Tengasco, Inc.
Annual Report
2016
Corporate Headquarters
Independent Auditors
Form 10-K
8000 E. Maplewood Avenue,
Suite 130
Greenwood Village, CO 80111
Phone: 720.420.4460
Fax: 720.554.7622
Website: www.tengasco.com
Corporate Officers
Michael J. Rugen
Chief Executive Officer
Chief Financial Officer
Cary V. Sorensen
Vice President,
General Counsel, Secretary
Board of Directors
Peter E. Salas
Chairman
Hughree F. Brooks
Director
Matthew K. Behrent
Director
Richard M. Thon
Director
Hein & Associates LLP
1999 Broadway, Suite 4000
Denver, CO 80202
Transfer Agent
Continental Stock
Transfer & Trust Company
1 State Street, 30th Floor
New York, NY 10004-1561
212-509-4000
Stock Exchange Listing
NYSE American
Ticker Symbol: TGC
Annual Meeting
The Annual Meeting of the
Stockholders will be held at
8:30 a.m. MST, Tuesday,
December 12, 2017 at the
central Conference Room at
Greenwood Corporate
Plaza, 8000 E. Maplewood
Avenue, Suite 115
Greenwood Village, CO
80111.
Management’s Discussion
and Analysis of Financial
Condition and Results of its
2016 Operations, along with
the quantitative and
qualitative market risks
faced by the Company are
discussed in the Company’s
Annual Report on Form 10-
K for the year ended
December 31, 2016, a copy
of which is included in this
Annual Report. Copies of
all Exhibits filed with the
Form 10 -K will be
furnished without charge
upon written request
directed to Investor
Relations, Tengasco, Inc.,
8000 E. Maplewood Ave,
Suite 130, Greenwood
Village, CO 80111.
To the Shareholders of Tengasco, Inc.:
I invite you to attend the Annual Meeting of Shareholders on Tuesday, December 12, 2017
at 8:30 AM MST at the central Conference Room, Suite 115, at 8000 E. Maplewood
Avenue in Greenwood Village, Colorado.
The Annual Meeting will be held in the central conference room of the office building
where the Company’s new headquarters offices are located. Please note that the
Conference Room for the Annual Meeting is numbered Suite 115, while the Company’s
offices are located in Suite 130. The Company moved to its new offices on June 1, 2017.
This new office location is close to the Company’s old address, as well as being close to
the hotel where the annual meetings for the past few years have been held.
This letter is included in the Annual Report for the calendar year 2016 that is being issued
in early November 2017 in connection with the 2017 Annual Meeting of Shareholders.
The Annual Report includes the formal notice of the Annual Shareholders' meeting in
2017, the Proxy Statement, and a copy of the Company's Form 10-K for the year ended
December 31, 2016 as filed with the Securities and Exchange Commission.
During 2017, the Company completed its rights offering that allowed current shareholders
to purchase additional stock from the Company. The proceeds from this rights offering
were used primarily to pay off the Company’s credit facility. The Company continues to
evaluate and pursue certain identified asset and corporate opportunities which the
Company believes could provide potential for growth.
The Company's management and Board of Directors thank all of our employees and their
families for their dedication and contribution to Tengasco operations. We also look
forward to seeing our shareholders at the December 12, 2017 Annual Meeting.
MICHAEL J. RUGEN
Chief Executive Officer and Chief Financial Officer
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TENGASCO, INC.
8000 E. Maplewood Ave., Suite 130
GREENWOOD VILLAGE, COLORADO 80111
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
December 12, 2017
TO THE STOCKHOLDERS:
Notice is hereby given that the 2017 annual meeting of stockholders (the “Annual Meeting”)
of Tengasco, Inc. (the “Company”) has been called for and will be held at the central Conference
Room, Suite 115, at 8000 E. Maplewood Ave., Greenwood Village, CO 80111 on December 12,
2017 at 8:30 AM local (Mountain) time for the following purposes:
1. To elect Matthew K. Behrent, Peter E. Salas, and Richard M. Thon, to the Board of
Directors to hold office until their successors shall have been elected and qualify;
2. To ratify the appointment by the Board of Directors of Hein & Associates, LLP to serve
as the independent certified public accountants for the current fiscal year;
3. To approve, by non-binding advisory vote, the compensation of the Company’s executive
officers;
4. To approve and ratify Rights Agreement; and
5. To consider and transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on October 23, 2017 as the record
date for the determination of the stockholders entitled to receive notice and to vote at the Annual
Meeting or any adjournments thereof. The list of stockholders entitled to vote will be available for
examination by any stockholder at the Company's offices at 8000 E. Maplewood Ave., Suite 130,
Greenwood Village, CO 80111, for ten (10) days prior to December 12, 2017.
Dated:
By Order of the Board of Directors
/s/ Michael J. Rugen
Michael J. Rugen, Chief Executive Officer
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE FILL
IN, SIGN AND DATE THE PROXY SUBMITTED HEREWITH AND RETURN IT IN THE
ENCLOSED STAMPED ENVELOPE. THE GRANTING OF SUCH PROXY WILL NOT
AFFECT YOUR RIGHT TO REVOKE SUCH PROXY IN PERSON SHOULD YOU LATER
DECIDE TO ATTEND THE MEETING. THE ENCLOSED PROXY IS BEING SOLICITED
BY THE BOARD OF DIRECTORS.
INTERNET AVAILABILITY OF PROXY MATERIALS
This Notice of Annual Meeting and Proxy Statement along with the form of proxy card and the
Company’s Annual Report on Form 10-K for the year ended December 31, 2016 will be available
online at http://www.cstproxy.com/tengasco/2017 on the first day these materials are mailed to
shareholders which is anticipated to be November 2, 2017.
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TENGASCO, INC. - PROXY STATEMENT
GENERAL
This proxy statement is furnished by the Board of Directors of Tengasco, Inc., a Delaware
corporation (sometimes the “Company” or “Tengasco”), with offices located at 8000 E.
Maplewood Ave., Suite 130, Greenwood Village, CO 80111, in connection with the solicitation of
proxies to be used at the annual meeting of stockholders of the Company to be held on December
12, 2017 and at any adjournments thereof (the “Annual Meeting”).
If your share ownership is recorded directly (i.e. your shares are in paper certificate form
and are registered as such by the Company’s transfer agent) you may vote in person at the Annual
Meeting or you may vote by proxy. If your share ownership is recorded directly and registered, you
will receive a proxy card by mail at the address shown on the transfer agent’s records. Voting
instructions are included on the proxy card. We recommend that you vote by proxy even if you
plan to attend the Annual Meeting.
If your share ownership is beneficial (that is, your shares are held in the name of a bank,
broker or other nominee referred to as in “street name”), your broker, bank, or nominee will issue
you a voting instruction form that you use to instruct them how to vote your shares. Your voting
instruction must be followed. Although most brokers and nominees offer mail, telephone and
internet voting, availability and specific procedures will depend on their respective voting
arrangements. If you wish to vote your shares that are held in street name in person at the
Annual Meeting, you must request and obtain a “legal proxy” from your bank or broker (not
from the Company) and bring the “legal proxy” to the annual meeting or you will not be
permitted to vote your shares in person at the meeting. You must bring a “legal proxy” to vote
in person at the meeting even if you have not instructed your broker to vote your shares. A legal
proxy is necessary to assure that shares held in street name that are to be voted in person at the
Annual Meeting have not been double-counted as a result of the vote collecting process. You may
not use the form of proxy set out at the end of this Proxy Statement in the place of a “legal proxy”
obtained from your bank or broker, to vote shares held in street name in person at the Annual
Meeting.
If a proxy is properly executed and returned, the shares represented thereby will be voted as
instructed on the proxy. Any proxy may be revoked by a stockholder prior to its exercise upon
written notice to the Chief Executive Officer of the Company, or by a registered stockholder voting
in person at the Annual Meeting. (See the procedure set out in the preceding paragraph for persons
wishing to vote at the Annual Meeting any shares they hold in street name.) Unless instructions to
the election of the directors named therein
the contrary are indicated, proxies will be voted
and FOR the ratification of the selection by the Audit Committee of the Board of Directors of Hein
& Associates, LLP, as the independent certified public accountants of the Company; FOR approval,
by non-binding advisory vote, of the compensation of the Company’s executive officers; and FOR
the approval of Rights Agreement and Rights Plan.
FOR
A copy of the Company’s Annual Report on Form 10-K of the Company for the fiscal year
ended December 31, 2016 (“Fiscal 2016”), which contains financial statements audited by the
Company's independent certified public accountants accompanies this proxy statement.
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The cost of preparing, assembling and mailing the Notice of Internet Availability of
Proxy materials, notice of meeting, proxy statement, the enclosed Annual Report on Form 10-K
and proxy card will be borne by the Company. In addition to solicitation of the proxies by
use of the mails, some of the officers and regular employees of the Company, without
extra remuneration, may solicit proxies personally or by telephone, fax transmission or e-mail.
The Company may also request brokerage houses, nominees, custodians and fiduciaries to
forward soliciting material to the beneficial owners of the common stock. The Company will
reimburse such persons for their expenses in forwarding soliciting material.
VOTING SECURITIES AND PRINCIPAL
HOLDERS
The Board of Directors has fixed October 23, 2017 as the record date (the “Record
Date”) for determination of stockholders entitled to notice of and to vote at the Annual Meeting.
Only stockholders on Record Date will be able to vote at the Annual Meeting. As of the
Record Date, 10,619,924 shares of the Company's common stock were outstanding, and each
share will be entitled to one (1) vote, with no shares having cumulative voting rights. Holders of
shares of common stock are entitled to vote on all matters. Unless otherwise indicated herein, a
majority of the votes represented by shares present or represented at the Annual Meeting is
required for approval of each matter that will be submitted to the stockholders.
Management knows of no business other than that specified in Items 1, 2, 3, and 4 in the
Notice of Annual Meeting, that will be presented at the Annual Meeting. If any other matter is
properly presented, the persons named in the enclosed proxy intend to vote in their best
judgment.
Five Percent
Stockholders
The following table sets forth the share holdings of those persons who own more than 5%
of the Company's common stock as of October 23, 2017 with these computations being based
upon 10,619,924 shares of common stock being outstanding as of that date:
Name and Address
Title
Number of Shares
Beneficially Owned
Percent of Class
Dolphin Offshore Partners, L.P.
c/o Dolphin Mgmt. Services, Inc.
P.O. Box 16867
Fernandina Beach, FL 32035
Stockholder
5,291,7411
49.8%
1 Consists of shares held directly by Peter E. Salas individually, and shares held directly by Dolphin Offshore Partners, L.P.
(“Dolphin”). Peter E. Salas is the sole shareholder of and controlling person of Dolphin Mgmt. Services, Inc. which is the
general partner of Dolphin.
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PROPOSAL NO. 1: ELECTION OF DIRECTORS
GENERAL
Article 3.1 of the Company's Bylaws provides that the number of directors of the Company
shall be a minimum of three and a maximum of ten. The members of the Board of Directors are
each elected for a one-year term or until their successors are elected and qualify with a plurality of
votes cast in favor of their election. Three nominees are put forth before the stockholders for
election to the Board of Directors at the Annual Meeting. All of the nominees are presently directors
of the Company.
The directors will serve until the next annual meeting of stockholders and thereafter until
their successors shall have been elected and qualified.
Unless authority is withheld, the proxies in the accompanying form will be voted in favor of
the election of the nominees named above as directors. If any nominee should subsequently become
unavailable for election, the persons voting the accompanying proxy may in their discretion vote for
a substitute.
BOARD OF DIRECTORS
The Board of Directors has the responsibility for establishing broad corporate policies and
for the overall performance of the Company. The members of the Board are kept informed of the
Company's business by various reports and documents sent to them as well as by operating and
financial reports made at Board meetings. The Board of Directors held 12 meetings in Fiscal 2016.
All directors who are up for re-election attended at least 75% of the aggregate number of meetings
of the Board of Directors and of the committees on which such directors served during Fiscal 2016.
Although it has no formal policy requiring attendance, the Company encourages all of its directors
to attend the annual meeting of stockholders. All of the Company’s directors attended last year’s
Annual Meeting and it is anticipated that all of the director-nominees will attend this year’s Annual
Meeting.
There is no understanding or arrangement between any director and any other persons
pursuant to which such individual was or is to be selected as a director or nominee of the Company.
The Company’s Chief Executive Officer does not currently serve as a Director. In the event
a Chief Executive Officer also serves as a Director, the Board has previously determined as a matter
of policy to divide the functions of CEO and Chairman between two individuals. Placing the CEO
on the Board as a director may have the dual beneficial effects of assisting both the CEO in making
operational decisions as he is expected to do in the ongoing operation of the Company with
accessibility to the guidance of the Board, while allowing the Board to more effectively oversee the
business risk without any additional influence from the CEO/Director if he were also serving as
Chairman.
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Identification of Director-Nominees
The following table sets forth the names of all director-nominees.
Name
Positions Held
Date of Initial Election or Designation
Matthew K. Behrent
Peter E. Salas
Richard M. Thon
Director
Director;
Chairman of the Board
Director
3/27/07
10/8/02
10/21/04
11/22/13
Background of Directors
The following is a brief account of the experience, for at least the past five (5) years, of each
nominee for director.
Matthew K. Behrent is 47 years old. He is currently the Executive Vice President, Corporate
Development of EDCI Holdings, Inc, a company that is currently engaged in carrying out a plan of
dissolution. Before joining EDCI in June, 2005, Mr. Behrent was an investment banker, working as a
Vice-President at Revolution Partners, a technology focused investment bank in Boston, from March
2004 until June 2005 and as an associate in Credit Suisse First Boston Corporation's technology
mergers and acquisitions group from June 2000 until January 2003. From June 1997 to May 2000,
Mr. Behrent practiced law, most recently with Cleary, Gottlieb, Steen & Hamilton in New York,
advising financial sponsors and corporate clients in connection with financings and mergers and
acquisitions transactions. Mr. Behrent received his J.D. from Stanford Law School in 1997, and his
B.A. in Political Science and Political Theory from Hampshire College in 1992. He became a
Director of the Company on March 27, 2007. He is also a Director and Chairman of the Audit
Committee of Asure Software, Inc. (NASDAQ: ASUR). The experience, qualifications, attributes,
and skills gained by Mr. Behrent in these sophisticated legal and financial positions directly apply to
and support the financial oversight of the Company’s operations and qualify Mr. Behrent to serve as a
Director of the Company.
Peter E. Salas is 63 years old. He has been President of Dolphin Asset Management Corp. and
its related companies since he founded it in 1988. Prior to establishing Dolphin, he was with J.P.
Morgan Investment Management, Inc. for ten years, becoming Co-manager, Small Company Fund
and Director-Small Cap Research. He received an A.B. degree in Economics from Harvard in 1978.
Mr. Salas was elected to the Board of Directors on October 8, 2002. During a portion of the last five
years, Mr. Salas also served on the Board of Directors of Southwall Technologies, Inc. and Williams
Controls, Inc. The business experience, attributes, and skills gained by Mr. Salas in these
sophisticated financial positions, together with his service as director of other public companies and
his capacity as controlling person of the Company’s largest shareholder directly apply to and
support his qualification as a director, and lead to the conclusion that Mr. Salas should serve as a
Director of the Company.
Richard M. Thon is 62 years old. He began a career with ARAMARK Corporation in 1987.
6
ARAMARK is based in Philadelphia, has 270,000 employees worldwide, and provides food services,
facilities management, and uniform and career apparel to health care institutions, universities, and
businesses in 21 countries. Mr. Thon served in various capacities in the Corporate Finance
Department of ARAMARK culminating with the position of Assistant Treasurer when he retired in
June 2002. His responsibilities included bank credit agreements, public debt issuance, interest rate
risk management, foreign subsidiary credit agreements, foreign exchange, letters of credit, insurance
finance, off-balance-sheet finance, and real estate and equipment leasing. Prior to joining
ARAMARK, Mr. Thon was a Vice President in the International Department of Mellon Bank. Since
his retirement in 2002, Mr. Thon has served in a variety of volunteer charitable activities. In addition,
during a portion of the past five years, he served on the board of ACT Conferencing, Inc. During the
same period he has been, but is not currently, a director of Boston Restaurant Associates, Inc. Mr.
Thon received a B.A. in Economics degree from Yale College in 1977 and a Masters of Business
Administration degree in Finance from The Wharton School, University of Pennsylvania in 1979.
Mr. Thon’s experience in the fields of banking and finance directly apply to the business needs of
the Company and lead to the conclusion that he will provide significant benefit to the Board and that
he is qualified to serve as a Director of the Company.
Director Independence
The Rules of the NYSE American (the “NYSE American Rules”) require that an issuer such
as the Company which is a “Smaller Reporting Company” pursuant to Regulation S-K Item 10(f)(1)
maintain a board of directors of which at least one-half of the members are independent in that they
are not officers of the Company and are free of any relationship that would interfere with the
exercise of their independent judgment. The NYSE American Rules also require that as a Smaller
Reporting Company, the Company’s Board of Directors’ Audit Committee be comprised of at least
two members all of whom qualify as independent under the criteria set forth in Rule 10 A-3 of the
Securities Exchange Act of 1934 and NYSE American Rule 803(b)(2)(c). The Board of Directors
has determined that the director-nominees, Matthew K. Behrent and Richard M. Thon, are
independent as defined by the NYSE American Rules, and that Matthew K. Behrent, and
Richard M. Thon are also independent as defined by Section 10A(m)(3) of the Securities Exchange
Act of 1934 and the rules and regulations of the Securities and Exchange Commission and that each
of these nominees does not have any relationship which would interfere with the exercise of his
independent judgment in carrying out his responsibilities as a director. In reaching its determination,
the Board of Directors reviewed certain categorical independence standards to provide assistance in
the determination of director independence. The categorical standards are set forth below and provide
that a director will not qualify as an independent director under the NYSE American Rules if:
• The Director is, or has been during the last three years, an employee or an officer of the
Company or any of its affiliates;
• The Director has received, or has an immediate family member 2 who has received,
during any twelve consecutive months in the last three years any compensation from the
2 Under these categorical standards “immediate family member” includes a person’s spouse, parents, children, siblings,
mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, and anyone who resides in such
person’s home (other than a domestic employee).
7
Company in excess of $120,000, other than compensation for service on the Board of
Directors, compensation to an immediate family member who is an employee of the
Company other than an executive officer, compensation received as an interim executive
retirement plan, or non-discretionary
officer or benefits under a
compensation;
tax-qualified
• The Director is a member of the immediate family of an individual who is, or has been in
any of the past three years, employed by the Company or any of its affiliates as an
executive officer;
• The Director, or an immediate family member, is a partner in, or controlling shareholder or
an executive officer of, any for-profit business organization to which the Company
made, or received, payments (other than those arising solely from investments in the
Company’s securities) that exceed 5% of the Company’s or business organization’s
consolidated gross revenues for that year, or $200,000, whichever is more, in any of the
past three years;
• The Director, or an immediate family member, is employed as an executive officer of
another entity where at any time during the most recent three fiscal years any of the
Company’s executives serve on that entity’s compensation committee; or
• The Director, or an immediate family member, is a current partner of the Company’s
outside auditors, or was a partner or employee of the Company’s outside auditors who
worked on the Company’s audit at any time during the past three years.
The following additional categorical standards were employed by the Board in determining whether a
director qualified as independent to serve on the Audit Committee and provide that a director will not
qualify if:
• The Director directly or indirectly accepts any consulting, advisory, or other
compensatory fee from the Company or any of its subsidiaries;
• The Director is an affiliated person 3 of the Company or any of its subsidiaries; or
• The Director participated in the preparation of the Company’s financial statements at
any time during the past three years.
The independent members of the Board meet as often as necessary to fulfill their
responsibilities, but meet at least annually in executive session without the presence of non-
independent directors and management.
3 For purposes of this categorical standard, an “affiliated person of the Company” means a person that directly or
indirectly through intermediaries controls, or is controlled by, or is under common control with the Company. A person
will not be considered to be in control of the Company, and therefore not an affiliate of the Company, if he is not the
beneficial owner, directly or indirectly of more than 10% of any class of voting securities of the Company and he is not an
executive officer of the Company. Executive officers of an affiliate of the Company as well as a director who is also an
employee of an affiliate of the Company will be deemed to be affiliates of the Company.
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Committees
The Company’s Board has audit and compensation/stock option committees.
Audit Committee
In Fiscal 2016, director-nominees Matthew K. Behrent and Richard M. Thon were the
members of the Audit Committee. Mr. Behrent was the Chairman of the Committee. The Board
determined that both Mr. Behrent and Mr. Thon are qualified as an “audit committee financial expert”
as defined by applicable Securities and Exchange Commission (“SEC”) regulations and the NYSE
American Rules. Each of the members of the Audit Committee met the independence and experience
requirements of the NYSE American exchange rules, the applicable securities laws, and the
regulations and rules promulgated by the SEC.
The Audit Committee adopted an Audit Committee Charter during fiscal 2001. In 2004 and
2015, the Board adopted amendments to the Audit Committee Charter, a copy of which, as
amended, is available on the Company’s internet website, www.tengasco.com. The Audit
Committee Charter fully complies with the requirements of the NYSE American Rules. The Audit
Committee reviews and reassesses the Audit Committee Charter annually.
The Audit Committee's functions are:
• To review with management and the Company’s independent auditors the scope of
the annual audit and quarterly statements, significant financial reporting issues and
judgments made in connection with the preparation of the Company’s financial
statements;
• To review major changes to the Company’s auditing and accounting principles and
practices suggested by the independent auditors;
• To monitor the independent auditor's relationship with the Company;
• To advise and assist the Board of Directors in evaluating the independent auditor's
examination;
• To supervise the Company's financial and accounting organization and financial
reporting;
• To nominate, for approval of the Board of Directors, a firm of certified public
accountants whose duty it is to audit the financial records of the Company for the
fiscal year for which it is appointed; and
• To review and consider fee arrangements with, and fees charged by, the Company’s
independent auditors.
The Audit Committee met each quarter and a total of 4 times in Fiscal 2016 with the
Company’s auditors, including discussing the audit of the Company’s year end financial statements. It
is intended that if elected as directors in 2017, Messrs. Behrent and Thon will continue to serve as
members of the Audit Committee with Mr. Behrent again serves as the Chairman of the Committee
and with Messrs. Behrent and Thon each being an audit committee financial expert.
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Audit Committee Report
The Audit Committee has:
I.
Reviewed and discussed the Company’s unaudited financial statements for the first
three quarters of Fiscal 2016 and the Company’s audited financial statements
for the year ended December 31, 2016 with the management of the Company
and the Company’s independent auditors;
II. Discussed with the Company’s independent auditors the matters required to be
discussed by Statement of Auditing Standards No. 61, as the same was in effect
on the date of the Company’s financial statements; and
III. Received the written disclosures and the letter from the Company’s independent
accountant required by applicable requirements of the Public Company
Accounting Oversight Board
independent accountant’s
regarding
communications with the audit committee concerning independence, and has
discussed with the independent accountant the independent accountant’s
independence.
the
Based on the foregoing materials and discussions, the Audit Committee recommended to the
Board of Directors that the unaudited financial statements for each of the first three quarters of
Fiscal 2016 be included in the Quarterly Reports on Form 10-Q for those quarters and that the audited
financial statements for the year ended December 31, 2016 be included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016.
Members of the Audit Committee
Matthew K. Behrent
Richard M. Thon
Nominations for the Board of Directors are determined by the independent directors
pursuant to procedures adopted by the Board. Those procedures provide that the qualifications that
should be met by any person recommended as a nominee for a position on the Company’s Board of
Directors should include one or more of the following: a background or experience in oil and gas
exploration, production, transportation, geology, construction, finance or in another business,
government service, or profession that would reasonably enable the nominee to provide seasoned and
reputable service to the shareholders of the Company in the performance of the duties of a
member of the Board of Directors. The Board has not paid fees to any third party to identify,
evaluate or to assist in identifying or evaluating, potential nominees, but may do so in the future if the
Board determines doing so is necessary or appropriate.
The Board has no policy regarding the consideration of “diversity” in identifying nominees for
director. The Company has no separate policy with regard to the consideration of any director
candidates recommended by security holders. However, the Board will consider director candidates
recommended by security holders provided that such nominations are timely made as set forth
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hereinafter under the heading “Stockholders Proposals”. Any person recommended by a security
holder to serve on the Board of Directors is considered upon the same terms as candidates
recommended by any other person. To date, the Company has not received any recommendations
from shareholders requesting that the Company consider a candidate for inclusion among the
Committee’s slate of nominees in the Company’s proxy statement.
Among the nominating procedures are the following:
• Any shareholder, officer, or director may recommend for nomination any person for the
slate of candidates for membership on the Company’s Board of Directors to be presented to
the shareholders at the Company’s annual meeting of shareholders. Such recommendations
must be furnished in writing addressed to the Company’s Board of Directors at the Company’s
principal offices. All such nominations will be furnished to the Board which may conduct
interviews, investigations or make other determinations as to the qualifications of such
recommended persons.
• Any then-current members of the Board of Directors desiring to stand for re-election may be
placed on the slate of directors for re-election without further inquiry as to their qualifications.
• The Board will determine the slate of candidates for the Board in such a manner and at such a
time so as not to delay either the mailing of the proxy statement to the Company’s
shareholders or the annual meeting of shareholders.
• The adopted procedures apply only to the determination of the slate of directors to be
presented for election at the annual meeting of the shareholders. Any vacancies on the Board of
Directors following the annual meeting of shareholders may be filled in the manner currently
applicable under the Company’s Charter, Bylaws, and applicable law.
• The procedures adopted may be amended from time to time by the Board of Directors in
order to comply with any applicable provision or interpretation of any rule, statute, or stock
exchange rule of the exchange on which the Company’s stock may be listed.
The nomination procedures adopted are posted on the Company’s internet website at
www.tengasco.com. In the event of any such amendment to the procedures, the Company intends to
disclose the amendments on the Company's internet website within five business days following such
amendment.
The independent members of the Board determined the slate of candidates for the Board of
Directors presented for election at this year’s Annual Meeting.
Compensation/Stock Option Committee
The members of the Compensation/Stock Option Committee in Fiscal 2016 were Matthew
K. Behrent, Hughree F. Brooks, and Richard M. Thon, with Mr. Brooks acting as Chairman.
Messrs. Behrent and Thon meet the current independence standards established by the NYSE
American Rules. It is intended that if elected as directors in 2016, Messrs. Behrent and Thon will
continue to serve as a members of the Compensation/Stock Option Committee with Mr. Thon serving
as Chairman.
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The Board of Directors has adopted a charter for the Compensation/Stock Option
Committee which is available at the Company’s internet website, www.tengasco.com.
The Compensation/Stock Option Committee’s functions, in conjunction with the Board of
Directors, are to provide recommendations with respect to general and specific compensation
policies and practices of the Company for directors, officers and other employees of the Company.
The Compensation/Stock Option Committee expects to periodically review the approach to
executive compensation and to make changes as competitive conditions and other circumstances
warrant and will seek to ensure the Company's compensation philosophy is consistent with the
Company's best interests and is properly implemented. The Committee determines or recommends to
the Board of Directors for determination the specific compensation of the Company’s Chief Executive
Officer and all of the Company’s other officers. Although the Committee may seek the input of the
Company’s Chief Executive Officer in determining the compensation of the Company’s other
executive officers, the Chief Executive Officer may not be present during the voting or deliberations
with respect to his compensation. The Committee may not delegate any of its responsibilities unless it
is to a subcommittee formed by the Committee, but only if such subcommittee consists entirely of
directors who meet the independence requirements of the NYSE American exchange rules.
The Compensation/Stock Option Committee is also charged with administering the Tengasco, Inc.
Stock Incentive Plan (the “Stock Incentive Plan”). The Compensation/Stock Option Committee has
complete discretionary authority with respect to the awarding of stock, stock options, and Stock
Appreciation Rights (“SARs”), under the Stock Incentive Plan, including, but not limited to,
determining the individuals who shall receive stock, options, and SARs; the times when they shall
receive them; whether an option shall be an incentive or a non-qualified stock option; whether an SAR
shall be granted separately, in tandem with or in addition to an option; the number of shares to be
subject to each option and SAR; the term of each option and SAR; the date each option and SAR
shall become exercisable; whether an option or SAR shall be exercisable in whole, in part or in
installments and the terms relating to such installments; the exercise price of each option and the base
price of each SAR; the form of payment of the exercise price; the form of payment by the
Company upon the exercise of an SAR; whether to restrict the sale or other disposition of the shares of
common stock acquired upon the exercise of an option or SAR; to subject the exercise of all or any
portion of an option or SAR to the fulfillment of a contingency, and to determine whether such
contingencies have been met; with the consent of the person receiving such option or SAR, to
cancel or modify an option or SAR, provided such option or SAR as modified would be permitted to
be granted on such date under the terms of the Stock Incentive Plan; and to make all other
determinations necessary or advisable for administering the Plan.
The Compensation/Stock Option Committee met 1 time in Fiscal 2016. The Committee has the
authority to retain a compensation consultant or other advisors to assist it in the evaluation of
compensation and has the sole authority to approve the fees and other terms of retention of such
consultants and advisors and to terminate their services. The Committee did not retain any such
consultants or advisors in 2016.
Compensation/Stock Option Committee Interlocking and Insider Participation
No interlocking relationship existed or exists between any member of the Company's
12
Compensation/Stock Option Committee and any member of the compensation committee of any
other company, nor has any such interlocking relationship existed in the past. No member or nominee
of the Compensation/Stock Option Committee is now or was previously an officer or an employee of
the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive
officers, directors and persons who beneficially own more than 10% of the Company’s Common
Stock to file initial reports of ownership and reports of changes in ownership with the SEC no later
than the second business day after the date on which the transaction occurred unless certain
exceptions apply. In fiscal 2016, the Company, its officers, directors and shareholders owning more
than 10% of its common stock were not delinquent in filing any Form 3, 4, and 5 reports.
Family and Other Relationships
There are no family relationships between any of the present directors or executive officers of
the Company.
Involvement in Certain Legal Proceedings
To the knowledge of management, no director, executive officer or affiliate of the Company or
owner of record or beneficially 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.
To the knowledge of management, during the past ten years, unless specifically indicated
below with respect to any numbered item, no present director, executive officer or person
nominated to become a director or an executive officer of the Company:
(1)
Filed a petition under the federal bankruptcy laws or any state insolvency
law, nor had a receiver, fiscal agent or similar officer appointed by a court for
the business or property of such person, or any partnership in which he or she
was a general partner at or within two years before the time of such filing, or
any corporation or business association of which he or she was an executive
officer at or within two years before the time of such filing; provided
however that:
(a) the Company’s Chief Executive Officer and Chief Financial Officer
Michael J. Rugen during 2007 through mid 2009 was Vice President of
Accounting and Finance for Nighthawk Oilfield Services in Houston,
Texas (Nighthawk); Nighthawk filed for bankruptcy protection under
Chapter 7 of the bankruptcy laws on July 10, 2009 and such fact was
affirmatively disclosed to the Company’s Board before Mr. Rugen was
appointed to the position of Chief Financial Officer of the Company in
September 2009, and the Board determined that the circumstances
surrounding bankruptcy filing did not disclose any reason to question the
integrity or qualifications of Mr. Rugen for the position of Chief Financial
Officer of the Company; and
(b) Peter E. Salas, a director of the Company, Chairman of the Board of the
13
Company, and a nominee for reelection as a director of the Company was
the chief executive officer of Boston Restaurant Associates, Inc. when that
company filed a Chapter 11 reorganization plan under federal bankruptcy
laws on May 20, 2015. The plan of reorganization became effective on
August 31, 2015 and Mr. Salas has remained the chief executive officer and
sole director of that company since the reorganization.
(2) Was convicted in a criminal proceeding or named the subject of a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) Was the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him or her from or otherwise limiting the following
activities: (a) acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by the Commodity Futures
Trading Commission, or an associated person of any of the foregoing, or as
an investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such activity; (b)
engaging in any type of business practice; or (c) engaging in any activity in
connection with the purchase or sale of any security or commodity or in
connection with any violation of federal or state securities laws or federal
commodities laws;
(4) Was the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any Federal or State authority barring, suspending or
otherwise limiting him or her for more than 60 days from engaging in any
activity described in paragraph 3(a) above, or being associated with any persons
engaging in any such activity;
(5) Was found by a court of competent jurisdiction in a civil action or by the SEC to
have violated any federal or state securities law, and the judgment in such civil
action or finding by the SEC has not been subsequently reversed, suspended, or
vacated;
(6) Was found by a court of competent jurisdiction in a civil action or by the
Commodity Futures Trading Commission (“CFTC”) to have violated any
federal commodities law, and the judgment in such civil action or finding by
the CFTC has not been subsequently reversed, suspended, or vacated;
(7) Was the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not subsequently reversed,
suspended or vacated, relating to an alleged violation of: (i) any federal or state
securities or commodities law or regulation; (ii) any law or regulation respecting
financial institutions or insurance companies including but not limited to a
14
temporary or permanent injunction, order of disgorgement or restitution, civil
money penalty or temporary or permanent cease and desist order, or removal or
prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud
or fraud in connection with any business entity; or
(8) Was the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Exchange Act [15 U.S.C. 78c(a)(26)], any
registered entity (as defined in Section 1(a)(29) of the Commodity Exchange
Act [7 U.S.C. 1(a)(29)], or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
Stockholder Communications with the Board of Directors
Stockholders may communicate with the Board of Directors of the Company by writing to:
Cary V. Sorensen, Secretary, Tengasco, Inc., 8000 E. Maplewood Ave., Suite 130, Greenwood
Village, CO 80111 or by e-mail: to: csorensen@tengasco.com Subject: Communication to Board of
Directors. All letters and e-mails will be answered, if possible, and will be distributed to Board
members as appropriate. Notwithstanding the foregoing, the Company has the authority to discard or
disregard any communication, which is unduly hostile, threatening, illegal or otherwise inappropriate
or to take any other appropriate actions with respect to such communications.
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
and Address
Title
Number of Shares
Beneficially Owned4
Percent of
Class 5
Matthew K. Behrent
Director
Hughree F. Brooks
Director
Michael J. Rugen
Chief Financial Officer
Peter E. Salas
Director; Chairman of the
Board
66,5256
14,6257
35,4268
Less than 1%
Less than 1%
Less than 1%
5,299,8669
49.87%
4 Unless otherwise stated, all shares of common stock are directly held with sole voting and dispositive power. The shares set forth in the
table are as of October 23, 2017.
5 Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of 1934 based upon 10,619,924 shares of common stock
being outstanding as of October 17, 2017. Shares not outstanding that are subject to options or warrants exercisable by the holder thereof
within 60 days of are deemed outstanding for the purposes of calculating the number and percentage owned by such stockholder, but not
deemed outstanding for the purpose of calculating the percentage of any other person. Unless otherwise noted, all shares listed as
beneficially owned by a stockholder are actually outstanding.
6 Consists of 58,400 shares held directly and 8,125 vested, fully exercisable options to purchase shares.
7 Consists of 6,500 shares held directly and 8,125 vested, fully exercisable options to purchase shares.
8 Consists of shares held directly.
9 Consists of 8,125 directly held, vested, fully exercisable options to purchase shares, 3,500 shares held individually, and 5,288,241
shares held directly by Dolphin Offshore Partners, L.P. (“Dolphin”). Peter E. Salas is the sole shareholder of and controlling person of
Dolphin Mgmt. Services, Inc. which is the general partner of Dolphin.
15
Cary V. Sorensen
Vice President; General
Counsel; Secretary
23,62310
Less than 1%
Richard M. Thon
Director
32,12511
Less than 1%
Change in Control
To the knowledge of the Company’s management, there are no present arrangements or
pledges of the Company’s securities which may result in a change in control of the Company.
EXECUTIVE COMPENSATION
The Company is a “smaller reporting company” under the rules promulgated by the Securities
and Exchange Commission and complies with the disclosure requirements specifically applicable to
smaller reporting companies. This Section and Summary Compensation Table are not intended to
meet the “Compensation Disclosure and Analysis” disclosure that is required to be made by larger
reporting companies.
The following table sets forth a summary of all compensation awarded to, earned or paid to, the
Company's Chief Executive Officer, Chief Financial Officer and other executive officers whose
compensation exceeded $100,000 during fiscal years ended December 31, 2016 and December 31,
2015.
Name and Principal Position
Michael J. Rugen,
Chief Executive Officer
(interim)2
Chief Financial Officer
Cary V. Sorensen,
V.P., General Counsel
Salary
($)
Year
2016 163,857
2015 168,008
Stock
Awards
Bonus
($)
($)
21,685 6,931
29,442
-
All Other
Compensation1
($)
6,737
8,394
Total
($)
199,210
205,844
2016
2015
81,900
92,677
-
-
3,495
4,662
85,395
97,339
1 The amounts in this column consist of the Company’s matching contributions to its 401 (k) plan,
personal use of company vehicles, moving expenses, and the portion of company-wide group term life
insurance premiums allocable to these named executive officers.
2 The information for Mr. Rugen for 2016 and 2015 includes compensation for his services as both
CEO and CFO. The bonus in 2016 and 2015 include $21,685 and $29,442 respectively for
quarterly bonuses paid to Mr. Rugen as compensation to serve in the capacity as CEO.
10 Consists of shares held directly.
11 Consists of 26,500 shares held directly and 5,625 vested, fully exercisable options to purchase shares.
16
OUTSTANDING EQUITY AWARDS AT FISCAL 2016 YEAR-END
Number of
securities
underlying
unexercised options
exercisable
0
0
Michael J. Rugen
Cary V. Sorensen
OPTION AWARDS
Number of
securities
underlying
unexercised options
unexercisable
0
0
Option
exercise
price
Option
expiration date
-
-
-
-
Option and Award Exercises
No options were exercised by any person during 2015 or 2016.
Employment Contracts
Employment Contracts and Compensation Agreements
On September 18, 2013, the Company and its Chief Financial Officer and interim Chief
Executive Officer Michael J. Rugen entered into a written Compensation Agreement as reported on
Form 8-K filed on September 24, 2013. Under the terms of the Compensation Agreement, Mr.
Rugen’s annual salary will increase from $150,000 to $170,000 per year in his capacity as Chief
Financial Officer, and he will receive a bonus of $7,500 per quarter for each quarter during which
he also serves as interim Chief Executive Officer. At June 1, 2015, Mr. Rugen’s salary was increased
to $199,826 per year in his capacity as Chief Financial Officer, the quarterly bonus received while in
the capacity as interim Chief Financial Officer was increased to $8,815 per quarter. The
increases at June 1, 2015 were for cost of living adjustments related to the relocation of the corporate
office from Knoxville to Greenwood Village. The Compensation agreement is not an employment
contract, but does provide that in the event Mr. Rugen were terminated without cause, he would
receive a severance payment in the amount of six month’s salary in effect at the time of any such
termination.
On February 19, 2015, the Company and its Vice President, General Counsel, and Corporate
Secretary Cary V. Sorensen entered into a written Compensation Agreement as reported on Form 8- K
filed on February 25, 2015. Under the terms of the Compensation Agreement, effective March 2,
2015, Mr. Sorensen’s annual salary will be reduced from $137,500 to $91,000 in consideration of
the Company's agreement to permit Mr. Sorensen to serve as a full time employee from a virtual
office in Galveston, Texas with presence in the Denver area headquarters as required. He will
remain eligible for certain existing benefits: 401-K plan, bonus potential; Company-paid state bar
membership dues and charges, and mobile phone charges. The Company also pays reasonable and
customary office operating expenses. The Company would pay for business travel on a mileage
basis and out of pocket travel costs. However, as to health insurance, Mr. Sorensen will obtain a
combination of private/governmental health and disability insurance in lieu of the Company plans,
with the Company reimbursing up to $13,000 per year in premiums incurred by him.
17
In addition, during the quarter ended March 31, 2015, the Company initiated cost reduction
measures including compensation reductions for each employee, the Board of Directors, and both of
the two executive officers of the Company. Mr. Rugen’s annual salary was reduced 18% from
$199,826 to $163,857 and his quarterly payment was also reduced 18% from $8,815 to $7,228; and
Mr. Sorensen’s annual salary was reduced by 10% from the $91,000 stated above. These
compensation reductions for the executive officers and employees will 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 when compensation shall revert 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 to each officer, employee and member of the
Board of Directors if he is still employed by the Company or still a member of the Board of
Directors.
There are presently no other employment contracts relating to any member of management.
However, depending upon the Company's operations and requirements, the Company may offer long-
term contracts to executive officers or key employees in the future.
Compensation of Directors
The Board of Directors has resolved to compensate members of the Board of Directors for
attendance at meetings at the rate of $250 per diem, together with direct out-of-pocket expenses
incurred in attendance at the meetings, including travel. The Directors, however, have waived per
diem fees as of this date for all prior meetings.
Members of the Board of Directors may also be requested to perform consulting or other
professional services for the Company from time to time, although at this time no such
arrangements are in place. The Board of Directors has reserved to itself the right to review all
directors' claims for compensation on an ad hoc basis.
Board members currently receive fees from the Company for their services as director.
They may also from time to time be granted stock options and common stock under the Tengasco,
Inc. Stock Incentive Plan. A separate plan to issue cash and/or shares of stock to independent
directors for service on the Board and committees of the Board of Directors was authorized by the
Board and approved by the Company’s shareholders. A copy of that plan is posted at the Company’s
website at www.tengasco.com. No award was made to any independent director under that plan in
Fiscal 2016.
18
DIRECTOR COMPENSATION FOR FISCAL 2016
Fees earned or
paid in cash
Stock and
Option awards
Total
$
$
$
$
7,500 $
7,500 $
7,500 $
7,500 $
2,331 $
2,331 $
2,331 $
2,331 $
9,831
9,831
9,831
9,831
Matthew K. Behrent
Hughree F. Brooks
Richard M. Thon
Peter E. Salas
CERTAIN TRANSACTIONS
There have been no material transactions, series of similar transactions or currently proposed
transactions entered into during 2016 and 2015, to which the Company or any of its subsidiaries
was or is to be a party, in which the amount involved exceeds the lesser of $120,000 or one percent of
the average of the Company’s total assets at year-end for its last two completed fiscal years in which
any director or executive officer or any security holder who is known to the Company to own of
record or beneficially more than 5% of the Company's common stock, or any member of the
immediate family of any of the foregoing persons, had a material interest.
In its Report on Form 10-K for the year ended December 31, 2016, the Company describes
two transactions of the type described above, that the Company entered into with Hoactzin in 2007
that remained in existence in 2015 and 2016. As noted in Item 1, Business, page 9 of the 10-K, Peter
E. Salas, the Chairman of the Board of Directors of the Company, is the controlling person of Hoactzin
and of Dolphin Offshore Partners, L.P., the Company’s largest shareholder. These two 2007
transactions between the Company and Hoactzin are described at the following pages locations in
that Report on Form 10-K and in its attached Notes to Consolidated Financial Statements: (1) the Ten
Well Program, see Item 1, Business, page 7; and (2) the net profits agreement at the Methane Project,
see Item 1, Business, pages 8 and F-12.
The approximate dollar value of the amount of Hoactzin’s interest in each of these two 2007
transactions during each of the years 2016 and 2015 was as follows: (1) Ten Well Program -
$25,000 in 2016; and $31,000 in 2015 (calculated as the total payments attributable to Hoactzin for its
program interest); and (2) Net Profits agreement at the Methane Project - $0 in 2016 and 2015
(calculated as the amount of net profits payable to Hoactzin; the project generated no net profits as
described in the agreement, and therefore no amount was paid to Hoactzin for net profits, in either
2016 or 2015).
In addition to the two 2007 transactions, Hoactzin owns a drilling program interest in the
Company’s “6 Well Program” in Kansas, acquired in 2005 by Hoactzin in exchange for surrender of
the Company’s promissory notes given by the Company for borrowings to fund the redemption in
2004 of the Company’s three series of preferred stock, all as previously disclosed. Hoactzin’s
interest in the 6 Well Program was $7,000 in 2016; and $13,000 in 2015 (calculated as the total
payments attributable to Hoactzin for its program interest) and is expected to decrease in the future as
19
the wells involved naturally decline in produced volumes.
Review, Approval or Ratification of Transactions with Related Parties 12
The Company’s Board of Directors has adopted a written Related Party Transactions Approval
Policy which is posted on the Company’s website at www.tengasco.com. It is the Company’s
preference to avoid entering into a material related-party transaction if a transaction with a non-
related party is available on an equally timely and equally beneficial basis. However, if a Related Party
Transaction appears to be in the Company’s best interest then it will be approved or ratified if the
Board of Directors pursuant to the Company’s Related Party Transaction Approval Policy expressly
finds that the terms of the transaction are comparable to or more beneficial to the Company than
those that could be obtained in arm’s length dealings with an unrelated third party; or, the
transaction is approved by the majority of disinterested directors of the Company’s Board.
Parent of Issuer
The Company has no parent.
BOARD RECOMMENDATION AND VOTE REQUIRED
For Proposal No. 1 regarding the election of directors, votes may be cast in favor of all
nominees, may be withheld with regard to all nominees or may be withheld only with regard to
nominees specified by the stockholder. Directors will be elected by a plurality of the votes of the
shares of the Company's common stock present in person or represented by proxy, and entitled to
vote on the election of directors at a meeting at which a quorum is present. Abstentions are
tabulated in determining the votes present at a meeting. Consequently, an abstention has the same
effect as a vote against a director-nominee, as each abstention would be one less vote in favor of a
director nominee. If a broker indicates on the proxy that it does not have discretionary authority as to
certain shares to vote on a particular matter (i.e., a “broker non-vote”), those shares will not be
considered as present and entitled to vote with respect to that matter. The Board of Directors
recommends that stockholders vote “FOR” the nominees set forth above. Unless marked to the
contrary, proxies received will be voted FOR the nominees set forth above.
12 A “Related Party” is any director or executive officer of the Company, any nominee for director, any shareholder known to
be the beneficial owner of more than 5% of any class of the Company’s voting stock, and any Immediate Family Member of
any such Party. “Immediate Family Member” means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of a person, and any person (other than a tenant or
an employee) sharing the household of such person.
20
PROPOSAL NO. 2
RATIFICATION OF SELECTION OF
HEIN & ASSOCIATES, LLP AS INDEPENDENT AUDITORS
The Board’s Audit Committee has recommended and the Board of Directors has approved
the engagement of Hein & Associates, LLP (“Hein”) as independent certified public accountants, to
audit the accounts for the Company for Fiscal 2017.
Hein audited the Company’s financial statements for the years ended December 31, 2016
and 2015. Hein was engaged on September 21, 2011 to serve as the Company’s independent
registered public accounting firm. The Company is advised that neither Hein nor any of its partners
has any material direct or indirect relationship with the Company. The Audit Committee considers
Hein to be well qualified for the function of serving as the Company's auditors. Delaware law does
not require the approval of the selection of auditors by the Company's stockholders, but in view of
the importance of the financial statements to stockholders, the Board of Directors deems it desirable
that they pass upon its selection of auditors. In the event the stockholders disapprove of the
selection, the Board of Directors will consider the selection of other auditors.
AUDIT AND NON-AUDIT FEES
Audit and Non-Audit Fees
The following table presents the fees for professional audit services rendered by the
Company’s current independent accountants, Hein & Associates (“Hein”), for the audit of the
Company’s annual consolidated financial statements and fees for professional audit services
rendered for the quarterly reviews for the fiscal years ended December 31, 2016 and December 31,
2015:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total Fees
AUDIT AND NON-AUDIT FEES
2016
$ 111,300
$ 18,322
-
-
$ 129,622
2015
$ 111,400
-
-
-
$ 111,400
Audit fees include fees related to the services rendered in connection with the annual audit
of the Company’s consolidated financial statements, the quarterly reviews of the Company’s
quarterly reports on Form 10-Q and the reviews of and other services related to statutory filings or
engagements for the subject fiscal years.
Audit-related fees are for assurance and related services by the principal accountants that are
reasonably related to the performance of the audit or review of the Company’s financial statements.
21
Tax Fees include services for (i) tax compliance, (ii) tax advice, (iii) tax planning and (iv)
tax reporting.
All Other Fees includes fees for all other services provided by the principal accountants not
covered in the other categories such as litigation support, etc.
All of the services for 2016 and 2015 were performed by the full-time, permanent
employees of Hein.
All of the 2016 services described above were approved by the Audit Committee pursuant to
the SEC rule that requires audit committee pre-approval of audit and non-audit services provided by
the Company’s independent auditors. The Audit Committee considered whether the provisions of
such services, including non-audit services, by Hein were compatible with maintaining its
independence and concluded they were.
BOARD RECOMMENDATION AND VOTE REQUIRED
The Board of Directors recommends that you vote in favor of the above proposal to ratify
the appointment of Hein & Associates, LLP as independent auditors of the Company for Fiscal
2017. Ratification will require the affirmative vote of a majority of the shares present and voting at
the meeting in person or by proxy. In the event ratification is not provided, the Audit Committee
and the Board of Directors will review the future selection of the Company's independent auditors.
Unless otherwise directed by the stockholder giving the proxy, the proxy will be voted for
the ratification of the selection by the Board of Directors of Hein & Associates, LLP as the
Company's independent certified public accountants for Fiscal 2017. Shares voted as abstaining will
count as votes cast. If a broker indicates on the proxy that it does not have discretionary authority as
to certain shares to vote on a particular matter (i.e., a “broker non-vote”), those shares will not be
considered as present and entitled to vote with respect to that matter. An abstention from voting by
a stockholder present in person or by proxy at the meeting has the same legal effect as a vote
“against” Proposal No. 2 because it represents a share present or represented at the meeting and
entitled to vote, thereby increasing the number of affirmative votes required to approve this
proposal.
22
PROPOSAL NO. 3
TO APPROVE, BY NON-BINDING ADVISORY VOTE, THE COMPENSATION
OF NAMED EXECUTIVE OFFICERS
The Company is asking its stockholders to approve a non-binding advisory resolution on the
Company’s compensation of its named executive officers as reported in this Proxy Statement (See,
“Proposal No. 1: Election of Directors, EXECUTIVE COMPENSATION). In accordance with
Section 14A of the Exchange Act, the Company is asking stockholders to approve the following
advisory Stockholders’ Resolution:
RESOLVED, that the stockholders of Tengasco, Inc. (the “Company”) approve, on an
advisory basis, the compensation of the Company's named executive officers as disclosed in
this proxy statement, including as discussed in the section entitled “EXECUTIVE
COMPENSATION”, the Summary Compensation Table and the related compensation tables
and notes in the Proxy Statement for the Company's 2017 Annual Meeting of Stockholders.
This advisory resolution, commonly referred to as a “say-on-pay” resolution, is non-binding on
the Board. Although non-binding, the Board and the Compensation Committee will consider the
voting results when evaluating the compensation of the Company’s executive officers.
BOARD RECOMMENDATION AND VOTE REQUIRED
The Board of Directors recommends that you vote in favor of the above proposal to approve by
shareholder resolution the compensation of the Company's named executive officers as disclosed in
section entitled “EXECUTIVE
this Proxy Statement,
COMPENSATION”, the Summary Compensation Table and the related compensation tables, notes
and narrative in the Proxy Statement for the Company's 2017 Annual Meeting of Stockholders.
including as discussed
the
in
Unless otherwise directed by the stockholder giving the proxy, the proxy will be voted for the
approval of the advisory resolution. If a broker indicates on the proxy that it does not have
discretionary authority as to certain shares to vote on a particular matter (i.e., a “broker non-vote”),
those shares will not be considered as present and entitled to vote with respect to that matter. An
abstention from voting by a stockholder present in person or by proxy at the meeting has the same
legal effect as a vote “against” Proposal No. 3 because it represents a share present or represented at
the meeting and entitled to vote, thereby increasing the number of affirmative votes required to
approve this proposal.
23
PROPOSAL NO. 4
TO APPROVE AND RATIFY RIGHTS AGREEMENT
The Board of Directors is asking its stockholders to approve and ratify the Rights Agreement dated as
of March 16, 2017 between the Company and Continental Stock Transfer & Trust Company, as rights
agent (the “Rights Agreement”), pursuant to which the Board of Directors declared a dividend of one
right (a “Right”) for each of the Company’s issued and outstanding shares of common stock to the
stockholders of record at the close of business on March 27, 2017 (the “Record Date”). Each Right
entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the
Company one one-thousandth of a share of the Company’s Series A Participating Preferred Stock,
$0.01 par value per share (the “Preferred Stock”), at a price of $1.10 (the “Exercise Price”), subject to
certain adjustments. If the stockholders do not approve and ratify the Rights Agreement at the Annual
Meeting on December 12, 2017, the Rights Agreement will expire at the close of business on
December 13, 2017.
Background and Reasons for the Proposal
As of December 2016, we estimate that we had approximately $26 million (before valuation
allowances) of deferred tax assets generated by net operating losses (“NOLs”), built-in losses and
other tax benefits. The NOLs do not fully expire for many years. To the extent we have future
taxable income, and until the NOLs expire, they can be used to offset future taxable income, if any. In
addition, NOLs may generally be carried back two years to offset past taxable income.
Because the amount and timing of our future taxable income cannot be accurately predicted, we
cannot estimate the exact amount of NOLs that can ultimately be used to reduce our income tax
liability. However, we believe the NOLs are a valuable asset and that it is in our best interests to
attempt to preserve their use by approving the Rights Agreement.
Limitations on our ability to use the NOLs would arise if we undergo an “ownership change” under
Section 382 of the Internal Revenue Code (“Section 382”). Calculating whether an “ownership
change” has occurred is subject to inherent uncertainty resulting from the complexity and ambiguity of
the Section 382 provisions, as well as limitations on the knowledge that any publicly traded company
can have about the ownership of its securities on a timely basis.
Section 382 Ownership Calculations
The benefit of the NOLs would be significantly reduced if we were to experience an “ownership
change” as defined in Section 382. To determine whether an “ownership change” has occurred, we
must compare the percentage of shares owned by each 5% stockholder immediately after the close of
the testing date to the lowest percentage of shares owned by such 5% stockholder at any time during
the testing period (which is generally a three-year rolling period). An “ownership change” occurs if
the aggregate increase in ownership by all such 5% stockholders exceeds 50 percentage points.
For example, if a single investor acquired more than 50% of our shares in a three-year period, an
“ownership change” would occur. Similarly, if ten persons, none of whom owned shares, each
acquired slightly over 5% of our shares within a three-year period (so that such persons owned, in the
aggregate, more than 50%), an “ownership change” would occur.
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In the event of an “ownership change,” the annual limit pursuant to Section 382 (the “Section 382
Limitation”) is obtained by multiplying (i) the aggregate value of our outstanding equity immediately
prior to the “ownership change” (reduced by certain capital contributions made during the
immediately preceding two years and certain other items) by (ii) the federal long-term tax-exempt
interest rate in effect for the month of the “ownership change.” In calculating the Section 382
Limitation, numerous special rules and limitations apply, including provisions dealing with “built-in
gains and losses.”
If we were to have taxable income in excess of the Section 382 Limitation following a Section 382
“ownership change,” we would not be able to offset tax on the excess income with the NOLs.
Although any loss carry forwards not used as a result of any Section 382 Limitation would remain
available to offset income in future years (again, subject to the Section 382 Limitation) until the NOLs
expire, any subsequent “ownership change” could significantly defer the utilization of the loss carry
forwards, accelerate payment of federal income tax and cause some of the NOLs to expire unused.
Because the aggregate value of our outstanding shares and the federal long-term tax-exempt interest
rate fluctuate, it is impossible to predict the Section 382 Limitation on our NOLs should an
“ownership change” occur in the future. However, such limitation could be material.
In determining whether an “ownership change” has occurred, the rules of Section 382 are complex and
beyond the scope of this discussion. However, some of the factors that are considered in performing a
Section 382 “ownership change” analysis include those set out below:
• All holders who each own less than 5% of a company’s common stock are generally (but not
always) collectively treated as a single 5% stockholder. Transactions in the public markets
among stockholders who are not 5% stockholders are generally (but not always) treated as a
single 5% stockholder.
• There are several rules regarding the aggregation and segregation of stockholders who
otherwise do not qualify as 5% stockholders. Certain constructive ownership rules, which
generally attribute ownership of shares owned by estates, trusts, corporations, partnerships or
other entities to the ultimate indirect individual owner thereof, or to related individuals, are
applied in determining the level of share ownership of a particular stockholder. Ownership of
shares is generally attributed to both their ultimate beneficial owner as well as to “first tier”
and “higher tier” entities, including trusts, corporations, partnerships or other entities.
• Acquisitions by a person which cause that person to become a 5% stockholder generally result
in a five percentage (or more) point change in ownership, regardless of the size of the final
purchase that caused the threshold to be exceeded.
• Special rules can result in the treatment of options (including warrants) or other similar
interests as having been exercised if such treatment would result in an “ownership change.”
• The redemption or buyback of shares by an issuer will increase the ownership of any 5%
stockholders (including groups of stockholders treated as a single stockholder) and can
contribute to an “ownership change.” In addition, it is possible that a redemption or buyback
25
of shares could cause a holder of less than 5% to become a 5% stockholder, resulting in a five
percentage (or more) point change in ownership.
Description of the Rights Agreement
The following description of the Rights Agreement is qualified in its entirety by reference to the text
of the Rights Agreement, which is attached to this Proxy Statement as Appendix A and incorporated
herein by this reference. We urge you to read carefully the Rights Agreement in its entirety as the
discussion below is only a summary.
The purpose of the Rights Agreement is to reduce the risk that the Company’s ability to use its NOLs
to reduce potential future federal income tax obligations would be limited by reason of the Company
experiencing an “ownership change,” as defined in Section 382. A company generally experiences an
ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in
Section 382, increases by more than 50 percentage points over a rolling three-year period. The Rights
Agreement is designed to reduce the likelihood that the Company will experience an ownership
change under Section 382 by discouraging any person or group from becoming a 4.95% shareholder
and discouraging any existing 4.95% (or more) shareholder from acquiring additional shares of our
common stock.
The Rights will not be exercisable until the earlier to occur of (i) (A) a person or group of affiliated or
associated persons or persons acting in concert who, at any time after the date of the Rights
Agreement, acquires, or obtains the right to acquire, beneficial ownership of 4.95% or more of the
outstanding shares of our common stock or (B) a person or group currently owning 4.95% (or more)
of the outstanding shares of our common stock acquires additional shares of our common stock, in
each case thereby becoming an “Acquiring Person,” subject to certain exceptions; or (ii) the
commencement or announcement of an intention to commence a tender offer or exchange offer, the
consummation of which would result in any person becoming an Acquiring Person, with the earlier of
such dates being called the “Distribution Date.”
With respect to certificates representing shares of our common stock outstanding as of the Record
Date, until the Distribution Date, the Rights will be evidenced by such certificates for shares of our
common stock registered in the names of the holders thereof, and not by separate right certificates.
With respect to book entry shares of our common stock outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by the balances indicated in the book entry account
system of the transfer agent for the common stock. Until the earlier of the Distribution Date (if one
occurs) or the Expiration Date, as described below, the transfer of any shares of common stock
outstanding on the Record Date will also constitute the transfer of the Rights associated with such
shares of common stock. As soon as practicable after the Distribution Date, separate certificates
evidencing the Rights (“Right Certificates”) will be mailed to holders of record of our common stock
as of the close of business on the Distribution Date, and such Right Certificates alone will evidence
the Rights.
The Rights, which are not exercisable until the Distribution Date, will expire prior to the earliest of (i)
March 16, 2020 or such later day as may be established by the Board of Directors prior to the
expiration of the Rights, provided that the extension is submitted to the Company’s stockholders for
ratification at the next annual meeting of stockholders of the Company succeeding such extension; (ii)
26
the time at which the Rights are redeemed pursuant to the Rights Agreement; (iii) the time at which
the Rights are exchanged pursuant to the Rights Agreement; (iv) the time at which the Rights are
terminated upon the occurrence of certain events; (v) the close of business on the first day after the
Company’s 2017 annual meeting of stockholders, if approval by the stockholders of the Company of
the Rights Agreement has not been obtained at such meeting; (vi) the close of business on the
effective date of the repeal of Section 382, if the Board of Directors determines that the Rights
Agreement is no longer necessary or desirable for the preservation of tax benefits; (vii) the close of
business on the first day of a taxable year of the Company to which the Board of Directors determines
that no tax benefits are available to be carried forward; and (viii) the close of business on the first day
after the Board of Directors determines by resolution in its business judgment that the Rights
Agreement is no longer necessary or appropriate (the earliest of (i) – (viii) being herein referred to as
the “Expiration Date”).
If issued, each share of Preferred Stock will be entitled, when, as and if declared, to a preferential per
share quarterly dividend payment equal to the greater of (i) $1.00 per share or (ii) an amount equal to
1,000 times the dividend declared per share of our common stock. Each share of Preferred Stock will
entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the
Company. In the event of any merger, consolidation or other transaction in which shares of our
common stock are converted or exchanged, each share of Preferred Stock will be entitled to receive
1,000 times the amount received per one share of common stock.
The Exercise Price payable, and the number of shares of Preferred Stock or other securities or
property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent
dilution in certain circumstances. The number of outstanding Rights and the number of one one-
thousandths of a Preferred Stock issuable upon exercise of each Right are also subject to adjustment in
the event of a stock split, reverse stock split, stock dividends and other similar transactions. With
certain exceptions, no adjustment in the Exercise Price will be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Exercise Price. No fractional shares
of Preferred Stock will be issued (other than fractions which are integral multiples of one one-
thousandth of a share of Preferred Stock). At any time after any person or group of affiliated or
associated persons becomes an Acquiring Person, the Board of Directors, at its option, may exchange
each Right (other than Rights owned by such person or group of affiliated or associated persons which
will have become void), in whole or in part, at an exchange ratio of two shares of our common stock
per outstanding Right (subject to adjustment).
At any time before any person or group of affiliated or associated persons becomes an Acquiring
Person, the Board of Directors may redeem the Rights in whole, but not in part, at a price of $0.001
per Right (subject to certain adjustments) (the “Redemption Price”). The redemption of the Rights
may be made effective at such time, on such basis and with such conditions as the Board of Directors
in its sole discretion may establish.
Immediately upon the action of the Board of Directors electing to redeem or exchange the Rights, the
Company shall make announcement thereof, and upon such election, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised or exchanged, the holder thereof, as such, will have no rights as a
stockholder of the Company, including, without limitation, the right to vote or to receive dividends.
27
The Board of Directors may from time to time and in its sole and absolute discretion supplement or
amend this Agreement in any respect without the approval of any holders of Rights, in order to (a)
cure any ambiguity; (b) correct or supplement any provision contained herein that may be defective or
inconsistent with any other provisions herein; (c) shorten or lengthen any time period hereunder; (d)
terminate this Agreement at any time before or after any person becomes an Acquiring Person; and (e)
otherwise change, amend, or supplement any provisions hereunder in any manner that the Company
may deem necessary or desirable. Notwithstanding any provision of the Rights Agreement to the
contrary, the Company, by action of the Board of Directors in its sole discretion acting in its business
judgment, may at any time before or after any person becomes an Acquiring Person amend this
Agreement to make the provisions of this Agreement inapplicable to a particular transaction by which
a person might otherwise become an Acquiring Person or to otherwise alter or waive any application
of any or all of the terms and conditions of this Agreement as they may apply with respect to any such
transaction.
Certain Considerations Relating to the Rights Agreement
The Board of Directors believes that attempting to protect the NOLs is in our and the stockholders’
best interests. However, we cannot eliminate all possibility that an “ownership change” will occur
even if the Rights Agreement is approved. You should consider the factors below when making your
decision.
Future Use and Amount of the NOLs is Uncertain. Our use of the NOLs depends on our ability to
generate taxable income in the future. We cannot assure you whether we will have taxable income in
any applicable period or, if we do, whether such income or the NOLs at such time will exceed any
potential Section 382 limitation.
Potential Challenge to the NOLs. The amount of the NOLs has not been audited or otherwise
validated by the Internal Revenue Service (the “IRS”). The IRS could challenge the amount of the
NOLs, which could result in an increase in our liability in the future for income taxes. In addition,
determining whether an “ownership change” has occurred is subject to uncertainty, both because of
the complexity and ambiguity of the Section 382 provisions and because of limitations on the
knowledge that any publicly traded company can have about the ownership of, and transactions in, its
securities on a timely basis. Therefore, we cannot assure you that the IRS or other taxing authority
will not claim that we experienced an “ownership change” and attempt to reduce the benefit of the
NOLs even if the Rights Agreement is in place.
Continued Risk of Ownership Change. Although the Rights Agreement is intended to diminish the
likelihood of an “ownership change,” we cannot assure you that it will be effective. The amount by
which an ownership interest may change in the future could, for example, be affected by purchases
and sales of shares by stockholders holding 5% or more of our outstanding common stock, over which
we have no control, and new issuances of shares by us, should we choose to do so.
Potential Effects on Liquidity. The Rights Agreement is intended to deter persons or groups of
persons from acquiring beneficial ownership of our common stock in excess of the specified
limitations. A stockholder’s ability to dispose of our common stock may be limited if the Rights
Agreement reduces the number of persons willing to acquire our common stock or the amount they are
willing to acquire. A stockholder may become an Acquiring Person upon actions taken by persons
28
related to, or affiliated with, them. Stockholders are advised to carefully monitor their ownership of
our common stock and consult their own legal advisors and/or us to determine whether their
ownership of the shares approaches the proscribed level.
Potential Impact on Value. The Rights Agreement could negatively impact the value of our common
stock by deterring persons or groups of persons from acquiring our common stock, including in
acquisitions for which some stockholders might receive a premium above market value.
Anti-Takeover Effect. The Board of Directors adopted the Rights Agreement to diminish the risk that
our ability to use the NOLs to reduce potential federal income tax obligations becomes limited.
Nonetheless, the Rights Agreement may have an “anti-takeover effect” because it may deter a person
or group of persons from acquiring beneficial ownership of 4.95% or more of the outstanding shares
of our common stock or, in the case of a person or group of persons that already own 4.95% or more
of the outstanding shares of our common stock, from acquiring any additional shares of our common
stock. The Rights Agreement could discourage or prevent a merger, tender offer, proxy contest or
accumulations of substantial blocks of shares.
BOARD RECOMMENDATION AND VOTE REQUIRED
The Board of Directors recommends that you vote in favor of the above proposal to approve and ratify
the Rights Agreement to help preserve the Company’s substantial amount of net operating loss carry
forwards and other tax benefits.
Unless otherwise directed by the stockholder giving the proxy, the proxy will be voted FOR the
approval of Proposal No. 4. If a broker indicates on the proxy that it does not have discretionary
authority as to certain shares to vote on a particular matter (i.e., a “broker non-vote”), those shares will
not be considered as present and entitled to vote with respect to that matter. An abstention from
voting by a stockholder present in person or by proxy at the meeting has the same legal effect as a vote
“against” Proposal No. 4 because it represents a share present or represented at the meeting and
entitled to vote, thereby increasing the number of affirmative votes required to approve this proposal.
29
STOCKHOLDERS' PROPOSALS
Proposals of stockholders intended to be presented at the 2018 annual meeting must be
received in writing, by the Chief Executive Officer of the Company at its offices by July 1, 2018 in
order to be considered for inclusion in the Company's proxy statement relating to that meeting.
SEC rules and regulations provide that if the date of the Company's 2018 Annual Meeting is
advanced or delayed more than 30 days from the date of the 2017 Annual Meeting, stockholder
proposals intended to be included in the proxy materials for the 2018 Annual Meeting must be
received by the Company within a reasonable time before the Company begins to print and mail the
proxy materials for the 2018 Annual Meeting. Upon determination by the Company that the date of
the 2018 Annual Meeting will be advanced or delayed by more than 30 days from the date of the
2017 Annual Meeting, the Company will disclose such change no later than in the earliest possible
Quarterly Report on Form 10-Q filed by the Company.
By Order of the Board of Directors
/s/ Cary V. Sorensen
Cary V. Sorensen, Secretary
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TENGASCO, INC.
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Michael J. Rugen and Cary V. Sorensen as proxies (the
“Proxies”), each with power of substitution and re-substitution, to vote all shares of Common
Stock, $.001 par value per share, of Tengasco, Inc. (the “Company”) held of record by the
undersigned on October 23, 2017 at the Annual Meeting of stockholders to be held at 8000 E.
Maplewood Ave., Suite 115, Greenwood Village, CO 80111 on December 12, 2017 at 8:30 AM
local (Mountain ) time, or at any adjournments thereof, as directed below, and in their discretion
on all other matters coming before the meeting or any adjournments thereof.
Please mark boxes / / in blue or black ink.
1. Election of Directors: Matthew K. Behrent, Peter E. Salas, and Richard M. Thon.
(Mark only one of the two boxes for this item)
/ / VOTE FOR all nominees named above except those who may be named on these
two lines:
(OR)
/ / VOTE WITHHELD as to all nominees named above.
Proposal to ratify appointment of Hein & Associates, LLP as the Company's independent
2.
certified public accountants for Fiscal 2017:
FOR
/ / AGAINST
/ / ABSTAIN
/ /
Proposal to approve, by non-binding advisory vote, the compensation of the Company’s
3.
executive officers:
FOR
/ / AGAINST
/ / ABSTAIN
/ /
4. PROPOSAL to approve Rights Agreement and Rights Plan:
FOR
/ / AGAINST
/ / ABSTAIN
/ /
In their discretion, the Proxies are authorized to vote upon such other business as may
5.
properly come before the meeting.
When properly executed, this Proxy will be voted as directed. If no direction is made, this
Proxy will be voted “FOR” election of all Directors named in Proposal 1; FOR Proposal 2; FOR
Proposal 3; FOR Proposal 4; and FOR Proposal 5.
Please mark, date, and sign and return this Proxy promptly in the enclosed
envelope.
Please sign exactly as name appears hereon. When shares are held by joint tenants,
both should sign. When signing as attorney or executor, administrator, trustee or
guardian, please give your full title as such. If a corporation, please sign in full corporate
name by president or other authorized officer. If a partnership, please sign in partnership
name by authorized person.
Dated:
, 2017
Signature
Print Name(s)
X
X
X
Signature, if held jointly
APPENDIX A
RIGHTS AGREEMENT
dated as of March 16, 2017
between
TENGASCO, INC.
and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
TABLE OF CONTENTS
SECTION 1. Certain Definitions.
SECTION 2. Appointment of Rights Agent.
SECTION 3. Issue of Rights Certificates.
SECTION 4. Form of Rights Certificate.
SECTION 5. Countersignature and Registration.
SECTION 6.
Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed,
Lost or Stolen Rights Certificates.
SECTION 7. Exercise of Rights; Exercise Price; Expiration Date of Rights.
SECTION 8. Cancellation and Destruction of Rights Certificates.
SECTION 9. Reservation and Availability of Capital Stock.
SECTION 10. Preferred Stock Record Date.
SECTION 11. Adjustment of Exercise Price, Number and Kind of Shares or Number of Rights.
SECTION 12. Certificate of Adjusted Exercise Price or Number of Shares.
SECTION 13. Termination of Rights in the Event of Board Approved Transaction.
SECTION 14. Fractional Rights; Fractional Shares; Waiver.
SECTION 15. Rights of Action.
SECTION 16. Agreement of Rights Holders.
SECTION 17. Rights Certificate Holder Not Deemed a Stockholder.
SECTION 18. Duties of Rights Agent.
SECTION 19. Concerning the Rights Agent.
SECTION 20. Merger or Consolidation or Change of Name of Rights Agent.
SECTION 21. Change of Rights Agent.
SECTION 22. Issuance of New Rights Certificates.
SECTION 23. Redemption.
SECTION 24. Exchange.
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SECTION 25. Process to Seek Exemption.
SECTION 26. Notice of Certain Events.
SECTION 27. Notices.
SECTION 28. Supplements and Amendments.
SECTION 29. Successors.
SECTION 30. Determinations and Actions by the Board.
SECTION 31. Benefits of this Agreement.
SECTION 32. Tax Compliance and Withholding.
SECTION 33. Severability.
SECTION 34. Governing Law.
SECTION 35. Counterparts.
SECTION 36. Interpretation.
SECTION 37. Force Majeure.
SIGNATURES
Exhibit A
Certificate of Designation
Exhibit B
Summary of Rights
Exhibit C
Form of Rights Certificate
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RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of March16, 2017, (this “Agreement”), by and between Tengasco, Inc., a
Delaware corporation (the “Company”), and Continental Stock Transfer & Trust Company, a New York
corporation, as rights agent (the “Rights Agent”).
WHEREAS, (a) the Company has certain net operating losses and certain other tax attributes (collectively,
“NOLs”) for United States federal income tax purposes, (b) the Company desires to avoid an “ownership change”
within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and thereby
preserve the Company’s ability to utilize such NOLs, and (c) in furtherance of such objective, the Company desires
to enter into this Agreement;
WHEREAS, the board of directors of the Company (the “Board”) authorized and declared a dividend of one
preferred share purchase right (a “Right”) for each share of Common Stock of the Company outstanding at the
Close of Business on the Record Date, each Right initially representing the right to purchase one one-thousandth
(subject to adjustment) of one share of Preferred Stock, upon the terms and subject to the conditions herein set forth,
and further authorized and directed the issuance of one Right (subject to adjustment) with respect to each share of
Common Stock of the Company that will become outstanding between the Record Date and the earlier of the
Distribution Date and the Expiration Date; provided, however, that Rights may be issued with respect to shares of
Common Stock that will become outstanding after the Distribution Date and prior to the Expiration Date in
accordance with Section 22 hereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties
hereby agree as follows:
SECTION 1. Certain Definitions.
For purposes of this Agreement, the following terms have the meanings indicated:
(a) “Acquiring Person” shall mean any Person which, together with all of its Related Persons, is the
Beneficial Owner of 4.95% or more of the shares of Common Stock of the Company then outstanding, but shall
exclude (i) the Excluded Persons, (ii) any Exempt Persons and (iii) any Grandfathered Persons.
Notwithstanding anything in Agreement to the contrary, no Person shall become an “Acquiring Person”:
(i) as the result of an acquisition of shares of Common Stock by the Company which, by reducing the
number of shares of Common Stock outstanding, increases the percentage of the shares of Common Stock
Beneficially Owned by such Person, together with all of its Related Persons, to 4.95% or more of the shares of
Common Stock of the Company then outstanding; provided, however, that if a Person, together with all of its
Related Persons, becomes the Beneficial Owner of 4.95% or more of the shares of Common Stock of the Company
then outstanding by reason of share acquisitions by the Company and, after such share acquisitions by the Company,
becomes the Beneficial Owner of any additional shares of Common Stock of the Company (other than pursuant to a
dividend or distribution paid or made by the Company on the outstanding Common Stock or pursuant to a split or
subdivision of the outstanding Common Stock), then such Person shall be deemed to be an “Acquiring Person”
unless, upon becoming the Beneficial Owner of such additional shares of Common Stock, such Person, together
with all of its Related Persons, does not Beneficially Own 4.95% or more of the Common Stock then outstanding;
(ii) if (A) the Board determines that such Person has become an “Acquiring Person” inadvertently
(including, without limitation, because (1) such Person was unaware that it Beneficially Owned a percentage of the
then outstanding Common Stock that would otherwise cause such Person to be an “Acquiring Person”; or (2) such
Person was aware of the extent of its Beneficial Ownership of Common Stock but had no actual knowledge of the
consequences of such Beneficial Ownership under this Agreement); and (B) such Person divests as promptly as
practicable (as determined by the Board) a sufficient number of shares of Common Stock so that such Person would
no longer be an “Acquiring Person”;
(iii) solely as a result of any unilateral grant of any security by the Company, or through the exercise
of any options, warrants, rights or similar interests (including restricted stock) granted by the Company to its
directors, officers and employees; provided, however, that if a Person, together with all of its Related Persons,
becomes the Beneficial Owner of 4.95% or more of the shares of Common Stock of the Company then outstanding
by reason of a unilateral grant of a security by the Company, or through the exercise of any options, warrants, rights
or similar interests (including restricted stock) granted by the Company to its directors, officers and employees, then
such Person shall nevertheless be deemed to be an “Acquiring Person” if, subject to Section 1(a)(ii), such Person,
together with all of its Related Persons, thereafter becomes the Beneficial Owner of any additional shares of
Common Stock (unless upon becoming the Beneficial Owner of additional shares of Common Stock, such Person,
together with all of its Related Persons, does not Beneficially Own 4.95% or more of the Common Stock then
outstanding), except as a result of (A) a dividend or distribution paid or made by the Company on the outstanding
Common Stock or a split or subdivision of the outstanding Common Stock; or (B) the unilateral grant of a security
by the Company, or through the exercise of any options, warrants, rights or similar interest (including restricted
stock) granted by the Company to its directors, officers and employees;
(iv) by means of share purchases or issuances (including debt to equity exchanges), directly from the
Company or indirectly through an underwritten offering of the Company, in a transaction approved by the Board;
provided however, that a Person shall be deemed to be an “Acquiring Person” if such Person (A) is or becomes the
Beneficial Owner of 4.95% or more of the shares of Common Stock then outstanding following such transaction and
(B) subsequently becomes the Beneficial Owner of any additional shares of Common Stock without the prior written
consent of the Company and then Beneficially Owns 4.95% or more of the shares of Common Stock then
outstanding; or
(v) if such Person is a bona fide swaps dealer who has become an “Acquiring Person” as a result of its
actions in the ordinary course of its business that the Board determines, in its sole discretion, were taken without the
intent or effect of evading or assisting any other Person to evade the purposes and intent of this Agreement, or
otherwise seeking to control or influence the management or policies of the Company.
(b) A person shall be deemed to be “Acting in Concert” with another Person if such Person knowingly acts
pursuant to an express agreement, arrangement or understanding in concert or in parallel with such other Person, or
towards a common goal with such other Person, relating to (i) acquiring, holding, voting or disposing of voting
securities of the Company or (ii) changing or influencing the control of the Company or in connection with or as a
participant in any transaction having that purpose or effect where at least one additional factor supports a
determination by the Board that such Persons intended to act in concert or in parallel, which such additional factors
may include, without limitation, exchanging information, attending meetings, conducting discussions or making or
soliciting invitations to act in concert or in parallel. In addition, a Person who is Acting in Concert with another
Person shall be deemed to be Acting in Concert with any third Person who is Acting in Concert with such other
Person.
(c) “Adjustment Shares” shall have the meaning set forth in Section 11(a)(ii) hereof.
(d) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of
the Exchange Act Regulations, as in effect on the date of this Agreement, and, to the extent not included within the
foregoing, shall also include with respect to any Person, any other Person whose shares of Common Stock would be
deemed to be constructively owned by such first Person, owned by a “single entity” with respect to such first Person
as defined in Section 1.382-3(a)(1) of the Treasury Regulations, or otherwise aggregated with shares owned by such
first Person, pursuant to the provisions of Section 382 of the Code and the Treasury Regulations promulgated
thereunder.
(e) “Agreement” shall have the meaning set forth in the Preamble hereof.
(f) A Person is the “Beneficial Owner” of (and “Beneficially Owns” and has “Beneficial Ownership”) of
any securities (that are as such “Beneficially Owned”):
(i) that such Person or any of such Person’s Affiliates or Associates Beneficially Owns, directly or
indirectly, as determined pursuant to Rule 13d-3 of the Exchange Act Regulations as in effect on the date of this
Agreement, including pursuant to any agreement, arrangement, or understanding (whether or not in writing), but
only if the effect of such agreement, arrangement or understanding is to treat such Persons as an “entity” under
Section 1.382-3(a)(1) of the Treasury Regulations;
(ii) that such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has (A) the
right to acquire (whether such right is exercisable immediately or only after the passage of time or satisfaction of
other conditions) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the
exercise of conversion rights, exchange rights (other than the Rights), rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the “Beneficial Owner” of (1) securities (including rights,
options or warrants) that are convertible or exchangeable into or exercisable for Common Stock until such time as
such securities are converted or exchanged into or exercised for Common Stock except to the extent the acquisition
or transfer of such rights, options or warrants would be treated as exercised on the date of its acquisition or transfer
under Section 1.382-4(d) of the Treasury Regulations; or (2) securities tendered pursuant to a tender or exchange
offer made in accordance with the Exchange Act Regulations by or on behalf of such Person or any of such Person’s
Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote
or dispose of, pursuant to any agreement, arrangement, or understanding (whether or not in writing), but only if the
effect of such agreement, arrangement or understanding is to treat such Persons as an “entity” under Section 1.382-
3(a)(1) of the Treasury Regulations;
(iii) that are Beneficially Owned, directly or indirectly, by any other Person (or any Affiliate or
Associate of such Person) with which such Person (or any of such Person’s Affiliates or Associates) is Acting in
Concert or has any agreement, arrangement, or understanding (whether or not in writing), for the purpose of
acquiring, holding, voting or disposing of any such securities, but only if the effect of such agreement, arrangement
or understanding is to treat such Persons as an “entity” under Section 1.382-3(a)(1) of the Treasury Regulations; or
(iv) which are Beneficially Owned, directly or indirectly, by a Counterparty (or any of such
Counterparty’s Affiliates or Associates) under any Derivatives Contract (without regard to any short or similar
position under the same or any other Derivatives Contract) to which such Person or any of such Person’s Affiliates
or Associates is a Receiving Party; provided, however, that the number of shares of Common Stock that a Person is
deemed to Beneficially Own pursuant to this clause (iv) in connection with a particular Derivatives Contract shall
not exceed the number of Notional Common Shares with respect to such Derivatives Contract; provided, further,
that the number of securities Beneficially Owned by each Counterparty (including its Affiliates and Associates)
under a Derivatives Contract shall for purposes of this clause (iv) include all securities that are Beneficially Owned,
directly or indirectly, by any other Counterparty (or any of such other Counterparty’s Affiliates or Associates) under
any Derivatives Contract to which such first Counterparty (or any of such first Counterparty’s Affiliates or
Associates) is a Receiving Party, with this proviso being applied to successive Counterparties as appropriate.
Notwithstanding anything in this definition of “Beneficial Ownership” to the contrary, (x) no Person engaged
in business as an underwriter of securities shall be the “Beneficial Owner” of any securities acquired through such
Person’s participation in good faith in a firm commitment underwriting until the expiration of forty (40) days after
the date of such acquisition; and (y) no Person shall be deemed the “Beneficial Owner” of any security as a result of
an agreement, arrangement or understanding to vote such security that would otherwise render such Person the
Beneficial Owner of such security if such agreement, arrangement or understanding is not also then reportable on
Schedule 13D and arises solely from a revocable proxy or consent given to such Person in response to a public
proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange
Act Regulations.
Notwithstanding anything in this definition of “Beneficial Ownership” to the contrary, to the extent not within
the foregoing provisions, a Person shall be deemed the Beneficial Owner of, and shall be deemed to beneficially
own or have Beneficial Ownership of, securities which such Person would be deemed to constructively own or
which otherwise would be aggregated with shares owned by such Person pursuant to Section 382 of the Code, or
any successor provision or replacement provision and the Treasury Regulations thereunder.
(g) “Board” shall have the meaning set forth in the recitals of this Agreement.
(h) “Book Entry” shall mean an uncertificated book entry for the Common Stock.
(i) “Business Day” shall mean any day other than a Saturday, a Sunday, or a day on which banking or trust
institutions in New York City, New York are authorized or obligated by law or executive order to close.
(j) “Certificate of Amendment” shall have the meaning set forth in Section 1(k) hereof.
(k) “Certificate of Incorporation” shall mean the Amended Certificate of Incorporation of the Company,
as amended, as filed with the Office of the Secretary of State of the State of Delaware, and together with that certain
Certificate of Designation of the Series A Participating Preferred Stock of the Company as filed with the Office of
the Secretary of State of the State of Delaware on March 16, 2017; and attached hereto as Exhibit A (the
“Certificate of Amendment”), as the same may hereafter be amended or restated.
(l) “Close of Business” on any given date shall mean 5:00 P.M., New York City time, on such date;
provided, however, that if such date is not a Business Day, it shall mean 5:00 P.M., Eastern time, on the next
succeeding Business Day.
(m) “Closing Price” shall mean in respect of any security for any day shall mean the last sale price, regular
way, reported at or prior to 4:00 P.M. Eastern time or, in case no such sale takes place on such day, the average of
the bid and asked prices, regular way, reported at or prior to 4:00 P.M. Eastern time, in either case as reported in the
principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the
NYSE or, if the security is not listed or admitted to trading on the NYSE, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal national securities exchange on which
the security is listed or admitted to trading or, if the security is not listed or admitted to trading on any national
securities exchange, the last quoted price reported at or prior to 4:00 P.M. Eastern time or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as reported by any system then in use
reported as of 4:00 P.M. Eastern time or, if not so quoted, the average of the closing bid and asked price furnished
by a professional market maker making a market in the security selected by the Board.
(n) “Code” shall have the meaning set forth in the recitals to this Agreement.
(o) “Common Stock” shall mean (i) when used with reference to the Company, the Common Stock, par
value $0.001 per share, of the Company.
(p) “Common Stock Equivalents” shall have the meaning set forth in Section 11(a)(iii) hereof.
(q) “Company” shall have the meaning set forth in the Preamble hereof.
(r) “Counterparty” shall have the meaning set forth in Section 1(u) hereof.
(s) “Current Market Price” of any security on any date shall mean the average of the daily closing prices
per share of such security for the thirty (30) consecutive Trading Days immediately prior to, but not including, such
date; provided, however, that in the event that the “Current Market Price” of such security is determined during a
period following the announcement by the issuer of such security of (i) a dividend or distribution on such security
payable in shares of such security or securities convertible into such shares (other than the Rights); or (ii) any
subdivision, combination or reclassification of such security, and prior to the expiration of the requisite 30 Trading
Day period after but not including the ex-dividend date for such dividend or distribution or the record date for such
subdivision, combination or reclassification, then, in each such case, the “Current Market Price” shall be
appropriately adjusted to take into account ex-dividend trading. If on any such date no market maker is making a
market in such security or such security is not publicly held or not listed or traded, the “Current Market Price” shall
mean the fair value per share as determined in good faith by the Board, whose determination shall be described in a
written statement filed with the Rights Agent and shall be conclusive for all purposes.
Except as provided in this paragraph, the “Current Market Price” of the Preferred Stock shall be determined in
accordance with the method set forth above. If the Preferred Stock is not publicly traded, the “Current Market Price”
of the Preferred Stock shall be conclusively deemed to be the Current Market Price of the Common Stock of the
Company as determined pursuant to the paragraph above (appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof), multiplied by one hundred. If neither the Common
Stock nor the Preferred Stock is publicly held or so listed or traded, the “Current Market Price” of the Preferred
Stock shall mean the fair value per share as determined in good faith by the Board, whose determination shall be
described in a written statement filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. For all purposes of this Agreement, the “Current Market Price” of one one-thousandth of a
share of Preferred Stock shall be equal to the “Current Market Price” of one share of Preferred Stock divided by
1,000.
(t) “Current Value” shall have the meaning set forth in Section 11(a)(iii) hereof.
(u) “Derivatives Contract” shall mean a contract between two parties (the “Receiving Party” and the
“Counterparty”) that is designed to produce economic benefits and risks to the Receiving Party that correspond
substantially to the ownership by the Receiving Party of a number of shares of Common Stock specified or
referenced in such contract (the number corresponding to such economic benefits and risks, the “Notional Common
Shares”), regardless of whether obligations under such contract are required or permitted to be settled through the
delivery of cash, Common Stock or other property, without regard to any short position under the same or any other
Derivatives Contract. For the avoidance of doubt, interests in broad-based index options, broad-based index futures
and broad-based publicly traded market baskets of stocks approved for trading by the appropriate federal
governmental authority shall not be deemed “Derivatives Contracts.”
(v) “Distribution Date” shall mean the earlier of (i) the Close of Business on the tenth Business Day after
the Stock Acquisition Date (or, if the tenth Business Day after the Stock Acquisition Date occurs before the Record
Date, the Close of Business on the Record Date) and (ii) the Close of Business on the tenth Business Day (or, if such
tenth Business Day occurs before the Record Date, the Close of Business on the Record Date), or such later date as
may be determined by the Board prior to such time any Person becomes an Acquiring Person, after the date of the
commencement by any Person (other than any Excluded Person) of, or of the first public announcement of the
intention of any Person (other than any Excluded Person) to commence, a tender or exchange offer the
consummation of which would result in such Person becoming the Beneficial Owner of 4.95% or more of the
outstanding shares of Common Stock.
(w) “Early Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
(x) “Equivalent Preferred Stock” shall have the meaning set forth in Section 11(b) hereof.
(y) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
(z) “Exchange Act Regulations” shall mean the General Rules and Regulations under the Exchange Act.
(aa) “Exchange Date” shall have the meaning set forth in Section 7(a) hereof.
(bb) “Exchange Ratio” shall have the meaning set forth in Section 24(a) hereof.
(cc) “Excess Shares” shall have the meaning set forth in Section 11(a)(ii) hereof.
(dd) “Exempt Person” shall mean any Person determined by the Board to be an “Exempt Person” in
accordance with the requirements set forth in Section 25 hereof for so long as such Person complies with any
limitations or conditions required by the Board in making such determination.
(ee) “Excluded Person” shall mean (i) the Company or any of its Subsidiaries; (ii) any officers, directors
and employees or any of its Subsidiaries solely in respect of such Person’s status or authority as such (including,
without limitation, any fiduciary capacity); or (iii) any employee benefit plan of the Company or of any Subsidiary
of the Company or any entity or trustee holding (or acting in a fiduciary capacity in respect of) shares of capital
stock of the Company for or pursuant to the terms of any such plan, or for the purpose of funding other employee
benefits for employees of the Company or any Subsidiary of the Company.
(ff) “Exemption Request” shall have the meaning set forth in Section 25(a) hereof.
(gg) “Exercise Price” shall have the meaning set forth in Section 4(a), 11(a)(ii) and 13(a) hereof.
(hh) “Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
(ii) “Final Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
(jj) “Flip-In Event” shall mean any event described in Section 11(a)(ii) hereof.
(kk) “Flip-In Trigger Date” shall have the meaning set forth in Section 11(a)(iii) hereof.
(ll) [Intentionally omitted]
(mm) “Grandfathered Person” shall mean any Person which, together with all of its Related Person[[s, is,
as of the date of this Agreement, the Beneficial Owner of 4.95% or more of the shares of Common Stock of the
Company then outstanding. A Person ceases to be a “Grandfathered Person” if and when (i) such Person becomes
the Beneficial Owner of less than 4.95% of the shares of Common Stock of the Company then outstanding; or
(ii) such Person increases its Beneficial Ownership of shares of Common Stock of the Company to an amount equal
to or greater than the greater of (A) 4.95% of the shares of Common Stock of the Company then outstanding and
(B) the sum of (1) the lowest Beneficial Ownership of such Person as a percentage of the shares of Common Stock
of the Company outstanding as of any time from and after the public announcement of this Agreement (other than as
a result of an acquisition of shares of Common Stock by the Company) plus (2) one share of Common Stock of the
Company then outstanding.
(nn) “Independent Directors” shall mean those members of the Board who meet the criteria for
independent directors of the NYSE MKT corporate governance rules and any other applicable laws, rules and
regulations regarding independence in effect from time to time.
(oo) “NOLs” shall have the meaning set forth in the recitals of this Agreement.
(pp) “Notional Common Shares” shall have the meaning set forth in Section 1(u) hereof.
(qq) “NYSE” shall mean the New York Stock Exchange.
(rr) “Person” shall mean any individual, firm, corporation, partnership (general or limited), limited liability
company, limited liability partnership, association, unincorporated organization, trust or other legal entity, or group
of persons making a “coordinated acquisition” of Common Stock or otherwise treated as an “entity” within the
meaning of Section 1.382-3(a)(1) of the Treasury Regulations or otherwise, including (i) any syndicate or group
deemed to be a Person under Section 13(d)(3) of the Exchange Act and Rule 13d-5(b) thereunder; and (ii) any
successor (by merger or otherwise) of any such firm, corporation, partnership (general or limited), limited liability
company, limited liability partnership, association, unincorporated organization, trust, or other group or entity.
(ss) “Preferred Stock” shall mean the Series C Junior Participating Preferred Stock, par value $0.01 per
share, of the Company, having the voting rights, powers, designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations and restrictions set forth in the Certificate of
Designations, as amended by the Certificate of Amendment.
(tt) [Intentionally omitted]
(uu) “Receiving Party” shall have the meaning set forth in Section 1(u) hereof.
(vv) “Record Date” shall mean the Close of Business on March 27, 2017.
(ww) “Redemption Date” shall have the meaning set forth in Section 7(a) hereof.
(xx) “Redemption Period” shall have the meaning set forth in Section 23(a) hereof.
(yy) “Redemption Price” shall have the meaning set forth in Section 23(a) hereof.
(zz) “Related Person” shall mean, as to any Person, any Affiliates or Associates of such Person.
(aaa) “Requesting Person” shall have the meaning set forth in Section 25(a) hereof.
(bbb) “Rights” shall have the meaning set forth in the recitals of this Agreement.
(ccc) “Rights Agent” shall have the meaning set forth in the Preamble hereof.
(ddd) “Rights Certificate” shall have the meaning set forth in Section 3(d) hereof.
(eee) “Schedule 13D” shall mean a statement on Schedule 13D pursuant to Rule 13d-1(a), 13d-1(e), 13d-
1(f) or 13d-1(g) of the General Rules and Regulations under the Exchange Act as in effect at the time of the public
announcement of the declaration of the Rights dividend with respect to the shares of Common Stock Beneficially
Owned by the Person filing such statement.
(fff) “Securities Act” shall mean the Securities Act of 1933, as amended.
(ggg) “Spread” shall have the meaning set forth in Section 11(a)(iii) hereof.
(hhh) “Stock Acquisition Date” shall mean the first date of public announcement (including, without
limitation, the filing of any report pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring
Person that a Person has become an Acquiring Person, or such other date, as determined by the Board, on which a
Person has become an Acquiring Person.
(iii) “Stockholder Approval” shall mean the approval or ratification by the stockholders of the Company of
this Agreement (or such Agreement as then in effect or as contemplated to be in effect following such Stockholder
Approval) as demonstrated by the votes cast in favor of any such approval or ratification proposal submitted to a
stockholder vote by the Company exceeding the votes cast against such proposal at a duly held meeting of
stockholders of the Company.
(jjj) “Subsidiary” shall mean, with reference to any Person, any other Person of which (i) a majority of the
voting power of the voting securities or equity interests is Beneficially Owned, directly or indirectly, by such first-
mentioned Person or otherwise controlled by such first-mentioned Person; or (ii) an amount of voting securities or
equity interests sufficient to elect at least a majority of the directors or equivalent governing body of such other
Person is Beneficially Owned, directly or indirectly, by such first-mentioned Person, or otherwise controlled by such
first-mentioned Person.
(kkk) “Substitution Period” shall have the meaning set forth in Section 11(a)(iii) hereof.
(lll) “Summary of Rights” shall have the meaning set forth in Section 3(a) hereof.
(mmm) “Tax Benefits” shall mean the net operating loss carryovers, capital loss carryovers, general
business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as
any loss or deduction attributable to a “net unrealized built-in loss” within the meaning of Section 382 of the Code
and the Treasury Regulations promulgated thereunder, of the Company or any of its Subsidiaries.
