RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 4.00 to 1.00 and, if the leverage ratio is in excess of 3.00 to 1.00, a current ratio of greater than 1.00 to 1.00.

As of September 30, 2019 , the Company was in compliance with all covenants under the RBL Facility.

Deferred financing costs incurred in connection with securing the RBL Facility were $ 11.7 million , which are amortized on a straight-line basis over a period of five years and included in “Interest expense, net” in the Company’s consolidated statement of operations.

During the three and nine months ended September 30, 2019 , the Company recognized interest expense of $ 1.1 million and $ 3.4 million , respectively, related to the RBL Facility.

The unamortized portion of the deferred financing costs are included in “Deferred financing costs, net” on the accompanying unaudited consolidated balance sheet as of September 30, 2019 .

The Company did no t have any outstanding borrowings under its RBL Facility as of September 30, 2019 .

As of March 31, 2020 , the Company was in compliance with all covenants under the RBL Facility.

The Company recognized interest expense of $ 1.1 million during the three months ended March 31, 2020 and 2019 related to the RBL Facility.

The unamortized portion of the deferred financing costs are included in “Deferred financing costs, net” on the accompanying consolidated balance sheet as of March 31, 2020 .

The Company did no t have any outstanding borrowings under its RBL Facility as of March 31, 2020 .

2026 Senior Notes

On the Closing Date, the Issuers issued and sold $ 400.0 million aggregate principal amount of 2026 Senior Notes.

The 2026 Senior Notes were issued under the Indenture, dated as of the Closing Date (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee.

On July 31, 2018, the Issuers issued and sold $ 400.0 million aggregate principal amount of 2026 Senior Notes.

The 2026 Senior Notes were issued under the Indenture, dated as of July 31, 2018 (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee.

The 2026 Senior Notes are guaranteed on a senior unsecured basis by the Company, Magnolia Operating, and Magnolia Intermediate and may be guaranteed by certain future subsidiaries of the Company.

1 unchanged sentence

At any time prior to August 1, 2021, the Issuers may, on any one or more occasions, redeem all or a part of the 2026 Senior Notes at a redemption price equal to 100 % of the principal amount of the 2026 Senior Notes redeemed, plus a “make whole” premium on accrued and unpaid interest, if any, to, but excluding, the date of redemption.

After August 1, 2021, the Issuers may redeem all or a part of the Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest.

The Company incurred $ 11.8 million of deferred financing costs related to the issuance of the 2026 Senior Notes, which were capitalized, are amortized using the effective interest method over the term of the 2026 Senior Notes, and are included in “Interest expense, net” in the Company’s consolidated statement of operations.

The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as Long-term debt, net on the consolidated balance sheet as of September 30, 2019 .

During the three and nine months ended September 30, 2019 , the Company recognized interest expense of $ 6.3 million and $ 18.9 million , respectively, related to the 2026 Senior Notes.

After August 1, 2021, the Issuers may redeem all or a part of the 2026 Senior Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest.

The Company incurred $ 11.8 million of deferred financing costs related to the issuance of the 2026 Senior Notes, which were capitalized.

These costs are amortized using the effective interest method over the term of the 2026 Senior Notes and are included in “Interest expense, net” in the Company’s consolidated statements of operations.

The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as “Long-term debt, net” on the consolidated balance sheet as of March 31, 2020 .

The Company recognized interest expense of $ 6.3 million for the three months ended March 31, 2020 and 2019 related to the 2026 Senior Notes.

Affiliate Guarantors

Certain subsidiaries of the Company are guarantors under the terms of its Senior Notes and RBL Facility.

The parent guarantees may be released upon the request of Magnolia Operating.

The Company, Magnolia LLC (together with the Company, the “Parent Guarantors”), and the direct parent company of Magnolia Operating and certain subsidiaries of Magnolia Operating are guarantors under the terms of its 2026 Senior Notes and RBL Facility.

The Parent Guarantors may be released upon the request of Magnolia Operating.

Magnolia’s consolidated financial statements reflect the financial position of these subsidiary guarantors.

2 unchanged sentences

There are restrictions on dividends, distributions, loans, or other transfers of funds from the subsidiary guarantors to the Company.

Magnolia’s leases primarily consist of real estate, vehicles, and field equipment.

The Company’s leases have remaining lease terms of up to 8 years , some of which include options to renew or terminate the lease.

