Riley Exploration Permian, Inc. 10-Q

Item 1. Financial Statements RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, 2021 September 30, 2021 (In thousands, except share amounts) Assets Current Assets: Cash and cash equivalents $ 8,317 $ 17,067 Accounts receivable 18,002 17,473 Accounts receivable - related parties — 456 Prepaid expenses and other current assets 4,902 1,730 Current derivative assets 83 — Total current assets 31,304 36,726 Oil and natural gas properties, net (successful efforts) 359,131 345,797 Other property and equipment, net 3,174 3,183 Non-current derivative assets 267 106 Other non-current assets, net 2,293 2,419 Total Assets $ 396,169 $ 388,231 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 7,737 $ 12,234 Accounts payable - related parties 164 — Accrued liabilities 12,874 19,355 Revenue payable 11,370 9,008 Current derivative liabilities 30,984 42,144 Other current liabilities 947 874 Total Current Liabilities 64,076 83,615 Non-current derivative liabilities 9,515 8,932 Asset retirement obligations 2,261 2,306 Revolving credit facility 65,000 60,000 Deferred tax liabilities 17,384 11,628 Other non-current liabilities 95 60 Total Liabilities 158,331 166,541 Commitments and Contingencies (Note 13) 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; 19,836,885 and 19,672,050 shares issued and outstanding at December 31, 2021 and September 30, 2021, respectively 20 20 Additional paid-in capital 271,737 270,837 Accumulated deficit ( 33,919 ) ( 49,167 ) Total Shareholders' Equity 237,838 221,690 Total Liabilities and Shareholders' Equity $ 396,169 $ 388,231 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended December 31, 2021 2020 (In thousands, except per share/unit amounts) Revenues: Oil and natural gas sales, net $ 56,650 $ 22,414 Contract services - related parties 600 600 Total Revenues 57,250 23,014 Costs and Expenses: Lease operating expenses 7,419 4,568 Production and ad valorem taxes 3,005 1,289 Exploration costs 611 424 Depletion, depreciation, amortization and accretion 6,867 5,990 General and administrative: Administrative costs 3,633 2,445 Unit-based compensation expense — 413 Share-based compensation expense 951 — Cost of contract services - related parties 150 148 Transaction costs 1,258 1,049 Total Costs and Expenses 23,894 16,326 Income From Operations 33,356 6,688 Other Income (Expense): Interest expense ( 896 ) ( 1,235 ) Loss on derivatives ( 5,193 ) ( 13,909 ) Total Other Income (Expense) ( 6,089 ) ( 15,144 ) Net Income (Loss) Before Income Taxes 27,267 ( 8,456 ) Income tax benefit (expense) ( 5,869 ) 515 Net Income (Loss) 21,398 ( 7,941 ) Dividends on preferred units — ( 917 ) Net Income (Loss) Attributable to Common Shareholders/Unitholders $ 21,398 $ ( 8,858 ) Net Income (Loss) per Share/Unit: Basic $ 1.10 $ ( 0.71 ) Diluted $ 1.09 $ ( 0.71 ) Weighted Average Common Shares/Units Outstanding: Basic 19,470 12,469 Diluted 19,569 12,469 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/SHAREHOLDERS' EQUITY (Unaudited) (In Thousands) Three Months Ended December 31, 2021 Members' Equity Shareholders' Equity Common Stock Units Outstanding Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Total Shareholders' Equity Balance, September 30, 2021 — $ — 19,672 $ 20 $ 270,837 $ ( 49,167 ) $ 221,690 Share-based compensation expense — — — — 919 — 919 Repurchased shares for tax withholding — — ( 10 ) — ( 19 ) — ( 19 ) Issuance of common shares under long-term incentive plan — — 175 — — — — Dividends declared — — — — — ( 6,150 ) ( 6,150 ) Net income — — — — — 21,398 21,398 Balance, December 31, 2021 — $ — 19,837 $ 20 $ 271,737 $ ( 33,919 ) $ 237,838 Three Months Ended December 31, 2020 Members' Equity Shareholders' Equity Common Stock Units Outstanding Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Total Shareholders' Equity Balance, September 30, 2020 1,555 $ 166,617 — $ — $ — $ — $ — Issuance of common units under long-term incentive plan 13 — — — — — — Dividends on preferred units — ( 917 ) — — — — — Dividends on common units — ( 3,801 ) — — — — — Unit-based compensation expense — 413 — — — — — Net loss — ( 7,941 ) — — — — — Balance, December 31, 2020 1,568 $ 154,371 — $ — $ — $ — $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 8 RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended December 31, 2021 2020 (In thousands) Cash Flows from Operating Activities: Net income (loss) $ 21,398 $ ( 7,941 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Oil and gas lease expirations 588 424 Depletion, depreciation, amortization and accretion 6,867 5,990 Loss on derivatives 5,193 13,909 Settlements on derivative contracts ( 16,014 ) 5,173 Amortization of deferred financing costs 282 155 Unit-based compensation expense — 413 Share-based compensation expense 951 — Deferred income tax expense (benefit) 5,756 ( 515 ) Changes in operating assets and liabilities: Accounts receivable ( 529 ) ( 397 ) Accounts receivable – related parties 456 ( 258 ) Prepaid expenses and other current assets ( 3,172 ) ( 39 ) Other non-current assets — 1 Accounts payable and accrued liabilities ( 2,625 ) ( 385 ) Accounts payable - related parties 164 — Income taxes payable 113 — Revenue payable 2,362 95 Advances from joint interest owners — ( 2 ) Advances from related parties — 570 Other liabilities ( 63 ) — Net Cash Provided By Operating Activities 21,727 17,193 Cash Flows from Investing Activities: Additions to oil and natural gas properties ( 29,011 ) ( 9,389 ) Additions to other property and equipment ( 117 ) ( 318 ) Net Cash Used In Investing Activities ( 29,128 ) ( 9,707 ) Cash Flows from Financing Activities: Deferred financing costs ( 274 ) ( 52 ) Proceeds from revolving credit facility 5,000 2,000 Repayment under revolving credit facility — ( 5,500 ) Payment of common share/unit dividends ( 6,056 ) ( 3,717 ) Common stock repurchased for tax withholding ( 19 ) — Net Cash Used in Financing Activities ( 1,349 ) ( 7,269 ) Net Increase (Decrease) in Cash and Cash Equivalents ( 8,750 ) 217 Cash and Cash Equivalents, Beginning of Period 17,067 1,660 Cash and Cash Equivalents, End of Period $ 8,317 $ 1,877 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 RILEY EXPLORATION PERMIAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited) Three Months Ended December 31, 2021 2020 (In thousands) Supplemental Disclosure of Cash Flow Information Cash Paid For: Interest $ 495 $ 850 Non-cash Investing and Financing Activities - Continuing Operations: Changes in capital expenditures in accounts payable and accrued liabilities $ ( 8,443 ) $ ( 680 ) Common share/unit dividends incurred but not paid $ ( 114 ) $ ( 84 ) Asset retirement obligations $ 56 $ 17 Preferred unit dividends paid in kind $ — $ 904 Preferred unit dividends $ — $ 917 The accompanying notes are an integral part of these condensed consolidated financial statements. 10 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Nature of Business Organization Riley Permian is a growth-oriented, independent oil and natural gas company focused on the acquisition, exploration, development and production of oil, natural gas and NGLs in Texas and New Mexico. Our activities primarily include the horizontal development of the San Andres formation, a shelf margin deposit on the Northwest Shelf of the Permian Basin. Our acreage is primarily located on large, contiguous blocks in Yoakum County, Texas. On February 26, 2021 (the “Closing Date”), Riley Permian (f/k/a Tengasco, Inc. (“Tengasco”)), consummated a merger, dated as of October 21, 2020, by and among Tengasco, Antman Sub, LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of Tengasco (“Merger Sub”), and Riley Exploration – Permian, LLC (“REP LLC”). Merger Sub merged with and into REP LLC, with REP LLC as the surviving company and as a wholly owned subsidiary of Tengasco (collectively, with the other transactions described in the Merger Agreement, the “Merger”). On the Closing Date, the Registrant changed its name from Tengasco, Inc. to Riley Exploration Permian, Inc. (2) Basis of Presentation These unaudited condensed consolidated financial statements as of December 31, 2021 and for the three months ended December 31, 2021 and 2020 include the accounts of Riley Permian and its wholly owned subsidiaries REP LLC, Riley Permian Operating Company, LLC ("RPOC"), Tengasco Pipeline Corporation, Tennessee Land & Mineral Corporation, and Manufactured Methane Corporation, and have been prepared in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated upon consolidation. The Merger was accounted for as a reverse merger and, as such, the historical operations of REP LLC are deemed to be those of the Company. Thus, the condensed consolidated financial statements included in this report reflect (i) the historical operating results of REP LLC prior to the Merger; (ii) the consolidated results of the Company following the Merger; (iii) the assets and liabilities of REP LLC at their historical cost; and (iv) the Company’s equity and earnings per share for all periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulation of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company's most recent Annual Report on Form 10-K for the year ended September 30, 2021. 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 liabilities and results of operations or cash flows. These condensed consolidated financial statements have not been audited by an independent registered public accounting firm. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The results of operations for the three months ended December 31, 2021, are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2022, for various reasons, including as a result of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results, fluctuations in the fair value of derivative instruments, the future impacts of COVID-19 and other factors. (3) Summary of Significant Accounting Policies Significant Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 11 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include, but are not limited to, estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, accounts receivable, accrued capital expenditures and operating expenses, AROs, the fair value determination of acquired assets and assumed liabilities, certain tax accruals and the fair value of derivatives. Accounts Receivable Accounts receivable is summarized below: December 31, 2021 September 30, 2021 (In thousands) Oil, natural gas and NGL sales $ 17,562 $ 17,008 Joint interest accounts receivable 409 413 Realized derivative receivable — 42 Other accounts receivable 31 10 Total accounts receivable $ 18,002 $ 17,473 The Company had no allowance for doubtful accounts at December 31, 2021 and September 30, 2021. Other Non-Current Assets, Net Other non-current assets consisted of the following: December 31, 2021 September 30, 2021 (In thousands) Deferred financing costs, net $ 1,345 $ 1,353 Prepayments to outside operators 690 707 Right of use assets 208 309 Other deposits 50 50 Total other non-current assets, net $ 2,293 $ 2,419 Accrued Liabilities Accrued liabilities consisted of the following: December 31, 2021 September 30, 2021 (In thousands) Accrued capital expenditures $ 5,618 $ 9,718 Accrued lease operating expenses 2,534 2,428 Accrued general and administrative costs 3,404 4,375 Other accrued expenditures 1,318 2,834 Total accrued liabilities $ 12,874 $ 19,355 Asset Retirement Obligations Components of the changes in ARO for the three months ended December 31, 2021 and year ended September 30, 2021 are shown below: December 31, 2021 September 30, 2021 (In thousands) ARO, beginning balance $ 2,434 $ 2,326 Liabilities incurred 56 113 Liability settlements and disposals ( 58 ) ( 92 ) Accretion 21 87 ARO, ending balance 2,453 2,434 Less: current ARO (1) ( 192 ) ( 128 ) ARO, long-term $ 2,261 $ 2,306 _____________________ (1) Current ARO is included within other current liabilities on the accompanying condensed consolidated balance sheets. Revenue Recognition The following table presents oil and natural gas sales disaggregated by product: Three Months Ended December 31, 2021 2020 (In thousands) Oil and natural gas sales: Oil $ 50,623 $ 22,107 Natural gas 2,705 119 Natural gas liquids 3,322 188 Total oil and natural gas sales, net $ 56,650 $ 22,414 Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance and is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Company adopted this ASU effective October 1, 2021. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements. Issued Accounting Standards Not Yet Adopted 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. 12 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) (4) Acquisitions Business Combination Between REP LLC and Tengasco Immediately prior to the closing of the Merger on February 26, 2021, REP LLC converted all of its issued and outstanding Series A Preferred Units into common units of REP LLC. In connection with the Merger, holders of common units of REP LLC were entitled to receive, in exchange for each common unit, shares of common stock of Tengasco (which was renamed Riley Exploration Permian, Inc.), par value $ 0.001 per share (“Tengasco common stock”) based on the exchange ratio set forth in the Merger Agreement (the “Exchange Ratio”), with cash paid in lieu of the issuance of any fractional shares. The Exchange Ratio was 97.796467 shares of Tengasco common stock for each common unit of REP LLC (as adjusted for the reverse stock