What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-08 compared with 2020-03-25 · 665 added, 899 removed, 980 unchanged (61% of the section changed)

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The types of derivative instruments that we typically utilize include fixed-price swaps, costless collars, basis swaps and WTI NYMEX rolls.

The total volumes that we hedge through the use of our derivative instruments varies from period to period, however, generally our objective is to hedge approximately 75% to 85% of our anticipated production for the next 24 to 36 months, when derivative contracts are available at terms (or prices) acceptable to us.

Our hedge policies and objectives may change significantly as our operational profile changes.

The total volumes that we hedge through the use of our derivative instruments varies from period to period, however, generally our objective is to hedge approximately 65% to 85% of our anticipated production for up to the next 30 months, when derivative contracts are available at terms (or prices) acceptable to us and in a manner consistent with at least the minimum requirements that may be in effect from time to time under our Senior Credit Agreement.

Our hedge policies and objectives may change significantly as our operational profile and contractual obligations changes.

We do not enter into derivative contracts for speculative trading purposes.

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It is our policy to enter into derivative contracts only with counterparties that are creditworthy institutions deemed by management as competitive market makers.

As of December 31, 2019 (Successor), we did not post collateral under any of our derivative contracts as they are secured under our Senior Credit Agreement or are uncollateralized trades.

The filing of the voluntary petitions for relief under chapter 11 of the Bankruptcy Code described in in Item 1.

Consolidated Financial Statements —Note 2, “

Reorganization ,”

constituted an event of default under our derivatives contracts that gave the counterparties the option to terminate such contracts.

Certain parties elected to terminate their contracts in August 2019 (Predecessor) and we received approximately $0.1 million to settle a portion of the outstanding positions while other positions were novated for fees totaling $0.5 million.

The remaining derivative contracts, including the novated positions, were secured on a super-priority pari passu basis with our Predecessor Credit Agreement during the bankruptcy process and remained in place following our chapter 11 proceedings.

We account for our derivative

activities under the provisions of ASC 815, Derivatives and Hedging , (ASC 815).

ASC 815 establishes accounting and reporting that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value.

Consolidated Financial Statements and Supplementary Data —Note 10, “Derivative and Hedging Activities,”

for more details.

As of December 31, 2020 (Successor), we did not post collateral under any of our derivative contracts as they are secured under our Senior Credit Agreement.

We account for our derivative activities under the provisions of ASC 815, Derivatives and Hedging , (ASC 815).

ASC 815 establishes accounting and reporting that every derivative instrument be recorded on the balance sheet as either

an asset or liability measured at fair value.

Consolidated Financial Statements and Supplementary Data —Note 10, “Derivative and Hedging Activities,” for more details.

Fair Market Value of Financial Instruments

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These estimates involve uncertainties and cannot be determined with precision.

The estimated fair value of cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximates their carrying value due to their short‑term nature.

Consolidated Financial Statements and Supplementary Data —Note 9, “

Fair Value Measurements,”

for additional information.

The estimated fair value of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature.

Consolidated Financial Statements and Supplementary Data —Note 9, “ Fair Value Measurements,” for additional information.

Interest Rate Sensitivity

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Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are LIBOR and ABR based and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these obligations.

At December 31, 2019 (Successor), the principal amount of our debt was $144.0 million, all of which bears interest at floating and variable interest rates that, at our option, are tied to the prime rate or LIBOR.

At December 31, 2020 (Successor), the principal amount of our debt was $160.2 million, of which approximately 1.4% bears interest at a weighted average fixed interest rate of 1.0% per year.

The remaining 98.6% of our total debt at December 31, 2020 (Successor) bears interest at floating and variable interest rates that, at our option, are tied to the prime rate or LIBOR.

Fluctuations in market interest rates will cause our annual interest costs to fluctuate.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Management’s report on internal control over financial reporting

Reports of independent registered public accounting firm

Management’s report on internal control over financial reporting

Report of independent registered public accounting firm

Consolidated statements of operations

Consolidated balance sheets

Consolidated statements of stockholders’

Consolidated statements of stockholders’ equity

Consolidated statements of cash flows

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Supplemental oil and gas information (unaudited)

Selected quarterly financial data (unaudited)

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Battalion Oil Corporation (the Company), including the Company’s Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

The Company’s internal control system was designed to provide reasonable assurance to the Company’s Management and Board of Directors regarding the preparation and fair presentation of published financial statements.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Based on this evaluation, management concluded that Battalion Oil Corporation’s internal control over financial reporting was effective as of December 31, 2019.

Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 which is included herein.

Based on this evaluation, Management concluded that Battalion Oil Corporation’s internal control over financial reporting was effective as of December 31, 2020.

This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding the effectiveness of the Company’s internal control over financial reporting.

Management’s report was not subject to attestation by its independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit smaller reporting companies to provide only Management’s report in this Annual Report on Form 10-K.

/s/ RICHARD H.

KEVIN ANDREWS

Kevin Andrews

Chief Executive Officer

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To the Stockholders and the Board of Directors of Battalion Oil Corporation

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Battalion Oil Corporation and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 (Successor Company balance sheet) and 2018 (Predecessor Company balance sheet), and the related consolidated statement of operations, stockholders’

equity, and cash flows for the period of October 2, 2019 to December 31, 2019 (Successor Company operations), the period of January 1, 2019 to October 1, 2019, and for the years ended December 31, 2018 and 2017 (Predecessor Company operations) and for our report dated March 25, 2020, expressed an unqualified opinion on those financial statements and includes an explanatory paragraph relating to the Company’s reorganization under the bankruptcy code.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

/s/ Deloitte & Touche LLP

Houston, Texas

March 25, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Battalion Oil Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Battalion Oil Corporation and subsidiaries (the “Company”) as of December 31, 2019 (Successor Company balance sheet) and 2018 (Predecessor Company balance sheet) and the related consolidated statements of operations, stockholders’

equity, and cash flows for the period of October 2, 2019 to December 31, 2019 (Successor Company operations) and January 1, 2019 to October 1, 2019, and for the years ended December 31, 2018 and 2017 (Predecessor Company operations) and the related notes (collectively referred to as the “financial statements”).

In our opinion, the Successor Company’s financial statements present fairly, in all material respects, the financial position of Battalion Oil Corporation and subsidiaries as of December 31, 2019, and the results of its operations and its cash flows for the period of October 2, 2019 to December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.

Further, in our opinion, the Predecessor Company financial statements referred to above present fairly, in all material respects, the financial position of the Predecessor Company as of December 31, 2018, and the result of its operations and its cash flows for the period of January 1, 2019 to October 1, 2019 and for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 25, 2020 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Fresh-Start Reporting

We have audited the accompanying consolidated balance sheets of Battalion Oil Corporation and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows, for the year ended December 31, 2020 and for the period from October 2, 2019 to December 31, 2019 (effective October 2, 2019, the “Successor Company”), the period of January 1, 2019 to October 1, 2019, and for the year ended December 31, 2018 (pre-October 2, 2019, the “Predecessor Company”), and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Successor Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year ended December 31, 2020 and for the period from October 2, 2019 to December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Further, in our opinion, the Predecessor Company financial statements referred to above present fairly, in all material respects, its operations and its cash flows for the period from January 1, 2019 to October 1, 2019 and for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, on September 24, 2019, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective after the close of business on October 8, 2019.

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Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgements.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

Proved Oil and Natural Gas Property and Depletion — Oil and Natural Gas Reserve Quantities — Refer to Note 1 and 7 to the financial statements

Critical Audit Matter Description

The Company uses the full cost method of accounting for its investment in oil and natural gas properties.

The Company’s proved oil and natural gas properties are depleted using the units of production method and are evaluated for impairment by the full cost ceiling impairment test utilizing the Company’s oil and natural gas reserves in accordance with accounting principles generally accepted in the United States and SEC guidelines.

The development of the Company’s oil and natural gas reserve quantities and the related net present value of future cash flows from the related proved reserves requires management to make significant estimates and assumptions related to the intent and ability to complete undeveloped proved reserves within a five-year development period, as prescribed by SEC guidelines, and the future development costs associated with these reserves.

The Company engages an independent reservoir engineering firm, management’s specialist, to estimate oil and natural gas quantities using these estimates and assumptions and engineering data.

Changes in these assumptions or engineering data could have a significant impact on the amount of depletion and impairment recorded for the Company’s proved oil and natural gas properties.

The gross proved oil and natural gas properties balance was $509.3 million with an accumulated depletion balance of $295.2 million as of December 31, 2020.

Depletion, depreciation, and amortization was $60.5 million for the twelve months ended December 31, 2020.

Full cost ceiling impairment was $215.1 million for the twelve months ended December 31, 2020.

Given the significant judgments made by management and management’s specialist, performing audit procedures to evaluate the Company’s oil and natural gas reserve quantities and the related net cash flows, including management’s estimates and assumptions related to the intent and ability to complete undeveloped proved reserves within the five-year development period and future development costs, requires a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures of management’s significant judgments and assumptions related to oil and natural gas reserves quantities and estimates of the future net cash flows included the following, among others:

● We evaluated the reasonableness of management’s five-year development plan by comparing the forecasts to:

- Historical conversions of proved undeveloped oil and natural gas reserves into proved developed oil and natural gas reserves.

- Internal communications to management and the Board of Directors.

- Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

- The financial capability of the Company to execute its drilling program.

● We evaluated the reasonableness of management’s estimate of future development costs by comparing the estimate to:

- Historical development of similar wells, including location of the well.

- Future development costs to internal data.

- Internal communications to management and the Board of Directors.

- Approval for expenditures.

● We evaluated the reasonableness of management’s estimated reserve quantities by performing the following:

- Evaluating the experience, qualifications and objectivity of management’s specialist, an independent reservoir engineering firm.

- Performing analytical procedures on the reserve quantities developed by management’s specialist.

/s/ DELOITTE & TOUCHE LLP

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March 8, 2021

We have served as the Company’s auditor since 2012.

BATTALION OIL CORPORATION

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January 1, 2019

Years Ended December 31,

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Operating revenues:

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Reorganization items, net

Gain (loss) on extinguishment of debt

Total other income (expenses)

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Net income (loss)

Non-cash preferred dividend

Net income (loss) available to common stockholders

Net income (loss) per share of common stock:

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Liabilities from derivative contracts

Current portion of long-term debt

Operating lease liabilities

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Total current liabilities

Long-term debt, net

Long-term debt

Other noncurrent liabilities:

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Operating lease liabilities

Deferred income taxes

Commitments and contingencies (Note 12)

Stockholders' equity:

Predecessor Common stock:

1,000,000,000 shares of $0.0001 par value

authorized;160,612,852 shares issued and outstanding

Predecessor Additional paid-in capital

Common stock:

100,000,000 shares of $0.0001 par value

16,203,940 shares issued and outstanding

Successor Additional paid-in capital

100,000,000 shares of $0.0001 par value authorized;

16,203,979 and 16,203,940 shares issued and outstanding as of

December 31, 2020 and 2019, respectively

Additional paid-in capital

Retained earnings (accumulated deficit)

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BATTALION OIL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Preferred Stock

Stockholders'

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Net income (loss)

Sale of preferred stock

Preferred beneficial conversion feature

Conversion of preferred stock

Equity issuance costs

Long-term incentive plan grants

Long-term incentive plan forfeitures

Reduction in shares to cover

individuals' tax withholding

Stock-based compensation

Balances at December 31, 2017 (Predecessor)

Net income (loss)

Common stock issuance

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Balances at December 31, 2019 (Successor)

Net income (loss)

Equity issuance costs and other

Stock-based compensation

Balances at December 31, 2020 (Successor)

The accompanying notes are an integral part of these consolidated financial statements.

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January 1, 2019

Years Ended December 31,

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Cash flows from operating activities:

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Reorganization items, net

Loss (gain) on extinguishment of debt

Other expense (income)

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Acquisition of oil and natural gas properties

Acquisition of other operating property and equipment

Other operating property and equipment capital expenditures

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Debt issuance costs

Preferred stock issued

Common stock issued

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Asset retirement obligations

Accretion of non-cash preferred dividend

Accrued equity issuance costs

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Basis of Presentation and Principles of Consolidation

Battalion Oil Corporation (Battalion or the Company) is the successor reporting company to Halcón Resources Corporation (Halcón).

On January 21, 2020, Battalion filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation with the Delaware Secretary of State to effect a change of the Company’s corporate name from Halcón Resources Corporation to Battalion Oil Corporation.

Battalion Oil Corporation (Battalion or the Company) is the successor reporting company to Halcón Resources Corporation (Halcón).

Battalion is an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States.

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The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development.

Allocation of capital is made across the Company’s entire portfolio without regard to operating area.

All intercompany accounts and transactions have been eliminated.

The Company has evaluated events and transactions through the date of issuance of this report in conjunction with the preparation of these consolidated financial statements.

Risk and Uncertainties

The Company is continuously monitoring the current and potential impacts of the novel coronavirus (COVID-19) pandemic on its business, including how it has and may continue to impact its operations, financial results, liquidity, contractors, customers, employees and vendors, and taking appropriate actions in response, including reducing capital expenditures, temporarily shutting-in producing wells, and implementing various measures to ensure the continued operation of its business in a safe and secure manner.

COVID-19 and governmental actions to contain the pandemic have contributed to an economic downturn, reduced demand for oil and natural gas and, together with a price war between the Organization of Petroleum Exporting Countries (OPEC)/Saudi Arabia and Russia, depressed oil and natural gas prices to historically low levels.

Although OPEC and Russia subsequently agreed to reduce production, downward pressure on prices has continued and could continue for the foreseeable future, particularly given concerns over the impacts of the current economic downturn on demand.

The Company is unable to predict the effect that these events will have on its business and financial condition due to numerous uncertainties, including the severity and duration of the COVID-19 outbreak and the impacts that governmental or other actions taken to limit the extent and duration of the outbreak, in conjunction with economic conditions, will have on its business, demand for oil and natural gas, and oil and natural gas prices.

The health of the Company’s employees, contractors and vendors, and its ability to meet staffing needs in its operations and critical functions cannot be predicted, nor can the impact on the Company’s customers, vendors and contractors.

Any material effect on these parties could adversely impact the Company.

These and other factors could affect the Company’s operations, earnings and cash flows and could cause its results to not be comparable to those of the same period in previous years.

For example, the Company realized lower revenue as a result of commodity price declines, which began in March 2020.

In response to low commodity prices, the Company temporarily shut-in producing wells in May and June 2020, which further contributed to lower revenues in the current year.

Additionally, as discussed further in Note 7, “Oil and Natural Gas Properties,” the Company incurred ceiling test impairments, which were primarily driven by a decline in the average pricing used in the valuation of the Company’s reserves.

The results presented in this Form 10-K are not necessarily indicative of future operating results.

For further information regarding the actual and potential impacts of COVID-19 on the Company, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

Emergence From Voluntary Reorganization Under Chapter 11

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Bankruptcy Court for the Southern District of Texas (the Bankruptcy Court) to pursue a prepackaged plan of reorganization (the Plan).

The Company’s chapter 11 proceedings were administered under the caption In re Halcón Resources Corporation, et al.

The Company’s chapter 11 proceedings

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

were administered under the caption In re Halcón Resources Corporation, et al.

On September 24, 2019, the Bankruptcy Court entered an order confirming the Plan and on October 8, 2019, the Plan became effective (the Effective Date) and the Company emerged from chapter 11 bankruptcy.

See Note 2, “

Reorganization, ”

for further details on the Company’s chapter 11 bankruptcy and the Plan.

Upon emergence from chapter 11 bankruptcy, the Company adopted fresh-start accounting in accordance with provisions of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 852, Reorganizations (ASC 852) which resulted in the Company becoming a new entity for financial reporting purposes on the Effective Date.

See Note 2, “ Reorganization, ” for further details on the Company’s chapter 11 bankruptcy and the Plan.

The Company elected to apply fresh-start accounting effective October 1, 2019, to coincide with the timing of its normal fourth quarter reporting period, which resulted in the Company becoming a new entity for financial reporting purposes.

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As such, fresh-start accounting is reflected in the accompanying consolidated balance sheet as of December 31, 2019 (Successor) and related reorganization adjustments and fresh-start adjustments are included in the accompanying statement of operations for the period from January 1, 2019 through October 1, 2019 (Predecessor).

Upon the adoption of fresh-start accounting, the Company’s assets and liabilities were recorded at their fair values as of the fresh-start reporting date.

As a result of the adoption of fresh-start accounting, the Company’s consolidated financial statements subsequent to October 1, 2019 are not comparable to its consolidated financial statements prior to, and including, October 1, 2019.

See Note 3, “Fresh-start Accounting,”

for further details on the impact of fresh-start accounting on the Company’s consolidated financial statements.

References to “Successor”

or “Successor Company”

relate to the financial position and results of operations of the reorganized Company subsequent to October 1, 2019.

References to “Predecessor”

or “Predecessor Company”

relate to the financial position and results of operations of the Company prior to, and including, October 1, 2019.

Upon the adoption of fresh-start accounting, the Company’s assets and liabilities were recorded at their fair values as of the fresh-start reporting date.

See Note 3, “Fresh-start Accounting,” for further details on the impact of fresh-start accounting on the Company’s consolidated financial statements.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to October 1, 2019.

References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of the Company prior to, and including, October 1, 2019.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods.

Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion relating to oil and natural gas properties, asset retirement obligations, fair value estimates, including estimates of Reorganization Value, Enterprise Value and the fair value of assets and liabilities recorded as a result of the adoption of fresh-start accounting, plus the estimated fair values of assets acquired and liabilities assumed in connection with the Pecos County Acquisition and the fair value of assets sold in connection with the Williston Divestiture and the El Halcón Divestiture (see Note 6, “Acquisitions and Divestitures,”

for information on the Pecos County Acquisition, the Williston Divestiture and the El Halcón Divestiture), including the gains on sales recorded, and income taxes.

Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion relating to oil and natural gas properties, asset retirement obligations, fair value estimates, including estimates of Reorganization Value, Enterprise Value and the fair value of assets and liabilities recorded as a result of the adoption of fresh-start accounting, plus the estimated fair value of assets sold in connection with the Williston Divestiture (see Note 6, “Acquisitions and Divestitures,” for information on the Williston Divestiture), including the gain on sale recorded, and income taxes.

The Company bases its estimates and judgments on historical experience and on various other assumptions and information believed to be reasonable under the circumstances.

Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

Actual results may differ from the estimates and assumptions used in the preparation of the Company’s consolidated financial statements.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Cash, Cash Equivalents and Restricted Cash

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These investments are carried at cost, which approximates fair value.

Amounts in the consolidated balance sheets included in cash, cash equivalents and restricted cash on the Company’s consolidated statement of cash flows are as follows:

Amounts in the consolidated balance sheets included in “ Cash and cash equivalents ” and “ Restricted cash ” reconcile to the Company’s consolidated statements of cash flows as follows:

December 31, 2020

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Total cash, cash equivalents and restricted cash

Restricted Cash consists of funds related to payments prescribed under the Plan that are held in an interest-bearing escrow account.

Restricted cash consists of funds related to payments prescribed under the Plan that were held in an interest-bearing escrow account.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers.

Accounts receivable are recorded at the amount due, less an allowance for doubtful accounts, when applicable.

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The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific identification method.

As of December 31, 2019 (Successor) and 2018 (Predecessor), allowances for doubtful accounts were approximately $0.1 million and $0.2 million, respectively.

As of December 31, 2020 and 2019 (Successor), allowances for doubtful accounts were approximately $0.2 million and $0.1 million, respectively.

Oil and Natural Gas Properties

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Accordingly, all costs incurred in the acquisition, exploration and development of proved and unproved oil and natural gas properties, including the costs of abandoned properties, treating equipment and gathering support facilities, dry holes, geophysical costs, and annual lease rentals are capitalized.

All general and administrative corporate costs unrelated to drilling activities are expensed as

All general and administrative corporate costs unrelated to drilling activities are expensed as incurred.

Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to estimated proved reserves would significantly change.