The exercise of lease renewal options is at the Company’s sole discretion.

Magnolia’s lease agreements do not contain any residual value guarantees or restrictive covenants.

As most of Magnolia’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The Company used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.

(In thousands)

September 30, 2019

Operating Leases

Operating lease assets

Operating lease liabilities - current

Operating lease liabilities - long-term

Total operating lease liabilities

Weighted average remaining lease term (in years)

Weighted average discount rate

For the three and nine months ended September 30, 2019 , respectively, the Company incurred $ 0.9 million and $ 2.1 million of lease costs for operating leases included on the Company’s balance sheet, $ 5.9 million and $ 21.1 million for short-term lease costs and $ 0.6 million and $ 2.5 million for variable lease costs.

Cash paid for amounts included in the measurement of lease liabilities in operating cash flows from operating leases for the nine months ended September 30, 2019 is $ 2.0 million .

Maturities of lease liabilities as of September 30, 2019 under the scope of ASC 842 are as follows:

Commitments and Contingencies

Legal Matters

The Company is involved in disputes or legal actions in the ordinary course of business.

For example, certain of the Karnes County Contributors and the Company have been named as defendants in a lawsuit where the plaintiffs claim to be entitled to a minority working interest in certain Karnes County Assets.

The litigation is in the pre-trial stage.

The exposure related to this litigation is currently not reasonably estimable.

The Karnes County Contributors retained all such liability in connection with the Business Combination.

At March 31, 2020 , the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statements of operations, balance sheet, or cash flows.

No amounts were accrued with respect to outstanding litigation at March 31, 2020 or March 31, 2019 .

Environmental Matters

The Company, as an owner or lessee and operator of oil and natural gas properties, is subject to various federal, state, local laws, and regulations relating to discharge of materials into, and protection of, the environment.

These laws and regulations may, among other things, impose liability on the lessee under an oil and natural gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages.

In some instances, the Company may be directed to suspend or cease operations in the affected area.

The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks.

Risks and Uncertainties

The Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments, and competition from other energy sources.

Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future.

The coronavirus disease 2019 (“COVID-19”) pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and natural gas industry.

Oil demand has significantly deteriorated as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus.

Furthermore, in the midst of the ongoing COVID-19 pandemic, the competition between Russia and Saudi Arabia for crude oil market share caused a substantial increase in supply.

The implications of these unprecedented events continue to unfold and may have further negative effects to the Company’s business, such as production curtailment, reduced storage capacity, and reductions to its operating plans.

The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

The CARES Act includes several significant business tax provisions that, among other things, allow businesses to carry back net operating losses (“NOL”) arising in 2018, 2019, and 2020 to the five prior tax years.

Applying the NOL carryback provision results in an income tax benefit of $ 1.2 million in the first quarter of 2020 and the difference in the U.S.

federal rate of 35% in 2017 compared to 21% in 2018 and thereafter results in a discrete benefit to the tax provision of approximately $ 0.5 million for the period ended March 31, 2020.

The income tax expense or benefit recorded for the period is based on applying an estimated annual effective income tax rate to the net income or loss for the quarters ended March 31, 2020 and March 31, 2019.

The accounting estimates used to compute the income tax expense or benefit may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes.

The Company’s annual effective tax rate for the three months ended March 31, 2020 and 2019 was 3.8 % and 14.2 % , respectively.

The primary differences between the annual effective tax rate and the statutory rate of 21.0% are income attributable to noncontrolling interest, the recognition of a valuation allowance on federal and state deferred tax assets, and state taxes.

During the first quarter of 2020, Magnolia’s effective tax rate was primarily impacted by the recognition of valuation allowances for its deferred tax assets from non-cash impairments of the carrying value of the Company’s oil and natural gas properties and the net deferred tax assets generated in this period.

During the first quarter of 2020, the Company moved from a net deferred tax liability position to an estimated net deferred tax asset position of $ 208.8 million resulting primarily from oil and natural gas impairments.

Management assessed whether it is more-likely-than-not that it will generate sufficient taxable income to realize its deferred income tax assets, including the investment in partnership and net operating loss carryforwards.

In making this determination, the Company considered all available positive and negative evidence and made certain assumptions.

The Company considered, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends, and its outlook for future years.

As of March 31, 2020, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $ 208.8 million .