split). Immediately prior to the closing of the Merger, Tengasco effected a one-for-twelve reverse stock split resulting in outstanding common stock of approximately 17.8 million shares including shares of Tengasco common stock issued in the Merger. The combination between REP LLC and Tengasco qualified as a business combination, with REP LLC being treated as the accounting acquirer. The assets acquired and liabilities assumed were recognized on the consolidated balance sheet at fair value as of the acquisition date. The consideration paid in the Merger by REP LLC as the accounting acquirer totaled approximately $ 26.4 million and was determined based on the closing price of Tengasco’s common stock on February 26, 2021 and the total number of shares outstanding immediately prior to the Merger. The Merger was structured as a tax-free reorganization for United States federal income tax purposes. The following table summarizes the consideration for the Merger (presented in thousands, except stock price): Tengasco common stock price $ 29.64 Tengasco common stock - issued and outstanding as of February 26, 2021 891 Total consideration $ 26,392 The Company incurred $ 1.0 million of costs related to the Merger during the three months ended December 31, 2020, which is included in transaction costs on the condensed consolidated statement of operations. 13 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The Company completed the determination of the fair value attributable to the assets acquired and liabilities assumed as of September 30, 2021. The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values on February 26, 2021 (in thousands): Assets Cash and cash equivalents $ 860 Account receivable 325 Prepaid and other current assets 759 Total current assets 1,944 Oil and gas properties 4,525 Other property and equipment 91 Right of use assets 42 Other non-current assets 4 Deferred tax assets 2,987 Total assets acquired 9,593 Liabilities Accounts payable 130 Accrued liabilities 409 Current lease liabilities, operating 42 Current lease liabilities, financing 68 Total current liabilities 649 Asset retirement obligations 1,565 Total liabilities assumed 2,214 Net identifiable assets acquired 7,379 Goodwill 19,013 Net assets acquired $ 26,392 The goodwill recognized was primarily attributable to a substantial increase in the stock price of Tengasco on the Closing Date, which increased the amount of the consideration transferred. Pro Forma Operating Results (Unaudited) The following unaudited pro forma combined results for the three months ended December 31, 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 $ 0.9 million of transaction costs being reclassified to the first quarter of fiscal year 2020 which were incurred during the three months ended December 31, 2020. 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 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 14 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) conversion of the REP LLC preferred units into common units and retroactively adjusted for the Exchange Ratio and one-for-twelve reverse stock split. Three Months Ended December 31, 2020 (In thousands, except per share/unit amounts) Total Revenues $ 23,014 Pro Forma Net Income (Loss) before Taxes ( 6,647 ) Pro forma income tax benefit (expense) 1,396 Pro Forma Net Income (Loss) $ ( 5,251 ) Net Income (Loss) per Share/Unit from Continuing Operations: Basic $ ( 0.30 ) Diluted $ ( 0.30 ) 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. (5) Oil and Natural Gas Properties Oil and natural gas properties are summarized below: December 31, 2021 September 30, 2021 (In thousands) Proved $ 421,779 $ 402,165 Unproved 18,839 20,557 Work-in-progress 13,534 11,411 454,152 434,133 Accumulated depletion and amortization ( 95,021 ) ( 88,336 ) Total oil and natural gas properties, net $ 359,131 $ 345,797 Depletion and amortization expense for proved oil and natural gas properties was $ 6.7 million and $ 5.9 million for the three months ended December 31, 2021 and 2020, respectively. The Company incurred $ 0.6 million and $ 0.4 million of exploration costs, which primarily related to the expiration of oil and natural gas leases for the three months ended December 31, 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 three months ended December 31, 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 included and recognized in other income (expenses) in the condensed consolidated statement of operations. 15 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) As of December 31, 2021, the Company's oil and natural gas derivative instruments consisted of fixed price swaps, costless collars, and basis protection swaps. The following table summarizes the open financial derivative positions as of December 31, 2021, related to oil and natural gas production: Weighted Average Price Calendar Quarter Notional Volume Fixed Put Call ($ per unit) Oil Swaps (Bbl) Q1 2022 345,000 $ 57.47 $ — $ — Q2 2022 345,000 $ 57.47 $ — $ — Q3 2022 270,000 $ 56.03 $ — $ — Q4 2022 270,000 $ 56.03 $ — $ — 2023 720,000 $ 53.27 $ — $ — Natural Gas Swaps (Mcf) Q1 2022 360,000 $ 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) Q1 2022 240,000 $ 0.41 $ — $ — Q2 2022 240,000 $ 0.41 $ — $ — Q3 2022 240,000 $ 0.41 $ — $ — Q4 2022 240,000 $ 0.41 $ — $ — 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 December 31, 2021: Open Coverage Period Notional Amount Fixed Rate (In thousands) Floating-to-Fixed Interest Rate Swaps January 2022 - September 2023 $ 40,000 0.24 % 16 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Balance Sheet Presentation of Derivatives The following table presents the location and fair value of the Company’s derivative contracts included in the condensed consolidated balance sheets as of December 31, 2021 and September 30, 2021: December 31, 2021 Balance Sheet Classification Gross Fair Value Amounts Netted Net Fair Value (In thousands) Current derivative assets $ 281 $ ( 198 ) $ 83 Non-current derivative assets 267 — 267 Current derivative liabilities ( 31,182 ) 198 ( 30,984 ) Non-current derivative liabilities ( 9,515 ) — ( 9,515 ) Total $ ( 40,149 ) $ — $ ( 40,149 ) 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 ) The following table presents the Company's derivative activities for the three months ended December 31, 2021 and 2020: Three Months Ended December 31, 2021 2020 (In thousands) Fair value of net asset (liability), beginning of period $ ( 50,970 ) $ 21,921 Loss on derivatives ( 5,193 ) ( 13,909 ) Settlements on derivatives 16,014 ( 5,173 ) Fair value of net asset (liability), end of period $ ( 40,149 ) $ 2,839 (7) Fair Value Measurements The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability. The carrying values of financial instruments comprising cash and cash equivalents, payables, receivables, related party accounts receivable and accounts payable, 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 17 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) accounted for at fair value on a recurring basis as of December 31, 2021 and September 30, 2021, by Level within the fair value hierarchy: December 31, 2021 Level 1 Level 2 Level 3 Total (In thousands) Financial assets: Commodity derivative assets $ — $ 187 $ — $ — Interest rate assets $ — $ 361 $ — $ — Financial liabilities: Commodity derivative liabilities $ — $ ( 40,687 ) $ — $ — Interest rate liabilities $ — $ ( 10 ) $ — $ — 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 ) $ — $ — (8) Transactions with Related Parties Contract Services RPOC provides certain administrative services to Combo Resources, LLC ("Combo") and is also the contract operator on behalf of Combo in exchange for a monthly fee of $ 100 thousand and reimbursement of all third party expenses pursuant to a contract services agreement. Additionally, RPOC provides certain administrative and operational services to Riley Exploration Group, LLC ("REG") in exchange for a monthly fee of $ 100 thousand pursuant to a contract services agreement. The following table presents revenues from contract services for related parties: Three Months Ended December 31, 2021 2020 (In thousands) Combo $ 300 $ 300 REG 300 300 Contract services - related parties $ 600 $ 600 Cost of contract services $ 150 $ 148 The Company had amounts (payable to) and due from Combo of $( 0.2 ) million and $ 0.5 million at December 31, 2021 and September 30, 2021, respectively, which are reflected in accounts payable - related parties and accounts receivable - related parties on the accompanying condensed consolidated balance sheets. There were no amounts due to the Company from REG as of December 31, 2021 and September 30, 2021. Consulting and Legal Fees 18 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The Company has an engagement agreement with di Santo Law PLLC ("di Santo Law"), a law firm owned by Beth di Santo, a member of our Board of Directors, pursuant to which di Santo Law's attorneys provide legal services to the Company. For the three months ended December 31, 2021 and 2020, the Company incurred legal fees from di Santo Law of approximately $ 0.2 million and $ 0.2 million, respectively. As of December 31, 2021 and September 30, 2021, the Company had approximately $ 0.2 million and $ 0.8 million in amounts accrued for di Santo Law. Such amounts were included in accrued liabilities in the accompanying condensed consolidated balance sheets. (9) Revolving Credit Facility On September 28, 2017, REP LLC entered into a credit agreement (the "Credit Agreement") to establish a senior secured revolving credit facility with a syndicate of banks including SunTrust Bank, now Truist Bank as successor by merger, as administrative agent. The revolving credit facility had an initial borrowing base of $ 25 million with a maximum facility amount of $ 500 million. On October 12, 2021, the revolving credit facility was amended to, among other things, increase the borrowing base to $ 175 million from $ 135 million, provide for the transition away from LIBOR to an alternative reference rate and change the requirements for Restricted Payments (as defined in the Credit Agreement) to consider the Company's total leverage ratio and available free cash flow under certain circumstances. Substantially all of the Company’s assets are pledged to secure the revolving credit facility. 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 2.75 % and 3.75 % (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 1.75 % and 2.75 % (depending on the borrowing base utilization percentage). The Company is also subject to an unused commitment fee of between 0.375 % and 0.500 % (depending on the borrowing base utilization percentage). The Credit Agreement contains certain covenants, which, among other things, require the maintenance of (i) a total leverage ratio of not more than 3.25 to 1.0 and (ii) a minimum current ratio of not less than 1.0 to 1.0 as of the last day of any 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 2.50 to 1.0. If the Company's leverage ratio, after giving pro forma effect to such Restricted Payments (as defined in the Credit Agreement), is below 2.0 to 1.0, then an additional test of free cash flow is applied, and the Company will only be permitted to make such Restricted Payments if such payment does not exceed the Company's free cash flow. The Company is also required to limit its cash balance to less than $ 15 million or 10 % of the borrowing base, whichever is greater. If the Company's cash balance exceeds this limit for five consecutive business days, the Company will be required to apply the excess to reduce its credit facility borrowings. The Credit Agreement also contains other customary affirmative and negative covenants and events of default. As of December 31, 2021, the Company's minimum hedging requirement was 50 % of its PDP volumes on a rolling 24 month basis. The following table summarizes the Company's interest expense: Three Months Ended December 31, 2021 2020 (In thousands) Interest expense $ 512 $ 1,041 Amortization of deferred financing costs (1) 282 155 Unused commitment fees 102 39 Total interest expense $ 896 $ 1,235 _____________________ (1) Includes $ 0.1 million of unamortized deferred financing costs written off during the three months ended December 31, 2021 in conjunction with the amendment of the Credit Agreement in October 2021. 19 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) As of December 31, 2021 and September 30, 2021, the weighted average interest rate on outstanding borrowings under the revolving credit facility was 3.10 % and 2.83 %, respectively. As of December 31, 2021 and September 30, 2021, the Company was in compliance with all covenants contained in the Credit Agreement and had $ 65 million and $ 60 million, respectively, of outstanding borrowings and an additional $ 110 million and $ 75 million, respectively, available under the borrowing base. (10) Members’/Shareholders' Equity Dividends For the three months ended December 31, 2021 and 2020, the Company declared quarterly dividends on its common stock and common units totaling approximately $ 6.1 million and $ 3.8 million, respectively. See Note 9 - Revolving Credit Facility for discussion over the Company's restrictions on certain payments, including dividends. Share-Based and Unit-Based Compensation In connection with the Merger, the Company shareholders adopted an omnibus equity incentive plan, the 2021 LTIP, for the employees, consultants and the directors of the Company and its affiliates who perform services for the Company. The holders of unvested restricted units issued under the 2018 LTIP were issued substitute awards under the 2021 LTIP at the closing of the Merger. Upon the closing of the Merger and after giving effect to the adjustment resulting from the one-for-twelve reverse stock split, the 2021 LTIP had 1,387,022 shares of common stock available for issuance, of which 814,707 shares remained available as of December 31, 2021. 2021 Long-Term Incentive Plan Restricted Shares: The Company granted 174,575 restricted shares to executive officers and employees of the Company during the three months ended December 31, 2021. The restricted shares granted to executive officers and employees vest over a period of 36 months with a grant date fair value of $ 23.46 . 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 following table presents the Company's restricted stock activity during the three months ended December 31, 2021 under the 2021 LTIP: 2021 Long-Term Incentive Plan Restricted Shares Weighted Average Grant Date Fair Value Unvested at September 30, 2021 228,369 $ 15.35 Granted 174,575 $ 23.46 Vested ( 36,155 ) $ 13.80 Forfeited — $ — Unvested at December 31, 2021 366,789 $ 19.41 During the three months ended December 31, 2021, total share-based compensation expense of $ 1.0 million is included in general and administrative costs on the Company's condensed consolidated statement of operations for the restricted share awards granted under the 2021 LTIP. Approximately $ 5.5 million of additional share-based compensation expense will be recognized over the weighted average life of 28 months for the restricted share awards granted under the 2021 LTIP. 2018 Long-Term Incentive Plan In connection with the Merger and in accordance with the Merger Agreement, each unvested restricted unit outstanding under the 2018 LTIP was converted into restricted shares of the Company under the 2021 LTIP. The holders of unvested restricted units issued under the 2018 LTIP were issued substitute awards under the 2021 LTIP at the closing of the Merger. 20 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Restricted Units: The Company granted 13,309 restricted units to executives and employees of the Company during the three months ended December 31, 2020. These restricted units vest over a period of 36 months with a fair value price of $ 112.47 . The Company determined the fair value of the common units in accordance with ASC 718 using an options pricing model. 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. Total unit-based compensation expense of $ 0.4 million, respectively, is included in general and administrative costs on the Company's condensed consolidated statement of operations for all of the issuances outstanding for the three months ended December 31, 2020. (11) Income Taxes REP LLC was organized as a limited liability company and treated as a flow-through entity for federal income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns, even though such taxable income or tax credits may not have been distributed. In connection with the closing of the Merger, the Company's tax status changed from a limited liability company to a C-corporation. As a result, the Company is responsible for federal and state income taxes and must record deferred tax assets and liabilities for the tax effects of any temporary differences that exist on the date of the change. The components of the Company's consolidated provision for income taxes from continuing operations are as follows: Three Months Ended December 31, 2021 2020 (In thousands) Current income tax expense: Federal $ — $ — State 113 — Total current income tax expense 113 — Deferred income tax expense (benefit): Federal 5,669 — State 87 ( 515 ) Total deferred income tax expense (benefit) 5,756 ( 515 ) Total income tax expense (benefit) $ 5,869 $ ( 515 ) A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: Three Months Ended December 31, 2021 2020 Tax at statutory rate 21.0 % 21.0 % Nondeductible compensation 0.1 % — % Stock compensation ( 0.3 ) % — % State income taxes, net of federal benefit 0.7 % 2.0 % Income subject to taxation by REP LLC's unitholders — % ( 21.0 ) % Effective income tax rate 21.5 % 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 21 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions. (12) 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 three months ended December 31, 2021 and 2020: Three Months Ended December 31, 2021 2020 (In thousands, except per share/unit) Net income (loss) - Diluted $ 21,398 $ ( 7,941 ) Less: Dividends on preferred units — ( 917 ) Net income (loss) attributable to common shareholders/unitholders - Basic (1) $ 21,398 $ ( 8,858 ) Basic weighted-average common shares/units outstanding 19,470 12,469 Effecting of dilutive securities: Restricted shares/units 99 — Diluted weighted-average common shares/units outstanding 19,569 12,469 Basic net income (loss) per common share/unit $ 1.10 $ ( 0.71 ) Diluted net income (loss) per common share/unit $ 1.09 $ ( 0.71 ) _____________________________________________________ (1) Used in basic and diluted net loss per share calculation for December 31, 2020 since the Company was in a net loss position. For the three months ended December 31, 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: Three Months Ended December 31, 2021 2020 (In thousands) Series A preferred units — 4,170 Restricted shares/units 268 281 (13) Commitments and Contingencies Legal Matters The Company has been named as a defendant in an action commenced on October 25, 2021 in United States Bankruptcy Court for the Northern District of Texas, Dallas Division, by the Chapter 7 Trustee for the Hoactzin Bankruptcy. The Company was served with this lawsuit on or about December 7, 2021. The complaint alleges that in October of 2018, one year prior to the Hoactzin bankruptcy filing in October of 2019, Peter Salas ("Salas"), Chairman of the Board of Tengasco during the period of the purported fraudulent transfers, caused Hoactzin to transfer its working interests in certain wells on its Kansas acreage (the “Kansas Working Interests”) to the Company for an amount the complaint alleges was purportedly less than the reasonable equivalent value of such Kansas Working Interests. The complaint includes avoidance actions and other causes of action in connection with the transfer of the Kansas Working Interests, as well as other causes of action alleged related to certain transactions to which the Company was not a party. The complaint also alleges that Salas, Dolphin Direct Equity Partners, L.P. ("DDEP"), an entity substantially owned by Salas, and the Company are jointly and severally liable for the damages incurred by Hoactzin. In connection with the 22 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Company’s merger in February 2021, Salas resigned his position from the Company’s Board and no longer holds any position as an officer or director of the Company. On April 2, 2021, the Company closed on the sale of all the assets it held in Kansas (of which the Kansas Working Interests were a small part) to a third party for an agreed upon purchase price of $ 3.2 million. As of the date of this Quarterly Report, the Company has filed its initial Answer denying the allegations against it. 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 December 31, 2021 and September 30, 2021. At this time, management does not expect the impact of this litigation to be material to our financial position or results of operations. 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 December 31, 2021 or September 30, 2021. Contractual Commitments In July 2021, as part of a planned expansion of the primary gas processing plant owned by the Company's primary midstream partner, Stakeholder Midstream LLC ("Stakeholder"), 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 has remaining commitments totaling approximately $ 0.8 million and $ 2.6 million to purchase supplies by January 2022 and April 2022, respectively. On 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. (14) Subsequent Events On January 12, 2022, the Board of Directors of the Company declared a cash dividend of $ 0.31 per share of common stock, payable on February 9, 2022 to its shareholders of record at the close of business on January 26, 2022. On January 25, 2022, the Company and di Santo Law PLLC, a law firm owned by a member of our Board of Directors, entered into an engagement letter that provides a monthly fixed fee in exchange for general corporate legal services. The agreement has an initial term of one year and provides for a monthly cash payment of $ 30,000 and an aggregate one-time grant of 10,500 shares of restricted stock that will vest in four equal installments at the end of each quarter in calendar year 2022. 23 Table of Contents RILEY EXPLORATION PERMIAN, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)