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Investments in unevaluated oil and natural gas properties and exploration and development projects for which depletion expense is not currently recognized, and for which exploration or development activities are in progress, qualify for interest capitalization.

The Company determines capitalized interest, when applicable, by multiplying the Company’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred that were excluded from the full cost pool;

however, the amount of capitalized interest cannot exceed the amount of gross interest expense incurred in any given period.

The Company’s accounting policy on the capitalization of interest establishes thresholds for the determination of a development project for the purpose of interest capitalization.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Other Operating Property and Equipment

Other operating property and equipment additions are recorded at cost.

Other operating property and equipment was recorded at fair value as a result of fresh-start accounting on October 1, 2019 and additions are recorded at cost.

Depreciation is calculated using the straight-line method over the following estimated useful lives:

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automobiles and computers, three years;

computer software, fixtures, furniture and equipment, the lesser of lease term or five years;

computer software, fixtures, furniture and equipment, five years;

trailers, seven years;

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Material expenditures which increase the life or productive capacity of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.

Refer to Note 3, “

Fresh-start Accounting,”

for a discussion of the valuation approach used to record other operating property and equipment at fair value as of October 1, 2019.

Refer to Note 6, “Acquisitions and Divestitures,”

for a discussion of other operating property and equipment acquired and divested.

Refer to Note 3, “ Fresh-start Accounting,” for a discussion of the valuation approach used to record other operating property and equipment at fair value as of October 1, 2019.

Refer to Note 6, “Acquisitions and Divestitures,” for a discussion of other operating property and equipment divested.

The Company reviews its other operating property and equipment for impairment in accordance with ASC 360, Property, Plant, and Equipment (ASC 360).

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Further, the Company evaluates the remaining useful lives of its other operating property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Restructuring

During 2020, the Company incurred approximately $2.6 million in restructuring charges related to the consolidation into one corporate office and reductions in its workforce due to efforts to improve efficiencies and reduce future costs.

In May 2020 (Successor), in furtherance of the consolidation into one corporate office, the Company exercised a one-time early termination option under the lease agreement for the Company’s office space in Denver, Colorado.

Refer to Note 4, “Leases , ” for further details.

During 2019 (both in Successor and Predecessor periods), several senior executives of the Company resigned from their positions.

These were considered terminations without cause under their respective employment agreements, which entitled them to certain benefits.

Additionally during the third quarter of 2019 (Predecessor), the Company made the decision to consolidate into one corporate office located in Houston, Texas.

The transition includes both severance and relocation costs as well as incremental costs associated with hiring new employees to replace key positions.

Consequently, for the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor), the Company incurred approximately $1.2 million and $15.1 million, respectively, in restructuring charges.

These costs were recorded in “Restructuring” on the consolidated statements of operations.

Concentrations of Credit Risk

The purchasers of the Company’s oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies.

The Company’s primary concentrations of credit risk are the risks of uncollectible accounts receivable and of nonperformance by counterparties under the Company’s derivative contracts.

Each reporting period, the Company assesses the recoverability of material receivables using historical data, current market conditions and reasonable and supportable forecasts of future economic conditions to determine expected collectability of its material receivables.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company’s accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers.

The purchasers of the Company’s oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies.

Historically, the Company has not experienced any significant losses from uncollectible accounts.

For the combined periods of October 2, 2019 through December 31, 2019 (Successor), and January 1, 2019 through October 1, 2019 (Predecessor), two individual purchasers of our production, Western Refining Inc.

and Sunoco Inc., each accounted for more than 10% of total sales, collectively representing 80% of our total sales for the period.

For the year ended December 31, 2018 (Predecessor), two individual purchasers of the Company’s production, Sunoco, Inc.

and Western Refining, Inc., each accounted for more than 10% of total sales, collectively representing 77% of the Company’s total sales for the year.

In 2017 (Predecessor), two individual purchasers of the Company’s production, Crestwood Midstream Partners and Suncor Energy Marketing, Inc., each accounted for more than 10% of total sales, collectively representing 58% of the Company’s total sales for the year.

In 2020 (Successor), two individual purchasers of the Company’s production, Western Refining Inc.

and Sunoco Inc., each accounted for more than 10% of total sales, collectively representing 57% of its total sales for the year.

For the combined periods of October 2, 2019 through December 31, 2019 (Successor), and January 1, 2019 through October 1, 2019 (Predecessor), two individual purchasers of the Company’s production, Western Refining Inc.

and Sunoco Inc., each accounted for more than 10% of total sales, collectively representing 80% of its total sales for the period.

For the year ended December 31, 2018 (Predecessor), two individual purchasers of the Company’s production, Western Refining Inc.

and Sunoco, Inc., each accounted for more than 10% of total sales, collectively representing 77% of its total sales for the year.

The Company operates a substantial portion of its oil and natural gas properties.

As the operator of a property, the Company makes full payments for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs.

The Company’s joint interest partners consist primarily of independent oil and natural gas producers.

If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the Company’s joint interest partners to reimburse the Company could be adversely affected.

The Company’s joint interest partners consist primarily of independent oil and natural gas producers.

Joint operating agreements govern the operations of an oil or natural gas well and, in most instances, provide for offsetting of amounts payable or receivable between the Company and its joint interest owners.

The Company’s joint interest partners consist primarily of independent oil and natural gas producers.

The Company’s exposure to credit risk under its derivative contracts is diversified among major financial institutions with investment grade credit ratings, where it has master netting agreements which provide for offsetting of amounts payable or receivable between the Company and the counterparty.

To manage counterparty risk associated with derivative contracts, the Company selects and monitors counterparties based on an assessment of their financial strength and/or credit ratings.

At December 31, 2020 (Successor), the Company’s derivative counterparties include two major financial institutions, both of which are secured lenders under the Senior Credit Agreement.

Risk Management Activities

The Company follows ASC 815, Derivatives and Hedging (ASC 815).

From time to time, in accordance with the Company’s policy, it may hedge a portion of its forecasted oil, natural gas, and natural gas liquids production.

The Company recognized all derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value.

The Company has elected to not designate any of its positions for hedge accounting.

Accordingly, the Company records the net change in the mark‑to‑market valuation of these positions, as well as payments and receipts on settled contracts, in “

Net gain (loss) on derivative contracts ”

on the consolidated statements of operations.

Accordingly, the Company records the net change in the mark-to-market valuation of these positions, as well as payments and receipts on settled contracts, in “ Net gain (loss) on derivative contracts ” on the consolidated statements of operations.

The Company accounts for income taxes using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

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The Company classifies all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the consolidated balance sheets.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company follows ASC 740, Income Taxes (ASC 740).

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The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.

The Company has no liability for unrecognized tax benefits as of December 31, 2019 (Successor) and 2018 (Predecessor).

Accordingly, there is no amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and there is no amount of interest or penalties currently recognized in the consolidated statements of operations or consolidated balance sheets as of December 31, 2019 (Successor), 2018 (Predecessor) and 2017 (Predecessor).

The Company has no liability for unrecognized tax benefits as of December 31, 2020 and 2019 (Successor).

Accordingly, there is no amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and there is no amount of interest or penalties currently recognized in the consolidated statements of operations or consolidated balance sheets as of December 31, 2020 (Successor), 2019 (Successor) and 2018 (Predecessor).

In addition, the Company does not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The Company includes interest and penalties relating to uncertain tax positions within “

Interest expense and other ”

on the Company’s consolidated statements of operations.

Refer to Note 14, “

Income Taxes, ”

for more details.

Generally, the Company’s income tax years 2016 through 2019 remain open for federal purposes and are subject to examination by Federal tax authorities.

No claims were filed with respect to any historical income tax periods that caused any challenge to the Plan.

The Company’s income tax returns are also subject to audit by the tax authorities in Louisiana, Mississippi, North Dakota, Oklahoma, Texas, Pennsylvania, Ohio and certain other state taxing jurisdictions

where the Company has, or previously had, operations.

The Company includes interest and penalties relating to uncertain tax positions within “ Interest expense and other ” on the Company’s consolidated statements of operations.

Refer to Note 14, “ Income Taxes, ” for more details.

Generally, the Company’s income tax years 2017 through 2020 remain open for federal purposes and are subject to examination by federal tax authorities.

In certain jurisdictions the Company operates through more than one legal entity, each of which may have different open years subject to examination.

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ASC 410, Asset Retirement and Environmental Obligations (ASC 410) requires that the fair value of an asset retirement cost, and corresponding liability, should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method.

The Company records asset retirement obligations to reflect the Company’s legal obligations related to future plugging and abandonment of its oil and natural gas wells, treating equipment and gathering support facilities.

The Company estimates the expected cash flows associated with the obligation and discounts the amounts using a credit-adjusted, risk-free interest rate.

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Additional retirement obligations increase the liability associated with new oil and natural gas wells, treating equipment and gathering support facilities as these obligations are incurred.

Effective January 1, 2019 (Predecessor), the Company accounts for leases in accordance with ASC 842, Leases (ASC 842).

The Company determines if an arrangement is a lease at contract inception.

A lease exists when a contract conveys to the customer the right to control the use of identified asset for a period of time in exchange for consideration.

The definition of a lease embodies two conditions:

(1) there is an identified asset in the contract that is land or a depreciable asset, and (2) the customer has the right to control the use of the identified asset.

The Company leases equipment and office space pursuant to net operating leases.

Operating leases where the Company is the lessee are included in “Operating lease right of use assets”

and “Operating lease liabilities”

on the consolidated balance sheets.

The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

Key estimates and judgments include how the Company determined (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments.

The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

Additionally, the Company applies a portfolio approach to determine the discount rate (the incremental borrowing rate for leases with similar characteristics).

The Company uses the implicit rate when readily determinable.

The lease term includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

Lease payments included in the measurement of the lease asset or liability comprise the following, when applicable:

fixed payments (including in‑substance fixed payments), variable payments that depend on index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.

The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.

For the Company’s operating leases, the right of use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received.

Lease expense for lease payments is recognized on a straight‑line basis over the lease term.

Variable lease payments associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs.

Variable lease payments, when applicable, are presented as “Gathering and other”

or “General and administrative”

in the consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating leases.

The Company has lease agreements which include lease and nonlease components and the Company has elected to combine lease and nonlease components, when fixed, for all lease contracts.

Nonlease components include common area maintenance charges on office leases and, when applicable, services associated with equipment leases.

The Company determines whether the lease or nonlease component is the predominant component on a case‑by‑case basis.

The Company reviews its right of use assets for impairment in accordance with ASC 360.

ASC 360 requires the Company to evaluate right of use assets for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount.

If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value.

The Company monitors for events or changes in circumstances that would require a reassessment of a lease.

When a reassessment results in the remeasurement of a lease liability, an adjustment is made to the carrying amount of the corresponding right of use asset unless doing so would reduce the carrying amount of the right of use asset to an amount less than zero.

In that case, the amount of the adjustment that would result in a negative right of use asset balance is recorded in the consolidated statements of operations.

The Company elected not to recognize right of use assets and lease liabilities for all short‑term leases that have a lease term of 12 months or less.

The Company recognizes the lease payments associated with its short‑term leases as an expense on a straight‑line basis over the lease term.

Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases.

Restructuring

During 2019 (both in Successor and Predecessor periods), senior executives of the Company resigned from their positions.

These were considered terminations without cause under their respective employment agreements, which entitled them to certain benefits.

Additionally during the third quarter of 2019 (Predecessor), the Company made the decision to consolidate into one corporate office located in Houston, Texas in an effort to improve efficiencies and go forward costs.

The transition includes both severance and relocation costs as well as incremental costs associated with hiring new employees to replace key positions.

on the consolidated statements of operations.

The Company sponsors a 401(k) tax deferred savings plan, whereby the Company matches a portion of employees’

contributions in cash.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company sponsors a 401(k) tax deferred savings plan, whereby the Company matches a portion of employees’ contributions in cash.

Participation in the plan is voluntary and all employees of the Company who are 18 years of age are eligible to participate.

The Company provided matching contributions of $0.2 million and $1.1 million for the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor), respectively.

The Company provided matching contributions of $1.5 million and $2.2 million for the years ended December 31, 2018 and 2017 (Predecessor), respectively.

The Company matches employee contributions dollar-for-dollar on the first 10% of an employee’s pre‑tax earnings, subject to individual IRS limitations.

Related Party Transactions

Crude Oil Gathering Agreement

On July 27, 2018 (Predecessor), a subsidiary of the Company entered into a crude oil gathering agreement with SCM Crude, LLC (SCM) pursuant to which the Company agreed to dedicate, for a term of 15 years, production of crude oil from its currently owned, or later acquired, acreage in designated areas in Ward and Winkler Counties, Texas (excluding certain specific wells) for the receipt, gathering and transportation on a gathering system to be designed, engineered and constructed by SCM.

For the period of January 1, 2019 through October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor), the Company recorded revenue $101.6 million and $13.0 million, respectively, from SCM under the crude oil gathering agreement.

As of December 31, 2018 (Predecessor), the Company recorded a $10.9 million receivable from SCM for its crude oil sales.

Certain funds under the control of Ares Management LLC (Ares) are the majority owners and controlling parties of SCM.

Ares also controls other funds which owned in excess of ten percent (10%) of the common stock of the Company prior to the Effective Date of the Plan.

No Ares fund that was a stockholder of the Company had an interest in SCM but one of the Company’s former directors, who is employed by Ares, also serves on the board of directors of SCM’s parent company.

As of the Effective Date, SCM is no longer a related party to the Successor Company.

Gas Purchase and Processing Agreement

On November 16, 2017 (Predecessor), a subsidiary of the Company entered into a gas purchase and processing agreement with Salt Creek Midstream, LLC (Salt Creek) pursuant to which the Company agreed to dedicate for a term of 15 years, all production from its acreage in Ward County, Texas (that is not otherwise previously dedicated) and certain sections in Winkler County, Texas to a natural gas gathering pipeline and processing facilities to be constructed by Salt Creek.

For the period of January 1, 2019 through October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor), the Company recorded revenue of $6.0 million and $0.4 million, respectively, from Salt Creek under the gas purchase and processing agreement.

As of December 31, 2018 (Predecessor), the Company had no receivables outstanding from Salt Creek.

Certain funds under the control of Ares are the majority owners and controlling parties of Salt Creek.

Ares also controls other funds which owned in excess of ten percent (10%) of the stock of the Company prior to the Effective Date of the Plan.

No Ares fund that was a stockholder of the Company had an interest in Salt Creek but one of the Company’s former directors, who is employed by Ares, also serves on the board of directors of Salt Creek.

As of the Effective Date, Salt Creek is no longer a related party to the Successor Company.

Pipeline Testing Services

In February 2019 (Predecessor), the Company entered into an agreement with Cima Inspection LLC (Cima), a company specializing in advanced, non-destructive methods of testing pipes and tubing, pursuant to which Cima will inspect various Company gathering and transportation assets.

One of the Company's former directors (as of the Effective Date of the Plan) owns a minority interest in Cima and serves as its chief executive officer.

For the period of January 1, 2019 through October 1, 2019 (Predecessor), the Company incurred charges of approximately $0.9 million for services provided by Cima.

As of the Effective Date, Cima is no longer a related party to the Successor Company.

Charter of Aircraft

In the ordinary course of business, the Company occasionally chartered a private aircraft for business use.

The Company’s former Chairman, Chief Executive Officer and President indirectly owns an aircraft that the Company chartered from time to time.

During 2018 and a portion of 2017 (Predecessor), fees for the use of the Company’s former Chairman, Chief Executive Officer and President’s aircraft by the Company were based upon comparable costs that the Company would have incurred in chartering the same type and size of aircraft from an independent third party utilizing data from several independent third party aircraft leasing companies.

In the first quarter of 2019 (Predecessor), the Company terminated all charter arrangements with the Company’s former Chairman, Chief Executive Officer and

President relating to the use of his aircraft.

During the period of January 1, 2019 to October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor), the Company paid approximately $0.2 million and $0.9 million, respectively, related to use of the aircraft indirectly owned by the Company’s former Chairman, Chief Executive Officer and President during 2018.

As of December 31, 2018 (Predecessor), the Company recorded a $0.2 million payable to the Company’s former Chairman, Chief Executive Officer and President.

The Company provided matching contributions of $0.8 million, $0.2 million and $1.1 million for the year ended December 31, 2020 (Successor), the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor), respectively.

The Company provided matching contributions of $1.5 million for the year ended December 31, 2018 (Predecessor).

The Company matches employee contributions dollar-for-dollar on the first 10% of an employee’s pre-tax earnings, subject to individual IRS limitations.

Change in Estimate

In late March 2020 (Successor), due to changes in market conditions and decreased commodity prices, the Company determined discretionary cash incentives related to 2019 would not be paid, causing a $1.6 million reduction to “General and administrative” on the condensed consolidated statement of operations for the year ended December 31, 2020 (Successor).

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842) (ASU 2016-02).

For public business entities, ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The FASB issued ASU 2016-02 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.

The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach as of the adoption date.

See “Leases”

above and Note 4, “Leases,”

below for further details.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments –

Credit Losses (Topic 326) (ASU 2016-13), which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

ASU 2016-13 will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost.

ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.

The Company adopted ASU 2016-13 effective January 1, 2020 using the modified retrospective approach as of the adoption date.

The adoption will not have a material impact on the Company’s operating results, financial position or disclosures.

In March 2020, the FASB issued Accounting Standards Update (ASU) No.

2020-04, Reference Rate Reform (Topic 848) (ASU 2020-04), in response to the risk of cessation of the London Interbank Offered Rate (LIBOR).

This amendment provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging arrangements, and other transactions that reference LIBOR.

ASU 2020-04 will be in effect through December 31, 2022.

The Company is currently evaluating ASU 2020-04 and the impact it may have on its operating results, financial position and disclosures.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740) –

Simplifying the Accounting for Income Taxes (ASU 2019-12) as part of their simplification initiative.

2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (ASU 2019-12) as part of their simplification initiative.

ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance.

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The Company is currently evaluating the effects of ASU 2019-12, but does not believe that it will have a material impact on its operating results, financial position or disclosures.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) (ASU 2016-13), which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

ASU 2016-13 will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost.

The Company adopted ASU 2016-13 effective January 1, 2020 using the modified retrospective approach as of the adoption date.

Based the Company’s assessment of its applicable financial assets, which are receivables from joint interest owners and oil and natural gas purchasers with various potential remedies ensuring collection from those parties, as well as assets from derivative contracts outstanding with major financial institutions, the adoption of ASU 2016-13 did not have a material impact on the Company’s operating results or financial position.

REORGANIZATION

On August 2, 2019, the Company entered into a Restructuring Support Agreement (the Restructuring Support Agreement) with certain holders of the Company’s 6.75% senior unsecured notes due 2025 (the Unsecured Senior Noteholders).

On August 7, 2019, the Company filed voluntary petitions for relief under chapter 11 of the Bankruptcy Court to effect an accelerated prepackaged bankruptcy restructuring as contemplated in the Restructuring Support Agreement.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company continued to operate its businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the United States Bankruptcy Code and orders of the Bankruptcy Court.

On September 24, 2019, the Bankruptcy Court entered an order confirming the Plan and on October 8, 2019 (the Effective Date), the Company emerged from chapter 11 bankruptcy.

On September 24, 2019, the Bankruptcy Court entered an order confirming the Plan and on October 8, 2019, the Company emerged from chapter 11 bankruptcy.

Pursuant to the terms of the Plan contemplated by the Restructuring Support Agreement, the Unsecured Senior Noteholders and other claim and interest holders received the following treatment in full and final satisfaction of their claims and interests:

borrowings outstanding under the Predecessor Credit Agreement, plus unpaid interest and fees, were repaid in full, in cash, including by a refinancing (refer to Note 8, “

Long-Term Debt ”

for further details regarding the credit agreement);

● borrowings outstanding under the Predecessor Credit Agreement, plus unpaid interest and fees, were repaid in full, in cash, including by a refinancing (refer to Note 8, “ Debt ” for further details regarding the credit agreement);

● the Unsecured Senior Noteholders received their pro rata share of 91% of the common stock of reorganized Battalion (New Common Shares), subject to dilution, issued pursuant to the Plan and participated in the Senior Noteholder Rights Offering (defined below);

the Company’s general unsecured claims were unimpaired and paid in full in the ordinary course;

all of the Predecessor Company’s outstanding shares of common stock were cancelled and the existing common stockholders received their pro rata share of 9% of the New Common Shares issued pursuant to the Plan, subject to dilution, together with Warrants (defined below) to purchase common stock of reorganized Battalion and participated in the Existing Equity Interests Rights Offering (defined below and, collectively, the Existing Equity Total Consideration);

provided, however, that registered holders of existing common stock with 2,000 shares or fewer of common stock received cash in an amount equal to the inherent value of such holder’s pro rata share of the Existing Equity Total Consideration (the Existing Equity Cash Out).

● the Company’s general unsecured claims were unimpaired and paid in full in the ordinary course;

● all of the Predecessor Company’s outstanding shares of common stock were cancelled and the existing common stockholders received their pro rata share of 9% of the New Common Shares issued pursuant to the Plan, subject to dilution, together with Warrants (defined below) to purchase common stock of reorganized Battalion and participated in the Existing Equity Interests Rights Offering (defined below and, collectively, the Existing Equity Total Consideration);

Each of the foregoing percentages of equity in the reorganized Company were as of October 8, 2019 and are subject to dilution by New Common Shares issued in connection with (i) a management incentive plan, (ii) the Warrants (defined below), (iii) the Equity Rights Offerings (defined below), and (iv) the Backstop Commitment Premium (defined below).

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The Warrants cumulatively represent 30% of the New Common Shares issued pursuant to the Plan.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Registration Rights Agreement

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FRESH-START ACCOUNTING

assets immediately prior to the date of confirmation was less than the total of the post-petition liabilities and allowed claims, and (ii) the holders of the existing voting shares of the Predecessor entity received less than 50% of the voting shares of the emerging entity.

Refer to Note 2 , “Reorganization,”

for the terms of the Plan.

Upon the Company’s emergence from chapter 11 bankruptcy, the Company qualified for and adopted fresh-start accounting in accordance with the provisions set forth in ASC 852 as (i) the Reorganization Value of the Company’s assets immediately prior to the date of confirmation was less than the total of the post-petition liabilities and allowed claims, and (ii) the holders of the existing voting shares of the Predecessor entity received less than 50% of the voting shares of the emerging entity.

Refer to Note 2 , “Reorganization,” for the terms of the Plan.

Fresh-start accounting requires the Company to present its assets, liabilities, and equity as if it were a new entity upon emergence from bankruptcy.

The new entity is referred to as “Successor”

or “Successor Company.”

However, the Company will continue to present financial information for any periods before adoption of fresh-start accounting for the Predecessor Company.

The new entity is referred to as “Successor” or “Successor Company.” However, the Company will continue to present financial information for any periods before adoption of fresh-start accounting for the Predecessor Company.

The Predecessor and Successor Companies lack comparability, as required in ASC Topic 205, Presentation of Financial Statements (ASC 205).

ASC 205 states financial statements are required to be presented comparably from year to year, with any exceptions to comparability clearly disclosed.

Therefore, “black-line”

financial statements are presented to distinguish between the Predecessor and Successor Companies.

Therefore, “black-line” financial statements are presented to distinguish between the Predecessor and Successor Companies.

Adopting fresh-start accounting results in a new financial reporting entity with no beginning retained earnings or deficit as of the fresh-start reporting date.

Upon the adoption of fresh-start accounting, the Company allocated the Reorganization Value (the fair value of the Successor Company’s total assets) to its individual assets based on their estimated fair values.

The Reorganization Value is intended to represent the approximate amount a willing buyer would pay for the Company’s assets immediately after the reorganization.

Reorganization Value is derived from an estimate of Enterprise Value, or the fair value of the Company’s long-term debt, stockholders’

equity and working capital.

The Reorganization Value is intended to represent the approximate amount a willing buyer would pay for the Company’s assets immediately after the reorganization.

Reorganization Value is derived from an estimate of Enterprise Value, or the fair value of the Company’s long-term debt, stockholders’ equity and working capital.

The estimated Enterprise Value of $441.6 million at the Effective Date was in the Bankruptcy Court approved range of $425.0 million and $475.0 million.

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The Company evaluated and concluded that events between October 1, 2019 and October 8, 2019 were immaterial and use of an accounting convenience date of October 1, 2019 was appropriate.

Reorganization items, net ”

for the period from January 1, 2019 through October 1, 2019 (Predecessor).

The Company’s principal assets are its oil and natural gas properties.

For purposes of estimating the fair value of the Company’s proved reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.0%.

The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan.

As such, fresh-start accounting is reflected in the accompanying consolidated balance sheet as of December 31, 2019 (Successor) and related

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

reorganization adjustments and fresh-start adjustments are included in the accompanying consolidated statement of operations in “ Reorganization items, net ” for the period from January 1, 2019 through October 1, 2019 (Predecessor).

The Company’s principal assets are its oil and natural gas properties.

The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan.

Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $71.51 per barrel of oil, $3.37 per MMBtu of natural gas and $29.50 per barrel of oil equivalent of natural gas liquids.

Base pricing was derived from an average of forward strip prices and analysts’

estimated prices.

In estimating the fair value of the Company’s unproved acreage, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company’s unproved acreage from a market participant perspective.

See further discussion below in the “Fresh-start accounting adjustments”

for the specific assumptions used in the valuation of the Company’s various other assets.

Base pricing was derived from an average of forward strip prices and analysts’ estimated prices.

See further discussion below in the “Fresh-start accounting adjustments” for the specific assumptions used in the valuation of the Company’s various other assets.

Although the Company believes the assumptions and estimates used to develop Enterprise Value and Reorganization Value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions.

The assumptions used in estimating these values are inherently uncertain and require judgment.

The following table reconciles the Company’s Enterprise Value to the estimated fair value of the Successor’s common stock as of October 1, 2019 (in thousands):

October 1, 2019

3 unchanged sentences

Fair Value of Successor common stock

The following table reconciles the Company’s Enterprise Value to its Reorganization Value as of October 1, 2019 (in thousands):

October 1, 2019

6 unchanged sentences

Condensed Consolidated Balance Sheet

The following illustrates the effects on the Company’s consolidated balance sheet due to the reorganization and fresh-start accounting adjustments.

The explanatory notes following the table below provide further details on the adjustments, including the Company’s assumptions and methods used to determine fair value for its assets, liabilities, and warrants.

The following illustrates the effects on the Company’s consolidated balance sheet due to the reorganization and fresh-start accounting adjustments.

The explanatory notes following the table below provide further details on the

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

adjustments, including the Company’s assumptions and methods used to determine fair value for its assets, liabilities, and warrants.

Amounts included in the table below are rounded to thousands.

26 unchanged sentences

Total current liabilities

Long-term debt, net

Long-term debt

Liabilities subject to compromise

12 unchanged sentences

Total liabilities and stockholders' equity

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Reorganization adjustments

The table below details cash payments as of October 1, 2019, pursuant to the terms of the Plan described in Note 2, “

Reorganization, ”

(in thousands):

1) The table below details cash payments as of October 1, 2019, pursuant to the terms of the Plan described in Note 2, “ Reorganization, ” (in thousands):

Proceeds from Senior Noteholder Rights Offering

8 unchanged sentences

Total Sources and Uses

Reflects the funding of an escrow account for professional fees associated with the chapter 11 bankruptcy and an account to cash collateralize the Predecessor Company’s outstanding letters of credit.

Represents $10.2 million in debt issuance costs related to the Senior Credit Agreement, partially offset by the release of $3.1 million in fees paid to the Company’s restructuring advisors prior to the emergence from chapter 11 bankruptcy.

Represents $7.7 million in fees to be paid to the Company’s restructuring advisors subsequent to the Company’s emergence from chapter 11 bankruptcy, partially offset by payments of i) payments of accrued interest and fees on the Predecessor Credit Agreement and the DIP Facility of $3.5 million and ii) professional fees associated with the chapter 11 bankruptcy of $1.5 million.

2) Reflects the funding of an escrow account for professional fees associated with the chapter 11 bankruptcy and an account to cash collateralize the Predecessor Company’s outstanding letters of credit.

3) Represents $10.2 million in debt issuance costs related to the Senior Credit Agreement, partially offset by the release of $3.1 million in fees paid to the Company’s restructuring advisors prior to the emergence from chapter 11 bankruptcy.

4) Represents $7.7 million in fees to be paid to the Company’s restructuring advisors subsequent to the Company’s emergence from chapter 11 bankruptcy, partially offset by payments of i) accrued interest and fees on the Predecessor Credit Agreement and the DIP Facility of $3.5 million and ii) professional fees associated with the chapter 11 bankruptcy of $1.5 million.

5) On the Emergence Date, in accordance with the Plan, the Company repaid the principal outstanding on the Predecessor Credit Agreement of $223.2 million and the DIP Facility of $35.0 million using proceeds from the Equity Rights Offerings and borrowings under the Senior Credit Agreement.

7 unchanged sentences

8) Reflects the cancellation of Predecessor common stock and additional paid-in capital.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9) The following table reconciles reorganization adjustments made to Successor common stock and additional paid-in capital (in thousands):

18 unchanged sentences

Fresh-start accounting adjustments

Adjustment reflects the write-off of debt issuance costs associated with the Senior Credit Agreement of $10.2 million and the write-off of prepaid expenses related to $1.2 million of premiums for the Predecessor Company’s directors and officers’

insurance policy.

Includes the reclassification of treating equipment and gathering support facilities from “Other operating property and equipment”

to “Oil and natural gas properties, evaluated.”

The Successor Company’s policy of accounting for its treating equipment and gathering support facilities identifies these assets as part of the Company’s full cost pool due to their supporting nature to the Company’s oil and natural gas operations.

Reflects the adjustment to fair value of the Company’s oil and natural gas properties and unproved acreage, as well as the elimination of accumulated depletion.

11) Adjustment reflects the write-off of debt issuance costs associated with the Senior Credit Agreement of $10.2 million and the write-off of prepaid expenses related to $1.2 million of premiums for the Predecessor Company’s directors and officers’ insurance policy.

12) Includes the reclassification of treating equipment and gathering support facilities from “Other operating property and equipment” to “Oil and natural gas properties, evaluated.” The Successor Company’s policy of accounting for its treating equipment and gathering support facilities identifies these assets as part of the Company’s full cost pool due to their supporting nature to the Company’s oil and natural gas operations.

13) Reflects the adjustment to fair value of the Company’s oil and natural gas properties and unproved acreage, as well as the elimination of accumulated depletion.

In estimating the fair value of its oil and natural gas properties, the Company used a combination of the income and market approaches.

The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan.

Base pricing was derived from an average of forward strip prices and analysts’

estimated prices.

Reflects the adjustment to fair value of the Company’s other operating property and equipment, as well as the elimination of accumulated depreciation.

Base pricing was derived from an average of forward strip prices and analysts’ estimated prices.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14) Reflects the adjustment to fair value of the Company’s other operating property and equipment, as well as the elimination of accumulated depreciation.

For purposes of estimating the fair value of its other operating property and equipment, the Company used a combination of the market and cost approaches.

2 unchanged sentences

The estimation of fair value under the cost approach was based on current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and age of the assets.

Upon adoption of fresh start accounting, the Company’s lease obligations were recalculated using the incremental borrowing rate applicable to the Company upon emergence from chapter 11 bankruptcy and commensurate with its new capital structure.

15) Upon adoption of fresh start accounting, the Company’s lease obligations were recalculated using the incremental borrowing rate applicable to the Company upon emergence from chapter 11 bankruptcy and commensurate with its new capital structure.

The incremental borrowing rate used decreased from 4.83% in the Predecessor period to 3.70% in the Successor period.

Additionally represents the removal of right-of-use assets and lease liabilities associated with the Company’s compressors, as the remaining contract term of the compressor leases were less than one year as of the Effective Date.

See Note 4, “Leases,”

for details associated with the Company’s short-term lease costs.

See Note 4, “Leases,” for details associated with the Company’s short-term lease costs.

16) Reflects the cumulative effect of the fresh-start accounting adjustments discussed above.

Reorganization Items

Reorganization items represent (i) expenses or income incurred subsequent to the Petition Date as a direct result of the Plan, (ii) gains or losses from liabilities settled, and (iii) fresh‑start accounting adjustments and are recorded in “

Reorganization items, net ”

in the Company’s consolidated statements of operations.

Reorganization items represent (i) expenses or income incurred subsequent to the Petition Date as a direct result of the Plan, (ii) gains or losses from liabilities settled, and (iii) fresh-start accounting adjustments and are recorded in “ Reorganization items, net ” in the Company’s consolidated statements of operations.

The following table summarizes the net reorganization items (in thousands):

9 unchanged sentences

Gain (loss) on reorganization items

Adoption of Accounting Standards Codification 842, Leases

On January 1, 2019 (Predecessor), the Company adopted ASC 842 using the modified retrospective approach as of the adoption date.

Reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods.

The table below details the impact of adoption on the Company’s unaudited condensed consolidated balance sheet as of January 1, 2019 (Predecessor) (in thousands):

December 31, 2018

Impact of adoption

January 1, 2019

Other noncurrent assets:

Operating lease right of use assets

Current liabilities:

Accounts payable and accrued liabilities

Operating lease liabilities

Other noncurrent liabilities:

Operating lease liabilities

Practical Expedients

The Company elected the following practical expedients for transition to, and ongoing accounting under, ASC 842:

(i) the Company does not separate lease and non-lease components of a contract, (ii) the Company does not reassess whether expired or existing contracts contain leases, nor does it reassess the lease classification for expired or existing leases and does not reassess whether previously capitalized initial direct costs would qualify for capitalization under ASC 842, (iii) the Company applies a single discount rate to a portfolio of leases with reasonably similar characteristics and iv) the Company does not assess whether existing or expired land easements that were not previously accounted for as leases are or contain a lease under ASC 842.

The Company determines if an arrangement is a lease at contract inception.

A lease exists when a contract conveys to the customer the right to control the use of an identified asset for a period of time in exchange for consideration.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

definition of a lease embodies two conditions:

(1) there is an identified asset in the contract that is land or a depreciable asset, and (2) the customer has the right to control the use of the identified asset.

The Company leases equipment and office space pursuant to net operating leases.

Operating leases where the Company is the lessee are included in “Operating lease right of use assets” and “Operating lease liabilities” on the consolidated balance sheets.

The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

Key estimates and judgments include how the Company determined (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

ASC 842, Leases (ASC 842) requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate.

The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

Additionally, the Company applies a portfolio approach to determine the discount rate (the incremental borrowing rate for leases with similar characteristics).

The Company uses the implicit rate when readily determinable.

Lease payments included in the measurement of the lease asset or liability comprise the following, when applicable:

fixed payments (including in-substance fixed payments), variable payments that depend on an index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Variable lease payments associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs.

Variable lease payments, when applicable, are presented as “Gathering and other,” “ Restructuring ” or “General and administrative” in the consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating leases.

The Company has lease agreements which include lease and nonlease components and the Company has elected to combine lease and nonlease components, when fixed, for all lease contracts.

Nonlease components include common area maintenance charges on office leases and, when applicable, services associated with equipment leases.

The Company determines whether the lease or nonlease component is the predominant component on a case-by-case basis.

The Company reviews its right of use assets for impairment in accordance with ASC 360.

ASC 360 requires the Company to evaluate right of use assets for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount.

The Company monitors for events or changes in circumstances that would require a reassessment of a lease.

When a reassessment results in the remeasurement of a lease liability, an adjustment is made to the carrying amount of the

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

corresponding right of use asset unless doing so would reduce the carrying amount of the right of use asset to an amount less than zero.

In that case, the amount of the adjustment that would result in a negative right of use asset balance is recorded in the unaudited condensed consolidated statements of operations.

The Company elected not to recognize right of use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less.

The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term.

Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases.

The Company leases equipment and office space under operating leases.

The Company has no leases that meet the criteria for classification as a finance lease.

The operating leases have initial lease terms ranging from 2 to 5 years for the period from October 2, 2019 through December 31, 2019 (Successor) and 1 to 4 years for the period from January 1, 2019 through October 1, 2019 (Predecessor).

The operating leases outstanding as of December 31, 2020 and 2019 (Successor) have initial lease terms ranging from 2 to 5 years.

Payments due under the lease contracts include fixed payments plus, in some instances, variable payments.

The table below summarizes the Company’s leases for the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor) (in thousands, except years and discount rate):

The table below summarizes the Company’s leases for the year ended December 31, 2020 (Successor), the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor) (in thousands, except years and discount rate):

October 2, 2019

1 unchanged sentence

December 31, 2020

December 31, 2019

October 1, 2019

9 unchanged sentences

Weighted-average discount rate - operating leases

Refer to Note 3, “

Fresh-start Accounting,”

for a discussion of the valuation approach used to record the right of use asset at fair value as of October 1, 2019.

Future minimum lease payments associated with the Company’s non-cancellable operating leases for office space and equipment as of December 31, 2019 (Successor), are presented in the table below (in thousands):

Refer to Note 3, “ Fresh-start Accounting,” for a discussion of the valuation approach used to record the right of use asset at fair value as of October 1, 2019.

As described in Note 1, “ Summary of Significant Events and Accounting Policies ,” the Company exercised a one-time early termination option under the lease agreement for the Company’s office space in Denver, Colorado in May 2020 (Successor) and paid a $1.3 million termination fee.

The early termination option was deemed probable in May 2020 (Successor) and was recognized in the Company’s operating lease right of use asset and operating lease liability during the three months ended June 30, 2020 (Successor).

This reduced the Company’s operating lease liability to $0.5 million, representing the remaining lease cost to be incurred from June 2020 through March 2021.

The Company’s

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

abandonment of its office lease in Denver resulted in a $0.5 million impairment to its operating lease right of use asset presented as “ Restructuring ” in the consolidated statements of operations for the year ended December 31, 2020 (Successor).

Future minimum lease payments associated with the Company’s non-cancellable operating leases for office space and equipment as of December 31, 2020 (Successor), are presented in the table below (in thousands):

December 31, 2020

4 unchanged sentences

Noncurrent operating lease liabilities

Prior to the adoption of ASC 842, future obligations, including variable nonlease components, associated with the Company’s non-cancellable operating leases for office space and equipment as of December 31, 2018 (Predecessor), are presented in the table below (in thousands):

December 31, 2018

Total operating lease payments

Practical Expedients

The Company elected the following practical expedients for transition to, and ongoing accounting under, ASC 842:

(i) the Company does not separate lease and non-lease components of a contract, (ii) the Company does not reassess whether expired or existing contracts contain leases, nor does it reassess the lease classification for expired or existing leases and does not reassess whether previously capitalized initial direct costs would qualify for capitalization under ASC 842, (iii) the Company applies a single discount rate to a portfolio of leases with reasonably similar characteristics and (iv) the Company does not assess whether existing or expired land easements that were previously accounted for as leases are or contain a lease under ASC 842.

OPERATING REVENUES

3 unchanged sentences

Revenues from the sale of crude oil, natural gas and natural gas liquids are recognized, at a point in time, when a performance obligation is satisfied by the transfer of control of the commodity to the customer.

Because the Company’s performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company recognized amounts due from contracts with customers of $36.4 million and $26.4 million as of December 31, 2019 (Successor) and 2018 (Predecessor), respectively, as “Accounts receivable”

on the consolidated balance sheets.

Substantially all of the Company’s revenues are derived from its single basin operations, the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, Texas.

The following table disaggregates the Company’s revenues by major product, in order to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors in the Company’s single basin operations, for the periods indicated (in thousands):

Because the Company’s performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company recognized amounts due from contracts with customers of $24.5 million and $36.4 million as of December 31, 2020 and 2019 (Successor), respectively, as “Accounts receivable” and “Other assets” on the consolidated balance sheets.