The Company’s income tax provision consists of the following components:

(In thousands)

Maturity of Lease Liabilities (1)

Operating Leases

2019 (remaining)

Total lease payments

Present value of lease liabilities

As of December 31, 2018, minimum future contractual payments for long-term operating leases under the scope of ASC 840 were $ 881 thousand in 2019, $ 646 thousand in 2020, $ 198 thousand in 2021, $ 14 thousand in 2022, $ 15 thousand in 2023 and $ 63 thousand thereafter.

Three Months Ended

March 31, 2020

Three Months Ended March 31, 2019

Total provision

The Company is subject to U.S.

federal income tax, the margin tax in the state of Texas, and Louisiana corporate income tax.

No amounts have been accrued for income tax uncertainties or interest and penalties as of March 31, 2020 .

The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position.

The Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities for all periods.

Stockholders’ Equity

Class A Common Stock

In connection with the closing of the Business Combination, the Company increased the number of authorized shares of Class A Common Stock to 1.3 billion .

At September 30, 2019 , there were 168.3 million shares issued and 167.3 million shares outstanding of Class A Common Stock.

At March 31, 2020 , there were 168.5 million shares of Class A Common Stock issued and 166.5 million shares of Class A Common Stock outstanding.

The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters and are entitled one vote for each share held.

There is no cumulative voting with respect to the election of directors, which results in the holders of more than 50% of the shares being able to elect all of the directors, subject to voting obligations under the Stockholder Agreement (defined below).

In the event of a liquidation, dissolution, or winding up of the Company, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock.

1 unchanged sentence

Class B Common Stock

In connection with the closing of the Business Combination, the Company authorized 225.0 million shares of Class B Common Stock.

At September 30, 2019 , there were 91.8 million shares of Class B Common Stock issued and outstanding.

At March 31, 2020 , there were 85.8 million shares of Class B Common Stock issued and outstanding.

Holders of Class B Common Stock vote together as a single class with holders of Class A Common Stock on all matters properly submitted to a vote of the stockholders.

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The holders of the Class B Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.

On June 7, 2019, the Company commenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”), pursuant to which the Company (1) offered to holders of its warrants the opportunity to receive 0.29 shares of Class A Common Stock in exchange for each warrant validly tendered and (2) solicited the consent from the holders of its warrants to approve an amendment to the Company’s existing warrant agreement, by and between the Company and Continental Stock Transfer & Trust Company, to amend the agreement to provide the Company with the right to require any holder of the Company’s warrants to exchange their warrants for Class A Common Stock at an exchange ratio of 0.261 shares of Class A Common Stock for each whole warrant (the “Warrant Amendment”).

Pursuant to the Offer, certain of the Company’s warrantholders, including directors and executive officers, agreed to tender their warrants and provide the corresponding consent to the Warrants Amendment in the Consent Solicitation by entering into the Tender and Support Agreement (as defined below).

The Offer and Consent Solicitation expired on July 5, 2019.

In connection with the closing of the Offer on July 10, 2019 and the subsequent exercise of the Company’s right to exchange all remaining warrants on July 25, 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its 31.7 million warrants outstanding, which consisted of 21.7 million public warrants and 10.0 million private placement warrants.

As the fair value of the warrants exchanged in the Offer was less than the fair value of the Class A Common Stock issued, the company recorded a non-cash deemed dividend of $ 2.8 million for the incremental value provided to the warrant holders.

The fair value of warrants and the Class A Common Stock was determined using unadjusted quoted prices in an active market, a Level 1 fair value input.

The Company capitalized $ 2.2 million of expenses related to the Offer within additional paid-in capital.

Share Repurchase Program

On August 5, 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares.

On August 5, 2019, the Company’s board of directors authorized a share repurchase program of up to 10 million shares of Class A Common Stock.

The program does not require purchases to be made within a particular timeframe.

As of September 30, 2019 , the Company had repurchased 950 thousand shares of Class A Common Stock at a weighted average price of $ 10.23 , for a total cost of approximately $ 9.7 million .

As of March 31, 2020 , the Company had repurchased 2.0 million shares under the plan at a cost of $ 16.8 million .

Noncontrolling Interest

Noncontrolling interest in Magnolia’s consolidated subsidiaries include amounts attributable to Magnolia LLC Units that were issued to the Karnes County Contributors in connection with the Business Combination.

The noncontrolling interest percentage is affected by various equity transactions such as issuances of Class A Common Stock and the conversion of Class B Common Stock to Class A Common Stock.

