HighPeak Energy, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 64 Consolidated Balance Sheets as of December 31, 2020 and 2019 65 Consolidated and Combined Statements of Operations for the Period from August 22, 2020 through December 31, 2020, January 1, 2020 through August 21, 2020 and the Year Ended December 31, 2019 66 Consolidated and Combined Statements of Changes in Partners' Capital for the Period from January 1, 2020 through August 21, 2020 and the Year Ended December 31, 2019 67 Consolidated Statement of Changes in Stockholders' Equity for the Period from August 22, 2020 through December 31, 2020 68 Consolidated and Combined Statements of Cash Flows for the Period from August 22, 2020 through December 31, 2020, January 1, 2020 through August 21, 2020 and the Year Ended December 31, 2019 69 Notes to Consolidated and Combined Financial Statements 70 Unaudited Supplementary Data 88 63 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of HighPeak Energy, Inc. Opinion on the Consolidated and Combined Financial Statements We have audited the accompanying consolidated balance sheets of HighPeak Energy, Inc. and its subsidiaries (the Company) as of December 31, 2020 (Successor Company) and 2019 (Predecessor Company), and the related consolidated statements of operations, stockholders’ equity, and cash flows for the period from August 22, 2020 through December 31, 2020 (Successor Company) and the consolidated statements of operations, partners’ capital, and cash flows for the period from January 1, 2020 through August 21, 2020 and for the year ended December 31, 2019 (Predecessor Company), and the related notes (collectively, the consolidated and combined financial statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the period from August 22, 2020 through December 31, 2020 (Successor Company) and the period from January 1, 2020 through August 21, 2020 and for the year ended December 31, 2019 (Predecessor Company), in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 provides a reasonable basis for our opinion. /s/ WEAVER AND TIDWELL, L.L.P. We have served as the Company's auditor since 2020. Fort Worth, Texas March 15, 2021 64 HighPeak Energy, Inc. Consolidated Balance Sheets Successor Predecessors (in thousands, except share and per share amounts) December 31, 2020 December 31, 2019 ASSETS Current Assets: Cash and cash equivalents $ 19,552 $ 22,711 Accounts receivable 7,722 3,363 Subscription receivable 3,596 - Prepaid expenses 2,254 25 Inventory 121 184 Deposits 50 61,550 Notes receivable - 4,193 Total current assets 33,295 92,026 Oil and natural gas properties, using the successful efforts method of accounting: Proved properties 367,372 178,835 Unproved properties 152,741 227,525 Accumulated depletion, depreciation and amortization (17,477 ) (1,566 ) Total oil and natural gas properties, net 502,636 404,794 Other property and equipment, net 1,092 1,088 Other noncurrent assets 907 - Total assets $ 537,930 $ 497,908 LIABILITIES AND STOCKHOLDERS' EQUITY / PARTNERS' CAPITAL Current liabilities: Accounts payable - trade $ 7,581 $ 11,118 Accrued liabilities 12,374 19,678 Other current liabilities 2,480 184 Total current liabilities 22,435 30,980 Noncurrent liabilities: Deferred income taxes 38,898 - Asset retirement obligations 2,293 2,212 Other 78 - Commitments and contingencies (Note 9) Stockholders' equity / partners' capital: Partners' capital - 458,970 Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at December 31, 2020 - - Common stock, $0.0001 par value, 600,000,000 shares authorized, 91,967,565 shares issued and outstanding at December 31, 2020 9 - Additional paid-in capital 581,426 - Accumulated deficit (107,209 ) (5,746 ) Total stockholders' equity / partners' capital 474,226 464,716 Total liabilities and stockholders' equity / partners' capital $ 537,930 $ 497,908 The accompanying notes are an integral part of these condensed consolidated and combined financial statements. 65 HighPeak Energy, Inc. Consolidated and Combined Statements of Operations Year Ended December 31, 2020 Successor Predecessors (in thousands, except per share amounts) August 22, 2020 through December 31, 2020 January 1, 2020 through August 21, 2020 Year Ended December 31, 2019 Operating Revenues: Crude oil sales $ 15,988 $ 8,069 $ 7,849 Natural gas and NGL sales 412 154 266 Total operating revenues 16,400 8,223 8,115 Operating Costs and Expenses: Oil and natural gas production 2,653 4,870 3,372 Production and ad valorem taxes 886 566 449 Exploration and abandonments 5,032 4 2,850 Depletion, depreciation and amortization 9,877 6,385 4,269 Accretion of discount on asset retirement obligations 51 89 72 General and administrative 2,775 4,840 8,682 Stock based compensation 15,776 - - Total operating costs and expenses 37,050 16,754 19,694 Loss from operations (20,650 ) (8,531 ) (11,579 ) Interest income 6 - - Interest expense (8 ) - - Other expense - (76,503 ) - Loss before income taxes (20,652 ) (85,034 ) (11,579 ) Income tax benefit (4,223 ) - - Net loss $ (16,429 ) $ (85,034 ) $ (11,579 ) Earnings per share: Basic net loss $ (0.18 ) Diluted net loss $ (0.18 ) Weighted average shares outstanding: Basic 91,629 Diluted 91,629 The accompanying notes are an integral part of these condensed consolidated and combined financial statements. 66 HighPeak Energy, Inc. Consolidated and Combined Statements of Changes in Partners' Capital (Predecessors) (in thousands) From January 1, 2020 through August 21, 2020 General Partner Capital Limited Partners' Capital Total Partners' Capital Balance, December 31, 2019 $ - $ 464,716 $ 464,716 Cash capital contributions - 54,000 54,000 Distribution to partners - (2,780 ) (2,780 ) Net loss - (85,034 ) (85,034 ) Balance, August 21, 2020 $ - $ 430,902 $ 430,902 Year Ended December 31, 2019 General Partner Capital Limited Partners' Capital Total Partners' Capital Balance, December 31, 2018 $ - $ 84,057 $ 84,057 Cash capital contributions - 73,543 73,543 Noncash capital contributions - 232,394 232,394 Step up in basis from contributions - 86,301 86,301 Net loss - (11,579 ) (11,579 ) Balance, December 31, 2019 $ - $ 464,716 $ 464,716 The accompanying notes are an integral part of these condensed consolidated and combined financial statements. 67 HighPeak Energy, Inc. Consolidated Statement of Changes in Stockholders' Equity (in thousands) From August 22, 2020 through December 31, 2020 Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Stockholders' Equity Balance, August 21, 2020 - $ - $ - $ - $ - HighPeak business combination with HPK LP 81,383 8 521,674 (90,780 ) 430,902 Conversion of Pure Common Stock 1,232 - 12,324 - 12,324 Forward Purchases 8,977 1 89,768 - 89,769 Offering costs (including costs incurred at Pure prior to HighPeak business combination) - - (21,766 ) - (21,766 ) Deferred income tax liability at HighPeak business combination - - (39,946 ) - (39,946 ) Exercise of warrants 313 - 3,596 - 3,596 Stock-based compensation costs: Shares issued upon options being exercised - - - - - Compensation costs included in net loss 63 - 15,776 - 15,776 Net loss - - - (16,429 ) (16,429 ) Balance, December 31, 2020 91,968 $ 9 $ 581,426 $ (107,209 ) $ 474,226 The accompanying notes are an integral part of these condensed consolidated and combined financial statements. 68 HighPeak Energy, Inc. Consolidated and Combined Statements of Cash Flows Year Ended December 31, 2020 Successor Predecessors (in thousands) August 22, 2020 through December 31, 2020 January 1, 2020 through August 21, 2020 Year Ended December 31, 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (16,429 ) $ (85,034 ) $ (11,579 ) Adjustments to reconcile net loss to net cash provided by (used in) operations: Exploration and abandonment expense 4,854 4 2,850 Depletion, depreciation and amortization expense 9,877 6,385 4,269 Accretion expense 51 89 72 Stock based compensation expense 15,776 - - Amortization of debt issuance costs 4 - - Loss on terminated acquisition - 76,500 - Deferred income taxes (1,047 ) - - Changes in operating assets and liabilities: Accounts receivable (5,177 ) 844 70 Inventory and other current assets (506 ) (196 ) (209 ) Accounts payable and accrued liabilities (1,990 ) (2,694 ) 3,755 Net cash provided by (used in) operating activities 5,413 (4,102 ) (772 ) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to oil and natural gas properties (64,947 ) (49,364 ) (60,998 ) Changes in working capital associated with oil and natural gas property additions (5,666 ) 7,348 24,682 Acquisitions of oil and natural gas properties (1,181 ) (3,338 ) (10,918 ) Issuance of notes receivable - (7,482 ) (4,193 ) Other property additions (145 ) (50 ) (7 ) Extension payment on acquisition - (15,000 ) - Net cash used in investing activities (71,939 ) (67,886 ) (51,434 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock offering 92,554 - - Stock offering costs (8,114 ) - - Cash acquired from non-successors in HighPeak business combination 100 - - Debt issuance costs (405 ) - - Contributions from partners - 54,000 74,023 Distributions to partners - (2,780 ) - Net cash provided by financing activities 84,135 51,220 74,023 Net increase (decrease) in cash and cash equivalents 17,609 (20,768 ) 21,817 Cash and cash equivalents, beginning of period 1,943 22,711 894 Cash and cash equivalents, end of period $ 19,552 $ 1,943 $ 22,711 Supplemental disclosure of non-cash transactions: Subscription receivable from exercise of warrants $ 3,596 $ - $ - Noncash contributions from Limited Partners (see Note 9 for more detail) - - 232,394 Step up in basis of oil and gas properties - - 86,301 Additions (reductions) to asset retirement obligations (142 ) 112 312 Stock offering costs of accounting acquiree (13,652 ) - - The accompanying notes are an integral part of these condensed consolidated and combined financial statements. 69 HIGHPEAK ENERGY, INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS December 31, 2020 NOTE 1. Organization and Nature of Operations HighPeak Energy, Inc. ("HighPeak Energy" the "Company," or the “Successor”) is a Delaware corporation, initially formed in October 2019 as a wholly owned subsidiary of Pure Acquisition Corp (“Pure”), a Delaware corporation, formed in November 2017, which was a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Pure and one or more businesses. See Note 10 regarding the business combination which resulted in the Company becoming the parent company and Pure to become a wholly owned subsidiary along with the businesses acquired. HighPeak Energy’s common stock and warrants are listed and traded on the Nasdaq Global Market (the "Nasdaq") under the ticker symbols “HPK” and “HPKEW,” respectively. HighPeak Energy’s Contingent Value Rights (“CVRs”) are currently traded on the Over-The-Counter market, although the Company has applied for listing on the Nasdaq as well. The Company is an independent oil and gas exploration and production company that explores for, develops and produces oil, natural gas liquids and natural gas in the Permian Basin in West Texas. NOTE 2. Basis of Presentation and Summary of Significant Accounting Policies Presentation. The accompanying consolidated and combined financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments, consisting of normal and recurring accruals considered necessary for a fair presentation, have been included. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying consolidated and combined financial statements. In connection with the preparation of the consolidated and combined financial statements, the Company evaluated subsequent events after the balance sheet date of December 31, 2020, through the date of this report. The accompanying consolidated and combined statement of operations and the consolidated and combined statement of cash flows for the period from January 1, 2020 through August 21, 2020 are those of HPK Energy, LP, a Delaware limited partnership ("HPK LP") which is the predecessor to HighPeak Energy prior to the HighPeak business combination between the Company, Pure and HPK LP that closed on August 21, 2020 (the “HighPeak business combination”). The accompanying consolidated and combined statement of operations and consolidated and combined statement of cash flows for the year ended December 31, 2019 are those of HighPeak Energy, LP, a Delaware limited partnership ("HighPeak I") which is the predecessor to HPK LP prior to the HPK LP business combination that closed on October 1, 2019 (the “HPK LP business combination”) and those of HPK LP from October 1, 2019 through December 31, 2019. HPK LP and HighPeak I are individually and collectively referred to as the "Predecessors" herein. However, if we refer to the "Company" for a date or activity prior to August 21, 2020, we are also referring to the Predecessors. See Note 10 for further information regarding the two aforementioned business combinations. The following table details the year ended December 31, 2019 and its components of individual line items and how they were combined for presentation on the face of the accompanying financial statements. 70 Predecessors for the Year Ended December 31, 2019 (in thousands) HPK LP from August 28, 2019 (Inception) through December 31, 2019 HighPeak I for the Year Ended December 31, 2019 Eliminations Combined Year Ended December 31, 2019 Operating Revenues: Crude oil sales $ 3,695 $ 4,154 $ 7,849 Natural gas and NGL sales 163 103 266 Total operating revenues 3,858 4,257 8,115 Operating Costs and Expenses: Oil and natural gas production 1,578 1,794 3,372 Production and ad valorem taxes 188 261 449 Exploration and abandonments 33 2,817 2,850 Depletion, depreciation and amortization 1,612 2,657 4,269 Accretion of discount on asset retirement obligations 34 38 72 General and administrative 6,159 2,523 8,682 Total operating costs and expenses 9,604 10,090 19,694 Loss from operations (5,746 ) (5,833 ) (11,579 ) Equity in losses of affiliate - (3,175 ) 3,175 - Net loss $ (5,746 ) $ (9,008 ) $ 3,175 $ (11,579 ) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,746 ) $ (9,008 ) $ 3,175 $ (11,579 ) Adjustments to reconcile net loss to net cash provided by (used in) operations: Exploration and abandonment expense 33 2,817 - 2,850 Depletion, depreciation and amortization expense 1,612 2,657 - 4,269 Accretion expense 34 38 - 72 Equity in loss off affiliate - 3,175 (3,175 ) - Changes in operating assets and liabilities: Accounts receivable (1,355 ) 1,425 - 70 Inventory and other current assets (88 ) (121 ) - (209 ) Accounts payable and accrued liabilities 3,010 745 - 3,755 Net cash provided by (used in) operating activities (2,500 ) 1,728 - (772 ) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to oil and natural gas properties (45,318 ) (15,687 ) - (61,005 ) Changes in working capital associated with oil and natural gas property additions 19,097 5,585 - 24,682 Acquisitions of oil and natural gas properties (2,456 ) (8,462 ) - (10,918 ) Investment in affiliate - (7,796 ) 7,796 - Issuance of notes receivable (4,193 ) - - (4,193 ) Net cash used in investing activities (32,870 ) (26,360 ) 7,796 (51,434 ) CASH FLOWS FROM FINANCING ACTIVITIES: Contributions from partners 58,081 23,738 (7,796 ) 74,023 Net cash provided by financing activities 58,081 23,738 (7,796 ) 74,023 Net increase (decrease) in cash and cash equivalents 22,711 (894 ) - 21,817 Cash and cash equivalents, beginning of period - 894 - 894 Cash and cash equivalents, end of period $ 22,711 $ - $ - $ 22,711 See Note 10 for information regarding the HighPeak business combination and the HPK LP business combination and how they were accounted for in the accompanying financial statements. 71 Principles of consolidation. The condensed consolidated and combined financial statements include the accounts of the Company and its wholly owned subsidiaries since August 22, 2020, and its Predecessors and their wholly owned subsidiaries since their acquisition or formation for all periods prior to August 21, 2020. All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation. Use of estimates in the preparation of financial statements. Preparation of the Company's consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Depletion of oil and gas properties and evaluations for impairment of proved and unproved oil and gas properties, in part, is determined using estimates of proved, probable and possible oil and gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and future undiscounted and discounted net cash flows. Other items subject to such estimates and assumptions include, but are not limited to, the carrying value of oil and natural gas properties, asset retirement obligations, equity-based compensation and estimates of income taxes. Actual results could differ from the estimates and assumptions utilized. Cash and cash equivalents. The Company’s cash and cash equivalents include depository accounts held by banks with original issuance maturities of 90 days or less. The Company’s cash and cash equivalents are generally held in financial institutions in amounts that may exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected. Accounts receivable. The Company’s accounts receivable are primarily comprised of oil and gas sales receivables, a current U.S. federal income tax receivable, joint interest receivables and other receivables for which the Company does not require collateral security. The Company’s share of oil and gas production is sold to various purchasers who must be prequalified under the Company’s credit risk policies and procedures. The Company records allowances for doubtful accounts based on the age of accounts receivables and the financial condition of its purchasers. The Company’s credit risk related to collecting accounts receivables is mitigated by using credit and other financial criteria to evaluate the credit standing of the entity obligated to make payment on the accounts receivable, and where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the counterparty or other credit support. As of December 31, 2020 and 2019, the Company’s accounts receivables primarily consist of amounts due from the sale of crude oil, natural gas and natural gas liquids of $4.2 million and $2.9 million, respectively, and are based on estimates of sales volumes and realized prices the Company anticipates it will receive, a current U.S. federal income tax receivable of $3.2 million and zero, respectively, related to U.S. federal income taxes paid prior to the HighPeak business combination that will be received by carrying back and utilizing the net operating losses generated from August 22, 2020 through December 31, 2020, and joint interest receivables of $345,000 and $440,000, respectively. The Company routinely reviews outstanding balances and establishes allowances for bad debts equal to the estimable portions of accounts receivable for which failure to collect is considered probable. As of December 31, 2020 and 2019, the Company had no allowance for doubtful accounts recorded. Subscription receivable. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 505-10-45-2, “Receivables for Issuance of Equity,” the Company recorded a subscription receivable as of December 31, 2020 related to the exercise of warrants prior to December 31, 2020 as the cash was collected before the financial statements are issued or available to be issued. Prior to December 31, 2020, 312,711 warrants were exercised for cash proceeds of $3.6 million. Due to the timing of the exercises, the shares underlying the warrants were issued in December 2020 and the proceeds were received subsequent to December 31, 2020. The outstanding proceeds were recorded as a subscription receivable in the accompanying balance sheets as of December 31, 2020. Notes receivable. Pursuant to an agreement between HPK LP and Pure, whereby Pure obtained extensions to complete its initial business combination to August 21, 2020, HPK LP made loans to Pure totaling $11.7 million and $4.2 million as of August 21, 2020 and December 31, 2019, respectively. The Company routinely reviews outstanding balances and establishes allowances for bad debts equal to the estimable portions of notes receivable for which failure to collect is considered probable. As of December 31, 2019, the Company had no allowance for doubtful accounts recorded. See additional information regarding Pure and the notes receivable cancellations in relations to the HighPeak business combination in Note 10. Deposits. During 2019, HPK LP paid $61.5 million to Grenadier Energy Partners II, LLC (“Grenadier”) as a non-refundable deposit for an acquisition (the “Grenadier Acquisition”) and an additional $15.0 million extension payment was paid in 2020 that was to be accounted for as additional consideration for the Grenadier Acquisition upon closing. The Grenadier Acquisition was terminated in April 2020 and the $76.5 million in deposits and extension payments were charged to expense. In addition, the Company has paid the Texas Railroad Commission $50,000 in lieu of a plugging bond as statutorily required. Inventory. Inventory is comprised primarily of oil and gas drilling or repair items such as tubing, casing, proppant used to fracture-stimulate oil and gas wells, water, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or net realizable value, on a weighted average cost basis. Valuation allowances for materials and supplies inventories are recorded as reductions to the carrying values of the materials and supplies inventories in the Company’s condensed consolidated balance sheet and as charges to other expense in the condensed consolidated statements of operations. The Company’s materials and supplies inventory as of December 31, 2020 and 2019 is $120,000 and $184,000, respectively, and the Company has not recognized any valuation allowance to date. Oil and gas properties. The Company utilizes the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs and geological and geophysical expenditures are expensed. The Company does not carry the costs of drilling an exploratory well as an asset in its consolidated balance sheet following the completion of drilling unless both of the following conditions are met: (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. Due to the capital-intensive nature and the geographical location of certain projects, it may take an extended period of time to evaluate the future potential of an exploration project and the economics associated with making a determination on its commercial viability. In these instances, the project’s feasibility is not contingent upon price improvements or advances in technology, but rather the Company’s ongoing efforts and expenditures related to accurately predict the hydrocarbon recoverability based on well information, gaining access to other companies’ production data in the area, transportation or processing facilities and/or getting partner approval to drill additional appraisal wells. These activities are ongoing and are being pursued constantly. Consequently, the Company’s assessment of suspended exploratory well costs is continuous until a decision can be made that the project has found sufficient proved reserves to sanction the project or is noncommercial and is charged to exploration and abandonment expense. See Note 5 for additional information. 72 The capitalized costs of proved properties are depleted using the unit-of-production method based on proved reserves for leasehold costs and proved reserves for drilling, completion and other oil and natural gas property costs. Costs of unproved leasehold costs are excluded from depletion until proved reserves are established or, if unsuccessful, impairment is determined. Proceeds from the sales of individual properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depletion, depreciation and amortization, if doing so does not materially impact the depletion rate of an amortization base. Generally, no gain or loss is recorded until an entire amortization base is sold. However, gain or loss is recorded from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base. The Company performs assessments of its long-lived assets to be held and used, including proved oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In these circumstances, the Company recognizes an impairment charge for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Unproved oil and gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects. If the estimated future net cash flows attributable to such projects are not expected to be sufficient to fully recover the costs invested in each project, the Company will recognize an impairment charge at that time. During the period from August 22, 2020 to December 31, 2020, the Company recognized an impairment of $4.8 million related to various leasehold costs that the Company was not successful in obtaining extensions on that is included in exploration and abandonment expenses in the accompanying consolidated and combined financial statements. Other property and equipment, net. Other property and equipment is recorded at cost. The carrying values of other property and equipment, net of accumulated depreciation of $237,000 and $46,000 as of December 31, 2020 and 2019, respectively, are as follows: Successor Predecessors December 31, 2020 December 31, 2019 (in thousands) Land $ 725 $ 580 Information technology 292 459 Transportation equipment 41 - Leasehold improvements 24 37 Field equipment 10 12 Total other property and equipment, net $ 1,092 $ 1,088 Other property and equipment is depreciated over its estimated useful life on a straight-line basis. Land is not depreciated. Information technology is generally depreciated over three years, transportation equipment is generally depreciated over five years and field equipment is generally depreciated over seven years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the underlying terms of the associated leases. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recorded is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value. The estimated fair value is determined using either a discounted future cash flow model or another appropriate fair value method. Debt issuance costs. In December 2020, the Company paid $405,000 in debt issuance costs related to its new revolving credit facility. Amortization of $4,000 based on the straight-line method over the term of the credit facility which approximates the interest rate method was recognized in 2020 and included in interest expense on the accompanying statement of operations. As of December 31, 2020, the net debt issuance costs are included in noncurrent assets on the accompanying consolidated balance sheet due to the fact that the credit facility was undrawn at the time. In the future, these net costs will be included with long-term debt, if any, in accordance with GAAP. See Note 6 for additional information regarding the Company’s new revolving credit facility. 73 Leases. The Company enters into leases for drilling rigs, storage tanks, equipment and buildings and recognizes lease expense on a straight-line basis over the lease term. Lease right-of-use assets and liabilities are initially recorded on the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s lease contracts do not provide an implicit discount rate, the Company uses its incremental borrowing rate, which is determined based on information available at the commencement date of a lease. Leases may include renewal, purchase or termination options that can extend or shorten the term of a lease. The exercise of those options is at the Company’s sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required. Leases with an initial term of 12 months or less are not recorded as lease right-of-use assets and liability. See Note 9 for additional information. Accounts payable and accrued liabilities. Accounts payable and accrued liabilities as of December 31, 2020 and 2019 totaled approximately $22.4 million and $31.0 million, respectively, including trade accounts payable, revenues payable and accruals for capital expenditures, operating and general and administrative expenses, operating leases and other miscellaneous items. Asset retirement obligations. The Company records a liability for the fair value of an asset retirement obligation in the period in which the associated asset is acquired or placed into service, if a reasonable estimate of fair value can be made. Asset retirement obligations are generally capitalized as part of the carrying value of the long-lived asset to which it relates. Conditional asset retirement obligations meet the definition of liabilities and are recorded when incurred and when fair value can be reasonably estimated. See Note 7 for additional information. Revenue recognition . The Company follows FASB ASC 606, “Revenue from Contracts with Customers,” (“ASC 606”) whereby the Company recognizes revenues from the sales of oil and natural gas to its purchasers and presents them disaggregated on the Company’s condensed consolidated and combined statements of operations. The Company enters into contracts with purchasers to sell its oil and natural gas production. Revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed in ASC 606. Specifically, revenue is recognized when the Company’s performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production. At December 31, 2020 and 2019, the Company had receivables related to contracts with purchasers of approximately $4.2 million and $2.9 million, respectively. Oil Contracts. The Company’s oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the oil has been transferred to the purchaser. The oil produced is sold under contracts using market-based pricing which is then adjusted for the differentials based upon delivery location and oil quality. Since the differentials are incurred after the transfer of control of the oil, the differentials are included in oil sales on the consolidated and combined statements of operations as they represent part of the transaction price of the contract. Natural Gas Contracts. The majority of the Company’s natural gas is sold at the lease location, which is generally when control of the natural gas has been transferred to the purchaser. The natural gas is sold under (i) percentage of proceeds processing contracts or (ii) a hybrid of percentage of proceeds and fee-based contracts. Under the majority of the Company’s contracts, the purchaser gathers the natural gas in the field where it is produced and transports it to natural gas processing plants where natural gas liquid products are extracted. The natural gas liquid products and remaining residue gas are then sold by the purchaser. Under percentage of proceeds and hybrid percentage of proceeds and fee-based contracts, the Company receives a percentage of the value for the extracted liquids and the residue gas. Since control of the natural gas transfers upstream of the transportation and processing activities, revenue is recognized as the net amount received from the purchaser. The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with ASC 606. The exemption, as described in ASC 606-10-50-14(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. 74 Income taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date. The Company reviews its deferred tax assets for recoverability and establishes a valuation allowance based on projected future taxable income, applicable tax strategies and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not (likelihood of greater than 50 percent) that some portion or all the deferred tax assets will not be realized. The Company has not established a valuation allowance as of December 31, 2020. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. If all or a portion of the unrecognized tax benefit is sustained upon examination by the taxing authorities, the tax benefit will be recognized as a reduction to the Company’s deferred tax liability and will affect the Company’s effective tax rate in the period it is recognized. See Note 12 for addition information. The Company records any tax-related interest charges as interest expense and any tax-related penalties as other expense in the condensed consolidated and combined statements of operations of which there have been none to date. Prior to August 21, 2020, the Predecessors did not record a provision for U.S. federal income tax because the Predecessors were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessors reported their share of the Company’s income or loss on their respective income tax returns. The Predecessors were required to file tax returns on Form 1065 with the Internal Revenue Service (“IRS”). The 2017 to 2019 tax years remain open to examination. The Predecessors recognize in their condensed consolidated and combined financial statements the effect of a tax position, if that position is more likely than not to be sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. Tax positions taken related to the Predecessors’ status as limited partnerships, and state filing requirements have been reviewed, and management is of the opinion that they would more likely than not be sustained by examination. Accordingly, the Company has not recorded an income tax liability for uncertain tax benefits for periods prior to August 21, 2020. Under the new centralized partnership audit rules effective for tax years beginning after 2017, the IRS assesses and collects underpayments of tax from the partnership instead of from each partner. The partnership may be able to pass the adjustments through to its partners by making a push-out election or, if eligible, by electing out of the centralized partnership audit rules. The collection of tax from the partnership is only an administrative convenience for the IRS to collect any underpayment of income taxes including interest and penalties. Income taxes on partnership income, regardless of who pays the tax or when the tax is paid, is attributed to the partners. Any payment made by the Company as a result of an IRS examination will be treated as an expense from the Company in the condensed consolidated and combined financial statements. The Company is also subject to Texas Margin Tax. The Company realized no Texas Margin Tax in the accompanying condensed consolidated and combined financial statements as we do not anticipate owing any Texas Margin Tax for the periods presented. Stock-based compensation. Stock-based compensation expense for stock options (“Equity Awards”) is measured at the grant date or modification date, as applicable, using the fair value of the award, and is recorded, net of forfeitures, on a straight-line basis over the requisite service period of the respective award. The fair value of Equity Awards is determined on the grant date or modification date, as applicable, using a Black-Scholes option valuation model with the following inputs; (i) the grant date’s closing stock price, (ii) the exercise price of the stock options, (iii) the expected term of the stock option, (iv) the estimated risk-free adjusted interest rate for the duration of the option’s expected term, (v) the expected annual dividend yield on the underlying stock and (vi) the expected volatility over the option’s expected term. Stock-based compensation for HighPeak Energy common stock issued to directors with no restrictions thereon, as was the case with the 62,500 shares issued in November 2020 to the non-management directors, is measured at the grant date using the fair value of the award and is recorded as stock-based compensation in the accompanying financial statements immediately. If restricted stock is awarded to employees or directors in the future, as the case may be, stock-based compensation will be recognized on a straight-line basis over the requisite service period of the respective award. Segments. Based on the Company’s organizational structure, the Company has one operating segment, which is oil and natural gas development, exploration and production. In addition, the Company has a single, company-wide management team that allocates capital resources to maximize profitability and measures financial performance as a single enterprise. 75 Impact of the COVID-19 Pandemic. A novel strain of the coronavirus disease 2019 ("COVID-19") surfaced in late 2019 and spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The COVID-19 pandemic significantly affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the COVID-19 pandemic resulted in travel restrictions, business closures and other restrictions that have disrupted the demand for oil throughout the world and when combined with pressures on the global supply-demand balance for oil and related products, resulted in significant volatility in oil prices beginning late February 2020. The length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact of the effects of the COVID-19 pandemic to global oil demand, which negatively impacted the Company's results of operations and led to a significant reduction in the Company's 2020 capital activities. Adoption of new accounting standards. In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" ("ASC 842"), which supersedes the lease recognition requirements in ASC 840, "Leases" ("ASC 840"), and requires lessees to recognize lease assets and lease liabilities for those leases previously classified as operating leases. The Company adopted ASC 842 as of August 22, 2020 using the modified retrospective transition method. The Company elected to apply the transition guidance under ASU 2018-11, "Leases (Topic 842) Targeted Improvements," in which ASC 842 is applied at the adoption date, while the comparative periods will continue to be reported in accordance with historic accounting under ASC 840. This standard does not apply to leases to explore for or use minerals, oil or natural gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained. ASC 842 allowed for the election of certain practical expedients at adoption to ease the burden of implementation. At implementation, the Company elected to (i) maintain the historical lease classification for leases prior to August 22, 2020, (ii) maintain the historical accounting treatment for land easements that existed at adoption, (iii) use historical practices in assessing the lease term of existing contracts at adoption, (iv) combine lease and non-lease components of a contract as a single lease and (v) not record short-term leases in the consolidated balance sheet, all in accordance with ASC 842. The adoption of ASC 842 did not have a material impact on the consolidated statements of operations and had no impact on the Company's cash flows. The Company did not record a change to its opening retained earnings as of August 22, 2020, as there was no material change to the timing or pattern of recognition of lease costs due to the adoption of ASC 842. New accounting pronouncements. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. The Company has evaluated the ASU 2016-03 and does not believe its adoption will have a material impact on the Company’s consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the SOFR. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification rate date or reassess a previous accounting determination. Entities can also elect various optional expedients that would allow them to continue applying hedge accounting relationships affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”). This ASU clarifies that all derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment (“The Discounting Transition”) are in the scope of ASC 848 and therefore qualify for the available temporary optional expedients and exceptions. As such, entities that employ derivatives that are the designated hedged item in a hedge relationship where perfect effectiveness is assumed can continue to apply hedge accounting without de-designating the hedging relationship to the extent such derivatives are impacted by the Discounting Transition. The Company has evaluated recently issued, but not yet adopted, accounting pronouncements and does not believe they would have a material effect on the Company’s condensed consolidated and combined financial statements. 76 NOTE 3. Acquisitions During the period from August 22, 2020 to December 31, 2020 and the period from January 1, 2020 to August 21, 2020, the Company spent a total of $1.2 million and $3.3 million, respectively, to acquire primarily undeveloped acreage, three vertical producing properties and two salt-water disposal wells in and around the Company’s existing properties for future exploration activities in the Midland Basin. Grenadier Acquisition. In June 2019, HighPeak Energy Assets II, LLC (“HighPeak Assets II”) signed a purchase and sale agreement with Grenadier to acquire substantially all the oil and gas assets of Grenadier, effective June 1, 2019, subject to certain customary closing adjustments for a total purchase price of $615.0 million. Since HighPeak Assets II was contributed to the Predecessors in the HPK LP business combination discussed in Note 10, this purchase and sale agreement became part of the Predecessors effective October 1, 2019. The Grenadier Acquisition was originally scheduled to close no later than October 2019 but was extended twice to May 2020. In consideration for the initial extension, HPK LP: (i) released the then existing $30.75 million deposit from escrow and (ii) paid directly to Grenadier an additional $30.75 million and (iii) agreed to treat the collective sum as a nonrefundable deposit to Grenadier. In consideration for the second extension, HPK LP agreed to pay Grenadier an additional $15.0 million that was also nonrefundable but, unlike the $61.5 million deposit, was not to be credited toward the purchase price. The Grenadier Acquisition was terminated in April 2020 and was not consummated and therefore a charge to expense of $76.5 million was recognized. NOTE 4. Fair Value Measurements The Company determines fair value based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three input levels of the fair value hierarchy are as follows: ● Level 1 – quoted prices for identical assets or liabilities in active markets. ● Level 2 – quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means. ● Level 3 – unobservable inputs for the asset or liability, typically reflecting management’s estimate of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore, determined using model-based techniques, including discounted cash flow models. Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level of input that is significant to the measurement in its entirety. The Company did not have any assets or liabilities that are measured at fair value on a recurring basis as of December 31, 2020 or 2019. Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Specifically, (i) stock-based compensation is measured at fair value on the date of grant based on Level 2 inputs based upon market data, (ii) the oil and gas properties of HighPeak Assets II that were contributed to one of the Predecessors discussed further and in more detail in Note 10 were measured at current estimated fair value using Level 3 inputs based upon market conditions in the area, and (iii) the estimates and fair value measurements used for the evaluation of proved property for potential impairment using Level 3 inputs based upon market conditions in the area. The Company assesses the recoverability of the carrying amount of certain assets and liabilities whenever events or changes in circumstances indicate the carrying amount of an asset or liability may not be recoverable. These assets and liabilities can include inventories, proved and unproved oil and gas properties and other long-lived assets that are written down to fair value when they are impaired or held for sale. The Company did not record any impairments to proved or unproved oil and gas properties for the periods presented in the accompanying condensed consolidated and combined financial statements. The Company has other financial instruments consisting primarily of cash equivalents, accounts receivable, accounts payable, long-term debt and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Concentrations of credit risk. As of December 31, 2020 and 2019, management concluded there are no concentrations of credit risk, based on the nature of the assets held by the Company. Impact of the COVID-19 pandemic on certain assets and liabilities measured at fair value on a nonrecurring basis. 77 Proved Properties. The Company performs assessments of its proved oil and gas properties accounted for under the successful efforts method of accounting whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In these circumstances, the Company recognizes an impairment charge for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Due to the decrease in management's commodity price outlooks ("Management's Price Outlooks"), the Company performed an impairment assessment of its proved oil and gas properties as of December 31, 2020 and determined that its proved oil and gas properties were not impaired. The primary factors that may affect estimates of future cash flows for the Company's proved oil and gas properties are (i) future reserve adjustments, both positive and negative, to proved reserves and risk-adjusted probable and possible reserves, (ii) results of future drilling activities, (iii) management's price outlooks and (iv) increases or decreases in production and capital costs. There is significant uncertainty surrounding the long-term impact to global oil demand due to the effects of the COVID-19 pandemic. These conditions negatively impacted the Company's 2020 capital activities and production levels. It is reasonably possible that the carrying value of the Company's proved oil and gas properties could exceed their estimated fair value resulting in the need to impair their carrying values in the future. If incurred, an impairment of the Company's proved oil and gas properties could have a material adverse effect on the Company's financial condition and results of operations. NOTE 5. Exploratory Well Costs The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. The Company's capitalized exploratory well and project costs are included in proved properties in the condensed consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense. The changes in capitalized exploratory well costs are as follows (in thousands): Year Ended December 31, 2020 Successor Predecessors August 22, through December 31, 2020 January 1, through August 21, 2020 Year Ended December 31, 2019 Beginning capitalized exploratory well costs $ 41,524 $ 11,427 $ - Additions to exploratory well costs pending the determination of proved reserves 53,462 48,169 58,435 Reclassification due to determination of proved reserves (62,394 ) (18,072 ) (47,008 ) Exploratory well costs charged to exploration and abandonment expense - - - Ending capitalized exploratory well costs $ 32,592 $ 41,524 $ 11,427 All capitalized exploratory well costs have been capitalized for less than one year based on the date of drilling. Note 6. Long-Term Debt Revolving Credit Facility . In December 2020, the Company entered into a revolving credit facility with Fifth Third Bank, National Association (“Fifth Third”) as the administrative agent and sole lender (“Revolving Credit Facility”) that matures on June 17, 2024. The Revolving Credit Facility has an initial borrowing base of $40 million. The Company elected to reduce the aggregate elected commitments under the Revolving Credit Facility to $20 million. The borrowing capacity under the Revolving Credit Facility is equal to the lowest of (i) the borrowing base (which currently stands at $40.0 million), (ii) the aggregate elected commitments (which currently stand at $20.0 million) and (iii) $500.0 million. As of December 31, 2020, the Company had no outstanding borrowings under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest, at the option of the Company, based on (a) a rate per annum equal to the higher of (i) the prime rate announced from time to time by Fifth Third, (ii) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System during the last preceding business day plus 0.5 percent or (iii) the Adjusted LIBOR Rate, plus a margin (the “Applicable Margin”), which is currently 3.25 percent and is also determined by the Borrowing Base Utilization Percentage as defined in the Revolving Credit Facility. Letters of credit outstanding under the Revolving Credit Facility are subject to a per annum fee, representing the Applicable Margin plus 0.125 percent. The Company also pays commitment fees on undrawn amounts under the Revolving Credit Facility equal to 0.50 percent. Borrowings under the Revolving Credit Facility are secured by a first lien security interest on substantially all assets of the Company and its restricted subsidiaries, including mortgages on the Company’s and its restricted subsidiaries’ oil and gas properties. The Revolving Credit Facility is scheduled to have the borrowing base redetermined semiannually in April and October. Additionally, the Company and Fifth Third each have the option for a wild card evaluation between redeterminations. 78 The Revolving Credit Facility requires the maintenance of a ratio of total debt to EBITDAX, subject to certain adjustments, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter (commencing with the fiscal quarter ending March 31, 2021) and a current ratio, subject to certain adjustments of at least 1.00 to 1.00 as of the last day of any fiscal quarter (commencing with the fiscal quarter ending March 31, 2021). The Company has limited equity cure rights for a breach of the above-listed financial covenants. Additionally, the Revolving Credit Agreement contains additional restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional indebtedness, incur additional liens, make investments and loans, enter into mergers and acquisitions, make or declare dividends and other payments, enter into certain hedging transactions, sell assets and engage in transactions with affiliates. The Revolving Credit Facility contains customary mandatory prepayments, including a monthly mandatory prepayment if the Consolidated Cash Balance (as defined in the Revolving Credit Agreement) is in excess of $20.0 million. In addition, the Revolving Credit Agreement is subject to customary events of default, including a change in control. If an event of default occurs and is continuing, the administrative agent or the majority may accelerate any amounts outstanding and terminate lender commitments. Note 7. Asset Retirement Obligations The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations. Asset retirement obligations activity is as follows (in thousands): Year Ended December 31, 2020 Successor Predecessors August 22, 2020 through December 31, 2020 January 1, 2020 through August 21, 2020 Year Ended December 31, 2019 Beginning asset retirement obligations $ 2,398 $ 2,212 $ 520 Liabilities incurred from new wells 84 97 1,511 Liabilities settled upon plugging and abandoning wells (29 ) - (51 ) Revision of estimates (a) (211 ) - 160 Accretion of discount 51 89 72 Ending asset retirement obligations $ 2,293 $ 2,398 $ 2,212 (a) The revisions to the Company’s asset retirement obligation estimates are primarily due to changes in estimated costs based on experience with the properties. As of December 31, 2020 and 2019, all asset retirement obligations are considered noncurrent and classified as such in the accompanying consolidated balance sheet. NOTE 8. Incentive Plans 401(k) Plan. The HighPeak Energy Employees, Inc 401(k) Plan (the “401(k) Plan”) is a defined contribution plan established under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"). As of October 1, 2020, all regular full-time and part-time employees of the Company are eligible to participate in the 401(k) Plan after three continuous months of employment with the Company. Participants may contribute up to 80 percent of their annual base salary into the 401(k) Plan. Matching contributions are made to the 401(k) Plan in cash by the Company in amounts equal to 100 percent of a participant’s contributions to the 401(k) Plan that are not in excess of four percent of the participant’s annual base salary (the “Matching Contribution”). Each participant’s account is credited with the participant’s contributions, Matching Contributions and allocations of the 401(k) Plan’s earnings. Participants are fully vested in their account balances at their eligibility date. During the period from August 24, 2020 through December 31, 2020, the Company contributed $49,000 to the 401(k) Plan. 79 Long-Term Incentive Plan. The Company’s 2020 Long-Term Incentive Plan (“LTIP”) provides for the granting of stock awards, stock options, dividend equivalents and substitute awards to directors, officers and employees of the Company. The number of shares available for grant pursuant to awards under the LTIP are as follows: December 31, 2020 Approved and authorized awards 11,907,006 Awards granted under plan (9,767,995 ) Awards available for future grant 2,139,011 Stock Options. Stock options were granted to employees on August 24, 2020. Stock-based compensation expense related to stock options for the period from August 22, 2020 to December 31, 2020 for the Company was $15.5 million, and as of December 31, 2020 there was $3.8 million of unrecognized stock-based compensation expense related to unvested stock-based compensation awards. The unrecognized compensation expense will be recognized on a straight-line basis over the remaining vesting periods of the awards, which is a period of less than two years. The Company estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires the Company to make several assumptions. The expected term of options granted was determined based on the simplified method of the midpoint between the vesting dates and the contractual term of the options. The risk-free interest rate is based on the U.S. treasury yield curve rate for the expected term of the option at the date of grant and the volatility was based on the volatility of a peer group of companies with similar characteristics of the Company on the date of grant since the Company did not have any trading history. More detailed stock options activity and details are as follows: Stock Options Exercise Price Remaining Term in Years Intrinsic Value (in thousands) Outstanding at August 22, 2020 - Awards granted 9,705,495 $ 10.00 Awards forfeited - Exercised - Outstanding at December 31, 2020 9,705,495 $ 10.00 9.7 $ 57,942 Vested at December 31, 2020 7,204,163 $ 10.00 9.7 $ 43,009 Exercisable at December 31, 2020 7,204,163 $ 10.00 9.7 $ 43,009 Stock Issued to Directors. Stock was issued to the outside directors of the Company in November 2020 in the amount of 12,500 shares each totaling 62,500 shares in total. There were no restrictions of these shares. Therefore stock-based compensation expense was recognized immediately upon the issuance of these shares in the amount of $302,000 which was based upon the closing price of the stock on the date the stock issuance was approved by the board of directors of the Company. NOTE 9. Commitments and Contingencies Leases. The Company adopted ASC Topic 842, “Leases” electing the transition method which permits entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected this transition approach, however the cumulative impact of adoption in the opening balance of retained earnings as of January 1, 2020 was zero. Therefore, as of December 31, 2020 the Company had operating right-of-use assets totaling $506,000 included in other noncurrent assets and operating lease liabilities totaling $508,000, $430,000 of which is included in other current liabilities and $78,000 is included in other noncurrent liabilities on the accompanying consolidated balance sheet. The Company does not currently have any finance right-of-use leases. Maturities of the operating lease obligations are as follows (in thousands): Successor December 31, 2020 2021 $ 439 2022 79 Total lease payments 518 Less present value discount (10 ) Present value of lease liabilities $ 508 80 Legal actions. From time to time, the Company may be a party to various proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to these proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable, and the amount of the loss can be reasonably estimated. Indemnifications. The Company has agreed to indemnify its directors and certain of its officers, employees and agents with respect to claims and damages arising from acts or omissions taken in such capacity, as well as with respect to certain litigation. Environmental. Environmental expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Environmental expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Liabilities for expenditures that will not qualify for capitalization are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are undiscounted unless the timing of cash payments for the liability is fixed or reliably determinable. Environmental liabilities normally involve estimates that are subject to revision until settlement or remediation occurs. Salt-Water Disposal Commitments. The Company has committed to deliver a total of 5.5 MMBbl of produced water for disposal with two different third-party salt-water disposal companies, including 2.5 MMBbl between September 30, 2020 and September 30, 2021 and 3.0 MMBbl between July 24, 2020 and July 24, 2022. As of December 31, 2020, the Company delivered approximately 0.7 MMBbl and 0.7 MMBbl, respectively under the two agreements. Both agreements require a payment for any volumes not delivered should the Company not perform under the agreements, indicating a monetary commitment of approximately $1.8 million as of December 31, 2020. Given the current production levels coupled with the wells planned to come on production in 2021, the Company expects to meet the volume commitments under these agreements. NOTE 10. Related Party Transactions HPK LP Business Combination. Effective October 1, 2019, HighPeak I and HighPeak Energy II, LP (“HighPeak II”) contributed cash and wholly owned subsidiaries, HighPeak Energy Assets, LLC, HighPeak Assets II, LLC and HighPeak Energy Holdings, LLC to HPK LP in return for limited partnership interest in HPK LP. Subsequent to the HPK LP business combination referenced in the preceding sentence and in 2019, HighPeak I contributed an additional $805,000 and HighPeak II contributed an additional $25.8 million in cash to HPK LP. During the period from January 1, 2020 through August 21, 2020, HighPeak II contributed an additional $54.0 million in cash to HPK LP. Also, during the period from January 1, 2020 through August 21, 2020, HPK LP made distributions to HighPeak I and HighPeak II of $2.8 million in total. Therefore, just prior to the HighPeak business combination which closed on August 21, 2020, HighPeak I and HighPeak II owned approximately 51.9% and 48.1% of HPK LP, respectively. Since HighPeak I is the predecessor to HPK LP, its consolidated statement of operations and consolidated statement of cash flows for the nine months ended September 30, 2019 have been included in the accompanying financial statements for comparative purposes. However, HighPeak II’s results of operations are significant and as such HighPeak II’s consolidated statement of operations is shown below for additional comparative and informational purposes (in thousands). Nine Months Ended September 30, 2019 Operating Revenues: Crude oil sales $ 719 Natural gas and natural gas liquid sales 223 Total operating revenues 942 Operating costs and expenses: Oil and natural gas production 1,190 Production and ad valorem taxes 59 Exploration and abandonment 756 Depletion, depreciation and amortization 650 Accretion of discount on asset retirement obligations 86 General and administrative 2,891 Abandoned project 1,122 Total operating costs and expenses 6,754 Loss from operations (5,812 ) Interest income 107 Net loss $ (5,705 ) 81 HighPeak Business Combination. On August 21, 2020, the Company completed the HighPeak business combination between the Company, Pure, HPK LP, HighPeak I, and HighPeak II. HighPeak I and HighPeak II contributed their partnership interests in HPK LP to the Company in return for 76,383,054 shares of publicly traded common stock of the Company. The table below shows the construction of the beginning balance sheet of the Company on August 22, 2020 upon the closing of the HighPeak business combination (in thousands). (a) (b) (c) (d) (e) (f) HPK LP Pure HighPeak Employees, Inc. Issuance of HighPeak Energy Common Stock Cash Offering Costs Deferred Tax Liability Beginning Balance Sheet on August 22, 2020 Cash and cash equivalents $ 1,943 $ 1 $ 99 $ 92,554 $ (8,114 ) $ - $ 86,483 Accounts receivable 3,001 - 26 - - - 3,027 Total current assets 4,944 1 125 92,554 (8,114 ) - 89,510 Total oil and gas properties, net 452,039 - - - - - 452,039 Other property and equipment, net 436 - - - - - 436 Total assets $ 457,419 $ 1 $ 125 $ 92,554 $ (8,114 ) $ - $ 541,985 Current liabilities $ 35,794 $ 2,025 $ 77 $ (9,538 ) $ - $ - $ 28,358 Deferred income tax liability - - - - - 39,946 39,946 Notes payable (receivable) (11,675 ) 11,675 - - - - - Asset retirement obligations 2,398 - - - - - 2,398 Partners' capital 521,682 - - (521,682 ) - - - Common stock - - - 9 - - 9 Additional paid-in capital - (13,699 ) 48 623,765 (8,114 ) (39,946 ) 562,054 Accumulated deficit (90,780 ) - - - - - (90,780 ) Total stockholders' equity/partner's capital 430,902 (13,699 ) 48 102,092 (8,114 ) (39,946 ) 471,283 Total liabilities and stockholders' equity/partners' capital $ 457,419 $ 1 $ 125 $ 92,554 $ (8,114 ) $ - $ 541,985 (a) Represents HPK LP’s condensed consolidated balance sheet estimated as of August 21, 2020. (b) Represents Pure’s condensed consolidated balance sheet estimated as of August 21, 2020 after taking into account: (i) the closing of its trust account, (ii) the redemption of Pure’s Class A Common Stock by the former public stockholders of Pure that elected to redeem, (iii) paying out the cash consideration to those former public stockholders of Pure who elected to remain and (iv) the conversion of the remaining shares of Pure’s Class A Common Stock to HighPeak Energy common stock upon the closing of the HighPeak business combination. The $13.7 million reduction to equity is considered noncash offering costs on the condensed consolidated statement of changes in stockholders’ equity. (c) Represents the balance sheet of HighPeak Energy Employees, Inc which was acquired by the Company for $10.00 upon the closing of the HighPeak business combination. (d) Represents the issuance by the Company of 91,592,354 shares of common stock, 10,538,183 warrants and 10,209,300 Contingent Value Rights upon the closing of the HighPeak business combination. The reduction to accounts payable of $9.5 million represents those vendors of HPK LP that purchased shares under the Forward Purchase Agreement Amendment in the HighPeak business combination in lieu of being paid cash for the majority of their outstanding balances. (e) Represents the cash costs paid for the offering of the aforementioned shares in addition to the cash costs that had previously been incurred by Pure of $13.7 million in column (b). (f) Represents the beginning deferred tax liability of the Company given the combination of all the entities, most of which originated from HPK LP which was a partnership for U.S. federal income tax purposes and therefore did not record a deferred tax liability. 82 Pursuant to the Business Combination Agreement, among other things, (a) MergerSub merged with and into Pure, with Pure surviving as a wholly owned subsidiary of the Company, (b) each outstanding share of Pure’s Class A Common Stock and Pure’s Class B Common Stock (other than certain shares of Pure’s Class B Common Stock that were surrendered for cancellation by Pure’s Sponsor) were converted into the right to receive (A) one share of HighPeak Energy common stock (and cash in lieu of fractional shares), and (B) solely with respect to each outstanding share of Pure’s Class A Common Stock, (i) a cash amount, without interest, equal to $0.62, which represented the amount by which the per-share redemption value of Pure’s Class A Common Stock that exceeded $10.00 per share at the closing, without interest, in each case, totaling approximately $767,902, (ii) one CVR for each one whole share of HighPeak Energy common stock (excluding fractional shares) issued to holders of Pure’s Class A Common Stock pursuant to clause (A), representing the right to receive additional shares of HighPeak Energy common stock (or such other specified consideration as is specified with respect to certain events) under certain circumstances, if necessary, to satisfy a 10% preferred simple annual return, subject to a floor downside per-share price of $4.00, as measured at the applicable maturity, which will occur on a date to be specified and which may be any date occurring during the period beginning on (and including) August 21, 2022 and ending on (and including) February 21, 2023, or in certain circumstances after the occurrence of certain change of control events with respect to the Company’s business, including certain mergers, consolidations and asset sales (with an equivalent number of shares of HighPeak Energy common stock held by HighPeak I and HighPeak II being collectively forfeited) and (iii) one warrant to purchase HighPeak Energy common stock for each one whole share of HighPeak Energy common stock (excluding fractional shares) issued to holders of Pure’s Class A Common Stock pursuant to clause (A), (c) the HPK Contributors (A) contributed their limited partner interests in HPK LP to the Company in exchange for HighPeak Energy common stock and the general partner interests in HPK LP to a wholly owned subsidiary of the Company in exchange for no consideration, and (B) contributed the outstanding Sponsor Loans (as defined in the Business Combination Agreement) in exchange for HighPeak Energy common stock and such Sponsor Loans were cancelled in connection with the closing of the HighPeak business combination and (d) following the consummation of the foregoing transactions, the Company caused HPK LP to merge with and into the Surviving Corporation (as successor to Pure) and all interests in HPK LP were cancelled in exchange for no consideration. HighPeak I and HighPeak II collectively received 76,383,054 shares of HighPeak Energy common stock pursuant to the Business Combination Agreement. Further, certain of the Company’s executive officers and directors received the consideration provided by the HighPeak business combination through their ownership of Pure’s Class A Common Stock. Steven W. Tholen, the Company’s Chief Financial Officer received 5,000 shares of HighPeak Energy common stock, 5,000 CVRs and 5,000 warrants in exchange for shares of Pure’s Class A Common Stock owned by him prior to the HighPeak business combination. Michael L. Hollis, the Company’s President and member of the Company’s board of directors (the “Board”), received 16,802 shares of HighPeak Energy common stock, 16,802 CVRs and 20,382 warrants in exchange for shares of Pure’s Class A Common Stock and Pure’s warrants, respectively, owned by him prior to the HighPeak business combination. Further, Rodney L. Woodard, the Chief Operating Officer of the Company, received 14,000 shares of HighPeak Energy common stock, 14,000 CVRs and 14,000 warrants in exchange for shares of Pure’s Class A Common Stock and Pure’s warrants, respectively, owned by him prior to the HighPeak business combination. Unaudited Pro Forma Operating Results. The following unaudited pro forma combined financial information has been prepared as if the HighPeak business combination and the HPK LP business combination had taken place on January 1, 2019. The unaudited pro forma consolidated financial information has been prepared using the reverse merger business combination method of accounting in accordance with GAAP. The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable and the estimated tax impacts of the pro forma adjustments. The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the business combinations taken place on January 1, 2019; furthermore, the financial information is not intended to be a projection of future results (in thousands, except per share amounts). (Unaudited Pro Forma) Year Ended December 31, 2020 2019 Total revenues $ 24,623 $ 9,057 Net income attributable to Common Stock (23,310 ) (8,838 ) Basic and diluted net loss per share (0.25 ) (0.10 ) 83 Contingent Value Rights. At the closing of the HighPeak business combination, the Company entered into the Contingent Value Rights Agreement (the “CVR Agreement”) by and among, the Company, Pure’s Sponsor, HighPeak I, HighPeak II (together with HighPeak I, the “CVR Sponsors”) and Continental Stock Transfer & Trust Company, in its capacity as Rights Agent (the “Rights Agent”) whereby it issued 10,209,300 CVRs. The CVR Agreement provides for, among other things, the CVRs, which represent contractual rights to receive a contingent payment (in the form of additional shares of HighPeak Energy common stock, or as otherwise specified in the CVR Agreement) in certain circumstances that were issued to the holders of shares of Pure’s Class A Common Stock that participated in the HighPeak business combination and certain qualified institutional buyers and accredited investors, including certain affiliates and officers of the Company, that purchased forward purchase units of the Company pursuant to the Forward Purchase Agreement Amendment (as defined below). Pursuant to the CVR Agreement, holders of CVRs in whose name a CVR is registered in the CVR registrar maintained by the Rights Agent at any date of determination are being provided with a significant valuation protection through the opportunity to obtain additional contingent consideration in the form of additional shares of HighPeak Energy common stock if the trading price of HighPeak Energy’s common stock is below the price that would provide the holders of CVRs with a 10% preferred simple annual return on their shares of common stock held at Closing (based on a $10.00 per share price at the closing of the HighPeak business combination), subject to a floor downside per-share price of $4.00 (the “Preferred Returns”), either at (i) the date to be specified by the CVR Sponsors, which may be any date occurring during the period beginning on (and including) August 21, 2022 and ending on (and including) February 21, 2023, or (ii) in certain circumstances, the occurrence of certain change of control events with respect to the Company’s business, including certain mergers, consolidation and asset sales. If any additional shares of HighPeak Energy common stock are issued to Qualifying CVR Holders (as defined in the CVR Agreement) pursuant to the CVR Agreement, the CVR Sponsors will collectively forfeit an equivalent number of shares they own that are currently in escrow to the Company for cancellation. The Preferred Returns could entitle a Qualifying CVR Holder to receive up to 2.125 shares of HighPeak Energy common stock per CVR. Following the closing, the CVR Sponsors collectively placed 21,694,763 shares in escrow, which equaled the maximum number of additional shares of HighPeak Energy common stock issuable pursuant to the CVR Agreement, which such shares will be released either to the Company for cancellation in connection with the satisfaction of any Preferred Returns or back to the CVR Sponsors, collectively, as applicable, following the maturity date under the CVR Agreement. Stockholders ’ Agreement . At the closing of the HighPeak business combination, Pure’s Sponsor, HighPeak I, HighPeak II, HighPeak III and Jack Hightower (collectively, with each of their respective affiliates and permitted transferees, the “Principal Stockholder Group”), on the one hand, and the Company, on the other hand, entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”), which governs certain rights and obligations following the HighPeak business combination. Under the Stockholders’ Agreement, the Principal Stockholder Group will be entitled, based on its percentage ownership of the total amount of HighPeak Energy common stock issued and outstanding immediately following the closing (the “Original Shares”) and provided that the Original Shares constitute not less than the percentage of the then outstanding total voting securities of the Company set forth below, to nominate a number of directors for appointment to the Board as follows: ● for so long as (i) the Principal Stockholder Group beneficially owns at least 35% of the Original Shares and (ii) the Original Shares constitute at least 30% of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate up to four (4) nominees, and if the Principal Stockholder Group owns less than 50% of the total outstanding voting securities, at least one nominee shall be independent as defined by applicable listing standards; ● for so long as (i) the Principal Stockholder Group beneficially owns less than 35% but at least 25% of the Original Shares and (ii) the Original Shares constitute at least 25% of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate up to three (3) nominees; ● for so long as (i) the Principal Stockholder Group beneficially owns less than 25% but at least 15% of the Original Shares and (ii) the Original Shares constitute at least 15% of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate up to two (2) nominees; and ● if (i) the Principal Stockholder Group beneficially owns less than 15% but at least 5% of the Original Shares and (ii) the Original Shares constitute at least 7.5% of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate one (1) nominee. If at any time the Principal Stockholder Group owns less than 5% of the Original Shares or the Original Shares constitute less than 7.5% of the Company’s then-outstanding voting securities, it will cease to have any rights to designate individuals for nomination to the Board. For so long as the Principal Stockholder Group has the right to designate at least one director for nomination under the Stockholders’ Agreement, the Company will take all Necessary Action (as defined therein) to ensure that the number of directors serving on the Board shall not exceed seven (7). For so long as the Principal Stockholder Group owns a number of shares of HighPeak Energy common stock equal to at least (i) 20% of the Original Shares and (ii) 7.5% of the then-outstanding voting securities of the Company, the Company and the Principal Stockholder Group shall have the right to have a representative appointed to serve on each committee of the Board (other than the audit committee) for which any such representative is eligible pursuant to applicable laws and the Nasdaq. For so long as the Principal Stockholder Group has the right to designate one or more individuals for nomination to the Board, the Principal Stockholder Group shall have the right to appoint one (1) non-voting observer to the Board. The Stockholders’ Agreement also includes customary restrictions on the transfer of equity securities to certain persons acquiring beneficial ownership. Pursuant to the Stockholders’ Agreement, the Principal Stockholder Group will agree not to transfer, directly or indirectly, any equity securities of the Company for a period of 180 days after the Closing, subject to certain customary exceptions. The Stockholders’ Agreement will terminate as to each stockholder upon the time at which the Principal Stockholder Group no longer has the right to designate an individual for nomination to the Board under the Stockholders’ Agreement and as to a member of the Principal Stockholder Group that no longer owns any of the Original Shares. Registration Rights Agreement . At the closing of the HighPeak business combination, the Company entered into the Registration Rights Agreement (the “Registration Rights Agreement”), by and among the Principal Stockholder Group and certain other security holders named therein, pursuant to which the Company will be obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act of 1933, as amended (the “Securities Act”) all or any portion of the shares of HighPeak Energy common stock that the holders named thereto hold as of the date of such agreement and that they may acquire thereafter, including upon the conversion, exchange or redemption of any other security therefor (the “Registrable Securities”). The Company has agreed to file and cause to become effective a registration statement covering the Registrable Securities held by such holder making a demand for registration, provided that no fewer than the amount of Registrable Securities representing the lesser of (i) $25 million or (ii) all Registrable Securities owned by such holder, as applicable, are covered under the holder’s demand for registration. The holders can submit a request beginning immediately after the HighPeak business combination. Under the Registration Rights Agreement, the holders also have “piggyback” registration rights exercisable at any time that allow them to include the shares of HighPeak Energy common stock that they own in certain registrations initiated by the Company, provided that such holder elects to include its Registrable Securities in an amount not less than $5 million. Subject to customary exceptions, holders will also have the right to request one or more underwritten offerings of Registrable Securities, provided, that, they hold at least $5 million in Registrable Securities and each such offering include a number of Registrable Securities equal to the lesser of (i) $25 million and (ii) all of the Registrable Securities owned by such holders as of the date of the request. In the event that the sale of registered securities under a registration statement would require disclosure of certain material non-public information not otherwise required to be disclosed, the Company may postpone the effectiveness of the applicable registration statement or require the suspension of sales thereunder. The Company may not delay or suspend a registration statement on more than two (2) occasions for more than sixty (60) consecutive calendar days or more than ninety (90) total calendar days, in each case, during any twelve (12) month period. 84 Forward Purchases . In connection with the closing of the HighPeak business combination, the Company also issued shares of HighPeak Energy common stock, warrants and CVRs (the “Forward Purchases”) to certain qualified institutional buyers and accredited investors (the “Forward Purchase Investors”) pursuant to that certain Amended & Restated Forward Purchase Agreement, dated as of July 24, 2020 (the “Forward Purchase Agreement Amendment”), by and among the Company, each party designated as a purchaser therein (including purchasers that subsequently joined prior to the closing of the HighPeak business combination as parties thereto), HighPeak Energy Partners, LP, and, solely for the limited purposes specified therein, Pure. Prior to the closing of the HighPeak business combination, and subsequent to the Company’s entry into the Forward Purchase Agreement Amendment, an aggregate of 8,976,875 forward purchase units (with each forward purchase unit consisting of one share of HighPeak Energy common stock, one warrant and one CVR), for aggregate consideration of approximately $89.8 million in a private placement pursuant to the Assignment and Joinder agreements under and pursuant to the Forward Purchase Agreement Amendment. The proceeds from the Forward Purchases were used to fund a portion of the minimum equity consideration condition to closing required to effect the HighPeak business combination pursuant to the Business Combination Agreement. General and Administrative Expenses. The general partner of HPK LP utilized HighPeak Energy Management, LLC (the “Management Company”) to provide services and assistance to conduct, direct and exercise full control over the activities of HPK LP per its Partnership Agreement. However, the Management Company is funded via payments from the parent companies of HighPeak I and HighPeak II pursuant to their respective Limited Partnership Agreements, as amended. Therefore, HPK LP reimbursed the parent companies of HighPeak I and HighPeak II for actual costs incurred by the Management Company. During the period from January 1, 2020 through August 21, 2020, HPK LP paid $2.4 million each to the parent companies of HighPeak I and HighPeak II of which $4.7 million is included in general and administrative expenses in the accompanying results of operations for the period from January 1, 2020 through August 21, 2020. Effective upon closing of the HighPeak business combination, the Management Company will no longer be paid by the Company as all costs directly attributable to the Company will be paid by the Company going forward. In October 2020, the Company paid G4 Companies, LLC, a company wholly owned by a director of the Company, $1.5 million for the design of a full-scale model for a water recycle and purification treatment facility that the Company plans to construct in our development area to handle produced water in an environmentally friendly manner. Phase I and II water testing has already been completed to ascertain the viability of such a system. The timing of the construction of the facility is still under review and consideration. NOTE 11. Major Customers Lion Oil Trading and Transportation, LLC purchased approximately 98% of the Company’s crude oil, natural gas and natural gas liquids during the period from August 22, 2020 through December 31, 2020. Lion Oil Trading and Transportation, LLC and Enlink Crude Purchasing, LLC purchased approximately 49% and 44%, respectively, of the Company’s crude oil, natural gas and natural gas liquids during the period from January 1, 2020 through August 21, 2020. Based on the current demand for oil and natural gas and the availability of other purchasers, management believes the loss of these major purchasers would not have a material adverse effect on our financial condition and results of operations because crude oil and natural gas are fungible products with well-established markets and numerous purchasers. NOTE 12. Income Taxes On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine how the CARES Act may impact its business, results of operations, financial condition and liquidity. 85 The Company’s income tax expense (benefit) attributable to income (loss) from operations consisted of the following(in thousands): August 22, 2020 through December 31, 2020 Current tax benefit $ (3,176 ) Deferred tax benefit (1,047 ) Income tax benefit $ (4,223 ) The reconciliation between the income tax expense (benefit) computed by multiplying pre-tax income (loss) by the U.S. federal statutory rate and the reported amounts of income tax expense (benefit) is as follows (in thousands, except rate): August 22, 2020 through December 31, 2020 Income tax expense (benefit) at U.S. federal statutory rate $ (4,337 ) Limited tax benefit due to stock-based compensation 127 Other (13 ) Income tax expense (benefit) $ (4,223 ) Effective income tax rate 20.4 % The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows as of December 31, 2020 (in thousands): December 31, 2020 Deferred tax assets: Net operating loss carryforwards $ 9,725 Stock-based compensation 3,124 Other 31 Less: Valuation allowance - Net deferred tax assets 12,880 Deferred tax liabilities: Oil and natural gas properties, principally due to differences in basis and depreciation and the deduction of intangible drilling costs for tax purposes (51,778 ) Net deferred tax liabilities $ (38,898 ) The effective income tax rate differs from the U.S. statutory rate of 21 percent primarily due to permanent differences between GAAP income and taxable income. Periods prior to August 22, 2020 are not shown because the Predecessors were treated as partnerships for U.S. federal income tax purposes and therefore do not record a provision for U.S. federal income tax because the partners of the Predecessors report their share of the Predecessors’ income or loss on their respective income tax returns. The Predecessors are required to file tax returns on Form 1065 with the IRS. The 2017 through 2019 tax years remain open to examination. 86 As required by ASC Topic 740, “Income Taxes,” (“ASC 740”) the Company uses reasonable judgments and makes estimates and assumptions related to evaluating the probability of uncertain tax positions. The Company bases its estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not” be sustained in an income tax audit. Based on that analysis, the Company believes the Company has not taken any material uncertain tax positions, and therefore has not recorded an income tax liability related to uncertain tax positions. However, if actual results materially differ, the Company’s effective income tax rate and cash flows could be affected in the period of discovery or resolution. The Company also reviews the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company’s deferred tax assets and records a valuation allowance when the Company believes that a portion or all the deferred tax assets may not be realized. If the Company is unable to realize the expected future benefits of its deferred tax assets, the Company is required to provide a valuation allowance. The Company uses its history and experience, overall profitability, future management plans, tax planning strategies, and current economic information to evaluate the amount of valuation allowance to record. As of December 31, 2020, the Company has not recorded a valuation allowance for deferred tax assets arising from its operations because the Company believes they meet the “more likely than not” criteria as defined by the recognition and measurement provisions of ASC 740. However, the Company may not realize the $12.9 million in deferred tax assets it has as of December 31, 2020 if the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company's deferred tax assets change, which would affect the Company’s effective income tax rate and cash flows in the period of discovery or resolution. On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, an omnibus spending bill to fund the federal government that also includes an array of COVID-related tax relief for individuals and businesses. The tax-related measures contained in the Act revise and expand provisions enacted earlier in the year by the Families First Coronavirus Response Act and the CARES Act. The Act also extends a number of expiring tax provisions. Additionally, the Act provides for a 100% deduction for certain business meals incurred in calendar years 2021 and 2022, which are currently deductible at 50% for years ending December 31, 2020. The Company determined that income tax effects related to the passage of the Consolidated Appropriations Act were not material to the financial statements for the year ended December 31, 2020. The Company is also subject to Texas Margin Tax. The Company realized no Texas Margin Tax in the accompanying condensed consolidated and combined financial statements as we do not anticipate owing any Texas Margin Tax for any periods. NOTE 13. Earnings (Loss) Per Share The Company uses the two-class method of calculating earnings (loss) per share because certain of the Company’s unvested stock-based awards qualify as participating securities. The Company’s basic earnings (loss) per share attributable to common stockholders is computed as (i) net income (loss) as reported attributable to common stockholders, (ii) less participating basic earnings (iii) divided by weighted average basic common shares outstanding. The Company’s diluted earnings (loss) per share attributable to common stockholders is computed as (i) basic earnings (loss) attributable to common stockholders, (ii) plus reallocation of participating earnings (iii) divided by weighted average diluted shares outstanding. The components of basic and diluted earnings (loss) per share attributable to common stockholders are as follows (in thousands): Successor August 22, through December 31, 2020 Net income (loss) attributable to common stockholders $ (16,429 ) Participating share-based earnings (a) - Basic and diluted net income (loss) attributable to common stockholders $ (16,429 ) Basic weighted average shares outstanding 91,629 Dilution attributable to stock-based compensation awards - Diluted weighted average shares outstanding 91,629 (a) Participating earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unexercised stock option awards do not participate in undistributed net losses as they are not contractually obligated to do so. The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding. The Company excluded 10,225,472 of weighted average shares of common stock issuable upon the conversion of the warrants for the period from August 22, 2020 through December 31, 2020 as the effect was anti-dilutive. NOTE 14. Stockholders ’ Equity (Successor) At December 31, 2020, the Company has 91,967,565 shares of common stock outstanding, 10,225,472 warrants outstanding with an exercise price of $11.50 per share that expire on August 21, 2025 and 10,209,300 CVRs outstanding that give the holders a right to receive up to 2.125 shares of HighPeak Energy common stock per CVR in order to satisfy the Preferred Returns (with an equivalent number of shares of Company common stock held by HighPeak I and HighPeak II being collectively forfeited in connection therewith). As such, HighPeak I and HighPeak II have placed a total of 21,694,763 shares of common stock of the Company in escrow. 87 NOTE 15. Partners ’ Capital (Predecessors) Allocation of partner ’ s net profits and losses. Net income or loss and net gain or loss on investments of the Predecessors for the period are allocated among its partners in proportion to the relative capital contributions made to the Predecessors. The Predecessors realized a net loss of $85.0 million for the period from January 1, 2020 through August 21, 2020. Partner ’ s distributions. The proceeds distributable by the Predecessors (which shall include all proceeds attributable to the disposition of investments, net of expenses) is distributable in accordance with their respective Partnership Agreements. As of August 21, 2020, the Predecessor had made distributions of $2.8 million prior to closing of the HighPeak business combination. NOTE 16. Subsequent Events Exercises of warrants. Subsequent to December 31, 2020, the Company received proceeds of $9.1 million as a result of the exercise of 788,009 warrants, 312,711 of which were exercised prior to and 475,298 that were exercised subsequent to December 31, 2020. Of the $9.1 million, $3.6 million was the receipt of the subscription receivable recorded as of December 31, 2020. In addition, there were cashless exercises of 250,000 warrants subsequent to December 31, 2020 whereby, the holder converted their 250,000 warrants into 78,767 shares of common stock in accordance with the terms of the warrant agreement, as amended. Therefore, as of March 15, 2020, the Company has 92,675,898 common stock, 9,500,174 warrants and 10,209,300 CVRs issued and outstanding. Revolving Credit Facility commitment. In March 2021, the Company’s borrowing base and bank commitments under the Revolving Credit Facility were increased to $50 million, subject to finalization of customary documentation. Note 17 – Supplemental Oil and Gas Disclosures (Unaudited) Net Capitalized Costs The following table reflects the capitalized costs of natural gas and oil properties and the related accumulated depletion (in thousands): Successor Predecessors December 31, 2020 December 31, 2019 (in thousands) Proved properties $ 367,372 $ 178,835 Unproved properties 152,741 227,525 Total capitalized costs 520,113 406,360 Less: accumulated depletion (17,477 ) (1,566 ) Net capitalized costs $ 502,636 $ 404,794 Cost Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development The following table reflects costs incurred in oil, natural gas and NGL property acquisition, development and exploratory activities (in thousands): Year Ended December 31, 2020 Successor Predecessors August 22, 2020 through December 31, 2020 January 1, 2020 through August 21, 2020 Year Ended December 31, 2019 Acquisition costs: Proved properties $ - $ 585 $ 4,635 Unproved properties 1,181 2,753 6,288 Total acquisition costs 1,181 3,338 10,923 Exploration costs 52,837 48,801 59,349 Development costs 11,757 863 54 Oil and gas expenditures 65,775 53,002 70,326 Asset retirement obligations, net (105 ) 98 316 Total costs incurred $ 65,670 $ 53,100 $ 70,642 88 Results of Operations for Oil, Natural Gas and NGL Producing Activities The following table reflects the Partnership’s results of operations for oil, natural gas and natural gas liquids producing activities (in thousands): Year Ended December 31, 2020 Successor Predecessors August 22, 2020 through December 31, 2020 January 1, 2020 through August 21, 2020 Year Ended December 31, 2019 Oil, NGL and natural gas sales $ 16,400 $ 8,223 $ 8,115 Lease operating expenses 2,653 4,870 3,372 Production and ad valorem taxes 886 566 449 Exploration and abandonment expense 5,032 4 2,850 Depletion, depreciation and amortization expense 9,877 6,385 4,269 Accretion of discount on asset retirement obligations 51 89 72 Results of operations from oil and gas production activities $ (2,099 ) $ (3,691 ) $ (2,897 ) Oil, Natural Gas and NGL Reserves Proved reserves were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing economic and operating conditions based upon the 12-month unweighted average of the first day of the month spot prices prior to the end of the reporting period. These prices as of December 31, 2020 and 2019 were $39.57 and $55.69 per barrel for crude oil and $1.985 and $2.578 per MMBtu for natural gas, respectively. The estimated realized prices used in computing the Company’s reserves as of December 31, 2020 were as follows: (i) oil - $38.08 per barrel, (ii) natural gas - ($1.304) per Mcf, and (iii) NGL - $12.27 per barrel. The estimated realized prices used in computing the Partnership’s reserves as of December 31, 2019 were as follows: (i) oil - $50.57 per barrel, (ii) natural gas - $0.10 per Mcf, and (iii) NGL - $21.17 per barrel. All prices are net of adjustments for regional basis differentials, treating costs, transportation, gas shrinkage, gas heating vale (BTU content) and/or crude quality and gravity adjustments. The proved reserve estimates as of December 31, 2020 and 2019 were prepared by Cawley, Gillespie & Associates, Inc. (“CG&A”), independent reserve engineers, and reflect the Company’s current development plans. All estimates of proved reserves are determined according to the rules prescribed by the SEC in existence at the time estimates were made. These rules require that the standard of “reasonable certainty” be applied to proved reserve estimates, which is defined as having a high degree of confidence that the quantities will be recovered. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as more technical and economic data becomes available, a positive or upward revision or no revision is much more likely than a negative or downward revision. Estimates are subject to revision based upon a number of factors, including many factors beyond the Company’s control, such as reservoir performance, prices, economic conditions, and government restrictions. In addition, results of drilling, testing, and production subsequent to the date of an estimate may justify revision of that estimate. Reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. Estimating quantities of proved oil and natural gas reserves is a complex process that involves significant interpretations and assumptions and cannot be measured in an exact manner. It requires interpretations and judgment of available technical data, including the evaluation of available geological, geophysical and engineering data. The accuracy of any reserve estimate is highly dependent on the quality of available data, the accuracy of the assumptions on which they are based upon, economic factors, such as oil and natural gas prices, production costs, severance and excise taxes, capital expenditures, workover and remedial costs, and the assumed effects of governmental regulation. In addition, due to the lack of substantial, if any, production data, there are greater uncertainties in estimating PUD reserves, proved developed non-producing reserves and proved developed reserves that are early in their production life. As a result, the Company’s reserve estimates are inherently imprecise. The meaningfulness of reserve estimates is highly dependent on the accuracy of the assumptions on which they were based. In general, the volume of production from oil and natural gas properties the Company owns declines as reserves are depleted. Except to the extent the Company conducts successful exploration and development activities or acquires additional properties containing proved reserves, or both, the Company’s proved reserves will decline as reserves are produced. 89 The following table reflects changes in proved reserves during the periods indicated: Crude Oil (MBbl) Natural Gas (MMcf) NGL (MBbl) Total (MBoe) Predecessors Proved Reserves at January 1, 2019 2,914 809 222 3,271 Contribution from HighPeak II 973 569 78 1,146 Extensions and discoveries 5,413 2,528 759 6,593 Revisions of previous estimates 217 887 290 655 Production (145 ) (139 ) - (168 ) Proved Reserves at December 31, 2019 9,372 4,654 1,349 11,497 Purchase of minerals in place 44 36 - 50 Extensions and discoveries 1,008 252 67 1,117 Revisions of previous estimates (1,555 ) (1,144 ) (374 ) (2,120 ) Production (236 ) (87 ) (20 ) (270 ) Proved Reserves at August 21, 2020 8,633 3,711 1,022 10,274 Successor Proved Reserves at August 22, 2020 8,633 3,711 1,022 10,274 Extensions and discoveries 11,977 5,215 1,433 14,279 Revisions of previous estimates (1,180 ) (875 ) (277 ) (1,603 ) Production (398 ) (112 ) (18 ) (435 ) Proved Reserves at December 31, 2020 19,032 7,939 2,160 22,515 At December 31, 2020, the Company had approximately 22,515 MBoe of proved reserves. Effective August 21, 2020, the HighPeak business combination included estimated proved reserves totaling 10,274 MBoe. For the period from August 22, 2020 to December 31, 2020, extensions and discoveries increased proved reserves by 14,279 MBoe as a result of: (i) drilling 3 gross (3.0 net) exploratory wells that were on production as of December 31, 2020, (ii) 9 gross (8.9 net) exploratory wells that were in the final stages of completion as of December 31, 2020, and (iii) the addition of 15 gross (12.4 net) PUDs. Downward revisions of previous estimates of 1,603 MBoe for the period from August 22, 2020 to December 31, 2020 were primarily the result of: (i) negative revisions of 1,112 MBoe due to technical revisions attributable to decreased well performance and adjustments to our PUD estimates, (ii) negative revisions of 409 MBoe related to PUDs removed from the development program, (iii) negative revisions of approximately 98 MBoe primarily due to decreases in oil, natural gas and NGL prices and increased price differentials, (iv) partially offset by positive revisions of approximately 16 MBoe related to decreased forecasted operating expenses. The net increase in proved reserves was partially offset by 435 MBoe in production during the period from August 22, 2020 to December 31, 2020. The Company’s current development plan reflects allocation of capital with a focus on efficiencies, recoveries and rates of return. At August 21, 2020, the Company had approximately 10,274 MBoe of proved reserves. During the period from January 1, 2020 to August 21, 2020, the Company acquired interests in three (3) producing vertical wells near its area of operation which included estimated proved reserves totaling 50 MBoe. For the period from January 1, 2020 to August 21, 2020, extensions and discoveries increased proved reserves by 1,117 MBoe as a result of: (i) drilling 3 gross (3.0 net) exploratory wells that were on production as of August 21, 2020. Revisions of previous estimates of 2,120 MBoe for the period from January 1, 2020 to August 21, 2020 were primarily the result of: (i) negative revisions totaling approximately 1,975 MBoe due to technical revisions attributable to decreased well performance of offset horizontal wells resulting in lessoned projected performance and adjustments to PUD estimates, (ii) negative revisions of approximately 173 MBoe primarily due to decreases in oil, natural gas and NGL prices and increased price differentials, and (iii) partially offset by positive revisions of 28 MBoe due to decreased forecasted operating expenses. Adding to the net decrease in proved reserves was 270 MBoe in production during the period from January 1, 20202 to August 21, 2020. At December 31, 2019, the Predecessors had approximately 11,497 MBoe of proved reserves. Effective October 1, 2019, the contribution of a subsidiary to the Predecessors by HighPeak II included estimated proved reserves totaling 1,146 MBoe. For the year ended December 31, 2019, extensions and discoveries increased proved reserves by 6,593 MBoe as a result of: (i) drilling or participating in the drilling of 2 gross (1.8 net) exploratory wells that were on production as of December 31, 2019, (ii) 5 gross (5.0 net) exploratory wells that were being drilled or pending completion as of December 31, 2019, and (iii) the addition of 13 gross (4.4 net) PUDs. Revisions of previous estimates of 655 MBoe for the year ended December 31, 2019 were primarily the result of: (i) negative revisions totaling approximately 80 MBoe due to reductions in pricing and increases in pricing differentials, (ii) negative revisions of approximately 54 MBoe primarily due to increased forecasted operating expenses, and (iii) positive revisions of 789 MBoe due to improvements in well performance attributable to improved well performance of offset horizontal wells resulting in improved projected performance of these PUDs. The net increase in proved reserves was offset by 168 MBoe in production during the year ended December 31, 2019. 90 The following table sets forth the Partnership’s estimated quantities of proved developed and proved undeveloped oil, natural gas and natural gas liquid reserves: Successor December 31, 2020 Predecessors December 31, 2019 Proved Developed Reserves (1) Oil (MBbl) 8,730 4,091 Natural gas (MMcf) 3,572 1,952 Natural gas liquids (MBbl) 957 548 Total (MBoe) 10,282 4,964 Proved Undeveloped Reserves Oil (MBbl) 10,302 5,281 Natural gas (MMcf) 4,367 2,702 Natural gas liquids (MBbl) 1,203 801 Total (MBoe) 12,233 6,533 Total Proved Reserves Oil (MBbl) 19,032 9,372 Natural gas (MMcf) 7,939 4,654 Natural gas liquids (MBbl) 2,160 1,349 Total (MBoe) 22,515 11,497 (1) As of December 31, 2020 and 2019, proved developed reserves includes proved developed non-producing reserves of 4,517 and 3,101 MBbl of crude oil, 1,912 and 1,454 MMcf of natural gas and 517 and 447 MBbl of natural gas liquids, respectively. Standardized Measure of Discounted Future Net Cash Flows The following table reflects the Partnership’s standardized measure of discounted future net cash flows relating from its proved crude oil, natural gas and natural gas liquids reserves (in thousands): Successor December 31, 2020 Predecessors December 31, 2019 Future cash inflows $ 740,859 $ 502,961 Future production costs (217,025 ) (127,897 ) Future development costs (117,887 ) (78,360 ) Future income tax expense (25,824 ) (2,640 ) Future net cash flows 380,123 294,064 Discount to present value at 10% annual rate (157,931 ) (154,043 ) Standardized measure of discounted future net cash flows $ 222,192 $ 140,021 (1) Effective beginning on August 22, 2020 and as of December 31, 2020, the Company is treated as a corporation for U.S. federal income tax purposes. Accordingly, “future income tax expense” above includes estimates of future federal income taxes and margin / franchise taxes in Texas that may be incurred by the Company. As of December 31, 2019, the Predecessors were each treated as a partnership for U.S. federal income tax purposes. Accordingly, federal taxable income and losses were reported on the income tax returns of the Predecessor’s partners. The Predecessors were subject to margin / franchise taxes in Texas, which is reflected as “Future income tax expense”. 91 The following table reflects the principal changes in the standardized measure of discounted future net cash flows attributable to the Partnership’s proved reserves (in thousands): Year Ended December 31, 2020 (2) Year Ended December 31, 2019 (2) Standardized measure of discounted future net cash flows, beginning of year $ 140,021 $ 31,118 Contribution of HighPeak II to Predecessors - 10,488 Sales of oil and natural gas, net of production costs (15,648 ) (4,294 ) Extensions and discoveries, net of future development costs 172,478 85,626 Net changes in prices and production costs (50,728 ) (6,755 ) Changes in estimated future development costs 6,466 9,483 Purchases of minerals in place 600 14 Revisions of previous quantity estimates (41,646 ) 8,232 Accretion of discount 14,134 3,165 Net changes in income taxes (1) (10,675 ) (857 ) Net changes in timing of production and other 7,190 3,801 Standardized measure of discounted future net cash flows, end of year $ 222,192 $ 140,021 (1) Effective with the HighPeak business combination that closed on August 21, 2020, the oil and gas properties became owned by HighPeak Energy, which is treated as a corporation for U.S. federal income tax purposes. As such, the “Net change in income taxes” in the table above for the year ended December 31, 2020 reflects the change in tax status applicable to the operations of the oil and gas properties. Prior to the HighPeak business combination, the Predecessors were each treated as a partnership for U.S. federal income tax purposes. Accordingly, federal taxable income and losses relating to the operation of the oil and gas properties were reported on the income tax returns of the Predecessors’ partners. The Predecessors were subject to margin / franchise taxes in Texas, which is reflected as “Net change in income taxes” in the table above for the year ended December 31, 2019. (2) The year ended December 31, 2020 in the table above reflects the change in standardized measure from that of HPK LP, our Predecessor, as of December 31, 2019 to that of the Company as of December 31, 2020 and amounts are combined for the period from January 1, 2020 to August 21, 2020 of HPK LP and from August 22, 2020 to December 31, 2020 of the Company. There was no third-party reserve report prepared as of August 21, 2020 from which to compute a standardized measure from as of that date. The year ended December 31, 2019 in the table above reflects the change in standardized measure from that of HighPeak I, HPK LP’s Predecessor, as of December 31, 2018 to that of HPK LP as of December 31, 2019 and amounts are combined for the period from January 1, 2019 to September 30, 2019 of HighPeak I and from October 1, 2019 to December 31, 2019 of HPK LP. There was no third-party reserve report prepared for HighPeak I as of October 1, 2019 from which to compute a standardized measure from as of that date. We believe the table above accurately reflects the change in standardized measure for the Predecessors and Successor in a meaningful context. 92 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 1, 2020, we dismissed WithumSmith+Brown, PC (“Withum”) from serving as our independent registered public accounting firm and engaged Weaver and Tidwell, L.L.P. (“Weaver”) as our new independent registered public accounting firm. Our Audit Committee approved and authorized the change. Withum’s report of independent registered public accounting firm, dated May 13, 2020 on the consolidated financial statements of the Company as of December 31, 2019 and for the period from October 29, 2019 (inception) through December 31, 2019 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles other than the Company’s ability to continue as a going concern due to Pure’s obligation to either complete a business combination by the close of business on August 21, 2020 or cease all operations except for the purpose of liquidating.