(nnn) “Trading Day” shall mean, in respect to any security, (i) if such security is listed or admitted to
trading on any national securities exchange, a day on which the principal national securities exchange on which such
security is listed or admitted to trading is open for the transaction of business; and (ii) if such security is not so listed
or admitted, a Business Day.
(ooo) “Treasury Regulations” shall mean the U.S. Treasury Regulations promulgated under the Code, as
may be amended from time to time.
(ppp) “Triggering Event” shall mean any Flip-In Event.
(qqq) “Trust” shall have the meaning set forth in Section 24(d) hereof.
(rrr) “Trust Agreement” shall have the meaning set forth in Section 24(d) hereof.
SECTION 2. Appointment of Rights Agent.
The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date be the holders of Common Stock) and
in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable; provided
that the Company shall notify the Rights Agent in writing two Business Days prior to such appointment. In the event
the Company appoints one or more co-Rights Agents, the respective duties of the Rights Agent and any co-Rights
Agents under the provisions of this Agreement shall be as the Company reasonably determines, and the Company
shall notify, in writing, the Rights Agent and any co-Rights Agents of such duties. The Rights Agent shall have no
duty to supervise, and shall in no event be liable for, the acts or omissions of any such co-Rights Agents.
SECTION 3.
Issue of Rights Certificates.
(a) On the Record Date, or as soon as practicable thereafter, the Company will send (directly or, at the
expense of the Company, through the Rights Agent or its transfer agent if the Rights Agent or transfer agent is
directed by the Company and provided with all necessary information and documents) a copy of a Summary of
Rights to Purchase Preferred Stock, in substantially the form attached hereto as Exhibit B and which may be
appended to certificates that represent shares of Common Stock (the “Summary of Rights”), to each record holder
of Common Stock as of the Close of Business on the Record Date (other than any Acquiring Person or any
Associate or Affiliate of any Acquiring Person), at the address of such holder shown on the records of the Company
or transfer agent or register for Common Stock. With respect to certificates representing shares of Common Stock
(or Book Entry shares of Common Stock) outstanding as of the Record Date, until the Distribution Date, the Rights
shall be evidenced by such shares of Common Stock registered in the names of the holders thereof together with the
Summary of Rights, and not by separate Rights Certificates. With respect to Book Entry shares of Common Stock
outstanding as of the Record Date, until the Distribution Date, the Rights shall be evidenced by the balances
indicated in the Book Entry account system of the transfer agent for the Common Stock together with the Summary
of Rights. Until the earlier of the Distribution Date and the Expiration Date, the transfer of any shares of Common
Stock outstanding on the Record Date (whether represented by certificates or evidenced by the balances indicated in
the Book Entry account system of the transfer agent for the Common Stock, and, in either case, regardless of
whether a copy of the Summary of Rights is submitted with the surrender or request for transfer), shall also
constitute the transfer of the Rights associated with such shares of Common Stock.
(b) Rights shall be issued, without any further action, in respect of all shares of Common Stock that become
outstanding (whether originally issued or delivered from the Company’s treasury) after the Record Date but prior to
the earlier of the Distribution Date and the Expiration Date; provided, however, that Rights also shall be issued to
the extent provided in Section 21 hereof. Confirmation and account statements sent to holders of Common Stock for
Book Entry form or, in the case of certificated shares, certificates, representing such shares of Common Stock,
issued after the Record Date shall bear a legend substantially in the following form:
“[This certificate] [These shares] also evidence[s] and entitle[s] the holder hereof to certain Rights as set forth
in a Rights Agreement between Tengasco, Inc. , a Delaware corporation (the “Company”), and Continental
Stock Transfer & Trust Company, LLC or any successor Rights Agent (the “Rights Agent”) dated as of March
16, 2017, as the same may be amended or supplemented from time to time (the “Rights Agreement”), the
terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal
executive offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such
Rights shall be evidenced by separate certificates and will no longer be evidenced by [this certificate] [these
shares]. The Company will mail to the holder of [this certificate] [these shares] a copy of the Rights
Agreement as in effect on the date of mailing without charge after receipt of a written request therefor.
Under certain circumstances, as set forth in the Rights Agreement, Rights that are Beneficially Owned by any
Person who is, was or becomes an Acquiring Person or any Related Person thereof (as such capitalized terms
are defined in the Rights Agreement), or specified transferees of such Acquiring Person (or Related Person
thereof) may become null and void and will no longer be transferable.”
With respect to all certificates representing shares of Common Stock containing the foregoing legend, until the
earliest of the Distribution Date and the Expiration Date, the Rights associated with the Common Stock represented
by such certificates shall be evidenced by such certificates alone and registered holders of Common Stock shall also
be the registered holders of the associated Rights, and the transfer of any such certificate shall also constitute the
transfer of the Rights associated with the shares of Common Stock represented by such certificates.
With respect to Common Stock in Book Entry form for which there has been sent a confirmation or account
statement containing the foregoing legend, until the earliest of the Distribution Date and the Expiration Date, the
Rights associated with the Common Stock shall be evidenced by such Common Stock alone and registered holders
of Common Stock shall also be the registered holders of the associated Rights, and the transfer of any such Common
Stock shall also constitute the transfer of the Rights associated with such shares of Common Stock.
Notwithstanding this paragraph (b), the omission of the legend or the failure to send, deliver or provide the
registered owner of shares of Common Stock a copy of the Summary of Rights shall not affect the enforceability of
any part of this Agreement or the rights of any holder of the Rights.
In the event that the Company purchases or otherwise acquires any shares of Common Stock after the Record
Date but prior to the Distribution Date, any Rights associated with such shares of Common Stock shall be cancelled
and retired so that the Company is not entitled to exercise any Rights associated with the shares of Common Stock
that are no longer outstanding.
(c) Until the Distribution Date, the Rights shall be transferable only in connection with the transfer of the
underlying shares of Common Stock (including a transfer to the Company).
(d) As soon as practicable after the Distribution Date, the Company will prepare and execute, and the Rights
Agent will countersign and the Company will send or cause to be sent (and the Rights Agent will, if so requested
and provided with all necessary information and documents, at the expense of the Company, send) by first-class,
insured, postage-prepaid mail, to each record holder of shares of Common Stock as of the Close of Business on the
Distribution Date (other than any Acquiring Person or any Related Person of an Acquiring Person), at the address of
such holder shown on the records of the Company, one or more rights certificates, in substantially the form of
Exhibit C hereto (the “Rights Certificate”), evidencing one Right for each share of Common Stock so held, subject
to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common
Stock has been made pursuant to Section 11 hereof, at the time of distribution of the Rights Certificates, the
Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof)
so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights shall be evidenced solely by such Rights
Certificates, and the Rights Certificates and the Rights shall be transferable separately from the transfer of Common
Stock. The Company shall promptly notify the Rights Agent in writing upon the occurrence of the Distribution Date
and, if such notification is given orally, the Company shall confirm the same in writing on or prior to the Business
Day next following. Until such written notice is received by the Rights Agent, the Rights Agent may presume
conclusively for all purposes that the Distribution Date has not occurred.
SECTION 4. Form of Rights Certificate.
(a) The Rights Certificates (and the forms of election to purchase and of assignment and the certificate to be
printed on the reverse thereof) shall be substantially in the form set forth in Exhibit C hereto and may have such
changes or marks of identification or designation and such legends, summaries, or endorsements printed thereon as
the Company may deem appropriate (but which do not affect the rights, duties, liabilities, protections or
responsibilities of the Rights Agent), and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any applicable law or any rule or regulation thereunder or with any applicable rule or
regulation of any stock exchange upon which the Rights may from time to time be listed or the Financial Industry
Regulatory Authority, or to conform to customary usage. Subject to the provisions of this Agreement, the Rights
Certificates, whenever distributed, shall be dated as of the Distribution Date and on their face shall entitle the
holders thereof to purchase such number of one one-thousandths of a share of Preferred Stock as shall be set forth
therein at the price set forth therein (such price, the “Exercise Price”), but the amount and type of securities, cash,
or other assets that may be acquired upon the exercise of each Right and the Exercise Price thereof shall be subject
to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant hereto that represents Rights Beneficially Owned by (i) an
Acquiring Person or any Related Person of an Acquiring Person; (ii) a transferee of an Acquiring Person (or of any
such Related Person) that becomes a transferee after the Acquiring Person becomes an Acquiring Person; or (iii) a
transferee of an Acquiring Person (or of any such Related Person) that becomes a transferee prior to or concurrently
with the Acquiring Person becoming an Acquiring Person and that receives such Rights pursuant to either (A) a
transfer (whether or not for consideration) from the Acquiring Person (or any such Related Person) to holders of
equity interests in such Acquiring Person (or any such Related Person) or to any Person with whom such Acquiring
Person (or any such Related Person) has any continuing written or oral plan, agreement, arrangement, or
understanding regarding the transferred Rights, shares of Common Stock, or the Company; or (B) a transfer that the
Board has determined in good faith to be part of a plan, agreement, arrangement, or understanding that has as a
primary purpose or effect the avoidance of Section 7(e) hereof (and any Rights Certificate issued pursuant to Section
6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence), shall contain upon the direction of the Board a legend substantially in the following form:
“The Rights represented by this Rights Certificate are or were Beneficially Owned by a Person who was or
became an Acquiring Person or a Related Person of an Acquiring Person (as such terms are defined in the
Rights Agreement dated as of March 16, 2017 by and between Tengasco, Inc. and Continental Stock Transfer
& Trust Company (the “Rights Agreement”)). Accordingly, this Rights Certificate and the Rights represented
hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement.”
The Company shall give written notice to the Rights Agent promptly after it becomes aware of the existence
and identity of any Acquiring Person or any Related Person thereof. Until such notice is received by the Rights
Agent, the Rights Agent may presume conclusively without independent verification thereof for all purposes that no
Person has become an Acquiring Person or a Related Person of an Acquiring Person. The Company shall instruct the
Rights Agent in writing of the Rights which should be so legended.
SECTION 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company by its Chief Executive Officer,
President, Secretary, Treasurer, any Vice-President, any Assistant Secretary or any other officer of the Company,
shall have affixed thereto the Company’s corporate seal (or a facsimile thereof), and shall be attested by the
Company’s Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Rights
Certificates may be manual or by facsimile or other customary shall mean of electronic transmission (e.g.,
“pdf”). Rights Certificates bearing the manual or facsimile signatures of the individuals who were at the time of
execution the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any
of them have ceased to hold such offices prior to the countersigning of such Rights Certificates by the Rights Agent
or did not hold such offices at the date of such Rights Certificates. No Rights Certificate shall be entitled to any
benefit under this Agreement or shall be valid for any purpose unless there appears on such Rights Certificate a
countersignature duly executed by the Rights Agent by manual or facsimile or other customary shall mean of
electronic transmission (e.g., “pdf”) of an authorized officer, and such countersignature upon any Rights Certificate
shall be conclusive evidence, and the only evidence, that such Rights Certificate has been duly countersigned as
required hereunder.
(b) Following the Distribution Date, and receipt by the Rights Agent of written notice to that effect and all
other relevant and necessary information referred to in Section 3(d) hereof, the Rights Agent shall keep or cause to
be kept, at its office designated for such purpose, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the name and address of each holder of the Rights Certificates, the number of
Rights evidenced on its face by each Rights Certificate and the date of each Rights Certificate.
SECTION 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed,
Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Sections 4(b), 7(e) and 14 hereof, at any time after the Close of Business on
the Distribution Date and at or prior to the Close of Business on the Expiration Date, any Rights Certificate (other
than Rights Certificates representing Rights that have become null and void pursuant to Section 7(e) hereof, that
have been redeemed pursuant to Section 23 hereof, or that have been exchanged pursuant to Section 24 hereof) may
be transferred, split up, combined or exchanged for another Rights Certificate, entitling the registered holder to
purchase a like number of one one-thousandths of a share of Preferred Stock (or following a Triggering Event,
Common Stock, other securities, cash or other assets, as the case may be) as the Rights Certificate or Certificates
surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Rights Certificate shall make such request in writing delivered to the Rights Agent, and shall
surrender, together with any required form of assignment duly executed and properly completed, the Rights
Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent designated for such
purpose. The Rights Certificates are transferable only on the books and records of the Rights Agent. Neither the
Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any
such surrendered Rights Certificate until the registered holder has properly completed and executed the certificate
set forth in the form of assignment on the reverse side of such Rights Certificate and has provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) of the Rights represented by such
Rights Certificate or Related Person thereof as the Company or the Rights Agent requests, whereupon the Rights
Agent shall, subject to the provisions of Sections 4(b), 7(e) and 14 hereof, countersign and deliver to the Person
entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may
require payment by the holder of the Rights of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. If and to the
extent the Company does require payment of any such taxes or governmental charges, the Company shall give the
Rights Agent prompt written notice thereof and the Rights Agent shall not deliver any Rights Certificate unless and
until it is satisfied that all such payments have been made, and the Rights Agent shall forward any such sum
collected by it to the Company or to such Persons as the Company specifies by written notice. The Rights Agent
shall have no duty or obligation to take any action with respect to a Rights holder under any Section of this
Agreement which requires the payment by such Rights holder of applicable taxes and/or governmental charges
unless and until it is satisfied that all such taxes and/or governmental charges have been paid.
(b) If a Rights Certificate is mutilated, lost, stolen or destroyed, upon written request by the registered holder
of the Rights represented thereby and upon payment to the Company and the Rights Agent of all reasonable
expenses incident thereto, there shall be issued, in exchange for and upon cancellation of the mutilated Rights
Certificate, or in substitution for the lost, stolen or destroyed Rights Certificate, a new Rights Certificate, in
substantially the form of the prior Rights Certificate, of like tenor and representing the equivalent number of Rights,
but, in the case of loss, theft, or destruction, only upon receipt of evidence satisfactory to the Company and the
Rights Agent of such loss, theft or destruction of such Rights Certificate and such additional evidence of the identity
of the Beneficial Owner (or former Beneficial Owner) or Related Persons thereof as the Company or the Rights
Agent requests, and, if requested by the Company or the Rights Agent, indemnity also satisfactory to it.
(c) Notwithstanding any other provision hereof, the Company and the Rights Agent may amend this Agreement to
provide for uncertificated Rights in addition to or in lieu of Rights evidenced by Right Certificates, to the extent
permitted by applicable law.
SECTION 7.
Exercise of Rights; Exercise Price; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein including, without limitation, in the restrictions on
exercisability set forth in Sections 9(c), 11(a)(iii) and 23(a) hereof) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and the certificate
on the reverse side thereof properly completed and duly executed, to the Rights Agent at the office of the Rights
Agent designated for such purpose, together with payment of the Exercise Price for each one one-thousandth of a
share of Preferred Stock (or Common Stock, other securities, cash or other assets, as the case may be) as to which
the Rights are exercised prior to the earliest of (i) the Close of Business on March 16, 2020 or such later date as may
be established by the Board prior to the expiration of the Rights as long as the extension is submitted to the
stockholders of the Company for ratification at the next annual meeting of stockholders succeeding such extension
(the “Final Expiration Date”); (ii) the time at which the Rights are redeemed pursuant to Section 23 hereof (the
“Redemption Date”); (iii) the time at which the Rights are exchanged pursuant to Section 24 hereof (the
“Exchange Date”); (iv) the closing of any merger or other acquisition transaction involving the Company pursuant
to an agreement of the type described in Section 13 at which time the Rights are terminated; (v) the Close of
Business on the first day after the Company’s 2017 annual meeting of stockholders, if Stockholder Approval has not
been obtained at such meeting (the “Early Expiration Date”); (vi) the Close of Business on the effective date of the
repeal of Section 382 of the Code if the Board determines that this Agreement is no longer necessary or desirable for
the preservation of Tax Benefits; (vii) the Close of Business on the first day of a taxable year of the Company to
which the Board determines that no Tax Benefits are available to be carried forward; and (viii) the Close of Business
on the first day after the Board of Directors determines by resolution in its business judgment that the Agreement is
no longer necessary or appropriate (the earliest of (i) – (viii) being herein referred to as the “Expiration Date”).
(b) Each Right shall entitle the registered holder thereof to purchase one one-thousandth of a share of
Preferred Stock. The Exercise Price for each one one-thousandth of a share of Preferred Stock pursuant to the
exercise of a Right shall be initially $1.10, and shall be subject to adjustment from time to time as provided in
Section 11 hereof and payable in lawful money of the United States in accordance with paragraph (c) of this Section
7.
(c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to
purchase and the certificate properly completed and duly executed, accompanied by payment, with respect to each
Right so exercised, of the Exercise Price per one one-thousandth of a share of Preferred Stock (or Common Stock,
other securities, cash or other assets, as the case may be) to be purchased and an amount equal to any applicable tax
or governmental charge, then the Rights Agent shall, subject to Section 18(j) hereof, promptly (i) (A) requisition
from any transfer agent of the Preferred Stock certificates representing such number of one one-thousandths of a
share of Preferred Stock (or fractions of shares that are integral multiples of one one-thousandth of a share of
Preferred Stock) as are to be purchased and the Company shall direct its transfer agent to comply with all such
requests; or (B) if the Company has elected to deposit the total number of shares of Preferred Stock issuable upon
exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts
representing such number of one one-thousandths of a share of Preferred Stock as are to be purchased (in which case
certificates for the shares of Preferred Stock represented by such receipts shall be deposited by the transfer agent
with the depositary agent), and the Company shall direct the depositary to comply with all such requests; (ii) if
necessary to comply with this Agreement, requisition from the Company the amount of cash, if any, to be paid in
lieu of fractional shares in accordance with Section 14 hereof; (iii) after receipt of such certificates or such
depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such holder; and (iv) if necessary to comply
with this Agreement, after receipt thereof, deliver such cash, if any, to or upon the order of the registered holder of
such Rights Certificate. In the event that the Company is obligated to issue Common Stock or other securities of the
Company, pay cash and/or distribute other assets pursuant to Section 11(a) hereof, the Company shall make all
arrangements necessary so that such Common Stock, other securities, cash and/or other assets are available for
distribution by the Rights Agent, if and when necessary to comply with this Agreement, and until so received, the
Rights Agent shall have no duties or obligations with respect to such securities, cash and/or other assets. The
payment of the Exercise Price (as such amount may be reduced pursuant to Section 11(a)(iii) hereof) may be made
in cash or by certified or bank check or money order payable to the order of the Company.
(d) In the event a registered holder of any Rights Certificate exercises less than all the Rights evidenced
thereby, a new Rights Certificate evidencing the Rights remaining unexercised shall be issued by the Rights Agent
and delivered to, or upon the order of, such holder, registered in such name or names as designated by such holder,
subject to the provisions of Sections 6 and 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Flip-
In Event, any Rights Beneficially Owned by (i) an Acquiring Person or a Related Person of an Acquiring Person;
(ii) a transferee of an Acquiring Person (or of any such Related Person) who becomes a transferee after the
Acquiring Person becomes such; or (iii) a transferee of an Acquiring Person (or of any such Related Person) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming such and who receives such
Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person (or any such
Related Person) to holders of equity interests in such Acquiring Person (or any such Related Person) or to any
Person with whom the Acquiring Person (or any such Related Person) has any continuing written or oral plan,
agreement, arrangement or understanding regarding the transferred Rights, shares of Common Stock or the
Company; or (B) a transfer that the Board has determined in good faith to be part of a plan, agreement, arrangement
or understanding that has as a primary purpose or effect of the avoidance of this Section 7(e), shall be null and void
without any further action, and any holder of such Rights thereafter shall have no rights or preferences whatsoever
with respect to such Rights, whether under any provision of this Agreement, the Rights Certificates or otherwise
(including, without limitation, rights and preferences pursuant to Sections 7, 11, 23 and 24 hereof). The Company
shall use commercially reasonable efforts to ensure compliance with the provisions of this Section 7(e) and Section
4(b) hereof, but neither the Company nor the Rights Agent have any liability to any holder of Rights or any other
Person as a result of the Company’s failure to make any determination with respect to an Acquiring Person or its
Related Persons or transferees hereunder.
(f) Notwithstanding anything in this Agreement or any Rights Certificate to the contrary, neither the Rights
Agent nor the Company shall be obligated to take any action with respect to a registered holder upon the occurrence
of any purported transfer or exercise as set forth in this Section 7 by such registered holder unless such registered
holder has (i) properly completed and duly executed the certificate following the form of election to purchase set
forth on the reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) of the Rights represented by such
Rights Certificate or Related Persons thereof as the Company or the Rights Agent reasonably requests.
(g) Except for those provisions herein that expressly survive the termination of this Agreement, this
Agreement shall terminate upon the earlier of the Expiration Date and such time as all outstanding Rights have been
exercised, redeemed or exchanged hereunder.
(h) Notwithstanding any provision of this Agreement to the contrary, the Company, by action of the Board
in its sole discretion acting in its business judgment, may at any time before or after any Person becomes an
Acquiring Person amend this Agreement to make the provisions of this Agreement inapplicable to a particular
transaction by which a Person might otherwise become an Acquiring Person or to otherwise alter the terms and
conditions of this Agreement as they may apply with respect to any such transaction.
SECTION 8. Cancellation and Destruction of Rights Certificates.
All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange
shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in
cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be
issued in lieu thereof except as expressly permitted by this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any Rights Certificates
acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled
Rights Certificates to the Company, or shall, at the written request of the Company, destroy or cause to be destroyed
such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company.
SECTION 9. Reservation and Availability of Capital Stock.
(a) The Company shall cause to be reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and following the occurrence of a Triggering Event, out of its authorized and unissued shares of
Common Stock and/or other securities or out of its authorized and issued shares held in its treasury), a number of
shares of Preferred Stock (and, following the occurrence of a Triggering Event, shares of Common Stock and/or
other securities) that, as provided in this Agreement, including Section 11(a)(iii) hereof, shall be sufficient to permit
the exercise in full of all outstanding Rights. Upon the occurrence of any events resulting in an increase in the
aggregate number of shares of Preferred Stock (or Common Stock and/or other equity securities of the Company)
issuable upon exercise of all outstanding Rights above the number then reserved, the Company shall make
appropriate increases in the number of shares so reserved.
(b) As long as the shares of Preferred Stock (and following the occurrence of a Triggering Event, Common
Stock and/or other securities) issuable upon the exercise of the Rights may be listed or admitted to trading on any
national securities exchange, the Company shall use its commercially reasonable efforts to cause, from and after
such time as the Rights become exercisable, all shares reserved for such issuance to be listed or admitted to trading
on such exchange upon official notice of issuance upon such exercise.
(c) If the Company is required to file a registration statement pursuant to the Securities Act with respect to
the securities purchasable upon exercise of the Rights, the Company shall use its commercially reasonable efforts to
(i) file, as soon as practicable following the earliest date after the first occurrence of a Flip-In Event on which the
consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with
this Agreement, or as soon as is required by law following the Distribution Date, as the case may be, such
registration statement; (ii) cause such registration statement to become effective as soon as practicable after such
filing; and (iii) cause such registration statement to remain effective (and to include a prospectus at all times
complying with the requirements of the Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for the securities covered by such registration statement, and (B) the Expiration Date. The
Company shall also take such action as may be appropriate under, or to ensure compliance with, the securities or
“blue sky” laws of the various states in connection with the exercisability of the Rights. The Company may
temporarily suspend, with written notice thereof to the Rights Agent, for a period of time not to exceed ninety (90)
days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in
order to prepare and file such registration statement and permit it to become effective. Upon any such suspension,
the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no longer in effect, in each case with
simultaneous written notice to the Rights Agent. In addition, if the Company shall determine that a registration
statement is required following the Distribution Date, the Company may temporarily suspend the exercisability of
the Rights until such time as a registration statement has been declared effective. Notwithstanding any provision of
this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction if the requisite qualification in
such jurisdiction shall not have been obtained, the exercise thereof shall not be permitted under applicable law, or an
effective registration statement is required and shall not have been declared effective or has been suspended.
(d) The Company shall take such action as may be necessary to ensure that each one one-thousandths of a
share of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other
securities that may be delivered upon exercise of Rights) shall be, at the time of delivery of the certificates or
depositary receipts for such securities (subject to payment of the Exercise Price), duly and validly authorized and
issued, fully paid and non-assessable.
(e) The Company shall pay when due and payable any and all documentary, stamp or transfer tax, or other
tax or governmental charge, that is payable in respect of the issuance and delivery of the Rights Certificates or the
issuance and delivery of any certificates or depository receipts or entries in the Book Entry account system of the
transfer agent for the Preferred Stock for a number of one one-thousandths of a share of Preferred Stock (or
Common Stock and/or other equity securities of the Company that may be delivered upon exercise of the Rights)
upon the exercise of Rights; provided, however, the Company shall not be required to pay any such tax or
governmental charge that may be payable in connection with the issuance or delivery of any of any certificates or
depositary receipts or entries in the Book Entry account system of the transfer agent for the Preferred Stock for a
number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other equity securities of the
Company as the case may be) to any Person other than the registered holder of the Rights Certificates evidencing the
Rights surrendered for exercise. The Company shall not be required to issue or deliver any certificates or depositary
receipts or entries in the Book Entry account system of the transfer agent for the Preferred Stock (or Common Stock
and/or other equity securities of the Company as the case may be) to, or in a name other than that of, the registered
holder upon the exercise of any Rights until any such tax or governmental charge has been paid (any such tax or
governmental charge being payable by the holder of such Rights Certificate at the time of surrender) or until it has
been established to the Company’s or Rights Agent’s satisfaction that no such tax or governmental charge is due.
SECTION 10. Preferred Stock Record Date.
Each Person in whose name any certificate or entry in the Book Entry account system of the transfer agent for
the Preferred Stock for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or
other securities, as the case may be) is issued upon the exercise of Rights shall be for all purposes the holder of
record of such fractional shares of Preferred Stock (or Common Stock and/or other securities, as the case may be)
represented thereby on, and such certificate or entry shall be dated the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes
and governmental charges) was made; provided, however, that if the date of such surrender and payment is a date
upon which the applicable transfer books of the Company are closed, such Person shall be deemed to have become
the record holder of such securities (fractional or otherwise) on, and such certificate or entry shall be dated, the next
succeeding Business Day on which the applicable transfer books of the Company are open; provided, further, that if
delivery of a number of one one-thousandths of a share of Preferred Stock is delayed pursuant to Section 9(c)
hereof, such Persons shall be deemed to have become the record holders of such number of one one-thousandths of a
share of Preferred Stock only when such Preferred Stock first become deliverable. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the
Company with respect to the securities for which the Rights are exercisable, including, without limitation, the right
to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
SECTION 11. Adjustment of Exercise Price, Number and Kind of Shares or Number of Rights.
The Exercise Price, the number and kind of securities covered by each Right and the number of Rights
outstanding are subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company at any time after the date hereof (A) declares a dividend on the Preferred
Stock payable in shares of Preferred Stock; (B) subdivides the outstanding Preferred Stock; (C) combines the
outstanding Preferred Stock into a smaller number of shares; or (D) issues any shares of its capital stock in a
reclassification of Preferred Stock (including any such reclassification in connection with a consolidation or merger
in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section
11(a), then the Exercise Price in effect at the time of the record date for such dividend or of the effective date of
such subdivision, combination or reclassification, and the number and kind of shares (or fractions thereof) of
Preferred Stock or capital stock, as the case may be, issuable on such date upon exercise of the Rights, shall be
proportionately adjusted so that the holder of any Right exercised after such time becomes entitled to receive, upon
payment of the Exercise Price then in effect, the aggregate number and kind of shares (or fractions thereof) of
Preferred Stock or capital stock, as the case may be, which, if such Right had been exercised immediately prior to
such date, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that in no event may the consideration to be paid
upon the exercise of one Right be less than the aggregate par value of the shares (or fractions thereof) of capital
stock of the Company issuable upon exercise of one Right. If an event occurs that would require an adjustment
under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Section 23 and Section 24 hereof, in the event that any Person (other than any Excluded
Person), alone or together with its Related Persons, becomes an Acquiring Person (the first occurrence of such
event, the “Flip-In Event”), then proper provision shall be made so that promptly following the Redemption Period,
each holder of a Right (except as provided below and in Section 7(e) hereof) shall thereafter have the right to
receive, upon exercise thereof and payment of an amount equal to the then current Exercise Price in accordance with
the terms of this Agreement, in lieu of a number of one one-thousandths of a share of Preferred Stock, a number of
shares of Common Stock of the Company equal to the result obtained by (A) multiplying the then current Exercise
Price by the then number of one one-thousandths of a share of Preferred Stock for which a Right was or would have
been exercisable immediately prior to the first occurrence of a Flip-In Event, whether or not such Right was then
exercisable; and (B) dividing that product (which, following such first occurrence, shall be referred to as the
“Exercise Price” for each Right and for all purposes of this Agreement by 50% of the Current Market Price of
Common Stock on the date of such first occurrence (such number of shares, the “Adjustment Shares”); provided,
however, that in connection with any exercise effected pursuant to this Section 11(a)(ii), no holder of Rights shall be
entitled to receive unless the Board of Directors in its sole discretion expressly permits, Common Stock (or other
shares of capital stock of the Company) that would result in such holder, together with such holder’s Affiliates and
Associates, becoming the Beneficial Owner of more than 4.95% of the then-outstanding Common Stock. In like
manner, in connection with any exercise effected pursuant to this Section 11(a)(ii), no holder of Rights of more than
4.95% of the outstanding common stock on the date of this Agreement together with such holder’s Affiliates and
Associates shall be entitled to receive, unless the Board of Directors in its sole discretion expressly permits,
Common Stock (or other shares of capital stock of the Company) that would result in such holder together with such
holder’s Affiliates and Associates, , increasing its ownership above its current level. If a holder would, but for either
of the immediately preceding two sentences, be entitled to receive a number of shares that would otherwise result in
such holder, together with such holder’s Affiliates and Associates, becoming the Beneficial Owner of in excess of
4.95% or such Beneficial Owner’s current ownership exceeding its current ownership, as the case may be, of the
then-outstanding Common Stock (such shares, the “Excess Shares”), then in lieu of receiving such Excess Shares
and to the extent permitted by law or orders applicable to the Company, such holder will only be entitled to receive
an amount in cash representing that portion of the Exercise Price paid for the Excess Shares not received by such
person. The Company shall provide the Rights Agent with written notice of the identity of any such Acquiring
Person, Related Person or the nominee or transferee of any of the foregoing, and the Rights Agent may rely on such
notice in carrying out its duties under this Agreement and shall be deemed not to have any knowledge of the identity
of any such Acquiring Person, Related Person or the nominee or transferee of any of the foregoing, unless and until
it has received such notice.
(iii) In the event that the number of shares of Common Stock authorized by the Certificate of
Incorporation, but not outstanding, or reserved for issuance for purposes other than upon exercise of the Rights, is
not sufficient to permit the exercise in full of the Rights in accordance with the foregoing clause (ii), the Board shall,
to the extent permitted by applicable law and by any agreements or instruments then in effect to which the Company
is a party, (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right
(the “Current Value”) over (2) the Exercise Price (such excess being the “Spread”), and (B) with respect to each
Right (subject to Section 7(e) hereof), make adequate provision to substitute for some or all of the Adjustment
Shares, upon exercise of a Right and payment of the applicable Exercise Price, (1) cash; (2) a reduction in the
Exercise Price; (3) shares or fractions of a share of Preferred Stock or other equity securities of the Company
(including, without limitation, shares, or units of shares, of Preferred Stock which the Board has determined to have
the same value as shares of Common Stock) (such shares of equity securities being herein called “Common Stock
Equivalents”); (4) debt securities of the Company; (5) other assets; or (6) any combination of the foregoing, in each
case having an aggregate value equal to the Current Value, as determined by the Board based upon the advice of a
financial advisor selected by the Board; provided, however, if the Company has not made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a
Flip-In Event; and (y) the date on which the Redemption Period expires (the later of (x) and (y) being referred to
herein as the “Flip-In Trigger Date”), then the Company shall deliver, upon the surrender for exercise of a Right
and without requiring payment of the Exercise Price, shares of Common Stock (to the extent available), and then, if
necessary such number or fractions of shares of Preferred Stock (to the extent available) and then, if necessary, cash,
which shares and/or cash have an aggregate value equal to the Spread.
