Riley Exploration Permian, Inc. 10-K

Item 9A. Controls and Procedures Disclosure Controls and Procedures Our management establishes and maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. We evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021, with the participation of our CEO and CFO, as well as other key members of our management. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2021. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). We have evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report, with the participation of our CEO and CFO, as well as other key members of our management. Based on this assessment, management concluded that, as of September 30, 2021, the Company’s internal control over financial reporting was effective. Changes in Internal Control Over Financial Reporting We previously disclosed material weaknesses in internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in the Company's Form 10-Q as of March 31, 2021 and Item 1A herein, we had not yet designed an effective financial reporting process and did not complete thorough reviews of financial reports in a timely manner to allow for an appropriate level of analysis that would have identified these errors related to (i) accounting for stock-based compensation and our failure to record compensation expense for certain vested stock-based compensation grants in the correct reporting period, (ii) accounting for dividend distributions and our failure to record a declared dividend in the reporting period in which the dividend was declared, (iii) accounting for derivative settlements, and (iv) controls over preparation and review of the Company’s statement of cash flows were not effective. From the identification of the material weaknesses, it was determined that a lack of sufficient personnel were in place to allow for appropriate and thorough review and supervision of the financial reporting process. Additionally, we identified enhancements to certain existing financial reporting processes that would facilitate timely identification of equity transactions. These enhancements were implemented during the fiscal year ended September 30, 2021. In addition to augmenting our financial reporting processes, we hired additional accounting personnel, including a Chief Accounting Officer and senior financial reporting accountant, and engaged third party consultants to provide technical accounting expertise and an additional layer of review. These additional accounting personnel and resources were put in place during 2021 and have been fully integrated into the financial reporting process and the company’s internal control over financial reporting. As these improvements were fully implemented and in place during our fiscal year ended September 30, 2021, a sustained period of effective operation was demonstrated during the fiscal year and in connection with the preparation of our consolidated financial statements for the fiscal year ended September 30, 2021, to enable the management of the Company to conclude the material 73 Table of Contents weaknesses have been fully remediated as of September 30, 2021. There were no other changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Attestation Report of the Independent Registered Public Accounting Firm Until we are an accelerated filer or a large accelerated filer (as defined in Exchange Act Rule 12b-2), we will not be required to comply with the auditor attestation requirements related to internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. Item 9B. Other Information None. 74 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance Information as to Item 10 will be set forth in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC within 120 days after the close of the year ended September 30, 2021. Item 11. Executive Compensation Information as to Item 11 will be set forth in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC within 120 days after the close of the year ended September 30, 2021. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information as to Item 12 will be set forth in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC within 120 days after the close of the year ended September 30, 2021. Item 13. Certain Relationships and Related Transactions, and Director Independence Information as to Item 13 will be set forth in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC within 120 days after the close of the year ended September 30, 2021. Item 14. Principal Accountant Fees and Services Information as to Item 14 will be set forth in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC within 120 days after the close of the year ended September 30, 2021. 75 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules The following documents are filed as a part of this report: (1) Consolidated Financial Statements Reference is made to the Index to Consolidated Financial Statements appearing on page F-1. (2) Financial Statement Schedules All financial statement schedules have been omitted because they are not applicable or the required information is presented in the consolidated financial statements or notes thereto. (3) Exhibits Exhibit Number Description 2.1 Agreement and Plan of Merger, by and among Tengasco, Inc., Antman Sub, LLC, and Riley Exploration - Permian, LLC, dated as of October 21, 2020 (incorporated by reference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2020). 2.2 Amendment No. 1 to Agreement and Plan of Merger, by and among Tengasco, Inc., Antman Sub, LLC, and Riley Exploration - Permian, LLC, dated as of January 20, 2021 (incorporated by reference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 22, 2021). 3.1 First Amended and Restated Certificate of Incorporation of Riley Exploration Permian, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 1, 2021, Registration No. 333-253750). 3.2 Second Amended and Restated Bylaws of Riley Exploration Permian, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 1, 2021, Registration No. 333-253750). 10.1 Credit Agreement dated as of September 28, 2017, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.2 First Amendment to Credit Agreement dated as of February 27, 2018, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.2 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.3 Second Amendment to Credit Agreement dated as of November 9, 2018, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.3 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.4 Third Amendment to Credit Agreement dated as of April 3, 2019, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.4 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.5 Fourth Amendment to Credit Agreement dated as of October 15, 2019, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.5 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.6 Fifth Amendment to Credit Agreement dated as of May 7, 2020, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.6 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 76 Table of Contents 10.7 Sixth Amendment to Credit Agreement dated as of August 31, 2020, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.7 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.8 Seventh Amendment and Consent to Credit Agreement dated as of October 21, 2020, by and among Riley Exploration – Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.8 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.9 Eighth Amendment to Credit Agreement dated as of March 5, 2021, by and among Riley Exploration Permian, Inc., Riley Exploration - Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, as filed with the Securities and Exchange Commission on May 17, 2021). 10.10 Ninth Amendment to Credit Agreement dated as of May 5, 2021, by and among Riley Exploration Permian, Inc., Riley Exploration - Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, as filed with the Securities and Exchange Commission on May 17, 2021). 10.11 Tenth Amendment to the Credit Agreement dated as of October 12, 2021, by and among Riley Exploration Permian, Inc., Riley Exploration - Permian, LLC, as borrower, Truist Bank, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 14, 2021). 10.12 Form of Indemnity Agreement (incorporated by reference from Exhibit 10.14 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on January 21, 2021, Registration No. 333-250019). 10.13 Form of Independent Director Agreement (incorporated by reference from Exhibit 10.13 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on January 21, 2021, Registration No. 333-250019). 10.14 † Riley Exploration Permian, Inc. 2021 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 25, 2021). 10.15 † Form of Common Stock Award Agreement (incorporated by reference from Exhibit 10.10 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 15, 2021). 10.16 † Form of Restricted Stock Agreement (Time Vesting) (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on March 1, 2021, Registration No. 333- 253750). 10.17 † Form of Substitute Restricted Stock Agreement (Time Vesting) (incorporated by reference from Exhibit 4.5 to the Registrant’s Registration Statement on Form S-8 filed with the Commission on March 1, 2021, Registration No. 333-253750). 10.18 † Form of Restricted Stock Agreement (Non-Employee Director) (incorporated by reference from Exhibit 4.6 to the Registrant’s Registration Statement on Form S-8 filed with the Commission on March 1, 2021, Registration No. 333-253750). 10.19 † Employment Agreement dated effective as of March 15, 2021 by and between Riley Exploration Permian, Inc. and Corey Riley (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 15, 2021). 10. 2 0 † Employment Agreement dated effective as of March 15, 2021 by and between Riley Exploration Permian, Inc. and Philip Riley (incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 15, 2021). 10.21 † Employment Agreement dated effective as of February 26, 2021 by and between Riley Exploration Permian, Inc. and Michael J. Rugen (incorporated by reference from Exhibit 10.15 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 4, 2021). 77 Table of Contents 10.22 † Employment Agreement dated April 1, 2019 by and between Riley Exploration – Permian, LLC and Bobby D. Riley and assigned by Riley Exploration – Permian, LLC to Riley Permian Operating Company, LLC on June 8, 2019 (incorporated by reference from Exhibit 10.9 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.23 † Amendment No. 1 to Employment Agreement dated October 1, 2020 by and between Riley Permian Operating Company, LLC and Bobby D. Riley (incorporated by reference from Exhibit 10.10 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 10.24 † Amendment No. 2 to Employment Agreement dated March 15, 2021 by and between Riley Permian Operating Company, LLC and Bobby D. Riley (incorporated by reference from Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 15, 2021). 10.25 † Employment Agreement dated April 1, 2019 by and between Riley Exploration – Permian, LLC and Kevin Riley and assigned by Riley Exploration – Permian, LLC to Riley Permian Operating Company, LLC on June 8, 2019 (incorporated by reference from Exhibit 10.11 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019) 10.26 † Amendment No. 1 to Employment Agreement dated March 15, 2021 by and between Riley Permian Operating Company, LLC and Kevin Riley (incorporated by reference from Exhibit 10.8 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 15, 2021). 10.27 Second Amended and Restated Registration Rights Agreement dated October 7, 2020 by and among Riley Exploration – Permian, LLC, Riley Exploration Group, Inc., Yorktown Energy Partners XI, L.P., Boomer Petroleum, LLC, Bluescape Riley Exploration Holdings LLC, Bluescape Riley Acquisition Company LLC, Bobby D. Riley, Kevin Riley and Corey Riley (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-4/A, as filed with the Securities and Exchange Commission on December 31, 2020, Registration No. 333-250019). 21.1 * Subsidiaries of the Registrant 23.1 * Consent of BDO USA LLP 23.2 * Consent of Netherland, Sewell & Associates, Inc. 31.1 * Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 * Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 * Certification of Chief Executive Officer pursuant to 18 U.S.C., Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 * Certification of Chief Financial Officer pursuant to 18 U.S.C., Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 * Report of Netherland, Sewell & Associates, Inc. 