As of September 30, 2019 , Magnolia owned approximately 64.6 % of the interest in Magnolia LLC and the noncontrolling interest was 35.4 % .

In the first quarter of 2019, Magnolia Operating formed a joint venture, in which MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85 % of the units, with the remaining 15 % attributable to noncontrolling interest.

Supplemental Cash Flow Information

Supplemental cash flow disclosures are presented below:

(In thousands)

September 30, 2019

July 31, 2018

September 30, 2018

January 1, 2018 Through

July 30, 2018

Supplemental non-cash operating activity:

Cash paid for income taxes

Cash paid for interest

Supplemental non-cash investing and financing activity:

Accruals or liabilities for capital expenditures

Contingent Consideration issued in Business Combination

Non-Compete agreement entered into in Business Combination

Equity issuances in connection with acquisitions

Non-cash deemed dividend related to warrant exchange

Supplemental non-cash lease operating activity:

Right-of-use assets obtained in exchange for operating lease obligations

The noncontrolling interest percentage is affected by various equity transactions such as issuances of Class A Common Stock, the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) for Class A Common Stock, or cancellation of Class B Common Stock (and corresponding Magnolia LLC Units).

As of March 31, 2020 , Magnolia owned approximately 66 % of the interest in Magnolia LLC and the noncontrolling interest was 34 % .

In the first quarter of 2019, Magnolia Operating formed Highlander as a joint venture where MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85 % of the units in Highlander, with the remaining 15 % attributable to noncontrolling interest.

Stock Based Compensation

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A total of 11.8 million shares of Class A Common Stock have been authorized for issuance under the Plan.

The Company granted employees stock based compensation awards in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) to enhance the Company and its affiliates’ ability to attract, retain and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities.

The Company grants stock based compensation awards in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) to eligible employees and directors to enhance the Company and its affiliates’ ability to attract, retain, and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities.

Shares issued as a result of awards granted under the Plan are generally new shares of Class A Common Stock.

Stock based compensation expense is recognized within general and administrative expense on the consolidated statement of operations and was $ 2.8 million and $ 8.4 million for the three and nine months ended September 30, 2019 .

Stock based compensation expense is recognized net of forfeitures within “General and administrative expenses” on the consolidated statements of operations and was $ 2.9 million and $ 2.4 million for the three months ended March 31, 2020 and 2019, respectively.

The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.

Restricted Stock Units

The Company grants service-based RSU awards to employees and non-employee directors, which generally vest ratably over a three -year service period.

RSUs represent the right to receive shares of Class A Common Stock at the end of the vesting period equal to the number of RSUs granted.

RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient is no longer an employee or director of the Company for any reason prior to vesting of the award.

The Company grants service-based RSU awards to employees and non-employee directors, which generally vest ratably over a three -year service period, in the case of awards to employees, and vest in full after one year , in the case of awards to directors.

RSUs represent the right to receive shares of Class A Common Stock at the end of the vesting period equal to the number of RSUs that vest.

RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company for any reason prior to vesting of the award.

Compensation expense for the service-based RSU awards is based upon the grant date market value of the award and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards.

Unrecognized compensation expense related to unvested restricted shares at September 30, 2019 was $ 12.0 million , which the Company expects to recognize over a weighted average period of 2.1 years.

The table below summarizes restricted stock unit activity for the nine months ended September 30, 2019 .

Unrecognized compensation expense related to unvested RSUs at March 31, 2020 was $ 13.6 million , which the Company expects to recognize over a weighted average period of 2.2 years.

The table below summarizes RSU activity for the three months ended March 31, 2020 :

Restricted Stock Units

Weighted Average Grant Date

Unvested restricted stock units, beginning of period

Unvested restricted stock units, end of period

Weighted Average Grant Date Fair Value

Unvested RSUs, beginning of period

Unvested RSUs, end of period

Performance Stock Units

During the nine months ended September 30, 2019 , the Company granted PSUs to certain employees, with each PSU representing the contingent right to receive one share of Class A Common Stock.

The number of shares of Class A Common Stock issuable upon vesting, however, ranges from zero to 150 % of the number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over an approximate three -year performance period, the last day of which is also the vesting date.

Unrecognized compensation expense related to unvested PSUs at September 30, 2019 was $ 7.0 million , which the Company expects to recognize over a weighted average period of 2.1 years.

