On October 21, 2020, Tengasco, Inc. (“TGC”) and Riley Exploration - Permian, LLC (“REP”) entered into the merger agreement, pursuant to which a newly-formed wholly-owned subsidiary of TGC, Antman Sub, LLC (“Merger Sub”), would merge with and into REP (the “merger”) on the terms and subject to the conditions of the merger agreement, with REP continuing as the surviving entity in the merger and as a wholly-owned subsidiary of TGC. On February 26, 2021 (effective date of the merger), each REP common unit issued and outstanding immediately prior to the effective date (other than excluded units) was cancelled and converted into the right to receive 97.796467 shares of TGC common stock. Also, on February 26, 2021 the Company effected a 1 for 12 reverse stock split.

The unaudited pro forma condensed consolidated and combined balance sheet gives effect to these transactions and related adjustments as if they had occurred on December 31, 2020. The unaudited pro forma condensed consolidated and combined statements of operations combine the results of operations of REP’s fiscal year ended September 30, 2020 and TGC’s results of operations for the twelve month period ended September 30, 2020 and REP’s fiscal quarter ended December 31, 2020 and TGC’s results of operations for the three month period ended December 31, 2020 and give effect to these transactions and related adjustments as if they had occurred on October 1, 2019.

TGC’s results of operations for the twelve month period ended September 30, 2020 were derived from TGC’s unaudited consolidated statement of operations for the nine months ended September 30, 2020 combined with the three month period ended December 31, 2019. The three month period was obtained by using TGC’s audited consolidated statement of operations for the year ended December 31, 2019 as adjusted to remove TGC’s unaudited consolidated statement of operations for the nine months ended September 30, 2019. TGC’s result of operations for the three month period ended December 31, 2020 were derived by taking the difference between TGC’s annual audited consolidated statement of operations for the year ended December 31, 2020 and TGC’s unaudited consolidated statement of operations for the nine months ended September 30, 2020.

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The unaudited pro forma condensed consolidated and combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations or financial position that the pro forma condensed consolidated and combined company would have reported had the merger and related transactions been completed as of the dates set forth in this unaudited pro forma condensed consolidated and combined financial information and should not be taken as indicative of the combined company’s results of operations or financial position. A final determination of the fair value of TGCs’ assets and liabilities will be based on the actual assets and liabilities of TGC that exist as of the closing date of the merger. In addition, the value of the consideration upon the consummation of the merger was determined based on the closing price of TGC’s common stock on the closing date of the merger. REP estimated the fair value of TGC’s assets and liabilities based on discussions with TGC’s management, preliminary valuation studies, due diligence and information presented in TGC’s SEC filings. Any increases or decreases in the fair value of assets acquired and liabilities assumed upon completion of the final valuations will result in adjustments to the unaudited pro forma balance sheet and/or statements of operations. The final purchase price allocation may be materially different than that reflected in the pro forma purchase price allocation presented herein. The actual results may differ significantly from those reflected in the unaudited pro forma condensed consolidated and combined financial information for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed consolidated and combined financial information and actual results. The final purchase price allocation will be presented in REP’s future financial statements and is subject to a measurement period not to exceed one year from the closing of the transaction.

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		Unaudited Reconciliation of TGC’s historical statement of operations for the three month period from October 1, 2020 through December 31, 2020
		For the Year Ended				For the Nine Months Ended				For the Three Month Period
		December 31 2020				September 30 2020 (Unaudited)				October 1, 2020 - December 31, 2020 (Unaudited)
		(In Thousands)
Revenues
Oil and gas properties		$	3,038			$	2,292			$	746
Total revenues			3,038				2,292				746
Cost and expenses
Production costs and taxes			3,104				2,399				705
Depreciation, depletion, and amortization			644				461				183
General and administrative			2,187				1,324				863
Impairment costs			920				-				920
Total cost and expenses			6,855				4,184				2,671
Net loss from operations			(3,817	)			(1,892	)			(1,925	)
Other income (expense)
Interest expense			(8	)			(6	)			(2	)
Gain on sale of assets			11				4				7
Other income			166				-				166
Total other income (expense)			169				(2	)			171
Net loss from operations before income tax			(3,648	)			(1,894	)			(1,754	)
Deferred income tax benefit			-				-				-
Net loss			(3,648	)			(1,894	)			(1,754	)

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(2)

TGC’s historical statements of operations were adjusted to only include the twelve months ended September 30, 2020. The data in the unaudited pro forma statement of operations includes the financials for the period October 1, 2019 through September 30, 2020. The historical data in the above table will not be comparative to the financials included in other sections of this filling. The table below includes a reconciliation of TGC’s historical statement of operations for the nine month period ended September 30, 2020 to the twelve month period ended September 30, 2020.