If, upon the occurrence of a Flip-In Event, the Board determines in good faith that it is likely that sufficient
additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, then if the
Board so elects, the thirty-day period set forth above may be extended to the extent necessary, but not more than
ninety (90) days after the Flip-In Trigger Date, in order that the Company may seek stockholder approval for the
authorization of such additional shares (such period, as it may be extended, the “Substitution Period”). To the
extent that action is to be taken pursuant to the preceding provisions of this Section 11(a)(iii), the Company
(aa) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights;
and (bb) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek
an authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to the
second sentence of this Section 11(a)(iii) and to determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement (with prompt written notice thereof to the Rights Agent) stating that the
exercisability of the Rights has been temporarily suspended, as well as a public announcement (with prompt written
notice thereof to the Rights Agent) at such time as the suspension is no longer in effect. For purposes of this Section
11(a)(iii), the value of the Common Stock shall be the Current Market Price of the Common Stock on the Flip-In
Trigger Date and the value of any Common Stock Equivalents shall have the same value as the Common Stock on
such date. The Board may establish procedures to allocate the right to receive shares of Common Stock upon the
exercise of the Rights among holders of Rights pursuant to this Section 11(a)(iii).
(b) In case the Company fixes a record date for the issuance of rights, options or warrants to all holders of
Preferred Stock entitling them (for a period expiring within forty-five (45) days after such record date) to subscribe
for or purchase Preferred Stock (or shares having the same rights, privileges and preferences as the shares of
Preferred Stock (“Equivalent Preferred Stock”)) or securities convertible into Preferred Stock or Equivalent
Preferred Stock at a price per share of Preferred Stock or per share of Equivalent Preferred Stock (or having a
conversion price per share, if a security convertible into Preferred Stock or Equivalent Preferred Stock) less than the
Current Market Price of the Preferred Stock on such record date, the Exercise Price to be in effect after such record
date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of shares of Preferred Stock or Equivalent Preferred Stock
outstanding on such record date, plus the number of shares of Preferred Stock or Equivalent Preferred Stock which
the aggregate offering price of the total number of shares of Preferred Stock and/or Equivalent Preferred Stock so to
be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would
purchase at such Current Market Price, and the denominator of which shall be the number of shares of Preferred
Stock or Equivalent Preferred Stock outstanding on such record date, plus the number of additional shares of
Preferred Stock and/or Equivalent Preferred Stock to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible); provided, however, that in no event may the
consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital
stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid by delivery
of consideration all or part of which may be in a form other than cash, the value of such consideration shall be
determined by the Board, whose determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and the holders of the Rights. Shares of Preferred Stock or Equivalent
Preferred Stock owned by or held for the account of the Company or any Subsidiary will not be deemed outstanding
for the purpose of such computation. Such adjustment shall be made successively whenever such a record date is
fixed, and in the event that such rights, options or warrants are not so issued, the Exercise Price shall be adjusted to
be the Exercise Price that would then be in effect if such record date had not been fixed.
(c) In case the Company fixes a record date for a distribution to all holders of shares of Preferred Stock
(including any such distribution made in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), evidences of indebtedness, cash (other than a regular quarterly cash dividend
out of the earnings or retained earnings of the Company), assets (other than a dividend payable in shares of Preferred
Stock, but including any dividend payable in stock other than Preferred Stock), or subscription rights, options or
warrants (excluding those referred to in Section 11(b) hereof), then, in each case, the Exercise Price to be in effect
after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the Current Market Price of the Preferred Stock on such
record date minus the fair market value (as determined in good faith by the Board, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding and conclusive for all purposes on the
Rights Agent and the holders of the Rights) of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants distributable in respect of a share of Preferred Stock, and the
denominator of which shall be the Current Market Price of the Preferred Stock on such record date; provided,
however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate
par value of the shares of capital stock of the Company issuable upon exercise of one Right. Such adjustments shall
be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the
Exercise Price shall be adjusted to be the Exercise Price that would have been in effect if such record date had not
been fixed.
(d) Notwithstanding anything herein to the contrary, no adjustment in the Exercise Price is required unless
such adjustment would require an increase or decrease of at least one percent (1%) in the Exercise Price; provided,
however, that any adjustments that by reason of this Section 11(d) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to
the nearest cent or to the nearest ten-thousandth of a share of Common Stock or other share or one-millionth of a
share of Preferred Stock, as the case may be. Notwithstanding the first sentence of this Section 11(d), no adjustment
required by this Section 11 may be made after the earlier of (i) three years from the date of the transaction that
requires such adjustment and (ii) the Expiration Date.
(e) If, as a result of an adjustment made pursuant to Sections 11(a)(ii) or 13(a) hereof, the holder of any
Right thereafter exercised becomes entitled to receive any shares of capital stock other than Preferred Stock, the
number of such other shares shall be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Preferred Stock contained in Sections 11(a), (b), (c),
(d), (f), (g), (h), (i), (j), (k) and (l) hereof, and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to
the Preferred Stock shall apply on like terms to any such other shares.
(f) All Rights originally issued by the Company subsequent to any adjustment made to the Exercise Price
hereunder will evidence the right to purchase, at the adjusted Exercise Price, the number of one one-thousandths of a
share of Preferred Stock (or other securities or amount of cash or combination thereof) that may be acquired from
time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein.
(g) Unless the Company has exercised its election pursuant to Section 11(h), upon each adjustment of the
Exercise Price as a result of the calculations made in Sections 11(b) and (c) hereof, each Right outstanding
immediately prior to the making of such adjustment will thereafter evidence the right to purchase, at the adjusted
Exercise Price, a number of one one-thousandths of a share of Preferred Stock (calculated to the nearest one-
millionth of a share) obtained by (i) multiplying (A) the number of one one-thousandths of a share covered by a
Right immediately prior to this adjustment by (B) the Exercise Price in effect immediately prior to such adjustment
of the Exercise Price; and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such
adjustment of the Exercise Price.
(h) The Company may elect, on or after the date of any adjustment of the Exercise Price, to adjust the
number of Rights, in lieu of any adjustment in the number of one one-thousandths of a share of Preferred Stock that
may be acquired upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of
Rights shall be exercisable for the number of one one-thousandths of a share of Preferred Stock for which a Right
was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the
number of Rights shall become a number of Rights (calculated to the nearest one ten-thousandth of a Right)
obtained by dividing the Exercise Price in effect immediately prior to adjustment of the Exercise Price by the
Exercise Price in effect immediately after adjustment of the Exercise Price. The Company shall make a public
announcement (with prompt written notice thereof to the Rights Agent) of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be
made. Such record date may be the date on which the Exercise Price is adjusted or any day thereafter, but, if the
Rights Certificates have been issued, shall be at least ten (10) days later than the date of such public announcement.
If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(h),
the Company shall, as promptly as practicable, at the option of the Company, either (A) cause to be distributed to
holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14
hereof, the additional Rights to which such holders are entitled as a result of such adjustment, or (B) cause to be
distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders become entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and delivered by the Company, and countersigned and delivered by the Rights
Agent, in the manner provided for herein (and may bear, at the option of the Company, the adjusted Exercise Price)
and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the
public announcement.
(i) Irrespective of any adjustment or change in the Exercise Price or the number of one one-thousandths of a
share of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Exercise Price per one one-thousandth of a share and the number of one one-
thousandths of a share which were expressed in the initial Rights Certificates issued hereunder.
(j) Before taking any action that would cause an adjustment reducing the Exercise Price below the then par
value, if any, of the number of one one-thousandths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action that may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue, such number of fully paid and non-assessable of one one-
thousandths of a share of Preferred Stock at such adjusted Exercise Price.
(k) In any case in which this Section 11 requires that an adjustment in the Exercise Price be made effective
as of a record date for a specified event, the Company may elect to defer (with prompt written notice thereof to the
Rights Agent) until the occurrence of such event the issuance to the holder of any Right exercised after such record
date of that number of one one-thousandths of a share of Preferred Stock and shares of other capital stock or
securities of the Company, if any, issuable upon such exercise over and above the number of one one-thousandths of
a share of Preferred Stock and shares of other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company
shall deliver to such holder a due bill or other appropriate instrument evidencing such holder’s right to receive such
additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment.
(l) Notwithstanding anything in this Section 11 to the contrary, prior to the Distribution Date, the Company
is entitled to make such reductions in the Exercise Price, in addition to those adjustments expressly required by this
Section 11, to the extent that the Board determines that any (i) consolidation or subdivision of the Preferred Stock;
(ii) issuance wholly for cash of any shares of Preferred Stock at less than the Current Market Price; (iii) issuance
wholly for cash of shares of Preferred Stock or securities that by their terms are convertible into or exchangeable for
shares of Preferred Stock; (iv) stock dividends; or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Preferred Stock is taxable to such holders or reduces the
taxes payable by such holders.
(m) The Company may not, at any time after the Distribution Date, (i) consolidate with any other Person
(other than a direct or indirect, wholly-owned Subsidiary of the Company in a transaction that complies with Section
11(n) hereof); (ii) merge with or into any other Person (other than a direct or indirect, wholly-owned Subsidiary of
the Company in a transaction that complies with Section 11(n) hereof); or (iii) sell or transfer (or permit any
Subsidiary to sell or transfer), in one transaction, or a series of transactions, assets or earning power aggregating
more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other
Person or Persons (other than the Company and/or any of its direct or indirect, wholly-owned Subsidiaries in one or
more transactions, each of which complies with Section 11(n) hereof), if at the time of or immediately after such
consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or
agreements in effect that would substantially diminish or otherwise eliminate the benefits intended to be afforded by
the Rights.
(n) After the earlier of the Distribution Date and the Stock Acquisition Date and as long as any Rights are
outstanding (other than Rights that have become null and void pursuant to Section 7(e) hereof), the Company may
not, except as permitted by Sections 23, 24, and 27 hereof, take (or permit any Subsidiary of the Company to take)
any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially
or otherwise eliminate the benefits intended to be afforded by the Rights.
(o) Notwithstanding anything in this Agreement to the contrary, in the event that the Company, at any time
after the date hereof and prior to the Distribution Date, (i) declares a dividend on the outstanding shares of Common
Stock payable in shares of Common Stock; (ii) subdivides any outstanding shares of Common Stock; (iii) combines
any of the outstanding shares of Common Stock into a smaller number of shares; or (iv) issues any shares of its
capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving corporation), then the number of
Rights associated with each share of Common Stock then outstanding or issued or delivered thereafter but prior to
the Distribution Date shall be proportionately adjusted so that the number of Rights thereafter associated with each
share of Common Stock following any such event equals the result obtained by multiplying the number of Rights
associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which
shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event
and the denominator of which shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event. The adjustments provided for in this Section 11(o) shall be made
successively whenever such a dividend is declared or paid or such a subdivision, combination, or reclassification is
effected. If an event occurs that would require an adjustment under Section 11(a)(ii) hereof and this Section 11(o),
the adjustments provided for in this Section 11(o) shall be in addition and prior to any adjustment required pursuant
to Section 11(a)(ii) hereof.
SECTION 12. Certificate of Adjusted Exercise Price or Number of Shares.
Whenever an adjustment is made or any event affecting the Rights or their exercisability (including without
limitation an event that causes Rights to become null and void) occurs as provided in Section 11 hereof, the
Company shall (a) promptly prepare a certificate setting forth such adjustment or describing such event, and a brief
reasonably detailed statement of the facts, computations and methodology accounting for such adjustment;
(b) promptly file with the Rights Agent, and with each transfer agent for the Preferred Stock and the Common Stock,
a copy of such certificate; and (c) mail a brief summary thereof to each holder of a Rights Certificate (or, if prior to
the Distribution Date, each registered holder of shares of Common Stock) in accordance with Section 27 hereof.
Notwithstanding the foregoing sentence, the failure of the Company to make such certification or give such notice
shall not affect the validity of or the force or effect of the requirement for such adjustment. Any adjustment to be
made pursuant to Section 11 hereof shall be effective as of the date of the event giving rise to such adjustment. The
Rights Agent shall be entitled to rely on any such certificate and on any adjustment or statement therein contained
and shall have no duty or liability with respect thereto, and shall not be deemed to have knowledge of any such
adjustment or any such event unless and until it shall have received such certificate.
SECTION 13. Termination of Rights in the Event of Board Approved Transaction
Notwithstanding anything contained herein to the contrary, in the event of any merger or other acquisition
transaction involving the Company pursuant to a merger or other acquisition agreement between the Company and
any Person (or one or more of such Person’s Affiliates or Associates) which agreement has been approved by the
Board prior to any Person becoming an Acquiring Person, this Agreement and the rights of holders of Rights
hereunder shall be terminated in accordance with Section 7(a).
SECTION 14. Fractional Rights; Fractional Shares; Waiver.
(a) The Company is not required to issue fractions of Rights except prior to the Distribution Date as
provided in Section 11(o) hereof, or to distribute Rights Certificates that evidence fractional Rights. In lieu of such
fractional Rights, the Company shall pay to the Persons to which such fractional Rights would otherwise be issuable
an amount in cash equal to such fraction of the market value of a whole Right. For purposes of this Section 14(a),
the market value of a whole Right is the Closing Price of the Rights for the Trading Day immediately prior to the
date that such fractional Rights would have been otherwise issuable.
(b) The Company is not required to issue fractions of shares of Preferred Stock (other than fractions which
are integral multiples of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are integral
multiples of one one-thousandth of a share of Preferred Stock). In lieu of fractional shares of Preferred Stock that are
not integral multiples of one one-thousandth of a share of Preferred Stock, the Company may pay to the registered
holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one one-thousandth of a share of Preferred Stock. For purposes of this
Section 14(b), the current market value of one one-thousandth of a share of Preferred Stock is one one-thousandth of
the Closing Price of a share of Preferred Stock for the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of one of the events specified in Section 11 hereof giving rise to the right to
receive Common Stock, Common Stock Equivalents or other securities upon the exercise of a Right, the Company
will not be required to issue fractions of shares of Common Stock, Common Stock Equivalents or other securities
upon exercise of the Rights or to distribute certificates which evidence fractional shares of Common Stock,
Common Stock Equivalents or other securities. In lieu of fractional shares of Common Stock, Common Stock
Equivalents or other securities, the Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market
value of one share of Common Stock, Common Stock Equivalents or other securities. For purposes of this Section
14(c), the current market value of one share of Common Stock is the Closing Price of one share of Common Stock
for the Trading Day immediately prior to the date of such exercise.
(d) The holder of a Right, by the acceptance of the Right, expressly waives such holder’s right to receive any
fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this Section 14.
(e) Whenever a payment for fractional Rights or fractional shares is to be made by the Rights Agent under
this Agreement, the Company shall (i) promptly prepare and deliver to the Rights Agent a certificate setting forth in
reasonable detail the facts related to such payments and the prices and formulas utilized in calculating such
payments; and (ii) provide sufficient monies to the Rights Agent in the form of fully collected funds to make such
payments. The Rights Agent may rely upon such a certificate and has no duty with respect to, and will not be
deemed to have knowledge of, any payment for fractional Rights or fractional shares under any Section of this
Agreement relating to the payment of fractional Rights or fractional shares unless and until the Rights Agent has
received such a certificate and sufficient monies.
SECTION 15. Rights of Action.
All rights of action in respect of this Agreement, other than the rights of action vested in the Rights Agent
hereunder, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution
Date, the registered holders of shares of the Common Stock); and any registered holder of a Rights Certificate (or,
prior to the Distribution Date, any registered holder of shares of the Common Stock), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, any registered holder
of shares of the Common Stock), may, in such holder’s own behalf and for such holder’s own benefit, enforce, and
may institute and maintain any suit, action or proceeding against the Company or any other Person to enforce, or
otherwise act in respect of, such holder’s right to exercise the Rights evidenced by such Rights Certificate in the
manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies
available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an
adequate remedy at law for any breach of this Agreement by the Company and shall be entitled to specific
performance of the obligations hereunder, and injunctive relief against actual or threatened violations by the
Company of the obligations hereunder of any Person (including, without limitation, the Company) subject to this
Agreement.
SECTION 16. Agreement of Rights Holders.
Every holder of a Right, by accepting such Right, consents and agrees with the Company and the Rights
Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights shall be evidenced by the balances indicated in the Book Entry
account system of the transfer agent for the Common Stock registered in the names of the holders of Common Stock
(which Common Stock shall also be deemed to represent certificates for Rights) or, in the case of certificated shares,
the certificates for the Common Stock registered in the names of the holders of the Common Stock (which
certificates for shares of Common Stock also constitute certificates for Rights) and each Right is transferable only in
connection with the transfer of the Common Stock;
(b) after the Distribution Date, the Rights Certificates shall be transferable only on the registry books of the
Rights Agent if surrendered at the office of the Rights Agent designated for such purposes, duly endorsed or
accompanied by a proper instrument of transfer and with the appropriate forms and certificates properly completed
and duly executed;
(c) subject to Section 6(a) and Section 7(e) hereof, the Company and the Rights Agent may deem and treat
the Person in whose name a Rights Certificate (or, prior to the Distribution Date, the associated balance indicated in
the Book Entry account system of the transfer agent for the Common Stock, or in the case of certificated shares, by
the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced
thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated balance
indicated in the Book Entry account system of the transfer agent for the Common Stock, or in the case of certificated
shares, by the associated Common Stock certificate made by anyone other than the Company or the Rights Agent)
for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section
7(e) hereof, shall be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent
has any liability to any holder of a Right or any other Person as a result of the inability of the Company or the Rights
Agent to perform any of its or their obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree, judgment or ruling (whether interlocutory or final) issued by a court of competent
jurisdiction or by a governmental, regulatory, self-regulatory or administrative agency or commission, or any statute,
rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation; provided, however, the Company shall use its commercially reasonable
efforts to have any such injunction, order, decree, judgment or ruling lifted or otherwise overturned as promptly as
practicable.
SECTION 17. Rights Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Rights Certificate is entitled to vote, receive dividends or be deemed for any
purpose the holder of the shares of Preferred Stock or any other securities of the Company that may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights
Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or, except as provided in
Section 26 hereof, to receive notice of meetings or other actions affecting stockholders, or to receive dividends or
subscription rights, or otherwise, until the Right evidenced by such Rights Certificate have been exercised in
accordance with the provisions hereof.
SECTION 18. Duties of Rights Agent.
The Rights Agent undertakes to perform its duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of Rights Certificates, or, prior to the
Distribution Date, Common Stock, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel selected by it (who may be legal counsel for the Rights
Agent or the Company or an employee of the Rights Agent), and the advice or opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent, and the Rights Agent will have no liability for or in
respect of, any action taken, suffered or omitted to be taken by it in the absence of bad faith in accordance with such
advice or opinion.
(b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it
necessary or desirable that any fact or matter (including the identity of any Acquiring Person and the determination
of Current Market Price) be proved or established by the Company prior to taking, suffering or omitting to take any
action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the
President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the
Company and delivered to the Rights Agent; and such certificate shall be full and complete authorization and
protection to the Rights Agent, and the Rights Agent shall incur no liability for or in respect of any action taken,
suffered or omitted to be taken by it, in the absence of bad faith, under the provisions of this Agreement in reliance
upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross
negligence, bad faith, or willful misconduct (as determined by a court of competent jurisdiction in a final non-
appealable judgment). Anything to the contrary notwithstanding, in no event shall the Rights Agent be liable for
special, punitive, indirect, consequential or incidental loss or damage of any kind whatsoever (including but
not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage. Any
liability of the Rights Agent under this Agreement will be limited to the amount of annual fees paid by the Company
to the Rights Agent.
(d) The Rights Agent will not be liable for or by reason of any of the statements of fact or recitals contained
in this Agreement or in the Rights Certificates or be required to verify the same (except as to its countersignature
thereof), but all such statements and recitals are deemed to have been made by the Company only.
(e) The Rights Agent shall not have any liability for nor be under any responsibility in respect of the validity
of this Agreement or the execution and delivery hereof (except the due execution and delivery hereof by the Rights
Agent) or for the validity or execution of any Rights Certificate (except its countersignature thereon); nor will it be
liable or responsible for any breach by the Company of any covenant or failure by the Company to satisfy any
condition contained in this Agreement or in any Rights Certificate; nor will it be liable or responsible for any change
in the exercisability of the Rights (including, but not limited to, the Rights becoming null and void pursuant to
Section 7(e) hereof) or any change or adjustment in the terms of the Rights including, but not limited, to any
adjustment required under the provisions of Sections 11, 13, 23 or 24 hereof or for the manner, method or amount of
any such change or adjustment or the ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt by the Rights
Agent of the certificate describing any such adjustment contemplated by Section 12 hereof, upon which the Rights
Agent may rely); nor will it by any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of the Common Stock, the Preferred Stock or any other securities to be
issued pursuant to this Agreement or any Rights Certificate or as to whether any shares of Common Stock, Preferred
Stock or any other securities will, when so issued, be validly authorized and issued, fully paid and non-assessable.
(f) The Company shall perform, execute, acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all such further acts, instruments and assurances as may reasonably be required by the
Rights Agent for the performance by the Rights Agent of its duties under this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept verbal or written instructions with respect
to the performance of its duties hereunder and certificates delivered pursuant to any provision hereof from the
Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President,
the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company, and to apply to
such officers for advice or instructions in connection with its duties, and such advice or instruction shall be full
authorization and protection to the Rights Agent and the Rights Agent shall have no duty to independently verify the
accuracy or completeness of such instructions and shall incur no liability for or in respect of any action taken or
suffered or omitted to be taken by it by it, in the absence of bad faith, in accordance with advice or instructions of
any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent
for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action
proposed to be taken or omitted by the Rights Agent under this Agreement and the date on and/or after which such
action shall be taken or such omission shall be effective. The Rights Agent shall be fully authorized and protected in
relying upon the most recent verbal or written instructions received from any such officer, and shall not be liable for
any action taken, suffered or omitted to be taken by the Rights Agent in the absence of bad faith in accordance with
a proposal included in any such application on or after the date specified in such application (which date shall not be
less than five (5) Business Days after the date any officer of the Company actually receives such application unless
any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the
effective date in the case of an omission), the Rights Agent shall have received written instructions in response to
such application specifying the action to be taken, suffered or omitted.
(h) The Rights Agent and any stockholder, affiliate, director, officer or employee of the Rights Agent may
buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise
act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform
any duty hereunder either itself (through its directors, officers and employees) or by or through its attorneys or
agents, and the Rights Agent shall not be liable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company, any holder of Rights or any other Person resulting from any such act, default,
neglect or misconduct, absent gross negligence, bad faith or willful misconduct in the selection and continued
employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of
its rights or powers if there are reasonable grounds for believing that repayment of such funds or adequate
indemnification against such risk or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, either
(i) the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, or (ii) any other actual or
suspected irregularity exists, the Rights Agent shall not take any further action with respect to such requested
exercise or transfer without first consulting with the Company.
SECTION 19. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent on demand compensation as agreed in writing
between the Company and the Rights Agent for all services rendered by it hereunder and from time to time, on
demand of the Rights Agent, to reimburse the Rights Agent for all of its reasonable and documented expenses
incurred in the preparation, delivery, amendment, administration and execution of this Agreement and the exercise
and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent ,its employees,
officers or directors for, and to hold it harmless against, any loss, liability, damage, demand, judgment, fine, penalty,
claim, settlement, cost or expense (including the reasonable fees and expenses of legal counsel), for any action
taken, suffered or omitted to be taken by the Rights Agent pursuant to this Agreement or in connection with the
acceptance, administration, exercise and performance of its duties under this Agreement, including the reasonable
and documented costs and expenses of defending against any claim of liability arising therefrom, directly or
indirectly, or enforcing its rights hereunder; provided that the Company shall not be required to indemnify the
Rights Agent, its employees, officers or directors for any such loss, liability, damage, demand, judgment, fine,
penalty, claim, settlement cost or expense to the extent caused by the Right Agent’s gross negligence, bad faith or
willful misconduct (as determined by a court of competent jurisdiction in a final non-appealable judgment).
(b) The Rights Agent shall be authorized and protected and shall incur no liability for or in respect of
any action taken, suffered or omitted to be taken by it in connection with its acceptance and administration of this
Agreement and the exercise and performance of its duties hereunder in reliance upon any Rights Certificate or Book
Entry for Common Stock or other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statements or other paper or document
believed by it to be genuine and to be signed, executed and shall not be obligated to verify the accuracy or
completeness of such instrument, power of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statements or other paper or document and, where necessary, guaranteed, verified or acknowledged, by
the proper Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. The Rights
Agent shall not be deemed to have knowledge of any event of which it was supposed to receive notice thereof
hereunder, and the Rights Agent shall be fully protected and shall incur no liability for failing to take action in
connection therewith unless and until it has received such notice in writing.
(c) Notwithstanding anything in this Agreement to the contrary, in no case shall the Company be
liable with respect to any action, proceeding, suit or claim against the Rights Agent unless the Rights Agent shall
have notified the Company in accordance with Section 27 hereof of the assertion of such action, proceeding, suit or
claim against the Rights Agent, promptly after the Rights Agent shall have notice of such assertion of an action,
proceeding, suit or claim or have been served with the summons or other first legal process giving information as to
the nature and basis of the action, proceeding, suit or claim; provided that the failure to provide such notice promptly
shall not affect the rights of the Rights Agent hereunder except to the extent that such failure actually prejudices the
Company. The Company shall be entitled to participate at its own expense in the defense of any such action,
proceeding, suit or claim, and, if the Company so elects, the Company shall assume the defense of any such action,
proceeding, suit or claim. In the event that the Company assumes such defense, the Company shall not thereafter be
liable for the fees and expenses of any counsel retained by the Rights Agent, so long as the Company shall retain
counsel satisfactory to the Rights Agent, in the exercise of its reasonable judgment, to defend such action,
proceeding, suit or claim, and provided that the Rights Agent does not have defenses that are adverse to or different
from any defenses of the Company. The Rights Agent agrees not to settle any litigation in connection with any
action, proceeding, suit or claim with respect to which it may seek indemnification from the Company without the
prior written consent of the Company, which shall not be unreasonably withheld.
(d) The provisions of this Section 19 and Section 18 shall survive the termination of this Agreement,
the resignation, replacement or removal of the Rights Agent and the exercise, termination and the expiration of the
Rights. Notwithstanding anything in this Agreement to the contrary, in no event shall the Rights Agent be liable for
special, punitive, incidental, indirect or consequential loss or damage of any kind whatsoever (including but not
limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage and
regardless of the form of the action; and the Company agrees to indemnify the Rights Agent and to hold it harmless
to the fullest extent permitted by law against any loss, liability or expense incurred as a result of claims for special,
punitive, incidental, indirect or consequential loss or damages of any kind whatsoever provided in each case that
such claims are not based on the gross negligence, bad faith or willful misconduct of the Rights Agent (each as
determined by a final judgment of a court of competent jurisdiction). Any liability of the Rights Agent under this
Agreement shall be limited to the amount of annual fees paid by the Company to the Rights Agent.
SECTION 20. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any Person into which the Rights Agent or any successor Rights Agent is merged or with which the
Rights Agent or any successor Rights Agent is consolidated, or any Person resulting from any merger or
consolidation to which the Rights Agent or any successor Rights Agent is a party, or any Person succeeding to the
stockholder services business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights
Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the
parties hereto; but only if such Person would be eligible for appointment as a successor Rights Agent under the
provisions of Section 21 hereof. The purchase of all or substantially all of the Rights Agent’s assets employed in the
performance of transfer agent activities shall be deemed a merger or consolidation for purposes of this Section 20. In
case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the
Rights Certificates have been countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates have not been countersigned, any successor Rights Agent may countersign
such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights
Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under
its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates
shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior
name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the
Rights Certificates and in this Agreement.
SECTION 21.
Change of Rights Agent.
The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this
Agreement upon at least thirty (30) days’ notice in writing to the Company, and to each transfer agent of the
Preferred Stock and the Common Stock, by registered or certified mail, in which case the Company will give or
cause to be given written notice to the registered holders of the Rights Certificates by first-class mail. The Company
may remove the Rights Agent or any successor Rights Agent upon at least thirty (30) days’ notice in writing, mailed
to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock
and Preferred Stock, by registered or certified mail, and, if such removal occurs after the Distribution Date, to the
holders of the Rights Certificates by first-class mail. If the Rights Agent resigns or is removed or otherwise becomes
incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company fails to make such
appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights
Certificate (such holder shall, with such notice, submit its Rights Certificate for inspection by the Company), then
the incumbent Rights Agent or any registered holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be (a) a Person organized and doing business under the laws of the United States
or any State thereof, in good standing, which is authorized under such laws to exercise corporate trust, stock transfer
or stockholder services powers and which at the time of its appointment as Rights Agent has, or with its parent has, a
combined capital and surplus of at least $50,000,000 or (b) an affiliate of a Person described in clause (a) of this
sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent under this Agreement without further act or deed;
but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time
held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the
purpose in each case at the sole expense of the Company. Not later than the effective date of any such appointment,
the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the
Common Stock and the Preferred Stock, and, if such appointment occurs after the Distribution Date, mail a notice
thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this
Section 21, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
SECTION 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or the Rights Certificates to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by
the Board to reflect any adjustment or change made in accordance with the provisions of this Agreement in the
Exercise Price or the number or kind or class of shares or other securities or property that may be acquired under the
Rights Certificates. In addition, in connection with the issuance or sale of shares of Common Stock following the
Distribution Date (other than upon exercise of a Right) and prior to the redemption or the Expiration Date, the
Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board,
issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate may be issued if, and to the extent that, the Company has been
advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued, and (ii) no such Rights Certificate may be
issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
SECTION 23. Redemption.
(a) The Board may, within its sole discretion, at any time before any Person becomes an Acquiring Person
(the “Redemption Period”) cause the Company to redeem all, but not less than all, of the then outstanding Rights at
a redemption price of $0.001 per Right, as such amount may be appropriately adjusted to reflect any stock split,
reverse stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price, as
adjusted, the “Redemption Price”). Notwithstanding anything contained in this Agreement to the contrary, the
Rights will not be exercisable after the first occurrence of a Flip-In Event until such time as the Company’s right of
redemption hereunder has expired. The redemption of the Rights by the Board pursuant to this paragraph (a) may be
made effective at such time, on such basis and with such conditions as the Board may establish, in its sole discretion.
The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock based on the Current
Market Price or any other form of consideration deemed appropriate by the Board.
(b) Immediately upon the action of the Board ordering the redemption of the Rights pursuant to paragraph
(a) of this Section 23 (or such later time as the Board may establish for the effectiveness of such redemption), and
without any further action and without any notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for each Right held. The Company shall
promptly give (i) written notice to the Rights Agent of any such redemption; and (ii) public notice of any such
redemption; provided, however, that the failure to give, or any defect in, any such notice will not affect the validity
of such redemption. Within ten (10) days after such action of the Board ordering the redemption of the Rights, the
Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as
they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of
the transfer agent for the Common Stock. Any notice that is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which
the payment of the Redemption Price shall be made. Neither the Company nor any of its Related Persons may
redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in
this Section 23 or in Section 24 hereof, or other than in connection with the purchase of shares of Common Stock or
the conversion or redemption of shares of Common Stock in accordance with the applicable provisions of the
Certificate of Incorporation prior to the Distribution Date.
SECTION 24. Exchange.
(a) The Board may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or
part of the then outstanding and exercisable Rights (which shall not include Rights that have become null and void
pursuant to the provisions of Section 7(e) hereof) for shares of Common Stock at an exchange ratio of two shares of
Common Stock per each outstanding Right, as appropriately adjusted to reflect any stock split, reverse stock split,
stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred
to as the “Exchange Ratio”). The exchange of the Rights by the Board may be made effective at such time, on such
basis and with such conditions as the Board in its sole discretion may establish.
(b) Immediately upon the action of the Board ordering the exchange of any Rights pursuant to paragraph (a)
of this Section 24 and without any further action or notice, the right to exercise such Rights will terminate and the
only right thereafter of a holder of such Rights shall be to receive a number of shares of Common Stock equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio; provided, however, that in connection
with any exchange effected pursuant to this Section 24(b), no holder of Rights shall be entitled to receive Common
Stock (or other shares of capital stock of the Company) that would result in such holder, together with such holder’s
Affiliates and Associates, becoming either the Beneficial Owner of more than 4.95% of the then-outstanding
Common Stock or the Beneficial Owner of more than its then current number of shares it owns more than five
percent of the outstanding stock as of the date of this agreement and is a Grandfathered Person. If a holder would,
but for the immediately preceding sentence, be entitled to receive Excess Shares, in lieu of receiving such Excess
Shares and to the extent permitted by law or orders applicable to the Company, such holder will only be entitled to
receive an amount in cash or, at the election of the Company, a note or other evidence of indebtedness maturing
within nine months with a principal amount, equal to the current per share Current Market Price of a share of
Common Stock at the Close of Business on the Trading Day following the date the Board effects the forgoing
exchange multiplied by the number of Excess Shares that would otherwise have been issuable to such holder. The
exchange of the Rights by the Board may be made effective at such time, on such basis and with such conditions as
the Board in its sole discretion may establish. The Company shall promptly give (i) written notice to the Rights
Agent of any such exchange; and (ii) public notice of any such exchange; provided, however, that the failure to give,
or any defect in, such notice will not affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice that is mailed in the manner herein provided shall be deemed given, whether
or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of
the shares of Common Stock for Rights shall be effected and, in the event of any partial exchange, the number of
Rights that shall be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other
than Rights that have become null and void pursuant to the provisions of Section 7(e) hereof) held by each holder of
Rights.
(c) The Company may at its option substitute, and, in the event that there shall not be sufficient shares of
Common Stock issued but not outstanding or authorized but unissued to permit an exchange of Rights for Common
Stock as contemplated in accordance with this Section 24, the Company shall substitute to the extent of such
insufficiency, for each share of Common Stock that would otherwise be issuable upon exchange of a Right, a
number of shares of Preferred Stock or fraction thereof (or Equivalent Preferred Stock, as such term is defined in
Section 11(b)) such that the Current Market Price of one share of Preferred Stock (or Equivalent Preferred Share)
multiplied by such number or fraction is equal to the Current Market Price of one share of Common Stock as of the
date of such exchange.
(d) Upon declaring an exchange pursuant to this Section 24, or as promptly as reasonably practicable
thereafter, the Company may implement such procedures as it deems appropriate, in its sole discretion, for the
purpose of ensuring that the Common Stock (or such other consideration) issuable upon an exchange pursuant to this
Section 24 is not received by holders of Rights that have become null and void pursuant to Section 7(e) hereof.
Before effecting an exchange pursuant to this Section 24, the Board may direct the Company to enter into a Trust
Agreement in such form and with such terms as the Board shall then approve (the “Trust Agreement”). If the
Board so directs, the Company shall enter into the Trust Agreement and the Company shall issue to the trust created
by the Trust Agreement (the “Trust”) all or a portion (as designated by the Board) of the shares of Common Stock
and other securities, if any, distributable pursuant to the Exchange, and all stockholders entitled to distribution of
such shares or other securities (and any dividends or distributions made thereon after the date on which such shares
or other securities are deposited in the Trust) shall be entitled to receive a distribution of such shares or other
securities (and any dividends or distributions made thereon after the date on which such shares or other securities are
deposited in the Trust) only from the Trust and solely upon compliance with all relevant terms and provisions of the
Trust Agreement. Prior to effecting an exchange and registering shares of Common Stock (or other such securities)
in any Person’s name, including any nominee or transferee of a Person, the Company may require (or cause the
trustee of the Trust to require), as a condition thereof, that any holder of Rights provide evidence, including, without
limitation, the identity of the Beneficial Owners thereof and their Related Persons (or former Beneficial Owners
thereof and their Related Persons) as the Company reasonably requests in order to determine if such Rights are null
and void. If any Person fails to comply with such request, the Company shall be entitled conclusively to deem the
Rights formerly held by such Person to be null and void pursuant to Section 7(e) hereof and not transferable or
exercisable or exchangeable in connection herewith. Any shares of Common Stock or other securities issued at the
direction of the Board in connection herewith shall be validly issued, fully paid and nonassessable shares of
Common Stock or of such other securities (as the case may be), and the Company shall be deemed to have received
as consideration for such issuance a benefit having a value that is at least equal to the aggregate par value of the
shares so issued.
SECTION 25. Process to Seek Exemption
(a) Any Person who desires to effect any acquisition of Common Stock that might, if consummated, result in
such Person beneficially owning 4.95% or more of the then-outstanding Common Stock (or, in the case of a
Grandfathered Person, additional shares of Common Stock) (a “Requesting Person”) may request that the Board
grant an exemption with respect to such acquisition under this Agreement so that such Person would be deemed to
be an “Exempt Person” for purposes of this Agreement (an “Exemption Request”). An Exemption Request shall be
in proper form and shall be delivered by registered mail, return receipt requested, to the Secretary of the Company at
the principal executive office of the Company. The Exemption Request shall be deemed made upon receipt by the
Secretary of the Company. To be in proper form, an Exemption Request shall set forth (i) the name and address of
the Requesting Person, (ii) the number and percentage of shares of Common Stock then Beneficially Owned by the
Requesting Person, together with all Affiliates and Associates of the Requesting Person, and (iii) a reasonably
detailed description of the transaction or transactions by which the Requesting Person would propose to acquire
Beneficial Ownership of Common Stock aggregating 4.95% or more of the then-outstanding Common Stock and the
maximum number and percentage of shares of Common Stock that the Requesting Person proposes to acquire. The
Board shall endeavor to respond to an Exemption Request within twenty (20) Business Days after receipt of such
Exemption Request; provided, that the failure of the Board to make a determination within such period shall be
deemed to constitute the denial by the Board of the Exemption Request. The Requesting Person shall respond
promptly to reasonable and appropriate requests for additional information from the Company or the Board and its
advisors to assist the Board in making its determination. The Board shall only grant an exemption in response to an
Exemption Request if it receives, at the Board’s request, a report from the Company’s advisors to the effect that the
acquisition of Beneficial Ownership of Common Stock by the Requesting Person does not create a significant risk of
material adverse tax consequences to the Company or the Board otherwise determines in its sole discretion that the
exemption is in the best interests of the Company. Any exemption granted hereunder may be granted in whole or in
part, and may be subject to limitations or conditions (including a requirement that the Requesting Person agree that
it will not acquire Beneficial Ownership of shares of Common Stock in excess of the maximum number and
percentage of shares approved by the Board), in each case as and to the extent the Board shall determine necessary
or desirable to provide for the protection of the Company’s NOLs. Any Exemption Request may be submitted on a
confidential basis and, except to the extent required by applicable law, the Company shall maintain the
confidentiality of such Exemption Request and determination of the Board with respect thereto, unless the
information contained in the Exemption Request or the determination of the Board with respect thereto otherwise
becomes publicly available. The Exemption Request shall be considered and evaluated by the Independent Directors
who are also independent of the Requesting Person and disinterested with respect to the Exemption Request, and the
action of a majority of such Independent Directors shall be deemed to be the determination of the Board for
purposes of such Exemption Request.
SECTION 26. Notice of Certain Events.
(a) In case the Company proposes, at any time after the earlier of the Distribution Date or the Stock
Acquisition Date, (i) to pay any dividend payable in stock of any class or series to the holders of Preferred Stock or
to make any other distribution to the holders of Preferred Stock (other than a regular quarterly cash dividend out of
earnings or retained earnings of the Company); (ii) to offer to the holders of Preferred Stock rights or warrants to
subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other
securities, rights or options; (iii) to effect any reclassification of Preferred Stock (other than a reclassification
involving only the subdivision of outstanding shares of Preferred Stock); (iv) to effect any consolidation or merger
into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section
11(n) hereof) or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section 11(n) hereof); or (v) to effect the
liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each
registered holder of a Rights Certificate, to the extent feasible, and to the Rights Agent in accordance with Section
27 hereof, a written notice of such proposed action, which shall specify the record date for the purposes of such
stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution or winding up is to take place and the date of participation therein by the
holders of the shares of Preferred Stock if any such date is to be fixed, and such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least ten (10) days prior to the record date for determining holders
of the shares of Preferred Stock for purposes of such action and, in the case of any such other action, at least ten (10)
days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the
shares of Preferred Stock, whichever is earlier; provided, however, that no such action shall be taken pursuant to this
Section 26(a) that will or would conflict with any provision of the Certificate of Incorporation; provided, further,
that no such notice is required pursuant to this Section 26 if any Subsidiary of the Company effects a consolidation
or merger with or into, or effects a sale or other transfer of assets or earning power to, any other Subsidiary of the
Company.
(b) In case any Flip-In Event occurs, (i) the Company shall, as soon as practicable thereafter, give to each
registered holder of a Rights Certificate, to the extent feasible, and to the Rights Agent in accordance with Section
27 hereof, a written notice of the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof; and (ii) all references in paragraph
(a) of this Section 26 to Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if appropriate,
to any other securities that may be acquired upon exercise of a Right.
SECTION 27.
Notices.
Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of
any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class or express
United States mail, FedEx or UPS, postage prepaid and properly addressed (until another address is filed in writing
by the Rights Agent with the Company) as follows:
If to the Company, at its address at:
Tengasco, Inc.
6021 S. Syracuse Way, Suite 117
Greenwood Village, CO 80111
Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or
made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given
or made if sent in writing by first-class or express United States mail, FedEx or UPS, postage prepaid or overnight
delivery service and properly addressed (until another address is filed in writing with the Rights Agent) as follows:
Continental Stock Transfer and Trust Company
17 Battery Place, 8th Floor
New York, NY 10004
Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to
the holder of any Rights Certificate (or, if prior to the Distribution Date, to the holder of shares of Common Stock)
shall be sufficiently given or made if sent in writing by first-class or express United States mail, FedEx or UPS,
postage prepaid or overnight delivery service and properly addressed, to such holder at the address of such holder as
shown on the registry books of the Company.
SECTION 28. Supplements and Amendments.
Except as otherwise provided in this Section 28, the Company, by action of the Board, may from time to time
and in its sole and absolute discretion, and the Rights Agent shall if the Company so directs, supplement or amend
this Agreement in any respect without the approval of any holders of Rights, including, without limitation, in order
to (a) cure any ambiguity; (b) correct or supplement any provision contained herein that may be defective or
inconsistent with any other provisions herein; (c) shorten or lengthen any time period hereunder; (d) terminate this
Agreement at any time before or after any person becomes an Acquiring Person; and (e) otherwise change, amend,
or supplement any provisions hereunder in any manner that the Company may deem necessary or desirable;
provided, however, that from and after any Person becomes an Acquiring Person, this Agreement may not be
supplemented or amended in any manner other than termination or waiver as expressly provided in this Section 28
that would (a) adversely affect the interests of the holders of Rights (other than Rights that have become null and
void pursuant to Section 7(e) hereof) as such or (b) cause this Agreement to become amendable other than in
accordance with this Section 28. Notwithstanding any provision of this Agreement to the contrary, the Company, by
action of the Board in its sole discretion acting in its business judgment, may at any time before or after any Person
becomes an Acquiring Person amend this Agreement to make the provisions of this Agreement inapplicable to a
particular transaction by which a Person might otherwise become an Acquiring Person or to otherwise alter or waive
any application of any or all of the terms and conditions of this Agreement as they may apply with respect to any
such transaction. Upon the delivery of a certificate from an appropriate officer of the Company that states that the
proposed supplement or amendment is in compliance with the terms of this Section 28, the Rights Agent shall
execute such supplement or amendment; provided, however, that any supplement or amendment that does not
amend Sections 18, 19, 20, 21, or this Section 28 in a manner adverse to the Rights Agent shall become effective
immediately upon execution by the Company, whether or not also executed by the Rights Agent. The Company
shall provide within three (3) Business Days of the adoption of an amendment to the Agreement written notification
of such amendment to the Rights Agent.
Notwithstanding anything contained in this Agreement to the contrary, the Rights Agent may enter into any
supplement or amendment that affects the Rights Agent’s own rights, duties, obligations or immunities under this
Agreement.
Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the
interests of the holders of Common Stock.
SECTION 29. Successors.
All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent
shall bind and inure to the benefit of their respective successors and assigns hereunder.
SECTION 30. Determinations and Actions by the Board.
(a) For all purposes of this Agreement, any calculation of the number of shares of Common Stock or any
other class of capital stock outstanding at any particular time, including for purposes of determining the particular
percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be
made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the
Exchange Act or Section 382 of the Code and the Treasury Regulations promulgated thereunder, as applicable.
Except as otherwise specifically provided herein, the Board has the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the Board or to the Company hereunder, or
as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and
power (a) to interpret the provisions of this Agreement, and (b) to make all determinations deemed necessary or
advisable for the administration of this Agreement (including, without limitation, a determination to redeem or not
redeem the Rights in accordance with Section 23 hereof, to exchange or not exchange the rights in accordance with
Section 24 hereof, to amend or not amend this Agreement in accordance with Section 28 hereof). All such actions,
calculations, interpretations and determinations (including, for purposes of clause (ii) below, all omissions with
respect to the foregoing) that are done or made by the Board shall be (i) be final, conclusive, and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties; and (ii) not subject the Board or any
member thereof to any liability to the holders of the Rights.
SECTION 31. Benefits of this Agreement.
Nothing in this Agreement may be construed to give to any Person other than the Company, the Rights Agent
and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of
shares of the Common Stock of the Company) any legal or equitable right, remedy or claim under this Agreement;
rather, this Agreement is for the sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of shares of Common
Stock of the Company).
SECTION 32. Tax Compliance and Withholding.
(a) The Rights Agent, on its own behalf and on behalf of the Company, will comply with all applicable
certification, information reporting and withholding (including “backup” withholding) requirements imposed by
applicable tax laws, regulations or administrative practice with respect to (i) any payments made hereunder and (ii)
the issuance, delivery, holding, transfer, redemption or exercise of Rights, Common Stock or Preferred Stock
hereunder. Such compliance shall include, without limitation, the preparation and timely filing of required returns
and the timely payment of all amounts required to be withheld to the appropriate taxing authority or its designated
agent. The Rights Agent shall maintain all appropriate records documenting compliance with such requirements, and
shall make such records available, on written request, to the Company or its authorized representative within a
reasonable period of time after receipt of such request.
(b) In the event that the Company, the Rights Agent or their agents determine that they are obligated to
withhold or deduct any tax or other governmental charge under any applicable law on actual or deemed payments or
distributions hereunder to a holder of the Rights, Common Stock or other cash, securities or other property, the
Company, the Rights Agent or their agents shall be entitled to (i) deduct and withhold such amount by withholding a
portion or all of the cash, securities or other property otherwise deliverable or by otherwise using any property
(including, without limitation, Rights, Preferred Stock, Common Stock or cash) that is owned by such holder, or (ii)
in lieu of such withholding, require any holder to make a payment to the Company, the Rights Agent or their agents,
in each case in such amounts as they deem necessary to meet their withholding obligations, and in the case of (i)
above, shall also be entitled to sell all or a portion of such withheld securities or other property by public or private
sale in such amounts and in such manner as they deem necessary and practicable to pay such taxes and
governmental charges.
SECTION 33. Severability.
If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, null and void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement will remain in full force and effect and will in no way be affected, impaired or
invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term,
provision, covenant or restriction is held by such court or authority to be invalid, null and void or unenforceable and
the Board determines in good faith judgment that severing the invalid language from this Agreement would
materially and adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section
23 hereof shall be reinstated and will not expire until the Close of Business on the tenth (10th) Business Day
following the date of such determination by the Board.
SECTION 34. Governing Law.
This Agreement, each Right, and each Rights Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and performed entirely within such State.
SECTION 35. Counterparts.
This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall
constitute one and the same instrument. Delivery of an executed signature page of Agreement by facsimile or other
customary shall mean of electronic transmission (e.g., “PDF”) shall be effective as delivery of a manually executed
counterpart hereof.
SECTION 36. Interpretation.
The headings contained in this Agreement are for descriptive purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. For purposes of this Agreement, whenever a specific provision of the
Code or a specific Treasury Regulation is referenced, such reference shall also apply to any successor or
replacement provision or Treasury Regulation, as applicable.
SECTION 37. Force Majeure.
Notwithstanding anything to the contrary contained herein, the Rights Agent will not have any liability for not
performing, or a delay in the performance of, any act, duty, obligation or responsibility by reason of any occurrence
beyond the reasonable control of the Rights Agent (including, without limitation, any act or provision of any present
or future law or regulation or governmental authority, any act of God, war, civil or military disobedience or disorder,
riot, rebellion, terrorism, insurrection, fire, earthquake, storm, flood, strike, work stoppage, interruptions or
malfunctions of computer facilities, loss of data due to power failures or mechanical difficulties with information,
labor dispute, accident or failure or malfunction of any utilities, communication or computer (software or hardware)
services or similar occurrence).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the
date first above written.
TENGASCO, INC. ,
/s/ Cary V. Sorensen
By:
Name: Cary V. Sorensen
Title:
Vice President, General Counsel, and
Corporate Secretary
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
By:
Name:
Title:
[Signature Page to Rights Agreement]
Exhibit A
CERTIFICATE OF DESIGNATION OF
SERIES A PARTICIPATING PREFERRED STOCK OF
TENGASCO, INC.
In accordance with Section 151 of the Delaware General Corporation Law, the undersigned certifies that the
following resolution was adopted by the Board of Directors of Tengasco, Inc. at a meeting duly called and held:
RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation
in accordance with the provisions of the Certificate of Incorporation, the Board of Directors hereby establishes a
series of preferred stock, par value $0.01 per share, of the Corporation (the “Preferred Stock”), and states the
designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows:
Series A Participating Preferred Stock
(1) Designation and Amount. The shares of such series shall be designated as “Series A Participating Preferred
Stock” (the “Series A Preferred Stock”) and the number of shares constituting the Series A Preferred Stock shall be
10,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options,
rights or warrants.
(2) Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock)
ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series
A Preferred Stock, in preference to the holders of Common Stock, par value $0.001 per share (the “Common
Stock”), of the corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day
of March, June, September and December in each year (each such date being referred to herein as a “Quarterly
Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (1) $1.00 or (2) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate
per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-
cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of
the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the
corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause (2) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(b) The corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in
paragraph (a) of this subsection immediately after it declares a dividend or distribution on the Common Stock (other
than a dividend payable in shares of Common Stock); provided, that in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock
shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock
from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue
of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either
of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock
in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors
may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall be not more than sixty (60) days
prior to the date fixed for the payment thereof.
(3) Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the corporation. In
the event the corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares
of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein, in any other certificate of designation creating a series of Preferred
Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the corporation having general voting rights shall vote together as one
class on all matters submitted to a vote of stockholders of the corporation.
(c) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate action.
(4) Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred
Stock as provided in Section (2) are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full,
the corporation shall not:
(1) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
(2) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(3) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock other than
(A) such redemptions or purchases that may be deemed to occur upon the exercise of stock options, warrants or
similar rights or grant, vesting or lapse of restrictions on the grant of any other performance shares, restricted stock,
restricted stock units or other equity awards to the extent that such shares represent all or a portion of the exercise or
purchase price of such options, warrants or similar rights or other equity awards and the amount of withholding
taxes owed by the recipient of such award in respect of such grant, exercise, vesting or lapse of restrictions; (B) the
repurchase, redemption, or other acquisition or retirement for value of any such shares from employees, former
employees, directors, former directors, consultants or former consultants of the Corporation or their respective
estate, spouse, former spouse or family member, pursuant to the terms of the agreements pursuant to which such
shares were acquired, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of
any such junior stock in exchange for shares of any stock of the corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(4) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred
Stock except in accordance with a purchase offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of Directors, shall determine.
(b) The corporation shall not permit any subsidiary of the corporation to purchase or otherwise acquire for
consideration any shares of stock of the corporation unless the corporation could, under paragraph (a) of this Section
(4), purchase or otherwise acquire such shares at such time and in such manner.
(5) Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the
corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued
as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other certificate of designation creating a series of Preferred Stock or any
similar stock or as otherwise required by law.
(6) Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the
corporation, voluntary or otherwise, no distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior
thereto, the holders of shares of Series A Preferred Stock shall have received the greater of (A) $1,000 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment, or (B) an amount, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times
the aggregate amount to be distributed per share to holders of shares of Common Stock.
(7) Consolidation, Merger, Etc. In case the corporation shall enter into any consolidation, merger, combination
or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the
same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the corporation shall at any time declare or pay any dividend on the Common Stock payable
in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(8) No Redemption. The shares of Series A Preferred Stock shall not be redeemable.
(9) Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the
distribution of assets, shall rank senior to the Common Stock as to such matters.
(10) Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner
which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so
as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares
of Series A Preferred Stock, voting together as a single class; provided, however, that if the Board of Directors shall
determine at any time to terminate any rights to purchase such Series A Preferred Stock before issuance of such
Series A Preferred Stock, such termination is not an amendment subject to this paragraph and upon such termination
of rights, the certificate of incorporation may be amended to terminate the existence of any Series A Preferred Stock
authorized by this certificate of amendment.
(11) Fractional Shares. The Series A Preferred Stock may be issued in fractions of a share, which fractions
shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends,
participate in distributions, and to have the benefit of all other rights of holders of Series A Preferred Stock.
IN WITNESS WHEREOF, Tengasco, Inc. has caused this certificate to be executed on behalf of the Corporation by
the undersigned authorized officer this16th day of March, 2017.
/s/ Cary V. Sorensen
Name: Cary V. Sorensen
Title: Corporate Secretary, Tengasco, Inc.
Exhibit B
SUMMARY OF RIGHTS
TO PURCHASE SERIES A PARTICIPATING PREFERRED STOCK
Introduction
The Board of Directors (the “Board”) of Tengasco, Inc. , a Delaware corporation (the “Company”), declared
a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value
$0.001 per share, of the Company (the “Common Stock”). The dividend is payable to the stockholders of record on
March 27, 2017 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Participating Preferred Stock, par value $0.01 per share, of the Company (the
“Preferred Stock”) at a price of $1.10 per one one-thousandth of a share of Preferred Stock (the “Purchase
Price”), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as
March 16, 2017, as the same may be amended from time to time (the “Rights Agreement”), between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent (the “Rights Agent”).
Until the earlier to occur of (i) the close of business on the tenth business day after a public announcement that
a person or group of affiliated or associated persons (with certain exceptions, an “Acquiring Person”) has acquired
beneficial ownership of 4.95% or more of the outstanding shares of Common Stock and (ii) the close of business on
the tenth business day after the commencement by any person of, or of the first public announcement of the
intention of any Person to commence, a tender or exchange offer the consummation of which would result in such
Person becoming the Beneficial Owner of 4.95% or more of the outstanding shares of Common Stock (the earlier of
such dates being called the “Distribution Date”), the Rights will be evidenced, with respect to any of the Common
Stock certificates (or book entry shares) outstanding as of the Record Date, by such Common Stock certificate (or
book entry shares) together with this Summary of Rights.
The Rights Agreement provides that, until the Distribution Date (or earlier expiration or redemption of the
Rights), the Rights will be transferred with and only with the Common Stock. Until the Distribution Date (or earlier
expiration or redemption of the Rights), new Common Stock certificates issued after the Record Date upon transfer
or new issuances of Common Stock will contain a legend incorporating the Rights Agreement by reference, and
notice of such legend will be furnished to holders of book entry shares. Until the Distribution Date (or earlier
expiration or redemption of the Rights), the surrender for transfer of any certificates for shares of Common Stock (or
book entry shares of Common Stock) outstanding as of the Record Date, even without such legend or a copy of this
Summary of Rights, will also constitute the transfer of the Rights associated with the shares of Common Stock
represented by such certificate or registered in book entry form. As soon as practicable following the Distribution
Date, separate certificates evidencing the Rights (“Rights Certificates”) will be mailed to holders of record of the
Common Stock as of the Close of Business on the Distribution Date and such separate Right Certificates alone will
evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will expire prior to the earliest of (i)
March 16, 2020 or such later date as may be established by the Board prior to the expiration of the Rights as long as
the extension is submitted to the stockholders of the Company for ratification at the next annual meeting of
stockholders succeeding such extension (the “Final Expiration Date”), (ii) the time at which the Rights are
redeemed or exchanged by the Company, in each case as described below, (iii) upon the occurrence of certain
transactions, (iv) the close of business on the first day after the Company’s 2017 annual meeting of stockholders, if
approval by the stockholders of the Company of the Rights Agreement has not been obtained on or prior to the close
of business on the first day after the Company’s 2017 annual meeting of stockholders, (v) the Close of Business on
the effective date of the repeal of Section 382 of the Internal Revenue Code of 1986, as amended, if the Board
determines that this Agreement is no longer necessary or desirable for the preservation of Tax Benefits, (vi) the
Close of Business on the first day of a taxable year of the Company to which the Board determines that no Tax
Benefits (as defined in the Rights Agreement) are available to be carried forward; (vii) the Close of Business on the
first day of a taxable year of the Company to which the Board determines that no Tax Benefits are available to be
carried forward; and (viii) the Close of Business on the first day after the Board of Directors determines by
resolution in its business judgment that the Agreement is no longer necessary or appropriate.
The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property
issuable, upon exercise of the Rights is subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to
holders of the Preferred Stock of certain rights or warrants to subscribe for or purchase Preferred Stock at a price, or
securities convertible into Preferred Stock with a conversion price, less than the then-current market price of the
Preferred Stock or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular periodic cash dividends or dividends payable in Preferred Stock) or of subscription rights or
warrants (other than those referred to above).
The number of outstanding Rights is subject to adjustment in the event of a stock dividend on the Common
Stock payable in shares of Common Stock or subdivisions, consolidations or combinations of the Common Stock
occurring, in any such case, prior to the Distribution Date.
Shares of Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of
Preferred Stock will be entitled, when, as and if declared, to a minimum preferential quarterly dividend payment of
the greater of (a) $1.00 per share, and (b) an amount equal to 1,000 times the dividend declared per share of
Common Stock. In the event of liquidation, dissolution or winding up of the Company, the holders of the Preferred
Stock will be entitled to a minimum preferential payment of the greater of (i) $1,000.00 per share (plus any accrued
but unpaid dividends), and (ii) an amount equal to 1,000 times the payment made per share of Common Stock. Each
share of Preferred Stock will have 1,000 votes, voting together with the Common Stock. Finally, in the event of any
merger, consolidation or other transaction in which outstanding shares of Common Stock are converted or
exchanged, each share of Preferred Stock will be entitled to receive 1,000 times the amount received per share of
Common Stock. These rights are protected by customary anti-dilution provisions.
Because of the nature of the Preferred Stock’s dividend, liquidation and voting rights, the value of the one
one-thousandth interest in a share of Preferred Stock purchasable upon exercise of each Right should approximate
the value of one share of Common Stock.
In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each
holder of a Right, other than Rights beneficially owned by the Acquiring Person, affiliates and associates of the
Acquiring Person and certain transferees thereof (which will thereupon become null and void), will thereafter have
the right to receive upon exercise of a Right that number of shares of Common Stock having a market value of two
times the exercise price of the Right.
In the event that, after a person or group has become an Acquiring Person, the Company is acquired in a
merger or other business combination transaction or 50% or more of its consolidated assets or earning power are
sold, proper provisions will be made so that each holder of a Right (other than Rights beneficially owned by an
Acquiring Person, affiliates and associates of the Acquiring Person and certain transferees thereof which will have
become null and void) will thereafter have the right to receive upon the exercise of a Right that number of shares of
common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) that at
the time of such transaction have a market value of two times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and prior to the earlier of one of the
events described in the previous paragraph or the acquisition by such Acquiring Person of 50% or more of the
outstanding shares of Common Stock, the Board may exchange the Rights (other than Rights owned by such
Acquiring Person and certain transferees thereof which will have become null and void), in whole or in part, for
shares of Common Stock or Preferred Stock (or a series of the Company’s preferred stock having equivalent rights,
preferences and privileges), at an exchange ratio of two shares of Common Stock, or a fractional share of Preferred
Stock (or other preferred stock) equivalent in value thereto, per Right.
With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments
require an adjustment of at least 1% in such Purchase Price. No fractional shares of Preferred Stock or Common
Stock will be issued (other than fractions of shares of Preferred Stock which are integral multiples of one one-
thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary
receipts), and in lieu thereof an adjustment in cash will be made based on the current market price of the Preferred
Stock or the Common Stock.
At any time prior to the time an Acquiring Person becomes such, the Board may redeem the Rights in whole,
but not in part, at a price of $0.001 per Right (the “Redemption Price”) payable, at the option of the Company, in
cash, shares of Common Stock or such other form of consideration as the Board shall determine. The redemption of
the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole
discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive the Redemption Price.
For so long as the Rights are then redeemable, the Company may, except with respect to the Redemption
Price, amend the Rights Agreement in any manner. After the Rights are no longer redeemable, the Company may,
except with respect to the Redemption Price, amend the Rights Agreement in any manner that does not adversely
affect the interests of holders of the Rights (other than holders of Rights owned by or transferred to any person who
is or becomes an Acquiring Person or affiliates and associates of an Acquiring Person and certain transferees
thereof).
Until a Right is exercised or exchanged, the holder thereof, as such, will have no rights as a stockholder of the
Company, including, without limitation, the right to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an exhibit to
a Registration Statement on Form 8-A dated March 16, 2017. A copy of the Rights Agreement is available free of
charge from the Company. This summary description of the Rights does not purport to be complete and is qualified
in its entirety by reference to the Rights Agreement, as the same may be amended from time to time, which is hereby
incorporated herein by reference.
Exhibit C
FORM OF RIGHTS CERTIFICATE
Certificate No. R-
Rights
NOT EXERCISABLE AFTER _______________, 2020 OR EARLIER IF REDEEMED OR EXCHANGED
BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $0.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF ANY SUCH PERSON (AS SUCH TERMS
ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS
MAY BECOME NULL AND VOID. THE RIGHTS SHALL NOT BE EXERCISABLE, AND SHALL BE NULL
AND VOID, AS LONG AS HELD BY A HOLDER IN ANY JURISDICTION WHERE THE REQUISITE
QUALIFICATION TO THE ISSUANCE TO SUCH HOLDER, OR THE EXERCISE BY SUCH HOLDER, OF
THE RIGHTS IN SUCH JURISDICTION SHALL NOT HAVE BEEN OBTAINED OR BE OBTAINABLE.
[THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY
OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR A RELATED PERSON OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT.
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(E) OF THE RIGHTS
AGREEMENT.]*
* The portion of the legend in brackets shall be inserted only if applicable and shall replace the preceding sentence.
Rights Certificate
This certifies that , or its registered assigns, is the registered holder of the number of Rights set
forth above, each of which entitles the holder thereof, subject to the terms, provisions and conditions of the Rights
Agreement dated as of March 16, 2017, as amended from time to time (the “Rights Agreement”), between
Tengasco, Inc. , a Delaware corporation (the “Company”), and Continental Stock Transfer & Trust Company, as
Rights Agent (the “Rights Agent”), to purchase from the Company at any time after the Distribution Date and prior
to 5:00 p.m., New York City time, on _______________, 2020, at the office or offices of the Rights Agent
designated for such purpose, or its successors as Rights Agent, one one-thousandth of a fully paid, non-assessable
share of Series A Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), of the Company,
at a purchase price of $1.10 per one one-thousandth share of Preferred Stock (the “Exercise Price”), upon
presentation and surrender of this Rights Certificate with the Election to Purchase and related Certificate duly
executed. The number of Rights evidenced by this Rights Certificate (and the number of shares that may be
purchased upon exercise thereof) set forth above, and the Exercise Price per share as set forth above, are the number
and Exercise Price as of March 16, 2017, based on the Preferred Stock as constituted at such date, and are subject to
adjustment upon the happening of certain events as provided in the Rights Agreement. Capitalized terms used and
not defined herein shall have the meanings specified in the Rights Agreement.
From and after the occurrence of a Flip-In Event, the Rights evidenced by this Rights Certificate beneficially
owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person, (ii) a transferee of any
such Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, concurrently with or after such transfer, became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person shall become null and void and no holder hereof shall have any right
with respect to such Rights from and after the occurrence of such Flip-In Event.
The Rights evidenced by this Rights Certificate shall not be exercisable, and shall be null and void as long as
held, by a holder in any jurisdiction where the requisite qualification to the issuance to such holder, or the exercise
by such holder, of the Rights in such jurisdiction shall not have been obtained or be obtainable.
As provided in the Rights Agreement, the Exercise Price and the number and kind of shares of Preferred Stock
or other securities which may be acquired upon the exercise of the Rights evidenced by this Rights Certificate are
subject to modification and adjustment upon the happening of certain events, including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which
terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations,
duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of such Rights under the specific
circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the above-mentioned
office of the Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates, upon surrender at the office or offices of the
Rights Agent designated for such purpose, may be exchanged for another Rights Certificate of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of one one-thousandths of a share of
Preferred Stock as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have
entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not
exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed
by the Company under certain circumstances at its option at a redemption price of $0.001 per Right at any time prior
to the earlier of the Close of Business on (i) the Stock Acquisition Date and (ii) the Final Expiration Date.
At any time after a person becomes an Acquiring Person and prior to the acquisition by such person of 50% or
more of the outstanding Common Stock, the Board may exchange the Rights (other than Rights owned by such
Acquiring Person which have become null and void), in whole or in part, at an exchange ratio of two shares of
Common Stock per each outstanding Right or, in certain circumstances, other equity securities of the Company
which are deemed by the Board to have the same value as shares of Common Stock, subject to adjustment.
No fractional shares of Preferred Stock will be issued upon the exercise of any Right or Rights evidenced
hereby (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be
made, as provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for
any purpose the holder of shares of Preferred Stock or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to
confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned
by an authorized signatory of the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company.
Dated as of , .
TENGASCO, INC.
By:
Name:
Title:
Countersigned:
Dated as of , .
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY,
By:
Authorized Signatory
[Form of Reverse Side of Rights Certificate]
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person
who is or was an Acquiring Person or an Affiliate or Associate of any such Person (as such terms are defined
pursuant to the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights
evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of any such Person.
Dated , .
Signature Guaranteed:
Signature
NOTICE
The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the
face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever.
Signatures must be guaranteed by a participant in a Medallion Signature Guarantee Program at a level
acceptable to the Rights Agent.
In the event the certification set forth above is not completed, the Company will deem the beneficial owner of
the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement) and, in the case of an Assignment, will affix a legend to that effect on any Rights
Certificates issued in exchange for this Rights Certificate.
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder desires to exercise Rights represented by the Rights Certificate.)
To:
The undersigned hereby irrevocably elects to exercise Rights represented by this Rights Certificate
to purchase the shares of Preferred Stock issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person or such other property which may be issuable upon the exercise of the Rights) and
requests that certificates for such shares (or such other securities of the Company or of any other person or such
other property as may be issuable upon the exercise of the Rights) be issued in the name of and delivered to:
(Please print name and address)
Please insert social security or other identifying number: ____________________________________________
Signature Guaranteed:
Signature
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a
Person who is or was an Acquiring Person or an Affiliate or Associate of any such Person (as such terms are defined
in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not
acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person
or an Affiliate or Associate of any such Person.
Dated , .
Signature Guaranteed:
Signature
NOTICE
The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written
upon the face of this Rights Certificate in every particular, without alteration whatsoever. Signatures must be
guaranteed by a participant in a Medallion Signature Guarantee Program at a level acceptable to the Rights Agent. In
the event the certification set forth above is not completed, the Company will deem the beneficial owner of the
Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined
in the Rights Agreement).
[This page has been intentionally left blank.]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-K
(Mark one)
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2016 or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from
__________ to __________.
Commission File No. 1-15555
TENGASCO, INC.
(name of registrant as specified in its charter)
Delaware
(state or other jurisdiction of
Incorporation or organization)
6021 S. Syracuse Way, Suite 117,
Greenwood Village, CO
(Address of Principal Executive Offices)
87-0267438
(I.R.S. Employer
Identification No.)
80111
(Zip Code)
Registrant’s telephone number, including area code: (720) 420-4460.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicated by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes No
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files) Yes No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this Chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
(Do not check if a Smaller Reporting Company)
Accelerated Filer
Smaller Reporting Company
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter was approximately $3.0 million (June 30, 2016 closing price $0.75 – closing price has been
adjusted to reflect the impact of the 1 for 10 reverse stock split approved at the shareholder meeting on March 21, 2016, and effective with
trading on March 24, 2016).
The number of shares outstanding of the registrant’s $.001 par value common stock as of the close of business on March 24, 2017 was
10,601,685.
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PART I
Page
Table of Contents
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV Item 15. Exhibits, Financial Statement and Schedules
SIGNATURES
2
FORWARD LOOKING STATEMENTS
The information contained in this Report, in certain instances, includes forward-looking statements within the
meaning of applicable securities laws. Forward-looking statements include statements regarding the Company’s
“expectations,” “anticipations,” “intentions,” “beliefs,” or “strategies” or any similar word or phrase regarding the future.
Forward-looking statements also include statements regarding revenue margins, expenses, and earnings analysis for 2016 and
thereafter; oil and gas prices; exploration activities; development expenditures; costs of regulatory compliance;
environmental matters; technological developments; future products or product development; the Company’s products and
distribution development strategies; potential acquisitions or strategic alliances; liquidity and anticipated cash needs and
availability; prospects for success of capital raising activities; prospects or the market for or price of the Company’s common
stock; and control of the Company. All forward-looking statements are based on information available to the Company as of
the date hereof, and the Company assumes no obligation to update any such forward-looking statement. The Company’s
actual results could differ materially from the forward-looking statements. Among the factors that could cause results to
differ materially are the factors discussed in “Risk Factors” below in Item 1A of this Report.
Projecting the effects of commodity prices, which in past years have been extremely volatile, on production and
timing of development expenditures includes many factors beyond the Company’s control. The future estimates of net cash
flows from the Company’s proved reserves and their present value are based upon various assumptions about future
production levels, prices, and costs that may prove to be incorrect over time. Any significant variance from assumptions
could result in the actual future net cash flows being materially different from the estimates.
GLOSSARY OF OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and this
document:
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of gas.
BOE. One stock tank barrel equivalent of oil, calculated by converting gas volumes to equivalent oil barrels at a ratio of 6
thousand cubic feet of gas to 1 barrel of oil.
BOPD. Barrels of oil per day.
Btu. British thermal unit. One British thermal unit is the amount of heat required to raise the temperature of one pound of
water by one degree Fahrenheit.
Developed oil and gas reserves. Developed oil and gas reserves are reserves of any category that can be expected to be
recovered: (i) through existing wells with existing equipment and operating methods or in which the cost of the required
equipment is relatively minor compared to the cost of a new well; and (ii) through installed extraction equipment and
infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
Development project. A development project is the means by which petroleum resources are brought to the status of
economically producible. As examples, the development of a single reservoir or field, an incremental development in a
producing field or the integrated development of a group of several fields and associated facilities with a common ownership
may constitute a development project.
Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon
known to be productive.
Differential. An adjustment to the price of oil or gas from an established spot market price to reflect differences in the quality
and/or location of oil or gas.
Economically producible. The term economically producible, as it relates to a resource, means a resource which generates
revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. The value of the products that generate
revenue shall be determined at the terminal point of oil and gas producing activities. The terminal point is generally regarded
as the outlet valve on the lease or field storage tank.
3
Estimated ultimate recovery (EUR). Estimated ultimate recovery is the sum of reserves remaining as of a given date and
cumulative production as of that date,
Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a
service well or a stratigraphic test well.
Farmout. An assignment of an interest in a drilling location and related acreage conditional upon the drilling of a well on that
location.
Gas. Natural gas.
MBbl. One thousand barrels of oil or other liquid hydrocarbons.
MBOE. One thousand BOE.
Mcf. One thousand cubic feet of gas.
Mcfd. One thousand cubic feet of gas per day
MMcfe. One million cubic feet of gas equivalent.
MMBOE. One million BOE.
MMBtu. One million British thermal units.
MMcf. One million cubic feet of gas.
NYMEX. New York Mercantile Exchange.
Oil. Crude oil, condensate and natural gas liquids.
Operator. The individual or company responsible for the exploration and/or production of an oil or gas well or lease.
Play. A geographic area with hydrocarbon potential.
Polymer. The purpose of the polymer gel treatment is to reduce excessive water production and increase oil or gas production
from wells that produce from water-drive reservoirs. These wells are typically produced from naturally fractured carbonate
reservoirs such as dolomites and limestone in mature fields. Successful treatments are also run in certain types of sandstone
reservoirs. Other practical applications of polymer gels include the treatment of waterflood injection wells to correct
channeling or change the injection profile, to improve the ability of the injected fluids to sweep the producing wells in the
field, making the waterflood much more efficient and allowing the operator to recover more oil in a shorter period of time.
Proved oil and gas reserves. Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward,
from known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the
time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain,
regardless of whether deterministic or probabilistic methods are used for estimation. The project to extract the hydrocarbons
must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable
time.
The area of the reservoir considered as proved includes all of the following: (i) the area identified by drilling and limited by
fluid contacts, if any; and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be
continuous with it and to contain economically producible oil and gas on the basis of available geoscience and engineering
data.
In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as
seen in a well penetration unless geoscience, engineering or performance data and reliable technology establish a lower
contact with reasonable certainty.
4
Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an
associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience,
engineering or performance data and reliable technology establish the higher contact with reasonable certainty.
Reserves which can be produced economically through application of improved recovery techniques (including, but not
limited to, fluid injection) are included in the proved classification when: (i) successful testing by a pilot project in an area of
the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the
reservoir or an analogous reservoir or other evidence using reliable technology establishes the reasonable certainty of the
engineering analysis on which the project or program was based; and (ii) the project has been approved for development by
all necessary parties and entities, including governmental entities.
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined.
The price shall be the average price during the twelve-month period prior to the ending date of the period covered by the
report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such
period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
Proved reserve additions. The sum of additions to proved reserves from extensions, discoveries, improved recovery,
acquisitions and revisions of previous estimates.
Reserves. Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically
producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist,
or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the
production, installed means of delivering oil and gas or related substances to market and all permits and financing required to
implement the project. Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults
until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that
are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low
reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from
undiscovered accumulations).
Reserve additions. Changes in proved reserves due to revisions of previous estimates, extensions, discoveries, improved
recovery and other additions and purchases of reserves in-place.
Reserve life. A measure of the productive life of an oil or gas property or a group of properties, expressed in years.
Royalty interest. An interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the
production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay
any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are
usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
Standardized measure. The present value, discounted at 10% per year, of estimated future net revenues from the production
of proved reserves, computed by applying sales prices used in estimating proved oil and gas reserves to the year-end
quantities of those reserves in effect as of the dates of such estimates and held constant throughout the productive life of the
reserves and deducting the estimated future costs to be incurred in developing, producing, and abandoning the proved
reserves (computed based on year-end costs and assuming continuation of existing economic conditions). Future income
taxes are calculated by applying the appropriate year-end statutory federal and state income tax rates with consideration of
future tax rates already legislated, to pre-tax future net cash flows, net of the tax basis of the properties involved and
utilization of available tax carryforwards related to proved oil and gas reserves.
SWD. Salt water disposal well.
Undeveloped oil and gas reserves. Undeveloped oil and gas reserves are reserves of any category that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are
reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable
certainty of economic producibility at greater distances.
5
Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating
that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Under no
circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual
projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing
reasonable certainty.
Waterflood. A method of secondary recovery in which water is injected into the reservoir formation to displace residual oil.
The water from injection wells physically sweeps the displaced oil to adjacent production wells.
Working interest. An interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil
and gas from the leased acreage and requires the owner to pay a share of the costs of drilling and production operations.
References herein to the “Company”, “we”, “us” and “our” mean Tengasco, Inc.
PART I
ITEM 1. BUSINESS.
History of the Company
The Company was initially organized in Utah in 1916 under a name later changed to Onasco Companies, Inc. In
1995, the Company changed its name from Onasco Companies, Inc. by merging into Tengasco, Inc., a Tennessee
corporation, formed by the Company solely for this purpose. On June 11, 2011, the stockholders of the Company approved
an Agreement and Plan of Merger which provided for the merger of the Company into a wholly-owned subsidiary formed in
Delaware for the purpose of changing the Company’s state of incorporation from Tennessee to Delaware. The Company is
now a Delaware corporation.
OVERVIEW
The Company is in the business of exploration for and production of oil and natural gas. The Company’s primary
area of exploration and production is in Kansas.
The Company’s wholly-owned subsidiary, Tengasco Pipeline Corporation (“TPC”) owned and operated a pipeline
which it constructed to transport natural gas from the Company’s Swan Creek Field to customers in Kingsport, Tennessee.
The Company sold all its pipeline assets on August 16, 2013.
The Company’s wholly-owned subsidiary, Manufactured Methane Corporation (“MMC”) operates treatment and
delivery facilities in Church Hill, Tennessee for the extraction of methane gas from a landfill for eventual sale as natural gas
or for the generation of electricity.
General
1. The Kansas Properties
The Company’s operated properties in Kansas are located in central Kansas and as of December 31, 2016 include
177 producing oil wells, 23 shut-in wells, and 38 active disposal wells (the “Kansas Properties”). The Company has onsite
production management and field personnel working out of the Hays, Kansas office.
The leases for the Kansas Properties provide for a landowner royalty of 12.5%. Some wells are subject to an
overriding royalty interest from 0.5% to 9%. The Company maintains a 100% working interest in most of its wells and
undrilled acreage in Kansas.
During 2016, the Company participated in drilling one non-operated well which was completed as a producing well.
All of the Company’s current reserve value, production, oil and gas revenue, and future development objectives result from
the Company’s ongoing interest in Kansas. By using 3-D seismic evaluation on the Company’s existing locations, the
Company has historically added proven direct offset locations.
6
A. Kansas Production
The Company’s gross oil production in Kansas decreased by 26 MBbl from 158 MBbl in 2015 to 132 MBbl in
2016. This decrease was primarily the result of natural declines during 2016. The capital projects undertaken by the
Company in 2016 were funded by borrowings from the Company’s credit facility.
B. Kansas Ten Well Drilling Program
On September 17, 2007, the Company entered into a ten well drilling program with Hoactzin Partners, L.P.
(“Hoactzin”), consisting of wells to be drilled on the Company’s Kansas Properties (the “Program”). Peter E. Salas, the
Chairman of the Board of Directors of the Company, is the controlling person of Hoactzin and of Dolphin Offshore Partners,
L.P., the Company’s largest shareholder. The terms of the Program also provided that Hoactzin would receive all the
working interest in the producing wells, and would pay an initial fee to the Company of 25% of its working interest revenues
net of operating expenses as a management fee. The fee paid to the Company by Hoactzin increased from 25% to 85% of its
working interest revenues net of operating expenses when net revenues received by Hoactzin reached an agreed payout point
of approximately 1.35 times Hoactzin’s purchase price (the “Payout Point”) in February 2014.
In 2016, the wells from the Program produced total gross production of 9.9 MBbl of which the revenues from 7.4
MBbl were net to the Company. During the 4th quarter of 2016, total gross production from these wells averaged 26 barrels
per day, of which the revenues from 19 barrels per day were net to the Company.
The reserve information for the parties’ respective Ten Well Program interests as of December 31, 2016 is indicated
in the table below. These calculations were made using commodity prices based on the twelve month arithmetic average of
the first day of the month price for the period January through December 2016 as required by SEC regulations. The table
below reflects values realized at a price of $37.35 per barrel which was used in the December 31, 2016 reserve report.
Reserve Information for Ten Well Program Interest as of December 31, 2016
Barrels Attributable to
Party’s Interest
Undiscounted Future Net Cash
Flows Attributable to
Party’s Interest
Present Value of Future Net Cash
Flows Discounted at 10%
Attributable to Party’s Interest
MBbl
(in thousands)
(in thousands)
70.3 $
12.4 $
1,242 $
219 $
642
113
Tengasco
Hoactzin
The Hoactzin reserves were estimated based on Tengasco reserves as of December 31, 2016.
B. Kansas Production
The Company’s gross oil production in Kansas decreased by 26 MBbl from 158 MBbl in 2015 to 132 MBbl in
2016. This decrease was primarily the result of natural declines during 2016. The capital projects undertaken by the
Company in 2016 were funded by borrowings from the Company’s credit facility.
2. Tennessee Properties
A. Oil, Gas, and Pipeline Assets
In July 1995, the Company acquired the Swan Creek leases and began development of the field. In 2001, the
Company completed construction of a 65 mile pipeline from the Swan Creek Field to several meter stations in Kingsport,
Tennessee. Since that time, the Company evaluated whether continued development would add additional reserves and the
likelihood of realizing additional revenues from transportation of third party gas through the Company’s pipeline assets. The
Company determined that existing wells would be able to produce the remaining oil and gas reserves and that the Company
was unable to attract any additional third party gas without substantial capital investment. As a result, the Company elected
to sell its Swan Creek oil and gas assets and its pipeline assets and focus on its oil production from its Kansas Properties.
On August 16, 2013, the Company closed a sale to Swan Creek Partners LLC of all of the Company’s oil and gas
leases and producing assets in Tennessee as well as all the Company’s pipeline assets for $1.5 million.
7
B. Manufactured Methane Facilities
On October 24, 2006, the Company signed a twenty-year Landfill Gas Sale and Purchase Agreement (the
“Agreement”) with predecessors in interest of Republic Services, Inc. (“Republic”). The Company assigned its interest in the
Agreement to MMC. The Agreement provided that MMC would purchase the entire naturally produced gas stream being
collected at the Carter Valley municipal solid waste landfill owned and operated by Republic in Church Hill, Tennessee. The
Company installed a proprietary combination of advanced gas treatment technology to extract the methane component of the
purchased gas stream. (the “Methane Project”).
MMC declared startup of commercial operations of the Methane Project on April 1, 2009. The total cost for the
Methane Project through startup, including pipeline construction, was approximately $4.5 million.
In April 2011, MMC purchased from Parkway Services Group of Lafayette, Louisiana a Caterpillar genset which
was delivered in late 2011 and installed at the plant site for generation of electricity. Total cost of the generator including
installation and interconnection with the power grid was approximately $1.1 million.
On January 25, 2012, MMC commenced sales of electricity generated at the Carter Valley site. The electricity
generated is sold under a twenty year firm price contract with Holston Electric Cooperative, Inc., the local distributor, and
Tennessee Valley Authority through TVA’s Generation Partners program. That program accepted generated renewable
power up to 999KW; MMC’s generation equipment is rated at 974 KW to maximize revenues under the favorable electricity
pricing under the Generation Partners program. The price provision under this contract pays MMC the current retail price
charged monthly to small commercial customers by Holston Electric Cooperative, plus a “green” premium of 3 cents per
kilowatt hour (KWH). Current price paid to MMC is approximately $.129 per KWH. Beginning in January 2022 the price
paid for electricity will no longer include the three-cent “green” premium component. A one-eighth royalty on electricity
revenues is paid to the landfill owner.
On September 17, 2007, Hoactzin, simultaneously with subscribing to participate in the Ten Well Program (the
“Program”), pursuant to a separate agreement with the Company was conveyed a 75% net profits interest in the Methane
Project. Because the Payout Point was reached in February 2014 as described above, Hoactzin’s net profits interest in the
Methane Project has decreased to 7.5%. The agreed method of calculation of net profits takes into account specific costs and
expenses as well as gross gas revenues for the project. As a result of the startup costs, ongoing operating expenses, and
reduced production levels experienced, no net profits as defined have been realized during the period from the project startup
in April, 2009 through December 31, 2016 for payment to Hoactzin under the net profits interest. Since the start of 2014,
there have been no methane gas sales or revenues and consequently no net profits attributable to Hoactzin’s net profits
interest.
3. Other Areas of Development
Although focused on development of its current Kansas holdings, the Company will continue to review potential
transactions involving producing properties and undeveloped acreage in Kansas as well as acquisition and drilling
opportunities in the surrounding states.
Governmental Regulations
The Company is subject to numerous state and federal regulations, environmental and otherwise, that may have a
substantial negative effect on its ability to operate at a profit. For a discussion of the risks involved as a result of such
regulations, see, “Effect of Existing or Probable Governmental Regulations on Business and Costs and Effects of Compliance
with Environmental Laws” hereinafter in this section.
Principal Products or Services and Markets
The principal markets for the Company’s crude oil are local refining companies. At present, crude oil produced by
the Company in Kansas is sold at or near the wells to Coffeyville Resources Refining and Marketing, LLC (“Coffeyville”) in
Kansas City, Kansas and to CHS McPherson Refinery (“CHS”) in McPherson, Kansas. Both Coffeyville and CHS are solely
responsible for transportation to their refineries of the oil they purchase. The Company may sell some or all of its production
to one or more additional refineries in order to maximize revenues as purchases prices offered by the refineries fluctuate from
time to time.
8
Electricity generated at the Company’s MMC site in Tennessee is sold to Holston Electric Cooperative and TVA.
The contract with Holston Electric and TVA had a ten year initial commitment and has been extended for an additional ten
years as described above. The contract with Holston Electric and TVA will expire in January 2032.
Drilling Equipment
The Company does not currently own a drilling rig or any related drilling equipment. The Company obtains drilling
services as required from time to time from various drilling contractors in Kansas.
Distribution Methods of Products or Services
Crude oil is normally delivered to refineries in Kansas by tank truck. Electricity generated at the Company’s
Methane Facility is distributed into the electric grid.
Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition
The Company’s contemplated oil and gas exploration activities in the State of Kansas will be undertaken in a highly
competitive and speculative business atmosphere. In seeking any other suitable oil and gas properties for acquisition, the
Company will be competing with a number of other companies, including large oil and gas companies and other independent
operators with greater financial resources. Management does not believe that the Company’s competitive position in the oil
and gas industry will be significant as the Company currently exists.
There are numerous producers in the area of the Kansas Properties. Some of these companies are larger than the
Company and have greater financial resources. These companies are in competition with the Company for lease positions in
the known producing areas in which the Company currently operates, as well as other potential areas of interest.
Although management does not foresee any difficulties in procuring contracted drilling rigs, several factors,
including increased competition in the area, may limit the availability of drilling rigs, rig operators and related personnel
and/or equipment in the future. Such limitations would have a natural adverse impact on the profitability of the Company’s
operations.
The Company anticipates no difficulty in procuring well drilling permits in any state. The Company generally does
not apply for a permit until it is actually ready to commence drilling operations.
The prices of the Company’s products are controlled by the world oil market and the United States natural gas
market. Thus, competitive pricing behaviors are considered unlikely; however, competition in the oil and gas exploration
industry exists in the form of competition to acquire the most promising acreage blocks and obtaining the most favorable
process for transporting the product.
Sources and Availability of Raw Materials
Excluding the development of oil and gas reserves and the production of oil and gas, the Company’s operations are
not dependent on the acquisition of any raw materials.
Dependence on One or a Few Major Customers
At present, crude oil from the Kansas Properties is being purchased at the well and trucked by Coffeyville and CHS,
which are responsible for transportation of the crude oil purchased. The Company may sell some or all of its production to
one or more additional refineries in order to maximize revenues as purchase prices offered by the refineries fluctuate from
time to time.
In 2016 and 2015, no gas was produced or sold from the Methane Project. If any gas is produced from the Methane
Project in the future, the Company is dependent upon a small number of customers for the sale of gas from the Methane
Project. These customers are principally gas marketing companies, utility districts, and industrial customers in the Kingsport
area with which the Company may enter into gas sales contracts.
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Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, Including
Duration
On October 19, 2010, the Company’s subsidiary MMC was granted United States Patent No. 7,815,713 for Landfill
Gas Purification Method and System, pursuant to application filed January 10, 2007. The patent term is for twenty years
from filing date plus adjustment period of 595 days due to the length of the review process resulting in grant of the patent.
The patent is for the process designed and utilized by MMC at the Carter Valley landfill facility. The patent may result in a
competitive advantage to MMC in seeking new projects, and in the receipt of licensing fees for other projects that may be
using or wish to use the process in the future. However, the limited number of high Btu projects currently existing and
operated by others, the variety of processes available for use in high Btu projects, and the effects of current gas markets and
decreasing or inapplicable green energy incentives for such projects in combination cause the materiality of any licensing
opportunity presented by the patent to be difficult to determine or estimate, and thus the licensing fees from the patent, if any
are received, may not be material to the Company’s overall results of operations.
Need For Governmental Approval of Principal Products or Services
None of the principal products offered by the Company require governmental approval, although permits are
required for drilling oil or gas wells.
Effect of Existing or Probable Governmental Regulations on Business
Exploration and production activities relating to oil and gas leases are subject to numerous environmental laws, rules
and regulations. The Federal Clean Water Act requires the Company to construct a fresh water containment barrier between
the surface of each drilling site and the underlying water table. This involves the insertion of steel casing into each well, with
cement on the outside of the casing. The Company has fully complied with this environmental regulation, the cost of which
is approximately $10,000 per well.
As part of the Company’s purchase of the Kansas Properties, the Company acquired a statewide permit to drill in
Kansas. Applications under such permit are applied for and issued within one to two weeks prior to drilling. At the present
time, the State of Kansas does not require the posting of a bond either for permitting or to insure that the Company’s wells
are properly plugged when abandoned. All of the wells in the Kansas Properties have all permits required and the Company
believes that it is in compliance with the laws of the State of Kansas.
The Company’s exploration, production and marketing operations are regulated extensively at the federal, state and
local levels. The Company has made and will continue to make expenditures in its efforts to comply with the requirements of
environmental and other regulations. Further, the oil and gas regulatory environment could change in ways that might
substantially increase these costs. These regulations affect the Company’s operations and limit the quantity of hydrocarbons
it may produce and sell. Other regulated matters include marketing, pricing, transportation and valuation of royalty
payments. The Company’s operations are also subject to numerous and frequently changing laws and regulations governing
the discharge of materials into the environment or otherwise relating to environmental protection. For example, in May 2014
the Company become subject to regulations under the federal Endangered Species Act relating to the protection of the lesser
prairie chicken as a threatened species. To avoid stringent penalties for violation of those regulations, the Company entered
into a state-operated voluntary agreement avoiding those penalties provided certain protective methods are followed in
drilling operations and remediation fees are paid by the Company for any wells determined to be likely to interfere with the
habitat of the threatened species. These fees may increase the Company’s costs to drill in Kansas by approximately $40,000
per well. The Company owns or leases, and has in the past owned or leased, properties that have been used for the
exploration and production of oil and gas and these properties and the wastes disposed on these properties may be subject to
the Comprehensive Environmental Response, Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource
Conservation and Recovery Act, the Federal Water Pollution Control Act and analogous state laws. Under such laws, the
Company could be required to remove or remediate previously released wastes or property contamination.
Laws and regulations protecting the environment have generally become more stringent and, may in some cases,
impose “strict liability” for environmental damage. Strict liability means that the Company may be held liable for damage
without regard to whether it was negligent or otherwise at fault. Environmental laws and regulations may expose the
Company to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable
laws at the time they were performed. Failure to comply with these laws and regulations may result in the imposition of
administrative, civil and criminal penalties.
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While management believes that the Company’s operations are in substantial compliance with existing requirements
of governmental bodies, the Company’s ability to conduct continued operations is subject to satisfying applicable regulatory
and permitting controls. The Company’s current permits and authorizations and ability to get future permits and
authorizations may be susceptible, on a going forward basis, to increased scrutiny, greater complexity resulting in increased
costs or delays in receiving appropriate authorizations.
The Company maintains an Environmental Response Policy and Emergency Action Response Policy Program. A
plan was adopted which provides for the erection of signs at each well containing telephone numbers of the Company’s
office. A list is maintained at the Company’s office and at the home of key personnel listing phone numbers for fire, police,
emergency services and Company employees who will be needed to deal with emergencies.
The foregoing is only a brief summary of some of the existing environmental laws, rules and regulations to which
the Company’s business operations are subject, and there are many others, the effects of which could have an adverse impact
on the Company. Future legislation in this area will be enacted and revisions will be made in current laws. No assurance can
be given as to the effect these present and future laws, rules and regulations will have on the Company’s current and future
operations.
Research and Development
None.
Number of Total Employees and Number of Full-Time Employees
At December 31, 2016, the Company had 14 full time employees and no part-time employees. These employees are
located in Colorado, Kansas, Tennessee, and Texas.
Available Information
The Company is a reporting company, as that term is defined under the Securities Acts, and therefore files reports,
including Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K such as this Report, proxy information
statements and other materials with the Securities and Exchange Commission (“SEC”). You may read and copy any
materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549
upon payment of the prescribed fees. You may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.
In addition, the Company is an electronic filer and files its Reports and information with the SEC through the SEC’s
Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”). The SEC maintains a website that contains reports,
proxy and information statements and other information regarding issuers that file electronically through EDGAR with the
SEC, including all of the Company’s filings with the SEC. These may be read and printed without charge from the SEC’s
website. The address of that site is www.sec.gov.
The Company’s website is located at www.tengasco.com. On the home page of the website, you may access, free of
charge, the Company’s Annual Report on Form 10-K. Under the Investor Information /SEC filings tab you will find the
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings (Form 3, 4 and 5) and any amendments to
those reports as reasonably practicable after the Company electronically files such reports with the SEC. The information
contained on the Company’s website is not part of this Report or any other report filed with the SEC.
ITEM 1A. RISK FACTORS
In addition to the other information included in this Form 10-K, the following risk factors should be considered in
evaluating the Company’s business and future prospects. The risk factors described below are not exhaustive and you are
encouraged to perform your own investigation with respect to the Company and its business. You should also read the other
information included in this Form 10-K, including the financial statements and related notes.
The Company’s indebtedness, global recessions, or disruption in the domestic and global financial markets could have
an adverse effect on the Company’s operating results and financial condition.
As of December 31, 2016, the outstanding principal amount of the Company’s indebtedness under its credit facility
with Prosperity Bank was approximately $2.4 million. This balance was paid off in February 2017 using funds raised in the
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Company’s rights offering which closed on February 2, 2017. Although the Company’s indebtedness has been substantially
reduced, the current or an increased level of indebtedness, coupled with domestic and global economic conditions, the
associated volatility of energy prices, and the levels of disruption and continuing relative illiquidity in the credit markets may,
if continued for an extended period, have several important and adverse consequences on the Company’s business and
operations. For example, any one or more of these factors could (i) make it difficult for the Company to service or refinance
its existing indebtedness; (ii) increase the Company’s vulnerability to additional adverse changes in economic and industry
conditions; (iii) require the Company to dedicate a substantial portion or all of its cash flow from operations and proceeds of
any debt or equity issuances or asset sales to pay or provide for its indebtedness; (iv) limit the Company’s ability to respond
to changes in our businesses and the markets in which we operate; (v) place the Company at a disadvantage to our
competitors that are not as highly leveraged; or (vi) limit the Company’s ability to borrow money or raise equity to fund our
working capital, capital expenditures, acquisitions, debt service requirements, investments, general corporate activity or other
financing needs. The Company continues to closely monitor the disruption in the global financial and credit markets, as well
as the significant volatility in the market prices for oil and natural gas. As these events unfold, the Company will continue to
evaluate and respond to any impact on Company operations. The Company has and will continue to adjust its drilling plans
and capital expenditures as necessary. However, external financing in the capital markets may not be readily available, and
without adequate capital resources, the Company’s drilling and other activities may be limited and the Company’s business,
financial condition and results of operations may suffer. Additionally, in light of the credit markets and the volatility in
pricing for oil and natural gas, the Company’s ability to enter into future beneficial relationships with third parties for
exploration and production activities may be limited, and as a result, may have an adverse effect on current operational
strategy and related business initiatives.
