U.S. Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-15555
8000 E. Maplewood Ave, Suite 130, Greenwood Village, CO 80111
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“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 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 ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,658,77510,684,417 common shares at November 4, 20199, 2020.
Tengasco, Inc. and Subsidiaries
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Tengasco, Inc. and Subsidiaries
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Tengasco, Inc. and Subsidiaries
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Tengasco, Inc. and Subsidiaries
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Tengasco, Inc. and Subsidiaries
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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.
The accompanying unaudited condensed consolidated financial statements as of September 30, 20192020 and September 30, 20182019 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, 20182019 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, 20192020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019.2020. 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, 2018.2019.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries after elimination of all significant intercompany transactions and balances.
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.
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.
The following table presents the disaggregated revenue by commodity for the three months and nine months ended September 30, 20192020 and 20182019 (in thousands):
Cash and cash equivalents include temporary cash investments with a maturity of ninety days or less at date of purchase.
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, 20192020 and December 31, 2018.2019. These costs include production costs and taxes. The market value component is calculated using the average September 201930, 2020 and December 20182019 oil sales prices received fromby the Company’s Kansas properties. In addition, at December 31, 2018, the Company recorded equipment and materials to be used in its Kansas operation as inventory and was carried at the lower of cost or market value. The equipment inventory was sold to a third party during the three months ended March 31, 2019. The cost component of the equipment and materials inventory represented the original cost paid for the equipment and materials. The market component is based on estimated sales value for similar equipment and materials at the end of each period.Company. At September 30, 20192020 and December 31, 2018,2019, the cost component was used to value oil inventory. At September 30, 2020 and December 31, 2019, inventory consisted of the following (in thousands):
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, 20192020 and $23,000 at December 31, 2018.2019. 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, 20192020 and 2018.2019.
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, 20192020 or December 31, 2018.2019.
The following table sets forth information concerning the Company’s accounts receivable (in thousands):
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.
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.
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.
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.
Tengasco, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(4) | (4) Earnings per Common Share |
We report basic earnings per common share, which excludesexclude 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(in thousands except for share and per share amounts)amounts):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Income (numerator): | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | (182 | ) | | $ | 298 | | | $ | (269 | ) | | $ | 530 | | |
| Net income from discontinued operations | | $ | — | | | $ | — | | | $ | — | | | $ | 1,120 | | |
| Net loss | | | $ | (813 | ) | | $ | (182 | ) | | $ | (1,894 | ) | | $ | (269 | ) |
| Weighted average shares (denominator): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares – basic | | | 10,653,550 | | | | 10,624,493 | | | | 10,648,838 | | | | 10,624,476 | | | 10,680,050 | | | 10,653,550 | | | 10,673,238 | | | 10,648,838 | |
| Dilution effect of share-based compensation, treasury method | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Weighted average shares – dilutive | | | 10,653,550 | | | | 10,624,493 | | | | 10,648,838 | | | | 10,624,476 | | | | 10,680,050 | | | | 10,653,550 | | | | 10,673,238 | | | | 10,648,838 | |
| Income (loss) per share – basic and dilutive: | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.02 | ) | | $ | 0.03 | | | $ | (0.03 | ) | | $ | 0.05 | | |
| Discontinued operations | | $ | — | | | $ | — | | | $ | — | | | $ | 0.11 | | |
| 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 12.(10) Commitments and Contingencies)
(5) | Recent Accounting Pronouncements |
In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). This guidance was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments was permitted for all entities. The Company has identified each of its leases and determined the impact of this new guidance on each of the identified leases. The Company implemented ASU 2016-02 Leases (Topic 842) as of January 1, 2019 using the modified retrospective approach. As a result of this implementation, the Company recorded right-of-use assets and liabilities associated with operating leases of approximately $98,000. There was no transition adjustment related to finance leases.
The Company elected the package of practical expedients within ASU 2016-02 Leases (Topic 842) that allows an entity to not reassess, prior to the effective date, (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification of any expired or existing leases, or (iii) initial direct costs for any existing leases. Additionally, the Company elected the practical expedient to not evaluate existing or expired land easements not previously accounted for as leases prior to the effective date. The Company also made an account policy election not to apply the lease recognition requirements to leases with an initial term of 12 months or less.
(6) | Related Party Transactions |
On September 17, 2007, Hoactzin Partners, L.P. (“Hoactzin”) subscribed to a drilling program offered by the Company consisting of wells to be drilled on the Company’s Kansas Properties (the “Program”). Peter E. Salas, the Chairman of the Board of Directors of the Company, is the controlling person of Hoactzin and of Dolphin Offshore Partners, L.P., the Company’s largest shareholder. Hoactzin was also conveyed a net profits interest in the MMC facility at the Carter Valley municipal solid waste landfill owned and operated by Republic Services, Inc. in Church Hill, Tennessee where the Company installed a propriety combination of advanced gas treatment technology to extract the methane component of the purchased gas stream (the “Methane Project”). As a result of the startup costs, monthly operating expenses, and gas production levels experienced, no net profits as defined were realized during the period from startup in April, 2009 through January 26, 2018 (the date the Company sold the Methane Project to a third party, and the net profits interest of Hoactzin terminated). Consequently, no payment to Hoactzin were made under the net profits interest at any time. In addition, during the fourth quarter of 2018, the Company acquired all of Hoactzin’s working interest in the drilling program wells for $134,690.
Tengasco, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On December 18, 2007, the Company entered into a Management Agreement with Hoactzin to manage on behalf of Hoactzin all of its working interest in certain oil and gas properties owned by Hoactzin and located in the onshore Texas Gulf Coast, and offshore Texas and offshore Louisiana. As part of the consideration for the Company’s agreement to enter into the Management Agreement, Hoactzin granted to the Company an option to participate in up to a 15% working interest on a dollar for dollar cost basis in any new drilling or workover activities undertaken on Hoactzin’s managed properties during the term of the Management Agreement. The Management Agreement expired on December 18, 2012.
The Company entered into a transition agreement with Hoactzin effective December 18, 2012 whereby the Company no longer performs operations, but administratively assists Hoactzin in becoming operator of record of these wells and transferring all bonds from the Company to Hoactzin. This assistance is primarily related to signing the necessary documents to effectuate this transition. Hoactzin and its controlling member are indemnifying the Company for any costs or liabilities incurred by the Company resulting from such assistance or the fact that the Company is the operator of record on certain of these wells. As of the date of this Report, the Company continues to administratively assist Hoactzin with this transition process.
(7) | (5) Oil and Gas Properties |
The following table sets forth information concerning the Company’s oil and gas properties (in thousands):
| | | September 30, 2019 | | December 31, 2018 | | | September 30, 2020 | | | December 31, 2019 | |
| Oil and gas properties | | $ | 6,574 | | | $ | 6,503 | | | $ | 6,685 | | | $ | 6,751 | |
| Unevaluated properties | | | — | | | | 23 | | | — | | | — | |
| Accumulated depreciation, depletion, and amortization | | | (2,230 | ) | | | (1,722 | ) | | | (2,771 | ) | | | (2,366 | ) |
| Oil and gas properties, net | | $ | 4,344 | | | $ | 4,804 | | | $ | 3,914 | | | $ | 4,385 | |
The Company recorded depletion expense of $504,000$405,000 and $546,000$504,000 for the nine months ended September 30, 20192020 and 2018,2019, respectively. During the nine months ended September 30, 2019, and 2018, the Company also recorded in “Accumulated depreciation, depletion, and amortization” a $4,000 gain on asset retirement obligations and an $8,000 gain on asset retirement obligations, respectively.obligations.
(8) | (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, 20192020 (in thousands):
| Balance December 31, 2018 | | $ | 2,179 | | |
| Balance December 31, 2019 | | | $ | 1,998 | |
| Accretion expense | | 100 | | | 94 | |
| Liabilities incurred | | — | | | — | |
| Liabilities settled | | (56 | ) | | — | |
| Liabilities relieved - sold properties | | | (55 | ) | | | (63 | ) |
| Balance September 30, 2019 | | $ | 2,168 | | |
| Balance September 30, 2020 | | | $ | 2,029 | |
Tengasco, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(9) | (7) Long-Term Debt and Lease Liabilities |
Long Term Debt
Long-term debt to unrelated entities consisted of the following (in thousands):
| | | September 30, 2019 | | | December 31, 2018 | |
| Note payable to a financial institution, with interest only payment until maturity. | | $ | — | | | $ | — | |
| Installment notes bearing interest at the rate of 5.0% to 6.5% per annum collateralized by vehicles with monthly payments including interest, insurance and maintenance of approximately $5 | | | — | | | | 124 | |
| Total long-term debt | | | — | | | | 124 | |
| Less current maturities | | | — | | | | (51 | ) |
| Long-term debt, less current maturities | | $ | — | | | $ | 73 | |
At September 30, 2019, installment notes are recorded to Lease liabilities – finance leases.
At September 30, 2019,2020, 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, 2019,2020, the Company’s borrowing base was $4$3.1 million, subject to a credit limit based on current covenants of $3.8$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, 2019,2020, 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, 2019,2020, the interest rate on this credit facility was 5.50%3.75%. The Company was in compliance with all covenants during the quarter ended September 30, 2019.2020. The Company had no outstanding borrowing under the facility as of September 30, 20192020 or December 31, 2018.2019. 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 July 2019, the Company’s seniorsecond 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 after Prosperity Bank’s most recent review of the Company’s currently owned producing properties was amended to increase the borrowing base to $4 million, subject to a credit limit based on current covenants of $3.8 million,as described above and the maturity date was extended to July 31, 2021. The borrowing base remainstherefore is not subject to the existing periodic redetermination provisions in thesame terms as Company’s credit facility. The PPP loan has an interest rate remained prime plus 0.50% per annum. This rate was 6.00% at theof 1% with a maturity date of May 2022. There are no payments due during the amendment. The maximum line of creditfirst 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 underapplied 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 credit facility remained $50 million. The next borrowing base reviewnotified the Company that the PPP loan had been forgiven and the loan was closed. During the fourth quarter of 2020, the Company will take place in November 2019.record other income of $166,000 as a result of the PPP loan forgiveness.
Lease Liabilities
Effective January 1, 2018,2019, 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.term and an August 31, 2020 expiration date. The Company can renewrenewed the lease for 3612 additional months by providingthereby extending the expiration date to the Landlord written notice of intent to exercise the renewal not less than nine months prior to expiration of the initial term.August 31, 2021. The Company’s corporate office lease is classified as an operating lease.
Tengasco, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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.
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
In order toTo 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 6%3.75% as the discountsdiscount rate for these agreements.
Components of lease costs for the three months and nine months ended September 30, 2020 and 2019 (in thousands)(in thousands):
| | | | | Period Ended | |
| | | | Period Ended | | | | For the Three Months Ended | | | For the Nine Months Ended | |
| Income Statement Account | | Three Months September 30, 2019 | | | Nine Months September 30, 2019 | | Statement of Operations Account | | September 30, 2020 | | | September 30, 2019 | | | September 30, 2020 | | | September 30, 2019 | |
| | | | | | | | | | | | | | | | | | | | |
| Operating lease cost: | | | | | | | | | | | | | | | | | | | |
| Production costs and taxes | | $ | 3 | | | $ | 10 | | Production costs and taxes | | $ | 3 | | | $ | 3 | | | $ | 10 | | | $ | 10 | |
| General and administrative | | | 12 | | | | 37 | | General and administrative | | | 13 | | | | 12 | | | | 37 | | | | 37 | |
| Total operating lease cost | | | $ | 15 | | | $ | 47 | | | | $ | 16 | | | $ | 15 | | | $ | 47 | | | $ | 47 | |
| | | | | | | | | | | | | | | | | | | | | |
| Finance lease cost: | | | | | | | | | | | | | | | | | | | | |
| Amortization of right of use assets | Depreciation, depletion, and amortization | | $ | 21 | | | $ | 62 | | Depreciation, depletion, and amortization | | $ | 20 | | | $ | 21 | | | $ | 56 | | | $ | 62 | |
| Interest on lease liabilities | Net interest expense | | | 1 | | | | 4 | | Net interest expense | | | 1 | | | | 1 | | | | 4 | | | | 4 | |
| Total finance lease cost | | | $ | 22 | | | $ | 66 | | | | $ | 21 | | | $ | 22 | | | $ | 60 | | | $ | 66 | |
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)(in thousands):
| | | Period Ended | | | Period Ended | |
| | | Three Months September 30, 2019 | | Nine Months September 30, 2019 | | | 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 the measurement of lease liabilities: | | | | | | |
| | | | | | | | | | | | | | |
| Cash paid for amounts included in lease liabilities: | | | | | | | | | | | | | |
| Operating cash flows from operating leases | | $ | 15 | | | $ | 45 | | | $ | 16 | | | $ | 15 | | | $ | 47 | | | $ | 45 | |
| Operating cash flows from finance leases | | | 1 | | | | 4 | | | 1 | | | 1 | | | 4 | | | 4 | |
| Finance cash flows from finance leases | | | 9 | | | | 40 | | | 15 | | | 9 | | | 34 | | | 40 | |
| | | | | | | | | | | | | | | | | | | | | |
| Right of use assets obtained in exchange for lease obligations: | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | — | | | | 98 | | | — | | | — | | | 63 | | | 98 | |
Supplemental lease related balance sheet information as of September 30, 20192020 and December 31, 2018 (in thousands)2019 (in thousands):
| | | Balance Sheet as of | | | Balance Sheet as of | |
| | | September 30, 2019 | | | December 31, 2018 | | | September 30, 2020 | | | December 31, 2019 | |
| | | | | | | | | | | | | |
| Operating Leases: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Right of use asset - operating leases | | $ | 55 | | | $ | — | | | $ | 58 | | | $ | 41 | |
| | | | | | | | | | | | | |
| Lease liabilities - current | | $ | 56 | | | $ | — | | | $ | 58 | | | $ | 41 | |
| Lease liabilities - noncurrent | | | — | | | | — | | | | — | | | | — | |
| Total operating lease liabilities | | $ | 56 | | | $ | — | | | $ | 58 | | | $ | 41 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Finance Leases: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other property and equipment, gross | | $ | 263 | | | $ | — | | | $ | 293 | | | $ | 295 | |
| Accumulated depreciation | | | (129 | ) | | | — | | | | (159 | ) | | | (146 | ) |
| Other property and equipment, net | | $ | 134 | | | $ | — | | | $ | 134 | | | $ | 149 | |
| | | | | | | | | | | | | |
| Lease liabilities - current | | $ | 59 | | | $ | — | | | $ | 58 | | | $ | 61 | |
| Lease liabilities - noncurrent | | | 29 | | | | — | | | | 42 | | | | 41 | |
| Total finance lease liabilities | | $ | 88 | | | $ | — | | | $ | 100 | | | $ | 102 | |
Weighted average remaining lease term and discount rate as of September 30, 2019:2020:
| | | Operating Leases | | | Finance Leases | | | Operating Leases | | | Finance Leases | |
| | | | | | | | | | | | | |
| Weighted average remaining lease term | | 0.9 years | | | 0.9 years | | | 0.9 years | | | 1.1 years | |
| Weighted average discount rate | | 6.0 | % | | 5.7 | % | | 3.75 | % | | 5.35 | % |
Tengasco, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Maturity of lease liabilities as of September 30, 2019 (in thousands)2020 (in thousands):
| | | Operating Leases | | Finance Leases | | | Operating Leases | | | Finance Leases | |
| | | | | | | | | | | | |
| 2019 (October 2019 - December 2019) | | $ | 16 | | | $ | 27 | | |
| 2020 | | | 42 | | | | 43 | | | $ | 16 | | | $ | 21 | |
| 2021 | | | — | | | | 20 | | | 43 | | | 67 | |
| 2022 | | | | — | | | | 15 | |
| Total lease payments | | | 58 | | | | 90 | | | 59 | | | 103 | |
| Less imputed interest | | | (2 | ) | | | (2 | ) | | | (1 | ) | | | (3 | ) |
| Total | | $ | 56 | | | $ | 88 | | | $ | 58 | | | $ | 100 | |
(10) | Discontinued Operations |
(8) Liquidity
The following table sets forth information concerningThrough November 2021, the Discontinued Operations (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 thousands):
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | |
| Revenues | | $ | — | | | $ | — | | | $ | — | | | $ | 6 | |
| Production costs and taxes | | | — | | | | — | | | | — | | | | (40 | ) |
| Depreciation, depletion, and amortization | | | — | | | | — | | | | — | | | | (4 | ) |
| Interest income | | | — | | | | — | | | | — | | | | 1 | |
| Gain on sale of assets | | | — | | | | — | | | | — | | | | 1,157 | |
| Deferred income tax benefit | | | — | | | | — | | | | — | | | | — | |
| Net income from discontinued operations | | $ | — | | | $ | — | | | $ | — | | | $ | 1,120 | |
Discontinued operations are relatedthe covenants, in order for the borrowing to the Manufactured Methane facilities. The Company sold all its methane facility assets, except the applicable U.S. patent, on January 26, 2018 for $2.65 million.occur.
(11) | (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.
Tengasco, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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, 20192020 and December 31, 2018.2019.
(12) | Tengasco, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
(10) Commitments and Contingencies |
The Company as designated operator of the Hoactzin properties was administratively issued an “Incident of Non-Compliance” by the Bureau of Safety and Environmental Enforcement (“BSEE”) during the quarter ended September 30, 2012 concerning one of Hoactzin’s operated properties. This action called for payment of a civil penalty of $386,000 for failure to provide, upon request, documentation to the BSEE evidencing that certain safety inspections and tests had been conducted in 2011. On July 14, 2015, the federal district court in the Eastern District of Louisiana affirmed the civil penalty without reduction. The Company did not further appeal. In the third quarter of 2015, the Company paid the civil penalty and statutory interest thereon from funds borrowed under its credit facility. In the fourth quarter of 2015, the Company received a return of the cash collateral previously provided to RLI Insurance Company. The Company has not advanced any funds to pay any obligations of Hoactzin and no borrowing capability of the Company has been used in connection with its obligations under the Management Agreement, except for those funds used to pay the civil penalty and interest thereon.
During the second quarter of 2015, the Company received from Hoactzin a copy of an internal analysis prepared by Hoactzin setting out certain issues that Hoactzin may consider to form the basis of operational and other claims against the Company primarily under the Management Agreement. This analysis raised issues other than the “Incident of Non-Compliance” discussed above. The Company is discussing this analysis, as well as the civil penalty discussed above, with Hoactzin in an effort to determine whether there is possibility of a reasonable resolution of some or all of these matters on a negotiated basis.
In the normal course of business, the Company enters into commitments to spend capital on oil and gas properties. Since September 30, 2019, the Company has entered into a drilling commitment in the amount of approximately $293,000. In addition, the Company was in the process of drilling a well at September 30, 2019. Drilling commitments by the Company in excess of costs incurred through September 30, 2019 were approximately $73,000.
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, 2019,2020, the reductions were approximately $389,000.$390,000. Of the $389,000,$390,000, approximately $61,000$77,000 would be paid in the Company’s common stock. The $61,000$77,000 value represents approximately 100,00094,000 common shares valued at $0.61$0.82 per share which represents the closing price on September 30, 2019.2020. 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.
| 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 2019, 92.5 MBbl2020, 92.4MBbl gross of oil were sold from the Company’s properties. Of the 92.5 MBbl92.4MBbl sold, 72.1 MBbl67.0MBbl 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 20192020 of 72.1 MBbl67.0MBbl of oil compares to net sales of 73.0 MBbl72.1MBbl of oil during the first nine months of 2018.2019. 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 compared to $4.5 million during the first nine months of 2018.2019. This decrease in net revenue was primarily due to a $662,000an $1.2 million reduction related to an $9.18a $18.12 per barrel decrease in the average oil price from $61.27 per barrel during the first nine months of 2018 to $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 $53,000$269,000 reduction related to the 860 Bbla 5.1MBbl decrease in sales volumes. The 860 Bbl5.1MBbl decrease in sales volumes was primarily duerelated to lower sales volumes on the Albers, BSU, Liebenau, Veverka D lease dueleases related to polymer work performed in June 2018, and natural production declines, on various other properties, partially offset by higher sales volumes attributed tofrom the BSU #1-30Zimmerman well that was completed in October 2018.at the beginning of 2020.
Comparison of the Quarters Ended September 30, 20192020 and 20182019
The Company reported a net loss from continuing operationsof $(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 compared to net income from continuing operations of $298,000 or $0.03 per share of common stock during the third quarter of 2018.2019. The $480,000$631,000 decrease in net income was primarily due to an $439,000$450,000 decrease in revenues, and a $51,000$388,000 increase in general and administrative expenses, partially offset by a $167,000 decrease in production costs and taxes.taxes and a $40,000 decrease in depreciation, depletion, and amortization costs.
The Company recognized $1.21 million$765,000 in revenues during the third quarter of 20192020 compared to $1.65$1.2 million during the third quarter of 2018.2019. The $439,000$450,000 decrease in net revenues was primarily due to a $311,000$318,000 reduction related to a $13.16$15.15 per barrel decrease in the average oil price from $64.34 per barrel during the third quarter of 2018 to $51.18 per barrel during the third quarter of 2019 to $36.03 per barrel during the third quarter of 2020, and a $128,000$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 2.0 MBbl decrease in sales volumes. The 2.0 MBblannounced 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 sales volumes on the Veverka D lease as a result of expected declines from higher volumes realized immediately after the polymer work performed in June 2018 and natural declines on various other properties, partially offset by higher sales volumes attributed to the BSU #1-30 well that was completed in October 2018.
Productionrepair costs and taxes increased $51,000 from $862,000 during the third quarter of 2018 to $913,000 during the third quarter of 2019. This increase was primarily due to 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, 20192020 and 20182019
The Company reported a net loss from continuing operationsof $(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 compared to a net income from continuing operations of $530,000 or $0.05 per share of common stock during the first nine months of 2018.2019. The $799,000$1.6 million decrease in net income was primarily due to a $720,000an $1.5 million decrease in revenues, a $411,000 increase in general and administrative expenses, and a $102,000 increase$41,000 decrease in gain on sale of assets, partially offset by a $205,000 decrease in production costcosts and taxes.taxes, and a $105,000 decrease in depreciation, depletion, and amortization costs.
The Company recognized $3.8$2.3 million inof revenues during the first nine months of 20192020 compared to $4.5$3.8 million during the first nine months of 2018. The2019. This decrease in net revenue decrease from 2018 levels was primarily due to a $662,000an $1.2 million reduction related to an $9.18a $18.12 per barrel decrease in the average oil price from $61.27 per barrel during the first nine months of 2018 to $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 $53,000$269,000 reduction related to the 860 Bbla 5.1MBbl decrease in sales volumes. The 860 Bbl5.1MBbl decrease in sales volumes was primarily duerelated to lower sales volumes on the Albers, BSU, Liebenau, Veverka D lease as a result of expectedleases related to natural production declines, from higher volumes realized immediately after the polymer work performed in June 2018 and natural declines on various other properties, partially offset by higher sales volumes attributed tofrom the BSU #1-30Zimmerman well that was completed in October 2018.at the beginning of 2020.
ProductionGeneral and administrative costs and taxes increased $102,000$411,000 from $2.5$913,000 during the first nine months of 2019 to $1.3 million during the first nine months of 20182020. 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.
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 2019.2019 to $2.4 million during the first nine months of 2020. This increasedecrease 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
At September 30, 2019,2020, 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, 2019,2020, the Company’s borrowing base was $4$3.1 million, subject to a credit limit based on current covenants of approximately $3.8$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, 2019,2020, 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, 2019,2020, the interest rate on this credit facility was 5.50%3.75%. The Company was in compliance with all covenants during the quarter ended September 30, 2019.2020. The Company had no outstanding borrowing under the facility as of September 30, 20192020 or December 31, 2018.2019. 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 July 2019,2020, the Company’s seniorCompany 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 after Prosperity Bank’s most recent review of the Company’s currently owned producing properties was amended to increase the borrowing base to $4 million, subject to a credit limit based on current covenants of approximately $3.8 million,as described above and the maturity date was extended to July 31, 2021. The borrowing base remainstherefore is not subject to the existing periodic redetermination provisions in thesame terms as Company’s credit facility. The PPP loan has an interest rate remained prime plus 0.50% per annum. This rate was 6.00% at theof 1% with a maturity date of May 2022. There are no payments due during the amendment. The maximum line of creditfirst 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 underapplied 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 credit facility remained $50 million. The next borrowing base reviewnotified the Company that the PPP loan had been forgiven and the loan was closed. During the fourth quarter of 2020, the Company will take place in November 2019.record other income of $166,000 as a result of the PPP loan forgiveness.
Net cash providedused in operating activities from continuing operations was $371,000$(565,000) during the first nine months of 20192020 compared to $1.0 million$371,000 provided by operating activities from continuing operations during the first nine months of 2018.2019. Cash flow provided by working capital was $1,000$765,000 during the first nine months of 20192020 compared to $190,000 used in$1,000 provided by working capital during the first nine months of 2018.2019. The $191,000 increase in cash flow provided by working capital was primarily due to changes in inventory, and changes in accounts receivable, partially offset by changes in accrued liabilities, and increases in settlements on asset retirement obligations. The $647,000$936,000 decrease in cash provided by operating activities was primarily due to a $720,000$1.5 million decrease in revenues, and a $102,000$411,000 increase in production costgeneral and taxes,administrative costs, partially offset by the $191,000a $764,000 increase in cash flow provided by working capital.capital, and a $205,000 decrease in production costs and taxes. Net cash provided byused in investing activities from continuing operations was $36,000$(77,000) during the first nine months of 20192020 compared to $466,000 used in$36,000 provided by investing activities from continuing operations during the first nine months of 2018.2019. This increasedecrease in cash flow provided by investing activities was primarily due to a decrease in drilling and polymer project costs andproceeds from the sale of materialsequipment inventory to a third party during the first nine months of 2019.2019, and lower capital spending. Cash flow used inprovided by financing activities from continuing operations during the first nine months of 20192020 was $40,000$132,000 compared to $30,000$(40,000) used in financing activities during the first nine months of 2018.2019. 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.
Critical Accounting Policies
Effective January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842).
Commitments and Contingencies
The Company as designated operator of the Hoactzin properties was administratively issued an “Incident of Non-Compliance” by the Bureau of Safety and Environmental Enforcement (“BSEE”) during the quarter ended September 30, 2012 concerning one of Hoactzin’s operated properties. This action called for payment of a civil penalty of $386,000 for failure to provide, upon request, documentation to the BSEE evidencing that certain safety inspections and tests had been conducted in 2011. On July 14, 2015, the federal district court in the Eastern District of Louisiana affirmed the civil penalty without reduction. The Company did not further appeal. In the third quarter of 2015, the Company paid the civil penalty and statutory interest thereon from funds borrowed under its credit facility. In the fourth quarter of 2015, the Company received a return of the cash collateral previously provided to RLI Insurance Company. The Company has not advanced any funds to pay any obligations of Hoactzin and no borrowing capability of the Company has been used in connection with its obligations under the Management Agreement, except for those funds used to pay the civil penalty and interest thereon.
During the second quarter of 2015, the Company received from Hoactzin a copy of an internal analysis prepared by Hoactzin setting out certain issues that Hoactzin may consider to form the basis of operational and other claims against the Company primarily under the Management Agreement. This analysis raised issues other than the “Incident of Non-Compliance” discussed above. The Company is discussing this analysis, as well as the civil penalty discussed above, with Hoactzin in an effort to determine whether there is possibility of a reasonable resolution of some or all of these matters on a negotiated basis.
In the normal course of business, the Company enters into commitments to spend capital on oil and gas properties. Since September 30, 2019, the Company has entered into a drilling commitment in the amount of approximately $293,000. In addition, the Company was in the process of drilling a well at September 30, 2019. Drilling commitments by the Company in excess of costs incurred through September 30, 2019 were approximately $73,000.
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, 2019,2020, the reductions were approximately $389,000.$390,000. Of the $389,000,$390,000, approximately $61,000$77,000 would be paid in the Company’s common stock. The $61,000$77,000 value represents approximately 100,00094,000 common shares valued at $0.61$0.82 per share which represents the closing price on September 30, 2019.2020. 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.
| 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'sCompany’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 20192020 ranged from a low of $46.39$15.26 per barrel to a high of $58.60$53.04 per barrel.
As of September 30, 2020 and December 31, 2019, the Company hashad no open positions related to derivative agreements relating to commodities.
Interest Rate Risk
At September 30, 2019,2020, the Company had balances on financing leases outstanding of approximately $88,000, and$100,000, no balance owed on its credit facility with Prosperity Bank.Bank, and $166,000 due on the Company’s PPP loan. As of September 30, 2019,2020, 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, 20192020 was 5.50%3.75%. The Company’s financing leases of $88,000$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, 2019.2020. The Company did not have any open derivative contracts relating to interest rates at September 30, 20192020 or December 31, 2018.2019.
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'sCompany’s financial position, results of operations, and cash flows.
| 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 three months and nine months ended September 30, 2019,2020, 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
See ITEM 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Commitments and Contingencies, Legal Proceedings, above in this Report.
None.
Refer to Item 1A Risk Factors in the Company’s Report on Form 10-K for the year ended December 31, 20182019 filed on March 28, 201930, 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):
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.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.
None.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.
Not ApplicableAfter 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.
None.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.
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.
Not Applicable
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.
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.
The following exhibits are filed with this report:
| | | Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to Exchange Act Rule, Rule 13a-14a/15d-14a. |
| | | 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
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 13, 2019
TENGASCO, INC.
| Dated: November 12, 2020 | |
| |
| TENGASCO, INC. | |
| |
| By: | /s/Michael J. Rugen | |
| | Michael J. Rugen | |
| | Chief Executive Officer and Chief Financial Officer | |
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