Form 253G2 Phoenix Capital Group
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Offering
Circular
December 23, 2021
PHOENIX CAPITAL GROUP HOLDINGS, LLC
5601 S Broadway
Suite 240
Littleton, CO 80121
(303) 749-0074
9.0% Bonds (Bonds)
$75,000,000 Aggregate Maximum Offering Amount (75,000
Bonds)
$1,000 Minimum Purchase Amount (1 Bond)
Phoenix
Capital Group Holdings, LLC, a Delaware limited liability company
(the “Company”), is offering a
maximum of $75,000,000 in the aggregate, of its 9.0% unsecured
bonds, or the “Bonds,” pursuant to this
offering circular. The purchase price per Bond is $1,000, with a
minimum purchase amount of $1,000, or the “minimum
purchase”; however, the Company, in our sole discretion,
reserves the right to accept smaller purchase amounts. The Bonds
will bear interest at nine percent (9.0%) per year. The maximum
offering amount of Bonds is $75,000,000 the “Maximum Offering
Amount”). The Bonds will each be offered serially,
over a maximum period of 3 years, starting from the date of
qualification of the Offering Statement of which this Offering
Circular is a part, with the sole difference between the series
being their respective maturity dates. Each series of Bonds
beginning with Series A will correspond to a particular closing.
Each series of Bonds will mature on the third anniversary of the
initial issuance date of such series. The Company may elect to extend the maturity date
of the Bonds for up to two additional one-year periods in the
Company’s sole discretion. If the Company elects to extend
the maturity date of the Bonds, the Bonds will bear interest at
10.0% per annum during the first one-year extension period and will
bear interest at 11.0% per annum during the second one-year
extension period. Interest on the Bonds will be paid to the record
holders of the Bonds quarterly in arrears on January
25th,
April 25th,
July 25th
and October 25th
of each year, beginning on the first
such date that corresponds to the first full quarter after the
initial closing in the offering.
Bondholders will have the right to have their
Bonds redeemed at any time prior to the maturity date, subject to
an annual cap of 10% on all redemptions, regardless of the reason
for the redemption, at a price equal to $950 plus all accrued but
unpaid interest per Bond, regardless of when such Bonds are
redeemed (the “10%
Limit”). Bondholders will
also have the right to have their Bonds redeemed in the case of a
bondholder’s death, disability or bankruptcy, subject to
notice, discounts and other provisions contained in this offering
circular. Redemptions due to death, disability or bankruptcy
shall count towards the annual 10% Limit on redemptions described
above. See “Description of Bonds
– Redemption Upon Death, Disability or
Bankruptcy” and “Description of Bonds
– Bond Redemptions” for more
information.
i
The
Bonds will be offered to prospective investors on a best efforts
basis by Dalmore Group LLC (“Dalmore Group”, or
“our broker/dealer of record,”) a New York limited
liability company and a member of the Financial Industry Regulatory
Authority, or “FINRA.” “Best
efforts” means that our broker/dealer of record is not
obligated to purchase any specific number or dollar amount of the
Bonds, but it will use its best efforts to sell the Bonds. We
reserve the right to engage additional broker-dealers, or
“Selling Group Members,” who are members of FINRA, to
assist in the sale of the Bonds. At each closing date, the net
proceeds for such closing will be disbursed to our Company and
Bonds relating to such net proceeds will be issued to their
respective investors. We expect to commence the sale of the Bonds
as of the date on which the offering statement is declared
qualified by the United States Securities and Exchange Commission,
or the “SEC,” and terminate the
offering on earliest of: (i) the date we sell the Maximum Offering
Amount; (ii) the third anniversary of the date of qualification of
this offering statement; or (iii) such date upon which we determine
to terminate the offering, in our sole discretion. Notwithstanding the
previous sentence, we have the right, in our sole discretion, to
extend this offering beyond the third anniversary of the date of
qualification for an additional year.
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Price to
Investors
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Broker-Dealer
Fee (1)(2)
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Proceeds
to
Company
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Proceeds to
Other Persons
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Per Bond
(2)
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$1,000
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$10
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$990
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$0
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Maximum Offering
Amount of Bonds (2)
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$75,000,000
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$750,000
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$74,250,000
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$0
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(1)
This includes a broker-dealer fee of up to 1% of the gross proceeds
of the offering (the “Broker-Dealer
Fee”). The
Broker-Dealer fee will be paid to Dalmore Group as our
broker/dealer of record. See “Use of
Proceeds” and “Plan of
Distribution” for more information.
(2) All
figures are rounded to the nearest dollar.
_________
Generally,
no sale may be made to you in the offering if the aggregate
purchase price you pay is more than 10% of the greater of your
annual income or net worth. Different rules apply to accredited
investors and non-natural persons. Before making any representation
that your investment does not exceed applicable thresholds, we
encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For
general information on investing, we encourage you to refer to
www.investor.gov.
An
investment in the Bonds is subject to certain risks and should be
made only by persons or entities able to bear the risk of and to
withstand the total loss of their investment. Currently, there is
no market for the Bonds being offered, nor does our Company
anticipate one developing. Prospective investors should carefully
consider and review that risk as well as the RISK FACTORS beginning
on page 10 of this offering circular.
THE
SEC DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL TO ANY
SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS
UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR
OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO
AN EXEMPTION FROM REGISTRATION WITH THE SEC; HOWEVER, THE COMMISION
HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES
OFFERED ARE EXEMPT FROM REGISTRATION.
FORM 1-A DISCLOSURE FORMAT IS BEING
FOLLOWED.
ii
TABLE OF CONTENTS
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Contents
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OFFERING
CIRCULAR SUMMARY
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2
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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6
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RISK
FACTORS
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7
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USE OF
PROCEEDS
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15
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PLAN OF
DISTRIBUTION
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16
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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22
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GENERAL
INFORMATION AS TO OUR COMPANY
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25
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MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
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32
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ERISA
CONSIDERATIONS
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35
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DESCRIPTION
OF BONDS
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37
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LEGAL
PROCEEDINGS
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43
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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44
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MANAGER
AND EXECUTIVE OFFICERS
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45
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EXECUTIVE
COMPENSATION
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47
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INDEPENDENT
AUDITORS
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49
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LEGAL
MATTERS
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50
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WHERE
YOU CAN FIND ADDITIONAL INFORMATION
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51
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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iii
ABOUT THIS OFFERING CIRCULAR
The information in this offering circular may not
contain all of the information that is important to you. You should
read this entire offering circular and the exhibits carefully
before deciding whether to invest in the Bonds. See
“Where You
Can Find Additional Information” in this offering
circular.
Unless
the context otherwise indicates, references in this offering
circular to the terms “Company,” “we,”
“us,” and “our,” refer to Phoenix Capital
Group Holdings, LLC, a Delaware limited liability
company.
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1
OFFERING CIRCULAR SUMMARY
This
summary highlights information contained elsewhere in this offering
circular. This summary does not contain all of the information that
you should consider before deciding whether to invest in the Bonds.
You should carefully read this entire offering circular, including
the information under the heading “Risk Factors”
and all information included in this offering
circular.
Our Company, Phoenix Capital Group Holdings, LLC, a Delaware
limited liability company, was formed on April 23, 2019 to
purchase (i) property rights to extract natural resources from the
property (“mineral rights”), and (ii) ownership
interests in property without operating rights on the property
(“non-operated working interests”) in the United
States, primarily in the Williston Basin, Permian Basin and Denver
Julesburg Basin (“DJ Basin”), using the Company’s
proprietary software system to identify unique opportunities.
Although the Company has targeted
specific regions, we are agnostic to geography and look to focus
exclusively on the best asset for profitability when determining
which assets to buy. The more area the Company can cover, the more
we can ensure we are achieving the optimal return for invested
capital.
The Company focuses on assets that present high
near-term predictable cashflow. This analysis includes the
geography of the asset, the probability of future oil wells and
predictability of both the timing and value of the cashflow.
Following its acquisition of the asset, the Company partners with
an oil and gas extraction operator to share in the proceeds of the
natural resources extracted and sold by the operator. Using the
proprietary software that the Company has developed internally, the
Company is typically able to achieve an average payback period of
18-24 months on assets it buys. Additionally, the Company employs a tax-efficient
strategy of offsetting royalty income through use of intangible
drilling costs (non-operated working
interests).
We have
also developed a highly customized and proprietary software
platform to help us identify opportunities. This aggregate, niche,
scalable software platform is specific to us and there is no known
competitive product. As such, the software creates considerable
intrinsic value to operational efficiencies.
See “General
Information About Our Company – Business
Strategy”
The Offering. We are offering to
investors the opportunity to purchase up to an aggregate of
$75,000,000, of Bonds. See “Plan of Distribution - Who
May Invest” for further information. The offering will
terminate on the earliest of: (i) the date we sell the Maximum
Offering Amount; (ii) the third anniversary of the date of
qualification of this offering statement; or (iii) such date upon
which we determine to terminate the offering, in our sole
discretion.Notwithstanding the
previous sentence, we have the right to extend this offering beyond
the third anniversary of the date of qualification for an
additional year. If we do elect to extend the offering
beyond the initial three-year term, then we will be required to
file a new offering statement. In such a case, the new offering
statement must be declared qualified before we will be able to
continue the offering past the third anniversary of the date of
initial qualification.
Our
Company will conduct closings in this offering on the first and
third Thursday of each month or the “closing dates,”
and each, a “closing date,” until the offering
termination. Once a subscription has
been submitted and accepted by the Company, an investor will not
have the right to request the return of its subscription payment
prior to the next closing date. If subscriptions are received on a
closing date and accepted by the Company prior to such closing, any
such subscriptions will be closed on that closing date. If
subscriptions are received on a closing date but not accepted by
the Company prior to such closing, any such subscriptions will be
closed on the next closing date. It is expected that settlement
will occur on the same day as each closing date.
On each closing date, offering proceeds for that closing will
be disbursed to us and Bonds will be issued to investors, or the
“Bondholders.” If the Company is dissolved or
liquidated after the acceptance of a subscription, the respective
subscription payment will be returned to the subscriber. The
offering is being made on a best-efforts basis through Dalmore
Group, our broker/dealer of record.
2
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Issuer
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Phoenix
Capital Group Holdings, LLC, a Delaware limited liability
company.
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Securities Offered
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Maximum
– $75,000,000, aggregate principal amount of the
Bonds.
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Maturity Date
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The
Bonds will each be offered serially, over a maximum period of 3
years (subject to extension) starting from the date of
qualification of the Offering Statement of which this Offering
Circular is a part, with the sole difference between the series
being their respective maturity dates. The Bonds will mature on the
third anniversary of the initial issuance date of each
series.
The Company may elect to extend the maturity date of the Bonds for
up to two additional one-year periods in the Company’s sole
discretion. Each such extension would constitute a new offering for
the purpose of the registration requirements of the Securities Act
and, as such, would be required to be registered or conducted
pursuant to an exemption from registration. Any such subsequent
offering conducted pursuant to Regulation A would count against the
aggregate dollar limitations in Rule 251(a) of Regulation A. See
“Description
of Bonds – Interest and Maturity” for more information.
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Interest Rate
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9.0%
per annum computed on the basis of a 360-day year.
If we
elect to extend the maturity date of the Bonds, the Bonds will bear
interest at 10.0% per annum in the first one-year extension period
and 11.0% per year in the second one-year extension
period
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Interest Payments
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Paid to
the record holders of the Bonds quarterly in arrears, each January
25th,
April 25th, July
25th and
October 25th, for the preceding
fiscal quarter ending March 31st, June
30th,
September 30th and December
31st,
respectively, beginning on such payment date immediately following
the first full fiscal quarter after the initial closing in the
offering and continuing until its maturity date. Interest will
accrue and be paid on the basis of a 360-day year consisting of
twelve 30-day months. Interest on each Bond will accrue and be
cumulative from the end of the most recent interest period for
which interest has been paid on such Bond, or if no interest has
paid, from the date of issuance.
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Offering Price
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$1,000
per Bond.
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Ranking
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The
Bonds are subordinated, unsecured indebtedness of our Company.
They rank pari passu with
our other unsecured indebtedness, including the Unsecured Notes (as
defined herein), and structurally subordinated to all indebtedness
of our subsidiaries. The Bonds rank junior to any of our current
secured indebtedness, including any debt outstanding under the
Cortland Term Loan and Cortland LOC (each as defined herein), and
are subordinated to any right of payment under the
same.
The
Bonds would also rank junior to any of our future secured
indebtedness. See “General Information About
Our Company – Current Indebtedness” for more
information.
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Use of Proceeds
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We
estimate that the net proceeds we will receive from this offering
will be approximately $74,250,000 if we sell the Maximum Offering
Amount, after deducting fees payable to our broker/dealer of
record.
We plan
to use substantially all of the net proceeds from this offering for
the purchase mineral rights and non-operated working interests, as
well as additional asset acquisitions. See “Use of
Proceeds” for additional information.
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3
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Redemption at the Option of the Bondholder
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Bondholders
will have the right to have their Bonds redeemed at any time prior
to the maturity date, subject to an annual cap referenced below,
regardless of the reason for the redemption, at a price equal to
$950 plus all accrued but unpaid interest per Bond, regardless of
when such Bonds are redeemed.
Our
obligation to redeem Bonds in any given year pursuant to this
redemption is limited to 10% of the outstanding principal balance
of the Bonds, in the aggregate, on the most recent of January
1st, April
1st, July 1st or October
1st of the
applicable year while the Offering is open, and January
1st of the
applicable year, following the offering termination. In addition,
any Bonds redeemed as a result of a Bondholder's right upon death,
disability or bankruptcy, will be included in calculating the 10%
Limit and will thus reduce the number of Bonds, in the aggregate,
to be redeemed pursuant to the redemption. Bond redemptions will
occur in the order that notices are received. We are not required to
establish a sinking fund or reserve for the redemption of Bonds and
our ability to redeem Bonds will be subject to the availability of
cash or other financing sources and cannot be
assured.
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Redemption at the Option of the Company
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The
Bonds may be redeemed at our option at no penalty. If the Bonds are
renewed for an additional term, we may redeem the Bonds at any time
during such renewal period. Any redemption will occur at a price
equal to the then outstanding principal amount of the Bonds, plus
any accrued but unpaid interest. For the specific terms of the
Optional Redemption, please see “Description of Bonds – Optional
Redemption” for more information.
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Redemption Upon Death, Disability or Bankruptcy
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Within
90 days of the death, disability or bankruptcy of a Bondholder who
is a natural person, the estate of such Bondholder, or legal
representative of such Bondholder may request that we repurchase,
in whole but not in part and without penalty, the Bonds held by
such Bondholder by delivering to us a written notice requesting
such Bonds be redeemed. Redemptions due to death, disability or
bankruptcy shall count towards the annual 10% Limit on redemptions
described above; provided, however, that any redemptions pursuant
to death, disability or bankruptcy shall not be subject to the 10%
Limit. Any such request shall specify the particular event giving
rise to the right of the holder or beneficial holder to redeem his
or her Bonds. If a Bond is held jointly by natural persons who are
legally married, then such request may be made by (i) the surviving
Bondholder upon the death of the spouse, or (ii) the disabled
Bondholder (or a legal representative) upon disability of the
spouse. In the event a Bond is held together by two or more natural
persons that are not legally married, neither of these persons
shall have the right to request that the Company repurchase such
Bond unless each Bondholder has been affected by such an
event.
Disability
shall mean with respect to any Bondholder or beneficial holder, a
determination of disability based upon a physical or mental
condition or impairment arising after the date such Bondholder or
beneficial holder first acquired Bonds. Any such determination of
disability must be made by any of: (1) the Social Security
Administration; (2) the U.S. Office of Personnel Management; or (3)
the Veteran’s Benefits Administration, or the Applicable
Governmental Agency, responsible for reviewing the disability
retirement benefits that the applicable Bondholder or beneficial
holder could be eligible to receive.
Bankruptcy
shall mean, with respect to any Bondholder the final adjudication
related to (i) the filing of any petition seeking to adjudicate the
Bondholder bankrupt or insolvent, or seeking for itself any
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of such Bondholder or such
Bondholder’s debts under any law relating to bankruptcy,
insolvency, or reorganization or relief of debtors, or seeking,
consenting to, or acquiescing in the entry of an order for relief
or the appointment of a receiver, trustee, custodian, or other
similar official for such Person or for any substantial part of its
property, or (ii) without the consent or acquiescence of such
Bondholder, the entering of an order for relief or approving a
petition for relief or reorganization or any other petition seeking
any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or other similar relief under any
bankruptcy, liquidation, dissolution, or other similar statute,
law, or regulation, or, without the consent or acquiescence of such
Bondholder, the entering of an order appointing a trustee,
custodian, receiver, or liquidator of such Bondholder or of all or
any substantial part of the property of such Bondholder which order
shall not be dismissed within ninety (90) days.
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Subject
to the annual cap on redemptions, upon our receipt of a redemption
request in the event of death, disability or bankruptcy of a
Bondholder, we will designate a date for the redemption of such
Bonds, which date shall not be later than 90 days after we receive
documentation and/or certifications establishing (to the reasonable
satisfaction of the Company) the right to be redeemed. On the
designated date, we will redeem such Bonds at a price per Bond that
is equal to all accrued and unpaid interest, to but not including
the date on which the Bonds are redeemed plus the then outstanding
principal amount of such Bond.
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Default
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The
Indenture governing the Bonds will contain events of default, the
occurrence of which may result in the acceleration of our
obligations under the Bonds in certain circumstances. Events of
default, other than payment defaults, will be subject to our
Company's right to cure within a certain number of days of such
event of default. Our Company will have the right to cure any
payment default within 60 days before the trustee may declare a
default and exercise the remedies under the Indenture. See
“Description
of Bonds - Event of Default” for more
information.
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Form
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Bonds
will be registered in book-entry form only on the books and records
of UMB Bank, N.A. in the name of Phoenix American Financial
Services, Inc. (“Phoenix American”) as record holder of
such Bonds for the benefit of such purchasers. See "Description
of Bonds - Book-Entry, Delivery and Form" for more
information.
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Denominations
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We will
issue the Bonds only in denominations of $1,000.
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Payment of Principal and Interest
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Principal
and interest on the Bonds will be payable in U.S. dollars or other
legal tender, coin or currency of the U.S.
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Future Issuances
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We may,
from time to time, without notice to or consent of the Bondholders,
increase the aggregate principal amount of any series of the Bonds
outstanding by issuing additional bonds in the future with the same
terms of such series of Bonds, except for the issue date and
offering price, and such additional bonds shall be consolidated
with the applicable series of Bonds and form a single
series.
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Securities Laws Matters:
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The
Bonds being offered are not being registered under the Securities
Act in reliance upon exemptions from the registration requirements
of the Securities Act and such state securities laws and may not be
transferred or resold except as permitted under the Securities Act
and applicable state securities laws pursuant to registration or
exemption therefrom. In addition, the Company does not intend to be
registered as an investment company under the Investment Company
Act of 1940, as amended.
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Trustee, Registrar and Paying Agent
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We have
designated UMB Bank, N.A. as paying agent and Phoenix American
Financial Services, Inc., a California corporation as co-paying
agent in respect of Bonds registered to it as record holder. UMB
Bank, N.A. will also act as trustee under the Indenture and
registrar for the Bonds. As such, UMB Bank, N.A. will make payments
on the Bonds to Phoenix American (who will forward such payments to
the applicable Bondholders). The Bonds will be issued in book-entry
form only, evidenced by global certificates, as such, payments are
being made to Phoenix American.
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Governing Law
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The
Indenture and the Bonds will be governed by the laws of the State
of Delaware.
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Material Tax Considerations
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You
should consult your tax advisors concerning the U.S. federal income
tax consequences of owning the Bonds in light of your own specific
situation, as well as consequences arising under the laws of any
other taxing jurisdiction.
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Risk Factors
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An
investment in the Bonds involves certain risks. You should
carefully consider the risks above, as well as the other risks
described under “Risk Factors”
of this offering circular before making an investment
decision.
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5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This
offering circular contains certain forward-looking statements that
are subject to various risks and uncertainties. Forward-looking
statements are generally identifiable by use of forward-looking
terminology such as "may," "will," "should," "potential," "intend,"
"expect," "outlook," "seek," "anticipate," "estimate,"
"approximately," "believe," "could," "project," "predict," or other
similar words or expressions. Forward-looking statements are based
on certain assumptions, discuss future expectations, describe
future plans and strategies, contain financial and operating
projections or state other forward-looking information. Our ability
to predict results or the actual effect of future events, actions,
plans or strategies is inherently uncertain. Although we believe
that the expectations reflected in our forward-looking statements
are based on reasonable assumptions, our actual results and
performance could differ materially from those set forth or
anticipated in our forward-looking statements. Factors that could
have a material adverse effect on our forward-looking statements
and upon our business, results of operations, financial condition,
funds derived from operations, cash flows, liquidity and prospects
include, but are not limited to, the factors referenced in this
offering circular, including those set forth below.
When
considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this offering
circular. Readers are cautioned not to place undue reliance on any
of these forward-looking statements, which reflect our views as of
the date of this offering circular. The matters summarized below
and elsewhere in this offering circular could cause our actual
results and performance to differ materially from those set forth
or anticipated in forward-looking statements. Accordingly, we
cannot guarantee future results or performance. Furthermore, except
as required by law, we are under no duty to, and we do not intend
to, update any of our forward-looking statements after the date of
this offering circular, whether as a result of new information,
future events or otherwise.
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6
RISK FACTORS
An investment in the Bonds is highly speculative and is suitable
only for persons or entities that are able to evaluate the risks of
the investment. An investment in the Bonds should be made only by
persons or entities able to bear the risk of and to withstand the
total loss of their investment. Prospective investors should
consider the following risks before making a decision to purchase
the Bonds. To the best of our knowledge, we have included all
material risks to investors in this section.
Risks Related to the Bonds and to this Offering
The Bonds are not obligations of our subsidiaries and will be
subordinated to all of the liabilities of the Company’s
subsidiaries, if any. Such subordination increases the risk that we
will be unable to meet our obligations on the Bonds.
The
Bonds are obligations of the Company exclusively and not of any of
our subsidiaries. The Bonds are also effectively subordinated to
all of the liabilities of the Company’s subsidiaries, to the
extent of their assets, since they are separate and distinct legal
entities with no obligation to pay any amounts due under the
Company’s indebtedness, including the Bonds, or to make any
funds available to make payments on the Bonds. The Company’s
right to receive any assets of any subsidiary in the event of a
bankruptcy or liquidation of the subsidiary, and therefore the
right of the Company's creditors, including holders of the Bonds,
to participate in those assets, will be effectively subordinated to
the claims of that subsidiary's creditors, including trade
creditors, in each case to the extent that the Company is not
recognized as a creditor of such subsidiary. In addition, even
where the Company is recognized as a creditor of a subsidiary, the
Company’s rights as a creditor with respect to certain
amounts are subordinated to other indebtedness of that subsidiary,
including secured indebtedness to the extent of the assets securing
such indebtedness.
Amounts outstanding under our Cortland Term Loan and Cortland LOC
will be senior to the our payment obligations under the
Bonds.
The
Bonds will be junior to any debt outstanding under the
Company’s secured term loan and revolving line of credit with
Cortland Credit Lending Corporation. As of the date of this
offering circular, $5,000,000 remained outstanding under the
Cortland Term Loan and $22,800,000 is outstanding under the
Cortland LOC. We will be obligated to satisfy any obligations under
our Cortland Term Loan and Cortland LOC prior to satisfying any
payment obligations of the Bonds. If we are unable to pay off the
amounts due under the Cortland Term Loan and Cortland LOC, then we
will likely be unable to satisfy our payment obligations under the
Bonds until such amounts are paid.
The
Bonds are subordinated in the right of payment to the Cortland Term
Loan and Cortland LOC.
The Bonds are
subordinated to the Cortland Term Loan and Cortland LOC pursuant to
the terms of Indenture. The Bonds rank junior in right of payment
to any of the Company’s outstanding secured indebtedness
under the Cortland Term Loan pursuant to the terms of indenture and
Cortland LOC. Under the terms of the Indenture, no payments may be
made on the Bonds at any time when a default is continuing with
respect to the Cortland Term Loan and/or Cortland LOC. In the event
of the Company’s bankruptcy, liquidation, reorganization or
other winding up, Cortland Credit Lending Corporation
(“Cortland”), as the lender under the Cortland Term
Loan and Cortland LOC, will be entitled to receive payment in full
of all amounts due (or to become due) in respect of all debt
outstanding under the Cortland Term Loan and/or Cortland LOC before
the Bondholders are entitled to receive any payments. In addition,
the Company’s assets that secure the Cortland Term Loan
and/or Cortland LOC, which includes all of the assets of the
Company as of the date of this offering circular, will be available
to pay obligations on the Bonds only after the secured debt under
the Cortland Term Loan and/or Cortland LOC has been repaid in full
from these assets, and the assets of its subsidiaries will be
available to pay obligations on the Bonds only after all claims
under the Cortland Term Loan and/or Cortland LOC have been repaid
in full. There may not be sufficient assets remaining to pay
amounts due on any or all of the Bonds then
outstanding.
We may engage in a variety of transactions that may impair our
ability to pay interest and principal on the Bonds.
The
Indenture governing the Bonds will contain covenants that will
limit us from making any fundamental changes including any merger,
consolidation, winding up or liquidation. However, if we violate
this covenant or engage in any of transaction limited by the
covenants pursuant to a waiver to the Indenture, it could have an
adverse impact on Bondholders. In addition, other than the limited
covenants contained in the Indenture discussed in this offering
circular, we are not subject to additional restrictions on our
activities. We may engage in activities, such as issuing additional
debt that may rank senior or pari
passu with the Bonds, that may hinder our ability to pay our
bond service obligations.
The Indenture
requires a standstill period whereby the Trustee, whether on its
own or upon the request of the requisite number of Bondholders,
must obtain the consent of Cortland, as lender under the Cortland
Term Loan and Cortland LOC, to pursue any remedies against the
Company within ninety (90) days of an occurrence of an Event of
Default (as defined in the Indenture). As a result, the Trustee, on
behalf of the Bondholders, may not be able to exercise its right to
seek any remedies upon an Event of Default which may result in the
Bondholders incurring losses that may have otherwise been
avoided.
An
event of default under the Cortland Term Loan and/or Cortland LOC
would likely impair the Company’s ability to make payments of
principal and interest on the Bonds.
Pursuant to the
terms of the Indenture, the Company is not permitted to make any
payments to the Bondholders, including any payments of principal or
interest under the Bonds, for so long as any event of default
remains uncured or outstanding under the Cortland Term Loan and/or
Cortland LOC. As a result, the Bondholders may not receive the
payments they expect, or at all, upon an event of default under the
Cortland Term Loan and/or Cortland LOC. In addition, following the
cure of any such event of default or Cortland’s successful
remedy of such event of default, the Company may not have the
funds, or otherwise have the means, to make any payments due to the
Bondholders at such time.
Some significant restructuring transactions that may adversely
affect Bondholders may not constitute a Change of
Control/Repurchase Event under the Indenture, in which case we
would not be obligated to offer to repurchase the
Bonds.
Some
restructuring transactions that result in a change in control may
not qualify as a Repurchase Event under the Indenture; therefore,
Bondholders will not have the right to repurchase their Bonds, even
though the Company is under new management. These transactions are
limited to those which cause a non-affiliate of the Company to gain
voting control. Upon the occurrence of a transaction which results
in a change in control of the Company, Bondholders will have no
voting rights with respect to such a transaction. In the event of
any such transaction, Bondholders would not have the right to
require us to repurchase their Bonds, even though such a
transaction could increase the amount of our indebtedness, or
otherwise adversely affect the Bondholders.
7
If we sell substantially less than all of the Bonds we are
offering, the costs we incur to comply with the rules of the
Securities and Exchange Commission, or the SEC, regarding financial
reporting and other fixed costs (such as those relating to the
offering) will be a larger percentage of our revenue and may reduce
our financial performance and our ability to fulfil our obligations
under the Bonds.
We
expect to incur significant costs in maintaining compliance with
the financial reporting for a Tier II Regulation A issuer and that
our management will spend a significant amount of time assessing
the effectiveness of our internal control over financial reporting.
We do not anticipate that these costs or the amount of time our
management will be required to spend will be significantly less if
we sell substantially less than all of the Bonds we are
offering.
Redemption requests of Bonds at the option of the Bondholder will
be limited by the 10% Limit and to the extent they are accepted,
will be subject to financial penalties for early
redemption.
While
the Bonds carry an early redemption right and a redemption right in
the event of death, disability or bankruptcy of the Bondholder,
redemptions are subject to an annual 10% redemption limit. As a
result, requests for redemption from Bondholders may be rejected by
the Company. Additionally, with respect to redemptions at the
option of the Bondholders, except for death, disability or
bankruptcy, early redemption penalties will apply, which will
adversely affect Bondholders seeking to redeem Bonds prior to
maturity. If the Company elects to extend the maturity of the Bonds
as set forth herein, then a Bondholder may be required to redeem
its Bonds, inclusive of the early redemption penalty, if the
Bondholder does not wish to keep its Bonds through the extended
maturity.
Redemption requests for Bonds at the option of the Bondholder or in
the event of death, disability or bankruptcy of a Bondholder may
have an adverse effect on the Company’s overall growth and
ability to fulfil our obligations on the Bonds.
The
Bonds carry an early redemption right and a redemption right in the
event of death, disability or bankruptcy of the Bondholder. As a
result, one or more Bondholders may elect to have their Bonds
redeemed prior to maturity. In such an event, we may not have
access to the necessary cash to redeem such Bonds. Additionally,
any cash used to satisfy such redemption requests will be diverted
from cash required to fund the continued growth of the Company.
Accordingly, the use of funds towards redemptions could result in
the Company’s inability to meet projected growth targets,
which could, in turn, limit the Company’s ability to make
interest and principal payments to Bondholders.
Our trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Indenture at the request,
order or direction of any of the Bondholders, pursuant to the
provisions of the Indenture, unless such Bondholders shall have
offered to the trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred therein or
thereby.
The
Indenture governing the Bonds provides that in case an event of
default occurs and not be cured, the trustee will be required, in
the exercise of its power, to use the degree of care of a
reasonable person in the conduct of his own affairs. Subject to
such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the
request of any Bondholder, unless the Bondholder has offered to the
trustee security and indemnity satisfactory to it against any loss,
liability or expense.
There is no established trading market for the Bonds and we do not
expect one to develop. Therefore, Bondholders may not be able to
resell them for the price that they paid or sell them at
all.
Prior
to this offering, there was no active market for the Bonds and we
do not expect one to develop. We do not have any present intention
to apply for a quotation for the Bonds on an alternative trading
system or over the counter market and even if we obtain that
quotation in the future, we do not know the extent to which
investor interest will lead to the development and maintenance of a
liquid trading market. Further, the Bonds will not be quoted
on an alternative trading system or over the counter
market until after the termination of this offering, if at
all. Therefore, investors will be required to wait until at least
after the final termination date of this offering for such
quotation. The initial public offering price for the Bonds has been
determined by us. You may not be able to sell the Bonds you
purchase at or above the initial offering price or sell them at
all.
8
Alternative trading
systems and over the counter markets, as with other public
markets, may from time to time experience significant price
and volume fluctuations. As a result, if the Bonds are listed on
such a trading system, the market price of the Bonds may be
similarly volatile, and Bondholders may from time to time
experience a decrease in the value of their Bonds, including
decreases unrelated to our operating performance or prospects. The
price of the Bonds could be subject to wide fluctuations in
response to a number of factors, including those listed in this
"Risk
Factors" section of this offering circular. No assurance can
be given that the market price of the Bonds will not fluctuate or
decline significantly in the future or that Bondholders will be
able to sell their Bonds when desired on favorable terms, or at
all. Further, the sale of the Bonds may have adverse federal income
tax consequences.
We may redeem all or any part of the Bonds that have been issued
before their maturity, and you may be unable to reinvest the
proceeds at either the same or a higher rate of
return.
We may
redeem all or any part of the outstanding Bonds prior to maturity.
See “Description of Bonds -
Optional Redemption” for more information. If
redeemed, you may be unable to reinvest the money you receive in
the redemption at a rate that is equal to or higher than the rate
of return on the Bonds.
Risks Related to Our Business and Our Industry
Because we have only recently commenced business operations, we
face a risk of business failure.
Our
Company was formed on April 23, 2019, and as of the date of this
offering circular, we have conducted limited investing in mineral
rights. We have no significant history of ongoing operations, and,
as a result, we have no way to evaluate the likelihood that we will
be able to continue to operate the business successfully on an
ongoing basis.
Because of the unique difficulties and uncertainties inherent in
the mineral rights investment business, we face a potential risk of
business failure.
Potential
investors should be aware of the difficulties normally encountered
by companies investing in mineral rights and the potential failure
of such enterprises. The likelihood of success must be considered
in light of the problems, expenses, difficulties, complications and
delays encountered in connection with the mineral rights investment
that we plan to undertake. These potential problems include, but
are not limited to, unanticipated problems relating to finding
mineral rights assets, and additional costs and expenses that may
exceed current estimates. The search for minerals may also involve
numerous hazards. Thus, we may become subject to liability for such
hazards, including pollution, cave-ins and other hazards against
which we cannot insure or against which we may elect not to insure.
The payment of such liabilities may have a material adverse
effect on our financial position. In addition, there is no
assurance that the expenditures to be made by us in the exploration
phase will result in the discovery of economic deposits of
minerals. Problems such as unusual or unexpected formations and
other conditions are involved in mineral exploration and often
result in unsuccessful exploration efforts.
If we are unable to successfully compete within the mineral rights
business, we will not be able to achieve profitable
operations.
The
mineral rights business is highly competitive. This industry has a
multitude of competitors. Our exploration activities will be
focused on attempting to locate commercially viable mineral
deposits. Many of our competitors have greater financial
resources than us. As a result, we may experience difficulty
competing with other businesses when investing in mineral rights.
If we are unable to retain qualified third-party operators to
assist us in production activities if a commercially viable deposit
is found to exist, we may be unable to enter into production and
achieve profitable operations.
9
Because of factors beyond our control which could affect the
marketability of minerals found, we may experience difficulty
selling any minerals we discover.
Even
if commercial quantities of mineral reserves are discovered, a
ready market may not exist for the sale of these reserves. Numerous
factors beyond our control may affect the marketability of any
minerals discovered. These factors include market
fluctuations, the proximity and capacity of minerals markets and
processing equipment, government regulations, including regulations
relating to prices, taxes, royalties, land tenure, land use,
importing and exporting of minerals and environmental protection.
These factors could inhibit our ability to sell minerals in
the event that commercial amounts of minerals are
found.
Because we will be subject to compliance with government regulation
which may change, the anticipated costs of our exploration program
may increase.
State
and local government bodies regulate mineral exploration or
exploitation within that state. We may be required to obtain work
permits, post bonds and perform remediation work for any physical
disturbance to the land in order to comply with these regulations.
While our planned exploration program budgets for regulatory
compliance, there is a risk that new regulations could increase our
costs of doing business, prevent us from carrying out our
exploration program, and make compliance with new regulations
unduly burdensome.
A shortage of equipment and supplies for our third-party operators
could adversely affect our ability to operate our
business.
Our
third-party operators are dependent on various supplies and
equipment in order to carry out its extraction operations. Any
shortage of such supplies, equipment and parts could have a
material adverse effect on their ability to carry out operations
and therefore limit or increase the cost of production and,
ultimately, our profitability.
We will be contracting with third parties to perform the actual
extraction operations, and these third-party contractors may not
perform as we expect.
We will
be utilizing third-party contractors to perform the drilling and
extraction operations on our assets to extract the natural
resources we rely on to generate revenue. If the third-party
contractors we hire do not perform as we expect, we may not
generate as much of a profit as we anticipate, which could limit
our ability to make interest and principal payments to Bondholders.
Further, if the contractors are not competent with respect to
environmental laws and risks, we may face enforcement actions,
lawsuits, civil or criminal fines or penalties, loss or reputation
or other costly expenditures, all of which could damage our
business operations. Reckless action on the part of incompetent
contractors could also lead to damage to, or destruction of, our
assets leading to delays in future actions and loss of revenue,
among other costly outcomes.
We are subject to significant governmental regulations, which
affect our operations and costs of conducting our
business.
The
current and future operations of our business and that of the
third-party contractors on our land are and will be governed by
laws and regulations, including:
●
laws and
regulations governing mineral concession acquisition, prospecting,
development, mining and production;
●
laws and
regulations related to exports, taxes and fees;
●
labor standards and
regulations related to occupational health and mine
safety;
●
environmental
standards and regulations related to waste disposal, toxic
substances, land use and environmental protection; and
●
other
matters.
10
Companies engaged
in exploration activities often experience increased costs and
delays in production and other schedules as a result of the need to
comply with applicable laws, regulations and permits. Failure of
the third parties we contract with to comply with applicable laws,
regulations and permits may result in enforcement actions,
including the forfeiture of claims, orders issued by regulatory or
judicial authorities requiring operations to cease or be curtailed,
and may include corrective measures requiring capital expenditures,
installation of additional equipment or costly remedial actions. We
may be required to compensate those suffering loss or damage by
reason of our mineral exploration activities and may have civil or
criminal fines or penalties imposed for violations of such laws,
regulations and permits.
Regulations and pending legislation governing issues involving
climate change could result in increased operating costs, which
could have a material adverse effect on our business.
A
number of governments or governmental bodies have introduced or are
contemplating regulatory changes in response to various climate
change interest groups and the potential impact of climate change.
Legislation and increased regulation regarding climate change could
impose significant costs on us, the third parties we will contract
with to perform the mining operations, our venture partners and our
suppliers, including costs related to increased energy
requirements, capital equipment, environmental monitoring and
reporting and other costs to comply with such regulations. Any
adopted future climate change regulations could also negatively
impact our ability to compete with companies situated in areas not
subject to such limitations. Given the emotion, political
significance and uncertainty around the impact of climate change
and how it should be dealt with, we cannot predict how legislation
and regulation will affect our financial condition, operating
performance and ability to compete. Furthermore, even without such
regulation, increased awareness and any adverse publicity in the
global marketplace about potential impacts on climate change by us
or other companies in our industry could harm our reputation. The
potential physical impacts of climate change on our operations are
highly uncertain, and would be particular to the geographic
circumstances in areas in which we operate. These may include
changes in rainfall and storm patterns and intensities, water
shortages, changing sea levels and changing temperatures. These
impacts may adversely impact the cost, production and financial
performance of our operations.
Existing and
possible future laws, regulations and permits governing operations
and activities of exploration companies, or more stringent
implementation, could have a material adverse impact on our
business and cause increases in capital expenditures or require
abandonment or delays in exploration.
Our exploration and development activities are subject to
environmental risks, which could expose us to significant liability
and delay, suspension or termination of our
operations.
The
exploration and possible future development phases of our business
will be subject to federal, state and local environmental
regulation. These regulations mandate, among other things, the
maintenance of air and water quality standards and land
reclamation. They also set out limitations on the generation,
transportation, storage and disposal of solid and hazardous waste.
Environmental legislation is evolving in a manner which will
require stricter standards and enforcement, increased fines and
penalties for non-compliance, more stringent environmental
assessments, and a heightened degree of responsibility for
companies and their officers, directors and employees. Future
changes in environmental regulations, if any, may adversely affect
the operations of the third-party contractors on our land as well
as our business. If we fail to comply with any of the applicable
environmental laws, regulations or permit requirements, we could
face regulatory or judicial sanctions. Penalties imposed by either
the courts or administrative bodies could delay or stop the
operations of the third-party contractors on our land or require a
considerable capital expenditure. Although we and our third-party
operators intend to comply with all environmental laws and
permitting obligations in conducting our business, there is a
possibility that those opposed to exploration and mining will
attempt to interfere with our operations, whether by legal process,
regulatory process or otherwise.
Environmental
hazards unknown to us, which have been caused by previous or
existing owners or operators of the properties, may exist on the
properties in which we hold an interest. It is possible that our
properties could be located on or near the site of a Federal
Superfund cleanup project. Although we will endeavor to avoid such
sites, it is possible that environmental cleanup or other
environmental restoration procedures could remain to be completed
or mandated by law, causing unpredictable and unexpected
liabilities to arise.
11
U.S. Federal Laws
The Comprehensive Environmental, Response,
Compensation, and Liability Act (“CERCLA”),
and comparable state statutes, impose strict, joint and several
liability on current and former owners and operators of sites and
on persons who disposed of or arranged for the disposal of
hazardous substances found at such sites. It is not uncommon for
the government to file claims requiring cleanup actions, demands
for reimbursement for government-incurred cleanup costs, or natural
resource damages, or for neighboring landowners and other third
parties to file claims for personal injury and property damage
allegedly caused by hazardous substances released into the
environment. The Federal Resource Conservation and Recovery Act
(“RCRA”),
and comparable state statutes, govern the disposal of solid waste
and hazardous waste and authorize the imposition of substantial
fines and penalties for noncompliance, as well as requirements for
corrective actions. CERCLA, RCRA and comparable state statutes can
impose liability for clean-up of sites and disposal of substances
found on exploration, mining and processing sites long after
activities on such sites have been completed.
The
Clean Air Act, as amended, restricts the emission of air pollutants
from many sources, including mining and processing activities. The
mining operations conducted by third parties on our land may
produce air emissions, including fugitive dust and other air
pollutants from stationary equipment, storage facilities and the
use of mobile sources such as trucks and heavy construction
equipment, which are subject to review, monitoring and/or control
requirements under the Clean Air Act and state air quality laws.
New facilities of theirs may be required to obtain permits before
work can begin, and existing facilities may be required to incur
capital costs in order to remain in compliance. In addition,
permitting rules may impose limitations on their production levels
or result in additional capital expenditures in order to comply
with the rules.
The National Environmental Policy Act
(“NEPA”)
requires federal agencies to integrate environmental considerations
into their decision-making processes by evaluating the
environmental impacts of their proposed actions, including issuance
of permits to mining facilities, and assessing alternatives to
those actions. If a proposed action could significantly affect the
environment, the agency must prepare a detailed statement known as
an Environmental Impact Statement (“EIS”). The U.S. Environmental Protection
Agency, other federal agencies, and any interested third parties
will review and comment on the scoping of the EIS and the adequacy
of and findings set forth in the draft and final EIS. This process
can cause delays in issuance of required permits or result in
changes to a project to mitigate its potential environmental
impacts, which can in turn impact the economic feasibility of a
proposed project.
The Clean Water Act (“CWA”), and comparable state statutes, imposes
restrictions and controls on the discharge of pollutants into
waters of the United States. The discharge of pollutants into
regulated waters is prohibited, except in accordance with the terms
of a permit issued by the Environmental Protection Agency
(“EPA”) or an analogous state agency. The CWA
regulates storm water mining facilities and requires a storm water
discharge permit for certain activities. Such a permit requires the
regulated facility to monitor and sample storm water run-off from
its operations. The CWA and regulations implemented thereunder also
prohibit discharges of dredged and fill material in wetlands and
other waters of the United States unless authorized by an
appropriately issued permit. The CWA and comparable state statutes
provide for civil, criminal and administrative penalties for
unauthorized discharges of pollutants and impose liability on
parties responsible for those discharges for the costs of cleaning
up any environmental damage caused by the release and for natural
resource damages resulting from the release.
The Safe Drinking Water Act
(“SDWA”)
and the Underground Injection Control (“UIC”) program promulgated thereunder, regulate
the drilling and operation of subsurface injection wells. EPA
directly administers the UIC program in some states and in others
the responsibility for the program has been delegated to the state.
The program requires that a permit be obtained before drilling a
disposal or injection well. Violation of these regulations and/or
contamination of groundwater by mining related activities may
result in fines, penalties, and remediation costs, among other
sanctions and liabilities under the SWDA and state laws. In
addition, third-party claims may be filed by landowners and other
parties claiming damages for alternative water supplies, property
damages, and bodily injury.
12
We or our third-party operators could be subject to environmental
lawsuits.
Neighboring
landowners and other third parties could file claims based on
environmental statutes and common law for personal injury and
property damage allegedly caused by the release of hazardous
substances or other waste material into the environment on or
around our properties. There can be no assurance that our defense
of such claims will be successful. A successful claim against us or
any of the third parties we contract with to conduct operations on
our land could have an adverse effect on our business prospects,
financial condition and results of operation.
While the testing of our mineral right exploration software system
has been successful to date, there can be no assurance that we will
be able to replicate the process, along with all of the expected
economic advantages, on a large commercial scale.
As
of the date of this offering circular, we have built and operated
our mineral right exploration software system on a limited scale.
While we believe that our development and testing to date has
proven the concept of our software, there can be no assurance that
as we commence large scale operations that we will not incur
unexpected costs or hurdles that might restrict the desired scale
of our intended operations or negatively impact our projected gross
profit margin.
We do not currently own any intellectual property rights relating
to our mineral right exploration software system and may be subject
to competitors developing the same technology
As of
the date of this offering circular, we do not own any intellectual
property rights for any of our software used in our mineral rights
exploration. We substantially rely on this software to identify
profitable assets ahead of our competitors. If a competitor or
anyone else replicates our software, then our business would
materially suffer and our ability to repay any of our debts,
including the obligations under the Bonds, may be
affected.
Our mineral right exploration software system may infringe on the
intellectual property rights of others, which could lead to costly
disputes or disruptions.
The
applied science industry is characterized by frequent allegations
of intellectual property infringement. Though we do not expect to
be subject to any of these allegations, any allegation of
infringement could be time consuming and expensive to defend or
resolve, result in substantial diversion of management resources,
cause suspension of operations or force us to enter into royalty,
license, or other agreements rather than dispute the merits of such
allegation. If patent holders or other holders of intellectual
property initiate legal proceedings, we may be forced into
protracted and costly litigation. We may not be successful in
defending such litigation and may not be able to procure any
required royalty or license agreements on acceptable terms or at
all.
Our business is sensitive to the price of oil and timing of oil
production, which may have an adverse effect on our ability to
generate returns for investors.
We are
in the business of purchasing mineral rights and non-operated
working interests in land in the United States, including the
rights to drill for oil and gas. A decline in oil prices can have
an adverse effect on the value of our interests in the land which
will materially and adversely affect our ability to generate cash
flows and in turn our ability to make interest payments on the
Bonds. Further, a slowdown in the timing of oil production may
reduce our ability to collect lease payments from leaseholders,
which could limit our ability to make interest and principal
payments to Bondholders.
Our investments are focused on acquiring properties where oil
production is either ongoing or imminent. Therefore, very few of
our investments are expected to generate returns that substantially
exceed our projections.
We
focus on acquiring properties where oil production is ongoing or
imminent, which provide predictable near-term cash flows. Less than
ten percent (10%) of our total portfolio is expected to include
investments with no current drill schedule, therefore investors
should not expect our investments to generate returns that
substantially exceed our current projections.
13
The continuing spread of a new strain of coronavirus (also known as
the COVID-19 virus) may adversely affect our ability to generate
revenues.
The
World Health Organization has declared the spread of the COVID-19
virus a global pandemic, and the President of the United States has
declared a national state of emergency in the United States in
response to the outbreak. Considerable uncertainty still surrounds
the COVID-19 virus and its potential effects, and the extent of and
effectiveness of any responses taken on a national and local level.
However, measures taken to limit the impact of this coronavirus,
including social distancing and other restrictions on travel,
congregation and business operation have already resulted in
significant negative short-term economic impacts. The long-term
impact of this coronavirus on the U.S. and world economies remains
uncertain, but can result in long term infrastructure and supply
chain disruption, as well as dislocation and uncertainty in the
financial markets that could significantly and negatively impact
the global, national and regional economies, the length and breadth
of which cannot currently be predicted. Extended disruptions to the
global economy is likely to cause fluctuations in oil prices and
the timing of oil production, which could have a material adverse
effect on our ability to generate cash flow, which in turn could
limit our ability to pay interest on the Bonds.
Any
cybersecurity-attack or other security breach of our technology
systems, or those of third-party vendors we rely on, could subject
us to significant liability and harm our business operations and
reputation.
Cybersecurity
attacks and security breaches of our technology systems, including
those of our clients and third-party vendors, may subject us to
liability and harm our business operations and overall reputation.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in its computer
systems and networks. Threats to information technology systems
associated with cybersecurity risks and cyber incidents continue to
grow, and there have been a number of highly publicized cases
involving financial services companies, consumer-based companies
and other organizations reporting the unauthorized disclosure of
client, customer or other confidential information in recent years.
Cybersecurity risks could disrupt our operations, negatively impact
our ability to compete and result in injury to our reputation,
downtime, loss of revenue, and increased costs to prevent, respond
to or mitigate cybersecurity events. Although we have developed,
and continue to invest in, systems and processes that are designed
to detect and prevent security breaches and cyber-attacks, our
security measures, information technology and infrastructure may be
vulnerable to attacks by hackers or breached due to employee error,
malfeasance or other disruptions that could result in unauthorized
disclosure or loss of sensitive information; damage to our
reputation; the incurrence of additional expenses; additional
regulatory scrutiny or penalties; or our exposure to civil or
criminal litigation and possible financial liability, any of which
could have a material adverse effect on our business, financial
condition and results of operations.
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14
USE OF PROCEEDS
We
estimate that the net proceeds we will receive from this offering
will be $74,250,000 if we raise
the Maximum Offering Amount, after deducting fees payable to our
broker/dealer of record.
We
plan to use substantially all of the net proceeds from this
offering on continued acquisitions of mineral rights and
non-operated working interests, as well as additional asset
acquisitions. The table below demonstrates our anticipated uses of
offering proceeds, but the table below does not require us to use
offering proceeds as indicated. Our actual use of offering proceeds
will depend upon market conditions, among other considerations. The
numbers in the table are approximate.
|
|
Maximum
Offering Amount*
|
|
|
|
Amount
|
Percent
|
|
Gross offering
proceeds
|
$75,000,000
|
100%
|
|
Less offering
expenses:
|
|
|
|
Selling
commissions(1)
|
$750,000
|
1%
|
|
|
|
|
|
Net
Proceeds(2)
|
$74,250,000
|
99%
|
*Amounts and
percentages may vary from the above, provided that Selling
Commission and expenses will not exceed 1% of gross offering
proceeds.
(1)
This
includes a broker-dealer fee of up to 1% of the gross proceeds of
the offering. See
“Plan of
Distribution” for more information.
(2)
This
assumes we sell the Maximum Offering Amount comprised of
$75,000,000.
[Remainder of page intentionally left blank]
15
PLAN
OF DISTRIBUTION
Who May Invest
As a
Tier II, Regulation A offering, investors must comply with the 10%
limitation on investment in the offering, as prescribed in Rule
251. The only investor in this offering exempt from this limitation
is an accredited investor, an "Accredited Investor," as
defined under Rule 501 of Regulation D. If you meet one of the
following tests you qualify as an Accredited Investor:
(i)
You
are a natural person who has had individual income in excess of
$200,000 in each of the two most recent years, or joint income with
your spouse (or spousal equivalent) in excess of $300,000 in each
of these years, and have a reasonable expectation of reaching the
same income level in the current year;
(ii)
You
are a natural person and your individual net worth, or joint net
worth with your spouse (or spousal equivalent), exceeds $1,000,000
at the time you purchase the Bonds (please see below on how to
calculate your net worth);
(iii)
You
are an executive officer, director, trustee, general partner or
advisory board member of the issuer or a person serving in a
similar capacity as defined in the Investment Company Act of 1940,
as amended, the Investment Company Act, or a manager or executive
officer of the general partner of the issuer;
(iv)
You
are an investment adviser registered pursuant to Section 203 of the
Investment Advisers Act of 1940 or an exempt reporting adviser as
defined in Section 203(l) or Section 203(m) of that act, or an
investment adviser registered under applicable state
law.
(v)
You
are an organization described in Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended, the Code, a corporation, a
Massachusetts or similar business trust or a partnership or a
limited liability company, not formed for the specific purpose of
acquiring the Bonds, with total assets in excess of
$5,000,000;
(vi)
You
are an entity, with investments, as defined under the Investment
Company Act, exceeding $5,000,000, and you were not formed for the
specific purpose of acquiring the Bonds;
(vii)
You
are a bank or a savings and loan association or other institution
as defined in the Securities Act, a broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934, as
amended, the Exchange Act, an insurance company as defined by the
Securities Act, an investment company registered under the
Investment Company Act of 1940, as amended, the Investment Company
Act, or a business development company as defined in that act, any
Small Business Investment Company licensed by the Small Business
Investment Act of 1958, any Rural Business Investment Company as
defined in the Consolidated Farm and Rural Development Act of 1961
or a private business development company as defined in the
Investment Advisers Act of 1940;
(viii)
You
are an entity with total assets not less than $5,000,000 (including
an Individual Retirement Account trust) in which each equity owner
is an accredited investor;
(ix)
You
are a trust with total assets in excess of $5,000,000, your
purchase of the Bonds is directed by a person who either alone or
with his purchaser representative(s) (as defined in Regulation D
promulgated under the Securities Act) has such knowledge and
experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment, and
you were not formed for the specific purpose of investing in the
Bonds;
(x)
You
are a family client of a family office, as defined in the
Investment Advisers Act, with total assets not less than
$5,000,000, your purchase of the Bonds is directed by a person who
has such knowledge and experience in financial and business matters
that the family office is capable of evaluating the merits and
risks of the prospective investment, and the family office was not
formed for the specific purpose of investing in the
Bonds;
(xi)
You
are a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such
plan has assets in excess of $5,000,000; or
(xii)
You
are a holder in good standing of certain professional
certifications or designations, including the Financial Industry
Regulatory Authority, Inc. Licensed General Securities
Representative (Series 7), Licensed Investment Adviser
Representative (Series 65), or Licensed Private Securities
Offerings Representative (Series 82) certifications.
Under
Rule 251 of Regulation A, non-accredited, non-natural investors
are subject to the investment limitation and may only invest funds
which do not exceed 10% of the greater of the purchaser's revenue
or net assets (as of the purchaser's most recent fiscal year end).
A non-accredited, natural
person may only invest funds which do not exceed 10% of the
greater of the purchaser's annual income or net worth (please see
below on how to calculate your net worth).
16
Upon maturity, and subject to the terms and
conditions described in this offering circular, the Bonds will be
automatically renewed at the same interest rate and
for the same term, unless redeemed
upon maturity at our or your election. Each such renewal would
constitute a new offering for the purpose of the registration
requirements of the Securities Act and, as such, would be either
registered or conducted pursuant to an exemption from
registration.
NOTE: For the purposes of calculating your net worth, Net
Worth is defined as the difference between total assets and total
liabilities. This calculation must exclude the value of your
primary residence and may exclude any indebtedness secured by your
primary residence (up to an amount equal to the value of your
primary residence). In the case of fiduciary accounts, net worth
and/or income suitability requirements may be satisfied by the
beneficiary of the account or by the fiduciary, if the donor or
grantor is the fiduciary and the fiduciary directly or indirectly
provides funds for the purchase of the Bonds.
Determination of Suitability
The
Selling Group Members and registered investment advisors
recommending the purchase of Bonds in this offering have the
responsibility to make every reasonable effort to determine that
your purchase of Bonds in this offering is a suitable and
appropriate investment for you based on information provided by you
regarding your financial situation and investment objectives. In
making this determination, these persons have the responsibility to
ascertain that you:
●
meet
the minimum income and net worth standards set forth under
“Plan of
Distribution – Who May Invest ”
above;
●
can
reasonably benefit from an investment in the Bonds based on your
overall investment objectives and portfolio structure;
●
are
able to bear the economic risk of the investment based on your
overall financial situation;
●
are in
a financial position appropriate to enable you to realize to a
significant extent the benefits described in this offering circular
of an investment in the Bonds; and
●
have
apparent understanding of:
●
the
fundamental risks of the investment;
●
the
risk that you may lose your entire investment;
●
the
lack of liquidity of the Bonds;
●
the
restrictions on transferability of the Bonds; and
●
the tax
consequences of your investment.
Relevant
information for this purpose will include at least your age,
investment objectives, investment experience, income, net worth,
financial situation, and other investments as well as any other
pertinent factors. The Selling Group Members and registered
investment advisors recommending the purchase of Bonds in this
offering must maintain, for a six-year period, records of the
information used to determine that an investment in Bonds is
suitable and appropriate for you.
17
The Offering
We are
offering a maximum offering amount of $75,000,000 aggregate
principal amount of the Bonds to the public through our
broker/dealer of record at a price of $1,000 per Bond. The offering will
terminate on the earliest of: (i) the date we sell the Maximum
Offering Amount; (ii) the third anniversary of the date of
qualification of this offering statement; or (iii) such date upon
which we determine to terminate the offering, in our sole
discretion. Notwithstanding the previous sentence, we have the
right to extend this offering beyond the third anniversary of the
date of qualification for an additional year. If we do elect to
extend the offering beyond the initial three-year term, then we
will be required to file a new offering statement. In such a case,
the new offering statement must be declared qualified before we
will be able to continue the offering past the third anniversary of
the date of initial qualification.
We have
arbitrarily determined the selling price of the Bonds and such
price bears no relationship to our book or asset values, or to any
other established criteria for valuing issued or outstanding
Bonds.
The
Bonds are being offered on a “best efforts” basis,
which means generally that our broker/dealer of record is required
to use only its best efforts to sell the Bonds and it has no firm
commitment or obligation to purchase any of the Bonds. The offering
will continue until the offering termination. We will conduct
closings on the first and third Thursday of each month assuming
there are funds to close, until the offering termination. If either
day falls on a weekend or holiday, the closing will be conducted on
the next business day. Once a subscription has been submitted and
accepted by the Company, an investor will not have the right to
request the return of its subscription payment prior to the next
closing date. If subscriptions are received on a closing date and
accepted by the Company prior to such closing, any such
subscriptions will be closed on that closing date. If subscriptions
are received on a closing date but not accepted by the Company
prior to such closing, any such subscriptions will be closed on the
next closing date. It is expected that settlement will occur two
business days following each closing date. Two business days after
the closing date, offering proceeds for that closing will be
disbursed to us and the Bonds purchased will be issued to the
investors in the offering. If the Company is dissolved or
liquidated after the acceptance of a subscription, the respective
subscription payment will be returned to the subscriber. The
offering is being made on a best-efforts basis through Dalmore
Group, our broker/dealer of record.
Broker-Dealer and Compensation We Will Pay for the Sale of the
Bonds
Our
broker/dealer of record will receive a broker-dealer fee of up to
1% of the gross proceeds of the offering (“Broker-Dealer
Fee”). The Broker-Dealer
fee will be paid to Dalmore Group as our broker/dealer of
record. Total underwriting compensation to be received by
or paid to participating FINRA member broker-dealers, including,
without limitation, the broker-dealer fee, will not exceed 1% of
proceeds raised with the assistance of those participating FINRA
member broker-dealers. In addition, we have paid Dalmore
Group a one-time advance set up fee of $5,000 to cover reasonable
out-of-pocket accountable expenses actually anticipated to be
incurred by Dalmore Group, such as, among other things, preparing
the FINRA filing. In addition, we will pay a $20,000 consulting fee
that will be due after FINRA issues a “No Objection
Letter”.
Set
forth below are tables indicating the estimated compensation and
expenses that will be paid in connection with the offering to our
broker/dealer of record.
|
|
Per
Bond
|
Maximum Offering
Amount
|
|
Offering:
|
|
|
|
Price to
investor:
|
$1,000.00
|
$75,000,000
|
|
Less broker-dealer
fee:
|
$10
|
$750,000
|
|
Remaining
Proceeds:
|
$990
|
$74,250,000
|
We have
agreed to indemnify our broker/dealer of record, the Selling Group
Members and selected registered investment advisors, against
certain liabilities arising under the Securities Act. However, the
SEC takes the position that indemnification against liabilities
arising under the Securities Act is against public policy and is
unenforceable.
In
accordance with the rules of FINRA, the table above sets forth the
nature and estimated amount of all items that will be viewed as
“underwriting compensation” by FINRA that are
anticipated to be paid by us in connection with the offering. The
amounts shown assume we sell all the Bonds offered hereby and that
all Bonds are sold in the offering with the maximum wholesaling
fee, which is the distribution channel with the highest possible
selling commissions and fees.
18
It is
illegal for us to pay or award any commissions or other
compensation to any person engaged by you for investment advice as
an inducement to such advisor to advise you to purchase the Bonds;
however, nothing herein will prohibit a registered broker-dealer or
other properly licensed person from earning a sales commission in
connection with a sale of the Bonds.
Discounts for Bonds Purchased by Certain Persons
We
may pay reduced or no Broker-Dealer Fees in connection with the
sale of Bonds in this offering to:
|
|
●
|
registered principals or representatives of our dealer-manager or a
participating broker (and immediate family members of any of the
foregoing persons);
|
|
|
●
|
our employees, officers and directors or those of our manager, or
the affiliates of any of the foregoing entities (and the immediate
family members of any of the foregoing persons), any benefit plan
established exclusively for the benefit of such persons or
entities, and, if approved by our board of directors, joint venture
partners, consultants and other service providers;
|
|
|
●
|
clients of an investment advisor registered under the Investment
Advisers Act of 1940 or under applicable state securities laws
(other than any registered investment advisor that is also
registered as a broker-dealer, with the exception of clients who
have “wrap” accounts which have asset based fees with
such dually registered investment advisor/broker-dealer);
or
|
|
|
|
|
|
|
●
|
persons investing in a bank trust account with respect to which the
authority for investment decisions made has been delegated to the
bank trust department.
|
For purposes of the foregoing, “immediate
family members” means such person’s spouse, parents,
children, brothers, sisters, grandparents, grandchildren and any
such person who is so related by marriage such that this includes
“step-” and “-in-law” relations as well as
such persons so related by adoption. In addition, participating
brokers contractually obligated to their clients for the payment of
fees on terms inconsistent with the terms of acceptance of all or a
portion of the Broker-Dealer Fees may elect not to accept all or a
portion of such compensation. In that event, such Bonds will be
sold to the investor at a per Bond purchase price, net of all or a
portion of selling commissions. All sales must be made through a
registered broker-dealer participating in this offering, and
investment advisors must arrange for the placement of sales
accordingly through the broker/dealer of record. The net proceeds to us will not be affected by
reducing or eliminating Broker-Dealer Fees payable in connection
with sales to or through the persons described above. Purchasers
purchasing net of some or all of the Broker-Dealer Fees will
receive Bonds in principal amount of $1,000 per Bond
purchased.
Either
through this offering or subsequently on any secondary market,
affiliates of our Company may buy Bonds if and when they choose.
There are no restrictions to these purchases. Affiliates that
become Bondholders will have rights on parity with all other
Bondholders.
How to Invest
Subscription Agreement
All
investors will be required to complete and execute a subscription
agreement. The subscription agreement is available from your
registered representative or financial adviser and should be
delivered to Phoenix American Financial Services, Inc., Attn:
Lindsey Wilson, P.O. Box 363, El Segundo, CA 90245, together with
payment in full by check, ACH or wire of your subscription purchase
price in accordance with the instructions in the subscription
agreement. All checks should be made payable to “UMB Bank as
trustee for Phoenix Capital Group Holdings, LLC.” We will
hold closings on the first and third Thursday of each month
assuming there are funds to close. Once a subscription has been submitted and
accepted by the Company, an investor will not have the right to
request the return of its subscription payment prior to the next
closing date. If subscriptions are received on a closing date and
accepted by the Company prior to such closing, any such
subscriptions will be closed on that closing date. If subscriptions
are received on a closing date but not accepted by the Company
prior to such closing, any such subscriptions will be closed on the
next closing date. It is expected that settlement will occur on the
same day as each closing date. If the Company is dissolved
or liquidated after the acceptance of a subscription, the
respective subscription payment will be returned to the
subscriber.
19
By
completing and executing your subscription agreement you will also
acknowledge and represent that you have received a copy of this
offering circular, you are purchasing the Bonds for your own
account and that your rights and responsibilities regarding your
Bonds will be governed by the Indenture and the form of Bond
certificate each included as an exhibit to this offering
circular.
Book-Entry, Delivery and Form
The
Bonds purchased will be registered in book-entry form only on the
books and records of UMB Bank, N.A. in the name of Phoenix American
Financial Services, Inc. as record holder of such Bonds for the
benefit of such direct purchasers. The ownership of Bonds will be reflected on the
books and records of UMB Bank, N.A. in the name of Phoenix American
Financial Services, Inc. as record holder of such Bonds for the
benefit of such direct purchasers.
So long
as nominees, as described above, are the registered owners of the
certificates representing the Bonds, such nominees will be
considered the sole owners and holders of the Bonds for all
purposes and the Indenture. Owners of beneficial interests in the
Bonds will not be entitled to have the certificates registered in
their names, will not receive or be entitled to receive physical
delivery of the Bonds in definitive form and will not be considered
the owners or holders under the Indenture, including for purposes
of receiving any reports delivered by us or the trustee pursuant to
the Indenture. A Purchaser owning a Bond directly registered with
Phoenix American will directly exercise its rights as a Bondholder.
As a result all references in this offering circular to payments
and notices to Bondholders will refer to payments and notices to
Bondholders through UMB Bank, N.A. in accordance with its
applicable procedures.
Phoenix
American Financial Services, Inc.
All Bonds will be registered in book-entry
form only on the books and records of UMB Bank, N.A. in the name of
Phoenix American Financial Services, Inc. as record holder of such
Bonds for the benefit of such direct purchasers. Beneficial owners registered through Phoenix
American will receive written confirmation from Phoenix American
Financial Services, Inc. upon closing of their purchases. Transfers
of Bonds registered to Phoenix American will be accomplished by
entries made on the books of UMB Bank, N.A. at the
direction of Phoenix American acting on behalf of its beneficial
holders.
Book-Entry Format
Under
the book-entry format, UMB Bank, N.A., as our paying agent, will
pay interest or principal payments to Phoenix American.
Phoenix American will forward payments
directly to beneficial owners of Bonds registered to Phoenix
American. You may experience some delay in receiving your
payments under this system. Neither we, the trustee, nor the paying
agent has any direct responsibility or liability for the payment of
principal or interest on the Bonds to owners of beneficial
interests in the certificates.
We and
the trustee under the Indenture have no responsibility for any
aspect of the actions of Phoenix American. In addition, we and the
trustee under the Indenture have no responsibility or liability for
any aspect of the records kept by Phoenix American relating to or
payments made on account of beneficial ownership interests in the
Bonds or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. We also do not
supervise these systems in any way.
The
trustee will not recognize you as a Bondholder under the Indenture,
and you can only exercise the rights of a Bondholder indirectly
through Phoenix American. If the
global bond certificate representing your Bonds is held by Phoenix
American, conveyance of notices and other communications by the
trustee to the beneficial owners, and vice versa, will occur via
Phoenix American. The trustee will communicate directly with
Phoenix American, which will communicate directly with the
beneficial owners.
20
The Trustee
UMB
Bank, N.A. has agreed to be the trustee under the Indenture. The
Indenture contains certain limitations on the rights of the
trustee, should it become one of our creditors, to obtain payment
of claims in certain cases, or to realize on certain property
received in respect of any claim as security or otherwise. The
trustee will be permitted to engage in other transactions with us
and our affiliates.
The
Indenture provides that in case an event of default specified in
the Indenture shall occur and not be cured, the trustee will be
required, in the exercise of its power, to use the degree of care
of a reasonable person in the conduct of his own affairs. Subject
to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the
request of any Bondholder, unless the Bondholder has offered to the
trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Resignation or Removal of the Trustee.
The
trustee may resign at any time or may be removed by the holders of
a majority of the principal amount of then-outstanding Bonds. In
addition, upon the occurrence of contingencies relating generally
to the insolvency of the trustee, we may remove the trustee, or a
court of competent jurisdiction may remove the trustee, upon
petition of a holder of certificates. However, no resignation or
removal of the trustee may become effective until a successor
trustee has been appointed.
We are
offering the Bonds pursuant to an exemption to the Trust Indenture
Act of 1939, or the Trust Indenture Act. As a result, investors in
the Bonds will not be afforded the benefits and protections of the
Trust Indenture Act. However, in certain circumstances, the
Indenture makes reference to the substantive provisions of the
Trust Indenture Act.
Registrar and Paying Agent
We have
designated UMB Bank, N.A. as paying agent and Phoenix American
Financial Services, Inc., a California corporation as co-paying
agent in respect of Bonds registered to it as record holder. UMB
Bank, N.A. will also act as trustee under the Indenture and
registrar for the Bonds. As such, UMB Bank, N.A. will make payments
on the Bonds to Phoenix American (who will forward such payments to
the applicable Bondholders). The Bonds will be issued in book-entry
form only, evidenced by global certificates, as such, payments are
being made to Phoenix American.
[Remainder of page intentionally left blank]
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Phoenix Capital Group Holdings, LLC “Phoenix” was
formed in the state of Delaware on April 23, 2019. As of the date
of this offering circular, the Company conducts operations from
three physical offices located in Hermosa Beach, CA, Littleton, CO,
and Casper, WY respectively.
Phoenix developed a software platform in 2019 to identify, analyze,
underwrite, and formally transact in the purchasing of mineral
royalty assets. Mineral royalties are contractual obligations at
defined royalty rates between an operator that acts as a payor, and
a mineral owner. Upon completion of an acquisition, Phoenix becomes
the beneficiary of this contract royalty payment., as the mineral
owner of record. With respect to the technology platform, the
software is used solely for the internal benefit of Phoenix and is
not currently licensed to any 3rd
party. The analytics driven; automated
system incorporates data sets from multiple 3rd
party sources through custom
API’s that call in refreshed data every 24 hours. Within the
system, various dashboards can be accessed to analyze and review
granular data sets at the asset level. Internal underwriting
criteria generate offers to purchase assets furnished to the
Phoenix sales and marketing team based on a discounted cash flow
model driven by conservative estimates and inputs as a function of
the data analysis and management inputs and
assumptions.
Since inception, Phoenix has acquired over 640 different mineral
assets of which roughly 400 remain owned by the Phoenix as of the
time of the offering circular. Assets that were disposed of were
conveyed principally to private equity firms who operate in the
vibrant, liquid secondary market.
As of the date of this offering circular, the Company database has
nearly 30,000 individual records in the current markets of interest
which are comprised of the key basins in North Dakota, Montana,
Wyoming, Colorado, and Texas. The software can incorporate data
sets form any basin within the United States, however the
addressable market in the focus regions alone is more than
sufficient to create significant scale. However, management does
anticipate expanding beyond these regions over time.
Phoenix is a private, family and employee-owned
company.
COVID-19
During the pandemic of 2020, Phoenix implemented an employee safety
plan and allowed all employees to work remotely to ensure team
member health and safety. No material detriment to operations was
experienced though the utilization of the remote operating
infrastructure. As of the date of this offering circular, all
Phoenix office facilities are back to in-person
operations.
During the pandemic of 2020, the oil and gas market experienced
exacerbated commodity volatility. This fluid environment presented
unique opportunities for Phoenix to acquire assets at deeply
discounted prices and the Company reported record net income in its
2nd
year of operations. While long term
depressed oil prices would have a detrimental impact on operating
results, short term volatility can be mitigated through
opportunistic acquisitions and flexible fixed
overhead.
Operating Results
For the six month periods ended June 30, 2021 and 2020
Beginning in Q4 2020 and effectuated throughout the first half of
2021, the Company strategically moved away from a transactional
business model towards its long-term objective of a buy-and-hold
model. The buy-and-hold model achieves a much greater IRR for the
Company and its investors over the long-term and will be the
Company’s primary objective going forward. This strategy was
made possible through the partnerships the Company had forged with
financial institutions and unsecured debtors.
22
Revenue
The shift away from a gain on sale model towards a buy-and-hold
model significantly reduced gain on sale revenue in the six months
ended June 30, 2021 in comparison to the same period in 2020
($207,656 and $2,012,037, respectively). Royalty revenues, however,
significantly increased in the same period in 2021 in comparison to
2020, as was expected by the change in strategy ($5,336,850 and
$3,064,521, respectively). The top-line revenue gain from 2020 to
2021 was approximately 10%. Management is confident revenues will
grow at a much faster pace going forward as additional assets are
being added to the portfolio and continue to generate compounding
revenue streams, opposed to the transactional gain on sale
activity.
Operating
Expenses
The Company recorded operating expenses of $4,158,024 in the
six-month period ended June 30, 2021, in comparison to $2,759,696
in the same period in 2020. The increases in period over period
operating expenses were driven by increased personnel expense,
general increased overhead expenses, increased sales and marketing
expenditures, and associated professional fees and expenses. The
operating expenses of the company will continually grow in relation
to assets in the portfolio due to the relational manner of mineral
rights royalties to depletion and various oil and gas taxes and
expenses (owner deductions, severance taxes and ad valorem
taxes).
Net
Income
The Company recorded a net income of $1,079,496 in the six-month
period ending June 30, 2021 and $2,316,770 for the six-month period
ending June 30, 2020. The decrease in net income is due to the
reduction of gain on sale activity. The buy-and-hold strategy will
increase net income in future periods as opposed to the immediate
realization of the gain on sale using a divestiture
model
For the twelve month period ended December 31, 2021 and the period
from inception (April 23, 2019) through December 31,
2020
Revenue
The Company recorded revenue of $194,286 for the year ending
December 31, 2019 vs. $8,547,250 for the year ending December 31,
2020. Year over year increases were primarily the result of minimal
operating activity in 2019 vs 2020 due to date of inception and
market penetration in conjunction with growing market acceptance
and sales and marketing initiatives in 2020.
Operating
Expenses
The Company recorded operating expenses of $555,706 in the year
ending December 31, 2019 vs. operating expenses of $6,593,345 for
the year ending December 31, 2020. The increases in year over year
operating expenses were driven by increased personnel expense,
general increased overhead expenses, increased sales and marketing
expenditures, and associated professional fees and
expenses.
Net
Income
The Company recorded a net income of ($361,618) in the year ending
December 31, 2019 vs. net income of $1,842,577 for the year ending
December 31, 2020. The increase in net income was driven by
increased accretive acquisition activity in conjunction with gain
on sale transactions.
Capital Expenditures and Commitments
For the six months ending June 30, 2021, capital expenditures
consisted of increased overhead for staff and contractors in
conjunction with continued capital deployment into mineral asset
acquisition. In addition, ongoing investments into the technology
platform were deployed. No material investments or commitments were
made with respect to anything outside of the continued operational
growth of the Company. No investments or commitments were made with
respect to property, plant, and equipment
(“PPE”).
23
Liquidity and Capital Resources
As of December 31, 2020, the Company had cash on hand of $169,982
and undrawn lending capacity of $1,000,000. As of June 30, 2021,
the Company had cash on hand of $201,157 and undrawn lending
capacity of $5,060,000. The Company currently has a credit facility
with Cortland Credit Lending Corporation including a term loan of
$5,000,000 and a revolving line of credit with a revolver
commitment of up to $23,000,000. See
“General
Information About Our Company – Current
Indebtedness” for more information.
The Company, from time to time, has engaged in private placement
offerings of securities, including unsecured debt. As of June 30,
2021, the Phoenix notes payable balance was $1,960,231. Phoenix
intends to continue to rely on its cash from operations and ability
to incur additional indebtedness for its short and long term
liquidity.
Plan of Operations
Phoenix Capital Group Holdings plans on engaging in the continued
acquisition of mineral assets over the course of the next 12
months. In the opinion of management, based on historical
profitability, positive cash flows, and the prospective investment,
that the aggregate liquidity resources available to the Company are
sufficient to meet it’s ongoing and prospective capital needs
to continue to execute the business plan. Fixed overhead is not
anticipated to materially increase, and resources from this
offering and those available from organic and existing sources,
will largely be deployed in the continued purchase of mineral
assets. The Company, may, at the discretion of management,
introduce a hedging strategy to insure that exposure to commodity
fluctuations is mitigated as the portfolio is scaled. There are no
plans, at this time, to make any material changes to the day to day
operational focus.
Trend Information
While 2020 represented a period of tremendous volatility due to
both commodity prices and COVID-19, the Company was able to perform
extremely well and generate year over year increases in revenue and
profitability. While the underlying focus of the business has
always been to focus on acquiring predictable cash flowing mineral
assets, 2020 marked a favorable evolution in the overall Company
strategy. Phoenix was able to migrate the majority of its
acquisitions to “buy and hold” vs. “gain on
sale” activity largely due to increased liquidity and organic
cash flow deployment. The buy and hold strategy generates longer
lifetime value and more consistent, predictable cash flows over
time rather than larger single transactions that generate a gain on
sale gross profit. It is anticipated that this trend will continue
sequentially to a basis by which the Company has insignificant
selling activity. Additionally, commodity prices have become more
stable which has a net positive impact on the financial performance
of the Company
[Remainder of page intentionally left blank]
24
GENERAL INFORMATION ABOUT OUR COMPANY
Our Company
Phoenix Capital Group Holdings, LLC, a Delaware
limited liability company, (the “Company”)
was formed on April 23, 2019, to purchase mineral rights and
non-operated working interests in the United States, primarily in
the Williston Basin, the Permian Basin and the DJ Basin, using the
Company’s proprietary software system to identify unique
opportunities. Although the Company
has targeted specific regions, we are agnostic to geography and
look to focus exclusively on the best “bang for the
buck” when determining which assets to buy. The more area the
Company can cover, the more we can ensure we are achieving the
optimal return for invested capital.
The Company focuses on assets that present high
near-term predictable cashflow. This analysis includes the
geography of the asset, the probability of future oil wells and
predictability of both the timing and value of the cashflow. Using
the proprietary software that the Company has developed internally,
the Company is typically able to achieve an average payback period
of 18-24 months on assets it buys. Additionally, the Company employs a tax-efficient
strategy of offsetting royalty income through use of intangible
drilling costs (non-operated working
interests).
We have
developed have developed a highly customized and proprietary
software platform built around the well-known customer relationship
management (“CRM”) program Salesforce.
Customized inputs pull in detailed land and title data, well level
data including operator, production metrics, well status, date of
all activities well specific activities, and historical reporting.
Separately, a discounted cash flow model, using management inputs
for discount rate and the price of oil, are used in an underwriting
function to price assets. Various application programming
interfaces (“APIs”) pull data from 3rd
party databases and aggregate them into a dashboard with various
levels of permission for our team. These APIs call-in refreshed
data each night at midnight, so the dynamic nature of the system
creates efficiency on a day-to-day basis. In function, this tool
provides our sales and marketing team with a summary version of
assets to prospect for acquisition. These assets are graded
internally based on management’s desired target criteria for
high probability of high near-term cash flows. A daily acquisition
price is furnished to the sales team so that the sales team is
informed as to the maximum price that we are willing to offer in
any prospective transaction. Interested prospects then go through
an automated document request using the Salesforce workflow, which
distributes the opportunities to our operations team for the
preparation of an offering and sale package. The offering and sale
package is then delivered to the prospective seller. Using the CRM
features, the sales team is able to record all notes in real time
and each opportunity can be tracked from its original data upload
through the lifecycle of the sales process. While the data inputs
are largely based on public information, considerable customization
and coding has been done specific to what we desire from the tool.
This aggregate, niche, scalable software platform is specific to us
and there is no known competitive product. As such, the software
creates considerable intrinsic value to operational efficiencies,
however, also has de-facto value should it ever be licensed or
sold. We currently have no intention of licensing nor selling the
software.
The
Company does not own any copyright, patent rights or any other
intellectual property rights regarding its customized software
platform; however, the Company believes the investment of
significant monetary and intellectual resources have created a
proprietary software platform that would be difficult to replicate.
See “Risk
Factors – Risks Related to Our Business and
Industry.”
Organizationally,
the Company is broken into five departments made up of land and
title, operations, technology, sales and marketing, and finance.
Each business unit collaborates both internally and with the other
departments to create both autonomy and a team environment. The
Company maintains a combined domestic headcount of 30 employees and
contractors and has a satellite contract facility in Pakistan with
a headcount of 12.
25
Our Properties
Wells
The following table sets forth information about the wells in which
we have a mineral or royalty interest as of December 31,
2020:
|
|
Well Count
|
|
|
Basin or Producing Region
|
Gross
|
Net
|
|
Bakken/Williston Basin
|
683
|
0.75
|
|
DJ Basin/Rockies/Niobrara
|
23
|
1.95
|
|
Permian Basin
|
19
|
0.08
|
|
Total
|
725
|
2.78
|
Oil and Natural Gas Data
Evaluation and Review of Estimated Proved Reserves
Our
historical reserve estimates as of December 31, 2020 were
prepared by Curtis Allen, our Chief Financial Officer.
Kris
Woods, our Chief Technology Officer, along with input from Curtis
Allen, worked closely with petroleum engineers and reserve
engineers to create and tune the internal software to estimate the
reserves of our holdings. This software is the basis of both the
Company’s preliminary underwriting criteria and the basis of
the reserves estimates.
Following the
completion of this offering, we anticipate that Mr. Allen will
continue to be primarily responsible for the preparation of our
reserves. In addition, we anticipate that the preparation of our
proved reserve estimates are completed in accordance with internal
control procedures, including the following:
●
review and
verification of historical production data, which data is based on
actual production as reported by the operators of our
properties;
●
preparation of
reserve estimates by Mr. Allen or under his direct
supervision;
●
review by Mr. Allen
of all of our reported proved reserves at the close of calendar
year, including the review of all significant reserve changes and
all new proved undeveloped reserves additions;
●
verification of
property ownership by our land department; and
●
no employee's
compensation is tied to the amount of reserves booked.
26
Under
SEC rules, proved reserves are those quantities of oil and natural
gas, which, by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be economically
producible—from a given date forward, from known reservoirs
and under existing economic conditions, operating methods and
government regulations—prior to the time at which contracts
providing the right to operate expire, unless evidence indicates
that renewal is reasonably certain, regardless of whether
deterministic or probabilistic methods are used for the estimation.
If deterministic methods are used, the SEC has defined reasonable
certainty for proved reserves as a "high degree of confidence that
the quantities will be recovered." All of our proved reserves as of
December 31, 2020 were estimated using a deterministic method.
The estimation of reserves involves two distinct determinations.
The first determination results in the estimation of the quantities
of recoverable oil and gas and the second determination results in
the estimation of the uncertainty associated with those estimated
quantities in accordance with the definitions established under SEC
rules. The process of estimating the quantities of recoverable oil
and gas reserves relies on the use of certain generally accepted
analytical procedures. These analytical procedures fall into three
broad categories or methods: (1) performance-based methods,
(2) volumetric-based methods and (3) analogy. These
methods may be used singularly or in combination by the reserve
evaluator in the process of estimating the quantities of reserves.
The proved reserves for our properties were estimated by
performance methods, analogy or a combination of both methods. All
proved producing reserves attributable to producing wells were
estimated by performance methods. These performance methods
include, but may not be limited to, decline curve analysis, which
utilized extrapolations of available historical production and
pressure data. All proved developed non-producing reserves were
estimated by the analogy method.
Summary of Estimated Proved Reserves
The following table presents our estimated proved oil and natural
gas reserves as of December 31, 2020:
|
Estimated proved developed reserves
|
December 31,
20201
|
|
Oil
(Bbl)
|
388,930
|
|
Natural
Gas (Mcf)
|
785,041
|
|
Total
(Boe)(6:1)2
|
519,770
|
|
Estimated proved undeveloped reserves
|
|
|
Oil
(Bbl)
|
-
|
|
Natural
Gas (Mcf)
|
-
|
|
Total
(Boe)(6:1)2
|
-
|
|
Estimated proved reserves
|
|
|
Oil
(Bbl)
|
388,930
|
|
Natural
Gas (Mcf)
|
785,041
|
|
Total
(Boe)(6:1)2
|
519,770
|
|
Percent
proved developed
|
100%
|
(1)
Estimates of reserves as of December 31, 2020 were prepared using
an average price equal to the unweighted arithmetic average of
hydrocarbon prices received on a field-by-field basis on the first
day of each month within the year ended December 31, 2020, in
accordance with SEC guidelines applicable to reserve estimates as
of the end of such period. The unweighted arithmetic average first
day of the month prices were $47.02 per Bbl for oil and $1.75 per
MMBtu for natural gas at December 31, 2020. Reserve estimates do
not include any value for probable or possible reserves that may
exist, nor do they include any value for undeveloped acreage. The
reserve estimates represent our net revenue interest in our
properties. Although we believe these estimates are reasonable,
actual future production, cash flows, taxes, development
expenditures, production costs and quantities of recoverable oil
and natural gas reserves may vary substantially from these
estimates.
(2)
Estimated proved reserves are presented on an oil-equivalent basis
using a conversion of six Mcf per barrel of "oil equivalent." This
conversion is based on energy equivalence and not price or value
equivalence. If a price equivalent conversion based on the
twelve-month average prices for the year ended December 31, 2020
was used, the conversion factor would be approximately 26.9 Mcf per
Bbl of oil. In this prospectus, we supplementally provide
"value-equivalent" production information or volumes presented on
an oil-equivalent basis using a conversion factor of 25 Mcf of
natural gas per barrel of "oil equivalent," which is the conversion
factor we use in our business.
27
The foregoing reserves are all located within the continental
United States. Reserve engineering is and must be recognized as a
subjective process of estimating volumes of economically
recoverable oil and natural gas that cannot be measured in an exact
manner. The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological
interpretation. As a result, the estimates of different engineers
often vary. In addition, the results of drilling, testing, and
production may justify revisions of such estimates. Accordingly,
reserve estimates often differ from the quantities of oil and
natural gas that are ultimately recovered. Estimates of
economically recoverable oil and natural gas and of future net
revenues are based on a number of variables and assumptions, all of
which may vary from actual results, including geologic
interpretation, prices, and future production rates and costs.
Please read "Risk Factors."
Estimated Proved Undeveloped Reserves
The
Company does not estimate the quantity or perceived cashflow of
proved undeveloped reserves for financial reporting purposes. The
Company does not have the ability to accurately estimate when or if
undeveloped reserves under its holdings will be extracted and
instead takes the conservative approach of only estimating the
reserves that are either currently producing or have a clear line
of sight to being extracted. The Company’s management
believes its lack of control over the timing and extent of the
extraction of undeveloped reserves makes estimating these reserves
inapplicable and immaterial to its business and
operations.
Oil and Natural Gas Production Prices and Production
Costs
Production and Price History
The following table sets forth information regarding production of
oil and natural gas and certain price and cost information for each
of the periods indicated:
for the
company and the selected geographic areas which represent each
field that contains 15% or more of the company’s total proved
reserves.
|
|
Six
Months Ended
|
Year
Ended December 31,
|
|
|
Company
|
June 30,
2021
|
2020
|
2019
|
|
Production Data:
|
|
|
|
|
Oil
(Bbl)
|
66,711
|
122,538
|
493
|
|
Natural
Gas (Mcf)
|
133,422
|
245,076
|
986
|
|
Total
(Boe)(6:1) 1
|
88,948
|
163,384
|
657
|
|
Average
daily production (Boe/d)(6:1)
|
491
|
448
|
3
|
|
Average Realized Prices:
|
|
|
|
|
Oil
(Bbl)
|
$ 62.41
|
$ 45.87
|
$ 54.66
|
|
Natural
Gas (Mcf)
|
$ 1.87
|
$ 0.68
|
$ 1.29
|
|
Average Unit Cost per Boe (6:1):
|
|
|
|
|
Production
and ad valorem taxes
|
$ 3.88
|
$ 3.22
|
$ 2.43
|
|
|
|
|
|
(1)
"Btu-equivalent" production volumes are presented on an
oil-equivalent basis using a conversion factor of six Mcf of
natural gas per barrel of "oil equivalent," which is based on
approximate energy equivalency and does not reflect the price or
value relationship between oil and natural gas.
|
|
Six Months Ended
|
Year Ended December 31,
|
|
|
DJ Basin / Rockies /
Niobrara
|
June 30, 2021
|
2020
|
2019
|
|
Production Data:
|
|
|
|
|
Oil
(Bbl)
|
12,668
|
25,731
|
#REF!
|
|
Natural
Gas (Mcf)
|
17,837
|
42,202
|
#REF!
|
|
Total
(Boe)(6:1) 1
|
15,641
|
32,764
|
657
|
|
Average
daily production (Boe/d)(6:1)
|
86
|
90
|
3
|
|
Average Realized Prices:
|
|
|
|
|
Oil
(Bbl)
|
$ 62.88
|
$ 46.15
|
$ 54.66
|
|
Natural
Gas (Mcf)
|
$ 1.81
|
$ 0.61
|
$ 1.29
|
|
Average Unit Cost per Boe (6:1):
|
|
|
|
|
Production
and ad valorem taxes
|
$ 3.65
|
$ 3.18
|
$ 2.43
|
(1)
"Btu-equivalent" production volumes are presented on an
oil-equivalent basis using a conversion factor of six Mcf of
natural gas per barrel of "oil equivalent," which is based on
approximate energy equivalency and does not reflect the price or
value relationship between oil and natural
gas.
|
|
Six Months Ended
|
Year Ended December 31,
|
|
|
Bakken /
Williston Basin
|
June 30, 2021
|
2020
|
2019
|
|
Production Data:
|
|
|
|
|
Oil
(Bbl)
|
46,965
|
96,241
|
-
|
|
Natural
Gas (Mcf)
|
105,403
|
202,286
|
-
|
|
Total
(Boe)(6:1) 1
|
64,532
|
129,956
|
-
|
|
Average
daily production (Boe/d)(6:1)
|
357
|
356
|
-
|
|
Average Realized Prices:
|
|
|
|
|
Oil
(Bbl)
|
$61.98
|
$44.49
|
$-
|
|
Natural
Gas (Mcf)
|
$2.05
|
$0.72
|
$-
|
|
Average Unit Cost per Boe (6:1):
|
|
|
|
|
Production
and ad valorem taxes
|
$4.02
|
$3.45
|
$-
|
(1)
"Btu-equivalent" production volumes are presented on an
oil-equivalent basis using a conversion factor of six Mcf of
natural gas per barrel of "oil equivalent," which is based on
approximate energy equivalency and does not reflect the price or
value relationship between oil and natural
gas.
28
Productive Wells
Productive
wells consist of producing wells, wells capable of production, and
exploratory, development, or extension wells that are not dry
wells. As of December 31, 2020, we owned mineral or royalty
interests in 725 gross productive wells and 2.78 net productive
wells, all of which are primarily oil wells which produce natural
gas and natural gas liquids as well.
Drilling Results
As of December 31, 2019, the operators of our properties had
drilled 177 gross productive development wells (.07 net productive
wells) on the acreage underlying our mineral and royalty interests.
In addition to the 177 gross productive wells, 10 gross (.001 net)
wells are either drilled or completed awaiting first production. As
of December 31, 2020, the operators of our properties had drilled
657 gross (2.61 net) productive development wells on the acreage
underlying our mineral and royalty interests. In addition to the
657 gross productive wells, 68 gross (.17 net) wells are either
drilled or completed awaiting first production. As a holder of
mineral and royalty interests, we generally are not provided
information as to whether any wells drilled on the properties
underlying our acreage are classified as exploratory. We are not
aware of any dry holes drilled on the acreage underlying our
mineral and royalty interests during the relevant
periods.
Acreage
The following table sets forth information relating to the acreage
underlying our interests as of December 31, 2020:
|
|
Interests 1
|
|
|
|
State
|
Developed
Acreage
|
Undeveloped
Acreage
|
Total
Acreage
|
|
North
Dakota
|
133,049
|
34,542
|
167,591
|
|
Colorado
|
2,559
|
3,838
|
6,397
|
|
Texas
|
2,557
|
1,279
|
3,836
|
|
|
138,1652
|
39,659 3
|
177,824
|
(1) Includes both mineral and nonparticipating
royalty interest and non-operated working
interests.
(2)
Reflects interest in approximately 138,165 total gross (1,115 net)
developed acres.
(3) Reflects interest in approximately 39,659 total gross (391 net)
undeveloped acres.
As of December 31, 2020, approximately 263 of our net undeveloped
acreage were subject to leases. Of this undeveloped acreage,
approximately 129.76 net acreage was subject to a lease expiring in
March 2024, approximately 46.12 net acreage was subject to a lease
expiring in August 2023 and approximately 31.09 net acreage was
subject to a lease expiring in November 2022. No other lease on
undeveloped land exceeded ten acres.
29
Current Indebtedness
We
entered into a Credit Agreement on October 28, 2021 (the
“Credit Agreement”) with Cortland Credit Lending
Corporation (“Cortland”) which provides for a term loan
and revolving line of credit. The Term Loan provided for in the
Credit Agreement includes a commitment of $5,000,000 (the
“Cortland Term Loan”) which matures on October 28,
2022, subject to two one-year extensions at the discretion of
Cortland, and bears interest at a rate of the greater of (a) 10.50%
and, (b) the TD Bank US Prime Rate, plus 7.25%. The line of credit
provided for in the Credit Agreement permits borrowings up to the
lesser of (a) $23,000,000 and (b) a formula based on the value of
the collateral securing the debt (the “Cortland LOC”).
As of the date of this offering circular, we are permitted to
borrow up to $23,000,000 under the Cortland LOC and currently have
$22,800,000 outstanding. The Cortland Term Loan and Cortland LOC
are secured by all of the property and assets owned by the Company.
The Cortland Term Loan may only be used to re-finance our prior
loan arrangements, and the Company utilized the full $5,000,000, in
addition to amounts borrowed under the Cortland LOC, to pay off all
of the Company’s previous debt outstanding prior to its entry
into the Credit Agreement. The Bonds are
subordinated in the right of payment to the Cortland Term Loan and
Cortland LOC. See “Description of Bonds
– Ranking” for more information. The
Credit Agreement contains provisions, representations, warranties,
covenants and indemnities that are customary and standard for
secured debt. The foregoing description of the Credit Agreement is
qualified in its entirety by reference to the Credit Agreement
filed as an exhibit to the offering statement, of which this
offering circular is a part.
We
offered up to $6,000,000 of unsecured notes in an offering exempt
from registration under the Securities Act of 1933, as amended,
pursuant to Rule 506(c) of Regulation D promulgated thereunder (the
“Unsecured Notes”). As of the date of this offering
circular, we have sold an aggregate principal amount of
approximately $4,600,231 of the Unsecured Notes. The Unsecured
Notes have maturities ranging from December 2021 to March 2025 and
interest rates ranging from 7.5% to 15.0%. The Company terminated
its offering of the Unsecured Notes in connection with this
Offering.
Market Opportunity
We
focus on specific subsets of mineral assets in the United States.
From a market perspective, we focus on high attractive and defined
basins, currently serviced by top tier operators, with assets that
we believe will generate high near-term cash flow. All the assets
which we seek to acquire are purchased at attractive price points
and have a liquidity profile that is desirable in the secondary
market. The assets we seek to acquire have near term payback and
long-term residual cash flow upside.
30
Business Strategy
We have
a developed a process for the identification, acquisition and
monetization of our assets. Below is a general illustration of our
process:
1.
Our proprietary
software provides market intelligence to identify and rank
potential assets. We believe this is our core competitive advantage
because we are able to identify and unlock value with our
proprietary technology that may otherwise be missed.
2.
We make contact
with the owner of the asset and begin the conversation on how we
can help unlock value of the property for the owner.
3.
We provide the
potential seller with a packet detailing the Company, industry
data, property valuation and an all-cash offer based on the
valuation.
4.
Our sales team
engages the potential seller to discuss the terms of the sale and
the value of the property.
5.
We handle the
closing of the property and the property is migrated to our
portfolio.
6.
We utilize our land
rights to immediately extract natural resources from the property
using our trusted third-party operator network. Our proprietary
technology, which originally identified the potential natural
resource capability of the land, allows us to immediately create
cash flow from the property through the extraction of the natural
resource using the operator.
7.
We collect a
portion of the revenue generated from the natural resources
extracted and sold by the third-party operator. Our share of the
revenue depends on the type of asset, either mineral rights or
non-operated working interests, and our contract with the
third-party operator.
8.
We continue to
operate the property to extract the minerals through third-party
operators until we decide to sell the property rights typically for
many multiples than our original purchase price.
Separate from the
ordinary royalty income assets, we maintain a structural discipline
to participate in non-operated working interests, in part for their
tax benefits. Due to favorable IRS treatment, marrying this asset
class to our pure royalty income creates an augmented “write
off” strategy whereby the balanced portfolio effectively
creates little to no annual taxable income. The Company is data
driven. The Company’s software platform applies managements
criteria to catalogs of data points to automate 95% of business
functions while also allowing for robust reporting. The goal is to
give the sales and marketing team the best information, quickly, to
execute on managements acquisition strategy targeting high value
assets. The system allows for adjusted focus based on size and
region very efficiently as the Company grows and scales into new
markets and price-points using the same fundamental underlying
guidelines. Functionally, these transactions are very similar to
traditional real estate transactions with respect to the mechanics.
A seller agrees to sell to us, a purchase and sale agreement is
executed, earnest money is conveyed, manual diligence and title
review is conducted as an audit function prior to closing. Upon
closing the funds are conveyed to the seller and the title is
recorded in the respective jurisdiction by us. At this point, the
operator is directed to convey all future payments to us at the
defined rate. In most cases, our interaction with the operator is
more administrative and clerical in nature unless it is a working
interest or an alternative scenario. Assets can produce for upwards
of 20 years however there is a considerable regression/depletion
curve that commences over the life of the asset. As such, we tend
to focus on wells that have recently began producing, or are likely
to have new production in the near term. we focus on a closed loop
process from discovery to acquisition to long term balance sheet
ownership. The recurring nature of these cash flows allows for
considerable scale without material increases in fixed
overhead.
Liquidity and Track
Record
There
is currently no public trading market for any of our securities,
and an active market may not develop or be sustained. If an active
public trading market for our securities does not develop or is not
sustained, it may be difficult or impossible for you to resell your
interests at any price. Even if a public market does develop, the
market price could decline below the amount you paid for your
interests.
The
Company’s management team has not sponsored any prior
programs, and so does not have any prior program
history.
[Remainder of page intentionally left blank]
31
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following discussion is a summary of certain material U.S. federal
income tax consequences relevant to the purchase, ownership and
disposition of the Bonds, but does not purport to be a complete
analysis of all potential tax consequences. The discussion is based
upon the Code, current, temporary and proposed U.S. Treasury
regulations issued under the Code, or collectively the Treasury
Regulations, the legislative history of the Code, IRS rulings,
pronouncements, interpretations and practices, and judicial
decisions now in effect, all of which are subject to change at any
time. Any such change may be applied retroactively in a manner that
could adversely affect a Bondholder. This discussion does not
address all of the U.S. federal income tax consequences that may be
relevant to a holder in light of such Bondholder’s particular
circumstances or to Bondholders subject to special rules,
including, without limitation:
●
a
broker-dealer or a dealer in securities or currencies;
●
an S
corporation;
●
a bank,
thrift or other financial institution;
●
a
regulated investment company or a real estate investment
trust;
●
an
insurance company
●
a
tax-exempt organization;
●
a
person subject to the alternative minimum tax provisions of the
Code;
●
a
person holding the Bonds as part of a hedge, straddle, conversion,
integrated or other risk reduction or constructive sale
transaction;
●
a
partnership or other pass-through entity;
●
a
person deemed to sell the Bonds under the constructive sale
provisions of the Code;
●
a U.S.
person whose “functional currency” is not the U.S.
dollar; or
●
a U.S.
expatriate or former long-term resident.
In
addition, this discussion is limited to persons that purchase the
Bonds in this offering for cash and that hold the Bonds as
“capital assets” within the meaning of
Section 1221 of the Code (generally, property held for
investment). This discussion does not address the effect of any
applicable state, local, non-U.S. or other tax laws, including gift
and estate tax laws.
As used
herein, “U.S. Holder” means a beneficial owner of the
Bonds that is, for U.S. federal income tax purposes:
●
an
individual who is a citizen or resident of the U.S.;
●
a
corporation (or other entity treated as a corporation for U.S.
federal income tax purposes) created or organized in or under the
laws of the U.S., any state thereof or the District of
Columbia;
●
an
estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
●
a trust
that (1) is subject to the primary supervision of a U.S. court and
the control of one or more U.S. persons that have the authority to
control all substantial decisions of the trust, or (2) has a valid
election in effect under applicable Treasury Regulations to be
treated as a U.S. person.
32
If an
entity treated as a partnership for U.S. federal income tax
purposes holds the Bonds, the tax treatment of an owner of the
entity generally will depend upon the status of the particular
owner and the activities of the entity. If you are an owner of an
entity treated as a partnership for U.S. federal income tax
purposes, you should consult your tax advisor regarding the tax
consequences of the purchase, ownership and disposition of the
Bonds.
We have
not sought and will not seek any rulings from the IRS with respect
to the matters discussed below. There can be no assurance that the
IRS will not take a different position concerning the tax
consequences of the purchase, ownership or disposition of the Bonds
or that any such position would not be sustained.
THIS SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS IS FOR
GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE TAX ADVICE.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR
PARTICULAR SITUATIONS, POTENTIAL CHANGES IN APPLICABLE TAX LAWS AND
THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS,
INCLUDING GIFT AND ESTATE TAX LAWS, AND ANY TAX
TREATIES.
U.S. Holders
Interest
U.S.
Holder generally will be required to recognize and include in gross
income any stated interest as ordinary income at the time it is
paid or accrued on the Bonds in accordance with such holder’s
method of accounting for U.S. federal income tax
purposes.
Sale or Other Taxable Disposition of the Bonds
A U.S.
Holder will recognize gain or loss on the sale, exchange,
redemption (including a partial redemption), retirement or other
taxable disposition of a Bond equal to the difference between the
sum of the cash and the fair market value of any property received
in exchange therefore (less a portion allocable to any accrued and
unpaid stated interest, which generally will be taxable as ordinary
income if not previously included in such holder’s income)
and the U.S. Holder’s adjusted tax basis in the Bond. A U.S.
Holder’s adjusted tax basis in a Bond (or a portion thereof)
generally will be the U.S. Holder’s cost therefore decreased
by any payment on the Bond other than a payment of qualified stated
interest. This gain or loss will generally constitute capital gain
or loss. In the case of a non-corporate U.S. Holder, including an
individual, if the Bond has been held for more than one year, such
capital gain may be subject to reduced federal income tax rates.
The deductibility of capital losses is subject to certain
limitations.
Medicare Tax
Certain
individuals, trusts and estates are subject to a Medicare tax of
3.8% on the lesser of (i) ”net investment income,”
or (ii) the excess of modified adjusted gross income over a
threshold amount. Net investment income generally includes interest
income and net gains from the disposition of Bonds, unless such
interest payments or net gains are derived in the ordinary course
of the conduct of a trade or business (other than a trade or
business that consists of certain passive or trading activities).
U.S. Holders are encouraged to consult with their tax advisors
regarding the possible implications of the Medicare tax on their
ownership and disposition of Bonds in light of their individual
circumstances.
33
Information Reporting and Backup Withholding
A U.S.
Holder may be subject to information reporting and backup
withholding when such holder receives interest and principal
payments on the Bonds or proceeds upon the sale or other
disposition of such Bonds (including a redemption or retirement of
the Bonds). Certain holders (including, among others, corporations
and certain tax-exempt organizations) generally are not subject to
information reporting or backup withholding. A U.S. Holder will be
subject to backup withholding if such holder is not otherwise
exempt and:
●
such
holder fails to furnish its taxpayer identification number, or TIN,
which, for an individual is ordinarily his or her social security
number;
●
the IRS
notifies the payor that such holder furnished an incorrect
TIN;
●
in the
case of interest payments such holder is notified by the IRS of a
failure to properly report payments of interest or
dividends;
●
in the
case of interest payments, such holder fails to certify, under
penalties of perjury, that such holder has furnished a correct TIN
and that the IRS has not notified such holder that it is subject to
backup withholding; or
●
such
holder does not otherwise establish an exemption from backup
withholding.
A U.S.
Holder should consult its tax advisor regarding its qualification
for an exemption from backup withholding and the procedures for
obtaining such an exemption, if applicable. Backup withholding is
not an additional tax. Any amounts withheld under the backup
withholding rules from a payment to a U.S. Holder will be allowed
as a credit against the holder’s U.S. federal income tax
liability or may be refunded, provided the required information is
furnished in a timely manner to the IRS.
Non-U.S. Holders are encouraged to consult their tax
advisors.
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34
ERISA CONSIDERATIONS
The following is a summary of material
considerations arising under ERISA and the prohibited transaction
provisions of the Code that may be relevant to a prospective
investor, including plans and arrangements subject to the fiduciary
rules of ERISA and plans or entities that hold assets of such plans
(“ERISA
Plans”); plans and
accounts that are not subject to ERISA but are subject to the
prohibited transaction rules of Section 4975 of the Code, including
IRAs, Keogh plans, and medical savings accounts (together with
ERISA Plans, “Benefit Plans” or
“Benefit Plan
Investors”); and
governmental plans, church plans, and foreign plans that are exempt
from ERISA and the prohibited transaction provisions of the Code
but that may be subject to state law or other requirements, which
we refer to as Other Plans. This discussion does not address all
the aspects of ERISA, the Code or other laws that may be applicable
to a Benefit Plan or Other Plan, in light of their particular
circumstances.
In
considering whether to invest a portion of the assets of a Benefit
Plan or Other Plan, fiduciaries should consider, among other
things, whether the investment:
●
will be
consistent with applicable fiduciary obligations;
●
will be
in accordance with the documents and instruments covering the
investments by such plan, including its investment
policy;
●
in the
case of an ERISA plan, will satisfy the prudence and
diversification requirements of Sections 404(a)(1)(B) and
404(a)(1)(C) of ERISA, if applicable, and other provisions of the
Code and ERISA;
●
will
impair the liquidity of the Benefit Plan or Other
Plan;
●
will
result in unrelated business taxable income to the plan;
and
●
will
provide sufficient liquidity, as there may be only a limited or no
market to sell or otherwise dispose of our Bonds.