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Calculation Linkbase Document 101.DEF* XBRL Taxonomy Definition Linkbase Document 101.LAB* XBRL Taxonomy Label Linkbase Document 101.PRE* XBRL Taxonomy Presentation Linkbase Document * Filed herewith. † Compensatory plan or arrangement. Item 16. Form 10-K Summary None. 78 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. RILEY EXPLORATION PERMIAN, INC. Date: December 14, 2021 By: /s/ Bobby D. Riley Bobby D. Riley Chief Executive Officer By: /s/ Philip Riley Philip Riley Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on the dates indicated. Signature Title Date /s/ Bobby D. Riley Chairman of the Board and Chief Executive Officer (Principal Executive Officer) December 14, 2021 Bobby D. Riley /s/ Philip Riley Chief Financial Officer (Principal Financial Officer) December 14, 2021 Philip Riley /s/ Amber Bonney Chief Accounting Officer (Principal Accounting Officer) December 14, 2021 Amber Bonney /s/ Brent Arriaga Director December 14, 2021 Brent Arriaga /s/ Bryan H. Lawrence Director December 14, 2021 Bryan H. Lawrence /s/ E. Wayne Nordberg Director December 14, 2021 E. Wayne Nordberg /s/ Beth A. di Santo Director December 14, 2021 Beth A di Santo 79 Table of Contents INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of September 30, 2021 and 2020 F-4 Consolidated Statements of Operations for the Years Ended September 2021 and 2020 F-5 Consolidated Statements of Changes in Members'/Shareholders' Equity for the Years Ended September 2021 and 2020 F-7 Consolidated Statements of Cash Flows for the Years Ended September 2021 and 2020 F-8 Notes to Consolidated Financial Statements F-10 F-1 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Riley Exploration Permian, Inc. Oklahoma City, Oklahoma Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Riley Exploration Permian, Inc. (the “Company”) as of September 30, 2021 and 2020, the related consolidated statements of operations, changes in members’/shareholders’ equity, and cash flows for each of the two years in the period ended September 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2021 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. F-2 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Estimation of Oil and Natural Gas Reserves and Effect on Depreciation, Depletion and Amortization Expense (“DD&A”) Related to Proved Oil and Natural Gas Properties The Company’s oil and natural gas properties, net balance as of September 30, 2021 was $345.8 million, which includes proved oil and natural gas properties of $402.2 million and accumulated DD&A of $88.3 million. DD&A expense was $25.2 million for the year ended September 30, 2021. As described in Note 2 to the consolidated financial statements, the Company accounts for its oil and natural gas activities using the successful efforts method of accounting which involves management’s use of internal and independent petroleum engineers to make estimates of proved oil and natural gas reserves necessary to record DD&A expense. To estimate the proved oil and natural gas reserves, management and their internal and independent petroleum engineers make significant estimates and assumptions including forecasting of future production volumes and lease operating expenses of proved oil and natural gas properties. We have identified the estimation of future production volumes and lease operating expenses used to estimate proved oil and natural gas reserves and the associated effect on DD&A expense related to proved oil and natural gas properties as a critical audit matter. Estimating future production volumes and lease operating expenses involves a high degree of subjectivity from management and their internal and independent petroleum engineers. Changes in these estimates and assumptions could have a significant effect on the measurement of DD&A expense. In turn, auditing these estimates and assumptions required subjective and complex auditor judgement. The primary procedures we performed to address this critical audit matter included: • Evaluating the professional qualifications of the internal and independent petroleum engineers, including their relationship to the Company, and making inquiries regarding the process and judgments used in estimating the Company’s proved oil and natural gas reserves. • Comparing estimates of future production volumes, production decline analyses, and lease operating expenses against historical results of actual production volumes, production decline analyses, and lease operating expenses on a summary basis for all wells and a detailed basis for a sample of wells. • Performing a retrospective review over management estimates of future production volumes made in prior periods as compared to actual results. /s/ BDO USA, LLP We have served as the Company's auditor since 2016. Houston, Texas December 14, 2021 F-3 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONSOLIDATED BALANCE SHEETS September 30, 2021 September 30, 2020 (In thousands, except share amounts) Assets Current Assets: Cash and cash equivalents $ 17,067 $ 1,660 Accounts receivable 17,473 10,128 Accounts receivable - related parties 456 55 Prepaid expenses and other current assets 1,730 1,752 Current derivative assets — 18,819 Total current assets 36,726 32,414 Oil and natural gas properties, net (successful efforts) 345,797 310,726 Other property and equipment, net 3,183 1,801 Non-current derivative assets 106 3,102 Other non-current assets, net 2,419 2,949 Total Assets $ 388,231 $ 350,992 Liabilities, Series A Preferred Units, and Members'/Shareholders' Equity Current Liabilities: Accounts payable $ 12,234 $ 4,739 Accrued liabilities 19,355 8,688 Revenue payable 9,008 4,432 Income taxes payable 219 — Advances from joint interest owners 214 254 Current derivative liabilities 42,144 — Other current liabilities 441 450 Total Current Liabilities 83,615 18,563 Non-current derivative liabilities 8,932 — Asset retirement obligations 2,306 2,268 Revolving credit facility 60,000 101,000 Deferred tax liabilities 11,628 1,834 Other non-current liabilities 60 418 Total Liabilities 166,541 124,083 Commitments and Contingencies (Note 15) Series A Preferred Units — 60,292 Members' Equity — 166,617 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; 19,672,050 and 0 shares issued and outstanding at September 30, 2021 and 2020, respectively 20 — Additional paid-in capital 270,837 — Accumulated deficit ( 49,167 ) — Total Shareholders' Equity 221,690 — Total Liabilities, Series A Preferred Units, and Members'/Shareholders' Equity $ 388,231 $ 350,992 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended September 30, 2021 2020 (In thousands, except per share/unit amounts) Revenues: Oil and natural gas sales, net $ 148,636 $ 73,133 Contract services - related parties 2,400 3,800 Total Revenues 151,036 76,933 Costs and Expenses: Lease operating expenses 21,975 20,243 Production and ad valorem taxes 8,636 4,280 Exploration costs 9,566 9,923 Depletion, depreciation, amortization and accretion 26,015 21,479 General and administrative: Administrative costs 13,966 10,826 Unit-based compensation expense 689 963 Share-based compensation expense 6,104 — Cost of contract services - related parties 477 503 Transaction costs 3,732 1,431 Total Costs and Expenses 91,160 69,648 Income From Operations 59,876 7,285 Other Income (Expense): Interest expense ( 4,534 ) ( 5,299 ) Gain (loss) on derivatives ( 89,195 ) 33,876 Total Other Income (Expense) ( 93,729 ) 28,577 Net Income (Loss) from Continuing Operations Before Income Taxes ( 33,853 ) 35,862 Income tax expense ( 13,016 ) ( 718 ) Net Income (Loss) From Continuing Operations ( 46,869 ) 35,144 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued) Year Ended September 30, 2021 2020 (In thousands, except per share/unit amounts) Discontinued Operations: Loss from discontinued operations ( 18,738 ) — Income tax expense on discontinued operations ( 59 ) — Loss on discontinued operations ( 18,797 ) — Net Income (Loss) ( 65,666 ) 35,144 Dividends on preferred units ( 1,491 ) ( 3,535 ) Net Income (Loss) Attributable to Common Shareholders/Unitholders $ ( 67,157 ) $ 31,609 Net Income (Loss) per Share/Unit from Continuing Operations: Basic $ ( 3.02 ) $ 2.54 Diluted $ ( 3.02 ) $ 2.13 Net Loss per Share/Unit from Discontinued Operations: Basic $ ( 1.17 ) $ — Diluted $ ( 1.17 ) $ — Net Income (Loss) per Share/Unit: Basic $ ( 4.19 ) $ 2.54 Diluted $ ( 4.19 ) $ 2.13 Weighted Average Common Shares/Units Outstanding: Basic 16,021 12,457 Diluted 16,021 16,509 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/SHAREHOLDERS' EQUITY Members' Equity Shareholders' Equity Common Stock Units Outstanding Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Total Shareholders' Equity (In thousands) Balance, September 30, 2019 1,527 $ 149,383 — $ — $ — $ — $ — Issuance of common units under long-term incentive plan 31 — — — — — — Purchase of common units under long-term incentive plan ( 3 ) ( 322 ) — — — — — Dividends on preferred units — ( 3,535 ) — — — — — Dividends on common units — ( 15,016 ) — — — — — Unit-based compensation expense — 963 — — — — — Net income — 35,144 — — — — — Balance, September 30, 2020 1,555 $ 166,617 — $ — $ — $ — $ — Issuance of common units under long-term incentive plan 13 — — — — — — Purchase of common units under long-term incentive plan ( 3 ) ( 191 ) — — — — — Dividends on preferred units — ( 1,491 ) — — — — — Dividends on common units — ( 7,571 ) — — — — — Unit-based compensation expense — 689 — — — — — Net loss from October 1, 2020 through February 26, 2021 — ( 27,058 ) — — — — — Preferred units converted to common units 512 61,196 — — — — — 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 — — — — 1,939 — 1,939 Dividends declared — — — — — ( 10,559 ) ( 10,559 ) Net loss from February 27, 2021 through September 30, 2021 — — — — — ( 38,608 ) ( 38,608 ) Issuance of common shares under long-term incentive plan — — 197 — 4,165 — 4,165 Common stock sold to public, net of issuance costs — — 1,667 2 46,682 46,684 Repurchased shares for tax withholding — — ( 17 ) — ( 514 ) — ( 514 ) Balance, September 30, 2021 — $ — 19,672 $ 20 $ 270,837 $ ( 49,167 ) $ 221,690 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended September 30, 2021 2020 (In thousands) Cash Flows from Operating Activities: Net income (loss) $ ( 65,666 ) $ 35,144 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operations 18,797 — Oil and gas lease expirations 9,347 7,902 Depletion, depreciation, amortization and accretion 26,015 21,341 (Gain) loss on plugging liabilities — 138 (Gain) loss on derivatives 89,195 ( 33,876 ) Settlements on derivative contracts ( 16,304 ) 26,914 Amortization of deferred financing costs 653 648 Unit-based compensation expense 689 963 Share-based compensation expense 6,104 — Deferred income tax expense 12,962 665 Changes in operating assets and liabilities: Accounts receivable ( 7,345 ) 1,515 Accounts receivable – related parties ( 401 ) 449 Prepaid expenses and other current assets 201 839 Other non-current assets — 84 Accounts payable and accrued liabilities 7,445 16 Income taxes payable ( 54 ) — Revenue payable 4,576 ( 84 ) Advances from joint interest owners ( 40 ) ( 108 ) Other liabilities ( 101 ) — Net Cash Provided By Operating Activities - Continuing Operations 86,073 62,550 Cash Flows from Investing Activities: Additions to oil and natural gas properties ( 58,329 ) ( 47,183 ) Acquisitions of oil and natural gas properties ( 445 ) ( 4,110 ) Additions to other property and equipment ( 1,714 ) ( 228 ) Tengasco acquired cash 860 — Net Cash Used In Investing Activities - Continuing Operations ( 59,628 ) ( 51,521 ) Cash Flows from Financing Activities: Deferred financing costs ( 139 ) ( 1,476 ) Proceeds from revolving credit facility 5,500 16,500 Repayment under revolving credit facility ( 46,500 ) ( 12,500 ) Payment of common share/unit dividends ( 18,286 ) ( 15,297 ) 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 ( 514 ) — Purchase of common units under long-term incentive plan ( 191 ) ( 322 ) Net Cash Used in Financing Activities - Continuing Operations ( 14,937 ) ( 13,095 ) Net Increase (Decrease) in Cash and Cash Equivalents from Continuing Operations 11,508 ( 2,066 ) The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents RILEY EXPLORATION PERMIAN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) Year Ended September 30, 2021 2020 (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 (Decrease) in Cash and Cash Equivalents 15,407 ( 2,066 ) Cash and Cash Equivalents, Beginning of Period 1,660 3,726 Cash and Cash Equivalents, End of Period $ 17,067 $ 1,660 Supplemental Disclosure of Cash Flow Information Cash Paid For: Interest $ 3,234 $ 4,206 Non-cash Investing and Financing Activities - Continuing Operations: Changes in capital expenditures in accounts payable and accrued liabilities $ 11,204 $ ( 2,301 ) Common share/unit dividends incurred but not paid $ ( 302 ) $ ( 173 ) Asset retirement obligations $ 113 $ 1,184 Preferred unit dividends paid in kind $ 904 $ 3,482 Preferred unit dividends $ — $ 3,535 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 Activities - 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 consolidated financial statements. F-9 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) Nature of Business Organization Riley Exploration Permian, Inc., ("Riley Permian", "REPX", "the Company", "Registrant", "we", "our", or "us"), 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 the previously announced Merger pursuant to that certain Agreement and Plan of Merger (“Merger Agreement”), 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”), as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of January 20, 2021, by and among Tengasco, Merger Sub and REP LLC. Pursuant to the terms of the Merger Agreement, 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. Current Commodity Environment During 2020, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, spread quickly across the globe. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies. Various containment measures, which included the quarantining of cities, regions and countries, have resulted in a severe drop in general economic activity and a resulting decrease in energy demand. As oil and natural gas operations are considered essential in the State of Texas and New Mexico, the Company has not had any significant disruptions in operations. This outbreak and the related responses of governmental authorities and others to limit the spread of the virus significantly reduced global economic activity, resulting in a significant decline in the demand for oil and other commodities. These factors caused a swift and material deterioration in commodity prices for a majority of 2020, which significantly impacted our revenues for 2020 and, to a lesser degree, 2021. However, near the end of 2020 and during 2021, oil prices have increased but are expected to continue to be volatile as these events evolve. The Company cannot estimate the full length or gravity of the future impacts at this time and if there is another significant decline in oil price, it could have a material adverse effect on the Company’s results of operations, financial position, liquidity and the value of oil and natural gas reserves. (2) Basis of Presentation These consolidated financial statements as of the years ended September 30, 2021 and 2020 include the accounts of Riley Permian and its wholly-owned subsidiaries REP LLC, Riley Permian Operating Company, LLC ("RPOC"), Riley Employee Member, LLC ("REM"), Tengasco Pipeline Corporation ("TPC"), Tennessee Land & Mineral Corporation ("TLMC"), and Manufactured Methane Corporation ("MMC"), and have been prepared in accordance with accounting principles generally accepted in the United States ("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 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. As of June 22, 2021, REM and REP LLC consummated an Agreement and Plan of Merger whereby REM was merged into REP LLC with REP LLC as the surviving entity. Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications had an immaterial effect on the previously reported total assets, total liabilities, members'/shareholders' equity, results of operations or cash flows. F-10 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (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 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 operating expenses and asset retirement obligations ("ARO"), the fair value determination of acquired assets and assumed liabilities, certain tax accruals and the fair value of derivatives. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash at financial institutions which may at times exceed federally insured amounts. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents. Accounts Receivable Our receivables arise primarily from the sale of oil, natural gas and NGLs and joint interest owner receivables for properties in which we serve as the operator. Accounts receivable are stated at amounts due, net of an allowance for doubtful accounts, if necessary. Accounts receivable from oil, natural gas and NGL sales are generally due within 30 to 60 days after the last day of each production month. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to the earliest unpaid items. To the extent actual volumes and prices of oil, natural gas and NGLs are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volume and prices for these properties are estimated and recorded within accounts receivable in the accompanying consolidated balance sheets. Oil is priced based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location. Natural gas pricing provisions are tied to a market index, with certain adjustments based on, among other factors, quality and heat content of natural gas, and prevailing supply and demand conditions. NGLs are priced based upon a market index with certain adjustments for transportation and fractionation. These market indices are determined on a monthly basis. On October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using a modified retrospective approach. This ASU replaced the incurred impairment model with an expected credit loss model for financial instruments, including accounts receivable. The ASU requires the Company 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 previous accounting guidance. As a result of adoption, the Company would establish allowances for bad debts equal to the estimable portions of accounts receivable for which failure to collect is expected to occur, if applicable. The Company would estimate uncollectible amounts based on the length of time that the accounts receivable has been outstanding, historical collection experience and current and future economic and market conditions, if failure to collect is expected to occur. Allowances for doubtful accounts would be recorded as reductions to the carrying values of the accounts receivables included in the Company’s consolidated balance sheets and would be recorded in Administrative costs in the consolidated statements of operations in the accounting periods if failure to collect an estimable portion is determined to be probable. The Company had no allowance for doubtful accounts at September 30, 2021 and 2020. F-11 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Accounts receivable is summarized below: September 30, 2021 2020 (In thousands) Oil, natural gas and NGL sales $ 17,008 $ 6,919 Joint interest accounts receivable 413 1,022 Realized derivative receivable 42 2,187 Other accounts receivable 10 — Total accounts receivable $ 17,473 $ 10,128 Proved Oil and Natural Gas Properties The Company uses the successful efforts method of accounting for its oil and natural gas producing activities. Under this method, all property acquisition costs, and costs of development wells are capitalized as incurred. The costs of development wells are capitalized whether producing or non-producing. Costs to drill exploratory wells are capitalized pending the determination of whether proved reserves are found. If an exploratory well is determined to be unsuccessful, the costs of drilling the unsuccessful exploratory well are charged to exploration costs. Geological and geophysical costs, including seismic studies, are charged to exploration costs as incurred. Expenditures incurred to operate and for maintenance, repairs and minor renewals necessary to maintain our oil and natural gas properties in operating condition are charged to lease operating expenses as incurred. Capitalized costs of proved oil and natural gas properties are amortized using the units-of-production method based on production and estimates of proved reserve quantities. Leasehold acquisition costs of proved properties are depleted over total estimated proved reserves, and capitalized development costs of wells and related equipment and facilities are depleted over-estimated proved developed reserves. On the sale or retirement of a complete unit of a proved property or field, the cost and related accumulated depletion, depreciation and amortization are eliminated from the oil and natural gas property accounts, and the resulting gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the unamortized cost of the property is apportioned to the interest sold and the interest retained is accounted for on the basis of the fair value of the retained interests and a gain or loss is recognized. Unproved Oil and Natural Gas Properties Unproved oil and natural gas properties consist of costs incurred to acquire unproved leases. Unproved lease acquisition costs are capitalized until the leases expire or when we specifically identify leases that will revert to the lessor, at which time we charge the associated unproved lease acquisition costs to exploration costs. Lease acquisition costs related to successful drilling are reclassified to proved oil and natural gas properties. Upon the sale of an entire interest in an unproved property for cash or cash equivalents, a gain or loss is recognized to the extent of the difference between the proceeds received and the net carrying value of the property. Proceeds from the sale of partial interests in unproved oil and natural gas properties are accounted for as a recovery of costs unless the proceeds exceed the entire cost of the property. Impairment of Oil and Natural Gas Properties The cost of proved oil and natural gas properties are assessed on a field-by-field basis for impairment at least annually or whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. The expected undiscounted future cash flows of the oil and natural gas properties are compared to the carrying amount of the oil, natural gas and NGL properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the carrying amount of the oil and natural gas properties is adjusted to estimated fair value. Assumptions associated with discounted cash flow models or valuations used in the impairment evaluation include estimates of F-12 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) future oil, natural gas and NGL prices, production costs, development expenditures, anticipated production of proved reserves, appropriate risk-adjusted discount rates and other relevant data. Unproved oil and natural gas properties are assessed periodically for impairment on a property-by-property basis based on remaining lease terms, drilling results or future plans to develop acreage. See further discussion in Note 7 – Fair Value Measurements. Business Combinations In accordance with ASC 805 - Business Combinations (“ASC 805”), the Company accounts for its acquisitions that qualify as a business using the acquisition method. If the set of assets and activities acquired is not considered a business, it is accounted for as an asset acquisition using a cost accumulation model. In the cost accumulation model, the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. The Company includes the results of operations of acquired businesses beginning on the respective acquisition dates. In accordance with the acquisition method, the Company allocates the purchase price of an acquired business to its identifiable assets and liabilities based on the estimated fair values. Transaction costs related to the business combination are expensed as incurred. This fair value measurement is based on unobservable (Level 3) inputs. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The excess value of the net identifiable assets and liabilities acquired over the purchase price of an acquired business is recorded as a bargain purchase gain. Other Property and Equipment, Net Property and equipment are capitalized and recorded at cost, while maintenance and repairs are expensed. Depreciation of such property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 39 years. Depreciation expense for other property and equipment amounted to $ 420 thousand and $ 428 thousand for the years ended September 30, 2021 and 2020, respectively. Capitalized costs related to leasehold improvements are depreciated over the life of the lease. Deferred Financing Costs Deferred financing costs include origination, arrangement, legal and other fees to issue or amend the terms of credit facility agreements. These deferred financing costs are reported as other non-current assets and recognized on the consolidated statement of operations as interest expense by amortizing the costs over the related financing using the straight-line method, which approximates the effective interest method. Equity Issuance Costs Equity issuance costs include underwriter, legal, accounting, printing and other fees to issue common equity securities. These issuance costs are netted against offering proceeds at the time of issuance and are reported as other non-current assets when related to the issuance of common equity securities. The issuance costs are expensed to the consolidated statement of operations if the issuance is unsuccessful. Other Non-Current Assets Other non-current assets consisted of the following: September 30, 2021 2020 (In thousands) Deferred financing costs, net $ 1,353 $ 1,867 Prepayments to outside operators 707 284 Right of use assets 309 700 Other deposits 50 98 Total other non-current assets, net $ 2,419 $ 2,949 F-13 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Accrued Liabilities Accrued liabilities consisted of the following: September 30, 2021 2020 (In thousands) Accrued capital expenditures $ 9,718 $ 2,964 Accrued lease operating expenses 2,428 1,617 Accrued general and administrative costs 4,375 2,125 Accrued dividends on preferred units — 903 Other accrued expenditures 2,834 1,079 Total accrued liabilities $ 19,355 $ 8,688 Asset Retirement Obligations ARO consist of future plugging and abandonment expenses on oil and natural gas properties. The fair value of the ARO is recorded as a liability in the period in which wells are drilled with a corresponding increase in the carrying amount of oil and natural gas properties. The liability is accreted for the change in its present value each period and the capitalized cost is depreciated using the units-of-production method. The asset and liability is adjusted for changes resulting from revisions to the timing or the amount of the original estimate when deemed necessary. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. Components of the changes in ARO for the years ended September 30, 2021 and 2020 are shown below: September 30, 2021 2020 (In thousands) ARO, beginning balance $ 2,326 $ 1,203 Liabilities incurred 113 68 Liabilities acquired — 1,161 Revision of estimated obligations — ( 45 ) Liability settlements and disposals ( 92 ) ( 131 ) Accretion 87 70 ARO, ending balance 2,434 2,326 Less: current ARO (1) ( 128 ) ( 58 ) ARO, long-term $ 2,306 $ 2,268 _____________________ (1) Current ARO is included within other current liabilities on the consolidated balance sheets. Goodwill Goodwill represents the future economic benefit arising from other assets acquired in a business combination that are not individually identified or separately recognized. Goodwill is initially recognized as the excess of the purchase price of a business combination over the fair value of the net assets acquired and is tested for impairment annually in accordance with ASC 350 - Intangibles - Goodwill and Other ("ASC 350"), or more frequently if there is a change in events or circumstances that indicate the carrying value of the goodwill may not be recoverable. The impairment test should occur at the reporting unit level determined by the Company and an impairment should only exist if the Company has determined the carrying value of the goodwill no longer exceeds the implied fair value. If the Company determines it is more likely than not the fair value of the reporting unit is less than its carrying value, including F-14 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) goodwill, then a quantitative assessment is necessary. An impairment loss is recognized if the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill. The Company assessed the goodwill balance recognized from the Merger of $ 19.0 million for impairment since the Company entered into a purchase and sale agreement ("PSA") on March 10, 2021 for $ 3.5 million before closing adjustments. See further discussion in Note 13 - Discontinued Operations and Assets Held for Sale. At the closing of the Merger, the Company determined it had two reporting units, and the entire goodwill balance of $ 19.0 million 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. See further discussion in Note 4 - Acquisitions and Divestitures. The carrying value of the Kansas Reporting Unit was $ 22.0 million. At the closing of the Merger, the Company concluded the fair value of the Kansas Reporting Unit was $ 3.5 million. 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 consolidated statement of operations, of $ 18.5 million for the year ended September 30, 2021. Revenue Recognition Oil Sales Under the Company’s oil sales contracts, oil that is produced by the Company is delivered to the purchaser at a contractually agreed-upon delivery point at which point the purchaser takes custody, title and risk of loss of the product. Once control has been transferred, the purchaser transports the product to a third party and receives market-based prices from the third party. The Company receives a percentage of proceeds received by the purchaser less transportation costs in accordance with the pricing provisions in the Company's contracts. As transportation costs are incurred after the transfer of control, the costs are included in oil and natural gas sales and represent part of the transaction price of the contract. The pricing provisions also provide quantity requirements and grade and quality specifications. The Company recognizes revenue at the net price received when control transfers to the purchaser. Natural Gas and NGL Sales Under the Company’s natural gas gathering and processing contracts, natural gas is delivered to the purchaser at the inlet of the purchasers gathering system, at which point title and risk of loss is transferred to the purchaser. The purchaser gathers and processes the natural gas and remits proceeds to the Company for the resulting sales of natural gas and NGLs in accordance with the pricing provisions of the Company's contracts. As the gathering, processing and transportation activities occur after the transfer of control, these costs are netted against our oil and natural gas sales and represent part of the transaction price of the contract, and may exceed the sales price. The pricing provisions also provide quantity requirements and grade and quality specifications. The Company recognizes revenue on a net basis for amounts expected to be received from third party customers through the marketing process. Transaction Price Allocated to Remaining Performance Obligations For the contracts that are short term in nature with a contract term of one year or less, the Company applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. Based on the Company’s current product sales contracts, with contract terms ranging from one to ten years , each unit of production is considered a separate performance obligation and therefore future production volumes are wholly unsatisfied and do not require allocation or disclosure of the transaction price to remaining performance obligations. Contract Balances Under the Company’s product sales contracts, the Company has the right to invoice customers once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under ASC 606. Prior-Period Performance Obligations F-15 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Revenue is recorded in the month in which production is delivered to the purchaser. However, certain settlement statements for oil, natural gas and NGLs may not be received for thirty to ninety days after the date production is delivered and, as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. Differences identified between the Company’s revenue estimates and actual revenue received historically have not been significant. For the years ended September 30, 2021 and 2020, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. Disaggregation of Revenue The following table presents oil and natural gas sales from continuing operations disaggregated by product: Year Ended September 30, 2021 2020 (In thousands) Oil and natural gas sales: Oil $ 136,421 $ 74,895 Natural gas (1) 7,500 ( 1,267 ) Natural gas liquids (1) 4,715 ( 495 ) Total oil and natural gas sales, net $ 148,636 $ 73,133 _____________________ (1) The Company's natural gas and NGL sales are presented net of gathering, processing and transportation fees which at times exceed the price received and result in negative average prices. Contract Services with Related Parties The Company has contracts with related parties to provide certain contract operating, accounting and back-office support services. Revenue related to these contract services is recognized over time as the services are rendered, and the fee is stated within the contract at a fixed monthly rate. Costs directly attributable to performing these services are also recognized as the services are rendered. Refer to Note 8 – Transactions with Related Parties for a more detailed discussion regarding these contracts. Revenue Payable For certain oil and natural gas properties, where the Company serves as operator, the Company receives production proceeds from the purchaser and further distributes such amounts to other revenue and royalty owners. Production proceeds that the Company has not yet distributed to other revenue and royalty owners are reflected as revenue payable in the consolidated balance sheets. Lease Operating Expenses Lease operating costs, including payroll for field personnel, saltwater disposal, electricity, generator rentals, diesel fuel and other operating expenses, are expensed as incurred and included in lease operating expenses in our consolidated statements of operations. Income Taxes Upon closing of the Merger on February 26, 2021, Tengasco was renamed to Riley Exploration Permian, Inc. and REP LLC became a wholly-owned subsidiary of Riley Permian, the consolidated company. In addition, Riley Permian became a C-corporation which is subject to current federal and state income taxes, including Texas Margin Tax. See further discussion in Note 4 - Acquisitions and Divestitures. See further discussion in Note 12 - Income Taxes. Riley Permian uses the asset and liability method of accounting for income taxes, which requires the establishment of deferred tax accounts for all temporary differences between: (i) financial reporting and tax bases of assets and liabilities, using currently enacted federal and state income tax rates, and (ii) operating loss and tax credit carryforwards. In addition, deferred tax accounts must be adjusted to reflect new rates if enacted into law. F-16 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Realization of deferred tax assets is contingent on the generation of future taxable income. As a result, management considers whether it is more likely than not that all or a portion of such assets will be realized during periods when they are available, and if not, management provides a valuation allowance for amounts not likely to be recognized. Management periodically evaluates tax reporting methods to determine if any uncertain tax positions exist that would require the establishment of a loss contingency. A loss contingency would be recognized if it were probable that a liability has been incurred as of the date of the financial statements and the amount of the loss can be reasonably estimated. The amount recognized is subject to estimates and management’s judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately incurred for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. There are no unrecorded liabilities for uncertain tax positions related to the Company as of September 30, 2021 and 2020. Interest Expense We have financed a portion of our working capital requirements, capital expenditures and certain acquisitions with borrowings under our revolving credit facility. We incur interest expense that is affected by both fluctuations in interest rates and our financing decisions. Interest expense in the consolidated statement of operations reflects interest, unused commitment fees paid to our lender, interest rate swap settlements plus the amortization of deferred financing costs (including origination and amendment fees). Interest expense was $ 4.5 million and $ 5.3 million for the years ended September 30, 2021 and 2020. Concentrations of Credit Risk Our customer concentration may impact our overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and natural gas industry. We sell our production at market prices and to a relatively small number of purchasers, as is customary in the exploration, development and production business. Our purchaser contracts include marketing provisions with our purchasers to market our production. For the years ended September 30, 2021 and 2020, one purchaser accounted for 87 % and 86 %, respectively, of our revenue purchased, with three end customers each accounting for more than 10% of the purchased revenue. During such periods, no other purchaser accounted for 10% or more of our revenues. The loss of either of this purchaser could materially and adversely affect our revenues in the short-term. However, the end customers include companies with lower credit risk. Further, based on the current demand for oil and natural gas and the availability of other purchasers, we believe that the loss of any of our purchasers would not have a long-term material adverse effect on our financial condition and results of operations because oil, natural gas and NGLs are marketable products with well-established markets. We manage credit risk related to accounts receivable through credit approvals, escrow accounts and monitoring procedures. Accounts receivable are generally not collateralized. However, we routinely assess the financial strength of our customers and, based upon factors surrounding the credit risk, establish an allowance for uncollectible accounts, if required. As a result, we believe that our accounts receivable credit risk exposure beyond such allowance is limited. Environmental and Other Issues We are engaged in oil and natural gas exploration and production and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration procedures. In connection with our acquisition of existing or previously drilled well bores, we may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. Should it be determined that a liability exists with respect to any environmental cleanup or restoration, we would be responsible for curing such a violation. We account for environmental contingencies in accordance with the accounting guidance related to accounting for contingencies. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. Fair Value Measurements Certain financial instruments are reported at fair value on our consolidated balance sheets. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer F-17 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) of a liability in an orderly transaction between market participants (i.e. an exit price). To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability and have the lowest priority. The valuation techniques that may be used to measure fair value include a market approach, an income approach and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). The carrying values of financial instruments comprising cash and cash equivalents, payables, receivables, related party accounts receivable 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 line of credit approximates fair value because the underlying instruments are at interest rates which approximate current market rates. Derivative Contracts We report the fair value of derivatives on the consolidated balance sheets in derivative assets and derivative liabilities as either current or noncurrent based on the timing of the settlement of individual trades. Trades that are scheduled to settle in the next twelve months are reported as current. The Company nets derivative assets and liabilities, in the consolidated balance sheets, whenever it has a legally enforceable master netting agreement with the counterparty to a derivative contract. For the years ended September 30, 2021 and 2020, we have not designated our derivative contracts as hedges for accounting purposes, and therefore changes in the fair value of derivatives are recognized in earnings. Cash settlements of contracts are included in cash flows from operating activities in the consolidated statement of cash flows. Derivative contracts are settled on a monthly basis. The fair value of the derivatives is established using index prices, volatility curves and discount factors. The value we report in our consolidated financial statements is as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. The use of derivatives involves the risk that the counterparties to such contracts will be unable to meet their obligations under the terms of the agreement. To minimize the credit risk with derivative instruments, it is our policy to enter into derivative contracts primarily with counterparties that are financial institutions that are also lenders within our revolving credit facility. Under the terms of the current counterparties' contracts, only those that are lenders under our revolving credit facility are secured by the same collateral as outlined in our revolving credit facility. The counterparties are not required to provide credit support to the Company. See further discussion in Note 6 – Derivative Instruments. Leases The Company reviews all contracts to determine if a lease exists at contract inception. A lease exists when the Company has the right to obtain substantially all of the economic benefit of a specific asset and to control the use of that asset over the term of the agreement. Identified leases are classified as an operating or finance lease, which determines the recognition, measurement and presentation of expenses. As of September 30, 2021, the Company did not have any finance leases. Operating leases are capitalized on the consolidated balance sheet at commencement date through a lease right-of-use ("ROU") asset and lease liability representing the present value of lease payments over the lease term. In addition to the present value of lease payments, the operating lease ROU asset includes any lease payments made to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred. Options to extend or terminate leases are included in the lease term when it is reasonably certain the Company will exercise the option. For operating leases, lease costs are recognized on a straight-line basis over the term of the lease. The Company elected certain practical expedients and made certain accounting policy elections that impacted the effect of adoption on the consolidated balance sheets and statement of operations, including: (i) a package of practical expedients which F-18 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) allowed the Company to not reassess contracts that commenced prior to adoption in regards to lease terms, lease classification and indirect costs incurred prior to adoption, (ii) excluding land easements that existed or expired prior to adoption, (iii) policy election that eliminates the need for adjusting prior period comparable financial statements prepared under prior lease accounting guidance and (iv) to not apply the recognition requirements under the standard to short-term leases. The present value of operating lease payments and amortization of the lease liability is calculated using a discount rate. When available, the Company uses the rate implicit in the lease as the discount rate; however, most of the Company’s leases do not provide a readily determinable implicit rate. In such cases, the Company is required to use its incremental borrowing rate ("IBR"). The Company’s IBR reflects the estimated rate of interest that the Company would pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The Company is required to reassess the discount rate for any new and modified lease contracts as of the lease effective date . ROU asset and lease liability balances were as follows as of September 30, 2021 and 2020: September 30, 2021 2020 (In thousands) ROU asset $ 309 $ 700 Current lease liability $ 314 $ 392 Long-term lease liability $ — $ 314 The ROU asset, current lease liability, and long-term lease liability was included in other non-current asset, other current liabilities and non-current lease liabilities, respectively, on the accompanying consolidated balance sheet. For the year ended September 30, 2021 and 2020, the Company recorded $ 0.4 million in lease expense which is included in general and administrative costs on the accompanying consolidated statements of operations. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes accounting requirements for the recognition of credit losses from an incurred or probable impairment methodology to a Current Expected Credit Losses (“CECL”) methodology. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including but not limited to trade receivables. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this ASU effective October 1, 2020 using a modified retrospective approach. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements or related disclosures. The Company is exposed to credit losses primarily through receivables that result from oil and natural gas sales. Estimates of expected credit losses for accounts receivables consider factors such as historical collection experience, credit quality of our customers and current and future economic and market conditions. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The purpose of this amendment is to improve the effectiveness of disclosures in the notes to the consolidated financial statements. This ASU removes certain disclosure requirements around transfers between levels of the fair value hierarchy and the valuation processes for Level 3 fair value measurements, modifies certain reporting requirements around Level 3 fair value measurements and investments in certain entities that calculate net asset value, and adds certain disclosure requirements for Level 3 fair value measurements. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this ASU effective October 1, 2020. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements. F-19 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Issued Accounting Standards Not Yet Adopted 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. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 840): 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 as a continuation of the existing contract. This ASU was effective upon the issuance and its optional relief can be applied through December 31, 2022. (4) Acquisitions and Divestitures Business Combination Between REP LLC and Tengasco Immediately prior to the closing of the Merger on February 26, 2021, REP LLC converted all of the 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. See further discussion in Note 10 – Members'/Shareholders' Equity. Pursuant to the Merger Agreement and on the Closing Date, each restricted share of common stock issued to holders of restricted common units in REP LLC in conjunction with the Merger were issued under the 2021 Long Term Incentive Plan (the "2021 LTIP"). See further discussion in Note 10 – Members'/Shareholders' Equity. 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 consolidated balance sheet at fair value as of the acquisition date. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future commodity prices, future development, future operating costs, future cash flows and the use of weighted average cost of capital. These inputs required the use of significant judgments and estimates at the date of valuation. 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 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 to date for the Merger, of which $ 3.6 million and $ 1.4 million was expensed for the year ended September 30, 2021 and 2020, respectively, as transaction costs on the F-20 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) consolidated statement of operations. Included in the above costs, the Company incurred success fees of $ 1.75 million upon closing of the Merger which is included within transaction costs on the consolidated statement of operations. The Company has 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. The Company does not expect goodwill to be deductible for tax purposes. The Company did not integrate the acquired properties and the acquisition met the assets held for sale criteria on the Closing Date. See further discussion in Note 13 - Discontinued Operations and Assets Held for Sale. Post-Acquisition Operating Results Net loss attributable to the operations of the assets and liabilities acquired in the Merger of $ 115 thousand was included in loss from discontinued operations on the consolidated statement of operations for the year ended September 30, 2021. On April 2, 2021, the Company closed on the sale of the Kansas Reporting Unit with an effective date of March 1, 2021. A net loss of $ 18.8 million on discontinued operations, net of state and federal taxes, was included in loss on discontinued operations for the year ended September 30, 2021. Pro Forma Operating Results (Unaudited) The following unaudited pro forma combined results for the years ended September 30, 2021 and 2020 reflect the consolidated results of operations of the Company as if the Merger had occurred on October 1, 2019. The unaudited pro forma information includes adjustments for $ 3.6 million of transaction costs being reclassified to the first quarter of fiscal year 2020 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 Tengasco recognized under the full-cost method of accounting, which would not have been F-21 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) recognized under the successful efforts method, during the three months ended December 31, 2020. Also, the unaudited pro forma information has been tax affected 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. Year Ended September 30, 2021 2020 (In thousands, except per share/unit amounts) (Unaudited) Total Revenues $ 151,036 $ 76,933 Pro Forma Net Income (Loss) from Continuing Operations ( 30,146 ) 33,075 Pro Forma Net Income (Loss) from Discontinued Operations 275 ( 18,203 ) Pro Forma Net Income (Loss) before Taxes ( 29,871 ) 14,872 Pro forma income tax benefit (expense) 6,273 ( 3,123 ) Pro Forma Net Income (Loss) $ ( 23,598 ) $ 11,749 Net Income (Loss) per Share/Unit from Continuing Operations: Basic $ ( 1.88 ) $ 0.66 Diluted $ ( 1.88 ) $ 0.71 Net Income (Loss) per Share/Unit from Discontinued Operations: Basic $ 0.02 $ ( 1.46 ) Diluted $ 0.02 $ ( 1.46 ) The unaudited pro forma combined financial information is for informational purposes only and 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. Acquisitions On December 20, 2019, the Company acquired 1,237 net acres (unaudited) in Yoakum County, Texas. The acquisition included 17 total wells, with 11 producing and 6 salt water disposals, for a total purchase price of $ 3.3 million, as adjusted for customary closing items. The transaction was accounted for as an asset acquisition and was therefore recorded based on the total consideration paid, with value assigned to unproved oil and natural gas properties, capitalized asset retirement cost and ARO. During the years ended September 30, 2021 and 2020, the Company made several additional acquisitions in the ordinary course of business totaling $ 0.4 million and $ 0.8 million, respectively, for oil and natural gas properties, none of which individually were considered significant. These transactions were accounted for as asset acquisitions and was recorded based on the total consideration paid, with value assigned to unproved oil and natural gas properties. Divestitures On April 2, 2021, the Company closed on the sale of the Kansas Reporting Unit for an agreed upon purchase price of $ 3.5 million, less approximately $ 0.2 million of closing adjustments. See further discussion in Note 13 - Discontinued Operations and Assets Held for Sale. F-22 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Transaction Costs Transaction costs consist of those costs associated with investment banking, accounting, legal and other diligence costs related to unsuccessful acquisitions or successful acquisitions accounted for as business combinations. The Company recognized acquisition costs related to the Merger for the years ended September 30, 2021 and 2020 included in the table below: Year Ended September 30, 2021 2020 (In thousands) Business combination acquisition costs $ 3,572 $ 1,431 Other 160 — Total transaction costs $ 3,732 $ 1,431 (5) Oil and Natural Gas Properties Oil and natural gas properties are summarized below: Year Ended September 30, 2021 2020 (In thousands) Proved $ 402,165 $ 326,420 Unproved 20,557 32,084 Work-in-progress 11,411 15,398 434,133 373,902 Accumulated depletion and amortization ( 88,336 ) ( 63,176 ) Total oil and natural gas properties, net $ 345,797 $ 310,726 At September 30, 2021 and 2020, the Company had one and two exploratory wells, respectively, drilled but uncompleted that were included in work-in-progress with associated well costs of $ 3.7 million and $ 7.1 million, respectively. During the year ended September 30, 2021, one of the exploratory wells was completed, resulting in $ 3.4 million of costs transferred from work-in-progress to proved properties. At September 30, 2021, the Company had one exploratory well with costs of $ 3.7 million that has been capitalized for greater than one year but less than two years . The Company is in the process of evaluating completion methods for this exploratory well. Depletion and amortization expense for proved oil and natural gas properties was $ 25.2 million and $ 20.8 million, respectively, for the year ended September 30, 2021 and 2020. The Company incurred $ 9.6 million and $ 9.9 million of exploration costs, including $ 9.3 million and $ 7.9 million related to the expiration of oil and natural gas leases for the years ended September 30, 2021 and 2020, respectively. (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 may also limit future revenues from favorable price changes. For the years ended September 30, 2021 and 2020, we have not designated our derivative contracts as hedges for accounting purposes, and therefore changes in the fair value of derivatives are recognized in earnings. As of September 30, 2021, the Company's oil and natural gas derivative instruments consisted of the following types: F-23 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) • Fixed Price Swaps – the Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume. • Costless collars – the combination of a put option (fixed floor) and call option (fixed ceiling), with the options structured so that the premium paid to purchase the put option is offset by the premium received from the sale of the call option. If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the put and the call strike price, no payments are due from either party. • Basis Protection Swaps – basis swaps are settled based on differences between a fixed price differential and the differential between the settlement prices of two referenced indexes. We receive the fixed price differential and pay the differential between the referenced indexes. F-24 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table summarizes the open financial derivative positions as of September 30, 2021, related to oil and natural gas production: Weighted Average Price Calendar Quarter Notional Volume Fixed Put Call ($ per unit) Oil Swaps (Bbl) Q4 2021 558,116 $ 51.65 $ — $ — Q1 2022 405,000 $ 55.66 $ — $ — Q2 2022 405,000 $ 55.66 $ — $ — Q3 2022 330,000 $ 54.07 $ — $ — Q4 2022 330,000 $ 54.07 $ — $ — 2023 360,000 $ 59.01 $ — $ — Natural Gas Swaps (Mcf) Q4 2021 555,000 $ 3.03 $ — $ — Q1 2022 540,000 $ 3.26 $ — $ — Q2 2022 540,000 $ 3.26 $ — $ — Q3 2022 540,000 $ 3.26 $ — $ — Q4 2022 540,000 $ 3.26 $ — $ — Oil Collars (Bbl) Q1 2022 90,000 $ — $ 35.00 $ 42.63 Q2 2022 90,000 $ — $ 35.00 $ 42.63 Q3 2022 90,000 $ — $ 35.00 $ 42.63 Q4 2022 90,000 $ — $ 35.00 $ 42.63 Oil Basis (Bbl) Q4 2021 435,000 $ 0.40 $ — $ — Q1 2022 180,000 $ 0.40 $ — $ — Q2 2022 180,000 $ 0.40 $ — $ — Q3 2022 180,000 $ 0.40 $ — $ — Q4 2022 180,000 $ 0.40 $ — $ — Interest Rate Contracts The Company has entered into floating-to-fixed interest rate swaps (we receive a floating market rate equal to one-month LIBOR and pay 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, 2021: Open Coverage Period Notional Amount Fixed Rate (In thousands) Floating-to-Fixed Interest Rate Swaps October 2021 - September 2023 $ 40,000 0.24 % F-25 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Balance Sheet Presentation of Derivatives The following table presents the location and fair value of the Company’s derivative contracts included in the consolidated balance sheets as of September 30, 2021 and 2020: September 30, 2021 Balance Sheet Classification Gross Fair Value Amounts Netted Net Fair Value (In thousands) Current derivative assets $ 186 $ ( 186 ) $ — Non-current derivative assets 228 ( 122 ) 106 Current derivative liabilities ( 42,330 ) 186 ( 42,144 ) Non-current derivative liabilities ( 9,054 ) 122 ( 8,932 ) Total $ ( 50,970 ) $ — $ ( 50,970 ) September 30, 2020 Balance Sheet Classification Gross Fair Value Amounts Netted Net Fair Value (In thousands) Current derivative assets $ 19,690 $ ( 871 ) $ 18,819 Non-current derivative assets 4,651 ( 1,549 ) 3,102 Current derivative liabilities ( 871 ) 871 — Non-current derivative liabilities ( 1,549 ) 1,549 — Total $ 21,921 $ — $ 21,921 The following table presents the Company's derivative activities for the years ended September 30, 2021 and 2020: Year Ended September 30, 2021 2020 (In thousands) Fair value of net asset (liability), beginning of period $ 21,921 $ 14,959 Gain (loss) on derivatives ( 89,195 ) 33,876 Settlements on derivatives 16,304 ( 26,914 ) Fair value of net asset (liability), end of period $ ( 50,970 ) $ 21,921 (7) Fair Value Measurements The carrying values of financial instruments comprising cash and cash equivalents, payables, receivables, related party accounts receivable 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 line of credit 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. Assets and Liabilities Measured on a Recurring Basis The fair value of commodity derivatives and interest rate swaps is estimated using internal 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, 2021 and 2020, by level within the fair value hierarchy: F-26 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) September 30, 2021 Level 1 Level 2 Level 3 Total (In thousands) Financial assets: Commodity derivative assets $ — $ 308 $ — $ — Interest rate assets $ — $ 106 $ — $ — Financial liabilities: Commodity derivative liabilities $ — $ ( 51,336 ) $ — $ — Interest rate liabilities $ — $ ( 48 ) $ — $ — September 30, 2020 Level 1 Level 2 Level 3 Total (In thousands) Financial assets: Commodity derivative assets $ — $ 24,341 $ — $ 24,341 Financial liabilities: Commodity derivative liabilities $ — $ ( 1,672 ) $ — $ ( 1,672 ) Interest rate liabilities $ — $ ( 748 ) $ — $ ( 748 ) Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Assets and liabilities accounted for at fair value on a non-recurring basis in accordance with the fair value hierarchy include the initial recognition of asset retirement obligations, the fair value of oil and natural gas properties, and goodwill when acquired in a business combination or assessed for impairment. The fair value measurements of assets acquired and liabilities assumed are measured on a nonrecurring basis on the acquisition date using an income valuation technique based on inputs that are not observable in the market and therefore represent Level 3 inputs. Significant inputs used to determine the fair value include estimates of: (i) reserves; (ii) future commodity prices; (iii) operating and development costs; and (iv) a market-based weighted average cost of capital rate. The underlying commodity prices embedded in the Company's estimated cash flows are the product of a process that begins with NYMEX forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that the Company’s management believes will impact realizable prices. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation. The fair value of asset retirement obligations incurred and acquired during the years ended September 30, 2021 and 2020, totaled approximately $ 0.1 million and $ 1.2 million, respectively. The fair value of additions to the asset retirement obligation liabilities is measured using valuation techniques consistent with the income approach, which converts future cash flows to a single discounted amount. Significant inputs to the valuation include: (i) estimated plug and abandonment cost per well for all oil and natural gas wells and for all disposal wells; (ii) estimated remaining life per well; (iii) future inflation factors; and (iv) our average credit-adjusted risk-free rate. These assumptions represent Level 3 inputs. If the carrying amount of our oil and natural gas properties exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the oil and natural gas properties to fair value. The fair value of our oil and natural gas properties is determined using valuation techniques consistent with the income and market approach. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated operating and development costs using estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with the expected cash flow projected. These assumptions represent Level 3 inputs. F-27 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (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. The monthly fee was $ 250 thousand through June 30, 2020, $ 150 thousand for July 1, 2020 and $ 100 thousand effective August 1, 2020. RPOC also has the option to participate as a working interest owner in Combo wells operated by RPOC. Combo was previously owned by Oakspring Energy Holdings, LLC ("Oakspring") and by a wholly-owned subsidiary of Riley Exploration Group, Inc. ("REG"). On December 31, 2020, Oakspring contributed its interest in Combo to certain investment funds of Yorktown Partners, LLC, and the wholly-owned subsidiary of REG contributed its interest in Combo to Riley Exploration Group, LLC. Combo and REG are portfolio companies of Yorktown Energy Partners XI, L.P. ("Yorktown XI"), certain managed funds of which have investments in the Company (all deemed to be related parties). One of our executives held positions with REG and Combo at September 30, 2021. Our Executive Vice President, Business Intelligence is the President of both REG and Combo, as well as a board member of Combo. Additionally, RPOC provides certain administrative and operational services to REG in exchange for a monthly fee of $ 100 thousand pursuant to a contract services agreement. The following table presents revenues from contract services for related parties: Year Ended September 30, 2021 2020 (In thousands) Combo $ 1,200 $ 2,600 REG 1,200 1,200 Contract services - related parties $ 2,400 $ 3,800 Cost of contract services $ 477 $ 503 The Company had amounts due from Combo of $ 0.5 million and $ 0.1 million at September 30, 2021 and 2020, respectively, which are reflected in accounts receivable - related parties on the accompanying consolidated balance sheets. There were no amounts due to the Company from REG as of September 30, 2021 or 2020. Consulting and Legal Fees The Company has an arrangement with one of its board members to provide certain legal and advisory services. For the years ended September 30, 2021 and 2020, the Company incurred legal fees from this board member or an entity associated with the board member of $ 1.0 million and $ 0.4 million, respectively. As of September 30, 2021 and 2020, the Company had $ 0.0 million and $ 0.2 million in amounts due to this board member or an entity associated with the board member for legal services. Such amounts were included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. (9) Revolving Credit Facility On September 28, 2017, REP LLC entered into a 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. The revolving credit facility had an initial borrowing base of $ 25 million with a maximum facility amount of $ 500 million. As of September 30, 2021, the revolving credit facility had a borrowing base of $ 135 million. Substantially all of the Company’s assets are pledged to secure the revolving credit facility. Effective October 15, 2019, the Company amended its revolving credit facility to increase the borrowing base from $ 135 million to $ 180 million and had the ability to request an increase in its lender commitments up to the approved $ 200 million borrowing base amount. Effective May 7, 2020, the Company amended its revolving credit facility to decrease the F-28 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) borrowing base from $ 180 million to $ 150 million. Effective August 31, 2020, the Company amended its revolving credit facility to decrease the borrowing base from $ 150 million to $ 132.5 million. Effective March 5, 2021, the Company and REP LLC entered into the Eighth Amendment to the credit facility pursuant to which the parties thereto reaffirmed the borrowing base at $ 135 million with total commitments increasing to $ 135 million. On October 21, 2020, REP LLC entered into an amendment to its revolving credit facility to incorporate the changes in the legal structure of REP LLC upon consummation of the Merger, including the joinder of the Company as the parent guarantor thereto. The amendment was effective upon closing of the Merger. Effective August 31, 2021, the revolving credit facility was amended to among other things extend the maturity date of the facility to September 28, 2023. The borrowing base is subject to periodic redeterminations, mandatory reductions and further adjustments from time to time. The facility currently requires semi-annual redeterminations on February 1 and August 1. During these redetermination periods, the Company’s borrowing base may be increased and may also be reduced in certain circumstances. The revolving credit facility allows for Eurodollar Loans and Base Rate Loans (each as defined in the credit agreement). The interest rate on each Eurodollar Loan will be the adjusted LIBOR for the applicable interest period plus a margin between 2.50 % and 3.50 % (depending on the borrowing base utilization percentage). The annual interest rate on each Base Rate Loan is (i) the greatest of (a) the administrative agent’s prime lending rate, (b) the federal funds rate plus 0.5 % per annum or (c) the adjusted LIBOR determined on a daily basis for an interest period of one-month, plus 1.00 % per annum, plus (ii) a margin between 1.50 % and 2.50 % (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 3.5 to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0 as of the last day of any fiscal quarter. The credit agreement also contains a total leverage ratio for Restricted Payments after giving pro forma effect to such Restricted Payments, which includes payments to any holder of the Company's shares, would not exceed 2.75 to 1.0. The Company is also required to prepay the revolving credit facility if at any time the consolidated cash balance is in excess of the greater of $ 15 million or 10 % of the borrowing base for five consecutive business days and the Company has not identified an approved intended use for the excess cash. The credit agreement also contains other customary affirmative and negative covenants and events of default. The Company’s minimum hedging requirement was 50 % as of September 30, 2021. In October 2021, the revolving credit facility was further amended to, among other things, increase the borrowing base to $ 175 million, provide for the transition away from LIBOR to an alternative reference rate and change the requirements for Restricted Payments to consider the Company's total leverage ratio and available free cash flow under certain circumstances. The following table summarizes the Company's interest expense: Year Ended September 30, 2021 2020 (In thousands) Interest expense $ 3,686 $ 4,416 Amortization of deferred financing costs 653 648 Unused commitment fees 195 235 Total interest expense $ 4,534 $ 5,299 As of September 30, 2021 and 2020, the weighted average interest rate on outstanding borrowings under the revolving credit facility was 2.83 % and 4.09 %, respectively. As of September 30, 2021 and 2020, the Company was in compliance with all covenants contained in the credit agreement and had $ 60 million and $ 101 million, respectively, of outstanding borrowings and an additional $ 75 million and $ 31.5 million, respectively, available under the borrowing base. F-29 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (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 years ended September 30, 2021 and 2020, the Company declared quarterly cash dividends on its common units and common stock totaling approximately $ 18.1 million and $ 15 million, respectively. The cash dividends were declared for all issued and outstanding common shares or units, including vested and unvested under the respective Long Term Incentive Plan in effect during the period of dividend declaration. The portion of the cash dividend attributable to the unvested restricted shares issued under the 2021 LTIP is included in accrued liabilities on the consolidated balance sheet and will be paid in cash once the unvested restricted shares fully vest. Any accrued but unpaid cash dividends attributable to the unvested restricted shares issued under the 2018 LTIP was paid in accordance with the Merger Agreement immediately prior consummation of the Merger. See Note 9 - Revolving Credit Facility for discussion over the Company's restrictions on certain payments, including dividends. The table below summarizes the following cash distributions declared to common shareholders and unitholders during the years ended 2021 and 2020: Quarter Ended Per Share/Unit Distribution (1) Total Distribution 2021 September 30, 2021 $ 0.28 $ 5.5 June 30, 2021 $ — $ — March 31, 2021 (2) $ 0.29 $ 8.8 December 31, 2020 $ 0.30 $ 3.8 2020 September 30, 2020 $ 0.20 $ 2.5 June 30, 2020 $ 0.20 $ 2.5 March 31, 2020 $ 0.40 $ 5.0 December 31, 2019 $ 0.40 $ 5.0 _____________________ (1) Per unit amounts for dividends declared before the Closing Date of the Merger have been effected by giving adjustment to the 1-for-12 reverse stock split and exchange ratio of 97.796467 . (2) On February 4, 2021, the Board of Managers of REP LLC declared a $ 3.8 million cash dividend, paid on February 5, 2021. On March 4, 2021, the Board of Directors of the Company declared a cash dividend of $ 0.28 per share or $ 5.0 million total, paid on May 7, 2021. 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 1-for-12 reverse stock split, the 2021 LTIP had 1,387,022 shares of common stock available for issuance, of which 989,283 shares remained available as of September 30, 2021. F-30 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 2021 Long-Term Incentive Plan The 2021 LTIP will provide for potential grants of: (i) incentive stock options qualified as such under U.S. federal income tax laws ("ISO's:); (ii) stock options that do not qualify as incentive stock options; (iii) stock appreciation rights, or SARs; (iv) restricted stock awards; (v) restricted stock units, or RSUs; (vi) stock awards; (vii) performance awards; (viii) dividend equivalents; (ix) other stock-based awards; (x) cash awards; and (xi) substitute awards, all of which will collectively be referred to as the "Awards". The 2021 LTIP authorizes the Compensation Committee to administer the plan and designate eligible persons as participants, determine the type or types of Awards to be granted to an eligible person, determine the number of shares of stock or amount of cash to be covered by the Awards, approve the forms of award agreements for use under the plan, determine the terms and conditions of any Award, modify, waive or adjust any term or condition of an Award that has been granted, among other responsibilities delegated by the Company's Board. Restricted Shares: The Company granted 397,739 restricted shares to executives, employees and independent directors of the Company during the year ended September 30, 2021, of which 198,024 restricted shares were issued as substitute awards under the 2021 LTIP at the closing of the Merger. The holder of these restricted shares receives dividends, in arrears, once the shares vest. The Company has accrued for these dividends which are reported in accrued liabilities and other non-current liabilities. The Company estimates the fair values of the restricted shares as the closing price of the Company's common stock on the grant date of the award, with the expense amortized on a straight-line basis and recognized over the vesting period. The following table shows a summary of the restricted shares granted during the year ended September 30, 2021: 2021 Long-Term Incentive Plan Grant Date Restricted Shares Vesting Period Average Price Compensation Expense (In thousands) February 26, 2021 198,024 8 - 32 months $ 13.33 $ 744 March 1, 2021 3,374 12 months $ 24.21 44 March 15, 2021 158,582 N/A (1) $ 28.99 4,597 April 1, 2021 37,759 12 months $ 28.99 719 $ 6,104 _____________________ (1) On April 1, 2021, these restricted shares fully vested. The following table presents the Company's restricted stock activity during the year ended September 30, 2021 under the 2021 LTIP: 2021 Long-Term Incentive Plan Restricted Shares Weighted Average Grant Date Fair Value Unvested at September 30, 2020 — $ — Granted 397,739 $ 21.16 Vested ( 169,370 ) $ 28.99 Forfeited — $ — Unvested at September 30, 2021 228,369 $ 15.35 Total share-based compensation expense of $ 6.1 million is included in general and administrative costs on the Company's consolidated statement of operations for the restricted share awards granted under the 2021 LTIP during the year ended September 30, 2021. The Company will recognize any forfeited shares, and any unpaid dividends for those shares, as they occur as an increase to accrued liabilities and a reduction from shareholders' equity on the consolidated balance sheet. Approximately $ 2.3 million of additional share-based compensation expense will be recognized over the weighted average life for these grants of 21 months. F-31 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 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. Restricted Units: The Company granted 13,309 restricted units to executives and employees of the Company during the year ended September 30, 2021. The Company determined the fair value of the common units in accordance with ASC 718 using an options pricing model. The holder of these restricted units participated in dividend distributions in which the accrued dividends would be paid once the shares vest. Immediately prior to the consummation of the Merger and in accordance with the Merger Agreement, any accrued but unpaid cash dividends on the unvested restricted units issued under the 2018 LTIP was paid. The total expense was amortized on a straight-line basis and recognized over the vesting period. The following table shows a summary of the restricted units granted and the expense during the years ended September 30, 2021 and 2020: 2018 Long-Term Incentive Plan Grant Date Restricted Units Vesting Period Average Price Compensation Expense 2021 2020 (In thousands) April 29, 2019 14,766 36 months $ 113.25 $ 278 $ 676 February 1, 2020 15,767 36 months $ 100.69 203 287 October 1, 2020 13,309 36 months $ 112.47 208 — $ 689 $ 963 The following table presents the Company's restricted stock unit activity during the year ended September 30, 2021 under the 2018 LTIP: 2018 Long-Term Incentive Plan Restricted Units Weighted Average Grant Date Fair Value Unvested at September 30, 2020 23,909 $ 105.62 Granted 13,309 $ 112.47 Vested ( 10,213 ) $ 107.30 Forfeited ( 2,706 ) $ 104.89 Converted (1) ( 24,299 ) $ 108.75 Unvested at September 30, 2021 — $ — _____________________ (1) 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 $ 0.7 million and $ 1.0 million, respectively, is included in general and administrative costs on the Company's consolidated statement of operations for all of the issuances outstanding for the year ended September 30, 2021 and 2020. The Company recognized any forfeited shares, and any unpaid dividends for those shares, as they occurred as an increase to accrued liabilities and a reduction from shareholders' equity on the consolidated balance sheet. (11) Preferred Units As of August 13, 2020, REP LLC entered into the Fourth Amended and Restated Limited Liability Company Agreement (the "Fourth LLC Agreement") which declared the mandatory redemption date for all Series A Preferred Units in cash to one F-32 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) year following the expiration of the credit agreement (as may be further amended, restated, supplemented, modified or replaced from time to time) which was set to mature on September 28, 2023. In accordance with ASC 480 Distinguishing Liabilities From Equity, equity securities are required to be classified outside of permanent equity in temporary equity if they are redeemable or may become redeemable for cash or other assets. As the Company was not considered to have sole control over the contractually mandated redemption during the year ended September 30, 2020 based on the set redemption in 2024, the Series A Preferred Units were classified as mezzanine equity until they were converted into common units, as discussed below. Immediately prior to the closing of the Merger on February 26, 2021 and in accordance with the Merger Agreement, REP LLC converted each issued and outstanding Series A Preferred Unit into one common unit and paid the holders of REP LLC Series A Preferred Units a cash payment equal to the amount of any unpaid dividends accruing between October 1, 2020 and February 26, 2021 in accordance with the Fourth LLC Agreement. The Company converted 511,695 Series A Preferred Units with a value of $ 61.2 million to common units in accordance with the Fourth LLC Agreement and Merger Agreement. Additionally, the cash payment of any unpaid dividends accrued between October 1, 2020 and February 26, 2021 was $ 1.5 million on 511,695 Series A Preferred Units. The tables below summarize the preferred unit activity during the years ended September 30, 2021 and 2020: Units Amount (In thousands) Balance, September 30, 2019 475,152 $ 56,810 Dividends paid in kind 29,016 3,482 Balance, September 30, 2020 504,168 60,292 Dividends paid in kind 7,527 904 Units converted to common units ( 511,695 ) ( 61,196 ) Balance, September 30, 2021 — $ — After the closing of the Merger, the Company's authorized capital stock includes 25 million shares of preferred stock with a par value of $ 0.0001 per share, of which no shares were issued and outstanding as of September 30, 2021. (12) 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 on the date of the change. When push down accounting does not apply as part of a business combination, U.S. GAAP requires the effect of the change in tax status to be recognized in the financial statements and the effect is included in income (loss) from continuing operations. Upon consummation of the Merger, the Company established a $ 13.6 million provision for deferred income taxes with the conversion to a C-corporation. Accordingly, a provision for federal and state corporate income taxes has been made for the operations of REP LLC only from February 27, 2021 through September 30, 2021 in the accompanying consolidated financial statements. F-33 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The components of the Company's consolidated provision for income taxes from continuing operations are as follows: September 30, 2021 2020 (In thousands) Current income tax expense: Federal $ 2 $ — State 52 — Total current income tax expense 54 — Deferred income tax expense: Federal 14,202 — State ( 1,240 ) 718 Total deferred income tax expense 12,962 718 Total income tax expense $ 13,016 $ 718 Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. The Company's net deferred tax position is as follows: September 30, 2021 2020 (In thousands) Deferred tax assets Unrealized gain on derivatives $ 11,006 $ — Intangibles 222 — Inventory 23 — Share-based compensation 480 — Accruals and other 578 — Net operating loss 5,422 — Total deferred tax assets 17,731 — Oil and gas assets ( 29,161 ) ( 1,669 ) Other fixed assets ( 198 ) — Unrealized gain on derivatives — ( 165 ) Total deferred tax liabilities ( 29,359 ) ( 1,834 ) Net deferred tax liabilities $ ( 11,628 ) $ ( 1,834 ) F-34 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: September 30, 2021 2020 Tax at statutory rate 21.0 % 21.0 % Nondeductible compensation ( 1.0 ) % — % Transaction costs ( 1.5 ) % — % Stock compensation ( 0.1 ) % — % State income taxes, net of federal benefit 0.4 % 2.0 % Change in tax status ( 40.1 ) % — % Income subject to taxation by REP LLC's unitholders ( 17.1 ) % ( 21.0 ) % Effective income tax rate ( 38.4 ) % 2.0 % The Company's federal income tax returns for the years subsequent to September 30, 2017 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 September 30, 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 uncertain tax positions. Section 382 of the Internal Revenue Code limits the utilization of U.S. net operating loss ("NOL") carryforwards following a change in control. The Merger caused a stock ownership change for purposes of Section 382 which is subject to an approximate annual limit. The Company has federal net operating losses subject to the annual Section 382 limit of $ 13.7 million of which $ 4.9 million will expire beginning in 2022 with the remaining $ 8.8 million of the NOL's not expiring. Additionally, the Company has approximately $ 12.1 million of federal net operating losses generated after the Merger that are not limited by Section 382 and are not subject to expiration. We believe it is more likely than not the tax benefit of these net operating losses will be fully realized, as such no valuation allowance has been recorded. The deferred tax assets for the net operating losses are presented net with deferred tax liabilities, which primarily consist of book and tax depreciation differences. (13) 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. F-35 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table presents the components of the loss on discontinued operations reported in the consolidated statement of operations for the year ended 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 expense 107 Loss from discontinued operations before income taxes ( 18,738 ) Income tax expense ( 59 ) Net loss from discontinued operations, net of tax $ ( 18,797 ) For further discussion of revenues and expenses included in discontinued operations, see further discussion in Note 4 - Acquisitions and Divestitures. (14) 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. Certain restricted shares of the Company met the criteria of a participating security. The Company calculated net income or loss per share/unit using the two-class method for those shares. The table below sets forth the computation of basic and diluted net income (loss) per share/unit for the years ended September 30, 2021 and 2020: September 30, 2021 2020 (In thousands, except per share/unit) Continuing Operations: Net income (loss) - Diluted $ ( 46,869 ) $ 35,144 Less: Dividends on preferred units ( 1,491 ) ( 3,535 ) Net income (loss) attributable to common shareholders/unitholders - Basic (1) $ ( 48,360 ) $ 31,609 Basic weighted-average common shares/units outstanding 16,021 12,457 Effecting of dilutive securities: Series A preferred units — 3,999 Restricted shares/units — 53 Diluted weighted-average common shares/units outstanding 16,021 16,509 Continuing Operations: Basic net income (loss) per common share/unit $ ( 3.02 ) $ 2.54 Diluted net income (loss) per common share/unit $ ( 3.02 ) $ 2.13 _____________________________________________________ (1) Used in basic and diluted net loss per share calculation for September 30, 2021 since the Company was in a net loss position. F-36 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) For the years ended September 30, 2021 and 2020, the following shares/units were excluded from the calculation of diluted net income (loss) per share/unit due to their anti-dilutive effect: September 30, 2021 2020 (In thousands) Restricted shares/units 228 153 (15) Commitments and Contingencies Legal Matters The Company has been named as a defendant in an action commenced on November 30, 2021 in United States Bankruptcy Court For the Northern District of Texas Dallas Division by the Trustee for the Chapter 11 Bankruptcy of Hoactzin Partners, L.P. (“Hoactzin”), an affiliate of Peter Salas (“Salas”). The complaint alleges that, through a series of transactions involving Salas and various Hoactzin affiliates spanning 2014 through 2018, Hoactzin fraudulently transferred its working interests in certain wells on its Kansas acreage (the “Kansas Working Interests”) to Dolphin Direct Equity Partners, L.P. (“DDEP”), an entity substantially owned and controlled by Salas. Subsequently, DDEP sold the Kansas Working Interests to the Company in October 2018, one year prior to Hoactzin bankruptcy filing in October 2019, for an amount the complaint alleges was purportedly less than the reasonable value of such Kansas Working Interests. The action seeks, among other things, to recover approximately $ 14 million in damages, as well as an unspecified amount of punitive damages and attorney’s fees. The complaint alleges that Salas, DDEP and the Company are jointly and severally liable for the damages incurred by Hoactzin, During the period of the purported fraudulent transfers giving rise to the claims set forth in the complaint, Salas was Chairman of the Board of Tengasco, Inc., which subsequently merged with Riley Exploration - Permian, LLC on February 26, 2021 and was renamed Riley Exploration Permian, Inc. Concurrently with the closing of the merger, Salas resigned his position from the Board and no longer holds any position as a director or officer of the Company. On April 2, 2021, the Company closed on the sale of all assets it held in Kansas to a third party for an adjusted purchase price of $ 3.3 million, after customary closing adjustments. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the claims and the defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action. Due to the nature of the Company's business, the Company may at times be subject to claims and legal actions. The Company accrues liabilities when it is probable that future costs will be incurred, and such costs can be reasonably estimated. Such accruals are based on developments to date and the Company’s estimates of the outcomes of these matters. The Company did not recognize any material liability as of September 30, 2021 and September 30, 2020. Management believes it is remote that the impact of such matters will have a materially adverse effect on the Company’s financial position, results of operations, or cash flows. 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 environmental liabilities as of September 30, 2021 or 2020. Contractual Commitments In July 2021, as part of a planned expansion of Stakeholder’s primary gas processing plant, the Company committed to annually drill, complete and connect a minimum number of wells or deliver an annual target volume to Stakeholder's gathering system. While the minimum number of wells is below our planned development activity, there are financial penalties if the minimum activity levels are not met. The annual well or volume target is for each of five years beginning January 2022. The additional capacity from the gas processing plant expansion is expected to lead to increased natural gas sales and decreased gas flaring for the Company. In August 2021, the Company entered into a purchase agreement for supplies for its EOR project. Under the agreement, the Company committed to purchasing supplies totaling approximately $ 1.2 million and $ 3.3 million by January 2022 and April 2022, respectively. F-37 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (16) Subsequent Events On October 7, 2021, the Board of Directors of the Company declared a cash dividend of $ 0.31 per share of common stock, payable on November 4, 2021 to its shareholders of record at the close of business on October 21, 2021. Effective October 7, 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 and the second agreement is a connection agreement that also established a delivery point for the purchased CO 2 with the Cortez Pipeline Company. Effective October 12, 2021, the Company amended its revolving credit facility to increase the borrowing base and elected commitments of the lenders thereto from $ 135 million to $ 175 million. See further discussion in Note - 9 Revolving Credit Facility. F-38 SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) (Unaudited) (17) Supplemental Information on Oil and Natural Gas Operations (Unaudited) Capitalized Costs Capitalized costs include the cost of properties, equipment and facilities for oil and natural gas producing activities. Capitalized costs for proved properties include costs for oil and natural gas leaseholds where proved reserves have been identified, development wells and related equipment and facilities, including development wells in progress. Capitalized costs for unproved properties include costs for acquiring oil and natural gas leaseholds where no proved reserves have been identified, including costs of exploratory wells that are in the process of drilling or in active completion, and costs of exploratory wells suspended or waiting on completion. For a summary of these costs, please refer to Note 5 – Oil and Natural Gas Properties . Costs Incurred for Property Acquisition, Exploration and Development Amounts reported as costs incurred include both capitalized costs and costs charged to expense when incurred for oil and natural gas property acquisition, exploration and development activities. Costs incurred also include new ARO established in the current year as well as increases or decreases to ARO resulting from changes to cost estimates during the year. Exploration costs presented below include the costs of drilling and equipping successful and unsuccessful exploration wells during the year, geological and geophysical expenses and the costs of retaining undeveloped leaseholds. Development costs include the costs of drilling and equipping development wells and construction of related production facilities. The following summarizes the costs incurred for oil and natural gas property acquisition, exploration and development activities for the years ended September 30, 2021 and 2020: Years Ended September 30, 2021 2020 (In thousands) Acquisition of properties Proved $ 74 $ 1,187 Unproved 1,562 5,331 Exploration costs 7,993 8,039 Development costs 59,948 43,684 Total costs incurred $ 69,577 $ 58,241 F-39 SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) (Unaudited) Results of Operations The following table includes revenues and expenses associated with the Company's oil and natural gas producing activities. They do not include any allocation of the Company's interest costs or general corporate overhead. For the year ended September 30, 2020, they also do not include estimated corporate taxes since the Company was not a taxpaying entity for federal income tax purposes. Therefore, the following schedule is not necessarily indicative of the contribution of net earnings of the Company's oil and natural gas operations. Years Ended September 30, 2021 2020 (In thousands) Oil, natural gas and NGL sales $ 148,636 $ 73,133 Lease operating expenses 21,975 20,243 Production and ad valorem taxes 8,636 4,280 Exploration costs 9,566 9,923 Depletion, accretion and amortization 25,347 20,936 Results of operations 83,112 17,751 Income tax expense (1) ( 13,505 ) — Results of operations, net of income tax expense $ 69,607 $ 17,751 _____________________________________________________ (1) Subsequent to the Closing Date of the Merger, the statutory combined federal and state tax rate of 21.59 % is used. Prior to the Closing Date of the Merger and for the year ended September 30, 2020, the Company was a flow-through entity for federal income tax purposes. As such, no taxes are reflected here as taxable income was passed through to its members. Oil, Natural Gas and NGL Quantities Our reserve reports, as of September 30, 2021 and 2020, were prepared by Netherland, Sewell & Associates, Inc. and are presented below. All reserves are located within the continental United States. Proved oil, natural gas and NGL reserves are the estimated quantities of oil, natural gas and NGLs that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimate is made. Proved developed oil, natural gas and NGL reserves are proved reserves that can be expected to be recovered through existing wells and equipment in place and under operating methods being utilized at the time the estimates were made. A variety of methodologies are used to determine our proved reserve estimates. The principal methodologies employed are decline curve analysis and analogy. Some combination of these methods is used to determine reserve estimates in substantially all of our fields. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries and undeveloped locations are more imprecise than estimates of established proved producing oil and natural gas properties. Accordingly, these estimates are expected to change as future information becomes available. F-40 SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) (Unaudited) The following table sets forth information for the years ended September 30, 2021 and 2020 with respect to changes in the Company’s proved (i.e. proved developed and undeveloped) reserves: Oil Natural Gas NGLs Total (MBbl) (MMcf) (MBbl) (MBoe) September 30, 2019 37,159 40,991 10,812 54,803 Extensions and discoveries 2,265 3,030 642 3,412 Revisions ( 206 ) 11,290 ( 513 ) 1,163 Production ( 2,060 ) ( 1,628 ) ( 260 ) ( 2,591 ) September 30, 2020 37,158 53,683 10,681 56,787 Extensions and discoveries 9,308 12,089 2,436 13,759 Revisions 2,138 12,850 492 4,772 Production ( 2,341 ) ( 2,603 ) ( 380 ) ( 3,155 ) September 30, 2021 46,263 76,019 13,229 72,163 Proved Developed Reserves, Included Above September 30, 2019 19,198 23,096 6,045 29,092 September 30, 2020 19,149 31,137 5,847 30,186 September 30, 2021 26,170 46,173 7,650 41,516 Proved Undeveloped Reserves, Included Above September 30, 2019 17,961 17,895 4,767 25,711 September 30, 2020 18,009 22,546 4,834 26,601 September 30, 2021 20,093 29,846 5,579 30,647 As of September 30, 2021, reserves were comprised of 64.1 % oil, 17.6 % natural gas and 18.3 % NGL. 2021 proved reserves were estimated based on prices of $ 55.73 per Bbl of oil, $ 0.99 per Mcf of natural gas and $ 9.83 per Bbl of NGL. Prices used in the 2021 reserve report are based on the twelve month unweighted arithmetic average of the first-day-of-the-month price for each month in the period October 2020 through September 2021. For oil and NGL volumes, the average WTI spot price of $ 57.64 per Bbl is adjusted for quality, transportation fees, and market differentials. The fees associated with the transportation contract are included as a deduction to oil revenue. For gas volumes, the average Henry Hub spot price of $ 2.94 per MMBtu is adjusted for energy content, transportation fees and market differentials. As of September 30, 2020, reserves were comprised of 65.4 % oil, 15.8 % natural gas and 18.8 %% NGL. 2020 proved reserves were estimated based on prices of $ 41.91 per Bbl of oil, $( 0.06 ) per Mcf of natural gas and $( 1.96 ) per Bbl of NGL. Prices used in the 2020 reserve report are based on the twelve month unweighted arithmetic average of the first-day-of-the-month price for each month in the period October 2019 through September 2020. For oil and NGL volumes, the average WTI spot price of $ 43.63 per Bbl is adjusted for quality, transportation fees, and market differentials. The fees associated with the transportation contract are included as a deduction to oil revenue. For gas volumes, the average Henry Hub spot price of $ 1.97 per MMBtu is adjusted for energy content, transportation fees and market differentials. For the year ended September 30, 2021, the Company had upward revisions of previous estimates of 4,772 MBoe. These revisions are primarily the result of increases in pricing. The Company had extensions and discoveries to proved developed and proved non-developed reserves of 13,759 MBoe which consisted of 6,564 MBoe as a result of drilling successful wells that were previously classified as unproved locations, and the addition to proved undeveloped of 7,195 MBoe as a result of drilling successful wells offsetting locations that were previously unproven locations. During the fiscal year in 2021, the Company did not purchase any additional reserves. For the year ended September 30, 2020, the Company had upward revisions of previous estimates of 1,163 MBoe. These revisions consisted of a positive revision of 1,840 MBoe due to pricing and differentials, a downward revision of 1,952 MBoe due to lease operating expenses and a positive revision of 1,275 MBoe which was the result of better well performance that exceeded previous estimates. The Company had extensions and discoveries to proved developed and proved non-developed F-41 SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) (Unaudited) reserves of 3,412 MBoe which consisted of 1,404 MBoe as a result of drilling successful wells that were previously classified as unproved locations, and the addition to proved undeveloped of 2,008 MBoe as a result of drilling successful wells offsetting locations that were previously unproven locations. During the year ended September 30, 2020, the Company did not purchase any additional reserves. Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil, Natural Gas and NGL Reserves The Company follows the guidelines prescribed in ASC Topic 932 Extractive Activities – Oil and Gas for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. The following summarizes the policies used in the preparation of the accompanying oil, natural gas and NGL reserve disclosures, standardized measures of discounted future net cash flows from proved oil, natural gas and NGL reserves and the reconciliations of standardized measures from year to year. The standardized measure of discounted future net cash flows from production of proved reserves was developed as follows: (i) estimates are made of quantities of proved reserves and future periods during which they are expected to be produced based on year-end economic conditions; (ii) estimated future cash flows are compiled by applying the twelve month average of the first of the month prices of crude oil and natural gas relating to the Company’s proved reserves to the year-end quantities of those reserves for reserves; (iii) future cash flows are reduced by estimated production costs, costs to develop and produce the proved reserves and abandonment costs, all based on year-end economic conditions, plus Company overhead incurred; (iv) future income tax expenses are based on year-end statutory tax rates giving effect to the remaining tax basis in the oil and natural gas properties, other deductions, credits and allowances relating to the Company’s proved oil and natural gas reserves; and, (v) future net cash flows are discounted to present value by applying a discount rate of 10%. The assumptions used to compute the standardized measure are those prescribed by the FASB and the Securities and Exchange Commission. These assumptions do not necessarily reflect the Company’s expectations of actual revenues to be derived from those reserves, nor their present value. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations, since these reserve quantity estimates are the basis for the valuation process. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries and undeveloped locations are more imprecise than estimates of established proved producing oil and natural gas properties. The standardized measure of discounted future net cash flows does not purport, nor should it be interpreted, to present the fair value of the Company’s oil and natural gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs and a discount factor more representative of the time value of money and the risks inherent in reserve estimates. The following summary sets forth the Company’s future net cash flows relating to proved oil, natural gas and NGL reserves based on the standardized measure prescribed in ASC Topic 932: September 30, 2021 2020 (In thousands) Future crude oil, natural gas and NGLs sales (1) (2) $ 2,783,910 $ 1,533,286 Future production costs ( 839,167 ) ( 550,427 ) Future development costs ( 218,765 ) ( 144,912 ) Future income tax expense (3) ( 324,487 ) ( 3,167 ) Future net cash flows 1,401,491 834,780 10% annual discount ( 848,555 ) ( 532,442 ) Standardized measure of discounted future net cash flows $ 552,936 $ 302,338 _____________________________________________________ (1) 2021 proved reserves were derived based on prices of $ 55.73 of oil, $ 0.99 of natural gas and $ 9.83 of NGL. (2) 2020 proved reserves were derived based on prices of $ 41.91 of oil, $( 0.06 ) of natural gas and $( 1.96 ) of NGL. (3) The Company's calculations of the standardized measure of discounted future net cash flows as of September 30, 2020 included the Company’s obligation for Texas Margin Tax but excluded the effect of estimated future income tax expenses as the Company was a limited liability company and not subject to income taxes. F-42 SUPPLEMENTAL OIL AND GAS INFORMATION - (Continued) (Unaudited) Principal sources of change in the Standardized Measure are shown below: Year Ended September 30, 2021 2020 (In thousands) Balance, beginning of period $ 302,338 $ 442,212 Sales of crude oil, natural gas and NGLs, net ( 118,030 ) ( 48,611 ) Net change in prices and production costs 237,475 ( 162,571 ) Net changes in future development costs ( 18,856 ) ( 12,348 ) Extensions and discoveries 144,392 17,490 Revisions of previous quantity estimates 50,283 7,328 Previously estimated development costs incurred 12,844 10,448 Net change in income taxes ( 124,625 ) 891 Accretion of discount 30,551 44,627 Other 36,564 2,872 Balance, end of period $ 552,936 $ 302,338 F-43