BATTALION OIL CORP 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Instruments and Hedging Activity We are exposed to various risks, including energy commodity price risk, such as price differentials between the NYMEX commodity price and the index price at the location where our production is sold. When oil, natural gas, and natural gas liquids prices decline significantly, our ability to finance our capital budget and operations may be adversely impacted. We expect energy prices to remain volatile and unpredictable, therefore we have designed a risk management policy which provides for the use of derivative instruments to provide partial protection against declines in oil, natural gas and natural gas liquids prices by reducing the risk of price volatility and the affect it could have on our operations. 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 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. We are exposed to market risk on our open derivative contracts related to potential non-performance by our counterparties. 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, 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 59 Table of Contents an asset or liability measured at fair value. See Item 8. Consolidated Financial Statements and Supplementary Data —Note 10, “Derivative and Hedging Activities,” for more details. Fair Market Value of Financial Instruments The estimated fair values for financial instruments under ASC 825, Financial Instruments , (ASC 825) are 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, restricted cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature. See Item 8. Consolidated Financial Statements and Supplementary Data —Note 9, “ Fair Value Measurements,” for additional information. Interest Rate Sensitivity We are also exposed to market risk related to adverse changes in interest rates. 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, 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. At December 31, 2020 (Successor), the weighted average interest rate on our variable rate debt was 3.51% per year. If the balance of our variable interest rate at December 31, 2020 (Successor) were to remain constant, a 10% change in market interest rates would impact our cash flows by approximately $0.6 million per year. ​ 60 Table of Contents ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ​ ​ ​ ​ Page Management’s report on internal control over financial reporting ​ 62 Report of independent registered public accounting firm ​ 63 Consolidated statements of operations ​ 66 Consolidated balance sheets ​ 67 Consolidated statements of stockholders’ equity ​ 68 Consolidated statements of cash flows ​ 69 Notes to the consolidated financial statements ​ 70 Supplemental oil and gas information (unaudited) ​ 112 ​ ​ ​ ​ ​ 61 Table of Contents 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. 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, 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. LITTLE /s/ R. KEVIN ANDREWS Richard H. Little ​ R. Kevin Andrews Chief Executive Officer ​ Executive Vice President, ​ ​ Chief Financial Officer and Treasurer Houston, Texas ​ ​ March 8, 2021 ​ ​ ​ ​ 62 Table of Contents 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, 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. Accordingly, the accompanying financial statements have been prepared in conformity with FASB Accounting Standard Codification 852, Reorganizations, for the Successor Company as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods as described in Note 3 to the consolidated financial statements. 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. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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. ​ 63 Table of Contents 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. ​ 64 Table of Contents ● 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 ​ ​ ​ Houston, Texas ​ March 8, 2021 ​ ​ ​ We have served as the Company’s auditor since 2012. ​ ​ ​ 65 Table of Contents BATTALION OIL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ ​ Year Ended ​ through ​ ​ through ​ Year Ended ​ December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 Operating revenues: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Oil, natural gas and natural gas liquids sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Oil ​ $ 125,985 ​ $ 58,325 ​ ​ $ 145,024 ​ $ 199,601 Natural gas ​ ​ 5,818 ​ ​ 1,719 ​ ​ ​ 107 ​ ​ 6,791 Natural gas liquids ​ ​ 14,972 ​ ​ 5,071 ​ ​ ​ 13,229 ​ ​ 19,137 Total oil, natural gas and natural gas liquids sales ​ ​ 146,775 ​ ​ 65,115 ​ ​ ​ 158,360 ​ ​ 225,529 Other ​ ​ 1,514 ​ ​ 467 ​ ​ ​ 743 ​ ​ 1,080 Total operating revenues ​ ​ 148,289 ​ ​ 65,582 ​ ​ ​ 159,103 ​ ​ 226,609 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Production: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Lease operating ​ ​ 42,106 ​ ​ 12,804 ​ ​ ​ 39,617 ​ ​ 25,075 Workover and other ​ ​ 3,709 ​ ​ 1,655 ​ ​ ​ 5,580 ​ ​ 8,574 Taxes other than income ​ ​ 10,056 ​ ​ 3,730 ​ ​ ​ 9,213 ​ ​ 12,787 Gathering and other ​ ​ 56,016 ​ ​ 10,812 ​ ​ ​ 36,057 ​ ​ 60,090 Restructuring ​ ​ 2,580 ​ ​ 1,175 ​ ​ ​ 15,148 ​ ​ 128 General and administrative ​ ​ 18,456 ​ ​ 5,111 ​ ​ ​ 36,550 ​ ​ 62,056 Depletion, depreciation and accretion ​ ​ 62,053 ​ ​ 19,996 ​ ​ ​ 90,912 ​ ​ 77,527 Full cost ceiling impairment ​ ​ 215,145 ​ ​ — ​ ​ ​ 985,190 ​ ​ — (Gain) loss on sale of oil and natural gas properties ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ 7,235 (Gain) loss on sale of Water Assets ​ ​ — ​ ​ (506) ​ ​ ​ 3,618 ​ ​ (119,003) Total operating expenses ​ ​ 410,121 ​ ​ 54,777 ​ ​ ​ 1,221,885 ​ ​ 134,469 Income (loss) from operations ​ ​ (261,832) ​ ​ 10,805 ​ ​ ​ (1,062,782) ​ ​ 92,140 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expenses): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net gain (loss) on derivative contracts ​ ​ 38,759 ​ ​ (16,692) ​ ​ ​ (34,332) ​ ​ 92,625 Interest expense and other ​ ​ (6,634) ​ ​ (1,275) ​ ​ ​ (37,606) ​ ​ (43,015) Reorganization items, net ​ ​ — ​ ​ (3,298) ​ ​ ​ (117,124) ​ ​ — Total other income (expenses) ​ ​ 32,125 ​ ​ (21,265) ​ ​ ​ (189,062) ​ ​ 49,610 Income (loss) before income taxes ​ ​ (229,707) ​ ​ (10,460) ​ ​ ​ (1,251,844) ​ ​ 141,750 Income tax benefit (provision) ​ ​ — ​ ​ — ​ ​ ​ 95,791 ​ ​ (95,791) Net income (loss) ​ $ (229,707) ​ $ (10,460) ​ ​ $ (1,156,053) ​ $ 45,959 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) per share of common stock: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ (14.18) ​ $ (0.65) ​ ​ $ (7.27) ​ $ 0.29 Diluted ​ $ (14.18) ​ $ (0.65) ​ ​ $ (7.27) ​ $ 0.29 Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 16,204 ​ ​ 16,204 ​ ​ ​ 158,925 ​ ​ 157,011 Diluted ​ ​ 16,204 ​ ​ 16,204 ​ ​ ​ 158,925 ​ ​ 157,295 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ 66 Table of Contents BATTALION OIL CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ December 31, 2020 December 31, 2019 Current assets: ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 4,295 ​ $ 5,701 Accounts receivable, net ​ ​ 32,242 ​ ​ 48,504 Assets from derivative contracts ​ ​ 8,559 ​ ​ 4,995 Restricted cash ​ ​ — ​ ​ 4,574 Prepaids and other ​ ​ 2,740 ​ ​ 7,379 Total current assets ​ ​ 47,836 ​ ​ 71,153 Oil and natural gas properties (full cost method): ​ ​ ​ ​ ​ ​ Evaluated ​ ​ 509,274 ​ ​ 420,609 Unevaluated ​ ​ 75,494 ​ ​ 105,009 Gross oil and natural gas properties ​ ​ 584,768 ​ ​ 525,618 Less - accumulated depletion ​ ​ (295,163) ​ ​ (19,474) Net oil and natural gas properties ​ ​ 289,605 ​ ​ 506,144 Other operating property and equipment: ​ ​ ​ ​ ​ ​ Other operating property and equipment ​ ​ 3,535 ​ ​ 3,655 Less - accumulated depreciation ​ ​ (1,149) ​ ​ (378) Net other operating property and equipment ​ ​ 2,386 ​ ​ 3,277 Other noncurrent assets: ​ ​ ​ ​ ​ ​ Assets from derivative contracts ​ ​ 4,009 ​ ​ 224 Operating lease right of use assets ​ ​ 310 ​ ​ 3,165 Funds in escrow and other ​ ​ 2,351 ​ ​ 703 Total assets ​ $ 346,497 ​ $ 584,666 ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ Accounts payable and accrued liabilities ​ $ 58,928 ​ $ 97,333 Liabilities from derivative contracts ​ ​ 22,125 ​ ​ 8,069 Current portion of long-term debt ​ ​ 1,720 ​ ​ — Operating lease liabilities ​ ​ 403 ​ ​ 923 Asset retirement obligations ​ ​ — ​ ​ 109 Total current liabilities ​ ​ 83,176 ​ ​ 106,434 Long-term debt ​ ​ 158,489 ​ ​ 144,000 Other noncurrent liabilities: ​ ​ ​ ​ ​ ​ Liabilities from derivative contracts ​ ​ 4,291 ​ ​ 4,854 Asset retirement obligations ​ ​ 10,583 ​ ​ 10,481 Operating lease liabilities ​ ​ — ​ ​ 2,247 Commitments and contingencies (Note 12) ​ ​ ​ ​ ​ ​ Stockholders' equity: ​ ​ ​ ​ ​ ​ Common stock: 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 ​ ​ 2 ​ ​ 2 Additional paid-in capital ​ ​ 330,123 ​ ​ 327,108 Retained earnings (accumulated deficit) ​ ​ (240,167) ​ ​ (10,460) Total stockholders' equity ​ ​ 89,958 ​ ​ 316,650 Total liabilities and stockholders' equity ​ $ 346,497 ​ $ 584,666 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ 67 Table of Contents BATTALION OIL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Retained ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Earnings ​ ​ ​ ​ ​ Common Stock ​ Paid-In ​ (Accumulated ​ Stockholders' ​ Shares Amount Capital Deficit) Equity Balances at December 31, 2017 (Predecessor) ​ 149,379 ​ $ 15 ​ $ 1,016,281 ​ $ 55,702 ​ $ 1,071,998 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ 45,959 ​ ​ 45,959 Common stock issuance ​ 9,200 ​ ​ 1 ​ ​ 63,479 ​ ​ — ​ ​ 63,480 Equity issuance costs ​ — ​ ​ — ​ ​ (3,044) ​ ​ — ​ ​ (3,044) Stock option exercises ​ 42 ​ ​ — ​ ​ 323 ​ ​ — ​ ​ 323 Long-term incentive plan grants ​ 2,327 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Long-term incentive plan forfeitures ​ (262) ​ ​ — ​ ​ — ​ ​ — ​ ​ — Reduction in shares to cover ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ individuals' tax withholding ​ (73) ​ ​ — ​ ​ (301) ​ ​ — ​ ​ (301) Stock-based compensation ​ — ​ ​ — ​ ​ 18,629 ​ ​ — ​ ​ 18,629 Balances at December 31, 2018 (Predecessor) ​ 160,613 ​ ​ 16 ​ ​ 1,095,367 ​ ​ 101,661 ​ ​ 1,197,044 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ (1,156,053) ​ ​ (1,156,053) Long-term incentive plan grants ​ 4,164 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Long-term incentive plan forfeitures ​ (2,101) ​ ​ — ​ ​ — ​ ​ — ​ ​ — Reduction in shares to cover ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ individuals' tax withholding ​ (1,174) ​ ​ — ​ ​ (494) ​ ​ — ​ ​ (494) Stock-based compensation ​ — ​ ​ — ​ ​ (10,020) ​ ​ — ​ ​ (10,020) Balances at October 1, 2019 (Predecessor) ​ 161,502 ​ ​ 16 ​ ​ 1,084,853 ​ ​ (1,054,392) ​ ​ 30,477 Cancellation of Predecessor equity ​ (161,502) ​ ​ (16) ​ ​ (1,084,853) ​ ​ 1,054,392 ​ ​ (30,477) Balances at October 1, 2019 (Predecessor) ​ — ​ $ — ​ $ — ​ $ — ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Issuance of Successor common stock ​ 16,204 ​ $ 2 ​ $ 322,294 ​ $ — ​ $ 322,296 Issuance of Successor warrants ​ — ​ ​ — ​ ​ 7,336 ​ ​ — ​ ​ 7,336 Equity issuance costs ​ — ​ ​ — ​ ​ (2,503) ​ ​ — ​ ​ (2,503) Balances at October 1, 2019 (Successor) ​ 16,204 ​ $ 2 ​ $ 327,127 ​ $ — ​ $ 327,129 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ (10,460) ​ ​ (10,460) Equity issuance costs ​ — ​ ​ — ​ ​ (19) ​ ​ — ​ ​ (19) Balances at December 31, 2019 (Successor) ​ 16,204 ​ ​ 2 ​ ​ 327,108 ​ ​ (10,460) ​ ​ 316,650 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ (229,707) ​ ​ (229,707) Equity issuance costs and other ​ — ​ ​ — ​ ​ (14) ​ ​ — ​ ​ (14) Stock-based compensation ​ — ​ ​ — ​ ​ 3,029 ​ ​ — ​ ​ 3,029 Balances at December 31, 2020 (Successor) ​ 16,204 ​ $ 2 ​ $ 330,123 ​ $ (240,167) ​ $ 89,958 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements. ​ 68 Table of Contents BATTALION OIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ ​ Year Ended ​ through ​ ​ through ​ Year Ended ​ December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ (229,707) ​ $ (10,460) ​ ​ $ (1,156,053) ​ $ 45,959 Adjustments to reconcile net income (loss) to net cash provided by (used ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in) operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Depletion, depreciation and accretion ​ ​ 62,053 ​ ​ 19,996 ​ ​ ​ 90,912 ​ ​ 77,527 Full cost ceiling impairment ​ ​ 215,145 ​ ​ — ​ ​ ​ 985,190 ​ ​ — (Gain) loss on sale of oil and natural gas properties ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ 7,235 (Gain) loss on sale of Water Assets ​ ​ — ​ ​ (506) ​ ​ ​ 3,618 ​ ​ (119,003) Deferred income tax provision (benefit) ​ ​ — ​ ​ — ​ ​ ​ (95,791) ​ ​ 95,791 Stock-based compensation, net ​ ​ 2,578 ​ ​ — ​ ​ ​ (8,035) ​ ​ 15,266 Unrealized loss (gain) on derivative contracts ​ ​ 6,143 ​ ​ 18,681 ​ ​ ​ 45,834 ​ ​ (84,274) Amortization and write-off of deferred loan costs ​ ​ — ​ ​ — ​ ​ ​ 1,859 ​ ​ 1,405 Amortization of discount and premium ​ ​ — ​ ​ — ​ ​ ​ 134 ​ ​ 288 Reorganization items, net ​ ​ (6,565) ​ ​ (3,615) ​ ​ ​ 108,887 ​ ​ — Other expense (income) ​ ​ 312 ​ ​ 253 ​ ​ ​ 535 ​ ​ (1,608) Change in assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ 13,513 ​ ​ (10,571) ​ ​ ​ 3,781 ​ ​ 378 Prepaids and other ​ ​ 4,712 ​ ​ 2,911 ​ ​ ​ (6,729) ​ ​ 5,840 Accounts payable and accrued liabilities ​ ​ (17,987) ​ ​ (3,035) ​ ​ ​ (13,873) ​ ​ 22,351 Net cash provided by (used in) operating activities ​ ​ 50,197 ​ ​ 13,654 ​ ​ ​ (39,731) ​ ​ 67,155 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Oil and natural gas capital expenditures ​ ​ (101,788) ​ ​ (43,230) ​ ​ ​ (167,235) ​ ​ (475,685) Proceeds received from sales of oil and natural gas assets ​ ​ 29,029 ​ ​ — ​ ​ ​ 1,247 ​ ​ 3,816 Acquisition of oil and natural gas properties ​ ​ (23) ​ ​ — ​ ​ ​ (2,809) ​ ​ (333,857) Other operating property and equipment capital expenditures ​ ​ (82) ​ ​ — ​ ​ ​ (85,613) ​ ​ (116,995) Proceeds received from sale of other operating property and equipment ​ ​ — ​ ​ 6 ​ ​ ​ — ​ ​ 216,083 Funds held in escrow and other ​ ​ 510 ​ ​ 434 ​ ​ ​ (7) ​ ​ 153 Net cash provided by (used in) investing activities ​ ​ (72,354) ​ ​ (42,790) ​ ​ ​ (254,417) ​ ​ (706,485) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proceeds from borrowings ​ ​ 148,209 ​ ​ 36,000 ​ ​ ​ 445,234 ​ ​ 438,000 Repayments of borrowings ​ ​ (132,000) ​ ​ (22,000) ​ ​ ​ (315,234) ​ ​ (232,000) Cash payments to Common Holders, Noteholders and Preferred Holders ​ ​ — ​ ​ — ​ ​ ​ (4) ​ ​ — Debt issuance costs ​ ​ — ​ ​ (1,471) ​ ​ ​ (8,764) ​ ​ (4,334) Common stock issued ​ ​ — ​ ​ — ​ ​ ​ 155,929 ​ ​ 63,480 Equity issuance costs and other ​ ​ (32) ​ ​ (2,503) ​ ​ ​ (494) ​ ​ (3,021) Net cash provided by (used in) financing activities ​ ​ 16,177 ​ ​ 10,026 ​ ​ ​ 276,667 ​ ​ 262,125 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net increase (decrease) in cash, cash equivalents and restricted cash ​ ​ (5,980) ​ ​ (19,110) ​ ​ ​ (17,481) ​ ​ (377,205) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash, cash equivalents and restricted cash at beginning of period ​ ​ 10,275 ​ ​ 29,385 ​ ​ ​ 46,866 ​ ​ 424,071 Cash, cash equivalents and restricted cash at end of period ​ $ 4,295 ​ $ 10,275 ​ ​ $ 29,385 ​ $ 46,866 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow information: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash paid (received) for interest ​ $ 7,577 ​ $ (197) ​ ​ $ 33,071 ​ $ 37,526 Cash paid (refunded) for income taxes ​ ​ (1,250) ​ ​ — ​ ​ ​ — ​ ​ (5,000) Cash paid for reorganization items ​ ​ 6,565 ​ ​ 6,913 ​ ​ ​ 8,237 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Disclosure of non-cash investing and financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Asset retirement obligations ​ $ (592) ​ $ 293 ​ ​ $ 2,932 ​ $ 2,217 Accrued equity issuance costs ​ ​ (19) ​ ​ (2,484) ​ ​ ​ 2,503 ​ ​ — Accrued debt issuance costs ​ ​ — ​ ​ (1,471) ​ ​ ​ 1,471 ​ ​ (90) ​ The accompanying notes are an integral part of these consolidated financial statements. ​ ​ 69 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES 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 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. The consolidated financial statements include the accounts of all majority-owned, controlled subsidiaries. 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 On August 7, 2019 (the Petition Date), the Company and its subsidiaries filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the U.S. 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 70 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS were administered under the caption In re Halcón Resources Corporation, et al. (Case No. 19-34446). 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. 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. 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. 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. 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 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. 71 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ December 31, 2020 December 31, 2019 ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 4,295 ​ $ 5,701 Restricted cash ​ ​ — ​ ​ 4,574 Total cash, cash equivalents and restricted cash ​ $ 4,295 ​ $ 10,275 ​ 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. The Company establishes provisions for losses on accounts receivable if it determines that collection of all or part of the outstanding balance is doubtful. 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, 2020 and 2019 (Successor), allowances for doubtful accounts were approximately $0.2 million and $0.1 million, respectively. Oil and Natural Gas Properties The Company uses the full cost method of accounting for its investment in oil and natural gas properties as prescribed by the United States Securities and Exchange Commission (SEC). 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 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. Depletion of evaluated oil and natural gas properties is computed on the units of production method based on estimated proved reserves. The net capitalized costs of evaluated oil and natural gas properties are subject to a full cost ceiling limitation in which the costs are not allowed to exceed their related estimated future net revenues discounted at 10%, net of tax considerations. Costs associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves. The Company reviews its unevaluated properties at the end of each quarter to determine whether the costs incurred should be transferred to the full cost pool and thereby subject to amortization. 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. 72 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Other Operating Property and Equipment 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: buildings, twenty years; automobiles and computers, three years; computer software, fixtures, furniture and equipment, five years; trailers, seven years; heavy equipment, eight to ten years and leasehold improvements, lease term. Land and artwork are not depreciated. Upon disposition, the cost and accumulated depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. 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 divested. The Company reviews its other operating property and equipment for impairment in accordance with ASC 360, Property, Plant, and Equipment (ASC 360). ASC 360 requires the Company to evaluate other operating property and equipment 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. 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 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. 73 Table of Contents 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. 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. 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. 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 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. Income Taxes 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company classifies all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the consolidated balance sheets. 74 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company follows ASC 740, Income Taxes (ASC 740). ASC 740 creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the consolidated financial statements. The evaluation of a tax position in accordance with ASC 740 is a two-step process. The first step is a recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more likely than not recognition threshold, it is presumed that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the consolidated financial statements. 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, 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 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. In certain jurisdictions the Company operates through more than one legal entity, each of which may have different open years subject to examination. The open years for state purposes can vary from the normal three year statue expiration period for federal purposes. Tax audits may be ongoing at any point in time. Tax liabilities are recorded based on estimates of additional taxes which may be due upon the conclusion of these audits. Estimates of these tax liabilities are made based upon prior experience and are updated for changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. Asset Retirement Obligations 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. At least annually, the Company reassesses the obligation to determine whether a change in the estimated obligation is necessary. The Company evaluates whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed. Should these indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), the Company will accordingly update its assessment. 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. 75 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 401(k) Plan 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 $0.8 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 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. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020 with early adoption permitted. 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. ​ 2. 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 76 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Agreement. 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 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, “ 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; and ● 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). 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). As a component of the Restructuring Support Agreement (i) certain Unsecured Senior Noteholders purchased their pro rata share of New Common Shares for an aggregate purchase price of $150.2 million (the Senior Noteholder Rights Offering) and (ii) certain existing common stockholders purchased their pro rata share of New Common Shares for an aggregate purchase price of $5.8 million (the Existing Equity Interests Rights Offering, and together with the Senior Noteholder Rights Offering, the Equity Rights Offerings), in each case, at a price per share equal to a 26% discount to the value of the New Common Shares based on an assumed total enterprise value of $425.0 million. Certain of the Unsecured Senior Noteholders backstopped the Senior Noteholder Rights Offering and received as consideration (the Backstop Commitment Premium) New Common Shares equal to 6% of the aggregate amount of the Senior Noteholder Rights Offering, subject to dilution by New Common Shares issued in connection with a management incentive plan and the Warrants. If the backstop agreement had been terminated, the Company would have been obligated to make a cash payment equal to 6% of the aggregate amount of the Senior Noteholder Rights Offering. The proceeds of the Equity Rights Offerings were used by the Company to (i) provide additional liquidity for working capital and general corporate purposes, (ii) pay reasonable and documented restructuring expenses, and (iii) fund Plan distributions. Under the Restructuring Support Agreement, the existing common stockholders (subject to the Existing Equity Cash Out) were issued a series of warrants exercisable for cash for a three year period subsequent to the effective date of the Plan (Warrants). The Warrants were issued with strike prices based upon stipulated rate-of-return levels achieved by the Unsecured Senior Noteholders. The Warrants cumulatively represent 30% of the New Common Shares issued pursuant to the Plan. ​ 77 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Registration Rights Agreement On the Effective Date, the Company and the other signatories thereto (the Demand Stockholders), entered into a registration rights agreement (the Registration Rights Agreement), pursuant to which, subject to certain conditions and limitations, the Company agreed to file with the SEC a registration statement concerning the resale of the registrable shares of New Common Shares of the Company held by Demand Stockholders (the Registrable Securities), as soon as reasonably practicable but in no event later than the later to occur of (i) ninety (90) days after the Effective Date and (ii) a date specified by a written notice to the Company by Demand Stockholders holding at least a majority of the Registerable Securities, and thereafter to use its commercially reasonable best efforts to cause the registration statement to be declared effective by the SEC as soon as reasonably practicable. In addition, from time to time, the Demand Stockholders may request that additional Registrable Securities be registered for resale by the Company. Subject to certain limitations, the Demand Stockholders also have the right to request that the Company facilitate the resale of Registrable Securities pursuant to firm commitment underwritten public offerings. The Registration Rights Agreement contains other customary terms and conditions, including, without limitation, provisions with respect to suspensions of our registration obligations and indemnification. ​ 3. FRESH-START ACCOUNTING 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 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. 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 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. The Enterprise Value was derived from an independent valuation using an asset based methodology of estimated proved reserves, undeveloped acreage, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh-start reporting date of October 1, 2019. The Company elected to adopt 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. 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. As such, fresh-start accounting is reflected in the accompanying consolidated balance sheet as of December 31, 2019 (Successor) and related 78 Table of Contents 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. 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. 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. 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 ​ ​ ​ ​ Enterprise Value ​ $ 441,583 Plus: Cash ​ ​ 15,546 Less: Fair value of debt ​ ​ (130,000) Less: Fair value of warrants ​ ​ (7,336) Fair Value of Successor common stock ​ $ 319,793 ​ The following table reconciles the Company’s Enterprise Value to its Reorganization Value as of October 1, 2019 (in thousands): ​ ​ ​ ​ ​ ​ October 1, 2019 ​ ​ ​ ​ Enterprise Value ​ $ 441,583 Plus: Cash ​ ​ 15,546 Plus: Current liabilities ​ ​ 122,134 Plus: Lease liabilities ​ ​ 3,395 Plus: Noncurrent asset retirement obligation ​ ​ 10,153 Plus: Other noncurrent liabilities ​ ​ 1,625 Reorganization Value of Successor assets ​ $ 594,436 ​ 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 79 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of October 1, 2019 ​ Predecessor Company Reorganization Adjustments Fresh-Start Adjustments Successor Company Current assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 17,009 ​ $ (1,463) (1) ​ $ — ​ $ 15,546 Accounts receivable, net ​ ​ 37,826 ​ ​ — ​ ​ — ​ ​ 37,826 Assets from derivative contracts ​ ​ 15,310 ​ ​ — ​ ​ — ​ ​ 15,310 Restricted cash ​ ​ — ​ ​ 13,839 (2) ​ ​ — ​ ​ 13,839 Prepaids and other ​ ​ 14,642 ​ ​ 7,110 (3) ​ ​ (11,462) (11) ​ ​ 10,290 Total current assets ​ ​ 84,787 ​ ​ 19,486 ​ ​ (11,462) ​ ​ 92,811 Oil and natural gas properties (full cost method): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Evaluated ​ ​ 2,155,288 ​ ​ — ​ ​ (1,774,924) (12)(13) ​ ​ 380,364 Unevaluated ​ ​ 438,365 ​ ​ — ​ ​ (329,411) (13) ​ ​ 108,954 Gross oil and natural gas properties ​ ​ 2,593,653 ​ ​ — ​ ​ (2,104,335) ​ ​ 489,318 Less - accumulated depletion ​ ​ (1,709,719) ​ ​ — ​ ​ 1,709,719 (13) ​ ​ — Net oil and natural gas properties ​ ​ 883,934 ​ ​ — ​ ​ (394,616) ​ ​ 489,318 Other operating property and equipment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other operating property and equipment ​ ​ 203,373 ​ ​ — ​ ​ (199,718) (12)(14) ​ ​ 3,655 Less - accumulated depreciation ​ ​ (14,416) ​ ​ — ​ ​ 14,416 (14) ​ ​ — Net other operating property and equipment ​ ​ 188,957 ​ ​ — ​ ​ (185,302) ​ ​ 3,655 Other noncurrent assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets from derivative contracts ​ ​ 4,120 ​ ​ — ​ ​ — ​ ​ 4,120 Operating lease right of use assets ​ ​ 3,694 ​ ​ — ​ ​ (300) (15) ​ ​ 3,394 Funds in escrow and other ​ ​ 1,138 ​ ​ — ​ ​ — ​ ​ 1,138 Total assets ​ $ 1,166,630 ​ $ 19,486 ​ $ (591,680) ​ $ 594,436 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accounts payable and accrued liabilities ​ $ 112,578 ​ $ 2,727 (4) ​ $ — ​ $ 115,305 Liabilities from derivative contracts ​ ​ 6,829 ​ ​ — ​ ​ — ​ ​ 6,829 Current portion of long-term debt, net ​ ​ 258,234 ​ ​ (258,234) (5) ​ ​ — ​ ​ — Operating lease liabilities ​ ​ 1,337 ​ ​ — ​ ​ (424) (15) ​ ​ 913 Total current liabilities ​ ​ 378,978 ​ ​ (255,507) ​ ​ (424) ​ ​ 123,047 Long-term debt ​ ​ — ​ ​ 130,000 (6) ​ ​ — ​ ​ 130,000 Liabilities subject to compromise ​ ​ 625,005 ​ ​ (625,005) (7) ​ ​ — ​ ​ — Other noncurrent liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities from derivative contracts ​ ​ 1,625 ​ ​ — ​ ​ — ​ ​ 1,625 Asset retirement obligations ​ ​ 10,153 ​ ​ — ​ ​ — ​ ​ 10,153 Operating lease liabilities ​ ​ 2,438 ​ ​ — ​ ​ 44 (15) ​ ​ 2,482 Commitments and contingencies ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders' equity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock (Predecessor) ​ ​ 16 ​ ​ (16) (8) ​ ​ — ​ ​ — Common Stock (Successor) ​ ​ — ​ ​ 2 (9) ​ ​ — ​ ​ 2 Additional paid-in capital (Predecessor) ​ ​ 1,087,441 ​ ​ (1,087,441) (8) ​ ​ — ​ ​ — Additional paid-in capital (Successor) ​ ​ — ​ ​ 327,127 (9) ​ ​ — ​ ​ 327,127 Retained earnings (accumulated deficit) ​ ​ (939,026) ​ ​ 1,530,326 (10) ​ ​ (591,300) (16) ​ ​ — Total stockholders' equity ​ ​ 148,431 ​ ​ 769,998 ​ ​ (591,300) ​ ​ 327,129 Total liabilities and stockholders' equity ​ $ 1,166,630 ​ $ 19,486 ​ $ (591,680) ​ $ 594,436 ​ 80 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Reorganization adjustments 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): ​ ​ ​ ​ ​ Sources: ​ ​ Proceeds from Senior Noteholder Rights Offering ​ $ 150,150 Proceeds from Senior Credit Agreement ​ ​ 130,000 Proceeds from Existing Equity Interests Rights Offering ​ ​ 5,779 Total Sources ​ $ 285,929 ​ ​ ​ ​ Uses: ​ ​ ​ Payment of Predecessor Credit Agreement principal, accrued interest, and fees ​ $ (226,580) Payment of DIP Facility principal and accrued interest ​ ​ (35,174) Funding of professional fee escrow and cash collateral account ​ ​ (13,839) Payment of debt issuance costs on Senior Credit Agreement ​ ​ (8,764) Payment of professional fees and other ​ ​ (3,035) Total Uses ​ $ (287,392) ​ ​ ​ ​ Total Sources and Uses ​ $ (1,463) ​ 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. 6) Reflects the initial borrowing on the Senior Credit Agreement. 7) Liabilities subject to compromise were as follows (in thousands): ​ ​ ​ ​ 6.75% senior notes due 2025 $ 625,005 Liabilities subject to compromise ​ ​ 625,005 Discount on shares issued per the Senior Noteholder Subscription Rights Offering ​ ​ (67,840) Issuance of common stock to Class 4 claimholders ​ ​ (75,388) Gain on settlement of liabilities subject to compromise ​ $ 481,777 ​ ​ 8) Reflects the cancellation of Predecessor common stock and additional paid-in capital. ​ 81 Table of Contents 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): ​ ​ ​ ​ Par value of 16,203,940 shares of new common stock issued to holders of senior note claims and existing equity interest claims (valued at $19.74 per share) $ 2 Fair Value of warrants issued to holder of the Existing Equity Interests (1) ​ ​ 7,336 Additional paid-in-capital (Successor) ​ ​ 322,294 Equity issuance costs associated with Equity Rights Offering ​ ​ (2,503) Total change in Successor common stock and additional paid-in capital ​ $ 327,129 (1) The fair value of the warrants was estimated using a Binomial Lattice model with the following assumptions: implied stock price of the Successor Company of $19.74; initial strike price per share of $40.17, $48.28, and $60.45, for Series A, B, and C warrants, respectively, increased each month at an annualized rate of 6.75%; expected volatility of 45%; and risk free interest rate using the USD Yield Curve at each time-step in the lattice. 10) The table below reflects the cumulative effect of the adjustments discussed above (in thousands): ​ ​ ​ ​ ​ Gain on settlement of liabilities subject to compromise $ 481,777 Success fees incurred upon emergence ​ ​ (8,376) Fair value of equity issued to Predecessor common stockholders ​ ​ (7,449) Fair value of warrants issued to Predecessor common stockholders ​ ​ (7,336) Issuance of common stock to backstop commitment parties ​ ​ (13,079) Other ​ ​ (2,668) Cancellation of Predecessor Company equity ​ ​ 1,087,457 Net impact to retained earnings (accumulated deficit) ​ $ 1,530,326 ​ Fresh-start accounting adjustments 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. 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. 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 natural gas liquids. Base pricing was derived from an average of forward strip prices and analysts’ estimated prices. ​ 82 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. ​ 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. A market approach was relied upon to value land 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 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. ​ 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. ​ 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. The following table summarizes the net reorganization items (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ Period from ​ ​ Period from ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ through ​ ​ through ​ December 31, 2019 October 1, 2019 Gain on settlement of liabilities subject to compromise ​ $ — ​ ​ $ 481,777 Fresh start adjustments ​ ​ — ​ ​ ​ (591,300) Gain on adjustment of prepetition liabilities subject to compromise to the allowed claims amount ​ ​ — ​ ​ ​ 20,274 Write-off debt discount/premium and debt issuance costs ​ ​ — ​ ​ ​ (10,953) Reorganization professional fees and other ​ ​ (3,298) ​ ​ ​ (16,922) Gain (loss) on reorganization items ​ $ (3,298) ​ ​ $ (117,124) ​ ​ 4. LEASES 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. The 83 Table of Contents 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. 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 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. 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,” “ 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. 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 84 Table of Contents 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 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 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ Year Ended ​ through ​ ​ through ​ ​ ​ December 31, 2020 ​ December 31, 2019 October 1, 2019 ​ Lease cost ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease costs ​ $ 1,986 ​ $ 260 ​ $ 1,932 ​ Short-term lease costs ​ ​ 16,650 ​ ​ 4,408 ​ ​ 12,262 ​ Variable lease costs ​ ​ 913 ​ ​ 215 ​ ​ 1,210 ​ Total lease costs ​ $ 19,549 ​ $ 4,883 ​ $ 15,404 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other information ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash flows from operating leases ​ $ 2,350 ​ $ 254 ​ $ 1,936 ​ Right-of-use assets obtained in exchange for new operating lease liabilities ​ ​ — ​ ​ 3,394 ​ ​ 5,462 ​ Weighted-average remaining lease term - operating leases ​ ​ 0.5 years ​ 3.5 years ​ 3.7 years Weighted-average discount rate - operating leases ​ ​ 3.70 % ​ 3.70 % ​ 4.83 % ​ 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 85 Table of Contents 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): ​ ​ ​ ​ ​ ​ Successor ​ ​ December 31, 2020 2021 ​ $ 406 2022 ​ ​ — 2023 ​ ​ — 2024 ​ ​ — 2025 ​ ​ — Thereafter ​ ​ — Total operating lease payments ​ ​ 406 Less: discount to present value ​ ​ 3 Total operating lease liabilities ​ ​ 403 Less: current operating lease liabilities ​ ​ 403 Noncurrent 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 previously accounted for as leases are or contain a lease under ASC 842. ​ ​ 5. OPERATING REVENUES Revenue Recognition Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue. 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 $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 86 Table of Contents 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ ​ Year Ended ​ through ​ ​ through ​ Year Ended ​ December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 Operating revenues: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Oil, natural gas and natural gas liquids sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Oil ​ $ 125,985 ​ $ 58,325 ​ ​ $ 145,024 ​ $ 199,601 Natural gas ​ ​ 5,818 ​ ​ 1,719 ​ ​ ​ 107 ​ ​ 6,791 Natural gas liquids ​ ​ 14,972 ​ ​ 5,071 ​ ​ ​ 13,229 ​ ​ 19,137 Total oil, natural gas and natural gas liquids sales ​ ​ 146,775 ​ ​ 65,115 ​ ​ ​ 158,360 ​ ​ 225,529 Other ​ ​ 1,514 ​ ​ 467 ​ ​ ​ 743 ​ ​ 1,080 Total operating revenues ​ $ 148,289 ​ $ 65,582 ​ ​ $ 159,103 ​ $ 226,609 ​ Oil Sales 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, 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, 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 The Company evaluates its natural gas gathering and processing arrangements in place with midstream companies to determine when control of the natural gas is transferred. 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. 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. 87 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. ​ 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). ​ 6. ACQUISITIONS AND DIVESTITURES Acquisitions West Quito Draw Properties On February 6, 2018 (Predecessor), a wholly owned subsidiary of the Company entered into a Purchase and Sale Agreement (the Shell PSA) with SWEPI LP (Shell), an affiliate of Shell Oil Company, pursuant to which the Company purchased acreage and related assets in the Delaware Basin located in Ward County, Texas (the West Quito Draw Properties) for a total adjusted purchase price of $198.5 million. 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, “ Debt ,” and Note 13, “ Stockholders’ Equity ,” respectively. Monument Draw Assets (Ward and Winkler Counties, Texas) 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. Divestitures 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. 88 Table of Contents 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 (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). 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. 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 $850.0 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. If the Williston 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 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 a 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. ​ 89 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7. OIL AND NATURAL GAS PROPERTIES Oil and natural gas properties as of December 31, 2020 and 2019 (Successor) consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ December 31, 2020 ​ December 31, 2019 ​ ​ ​ ​ ​ ​ ​ Subject to depletion ​ $ 509,274 ​ $ 420,609 Not subject to depletion: ​ ​ ​ ​ ​ ​ Exploration and extension wells in progress ​ ​ — ​ ​ — Other capital costs: ​ ​ ​ ​ ​ Incurred in 2020 ​ ​ 983 ​ ​ — Incurred in 2019 (1) ​ ​ 74,511 ​ ​ 105,009 Incurred in 2018 ​ ​ — ​ ​ — Incurred in 2017 and prior ​ ​ — ​ ​ — Total not subject to depletion ​ ​ 75,494 ​ ​ 105,009 Gross oil and natural gas properties ​ ​ 584,768 ​ ​ 525,618 Less accumulated depletion ​ ​ (295,163) ​ ​ (19,474) Net oil and natural gas properties ​ $ 289,605 ​ $ 506,144 (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. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, treating equipment and gathering support facilities costs, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred. 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 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. 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. 90 Table of Contents 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. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. 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 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 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 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ West Texas Intermediate (per barrel) (1) Henry Hub (per MMBtu) (1) December 31, 2020 ​ $ 39.54 ​ $ 1.99 December 31, 2019 ​ ​ 55.85 ​ ​ 2.58 December 31, 2018 ​ ​ 65.56 ​ ​ 3.10 (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 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 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 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 (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. 91 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. ​ 8. DEBT As of December 31, 2020 and 2019 (Successor), the Company’s debt consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ December 31, 2020 December 31, 2019 Successor senior revolving credit facility ​ $ 158,000 ​ $ 144,000 Paycheck Protection Program loan ​ ​ 2,209 ​ ​ — Total debt ​ ​ 160,209 ​ ​ 144,000 Current portion of Paycheck Protection Program loan ​ ​ 1,720 ​ ​ — Total long-term debt ​ $ 158,489 ​ $ 144,000 ​ Successor Senior Revolving Credit Facility ​ 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. A portion of the Senior Credit Agreement, in the amount of $25.0 million, is available for the issuance of letters of credit. The maturity date of the Senior Credit Agreement is October 8, 2024. 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. 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 1.50% 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; breaches of representation and warranties; non-compliance with covenants; cross-defaults to material indebtedness; voluntary or involuntary bankruptcy; 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. 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. 92 Table of Contents 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 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. 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, to not greater than 3.50 to 1.00. 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 93 Table of Contents 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 In connection with the chapter 11 proceedings and pursuant to an order of the Bankruptcy Court dated August 9, 2019 (the Interim Order), the Predecessor Company entered into a Junior Secured Debtor-In-Possession Credit Agreement (the DIP Credit Agreement) with the Unsecured Senior Noteholders party thereto from time to time as lenders (the DIP Lenders) and Wilmington Trust, National Association, as administrative agent. Under the DIP Credit Agreement, the DIP Lenders made available a $35.0 million debtor-in-possession junior secured term credit facility (the DIP Facility), of which $25.0 million was extended as an initial loan and the remainder of which was drawn on September 5, 2019 (Predecessor). The DIP Facility was refinanced by the Senior Credit Agreement upon emergence from chapter 11 bankruptcy. 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. Predecessor Senior Revolving Credit Facility On September 7, 2017, the Predecessor Company entered into an Amended and Restated Senior Secured Revolving Credit Agreement (the Predecessor Credit Agreement) by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions party thereto, as lenders. Pursuant to the Predecessor Credit Agreement, the lenders party thereto agreed to provide the Company with a $1.0 billion senior secured reserve-based revolving credit facility with a borrowing base of $225.0 million as of October 1, 2019 (Predecessor). 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. 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. 94 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.75% Senior Notes On February 16, 2017, the Predecessor Company issued $850.0 million aggregate principal amount of 6.75% senior notes due 2025 (the 2025 Notes) in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (Securities Act), Rule 144A and Regulation S, and applicable state securities laws. The 2025 Notes were issued at par and bore interest at a rate of 6.75% per annum, payable semi-annually on February 15 and August 15 of each year. The maturity date of the 2025 Notes was February 15, 2025. 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. On October 8, 2019, upon emergence from chapter 11 bankruptcy, the 2025 Notes were cancelled. The Company discontinued recording interest on the 2025 Notes as of the Petition Date. 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. Debt Maturities Aggregate maturities required on debt at December 31, 2020 (Successor) due in future years are as follows (in thousands): ​ ​ ​ ​ ​ 2021 $ 1,720 2022 ​ ​ 489 2023 ​ ​ — 2024 ​ ​ 158,000 2025 ​ ​ — Thereafter ​ ​ — Total ​ $ 160,209 ​ 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, 2020 and 2019 (Successor), the Company did not have any unamortized debt issuance costs. ​ 9. 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 95 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS liabilities. 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). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. 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. 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, 2020 and 2019 (Successor) (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ December 31, 2020 ​ Level 1 Level 2 Level 3 Total Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets from derivative contracts ​ $ — ​ $ 12,568 ​ $ — ​ $ 12,568 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities from derivative contracts ​ $ — ​ $ 26,416 ​ $ — ​ $ 26,416 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ December 31, 2019 ​ Level 1 Level 2 Level 3 Total Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets from derivative contracts ​ $ — ​ $ 5,219 ​ $ — ​ $ 5,219 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities from derivative contracts ​ $ — ​ $ 12,923 ​ $ — ​ $ 12,923 ​ 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 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. 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 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. 96 Table of Contents 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. 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; 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. ​ 10. 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, 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. A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. Basis swaps effectively lock in a price differential between regional prices (i.e. Midland) where the product is sold and the relevant pricing index under which the oil production is hedged (i.e. Cushing). WTI NYMEX roll agreements account for pricing adjustments to the trade month versus the delivery month for contract pricing. 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 97 Table of Contents 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 ​ ​ ​ Asset derivative contracts ​ ​ ​ Liability derivative contracts as hedging contracts under ​ ​ ​ Successor ​ ​ ​ Successor ASC 815 Balance sheet location December 31, 2020 December 31, 2019 Balance sheet location December 31, 2020 December 31, 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commodity contracts ​ Current assets - assets from derivative contracts ​ $ 8,559 ​ $ 4,995 ​ Current liabilities - liabilities from derivative contracts ​ $ (22,125) ​ $ (8,069) Commodity contracts ​ Other noncurrent assets - assets from derivative contracts ​ ​ 4,009 ​ ​ 224 ​ Other noncurrent liabilities - liabilities from derivative contracts ​ ​ (4,291) ​ ​ (4,854) Total derivatives not designated as hedging contracts under ASC 815 ​ $ 12,568 ​ $ 5,219 ​ ​ ​ $ (26,416) ​ $ (12,923) ​ 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 ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ Derivatives not designated ​ Location of gain or (loss) ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ as hedging contracts ​ recognized in income ​ Year Ended ​ through ​ ​ through ​ Year Ended under ASC 815 on derivative contracts December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 Commodity contracts: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gain (loss) on commodity contracts ​ Other income (expenses) - net gain (loss) on derivative contracts ​ $ (6,143) ​ $ (18,681) ​ ​ $ (45,834) ​ $ 84,274 Realized gain (loss) on commodity contracts ​ Other income (expenses) - net gain (loss) on derivative contracts ​ ​ 44,902 ​ ​ 1,989 ​ ​ ​ 11,502 ​ ​ 8,351 Total net gain (loss) on derivative contracts ​ $ 38,759 ​ $ (16,692) ​ ​ $ (34,332) ​ $ 92,625 ​ 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. ​ 98 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Volume in ​ Weighted ​ ​ ​ ​ ​ ​ Mmbtu's/ ​ Average Period Instrument Commodity Bbl's Price 2021 ​ Fixed-Price Swap ​ Crude Oil ​ 3,076,979 ​ $ 44.98 2021 ​ Fixed-Price Swap ​ Natural Gas ​ 4,657,871 ​ ​ 2.74 2021 ​ Basis Swap ​ Crude Oil ​ 3,235,500 ​ ​ (0.07) 2021 ​ Basis Swap ​ Natural Gas ​ 4,657,871 ​ ​ (0.24) 2021 ​ WTI NYMEX Roll ​ Crude Oil ​ 2,941,000 ​ ​ (0.31) 2022 ​ Fixed-Price Swap ​ Crude Oil ​ 1,659,434 ​ ​ 46.58 2022 ​ Fixed-Price Swap ​ Natural Gas ​ 1,297,420 ​ ​ 3.01 2022 ​ Producer Collar (Ceiling) ​ Natural Gas ​ 2,388,624 ​ ​ 2.65 2022 ​ Producer Collar (Floor) ​ Natural Gas ​ 2,388,624 ​ ​ 2.50 2022 ​ Basis Swap ​ Crude Oil ​ 1,659,434 ​ ​ 0.44 2022 ​ Basis Swap ​ Natural Gas ​ 3,686,044 ​ ​ (0.30) 2022 ​ WTI NYMEX Roll ​ Crude Oil ​ 1,843,434 ​ ​ (0.07) ​ 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, 2020 and 2019 (Successor) (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative Assets ​ Derivative Liabilities ​ ​ Successor ​ Successor Offsetting of Derivative Assets and Liabilities December 31, 2020 ​ December 31, 2019 December 31, 2020 December 31, 2019 Gross amounts presented in the consolidated balance sheet ​ $ 12,568 ​ $ 5,219 ​ $ (26,416) ​ $ (12,923) Amounts not offset in the consolidated balance sheet ​ ​ (8,968) ​ ​ (4,557) ​ ​ 8,968 ​ ​ 4,557 Net amount ​ $ 3,600 ​ $ 662 ​ $ (17,448) ​ $ (8,366) ​ 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 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. 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 remained in place following the Company's chapter 11 bankruptcy. ​ 11. 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 additional capitalized costs are depreciated on a unit-of-production basis. 99 Table of Contents 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): ​ ​ ​ ​ ​ Liability for asset retirement obligations as of December 31, 2018 (Predecessor) ​ $ 6,914 Liabilities settled and divested (1) ​ ​ (229) Additions ​ ​ 354 Accretion expense ​ ​ 307 Revisions in estimated cash flows ​ ​ 2,807 Liability for asset retirement obligations as of October 1, 2019 (Predecessor) ​ $ 10,153 Fair Value Adjustment ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ Liability for asset retirement obligations as of October 1, 2019 (Successor) ​ $ 10,153 Additions ​ ​ 293 Accretion expense ​ ​ 144 Liability for asset retirement obligations as of December 31, 2019 (Successor) ​ $ 10,590 Liabilities settled and divested (1) ​ ​ (1,132) Additions ​ ​ 488 Accretion expense ​ ​ 585 Revisions in estimated cash flows ​ ​ 52 Liability for asset retirement obligations as of December 31, 2020 (Successor) ​ $ 10,583 (1) See Note 6, “Acquisitions and Divestitures,” for additional information on the Company’s divestiture activities. ​ 12. COMMITMENTS AND CONTINGENCIES Commitments 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, 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 $9.1 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. et al., No. 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. The Court of Common Pleas of Mercer County, Pennsylvania marked the judgment as satisfied on February 3, 2020 (Successor) and the Company considers this contingency resolved. 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. ​ 100 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. STOCKHOLDERS’ EQUITY Common Stock 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. 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. In addition, the amended and restated certificate of incorporation stipulates provisions for the right of removal of directors, specifically that prior to the 2021 Annual Meeting, any Group II Director (as defined in the certificate of incorporation) may be removed with or without cause by 85% of the shares then entitled to vote at an election of directors (which voting threshold has been increased solely with respect to such class of directors from a majority of shares then entitled to vote at an election of directors). Beginning at the 2021 Annual Meeting, any director of either class may be removed with or without cause by a majority of shares entitled to vote. 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. ​ Warrants 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. On the Effective Date, the Company issued (i) Series A Warrants to purchase an aggregate of 1,798,322 shares of common stock, with an initial exercise price of $40.17 per share, (ii) Series B Warrants to purchase an aggregate of 2,247,985 shares of common stock, with an initial exercise price of $48.28 per share and (iii) Series C Warrants to purchase an aggregate of 2,890,271 shares of common stock, with an initial exercise price of $60.45 per share. Each series of Warrants issued under the Warrant Agreement has a three-year term, expiring on October 8, 2022. 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, 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. ​ 101 Table of Contents 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. The warrants could be exercised to purchase 4.7 million shares of the Predecessor Company's common stock at an exercise price of $14.04 per share. The holders were entitled to exercise the warrants in whole or in part at any time prior to expiration on September 9, 2020. 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). 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 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. The guidance requires all stock-based payments to employees and directors, including grants of stock options and restricted stock, to be recognized in the financial statements based on their fair values. 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 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. 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. 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 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 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. 102 Table of Contents 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 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. 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. The following table sets forth the stock option transactions for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number Weighted Average Exercise Price Per Share Aggregate Intrinsic Value (1) (In thousands) Weighted Average Remaining Contractual Life (Years) Outstanding at December 31, 2017 (Predecessor) ​ 6,735,903 ​ $ 8.84 ​ $ 29 ​ 8.9 Granted ​ 1,206,800 ​ ​ 5.65 ​ ​ ​ ​ ​ Exercised ​ (41,667) ​ ​ 7.75 ​ ​ 29 ​ ​ Forfeited ​ (432,110) ​ ​ 8.68 ​ ​ ​ ​ ​ Outstanding at December 31, 2018 (Predecessor) ​ 7,468,926 ​ $ 8.34 ​ $ — ​ 8.1 Granted ​ — ​ ​ — ​ ​ ​ ​ ​ Exercised ​ — ​ ​ — ​ ​ ​ ​ ​ Forfeited ​ (5,182,238) ​ ​ 8.38 ​ ​ ​ ​ ​ Cancelled (2) ​ (2,286,688) ​ ​ 8.26 ​ ​ ​ ​ ​ Outstanding at October 1, 2019 (Predecessor) ​ — ​ $ — ​ $ — ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding at October 1, 2019 (Successor) ​ — ​ $ — ​ $ — ​ — Granted ​ — ​ ​ — ​ ​ ​ ​ ​ Exercised ​ — ​ ​ — ​ ​ ​ ​ ​ Forfeited ​ — ​ ​ — ​ ​ ​ ​ ​ Outstanding at December 31, 2019 (Successor) ​ — ​ $ — ​ $ — ​ — Granted ​ 557,844 ​ ​ 28.32 ​ ​ ​ ​ ​ Exercised ​ — ​ ​ — ​ ​ ​ ​ ​ Forfeited ​ (79,692) ​ ​ 28.32 ​ ​ ​ ​ ​ Outstanding at December 31, 2020 (Successor) ​ 478,152 ​ $ 28.32 ​ $ — ​ 6.2 (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. 103 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ​ ​ Options outstanding at December 31, 2020 (Successor) consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding ​ Exercisable (1) ​ ​ ​ ​ ​ ​ ​ ​ Weighted Average ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted Average ​ ​ ​ ​ ​ Weighted Average ​ Remaining ​ ​ ​ Weighted Average ​ Aggregate ​ Remaining Range of Grant ​ ​ ​ Exercise Price ​ Contractual Life ​ ​ ​ Exercise Price ​ Intrinsic ​ Contractual Life Prices Per Share Number per Share (Years ) Number per Share Value (Years ) $ 18.91 ​ 159,384 ​ $ 18.91 ​ 6.2 ​ — ​ $ — ​ $ — ​ — ​ 28.23 ​ 159,384 ​ ​ 28.23 ​ 6.2 ​ — ​ ​ — ​ ​ — ​ — ​ 37.83 ​ 159,384 ​ ​ 37.83 ​ 6.2 ​ — ​ ​ — ​ ​ — ​ — (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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ ​ Predecessor ​ ​ ​ Year Ended ​ ​ ​ Year Ended ​ ​ December 31, 2020 December 31, 2018 ​ Weighted average value per option granted during the period ​ $ 3.36 ​ ​ ​ $ 2.92 ​ Assumptions: ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock price volatility (1) ​ ​ 61.87 % ​ ​ ​ 52.08 % Risk free rate of return ​ ​ 1.21 % ​ ​ ​ 2.63 % Expected term ​ ​ 4.75 years ​ ​ ​ 6 years (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 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. 104 Table of Contents 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 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. 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. 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. The following table sets forth the restricted stock transactions for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of Shares Weighted Average Grant Date Fair Value Per Share Aggregate Intrinsic Value (1) (In thousands) Unvested outstanding shares at December 31, 2017 (Predecessor) ​ 745,507 ​ $ 7.05 ​ $ 5,643 Granted ​ 2,326,961 ​ ​ 5.47 ​ ​ ​ Vested ​ (537,411) ​ ​ 5.89 ​ ​ ​ Forfeited ​ (262,164) ​ ​ 6.29 ​ ​ ​ Unvested outstanding shares at December 31, 2018 (Predecessor) ​ 2,272,893 ​ $ 5.80 ​ $ 3,864 Granted ​ 4,163,348 ​ ​ 1.29 ​ ​ ​ Vested ​ (1,611,465) ​ ​ 4.65 ​ ​ ​ Accelerated vesting (2) ​ (2,724,086) ​ ​ 2.07 ​ ​ ​ Forfeited ​ (2,100,690) ​ ​ 2.58 ​ ​ ​ Unvested outstanding shares at October 1, 2019 (Predecessor) ​ — ​ $ — ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unvested outstanding shares at October 1, 2019 (Successor) ​ — ​ $ — ​ $ — Granted ​ — ​ ​ — ​ ​ ​ Vested ​ — ​ ​ — ​ ​ ​ Forfeited ​ — ​ ​ — ​ ​ ​ Unvested outstanding shares at December 31, 2019 (Successor) ​ — ​ $ — ​ $ — Granted ​ 987,590 ​ ​ 9.46 ​ ​ ​ Vested ​ — ​ ​ — ​ ​ ​ Forfeited ​ (113,456) ​ ​ 9.36 ​ ​ ​ Unvested outstanding shares at December 31, 2020 (Successor) ​ 874,134 ​ $ 9.48 ​ $ 3,287 (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. 105 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ ​ Year Ended ​ ​ ​ December 31, 2020 ​ Weighted average value per performance based RSUs granted during the period ​ $ 6.13 ​ Assumptions: ​ ​ ​ ​ Stock price volatility (1) ​ ​ 51.79 % Risk free rate of return ​ ​ 1.22 % Expected term ​ ​ 3.9 years (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. ​ 14. INCOME TAXES Income tax benefit (provision) for the indicated periods is comprised of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ ​ Year Ended ​ through ​ ​ through ​ Year Ended ​ December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 Current: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal ​ $ — ​ $ — ​ ​ $ — ​ $ — State ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ — Deferred: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal ​ ​ — ​ ​ — ​ ​ ​ 95,791 ​ ​ (95,791) State ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ — ​ ​ ​ 95,791 ​ ​ (95,791) Total income tax benefit (provision) ​ $ — ​ $ — ​ ​ $ 95,791 ​ $ (95,791) ​ 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 year ended December 31, 2020 (Successor), 106 Table of Contents 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ ​ Year Ended ​ through ​ ​ through ​ Year Ended ​ December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 Expected tax benefit (provision) ​ $ 48,238 ​ $ 2,196 ​ ​ $ 262,888 ​ $ (29,767) Stock-based compensation ​ ​ — ​ ​ — ​ ​ ​ (6,093) ​ ​ (350) Capital loss ​ ​ — ​ ​ — ​ ​ ​ 271,248 ​ ​ — Increase (reduction) in deferred tax asset ​ ​ — ​ ​ — ​ ​ ​ (9,287) ​ ​ (201,903) Change in valuation allowance and related items ​ ​ (10,849) ​ ​ (1,506) ​ ​ ​ (186,851) ​ ​ 136,432 Attribute reduction ​ ​ (37,985) ​ ​ — ​ ​ ​ (229,385) ​ ​ — Permanent adjustments ​ ​ 577 ​ ​ (690) ​ ​ ​ (7,241) ​ ​ (203) Other ​ ​ 19 ​ ​ — ​ ​ ​ 512 ​ ​ — Total income tax benefit (provision) ​ $ — ​ $ — ​ ​ $ 95,791 ​ $ (95,791) ​ The components of net deferred income tax assets (liabilities) recognized are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ December 31, 2020 December 31, 2019 Deferred noncurrent income tax assets: ​ ​ ​ ​ ​ ​ Net operating loss carry-forwards ​ $ 94,742 ​ $ 46,382 Built in loss adjustment Section 382 ​ ​ 98,416 ​ ​ 142,285 Capital loss carryforward ​ ​ 74,848 ​ ​ 74,848 Stock-based compensation expense ​ ​ 1,448 ​ ​ — Asset retirement obligations ​ ​ 2,347 ​ ​ 2,224 Book-tax differences in property basis ​ ​ 199,170 ​ ​ 200,478 Unrealized hedging transactions ​ ​ 2,908 ​ ​ 1,618 Disallowed interest Section 163(j) ​ ​ 13,579 ​ ​ 7,722 Basis difference in debt ​ ​ 1,687 ​ ​ 2,142 Operating lease liability ​ ​ 85 ​ ​ 666 Other ​ ​ 374 ​ ​ 991 Gross deferred noncurrent income tax assets ​ ​ 489,604 ​ ​ 479,356 Valuation allowance ​ ​ (489,539) ​ ​ (478,690) Deferred noncurrent income tax assets ​ $ 65 ​ $ 666 ​ ​ ​ ​ ​ ​ ​ Deferred noncurrent income tax liabilities: ​ ​ ​ ​ ​ ​ Lease right of use ​ $ (65) ​ $ (666) Deferred noncurrent income tax liabilities ​ $ (65) ​ $ (666) 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. 107 Table of Contents 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. The IRC provides that a debtor in bankruptcy may exclude CODI from taxable income but must first reduce its tax attributes by the amount any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. 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. ​ IRC Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. The Company's emergence from chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the corporation as of the emergence date. The ownership changes and resulting annual limitation resulted in the expiration of approximately $454.2 million of net operating losses generated prior to the emergence date. The expiration of these tax attributes was fully offset by a corresponding decrease in the Company's U.S. valuation allowance, which results in no net tax provision. An additional ownership change was experienced in December 2018 (Predecessor). 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. 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 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. In certain jurisdictions the Company operates through more than one legal entity, each of which may have different open years subject to examination. The open years for state purposes can vary from the normal three year statue expiration period for federal purposes. 108 Table of Contents 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. ​ ​ 109 Table of Contents BATTALION OIL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. 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. The following represents the calculation of earnings (loss) per share (in thousands, except per share amounts): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ ​ Year Ended ​ through ​ ​ through ​ Year Ended ​ December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 Basic: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) available to common stockholders ​ $ (229,707) ​ $ (10,460) ​ ​ $ (1,156,053) ​ $ 45,959 Weighted average basic number of common shares outstanding ​ ​ 16,204 ​ ​ 16,204 ​ ​ ​ 158,925 ​ ​ 157,011 Basic net income (loss) per common share ​ $ (14.18) ​ $ (0.65) ​ ​ $ (7.27) ​ $ 0.29 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) available to common stockholders ​ $ (229,707) ​ $ (10,460) ​ ​ $ (1,156,053) ​ $ 45,959 Weighted average basic number of common shares outstanding ​ ​ 16,204 ​ ​ 16,204 ​ ​ ​ 158,925 ​ ​ 157,011 Common stock equivalent shares representing shares issuable upon: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercise of Predecessor stock options ​ ​ — ​ ​ — ​ ​ ​ Anti-dilutive ​ ​ Anti-dilutive Exercise of Predecessor warrants ​ ​ — ​ ​ — ​ ​ ​ Anti-dilutive ​ ​ Anti-dilutive Vesting of Predecessor restricted stock ​ ​ — ​ ​ — ​ ​ ​ Anti-dilutive ​ ​ 284 Exercise of Successor Series A Warrants ​ ​ Anti-dilutive ​ ​ Anti-dilutive ​ ​ ​ — ​ ​ — Exercise of Successor Series B Warrants ​ ​ Anti-dilutive ​ ​ Anti-dilutive ​ ​ ​ — ​ ​ — Exercise of Successor Series C Warrants ​ ​ Anti-dilutive ​ ​ 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 ​ ​ 16,204 ​ ​ 16,204 ​ ​ ​ 158,925 ​ ​ 157,295 Diluted net income (loss) per common share ​ $ (14.18) ​ $ (0.65) ​ ​ $ (7.27) ​ $ 0.29 ​ 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. 110 Table of Contents 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. ​ 16. ADDITIONAL FINANCIAL STATEMENT INFORMATION Certain balance sheet amounts are comprised of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ December 31, 2020 December 31, 2019 Accounts receivable, net: ​ ​ ​ ​ ​ ​ Oil, natural gas and natural gas liquids revenues ​ $ 22,781 ​ $ 36,367 Joint interest accounts ​ ​ 8,543 ​ ​ 10,145 Other ​ ​ 918 ​ ​ 1,992 ​ ​ $ 32,242 ​ $ 48,504 Prepaids and other: ​ ​ ​ ​ ​ ​ Prepaids ​ $ 892 ​ $ 2,093 Income tax receivable ​ ​ — ​ ​ 1,250 Funds in escrow ​ ​ 1,740 ​ ​ 4,000 Other ​ ​ 108 ​ ​ 36 ​ ​ $ 2,740 ​ $ 7,379 Funds in escrow and other: ​ ​ ​ ​ ​ ​ Oil, natural gas and natural gas liquids revenues ​ $ 1,720 ​ $ — Funds in escrow ​ ​ 581 ​ ​ 580 Other ​ ​ 50 ​ ​ 123 ​ ​ $ 2,351 ​ $ 703 Accounts payable and accrued liabilities: ​ ​ ​ ​ ​ ​ Trade payables ​ $ 22,740 ​ $ 36,038 Accrued oil and natural gas capital costs ​ ​ 8,344 ​ ​ 22,781 Revenues and royalties payable ​ ​ 16,412 ​ ​ 25,457 Accrued interest expense ​ ​ 482 ​ ​ 604 Accrued employee compensation ​ ​ 3,223 ​ ​ 2,947 Accrued lease operating expenses ​ ​ 7,622 ​ ​ 9,230 Other ​ ​ 105 ​ ​ 276 ​ ​ $ 58,928 ​ $ 97,333 ​ ​ ​ 111 Table of Contents ​ SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) 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. 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. As a result, revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various reservoirs make these estimates generally less precise than other estimates included in the financial statement disclosures. Proved reserves represent estimated quantities of natural gas, crude oil and condensate and natural gas liquids that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions in effect when the estimates were made. 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, 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. F-2699. Within Netherland, Sewell, the technical persons primarily responsible for preparing the estimates set forth in the Netherland, Sewell reserves reports incorporated herein are Mr. Neil H. Little and Mr. Edward Roy III. Mr. Little, a Licensed Professional Engineer in the State of Texas (No. 117966), has been practicing consulting petroleum engineering at Netherland, Sewell since 2011 and has over nine years of prior industry experience. 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. Mr. 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 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. Mr. Daniel P. 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. The reserves information in this Annual Report on Form 10-K represents only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers may vary. In addition, results of 112 Table of Contents 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, 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. All prices are held constant in accordance with SEC guidelines. All proved reserves are located in the United States. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Proved Reserves ​ ​ ​ ​ ​ ​ Natural Gas ​ ​ ​ ​ ​ ​ Natural Gas ​ Liquids ​ Equivalent ​ Oil (MBbls) (MMcf) (MBbls) (MBoe) Proved reserves, December 31, 2017 (Predecessor) ​ 34,133 ​ 46,738 ​ 9,196 ​ 51,119 Extensions and discoveries ​ 31,104 ​ 68,772 ​ 10,602 ​ 53,168 Purchase of minerals in place ​ 2,201 ​ 4,770 ​ 669 ​ 3,665 Production ​ (3,558) ​ (4,607) ​ (749) ​ (5,075) Sale of minerals in place ​ (14) ​ (20) ​ (4) ​ (21) Revision of previous estimates ​ (13,212) ​ (10,904) ​ (2,614) ​ (17,644) Proved reserves, December 31, 2018 (Predecessor) ​ 50,654 ​ 104,749 ​ 17,100 ​ 85,212 Extensions and discoveries ​ 9,161 ​ 12,372 ​ 1,952 ​ 13,175 Production ​ (3,780) ​ (9,136) ​ (1,262) ​ (6,565) Revision of previous estimates ​ (16,801) ​ (35,724) ​ (7,015) ​ (29,769) Proved reserves, December 31, 2019 (Successor) ​ 39,234 ​ 72,261 ​ 10,775 ​ 62,053 Extensions and discoveries ​ 8,268 ​ 12,157 ​ 2,090 ​ 12,384 Production ​ (3,446) ​ (8,769) ​ (1,262) ​ (6,170) Sale of minerals in place ​ (1,433) ​ (2,177) ​ (246) ​ (2,042) Revision of previous estimates ​ (4,407) ​ 5,034 ​ 718 ​ (2,850) Proved reserves, December 31, 2020 (Successor) ​ 38,216 ​ 78,506 ​ 12,075 ​ 63,375 ​ 113 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ Equivalent (Mboe) ​ ​ Proved ​ Proved ​ ​ ​ ​ Developed ​ Undeveloped ​ Total Proved ​ Reserves Reserves Reserves Proved reserves, December 31, 2017 (Predecessor) ​ 16,018 ​ 35,101 ​ 51,119 Extensions and discoveries ​ 13,091 ​ 40,077 ​ 53,168 Purchase of minerals in place ​ 3,665 ​ — ​ 3,665 Production ​ (5,075) ​ — ​ (5,075) Sale of minerals in place ​ (21) ​ — ​ (21) Transfers ​ 11,964 ​ (11,964) ​ — Revision of previous estimates ​ 227 ​ (17,871) ​ (17,644) Proved reserves, December 31, 2018 (Predecessor) ​ 39,869 ​ 45,343 ​ 85,212 Extensions and discoveries ​ 2,813 ​ 10,362 ​ 13,175 Production ​ (6,565) ​ — ​ (6,565) Transfers ​ 10,213 ​ (10,213) ​ — Revision of previous estimates ​ (8,395) ​ (21,374) ​ (29,769) Proved reserves, December 31, 2019 (Successor) ​ 37,935 ​ 24,118 ​ 62,053 Extensions and discoveries ​ 13 ​ 12,371 ​ 12,384 Production ​ (6,170) ​ — ​ (6,170) Sale of minerals in place ​ (2,042) ​ — ​ (2,042) Transfers ​ 6,513 ​ (6,513) ​ — Revision of previous estimates ​ (17) ​ (2,833) ​ (2,850) Proved reserves, December 31, 2020 (Successor) ​ 36,232 ​ 27,143 ​ 63,375 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proved Developed Reserves ​ ​ ​ ​ ​ ​ Natural Gas ​ ​ ​ ​ ​ ​ Natural Gas ​ Liquids ​ Equivalent ​ Oil (MBbls) (MMcf) (MBbls) (MBoe) December 31, 2020 (Successor) ​ 20,371 ​ 51,097 ​ 7,345 ​ 36,232 December 31, 2019 (Successor) ​ 22,821 ​ 48,558 ​ 7,021 ​ 37,935 December 31, 2018 (Predecessor) ​ 24,672 ​ 44,743 ​ 7,740 ​ 39,869 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proved Undeveloped Reserves ​ ​ ​ ​ ​ ​ Natural Gas ​ ​ ​ ​ ​ ​ Natural Gas ​ Liquids ​ Equivalent ​ Oil (MBbls) (MMcf) (MBbls) (MBoe) December 31, 2020 (Successor) ​ 17,845 ​ 27,409 ​ 4,730 ​ 27,143 December 31, 2019 (Successor) ​ 16,413 ​ 23,703 ​ 3,754 ​ 24,118 December 31, 2018 (Predecessor) ​ 25,982 ​ 60,006 ​ 9,360 ​ 45,343 ​ 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 114 Table of Contents Basin. 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 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 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. Of the 13.1 MMBoe of extensions and discoveries in proved developed reserves, approximately 1.8 MMBoe are associated with infill drilling activity and 11.3 MMBoe are associated with drilling extensions in the Delaware Basin. 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 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. Of the 40.1 MMBoe of extensions and discoveries in proved undeveloped reserves, approximately 29.2 MMBoe are associated with infill drilling and 10.8 MMBoe are associated with drilling extensions in the Delaware Basin. 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. 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. For wells classified as proved developed producing where sufficient production history existed, reserves were based on individual well performance evaluation and production decline curve extrapolation techniques. For undeveloped locations and wells that lacked sufficient production history, reserves were based on analogy to producing wells within the same area exhibiting similar geologic and reservoir characteristics, combined with volumetric methods. The volumetric estimates were based on geologic maps and rock and fluid properties derived from well logs, core data, pressure measurements, and fluid samples. Well spacing was determined from drainage patterns derived from a combination of performance-based recoveries and volumetric estimates for each area or field. PUD locations were limited to areas of uniformly high quality reservoir properties, between existing commercial producers. 115 Table of Contents Reliable technologies were used to determine areas where PUD locations are more than one offset location away from a producing well. 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. 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 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 The following table illustrates the total amount of capitalized costs relating to oil and natural gas producing activities and the total amount of related accumulated depletion, depreciation and accretion (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ December 31, 2020 ​ December 31, 2019 ​ ​ December 31, 2018 Evaluated oil and natural gas properties ​ $ 509,274 ​ $ 420,609 ​ ​ $ 1,470,509 Unevaluated oil and natural gas properties ​ ​ 75,494 ​ ​ 105,009 ​ ​ ​ 971,918 ​ ​ ​ 584,768 ​ ​ 525,618 ​ ​ ​ 2,442,427 Accumulated depletion ​ ​ (295,163) ​ ​ (19,474) ​ ​ ​ (639,951) ​ ​ $ 289,605 ​ $ 506,144 ​ ​ $ 1,802,476 ​ Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities Costs incurred in property acquisition, exploration and development activities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Successor ​ ​ Predecessor ​ ​ ​ ​ ​ Period from ​ ​ Period from ​ ​ ​ ​ ​ ​ ​ October 2, 2019 ​ ​ January 1, 2019 ​ ​ ​ ​ Year Ended ​ through ​ ​ through ​ Year Ended ​ December 31, 2020 December 31, 2019 October 1, 2019 December 31, 2018 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property acquisition costs, proved ​ $ 23 ​ $ — ​ ​ $ — ​ $ 36,505 Property acquisition costs, unproved ​ ​ — ​ ​ — ​ ​ ​ 2,809 ​ ​ 297,537 Exploration and extension well costs ​ ​ 14,082 ​ ​ 9,209 ​ ​ ​ 89,389 ​ ​ 293,115 Development costs (1) ​ ​ 43,256 ​ ​ 15,839 ​ ​ ​ 60,275 ​ ​ 181,987 Total costs ​ $ 57,361 ​ $ 25,048 ​ ​ $ 152,473 ​ $ 809,144 (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. Further, the information in the following table may not represent realistic assessments of future cash flows, nor should the Standardized Measure be viewed as representative of the current value of the Company. 116 Table of Contents The Company believes that the following factors should be taken into account when reviewing the following information: ● future costs and selling prices will probably differ from those required to be used in these calculations; ● due to future market conditions and governmental regulations, actual rates of production in future years may vary significantly from the rate of production assumed in the calculations; ● a 10% discount rate may not be reasonable as a measure of the relative risk inherent in realizing future net oil and natural gas revenues; and ● future net revenues may be subject to different rates of income taxation. 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. The resulting net cash flows are reduced to present value amounts by applying a 10% discount factor. The Standardized Measure is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Years Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 ​ ​ (In thousands) Future cash inflows ​ $ 1,660,950 ​ $ 2,257,083 ​ $ 3,602,719 Future production costs ​ ​ (911,099) ​ ​ (1,207,370) ​ ​ (1,441,754) Future development costs ​ ​ (315,078) ​ ​ (261,747) ​ ​ (412,961) Future income tax expense ​ ​ (1,459) ​ ​ (1,577) ​ ​ (34,956) Future net cash flows before 10% discount ​ ​ 433,314 ​ ​ 786,389 ​ ​ 1,713,048 10% annual discount for estimated timing of cash flows ​ ​ (223,918) ​ ​ (377,514) ​ ​ (859,481) Standardized measure of discounted future net cash flows ​ $ 209,396 ​ $ 408,875 ​ $ 853,567 ​ 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, 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Years Ended December 31, ​ 2020 2019 2018 ​ ​ (In thousands) Beginning of year ​ $ 408,875 ​ $ 853,567 ​ $ 336,033 Sale of oil and natural gas produced, net of production costs ​ ​ (34,888) ​ ​ (104,007) ​ ​ (119,003) Purchase of minerals in place ​ ​ — ​ ​ — ​ ​ 36,600 Sales of minerals in place ​ ​ (22,387) ​ ​ — ​ ​ (119) Extensions and discoveries ​ ​ 17,127 ​ ​ 71,585 ​ ​ 510,492 Changes in income taxes, net ​ ​ 25 ​ ​ 5,845 ​ ​ (5,155) Changes in prices and costs ​ ​ (231,791) ​ ​ (306,466) ​ ​ (12,954) Previously estimated development costs incurred ​ ​ 68,135 ​ ​ 85,538 ​ ​ 115,213 Net changes in future development costs ​ ​ 3,867 ​ ​ 26,742 ​ ​ 23,909 Revisions of previous quantities ​ ​ (30,757) ​ ​ (266,538) ​ ​ (53,580) Accretion of discount ​ ​ 40,914 ​ ​ 85,968 ​ ​ 33,699 Changes in production rates and other ​ ​ (9,724) ​ ​ (43,359) ​ ​ (11,568) End of year ​ $ 209,396 ​ $ 408,875 ​ $ 853,567 ​ ​ ​ ​ ​ 117 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.