The table below summarizes performance stock award and unit activity for the nine months ended September 30, 2019 .

During the three months ended March 31, 2020 , the Company granted PSUs to certain employees.

Each PSU, to the extent earned, represents the contingent right to receive one share of Class A Common Stock and the awardee may earn between zero and 150 % of the target number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over a three -year performance period, the last day of which is also the vesting date.

In addition to the TSR conditions, vesting of the PSUs is subject to the awardee’s continued employment through the date of settlement of the PSUs, which will occur within 60 days following the end of the performance period.

Unrecognized compensation expense related to unvested PSUs at March 31, 2020 was $ 7.5 million , which the Company expects to recognize over a weighted average period of 2.0 years.

The table below summarizes PSU activity for the three months ended March 31, 2020 :

Performance Stock Units

Weighted Average Grant Date Fair Value

Unvested performance stock units, beginning of period

Unvested performance stock units, end of period

The grant date fair value of the PSUs granted during the nine months ended September 30, 2019 was $ 3.7 million , calculated using a Monte Carlo simulation.

Unvested PSUs, beginning of period

Unvested PSUs, end of period

The grant date fair value of the PSUs granted during the three months ended March 31, 2020 and 2019 was $ 2.5 million and $ 3.6 million , respectively, calculated using a Monte Carlo simulation.

The following table summarizes the assumptions used to calculate the grant date fair value of these PSUs.

Grant Date Fair Value Assumptions

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Expected term (in years)

Expected volatility

33.61% - 31.58%

Risk-free interest rate

2.48% - 2.29%

Earnings Per Share

Earnings (Loss) Per Share

A reconciliation of the numerators and denominators of the basic and diluted per share computations follows:

No such computation is necessary for the Predecessor Period as the Predecessor was not previously accounted for as a standalone legal entity and did not have publicly traded securities.

(In thousands, except per share data)

Three Months Ended

September 30, 2019

Nine Months Ended

September 30, 2019

July 31, 2018

September 30, 2018

Net Income attributable to Class A Common Stock

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Net income (loss) attributable to Class A Common Stock

Weighted average number of common shares outstanding during the period - basic

Net income per common share - basic

Net Income attributable to Class A Common Stock

Net income (loss) per share of Class A Common Stock - basic

Net income (loss) attributable to Class A Common Stock

Weighted average number of common shares outstanding during the period - basic

Dilutive effect warrants and stock based compensation

Dilutive effect warrants, stock based compensation, and other

Weighted average number of common shares outstanding during the period - diluted

Net income per common share - diluted

Net income (loss) per share of Class A Common Stock - diluted

The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding.

The Company excluded 91.8 million , 92.3 million , and 87.6 million of weighted average shares of Class A Common Stock issuable upon conversion of the Class B Common Stock (and the corresponding Magnolia LLC Units) for the three and nine months ended September 30, 2019 and for the period from July 31, 2018 through September 30, 2018, respectively, as the effect was anti-dilutive.

In addition, for the three months ended September 30, 2019 the effect of warrants were excluded because their inclusion would be anti-dilutive.

The Company excluded the following from the computation of diluted earnings or loss per share because the effect was anti-dilutive as a result of the net loss for the quarter ended March 31, 2020:

(i) 85.8 million weighted average shares of Class A Common Stock issuable upon exchange of the Class B Common Stock (and the corresponding Magnolia LLC Units), (ii) 4.0 million contingent shares of Class A Common Stock issuable to EnerVest, provided EnerVest does not compete in the Market Area, and (iii) 0.3 million RSUs and PSUs.

For the quarter ended March 31, 2019, the Company excluded 93.3 million weighted average shares of Class A Common Stock issuable upon the exchange of the Class B Common Stock (and the corresponding Magnolia LLC Units) as the effect was anti-dilutive.

Related Party Transactions

As of September 30, 2019 , EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership, both of which are part of the Karnes County Contributors, each held more than 10% of the Company’s common stock and qualified as principal owners of the Company, as defined in ASC 850, “Related Party Disclosures.”

Amended and Restated Limited Liability Company Agreement of Magnolia LLC

On the Closing Date, the Company, Magnolia LLC, and certain of the Karnes County Contributors entered into Magnolia LLC’s amended and restated limited liability company agreement, which sets forth, among other things, the rights and obligations of the holders of units in Magnolia LLC.

Under the Magnolia LLC Agreement, the Company is the sole managing member of Magnolia LLC.