Substantially all of the Company’s revenues are derived from its single basin operations, the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, Texas.

The following table disaggregates the Company’s revenues by major

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

product, in order to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors in the Company’s single basin operations, for the periods indicated (in thousands):

October 2, 2019

January 1, 2019

Years Ended December 31,

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Operating revenues:

3 unchanged sentences

Total operating revenues

The Company adopted ASC 606, “Revenue from Contracts with Customers”

effective January 1, 2018 (Predecessor) using the modified retrospective approach under which prior period amounts have not been adjusted.

The Company generally markets its crude oil production directly to the customer using two methods.

Under the first method, crude oil is sold at the wellhead at an index price adjusted for pricing differentials and other deductions.

Under the first method, crude oil is sold at the wellhead at an index price, averaged over the daily settlement prices for a production month, and adjusted for pricing differentials and other deductions.

Revenue is recognized at the wellhead, where control of the crude oil transfers to the customer, at the net price received.

Under the second method, crude oil is delivered to the customer at a contractual delivery point at which the customer takes custody, title and risk of loss of the product.

The Company receives a specified index price from the customer, net of applicable market-related adjustments.

The Company receives a specified index price from the customer, averaged over the daily settlement prices for a production month, and net of applicable market-related adjustments.

Revenue is recognized when control of the crude oil transfers at the delivery point at the net price received.

Settlement statements for the Company’s crude oil production are typically received within the month following the date of production and therefore the amount of production delivered to the customer and the price that will be received for that production are known at the time the revenue is recorded.

Payment under the Company’s crude oil contracts is typically due on or before the 20 th of the month following the delivery month.

Natural Gas and Natural Gas Liquids Sales

1 unchanged sentence

Under contracts where it is determined that control of the natural gas transfers at the wellhead, any fees incurred to gather or process the unprocessed natural gas are treated as a reduction of the sales price of unprocessed natural gas, and therefore revenues from such transactions are presented on a net basis.

Under contracts where it is determined that control of the natural gas transfers at the tailgate of the midstream entity’s processing plant, revenues are presented on a gross basis for amounts expected to be received from the midstream company or third party purchasers through the gathering and treating process and presented as "Natural gas" or "Natural gas liquids" and any fees incurred to gather or process the natural gas are presented separately as “

Gathering and other " on the consolidated statement of operations.

Under certain contracts, the Company may elect to take its residue gas and/or natural gas liquids in-kind at the tailgate of the midstream entity’s processing plant.

or "Natural gas liquids"

and any fees incurred to gather or process the natural gas are presented separately as “ Gathering and other "

on the consolidated statement of operations.

Under certain contracts, the Company may elect to take its residue gas and/or natural gas liquids in-kind at the tailgate of the midstream entity’s processing plant.

The Company then sells the products to a customer at contractual delivery points at prices based on an index.

In these instances, revenues are presented on a gross basis and any fees incurred to gather, process or transport the commodities are presented separately as “

Gathering and other " on the consolidated statement of operations.

Settlement statements for the Company’s natural gas and natural gas liquids production are typically received 30 days after the date of production and therefore the Company estimates the amount of production delivered to the customer and the price that will be received for that production.

Historically, differences between the Company’s estimates and the actual revenue received have not been material.

Payment under the Company’s natural gas gathering and processing contracts is typically due on or before the fifth day of the second month following the delivery month.

In these instances, revenues are presented on a gross basis and any fees incurred to gather, process or transport the commodities are presented separately as “ Gathering and other "

on the consolidated statement of operations.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Historically, differences between the Company’s estimates and the actual revenue received have not been material.

Payment under the Company’s natural gas gathering and processing contracts is typically due on or before the fifth day of the second month following the delivery month.

Practical Expedients

The Company does not disclose the transaction price of unsatisfied performance obligations for i) contracts with an original expected duration of one year or less and ii) contracts where variable consideration is allocated entirely to a wholly unsatisfied performance obligation (each unit of product typically represents a separate performance obligation, and therefore, future volumes under the Company’s long-term contracts are wholly unsatisfied).

ACQUISITIONS AND DIVESTITURES

2 unchanged sentences

The effective date of the acquisition was February 1, 2018 (Predecessor), and the Company closed the transaction on April 4, 2018 (Predecessor).

The Company funded the cash consideration for the acquisition of the West Quito Draw Properties with the net proceeds from the issuance of

additional 6.75% senior notes due 2025 and common stock, which are discussed in Note 8, “

Long-term Debt ,”

and Note 13, “

Stockholders’

Equity ,”

respectively.

The Company funded the cash consideration for the acquisition of the West Quito Draw Properties with the net proceeds from the issuance of additional 6.75% senior notes due 2025 and common stock, which are discussed in Note 8, “ Debt ,” and Note 13, “ Stockholders’ Equity ,” respectively.

Monument Draw Assets (Ward and Winkler Counties, Texas)

On June 15, 2017 (Predecessor) and January 9, 2018 (Predecessor), the Company purchased acreage in the Monument Draw area of the Delaware Basin, located in Ward and Winkler Counties, Texas (the Ward County Assets) that is prospective for the Wolfcamp and Bone Spring formations from a private company for $87.4 million and $108.2 million in cash, respectively.

Acquisition of Additional Properties in Monument Draw (Ward and Winkler Counties, Texas)

On December 13, 2017 (Predecessor), the Company acquired undeveloped acreage and related assets in the Delaware Basin, in an area contiguous to the western and southern areas of the Company’s existing Monument Draw properties in Ward County, Texas from a private company, for a total adjusted cash purchase price of $101.8 million.

The effective date of the acquisition was September 1, 2017 (Predecessor).

Hackberry Draw Assets (Pecos and Reeves Counties, Texas)

On January 18, 2017 (Predecessor), a wholly owned subsidiary of the Company, entered into a Purchase and Sale Agreement with Samson Exploration, LLC (Samson), pursuant to which it agreed to acquire acreage and related assets in the Hackberry Draw area of the Delaware Basin, located in Pecos and Reeves Counties, Texas (collectively, the Pecos County Assets), for a total adjusted purchase price of $699.2 million (the Pecos County Acquisition).

The Pecos County Acquisition closed on February 28, 2017 (Predecessor).

The transaction had an effective date of November 1, 2016 (Predecessor).

The Company funded the Pecos County Acquisition with the net proceeds from the private placement of new 8% automatically convertible preferred stock and borrowings under its Predecessor Credit Agreement.

Refer to Note 13, “Stockholders’

Equity,”

for further discussion of the Company’s issuance of the preferred stock.

The Pecos County Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations (ASC 805) which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values.

The estimated fair value of the properties acquired approximates the fair value of consideration and as a result no goodwill was recognized.

The following table summarizes the consideration paid to acquire the Pecos County Assets, as well as the estimated values of assets acquired and liabilities assumed as of the acquisition date (in thousands):

Cash consideration paid to Samson at closing (1)

Post-effective closing date adjustments (2)

Final consideration transferred

Estimated Fair Value of Liabilities Assumed:

Current liabilities

Asset retirement obligations

Amount attributable to liabilities assumed

Total purchase price plus liabilities assumed

Estimated Fair Value of Assets Acquired:

Evaluated oil and natural gas properties (3)(4)

Unevaluated oil and natural gas properties (3)(4)

Gas gathering and other operating assets (5)

Amount attributable to assets acquired

Represents amount of cash consideration, adjusted for customary closing items, for the purchase of the Pecos County Assets funded by the issuance of approximately $400.1 million of new 8% automatically convertible preferred stock and borrowings under the Predecessor Credit Agreement.

In accordance with the purchase agreement, the effective date of the acquisition was November 1, 2016 (Predecessor) and therefore revenues, expenses and related capital expenditures from November 1, 2016 through February 28, 2017 (Predecessor), the closing date of the Pecos County Acquisition, have been reflected as adjustments to the purchase price consideration.

In estimating the fair value of the Pecos County Assets’

oil and natural gas properties, the Company used an income approach.

For purposes of estimating the fair value of the proved, probable and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Pecos County Assets’

estimated reserves risked by reserve category and discounted using a weighted average cost of capital rate of 10.0% for proved reserves and 12.0% for probable and possible reserves.

The proved reserve locations were limited to wells expected to be drilled in the Company’s five-year development plan.

This estimation includes the use of unobservable inputs, such as estimated future production, oil and natural gas revenues and expenses.

The use of these unobservable inputs results in the fair value estimate of the Pecos County Assets being classified as Level 3.

Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $76.10 per barrel of oil, $4.14 per Mcf of natural gas and $29.48 per barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees and regional price differentials.

Base pricing was derived from an average of forward strip prices and research analysts’

estimated prices.

In estimating the fair value of the Pecos County Assets’

other operating property and equipment, the Company used a combination of the cost and market approaches.

A market approach was relied upon to value the land, heavy equipment and vehicles, and in this valuation approach, recent transactions of similar assets were utilized to determine the value from a market participant perspective.

For the remaining other operating assets, a cost approach was used.

The following unaudited pro forma combined results of operations are provided for the year ended December 31, 2017 (Predecessor) as though the Pecos County Acquisition had been completed as of the beginning of the comparable prior annual reporting period, or January 1, 2016 (Predecessor).

The pro forma combined results of operations for the year ended December 31, 2017 (Predecessor) have been prepared by adjusting the historical results of the Company to include the historical results of the Pecos County Assets.

These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined Company for the periods presented or that may be achieved by the combined Company in the future.

The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the Pecos County Acquisition or any estimated costs that will be incurred to integrate the Pecos County Assets.

Future results may vary significantly from the results reflected in this unaudited pro forma financial information because of future events and transactions, as well as other factors.

Amounts included in the table below are rounded to thousands, except per share amounts.

December 31, 2017

Net income (loss)

Net income (loss) available to common stockholders

Pro forma net income (loss) per share of common stock:

The Company’s historical financial information was adjusted to give effect to the pro forma events that are directly attributable to the Pecos County Assets and are factually supportable.

The unaudited pro forma consolidated results include the historical revenues and expenses of assets acquired and liabilities assumed, with the following adjustments:

Adjustment to recognize incremental depletion expense under the full cost method of accounting based on the fair value of the oil and natural gas properties and incremental accretion expense based on the asset retirement costs of the oil and natural gas properties at acquisition;

Adjustment to recognize incremental depreciation expense of the other operating property and equipment and incremental accretion expense based on the asset retirement costs of the other operating property and equipment at acquisition;

Eliminate transaction costs and non-recurring charges directly related to the transactions that were included in the historical results of operations for the Company in the amount of approximately $1.0 million.

Transaction costs directly related to the transaction that do not have a continuing impact on the combined Company’s operating results have been excluded from the pro forma earnings.

For the year ended December 31, 2017 (Predecessor), the Company recognized $46.2 million of oil, natural gas and natural gas liquids and other revenue related to the Pecos County Assets and $5.9 million of net field operating income (oil, natural gas and natural gas liquids and other revenues less lease operating expense, workover expense, production taxes, gathering and other expense, and depletion, depreciation and accretion expense) related to the Pecos County Assets.

Additionally, non-recurring transaction costs of approximately $1.0 million related to the Pecos County Acquisition for the year ended December 31, 2017 (Predecessor) are included in the consolidated statements of operations in “

General and administrative”

these non-recurring transaction costs have been excluded from the pro forma results in the above table.

On January 9, 2018 (Predecessor), the Company purchased acreage in the Monument Draw area of the Delaware Basin, located in Ward and Winkler Counties, Texas (the Ward County Assets) that is prospective for the Wolfcamp and Bone Spring formations from a private company for $108.2 million in cash.

Northern West Quito Assets

On December 18, 2020 (Successor), the Company sold certain oil and gas properties and related assets located in Ward County, Texas (the North West Quito Assets) to Point Energy Partners Operating, LLC for a total sales price of $26.3 million in cash, subject to customary post-closing adjustments as provided in the Purchase and Sale Agreement.

The effective date of the transaction was October 1, 2020 (Successor).

Proceeds from the sale were recorded as a reduction to the carrying value of the Company’s full cost pool with no gain or loss recorded.

The Company used the net proceeds from the sale to repay amounts outstanding under the Company’s Senior Credit Agreement and for general corporate purposes.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Water Infrastructure Assets

On December 20, 2018 (Predecessor), the Company sold its water infrastructure assets located in the Delaware Basin (the Water Assets) to WaterBridge Resources LLC (the Purchaser) for a total adjusted purchase price of $210.9 million in cash (the Water Infrastructure Divestiture).

On December 20, 2018 (Predecessor), the Company sold its water infrastructure assets located in the Delaware Basin (the Water Assets) to WaterBridge Resources LLC (WaterBridge) for a total adjusted sales price of $210.9 million in cash (the Water Infrastructure Divestiture).

The effective date of the transaction was October 1, 2018 (Predecessor).

Additional incentive payments of up to $25.0 million per year for the years from 2019 to 2023 were available based on the Company’s ability to meet certain annual incentive thresholds relating to the number of wells connected to the Water Assets per year.

In August 2019 (Predecessor), the Company and the Purchaser agreed to terminate the incentive payments provision.

Upon closing, the Company dedicated all of the produced water from its oil and natural gas wells within its Monument Draw, Hackberry Draw and West Quito Draw operating areas to the Purchaser.

Upon closing, the Company dedicated all of the produced water from its oil and natural gas wells within its Monument Draw, Hackberry Draw and West Quito Draw operating areas to WaterBridge.

There were no drilling or throughput commitments associated with the Water Infrastructure Divestiture.

The Purchaser will receive a market price, subject to annual adjustments for inflation, in exchange for the transportation, disposal and treatment of such produced water, and the Purchaser will receive a market price for the supply of freshwater and recycled produced water to the Company.

The gain on the sale was increased by $0.5 million during the period of October 2, 2019 through December 31, 2019 (Successor) and reduced during the period of January 1, 2019 through October 1, 2019 (Predecessor) by approximately $3.6 million as a result of customary post-closing adjustments.

Williston Basin Non-Operated Assets

On September 19, 2017 (Predecessor), certain wholly owned subsidiaries of the Company entered into an agreement with a privately-owned company pursuant to which the Company sold its non-operated properties and related assets located in the Williston Basin in North Dakota and Montana (the Non-Operated Williston Assets) for a total adjusted sales price of approximately $103.4 million.

The effective date of the transaction was April 1, 2017 (Predecessor) and the transaction closed on November 9, 2017 (Predecessor).

Proceeds from the sale were recorded as a reduction to the carrying value of the Company’s full cost pool with no gain or loss recorded.

WaterBridge will receive a market price, subject to annual adjustments for inflation, in exchange for the transportation, disposal and treatment of such produced water, and the purchaser will receive a market price for the supply of freshwater and recycled produced water to the Company.

During the year ended December 31, 2018 (Predecessor), the Company recorded a gain of $119.0 million on the sale of the Water Assets on the consolidated statements of operations in “(Gain) loss on sale of Water Assets.” The gain on the sale was increased by $0.5 million during the period of October 2, 2019 through December 31, 2019 (Successor) and reduced during the period of January 1, 2019 through October 1, 2019 (Predecessor) by approximately $3.6 million as a result of customary post-closing adjustments.

Williston Basin Operated Assets

On July 10, 2017 (Predecessor), the Company and certain of its subsidiaries entered into an agreement with Bruin Williston Holdings, LLC for the sale of all of the Company’s operated oil and natural gas leases, oil and natural gas wells and related assets located in the Williston Basin in North Dakota, as well as 100% of the membership interests in two of its subsidiaries (the Williston Assets) for a total adjusted sales price of approximately $1.4 billion (the Williston Divestiture).

The effective date of the sale was June 1, 2017 (Predecessor) and the transaction closed on September 7, 2017 (Predecessor).

The Company used the net proceeds from the sale to repay borrowings outstanding under its Predecessor Credit Agreement, repurchase approximately $425.0 million principal amount of the then outstanding $850 million principal amount of its 6.75% senior notes (refer to Note 8, “Long-term Debt”) , redeem all of its then outstanding 12% senior secured second lien notes due 2022 (the 2022 second lien notes) and for general corporate purposes.

The Company recognized a loss on the extinguishment of the 2022 Second Lien Notes of approximately $29.2 million, representing a $23.0 million loss on the redemption for the make whole premium paid and a $6.2 million loss on the write-off of the discount on the 2022 Second Lien Notes.

The loss was recorded in “Gain (loss) on extinguishment of debt”

on the consolidated statements of operations.

The net proceeds from the sale were allocated between the Company’s oil and natural gas properties, other operating property and equipment and liabilities transferred on a fair value basis.

Approximately $1.39 billion was allocated to the

Company’s oil and natural gas properties and approximately $10.9 million was allocated to other operating property and equipment.

As discussed further in Note 7, “Oil and Natural Gas Properties,”

the Company uses the full cost method of accounting for its investment in oil and natural gas properties.

The Company used the net proceeds from the sale to repay borrowings outstanding under its Predecessor Credit Agreement, repurchase approximately $425.0 million principal amount of the then outstanding $850.0 million principal amount of its 6.75% senior notes (refer to Note 8, “Debt”) , redeem all of its then outstanding 12% senior secured second lien notes due 2022 and for general corporate purposes.

The net proceeds from the sale were allocated between the Company’s oil and natural gas properties, other operating property and equipment and liabilities transferred on a fair value basis.

Approximately $1.39 billion was allocated to the Company’s oil and natural gas properties and approximately $10.9 million was allocated to other operating property and equipment.

As discussed further in Note 7, “Oil and Natural Gas Properties,” the Company uses the full cost method of accounting for its investment in oil and natural gas properties.

Under this method of accounting, sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and proved reserves.

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Accordingly, the Company recognized a gain on the sale of the Williston Assets of $485.9 million during the year ended December 31, 2017 (Predecessor).

This gain was reduced by $7.2 million during the year ended December 31, 2018 (Predecessor) as the result of customary post-closing adjustments.

The carrying value of the properties sold was determined by allocating total capitalized costs within the full cost pool between properties sold and properties retained based on their relative fair values.

The gain was recorded in “Gain (loss) on the sale of oil and natural gas properties,”

on the Company’s consolidated statements of operations.

East Texas Eagle Ford Assets

On January 24, 2017 (Predecessor), certain of the Company’s subsidiaries entered into an agreement with a subsidiary of Hawkwood Energy, LLC (Hawkwood) for the sale of all of the Company’s oil and natural gas properties and related assets located in the Eagle Ford formation of East Texas (the El Halcón Assets) for a total adjusted sales price of $491.1 million (the El Halcón Divestiture).

The effective date of the sale was January 1, 2017 (Predecessor) and the transaction closed on March 9, 2017 (Predecessor).

The Company used the net proceeds from the sale to repay borrowings outstanding under its Predecessor Credit Agreement and for general corporate purposes.

The net proceeds from the sale were allocated between the Company’s oil and natural gas properties, other operating property and equipment and liabilities transferred on a fair value basis.

Approximately $484.1 million was allocated to the Company’s oil and natural gas properties and $10.2 million was allocated to other operating property and equipment.

Under the full cost method of accounting, sales of oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and proved reserves.

If the El Halcón Divestiture was accounted for as an adjustment of capitalized costs with no gain or loss recognized, the adjustment would have significantly altered the relationship between capitalized costs and proved reserves.

Accordingly, the Company recognized a gain on the sale in connection with this transaction of $235.7 million during the year ended December 31, 2017 (Predecessor).

This gain was reduced by $7.2 million during the year ended December 31, 2018 (Predecessor) as a result of customary post-closing adjustments.

The gain was recorded in “Gain (loss) on sale of oil and natural gas properties,”

on the Company’s consolidated statements of operations.

The gain was recorded in “Gain (loss) on the sale of oil and natural gas properties,” on the Company’s consolidated statements of operations.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

OIL AND NATURAL GAS PROPERTIES

Oil and natural gas properties as of December 31, 2019 (Successor) and 2018 (Predecessor) consisted of the following (in thousands):

Oil and natural gas properties as of December 31, 2020 and 2019 (Successor) consisted of the following (in thousands):

December 31, 2020

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Net oil and natural gas properties

In 2019, with the adoption of fresh-start accounting, the Company’s unevaluated properties were recorded at fair value.

(1) In 2019, with the adoption of fresh-start accounting, the Company’s unevaluated properties were recorded at fair value.

The Company uses the full cost method of accounting for its investment in oil and natural gas properties.

1 unchanged sentence

To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.

Depletion for oil and natural gas properties is calculated using the unit of production method, which depletes the capitalized costs of evaluated properties plus future development costs based on the ratio of production for the current period to total reserve volumes of evaluated properties as of the beginning of the period.

Depletion expense was $60.5 million, $19.5 million and $84.6 million for the year ended December 31, 2020 (Successor), the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor), respectively.

Depletion expense is recorded in “Depletion, depreciation and accretion” in the Company’s consolidated statements of operations.

With the adoption of fresh-start accounting, the Company recorded its oil and natural gas properties at fair value as of the Emergence Date.

The Company’s evaluated and unevaluated properties were assigned fair values of $380.4 million and $109.0 million, respectively.

Refer to Note 3, “

Fresh-start Accounting ,”

for a discussion of the valuation approaches used.

The Company’s treating equipment and gathering support facilities were included in “

Oil and natural gas properties, evaluated ”

on the consolidated balance sheet as of the Emergence Date.

Refer to Note 3, “

Fresh-start Accounting ,”

for a discussion of the valuation approaches used.

The Company’s evaluated and unevaluated properties were assigned fair values of $380.4 million and $109.0 million, respectively.

Refer to Note 3, “ Fresh-start Accounting ,” for a discussion of the valuation approaches used.

The Company’s treating equipment and gathering support facilities were included in “ Oil and natural gas properties, evaluated ” on the consolidated balance sheet as of the Emergence Date.

Refer to Note 3, “ Fresh-start Accounting ,” for a discussion of the valuation approaches used.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Additionally, the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment or reduction in value.

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During any period in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and the full cost ceiling test limitation.

For the three months ended June 30, 2019 (Predecessor), the Company transferred approximately $481.7 million of unevaluated property costs to the full cost pool, the majority of which were associated with the Company’s Hackberry Draw area.

For the three months ended March 31, 2019 (Predecessor), the Company identified certain leases in the Hackberry Draw area with near-term expirations and transferred approximately $51.0

million of associated unevaluated property costs to the full cost pool.

These transfers of unevaluated property to the full cost pool in 2019 were the result of the Company’s focus on its most economic area, Monument Draw.

The ceiling test value of the Company’s reserves was calculated based on the following prices:

For the three months ended September 30, 2020 (Successor), the Company transferred approximately $23.6 million of unevaluated property costs to the full cost pool.

For the three months ended March 31, 2019 (Predecessor), the Company identified certain leases in the Hackberry Draw area with near-term expirations and transferred approximately $51.0 million of associated unevaluated property costs to the full cost pool.

These transfers of unevaluated property to the full cost pool in 2020 and 2019 were the result of the Company’s intent to focus available capital on Monument Draw.

The ceiling test value of the Company’s reserves was calculated based on the following prices:

(per barrel) (1)

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(1) Unweighted average of the first day of the 12-months ended spot price, adjusted by lease or field for quality, transportation fees and market differentials.

The Company’s net book value of oil and natural gas properties at March 31, June 30, and September 30, 2019 (Predecessor) exceeded the ceiling amount and the Company recorded full cost ceiling test impairments before income taxes of $275.2 million, $664.4 million and $45.6 million, respectively, for the periods.

The Company’s net book value of oil and natural gas properties at June 30, September 30, and December 31, 2020 (Successor) exceeded the ceiling amount and the Company recorded full cost ceiling test impairments before income taxes of $60.1 million, $128.3 million, and $26.7 million, respectively, for those periods, or $215.1 million for the year ended December 31, 2020 (Successor).

The ceiling test impairments during 2020 (Successor) were primarily driven by decreases in the first-day-of-the-month 12-month average prices for crude oil used in the ceiling test calculation.

Additionally, during the three months ended September 30, 2020 (Successor), the transfer of unevaluated property costs to the full cost pool, as discussed above, also contributed to the impairment recorded for the period.

During the three months ended December 31, 2020 (Successor), proved undeveloped reserves additions as a result of changes to the Company’s five year development plan partially offset the impact on the impairment of the average price decline for the period.

The ceiling test impairments during 2019 (Predecessor) were driven by the transfers of unevaluated property to the full cost pool that occurred during the year, as discussed above, and decreases in the first-day-of-the-month 12-month average prices for crude oil used in the ceiling test calculations.

The Company’s net book value of oil and natural gas properties in 2018 and 2017 (Predecessor) did not exceed the ceiling amount.

Full cost ceiling test impairments are recorded in “Full cost ceiling impairment”

in the Company’s consolidated statements of operations and in “Accumulated depletion”

in the Company’s consolidated balance sheets.

Changes in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties to the full cost pool, capital spending, and other factors will determine the Company’s ceiling test calculation and impairment analyses in future periods.

Under the full cost method of accounting, sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and proved reserves.

If the El Halcón and Williston Divestitures were accounted for as adjustments of capitalized costs with no gain or loss recognized, the adjustments would have significantly altered the relationship between capitalized costs and proved reserves.

Accordingly, the Company recognized a gain on the sale of the oil and natural gas properties associated with the El Halcón Divestiture of $235.7 million for the year ended December 31, 2017 (Predecessor).

The Company recognized an initial gain on the sale of the Williston Assets of $485.9 million during the year ended December 31, 2017 (Predecessor).

This gain was reduced by $7.2 million during the year ended December 31, 2018 (Predecessor) as the result of customary post-closing adjustments.

The gain (loss) was recorded in “Gain (loss) on sale of oil and natural gas properties,”

on the Company’s consolidated statements of operations.

LONG‑TERM DEBT

Long‑term debt as of December 31, 2019 (Successor) and 2018 (Predecessor) consisted of the following (in thousands):

The Company’s net book value of oil and natural gas properties in 2018 (Predecessor) did not exceed the ceiling amount.

Full cost ceiling test impairments are recorded in “Full cost ceiling impairment” in the Company’s consolidated statements of operations and in “Accumulated depletion” in the Company’s consolidated balance sheets.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2020 and 2019 (Successor), the Company’s debt consisted of the following (in thousands):

December 31, 2020

1 unchanged sentence

Successor senior revolving credit facility

6.75% senior notes due 2025 (1)

The Company’s 6.75% senior notes due 2025 were cancelled on October 8, 2019 upon emergence from chapter 11 bankruptcy.

Amount includes a $7.2 million unamortized discount at December 31, 2018 (Predecessor) associated with the 2025 Notes.

Amount includes a $5.4 million unamortized premium at December 31, 2018 (Predecessor) associated with the Additional 2025 Notes.

Additionally, these amounts are net of $10.1 million unamortized debt issuance costs at December 31, 2018 (Predecessor).

Paycheck Protection Program loan

Current portion of Paycheck Protection Program loan

Total long-term debt

Successor Senior Revolving Credit Facility

On the Effective Date, the Company entered into a senior secured revolving credit agreement, as amended on November 21, 2019, (the Senior Credit Agreement) with Bank of Montreal, as administrative agent, and certain other financial institutions party thereto, as lenders, which refinanced the DIP Facility and the Predecessor Credit Agreement, both discussed below.

On October 8, 2019, the Company entered into a senior secured revolving credit agreement, as amended, (the Senior Credit Agreement) with Bank of Montreal, as administrative agent, and certain other financial institutions party thereto, as lenders, which refinanced the DIP Facility and the Predecessor Credit Agreement, both discussed below.

The Senior Credit Agreement provides for a $750.0 million senior secured reserve- based revolving credit facility with a current borrowing base of $190.0 million.

1 unchanged sentence

The maturity date of the Senior Credit Agreement is October 8, 2024.

The first redetermination will be in the spring of 2020 and redeterminations will occur semi-annually thereafter, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations.

The borrowing base takes into account the estimated value of the Company’s oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria.

Amounts outstanding under the Senior Credit Agreement bear interest at specified margins over the base rate of 1.00% to 2.00% for ABR-based loans or at specified margins over LIBOR of 2.00% to 3.00% for Eurodollar-based loans, which margins may be increased one-time by not more than 50 basis points per annum if necessary in order to successfully syndicate the Senior Credit Agreement, which is currently in process.

These margins fluctuate based on the Company’s utilization of the facility.

Redeterminations will occur semi-annually on May 1 and November 1, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations.

Amounts outstanding under the Senior Credit Agreement bear interest at specified margins over the base rate of 1.50% to 2.50% for ABR-based loans or at specified margins over LIBOR of 2.50% to 3.50% for Eurodollar-based loans, which margins may be increased one-time by not more than 50 basis points per annum if necessary in order to successfully syndicate the Senior Credit Agreement.

These margins fluctuate based on the Company’s utilization of the facility.

The Company may elect, at its option, to prepay any borrowings outstanding under the Senior Credit Agreement without premium or penalty, except with respect to any break funding payments which may be payable pursuant to the terms of the Senior Credit Agreement.

The Company may be required to make mandatory prepayments of the outstanding borrowings under the Senior Credit Agreement in connection with certain borrowing base deficiencies, including deficiencies which may arise in connection with a borrowing base redetermination, an asset disposition or swap terminations attributable in the aggregate to more than ten percent (10%) of the then-effective borrowing base.

Amounts outstanding under the Senior Credit Agreement are guaranteed by the Company’s direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Company and its subsidiaries.

The Senior Credit Agreement contains certain events of default, including non-payment;

4 unchanged sentences

judgments and change in control.

The Senior Credit Agreement also contains certain financial covenants, including maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) of not greater than 3.50 to 1.00 and (ii) a Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00 to 1.00, both commencing with the fiscal quarter ending March 31, 2020.

As of December 31, 2019, there were no financial covenants in effect under the Senior Credit Agreement.

As of December 31, 2020 (Successor), after giving effect to the Third Amendment, discussed below, the Company was in compliance with the financial covenants under the Senior Credit Agreement.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2020 (Successor), the Company had $158.0 million indebtedness outstanding, approximately $4.7 million letters of credit outstanding and approximately $27.3 million of borrowing capacity available under the Senior Credit Agreement.

On November 21, 2019 (Successor), the Company entered into the First Amendment to the Senior Credit Agreement which, among other things, (i) reduced the borrowing base to $240.0 million and (ii) limited the Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) as of the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2020, of not greater than 3.50 to 1.00.

On October 29, 2020 (Successor), the Company entered into the Third Amendment to Senior Secured Revolving Credit Agreement and Limited Waiver (the Third Amendment).

The Third Amendment, among other things, set the borrowing base to $190.0 million as of November 1, 2020, which eliminated the final monthly reduction of $5.0 million required under the Second Amendment (discussed below).

The Third Amendment also reduced the amount available for issuance of letters of credit to $25.0 million and amended certain covenants including, but not limited to, covenants relating to increasing the minimum mortgaged total value of proved borrowing base properties from 85% to 90%.

Additionally, the Third Amendment provided for new covenants that, among other things, require the Company to enter into swap agreements representing not less than 65% of the Company’s reasonably anticipated projected production from proved reserves classified as developed producing reserves for a period from the Third Amendment effective date through at least December 31, 2022 and prohibit no more than $3.0 million of the Company’s uncontested accounts payable or accrued expenses, liabilities or other obligations from remaining outstanding for longer than 90 days.

Pursuant to the Third Amendment, the administrative agent and the lenders consented to a waiver of the Current Ratio (as defined in the Senior Credit Agreement) for the fiscal quarter ended September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending December 31, 2021.

On July 31, 2020 (Successor), the Company entered into the Limited Waiver to Senior Secured Revolving Credit Agreement (the Waiver) in which the lenders consented to waive maintenance of a Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00 to 1.00 for the fiscal quarter ended June 30, 2020.

On April 30, 2020 (Successor), the Company entered into the Second Amendment to the Senior Credit Agreement (Second Amendment) which, among other things, (i) reduced the borrowing base to $200.0 million effective from April 30, 2020, which was then reduced by $5.0 million monthly starting September 1, 2020 until November 1, 2020, so that the borrowing base was scheduled to be $185.0 million on November 1, 2020, provided the borrowing base redetermination scheduled for November 1, 2020 occurred pursuant to the terms of the Senior Credit Agreement, (ii) increased interest margins to 1.50% to 2.50% for ABR-based loans and 2.50% to 3.50% for Eurodollar-based loans, (iii) provided that should the Company’s Consolidated Cash Balance (as defined pursuant to the Second Amendment) exceed $10.0 million, such amounts shall be used to prepay any borrowings under the Senior Credit Agreement and thereafter, to the extent of any uncollateralized letters of credit exposure, shall be cash collateralized in accordance with the Senior Credit Agreement and (iv) allowed for a replacement benchmark rate to the London Interbank Offered Rate (which may include SOFR, Compounded SOFR or Term SOFR).

The Second Amendment also added provisions related to a loan incurred by the Company under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).

The Company used, and the Second Amendment required the Company to use, the loan proceeds for CARES Forgivable Uses under the CARES Act.

Additionally, the Second Amendment waived, for the fiscal quarter ended June 30, 2020, that the Company comply with the requirement under the Senior Credit Agreement that the Company unwind certain swap agreements for which settlement payments were calculated in such fiscal quarter to exceed 100% of actual production.

Paycheck Protection Program Loan

On April 16, 2020 (Successor), the Company entered into a promissory note (the PPP Loan) for a principal amount of approximately $2.2 million from Bank of Montreal under the Paycheck Protection Program of the CARES Act, which

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

is administered by the U.S.

Small Business Administration (SBA).

Pursuant to the terms of the CARES Act, the proceeds of the PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs.

The PPP Loan bears interest at a rate of 1.0% per annum and, if not forgiven, has a maturity date of April 16, 2022.

As long as the Company makes a timely application of forgiveness to the SBA, the Company is not required to make any payments under the PPP Loan until the forgiveness amount is communicated to the Company by the SBA.

The Company may elect, at its option, to prepay 20% or less of the borrowings outstanding under the PPP Loan without premium or penalty, and without notice.

Prepayments of more than 20% of the outstanding borrowings require written advanced notice and payment of accrued interest.

The PPP Loan contains certain events of default including non-payment, breach of representations and warranties, cross-defaults to other loans with the lender or to material indebtedness, voluntary or involuntary bankruptcy, judgments and change in control.

Under the terms of the CARES Act, the Company can apply for and be granted forgiveness for all or a portion of the PPP Loan.

Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act during the covered period after loan origination and the maintenance or achievement of certain employee levels.

The Company believes it is eligible for, and intends to pursue, forgiveness of the PPP Loan in accordance with the requirements and limitations under the CARES Act;

however, no assurance can be provided that forgiveness of any portion of the PPP Loan will be obtained.

Debtor-in-Possession Financing

2 unchanged sentences

The DIP Facility was refinanced by the Senior Credit Agreement upon emergence from chapter 11 bankruptcy.

The Predecessor Company used the proceeds of the DIP Facility to, among other things, (i) provide working capital and other general corporate purposes, including to finance capital expenditures and make certain interest payments as and to the extent set forth in the Interim Order and/or the final order, as applicable, of the Bankruptcy Court and in accordance with the Predecessor Company’s budget delivered pursuant to the DIP Credit Agreement, (ii) pay fees and expenses related to the transactions contemplated by the DIP Credit Agreement in accordance with such budget and (iii) cash collateralize any letters of credit.

The DIP Loans bore interest at a rate per annum equal to (i) adjusted LIBOR plus an applicable margin of 5.50% or (ii) an alternative base rate plus an applicable margin of 4.50%, in each case, as selected by the Company.

The DIP Facility was secured by (i) a junior secured perfected security interest on all assets that secured the Predecessor Credit Agreement (defined below) and (ii) a senior secured perfected security interest on all unencumbered assets of the Company and any subsidiary guarantors.

The security interests and liens were further subject to certain carve-outs and permitted liens, as set forth in the DIP Credit Agreement.

The DIP Credit Agreement contained certain customary (i) representations and warranties;

(ii) affirmative and negative covenants, including delivery of financial statements;

conduct of business;

reserve reports;

title information;

indebtedness;

dividends and distributions;

sale or discount of receivables;

sale of properties;

termination of swap agreements;

transactions with affiliates;

negative pledges;

dividend restrictions;

gas imbalances;

take-or-pay or other prepayments and swap agreements;

and (iii) events of default, including non-payment;

breaches of representations and warranties;

non-compliance with covenants or other agreements;

cross-default to material indebtedness;

change of control;

dismissal (or conversion to chapter 7) of the chapter 11 proceedings;

and failure to satisfy certain bankruptcy milestones.

Predecessor Senior Revolving Credit Facility

2 unchanged sentences

The maturity date of the Predecessor Credit Agreement was September 7, 2022.

The borrowing base was redetermined semi-annually, with the lenders and the Company each having the right to one interim unscheduled

redetermination between any two consecutive semi-annual redeterminations.

The borrowing base took into account the estimated value of the Company’s oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria.

The borrowing base was redetermined semi-annually, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations.

Amounts outstanding under the Predecessor Credit Agreement bore interest at specified margins over the base rate of 1.75% to 2.75% for ABR-based loans or at specified margins over LIBOR of 2.75% to 3.75% for Eurodollar-based loans.

These margins fluctuated based on the Company’s utilization of the facility.

The Predecessor Credit Agreement was refinanced by the Senior Credit Agreement upon emergence from chapter 11 bankruptcy.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6.75% Senior Notes

2 unchanged sentences

The maturity date of the 2025 Notes was February 15, 2025.

Proceeds from the private placement were approximately $834.1 million after deducting initial purchasers’

discounts and commissions and offering expenses.

The Company used a portion of the net proceeds from the private placement to fund the repurchase and redemption of the then outstanding 8.625% senior secured second lien notes (the 2020 Second Lien Notes), and for general corporate purposes.

Upon repurchase and redemption of the 2020 Second Lien Notes during the three months ended March 31, 2017, the Predecessor Company recorded a loss on extinguishment of debt of approximately $56.9 million, representing a $30.9 million loss on the repurchase for the tender premium paid and a $26.0 million loss on the write-off of the discount on the notes.

The loss was recorded in “Gain (loss) on extinguishment of debt”

on the consolidated statement of operations.

On July 25, 2017, the Predecessor Company concluded a consent solicitation of the holders of the 2025 Notes (the Consent Solicitation) and obtained consents to amend the indenture governing the 2025 Notes from approximately 99% of the holders of the 2025 Notes.

As supplemented, the indenture governing the 2025 Notes exempted, among other things, the Williston Divestiture from certain provisions triggered upon a sale of “all or substantially all of the assets”

of the Company.

Consenting holders of the 2025 Notes received a consent fee of 2.0% of principal, or $16.9 million.

The Company recorded the $16.9 million consent fees paid as a discount on the 2025 Notes.

On September 7, 2017, the Predecessor Company commenced an offer to purchase for cash up to $425.0 million of the $850.0 million outstanding aggregate principal amount of its 2025 Notes at 103.0% of principal plus accrued and unpaid interest.

The consummation of the Williston Divestiture constituted a “Williston Sale”

under the indenture governing the 2025 Notes, and the Company was required to make an offer to all holders of the 2025 Notes to purchase for cash an aggregate principal amount up to $425.0 million of the 2025 Notes.

The offer to purchase expired on October 6, 2017, with notes representing in excess of $425.0 million of principal amount validly tendered.

As a result, on October 10, 2017, the Predecessor Company repurchased approximately $425.0 million principal amount of the 2025 Notes on a pro rata basis at 103.0% of par plus accrued and unpaid interest of approximately $4.1 million.

The Company recognized a loss on the extinguishment of debt of approximately $28.9 million, representing a $12.8 million loss on the repurchase for the tender premium paid, an $8.3 million loss on the write-off of the discount, and a $7.8 million loss on the write-off of the debt issuance costs on the notes repurchased.