		Unaudited Reconciliation of TGC’s historical statement of operations for the tweleve month period from October 1, 2019 through September 30, 2020
		For the Nine Months Ended				For the Three Months Ended				For the Twelve Month Period
		September 30 2020				December 31 2019 (Unaudited)				October 1, 2019 - September 30, 2020 (Unaudited)
		(In Thousands)
Revenues
Oil and gas properties		$	2,292			$	1,134			$	3,426
Total revenues			2,292				1,134				3,426
Cost and expenses
Production costs and taxes			2,399				794				3,193
Depreciation, depletion, and amortization			461				150				611
General and administrative			1,324				389				1,713
Total cost and expenses			4,184				1,333				5,517
Net loss from operations			(1,892	)			(199	)			(2,091	)
Other income (expense)
Interest expense			(6	)			(2	)			(8	)
Gain on sale of assets and other income			4				6				10
Total other income (expense)			(2	)			4				2
Net loss from operations before income tax			(1,894	)			(195	)			(2,089	)
Deferred income tax benefit			-				28				28
Net loss			(1,894	)			(167	)			(2,061	)

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In accordance with the merger agreement, TGC issued approximately 203 million shares of TGC common stock to Riley members at the closing of the transaction. On February 26, 2021, the Company effected a 1 for 12 reverse stock split.  Immediately following the closing of the transaction, the current members of REP owned 95% of TGC and the current TGC stockholders owned the remaining 5%.

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Adjustments to the Unaudited Pro Forma Condensed Consolidated and Combined Statement of Operations for the three month period ended December 31, 2020

Adjustments to the Unaudited Pro Forma Condensed Consolidated and Combined Statement of Operations for the year ended September 30, 2020

The following reclassifications were made as a result of the transaction to conform to REP’s financial statement presentation:

(r)

Reclassification of $3.426 million of TGC’s oil and gas properties revenue to conform to REP’s presentation of oil and natural gas sales, net.

(s)

Reclassification of $3.165 million of TGC’s production costs and taxes to conform to REP’s presentation of lease operating expenses.

(t)

Reclassification to reflect the $0.014 million of general and administrative expense to conform to REP’s presentation of unit-based compensation expense.

The following pro forma adjustments are based on REP’s preliminary estimates and assumptions that are subject to change:

(u)

Adjustment to reflect the $0.010 million of exploration expense incurred by TGC for the twelve month period ended September 30, 2020 under the successful efforts method of accounting.

(v)

Adjustment to eliminate TGC’s historical depreciation, depletion and amortization (“DD&A”) of $0.055 million under the full costs basis of accounting to reflect the balance under successful efforts method of accounting.

(w)

Adjustment to reflect $6.936 million in estimated federal income tax expense associated with the pro forma combined results of operations assuming REP’s earnings had been subject to federal income tax using a federal tax rate of approximately 22.6% based on the estimated US federal income tax rate during the year ended September 30, 2020.

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Pro forma earnings from continuing operations per share for the three month period ended December 31, 2020 and fiscal year ended September 30, 2020 has been calculated based on the estimated weighted average number of common shares outstanding on a pro forma basis, as described below. The pro forma weighted average shares outstanding have been calculated as if the shares to be issued in the merger had been issued and outstanding for the periods presented. Note that the effect of the Company’s reverse stock split and its impacts on the earnings per share are also included within the table below.

		Three Month Period Ended December 31, 2020				Year Ended September 30, 2020
(in thousands, except per share data)
Net income (loss) from continuing operations		$	(7,141	)		$	26,192
REP’s weighted average units			1,530				1,529
REP’s convertible preferred units			512				491
REP’s restricted units			35				19
Total REP’s units converted			2,077				2,038
Weighted average REP shares outstanding - basic and diluted			2,077				2,038
Share consideration ratio			97.796467				97.796467
Post-share consolidation shares			203,123				199,309
1 for 12 reverse stock split		1:12				1:12
Post-share consolidation shares - post reverse stock split			16,927				16,609
Weighted average TGC shares outstanding  - basic and diluted			890				889
Adjusted weighted average shares outstanding - basic and diluted			17,817				17,498
Net income (loss) from continuing operations per share:
Basic and diluted		$	(0.40	)		$	1.50

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The standardized measure of discounted future net cash flows from production of proved reserves was developed as follows: (i) estimates are made of quantities of proved reserves and future periods during which they are expected to be produced based on year-end economic conditions; (ii) estimated future cash flows are compiled by applying the twelve month average of the first of the month prices of crude oil and natural gas relating to the proved reserves to the year-end quantities of those reserves for reserves; (iii) future cash flows are reduced by estimated production costs, costs to develop and produce the proved reserves and abandonment costs, all based on year-end economic conditions, plus overhead incurred; (iv) future income tax expenses are based on year-end statutory tax rates giving effect to the remaining tax basis in the oil and natural gas properties, other deductions, credits and allowances relating to the proved oil and natural gas reserves; and (v) future net cash flows are discounted to present value by applying a discount rate of 10%.

 

The assumptions used to compute the standardized measure are those prescribed by the FASB and the Securities and Exchange Commission. These assumptions do not necessarily reflect expectations of actual revenues to be derived from those reserves, nor their present value. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations, since these reserve quantity estimates are the basis for the valuation process. Reserve estimates are inherently imprecise and that estimates of new discoveries and undeveloped locations are more imprecise than estimates of established proved producing oil and natural gas properties. The standardized measure of discounted future net cash flows does not purport, nor should it be interpreted, to present the fair value of the oil and natural gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.

 

The changes in the pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the year ended September 30, 2020 and December 31, 2020 are as follows: