Riley Exploration Permian, Inc. 10-Q

Item 1. Financial Statements RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, 2022 December 31, 2021 (In thousands, except share amounts) Assets Current Assets: Cash and cash equivalents $ 17,908 $ 8,317 Accounts receivable 27,463 18,002 Prepaid expenses and other current assets 3,377 4,902 Current derivative assets 1,607 83 Total current assets 50,355 31,304 Oil and natural gas properties, net (successful efforts) 431,067 359,131 Other property and equipment, net 4,822 3,174 Non-current derivative assets — 267 Other non-current assets, net 4,307 2,293 Total Assets $ 490,551 $ 396,169 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 10,854 $ 7,737 Accounts payable - related parties 122 164 Accrued liabilities 28,785 12,874 Revenue payable 17,768 11,370 Current derivative liabilities 22,529 30,984 Other current liabilities 3,003 947 Total Current Liabilities 83,061 64,076 Non-current derivative liabilities 2,423 9,515 Asset retirement obligations 2,689 2,261 Revolving credit facility 48,000 65,000 Deferred tax liabilities 40,586 17,384 Other non-current liabilities 1,138 95 Total Liabilities 177,897 158,331 Commitments and Contingencies (Note 14) Shareholders' Equity: Preferred stock, $ 0.0001 par value, 25,000,000 shares authorized; 0 shares issued and outstanding — — Common stock, $ 0.001 par value, 240,000,000 shares authorized; 20,181,872 and 19,836,885 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 20 20 Additional paid-in capital 273,821 271,737 Retained earnings (Accumulated deficit) 38,813 ( 33,919 ) Total Shareholders' Equity 312,654 237,838 Total Liabilities and Shareholders' Equity $ 490,551 $ 396,169 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands, except per share/unit amounts) Revenues: Oil and natural gas sales, net $ 87,471 $ 48,014 $ 241,897 $ 126,222 Contract services - related parties 600 600 1,800 1,800 Total Revenues 88,071 48,614 243,697 128,022 Costs and Expenses: Lease operating expenses 8,813 5,686 23,705 17,407 Production and ad valorem taxes 5,826 2,575 14,854 7,347 Exploration costs 20 884 1,540 9,142 Depletion, depreciation, amortization and accretion 8,346 6,692 22,167 20,025 General and administrative: Administrative costs 5,154 4,790 13,567 11,516 Unit-based compensation expense — — — 276 Share-based compensation expense 704 751 2,274 6,101 Cost of contract services - related parties 89 147 263 329 Transaction costs — 198 2,638 2,683 Total Costs and Expenses 28,952 21,723 81,008 74,826 Income From Operations 59,119 26,891 162,689 53,196 Other Income (Expense): Interest expense, net ( 585 ) ( 963 ) ( 1,960 ) ( 3,299 ) Gain (loss) on derivatives 17,600 ( 14,987 ) ( 44,395 ) ( 75,286 ) Total Other Income (Expense) 17,015 ( 15,950 ) ( 46,355 ) ( 78,585 ) Net Income (Loss) From Continuing Operations Before Income Taxes 76,134 10,941 116,334 ( 25,389 ) Income tax benefit (expense) ( 16,317 ) 3,937 ( 25,130 ) ( 13,539 ) Net Income (Loss) From Continuing Operations 59,817 14,878 91,204 ( 38,928 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands, except per share/unit amounts) Discontinued Operations: Gain (loss) from discontinued operations — 775 — ( 18,738 ) Income tax benefit (expense) on discontinued operations — 1 — ( 59 ) Gain (Loss) on Discontinued Operations — 776 — ( 18,797 ) Net Income (Loss) 59,817 15,654 91,204 ( 57,725 ) Dividends on preferred units — — — ( 574 ) Net Income (Loss) Attributable to Common Shareholders/Unitholders $ 59,817 $ 15,654 $ 91,204 $ ( 58,299 ) Net Income (Loss) per Share/Unit from Continuing Operations: Basic $ 3.06 $ 0.77 $ 4.67 $ ( 2.29 ) Diluted $ 3.05 $ 0.76 $ 4.65 $ ( 2.29 ) Net Income (Loss) per Share/Unit from Discontinued Operations: Basic $ — $ 0.04 $ — $ ( 1.09 ) Diluted $ — $ 0.04 $ — $ ( 1.09 ) Net Income (Loss) per Share/Unit: Basic $ 3.06 $ 0.81 $ 4.67 $ ( 3.38 ) Diluted $ 3.05 $ 0.80 $ 4.65 $ ( 3.38 ) Weighted Average Common Shares/Units Outstanding: Basic 19,546 19,434 19,530 17,218 Diluted 19,587 19,540 19,632 17,218 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/SHAREHOLDERS' EQUITY (Unaudited) (In Thousands) Nine Months Ended September 30, 2022 Members' Equity Shareholders' Equity Common Stock Units Outstanding Amount Shares Amount Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Shareholders' Equity Balance, December 31, 2021 — $ — 19,837 $ 20 $ 271,737 $ ( 33,919 ) $ 237,838 Share-based compensation expense — — — — 1,061 — 1,061 Repurchased shares for tax withholding — — ( 13 ) — ( 339 ) — ( 339 ) Issuance of common shares under long-term incentive plan, net — — 30 — — — — Dividends declared — — — — — ( 6,154 ) ( 6,154 ) Net loss — — — — — ( 7,168 ) ( 7,168 ) Balance, March 31, 2022 — $ — 19,854 $ 20 $ 272,459 $ ( 47,241 ) $ 225,238 Share-based compensation expense — — — — 828 — 828 Repurchased shares for tax withholding — — ( 9 ) — ( 252 ) — ( 252 ) Issuance of common shares under long-term incentive plan — — 20 — — — — Dividends declared — — — — — ( 6,159 ) ( 6,159 ) Net income — — — — — 38,555 38,555 Balance, June 30, 2022 — $ — 19,865 $ 20 $ 273,035 $ ( 14,845 ) $ 258,210 Share-based compensation expense, net — — — — 795 — 795 Repurchased shares for tax withholding — — — — ( 9 ) — ( 9 ) Issuance of common shares under long-term incentive plan, net — — 317 — — — — Dividends declared — — — — — ( 6,159 ) ( 6,159 ) Net income — — — — — 59,817 59,817 Balance, September 30, 2022 — $ — 20,182 $ 20 $ 273,821 $ 38,813 $ 312,654 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/SHAREHOLDERS' EQUITY- (Continued) (Unaudited) (In Thousands) Nine Months Ended September 30, 2021 Members' Equity Shareholders' Equity Common Stock Units Outstanding Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Total Shareholders' Equity Balance, December 31, 2020 1,568 $ 154,371 — $ — $ — $ — $ — Purchase of common units under long-term incentive plan ( 3 ) ( 191 ) — — — — — Dividends on preferred units — ( 574 ) — — — — — Preferred units converted to common units 512 61,196 — — — — — Dividends on common units — ( 3,770 ) — — — — — Unit-based compensation expense — 276 — — — — — Net loss from January 1, 2021 through February 26, 2021 — ( 19,117 ) — — — — — Restricted common shares issued in exchange for common units issued under long-term incentive plan ( 24 ) — 198 — — — — Common shares issued in exchange for common units (effected for 1-for-12 reverse stock split) ( 2,053 ) ( 192,191 ) 16,733 17 192,174 — 192,191 Common shares issued for business combination — — 891 1 26,391 — 26,392 Restricted common shares issued — — 3 — — — — Share-based compensation expense — — — — 409 — 409 Dividends declared — — — — — ( 4,991 ) ( 4,991 ) Net loss from February 27, 2021 through March 31, 2021 — — — — — ( 32,761 ) ( 32,761 ) Balance, March 31, 2021 — $ — 17,825 $ 18 $ 218,974 $ ( 37,752 ) $ 181,240 Share-based compensation expense — — — — 779 — 779 Issuance of common shares under long-term incentive plan — — 197 — 4,165 — 4,165 Dividends paid — — — — — ( 55 ) ( 55 ) Net loss — — — — — ( 21,501 ) ( 21,501 ) Balance, June 30, 2021 — $ — 18,022 $ 18 $ 223,918 $ ( 59,308 ) $ 164,628 Share-based compensation expense — — — — 751 — 751 Repurchased shares for tax withholding — — ( 17 ) — ( 514 ) — ( 514 ) Common stock sold to public, net of issuance costs — — 1,667 2 46,682 — 46,684 Dividends declared — — — — — ( 5,513 ) ( 5,513 ) Net income — — — — — 15,654 15,654 Balance, September 30, 2021 — $ — 19,672 $ 20 $ 270,837 $ ( 49,167 ) $ 221,690 The accompanying notes are an integral part of these condensed consolidated financial statements. 10 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2022 2021 (In thousands) Cash Flows from Operating Activities: Net income (loss) $ 91,204 $ ( 57,725 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operations — 18,797 Oil and gas lease expirations 1,465 8,923 Depletion, depreciation, amortization and accretion 22,167 20,025 Loss on derivatives 44,395 75,286 Settlements on derivative contracts ( 61,198 ) ( 21,477 ) Amortization of deferred financing costs 548 498 Unit-based compensation expense — 276 Share-based compensation expense 2,684 6,101 Deferred income tax expense 23,202 13,352 Changes in operating assets and liabilities Accounts receivable ( 9,461 ) ( 6,949 ) Accounts receivable – related parties — ( 143 ) Prepaid expenses and other current assets 1,513 241 Accounts payable and accrued liabilities 6,038 8,463 Accounts payable - related parties ( 42 ) 800 Revenue payable 6,398 4,481 Other current liabilities 1,439 ( 763 ) Net Cash Provided by Operating Activities - Continuing Operations 130,352 70,186 Cash Flows from Investing Activities: Additions to oil and natural gas properties ( 82,101 ) ( 50,247 ) Acquisitions of oil and natural gas properties — ( 445 ) Additions to other property and equipment ( 1,081 ) ( 1,396 ) Tengasco acquired cash — 859 Net Cash Used in Investing Activities - Continuing Operations ( 83,182 ) ( 51,229 ) Cash Flows from Financing Activities: Deferred financing costs ( 1,722 ) ( 86 ) Proceeds from revolving credit facility 4,000 3,500 Repayment under revolving credit facility ( 21,000 ) ( 41,000 ) Payment of common share/unit dividends ( 18,257 ) ( 14,568 ) Proceeds from issuance of common stock — 50,000 Public offering costs — ( 3,316 ) Payment of preferred unit dividends — ( 1,491 ) Common stock repurchased for tax withholding ( 600 ) ( 514 ) Purchase of common units under long-term incentive plan — ( 191 ) Net Cash Used in Financing Activities - Continuing Operations ( 37,579 ) ( 7,666 ) Net Increase in Cash and Cash Equivalents from Continuing Operations 9,591 11,291 The accompanying notes are an integral part of these condensed consolidated financial statements. 11 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited) Nine Months Ended September 30, 2022 2021 (In thousands) Cash Flows from Discontinued Operations: Operating activities — 7 Investing activities — 3,892 Net Increase in Cash and Cash Equivalents from Discontinued Operations — 3,899 Net Increase in Cash and Cash Equivalents 9,591 15,190 Cash and Cash Equivalents, Beginning of Period 8,317 1,877 Cash and Cash Equivalents, End of Period $ 17,908 $ 17,067 Supplemental Disclosure of Cash Flow Information Cash Paid For: Interest, net of capitalized interest $ 1,866 $ 2,384 Non-cash Investing and Financing Activities - Continuing Operations: Changes in capital expenditures in accounts payable and accrued liabilities $ 11,971 $ 10,576 Right of use assets obtained in exchange for operating lease liability $ 1,624 $ — Preferred unit dividends $ — $ 574 Common stock issued in exchange for common units $ — $ 192,191 Assets acquired and liabilities assumed in business combination $ — $ 3,695 Common stock issued for business combination $ — $ 26,392 Preferred units converted to common units $ — $ 61,196 Non-cash Investing - Discontinued Operations: Goodwill incurred in business combination $ — $ 19,013 Assets acquired and liabilities assumed in business combination $ — $ 2,824 The accompanying notes are an integral part of these condensed consolidated financial statements. 12 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Nature of Business Organization Riley Permian is a growth-oriented, independent oil and natural gas company focused on the acquisition, exploration, development and production of oil, natural gas and NGLs in Texas and New Mexico. Our activities primarily include the horizontal development of the San Andres formation, a shelf margin deposit on the Northwest Shelf of the Permian Basin. Our acreage is primarily located on large, contiguous blocks in Yoakum County, Texas. On February 26, 2021 (the “Closing Date”), Riley Permian (f/k/a Tengasco, Inc. (“Tengasco”)), consummated a merger, dated as of October 21, 2020, by and among Tengasco, Antman Sub, LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of Tengasco (“Merger Sub”), and Riley Exploration – Permian, LLC (“REP LLC”). Merger Sub merged with and into REP LLC, with REP LLC as the surviving company and as a wholly owned subsidiary of Tengasco (collectively, with the other transactions described in the Merger Agreement, the “Merger”). On the Closing Date, the Registrant changed its name from Tengasco, Inc. to Riley Exploration Permian, Inc. (2) Basis of Presentation On August 16, 2022, the Board acting by written consent resolved to amend and restate the Company's Second Amended and Restated Bylaws to change the Company's fiscal year period from October 1st through September 30th each year to January 1st through December 31st each year commencing with the 2022 calendar year. On August 19, 2022, the holders of approximately 75 % of our outstanding Common Stock acting by written consent approved the Bylaws Restatement and adopted the Third Amended and Restated Bylaws. In accordance with Rule 14c-2 under the Exchange Act, the aforementioned actions taken by written consent became effective on September 23, 2022. As a result, the Company's 2022 fiscal year is now the period from January 1, 2022 to December 31, 2022. As a result of the change in the Company's fiscal year, this document reflects the Company's Quarterly Report for the three and nine months ended September 30, 2022 and comparative information for the 2021 periods. These unaudited condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 include the accounts of Riley Permian and its wholly owned subsidiaries REP LLC, Riley Permian Operating Company, LLC ("RPOC"), Tengasco Pipeline Corporation, Tennessee Land & Mineral Corporation, and Manufactured Methane Corporation, and have been prepared in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated upon consolidation. The Merger was accounted for as a reverse merger and, as such, the historical operations of REP LLC are deemed to be those of the Company. Thus, the condensed consolidated financial statements included in this report reflect (i) the historical operating results of REP LLC prior to the Merger; (ii) the consolidated results of the Company following the Merger; (iii) the assets and liabilities of REP LLC at their historical cost; and (iv) the Company’s equity and earnings per share for all periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended September 30, 2021 and the Company's Transition Report on Form 10-QT for the period ended December 31, 2021. These condensed consolidated financial statements have not been audited by an independent registered public accounting firm. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2022, for various reasons, including as a result of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results, fluctuations in the fair value of derivative instruments, the current and future impacts of the military conflict between Russia and Ukraine, the volatile inflationary environment in U.S. markets and other factors. 13 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) (3) Summary of Significant Accounting Policies Significant Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions may also affect 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 period. The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include, but are not limited to, estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, accounts receivable, accrued capital expenditures and operating expenses, ARO, the fair value determination of acquired assets and assumed liabilities, certain tax accruals and the fair value of derivatives. Accounts Receivable Accounts receivable is summarized below: September 30, 2022 December 31, 2021 (In thousands) Oil, natural gas and NGL sales $ 26,380 $ 17,562 Joint interest accounts receivable 500 409 Other accounts receivable 583 31 Total accounts receivable $ 27,463 $ 18,002 The Company had no allowance for credit losses at September 30, 2022 and December 31, 2021. 14 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Other Non-Current Assets, Net Other non-current assets consisted of the following: September 30, 2022 December 31, 2021 (In thousands) Deferred financing costs, net $ 2,519 $ 1,345 Prepayments to outside operators 248 690 Right of use assets 1,477 208 Other deposits 63 50 Total other non-current assets, net $ 4,307 $ 2,293 The Company incurred $ 1.7 million in financing costs related to the amendment of its revolving credit facility in April 2022. The Company extended certain existing leases and entered into a new lease during the nine months ended September 30, 2022, which resulted in additions to the right of use assets. Accrued Liabilities Accrued liabilities consisted of the following: September 30, 2022 December 31, 2021 (In thousands) Accrued capital expenditures $ 14,966 $ 5,618 Accrued lease operating expenses 4,315 2,534 Accrued general and administrative costs 4,750 3,404 Other accrued expenditures 4,754 1,318 Total accrued liabilities $ 28,785 $ 12,874 15 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Asset Retirement Obligations Components of the changes in ARO for the nine months ended September 30, 2022 and the year ended December 31, 2021 are shown below: September 30, 2022 December 31, 2021 (In thousands) ARO, beginning balance $ 2,453 $ 2,434 Liabilities incurred 348 56 Revision of estimated obligations 326 — Liability settlements and disposals ( 178 ) ( 58 ) Accretion 54 21 ARO, ending balance 3,003 2,453 Less: current ARO (1) ( 314 ) ( 192 ) ARO, long-term $ 2,689 $ 2,261 _____________________ (1) Current ARO is included within other current liabilities on the accompanying condensed consolidated balance sheets. Goodwill At the closing of the Merger, the Company determined it had two reporting units, and the entire goodwill balance was included in the reporting unit acquired in the Merger (the "Kansas Reporting Unit"). The Company did not fully integrate the Kansas Reporting Unit in the Company's operations as it was deemed to be held for sale upon acquisition. The Company assessed the goodwill balance for impairment since the Company entered into a purchase and sale agreement ("PSA") in March 2021 for $ 3.5 million before closing adjustments. As the carrying value exceeded the implied fair value at the time of the closing of the Merger, the Company concluded the goodwill balance associated with the Kansas Reporting Unit was impaired and recognized a goodwill impairment loss, included within loss from discontinued operations on the condensed consolidated statement of operations, of $ 18.5 million for the nine months ended September 30, 2021. See further discussion in Note 12 - Discontinued Operations and Assets Held for Sale. Revenue Recognition The following table presents oil and natural gas sales disaggregated by product: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Oil and natural gas sales: Oil $ 80,017 $ 44,026 $ 224,895 $ 114,314 Natural gas 4,216 1,908 8,855 7,381 Natural gas liquids 3,238 2,080 8,147 4,527 Total oil and natural gas sales, net $ 87,471 $ 48,014 $ 241,897 $ 126,222 Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance and is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Company adopted this ASU effective October 1, 2021. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements. 16 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates (e.g., LIBOR) that are expected to be discontinued. ASU 2020-04 allows, among other things, certain contract modifications, such as those within the scope of Topic 470 on debt, to be accounted for as a continuation of the existing contract. The Company adopted this ASU effective concurrent with the amendment of the Company's revolving credit facility in April 2022. See Note 9 - Revolving Credit Facility for additional information on the amendment of the revolving credit facility. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements. (4) Acquisitions Business Combination Between REP LLC and Tengasco Immediately prior to the closing of the Merger on February 26, 2021, REP LLC converted all of its issued and outstanding Series A Preferred Units into common units of REP LLC. In connection with the Merger, holders of common units of REP LLC were entitled to receive, in exchange for each common unit, shares of common stock of Tengasco (which was renamed Riley Exploration Permian, Inc.), par value $ 0.001 per share (“Tengasco common stock”) based on the exchange ratio set forth in the Merger Agreement (the “Exchange Ratio”), with cash paid in lieu of the issuance of any fractional shares. The Exchange Ratio was 97.796467 shares of Tengasco common stock for each common unit of REP LLC (as adjusted for the reverse stock split). Immediately prior to the closing of the Merger, Tengasco effected a one-for-twelve reverse stock split resulting in outstanding common stock of approximately 17.8 million shares including shares of Tengasco common stock issued in the Merger. The combination between REP LLC and Tengasco qualified as a business combination with REP LLC being treated as the accounting acquirer. The assets acquired and liabilities assumed were recognized on the condensed consolidated balance sheet at fair value as of the acquisition date. The consideration paid in the Merger by REP LLC as the accounting acquirer totaled approximately $ 26.4 million and was determined based on the closing price of Tengasco’s common stock on February 26, 2021 and the total number of shares outstanding immediately prior to the Merger. The Merger was structured as a tax-free reorganization for United States federal income tax purposes. The following table summarizes the consideration for the Merger (presented in thousands, except stock price): Tengasco common stock price $ 29.64 Tengasco common stock - issued and outstanding as of February 26, 2021 891 Total consideration $ 26,392 The Company incurred approximately $ 5.0 million of related costs for the Merger, of which $ 0.2 million and $ 2.6 million was expensed for the three and nine months ended September 30, 2021 as transaction costs on the condensed consolidated statements of operations. 17 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The Company completed the determination of the fair value attributable to the assets acquired and liabilities assumed as of September 30, 2021. The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values on February 26, 2021 (in thousands): Assets Cash and cash equivalents $ 860 Account receivable 325 Prepaid and other current assets 759 Total current assets 1,944 Oil and gas properties 4,525 Other property and equipment 91 Right of use assets 42 Other non-current assets 4 Deferred tax assets 2,987 Total assets acquired 9,593 Liabilities Accounts payable 130 Accrued liabilities 409 Current lease liabilities, operating 42 Current lease liabilities, financing 68 Total current liabilities 649 Asset retirement obligations 1,565 Total liabilities assumed 2,214 Net identifiable assets acquired 7,379 Goodwill 19,013 Net assets acquired $ 26,392 The goodwill recognized was primarily attributable to a substantial increase in the stock price of Tengasco on the Closing Date, which increased the amount of the consideration transferred. Pro Forma Operating Results (Unaudited) The following unaudited pro forma combined results for the year ended September 30, 2021 reflect the consolidated results of operations of the Company as if the Merger had occurred on October 1, 2019. Subsequent to the Merger, the Company changed its fiscal year period from October 1st through September 30th each year to January 1st to December 31st each year commencing with the 2022 calendar year. The unaudited pro forma information includes adjustments for $ 3.6 million of transaction costs being reclassified to the fourth quarter of calendar year 2019 which were incurred during the year ended September 30, 2021. Additionally, the Company adjusted for $ 0.9 million of oil and natural gas property impairment that Tengasco recognized under the full-cost method of accounting, which would not have been recognized under the successful efforts method, during the three months ended December 31, 2020. Also, the unaudited pro forma information has been tax 18 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) effected using a 21% tax rate. The common stock was also adjusted for the conversion of the REP LLC preferred units into common units and retroactively adjusted for the Exchange Ratio and one-for-twelve reverse stock split. For the year ended September 30, 2021 (In thousands, except per share/unit amounts) (Unaudited) Total Revenues $ 151,036 Pro Forma Net Loss before Taxes ( 29,871 ) Pro forma income tax benefit 6,273 Pro Forma Net Loss $ ( 23,598 ) Net Loss per Share/Unit from Continuing Operations: Basic $ ( 1.88 ) Diluted $ ( 1.88 ) Net Income per Share/Unit from Discontinued Operations: Basic $ 0.02 Diluted $ 0.02 The unaudited pro forma combined financial information is for informational purposes only and was based off of the fiscal year period October 1st through September 30th as this was the fiscal year in effect at the time of the Merger. The unaudited pro forma financial information was not modified for the change in the Company's fiscal year. It is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the Merger been completed as of October 1, 2019 and should not be taken as indicative of the Company's future combined results of operations. The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results. (5) Oil and Natural Gas Properties Oil and natural gas properties are summarized below: September 30, 2022 December 31, 2021 (In thousands) Proved $ 508,834 $ 421,779 Unproved 12,937 18,839 Work-in-progress 26,008 13,534 547,779 454,152 Accumulated depletion and amortization ( 116,712 ) ( 95,021 ) Total oil and natural gas properties, net $ 431,067 $ 359,131 Depletion and amortization expense for proved oil and natural gas properties was $ 8.2 million and $ 6.5 million for the three months ended September 30, 2022 and 2021. Depletion and amortization expense for proved oil and natural gas properties was $ 21.7 million and $ 19.3 million for the nine months ended September 30, 2022 and 2021, respectively. Exploration expense was $ 20 thousand and $ 0.9 million for the three months ended September 30, 2022 and 2021, respectively, and $ 1.5 million and $ 9.1 million for the nine months ended September 30, 2022 and 2021, respectively. Exploration expense was primarily attributable to the expiration of oil and natural gas leases for the nine months ended September 30, 2022 and three and nine months ended September 30, 2021. 19 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) (6) Derivative Instruments Oil and Natural Gas Contracts The Company uses commodity based derivative contracts to reduce exposure to fluctuations in oil and natural gas prices. While the use of these contracts limits the downside risk for adverse price changes, their use also limits future revenues from favorable price changes. We have not designated our derivative contracts as hedges for accounting purposes, and therefore changes in the fair value of derivatives are included and recognized in other income (expense) in the condensed consolidated statement of operations. As of September 30, 2022, the Company's oil and natural gas derivative instruments consisted of fixed price swaps, costless collars, and basis protection swaps. The following table summarizes the open financial derivative positions as of September 30, 2022, related to oil and natural gas production: Weighted Average Price Calendar Quarter / Year Notional Volume Fixed Put Call ($ per unit) Oil Swaps (Bbl) Q4 2022 270,000 $ 56.03 $ — $ — 2023 720,000 $ 53.27 $ — $ — Natural Gas Swaps (Mcf) Q4 2022 540,000 $ 3.26 $ — $ — Oil Collars (Bbl) Q4 2022 90,000 $ — $ 35.00 $ 42.63 2023 — $ — $ — $ — 2024 3,000 $ — $ 50.00 $ 88.00 Oil Basis (Bbl) Q4 2022 240,000 $ 0.41 $ — $ — Interest Rate Contracts The Company has entered into floating-to-fixed interest rate swaps, in which it receives a floating market rate equal to one-month LIBOR and pays a fixed interest rate, to manage interest rate exposure related to the Company's revolving credit facility. The following table summarizes the open interest rate derivative positions as of September 30, 2022: Open Coverage Period Notional Amount Fixed Rate (In thousands) Floating-to-Fixed Interest Rate Swaps October 2022 - September 2023 $ 40,000 0.24 % 20 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Balance Sheet Presentation of Derivatives The following tables present the location and fair value of the Company’s derivative contracts included in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021: September 30, 2022 Balance Sheet Classification Gross Fair Value Amounts Netted Net Fair Value (In thousands) Current derivative assets $ 1,611 $ ( 4 ) $ 1,607 Non-current derivative assets 17 ( 17 ) — Current derivative liabilities ( 22,533 ) 4 ( 22,529 ) Non-current derivative liabilities ( 2,440 ) 17 ( 2,423 ) Total $ ( 23,345 ) $ — $ ( 23,345 ) December 31, 2021 Balance Sheet Classification Gross Fair Value Amounts Netted Net Fair Value (In thousands) Current derivative assets $ 281 $ ( 198 ) $ 83 Non-current derivative assets 267 — 267 Current derivative liabilities ( 31,182 ) 198 ( 30,984 ) Non-current derivative liabilities ( 9,515 ) — ( 9,515 ) Total $ ( 40,149 ) $ — $ ( 40,149 ) The following table presents the components of the Company's gain (loss) on derivatives for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Settlements on derivative contracts $ ( 17,040 ) $ ( 11,171 ) $ ( 61,198 ) $ ( 21,477 ) Non-cash gain (loss) on derivatives 34,640 ( 3,816 ) 16,803 ( 53,809 ) Gain (loss) on derivatives $ 17,600 $ ( 14,987 ) $ ( 44,395 ) $ ( 75,286 ) (7) Fair Value Measurements The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. The carrying values of financial instruments comprising cash and cash equivalents, payables, receivables, and advances from joint interest owners approximate fair values due to the short-term maturities of these instruments. The carrying value reported for the revolving credit facility approximates fair value because the underlying instruments are at interest rates which approximate current market rates. The revolving line of credit is considered a Level 3 measurement. 21 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Assets and Liabilities Measured on a Recurring Basis The fair value of commodity derivatives and interest rate swaps is estimated using discounted cash flow calculations based upon forward curves. The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, by level within the fair value hierarchy: September 30, 2022 Level 1 Level 2 Level 3 Total (In thousands) Financial assets: Commodity derivative assets $ — $ 21 $ — $ 21 Interest rate assets $ — $ 1,607 $ — $ 1,607 Financial liabilities: Commodity derivative liabilities $ — $ ( 24,973 ) $ — $ ( 24,973 ) Interest rate liabilities $ — $ — $ — $ — December 31, 2021 Level 1 Level 2 Level 3 Total (In thousands) Financial assets: Commodity derivative assets $ — $ 187 $ — $ 187 Interest rate assets $ — $ 361 $ — $ 361 Financial liabilities: Commodity derivative liabilities $ — $ ( 40,687 ) $ — $ ( 40,687 ) Interest rate liabilities $ — $ ( 10 ) $ — $ ( 10 ) (8) Transactions with Related Parties Contract Services RPOC provides certain administrative services to Combo Resources, LLC ("Combo") and is also the contract operator on behalf of Combo in exchange for a monthly fee of $ 100 thousand and reimbursement of all third party expenses pursuant to a contract services agreement. Additionally, RPOC provides certain administrative and operational services to Riley Exploration Group, LLC ("REG") in exchange for a monthly fee of $ 100 thousand pursuant to a contract services agreement. The following table presents revenues from and related cost for contract services for related parties: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Combo $ 300 $ 300 $ 900 $ 900 REG 300 300 900 900 Contract services - related parties $ 600 $ 600 $ 1,800 $ 1,800 Cost of contract services $ 89 $ 147 $ 263 $ 329 The Company had amounts due to Combo of $ 0.1 million and $ 0.2 million at September 30, 2022 and December 31, 2021, respectively, which are reflected in accounts payable - related parties on the accompanying condensed consolidated balance 22 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) sheets. Amounts due to Combo reflect the revenue, net of any expenditures for wells and fees due under the contract services agreement, for Combo's net working interest in wells that the Company operates on Combo's behalf. Consulting and Legal Fees On January 25, 2022, the Company and di Santo Law PLLC ("di Santo Law"), a law firm owned by a member of our Board of Directors, entered into an engagement letter that provides a monthly fixed fee in exchange for general corporate legal services. The agreement has an initial term of one year and provides for a monthly cash payment of $ 30 thousand and an aggregate one-time grant of 10,500 shares of restricted stock that vest in four equal installments at the end of each quarter in calendar year 2022. Prior to entry into this agreement, di Santo Law's attorneys provided legal services to the Company based on hourly rates. The Company incurred legal fees from di Santo Law of approximately $ 0.2 million and $ 0.5 million for the three months ended September 30, 2022 and 2021, respectively. The Company incurred legal fees from di Santo Law of approximately $ 0.5 million and $ 1.3 million for the nine months ended September 30, 2022 and 2021. As of September 30, 2022, there were no amounts due to di Santo Law. As of December 31, 2021, the Company had approximately $ 0.2 million accrued for di Santo Law. Such amounts were included in accrued liabilities in the accompanying condensed consolidated balance sheets. (9) Revolving Credit Facility On September 28, 2017, REP LLC entered into a credit agreement (the "Credit Agreement") to establish a senior secured revolving credit facility with a syndicate of banks including SunTrust Bank, now Truist Bank as successor by merger, as administrative agent. Substantially all of the Company’s assets are pledged to secure the revolving credit facility. The revolving credit facility had an initial borrowing base of $ 25 million with a maximum facility amount of $ 500 million. On April 29, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $ 175 million to $ 200 million, extend the maturity date to April 2026, replace LIBOR with SOFR and change the requirements for hedging to be based on utilization of the borrowing base and the Company's leverage ratio. On October 25, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $ 200 million to $ 225 million and change the semi-annual redeterminations to April 1 and October 1 to align with the Company's new fiscal year end of December 31st.. The borrowing base is subject to periodic redeterminations, mandatory reductions and further adjustments from time to time. During these redetermination periods, the Company’s borrowing base may be increased or may be reduced in certain circumstances. The revolving credit facility allows for SOFR Loans and Base Rate Loans (each as defined in the Credit Agreement). The interest rate on each SOFR Loan will be the adjusted Term SOFR for the applicable interest period plus a margin between 2.75 % and 3.75 % (depending on the borrowing base utilization percentage). The annual interest rate on each Base Rate Loan will be the Base Rate for the applicable interest period plus a margin between 1.75 % and 2.75 % (depending on the borrowing base utilization percentage). The Company is also subject to an unused commitment fee of between 0.375 % and 0.500 % (depending on the borrowing base utilization percentage). The Credit Agreement contains certain covenants, which, among other things, require the maintenance of (i) a total leverage ratio of not more than 3.25 to 1.0 and (ii) a minimum current ratio of not less than 1.0 to 1.0 as of the last day of any quarter. The Credit Agreement also contains a total leverage ratio for Restricted Payments, as defined in the Credit Agreement, after giving pro forma effect to such Restricted Payments, which includes payments to any holder of the Company's shares, would not exceed 2.50 to 1.0. If the Company's leverage ratio, after giving pro forma effect to such Restricted Payments (as defined in the Credit Agreement), is above 2.0 to 1.0, then an additional test of free cash flow is applied, and the Company will only be permitted to make such Restricted Payments if such payment does not exceed the Company's free cash flow. The Company is also required to limit its cash balance to less than $ 15 million or 10 % of the borrowing base, whichever is greater. If the Company's cash balance exceeds this limit on the last business day of the month, the Company will be required to apply the excess to reduce its credit facility borrowings. The Credit Agreement also contains other customary affirmative and negative covenants and events of default. The Company's minimum hedging requirement is between 0 % and 50 % (depending on the borrowing base utilization percentage and leverage ratio as of the hedge evaluation date) of its proved developed producing ("PDP") volumes on a rolling 24-month basis. As of September 30, 2022, the Company's minimum hedging requirement was 0 %. 23 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The following table summarizes the Company's interest expense: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Interest expense, net of capitalized interest $ 273 $ 728 $ 1,050 $ 2,645 Amortization of deferred financing costs 175 170 548 498 Unused commitment fees 137 65 362 156 Total interest expense, net $ 585 $ 963 $ 1,960 $ 3,299 As of September 30, 2022 and December 31, 2021, the weighted average interest rate on outstanding borrowings under the revolving credit facility was 5.88 % and 3.10 %, respectively. As of September 30, 2022, the Company was in compliance with all covenants contained in the Credit Agreement and had $ 48 million of outstanding borrowings and $ 152 million available under the borrowing base. (10) Members’/Shareholders' Equity Public Offering of Common Stock On June 30, 2021, the Company entered into an Underwriting Agreement (the "Underwriting Agreement") with Truist Securities, Inc., as the representative of the other several underwriters named in the Underwriting Agreement. On July 2, 2021, the Company issued 1,666,667 shares of common stock at a price to the public of $ 30.00 per share in accordance with the Underwriting Agreement. Net proceeds from the issuance were approximately $ 46.7 million, after deducting the underwriting fees and other offering costs incurred. Dividends For the three months ended September 30, 2022 and 2021, the Company declared quarterly dividends on its common stock totaling approximately $ 6.2 million and $ 5.5 million, respectively. See Note 9 - Revolving Credit Facility for discussion over the Company's restrictions on certain payments, including dividends. Share-Based and Unit-Based Compensation In connection with the Merger, the Company shareholders adopted an omnibus equity incentive plan, the 2021 LTIP, for the employees, consultants and the directors of the Company and its affiliates who perform services for the Company. The holders of unvested restricted units issued under the 2018 LTIP were issued substitute awards under the 2021 LTIP at the closing of the Merger. Upon the closing of the Merger and after giving effect to the adjustment resulting from the one-for-twelve reverse stock split, the 2021 LTIP had 1,387,022 shares of common stock available for issuance, of which 444,549 shares remained available as of September 30, 2022. 24 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 2021 Long-Term Incentive Plan The following table presents the Company's restricted stock activity during the nine months ended September 30, 2022 under the 2021 LTIP: 2021 Long-Term Incentive Plan Restricted Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2021 366,789 $ 19.41 Granted 366,669 $ 17.61 Vested ( 96,838 ) $ 18.87 Forfeited ( 3,625 ) $ 23.46 Unvested at September 30, 2022 632,995 $ 18.45 For the three months ended September 30, 2022 and 2021, the total equity-based compensation expense is $ 0.8 million for both periods and is included in general and administrative costs on the Company's condensed consolidated statement of operations for the restricted share awards granted under the 2021 LTIP. For the nine months ended September 30, 2022 and 2021, the total equity-based compensation expense of $ 2.7 million and $ 6.1 million, respectively, is included in general and administrative costs on the Company's condensed consolidated statement of operations for the restricted share awards granted under the 2021 LTIP. Approximately $ 9.4 million of additional equity-based compensation expense will be recognized over the weighted average life of 30 months for the unvested restricted share awards as of September 30, 2022 granted under the 2021 LTIP. 2018 Long-Term Incentive Plan In connection with the Merger and in accordance with the Merger Agreement, each unvested restricted unit outstanding under the 2018 LTIP was converted into restricted shares of the Company under the 2021 LTIP. The holders of unvested restricted units issued under the 2018 LTIP were issued substitute awards under the 2021 LTIP at the closing of the Merger. Total unit-based compensation expense of $ 0.3 million is for all of the issuances outstanding during the period of January 2021 through the date of the merger, February 26, 2021. Unit-based compensation expense is included in general and administrative costs on the Company's condensed consolidated statement of operations. (11) Income Taxes REP LLC was organized as a limited liability company and treated as a flow-through entity for federal income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns, even though such taxable income or tax credits may not have been distributed. In connection with the closing of the Merger, the Company's tax status changed from a limited liability company to a C-corporation. As a result, the Company is responsible for federal and state income taxes and must record deferred tax assets and liabilities for the tax effects of any temporary differences that exist. 25 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The components of the Company's consolidated provision for income taxes from continuing operations are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Current income tax expense: Federal $ 142 $ 2 $ 1,442 $ 2 State 291 284 486 52 Total current income tax expense 433 286 1,928 54 Deferred income tax expense (benefit): Federal 15,460 ( 6,427 ) 22,439 14,202 State 424 2,204 763 ( 717 ) Total deferred income tax expense (benefit) 15,884 ( 4,223 ) 23,202 13,485 Total income tax expense (benefit) $ 16,317 $ ( 3,937 ) $ 25,130 $ 13,539 A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Tax at statutory rate 21.0 % 21.0 % 21.0 % 21.0 % Nondeductible compensation 0.1 % ( 32.1 ) % 0.2 % ( 1.3 ) % Transaction costs — % ( 47.7 ) % — % ( 2.1 ) % Stock compensation — % 0.2 % ( 0.1 ) % ( 0.1 ) % State income taxes, net of federal benefit 0.8 % 22.9 % 0.8 % ( 1.6 ) % Change in tax status — % ( 0.5 ) % — % ( 53.4 ) % Income subject to taxation by REP LLC's unitholders — % — % — % ( 15.8 ) % Other ( 0.5 ) % — % ( 0.3 ) % — % Effective income tax rate 21.4 % ( 36.2 ) % 21.6 % ( 53.3 ) % The Company's federal income tax returns for the years subsequent to December 31, 2018 remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2017. The Company currently believes that all other significant filing positions are highly certain and that all of its other significant income tax positions and deductions would be sustained under audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions. (12) Discontinued Operations and Assets Held For Sale Kansas Reporting Unit On March 10, 2021, the Company entered into a PSA to divest of the Kansas Reporting Unit for an agreed upon purchase price of $ 3.5 million before certain closing adjustments. In addition, the Company also agreed to assign to the buyer its lease associated with Tengasco's former corporate office in Greenwood Village, Colorado. With Tengasco qualifying as a business and the Kansas Reporting Unit making up a significant portion of the assets of Tengasco, the Company concluded that the transaction met the requirements of assets held for sale and discontinued operations upon the acquisition date. The sale closed on April 2, 2021 for an adjusted purchase price of $ 3.3 million, after customary closing adjustments. 26 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The following table presents the components of the loss on discontinued operations reported in the condensed consolidated statements of operations for the periods ended September 30, 2021: Three Months Ended Nine Months Ended September 30, 2021 September 30, 2021 (In thousands) Oil and natural gas sales $ — $ — Total revenues — — Lease operating expenses — 115 Goodwill impairment — 18,516 Total expenses — 18,631 Other income (expenses) 775 ( 107 ) Gain (loss) from discontinued operations before income taxes 775 ( 18,738 ) Income tax benefit (expense) 1 ( 59 ) Gain (loss) from discontinued operations, net of tax $ 776 $ ( 18,797 ) The Company did not have any discontinued operations during the three and nine months ended September 30, 2022. (13) Net Income (Loss) Per Share/Unit Net income (loss) per share/unit is calculated using a retroactive application of the Exchange Ratio and the one-for-twelve reverse stock split that occurred in conjunction with the Merger. The Company calculated net income or loss per share/unit using the treasury stock method. The table below sets forth the computation of basic and diluted net income (loss) per share/unit for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands, except per share/unit) Continuing Operations: Net income (loss) - Diluted $ 59,817 $ 14,878 $ 91,204 $ ( 38,928 ) Less: Dividends on preferred units — — — ( 574 ) Net income (loss) attributable to common shareholders/unitholders - Basic (1) $ 59,817 $ 14,878 $ 91,204 $ ( 39,502 ) Basic weighted-average common shares/units outstanding 19,546 19,434 19,530 17,218 Effecting of dilutive securities: Restricted shares/units 41 106 102 — Diluted weighted-average common shares/units outstanding 19,587 19,540 19,632 17,218 Continuing Operations: Basic net income (loss) per common share/unit $ 3.06 $ 0.77 $ 4.67 $ ( 2.29 ) Diluted net income (loss) per common share/unit $ 3.05 $ 0.76 $ 4.65 $ ( 2.29 ) _____________________________________________________ (1) Used in the basic and diluted net loss per share/unit calculation when the Company is in a net loss position. 26 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) For the three and nine months ended September 30, 2022 and 2021, the following shares/units were excluded from the calculation of diluted net income (loss) per share/unit due to their anti-dilutive effect: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Restricted shares/units 293 127 232 228 (14) Commitments and Contingencies Legal Matters The Company was named as a defendant in an adversary proceeding (the "Adversary Proceeding") commenced on October 25, 2021 in United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court"), by the Trustee of the Chapter 7 bankruptcy of the Hoactzin Partners, L.P. ("Hoactzin"). The complaint in the Adversary Proceeding alleges that in October of 2018, one year prior to the Hoactzin bankruptcy filing in October of 2019, Peter Salas ("Salas"), Chairman of the Board of Tengasco during the period of the purported fraudulent transfers, caused Hoactzin to transfer its working interests in certain wells on its Kansas acreage (the “Kansas Working Interests”) to the Company for an amount the complaint alleges was purportedly less than the reasonable equivalent value of such Kansas Working Interests. The complaint includes avoidance actions and other causes of action in connection with the transfer of the Kansas Working Interests, as well as other causes of action alleged related to certain transactions to which the Company was not a party. The complaint also alleges that Salas, Dolphin Direct Equity Partners, L.P. ("DDEP"), an entity substantially owned by Salas, and the Company are jointly and severally liable for the damages incurred by Hoactzin. In connection with the Company’s merger in February 2021, Salas resigned his position from the Company’s Board and no longer holds any position as an officer or director of the Company. On April 2, 2021, the Company closed on the sale of all the assets it held in Kansas (of which the Kansas Working Interests were a small part) to a third party for an agreed upon purchase price of $ 3.3 million. On October 13, 2022, the Company entered into a Compromise Settlement Agreement and Mutual General Release (the “Settlement Agreement”) with the Trustee for the bankruptcy estate for Hoactzin to resolve certain claims against the Company in the Adversary Proceeding. Under the terms of the Settlement Agreement, the Company will pay $ 80 thousand to the Trustee in full settlement and satisfaction of (a) all claims, causes of action, and damages that have been asserted against the Company or could be asserted against the Company in the Adversary Proceeding; and (b) all claims which might arise from or relate to any actions taken by the Company while acting in connection with Debtor. The effectiveness of the Settlement Agreement is contingent upon its approval by the Bankruptcy Court. On October 13, 2022, the Trustee filed a motion to approve the Settlement Agreement with the Bankruptcy Court (the “Settlement Motion”). A hearing will be held on November 16, 2022 on the Settlement Motion. Should the Court decline to approve the proposed settlement, the Trustee's claims against Riley Permian would proceed to trial, absent a subsequent settlement approved by the Court. If the Bankruptcy Court grants the Settlement Motion, after Riley Permian makes the settlement payment contemplated under the Settlement Agreement, Riley Permian and the Trustee intend to file a joint motion requesting dismissal of the Adversary Proceeding with prejudice, as contemplated by the Settlement Agreement. The Settlement Agreement will have no effect on the Trustee’s claims against any of the other defendants in the Adversary Proceeding, including without limitation, those claims against Peter Salas, our former Chief Executive Officer. Environmental Matters The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws, which are often changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. The Company had no material environmental liabilities as of September 30, 2022 or December 31, 2021. Contractual Commitments 27 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) In October 2021, the Company executed two agreements related to its EOR project. The first agreement is a CO 2 purchase agreement with Kinder Morgan CO 2 Company, LLC that has a primary term extending through the earlier of the total contract quantity delivered or December 31, 2025. The agreement also has a daily contract quantity for Kinder Morgan to deliver CO 2 to the Company. The second agreement is a connection agreement that also established a delivery point for the purchased CO 2 with the Cortez Pipeline Company. In April 2022, the Company entered into a purchase agreement for pipe related to its 2023 drilling program. Under the agreement, the Company has commitments to purchase an additional approximately $ 10.1 million of pipe by first quarter of 2023. In August 2022, the Company entered into a second amendment on its gas gathering and processing agreement with its primary midstream counterparty, Stakeholder Midstream LLC (“Stakeholder”). Stakeholder committed to expand their gathering and processing system with a commitment from the Company to deliver an annual minimum volume to Stakeholder’s gathering system for a minimum of seven years beginning on the in-service date of the expanded plant. (15) Subsequent Events On October 10, 2022, the Board of Directors of the Company declared a cash dividend of $ 0.34 per share of common stock payable on November 7, 2022 to its shareholders of record at the close of business on October 24, 2022. On October 25, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $ 200 million to $ 225 million and change the semi-annual redetermination dates to April 1 and October 1 to align with the Company's new fiscal year end of December 31st. 28 . Table of Contents