Introduction
The following discussion and analysis presents management's view of our business, financial condition and overall performance and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes. This information is intended to provide investors with an understanding of our past development activities, current financial condition and outlook for the future organized as follows: •Our Business •Overview of Significant Events •Liquidity and Capital Resources •Capital Development Activities •Results of Operations •Commitments and Contingencies •Summary of Critical Accounting Estimates •Recent Accounting Standards Our BusinessTellurian Inc. ("Tellurian," "we," "us," "our," or the "Company") intends to create value for shareholders by building a low-cost, global natural gas business, profitably delivering natural gas to customers worldwide (the "Business"). We are developing a portfolio of natural gas production, LNG marketing, and infrastructure assets that includes an LNG terminal facility (the "Driftwood terminal") and related pipelines (the "Pipeline Network"). We refer to the Driftwood terminal, the Pipeline Network and required natural gas production assets collectively as the "Driftwood Project ." Our existing natural gas production assets consist of 9,373 net acres and interests in 72 producing wells located in theHaynesville Shale trend of northernLouisiana . Our Business may be developed in phases. In connection with the implementation of our Business, we are offering partnership interests in theDriftwood Project . Partners will contribute cash in exchange for equity in theDriftwood Project and will receive LNG volumes at the cost of production, including the cost of debt, for the life of the Driftwood terminal. We plan to retain a portion of the ownership in theDriftwood Project and have engagedGoldman Sachs & Co. and Société Générale to serve as financial advisors. We continue to evaluate, and discuss with potential partners, the scope and other aspects of theDriftwood Project in light of the evolving economic environment, needs of potential partners and other factors. Whether we implement changes to the project will be based on a variety of factors, including the results of our continuing analysis, changing business conditions and investor feedback. Overview of Significant Events 2019 Term Loan OnMay 23, 2019 ,Driftwood Holdings LP , aDelaware limited partnership and an indirect wholly owned subsidiary ofTellurian Inc. ("Driftwood Holdings "), entered into a senior secured term loan agreement (the "2019 Term Loan") to borrow an aggregate principal amount of$60.0 million , an amount that was subsequently increased to$75.0 million . In conjunction with the 2019 Term Loan, we issued to the lender a warrant to purchase approximately 1.5 million shares of our common stock at$10.00 per share. During 2020, we entered into several amendments to the 2019 Term Loan and, in connection with those amendments, we issued to the lender a total of approximately 9.3 million shares of our common stock to retire$15.0 million of 28 -------------------------------------------------------------------------------- principal amount of the loan, repaid$19.1 million of principal amount of the loan in cash, replaced the original warrant with a warrant to purchase 9.0 million shares of our common stock at$1.00 per share and issued to the lender a new warrant to purchase 4.7 million shares of our common stock at$1.542 per share. As amended, (i) the maturity date of the 2019 Term Loan isMarch 23, 2022 , (ii) amounts borrowed bear interest at 16%, with an option on our part to defer 8% per annum as paid-in-kind, (iii) interest payments are made on a monthly basis, and (iv) we are required to maintain a month-end cash balance of at least$12.0 million . Following exercises of the warrants by the lender and reductions in the number of shares purchasable under the warrants resulting from partial repayments of amounts due under the 2019 Term Loan, the warrants give the lender the right, as ofFebruary 9, 2021 , to purchase approximately 3.5 million shares of our common stock for$1.00 and approximately 0.2 million shares of our common stock for$1.542 . 2020 Unsecured Note OnApril 29, 2020 , we issued a zero coupon$56.0 million senior unsecured note (the "2020 Unsecured Note") to a third party, raising proceeds of approximately$47.4 million , net of approximately$2.6 million in fees and$6.0 million in original issue discount. We also issued to the lender a warrant to purchase 20.0 million shares of our common stock at a strike price of$1.542 per share. The 2020 Unsecured Note is subject to certain cash sweep provisions, and a portion of the 2020 Unsecured Note must be paid on the first day of every month, beginning onJune 1, 2020 . Due to the amount of proceeds generated from the sale of our common stock under our at-the-market program inJune 2020 , as well as the equity offering completed onJuly 24, 2020 , these cash sweep provisions were triggered onJuly 1, 2020 andAugust 3, 2020 , requiring us to make a total of$8.0 million in additional repayments of the outstanding principal balance. As a result of these additional repayments, the final payment associated with the 2020 Unsecured Note is scheduled to occur onApril 1, 2021 instead ofJune 1, 2021 as originally scheduled. Equity Offering OnJuly 24, 2020 , we completed a registered direct offering pursuant to which we sold an aggregate of 35.0 million shares of our common stock at an offering price of$1.00 per share. Net proceeds from the transaction were approximately$32.8 million . LNG Marketing InJuly 2020 , we purchased the first cargo of LNG pursuant to the master LNG sale and purchase agreement entered into onApril 23, 2019 . This cargo was subsequently sold to an unrelated third party resulting in revenue of approximately$7.0 million . Restructuring InMarch 2020 , we implemented a cost reduction and reorganization plan due to the sharp decline in oil and natural gas prices as well as the growing negative economic effects of the COVID-19 pandemic. We incurred approximately$6.4 million of severance and reorganization charges due to the reduction in workforce. We have satisfied all amounts owed to former employees. Employee Retention Plan InJuly 2020 , the Company's Board of Directors approved an employee retention incentive plan (the "Employee Retention Plan") aggregating$12.0 million . The Employee Retention Plan vests in four equal installments upon the attainment of a ten-day average closing price of the Company's common stock above$2.25 ,$3.25 ,$4.25 and$5.25 (the "Stock Performance Targets"). Subject to continued employment, the Employee Retention Plan's awards are payable over a period of twelve months commencing with the later of (i) the first month following the month in which the applicable Stock Performance Target is attained, and (ii)June 2021 . The Employee Retention Plan will expire if the Stock Performance Targets are not attained byMarch 31, 2022 . Liquidity and Capital Resources Capital Resources We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We are currently funding our operations, development activities and general working capital needs through our cash on hand. Our current capital resources consist of approximately$78.3 million of cash and cash equivalents as ofDecember 31, 2020 on a consolidated basis, of which approximately$47.0 million is maintained at a wholly owned subsidiary ofTellurian Production Holdings LLC . We currently maintain an at-the-market equity offering program under which, as of the date of this filing, we have remaining availability to raise aggregate gross sales proceeds of approximately$274.9 million . SinceJanuary 1, 2021 , and throughFebruary 9, 2021 , we have sold approximately 25.6 million shares of common stock under our at-the-market program for total proceeds of approximately$57.2 million , net of approximately$1.8 million in fees and commissions. 29 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , we had total indebtedness of approximately$111.1 million , of which approximately$72.8 million is scheduled to be repaid within the next twelve months. We also had contractual obligations associated with our finance and operating leases totaling$108.6 million , of which$4.8 million is scheduled to be paid within the next twelve months. SinceJanuary 1, 2021 , we have repaid approximately$56.6 million in principal associated with our indebtedness. We are planning to generate proceeds from our at-the-market program and have determined that it is probable that such proceeds will satisfy our obligations and fund our working capital needs for at least twelve months following the issuance of the financial statements. We also continue to evaluate generating additional proceeds from various other potential financing transactions, such as issuances of equity, equity-linked and debt securities or similar transactions to fund our obligations and working capital needs. Sources and Uses of Cash The following table summarizes the sources and uses of our cash and cash equivalents and costs and expenses for the periods presented (in thousands): Year Ended December 31, 2020 2019 Cash used in operating activities$ (69,965) $ (113,008) Cash used in investing activities (1,307) (65,943) Cash provided by financing activities 84,527 63,844
Net increase (decrease) in cash, cash equivalents and restricted cash
13,255 (115,107)
Cash, cash equivalents and restricted cash, beginning of the period
68,482 183,589
Cash, cash equivalents and restricted cash, end of the period
$ 68,482 Net working capital$ (34,403) $ (50,344) Cash used in operating activities for the year endedDecember 31, 2020 decreased by approximately$43.0 million compared to the same period in 2019 due to an overall decrease in disbursements in the normal course of business. Cash used in investing activities for the year endedDecember 31, 2020 decreased by approximately$64.6 million compared to the same period in 2019. This decrease is predominantly driven by decreased natural gas development activities. Cash provided by financing activities for the year endedDecember 31, 2020 increased by approximately$20.7 million compared to the same period in 2019. This increase primarily relates to common stock issuances that raised net proceeds of approximately$99.7 million offset by approximately$60.1 million in principal repayments of our indebtedness and by an overall decrease in borrowings of approximately$25.0 million . See Note 9, Borrowings, and Note 11, Stockholders' Equity, of our Notes to Consolidated Financial Statements for further information. Capital Development Activities The activities we have proposed will require significant amounts of capital and are subject to risks and delays in completion. We have received all regulatory approvals and, as a result, our business success will depend to a significant extent upon our ability to obtain the funding necessary to construct assets on a commercially viable basis and to finance the costs of staffing, operating and expanding our company during that process. We currently estimate the total cost of theDriftwood Project to be approximately$28.9 billion , including owners' costs, transaction costs and contingencies but excluding interest costs incurred during construction of the Driftwood terminal and other financing costs. We have entered into four LSTK EPC agreements currently totaling$15.5 billion , or$561 per tonne, withBechtel Oil, Gas and Chemicals, Inc. ("Bechtel") for construction of the Driftwood terminal. The proposed Driftwood terminal will have a liquefaction capacity of up to approximately 27.6 Mtpa and will be situated on approximately 1,000 acres inCalcasieu Parish, Louisiana . The proposed Driftwood terminal will include up to 20 liquefaction Trains, three full containment LNG storage tanks and three marine berths. In addition, part of our strategy involves acquiring additional natural gas properties, including properties in theHaynesville shale trend. We intend to pursue potential acquisitions of such assets, or public or private companies that own such assets, in 2021. We would expect to use stock, cash on hand, or cash raised in financing transactions to complete an acquisition of this type. 30 -------------------------------------------------------------------------------- We anticipate funding our more immediate liquidity requirements relative to the detailed engineering work and other developmental costs, natural gas development costs, and general and administrative costs through the use of cash on hand, proceeds from operations, and proceeds from completed and future issuances of securities by us. Consistent with our overall financing strategy, the Company has considered, and in some cases discussed with investors, various potential financing transactions, including issuances of debt, equity and equity-linked securities or similar transactions, to support its short- and medium-term capital requirements. The Company will continue to evaluate its cash needs and business outlook, and it may execute one or more transactions of this type in the future. We currently expect that our long-term capital requirements will be financed by proceeds from future debt, equity and/or equity-linked transactions. In addition, part of our financing strategy is expected to involve seeking equity investments by LNG customers at a subsidiary level. Results of Operations The following table summarizes costs and expenses for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Total revenue$ 37,434 $ 28,774 $ 10,286 Cost of sales 17,223 7,071 6,115 Development expenses 27,492 59,629 44,034 Depreciation, depletion and amortization 17,228 20,446 1,567 General and administrative expenses 47,349 87,487 81,777 Impairment charge and loss on transfer of assets 81,065 - 4,513 Severance and reorganization charges 6,359 - - Related party charges 7,357 - - Loss from operations (166,639) (145,859) (127,720) Interest income (expense), net (43,445) (16,355) 1,574 Other income, net (612) 10,447 211 Income tax benefit (provision) - - 190 Net loss$ (210,696) $ (151,767) $ (125,745) Our consolidated net loss was approximately$210.7 million for the year endedDecember 31, 2020 , compared to a net loss of approximately$151.8 million for the same period of 2019. This$58.9 million increase in net loss was primarily a result of the following: •Approximately$81.1 million related to an impairment charge of our proved natural gas properties primarily due to depressed natural gas prices caused by the combined impact of increased production and falling demand brought about by current economic conditions. For further information regarding this impairment charge, see Note 3, Property, Plant and Equipment, of our Notes to Consolidated Financial Statements. •Increase of approximately$27.1 million in interest expense, net, which is primarily attributable to both the 2019 Term Loan and 2020 Unsecured Note incurring interest charges during the current period compared to only a portion of the 2019 Term Loan incurring charges during the prior period. •Increase of approximately$10.2 million in cost of sales primarily attributable to the sale of an LNG cargo. •Approximately$7.4 million in related party charges incurred during the current period compared to zero in the prior period. For further information regarding these related party charges, see Note 7, Related Party Transactions, of our Notes to Consolidated Financial Statements. •Approximately$6.4 million in severance and reorganization charges incurred during the period compared to zero in the prior period. For further information regarding the severance and reorganization charges, see Note 12, Severance and Reorganization, of our Notes to Consolidated Financial Statements. The above increases in expenses were partially offset by an increase in total revenue of approximately$8.7 million due primarily to the sale of an LNG cargo and a decrease in general and administrative expenses of approximately$40.1 million as well as a decrease in development expenses of approximately$32.1 million due to an overall decline in business activities during the current period. 31
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A discussion of variances between 2019 and 2018 can be found in the "Results of Operations" section on pages 39 through 40 of the Company's 2019 Annual Report on Form 10-K filed with theSEC onFebruary 24, 2020 . Commitments and Contingencies The information set forth in Note 10, Commitments and Contingencies, to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K is incorporated herein by reference. Summary of Critical Accounting Estimates Our accounting policies are more fully described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of our Notes to Consolidated Financial Statements included in this report. As disclosed in Note 1, the preparation of financial statements requires the use of judgments and estimates. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. We identified our most critical accounting estimates to be: •valuations of long-lived assets; and •share-based compensation. We believe that the following discussion addresses our critical accounting policies, which are those that require our most difficult, subjective or complex judgments about future events and related estimations that are fundamental to our results of operations. Valuation of Long-Lived Assets When there are indicators that our proved natural gas properties carrying value may not be recoverable, we compare expected undiscounted future cash flows at a depreciation, depletion and amortization group level to the unamortized capitalized cost of the asset. If the expected undiscounted future cash flows, based on our estimates of (and assumptions regarding) future natural gas prices, operating costs, development expenditures, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the income approach in accordance with GAAP. Estimates of undiscounted future cash flows require significant judgment, and the assumptions used in preparing such estimates are inherently uncertain. The impairment review includes cash flows from proved developed and undeveloped reserves, including any development expenditures necessary to achieve that production. Additionally, when probable and possible reserves exist, an appropriate risk-adjusted amount of these reserves may be included in the impairment calculation. In addition, such assumptions and estimates are reasonably likely to change in the future. Proved reserves are the estimated quantities of natural gas and condensate that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Despite the inherent imprecision in these engineering estimates, our reserves are used throughout our financial statements. For example, because we use the units-of-production method to deplete our natural gas properties, the quantity of reserves could significantly impact our DD&A expense. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Finally, these reserves are the basis for our supplemental natural gas disclosures. See Item 1 and 2 - Our Business and Properties for additional information on our estimate of proved reserves. Share-Based Compensation Share-based compensation transactions are measured based on the grant-date estimated fair value. For awards containing only service conditions or performance conditions deemed probable of occurring, the fair value is recognized as expense over the requisite service period using the straight-line method. We recognize compensation cost for awards with performance conditions if and when we conclude that it is probable that the performance condition will be achieved. For awards where the performance or market condition is not considered probable, compensation cost is not recognized until the performance or market condition becomes probable. We reassess the probability of vesting at each reporting period for awards with performance conditions and adjust compensation cost based on our probability assessment. We recognize forfeitures as they occur. Recent Accounting Standards We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our Consolidated Financial Statements or related disclosures.
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