Registration Rights Agreement

At the closing of the Business Combination, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with TPG Pace Energy Sponsor LLC, a Delaware limited liability company (“TPG Pace”), the Karnes County Contributors, and the Company’s four independent directors prior to the Business Combination (collectively, the “Holders”), pursuant to which the Company is obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act all or any portion of the shares of Class A Common Stock that the Holders held as of July 31, 2018 and that they may have acquired or might acquire thereafter, including upon conversion, exchange, or redemption of any other security therefor.

Under the Registration Rights Agreement, Holders also have “piggyback” registration rights exercisable at any time that allow them to include the shares of Class A Common Stock that they own in certain registrations initiated by the Company.

Pursuant to the Registration Rights Agreement, the Company has filed and taken effective two registration statements on Form S-3, each of which registered, among others, the offering by the Holders of the shares of Class A Common Stock included therein.

Stockholder Agreement

On the Closing Date, the Company, TPG Pace, and the Karnes County Contributors entered into the Stockholder Agreement (the “Stockholder Agreement”), under which the Karnes County Contributors are entitled to nominate two directors, one of whom shall be independent under the listing rules of the New York Stock Exchange, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002, for appointment to the board of directors of the Company (the “Board”) so long as they collectively own at least 15 % of the outstanding shares of Class A Common Stock and Class B Common Stock, (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis), and one director so long as they collectively own at least 2 % of the outstanding shares of Class A Common Stock and Class B Common Stock (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis).

The Karnes County Contributors are collectively entitled to appoint one director to each committee of the Board (subject to applicable laws and stock exchange rules).

Furthermore, TPG Pace was entitled to certain director nomination rights under the Stockholder Agreement, but those rights ceased following a distribution by TPG Pace of its shares in August 2019.

Contingent Consideration

Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Company agreed to issue or cause to be issued to the Karnes County Contributors additional equity in the Company and Magnolia LLC upon satisfaction of certain EBITDA and free cash flow or stock price thresholds in three tranches.

As of December 31, 2018, the Company had met the defined stock price thresholds and had issued an aggregate of 3.6 million additional shares of Class A Common Stock and 9.4 million additional shares of Class B Common Stock to the Karnes County Contributors and had caused Magnolia LLC to issue 9.4 million additional Magnolia LLC Units to the Karnes County Contributors.

Tender and Support Agreement

Pursuant to the Offer, certain of the Company’s warrantholders, including directors and executive officers, agreed to tender their warrants by entering into the tender and support agreement, dated as of June 7, 2019, by and between the Company and such holders (the “Tender and Support Agreement”).

See Note 11 - Stockholders’ Equity for more information.

Predecessor Transactions

EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors' investor commitments.

The management fees incurred were allocated to the Predecessor using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors.

The management fees and other costs allocated to the Predecessor and included in "General and administrative expenses" in the combined statements of operations were $ 1.6 million and $ 11.6 million for the periods of July 1 through July 30, 2018 and January 1 through July 30, 2018, respectively.

The Karnes County Contributors also entered into operating agreements with EVOC to act as contract operator of the Predecessor’s oil and natural gas wells.

The Predecessor reimbursed EVOC for direct expenses incurred.

A majority of such expenses were charged on an actual basis (i.e., no mark-up or subsidy to EVOC).

These costs are included in “Lease operating expenses” in the combined statements of operations in the Predecessor Period.

Additionally, in its role as contract operator, EVOC collected proceeds from oil, natural gas, and NGL sales and distributed them to the Predecessor and other working interest owners.

Commitments and Contingencies

Legal Matters

The Company is involved in disputes or legal actions in the ordinary course of business.

The litigation is in the discovery stage.

The exposure related to this litigation is currently not reasonably estimable.

The Karnes County Contributors retained all such liability in connection with the Business Combination.

At September 30, 2019 , the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statement of operations, balance sheet, or cash flows.

Environmental Matters

The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state, local laws and regulations relating to discharge of materials into, and protection of, the environment.

These laws and regulations may, among other

things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages.

In some instances, the Company may be directed to suspend or cease operations in the affected area.

The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks.

Risks and Uncertainties

Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future.

As of March 31, 2020 , EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership, both of which are part of the Karnes County Contributors, each held more than 10% of the Company’s common stock and qualified as principal owners of the Company, as defined in ASC 850, “Related Party Disclosures.”

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements