# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Sep 30, 2020

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2020-11-12
- Accepted by EDGAR: Nov 12, 2020, 16:40 ET
- Period: 2020-09-30
- Accession: 0001140361-20-025374
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000114036120025374/brhc10016873_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000114036120025374/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $765.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $2.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | −$812.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | −$1.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $2.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $6.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | −$813.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | −$1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | −$0.08 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | −$0.18 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 10,680,050 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 10,673,238 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | −$565.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2020-09-30 | $2.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $3.3m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $7.4m | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $851.0k | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $2.9m | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $65.0k | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $101.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $4.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 15,529 characters.

### Results of Operations and Financial Condition

During the first nine months of 2020, 92.4MBbl gross of oil were sold from the Company’s properties. Of the 92.4MBbl sold, 67.0MBbl were net to the Company after required payments to all of the royalty interests and the one remaining drilling program participant. The Company’s net sales from its properties during the first nine months of 2020 of 67.0MBbl of oil compares to net sales of 72.1MBbl of oil during the first nine months of 2019. The Company’s net revenue from its oil and gas properties was $2.3 million during the first nine months of 2020 compared to $3.8 million during the first nine months of 2019. This decrease in net revenue was primarily due to an $1.2 million reduction related to a $18.12 per barrel decrease in the average oil price from $52.09 per barrel during the first nine months of 2019 to $33.97 per barrel during the first nine months of 2020, and a $269,000 reduction related to a 5.1MBbl decrease in sales volumes. The 5.1MBbl decrease in sales volumes was primarily related to lower sales on the Albers, BSU, Liebenau, Veverka D leases related to natural production declines, partially offset by sales from the Zimmerman well that was completed at the beginning of 2020.

### Comparison of the Quarters Ended September 30, 2020 and 2019

The Company reported a net loss of $(813,000) or $(0.08) per share of common stock during the third quarter of 2020 compared to net loss of $(182,000) or $(0.02) per share of common stock during the third quarter of 2019. The $631,000 decrease in net income was primarily due to an $450,000 decrease in revenues, and a $388,000 increase in general and administrative expenses, partially offset by a $167,000 decrease in production costs and taxes and a $40,000 decrease in depreciation, depletion, and amortization costs.

The Company recognized $765,000 in revenues during the third quarter of 2020 compared to $1.2 million during the third quarter of 2019. The $450,000 decrease in net revenues was primarily due to a $318,000 reduction related to a $15.15 per barrel decrease in the average oil price from $51.18 per barrel during the third quarter of 2019 to $36.03 per barrel during the third quarter of 2020, and a $133,000 reduction related to a 2.6MBbl decrease in oil sales volumes. The 2.6MBbl decrease in sales volumes was primarily related to lower sales on the Albers, Dick A, Liebenau, and Stahl leases related to natural production declines and timing of crude pickups by the purchases, partially offset by sales from the Zimmerman well that was completed at the beginning of 2020.

General and administrative costs increased $388,000 from $297,000 during the third quarter of 2019 to $685,000 during the third quarter of 2020. This increase was primarily due to costs incurred during the third quarter of 2020 related to the announced transaction with Riley Exploration – Permian, LLC. See Part II, Item 5, Other Information.

Production costs and taxes decreased $167,000 from $913,000 during the third quarter of 2019 to $746,000 during the third quarter of 2020. This decrease was primarily due to lower well repair costs and a change in the oil inventory adjustment.

Depreciation, depletion, and amortization costs decreased $40,000 from $186,000 during the third quarter of 2019 to $146,000 during the third quarter of 2020. This decrease was primarily related to lower depletion expense on the Company’s oil properties.

### Comparison of the Nine Months Ended September 30, 2020 and 2019

The Company reported a net loss of $(1.9 million) or $(0.18) per share of common stock during the first nine months of 2020 compared to a net loss of $(269,000) or $(0.03) per share of common stock during the first nine months of 2019. The $1.6 million decrease in net income was primarily due to an $1.5 million decrease in revenues, a $411,000 increase in general and administrative expenses, and a $41,000 decrease in gain on sale of assets, partially offset by a $205,000 decrease in production costs and taxes, and a $105,000 decrease in depreciation, depletion, and amortization costs.

