Riley Exploration Permian, Inc. - Quarter Report: 2020 September (Form 10-Q)

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

Commission File No. 1-15555

Tengasco, Inc.

(Exact name of registrant as specified in its charter)

Delaware		87-0267438
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

8000 E. Maplewood Ave, Suite 130, Greenwood Village, CO 80111

(Address of principal executive offices)

720-420-4460

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	TGC	NYSE American

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,684,417 common shares at November 9, 2020.

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	* Unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
	* Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2020 and 2019	5
	* Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	6
	* Unaudited Changes in Stockholders’ Equity for the three months and nine months ended September 30, 2020 and 2019	7
	* Notes to Unaudited Condensed Consolidated Financial Statements	8
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	20
	ITEM 4. CONTROLS AND PROCEDURES	22
PART II.	OTHER INFORMATION	22
	ITEM 1. LEGAL PROCEEDINGS	22
	ITEM 1A. RISK FACTORS	22
	ITEM 2. UNREGISTERD SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES	24
	ITEM 4. MINE SAFTY DISCLOSURES	24
	ITEM 5. OTHER INFORMATION	24
	ITEM 6. EXHIBITS	25
	* SIGNATURES	26
	* CERTIFICATIONS

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Tengasco, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share data)

	September 30, 2020		December 31, 2019
Assets

Current
Cash and cash equivalents	$	2,545	$	3,055
Accounts receivable		262		557
Inventory		302		415
Prepaid expenses		156		247
Other current assets		4		4
Total current assets		3,269		4,278
Loan fees, net		2		4
Right of use asset - operating leases		58		41
Oil and gas properties, net (full cost accounting method)		3,914		4,385
Other property and equipment, net		134		149
Accounts receivable - noncurrent		—		65
Total assets	$	7,377	$	8,922

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Tengasco, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share data)

	September 30, 2020			December 31, 2019
Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable – trade	$	304		$	269
Accrued liabilities		255			164
Lease liabilities - operating leases - current		58			41
Lease liabilities - finance leases - current		58			61
Current maturities long-term debt		101			—
Asset retirement obligation - current		75			75
Total current liabilities		851			610
Lease liabilities - finance leases - noncurrent		42			41
Long-term debt, less current maturities		65			—
Asset retirement obligation - noncurrent		1,954			1,923
Total liabilities		2,912			2,574
Commitments and contingencies (Note 10)
Stockholders’ equity
Preferred stock, 25,000,000 shares authorized:
Series A Preferred stock, $0.0001 par value, 10,000 shares designated; 0 shares issued and outstanding		—			—
Common stock, $0.001 par value, authorized 100,000,000 shares, 10,680,050 and 10,658,775 shares issued and outstanding		11			11
Additional paid–in capital		58,304			58,293
Accumulated deficit		(53,850	)		(51,956	)
Total stockholders’ equity		4,465			6,348
Total liabilities and stockholders’ equity	$	7,377		$	8,922

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Tengasco, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except share and per share data)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues
Oil and gas properties	$	765		$	1,215		$	2,292		$	3,777
Total revenues		765			1,215			2,292			3,777
Cost and expenses
Production costs and taxes		746			913			2,399			2,604
Depreciation, depletion, and amortization		146			186			461			566
General and administrative		685			297			1,324			913
Total cost and expenses		1,577			1,396			4,184			4,083
Net loss from operations		(812	)		(181	)		(1,892	)		(306	)
Other income (expense)
Interest expense		(2	)		(2	)		(6	)		(8	)
Gain on sale of assets		1			1			4			45
Total other income (expense)		(1	)		(1	)		(2	)		37
Net loss from operations before income tax		(813	)		(182	)		(1,894	)		(269	)
Deferred income tax benefit (expense)		—			—			—			—
Net loss	$	(813	)	$	(182	)	$	(1,894	)	$	(269	)
Net loss per share
Basic and fully diluted	$	(0.08	)	$	(0.02	)	$	(0.18	)	$	(0.03	)
Shares used in computing earnings per share
Basic and fully diluted		10,680,050			10,653,550			10,673,238			10,648,838

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Tengasco, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	For the Nine Months Ended September 30,
	2020			2019
Operating activities
Net loss	$	(1,894	)	$	(269	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization		461			566
Amortization of loan fees-interest expense		2			4
Accretion on asset retirement obligation		94			100
Gain on asset sales		(4	)		(45	)
Stock based compensation		11			14
Changes in assets and liabilities:
Accounts receivable, current and noncurrent		360			22
Inventory, prepaid expenses and other assets		204			78
Accounts payable		118			4
Accrued and other current liabilities		96			(51	)
Settlement on asset retirement obligation		(13	)		(52	)
Net cash (used in) provided by operating activities		(565	)		371
Investing activities
Additions to oil and gas properties		(103	)		(153	)
Proceeds from sale of oil and gas properties		36			41
Additions to other property and equipment		(10	)		(2	)
Proceeds from sale of materials inventory		—			150
Net cash (used in) provided by investing activities		(77	)		36
Financing activities
Repayments of financing leases		(34	)		(40	)
Proceeds from borrowings		166			—
Net cash provided by (used in) financing activities		132			(40	)
Net change in cash and cash equivalents		(510	)		367
Cash and cash equivalents, beginning of period		3,055			3,115
Cash and cash equivalents, end of period	$	2,545		$	3,482
Supplemental cash flow information:
Cash interest payments	$	4		$	4
Supplemental non-cash investing and financing activities:
Financed company vehicles	$	54		$	30

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Tengasco, Inc. and Subsidiaries

Changes in Stockholders’ Equity

(unaudited)

(In thousands, except per share and share data)

Nine Months Ended September 30, 2020:
	Common Stock				Paid-in Capital		Accumulated Deficit			Total
	Shares		Amount		Paid-in Capital		Accumulated Deficit			Total
Balance, December 31, 2019		10,658,775	$	11	$	58,293	$	(51,956	)	$	6,348

Net loss		—		—		—		(527	)		(527	)
Compensation expense related to stock issued		7,436		—		4		—			4

Balance, March 31, 2020		10,666,211	$	11	$	58,297	$	(52,483	)	$	5,825

Net loss		—		—		—		(554	)		(554	)
Compensation expense related to stock issued		7,328		—		3		—			3

Balance, June 30, 2020		10,673,539	$	11	$	58,300	$	(53,037	)	$	5,274

Net loss		—		—		—		(813	)		(813	)
Compensation expense related to stock issued		6,511		—		4		—			4

Balance, September 30, 2020		10,680,050	$	11	$	58,304	$	(53,850	)	$	4,465

Nine Months Ended September 30, 2019:
	Common Stock				Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance, December 31, 2018		10,639,290	$	11	$	58,276	$	(51,520	)	$	6,767

Net loss		—		—		—		(96	)		(96	)
Compensation expense related to stock issued		4,962		—		4		—			4

Balance, March 31, 2019		10,644,252	$	11	$	58,280	$	(51,616	)	$	6,675

Net income		—		—		—		9			9
Compensation expense related to stock issued		4,411		—		6		—			6

Balance, June 30, 2019		10,648,663	$	11	$	58,286	$	(51,607	)	$	6,690

Net loss		—		—		—		(182	)		(182	)
Compensation expense related to stock issued		4,887		—		4		—			4

Balance, September 30, 2019		10,653,550	$	11	$	58,290	$	(51,789	)	$	6,512

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Description of Business and Significant Accounting Policies

Tengasco, Inc. (the “Company”) is a Delaware corporation. The Company is in the business of exploration for and production of oil and natural gas. The Company’s primary area of exploration and production is in Kansas.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2020 and September 30, 2019 have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet as of December 31, 2019 is derived from the audited financial statements but does not include all disclosures required by U.S. GAAP. The Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results for the three months and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all significant intercompany transactions and balances.

Use of Estimates

The accompanying condensed consolidated financial statements are prepared in conformity with U.S. GAAP which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include reserve quantities and estimated future cash flows associated with proved reserves, which significantly impact depletion expense and potential impairments of oil and natural gas properties, income taxes and the valuation of deferred tax assets, stock-based compensation, and commitments and contingencies. We analyze our estimates based on historical experience and various other assumptions that we believe to be reasonable. While we believe that our estimates and assumptions used in preparation of the condensed consolidated financial statements are appropriate, actual results could differ from those estimates and assumptions.

Revenue Recognition

The Company identifies the contracts with each of its customers and the separate performance obligations associated with each of these contracts. Revenues are recognized when the performance obligations are satisfied and when control of goods or services are transferred to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

Crude oil is sold on a month-to-month contract at a price based on an index price from the purchaser, net of differentials. Crude oil that is produced is stored in storage tanks. The Company will contact the purchaser and request it to pick up the crude oil from the storage tanks. When the purchaser picks up the crude from the storage tanks, control of the crude transfers to the purchaser, the Company’s contractual obligation is satisfied, and revenues are recognized. The sales of oil represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports revenues on a net basis to the Company. Fees and other deductions incurred prior to transfer of control are recorded as production costs. Revenues are reported net of fees and other deductions incurred after transfer of control.

The Company operates certain salt water disposal wells, some of which accept water from third parties. The contracts with the third parties primarily require a flat monthly fee for the third parties to dispose water into the wells. In some cases, the contract is based on a per barrel charge to dispose water into the wells. There is no requirement under the contracts for these third parties to use these wells for their water disposal. If the third parties do dispose water into the Company operated wells during a given month, the Company has met its contractual obligations and revenues are recognized for that month.

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents the disaggregated revenue by commodity for the three months and nine months ended September 30, 2020 and 2019 (in thousands):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019

Crude oil	$	757	$	1,208	$	2,275	$	3,757
Saltwater disposal fees		8		7		17		20
Total	$	765	$	1,215	$	2,292	$	3,777

There were no natural gas imbalances at September 30, 2020 or December 31, 2019.

Cash and Cash Equivalents

Cash and cash equivalents include temporary cash investments with a maturity of ninety days or less at date of purchase.

Inventory

Inventory consists of crude oil in tanks and is carried at lower of cost or market value. The cost value component of the oil inventory is calculated using the average cost per barrel for the three months ended September 30, 2020 and December 31, 2019. These costs include production costs and taxes. The market value component is calculated using the average September 30, 2020 and December 2019 oil sales prices received by the Company. At September 30, 2020 and December 31, 2019, the cost component was used to value oil inventory. At September 30, 2020 and December 31, 2019, inventory consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Oil – carried at lower of cost or market	$	302	$	415
Total inventory	$	302	$	415

Full Cost Method of Accounting

The Company follows the full cost method of accounting for oil and gas property acquisition, exploration, and development activities. Under this method, all costs incurred in connection with acquisition, exploration, and development of oil and gas reserves are capitalized. Capitalized costs include lease acquisitions, seismic related costs, certain internal exploration costs, drilling, completion, and estimated asset retirement costs. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated asset retirement costs which are not already included, net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The Company has determined its reserves based upon reserve reports provided by LaRoche Petroleum Consultants Ltd. since 2009. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual assessment of whether impairment has occurred. The Company had $0 in unevaluated properties as of September 30, 2020 and at December 31, 2019. Proceeds from the sale of oil and gas properties are accounted for as reductions to capitalized costs unless such sales cause a significant change in the relationship between costs and the estimated value of proved reserves, in which case a gain or loss is recognized.

At the end of each reporting period, the Company performs a “ceiling test” on the value of the net capitalized cost of oil and gas properties. This test compares the net capitalized cost (capitalized cost of oil and gas properties, net of accumulated depreciation, depletion and amortization and related deferred income taxes) to the present value of estimated future net revenues from oil and gas properties using an average price (arithmetic average of the beginning of month prices for the prior 12 months) and current cost discounted at 10% plus cost of properties not being amortized and the lower of cost or estimated fair value of unproven properties included in the cost being amortized (ceiling). If the net capitalized cost is greater than the ceiling, a write-down or impairment is required. A write-down of the carrying value of the asset is a non-cash charge that reduces earnings in the current period. Once incurred, a write-down may not be reversed in a later period. The Company did not record any impairment of its oil and gas properties during the nine months ended September 30, 2020 and 2019.

Accounts Receivable

Accounts receivable consist of uncollateralized joint interest owner obligations due within 30 days of the invoice date, uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 days of sales of oil and gas production, and other miscellaneous receivables. No interest is charged on past-due balances. Payments made on accounts receivable are applied first to the earliest unpaid items. We review accounts receivable periodically and reduce the carrying amount by a valuation allowance that reflects our best estimate of the amount that may not be collectible. There was no allowance recorded at September 30, 2020 or December 31, 2019.

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

The following table sets forth information concerning the Company’s accounts receivable (in thousands):

	September 30, 2020		December 31, 2019
Revenue	$	259	$	415
Tax		—		65
Joint interest		3		77
Accounts receivable - current	$	262	$	557

Tax - noncurrent	$	—	$	65

At December 31, 2019, the Company recorded a tax related current receivable of $65,000 and a tax related noncurrent receivable of $65,000. In September 2020, the Company received a tax refund of approximately $130,000 associated with the current and noncurrent tax receivables that existed at December 31, 2019.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, accelerated the Company’s ability to recover refundable alternative minimum tax (“AMT”) credits to 2018 and 2019. As a result, the Company has reclassified the $65,000 of the remaining noncurrent AMT credit carryforwards from a noncurrent receivable to a current receivable. The Company requested a refund of these AMT credits when it filed its 2019 tax return and received this refund in September 2020. (See Note (2) Income Taxes)

(2) Income Taxes

Income taxes are reported in accordance with U.S. GAAP, which requires the establishment of deferred tax accounts for all temporary differences between the financial reporting and tax bases of assets and liabilities, using currently enacted federal and state income tax rates. In addition, deferred tax accounts must be adjusted to reflect new rates if enacted into law.

The deferred income tax assets or liabilities for an oil and gas exploration and development company are dependent on many variables such as estimates of the economic lives of depleting oil and gas reserves and commodity prices. Accordingly, the asset or liability is subject to continuous recalculation and revision of the numerous estimates required, and may change significantly in the event of occurrences such as major acquisitions, divestitures, commodity price changes, changes in reserve estimates, changes in reserve lives, and changes in tax rates or tax laws.

The estimated annual effective tax rate of 0% differs from the statutory rate of 21% due primarily to adjustments to the valuation allowance on the deferred tax assets.

At December 31, 2019, federal net operating loss carryforwards amounted to approximately $33.9 million, of which approximately $31.6 million expires between 2020 and 2037 which can offset 100% of taxable income and approximately $2.3 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The total net deferred tax asset was $0 at September 30, 2020 and $65,000 at December 31, 2019. In September 2020, the Company received a tax refund of approximately $130,000 associated with the deferred tax asset at December 31, 2019. The Company recorded an allowance on the remaining deferred tax asset at September 30, 2020 and December 31, 2019 primarily due to expected future losses in the near term which would cause cumulative losses being incurred during the 3 year period. There were no recorded unrecognized tax benefits at September 30, 2020 and December 31, 2019.

(3) Capital Stock

Common Stock

On July 1, 2020, the Company issued 6,511 shares of common stock in the aggregate to the Company’s three directors and CFO and interim CEO.

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

On October 2, 2020, the Company issued 4,367 shares of common stock in the aggregate to the Company’s three directors and CFO and interim CEO.

Rights Agreement

Effective March 17, 2017 the Company’s board of directors (the “Board of Directors”) declared a dividend of one right (a “Right”) for each of the Company’s issued and outstanding shares of common stock, $0.001 par value per share (“Common Stock”). The dividend was paid to the stockholders of record at the close of business on March 27, 2017 (the “Record Date”). Each Right entitles the registered holder, subject to the terms of the Rights Agreement dated as of March 16, 2017 (the “Rights Agreement”) between the Company and the Rights Agent, Continental Stock Transfer & Trust Company, to purchase from the Company one one-thousandth of a share of the Company’s Series A Preferred Stock at a price of $1.10 (the “Exercise Price”), subject to certain adjustments.

The purpose of the Rights Agreement is to reduce the risk that the Company’s ability to use its net operating losses to reduce potential future federal income tax obligations would be limited if the Company’s experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code. A company generally experiences an ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in Section 382 of the Tax Code, increases by more than 50 percentage points over a rolling three-year period. The Rights Agreement is designed to reduce the likelihood that the Company will experience an ownership change under Section 382 of the Tax Code by discouraging any person or group from becoming a 4.95% shareholder and also discouraging any existing 4.95% (or more) shareholder from acquiring additional shares of the Company’s stock.

The Rights will not be exercisable until the “Distribution Date”, which is generally defined as the earlier to occur of:(i) a public announcement or filing that a person or group has, become an “Acquiring Person” which is defined as a person or group of affiliated or associated persons or persons acting in concert who, at any time after the date of the Rights Agreement, have acquired, or obtained the right to acquire, beneficial ownership of 4.95% or more of the Company’s outstanding shares of Common Stock; or a person or group currently owning 4.95% (or more) of the Company’s outstanding shares acquires additional shares of the Company’s stock; subject to certain exceptions; or (ii) the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person becoming an Acquiring Person.

The Rights, unless extended by the Board of Directors were to expire on the earlier of March 16, 2020; or a date the Board of Directors determines by resolution in its business judgment that the Rights Agreement is no longer necessary or appropriate; or in certain other specified circumstances. On March 16, 2020 the Board of Directors by unanimous resolution acting without meeting determined to extend the expiration date of the Rights Agreement to March 16, 2021 as expressly contemplated by the Rights Agreement.

At any time after any person or group of affiliated or associated persons becomes an Acquiring Person, the Board, at its option, may exchange each Right (other than Rights owned by such person or group of affiliated or associated persons which will have become void), in whole or in part, at an exchange ratio of two shares of Common Stock per outstanding Right (subject to adjustment).

For further information on the Rights Agreement, please refer to the Rights Agreement that was attached in full as an exhibit to the Company’s Form 8-K filed with SEC on March 17, 2017.

On October 20, 2020, the Board of Directors approved the Company entering into that certain Agreement and Plan of Merger (the “Merger Agreement”), dated October 21, 2020, by and among the Company, Antman Sub, LLC, a wholly owned subsidiary of the Company, and Riley Exploration—Permian, LLC. Accordingly, the Rights Agreement and the Rights will automatically terminate at the closing of the Merger contemplated by the Merger Agreement pursuant to the terms of the Rights Agreement. (See Note (11) Subsequent Events)

Preferred Stock

Series A Preferred Stock has a par value of $0.0001 and 10,000 shares have been designated. No shares of Series A Preferred Stock have been issued by the Company pursuant to the Rights Agreement described above or otherwise.

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(4) Earnings per Common Share

We report basic earnings per common share, which exclude the effect of potentially dilutive securities, and diluted earnings per common share which include the effect of all potentially dilutive securities unless their impact is anti-dilutive. The following are reconciliations of the numerators and denominators of our basic and diluted earnings per share (in thousands except for share and per share amounts):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
Income (numerator):
Net loss	$	(813	)	$	(182	)	$	(1,894	)	$	(269	)
Weighted average shares (denominator):
Weighted average shares – basic		10,680,050			10,653,550			10,673,238			10,648,838
Dilution effect of share-based compensation, treasury method		—			—			—			—
Weighted average shares – dilutive		10,680,050			10,653,550			10,673,238			10,648,838
Loss per share:
Basic and fully diluted	$	(0.08	)	$	(0.02	)	$	(0.18	)	$	(0.03	)

Options issued to the Company’s directors in which the exercise price was higher than the average market price each quarter were excluded from diluted shares as they would have been anti-dilutive. In addition, the shares that would be issued to employees and Company directors if the thirty day trailing average of WTI postings as published by the U.S. Energy Information Administration meets or exceeds $85 per barrel have also been excluded from this calculation. (See Note (10) Commitments and Contingencies)

(5) Oil and Gas Properties

The following table sets forth information concerning the Company’s oil and gas properties (in thousands):

	September 30, 2020			December 31, 2019
Oil and gas properties	$	6,685		$	6,751
Unevaluated properties		—			—
Accumulated depreciation, depletion, and amortization		(2,771	)		(2,366	)
Oil and gas properties, net	$	3,914		$	4,385

The Company recorded depletion expense of $405,000 and $504,000 for the nine months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2019, the Company also recorded in “Accumulated depreciation, depletion, and amortization” a $4,000 gain on asset retirement obligations.

(6) Asset Retirement Obligation

Our asset retirement obligations represent the estimated present value of the amount we will incur to plug, abandon, and remediate our producing properties at the end of their productive lives in accordance with applicable laws. The following table summarizes the Company’s Asset Retirement Obligation transactions for the nine months ended September 30, 2020 (in thousands):

Balance December 31, 2019	$	1,998
Accretion expense		94
Liabilities incurred		—
Liabilities settled		—
Liabilities relieved - sold properties		(63	)
Balance September 30, 2020	$	2,029

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(7) Long-Term Debt and Lease Liabilities

Long Term Debt

At September 30, 2020, the Company had a revolving credit facility with Prosperity Bank. This has historically been the Company’s primary source to fund working capital and capital spending. Under the credit facility, loans and letters of credit are available to the Company on a revolving basis in an amount outstanding not to exceed the lesser of $50 million or the Company’s borrowing base in effect from time to time. As of September 30, 2020, the Company’s borrowing base was $3.1 million, subject to a credit limit based on current covenants of $1.442 million. While the credit limit has not yet been formally reduced, the Company has experienced total negative EBITDA for the trailing 4 quarters ended September 30, 2020, which would result in a zero credit limit if the formal borrowing base review would have occurred at September 30, 2020, therefore prohibiting any borrowings on the Company’s credit facility. The credit facility is secured by substantially all of the Company’s producing and non-producing oil and gas properties. The credit facility includes certain covenants with which the Company is required to comply. At September 30, 2020, these covenants include the following: (a) Current Ratio > 1:1; (b) Funded Debt to EBITDA < 3.5x; and (c) Interest Coverage > 3.0x. At September 30, 2020, the interest rate on this credit facility was 3.75%. The Company was in compliance with all covenants during the quarter ended September 30, 2020. The Company had no outstanding borrowing under the facility as of September 30, 2020 or December 31, 2019. However, if the Company had borrowings under the credit facility at September 30, 2020, the Company would not have been in compliance with EBITDA related covenants as the Company reported negative EBITDA for the trailing four quarters ended September 30, 2020.

During the second quarter of 2020, the Company was approved by the Small Business Administration to receive a Paycheck Protection Program (“PPP”) loan in the amount of approximately $166,000. This loan was funded by Prosperity Bank in May 2020. The PPP loan is not part of the credit facility with Prosperity Bank as described above and therefore is not subject to the same terms as Company’s credit facility. The PPP loan has an interest rate of 1% with a maturity date of May 2022. There are no payments due during the first six months of the loan. After the six-month period has expired, all outstanding accrued interest is due. At that time, the remaining unforgiven portion of the loan will be due in 18 equal monthly installments of principal and interest. The Company applied for forgiveness of the amount due on the PPP loan based on spending the loan proceeds on eligible expenses as defined by statute. On November 5, 2020, Prosperity Bank notified the Company that the PPP loan had been forgiven and the loan was closed. During the fourth quarter of 2020, the Company will record other income of $166,000 as a result of the PPP loan forgiveness.

Lease Liabilities

Effective January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842). We first determine if a contract is a lease at inception of the arrangement. To the extent that we determine an arrangement represents a lease, we then classify that lease as an operating lease or a finance lease. As of January 1, 2019, the Company capitalizes its operating leases on the Consolidated Balance Sheet as a right of use asset and a corresponding lease liability. The Company also capitalizes its finance leases on the Consolidated Balance Sheet as other property and equipment and a corresponding lease liability. The right of use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Short term leases that have an initial term of one year or less are not capitalized unless the Company intends to renew the lease to extend the initial term past one year.

We lease certain office space, a storage yard, and field vehicles to support our operations. A more detailed description of the Company’s lease types is included below.

Office and Storage Yard

The Company maintains an office to support its corporate operations. This office agreement is with a third party and was structured with a 39 month initial term and an August 31, 2020 expiration date. The Company renewed the lease for 12 additional months thereby extending the expiration date to August 31, 2021. The Company’s corporate office lease is classified as an operating lease.

The Company maintains an office to support its field operations. This office is with a third party and is on a month-to-month lease. However, the Company intends to continue to renew this lease for the foreseeable future. Based on the Company’s intent to renew the lease, the Company is assuming the same lease term as its corporate office lease for calculation of its right of use asset and lease liability. The Company’s field office lease is classified as an operating lease.

The Company maintains a yard to store certain equipment used in its field operations. This storage yard agreement is with a third party and is on a month-to-month lease. However, the Company intends to continue to renew this lease for the foreseeable future. Based on the Company’s intent to renew the lease, the Company is assuming the same lease term as its corporate office lease for calculation of its right of use asset and lease liability. The Company’s storage yard is classified as an operating lease.

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

As a result of the renewal of the corporate office lease, the Company recorded right-of-use assets and liabilities associated with operating leases of approximately $63,000.

Field Vehicles

The Company leases certain vehicles from a third party for use in its field operations. The lease term for each vehicle is based on expected daily use of the vehicles by the field personnel, typically between 18 and 36 months. The Company also pays an upfront fee at the commencement of the lease term. The Company can continue to lease the vehicles past the initial lease term on a month-to-month basis. In addition, each vehicle has a residual value guarantee at the end of the lease term. The Company’s field vehicle leases are classified as finance leases.

Significant Judgment

To determine whether the Company’s contracts contain a lease component, the Company is required to exercise significant judgment. The Company will review each contract to determine if: an asset is specified in the contract; the asset is physically distinct; the supplier does not have substantive substitution rights; the Company obtains substantially all economic benefit from use of the asset; and the Company can direct the use of the asset. The Company also determines the appropriate discount rate to use on each lease. If there is a stated rate in the contract, the Company will use the stated rate as its discount rate. The contract associated with the field vehicles includes a stated rate typically between 5% and 6.5%. These stated rates for the field vehicle agreements were used as the discount rates. If there is no stated rate, the Company will use its borrowing rate as the discount rate. The contracts associated with the offices and yard do not include a stated rate. The Company used its borrowing rate of 3.75% as the discount rate for these agreements.

Components of lease costs for the three months and nine months ended September 30, 2020 and 2019 (in thousands):

		Period Ended
		For the Three Months Ended				For the Nine Months Ended
	Statement of Operations Account	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Operating lease cost:
	Production costs and taxes	$	3	$	3	$	10	$	10
	General and administrative		13		12		37		37
Total operating lease cost		$	16	$	15	$	47	$	47

Finance lease cost:
Amortization of right of use assets	Depreciation, depletion, and amortization	$	20	$	21	$	56	$	62
Interest on lease liabilities	Net interest expense		1		1		4		4
Total finance lease cost		$	21	$	22	$	60	$	66

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Supplemental lease related cash flow information for the three months and nine months ended September 30, 2020 and 2019 (in thousands):

	Period Ended
	For the Three Months Ended				For the Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Cash paid for amounts included in lease liabilities:
Operating cash flows from operating leases	$	16	$	15	$	47	$	45
Operating cash flows from finance leases		1		1		4		4
Finance cash flows from finance leases		15		9		34		40

Right of use assets obtained in exchange for lease obligations:
Operating leases		—		—		63		98

Supplemental lease related balance sheet information as of September 30, 2020 and December 31, 2019 (in thousands):

	Balance Sheet as of
	September 30, 2020			December 31, 2019

Operating Leases:

Right of use asset - operating leases	$	58		$	41

Lease liabilities - current	$	58		$	41
Lease liabilities - noncurrent		—			—
Total operating lease liabilities	$	58		$	41


Finance Leases:

Other property and equipment, gross	$	293		$	295
Accumulated depreciation		(159	)		(146	)
Other property and equipment, net	$	134		$	149

Lease liabilities - current	$	58		$	61
Lease liabilities - noncurrent		42			41
Total finance lease liabilities	$	100		$	102

Weighted average remaining lease term and discount rate as of September 30, 2020:

	Operating Leases			Finance Leases

Weighted average remaining lease term	0.9 years			1.1 years
Weighted average discount rate		3.75	%		5.35	%

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Maturity of lease liabilities as of September 30, 2020 (in thousands):

	Operating Leases			Finance Leases

2020	$	16		$	21
2021		43			67
2022		—			15
Total lease payments		59			103
Less imputed interest		(1	)		(3	)
Total	$	58		$	100

(8) Liquidity

Through November 2021, the Company believes its revenues as well as cash on hand will be sufficient to fund operating costs and general and administrative expenses. In addition, although the Company has recently experienced net loss and negative cash flow, the Company’s current assets exceed its current liabilities and are expected to continue through November 2021. If revenues and cash on hand are not sufficient to fund these expenses and the Company needed to borrow funds against the credit facility, the Company would require a waiver on the EBITDA related covenants, or a change in the covenants, in order for the borrowing to occur.

(9) Fair Value Measurements

FASB ASC 820, “Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described as follows:

Level 1 – Observable inputs, such as unadjusted quoted prices in active markets, for substantially identical assets and liabilities.

Level 2 – Observable inputs other than quoted prices within Level 1 for similar assets and liabilities. These include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. If the asset or liability has a specified or contractual term, the input must be observable for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs that are supported by little or no market activity, generally requiring a significant amount of judgment by management. The assets or liabilities fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Further, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Upon completion of wells, the Company records an asset retirement obligation at fair value using Level 3 assumptions.

Nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis upon impairment. The carrying amounts of other financial instruments including cash and cash equivalents, accounts receivable, account payables, accrued liabilities and long-term debt in our balance sheet approximates fair value as of September 30, 2020 and December 31, 2019.

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Tengasco, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(10) Commitments and Contingencies

Cost Reduction Measures

Commencing in the quarter ended March 31, 2015 and continuing into the quarter ended June 30, 2018, the Company implemented cost reduction measures including compensation reductions for each employee as well as members of the Board of Directors. These compensation reductions were to remain in place until such time, if any, that the market price of crude oil, calculated as a thirty-day trailing average of WTI postings as published by the U.S. Energy Information Administration meets or exceeds $70 per barrel. In May 2018, oil prices as so calculated exceeded $70 and compensation reverted to the levels in place before the reductions became effective. At such time, if any, that the market price of crude oil, calculated as a thirty-day trailing average of WTI postings as published by the U.S. Energy Information Administration meets or exceeds $85 per barrel, all previous reductions made will be reimbursed, a portion which may be paid in stock, to each employee and members of the Board of Directors if is still employed by the Company or still a member of the Board of Directors. For the period January 1, 2015 through September 30, 2020, the reductions were approximately $390,000. Of the $390,000, approximately $77,000 would be paid in the Company’s common stock. The $77,000 value represents approximately 94,000 common shares valued at $0.82 per share which represents the closing price on September 30, 2020. The Company has not accrued any liabilities associated with these compensation reductions.

Legal Proceedings

On May 14, 2020 the Company received notice of three orders (the “Orders”) issued by the Regional Director of the Bureau of Safety and Environmental Enforcement (“BSEE”) of the Department of the Interior dated May 13, 2020, stating that the Company, together with a group of several other named parties, were being looked to by the BSEE to perform the decommissioning of facilities on three Gulf of Mexico leases owned by Hoactzin Partners, L. P. (“Hoactzin’) and other lessees due to Hoactzin’s default in its lease obligations to decommission such facilities. No monetary amount was sought or described in the Orders. Hoactzin is controlled by Peter E. Salas, the chairman of the Company’s Board of Directors. Management’s assessment of the likelihood of a loss is remote as the Company believes it has available defenses to the Orders. On August 21 2020, the bankruptcy court in the Northern District of Texas in Dallas entered an agreed order requiring Hoactzin, the surety on Hoactzin’s bonds, and seven other working interest owners (a group not including the Company) to complete all the necessary decommissioning on all of Hoactzin’s facilities and to prepay all anticipated expenses, including insurance premiums and a contingency reserve, estimated to be necessary to do so. The bankruptcy trustee has reported that all funds to be paid have been received from all parties to the agreed order. Decommissioning is proceeding under the direction of the bankruptcy trustee and approved contractors under the control of the bankruptcy court. Accordingly, it is anticipated that all work contemplated by the Orders will be completed by, and at the expense of, other persons and the relief sought in the Orders for the Company to perform the work will at that time be moot as to the Company.

In all other respects, the Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state, or local governmental agency is presently contemplating any proceeding against the Company which would have a result materially adverse to the Company. To the knowledge of management, no director, executive officer or affiliate of the Company or owner of record or beneficial owner of more than 5% of the Company’s common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

(11) Subsequent Events

On October 21, 2020, the Company, Antman Sub, LLC, a newly-formed Delaware limited company and wholly-owned subsidiary of the Company (“Merger Sub”), and Riley Exploration - Permian, LLC a delaware limited liability company (“Riley”), entered the Merger Agreement pursuant to which Merger Sub will be merged with and into Riley, with Riley surviving the Merger as a wholly owned subsidiary of the Company. On the terms and subject to the conditions set forth in the Merger Agreement, upon consummation of the Merger, each common unit of Riley issued and outstanding immediately prior to the effective time of the Merger (other than cancelled units (as defined in the Merger Agreement)) will be converted into the right to receive: (a) 97.796467 shares of the Company’s common stock (together with any cash to be paid in lieu of fractional shares of the Company Common Stock) and (b) any dividends or other distributions to which the holder of a Riley common unit becomes entitled to upon the surrender of such Riley common unit in accordance with the Merger Agreement.

Additional information regarding the Merger and the Merger Agreement can be found in (a) the press release issued by the Company on October 21, 2020 and (b) the Current Report on Form 8-K filed by the Company on October 22, 2020.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations and Financial Condition

During the first nine months of 2020, 92.4MBbl gross of oil were sold from the Company’s properties. Of the 92.4MBbl sold, 67.0MBbl were net to the Company after required payments to all of the royalty interests and the one remaining drilling program participant. The Company’s net sales from its properties during the first nine months of 2020 of 67.0MBbl of oil compares to net sales of 72.1MBbl of oil during the first nine months of 2019. The Company’s net revenue from its oil and gas properties was $2.3 million during the first nine months of 2020 compared to $3.8 million during the first nine months of 2019. This decrease in net revenue was primarily due to an $1.2 million reduction related to a $18.12 per barrel decrease in the average oil price from $52.09 per barrel during the first nine months of 2019 to $33.97 per barrel during the first nine months of 2020, and a $269,000 reduction related to a 5.1MBbl decrease in sales volumes. The 5.1MBbl decrease in sales volumes was primarily related to lower sales on the Albers, BSU, Liebenau, Veverka D leases related to natural production declines, partially offset by sales from the Zimmerman well that was completed at the beginning of 2020.

Comparison of the Quarters Ended September 30, 2020 and 2019

The Company reported a net loss of $(813,000) or $(0.08) per share of common stock during the third quarter of 2020 compared to net loss of $(182,000) or $(0.02) per share of common stock during the third quarter of 2019. The $631,000 decrease in net income was primarily due to an $450,000 decrease in revenues, and a $388,000 increase in general and administrative expenses, partially offset by a $167,000 decrease in production costs and taxes and a $40,000 decrease in depreciation, depletion, and amortization costs.

The Company recognized $765,000 in revenues during the third quarter of 2020 compared to $1.2 million during the third quarter of 2019. The $450,000 decrease in net revenues was primarily due to a $318,000 reduction related to a $15.15 per barrel decrease in the average oil price from $51.18 per barrel during the third quarter of 2019 to $36.03 per barrel during the third quarter of 2020, and a $133,000 reduction related to a 2.6MBbl decrease in oil sales volumes. The 2.6MBbl decrease in sales volumes was primarily related to lower sales on the Albers, Dick A, Liebenau, and Stahl leases related to natural production declines and timing of crude pickups by the purchases, partially offset by sales from the Zimmerman well that was completed at the beginning of 2020.

General and administrative costs increased $388,000 from $297,000 during the third quarter of 2019 to $685,000 during the third quarter of 2020. This increase was primarily due to costs incurred during the third quarter of 2020 related to the announced transaction with Riley Exploration – Permian, LLC. See Part II, Item 5, Other Information.

Production costs and taxes decreased $167,000 from $913,000 during the third quarter of 2019 to $746,000 during the third quarter of 2020. This decrease was primarily due to lower well repair costs and a change in the oil inventory adjustment.

Depreciation, depletion, and amortization costs decreased $40,000 from $186,000 during the third quarter of 2019 to $146,000 during the third quarter of 2020. This decrease was primarily related to lower depletion expense on the Company’s oil properties.

Comparison of the Nine Months Ended September 30, 2020 and 2019

The Company reported a net loss of $(1.9 million) or $(0.18) per share of common stock during the first nine months of 2020 compared to a net loss of $(269,000) or $(0.03) per share of common stock during the first nine months of 2019. The $1.6 million decrease in net income was primarily due to an $1.5 million decrease in revenues, a $411,000 increase in general and administrative expenses, and a $41,000 decrease in gain on sale of assets, partially offset by a $205,000 decrease in production costs and taxes, and a $105,000 decrease in depreciation, depletion, and amortization costs.

The Company recognized $2.3 million of revenues during the first nine months of 2020 compared to $3.8 million during the first nine months of 2019. This decrease in net revenue was primarily due to an $1.2 million reduction related to a $18.12 per barrel decrease in the average oil price from $52.09 per barrel during the first nine months of 2019 to $33.97 per barrel during the first nine months of 2020, and a $269,000 reduction related to a 5.1MBbl decrease in sales volumes. The 5.1MBbl decrease in sales volumes was primarily related to lower sales on the Albers, BSU, Liebenau, Veverka D leases related to natural production declines, partially offset by sales from the Zimmerman well that was completed at the beginning of 2020.

General and administrative costs increased $411,000 from $913,000 during the first nine months of 2019 to $1.3 million during the first nine months of 2020. This increase was primarily due to costs incurred during the third quarter of 2020 related to the announced transaction with Riley Exploration – Permian, LLC. See Part II, Item 5, Other Information.

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Gain on sale of assets decreased $41,000 from $45,000 during the nine months of 2019 to $4,000 during the first nine months of 2020. This decrease was primarily related to gain on sale of equipment inventory to a third party during the first quarter of 2019.

Production costs and taxes decreased $205,000 from $2.6 million during the first nine months of 2019 to $2.4 million during the first nine months of 2020. This decrease was primarily due to lower well repair costs, partially offset by a change in the oil inventory adjustment.

Depreciation, depletion and amortization costs decreased $105,000 from $566,000 during the first nine months of 2019 to $461,000 during the nine months of 2020. This decrease was primarily related to lower depletion expense on the Company’s oil properties.

Liquidity and Capital Resources

During the second quarter of 2020, the Company was approved by the Small Business Administration to receive a Paycheck Protection Program (“PPP”) loan in the amount of approximately $166,000. This loan was funded by Prosperity Bank in May 2020. The PPP loan is not part of the credit facility with Prosperity Bank as described above and therefore is not subject to the same terms as Company’s credit facility. The PPP loan has an interest rate of 1% with a maturity date of May 2022. There are no payments due during the first six months of the loan. After the six-month period has expired, all outstanding accrued interest is due. At that time, the remaining unforgiven portion of the loan will be due in 18 equal monthly installments of principal and interest. The Company applied for forgiveness of the amount due on the PPP loan based on spending the loan proceeds on eligible expenses as defined by statute. The Company anticipates that it will be eligible for forgiveness of the entire loan amount as the proceeds had been used for eligible expenses. On November 5, 2020, Prosperity Bank notified the Company that the PPP loan had been forgiven and the loan was closed. During the fourth quarter of 2020, the Company will record other income of $166,000 as a result of the PPP loan forgiveness.

Net cash used in operating activities was $(565,000) during the first nine months of 2020 compared to $371,000 provided by operating activities during the nine months of 2019. Cash flow provided by working capital was $765,000 during the first nine months of 2020 compared to $1,000 provided by working capital during the first nine months of 2019. The $936,000 decrease in cash provided by operating activities was primarily due to a $1.5 million decrease in revenues, and a $411,000 increase in general and administrative costs, partially offset by a $764,000 increase in cash flow provided by working capital, and a $205,000 decrease in production costs and taxes. Net cash used in investing activities was $(77,000) during the first nine months of 2020 compared to $36,000 provided by investing activities during the first nine months of 2019. This decrease in cash flow provided by investing activities was primarily due to proceeds from the sale of equipment inventory to a third party during 2019, and lower capital spending. Cash flow provided by financing activities during the first nine months of 2020 was $132,000 compared to $(40,000) used in financing activities during the first nine months of 2019. This increase in cash provided by financing activities was primarily related to funding received from the PPP loan program.

Through November 2021, the Company believes its revenues as well as cash on hand will be sufficient to fund operating costs and general and administrative expenses and to remain in compliance with its bank covenants. If revenues and cash on hand are not sufficient to fund these expenses or if the Company needs additional funds for capital spending, the Company may be able to borrow funds against the credit facility depending on the borrowing base and credit limit. Because of the drop in oil prices during 2020 and resulting projected negative EBITDA, borrowing from the Company’s credit facility would result in non-compliance with current covenants, and would require a waiver on the EBITDA related covenants or a change in the covenants until such time as prices improve. In addition, if required, the Company could also issue additional shares of stock and/or sell assets as needed to further fund operations.

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Critical Accounting Policies

Effective January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842).

Commitments and Contingencies

Cost Reduction Measures

Legal Proceedings

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s Borrowing Base under its Credit Facility may be reduced by the lender.

The borrowing base under the Company’s revolving credit facility will be determined from time to time by the lender, consistent with its customary natural gas and crude oil lending practices. Reductions in estimates of the Company’s natural gas and crude oil reserves could result in a reduction in the Company’s borrowing base, which would reduce the amount of financial resources available under the Company’s revolving credit facility to meet its capital requirements. Such a reduction could be the result of lower commodity prices or production, inability to drill or unfavorable drilling results, changes in natural gas and crude oil reserve engineering, the lender’s inability to agree to an adequate borrowing base or adverse changes in the lenders’ practices regarding estimation of reserves. If cash flow from operations or the Company’s borrowing base decreases for any reason, the Company’s ability to undertake exploration and development activities could be adversely affected. As a result, the Company’s ability to replace naturally declining production may be limited. In addition, if the borrowing base is reduced, the Company may be required to pay down its borrowings under the revolving credit facility so that outstanding borrowings do not exceed the reduced borrowing base. This requirement could further reduce the cash available to the Company for capital spending and, if the Company did not have sufficient capital to reduce its borrowing level, could cause the Company to default under its revolving credit facility. Because of the drop in oil prices during 2020 and resulting projected negative EBITDA, borrowing from the Company’s credit facility would result in non-compliance with current covenants, and would require a waiver on the EBITDA related covenants, or a change in the covenants, until such time as prices improve.

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Commodity Risk

The Company’s major market risk exposure is in the pricing applicable to its oil production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil. Historically, prices received for oil and gas production have been volatile and unpredictable and price volatility is expected to continue. The average monthly Kansas oil prices received during the first nine months of 2020 ranged from a low of $15.26 per barrel to a high of $53.04 per barrel.

As of September 30, 2020 and December 31, 2019, the Company had no open positions related to derivative agreements relating to commodities.

Interest Rate Risk

At September 30, 2020, the Company had balances on financing leases outstanding of approximately $100,000, no balance owed on its credit facility with Prosperity Bank, and $166,000 due on the Company’s PPP loan. As of September 30, 2020, the interest rate on the credit facility was variable at a rate equal to prime plus 0.50% per annum. The Company’s credit facility interest rate at September 30, 2020 was 3.75%. The Company’s financing leases of $100,000 have fixed interest rates ranging from 5.0% to 6.5%. The Company’s PPP loan interest rate was 1%.

The annual impact on interest expense and the Company’s cash flows of a 10% increase in the interest rate on the credit facility would be approximately zero assuming borrowed amounts under the credit facility remained at the same amount owed as of September 30, 2020. The Company did not have any open derivative contracts relating to interest rates at September 30, 2020 or December 31, 2019.

Forward-Looking Statements and Risk

Certain statements in this report, including statements of the future plans (including the Merger and the transaction contemplated by the Merger Agreement), objectives, and expected performance of the Company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the Company’s control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict.

There are numerous uncertainties inherent in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can also affect these risks. Additionally, fluctuations in oil and gas prices, or a prolonged period of low prices, may substantially adversely affect the Company’s financial position, results of operations, and cash flows.

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ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer has concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

Changes in Internal Controls

During the nine months ended September 30, 2020, there have been no changes to the Company’s system of internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s system of controls over financial reporting. As part of a continuing effort to improve the Company’s business processes, management is evaluating its internal controls and may update certain controls to accommodate any modifications to its business processes or accounting procedures.

PART II OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See ITEM 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Commitments and Contingencies, Legal Proceedings, above in this Report.

ITEM 1A.

RISK FACTORS

Refer to Item 1A Risk Factors in the Company’s Report on Form 10-K for the year ended December 31, 2019 filed on March 30, 2020 (the “2019 10-K”) which is incorporated by this reference.

Set forth below are certain material changes to the Risk Factors disclosed in the 2019 10-K due to the Company executing that certain Agreement and Plan of Merger (the “Merger Agreement”), dated October 21, 2020, by and among, the Company, Antman Sub, LLC, a newly-formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Merger Sub”), and Riley Exploration – Permian, LLC, a Delaware limited liability company (“Riley”), pursuant to which Merger Sub will be merged with and into Riley, with Riley surviving that merger as a wholly-owned subsidiary of the Company (the “Merger”) (for more information regarding the Merger, See Part II, Item 5, Other Information):

The exchange ratio is not adjustable based on the market price of the Company’s common stock, so the merger consideration at closing may have a greater or lesser value than the market price at the time the Merger Agreement was signed.

The Merger Agreement has set the exchange ratio formula for Riley common units, and the exchange ratio is adjustable upward or downward if the number of outstanding Riley units or shares of the Company’s stock shall change including by reason of any reclassification, recapitalization, stock split (including a reverse stock split), or combination, exchange, readjustment of shares, or similar transaction, or any stock dividend or distribution paid in stock (other than certain specified changes in the Merger Agreement). Any changes in the market price of the Company’s common stock before the completion of the Merger will not affect the number of shares of the Company’s common stock that Riley members will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger, the market price of the Company’s common stock declines from the market price on the date of the Merger Agreement, then Riley members could receive merger consideration with substantially lower value. Similarly, if before the completion of the Merger, the market price of the Company’s common stock increases from the market price on the date of the Merger Agreement, then Riley members could receive merger consideration with substantially more value for their Riley common units than the parties had foreseen in the establishment of the exchange ratio.

The Merger may not be completed and the Merger Agreement may be terminated in accordance with its terms. Failure to complete the Merger could negatively impact the price of shares of the Company’s common stock as well as the Company’s future business and financial results.

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The Merger is subject to a number of conditions that must be satisfied prior to the completion of the Merger. These conditions to the completion of the Merger, some of which are beyond the control of the Company and Riley, may not be satisfied (or, where permitted, waived) in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed. The Merger Agreement may also be terminated under certain circumstances. If the transactions contemplated by the Merger Agreement are not completed for any reason, the Company’s ongoing business and financial results may be adversely affected.

The Company’s stockholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the completion of the Merger as compared to their current ownership and voting interests in the Company.

After the completion of the Merger, the Company’s current stockholders will own a smaller percentage of the combined company than their ownership of the Company prior to the Merger. As of the date the Merger Agreement was executed, it was estimated that as a result of the Merger and based solely on the exchange ratio of 97.796467, current Riley members would own, or hold rights to acquire, in the aggregate approximately 95% of the fully diluted closing common stock of the Company and current stockholders of the Company would own in the aggregate approximately 5% of the fully diluted closing common stock of the Company.

During the pendency of the Merger, the Company may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect its business.

Covenants in the Merger Agreement impede the ability of the Company to make acquisitions, subject to certain exceptions relating to fiduciary duties, or to complete other transactions that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, the Company may be at a disadvantage to its competitors during that period. In addition, while the Merger Agreement is in effect, the Company is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties.

Investigations regarding the Merger could result in one or more lawsuits against the Company’s board of directors and/or the Company, and other lawsuits may be filed against the Company, Riley and/or their respective boards challenging the Merger. An adverse ruling in any such lawsuit may prevent the Merger from being completed.

Following the public announcement of the Merger, at least one investigation was launched by a law firm as to whether the Company’s board of directors acted in the best interest of the Company’s stockholders in agreeing to the Merger, whether the board was fully informed as to the valuation of the acquisition, whether the transaction is fair to the Company’s stockholders, and whether all information regarding the sales process undertaken by the Company’s board of directors and financial analyses supporting the transaction will be fully and fairly disclosed to the Company’s stockholders. While no litigation has been filed to date, there is a possibility that such investigations could result in a lawsuit against the Company, Riley, and/or their respective boards. Any such lawsuit could seek, among other things, injunctive relief or other equitable relief, including a request to rescind parts of the Merger Agreement already implemented and to otherwise enjoin the parties from consummating the Merger, in addition to other fees and costs.

Uncertainties associated with the Merger may cause a loss of management personnel and other key employees, of the Company which could adversely affect the future business and operations of the combined company.

Whether or not the Merger is completed, the announcement and pendency of the Merger could disrupt the businesses of the Company. The Company is dependent on the experience and industry knowledge of its management and other key employees to execute its business plans. The surviving company’s success after the Merger will depend in part upon the ability of the Company to retain key management personnel and other key employees in advance of the Merger, and of the combined company’s ability to do so following the Merger. Current employees of the Company may experience uncertainty about their roles within the combined company following the Merger, which may have an adverse effect on the ability of the Company to retain key management and other key personnel or the ability of the combined company to do so following the Merger.

The issuance of shares of the Company’s common stock to Riley members in the Merger will dilute substantially the voting power of the Company’s current stockholders.

If the Merger is completed, each outstanding common unit of Riley will be converted into the right to receive a number of shares of the Company’s common stock equal to the exchange ratio determined pursuant to the Merger Agreement. Immediately following the Merger, the Company’s stockholders are expected to own approximately 5% of the outstanding capital stock of the combined company on a fully diluted basis, and Riley’s members are expected to own approximately 95% of the outstanding capital stock of the combined company on a fully diluted basis. Accordingly, the issuance of shares of the Company’s common stock to Riley’s members in the Merger will reduce significantly the relative voting power of each share of the Company’s common stock held by current stockholders of the Company. Consequently, the Company’s stockholders as a group will have significantly less influence over the management and policies of the combined company after the Merger than prior to the Merger.

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Use of TGC’s Net Operating Loss Carryforwards May Be Limited.

At December 31, 2019, TGC had, subject to the limitations discussed in this risk factor, substantial amounts of net operating loss carryforwards for U.S. federal and state income tax purposes. These loss carryforwards will eventually expire if not utilized. In addition, as to a portion of the U.S. net operating loss carryforwards, the amount of such carryforwards that TGC can use annually is limited under U.S. tax laws. Uncertainties exist as to both the calculation of the appropriate deferred tax assets based upon the existence of these loss carryforwards, as well as the future utilization of the operating loss carryforwards under the criteria set forth under FASB ASC 740, Income Taxes. In addition, further limitations exist upon use of these carryforwards in the event that a change in control of TGC occurs, which is expected as a result of the merger. There are risks that TGC may not be able to utilize some or all of the remaining carryforwards, or that deferred tax assets that were previously booked based upon such carryforwards may be written down or reversed based on future economic factors that may be experienced by TGC. The effect of such write downs or reversals, if they occur, may be material and substantially adverse. At December 31, 2019, federal net operating loss carryforwards amounted to approximately $33.8 million, of which $31.5 million expires between 2020 and 2037 which can offset 100% of taxable income and $2.3 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The total net deferred tax asset was $65,000 at December 31, 2019 and $130,000 at 2018. In 2018, TGC released a portion of the allowance related to its Minimum Tax Credit as a result of comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). TGC recorded an allowance on the remaining deferred tax asset at December 31, 2019 primarily due to expected future losses in the near term which would cause cumulative losses being incurred during the 3 year period. TGC recorded a full allowance against the deferred tax asset net of the alternative minimum tax (“AMT”) credit at December 31, 2018 primarily due to cumulative losses incurred during the 3 years ended December 31, 2018. The total valuation allowance December 31, 2019 was $10.7 million, and $11.5 million at December 31, 2018.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5.

OTHER INFORMATION

On October 21, 2020, the Company, Merger Sub, and Riley, entered the Merger Agreement pursuant to which Merger Sub will be merged with and into Riley, with Riley surviving the Merger as a wholly owned subsidiary of the Company. On the terms and subject to the conditions set forth in the Merger Agreement, upon consummation of the Merger, each common unit of Riley issued and outstanding immediately prior to the effective time of the Merger (other than cancelled units (as defined in the Merger Agreement)) will be converted into the right to receive: (a) 97.796467 shares of the Company’s common stock (together with any cash to be paid in lieu of fractional shares of the Company Common Stock) and (b) any dividends or other distributions to which the holder of a Riley common unit becomes entitled to upon the surrender of such Riley common unit in accordance with the Merger Agreement.

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ITEM 6.

EXHIBITS

The following exhibits are filed with this report:

	31*	Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to Exchange Act Rule, Rule 13a-14a/15d-14a.
	32*	Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Calculation Linkbase Document
	101.DEF	XBRL Taxonomy Definition Linkbase Document
	101.LAB	XBRL Taxonomy Label Linkbase Document
	101.PRE	XBRL Taxonomy Presentation Linkbase Document

*Filed with this report

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant duly caused this report to be signed on its behalf by the undersigned hereto duly authorized.

Dated: November 12, 2020

TENGASCO, INC.

By:	/s/Michael J. Rugen
	Michael J. Rugen
	Chief Executive Officer and Chief Financial Officer