ERISA
and the corresponding provisions of the Code prohibit a wide range
of transactions involving the assets of the Benefit Plan and
persons who have specified relationships to the Benefit Plan, who
are “parties in interest” within the meaning of ERISA
and, “disqualified persons” within the meaning of the
Code. Thus, a designated plan fiduciary of a Benefit Plan
considering an investment in our shares should also consider
whether the acquisition or the continued holding of our shares
might constitute or give rise to a prohibited transaction.
Fiduciaries of Other Plans should satisfy themselves that the
investment is in accord with applicable law.
Section
3(42) of ERISA and regulations issued by the Department of Labor,
or DOL, provide guidance on the definition of plan assets under
ERISA. These regulations also apply under the Code for purposes of
the prohibited transaction rules. Under the regulations, if a plan
acquires an equity interest in an entity which is neither a
“publicly-offered security” nor a security issued by an
investment company registered under the Investment Company Act, the
plan’s assets would include both the equity interest and an
undivided interest in each of the entity’s underlying assets
unless an exception from the plan asset regulations
applies
We
do not believe the DOL’s plan assets guidelines apply to our
Bonds or our Company because our Bonds are debt securities and not
equity interests in us.
If
the underlying assets of our Company were treated by the Department
of Labor as “plan assets,” the management of our
Company would be treated as fiduciaries with respect to Benefit
Plan Bondholders and the prohibited transaction restrictions of
ERISA and the Code could apply to transactions involving our assets
and transactions with “parties in interest” (as defined
in ERISA) or “disqualified persons” (as defined in
Section 4975 of the Code) with respect to Benefit Plan Bondholders.
If the underlying assets of our Company were treated as “plan
assets,” an investment in our Company also might constitute
an improper delegation of fiduciary responsibility to our Company
under ERISA and expose the ERISA Plan fiduciary to co-fiduciary
liability under ERISA and might result in an impermissible
commingling of plan assets with other property.
35
If
a prohibited transaction were to occur, an excise tax equal to 15%
of the amount involved would be imposed under the Code, with an
additional 100% excise tax if the prohibited transaction is not
“corrected.” Such taxes will be imposed on any
disqualified person who participates in the prohibited transaction.
In addition, other fiduciaries of Benefit Plan Bondholders subject
to ERISA who permitted such prohibited transaction to occur or who
otherwise breached their fiduciary responsibilities, could be
required to restore to the plan any losses suffered by the ERISA
Plan or any profits realized by these fiduciaries as a result of
the transaction or beach. With respect to an IRA or similar account
that invests in our Company, the occurrence of a prohibited
transaction involving the individual who established the IRA, or
his or her beneficiary, would cause the IRA to lose its tax-exempt
status. In that event, the IRA or other account owner generally
would be taxed on the fair market value of all the assets in the
account as of the first day of the owner’s taxable year in
which the prohibited transaction occurred.
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36
DESCRIPTION OF BONDS
This
description sets forth certain terms of the Bonds that we are
offering pursuant to this offering circular. In this section we use
capitalized words to signify terms that are specifically defined in
the Indenture, by and between us and UMB Bank, N.A., as trustee, or
the trustee. We refer you to the Indenture for a full disclosure of
all such terms, as well as any other capitalized terms used in this
offering circular for which no definition is provided.
Because
this section is a summary, it does not describe every aspect of the
Bonds or the Indenture. We urge you to read the Indenture carefully
and in its entirety because that document and not this summary
defines your rights as a Bondholders. Please review a copy of the
Indenture. The Indenture is filed as an exhibit to the offering
statement, of which this offering circular is a part, at
www.sec.gov. You may also obtain a copy of the Indenture from us
without charge. See “Where You Can Find More
Information” for more information. You may also review
the Indenture at the trustee’s corporate trust office at 928
Grand Blvd., 12th Floor,
Kansas City, Missouri 64106.
Ranking
The Bonds are unsecured indebtedness of our
Company and rank pari passu with our other unsecured indebtedness, including
the Unsecured Notes (as defined herein). The Bonds would rank
junior to any of our secured indebtedness including the
indebtedness outstanding under our Cortland Term Loan and/or
Cortland LOC.
Subordination
The
indebtedness evidenced by the Bonds is subordinated to the prior
payment in full of all debt outstanding under the Cortland Term
Loan and Cortland LOC (collectively, the “Senior
Debt”). During the continuance beyond any applicable grace
period of any default in the payment of principal, premium,
interest or any other payment due on any Senior Debt or in the
event that any event of default with respect to any Senior Debt
shall have occurred and be continuing permitting Cortland to
declare such Senior Debt due and payable prior to the date on which
it would otherwise have become due and payable, the Company may not
make any payments (including principal payments and interest
payments) on the Bonds. In the event that any Bonds are declared
due and payable before their maturity date, Cortland will be
entitled to receive payment in full of all amounts due or to become
due on or in respect of all Senior Debt before the Bondholders are
entitled to receive any payment by the Company on account of the
principal of or interest or other amounts due on the Bonds. In
addition, upon any payment or distribution of assets upon any
dissolution, winding-up, liquidation or reorganization of
the Company, the payment of the principal of and interest and other
amounts due on the Bonds will be subordinated to the extent
provided in the Indenture in right of payment to the prior payment
in full of all Senior Debt. Because of this subordination, if the
Company dissolves or otherwise liquidates, Bondholders may receive
less, ratably, than Cortland. The Indenture also requires a
standstill period whereby the Trustee, whether on its own accord or
upon the request of the requisite number of Bondholders, must
obtain the consent of Cortland, as lender under the Senior Debt, to
pursue any remedies against the Company within sixty (60) days of
an occurrence of an Event of Default (as defined in the Indenture).
As a result, the Trustee, on behalf of the Bondholders, may not be
able to exercise its right to seek any remedies upon an Event of
Default which may result in Bondholders incurring losses that may
have otherwise been avoided. See "Risk Factors -
Risks Related to the Bonds and to this Offering" for
more information.
Interest and Maturity
The
Bonds will each be offered serially, over a maximum period of 3
years, starting from the date of qualification of the Offering
Statement of which this Offering Circular is a part, with the sole
difference between the series being their respective maturity
dates. Each series of Bonds beginning with Series A will correspond
to a particular closing. Each series of Bonds will mature on the
third anniversary of the initial issuance date of such series.
Interest on the Bonds will be paid to
the record holders of the Bonds quarterly in arrears on January
25th,
April 25th,
July 25th
and October 25th
of each year, beginning on the first
such date that corresponds to the first full quarter after the
initial closing in the offering.
The
Company may elect to extend the maturity date of the Bonds for up
to two additional one-year periods in the Company’s sole
discretion. If the Company elects to extend the maturity date of
the Bonds, the Bonds will bear interest at 10.0% per annum during
the first one-year extension period and will bear interest at 11.0%
per annum during the second one-year extension period. Each such
extension would constitute a new offering for the purpose of the
registration requirements of the Securities Act and, as such, would
be required to be registered or conducted pursuant to an exemption
from registration. Any such subsequent offering conducted pursuant
to Regulation A would count against the aggregate dollar
limitations in Rule 251(a) of Regulation A. The Company and
Bondholders may elect to redeem all or a portion of the Bonds
according to the terms set forth herein.
With
respect to the maturity or extension thereto of a Bond, the Company
will send to the Trustee and each holder of such a Bond a notice of
maturity, no more than 240 days and no less than 180 days prior to
a maturity date for any Bond, notifying the holder of the Bond of
the Bond’s pending maturity and that the maturity of the Bond
will or will not be extended.
Manner of Offering
The
offering is being made on a best-efforts basis through our
broker/dealer of record. We reserve the right to conduct future
sales through other Selling Group Members. Our broker/dealer of
record will be required to purchase any of the Bonds.
THE
REQUIRED INTEREST PAYMENTS AND PRINCIPAL PAYMENT ARE NOT A GUARANTY
OF ANY RETURN TO YOU NOR ARE THEY A GUARANTY OF THE RETURN OF YOUR
INVESTED CAPITAL. While our Company is required to make interest
payments and principal payment as described in the Indenture and
above, we do not intend to establish a sinking fund to fund such
payments. Therefore, our ability to honor these obligations will be
subject to our ability to generate sufficient cash flow or procure
additional financing in order to fund those payments. If we cannot
generate sufficient cash flow or procure additional financing to
honor these obligations, we may be forced to sell some or all of
the Company’s assets to fund the payments. We cannot
guarantee that the proceeds from any such sale will be sufficient
to make the payments in their entirety or at all. If we cannot fund
the above payments, Bondholders will have claims against us with
respect to such violation as further described under the
Indenture.
37
Optional Redemption at Election of Bondholder
The Bonds will be redeemable at the election of
the Bondholder beginning anytime following the last issuance date
of the series of Bonds held by the Bondholder, or the Optional
Redemption. In order to request redemption, the Bondholder
must provide written notice to us at our principal place of
business that the Bondholder requests redemption of all or a
portion of the Bondholder’s Bonds, or a Notice of
Redemption.
Redemptions made
pursuant to the Optional Redemption of the Bonds shall be
at a price equal to $950 plus all
accrued but unpaid interest per Bond. We will have 120 days
from the date the applicable Notice of Optional Redemption is
provided to redeem the requesting Bondholder’s Bonds, subject
to the limitations set forth in the Bond. Our obligation to redeem
Bonds with respect to Notices of Redemption received in any given
Redemption Period (as defined below) is limited to an aggregate
principal amount of Bonds equal to 10% of the aggregate principal
of Bonds under the Indenture on the most recent of January
1st, April
1st, July 1st or October
1st of the
applicable year while the Offering is open, and January
1st of the
applicable year, following the offering termination. or the 10%
Limit. Any Bonds redeemed as a result of a Bondholder's right upon
death, disability or bankruptcy will be included in calculating the
10% Limit and will thus reduce the number of Bonds available to be
redeemed pursuant to Optional Redemption.
Our
obligation to redeem Bonds in any given year pursuant to this
redemption is limited to 10% of the outstanding principal balance
of the Bonds, in the aggregate, on the most recent of January
1st, April
1st, July 1st or October
1st of the
applicable year while the Offering is open, and January
1st of the
applicable year, following the offering termination. In addition,
any Bonds redeemed as a result of a Bondholder's right upon death,
disability or bankruptcy, will be included in calculating the 10%
Limit and will thus reduce the number of Bonds, in the aggregate,
to be redeemed pursuant to the redemption. Bond redemptions will
occur in the order that notices are received.
Redemption Upon Death, Disability or Bankruptcy
Within
90 days of the death, disability or bankruptcy of a Bondholder who
is a natural person, the estate of such Bondholder, or legal
representative of such Bondholder may request that we repurchase,
in whole but not in part and without penalty, the Bonds held by
such Bondholder by delivering to us a written notice requesting
such Bonds be redeemed. Redemptions due to death, disability or
bankruptcy shall count towards the annual 10% Limit on redemptions
described above; provided, however, that any redemptions pursuant
to death, disability or bankruptcy shall not be subject to the 10%
Limit. Any such request shall specify
the particular event giving rise to the right of the holder or
beneficial holder to redeem his or her Bonds. If a Bond is held
jointly by natural persons who are legally married, then such
request may be made by (i) the surviving Bondholder upon the death
of the spouse, or (ii) the disabled Bondholder (or a legal
representative) upon disability of the spouse. In the event a Bond
is held together by two or more natural persons that are not
legally married, neither of these persons shall have the right to
request that the Company repurchase such Bond unless each
Bondholder has been affected by such an event.
Disability
shall mean with respect to any Bondholder or beneficial holder, a
determination of disability based upon a physical or mental
condition or impairment arising after the date such Bondholder or
beneficial holder first acquired Bonds. Any such determination of
disability must be made by any of: (1) the Social Security
Administration; (2) the U.S. Office of Personnel Management; or (3)
the Veteran’s Benefits Administration, or the Applicable
Governmental Agency, responsible for reviewing the disability
retirement benefits that the applicable Bondholder or beneficial
holder could be eligible to receive.
Bankruptcy shall mean, with respect to any
Bondholder the final adjudication related to (i) the filing of any
petition seeking to adjudicate the Bondholder bankrupt or
insolvent, or seeking for itself any liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or
composition of such Bondholder or such Bondholder’s debts
under any law relating to bankruptcy, insolvency, or reorganization
or relief of debtors, or seeking, consenting to, or acquiescing in
the entry of an order for relief or the appointment of a receiver,
trustee, custodian, or other similar official for such Person or
for any substantial part of its property, or (ii) without the
consent or acquiescence of such Bondholder, the entering of an
order for relief or approving a petition for relief or
reorganization or any other petition seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution,
or other similar relief under any bankruptcy, liquidation,
dissolution, or other similar statute, law, or regulation, or,
without the consent or acquiescence of such Bondholder, the
entering of an order appointing a trustee, custodian, receiver, or
liquidator of such Bondholder or of all or any substantial part of
the property of such Bondholder which order shall not be dismissed
within ninety (90) days.
38
Upon
receipt of redemption request in the event of death, disability or
bankruptcy of a Bondholder, we will designate a date for the
redemption of such Bonds, which date shall not be later than 30
days after we receive documentation and/or certifications
establishing (to the reasonable satisfaction of the Company) the
right to be redeemed. On the designated date, we will redeem such
Bonds at a price per Bond that is
equal to all accrued and unpaid interest, to but not including the
date on which the Bonds are redeemed plus the then outstanding
principal amount of such Bond.
Optional
Redemption
We may
redeem the Bonds, in whole or in part, without penalty at any time.
If the Bonds are renewed for an additional term, we may redeem the
Bonds at any time during such renewal period. Any redemption of a
Bond will be at a price equal to the then outstanding principal on
the Bonds being redeemed, plus any accrued but unpaid interest on
such Bonds. If we plan to redeem the Bonds, we are required to give
notice of redemption not less than 5 days nor more than 60 days
prior to any redemption date to each Bondholder’s address
appearing in the securities register maintained by the trustee. In
the event we elect to redeem less than all of the Bonds, the
particular Bonds to be redeemed will be selected by the trustee by
such method as the trustee shall deem fair and
appropriate.
Merger, Consolidation or Sale
We may
consolidate or merge with or into any other corporation, and we may
sell, lease or convey all or substantially all of our assets to any
corporation, provided that the successor entity, if other than
us:
●
is
organized and existing under the laws of the United States of
America or any United States, or U.S., state or the District of
Columbia; and
●
assumes
all of our obligations to perform and observe all of our
obligations under the Bonds and the Indenture;
and
provided further that no event of default under the Indenture shall
have occurred and be continuing.
Except
as described below under “Certain Covenants –
Offer to Repurchase Upon a Change of Control Repurchase
Event,” the Indenture does not provide for any right
of acceleration in the event of a consolidation, merger, sale of
all or substantially all of the assets, recapitalization or change
in our stock ownership. In addition, the Indenture does not contain
any provision which would protect the Bondholders against a sudden
and dramatic decline in credit quality resulting from takeovers,
recapitalizations or similar restructurings.
Certain Covenants
We
will issue the Bonds under an Indenture, or the Indenture, to
be dated as of the initial issuance date of the Bonds between us
and UMB Bank, N.A., as the trustee. The Indenture does not limit
our ability to incur, or permit our subsidiaries to incur,
third-party indebtedness, whether secured or unsecured, including
the indebtedness outstanding under our Cortland Term Loan and/or
Cortland LOC.
Offer to Repurchase Upon a Change of Control Repurchase
Event
"Change of Control Repurchase Event",
means (A) the acquisition by any person, including any syndicate or
group deemed to be a "person" under Section 13(d)(3) of the
Exchange Act, of beneficial ownership, directly or indirectly,
through a purchase, merger or other acquisition transaction or
series of purchases, mergers or other acquisition transactions of
the membership units entitling that person to exercise more than
50% of the total voting power of all the membership units entitled
to vote in meetings of the Company (except that such person will be
deemed to have beneficial ownership of all securities that such
person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a
subsequent condition); and (B) following the closing of any
transaction referred to in subsection (A), neither we nor the
acquiring or surviving entity has a class of common securities (or
American Depositary Receipts representing such securities) listed
on the New York Stock Exchange (“NYSE”), the NYSE
American, or the Nasdaq Stock Market, or listed or quoted on an
exchange or quotation system that is a successor to the NYSE, the
NYSE American or the Nasdaq Stock Market.
39
If a
Change of Control Repurchase Event occurs, unless we have exercised
our option to redeem the Bonds as described under
“Optional
Redemption,” the Company or Trustee shall make an
offer to each Bondholder to repurchase all or any amount of each
Bondholder's Bonds at the redemption price set forth on the
Bond.
Reports
We
will furnish the following reports to each Bondholder:
Reporting Requirements
under Tier II of Regulation A.
After launching this Tier II, Regulation A offering, we will be
required to comply with certain ongoing disclosure requirements
under Rule 257 of Regulation A. We will be required to file: an
annual report with the SEC on Form 1-K; a semi-annual report with
the SEC on Form 1-SA; current reports with the SEC on Form 1-U; and
a notice under cover of Form 1-Z. The necessity to file current
reports will be triggered by certain corporate events, similar to
the ongoing reporting obligation faced by issuers under the
Exchange Act, however the requirement to file a Form 1-U is
expected to be triggered by significantly fewer corporate events
than that of the Form 8-K. Parts I & II of Form 1-Z will be
filed by us if and when we decide to and are no longer obligated to
file and provide annual reports pursuant to the requirements of
Regulation A.
Annual
Reports. As soon as
practicable, but in no event later than one hundred twenty (120)
days after the close of our fiscal year, ending December
31st,
we will cause to be mailed or made available, by any reasonable
means, to each Bondholder as of a date selected by us, an annual
report containing financial statements of our Company for such
fiscal year, presented in accordance with GAAP, including a balance
sheet and statements of operations, equity and cash flows, with
such statements having been audited by an accountant selected by
us. We shall be deemed to have made a report available to each
Bondholder as required if it has either (i) filed such report with
the SEC via its Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system and such report is publicly available on such system
or (ii) made such report available on any website maintained by our
Company and available for viewing by the
Bondholders.
Payment of Taxes and Other Claims
We
will pay or discharge or cause to be paid or discharged, before the
same shall become delinquent: (i) all taxes, assessments and
governmental charges levied or imposed upon us or upon our income,
profits or assets; and (ii) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien
upon our property; provided, however, that we will not be required
to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity
is being contested in good faith by appropriate proceedings or for
which we have set apart and maintain an adequate
reserve.
Prior to this offering, there has been no public
market for the Bonds. We may apply for quotation of the Bonds
on an alternative trading system or over the counter
market beginning after the final closing of this offering.
However, even if the Bonds are listed or quoted, no assurance can
be given as to (1) the likelihood that an active market for the
Bonds will develop, (2) the liquidity of any such market, (3) the
ability of Bondholders to sell the Bonds or (4) the prices that
Bondholders may obtain for any of the Bonds. No prediction can be
made as to the effect, if any, that future sales of the Bonds, or
the availability of the Bonds for future sale, will have on the
market price prevailing from time to time. Sales of substantial
amounts of the Bonds, or the perception that such sales could
occur, may adversely affect prevailing market prices of the Bonds.
See “Risk
Factors — Risks Related to the Bonds and the
Offering.”
40
Event of Default
The
following are events of default under the Indenture with respect to
the Bonds:
●
default
in the payment of any interest on the Bonds when due and payable,
which continues for 60 days, a cure period;
●
default
in the payment of any principal of or premium on the Bonds when
due, which continues for 60 days, a cure period;
●
default
in the performance of any other obligation or covenant contained in
the Indenture or in this offering circular for the benefit of the
Bonds, which continues for 120 days after written notice, a cure
period; and
●
specified
events in bankruptcy, insolvency or reorganization of
us;
Book-entry and
other indirect Bondholders should consult their banks or brokers
for information on how to give notice or direction to or make a
request of the trustee and how to declare or rescind an
acceleration of maturity.
Annually, within
120 days following December 31st while the Bonds are
outstanding, we will furnish to the trustee a written statement of
certain of our officers certifying that to their knowledge we are
in compliance with the Indenture, or else specifying any event of
default and the nature and status thereof. We will also deliver to
the trustee a written notification of any uncured event of default
within 30 days after we become aware of such uncured event of
default.
Remedies if an Event of Default Occurs
Subject
to any respective cure period, or other terms of the indetnure, if
an event of default occurs and is continuing, the trustee or the
Bondholders of not less than a majority in aggregate outstanding
principal amount of the Bonds may declare the principal thereof,
and all unpaid interest thereon to be due and payable immediately.
In such event, the trustee will have the right force us to sell any
assets held by us or any subsidiary of ours that we have the
unilateral right to cause it to sell its assets. We will be
required to contribute the proceeds of any such sale to the
repayment of the Bonds. With respect to subsidiaries for which we
do not have the unilateral right to sell their assets, the trustee
has the right to force us to sell our equity in such subsidiary in
order to repay the Bonds.
At any
time after the trustee or the Bondholders have accelerated the
repayment of the principal, premium, if any, and all unpaid
interest on the Bonds, but before the trustee has obtained a
judgment or decree for payment of money due, the Bondholders of a
majority in aggregate principal amount of outstanding Bonds may
rescind and annul that acceleration and its consequences, provided
that all payments, other than those due as a result of
acceleration, have been made and all events of default have been
remedied or waived.
The
Bondholders of a majority in principal amount of the outstanding
Bonds may waive any default with respect to that series, except a
default:
●
in the
payment of any amounts due and payable or deliverable under the
Bonds; or
●
in an
obligation contained in, or a provision of, the Indenture which
cannot be modified under the terms of the Indenture without the
consent of each Bondholder
The
Bondholders of a majority in principal amount of the outstanding
Bonds may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee with respect to the
Bonds, provided that (i) such direction is not in conflict
with any rule of law or the Indenture, (ii) the trustee may
take any other action deemed proper by the trustee that is not
inconsistent with such direction and (iii) the trustee need
not take any action that might involve it in personal liability or
be unduly prejudicial to the Bondholders not joining therein.
Subject to the provisions of the Indenture relating to the duties
of the trustee, before proceeding to exercise any right or power
under the Indenture at the direction of the Bondholders, the
trustee is entitled to receive from those Bondholders security or
indemnity satisfactory to the trustee against the costs, expenses
and liabilities which it might incur in complying with any
direction.
41
A
Bondholder will have the right to institute a proceeding with
respect to the Indenture or for any remedy under the Indenture,
if:
●
that
Bondholder previously gives to the trustee written notice of a
continuing event of default in excess of any cure
period,
●
the
Bondholders of not less than a majority in principal amount of the
outstanding Bonds have made written request;
●
such
Bondholder or Bondholders have offered to indemnify the trustee
against the costs, expenses and liabilities incurred in connection
with such request;
●
the
trustee has not received from the Bondholders of a majority in
principal amount of the outstanding Bonds a direction inconsistent
with the request (it being understood and intended that no one or
more of such Bondholders shall have any right in any manner
whatever by virtue of, or by availing of, any provision of the
Indenture to affect, disturb or prejudice the rights of any other
of such Bondholders, or to obtain or to seek to obtain priority or
preference over any other of such Bondholders or to enforce any
rights under the Indenture, except in the manner herein provided
and for equal and ratable benefit of all Bondholders);
and
●
the
trustee fails to institute the proceeding within 60
days.
However, the
Bondholder has the right, which is absolute and unconditional, to
receive payment of the principal of and interest on such Bond on
the respective due dates (or any redemption date, subject to
certain discounts) and to institute suit for the enforcement of any
such payment and such rights shall not be impaired without the
consent of such Bondholder.
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of page intentionally left blank]
42
LEGAL PROCEEDINGS
There
are currently no material legal proceedings involving our
Company.
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of page intentionally left blank]
43
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners (10% or
more)
|
Title of
Class
|
Name and Address of
Beneficial Owner
|
Amount and Nature of Beneficial
Ownership Acquirable
|
Percent of
class
|
|
LLC
Interests
|
Daniel Ferrari
*
1983 Water Chase
Drive, New Lenox, IL 60451
|
N/A
|
50%
|
|
LLC
Interests
|
Charlene Ferrari
*
1983 Water Chase
Drive, New Lenox, IL 60451
|
N/A
|
50%
|
*
Daniel Ferrari and Charlene Ferrari are the managers of Lion of
Judah, LLC which has sole power to designate the Manager of our
Company.
[Remainder of page intentionally left blank]
44
MANAGER AND EXECUTIVE OFFICERS
Our
Company is a manager-managed limited liability company and managed
by our sole manager pursuant to our limited liability company. Lion
of Judah, LLC has the power to select the manager of our Company in
its sole discretion. The following table sets forth information on
our manager and executive officers.
|
Name
|
|
Age
|
|
Position with our Company
|
|
Manager/Officer Since
|
|
Lindsey
Brianne Wilson
|
|
36
|
|
Manager
and Chief Operating Officer
|
|
April
2019
|
|
Curtis
Roger Allen
|
|
36
|
|
Chief
Financial Officer
|
|
February
2020
|
|
Kris
Woods
|
|
35
|
|
Chief
Technology Officer
|
|
August
2019
|
|
Sean
Goodnight
|
|
46
|
|
Chief
Acquisition Officer
|
|
June
2020
|
|
Justin
Lee Arn
|
|
41
|
|
Chief
Land and Title Officer
|
|
April
2020
|
|
Matt
Willer
|
|
45
|
|
Vice
President of Capital Markets
|
|
March
2021
|
Manager and Executive Officers
Set
forth below is biographical information for the executive officers
and manager of our Company.
Lindsey Wilson, Manager and Chief Operating Officer. Lindsey
brings years of extensive practical experience leading diverse,
multidisciplinary teams in the energy sector. Lindsey entered the
oil and gas industry in 2011 as a Leasing Agent in Texas and this
foundational experience was the springboard that ultimately allowed
her to transition into more advanced management roles within the
mineral and leasehold acquisition space. As a founding member of
Phoenix Capital Group, Lindsey establishes the objectives of the
business and leads all operational functions within the Company.
Responsible for overseeing the day-to-day operations of Phoenix
Capital Group, Lindsey takes great pride in working with all
departments on setting and achieving aggressive business goals.
Lindsey graduated from the University of Texas Arlington and holds
a Bachelor of Business Administration with a concentration in
Marketing.
Curtis Allen, Chief Financial Officer. Curtis graduated
magna cum laude from SUNY
Oswego with both his BS and MBA concentrated in accounting. Curtis
has over 10 years’ experience in financial services with an
emphasis on investment analysis. As a CPA, Curtis has a range of
experiences from his private tax-practice to auditing
billion-dollar defense contractors with the Department of Defense.
Most recently, he has spent over 7 years managing investments for
personal and corporate clients. Alongside being a CPA, Curtis also
holds series 7 and 66 licenses and has passed the CFA level I. At
Phoenix Capital Group, Curtis is responsible for all accounting and
finance functions and underwriting new potential deals along with a
multitude of day-to-day operational tasks.
Kristopher Woods, Chief Technology Officer. Kris has over 12 years’ experience as a
consultant and software engineer working across a number of
industries including energy, health & fitness and consumer
goods. At Phoenix Capital Group, his responsibilities include
identifying and validating technological needs, as well as
overseeing the implementation and management of all software
solutions. He has developed extensive insights into custom software
and technology solutions over the course of his career and brings
that knowledge and ability to lead diverse teams to his role at
Phoenix Capital Group. Kris holds a B.A. in Computer Science from
Lewis & Clark College and dual Masters degrees from Loyola
Marymount in Business Administration and Systems
Engineering.
Sean Goodnight, Chief Acquisitions Officer. Sean brings over 25 years of consultative sales
experience to Phoenix Capital Group. As a Colorado native, he
attended the University of Northern Colorado and spent the early
part of his career in the health care and insurance industries. He
was introduced into the oil and gas industry in 2016 working with
mineral acquisitions where he quickly transitioned into management.
With Phoenix Capital Group, Sean leads the Acquisitions department
and has implemented processes, developed tools, and introduced
materials that have contributed to the continued success of the
Company. He has built a team of talented, sophisticated
professionals who possess the expertise and skillset to maintain
the high level of standards that have become the foundation of his
department.
45
Justin Arn, Chief Land & Title Officer. Justin graduated from
the University of Hawaii at Manoa and majored in Philosophy with a
minor in Business Administration. Justin began his Land career
researching mineral and royalty rights for multiple mineral
acquisition companies focusing on the DJ Basin in Weld County,
Colorado and Laramie County, Wyoming. He has coordinated and
managed title projects, large and small, in Wyoming, Colorado,
North Dakota, Montana, and Texas, and performed and managed
opportunity and due diligence title work for the purchase of
thousands of Royalty Acres throughout the DJ, Bakken, and Permian
basins. Justin is an active member of the American Association
of Professional Landmen, and the Wyoming Association of
Professional Landmen.
Matt Willer, Vice President of Capital Markets. Matt Willer
is a seasoned finance professional that has spent 22 years
professionally assisting Companies of all sizes, in a variety of
industries, with their financing needs. Matt’s career began
at Smith Barney and after his early professional life was spent at
a large investment bank he sequentially migrated to smaller firms
where he has been able to have more autonomy and interaction with
clients. For the past decade, Matt’s experience has largely
been in an internal investment banking function to the operating
companies that he is assisting. With experience in both debt and
equity transactions, across both private and public Companies, Matt
has raised well over $100 million in new capital for the Companies
he’s worked with. Matt brings an entrepreneurial finance
background to Phoenix Capital Group Holdings where he currently
maintains the title of Vice President of Capital Markets and has
recently become a partner with the firm. Matt graduated from the
University of Southern California with a degree in Business
Administration with a dual specialty in Finance and
Management.
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46
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Below
is the annual compensation of each of the three highest paid
executive officers of our Company for the fiscal year ended
December 31, 2020.
|
Name
|
Position
|
Cash Compensation
|
Other Compensation
|
Total Compensation
|
|
Kris Woods
|
Chief Technology Officer
|
$150,000
|
(1)
|
$150,000
|
|
Lindsey Wilson
|
Manager and Chief Operating Officer
|
$114,000
|
(2)
|
$114,000
|
|
Curtis Allen
|
Chief Financial Officer
|
$108,000
|
(3)
|
$108,000
|
(1)
The
Company has granted Mr. Woods a 3.50% “profits
interest,” as that term is used in Internal Revenue Service
revenue rulings, pursuant to a Profits Interest Award Agreement
which is filed as an exhibit to the Offering Statement of which
this Offering Circular is a part.
(2)
The
Company has granted Ms. Wilson an 8.22% “profits
interest,” as that term is used in Internal Revenue Service
revenue rulings, pursuant to a Profits Interest Award Agreement
which is filed as an exhibit to the Offering Statement of which
this Offering Circular is a part.
(3)
The
Company has granted Mr. Allen an 8.22% “profits
interest,” as that term is used in Internal Revenue Service
revenue rulings, pursuant to a Profits Interest Award Agreement
which is filed as an exhibit to the Offering Statement of which
this Offering Circular is a part.
[Remainder of page intentionally left blank]
47
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During
the fiscal year ended December 31, 2020, the Company received
mineral and royalty interests as a capital contribution by Lion of
Judah Capital, LLC, an entity controlled by a family member of an
officer of the Company. The capital contribution is valued at
$630,425 and Lion of Judah Capital, LLC received its equity
ownership in the Company as consideration.
[Remainder of page intentionally left blank]
48
INDEPENDENT AUDITOR
The
financial statements of Phoenix Capital Group Holdings, LLC as of
December 31, 2020 and 2019, for the twelve months ended December
31, 2020 and for the period from inception (April 23, 2019) through
December 31, 2019, included in this offering circular, have been
audited by Cherry Bekaert LLP, independent auditors, as set forth
in their reports thereon.
[Remainder of page intentionally left blank]
49
LEGAL MATTERS
Certain
legal matters in connection with this offering, including the
validity of the Bonds, will be passed upon for us by Kaplan Voekler
Cunningham & Frank, PLC.
[Remainder of page intentionally left blank]
50
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We will
file, annual, semi-annual and special reports, and other
information, as applicable, with the SEC. You may read and copy any
document filed with the SEC at the SEC's public company reference
room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on
the public reference room. The SEC also maintains a web site that
contains reports, and informational statements, and other
information regarding issuers that file electronically with the SEC
(http://www.sec.gov).
Our
Company has filed an offering statement of which this offering
circular is a part with the SEC under the Securities Act. The
offering statement contains additional information about us. You
may inspect the offering statement without charge at the office of
the SEC at Room 1580, 100 F Street, N.E., Washington, D.C. 20549,
and you may obtain copies from the SEC at prescribed
rates.
This
offering circular does not contain all of the information included
in the offering statement. We have omitted certain parts of the
offering statement in accordance with the rules and regulations of
the SEC. For further information, we refer you to the offering
statement, which may be found at the SEC's website
at http://www.sec.gov. Statements contained in this offering
circular and any accompanying supplement about the provisions or
contents of any contract, agreement or any other document referred
to are not necessarily complete. Please refer to the actual exhibit
for a more complete description of the matters
involved.
[Remainder of page intentionally left blank]
51
PART F/S
PHOENIX CAPITAL GROUP HOLDINGS, LLC
FINANCIAL
STATEMENTS
AND
SUPPLEMENTAL
SCHEDULES
As of June 30, 2021 and 2020 and for the six months ended June 30,
2021 and
June 30, 2020
UNAUDITED FINANCIAL STATEMENTS
F-1
PHOENIX CAPITAL GROUP HOLDINGS, LLC.
TABLE
OF CONTENTS
|
FINANCIAL STATEMENTS
|
|
|
Balance
Sheets
|
F-3
|
|
Statements
of Operations
|
F-4
|
|
Statements
of Members’ Equity
|
F-5
|
|
Statements
of Cash Flows
|
F-6
|
|
Notes
to the Financial Statements
|
F-7
|
|
|
|
|
SUPPLEMENTAL SCHEDULES
|
|
|
Reconciliation
of Earnings Before Income Taxes, Depreciation and
|
|
|
Amortization
(EBITDA) to Net Income (Loss)
|
F-17
|
|
Schedules
of Selling, General, and Administrative Expenses
|
F-18
|
F-2
PHOENIX CAPITAL GROUP HOLDINGS, LLC
BALANCE
SHEETS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
|
|
June
30,
2021
|
June
30,
2020
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$201,157
|
$1,144,771
|
|
Other
receivables
|
528,042
|
-
|
|
Total Current
Assets
|
729,199
|
1,144,771
|
|
|
|
|
|
Oil and gas
properties, at cost, using the successful method of
accounting:
|
|
|
|
Proved
properties
|
16,608,089
|
9,324,076
|
|
Unproven
properties
|
660,385
|
370,752
|
|
Total Property and
Equipment
|
17,268,474
|
9,694,828
|
|
Accumulated
depletion
|
(4,523,286)
|
(1,185,245)
|
|
Net Property and
Equipment
|
12,745,188
|
8,509,583
|
|
|
|
|
|
Other
Assets:
|
|
|
|
Other
receivables
|
24,280
|
18,599
|
|
Company owned
vehicles
|
55,830
|
-
|
|
Total Other
Assets
|
80,110
|
18,599
|
|
Total
Assets
|
$13,554,497
|
$9,672,953
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts payable
(Note 5)
|
$191,316
|
$4,533,827
|
|
Accrued
expenses
|
40,686
|
9,920
|
|
Line of
credit
|
1,940,000
|
-
|
|
Current portion of
notes payable
|
600,000
|
-
|
|
Current portion of
deferred closings
|
617,174
|
1,029,836
|
|
Total Current
Liabilities
|
3,389,176
|
5,573,583
|
|
|
|
|
|
Noncurrent
Liabilities:
|
|
|
|
Notes
payable
|
1,360,231
|
-
|
|
PPP
loan
|
192,437
|
192,437
|
|
Deferred
closings
|
951,590
|
361,330
|
|
Bank term
loan
|
2,916,227
|
-
|
|
Loan on company
owned vehicle
|
49,253
|
|
|
Asset retirement
obligation
|
23,048
|
|
|
Total Noncurrent
Liabilities
|
5,492,786
|
553,767
|
|
Total
Liabilities
|
8,881,962
|
6,127,350
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
4,672,535
|
3,545,603
|
|
TOTAL
LIABILITIES AND MEMBERS' EQUITY
|
$13,554,497
|
$9,672,953
|
The accompanying notes to the financial statements are an integral
part of these statements.
F-3
PHOENIX CAPITAL GROUP HOLDINGS, LLC
STATEMENTS
OF OPERATIONS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
|
|
June
30,
2021
|
June
30,
2020
|
|
REVENUES
|
|
|
|
Gain on sale of
assets
|
$207,656
|
$2,012,038
|
|
Mineral and royalty
revenues
|
5,336,850
|
3,064,521
|
|
Total
revenues
|
5,544,506
|
5,076,559
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Depreciation,
depletion, accretion and amortization
|
1,531,886
|
1,180,458
|
|
Selling, general,
and administrative expenses
|
813,006
|
741,500
|
|
Severance and ad
valorem taxes
|
1,100,699
|
577,613
|
|
Payroll and payroll
expenses
|
411,008
|
145,855
|
|
Contractors and
professional fees
|
238,153
|
80,006
|
|
Gathering,
transportation and marketing
|
63,272
|
34,264
|
|
Total operating
expenses
|
4,158,024
|
2,759,696
|
|
|
|
|
|
Gain (loss) from
operations
|
1,386,482
|
2,316,863
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
Interest
expense
|
(306,986)
|
(93)
|
|
Total other
expenses
|
(306,986)
|
(93)
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$1,079,496
|
$2,316,770
|
The accompanying notes to the financial statements are an integral
part of these statements.
F-4
PHOENIX CAPITAL GROUP HOLDINGS, LLC
STATEMENTS
OF MEMBERS’ EQUITY
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
|
|
June
30,
2021
|
June
30,
2020
|
|
Balances, December
31 (preceeding year)
|
$3,073,039
|
$569,441
|
|
Contributions
|
670,000
|
1,135,267
|
|
Distributions
|
(150,000)
|
(475,875)
|
|
Net
income
|
1,079,496
|
2,316,770
|
|
Ending
balances
|
$4,672,535
|
$3,545,603
|
The accompanying notes to the financial statements are an integral
part of these statements.
F-5
PHOENIX CAPITAL GROUP HOLDINGS, LLC
STATEMENTS
OF CASH FLOWS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
|
|
June
30,
2021
|
June
30,
2020
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net income
(loss)
|
$1,079,496
|
$2,316,770
|
|
Adjustments to
reconcile net income (loss) to net cash
|
|
|
|
flows from
operating activities:
|
|
|
|
Depreciation,
depletion, accretion and amortization
|
1,531,886
|
1,180,458
|
|
Asset retirement
obligation
|
-
|
-
|
|
Gain on sale of
assets
|
(207,656)
|
(2,012,038)
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Other current
assets
|
(528,042)
|
(18,599)
|
|
Other
assets
|
(111,075)
|
-
|
|
Accounts payable
and accrued liabilities
|
87,801
|
(7,871)
|
|
Net cash flows from
operating activities
|
1,852,410
|
1,458,720
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITES
|
|
|
|
Additions to oil
and gas properties and leases
|
(4,216,419)
|
(14,622,376)
|
|
Proceeds from sale
of assets
|
1,195,376
|
8,022,963
|
|
Net cash flows from
investing activities
|
(3,021,043)
|
(6,599,413)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Borrowing of bank
line of credit and loans
|
2,155,480
|
-
|
|
Borrowing
(repayment) of notes payable
|
(1,949,718)
|
4,533,827
|
|
Borrowing of PPP
loan
|
-
|
192,437
|
|
Member's
contributions
|
670,000
|
585,267
|
|
Member's
distributions
|
(150,000)
|
(475,874)
|
|
Increase in
deferred closings
|
474,046
|
1,391,165
|
|
Net cash flows from
financing activities
|
1,199,808
|
6,226,822
|
|
|
|
|
|
Net change in
cash
|
31,175
|
1,086,129
|
|
Cash, beginning of
year
|
169,982
|
58,642
|
|
Cash, end of
year
|
$201,157
|
$1,144,771
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
|
|
|
|
Noncash owner
contribution of oil and gas property
|
$-
|
$550,000
|
|
Cash paid during
the period for interest
|
306,986
|
93
|
|
|
$306,986
|
$93
|
(1)
Owner contribution of one leasehold asset was contributed to the
company in March 2020.
The accompanying notes to the financial statements are an integral
part of these statements.
F-6
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note 1 – Business and basis of presentation
Phoenix Capital Group Holdings, LLC
(“Phoenix” or the “Company") is a Delaware
LLC formed on April 23, 2019, to acquire mineral rights, royalty
interests and non-operated working interests in the Permian Basin,
TX, the Williston Basin, ND/MT, and the Denver-Julesburg Basin,
CO.
The
Company, through utilization of proprietary software developed
internally coupled with years of industry experience, believes it
has a significant competitive advantage in the
marketplace.
Phoenix
operates as a profit-share partnership. At the end of 2020, there
are nine profit-share partners, of which Lion of Judah Capital,
LLC, a Delaware LLC, is the majority profit-share owner and
exclusive equity contributor and owner. At the end of 2020, Lion of
Judah Capital, LLC was a 66.96% profit-share owner.
Note 2 – Significant accounting policies
Basis of preparation
The
accompanying financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). The financial
statements reflect all normal recurring adjustments that, in the
opinion of management, are necessary for a fair representation. The
Company operates in one segment: oil and natural gas exploration
and production.
Cash and cash equivalents
The Company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The Company maintains
its cash and cash equivalents at financial institutions. The
balances may exceed the Federal Deposit Insurance Corporation
(“FDIC”) insurance coverage and, as a result, there may
be a concentration of credit risk related to amounts on deposit in
excess of FDIC insurance coverage.
Fair value of financial instruments
The
carrying values of the Company’s current financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities, approximate
their fair value at June 30, 2021 and 2020 because of the
short-term maturity of these instruments.
Asset retirement obligations
Fair
values of legal obligations to retire and remove long-lived assets
are recorded when the obligation is incurred. When the liability is
initially recorded, the Company capitalizes this cost by increasing
the carrying amount of the related property and equipment. Over
time, the liability is accreted for the change in its present value
and the capitalized cost in oil and natural gas properties is
depleted based on units of production consistent with the related
asset.
Use of estimates
The
preparation of the financial statements in conformity with U.S.
GAAP as detailed in the Financial Accounting Standards Boards
(“FASB”) Accounting Standards Codification
(“ASC”) requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, and the 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. Accordingly, actual results could differ materially from
these estimates.
F-7
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note
2 – Significant accounting policies (continued)
Use of estimates (continued)
The
accompanying financial statements are based on a number of
significant estimates including quantities of oil, natural gas and
natural gas liquids (“NGL”) reserves that are the basis
for the calculations of depreciation, depletion, amortization
(“DD&A”), and determinations of impairment of oil
and natural gas properties. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and natural
gas and there are numerous uncertainties inherent in estimating
quantities of proved oil and natural gas reserves. The accuracy of
any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a
result, reserve estimates may materially differ from the quantities
of oil and natural gas that are ultimately recovered.
Joint activities
Certain
of exploration, development, and production activities are
conducted jointly with other entities and, accordingly, the
financial statements reflect only the Company’s proportionate
interest in such activities.
Impairment of long-lived assets
The
Company follows the provisions of ASC 360, Property, Plant, and Equipment
(“ASC 360”). ASC 360 requires that our long-lived
assets be assessed for potential impairment of their carrying
values whenever events or changes in circumstances indicate such
impairment may have occurred. Proved oil and natural gas properties
are evaluated by field for potential impairment. An impairment on
proved properties is recognized when the estimated undiscounted
future net cash flows of a field are less than its carrying value.
If an impairment occurs, the carrying value of the impaired field
is reduced to its estimated fair value, which is generally
estimated using a discounted cash flow approach.
Unproved oil and
natural gas properties do not have producing properties and are
valued on acquisition by management, with the assistance of an
independent expert when necessary. As reserves are proved through
the successful completion of exploratory wells, the cost is
transferred to proved properties. The cost of the remaining
unproved basis is periodically evaluated by management to assess
whether the value of a property has diminished. To do this
assessment, management considers, (i) estimated potential reserves
and future net revenues from an independent expert, (ii) our
history in exploring the area, (iii) our future drilling plans per
our capital drilling program prepared by our reservoir engineers
and operations management, and (iv) other factors associated with
the area. Impairment is taken on the unproved property value if it
is determined that the costs are not likely to be recoverable. The
valuation is subjective and requires management to make estimates
and assumptions which, with the passage of time, may prove to be
materially different from actual results.
Accounts receivable
Receivables consist
of royalty income due from operators for oil and gas sales to
purchasers and receipts from the Company’s non-operating
interest ownership. Those purchasers remit payment for production
to the operator and the operator in turn remits payment to Phoenix
for the agreed-to royalties. Receivables from third parties, for
which we did not receive actual information, either due to timing
delays or due to the unavailability of data at the time when
revenues are recognized, are estimated. Volume estimates for wells
with available historical actual data are based upon, (i) the
historical actual data for the months the data is available or (ii)
engineering estimates for the months the historical actual data is
not available. Phoenix does not recognize revenues for wells with
no historical actual data because we cannot conclude that it is
probable that a significant revenue reversal will not occur in
future periods. Pricing estimates are based upon actual prices
realized in an area by adjusting the market price for the average
basis differential from market on a basin-by-basin
basis.
Phoenix
routinely reviews outstanding balances, assesses the financial
strength of its customers, and records a reserve for amounts not
expected to be fully recovered. There is no allowance for doubtful
accounts as of June 30, 2021 and 2020.
F-8
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note
2 – Significant accounting policies (continued)
Concentration of significant customers
Financial
instruments that potentially subject Phoenix to concentrations of
credit risk consist of cash, receivable, royalty revenue, and our
revolving credit facility. Royalty revenues are concentrated among
operators engaged in the energy industry within the United States.
Management periodically assesses the financial condition of these
entities and institutions and considers any possible credit risk to
be minimal.
Great
Western Oil and Gas is responsible for approximately 50% and 90% of
the royalty revenue received in the six-month periods ending June
30, 2021 and June 30, 2020, respectively. The concentration risk of
Great Western Oil and Gas will become smaller in subsequent years
as the assets deplete and are replaced by future acquisitions. This
concentration of revenues with Great Western Oil and Gas also
creates a geographic concentration of revenues exceeding 50% in the
Denver-Julesburg Basin.
Oil and gas properties
The
Company invests primarily in mineral, royalty, and overriding
royalty interests of oil and natural gas properties. Oil and
natural gas producing activities are accounted for in accordance
with the successful efforts method of accounting. Under this
method, costs of acquiring properties are capitalized. All general
and administrative costs unrelated to acquisitions are expensed as
incurred. Depletion of capitalized costs is recorded using the
units-of-production method based on proved reserves. On the sale or
retirement of a proved property, the cost and related accumulated
depletion are removed from the property accounts and any gain or
loss is recognized.
The
depletion rate is determined by dividing the cumulative recovered
barrels of oil by the estimated ultimate recovery by well and
averaged amongst all wells within the pooled unit. This rate is
multiplied by the original cost basis and reduced by depletion
taken in prior periods. The cost basis remaining represents the
percentage of the asset remaining to be recovered by the wells
within the pooled unit.
For
more than 95% of properties within Phoenix’s inventory, oil
production represents over 90% of the value of the property and in
some cases approached 100%. Therefore, for depletion purposes,
Phoenix uses oil recovery for all properties as the unit of
production for depletion.
Phoenix
evaluates the oil and gas properties in its inventory on a yearly
basis for impairment, in accordance with the FASB’s
authoritative guidance, a discount rate of 10% is applied to the
annual future net cash flows to determine if the carrying value of
the property exceeds the present value of future cashflows. Phoenix
has not impaired the value of any properties in 2021 or
2020.
Equipment and other property
Equipment and other
property are stated at cost, and inventory is stated at weighted
average cost which does not exceed replacement cost. Depreciation
is calculated using the straight-line method over the estimated
useful lives (ranging from 3 to 7 years) of the respective assets.
The costs of normal maintenance and repairs are charged to expense
as incurred. Material expenditures that increase the life of an
asset are capitalized and depreciated over the estimated remaining
useful life of the asset. The cost of equipment sold or otherwise
disposed of, and the related accumulated depreciation, are removed
from the accounts and any gain or loss is reflected in current
earnings.
F-9
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note
2 – Significant accounting policies (continued)
Revenue from contracts with customers
The
Company recognizes its revenues following the ASC Topic
606, Revenue from Contracts with
Customers, ("ASC 606"). Revenue is recorded when title
passes to the operator or purchaser. Royalty interest owners have
no rights or obligations to explore, develop, or operate properties
and do not incur any of the costs of exploration, development, and
operation of the properties. Given the inherent time lag between
when oil, natural gas, NGL production and sales occur, and when
operators or purchasers often make disbursements to royalty
interest owners and due to the large potential fluctuations of both
oil production and sale price, a significant portion of the
Company’s revenue may represent accrued revenue based on
estimated net sales volumes.
Oil
and natural gas sales
Oil,
natural gas, and NGL sales revenues are generally recognized when
control of the product is transferred to the customer, the
performance obligations under the terms of the contracts with
customers are satisfied and collectability is reasonably assured.
As non-operators and mineral right owners, Phoenix in applicable
situations have elected not to have control of the product. All of
the Company’s oil, natural gas, and NGL sales are made under
contracts with customers (operators). The performance obligations
for the Company’s contracts with customers are satisfied at a
point in time through the delivery of oil and natural gas to its
customers.
Allocation
of transaction price to remaining performance
obligations
As the
Company has determined that each unit of product generally
represents a separate performance obligation, future volumes are
wholly unsatisfied and disclosure of the transaction price
allocated to remaining performance obligations is not required. The
Company has utilized the practical expedient in ASC 606, which
permits the Company to allocate variable consideration to one
or more but not all performance obligations in the contract if the
terms of the variable payment relate specifically to the
Company’s efforts to satisfy that performance obligation and
allocating the variable amount to the performance obligation is
consistent with the allocation objective under ASC 606.
Additionally, the Company will not disclose variable consideration
subject to this practical expedient.
Fair value measurements
The
Company follows ASC 820, Fair
Value Measurements and Disclosures (“ASC 820”).
This standard defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. ASC 820 does not require any new fair value
measurements but applies to assets and liabilities that are
required to be recorded at fair value under other accounting
standards. ASC 820 characterizes inputs used in determining fair
value according to a hierarchy that prioritizes those inputs based
upon the degree to which they are observable.
The
three levels of the fair value measurement hierarchy are as
follows:
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: Measured based on prices or valuation models that required
inputs that are both significant to the fair value measurement and
less observable for objective sources (i.e., supported by little or
no market activity).
F-10
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note
2 – Significant accounting policies (continued)
Advertising and marketing costs
Advertising and
marketing costs for the six months ending June 30, 2021 and June
30, 2020 was approximately $63,272 and $34,264,
respectively.
Recently issued accounting standards not yet adopted
In
February 2016, FASB issued Accounting Standards Update
(“ASU”) 2016-02, Leases, which requires all leasing
arrangements to be presented in the balance sheet as liabilities
along with a corresponding asset. ASU 2016-02 does not apply to
leases of mineral rights to explore for or use crude oil and
natural gas. The ASU will replace most existing lease guidance in
U.S. GAAP when it becomes effective. In January 2018, FASB issued
ASU 2018-01, Land Easement Practical Expedient for Transition to
Topic 842, to provide an optional practical expedient to not
evaluate existing or expired land easements that were not
previously accounted for as leases under Topic 840. In July 2018,
FASB issued ASU 2018-11 Leases (Topic 842): Targeted
Improvements, which provides for another transition method, in
addition to the existing transition method, by allowing entities to
initially apply the new leases standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption (i.e., comparative
periods presented in the financial statements will continue to be
in accordance with current U.S. GAAP (Topic 840, Leases)). The new
standard becomes effective during the fiscal year ending December
31, 2022 and interim periods within the fiscal year ending December
31, 2023 and early adoption is permitted. Management is currently
evaluating the impact that the adoption of this update will have on
our financial statements and related disclosures.
The
Company has reviewed other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any,
on the Company’s results of operations, financial position
and cash flows. Based on that review, the Company believes that
none of these pronouncements will have a significant effect on
current or future earnings or operations.
Income taxes
The
Company is a limited liability company and has elected to be
treated as a partnership for income tax purposes. The pro rata
share of taxable income or loss is included in the individual
income tax returns of members based on their percentage of
ownership. Consequently, no provision for incomes taxes is made in
the accompanying financial statements.
Note 3 – Oil and gas properties
The
Company invests in two materially different asset classes –
mineral rights (including overriding royalty interest and
non-participating royalty interest) and non-operated working
interests using the successful efforts method of accounting for
both asset classes.
F-11
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note 3 – Oil and gas properties (continued)
Non-operated working interests (leases and unleased
minerals)
Non-operated
working interests are the second of the two asset classes that the
Company invests in. Leases represent the potential to participate
in drilling projects, absorbing both the cost of the drilling
project as well as the larger rate of return when the wells produce
(as compared with the smaller lease rate owned by the
lessee).
Proved and unproved properties
Phoenix
considers a property proved when there are estimated quantities of
oil, natural gas, and NGLs which geological and engineering data
demonstrate, with reasonable certainty, to be recoverable in future
years from known reservoirs under existing economic and operating
conditions (i.e., prices and costs) existing at the time the
estimate was made.
Phoenix
considers a property unproved when there are currently no producing
wells pooling the property. For over 95% of the value of the
unproven properties in 2020, Phoenix has analyzed the wells within
a 5-mile radius of the property to conclude the property is
economically viable for oil extraction and has the potential to be
drilled.
Mineral and royalty revenues
Phoenix
is paid mineral and royalty revenue monthly by the various
operators and working interest owners within the pooled units that
Phoenix owns. Mineral and royalty revenues are subject to various
expenses that are removed from Phoenix’s paystub including
owner deductions, severance and ad valorem taxes, and out-of-state
owner withholdings. Phoenix grosses revenue up on the top-line and
includes these expenses as operating expenses on the statement of
operations.
Note 5 – Accounts payable
In
March 2020, the Company obtained a 10.4% non-operating working
interest in Adams County, CO operated by Great Western Oil and Gas.
At that time, Great Western Oil and Gas had already drilled eight
wells with plans to drill fourteen additional wells on the site,
which were completed in July 2020. Throughout 2020, Phoenix made
payments of $3,200,000 to Great Western Oil and Gas for its portion
of the wells, while Phoenix and Great Western Oil and Gas
negotiated terms of its joint venture. In December 2020, Phoenix
and Great Western Oil and Gas came to an agreement whereby Phoenix
would pay Great Western Oil and Gas interest of $50,000 in December
2020, Great Western Oil and Gas would net Phoenix’s revenue
against the cost of the wells and Phoenix would pay $600,000 a
month beginning in January 2021 until the balance of the payable
was paid.
Additionally, the
accounts payable balance includes marketing and legal expenses, as
well as joint interest billing (JIB) costs due for other projects.
Phoenix has concentration in the accounts payable account, where
over 95% of the accounts payable balance is due to Great Western
Oil and Gas.
Note 6 – Line of credit
In May
2021, First International Bank and Trust and Phoenix agreed to
expand the credit facility. First International Bank and Trust
extended the total lending amount to $10,000,000 by taking
$3,000,000 of the previous line of credit and converting it into a
term loan over 5-years, while also creating a $7,000,000 lending
facility. First International Bank and Trust has made $1,940,000 of
the $7,000,000 facility available to Phoenix.
F-12
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note 7 – Notes payable
Phoenix
has an investor program issued under Regulation D of federal
securities law. Under the federal securities laws, any offer or
sale of a security must either be registered with the SEC or meet
an exemption. Regulation D under the Securities Act provides a
number of exemptions from the registration requirements, allowing
some companies to offer and sell their securities without having to
register the offering with the SEC. Under this program, Phoenix
took in an additional $1,960,231 of debt from multiple investors
with varying maturities and interest rates ranging from 9.3% to
10.5% APR for the quarter ended June 30, 2021. Interest is paid
quarterly on the majority of these notes. For the notes where
interest is being compounded, interest is expensed and capitalized
quarterly.
Note 8 – Deferred closing
The
Company has agreed to deferred closing arrangements (installment
sales) with numerous clients with principal amount of $1,568,764
owed for the quarter ended June 30, 2021. Deferred closings have
several different payment structures and interest rates ranging
from 8% to 10% annually. Interest is capitalized quarterly on
deferments that are not paying interest quarterly.
Note 9 – Member’s equity
Member’s
equity consists of two buckets, retained earnings and owner’s
investment. Owner’s investment represents contributions and
distributions made by Lion of Judah Capital, LLC, the majority
profit-share owner and sole equity owner.
All
members of Phoenix have a profit-share interest in Phoenix’s
net income. All partners are paid monthly guaranteed payments,
which are a draw against each member’s future capital
account. Lion of Judah Capital, LLC is credited with a 10%
preferential return on its contributed capital before
member’s profit-share percentages are applied to net
income.
F-13
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note 10 – Related parties transactions
As of
June 30, 2021 and 2020, the Company had no material related party
receivables or payables.
Note 11 – Company commitments
Phoenix
leases office space under several operating leases. Rent expense
for the year ended December 31, 2020 and for the period from
inception April 23, 2019 through December 31, 2019 was $114,768 and
$31,330, respectively. Phoenix has offices in Hermosa Beach, CA
(month-to-month), Littleton, CO (2-year lease – expiring on
January 31, 2023) and Casper, WY (1-year lease – expiring on
October 31, 2021). The on-going lease commitments are approximately
$11,381 per month.
Future
commitments for the years ended amounts to:
|
2021
|
$80,627
|
|
2022
|
69,864
|
|
2023
|
5,835
|
|
Total
|
$156,326
|
Note 12 – COVID-19 pandemic and impact on global demand for
oil and natural gas
The
ongoing global spread of a novel strain of coronavirus
(SARS-Cov-2), which causes COVID-19, has caused a continuing
disruption to the oil and natural gas industry and to our business
by, among other things, contributing to a significant decrease in
global crude oil demand and the price for oil beginning in the
first quarter of 2020 and continuing through the fourth quarter of
2020. The declining commodity prices have adversely affected the
revenues the Company receives for its royalty interests and could
affect its ability to access the capital markets on terms favorable
to the Company.
Additionally, in
response to the decline in commodity prices, many operators on the
Company's properties have announced reductions in their estimated
capital expenditures for 2021 and beyond, which has and will
adversely affect the near-term development of the Company's
properties during the second half of the year and into 2021. While
these lower commodity prices initially resulted in some of the
Company's operators shutting in or curtailing production from wells
on its properties during the second quarter of 2020, we saw a
majority of the Company’s operators resume production for
previously curtailed and shut-in wells in connection with the
improvement of commodity prices in the second half of
2020.
In
response to the COVID-19 pandemic, the potential risk to the
Company’s workforce and in compliance with stay-at-home
orders, the Company successfully implemented policies and the
technological infrastructure for all of its employees to work from
home in the first quarter of 2020 and ceased all business travel.
Due to these efforts, the Company has not experienced material
disruptions to its operations or the health of its workforce and
has maintained the engagement and connectivity of its
personnel.
F-14
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
Note 13 – Subsequent events
Management has
evaluated subsequent events through August 25, 2021, in connection
with the preparation of these financial statements, which is the
date the financial statements were available to be
issued.
PPP loan forgiveness
On July
7, 2021, management was notified by Chase Bank, who issued the PPP
loan to Phoenix, that the forgiveness request had been approved in
full by the SBA. Phoenix will recognize other income of $192,437 in
third quarter of 2021 in relation to the loan being
forgiven.
F-15
SUPPLEMENTAL SCHEDULES
F-16
PHOENIX CAPITAL GROUP HOLDINGS, LLC.
RECONCILIATION
OF EARNINGS BEFORE INCOME TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA) TO NET INCOME (LOSS)
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
|
|
June
30,
2021
|
June
30,
2020
|
|
STATEMENTS
OF OPERATIONS
|
|
|
|
Net Income
(Loss)
|
$1,079,496
|
$2,316,770
|
|
|
|
|
|
EXPENSES
TO ADD BACK
|
|
|
|
Depreciation,
depletion, accretion, and amortization
|
1,531,886
|
1,180,458
|
|
Interest
expense
|
306,986
|
93
|
|
|
|
|
|
OTHER
FINANCIAL DATA
|
|
|
|
EBITDA
(1)
|
$2,918,368
|
$3,497,321
|
|
|
|
|
(1)
EBITDA is a non-GAAP supplemental financial measure used by
management and by external users of financial statements such as
investors, research analysts, and others, to assess the financial
performance of our assets and their ability to sustain
distributions over the long term without regard to financing
methods, capital structure, or historical cost basis.
EBITDA is defined as net income (loss) before interest expense,
income taxes, and depreciation, depletion, and
amortization.
EBITDA does not represent and should not be considered an
alternative to, or more meaningful than, net income (loss), income
from operations, cash flows from operating activities, or any other
measure of financial performance presented in accordance with U.S.
GAAP as measures of financial performance. EBITDA has important
limitations as an analytical tool because it excludes some but not
all items that affect net income (loss), the most directly
comparable U.S. GAAP financial measure. The computation of EBITDA
may differ from computations of similarly titled measures of other
companies.
F-17
PHOENIX CAPITAL GROUP HOLDINGS, LLC.
SCHEDULES
OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE SIX MONTHS ENDING JUNE 30, 2021 AND JUNE 30
2020
(UNAUDITED)
|
|
June
30,
2021
|
June
30,
2020
|
|
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES
|
|
|
|
Guaranteed
payments
|
$418,237
|
$512,177
|
|
Office supplies,
equipment, and software
|
146,283
|
86,747
|
|
Rent
|
72,516
|
43,252
|
|
Bank charges and
fees
|
54,460
|
-
|
|
Dues and
subscriptions
|
5,767
|
27,157
|
|
Shipping, freight,
and delivery
|
16,818
|
5,389
|
|
Other
|
98,925
|
66,778
|
|
Total selling,
general, and administrative expenses
|
$813,006
|
$741,500
|
F-18
PHOENIX CAPITAL GROUP HOLDINGS, LLC.
FINANCIAL
STATEMENTS
AND
SUPPLEMENTAL
SCHEUDULES
As of December 31, 2020 and 2019 and for the year ended December
31, 2020 and
for the period April 23, 2019 (inception) through December 31,
2019
And Report of Independent Auditor
F-19
PHOENIX CAPITAL GROUP HOLDINGS, LLC.
TABLE
OF CONTENTS
|
REPORT OF INDEPENDENT AUDITOR
|
F-21
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
Balance
Sheets
|
F-23
|
|
Statements of
Operations
|
F-24
|
|
Statements of
Members’ Equity
|
F-25
|
|
Statements of Cash
Flows
|
F-26
|
|
Notes
to the Financial Statements
|
F-27
|
|
|
|
|
SUPPLEMENTAL SCHEDULES
|
|
|
Reconciliation of
Earnings Before Income Taxes, Depreciation and
|
|
|
Amortization
(EBITDA) to Net Income (Loss)
|
F-38
|
|
Schedules of
Selling, General, and Administrative Expenses
|
F-39
|
|
Supplemental Oil
and Natural Gas Disclousres - Unaudited
|
F-40
|
F-20
Report of Independent Auditor
To the
Board of Directors and Members
Phoenix
Capital Group Holdings, LLC
Hermosa
Beach, California
We have
audited the accompanying financial statements of Phoenix Capital
Group Holdings, LLC (a Delaware corporation), which comprise the
balance sheets as of December 31, 2020 and 2019, and the related
statements of operations, members’ equity, and cash flows for
the year ended December 31, 2020 and for the period from April 23,
2019 (inception) through December 31, 2019, and the related notes
to the financial statements.
Management’s Responsibility for the Financial
Statements
Management
is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of
the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Phoenix Capital
Group Holdings, LLC as of December 31, 2020 and 2019, and the
results of its operations and its cash flows for the year ended
December 31, 2020 and for the period from April 23, 2019
(inception) through December 31, 2019, in accordance with
accounting principles generally accepted in the United States of
America.
F-21
Report on Supplementary Information
Our
audits were conducted for the purpose of forming an opinion on the
financial statements as a whole. The supplementary schedules of
reconciliation of earnings before income taxes, depreciation and
amortization (EBITDA) to net income (loss) and selling, general,
and administrative expenses are presented for purposes of
additional analysis and are not a required part of the financial
statements. Such information is the responsibility of management
and was derived from and relates directly to the underlying
accounting and other records used to prepare the financial
statements. The information has been subjected to the auditing
procedures applied in the audit of the financial statements and
certain additional procedures, including comparing and reconciling
such information directly to the underlying accounting and other
records used to prepare the financial statements or to the
financial statements themselves, and other additional procedures in
accordance with auditing standards generally accepted in the United
States of America. In our opinion, the information is fairly
stated, in all material respects, in relation to the financial
statements as a whole.
/s/
Cherry Bekaert LLP
Ft.
Lauderdale, Florida
August
26, 2021
F-22
PHOENIX CAPITAL GROUP HOLDINGS, LLC
BALANCE
SHEETS
DECEMBER 31, 2020 AND 2019
|
|
2020
|
2019
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$169,982
|
$58,642
|
|
Other
receivables
|
-
|
600
|
|
Total Current
Assets
|
169,982
|
59,242
|
|
|
|
|
|
Oil and gas
properties, at cost, using the successful method of
accounting:
|
|
|
|
Proved
properties
|
13,474,002
|
534,884
|
|
Unproven
properties
|
515,276
|
-
|
|
Total Property and
Equipment
|
13,989,278
|
534,884
|
|
Accumulated
depletion
|
(2,993,286)
|
(6,894)
|
|
Net Property and
Equipment
|
10,995,992
|
527,990
|
|
|
|
|
|
Other
Assets:
|
|
|
|
Other
receivables
|
21,419
|
-
|
|
Total Other
Assets
|
21,419
|
-
|
|
Total
Assets
|
$11,187,393
|
$587,232
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts payable
(Note 5)
|
$3,092,871
|
$-
|
|
Accrued
expenses
|
11,288
|
17,791
|
|
Line of
credit
|
2,750,000
|
-
|
|
Current portion of
notes payable
|
350,000
|
-
|
|
Current portion of
deferred closings
|
668,377
|
-
|
|
Total Current
Liabilities
|
6,872,536
|
17,791
|
|
|
|
|
|
Noncurrent
Liabilities:
|
|
|
|
Notes
payable
|
600,000
|
-
|
|
PPP
loan
|
192,437
|
-
|
|
Deferred
closings
|
426,341
|
-
|
|
Asset retirement
obligation
|
23,048
|
-
|
|
Total Noncurrent
Liabilities
|
1,241,826
|
-
|
|
Total
Liabilities
|
8,114,362
|
17,791
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
3,073,031
|
569,441
|
|
TOTAL
LIABILITIES AND MEMBERS' EQUITY
|
$11,187,393
|
$587,232
|
The accompanying notes to the financial statements are an integral
part of these statements.
F-23
PHOENIX CAPITAL GROUP HOLDINGS, LLC
STATEMENTS
OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020 AND
FOR THE PERIOD APRIL 23, 2019 (INCEPTION) THROUGH DECEMBER 31,
2019
|
|
2020
|
2019
|
|
REVENUES
|
|
|
|
Gain on sale of
assets
|
$2,828,819
|
$154,861
|
|
Mineral and royalty
revenues
|
5,718,431
|
39,425
|
|
Total
revenues
|
8,547,250
|
194,286
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Depreciation,
depletion, accretion and amortization
|
2,990,916
|
6,894
|
|
Selling, general,
and administrative expenses
|
1,414,157
|
295,731
|
|
Severance and ad
valorem taxes
|
1,145,325
|
1,193
|
|
Payroll and payroll
expenses
|
585,302
|
66,058
|
|
Contractors and
professional fees
|
270,404
|
136,164
|
|
Gathering,
transportation and marketing
|
187,241
|
49,666
|
|
Total operating
expenses
|
6,593,345
|
555,706
|
|
|
|
|
|
Gain (loss) from
operations
|
1,953,905
|
(361,420)
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
Interest
expense
|
(111,328)
|
(198)
|
|
Total other
expenses
|
(111,328)
|
(198)
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$1,842,577
|
$(361,618)
|
The
accompanying notes to the financial statements are an integral part
of these statements.
F-24
PHOENIX CAPITAL GROUP HOLDINGS, LLC
STATEMENTS
OF MEMBERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2020 AND
FOR THE PERIOD APRIL 23, 2019 (INCEPTION) THROUGH DECEMBER 31,
2019
|
Balances,
inception, April 23, 2019
|
$-
|
|
Contributions
|
1,406,059
|
|
Distributions
|
(475,000)
|
|
Net
loss
|
(361,618)
|
|
Balances, December
31, 2019
|
569,441
|
|
Contributions
|
1,368,191
|
|
Distributions
|
(707,178)
|
|
Net
income
|
1,842,577
|
|
Balances, December
31, 2020
|
$3,073,031
|
F-25
PHOENIX CAPITAL GROUP HOLDINGS, LLC
STATEMENTS
OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2020 AND
FOR THE PERIOD APRIL 23, 2019 (INCEPTION) THROUGH DECEMBER 31,
2019
|
|
2020
|
2019
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net income
(loss)
|
$1,842,577
|
$(361,618)
|
|
Adjustments to
reconcile net income (loss) to net cash
|
|
|
|
flows from
operating activities:
|
|
|
|
Depreciation,
depletion, accretion and amortization
|
2,990,916
|
6,894
|
|
Asset retirement
obligation
|
23,048
|
-
|
|
Gain on sale of
assets
|
(2,828,819)
|
(154,861)
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Other current
assets
|
600
|
(600)
|
|
Other
assets
|
(21,419)
|
-
|
|
Accounts payable
and accrued liabilities
|
3,086,962
|
17,791
|
|
Net cash flows from
operating activities
|
5,093,865
|
(492,394)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITES
|
|
|
|
Additions to oil
and gas properties and leases
|
(20,911,545)
|
(1,020,923)
|
|
Proceeds from sale
of assets
|
10,911,277
|
640,900
|
|
Net cash flows from
investing activities
|
(10,000,268)
|
(380,023)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Borrowing of bank
line of credit
|
2,750,000
|
-
|
|
Borrowing of notes
payable
|
950,000
|
-
|
|
Borrowing of PPP
loan
|
192,437
|
-
|
|
Member's
contributions
|
737,766
|
1,406,059
|
|
Member's
distributions
|
(707,178)
|
(475,000)
|
|
Decrease in
deferred closings
|
1,094,718
|
-
|
|
Net cash flows from
financing activities
|
5,017,743
|
931,059
|
|
|
|
|
|
Net change in
cash
|
111,340
|
58,642
|
|
Cash, beginning of
year
|
58,642
|
-
|
|
Cash, end of
year
|
$169,982
|
$58,642
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
|
|
|
|
Noncash owner
contribution of oil and gas property
|
$630,425
|
$-
|
|
Cash paid during
the period for interest
|
111,328
|
198
|
|
|
$741,753
|
$198
|
(1)
Owner contributions of three leasehold assets were contributed to
the company in 2020.
The
accompanying notes to the financial statements are an integral part
of these statements.
F-26
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note 1 – Business and basis of presentation
Phoenix Capital Group Holdings, LLC
(“Phoenix” or the “Company") is a Delaware
LLC formed on April 23, 2019, to acquire mineral rights, royalty
interests and non-operated working interests in the Permian Basin,
TX, the Williston Basin, ND/MT, and the Denver-Julesburg Basin,
CO.
The
Company, through utilization of proprietary software developed
internally coupled with years of industry experience, believes it
has a significant competitive advantage in the
marketplace.
Phoenix
operates as a profit-share partnership. At the end of 2020, there
are nine profit-share partners, of which Lion of Judah Capital,
LLC, a Delaware LLC, is the majority profit-share owner and
exclusive equity contributor and owner. At the end of 2020, Lion of
Judah Capital, LLC was a 66.96% profit-share owner.
Note 2 – Significant accounting policies
Basis of preparation
The
accompanying financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). The financial
statements reflect all normal recurring adjustments that, in the
opinion of management, are necessary for a fair representation. The
Company operates in one segment: oil and natural gas exploration
and production.
Cash and cash equivalents
The Company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The Company maintains
its cash and cash equivalents at financial institutions. The
balances may exceed the Federal Deposit Insurance Corporation
(“FDIC”) insurance coverage and, as a result, there may
be a concentration of credit risk related to amounts on deposit in
excess of FDIC insurance coverage.
Fair value of financial instruments
The
carrying values of the Company’s current financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities, approximate
their fair value at December 31, 2020 and 2019 because of the
short-term maturity of these instruments.
Asset retirement obligations
Fair
values of legal obligations to retire and remove long-lived assets
are recorded when the obligation is incurred. When the liability is
initially recorded, the Company capitalizes this cost by increasing
the carrying amount of the related property and equipment. Over
time, the liability is accreted for the change in its present value
and the capitalized cost in oil and natural gas properties is
depleted based on units of production consistent with the related
asset.
Use of estimates
The
preparation of the financial statements in conformity with U.S.
GAAP as detailed in the Financial Accounting Standards Boards
(“FASB”) Accounting Standards Codification
(“ASC”) requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, and the 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. Accordingly, actual results could differ materially from
these estimates.
F-27
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note
2 – Significant accounting policies (continued)
Use of estimates (continued)
The
accompanying financial statements are based on a number of
significant estimates including quantities of oil, natural gas and
natural gas liquids (“NGL”) reserves that are the basis
for the calculations of depreciation, depletion, amortization
(“DD&A”), and determinations of impairment of oil
and natural gas properties. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and natural
gas and there are numerous uncertainties inherent in estimating
quantities of proved oil and natural gas reserves. The accuracy of
any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a
result, reserve estimates may materially differ from the quantities
of oil and natural gas that are ultimately recovered.
Joint activities
Certain
of exploration, development, and production activities are
conducted jointly with other entities and, accordingly, the
financial statements reflect only the Company’s proportionate
interest in such activities.
Impairment of long-lived assets
The
Company follows the provisions of ASC 360, Property, Plant, and Equipment
(“ASC 360”). ASC 360 requires that our long-lived
assets be assessed for potential impairment of their carrying
values whenever events or changes in circumstances indicate such
impairment may have occurred. Proved oil and natural gas properties
are evaluated by field for potential impairment. An impairment on
proved properties is recognized when the estimated undiscounted
future net cash flows of a field are less than its carrying value.
If an impairment occurs, the carrying value of the impaired field
is reduced to its estimated fair value, which is generally
estimated using a discounted cash flow approach.
Unproved oil and
natural gas properties do not have producing properties and are
valued on acquisition by management, with the assistance of an
independent expert when necessary. As reserves are proved through
the successful completion of exploratory wells, the cost is
transferred to proved properties. The cost of the remaining
unproved basis is periodically evaluated by management to assess
whether the value of a property has diminished. To do this
assessment, management considers, (i) estimated potential reserves
and future net revenues from an independent expert, (ii) our
history in exploring the area, (iii) our future drilling plans per
our capital drilling program prepared by our reservoir engineers
and operations management, and (iv) other factors associated with
the area. Impairment is taken on the unproved property value if it
is determined that the costs are not likely to be recoverable. The
valuation is subjective and requires management to make estimates
and assumptions which, with the passage of time, may prove to be
materially different from actual results.
Accounts receivable
Receivables consist
of royalty income due from operators for oil and gas sales to
purchasers and receipts from the Company’s non-operating
interest ownership. Those purchasers remit payment for production
to the operator and the operator in turn remits payment to Phoenix
for the agreed-to royalties. Receivables from third parties, for
which we did not receive actual information, either due to timing
delays or due to the unavailability of data at the time when
revenues are recognized, are estimated. Volume estimates for wells
with available historical actual data are based upon, (i) the
historical actual data for the months the data is available or (ii)
engineering estimates for the months the historical actual data is
not available. Phoenix does not recognize revenues for wells with
no historical actual data because we cannot conclude that it is
probable that a significant revenue reversal will not occur in
future periods. Pricing estimates are based upon actual prices
realized in an area by adjusting the market price for the average
basis differential from market on a basin-by-basin
basis.
Phoenix
routinely reviews outstanding balances, assesses the financial
strength of its customers, and records a reserve for amounts not
expected to be fully recovered. There is no allowance for doubtful
accounts as of December 31, 2020 and 2019.
F-28
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note
2 – Significant accounting policies (continued)
Concentration of significant customers
Financial
instruments that potentially subject Phoenix to concentrations of
credit risk consist of cash, receivable, royalty revenue, and our
revolving credit facility. Royalty revenues are concentrated among
operators engaged in the energy industry within the United States.
Management periodically assesses the financial condition of these
entities and institutions and considers any possible credit risk to
be minimal.
Great
Western Oil and Gas is responsible for approximately 75% of the
royalty revenue received in 2020. The concentration risk of Great
Western Oil and Gas will become smaller in subsequent years as the
assets deplete and are replaced by future acquisitions. This
concentration of revenues with Great Western Oil and Gas also
creates a geographic concentration of revenues exceeding 75% in the
Denver-Julesburg Basin.
Oil and gas properties
The
Company invests primarily in mineral, royalty, and overriding
royalty interests of oil and natural gas properties. Oil and
natural gas producing activities are accounted for in accordance
with the successful efforts method of accounting. Under this
method, costs of acquiring properties are capitalized. All general
and administrative costs unrelated to acquisitions are expensed as
incurred. Depletion of capitalized costs is recorded using the
units-of-production method based on proved reserves. On the sale or
retirement of a proved property, the cost and related accumulated
depletion are removed from the property accounts and any gain or
loss is recognized.
The
depletion rate is determined by dividing the cumulative recovered
barrels of oil by the estimated ultimate recovery by well and
averaged amongst all wells within the pooled unit. This rate is
multiplied by the original cost basis and reduced by depletion
taken in prior periods. The cost basis remaining represents the
percentage of the asset remaining to be recovered by the wells
within the pooled unit.
For
more than 95% of properties within Phoenix’s inventory, oil
production represents over 90% of the value of the property and in
some cases approached 100%. Therefore, for depletion purposes,
Phoenix uses oil recovery for all properties as the unit of
production for depletion.
Phoenix
evaluates the oil and gas properties in its inventory on a yearly
basis for impairment, in accordance with the FASB’s
authoritative guidance, a discount rate of 10% is applied to the
annual future net cash flows to determine if the carrying value of
the property exceeds the present value of future cashflows. Phoenix
has not impaired the value of any properties in 2020 or
2019.
Equipment and other property
Equipment and other
property are stated at cost, and inventory is stated at weighted
average cost which does not exceed replacement cost. Depreciation
is calculated using the straight-line method over the estimated
useful lives (ranging from 3 to 7 years) of the respective assets.
The costs of normal maintenance and repairs are charged to expense
as incurred. Material expenditures that increase the life of an
asset are capitalized and depreciated over the estimated remaining
useful life of the asset. The cost of equipment sold or otherwise
disposed of, and the related accumulated depreciation, are removed
from the accounts and any gain or loss is reflected in current
earnings.
F-29
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note
2 – Significant accounting policies (continued)
Revenue from contracts with customers
The
Company recognizes its revenues following the ASC Topic
606, Revenue from Contracts with
Customers, ("ASC 606"). Revenue is recorded when title
passes to the operator or purchaser. Royalty interest owners have
no rights or obligations to explore, develop, or operate properties
and do not incur any of the costs of exploration, development, and
operation of the properties. Given the inherent time lag between
when oil, natural gas, NGL production and sales occur, and when
operators or purchasers often make disbursements to royalty
interest owners and due to the large potential fluctuations of both
oil production and sale price, a significant portion of the
Company’s revenue may represent accrued revenue based on
estimated net sales volumes.
Oil
and natural gas sales
Oil,
natural gas, and NGL sales revenues are generally recognized when
control of the product is transferred to the customer, the
performance obligations under the terms of the contracts with
customers are satisfied and collectability is reasonably assured.
As non-operators and mineral right owners, Phoenix in applicable
situations have elected not to have control of the product. All of
the Company’s oil, natural gas, and NGL sales are made under
contracts with customers (operators). The performance obligations
for the Company’s contracts with customers are satisfied at a
point in time through the delivery of oil and natural gas to its
customers.
Allocation
of transaction price to remaining performance
obligations
As the
Company has determined that each unit of product generally
represents a separate performance obligation, future volumes are
wholly unsatisfied and disclosure of the transaction price
allocated to remaining performance obligations is not required. The
Company has utilized the practical expedient in ASC 606, which
permits the Company to allocate variable consideration to one
or more but not all performance obligations in the contract if the
terms of the variable payment relate specifically to the
Company’s efforts to satisfy that performance obligation and
allocating the variable amount to the performance obligation is
consistent with the allocation objective under ASC 606.
Additionally, the Company will not disclose variable consideration
subject to this practical expedient.
Fair value measurements
The
Company follows ASC 820, Fair
Value Measurements and Disclosures (“ASC 820”).
This standard defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. ASC 820 does not require any new fair value
measurements but applies to assets and liabilities that are
required to be recorded at fair value under other accounting
standards. ASC 820 characterizes inputs used in determining fair
value according to a hierarchy that prioritizes those inputs based
upon the degree to which they are observable.
The
three levels of the fair value measurement hierarchy are as
follows:
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: Measured based on prices or valuation models that required
inputs that are both significant to the fair value measurement and
less observable for objective sources (i.e., supported by little or
no market activity).
F-30
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note
2 – Significant accounting policies (continued)
Advertising and marketing costs
Advertising and
marketing costs for the year ended December 31, 2020, and for the
period from inception through December 31, 2019, was approximately
$187,000 and $50,000, respectively.
Recently issued accounting standards not yet adopted
In
February 2016, FASB issued Accounting Standards Update
(“ASU”) 2016-02, Leases, which requires all leasing
arrangements to be presented in the balance sheet as liabilities
along with a corresponding asset. ASU 2016-02 does not apply to
leases of mineral rights to explore for or use crude oil and
natural gas. The ASU will replace most existing lease guidance in
U.S. GAAP when it becomes effective. In January 2018, FASB issued
ASU 2018-01, Land Easement Practical Expedient for Transition to
Topic 842, to provide an optional practical expedient to not
evaluate existing or expired land easements that were not
previously accounted for as leases under Topic 840. In July 2018,
FASB issued ASU 2018-11 Leases (Topic 842): Targeted
Improvements, which provides for another transition method, in
addition to the existing transition method, by allowing entities to
initially apply the new leases standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption (i.e., comparative
periods presented in the financial statements will continue to be
in accordance with current U.S. GAAP (Topic 840, Leases)). The new
standard becomes effective during the fiscal year ending December
31, 2022 and interim periods within the fiscal year ending December
31, 2023 and early adoption is permitted. Management is currently
evaluating the impact that the adoption of this update will have on
our financial statements and related disclosures.
The
Company has reviewed other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any,
on the Company’s results of operations, financial position
and cash flows. Based on that review, the Company believes that
none of these pronouncements will have a significant effect on
current or future earnings or operations.
Income taxes
The
Company is a limited liability company and has elected to be
treated as a partnership for income tax purposes. The pro rata
share of taxable income or loss is included in the individual
income tax returns of members based on their percentage of
ownership. Consequently, no provision for incomes taxes is made in
the accompanying financial statements.
Note 3 – Oil and gas properties
The
Company invests in two materially different asset classes –
mineral rights (including overriding royalty interest and
non-participating royalty interest) and non-operated working
interests using the successful efforts method of accounting for
both asset classes.
Mineral rights, overriding royalty interest, and non-participating
royalty interests
The
mineral rights account consists of 47 unique mineral rights
holdings (183 net mineral acres (“NMA”)) in 2019 and
237 unique mineral rights holdings (1,069 NMA) in 2020 which
figures are net of the divestitures described in this paragraph.
Phoenix divested 10 unique mineral rights holdings (65 NMA) in
2019 and 205 unique mineral rights holdings (2,233 NMA) in 2020.
Most of these holdings are in the Williston Basin, ND/MT with the
vast majority proven and currently producing. Phoenix expanded
ownership into the Denver-Julesburg, CO and Permian Basins, TX
during 2020. Mineral rights are the first of two asset classes that
the Company invests in.
F-31
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note 3 – Oil and gas properties (continued)
Mineral rights, overriding royalty interest, and non-participating
royalty interests (continued)
The
following details the location of the Company’s oil and
natural properties, proved, and unproved by location:
|
|
2020
|
2019
|
|
Oil and natural gas
properties, proved:
|
|
|
|
Williston
Basin
|
$3,372,789
|
$534,884
|
|
Denver-Julesburg
|
10,077,673
|
-
|
|
Permian
Basins
|
23,540
|
-
|
|
|
13,474,002
|
534,884
|
|
|
|
|
|
Oil and natural gas
properties, unproved:
|
|
|
|
Williston
Basin
|
369,910
|
-
|
|
Denver-Julesburg
|
137,106
|
-
|
|
Permian
Basins
|
8,260
|
-
|
|
|
515,276
|
-
|
|
|
$13,989,278
|
$534,884
|
Non-operated working interests (leases and unleased
minerals)
Non-operated
working interests are the second of the two asset classes that the
Company invests in. Leases represent the potential to participate
in drilling projects, absorbing both the cost of the drilling
project as well as the larger rate of return when the wells produce
(as compared with the smaller lease rate owned by the
lessee).
As
of December 31, 2020 and 2019, Phoenix held 509 and 0,
respectively, of net acres of non-operated working
interests. Phoenix has a substantial concentration risk in
Great Western Oil and Gas, which represents over 90% of the value
of the leases held account at the end of 2020. Phoenix has full
faith and belief that Great Western Oil and Gas will continue as a
going concern for the near-term.
Proved and unproved properties
Phoenix
considers a property proved when there are estimated quantities of
oil, natural gas, and NGLs which geological and engineering data
demonstrate, with reasonable certainty, to be recoverable in future
years from known reservoirs under existing economic and operating
conditions (i.e., prices and costs) existing at the time the
estimate was made.
Phoenix
considers a property unproved when there are currently no producing
wells pooling the property. For over 95% of the value of the
unproven properties in 2020, Phoenix has analyzed the wells within
a 5-mile radius of the property to conclude the property is
economically viable for oil extraction and has the potential to be
drilled.
Mineral and royalty revenues
Phoenix
is paid mineral and royalty revenue monthly by the various
operators and working interest owners within the pooled units that
Phoenix owns. Mineral and royalty revenues are subject to various
expenses that are removed from Phoenix’s paystub including
owner deductions, severance and ad valorem taxes, and out-of-state
owner withholdings. Phoenix grosses revenue up on the top-line and
includes these expenses as operating expenses on the statement of
operations.
F-32
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note 4 – Asset retirement obligations
As part
of the development of oil and natural gas properties, the Company
incurs asset retirement obligations (“ARO”). ARO
results from the Company’s responsibility to abandon and
reclaim their net share of all working interest properties and
facilities. At December 31, 2020, the net present value of the
total ARO was estimated to be $23,048, with the undiscounted value
being $187,699. Total ARO shown in the table below consists of
amounts for future plugging and abandonment liabilities on the
wellbores and facilities based on third party estimates of such
costs, adjusted for inflation at a rate of 2.50% per annum for the
years ended December 31, 2020 and 2019. These values are discounted
to present value using a rate of 7.50% per annum for the years
ended December 31, 2020 and 2019.
The
following table summarizes the changes in the ARO for the years
ended December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Asset retirement
obligations at beginning of period
|
$-
|
$-
|
|
Additions
|
23,048
|
-
|
|
Accretions
|
-
|
-
|
|
Asset retirement
obligations at end of period
|
$23,048
|
$-
|
|
Long-term
portion
|
$23,048
|
$-
|
ARO is
measured using primarily Level 3 inputs. The significant
unobservable inputs to this fair value measurement include
estimates of plugging costs, remediation costs, inflation rate, and
well life. The inputs are calculated based on historical data as
well as current estimated costs.
Note 5 – Accounts payable
In
March 2020, the Company obtained a 10.4% non-operating working
interest in Adams County, CO operated by Great Western Oil and Gas.
At that time, Great Western Oil and Gas had already drilled eight
wells with plans to drill fourteen additional wells on the site,
which were completed in July 2020. Throughout 2020, Phoenix made
payments of $3,200,000 to Great Western Oil and Gas for its portion
of the wells, while Phoenix and Great Western Oil and Gas
negotiated terms of its joint venture. In December 2020, Phoenix
and Great Western Oil and Gas came to an agreement whereby Phoenix
would pay Great Western Oil and Gas interest of $50,000 in December
2020, Great Western Oil and Gas would net Phoenix’s revenue
against the cost of the wells and Phoenix would pay $600,000 a
month beginning in January 2021 until the balance of the payable
was paid. The average balance of the payable throughout 2020 was
$4,467,558.
Additionally, the
accounts payable balance includes marketing and legal expenses, as
well as joint interest billing (JIB) costs due for other projects.
Phoenix has concentration in the accounts payable account, where
over 95% of the accounts payable balance is due to Great Western
Oil and Gas.
Note 6 – Line of credit
In
October 2020, the Company obtained a $3,750,000 open-end revolving
line of credit with First International Bank and Trust due on
October 2021. At the end of December 2020, the Company had advanced
$2,750,000. The average outstanding balance for 2020 was $342,896
and total interest paid in 2020 was $9,771. Interest is payable
monthly at a fixed rate of 7.29% per annum on a 365/360-day basis.
The line of credit is collateralized by assets within the
Company’s inventory.
F-33
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note 7 – Notes payable
In May
2020, the Company received a loan under the Paycheck Protection
Program (“PPP”) for an amount of $192,437, which was
established under the Coronavirus Aid, Relief, and Economic
Security Act (the CARES Act) and administered by the U.S. Small
Business Administration (“SBA”). The PPP loan matures
in April 2025 and bears interest at 1% per annum with an interest
only period until the applicable deferral period expires. The
receipt of the funds from the PPP loan and the forgiveness of the
PPP loan is dependent on the Company having initially qualified for
the PPP loan and qualifying for the forgiveness of such PPP loan
based on funds being used for certain expenditures such as payroll
costs and rent, as required by the terms of the PPP loan. Phoenix
has applied for full forgiveness and believes it will be
granted.
Additionally,
Phoenix has an investor program issued under Regulation D of
federal securities law. Under the federal securities laws, any
offer or sale of a security must either be registered with the SEC
or meet an exemption. Regulation D under the Securities Act
provides a number of exemptions from the registration requirements,
allowing some companies to offer and sell their securities without
having to register the offering with the SEC. Under this program,
Phoenix took in an additional $950,000 of debt from multiple
investors with varying maturities and interest rates ranging from
9.3% to 10.5% APR. Interest is paid quarterly on the majority of
these notes. For the notes where interest is being compounded,
interest is expensed and capitalized quarterly. Interest expense of
$51,464 in 2020 was attributable to these notes.
Future
payments for the notes payable amounts to:
|
Years
ended:
|
|
|
2021
|
$350,000
|
|
2022
|
400,000
|
|
2023
|
-
|
|
2024
|
200,000
|
|
|
$950,000
|
Note 8 – Deferred closing
The
Company has agreed to deferred closing arrangements (installment
sales) with numerous clients with principal amount of $1,094,718
owed at the close of 2020, of which $426,341 are long term with
repayments due from 2022 to 2025. Deferred closings have several
different payment structures and interest rates ranging from 8% to
10% annually. Interest is capitalized quarterly on deferments that
are not paying interest quarterly.
Note 9 – Member’s equity
Member’s
equity consists of two buckets, retained earnings and owner’s
investment. Owner’s investment represents contributions and
distributions made by Lion of Judah Capital, LLC, the majority
profit-share owner and sole equity owner.
All
members of Phoenix have a profit-share interest in Phoenix’s
net income. All partners are paid monthly guaranteed payments,
which are a draw against each member’s future capital
account. Lion of Judah Capital, LLC is credited with a 10%
preferential return on its contributed capital before
member’s profit-share percentages are applied to net
income.
F-34
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note 10 – Related parties transactions
During
the year ended December 31, 2020 and for the period from inception
through December 31, 2019, the Company received as a capital
contribution minerals and royalty interests from an entity
controlled by a family member of an officer of the Company. The
officer also holds membership interests in Alpha and Omega Capital,
LLC. Total consideration received during the year ended December
31, 2020 and for the period from inception through December 31,
2019 was $630,425 and $-, respectively. As of December 31, 2020 and
2019, the Company had no material related party receivables or
payables.
Note 11 – Company commitments
Phoenix
leases office space under several operating leases. Rent expense
for the year ended December 31, 2020 and for the period from
inception April 23, 2019 through December 31, 2019 was $114,768 and
$31,330, respectively. Phoenix has offices in Hermosa Beach, CA
(month-to-month), Littleton, CO (2-year lease – expiring on
January 31, 2023) and Casper, WY (1-year lease – expiring on
October 31, 2021). The on-going lease commitments are approximately
$11,381 per month.
Future
commitments for the years ended amounts to:
|
2021
|
$80,627
|
|
2022
|
69,864
|
|
2023
|
5,835
|
|
Total
|
$156,326
|
Note 12 – COVID-19 pandemic and impact on global demand for
oil and natural gas
The
ongoing global spread of a novel strain of coronavirus
(SARS-Cov-2), which causes COVID-19, has caused a continuing
disruption to the oil and natural gas industry and to our business
by, among other things, contributing to a significant decrease in
global crude oil demand and the price for oil beginning in the
first quarter of 2020 and continuing through the fourth quarter of
2020. The declining commodity prices have adversely affected the
revenues the Company receives for its royalty interests and could
affect its ability to access the capital markets on terms favorable
to the Company.
Additionally, in
response to the decline in commodity prices, many operators on the
Company's properties have announced reductions in their estimated
capital expenditures for 2021 and beyond, which has and will
adversely affect the near-term development of the Company's
properties during the second half of the year and into 2021. While
these lower commodity prices initially resulted in some of the
Company's operators shutting in or curtailing production from wells
on its properties during the second quarter of 2020, we saw a
majority of the Company’s operators resume production for
previously curtailed and shut-in wells in connection with the
improvement of commodity prices in the second half of
2020.
In
response to the COVID-19 pandemic, the potential risk to the
Company’s workforce and in compliance with stay-at-home
orders, the Company successfully implemented policies and the
technological infrastructure for all of its employees to work from
home in the first quarter of 2020 and ceased all business travel.
Due to these efforts, the Company has not experienced material
disruptions to its operations or the health of its workforce and
has maintained the engagement and connectivity of its
personnel.
F-35
PHOENIX CAPITAL GROUP HOLDINGS, LLC
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note 13 – Subsequent events
Management has
evaluated subsequent events through August 25, 2021, in connection
with the preparation of these financial statements, which is the
date the financial statements were available to be
issued.
Line of credit update
In May
2021, First International Bank and Trust and Phoenix agreed to
expand the credit facility. First International Bank and Trust
extended the total lending amount to $10,000,000 by taking
$3,000,000 of the previous line of credit and converting it into a
term loan over 5-years, while also creating a $7,000,000 lending
facility. First International Bank and Trust has made $4,300,000 of
the $7,000,000 facility available to Phoenix as of August 2021 with
the remaining $2,700,000 still available on the $7,000,000 line of
credit.
PPP loan forgiveness
On July
7, 2021, management was notified by Chase Bank, who issued the PPP
loan to Phoenix, that the forgiveness request had been approved in
full by the SBA. Phoenix will recognize other income of $192,437 in
third quarter of 2021 in relation to the loan being
forgiven.
F-36
SUPPLEMENTAL SCHEDULES
F-37
PHOENIX CAPITAL GROUP HOLDINGS, LLC.
RECONCILIATION
OF EARNINGS BEFORE INCOME TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA) TO NET INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2020 AND
FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31,
2019
|
|
2020
|
2019
|
|
STATEMENTS
OF OPERATIONS
|
|
|
|
Net Income
(Loss)
|
$1,842,577
|
$(361,618)
|
|
|
|
|
|
EXPENSES
TO ADD BACK
|
|
|
|
Depreciation,
depletion, accretion, and amortization
|
2,990,916
|
6,894
|
|
Interest
expense
|
111,328
|
198
|
|
|
|
|
|
OTHER
FINANCIAL DATA
|
|
|
|
EBITDA
(1)
|
$4,944,821
|
$(354,526)
|
(1)
EBITDA is a non-GAAP supplemental financial measure used by
management and by external users of financial statements such as
investors, research analysts, and others, to assess the financial
performance of our assets and their ability to sustain
distributions over the long term without regard to financing
methods, capital structure, or historical cost basis.
EBITDA is defined as net income (loss) before interest expense,
income taxes, and depreciation, depletion, and
amortization.
EBITDA does not represent and should not be considered an
alternative to, or more meaningful than, net income (loss), income
from operations, cash flows from operating activities, or any other
measure of financial performance presented in accordance with U.S.
GAAP as measures of financial performance. EBITDA has important
limitations as an analytical tool because it excludes some but not
all items that affect net income (loss), the most directly
comparable U.S. GAAP financial measure. The computation of EBITDA
may differ from computations of similarly titled measures of other
companies.
F-38
PHOENIX CAPITAL GROUP HOLDINGS, LLC.
SCHEDULES
OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 2020 AND
FOR THE PERIOD FROM INCEPTION THROUGH DECEMBER 31,
2019
|
|
2020
|
2019
|
|
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES
|
|
|
|
Guaranteed
payments
|
$950,256
|
$215,200
|
|
Office supplies,
equipment, and software
|
230,193
|
25,402
|
|
Rent
|
114,768
|
31,330
|
|
Bank charges and
fees
|
42,158
|
632
|
|
Dues and
subscriptions
|
34,886
|
14,011
|
|
Shipping, freight,
and delivery
|
19,939
|
3,680
|
|
Other
|
21,957
|
5,476
|
|
Total selling,
general, and administrative expenses
|
$1,414,157
|
$295,731
|
F-39
PHOENIX
CAPITAL GROUP HOLDINGS, LLC.
SUPPLEMENTAL OIL
AND GAS DISCLOSURES - UNAUDITED
Geographic Area of Operations
All of
the Company’s proved reserves are located within the
continental United States, with the majority concentrated in Texas,
North Dakota and Colorado.
Costs Incurred in Oil and Natural Gas Property Acquisitions and
Development Activities
Costs
incurred in oil and natural gas property acquisition and
development, whether capitalized or expensed, are presented
below:
|
|
Year Ended December 31,
|
|
|
|
2020
|
2019
|
|
Acquisition
Costs of Properties
|
|
|
|
Proved
|
$ 2,953,845
|
$ 534,884
|
|
Unproved
|
515,276
|
-
|
|
Development
Costs
|
9,985,273
|
-
|
|
Total
|
$ 13,454,394
|
$ 534,884
|
Property
acquisition costs include costs incurred to purchase, lease or
otherwise acquire a property. Development costs include costs
incurred to gain access to and prepare development well locations
for drilling, to drill and equip development wells, and to provide
facilities to extract, treat and gather natural gas.
Oil and Natural Gas Capitalized Costs
Aggregate
capitalized costs related to oil and natural gas production
activities with applicable accumulated depreciation, depletion and
amortization including impairments, are presented
below:
|
|
Year Ended December 31,
|
|
|
|
2020
|
2019
|
|
Proved
properties
|
$ 13,474,002
|
$ 534,884
|
|
Unproved
properties
|
515,276
|
-
|
|
Total
|
13,989,278
|
534,884
|
|
Accumulated
depreciation, depletion, amortization, and impairment
|
$ (2,993,286)
|
$ (6,894)
|
|
Oil
and natural gas properties, net
|
$ 10,995,992
|
$ 527,990
|
Oil and Natural Gas Reserve Information
The
following table sets forth estimated net quantities of the
Company’s proved developed oil and natural gas reserves.
Estimated reserves for the periods presented are based on the
unweighted average of first-day-of-the-month commodity prices over
the period January through December for the year in accordance with
definitions and guidelines set forth by the SEC and the FASB. For
estimates of oil reserves, the average WTI spot oil prices used
were $47.02, and $59.88 per barrel as of December 31, 2020 and
2019, respectively. These average prices are adjusted for quality,
transportation fees, and market differentials. For estimates of
natural gas reserves, the average Henry Hub prices used were $1.75
per MMBTU as of December 31, 2020 and 2019. These average prices
are adjusted for energy content, transportation fees, and market
differentials.
The
Company does not estimate the quantity or perceived cashflow of
proved undeveloped reserves for financial reporting purposes. The
Company does not have the ability to accurately estimate when or if
undeveloped reserves under its holdings will be extracted and
instead takes the conservative approach of only estimating the
reserves that are either currently producing or have a clear line
of sight to being extracted.
|
|
Crude Oil (Bbl)
|
Natural Gas (Mcf)
|
Total (Boe)
|
|
Net
proved reserves at April 23, 2019
|
-
|
-
|
-
|
|
Revisions
of previous estimates
|
-
|
-
|
-
|
|
Purchases of minerals in place 2
|
29,119
|
54,772
|
38,248
|
|
Production
|
(493)
|
(986)
|
(657)
|
|
Net
proved reserves at December 31, 2019
|
28,626
|
53,786
|
37,590
|
|
Revisions of previous estimates
1
|
(4,294)
|
(8,068)
|
(5,639)
|
|
Purchases of minerals in place 2
|
487,136
|
984,399
|
651,203
|
|
Production
|
(122,538)
|
(245,076)
|
(163,384)
|
|
Net
proved reserves at December 31, 2020
|
388,930
|
785,041
|
519,770
|
1
Revisions of previous estiamtes
include technical revisions due to changes in commodity
prices.
2
Includes the acquisition of
approximately $500,000 and $13.5 million of mineral and royalty
reserves in 2019 and 2020, respectively, primarily in the
Williston, DJ and Permian Basins.
F-40
Standardized Measure of Discounted Future Net Cash
Flows
Future
cash inflows represent expected revenues from production of
period-end quantities of proved reserves based on the 12-month
unweighted average of first-day-of-the-month commodity prices for
the periods presented. All prices are adjusted by field for
quality, transportation fees, energy content and regional price
differentials. Future cash inflows are computed by applying
applicable prices relating to the Company’s proved reserves
to the year-end quantities of those reserves. Future production,
development, site restoration and abandonment costs are derived
based on current costs assuming continuation of existing economic
conditions.
|
|
Year Ended December 31,
|
|
|
|
2020
|
2019
|
|
Future
cash inflows
|
$ 25,034,197
|
$ 1,900,324
|
|
Future
production costs
|
(2,722,509)
|
(200,381)
|
|
Future
net cash flows
|
22,311,688
|
1,699,943
|
|
Less
10% annual discount to reflect timing of cash flows
|
(8,082,681)
|
(530,330)
|
|
Standard
measure of discounted future net cash flows
|
$ 14,229,007
|
$ 1,169,613
|
|
Changes in the Standardized Measure for Discounted Cash
Flows
|
|
|
For the Year Ended December 31, 2020
|
|
|
Net
change in sales and transfer prices and in production (lifting)
costs related to future production
|
$ -
|
|
Changes
in the estimated future development costs
|
-
|
|
Sales
and transfers of oil and gas produced during the
period
|
(5,787,470)
|
|
Net
change due to extensions, discoveries, and improved
recovery
|
-
|
|
Net
change due to purchases and sales of minerals in place
|
18,914,977
|
|
Net
change due to revisions in quantity estimates
|
(201,298)
|
|
Previously
estimated development costs incurred during the period
|
80,152
|
|
Accretion
of discount
|
53,033
|
|
Aggregate
change in the standardized measure of discounted future net cash
flows for the year
|
$ 13,059,394
|
The
data presented should not be viewed as representing the expected
cash flow from, or current value of, existing proved reserves since
the computations are based on a significant amount of estimations
and assumptions. The required projection of production and related
expenditures over time requires furtherestimates with respect to
pipeline availability, rates of demand and governmental control.
Actual future prices and costs are likely to be substantially
different from historical prices and costs utilized in the
computation of reported amounts. Any analysis or evaluation of the
reported amounts should give specific recognition to the
computational methods utilized and the limitations inherent
therein.
Selected Quarterly Financial Information –
Unaudited
Quarterly financial
data was as follows for the periods indicated.
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|
2020
|
|
|
|
|
|
Total
Revenue
|
$ 3,427,475
|
$ 1,649,083
|
$ 1,013,337
|
$ 2,457,355
|
|
Net
Income
|
2,124,120
|
192,649
|
(729,957)
|
255,765
|
|
Total
Assets
|
7,784,804
|
9,672,952
|
10,774,289
|
11,187,393
|
|
Total
Liabilities
|
4,506,850
|
6,127,349
|
7,755,718
|
8,114,362
|
|
Total
Equity
|
$ 3,277,954
|
$ 3,545,603
|
$ 3,018,571
|
$ 3,073,031
|
|
2019
|
|
|
|
|
|
Total
Revenue
|
$ -
|
$ -
|
$ -
|
$ 194,286
|
|
Net
Income
|
(179)
|
(74,746)
|
(218,974)
|
(67,719)
|
|
Total
Assets
|
-
|
31,946
|
676,149
|
587,232
|
|
Total
Liabilities
|
179
|
6,871
|
20,149
|
17,791
|
|
Total
Equity
|
$ (179)
|
$ 25,075
|
$ 656,000
|
$ 569,441
|
F-41
PHOENIX CAPITAL GROUP HOLDINGS, LLC
9.0% Bonds (Bonds)
$75,000,000 Aggregate Maximum Offering Amount (75,000
Bonds)
$1,000 Minimum Purchase Amount (1 Bond)
OFFERING CIRCULAR
December 23, 2021
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