The Company recognized $2.3 million of revenues during the first nine months of 2020 compared to $3.8 million during the first nine months of 2019. This decrease in net revenue was primarily due to an $1.2 million reduction related to a $18.12 per barrel decrease in the average oil price from $52.09 per barrel during the first nine months of 2019 to $33.97 per barrel during the first nine months of 2020, and a $269,000 reduction related to a 5.1MBbl decrease in sales volumes. The 5.1MBbl decrease in sales volumes was primarily related to lower sales on the Albers, BSU, Liebenau, Veverka D leases related to natural production declines, partially offset by sales from the Zimmerman well that was completed at the beginning of 2020.

General and administrative costs increased $411,000 from $913,000 during the first nine months of 2019 to $1.3 million during the first nine months of 2020. This increase was primarily due to costs incurred during the third quarter of 2020 related to the announced transaction with Riley Exploration – Permian, LLC. See Part II, Item 5, Other Information.

Gain on sale of assets decreased $41,000 from $45,000 during the nine months of 2019 to $4,000 during the first nine months of 2020. This decrease was primarily related to gain on sale of equipment inventory to a third party during the first quarter of 2019.

Production costs and taxes decreased $205,000 from $2.6 million during the first nine months of 2019 to $2.4 million during the first nine months of 2020. This decrease was primarily due to lower well repair costs, partially offset by a change in the oil inventory adjustment.

Depreciation, depletion and amortization costs decreased $105,000 from $566,000 during the first nine months of 2019 to $461,000 during the nine months of 2020. This decrease was primarily related to lower depletion expense on the Company’s oil properties.

### Liquidity and Capital Resources

At September 30, 2020, the Company had a revolving credit facility with Prosperity Bank. This has historically been the Company’s primary source to fund working capital and capital spending. Under the credit facility, loans and letters of credit are available to the Company on a revolving basis in an amount outstanding not to exceed the lesser of $50 million or the Company’s borrowing base in effect from time to time. As of September 30, 2020, the Company’s borrowing base was $3.1 million, subject to a credit limit based on current covenants of $1.442 million. While the credit limit has not yet been formally reduced, the Company has experienced total negative EBITDA for the trailing 4 quarters ended September 30, 2020, which would result in a zero credit limit if the formal borrowing base review would have occurred at September 30, 2020, therefore prohibiting any borrowings on the Company’s credit facility. The credit facility is secured by substantially all of the Company’s producing and non-producing oil and gas properties. The credit facility includes certain covenants with which the Company is required to comply. At September 30, 2020, these covenants include the following: (a) Current Ratio \> 1:1; (b) Funded Debt to EBITDA \< 3.5x; and (c) Interest Coverage \> 3.0x. At September 30, 2020, the interest rate on this credit facility was 3.75%. The Company was in compliance with all covenants during the quarter ended September 30, 2020. The Company had no outstanding borrowing under the facility as of September 30, 2020 or December 31, 2019. However, if the Company had borrowings under the credit facility at September 30, 2020, the Company would not have been in compliance with EBITDA related covenants as the Company reported negative EBITDA for the trailing four quarters ended September 30, 2020.

During the second quarter of 2020, the Company was approved by the Small Business Administration to receive a Paycheck Protection Program (“PPP”) loan in the amount of approximately $166,000. This loan was funded by Prosperity Bank in May 2020. The PPP loan is not part of the credit facility with Prosperity Bank as described above and therefore is not subject to the same terms as Company’s credit facility. The PPP loan has an interest rate of 1% with a maturity date of May 2022. There are no payments due during the first six months of the loan. After the six-month period has expired, all outstanding accrued interest is due. At that time, the remaining unforgiven portion of the loan will be due in 18 equal monthly installments of principal and interest. The Company applied for forgiveness of the amount due on the PPP loan based on spending the loan proceeds on eligible expenses as defined by statute. The Company anticipates that it will be eligible for forgiveness of the entire loan amount as the proceeds had been used for eligible expenses. On November 5, 2020, Prosperity Bank notified the Company that the PPP loan had been forgiven and the loan was closed. During the fourth quarter of 2020, the Company will record other income of $166,000 as a result of the PPP loan forgiveness.

Net cash used in operating activities was $(565,000) during the first nine months of 2020 compared to $371,000 provided by operating activities during the nine months of 2019. Cash flow provided by working capital was $765,000 during the first nine months of 2020 compared to $1,000 provided by working capital during the first nine months of 2019. The $936,000 decrease in cash provided by operating activities was primarily due to a $1.5 million decrease in revenues, and a $411,000 increase in general and administrative costs, partially offset by a $764,000 increase in cash flow provided by working capital, and a $205,000 decrease in production costs and taxes. Net cash used in investing activities was $(77,000) during the first nine months of 2020 compared to $36,000 provided by investing activities during the first nine months of 2019. This decrease in cash flow provided by investing activities was primarily due to proceeds from the sale of equipment inventory to a third party during 2019, and lower capital spending. Cash flow provided by financing activities during the first nine months of 2020 was $132,000 compared to $(40,000) used in financing activities during the first nine months of 2019. This increase in cash provided by financing activities was primarily related to funding received from the PPP loan program.

Through November 2021, the Company believes its revenues as well as cash on hand will be sufficient to fund operating costs and general and administrative expenses and to remain in compliance with its bank covenants. If revenues and cash on hand are not sufficient to fund these expenses or if the Company needs additional funds for capital spending, the Company may be able to borrow funds against the credit facility depending on the borrowing base and credit limit. Because of the drop in oil prices during 2020 and resulting projected negative EBITDA, borrowing from the Company’s credit facility would result in non-compliance with current covenants, and would require a waiver on the EBITDA related covenants or a change in the covenants until such time as prices improve. In addition, if required, the Company could also issue additional shares of stock and/or sell assets as needed to further fund operations.

### Critical Accounting Policies

Effective January 1, 2019, the Company adopted ASU 2016-02 *Leases (Topic 842).*

### Commitments and Contingencies

#### Cost Reduction Measures

Commencing in the quarter ended March 31, 2015 and continuing into the quarter ended June 30, 2018, the Company implemented cost reduction measures including compensation reductions for each employee as well as members of the Board of Directors. These compensation reductions were to remain in place until such time, if any, that the market price of crude oil, calculated as a thirty-day trailing average of WTI postings as published by the U.S. Energy Information Administration meets or exceeds $70 per barrel. In May 2018, oil prices as so calculated exceeded $70 and compensation reverted to the levels in place before the reductions became effective. At such time, if any, that the market price of crude oil, calculated as a thirty-day trailing average of WTI postings as published by the U.S. Energy Information Administration meets or exceeds $85 per barrel, all previous reductions made will be reimbursed, a portion which may be paid in stock, to each employee and members of the Board of Directors if is still employed by the Company or still a member of the Board of Directors. For the period January 1, 2015 through September 30, 2020, the reductions were approximately $390,000. Of the $390,000, approximately $77,000 would be paid in the Company’s common stock. The $77,000 value represents approximately 94,000 common shares valued at $0.82 per share which represents the closing price on September 30, 2020. The Company has not accrued any liabilities associated with these compensation reductions.

#### Legal Proceedings

On May 14, 2020 the Company received notice of three orders (the “Orders”) issued by the Regional Director of the Bureau of Safety and Environmental Enforcement (“BSEE”) of the Department of the Interior dated May 13, 2020, stating that the Company, together with a group of several other named parties, were being looked to by the BSEE to perform the decommissioning of facilities on three Gulf of Mexico leases owned by Hoactzin Partners, L. P. (“Hoactzin’) and other lessees due to Hoactzin’s default in its lease obligations to decommission such facilities. No monetary amount was sought or described in the Orders. Hoactzin is controlled by Peter E. Salas, the chairman of the Company’s Board of Directors. Management’s assessment of the likelihood of a loss is remote as the Company believes it has available defenses to the Orders. On August 21 2020, the bankruptcy court in the Northern District of Texas in Dallas entered an agreed order requiring Hoactzin, the surety on Hoactzin’s bonds, and seven other working interest owners (a group not including the Company) to complete all the necessary decommissioning on all of Hoactzin’s facilities and to prepay all anticipated expenses, including insurance premiums and a contingency reserve, estimated to be necessary to do so. The bankruptcy trustee has reported that all funds to be paid have been received from all parties to the agreed order. Decommissioning is proceeding under the direction of the bankruptcy trustee and approved contractors under the control of the bankruptcy court. Accordingly, it is anticipated that all work contemplated by the Orders will be completed by, and at the expense of, other persons and the relief sought in the Orders for the Company to perform the work will at that time be moot as to the Company.

In all other respects, the Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state, or local governmental agency is presently contemplating any proceeding against the Company which would have a result materially adverse to the Company. To the knowledge of management, no director, executive officer or affiliate of the Company or owner of record or beneficial owner of more than 5% of the Company’s common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

## Market risk

As filed, 5,016 characters.

**The Company’s Borrowing Base under its Credit Facility may be reduced by the lender.**

The borrowing base under the Company’s revolving credit facility will be determined from time to time by the lender, consistent with its customary natural gas and crude oil lending practices. Reductions in estimates of the Company’s natural gas and crude oil reserves could result in a reduction in the Company’s borrowing base, which would reduce the amount of financial resources available under the Company’s revolving credit facility to meet its capital requirements. Such a reduction could be the result of lower commodity prices or production, inability to drill or unfavorable drilling results, changes in natural gas and crude oil reserve engineering, the lender’s inability to agree to an adequate borrowing base or adverse changes in the lenders’ practices regarding estimation of reserves. If cash flow from operations or the Company’s borrowing base decreases for any reason, the Company’s ability to undertake exploration and development activities could be adversely affected. As a result, the Company’s ability to replace naturally declining production may be limited. In addition, if the borrowing base is reduced, the Company may be required to pay down its borrowings under the revolving credit facility so that outstanding borrowings do not exceed the reduced borrowing base. This requirement could further reduce the cash available to the Company for capital spending and, if the Company did not have sufficient capital to reduce its borrowing level, could cause the Company to default under its revolving credit facility. Because of the drop in oil prices during 2020 and resulting projected negative EBITDA, borrowing from the Company’s credit facility would result in non-compliance with current covenants, and would require a waiver on the EBITDA related covenants, or a change in the covenants, until such time as prices improve.

### Commodity Risk

The Company’s major market risk exposure is in the pricing applicable to its oil production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil. Historically, prices received for oil and gas production have been volatile and unpredictable and price volatility is expected to continue. The average monthly Kansas oil prices received during the first nine months of 2020 ranged from a low of $15.26 per barrel to a high of $53.04 per barrel.

As of September 30, 2020 and December 31, 2019, the Company had no open positions related to derivative agreements relating to commodities.

### Interest Rate Risk

At September 30, 2020, the Company had balances on financing leases outstanding of approximately $100,000, no balance owed on its credit facility with Prosperity Bank, and $166,000 due on the Company’s PPP loan. As of September 30, 2020, the interest rate on the credit facility was variable at a rate equal to prime plus 0.50% per annum. The Company’s credit facility interest rate at September 30, 2020 was 3.75%. The Company’s financing leases of $100,000 have fixed interest rates ranging from 5.0% to 6.5%. The Company’s PPP loan interest rate was 1%.

The annual impact on interest expense and the Company’s cash flows of a 10% increase in the interest rate on the credit facility would be approximately zero assuming borrowed amounts under the credit facility remained at the same amount owed as of September 30, 2020. The Company did not have any open derivative contracts relating to interest rates at September 30, 2020 or December 31, 2019.

### Forward-Looking Statements and Risk

Certain statements in this report, including statements of the future plans (including the Merger and the transaction contemplated by the Merger Agreement), objectives, and expected performance of the Company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the Company’s control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict.

There are numerous uncertainties inherent in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can also affect these risks. Additionally, fluctuations in oil and gas prices, or a prolonged period of low prices, may substantially adversely affect the Company’s financial position, results of operations, and cash flows.

## Controls and procedures

As filed, 1,865 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer has concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

### Changes in Internal Controls

During the nine months ended September 30, 2020, there have been no changes to the Company’s system of internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s system of controls over financial reporting. As part of a continuing effort to improve the Company’s business processes, management is evaluating its internal controls and may update certain controls to accommodate any modifications to its business processes or accounting procedures.

## Risk factors

As filed, 11,379 characters.

Refer to Item 1A Risk Factors in the Company’s Report on Form 10-K for the year ended December 31, 2019 filed on March 30, 2020 (the “2019 10-K”) which is incorporated by this reference.

Set forth below are certain material changes to the Risk Factors disclosed in the 2019 10-K due to the Company executing that certain Agreement and Plan of Merger (the “Merger Agreement”), dated October 21, 2020, by and among, the Company, Antman Sub, LLC, a newly-formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Merger Sub”), and Riley Exploration – Permian, LLC, a Delaware limited liability company (“Riley”), pursuant to which Merger Sub will be merged with and into Riley, with Riley surviving that merger as a wholly-owned subsidiary of the Company (the “Merger”) (for more information regarding the Merger, See Part II, Item 5, Other Information):

***The exchange ratio is not adjustable based on the market price of the Company’s common stock, so the merger consideration at closing may have a greater or lesser value than the market price at the time the Merger Agreement was signed.***

The Merger Agreement has set the exchange ratio formula for Riley common units, and the exchange ratio is adjustable upward or downward if the number of outstanding Riley units or shares of the Company’s stock shall change including by reason of any reclassification, recapitalization, stock split (including a reverse stock split), or combination, exchange, readjustment of shares, or similar transaction, or any stock dividend or distribution paid in stock (other than certain specified changes in the Merger Agreement). Any changes in the market price of the Company’s common stock before the completion of the Merger will not affect the number of shares of the Company’s common stock that Riley members will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger, the market price of the Company’s common stock declines from the market price on the date of the Merger Agreement, then Riley members could receive merger consideration with substantially lower value. Similarly, if before the completion of the Merger, the market price of the Company’s common stock increases from the market price on the date of the Merger Agreement, then Riley members could receive merger consideration with substantially more value for their Riley common units than the parties had foreseen in the establishment of the exchange ratio.

***The Merger may not be completed and the Merger Agreement may be terminated in accordance with its terms. Failure to complete the Merger could negatively impact the price of shares of the Company’s common stock as well as the Company’s future business and financial results.***

The Merger is subject to a number of conditions that must be satisfied prior to the completion of the Merger. These conditions to the completion of the Merger, some of which are beyond the control of the Company and Riley, may not be satisfied (or, where permitted, waived) in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed. The Merger Agreement may also be terminated under certain circumstances. If the transactions contemplated by the Merger Agreement are not completed for any reason, the Company’s ongoing business and financial results may be adversely affected.

***The Company’s stockholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the completion of the Merger as compared to their current ownership and voting interests in the Company.***

After the completion of the Merger, the Company’s current stockholders will own a smaller percentage of the combined company than their ownership of the Company prior to the Merger. As of the date the Merger Agreement was executed, it was estimated that as a result of the Merger and based solely on the exchange ratio of 97.796467, current Riley members would own, or hold rights to acquire, in the aggregate approximately 95% of the fully diluted closing common stock of the Company and current stockholders of the Company would own in the aggregate approximately 5% of the fully diluted closing common stock of the Company.

***During the pendency of the Merger, the Company may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect its business.***

Covenants in the Merger Agreement impede the ability of the Company to make acquisitions, subject to certain exceptions relating to fiduciary duties, or to complete other transactions that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, the Company may be at a disadvantage to its competitors during that period. In addition, while the Merger Agreement is in effect, the Company is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties.

***Investigations regarding the Merger could result in one or more lawsuits against the Company’s board of directors and/or the Company, and other lawsuits may be filed against the Company, Riley and/or their respective boards challenging the Merger. An adverse ruling in any such lawsuit may prevent the Merger from being completed.***

Following the public announcement of the Merger, at least one investigation was launched by a law firm as to whether the Company’s board of directors acted in the best interest of the Company’s stockholders in agreeing to the Merger, whether the board was fully informed as to the valuation of the acquisition, whether the transaction is fair to the Company’s stockholders, and whether all information regarding the sales process undertaken by the Company’s board of directors and financial analyses supporting the transaction will be fully and fairly disclosed to the Company’s stockholders. While no litigation has been filed to date, there is a possibility that such investigations could result in a lawsuit against the Company, Riley, and/or their respective boards. Any such lawsuit could seek, among other things, injunctive relief or other equitable relief, including a request to rescind parts of the Merger Agreement already implemented and to otherwise enjoin the parties from consummating the Merger, in addition to other fees and costs.

***Uncertainties associated with the Merger may cause a loss of management personnel and other key employees, of the Company which could adversely affect the future business and operations of the combined company.***

Whether or not the Merger is completed, the announcement and pendency of the Merger could disrupt the businesses of the Company. The Company is dependent on the experience and industry knowledge of its management and other key employees to execute its business plans. The surviving company’s success after the Merger will depend in part upon the ability of the Company to retain key management personnel and other key employees in advance of the Merger, and of the combined company’s ability to do so following the Merger. Current employees of the Company may experience uncertainty about their roles within the combined company following the Merger, which may have an adverse effect on the ability of the Company to retain key management and other key personnel or the ability of the combined company to do so following the Merger.

***The issuance of shares of the Company’s common stock to Riley members in the Merger will dilute substantially the voting power of the Company’s current stockholders.***

If the Merger is completed, each outstanding common unit of Riley will be converted into the right to receive a number of shares of the Company’s common stock equal to the exchange ratio determined pursuant to the Merger Agreement. Immediately following the Merger, the Company’s stockholders are expected to own approximately 5% of the outstanding capital stock of the combined company on a fully diluted basis, and Riley’s members are expected to own approximately 95% of the outstanding capital stock of the combined company on a fully diluted basis. Accordingly, the issuance of shares of the Company’s common stock to Riley’s members in the Merger will reduce significantly the relative voting power of each share of the Company’s common stock held by current stockholders of the Company. Consequently, the Company’s stockholders as a group will have significantly less influence over the management and policies of the combined company after the Merger than prior to the Merger.

### Use of TGC’s Net Operating Loss Carryforwards May Be Limited.

At December 31, 2019, TGC had, subject to the limitations discussed in this risk factor, substantial amounts of net operating loss carryforwards for U.S. federal and state income tax purposes. These loss carryforwards will eventually expire if not utilized. In addition, as to a portion of the U.S. net operating loss carryforwards, the amount of such carryforwards that TGC can use annually is limited under U.S. tax laws. Uncertainties exist as to both the calculation of the appropriate deferred tax assets based upon the existence of these loss carryforwards, as well as the future utilization of the operating loss carryforwards under the criteria set forth under FASB ASC 740, Income Taxes. In addition, further limitations exist upon use of these carryforwards in the event that a change in control of TGC occurs, which is expected as a result of the merger. There are risks that TGC may not be able to utilize some or all of the remaining carryforwards, or that deferred tax assets that were previously booked based upon such carryforwards may be written down or reversed based on future economic factors that may be experienced by TGC. The effect of such write downs or reversals, if they occur, may be material and substantially adverse. At December 31, 2019, federal net operating loss carryforwards amounted to approximately $33.8 million, of which $31.5 million expires between 2020 and 2037 which can offset 100% of taxable income and $2.3 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The total net deferred tax asset was $65,000 at December 31, 2019 and $130,000 at 2018. In 2018, TGC released a portion of the allowance related to its Minimum Tax Credit as a result of comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). TGC recorded an allowance on the remaining deferred tax asset at December 31, 2019 primarily due to expected future losses in the near term which would cause cumulative losses being incurred during the 3 year period. TGC recorded a full allowance against the deferred tax asset net of the alternative minimum tax (“AMT”) credit at December 31, 2018 primarily due to cumulative losses incurred during the 3 years ended December 31, 2018. The total valuation allowance December 31, 2019 was $10.7 million, and $11.5 million at December 31, 2018.

Filed Nov 12, 2020.
Source: SEC EDGAR, the filing index for accession 0001140361-20-025374. Last ingested by Listed: Nov 4, 2026, 18:14 ET. No prices; not investment advice.