The loss was recorded in “Gain (loss) on extinguishment of debt”

on the consolidated statements of operations.

On February 15, 2018, the Predecessor Company issued an additional $200.0 million aggregate principal amount of its 2025 Notes at a price to the initial purchasers of 103.0% of par (the Additional 2025 Notes).

The net proceeds from the sale of the Additional 2025 Notes were approximately $202.4 million after deducting initial purchasers’

premiums, commissions and estimated offering expenses.

The proceeds were used to fund the cash consideration for the acquisition of the West Quito Draw Properties, discussed further in Note 6, "Acquisitions and Divestitures,”

and for general corporate purposes, including to fund the Company’s 2018 drilling program.

On the Petition Date, the 2025 Notes represented " Liabilities subject to compromise " and the corresponding discount of $6.6 million and premium of $4.9 million were written-off to " Reorganization items, net " on the

consolidated statements of operations.

The net proceeds from the sale of the Additional 2025 Notes were approximately $202.4 million after deducting initial purchasers’ premiums, commissions and estimated offering expenses.

The proceeds were used to fund the cash consideration for the acquisition of the West Quito Draw Properties, discussed further in Note 6, "Acquisitions and Divestitures,” and for general corporate purposes, including to fund the Company’s 2018 drilling program.

On the Petition Date, the 2025 Notes represented "

Liabilities subject to compromise "

and the corresponding discount of $6.6 million and premium of $4.9 million were written-off to "

Reorganization items, net "

on the consolidated statements of operations.

On October 8, 2019, upon emergence from chapter 11 bankruptcy, the 2025 Notes were cancelled.

1 unchanged sentence

The contractual interest expense not accrued or recorded in the consolidated statement of operations was approximately $7.1 million, representing interest expense from the Petition Date through the Effective Date.

Refer to Note 2, “

Reorganization ”

for further details.

Refer to Note 2, “ Reorganization ” for further details.

Debt Maturities

Aggregate maturities required on long-term debt at December 31, 2019 (Successor) due in future years are as follows (in thousands, excluding discounts, premiums and debt issuance costs):

Aggregate maturities required on debt at December 31, 2020 (Successor) due in future years are as follows (in thousands):

Debt Issuance Costs

The Company capitalizes certain direct costs associated with the issuance of debt and amortizes such costs over the lives of the respective debt.

During the period of January 1, 2019 through October 1, 2019 (Predecessor), the Company expensed to “Reorganization items, net”

$9.3 million of debt issuance costs associated with its 2025 Notes, which were cancelled upon emergence from chapter 11 bankruptcy.

During the period, the Company also expensed to “Interest expense and other”

$0.7 million of debt issuance costs associated with its Predecessor Credit Agreement.

At December 31, 2019 (Successor) and 2018 (Predecessor), the Company had zero and $11.1 million of unamortized debt issuance costs, respectively.

The debt issuance costs for the Company’s Predecessor Credit Agreement were presented in “Funds in escrow and other ”

within total assets on the consolidated balance sheet, and the debt issuance costs for the Predecessor Company’s senior unsecured debt were presented in “Long-term debt, net”

within total liabilities on the consolidated balance sheet.

During the period of January 1, 2019 through October 1, 2019 (Predecessor), the Company expensed to “Reorganization items, net” $9.3 million of debt issuance costs associated with its 2025 Notes, which were cancelled upon emergence from chapter 11 bankruptcy.

During the period, the Company also expensed to “Interest expense and other” $0.7 million of debt issuance costs associated with its Predecessor Credit Agreement.

At December 31, 2020 and 2019 (Successor), the Company did not have any unamortized debt issuance costs.

FAIR VALUE MEASUREMENTS

Pursuant to ASC 820, Fair Value Measurement (ASC 820), the Company’s determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company’s consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

5 unchanged sentences

The Company classifies fair value balances based on the observability of those inputs.

As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

There were no transfers between fair value hierarchy levels for any period presented.

The following tables set forth by level within the fair value hierarchy the Company’s financial

assets and liabilities that were accounted for at fair value as of December 31, 2019 (Successor) and 2018 (Predecessor) (in thousands):

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2020 and 2019 (Successor) (in thousands):

December 31, 2020

5 unchanged sentences

Derivative contracts listed above as Level 2 include fixed-price swaps, collars, puts, calls, basis swaps and WTI NYMEX rolls that are carried at fair value.

The Company records the net change in the fair value of these positions in “Net gain (loss) on derivative contracts”

in the Company’s consolidated statements of operations.

The Company records the net change in the fair value of these positions in “Net gain (loss) on derivative contracts” in the Company’s consolidated statements of operations.

The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2.

This observable data includes the forward curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves.

See Note 10, “Derivative and Hedging Activities,”

for additional discussion of derivatives.

The Company’s derivative contracts are with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk.

See Note 10, “Derivative and Hedging Activities,” for additional discussion of derivatives.

The Company’s derivative contracts are with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk.

As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts;

however, the Company does not anticipate such nonperformance.

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments .

The estimated fair value amounts have been determined at discrete points in time based on relevant market information.

These estimates involve uncertainties and cannot be determined with precision.

The estimated fair value of cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximates their carrying value due to their short‑term nature.

The estimated fair value of the Company’s Senior Credit Agreement approximates carrying value because the interest rates approximate current market rates.

The following table presents the estimated fair values of the Company’s fixed interest rate, long‑term debt instruments as of December 31, 2019 (Successor) and 2018 (Predecessor) (excluding discounts, premiums and debt issuance costs) (in thousands):

December 31, 2019

December 31, 2018

6.75% senior notes (1)

The 6.75% senior notes were cancelled on October 8, 2019 upon emergence from chapter 11 bankruptcy.

The fair value of the Company’s fixed interest debt instruments was calculated using Level 1 criteria.

The fair value of the Company’s senior notes is based on quoted market prices from trades of such debt.

The estimated fair value of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying value due to their short- term nature.

The estimated fair value of the Company’s Senior Credit Agreement approximates carrying value because the interest rates approximate current market rates.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

On the Effective Date, the Company emerged from chapter 11 bankruptcy and adopted fresh-start accounting, which resulted in the Company becoming a new entity for financial reporting purposes.

Upon the adoption of fresh-start accounting, the Company’s assets, liabilities and warrants were recorded at their fair values as of the fresh-start reporting date, October 1, 2019.

See Note 3, “Fresh-start Accounting,”

for a detailed discussion of the fair value approaches used by the Company.

On February 28, 2017 (Predecessor), the Company closed the Pecos County Acquisition and recorded the assets acquired and liabilities assumed at their acquisition date fair values.

See Note 6, "Acquisitions and Divestitures,”

for a discussion of the fair value approaches used by the Company and the classification of the estimates within the fair value hierarchy.

Upon the adoption of fresh-start accounting, the Company’s assets, liabilities and warrants were recorded at their fair values as of the fresh-start reporting date, October 1, 2019.

See Note 3, “Fresh-start Accounting,” for a detailed discussion of the fair value approaches used by the Company.

The Company follows the provisions of ASC 820, for nonfinancial assets and liabilities measured at fair value on a non-recurring basis.

These provisions apply to the Company’s initial recognition of asset retirement obligations for which fair value is used.

The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments;

These provisions apply to the Company’s initial recognition of asset retirement obligations for which fair value is used.

The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments;

and therefore, the Company has designated these liabilities as Level 3.

See Note 11, “Asset Retirement Obligations,”

for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations.

See Note 11, “Asset Retirement Obligations,” for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations.

DERIVATIVE AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk and interest rate risk.

In accordance with the Company’s policy, it generally hedges a substantial, but varying, portion of anticipated oil, natural gas and natural gas liquids production for future periods.

Derivatives are carried at fair value on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the change occurs.

The Company’s hedge policies and objectives may change significantly as its operational profile changes.

The Company does not enter into derivative contracts for speculative trading purposes.

It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial or commodity hedging institutions deemed by management as competent and competitive market makers.

As of December 31, 2019 (Successor), the Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Senior Credit Agreement or are uncollateralized trades.

The Company’s crude oil, natural gas and natural gas liquids derivative positions at any point in time may consist of fixed-price swaps, costless put/call collars, basis swaps and WTI NYMEX rolls.

As of December 31, 2020 (Successor), the Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Senior Credit Agreement.

The Company’s crude oil, natural gas and natural gas liquids derivative positions at any point in time may consist of fixed-price swaps, costless put/call collars, basis swaps and WTI NYMEX rolls.

Fixed-price swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas.

4 unchanged sentences

The Company has elected not to designate any of its derivative contracts for hedge accounting.

Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in “Net gain (loss) on derivative contracts”

on the consolidated statements of operations.

All derivative contracts are recorded at fair market value in accordance with ASC 815 and ASC 820 and included in the consolidated balance sheets as assets or liabilities.

The following table summarizes the location and fair value

amounts of all derivative contracts in the consolidated balance sheets as of December 31, 2019 (Successor) and 2018 (Predecessor) (in thousands):

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

amounts of all derivative contracts in the consolidated balance sheets as of December 31, 2020 and 2019 (Successor) (in thousands):

Derivatives not designated

15 unchanged sentences

Total derivatives not designated as hedging contracts under ASC 815

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivative contracts in the Company’s consolidated statements of operations (in thousands):

Amount of gain or (loss) recognized in income on derivative contracts for the

Derivatives not designated

Location of gain or (loss)

October 2, 2019

January 1, 2019

Derivatives not designated as hedging

Location of gain or (loss) recognized in

Years Ended December 31,

contracts under ASC 815

income on derivative contracts

as hedging contracts

recognized in income

under ASC 815

on derivative contracts

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Commodity contracts:

4 unchanged sentences

Total net gain (loss) on derivative contracts

At December 31, 2019 (Successor) and 2018 (Predecessor), the Company had the following open crude oil and natural gas derivative contracts:

December 31, 2019

Basis Differential

January 2020 - June 2020

Fixed-Price Swap

January 2020 - September 2020

Fixed-Price Swap

January 2020 - December 2020

Fixed-Price Swap

55.68 - 60.00

January 2020 - December 2020

Fixed-Price Swap

January 2020 - December 2020

WTI NYMEX Roll

February 2020 - December 2020

WTI NYMEX Roll

April 2020 - December 2020

January 2021 - December 2021

During the year ended December 31, 2020 (Successor), the Company terminated certain derivative contracts in advance of their natural expiration dates and received net proceeds of approximately $22.9 million, which were recorded in “ Net gain (loss) on derivative contracts” on the consolidated statements of operations.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2020 (Successor), the Company had the following open crude oil and natural gas derivative contracts:

Fixed-Price Swap

50.70 - 52.80

January 2021 - December 2021

Fixed-Price Swap

January 2021 - December 2021

WTI NYMEX Roll

January 2022 - December 2022

Fixed-Price Swap

January 2022 - December 2022

WTI NYMEX Roll

(0.02) - 0.00

December 31, 2018

Basis Differential

January 2019 - March 2019

January 2019 - June 2019

January 2019 - September 2019

(6.20) - (7.60)

January 2019 - December 2019

Fixed-Price Swap

Natural Gas Liquids

29.08 - 30.15

January 2019 - December 2019

50.00 - 58.00

55.20 - 63.00

January 2019 - December 2019

(0.98) - (6.50)

January 2019 - December 2019

(1.05) - (1.40)

January 2019 - December 2019

Producer Collar (Ceiling)

Producer Collar (Floor)

WTI NYMEX Roll

April 2019 - June 2019

April 2019 - December 2019

July 2019 - December 2019

50.00 - 55.00

55.00 - 69.00

July 2019 - December 2019

(2.40) - (6.50)

October 2019 - December 2019

Fixed-Price Swap

Natural Gas Liquids

October 2019 - December 2019

January 2020 - December 2020

The Company presents the fair value of its derivative contracts at the gross amounts in the consolidated balance sheets.

The following table shows the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts at December 31, 2019 (Successor) and 2018 (Predecessor) (in thousands):

The following table shows the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts at December 31, 2020 and 2019 (Successor) (in thousands):

Derivative Assets

8 unchanged sentences

The Company enters into an International Swap Dealers Association Master Agreement (ISDA) with each counterparty prior to a derivative contract with such counterparty.

The ISDA is a standard contract that governs all

derivative contracts entered into between the Company and the respective counterparty.

The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty.

The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.

The filing of the voluntary petitions for relief under chapter 11 of the Bankruptcy Code described in Note 2, " Reorganization ," constituted an event of default under the Company's derivatives contracts that gave the counterparties the option to terminate such contracts.

The filing of the voluntary petitions for relief under chapter 11 of the Bankruptcy Code described in Note 2, "

Reorganization ,"

constituted an event of default under the Company's derivatives contracts that gave the counterparties the option to terminate such contracts.

Certain parties elected to terminate their contracts in August 2019 (Predecessor) and the Company received approximately $0.1 million to settle a portion of the outstanding positions while other positions were novated for fees totaling $0.5 million.

The remaining derivative contracts, including the novated positions, were secured on a super-priority pari passu basis with the Company's Predecessor Credit Agreement during the bankruptcy process and remain in place following the Company's chapter 11 bankruptcy.

The remaining derivative contracts, including the novated positions, were secured on a super-priority pari passu basis with the Company's Predecessor Credit Agreement during the bankruptcy process and remained in place following the Company's chapter 11 bankruptcy.

ASSET RETIREMENT OBLIGATIONS

The Company records an asset retirement obligation (ARO) on oil and natural gas properties when it can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs.

The Company records the ARO liability on the consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties”

during the period in which the obligation is incurred.

The Company records the accretion of its ARO liabilities in “Depletion, depreciation and accretion”

expense in the consolidated statements of operations.

The Company records the ARO liability on the consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties” during the period in which the obligation is incurred.

The Company records the accretion of its ARO liabilities in “Depletion, depreciation and accretion” expense in the consolidated statements of operations.

The additional capitalized costs are depreciated on a unit-of-production basis.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company recorded the following activity related to its ARO liability (inclusive of the current portion) (in thousands):

1 unchanged sentence

Liabilities settled and divested (1)

Acquisitions (1)

Accretion expense

Revisions in estimated cash flows

Liability for asset retirement obligations as of December 31, 2018 (Predecessor)

Liabilities settled and divested (1)

Accretion expense

Revisions in estimated cash flows

Liability for asset retirement obligations as of October 1, 2019 (Predecessor)

3 unchanged sentences

Liability for asset retirement obligations as of December 31, 2019 (Successor)

See Note 6, “Acquisitions and Divestitures,”

for additional information on the Company’s acquisition and divestiture activities.

Liabilities settled and divested (1)

Accretion expense

Revisions in estimated cash flows

Liability for asset retirement obligations as of December 31, 2020 (Successor)

(1) See Note 6, “Acquisitions and Divestitures,” for additional information on the Company’s divestiture activities.

COMMITMENTS AND CONTINGENCIES

As of December 31, 2019 (Successor), the Company has an active drilling rig commitment of approximately $3.2 million that will be incurred during 2020.

Termination of the active drilling rig commitment would require an early termination penalty of $2.6 million, which would be in lieu of paying the active drilling rig commitment of $3.2 million.

As of December 31, 2019 (Successor), the Company has purchase commitments related to equipment of approximately $8.2 million that will be incurred during 2020.

The Company has entered into various long-term gathering, transportation and sales contracts with respect to its oil and natural gas production from the Delaware Basin in West Texas.

As of December 31, 2019 (Successor), the Company had in place three long-term crude oil contracts and 14 long-term natural gas contracts in this area and the sales prices under these contracts are based on posted market rates.

As of December 31, 2020 (Successor), the Company had in place two long-term crude oil contracts and 12 long-term natural gas contracts in this area and the sales prices under these contracts are based on posted market rates.

Under the terms of these contracts, the Company has committed a substantial portion of its production from this area for periods ranging from one to twenty years from the date of first production.

Contingencies

On February 26, 2019 (Predecessor), a subsidiary of the Company was ordered to pay $9,107,054 in a judgment entered by The Court of Common Pleas of Mercer County, Pennsylvania in a litigation matter captioned Vodenichar, et al., v.

Halcón Energy Properties, Inc.

On February 26, 2019 (Predecessor), a subsidiary of the Company was ordered to pay $9.1 million in a judgment entered by The Court of Common Pleas of Mercer County, Pennsylvania in a litigation matter captioned Vodenichar, et al., v.

Halcón Energy Properties, Inc.

2013-0512, arising from a dispute over whether the subsidiary complied with the terms of a letter of intent related to the leasing of acreage.

1 unchanged sentence

In addition to the matter described above, from time to time, the Company may be a plaintiff or defendant in a pending or threatened legal proceeding arising in the normal course of our business.

While the outcome and impact of currently pending legal proceedings cannot be determined, the Company’s management and legal counsel believe that the resolution of these proceedings through settlement or adverse judgment will not have a material effect on the Company’s consolidated operating results, financial position or cash flows.

STOCKHOLDERS’

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

STOCKHOLDERS’ EQUITY

On October 8, 2019, upon emergence from chapter 11 bankruptcy, all existing shares of Predecessor common stock were cancelled and the Successor Company issued approximately 16.2 million shares of new common stock.

Refer to Note 2, “

Reorganization, ”

for further details.

Refer to Note 2, “ Reorganization, ” for further details.

On October 8, 2019, upon emergence from chapter 11 bankruptcy, the Successor Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for, among other things, (i) the total number of shares of all classes of capital stock that the Successor Company has the authority to issue is 101,000,000 of which 100,000,000 shares are common stock, par value $0.0001 per share and 1,000,000 shares are preferred stock, par value $0.0001 per share, (ii) a classified board structure until the 2021 Annual Meeting of Stockholders, and (iii) a restriction on the Successor Company from issuing any non-voting equity securities in violation of Section 1123(a)(6) of chapter 11 of title 11 of the United States Code.

2 unchanged sentences

On February 9, 2018 (Predecessor), the Company sold 9.2 million shares of common stock, par value $0.0001 per share, in a public offering at a price of $6.90 per share.

The net proceeds to the Company from the offering were approximately $60.4 million, after deducting the underwriters’

discounts and offering expenses.

The Company used the net proceeds, together with the net proceeds from the issuance of the Additional 2025 Notes, to fund the cash consideration for the acquisition of the West Quito Draw Properties, and for general corporate purposes, including funding the Company’s 2018 drilling program.

The net proceeds to the Company from the offering were approximately $60.4 million, after deducting the underwriters’ discounts and offering expenses.

On October 8, 2019, upon emergence from chapter 11 bankruptcy, by operation of the Plan and the confirmation order, all existing warrants of the Predecessor Company were cancelled and the Successor Company entered into a warrant agreement (the Warrant Agreement) with Broadridge Corporate Issuer Solutions, Inc.

as the warrant agent, pursuant to which the Successor Company issued three series of warrants (the Series A Warrants, the Series B Warrants and the Series C Warrants and together, the Warrants, and the holders thereof, the Warrant Holders), on a pro rata basis to pre-emergence holders of the Company’s Existing Equity Interests pursuant to the Plan.

Each Warrant represents the right to purchase one share of common stock at the applicable exercise price, subject to adjustment as provided in the Warrant Agreement and as summarized below.

2 unchanged sentences

The strike price of each series of Warrants issued under the Warrant Agreement increases monthly at an annualized rate of 6.75%, compounding monthly, as provided in the Warrant Agreement.

As of December 31, 2019, the exercise prices of the Series A, B and C Warrants were $40.51, $48.71 and $61.02, respectively.

The Warrants do not grant the Warrant Holder any voting or control rights or dividend rights, or contain any negative covenants restricting the operation of our business.

Refer to Note 2 “

Reorganization”

for further details.

As of December 31, 2020 (Successor), the Company had 1.8 million, Series A, 2.2 million Series B and 2.9 million Series C warrants outstanding with corresponding exercise prices of $42.65, $51.43 and $64.59, respectively.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Warrants do not grant the Warrant Holder any voting or control rights or dividend rights, or contain any negative covenants restricting the operation of the Company’s business.

Refer to Note 2 “ Reorganization,” for further details.

On September 9, 2016, the Predecessor Company issued 4.7 million warrants.

1 unchanged sentence

The holders were entitled to exercise the warrants in whole or in part at any time prior to expiration on September 9, 2020.

Preferred Stock and Non-Cash Preferred Stock Dividend

On January 24, 2017 (the Commitment Date), the Predecessor Company entered into a stock purchase agreement with certain accredited investors to sell, in a private placement exempt from registration requirements of the Securities Act pursuant to Section 4(a)(2), approximately 5,518 shares of 8% Automatically Convertible Preferred Stock, par value $0.0001 per share (the Preferred Stock), each share of which was convertible into 10,000 shares of common stock.

Also on January 24, 2017 (Predecessor), the Company received an executed written consent in lieu of a stockholders’

meeting authorizing and approving the conversion of the Preferred Stock into common stock.

On February 27, 2017 (Predecessor), the Company filed with the Delaware Secretary of State a Certificate of Designation, Preferences, Rights and Limitations of the Preferred Stock (the Certificate of Designation), which created the series of preferred stock issued by the Company on that same date.

The Company issued the Preferred Stock at $72,500 per share.

Gross proceeds were approximately $400.1 million, or $7.25 per share of common stock.

The Company incurred approximately $11.9 million in expenses associated with this offering, including placement agent fees.

On March 16, 2017 (Predecessor), the Company mailed a definitive information statement to its stockholders notifying them that a majority of its stockholders had consented to the issuance of common stock, par value $0.0001 per share, upon the conversion of the Preferred Stock.

The Preferred Stock automatically converted into 55.2 million shares of common stock on April 6, 2017 (Predecessor) in accordance with the terms of the Certificate of Designation.

No cash dividends were paid on the Preferred Stock since, pursuant to the terms of the Certificate of Designation of the Preferred Stock, conversion occurred prior to June 1, 2017 (Predecessor).

In accordance with ASC Topic 470, Debt (ASC 470), the Company determined that the conversion feature in the Preferred Stock represented a beneficial conversion feature.

The fair value of the Company’s common stock of $8.12 per share on the Commitment Date was greater than the conversion price of $7.25 per share of common stock, representing a beneficial conversion feature of $0.87 per share of common stock, or approximately $48.0 million in aggregate.

Under ASC 470, $48.0 million (the intrinsic value of the beneficial conversion feature) of the proceeds received from the issuance of the Preferred Stock was allocated to “Additional paid‑in capital,”

creating a discount on the Preferred Stock (the Discount).

The Discount is required to be amortized on a non‑cash basis over the approximate 65-month period between the issuance date and the required redemption date of July 28, 2022, or fully amortized upon an accelerated date of redemption or conversion, and recorded as a preferred dividend.

The Discount was fully amortized and a non‑cash preferred dividend was recorded upon the conversion date of April 6, 2017 (Predecessor).

The Discount amortization is reflected in “Non‑cash preferred dividend”

in the consolidated statements of operations.

The preferred dividend was charged against additional paid‑in capital since no retained earnings were available.

Upon emergence from chapter 11 bankruptcy, all of these outstanding warrants were cancelled.

Refer to Note 2 “Reorganization,” for further details.

Incentive Plans

On September 9, 2016, the Predecessor Company’s board of directors adopted the 2016 Long‑Term Incentive Plan (the 2016 Plan).

As of April 6, 2017 (Predecessor), an aggregate of 19.0 million shares of the Predecessor Company’s common stock were available for grant pursuant to awards under the 2016 Plan.

As of December 31, 2018 (Predecessor), a maximum of 4.9 million shares of the Predecessor Company’s common stock remained reserved for issuance under the 2016 Plan.

On September 9, 2016, the Predecessor Company’s board of directors adopted the 2016 Long-Term Incentive Plan (the 2016 Plan).

Immediately prior to emergence from chapter 11 bankruptcy, the 2016 Plan was cancelled and all outstanding stock-based compensation awards granted thereunder were either vested or cancelled.

On January 29, 2020, the Successor Company’s board of directors adopted the 2020 Long-Term Incentive Plan (the 2020 Plan).

An aggregate of approximately 1.5 million shares of the Successor Company’s common stock are available for grant pursuant to awards under the 2020 Plan.

On January 29, 2020, the Successor Company’s board of directors adopted the 2020 Long-Term Incentive Plan (the 2020 Plan).

An aggregate of approximately 1.5 million shares of the Successor Company’s common stock were available for grant pursuant to awards under the 2020 Plan.

As of December 31, 2020 (Successor), a maximum of 0.2 million shares of the Successor Company’s common stock remained reserved for issuance under the 2020 Plan.

The Company accounts for stock-based payment accruals under authoritative guidance on stock compensation.

1 unchanged sentence

The Company has elected not to apply a forfeiture estimate and will recognize a credit in compensation expense to the extent awards are forfeited.

For the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor), the Company recognized zero and a credit of $8.0 million, respectively, related to stock-based-compensation recorded as a component of "General and administrative" on the consolidated statement of operations.

For the year ended December 31, 2020 (Successor), the Company recognized $2.6 million related to stock-based compensation recorded as a component of “General and administrative” on the consolidated statement of operations.

on the consolidated statement of operations.

During 2019 (both in Successor and Predecessor periods), senior executives departed the Company.

In accordance with the terms of these senior executives' employment agreements, unvested stock options and unvested shares of restricted stock were modified to vest immediately upon termination or approval by the Bankruptcy Court.

For the period of January 1, 2019 through October 1, 2019 (Predecessor), the Company recognized incremental reductions to stock-based compensation expense of $9.5 million, respectively, associated with these modifications.

For the years ended December 31, 2018 and 2017 (Predecessor), the Company recognized $15.3 million and $36.8 million of stock-based compensation expense, respectively, related to stock-based compensation recorded as a component of "General and administrative" on the consolidated statement of operations.

For the period of January 1, 2019 through October 1, 2019 (Predecessor), the Company recognized incremental reductions to stock-based compensation expense of $9.5 million associated with these modifications.

For the year ended December 31, 2018 (Predecessor), the Company recognized $15.3 million related to stock-based compensation recorded as a component of "General and administrative"

on the consolidated statement of operations.

Stock Options

From time to time, the Company granted stock options under the 2016 Plan covering shares of common stock to employees of the Predecessor Company.

Stock options, when exercised, were settled through the payment of the exercise price in exchange for new shares of stock underlying the option.

These awards typically vested over a three year period at a rate of one-third on the annual anniversary date of the grant and expired ten years from the grant date.

From time to time, the Company grants stock options under the 2020 Plan covering shares of common stock to employees of the Successor Company and granted stock options under the 2016 Plan covering shares of common stock to employees of the Predecessor Company.

Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option.

Awards granted under the 2020 Plan typically vest over a four year period at a rate of one-fourth on the annual anniversary date of the grant and expire seven years from the date of grant.

Awards granted under the 2016 Plan typically vested over a three year period at a rate of one-third on the annual anniversary date of the grant and expired ten years from the grant date.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The aggregate grant date fair value of options granted during the year ended December 31, 2020 (Successor) was $1.9 million.

At December 31, 2020 (Successor), the Company had $0.9 million of unrecognized compensation expense related to non-vested stock-options to be recognized over a weighted-average period of 1.7 years.

No stock options were granted during the period of October 2, 2019 through December 31, 2019 (Successor) or the period of January 1, 2019 through October 1, 2019 (Predecessor).

The weighted average grant date fair value of options granted during the year ended December 31, 2018 (Predecessor) was $3.5 million.

The aggregate grant date fair value of options granted during the year ended December 31, 2018 (Predecessor) was $3.5 million.

During the year ended December 31, 2018, the Predecessor Company received $0.3 million from the exercise of stock options.

At December 31, 2018, the Predecessor Company had $5.2 million of unrecognized compensation expense related to non-vested stock options to be recognized over a weighted-average vesting period of 0.9 years.

The weighted average grant date fair value of options granted during the year ended December 31, 2017 (Predecessor) was $7.8 million.

At December 31, 2017, the Predecessor Company had $13.0 million of unrecognized compensation expense related to non-vested stock options to be recognized over a weighted-average vesting period of 1.2 years.

Immediately prior to emergence from chapter 11 bankruptcy, all outstanding stock options under the 2016 Plan were cancelled.

Refer to Note 2, “Reorganization,”

for further details.

Refer to Note 2, “Reorganization,” for further details.

The following table sets forth the stock option transactions for the periods indicated:

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Outstanding at December 31, 2018 (Predecessor)

Cancelled (2)

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Outstanding at December 31, 2019 (Successor)

The period end intrinsic value of stock options was calculated as the amount by which the closing market price on December 31, 2018, 2017 and 2016 (Predecessor) of the underlying stock exceeded the exercise price of the option.

Outstanding at December 31, 2020 (Successor)

(1) The period end intrinsic value of stock options was calculated as the amount by which the closing market price on December 31, 2020 (Successor) and 2018 (Predecessor) of the underlying stock exceeded the exercise price of the option.

The intrinsic value of stock options exercised during the year ended December 31, 2018 (Predecessor) was calculated as the amount by which the market price at the time of exercise of the underlying stock exceeded the exercise price of the option.

(2) Immediately prior to emergence from chapter 11 bankruptcy, all outstanding options under the 2016 Plan were cancelled.

The assumptions used in calculating the Black-Scholes-Merton valuation model fair value of the Company’s stock options for years ended December 31, 2018 and 2017 (Predecessor) are set forth in the following table:

Years Ended December 31,

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Options outstanding at December 31, 2020 (Successor) consisted of the following:

Exercisable (1)

Weighted Average

Range of Grant

Exercise Price

Contractual Life

Exercise Price

Contractual Life

Prices Per Share

(1) At December 31, 2020 (Successor), none of the Company’s stock options were exercisable due to service performance conditions or options exercise prices above current market value of the underlying stock.

The assumptions used in calculating the Black-Scholes-Merton valuation model fair value of the Company’s stock options for years ended December 31, 2020 (Successor) and 2018 (Predecessor) are set forth in the following table:

December 31, 2020

December 31, 2018

Weighted average value per option granted during the period

Assumptions :

Stock price volatility (1)

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Expected term

Due to the Predecessor Company’s limited historical data, expected volatility was estimated using volatilities of similar entities whose share or option prices and assumptions were publicly available.

(1) Due to the Successor and Predecessor Company’s limited historical data, expected volatility was estimated using volatilities of similar entities whose share or option prices and assumptions were publicly available.

Restricted Stock

From time to time, the Company granted shares of restricted stock under the 2016 Plan to employees and non-employee directors of the Predecessor Company.

Employee share typically vested over a three year period at a rate of one-third on the annual anniversary date of the grant, and the non-employee directors' shares vested six months from the date of grant.

From time to time, the Company grants shares of restricted stock units (RSUs) under the 2020 Plan to employees of the Successor Company and granted shares of restricted stock under the 2016 Plan to employees and non-employee directors of the Predecessor Company.

Under the 2020 Plan, employee RSUs will vest and convert to shares typically over a four year period at a rate of one-fourth on the annual anniversary date of the grant or when the performance or market conditions described below occur.

Under the 2016 Plan, employee shares of restricted stock typically vested over a three year period at a rate of one-third on the annual anniversary date of the grant, and the non-employee directors' shares of restricted stock vested six months from the date of grant.

During the year ended December 31, 2020 (Successor), the Company granted 1.0 million shares of RSUs with the vesting conditions and fair values described below under the 2020 Plan to employees of the Company.

At December 31, 2020 (Successor), the Company had $4.1 million of unrecognized compensation expense related to non-vested RSU awards to be recognized over a weighted-average period of 2.5 years.

● 0.4 million RSUs granted will vest over four years at a rate one-fourth on the annual anniversary of date of the grant.

The aggregate grant date fair value of these RSUs was $5.0 million.

● 0.2 million RSUs granted will vest in full only upon achievement of certain business combination goals, as defined in the award agreements.

The aggregate grant date fair value of these RSUs was $2.1 million.

As of December 31, 2020 (Successor), a business combination, as defined in the award agreements, had not been consummated and was not considered probable.

As such, no expense has been recognized for the RSUs with business combination vesting conditions.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

● 0.4 million RSUs granted will vest in full or in part or may terminate based on the Company’s total shareholder return relative to the total shareholder return of certain of its peer companies as defined in the award agreements over the performance period ending on February 20, 2024.

The aggregate grant date fair value of these RSUs was $2.3 million.

No shares of restricted stock were granted during the period of October 2, 2019 through December 31, 2019 (Successor).

The weighted average grant date fair value of shares granted during the period from January 1, 2019 through October 1, 2019 (Predecessor) was $5.4 million.

The weighted average grant date fair value of shares granted during the year ended December 31, 2018 (Predecessor) was $12.7 million.

At December 31, 2018, the Predecessor Company had $6.1 million of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over a weighted-average vesting period of 1.1 years.

The weighted average grant date fair value of shares granted during the year ended December 31, 2017 (Predecessor) was $14.3 million.

The aggregate grant date fair value of shares granted during the period from January 1, 2019 through October 1, 2019 (Predecessor) was $5.4 million.

The aggregate grant date fair value of shares granted during the year ended December 31, 2018 (Predecessor) was $12.7 million.

Immediately prior to emergence from chapter 11 bankruptcy, all outstanding unvested restricted stock granted under the 2016 Plan was vested.

Refer to Note 2, "Reorganization," for further details.

Refer to Note 2, "Reorganization,"

for further details.

The following table sets forth the restricted stock transactions for the periods indicated:

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Unvested outstanding shares at December 31, 2018 (Predecessor)

Accelerated vesting (2)

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Unvested outstanding shares at December 31, 2019 (Successor)

The intrinsic value of restricted stock was calculated as the closing market price on December 31, 2018, 2017 and 2016 (Predecessor) of the underlying stock multiplied by the number of restricted shares.

The total fair value of shares vested was $1.8 million, $2.0 million and $16.1 million for the period of January 1, 2019 through October 1, 2019 (Predecessor), the years ended December 31, 2018 and 2017 (Predecessor), respectively.

Unvested outstanding shares at December 31, 2020 (Successor)

(1) The intrinsic value of restricted stock was calculated as the closing market price on December 31, 2020 (Successor) and 2018 (Predecessor) of the underlying stock multiplied by the number of restricted shares that would be issuable.

The total fair value of shares vested was $1.8 million and $2.0 million for the period of January 1, 2019 through October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor), respectively.

(2) Immediately prior to emergence from chapter 11 bankruptcy, all outstanding unvested restricted stock under the 2016 Plan was vested.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The assumptions used in calculating the Monte Carlo valuation model fair value of the Company’s RSUs with performance based vesting conditions for the year ended December 31, 2020 (Successor) are set forth in the following table:

December 31, 2020

Weighted average value per performance based RSUs granted during the period

Stock price volatility (1)

Risk free rate of return

Expected term

(1) Due to the Successor Company’s limited historical data, expected volatility was estimated using volatilities of peer entities as defined in the award agreements whose share prices and assumptions were publicly available.

Income tax benefit (provision) for the indicated periods is comprised of the following (in thousands):

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January 1, 2019

Years Ended December 31,

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Total income tax benefit (provision)

The actual income tax benefit (provision) differs from the expected income tax benefit (provision) as computed by applying the United States federal corporate income tax rate of 21% for the period from October 2, 2019 through December 31, 2019 (Successor), the period from January 1, 2019 through October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor) and 35% for the year ended December 31, 2017 (Predecessor), as follows (in thousands):

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

the period from October 2, 2019 through December 31, 2019 (Successor), the period from January 1, 2019 through October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor), as follows (in thousands):

October 2, 2019

January 1, 2019

Years Ended December 31,

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Expected tax benefit (provision)

State income tax expense, net of federal benefit

Stock-based compensation

Change in state rate

Increase (reduction) in deferred tax asset

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Attribute reduction

Tax Cuts and Jobs Act of 2017

Permanent adjustments

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Deferred noncurrent income tax liabilities:

Basis difference in debt

Book-tax differences in property basis

Unrealized hedging transactions

Lease right of use

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Net noncurrent deferred income tax assets (liabilities)

The amount of U.S.

consolidated Net Operating Losses (NOLs) available as of December 31, 2020 (Successor) after attribute reduction is estimated to be approximately $905.2 million, but the amount after attribute reduction and the Section 382 limitation is $451.0 million.

Of this amount, $105.6 million is subject to the 20 year carryforward period and will expire in 2037.

The remaining $345.4 million may be carried forward indefinitely but is in part subject to a Section 382 limitation.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized.

The Company considers all available evidence (both positive and negative) in determining whether a valuation allowance is required.

The Company evaluated possible sources of taxable income that may be available to realize the benefit of deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies in making this assessment.

As a result of the Company’s analysis, it was concluded that as of December 31, 2020 (Successor), a valuation allowance should continue to be applied against the Company’s net deferred tax asset.

The Company recorded a valuation allowance as of December 31, 2020 (Successor) of $489.5 million, an increase of $10.8 million from December 31, 2019 (Successor).

The Company will continue to monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits and other deferred tax assets will be utilized.

The Company emerged from Chapter 11 Bankruptcy on October 8, 2019.

Under the Plan, a substantial portion of the Company’s pre-petition debt securities were extinguished.

Absent an exception, a debtor recognizes cancellation of indebtedness income (CODI) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price.

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As a result of the market value of equity upon emergence from chapter 11 bankruptcy proceedings, U.S.

CODI was approximately $524.8 million, which reduced the value of the Company’s net operating losses and capital losses on January 1, 2020.

The deferred tax balances disclosed above reflect the estimated impact of the attribute reduction on January 1, 2020.

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This ownership change and resulting annual limitation generated the estimated expiration of approximately $891.5 million of net operating loss.

The expiration of these tax attributes was partially offset by a corresponding decrease in the Company’s U.S.

valuation allowance, which resulted in a $95.8 million deferred tax expense placing the Company in a net deferred tax liability position.

The amount of U.S.

consolidated NOLs available as of December 31, 2019 (Successor) after attribute reduction is estimated to be approximately $675.1 million, but the amount after attribute reduction and the Section 382 limitation is

$220.0 million..

Of this amount, $103.2 million is subject to the 20 year carryforward period and will expire in 2037.

The remaining $117.7 million may be carried forward indefinitely but in part subject to a Section 382 limitation.

The Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized.

The Company considers all available evidence (both positive and negative) in determining whether a valuation allowance is required.

As a result of the Company’s analysis, it was concluded that as of December 31, 2019 (Successor), a valuation allowance should continue to be applied against the Company’s net deferred tax asset.

The Company recorded a valuation allowance as of December 31, 2019 (Successor) of $478.7 million, an increase of $188.4 million from December 31, 2018 (Predecessor).

The Company will continue to monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits and other deferred tax assets will be utilized.

ASC 740, Income Taxes (ASC 740) prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return.

For those benefits to be recognized, an income tax position must be more-likely-than- not to be sustained upon examination by taxing authorities.

The Company has no unrecognized tax benefits for the period of October 2, 2019 through December 31, 2019 (Successor), the period of January 1, 2019 through October 1, 2019 (Predecessor), the years ended December 31, 2018 (Predecessor).

Generally, the Company’s income tax years 2016 through 2019 remain open for federal purposes and are subject to examination by Federal tax authorities.

The Company has no unrecognized tax benefits for the year ended December 31, 2020 (Successor), the period of October 2, 2019 through December 31, 2019 (Successor), the period of January 1, 2019 through October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor).

Generally, the Company’s income tax years 2017 through 2020 remain open for federal purposes and are subject to examination by Federal tax authorities.

The Company's income tax returns are also subject to audit by the tax authorities in Louisiana, Mississippi, North Dakota, Oklahoma, Texas, Pennsylvania, Ohio and certain other state taxing jurisdictions where the Company has, or previously had, operations.

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The open years for state purposes can vary from the normal three year statue expiration period for federal purposes.

The Company recognizes interest and penalties accrued to unrecognized benefits in “Interest expense and other”

in its consolidated statements of operations.

For the period of October 2, 2019 through December 31, 2019 (Successor), the period of January 1, 2019 through October 1, 2019 (Predecessor), the years ended December 31, 2018 (Predecessor), the Company recognized no interest and penalties.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company recognizes interest and penalties accrued to unrecognized benefits in “Interest expense and other” in its consolidated statements of operations.

For the year ended December 31, 2020 (Successor), the period of October 2, 2019 through December 31, 2019 (Successor), the period of January 1, 2019 through October 1, 2019 (Predecessor) and the year ended December 31, 2018 (Predecessor), the Company recognized no interest and penalties.

During 2020, the CARES Act and the Consolidated Appropriations Act of 2021 (the CAA) were signed into law.

The CARES Act provides relief to corporate taxpayers by permitting a five-year carryback of 2018 to 2020 NOLs, removing the 80% limitation on the utilization of those NOLs, increasing the Section 163(j) 30% limitation on interest expense deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerates refunds for minimum tax credit carryforwards, as well as other provisions.

The CAA extends various expiring tax provisions, clarifies that debt forgiven under the Paycheck Protection Program (PPP) is not included in gross income, clarifies that certain business expenses paid with forgiven PPP funds are tax deductible, as well as other tax provisions.

Both the CARES Act and CAA did not have a material impact to the Company’s consolidated financial statements and related disclosures.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE

On October 8, 2019, upon emergence from chapter 11 bankruptcy, the Predecessor Company’s equity was cancelled and new equity was issued.

Refer to Note 2, “Reorganization,”

for further details.

On October 8, 2019, upon emergence from chapter 11 bankruptcy, the Predecessor Company’s equity was cancelled and new equity was issued.

Refer to Note 2, “Reorganization,” for further details.

The following represents the calculation of earnings (loss) per share (in thousands, except per share amounts):

1 unchanged sentence

January 1, 2019

Years Ended December 31,

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Net income (loss) available to common stockholders

7 unchanged sentences

Anti-dilutive

Exercise of Predecessor warrants

1 unchanged sentence

Anti-dilutive

Conversion of Predecessor preferred stock

Anti-dilutive

Vesting of Predecessor restricted shares

Vesting of Predecessor restricted stock

Anti-dilutive

1 unchanged sentence

Anti-dilutive

Exercise of Successor Series B Warrants

Anti-dilutive

Exercise of Successor Series C Warrants

Anti-dilutive

Exercise of Successor stock options

Anti-dilutive

Vesting of Successor restricted stock units

Anti-dilutive

Weighted average diluted number of common shares outstanding

Diluted net income (loss) per common share

Common stock equivalents, including warrants, stock options and restricted stock units, if considered issuable, totaling 7.7 million shares for the year ended December 31, 2020 (Successor) were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to the net loss.

Common stock equivalents, including warrants, totaling 6.9 million shares for the period of October 2, 2019 through December 31, 2019 (Successor) were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to the net loss.

Common stock equivalents, including stock options, restricted shares and warrants totaling 14.1 million shares for the period of January 1, 2019 through October 1, 2019 (Predecessor) were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to the net loss.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Common stock equivalents, including stock options, restricted shares and warrants, totaling 13.1 million shares for the year ended December 31, 2018 (Predecessor) were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive.

Common stock equivalents, including stock options, restricted shares, warrants, and preferred stock totaling 17.1 million shares for the year ended December 31, 2017 (Predecessor) were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive.

On February 20, 2020 the Successor Company granted under the 2020 Plan stock options and restricted stock units to purchase or receive an aggregate of 1.3 million shares of common stock.

ADDITIONAL FINANCIAL STATEMENT INFORMATION

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Funds in escrow and other:

Oil, natural gas and natural gas liquids revenues

Funds in escrow

8 unchanged sentences

Oil and Natural Gas Reserves

Users of this information should be aware that the process of estimating quantities of “proved”

and “proved developed”

oil and natural gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir.

Users of this information should be aware that the process of estimating quantities of “proved” and “proved developed” oil and natural gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir.

The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions.

3 unchanged sentences

Proved developed reserves are proved reserves expected to be recovered through wells and equipment in place and under operating methods used when the estimates were made.

The proved reserves estimates reported herein for the years ended December 31, 2019 (Successor), 2018 (Predecessor) and 2017 (Predecessor) have been independently evaluated by Netherland, Sewell, a worldwide leader of petroleum property analysis for industry and financial organizations and government agencies.

The proved reserves estimates reported herein for the years ended December 31, 2020 (Successor), 2019 (Successor) and 2018 (Predecessor) have been independently evaluated by Netherland, Sewell, a worldwide leader of petroleum property analysis for industry and financial organizations and government agencies.

Netherland, Sewell was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No.

1 unchanged sentence

Little and Mr.

Edward Roy III.

Little, a Licensed Professional Engineer in the State of Texas (No.

1 unchanged sentence

He graduated from Rice University in 2002 with a Bachelor of Science Degree in Chemical Engineering and from University of Houston in 2007 with a Master of Business Administration Degree.

Norton, a Licensed Professional Geoscientist in the State of Texas (No.

441), has been a practicing petroleum geoscience consultant at Netherland, Sewell since 1989 and has over 10 years of prior industry experience.

He graduated from Texas A&M University in 1978 with a Bachelor of Science Degree in Geology.

Roy, a Licensed Professional Geoscientist in the State of Texas, Geology (No.

2364), has been practicing consulting petroleum geoscience at Netherland, Sewell since 2008 and has over 11 years of prior industry experience.

He graduated from Texas Christian University in 1992 with a Bachelor of Science Degree in Geology and from Texas A&M University in 1998 with a Master of Science Degree in Geology.

Netherland, Sewell has reported to the Company that both technical principals meet or exceed the education, training, and experience requirements set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers;

they are both proficient in judiciously applying industry standard practices to engineering and geoscience evaluations as well as applying SEC and other industry reserves definitions and guidelines.

The Company’s board of directors has established an independent reserves committee composed of independent directors with experience in energy company reserve evaluations.

The Company’s independent engineering firm reports jointly to the reserves committee and to Executive Vice President and Chief Operating Officer.

The Company’s board of directors has established an independent reserves committee composed of independent directors with experience in energy company reserve evaluations.

The Company’s independent engineering firm reports jointly to the reserves committee and to Executive Vice President and Chief Operating Officer.

The reserves committee is charged with ensuring the integrity of the process of selection and engagement of the independent engineering firm and in making a recommendation to the board of directors as to whether to approve the report prepared by the independent engineering firm.

Rohling, the Company’s Executive Vice President and Chief Operating Officer is primarily responsible for overseeing the preparation of the annual reserve report by Netherland, Sewell.

He has more than 14 years of oil and gas operations experience and earned a Bachelor of Science degree in Petroleum Engineering from Texas A&M University and is an active member of the Society of Petroleum Engineers.

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As a result, estimates of different engineers may vary.

In addition, results of drilling, testing and production subsequent to the date of an estimate may lead to revising the original estimate.

Accordingly, initial reserve estimates are often different from the quantities of oil and natural gas that are ultimately

In addition, results of

drilling, testing and production subsequent to the date of an estimate may lead to revising the original estimate.

Accordingly, initial reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered.

The meaningfulness of such estimates depends primarily on the accuracy of the assumptions upon which they were based.

Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities or both, the Company’s proved reserves will decline as reserves are produced.

The following tables illustrate changes in the Company’s estimated net proved developed and proved undeveloped reserves for the periods indicated.

The oil and natural gas liquids prices as of December 31, 2019 (Successor), 2018 (Predecessor) and 2017 (Predecessor) are based on the respective 12-month unweighted average of the first of the month prices of the West Texas Intermediate spot price which equates to $55.85 per barrel, $65.56 per barrel and $51.34 per barrel, respectively.

The natural gas prices as of December 31, 2019 (Successor), 2018 (Predecessor) and 2017 (Predecessor) are based on the respective 12-month unweighted average of the first of the month prices of the Henry Hub spot price which equates to $2.578 per MMBtu, $3.100 per MMBtu and $2.976 per MMBtu, respectively.

The following tables illustrate changes in the Company’s estimated net proved developed and proved undeveloped reserves for the periods indicated.

The oil and natural gas liquids prices as of December 31, 2020 (Successor), 2019 (Successor) and 2018 (Predecessor) are based on the respective 12-month unweighted average of the first of the month prices of the West Texas Intermediate spot price which equates to $39.54 per barrel, $55.85 per barrel and $65.56 per barrel, respectively.

The natural gas prices as of December 31, 2020 (Successor), 2019 (Successor) and 2018 (Predecessor) are based on the respective 12-month unweighted average of the first of the month prices of the Henry Hub spot price which equates to $1.99 per MMBtu, $2.58 per MMBtu and $3.10 per MMBtu, respectively.

All prices are adjusted by lease or field for energy content, transportation fees, and market differentials.

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Extensions and discoveries

Purchase of minerals in place

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2018 (Predecessor

Proved reserves, December 31, 2019 (Successor)

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

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Extensions and discoveries

Purchase of minerals in place

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2018 (Predecessor)

Proved reserves, December 31, 2019 (Successor)

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

2 unchanged sentences

December 31, 2020 (Successor)

December 31, 2018 (Predecessor)

December 31, 2019 (Successor)

December 31, 2018 (Predecessor)

1 unchanged sentence

December 31, 2020 (Successor)

December 31, 2018 (Predecessor)

December 31, 2019 (Successor)

December 31, 2018 (Predecessor)

The Company’s proved reserves have been estimated using deterministic methods.

At December 31, 2019 (Successor), total proved reserves were approximately 62.1 MMBoe, a 23.1 MMBoe net decrease over the previous year’s estimate of 85.2 MMBoe.

The net decrease in total proved reserves was the result of net negatives revisions of 29.7 MMBoe and production of 6.6 MMBoe, partially offset by additions and extensions of 13.2 MMBoe.

Negative revisions of 29.7 MMBoe primarily relate to changes in our development plans to focus on our most economic area, Monument Draw and due to the effect of lower prices.

At December 31, 2019 (Successor), the Company’s proved developed reserves were approximately 37.9 MMBoe, a 2.0 MMBoe net decrease from the previous year’s estimate of 39.9 MMBoe.

The Company’s proved reserves have been estimated using deterministic methods.

At December 31, 2020 (Successor), total proved reserves were approximately 63.4 MMBoe, a 1.3 MMBoe net increase over the previous year’s estimate of 62.1 MMBoe.

The net increase in total proved reserves was the result of additions and extensions of 12.4 MMBoe, partially offset by production of 6.2 MMBoe, sales of 2.0 MMBoe, and net negative revisions of 2.9 MMBoe due primarily to decreases in SEC pricing.

At December 31, 2020 (Successor), the Company’s proved developed reserves were approximately 36.2 MMBoe, a 1.7 MMBoe net decrease from the previous year’s estimate of 37.9 MMBoe.

The net decrease in total proved reserves was the result of production of 6.2 MMBoe and sales of 2.0 MMBoe, partially offset by development of 6.5 MMBoe (transferred from proved undeveloped).

At December 31, 2020 (Successor), the Company’s estimated proved undeveloped (PUD) reserves were approximately 27.1 MMBoe, a 3.0 MMBoe net increase from the previous year’s estimate of 24.1 MMBoe.

The net increase in total PUD reserves was the result of additions and extensions of 12.4 MMBoe, partially offset by development of 6.5 MMBoe and negative revisions of 2.8 MMBoe due primarily to decreases in SEC pricing.

Of the 12.4 MMBoe of extensions and discoveries in PUD reserves, all are associated with drilling extensions in the Delaware

None of the extensions and discoveries in PUD reserves in 2020 (Successor) were associated with infill drilling activity.

At December 31, 2019 (Successor), the Company’s proved developed reserves were approximately 37.9 MMBoe, a 2.0 MMBoe net decrease from the previous year’s estimate of 39.9 MMBoe.

The net decrease in total proved reserves was the result of negative revisions of 8.4 MMBoe and production of 6.5 MMBoe, partially offset by additions and extensions of 2.8 MMBoe and development of 10.1 MMBoe (transferred from proved undeveloped).

Negative revisions of 8.4 MMBoe primarily relate to changes in the Company’s development plans to focus on its most economic area, Monument Draw and due to the effect of lower prices.

Negative revisions of 8.4 MMBoe primarily relate to changes in the Company’s development plans to focus on Monument Draw and due to the effect of lower prices.

Of the 2.8 MMBoe of extensions and discoveries in proved developed reserves, approximately 1.2 MMBoe are associated with infill drilling activity and 1.6 MMBoe are associated with drilling extensions in the Delaware Basin.

At December 31, 2019 (Successor), the Company’s estimated proved undeveloped (PUD) reserves were approximately 24.1 MMBoe, a 21.2 MMBoe net decrease from the previous year’s estimate of 45.3 MMBoe.

At December 31, 2019 (Successor), the Company’s estimated PUD reserves were approximately 24.1 MMBoe, a 21.2 MMBoe net decrease from the previous year’s estimate of 45.3 MMBoe.

The net decrease in total PUD reserves was the result of negative revisions of 21.4 MMBoe and development of 10.2 MMBoe, partially offset by additions and extensions of 10.4 MMBoe.

The negative revisions to PUD reserves in 2019 were primarily attributable to the changes in the Company’s development plans to focus on Monument Draw and due to the effect of lower prices.

Of the 10.4 MMBoe of extensions and discoveries in PUD reserves, approximately 6.6 MMBoe are associated with infill drilling activity and 3.8 MMBoe are associated with drilling extensions in the Delaware Basin.

At December 31, 2018, the Predecessor Company’s proved developed reserves were approximately 39.9 MMBoe, a 23.9 MMBoe net increase over the previous year’s estimate of 16.0 MMBoe.

The net increase in proved developed reserves was the result of additions and extensions of 13.1 MMBoe, acquisitions of 3.7 MMBoe, development of 12.0 MMBoe (transferred from PUD), and net positive revisions of 0.2 MMBoe, partially offset by production of 5.1 MMBoe.

1 unchanged sentence

Net positive revisions of 0.2 MMBoe in proved developed reserves include 0.3 MMBoe in net negative performance revisions and 0.5 MMBoe in positive revisions due to increase in prices.

At December 31, 2018, the Predecessor Company’s estimated proved undeveloped (PUD) reserves were approximately 45.3 MMBoe, a 10.2 MMBoe net increase over the previous year’s estimate of 35.1 MMBoe.

At December 31, 2018, the Predecessor Company’s estimated PUD reserves were approximately 45.3 MMBoe, a 10.2 MMBoe net increase over the previous year’s estimate of 35.1 MMBoe.

The net increase in PUD reserves was the result of additions and extensions of 40.1 MMBoe, partially offset by net negative revisions of 17.9 MMBoe and development of 12.0 MMBoe.

1 unchanged sentence

Net negative revisions of 17.9 MMBoe in proved undeveloped reserves include net negative revisions of 18.6 MMBoe resulting from the removal of PUD locations that were rescheduled to be developed beyond five years from when they were initially recorded, and 0.7 MMBoe of positive revisions due to the effect of higher prices.

During 2017 (Predecessor), net negative revisions of 69.9 MMBoe in proved developed reserves were the result of divestitures of 100.5 MMBoe and production of 10.0 MMBoe, partially offset by additions and extensions of 8.3 MMBoe, acquisitions of 9.1 MMBoe, development of 7.4 MMBoe (transferred from PUD), and net positive revisions of 15.8 MMBoe.

Of the 8.3 MMBoe of extensions and discoveries in proved developed reserves, approximately 3.1 MMBoe are associated with infill drilling activity and 2.5 MMBoe are associated with drilling extensions in the Delaware Basin.

The Company did not separately track infill drilling activities as a subset of additions to extensions and discoveries for the properties it disposed of during 2017.

Net positive revisions of 15.8 MMBoe in proved developed reserves include 12.5 MMBoe in net positive performance revisions and 3.3 MMBoe in positive revisions due to increase in prices.

As of December 31, 2019 (Successor) all of the Company’s PUD reserves are planned to be developed within five years from the date they were initially recorded.

As of December 31, 2020 (Successor) all of the Company’s PUD reserves are planned to be developed within five years from the date they were initially recorded.

During 2020 (Successor), approximately $43.3 million in capital expenditures went toward the development of proved undeveloped reserves, which includes drilling, completion and other facility costs associated with developing proved undeveloped wells.

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These technologies include seismic data, wire line openhole log data, core data, log cross-sections, performance data, and statistical analysis.

In such areas, these data demonstrated consistent, continuous

reservoir characteristics in addition to significant quantities of economic EURs from individual producing wells.

In such areas, these data demonstrated consistent, continuous reservoir characteristics in addition to significant quantities of economic EURs from individual producing wells.

The Company relied only on production flow tests and historical production data, along with the reliable geologic data mentioned above to estimate proved reserves.

No other alternative methods or technologies were used to estimate proved reserves.

Out of total proved undeveloped reserves of 24.1 MMBoe at December 31, 2019 (Successor), 4.9 MMBoe were associated with five gross PUD locations that were more than one offset location from a producing well.

Out of total proved undeveloped reserves of 27.1 MMBoe at December 31, 2020 (Successor), 13.7 MMBoe were associated with 15 gross PUD locations that were more than one offset location from a producing well.

Capitalized Costs Relating to Oil and Natural Gas Producing Activities

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January 1, 2019

Years Ended December 31,

December 31, 2020

December 31, 2019

October 1, 2019

December 31, 2018

Property acquisition costs, proved

2 unchanged sentences

Development costs (1)

(1) Excludes $31.5 million, $11.3 million, $72.9 million and $122.0 million for the year ended December 31, 2020 (Successor), the period from October 2, 2019 to December 31, 2019 (Successor), the period from January 1, 2019 to October 1, 2019 (Predecessor), and the year ended December 31, 2018 (Predecessor) of development costs related to the Company’s treating equipment and gathering support facilities.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves

The following Standardized Measure of Discounted Future Net Cash Flows (Standardized Measure) has been developed utilizing ASC 932, Extractive Activities—Oil and Gas (ASC 932) procedures and based on oil and natural gas reserve and production volumes estimated by the Company’s engineering staff.

It can be used for some comparisons, but should not be the only method used to evaluate the Company or its performance.

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● future net revenues may be subject to different rates of income taxation.

At December 31, 2019 (Successor), 2018 (Predecessor) and 2017 (Predecessor), as specified by the SEC, the prices for oil and natural gas used in this calculation were the unweighted 12-month average of the first day of the month prices, except for volumes subject to fixed price contracts.

At December 31, 2020 (Successor), 2019 (Successor) and 2018 (Predecessor), as specified by the SEC, the prices for oil and natural gas used in this calculation were the unweighted 12-month average of the first day of the month prices, except for volumes subject to fixed price contracts.

Estimates of future income taxes are computed using current statutory income tax rates including consideration for estimated future statutory depletion and tax credits.

11 unchanged sentences

Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves

The following is a summary of the changes in the Standardized Measure for the Company’s proved oil and natural gas reserves during each of the years in the three year period ended December 31, 2019:

Years Ended December 31,

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Changes in production rates and other

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table presents selected quarterly financial data derived from the Company’s unaudited consolidated interim financial statements.

The following data is only a summary and should be read with the Company’s historical consolidated financial statements and related notes contained in this document (in thousands, except per share amounts).

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total operating revenues

Income (loss) from operations

Reorganization items, net

Net income (loss)

Net income (loss) available to common stockholders (1)

Net income (loss) per share of common stock:

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total operating revenues

Income (loss) from operations

Net income (loss)

Net income (loss) available to common stockholders (2)

Net income (loss) per share of common stock:

The volatility in “Net income (loss) available to common stockholders”

results primarily from i) the Company’s full cost ceiling impairments and associated income tax effects and ii) the Company’s reorganization and associated fresh-start accounting.

The volatility in “Net income (loss) available to common stockholders”

is substantially due to the $119.0 million gain on the sale of Water Assets.

See footnotes for additional information.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk