SANDRIDGE ENERGY INC 10-Q

ITEM 1. Financial Statements SANDRIDGE ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 31, 2021 December 31, 2020 ASSETS Current assets Cash and cash equivalents $ 73,876 $ 22,130 Restricted cash - other 2,639 6,136 Accounts receivable, net 18,963 19,576 Prepaid expenses 2,841 2,890 Other current assets 80 80 Total current assets 98,399 50,812 Oil and natural gas properties, using full cost method of accounting Proved 1,443,508 1,463,950 Unproved 13,341 17,964 Less: accumulated depreciation, depletion and impairment ( 1,376,754 ) ( 1,375,692 ) 80,095 106,222 Other property, plant and equipment, net 101,057 103,118 Other assets 703 680 Total assets $ 280,254 $ 260,832 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 42,280 $ 51,426 Asset retirement obligation 15,937 16,467 Other current liabilities 364 984 Total current liabilities 58,581 68,877 Long-term debt 20,000 20,000 Asset retirement obligation 35,934 40,701 Other long-term obligations 2,413 3,188 Total liabilities 116,928 132,766 Commitments and contingencies (Note 9) Stockholders’ Equity Common stock, $ 0.001 par value; 250,000 shares authorized; 36,135 issued and outstanding at March 31, 2021 and 35,928 issued and outstanding at December 31, 2020 36 36 Warrants 88,520 88,520 Additional paid-in capital 1,062,437 1,062,220 Accumulated deficit ( 987,667 ) ( 1,022,710 ) Total stockholders’ equity 163,326 128,066 Total liabilities and stockholders’ equity $ 280,254 $ 260,832 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three Months Ended March 31, 2021 2020 Revenues Oil, natural gas and NGL $ 33,623 $ 40,139 Other — 190 Total revenues 33,623 40,329 Expenses Lease operating expenses 7,954 15,642 Production, ad valorem, and other taxes 2,176 3,199 Depreciation and depletion — oil and natural gas 2,505 24,855 Depreciation and amortization — other 1,494 2,634 Impairment — 7,970 General and administrative 2,090 5,483 Restructuring expenses 2,054 — Employee termination benefits 49 3,254 (Gain) loss on derivative contracts — ( 10,226 ) (Gain) loss on sale of assets ( 19,713 ) — Other operating (income) expense, net ( 48 ) 277 Total expenses ( 1,439 ) 53,088 Income (loss) from operations 35,062 ( 12,759 ) Other income (expense) Interest expense, net ( 47 ) ( 637 ) Other income (expense), net 28 76 Total other income (expense) ( 19 ) ( 561 ) Income (loss) before income taxes 35,043 ( 13,320 ) Income tax expense (benefit) — ( 650 ) Net income (loss) $ 35,043 $ ( 12,670 ) Net income (loss) per share Basic $ 0.97 $ ( 0.36 ) Diluted $ 0.94 $ ( 0.36 ) Weighted average number of common shares outstanding Basic 36,156 35,551 Diluted 37,439 35,551 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) (In thousands) Common Stock Warrants Additional Paid-In Capital Accumulated Deficit Total Shares Amount Shares Amount Three Months Ended March 31, 2021 Balance at December 31, 2020 35,928 $ 36 6,734 $ 88,520 $ 1,062,220 $ ( 1,022,710 ) $ 128,066 Issuance of stock awards, net of cancellations 6 — — — — — — Stock-based compensation — — — — 236 — 236 Issuance of common stock for general unsecured claims 201 — — — — — — Issuance of warrants for general unsecured claims — — 247 — — — — Cash paid for tax obligations on vested stock awards — — — — ( 19 ) — ( 19 ) Net Income — — — — — 35,043 35,043 Balance at March 31, 2021 36,135 $ 36 6,981 $ 88,520 $ 1,062,437 $ ( 987,667 ) $ 163,326 Common Stock Warrants Additional Paid-In Capital Accumulated Deficit Total Shares Amount Shares Amount Three Months Ended March 31, 2020 Balance at December 31, 2019 35,772 $ 36 6,659 $ 88,520 $ 1,059,253 $ ( 745,357 ) $ 402,452 Common stock issued for general unsecured claims 38 — — — — — — Stock-based compensation — — — — 185 — 185 Issuance of warrants for general unsecured claims — — 47 — — — — Cash paid for tax obligations on vested stock awards — — — — ( 1 ) — ( 1 ) Net loss — — — — — ( 12,670 ) ( 12,670 ) Balance at March 31, 2020 35,810 $ 36 6,706 $ 88,520 $ 1,059,437 $ ( 758,027 ) $ 389,966 The accompanying notes are an integral part of these condensed consolidated financial statements . 6 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 35,043 $ ( 12,670 ) Adjustments to reconcile net loss to net cash provided by operating activities Provision for doubtful accounts 21 283 Depreciation, depletion, and amortization 3,999 27,489 Impairment — 7,970 Debt issuance costs amortization 16 159 (Gain) loss on derivative contracts — ( 10,226 ) Cash received on settlement of derivative contracts — 4,087 Gain on sale of assets ( 19,713 ) — Stock-based compensation 235 169 Other 35 156 Changes in operating assets and liabilities ( 5,305 ) 686 Net cash provided by (used in) operating activities 14,331 18,103 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures for property, plant and equipment ( 3,094 ) ( 5,452 ) Purchase of other property and equipment ( 59 ) — Proceeds from sale of assets 37,238 989 Net cash provided by (used in) investing activities 34,085 ( 4,463 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings — 21,000 Repayments of borrowings — ( 32,500 ) Reduction of financing lease liability ( 74 ) ( 366 ) Debt issuance costs ( 74 ) — Cash paid for tax obligations on vested stock awards ( 19 ) ( 1 ) Net cash provided by (used in) financing activities ( 167 ) ( 11,867 ) NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS and RESTRICTED CASH 48,249 1,773 CASH, CASH EQUIVALENTS and RESTRICTED CASH, beginning of year 28,266 5,968 CASH, CASH EQUIVALENTS and RESTRICTED CASH, end of period $ 76,515 $ 7,741 Supplemental Disclosure of Cash Flow Information Cash paid for interest, net of amounts capitalized $ ( 92 ) $ ( 540 ) Cash received for income taxes $ — $ 616 Supplemental Disclosure of Noncash Investing and Financing Activities Purchase of PP&E in accounts payable $ 1,342 $ 1,066 Right-of-use assets obtained in exchange for financing lease obligations $ 363 $ 67 Carrying value of properties exchanged $ — $ 3,890 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Nature of Business. SandRidge Energy, Inc. is an oil and natural gas acquisition, development and production company headquartered in Oklahoma City, Oklahoma with a principal focus on developing and producing hydrocarbon resources in the United States. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned or majority owned subsidiaries, including its proportionate share of the Royalty Trusts. All intercompany accounts and transactions have been eliminated in consolidation. Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes contained in the Company’s 2020 Form 10-K. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the financial statements include all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, necessary to fairly state the Company’s unaudited condensed consolidated financial statements. Significant Accounting Policies. The unaudited condensed consolidated financial statements were prepared in accordance with the accounting policies stated in the 2020 Form 10-K as well as the items noted below. Use of Estimates. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of assumptions, judgments and estimates include: oil, natural gas and natural gas liquids (“NGL”) reserves; impairment tests of long-lived assets; the carrying value of unproved oil and natural gas properties; depreciation, depletion and amortization; asset retirement obligations; determinations of significant alterations to the full cost pool and related estimates of fair value used to allocate the full cost pool net book value to divested properties, as necessary; valuation allowances for deferred tax assets; income taxes; valuation of derivative instruments; contingencies; and accrued revenue and related receivables. Although management believes the estimates used in the areas noted above are reasonable, actual results could differ significantly from those estimates. Going Concern Consideration. The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Recently Adopted Accounting Pronouncements. ASU 2019-12 - In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies various aspects of accounting for income taxes, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax laws, and year-to-date loss limitation in interim-period tax accounting. The Company adopted this ASU on January 1, 2021 using an applied prospective basis; however, the impact was not material upon adoption. Recent Accounting Pronouncements Not Yet Adopted. ASU 2020-04 - In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), to facilitate the effects of reference rate reform on financial reporting. This ASU provides optional practical expedients and exceptions for applying GAAP provisions to contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate ("LIBOR"), or other reference rates expected to be discontinued because of reference rate reform, if certain criteria are met. The provisions of this ASU do not apply to contract modifications made and hedging transactions entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in ASU 2020-04 are effective, for all entities, as of March 12, 2020 through December 31, 2022. The Company is currently reviewing the potential impact of the upcoming LIBOR reference rate change on its current contracts and will determine the applicable provisions of ASU 2020-04. 8 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 2. Fair Value Measurements The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the levels of the fair value hierarchy noted below. The carrying values of cash, restricted cash, accounts receivable, prepaid expenses, certain other current and non-current assets, accounts payable and accrued expenses, and other current liabilities and other long-term obligations included in the unaudited condensed consolidated balance sheets approximated fair value at March 31, 2021 and December 31, 2020. Additionally, the carrying amount of debt associated with borrowings outstanding under the credit facility dated November 30, 2020 ("New Credit Facility") approximates fair value as borrowings bear interest at variable rates. As a result, these financial assets and liabilities are not discussed below. Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Measurement based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Assets and liabilities that are measured at fair value are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, considers the market for the Company’s financial assets and liabilities, the associated credit risk and other factors. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 Fair Value Measurements Commodity Derivative Contracts. As applicable, the fair values of the Company’s oil and natural gas fixed price swaps are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, volatility factors and discount rates, or can be corroborated from active markets. Fair value is determined through the use of a discounted cash flow model or option pricing model using the applicable inputs discussed above. The Company applies a weighted average credit default risk rating factor for its counterparties or gives effect to its credit default risk rating, as applicable, in determining the fair value of these derivative contracts. Credit default risk ratings are based on current published credit default swap rates. Fair Value - Recurring Measurement Basis There were no open commodity derivative contracts as of March 31, 2021 and December 31, 2020. Transfers. The Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements during the three-month periods ended March 31, 2021 and 2020. 3. Derivatives Commodity Derivatives The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. On occasion, the Company has attempted to manage this risk on a portion of its forecasted oil or natural gas production sales through the use of commodity derivative contracts. There were no open commodity derivative contracts as of March 31, 2021 and December 31, 2020. Historically, the Company has not designated any of its derivative contracts as hedges for accounting purposes. All derivative contracts have historically been recorded at fair value with changes in derivative contract fair values recognized as a gain or loss on derivative contracts in the condensed consolidated statements of operations. None of the Company’s previous commodity derivative contracts could be terminated prior to contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. Commodity derivative contracts were settled on a monthly basis, and the commodity derivative contract valuations were adjusted to the mark-to-market valuation on a quarterly basis. 9 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) The following table summarizes derivative activity for the three-month periods ended March 31, 2021, and 2020 (in thousands): Three Months Ended March 31, 2021 2020 (Gain) loss on commodity derivative contracts $ — $ ( 10,226 ) Cash received on settlements $ — $ ( 4,087 ) Master Netting Agreements and the Right of Offset. As applicable, The Company historically had master netting agreements with all of its commodity derivative counterparties and has presented its derivative assets and liabilities with the same counterparty on a net basis in the unaudited condensed consolidated balance sheets. As a result of the netting provisions, the Company's maximum amount of loss under commodity derivative transactions due to credit risk is limited to the net amounts due from its counterparties. There were no open commodity derivatives contracts as of March 31, 2021 and December 31, 2020. Because we did not designate any of our derivative contracts as hedges for accounting purposes, changes in the fair value of our derivative contracts were recognized as gains and losses in current period earnings. As a result, and as applicable, our current period earnings could have been significantly affected by changes in the fair value of our commodity derivative contracts. Changes in fair value were principally measured based on a comparison of future prices to the contract price at the end of the period. 4. Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): March 31, 2021 December 31, 2020 Oil and natural gas properties Proved $ 1,443,508 $ 1,463,950 Unproved 13,341 17,964 Total oil and natural gas properties 1,456,849 1,481,914 Less accumulated depreciation, depletion and impairment ( 1,376,754 ) ( 1,375,692 ) Net oil and natural gas properties 80,095 106,222 Land 200 200 Electrical infrastructure 121,819 121,819 Other non-oil and natural gas equipment 1,630 1,563 Buildings and structures 3,603 3,603 Financing leases 363 1,051 Total 127,615 128,236 Less accumulated depreciation and amortization ( 26,558 ) ( 25,118 ) Other property, plant and equipment, net 101,057 103,118 Total property, plant and equipment, net $ 181,152 $ 209,340 See Note 5 for discussion of impairment of property, plant and equipment. 5. Impairment The Company assesses the need to impair its oil and gas properties during its quarterly full cost pool ceiling limitation calculation. The Company analyzes various property, plant and equipment for impairment when certain triggering events occur 10 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) by comparing the carrying values of the assets to their estimated fair values. The full cost pool ceiling limitation and estimated fair values of midstream and other assets were determined in accordance with the policies discussed in Note 1 as applicable. In the three - month period ended March 31, 2021, we did not record a full cost ceiling limitation impairment charge . The Company recorded a full cost ceiling limitation impairment of $ 8.0 million for the three-month period ended March 31, 2020, which resulted from various factors including a decrease in the trailing twelve-month weighted average natural gas price in the first quarter of 2020. Calculation of the full cost ceiling test is based on, among other factors, average prices for the trailing twelve-month period determined by reference to the first-day-of-the-month index prices ("SEC prices") as adjusted for price differentials and other contractual arrangements. The SEC prices utilized in the calculation of proved reserves included in the full cost ceiling test at March 31, 2021 were $ 40.01 per barrel of oil and $ 2.16 per Mcf of natural gas, before price differential adjustments. 6. Acquisitions and Divestitures North Park Basin Sale On February 5, 2021, the Company sold all of its oil and natural gas properties and related assets of the North Park Basin ("NPB"), in Colorado, for a purchase price of $ 47 million. The sale closed for net proceeds of $ 39.7 million in cash, which amounts to the purchase price of $ 47 million net of effective date to close date adjustments. Consequently, the Company allocated a portion of the full cost pool net book value, using the income approach, to the divested oil and gas properties and recognized a reduction of full cost pool assets of $ 22.0 million and a reduction of $ 4.6 million to its non-full cost pool assets. As the sale significantly altered the relationship between capitalized costs and proved reserves, the Company recognized a $ 19.7 million gain related to the assets sold. The gain represents net proceeds of $ 39.7 million coupled with the release of revenues in suspense of $ 0.5 million and the relief of asset retirement obligations of $ 6.1 million offset by the reduction of $ 26.6 million in oil and gas properties related to NPB. For the three-months ended March 31, 2021, NPB represented $ 3.2 million, or 9.4 % of the Company's $ 33.6 million total consolidated Revenues, NPB represented $ 0.9 million, or 11.6 % of the Company's $ 8.0 million consolidated Lease operating expense, it represented $ 0.2 million, or 11.4 % of the Company's $ 2.2 million consolidated Production, ad valorem and other taxes and NPB represented 0.1 MMBoe, or 4.1 % of the Company's consolidated total production volumes of 1.6 MMBoe. For the three-months ended March 31, 2020, NPB represented $ 12.8 million, or 31.6 % of the Company's $ 40.3 million total consolidated Revenues, NPB represented $ 3.5 million or 22.7 % of the Company's $ 15.6 million consolidated Lease operating expense, it represented $ 0.8 million, or 24.1 % of the Company's $ 3.2 million consolidated Production, ad valorem and other taxes and NPB represented 0.3 MMBoe, or 12.8 % of the Company's consolidated total production volumes of 2.6 MMBoe. 7. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following (in thousands): March 31, 2021 December 31, 2020 Accounts payable and other accrued expenses $ 19,828 $ 23,017 Production payable 15,073 15,367 Payroll and benefits 1,770 5,640 Taxes payable 5,375 6,864 Drilling advances 234 477 Accrued interest — 61 Total accounts payable and accrued expenses $ 42,280 $ 51,426 11 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 8. Long-Term Debt Credit Facility. Credit Facility. On November 30, 2020 the Company entered into a $ 30.0 million credit facility with a related party and affiliate of Icahn Enterprises and Icahn Agency Services LLC, as administrative agent. As of March 31, 2021 and December 31, 2020, the Company had a $ 20.0 million term loan outstanding under the New Credit Facility. The New Credit Facility consists of a $ 10.0 million revolving loan facility and a $ 20 million term loan facility. There are no scheduled borrowing base redeterminations under the New Credit Facility. At March 31, 2021, the Company had $ 10.0 million available to be drawn under the revolving loan facility. The New Credit Facility matures on November 30, 2023. The outstanding borrowings under the New Credit Facility bear interest at a rate tied to a utilization ratio of (a) LIBOR plus an applicable margin that varies from 200 to 300 basis points or (b) the base rate plus an applicable margin that varies from 100 basis points to 200 basis points. During the three-months ended March 31, 2021, the weighted average interest rate paid for borrowings outstanding under the New Credit Facility was approximately 2.6 %. The Company has the right to prepay loans under the New Credit Facility at any time without a prepayment penalty, other than customary “breakage” costs with respect to LIBOR loans. The New Credit Facility is secured by (i) first-priority mortgages on at least 95 % of the PV-9 pricing of the of all proved reserves included in the most recently delivered reserve report of the Company, (ii) a first-priority perfected pledge of substantially all of the capital stock owned by each credit party and (iii) a first-priority security interest in the cash, cash equivalents, deposit, securities and other similar accounts, and a first-priority perfected security interest in substantially all other tangible and intangible assets of the credit parties (including but not limited to as-extracted collateral, accounts receivable, inventory, equipment, general intangibles, investment property, intellectual property, real property and the proceeds of the foregoing). The New Credit Facility includes events of default and certain customary affirmative and negative covenants. The Company is required maintain certain financial covenants, commencing with the first full quarter ending after the effective date thereof to, maintain (i) a maximum consolidated total net leverage ratio, measured as of the end of any fiscal quarter, of no greater than 3.50 to 1.00 and (ii) a minimum consolidated interest coverage ratio, measured as of the end of any fiscal quarter, of no less than 2.25 to 1.00. As of March 31, 2021, the Company was in compliance with all applicable covenants and had a consolidated total net leverage ratio of ( 0.18 ) and consolidated interest coverage ratio of 42.86 . During the three-months ended March 31, 2021, the Company paid a related party, an affiliate of Icahn Enterprises, $ 0.2 million of interest expense which is included on the Interest expense, net line item on the Condensed Consolidated Statement of Operations. The total outstanding balance of the New Credit facility is recorded in long-term debt on the Condensed Consolidated Balance Sheet as of March 31, 2021. 9. Commitments and Contingencies Legal Proceedings. As previously disclosed, on May 16, 2016, the Company and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Bankruptcy Court confirmed the joint plan of organization (the “Plan”) of the Debtors on September 9, 2016, and the Debtors subsequently emerged from bankruptcy on October 4, 2016. Pursuant to the Plan, claims against the Company were discharged without recovery in each of the following consolidated cases (the “Cases”): • In re SandRidge Energy, Inc. Securities Litigation , Case No. 5:12-cv-01341-LRW, USDC, Western District of Oklahoma; and • Ivan Nibur, Lawrence Ross, Jase Luna, Matthew Willenbucher, and the Duane & Virginia Lanier Trust v. SandRidge Mississippian Trust I, et al ., Case No. 5:15-cv-00634-SLP, USDC, Western District of Oklahoma 12 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) The lead plaintiffs in both In re SandRidge Energy, Inc. Securities Litigation and Lanier Trust assert claims on behalf of themselves and (i) in In re SandRidge Energy, Inc. Securities Litigation, a class of all purchasers of SandRidge common stock from February 24, 2011 and November 8, 2012 under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and (ii) in Lanier Trust, a putative class of purchasers of SandRidge Mississippian Trust I and SandRidge Mississippian Trust II common units between April 7, 2011 and November 8, 2012 under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, both based on allegations that defendants, which include certain former officers of the Company and the SandRidge Mississippian Trust I, made misrepresentations or omissions concerning various topics including the performance of wells operated by the Company in the Mississippian region. Discovery in each of the Cases closed on June 19, 2019. Following a hearing on class certification in each of the Cases on September 6, 2019, the court granted class certification in In re SandRidge Energy, Inc. Securities Litigation on September 30, 2019. The motion for class certification in Lanier Trust remains pending. On April 2, 2020, the individual defendants and SandRidge Mississippian Trust I filed motions for summary judgment seeking the dismissal of all claims asserted against them in the Lanier Trust matter. On the same date, the individual defendants filed motions for summary judgment seeking the dismissal of all claims asserted against them In re SandRidge Energy, Inc. Securities Litigation. The motions remain pending. In each of the Cases, lead plaintiffs seek to recover unspecified damages, interest, costs and expenses incurred in the litigation on behalf of themselves and class members. Although the claims against the Company in each Case have been discharged pursuant to the Plan, the Company remains a nominal defendant. The Company may also be contractually obligated to indemnify two former officers who are defendants and the SandRidge Mississippian Trust I against losses, claims, damages, liabilities and expenses, including reasonable costs of investigation and attorney’s fees and expenses, which it is required to advance, arising out of the Cases, although the Company disputes any such obligations. Such indemnification is not covered by insurance with respect to the Trust. As of October 2020, we have exhausted all remaining insurance coverage for the costs of indemnification and expect no further reimbursements. In light of the status of the Cases, and the facts, circumstances and legal theories relating thereto, the Company is not able to determine the likelihood of an outcome in either case or provide an estimate of any reasonably possible loss or range of possible loss related thereto. However, considering the exhaustion of insurance coverage available to the Company, such losses, if incurred, could be material. The Company has not established any liabilities relating to the Cases and believes that the plaintiffs’ claims are without merit. The Company intends to continue to vigorously defend against the Cases in its capacity as a nominal defendant. In addition to the matters described above, the Company is involved in various lawsuits, claims and proceedings, which are being handled and defended by the Company in the ordinary course of business. 13 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 10. Income Taxes For each interim reporting period, the Company estimates the effective tax rate expected for the full fiscal year and uses that estimated rate in providing for income taxes on a current year-to-date basis. Deferred income taxes are provided to reflect the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The Company’s deferred tax assets have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred assets will not be realized based on the weight of all available evidence. The Company continues to closely monitor and weigh all available evidence, including both positive and negative, in making its determination whether to maintain a valuation allowance. As a result of the significant weight placed on the Company's cumulative negative earnings position, the Company continued to maintain a full valuation allowance against its net deferred tax asset at March 31, 2021 and December 31, 2020. As a result, the Company had no federal or state income tax expense or benefit for the three-month period ended March 31, 2021and recorded an insignificant income tax benefit for the year ended December 21, 2020. The benefit is related to previously sequestered alternative minimum tax (AMT) refund amounts released to the Company during 2020. The Company has no remaining AMT credits to be refunded. Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. As a result of the Chapter 11 reorganization and related transactions, the Company experienced an ownership change within the meaning of IRC Section 382 during 2016 that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC Section 382 limitation. This limitation has not resulted in cash taxes for any period subsequent to the ownership change. Since the 2016 ownership change, the Company has generated additional NOLs and other tax attributes that are not currently subject to an IRC Section 382 limitation. The Company's ability to use NOLs and other tax attributes to reduce taxable income and income taxes could be materially impacted by a future IRC 382 ownership change. Future transactions involving the Company's stock, including those outside of the Company's control, could cause an IRC 382 ownership change resulting in a limitation on tax attributes currently not limited and a more restrictive limitation on tax attributes currently subject to the previous IRC 382 limitation. As of March 31, 2021, the Company had approximately $ 1.7 billion of federal NOL carryforwards, net of NOLs expected to expire unused due to the 2016 IRC Section 382 limitation. Of the $ 1.7 billion of federal NOL carryforwards, $ 0.8 billion expire during the years 2025 through 2037, while $ 0.9 billion do not have an expiration date. Additionally, the Company had federal tax credits in excess of $ 33.5 million which begin expiring in 2029. The Company did not have unrecognized tax benefits at March 31, 2021 and December 31, 2020. The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2017 to present remain open for federal examination. Additionally, tax years 2005 through 2017 remain subject to examination for the purpose of determining the amount of federal NOL and other carryforwards. The number of years open for state tax audits varies, depending on the state, but are generally from three to five years . In July 2020, the U.S. Treasury Department released final and proposed regulations on IRC Section 163(j) which limits business interest expense deductions. These regulations apply to tax years beginning January 1, 2021. However, taxpayers may choose to apply these regulations to tax years beginning after December 31, 2017. The Company adopted the final regulations for the year ended December 31, 2020. This does not result in any material impact to the provision. 11. Equity Common Stock, Performance Share Units, and Stock Options . At March 31, 2021, the Company had approximately 250.0 million shares of common stock authorized, 36.1 million shares of common stock, par value $ 0.001 per share, issued and outstanding. Further, at March 31, 2021, the Company had approximately 0.1 million shares of unvested restricted stock awards, 1.5 million shares of unvested restricted stock units, 0.1 million stock options outstanding, and 0.2 million of unvested performance share units. Warrants . The Company has issued approximately 4.9 million Series A warrants and 2.1 million Series B warrants that are exercisable until October 4, 2022 for one share of common stock per warrant at initial prices of $ 41.34 and $ 42.03 per share, 14 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) respectively, subject to adjustments pursuant to the terms of the warrants, to certain holders of general unsecured claims as defined in the Plan. The warrants contain customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. The Tax Benefits Preservation Plan. On July 1, 2020, the Board declared a dividend distribution of one right (a “Right”) for each outstanding share of Company common stock, par value $ 0.001 per share to stockholders of record at the close of business on July 13, 2020. Each Right entitles its holder, under certain circumstances, to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, par value $ 0.001 per share, at an exercise price of $ 5.00 per Right, subject to adjustment. The description and terms of the Rights are set forth in the tax benefits preservation plan, dated as of July 1, 2020, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (and any successor rights agent, the “Rights Agent”). The Company adopted the Tax Benefits Preservation Plan, as amended on March 16, 2021, in order to protect shareholder value against a possible limitation on the Company’s ability to use its tax net operating losses (the “NOLs”) and certain other tax benefits to reduce potential future U.S. federal income tax obligations. The NOLs are a valuable to the Company, which may inure to the benefit of the Company and its stockholders. However, if the Company experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), its ability to fully utilize the NOLs and certain other tax benefits will be substantially limited and the timing of the usage of the NOLs and such other benefits could be substantially delayed, which could significantly impair the value of those assets. Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more of its “five-percent shareholders” (as such term is defined in Section 382 of the Code) increases by more than 50 percentage points over the lowest percentage of stock owned by such stockholder or stockholders at any time over a three-year period. The Tax Benefits Preservation Plan is intended to prevent against such an “ownership change” by deterring any person or group from acquiring beneficial ownership of 4.9 % or more of the Company’s securities. Subject to certain exceptions, the Rights become exercisable and trade separately from Common Stock only upon the “Distribution Time,” which occurs upon the earlier of: • the close of business on the tenth (10th) day after the “Stock Acquisition Date,” which is (a) the first date of public announcement that a person or group of affiliated or associated persons (with certain exceptions, an “Acquiring Person”) has acquired, or obtained the right or obligation to acquire, beneficial ownership of 4.9 % or more of the outstanding shares of Common Stock (with certain exceptions) or (b) such other date, as determined by the Board, on which a person or group has become an Acquiring Person, or • the close of business on the tenth (10th) business day (or later date as may be determined by the Board prior to such time as any person or group becomes an Acquiring Person) following the commencement of a tender offer or exchange offer which, if consummated, would result in a person or group becoming an Acquiring Person. Any existing stockholder or group that beneficially owns 4.9 % or more of Common Stock has been grandfathered at its current ownership level, but the Rights will not be exercisable if, at any time after the announcement of the Tax Benefits Preservation Plan, such stockholder or group increases its ownership of Common Stock by one share of Common Stock. Certain synthetic interests in securities created by derivative positions, whether or not such interests are considered to be ownership of the underlying Common Stock or are reportable for purposes of Regulation 13D of the Securities Exchange Act of 1934, as amended, are treated as beneficial ownership of the number of shares of Common Stock equivalent to the economic exposure created by the derivative position, to the extent actual shares of Common Stock are directly or indirectly held by counterparties to the derivatives contracts. Until the earlier of the Distribution Time and the Expiration Time, the surrender for transfer of any shares of Common Stock will also constitute the transfer of the Rights associated with those shares. As soon as practicable after the Distribution Time, separate rights certificates will be mailed to holders of record of Common Stock as of the close of business on the Distribution Time. From and after the Distribution Time, the separate rights certificates alone will represent the Rights. Except as otherwise provided in the Tax Benefits Preservation Plan, only shares of Common Stock issued prior to the Distribution Time will be issued with Rights. The Rights are not exercisable until the Distribution Time. The Tax Benefits Preservation Plan will expire on the earliest of: (i) the close of business on the day following the certification of the voting results of the Company’s 2021 annual meeting of stockholders or any prior special meeting of 15 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) stockholders, if at such stockholder meeting a proposal to approve this Agreement has not been passed by the affirmative vote of the holders of at least majority of the shares of Common Stock entitled to vote at the 2021 annual meeting of stockholders or any other meeting of the stockholders of the Company duly held prior to such meeting, (ii) the time at which the Rights are redeemed pursuant to the Tax Benefits Preservation Plan, (iii) the time at which the Rights are exchanged pursuant to the Tax Benefits Preservation Plan, (iv) the closing of any merger or other acquisition transaction involving the Company pursuant to an agreement of the type described in Section 13(f) of the Tax Benefits Preservation Plan, at which time, the Rights are terminated, (v) the time at which the Board determines that the NOLs are utilized in all material respects or that an ownership change under Section 382 would not adversely impact in any material respect the time period in which the Company could use the NOLs, or materially impair the amount of the NOLs that could be used by the Company in any particular time period, for applicable tax purposes and (vi) the Close of Business on July 1, 2023 (the earliest of (i), (ii), (iii), (iv), (v), and (vi) being herein referred to as the “Expiration Time”). In the event that any person or group (other than certain exempt persons) becomes an Acquiring Person (a “Flip-in Event”), each holder of a Right (other than any Acquiring Person and certain related parties, whose Rights automatically become null and void) will have the right to receive, upon exercise, shares of Common Stock having a value equal to two times the exercise price of the Right. In the event that, at any time following the Stock Acquisition Date, any of the following occurs (each, a “Flip-over Event”): • the Company consolidates with, or merges with and into, any other entity, and the Company is not the continuing or surviving entity • any entity engages in a share exchange with or consolidates with, or merges with or into, the Company, and the Company is the continuing or surviving entity and, in connection with such share exchange, consolidation or merger, all or part of the outstanding shares of Common Stock are changed into or exchanged for stock or other securities of any other entity or cash or any other property; or • the Company sells or otherwise transfers, in one transaction or a series of related transactions, fifty percent (50%) or more of the Company’s assets, cash flow or earning power, each holder of a Right (except Rights which previously have been voided as described above) will have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. 12. Revenues The fol lowing table disaggregates the Company’s revenue by source for the three-month periods ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (In thousands) Oil $ 15,548 $ 28,654 NGL 8,856 5,934 Natural gas 9,219 5,551 Other — 190 Total revenues $ 33,623 $ 40,329 Oil, natural gas and NGL revenues. A majority of the Company’s revenues come from sales of oil, natural gas and NGLs are recorded at a point in time when control of the oil, natural gas and NGL production passes to the customer at the inlet of the processing plant or pipeline, or the delivery point for onloading to a delivery truck. As the Company’s customers obtain control of the production prior to selling it to other end customers, the Company presents its revenues on a net basis, rather than on a gross basis. 16 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) Pricing for the Company’s oil, natural gas and NGL contracts is variable and is based on either an index price, net of deductions, or a percentage of the sales price obtained by the customer, which is also based on index prices. The transaction price is allocated on a pro-rata basis to each unit of oil, natural gas or NGL sold based on the terms of the contract. Oil, natural gas and NGL revenues are also recorded net of royalties, discounts and allowances, and transportation costs, as applicable. Taxes assessed by governmental authorities on oil, natural gas and NGL sales are presented separately from revenues and are included in production, ad valorem, and other tax expense in the consolidated statements of operations. Revenues Receivable. The Company records an asset in accounts receivable, net on its consolidated balance sheet for revenues receivable from contracts with customers at the end of each period. Pricing for revenues receivable is estimated using current month crude oil, natural gas and NGL prices, net of deductions. Revenues receivable are typically collected the month after the Company delivers the related production to its customers. As of March 31, 2021, and December 31, 2020, the Company had revenues receivable of $ 14.2 million and $ 12.8 million, respectively, and did no t record any bad debt expense on revenues receivable during the three-month periods ended March 31, 2021 and 2020. 13. Employee Termination Benefits Certain employees received termination benefits including cash severance and accelerated share-based compensation upon separation of service from the Company as a result of the sale of North Park assets and other employee terminations during the three-month period ended March 31, 2021 and as a result of a reduction in workforce during the three-month period ended March 31, 2020. The following tables presents a summary of employee termination benefits for the three-month periods ended March 31, 2021 and 2020 (in thousands): Cash Share-Based Compensation (1) Number of Shares Total Employee Termination Benefits Three Months Ended March 31, 2021 Executive Employee Termination Benefits $ — $ — — $ — Other Employee Termination Benefits 32 17 — 49 $ 32 $ 17 — $ 49 Three Months Ended March 31, 2020 Executive Employee Termination Benefits $ 3 $ — — $ 3 Other Employee Termination Benefits 3,211 40 4 3,251 $ 3,214 $ 40 4 $ 3,254 ____________________ (1) Share-based compensation recognized in connection with the accelerated vesting of restricted stock awards due to the sale of the North Park assets for the three-month period ended March 31, 2021 and as a result of the reduction in workforce for the three-month period ended March 31, 2020. The remaining unrecognized compensation expense associated with these awards at the date of termination was recorded as employee termination benefits. The unrecognized compensation expense was calculated using the grant date fair value for restricted stock awards. One share of the Company’s common stock was issued per restricted stock award. 17 Table of Contents SANDRIDGE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 14. Earnings (Loss) per Share The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted earnings (loss) per share: Earnings (Loss) Weighted Average Shares Earnings (Loss) Per Share (In thousands, except per share amounts) Three Months Ended March 31, 2021 Basic earnings per share $ 35,043 36,156 (1) $ 0.97 Effect of dilutive securities Restricted stock units — 1,166 Restricted stock awards — 88 Performance share units (2) — — Warrants — — Stock options — 29 Diluted earnings per share (3) $ 35,043 37,439 $ 0.94 Three Months Ended March 31, 2020 Basic loss per share $ ( 12,670 ) 35,551 $ ( 0.36 ) Effect of dilutive securities Restricted stock awards — — Performance share units — — Warrants — — Diluted loss per share (4) $ ( 12,670 ) 35,551 $ ( 0.36 ) ____________________ (1) Includes 0.2 million of performance share units that are no longer contingently issuable. (2) The performance share unit awards are contingently issuable and are considered in the calculation of diluted earnings per share. The Company assesses the number of awards that would be issuable, if any, under the terms of the agreement if the end of the reporting period were the end of the contingency period. (3) The incremental shares of potentially dilutive restricted stock units, restricted stock awards and stock options were included for the three-month periods ended March 31, 2021 as their effect was dilutive under the treasury stock method. (4) No incremental shares of potentially dilutive restricted stock awards, performance share units, warrants or stock options were included for the three-month periods ended March 31, 2020, as their effect was antidilutive under the treasury stock method. 15. Subsequent Events Overriding Royalty Interest Acquisition On April 22, 2021, the Company announced the acquisition of all the overriding royalty interest assets of SandRidge Mississippian Trust I (the “Trust”). The gross purchase price is $ 4.9 million (net $ 3.6 million, given the Company's 26.9 % ownership of the Trust). 18 Tabl e of Contents