Agreements Governing the Company’s Indebtedness may Limit the Company’s Ability to Execute Capital Spending
or to Respond to Other Initiatives or Opportunities as they May Arise.
Because the availability of borrowings by the Company under the terms of the Company’s amended and restated
credit facility with Prosperity Bank is subject to an upper limit of the borrowing base as determined by the lender’s calculated
estimated future cash flows from the Company’s oil and natural gas reserves, the Company expects any decline in the pricing
for these commodities, if continued for any extended period, would very likely result in a reduction in the Company’s
borrowing base. A reduction in the Company’s borrowing base could be significant and as a result, would not only reduce
the capital available to the Company but may also require repayment of principal to the lender under the terms of the facility.
Additionally, the terms of the Company’s amended and restated credit facility with Prosperity Bank restrict the Company’s
ability to incur additional debt. The credit facility contains covenants and other restrictions customary for oil and gas
borrowing base credit facilities, including limitations on debt, liens, and dividends, voluntary redemptions of debt,
investments, and asset sales. In addition, the credit facility requires that the Company maintain compliance with certain
financial tests and financial covenants. If future debt financing is not available to the Company when required as a result of
limited access to the credit markets or otherwise, or is not available on acceptable terms, the Company may be unable to
invest needed capital for drilling and exploration activities, take advantage of business opportunities, respond to competitive
pressures or refinance maturing debt. In addition, the Company may be forced to sell some of the Company’s assets on an
untimely basis or under unfavorable terms. Any of these results could have a material adverse effect on the Company’s
operating results and financial condition.
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 lender’s practices regarding estimation of reserves. If either 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 production may be limited. In addition, these adverse conditions could
lead to non-compliance with certain credit facility covenants, ultimately causing the Company to default under its revolving
credit facility.
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The Company’s Credit Facility is Subject to Variable Rates of Interest, Which Could Negatively Impact the
Company.
Borrowings under the Company’s credit facility with Prosperity Bank are at variable rates of interest and expose the
Company to interest rate risk. If interest rates increase, the Company’s debt service obligations on the variable rate
indebtedness would increase even though the amount borrowed remained the same, and the Company’s income and cash
flows would decrease. The Company’s credit facility agreement contains certain financial covenants based on the
Company’s performance. If the Company’s financial performance results in any of these covenants being violated,
Prosperity Bank may choose to require repayment of the outstanding borrowings sooner than currently required by the
agreement.
Declines in Oil or Gas Prices Have and Will Materially Adversely Affect the Company’s Revenues.
The Company’s financial condition and results of operations depend in large part upon the prices obtainable for the
Company’s oil and natural gas production and the costs of finding, acquiring, developing and producing reserves. As seen in
recent years, prices for oil and natural gas are subject to extreme fluctuations in response to changes in supply, market
uncertainty and a variety of additional factors that are beyond the Company’s control. These factors include worldwide
political instability (especially in the Middle East and other oil producing regions), the foreign supply of oil and gas, the price
of foreign imports, the level of drilling activity, the level of consumer product demand, government regulations and taxes, the
price and availability of alternative fuels, speculating activities in the commodities markets, and the overall economic
environment. The Company’s operations are substantially adversely impacted as oil prices decline. Lower prices
dramatically affect the Company’s revenues from its drilling operations. Further, drilling of new wells, development of the
Company’s leases and acquisitions of new properties are also adversely affected and limited. As a result, the Company’s
potential revenues from operations as well as the Company’s proved reserves may substantially decrease from levels
achieved during the period when oil prices were much higher. There can be no assurances as to the future prices of oil or
gas. A substantial or extended decline in oil or gas prices would have a material adverse effect on the Company’s financial
position, results of operations, quantities of oil and gas that may be economically produced, and access to capital. Oil and
natural gas prices have historically been and are likely to continue to be volatile.
This volatility makes it difficult to estimate with precision the value of producing properties in acquisitions and to
budget and project the return on exploration and development projects involving the Company’s oil and gas properties. In
addition, unusually volatile prices often disrupt the market for oil and gas properties, as buyers and sellers have more
difficulty agreeing on the purchase price of properties.
Risk in Rates of Oil and Gas Production, Development Expenditures, and Cash Flows May Have a Substantial Impact
on the Company’s Finances.
Projecting the effects of commodity prices on production, and timing of development expenditures include many
factors beyond the Company’s control. The future estimates of net cash flows from the Company’s proved and other reserves
and their present value are based upon various assumptions about future production levels, prices, and costs that may prove to
be incorrect over time. Any significant variance from assumptions could result in the actual future net cash flows being
materially different from the estimates, which would have a significant impact on the Company’s financial position.
The Company Has a History of Significant Losses.
During the early stages of the development of its oil and gas business, the Company had a history of significant
losses from operations, in particular its development of the Swan Creek Field and the Company’s pipeline assets. In addition,
the Company has recorded an impairment of its oil and gas properties during 2008, 2015, and 2016, impairments of its
pipeline assets during 2010 and 2012, and an impairment of its methane facility in 2014. As of December 31, 2016, the
Company has an accumulated deficit of $52.5 million. The Company recorded net losses of $2.0 million in 2009, $1.7
million in 2010, $0.1 million in 2012, $0.8 million in 2014, $24.7 million in 2015, and $4.2 million in 2016. In the event the
Company experiences losses in the future, those losses may curtail the Company’s development and operating activities.
The Company’s Oil and Gas Operations Involve Substantial Cost and are Subject to Various Economic Risks.
The Company’s oil and gas operations are subject to the economic risks typically associated with exploration,
development, and production activities, including the necessity of making significant expenditures to locate or acquire new
producing properties or to drill exploratory and developmental wells. In conducting exploration and development activities,
the presence of unanticipated pressure or irregularities in formations, miscalculations, and accidents may cause the
13
Company’s exploration, development, and production activities to be unsuccessful. This could result in a total loss of the
Company’s investment in such well(s) or property. In addition, the cost of drilling, completing and operating wells is often
uncertain.
The Company’s Failure to Find or Acquire Additional Reserves Will Result in the Decline of the Company’s Reserves
Materially From Their Current Levels.
The rate of production from the Company’s Kansas oil properties generally declines as reserves are depleted.
Except to the extent that the Company either acquires additional properties containing proved reserves, conducts successful
exploration and development drilling, or successfully applies new technologies or identifies additional behind-pipe zones or
secondary recovery reserves, the Company’s proved reserves will decline materially as production from these properties
continues. The Company’s future oil and natural gas production is consequently highly dependent upon the level of success
in acquiring or finding additional reserves or other alternative sources of production. Any decline in oil prices and any
prolonged period of lower prices will adversely impact the Company’s future reserves since the Company is less likely to
acquire additional producing properties during such periods. The lower oil prices may have a negative effect on new drilling
and development as such activities become far less likely to be profitable. Thus, any acquisition of new properties poses a
greater risk to the Company’s financial conditions as such acquisitions may be commercially unreasonable.
In addition, the Company’s drilling for oil and natural gas may involve unprofitable efforts not only from dry wells
but also from wells that are productive but do not produce sufficient volumes to be commercially profitable after deducting
drilling, operating, and other costs. Also, wells that are profitable may not achieve a targeted rate of return. The Company
relies on seismic data and other technologies in identifying prospects and in conducting exploration activities. The seismic
data and other technologies used do not allow the Company to know conclusively prior to drilling a well whether oil or
natural gas is present or may be produced economically.
The ultimate costs of drilling, completing, and operating a well can adversely affect the economics of a project.
Further drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including unexpected
drilling conditions, title problems, pressure or irregularities in formations, equipment failures, accidents, adverse weather
conditions, environmental and other governmental requirements and the cost of, or shortages or delays in the availability of
drilling rigs, equipment, and services.
The Company’s Reserve Estimates May Be Subject to Other Material Downward Revisions.
The Company’s oil and natural gas reserve estimates may be subject to material downward revisions for additional
reasons other than the factors mentioned in the previous risk factor entitled “The Company’s Failure to Find or Acquire
Additional Reserves Will Result in the Decline of the Company’s Reserves Materially from their Current Levels.” While the
future estimates of net cash flows from the Company’s proved reserves and their present value are based upon assumptions
about future production levels, prices, and costs that may prove to be incorrect over time, those same assumptions, whether or
not they prove to be correct, may cause the Company to make drilling or developmental decisions that will result in some or
all of the Company’s proved reserves to be removed from time to time from the proved reserve categories previously reported
by the Company.
This may occur because economic expectations or forecasts, together with the Company’s limited resources, may
cause the Company to determine that drilling or development of certain of its properties may be delayed or may not
foreseeably occur, and as a result of such decisions any category of proved reserves relating to those yet undrilled or
undeveloped properties may be removed from the Company’s reported proved reserves. Consequently, the Company’s
proved reserves of oil may be materially revised downward from time to time.
In addition, the Company may elect to sell some or all of its oil or gas reserves in the normal course of the
Company’s business. Any such sale would result in all categories of those proved oil or gas reserves that were sold no longer
being reported by the Company.
There is Risk That the Company May Be Required to Write Down the Carrying Value of its Natural Gas and Crude
Oil Properties.
The Company uses the full cost method to account for its natural gas and crude oil operations. Accordingly, the
Company capitalizes the cost to acquire, explore for and develop natural gas and crude oil properties. Under full cost
accounting rules, the net capitalized cost of natural gas and crude oil properties and related deferred income tax if any may
not exceed a “ceiling limit” which is based upon the present value of estimated future net cash flows from proved reserves,
14
discounted at 10%, plus cost of properties not being amortized and the lower of cost or estimated fair value of unproven
properties included in the cost being amortized. If net capitalized cost of natural gas and crude oil properties exceeds the
ceiling limit, the Company must charge the amount of the excess, net of any tax effects, to earnings. This charge does not
impact cash flow from operating activities, but does reduce the Company’s stockholders’ equity and earnings. The risk that
the Company will be required to write-down the carrying value of natural gas and crude oil properties increases when natural
gas and crude oil prices are low. In addition, write-downs may occur if the Company experiences substantial downward
adjustments to its estimated proved reserves. An expense recorded in a period may not be reversed in a subsequent period
even though higher natural gas and crude oil prices may have increased the ceiling applicable to the subsequent period.
Due to the low oil prices experienced since the quarter ended September 30, 2014, during 2015 the Company
experienced ceiling test failures resulting in recording non-cash impairments of $14.5 million. During 2016, the Company
recorded ceiling test failures resulting in recording non-cash impairment of $2.7 million. Should prices continue at depressed
levels during future periods, the Company may be required to record additional impairment of its oil properties.
There is a Risk That the Company May Be Required to Write Down the Carrying Value of its Manufactured
Methane Facilities.
The Company’s Manufactured Methane facilities are subject to review for impairment whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable. The carrying amount is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the methane
facility assets. Should this occur, the assets’ carrying amount will be reduced to its fair value and the excess over fair value
net of any tax effects, will be charged to earnings. This expense may not be reversed in future periods. In 2014, the Company
recognized a non-cash impairment of its Manufactured Methane facilities in the amount of $2.8 million ($1.7 million net of
tax effect). The impairment resulted from the Company’s assessment that future cash flows, using historical costs and
runtimes, were insufficient to recover the Manufactured Methane facilities’ net book value. The Manufactured Methane
facilities were written down to fair value amount calculated from estimated discounted cash flows, as well as certain
expressions of interest with regard to the purchase by outside parties of the Company’s Manufactured Methane facilities.
Use of the Company’s Net Operating Loss Carryforwards May Be Limited.
At December 31, 2016, the Company 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 the Company 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,
limitations exist upon use of these carryforwards in the event that a change in control of the Company occurs. There are risks
that the Company 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 the Company. The effect of such write downs or reversals, if they occur, may be material and
substantially adverse. At December 31, 2015 and 2016, the Company recorded a valuation allowance against the entire
deferred tax asset, including the portion related to the remaining net operating loss carryforwards. This allowance was
recorded primarily as a result of cumulative book losses experienced over the 3 year period ending December 31, 2015 and
2016.
Shortages of Oil Field Equipment, Services or Qualified Personnel Could Adversely Affect the Company’s Results of
Operations.
The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists,
geophysicists, engineers, and other professionals in the oil and natural gas industry can fluctuate significantly, often in
correlation with oil and natural gas prices, causing periodic shortages. The Company does not own any drilling rigs and is
dependent upon third parties to obtain and provide such equipment as needed for the Company’s drilling activities. There
have also been shortages of drilling rigs and other equipment when oil prices have risen. As prices increased, the demand for
rigs and equipment increased along with the number of wells being drilled. These factors also cause significant increases in
costs for equipment, services and personnel. These shortages or price increases could adversely affect the Company’s profit
margin, cash flow, and operating results or restrict the Company’s ability to drill wells and conduct ordinary operations.
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The Company has Significant Costs to Conform to Government Regulation of the Oil and Gas Industry.
The Company’s exploration, production, and marketing operations are regulated extensively at the federal, state and
local levels. The Company is currently in compliance with these regulations. In order to maintain its compliance, the
Company has made and will continue to make substantial expenditures in its efforts to comply with the requirements of
environmental and other regulations. Further, the oil and gas regulatory environment could change in ways that might
substantially increase these costs. Hydrocarbon-producing states regulate conservation practices and the protection of
correlative rights. These regulations affect the Company’s operations and limit the quantity of hydrocarbons it may produce
and sell. Other regulated matters include marketing, pricing, transportation and valuation of royalty payments.
The Company has Significant Costs Related to Environmental Matters.
The Company’s operations are also subject to numerous and frequently changing laws and regulations governing the
discharge of materials into the environment or otherwise relating to environmental protection. The Company owns or leases,
and has owned or leased, properties that have been leased for the exploration and production of oil and gas and these
properties and the wastes disposed on these properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource Conservation and Recovery Act, the federal
Water Pollution Control Act, the federal Endangered Species Act, and similar state laws. Under such laws, the Company
could be required to remove or remediate wastes or property contamination.
Laws and regulations protecting the environment have generally become more stringent and, may in some cases,
impose “strict liability” for environmental damage. Strict liability means that the Company may be held liable for damage
without regard to whether it was negligent or otherwise at fault. Environmental laws and regulations may expose the
Company to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable
laws at the time they were performed. Failure to comply with these laws and regulations may result in the imposition of
administrative, civil and criminal penalties.
The Company’s ability to conduct continued operations is subject to satisfying applicable regulatory and permitting
controls. The Company’s current permits and authorizations and ability to get future permits and authorizations may be
susceptible, on a going forward basis, to increased scrutiny, greater complexity resulting in increased cost or delays in
receiving appropriate authorizations.
Insurance Does Not Cover All Risks.
Exploration for and development and production of oil can be hazardous, involving unforeseen occurrences such as
blowouts, fires, and loss of well control, which can result in damage to or destruction of wells or production facilities, injury
to persons, loss of life or damage to property or to the environment. Although the Company maintains insurance against
certain losses or liabilities arising from its operations in accordance with customary industry practices and in amounts that
management believes to be prudent, insurance is not available to the Company against all operational risks.
The Company’s Methane Extraction Operation from Non-conventional Reserves Involves Substantial Costs and is
Subject to Various Economic, Operational, and Regulatory Risks.
The Company’s operations in its existing project involving the extraction of methane gas from non-conventional
reserves such as landfill gas streams, required investment of substantial capital and is subject to the risks typically associated
with capital intensive operations, including risks associated with the availability of financing for required equipment,
construction schedules, air and water environmental permitting, and locating transportation facilities and customers for the
products produced from those operations which may delay or prevent startup of such projects. After startup of commercial
operations, the presence of unanticipated pressures or irregularities in constituents of the raw materials used in such projects
from time to time, miscalculations or accidents may cause the Company’s project activities to be unsuccessful. Although the
technologies to be utilized in such projects are believed to be effective and economical, there are operational risks in the use
of such technologies in the combination to be utilized by the Company as a result of both the combination of technologies
and the early stages of commercial development and use of such technologies for methane extraction from non-conventional
sources such as those to be used by the Company. This risk could result in total or partial loss of the Company’s investment
in such projects. The economic risks of such projects include the marketing risks resulting from price volatility of the
methane gas produced from such projects, which is similar to the price volatility of natural gas. This project is also subject to
the risk that the products manufactured may not be accepted for transportation in common carrier gas transportation facilities,
although the products meet specified requirements for such transportation, or may be accepted on such terms that reduce the
returns of such projects to the Company. This project is also subject to the risk that the product manufactured may not be
16
accepted by purchasers thereof from time to time and the viability of such projects would be dependent upon the Company’s
ability to locate a replacement market for physical delivery of the gas produced from the project.
We have been granted one U.S. patent and have been granted a continuation patent application relating to certain
aspects of our methane extraction technology. Our ability to license our technology is substantially dependent on the validity
and enforcement of this patent. We cannot assure you that our patent will not be invalidated, circumvented or challenged,
that the rights granted under the patents will provide us competitive advantages. In addition, third parties may seek to
challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by or licensed to us based
on, among other things: subsequently discovered prior art; lack of entitlement to the priority of an earlier, related application;
or failure to comply with the written description, best mode, enablement or other applicable requirements. If a third party is
successful in challenging the validity of our patent, our inability to enforce our intellectual property rights could materially
harm our methane extraction business. Furthermore, our technology may be the subject of claims of intellectual property
infringement in the future. Our technology may not be able to withstand third-party claims or rights against their use.
Any intellectual property claims, with or without merit, could be time-consuming, expensive to litigate or settle,
could divert resources and attention and could require us to obtain a license to use the intellectual property of third parties.
We may be unable to obtain licenses from these third parties on favorable terms, if at all. Even if a license is available, we
may have to pay substantial royalties to obtain a license. If we cannot defend such claims or obtain necessary licenses on
reasonable terms, we may be precluded from offering most or all of our technology and our methane extraction business may
be adversely affected.
The Company Faces Significant Competition with Respect to Acquisitions or Personnel.
The oil and gas business is highly competitive. In seeking any suitable oil and gas properties for acquisition, or
drilling rig operators and related personnel and equipment, the Company is a small entity with limited financial resources and
may not be able to compete with most other companies, including large oil and gas companies and other independent
operators with greater financial and technical resources and longer history and experience in property acquisition and
operation.
The Company Depends on Key Personnel, Whom it May Not be Able to Retain or Recruit.
Certain members of present management and certain Company employees have substantial expertise in the areas of
endeavor presently conducted and to be engaged in by the Company. To the extent that their services become unavailable,
the Company would be required to retain other and additional qualified personnel to perform these services in technical areas
upon which the Company is dependent to conduct exploration and production activities. The Company does not know
whether it would be able to recruit and hire qualified and additional persons upon acceptable terms. The Company does not
maintain “Key Person” insurance for any of the Company’s key employees.
The Company’s Operations are Subject to Changes in the General Economic Conditions.
Virtually all of the Company’s operations are subject to the risks and uncertainties of adverse changes in general
economic conditions, the outcome of potential legal or regulatory proceedings, changes in environmental, tax, labor and other
laws and regulations to which the Company is subject, and the condition of the capital markets utilized by the Company to
finance its operations.
Being a Public Company Significantly Increases the Company’s Administrative Costs.
The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and listing requirements
subsequently adopted by the NYSE MKT, the exchange on which the Company’s stock is traded, in response to Sarbanes-
Oxley, have required changes in corporate governance practices, internal control policies and audit committee practices of
public companies. Although the Company is a relatively small public company, these rules, regulations, and requirements
for the most part apply to the same extent as they apply to all major publicly traded companies. As a result, they have
significantly increased the Company’s legal, financial, compliance and administrative costs, and have made certain other
activities more time consuming and costly, as well as requiring substantial time and attention of our senior management. The
Company expects its continued compliance with these and future rules and regulations to continue to require significant
resources. These rules and regulations also may make it more difficult and more expensive for the Company to obtain
director and officer liability insurance in the future, and could make it more difficult for it to attract and retain qualified
members for the Company’s Board of Directors, particularly to serve on its audit committee.
17
The Company’s Chairman of the Board Beneficially Controls a Substantial Amount of the Company’s Common
Stock and Has Significant Influence over the Company’s Business.
Peter E. Salas, the Chairman of the Company’s Board of Directors, is the sole shareholder and controlling person of
Dolphin Mgmt. Services, Inc. the general partner of Dolphin Offshore Partners, L.P. (“Dolphin”), which is the Company’s
largest shareholder. At March 20, 2017, Mr. Salas individually and through Dolphin controls 5,290,241 shares of the
Company’s common stock and had options granting him the right to acquire an additional 10,000 shares of common stock.
His ownership and voting control of approximately 49.9% of the Company’s common stock gives him significant influence
on the outcome of corporate transactions or other matters submitted to the Board of Directors or shareholders for approval,
including mergers, consolidations, and the sale of all or substantially all of the Company’s assets.
Shares Eligible for Future Sale May Depress the Company’s Stock Price.
At March 24, 2017, the Company had 10,601,685 shares of common stock outstanding of which 5,423,951 shares
were held by officers, directors, and affiliates. In addition, options to purchase 35,625 shares of unissued common stock
were granted under the Tengasco, Inc. Stock Incentive Plan all of which were vested at March 24, 2017.
All of the shares of common stock held by affiliates are restricted or controlled securities under Rule 144
promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The shares of the common stock issuable
upon exercise of the stock options have been registered under the Securities Act. Sales of shares of common stock under
Rule 144 or another exemption under the Securities Act or pursuant to a registration statement could have a material adverse
effect on the price of the common stock and could impair the Company’s ability to raise additional capital through the sale of
equity securities.
Future Issuance of Additional Shares of the Company’s Common Stock Could Cause Dilution of Ownership Interest
and Adversely Affect Stock Price.
The Company may in the future issue previously authorized and unissued securities, resulting in the dilution of the
ownership interest of its current stockholders. The Company is currently authorized to issue a total of 100 million shares of
common stock with such rights as determined by the Board of Directors. Of that amount, approximately 10.6 million shares
have been issued. The potential issuance of the approximately 89.4 million remaining authorized but unissued shares of
common stock may create downward pressure on the trading price of the Company’s common stock.
The Company may also issue additional shares of its common stock or other securities that are convertible into or
exercisable for common stock for raising capital or other business purposes. Future sales of substantial amounts of common
stock, or the perception that sales could occur, could have a material adverse effect on the price of the Company’s common
stock.
The Company May Issue Shares of Preferred Stock with Greater Rights than Common Stock.
Subject to the rules of the NYSE MKT, the Company’s charter authorizes the Board of Directors to issue one or
more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of
the Company’s common stock. Any preferred stock that is issued may rank ahead of the Company’s common stock in terms
of dividends, priority and liquidation premiums and may have greater voting rights than the Company’s common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES.
Property Location, Facilities, Size and Nature of Ownership.
The Company leases its principal executive offices, consisting of approximately 3,021 square feet located at 6021 S.
Syracuse Way, Suite 117, Greenwood Village, Colorado at a current rental of $4,378 per month, expiring in May 2017. The
Company also leases an office in Hays, Kansas at a rental of $750 per month that is currently a month to month lease.
18
The Company carries commercial insurance as well as property insurance on its methane facility, offices, vehicles,
and office contents. As of December 31, 2016, the Company does not have an interest in producing or non-producing oil and
gas properties in any state other than Kansas.
Kansas Properties
The Kansas Properties as of December 31, 2016 contained 22,612 gross acres in central Kansas. Of these 22,612
gross acres, 13,913 acres were held by production and 8,699 acres were undeveloped.
Many of these leases are still in effect because they are being held by production. The Kansas leases provide for a
landowner royalty of 12.5%. Some wells are subject to an overriding royalty interest from 0.5% to 9%. The Company
maintains a 100% working interest in most of its wells and undrilled acreage in Kansas. The terms for most of the
Company’s newer leases in Kansas are from three to five years.
During 2016, the Company participated in drilling one non-operated well which was completed as a producing well.
All of the Company’s current reserve value, production, oil and gas revenue, and future development objectives result from
the Company’s ongoing interest in Kansas. By using 3-D seismic evaluation on the Company’s existing locations, the
Company has historically added proven direct offset locations and will continue using 3-D seismic evaluation techniques in
the future.
Reserve and Production Summary
The following tables indicate the county breakdown of 2016 production and reserve values as of December 31,
2016.
Production by County
Area
Rooks County, KS
Trego County, KS
Ellis County, KS
Barton County, KS
Graham County, KS
Russell County, KS
Rush County, KS
Osborne County, KS
Pawnee County, KS
Stafford County, KS
Total
Gross
Production
MBOE
83.7
21.1
6.8
5.9
4.1
3.2
2.3
1.8
1.6
1.1
131.6
Average Net
Revenue
Interest
0.819898
0.806147
0.799655
0.816545
0.872505
0.855950
0.861001
0.580700
0.801618
0.716218
Percentage
of Total Oil
Production
63.6 %
16.0 %
5.2 %
4.5 %
3.1 %
2.5 %
1.7 %
1.4 %
1.2 %
0.8 %
100.0 %
19
Reserve Value by County Discounted at 10% (in thousands)
Area
Rooks County, KS
Trego County, KS
Graham County, KS
Barton County, KS
Ellis County, KS
Rush County, KS
Ness County, KS
Russell County, KS
Pawnee County, KS
Osborne County, KS
Stafford County, KS
Total
Reserve Analyses
Proved
Developed
Proved
Undeveloped
Proved
Reserves
$
$
3,488 $
1,161
506
237
206
97
35
33
27
25
—
5,815 $
— $
—
—
—
—
—
—
—
—
—
—
— $
3,488
1,161
506
237
206
97
35
33
27
25
—
5,815
% of
Total
60.0 %
19.9 %
8.7 %
4.1 %
3.5 %
1.7 %
0.6 %
0.6 %
0.5 %
0.4 %
— %
100.0 %
The Company’s estimated total net proved reserves of oil and natural gas as of December 31, 2016 and 2015, and
the present values of estimated future net revenues attributable to those reserves as of those dates, are presented in the
following tables. All of the Company’s reserves were located in the United States. These estimates were prepared by
LaRoche Petroleum Consultants, Ltd. (“LaRoche”) of Dallas, Texas, and are part of their reserve reports on the Company’s
oil and gas properties. LaRoche and its employees and its registered petroleum engineers have no interest in the Company
and performed those services at their standard rates. LaRoche’s estimates were based on a review of geologic, economic,
ownership, and engineering data provided to them by the Company. In accordance with SEC regulations, no price or cost
escalation or reduction was considered. The technical persons at LaRoche responsible for preparing the Company’s reserve
estimates meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the
standards pertaining to the estimating and auditing of oil and gas reserves information promulgated by the Society of
Petroleum Engineers. Our independent third party engineers do not own an interest in any of our properties and are not
employed by the Company on a contingent basis.
In substance, the LaRoche Report used estimates of oil and gas reserves based upon standard petroleum engineering
methods which include production data, decline curve analysis, volumetric calculations, pressure history, analogy, various
correlations and technical factors. Information for this purpose was obtained from owners of interests in the areas involved,
state regulatory agencies, commercial services, outside operators and files of LaRoche.
Management has established, and is responsible for, internal controls designed to provide reasonable assurance that
the estimates of Proved Reserves are computed and reported in accordance with SEC rules and regulations as well as with
established industry practices. The Company evaluates reserves on a well by well basis and on a company wide basis. Prior
to generation of the annual reserves, management and staff meet with LaRoche to review properties and discuss assumptions
to be used in the calculation of reserves. Management reviews all information submitted to LaRoche to ensure the accuracy
of the data. Management also reviews the final report from LaRoche and discusses any differences from Management
expectations with LaRoche.
Total Proved Reserves as of December 31, 2016
Oil (MBbl)
Future net cash flows before income taxes
discounted at 10% (in thousands)
Producing
Non Producing
40
690
Undeveloped
Total
—
730
$
5,397 $
418 $
— $
5,815
20
Total Proved Reserves as of December 31, 2015
Oil (MBbl)
Future net cash flows before income taxes
discounted at 10% (in thousands)
Producing
Non-producing
60
817
Undeveloped
Total
—
877
$
7,686 $
601 $
— $
8,287
Historically, all drilling has primarily been funded by cash flows from operations with supplemental funding
provided by the Company’s credit facility. The Company had no Proved Undeveloped Reserves at December 31, 2016 and
2015.
The oil price after basis adjustments used in our December 31, 2016 reserve valuation was $37.35 per Bbl compared
to $43.98 per Bbl used in our December 31, 2015 reserve valuation. The primary factors causing the decrease in proved
reserve volumes from December 31, 2015 levels was reduced oil prices.
The assumed prices used in calculating the estimated future net revenue attributable to proved reserves do not
necessarily reflect actual market prices for oil production sold after December 31, 2016. There can be no assurance that all of
the estimated proved reserves will be produced and sold at the assumed prices. Accordingly, the foregoing prices should not
be interpreted as a prediction of future prices.
Production
The following tables summarize for the past three fiscal years the volumes of oil and gas produced from operated
properties, the Company’s operating costs, and the Company’s average sales prices for its oil and gas. The net production
volumes excluded volumes produced to royalty interest or other parties’ working interest.
Gross
Production
Kansas
Net
Production
Oil
(MBbl)
Gas
(MMcf)
Oil
(MBbl)
Gas
(MMcf)
Cost of Net
Production
(Per BOE)
Average Sales Price
Gas
Oil
(Per Mcf)
(Bbl)
131.6
158.0
185.6
—
—
—
107.0
129.1
152.2
— $
— $
— $
27.82 $
25.67 $
31.77 $
37.53
42.66
86.05
—
—
—
Years Ended
December 31,
2016
2015
2014
Oil and Gas Drilling Activities
During 2016, the Company participated in drilling 1 non-operated well which was completed as a producing well.
All of the Company’s current reserve value, production, oil and gas revenue, and future development objectives result from
the Company’s ongoing interest in Kansas.
21
Gross and Net Wells
The following tables set forth the fiscal years ending December 31, 2015, 2014 and 2013 the number of gross and
net development wells drilled by the Company. The term gross wells means the total number of wells in which the Company
owns an interest, while the term net wells means the sum of the fractional working interest the Company owns in the gross
wells.
2016
For Years Ending December 31,
2015
2014
Gross
Net
Gross
Net
Gross
Net
1
—
0.25
—
—
1
—
1
5
5
5
5
Kansas
Productive Wells
Dry Holes
Productive Wells
As of December 31, 2016, the Company held a working interest in 204 gross wells, including interest in 4 properties
operated by others, and 197 net wells in Kansas. Productive wells are either producing wells or wells capable of commercial
production although currently shut-in. One or more completions in the same bore hole are counted as one well. The term
gross wells means the total number of wells in which the Company owns an interest, while the term net wells means the sum
of the fractional working interests the Company owns in all of the gross wells.
Developed and Undeveloped Oil and Gas Acreage
As of December 31, 2016 the Company owned an operated working interests in the following developed and
undeveloped oil and gas acreage. The term gross acres means the total number of acres in which the Company owns an
interest, while the term net acres means the sum of the fractional working interest the Company owns in the gross acres, less
the interest of royalty owners.
Developed
Undeveloped
Total
Gross Acres
Net Acres
Gross Acres
Net Acres
Gross Acres
Net Acres
Kansas
13,913
11,486
8,699
6,927
22,612
18,413
The following table identifies the number of gross and net undeveloped acres as of December 31, 2016 that will
expire, by year, unless production is established before lease expiration or unless the lease is renewed.
Gross Acres
Net Acres
ITEM 3. LEGAL PROCEEDINGS
2017
2018
Total
8,539
6,787
160
140
8,699
6,927
The Company has been named as a defendant in a breach of contract lawsuit titled Offshore Oilfield Services, Inc. v. Prime 8
Offshore, LLC and Tengasco, Inc., No 201657156 in the 270th District Court of Harris County, Texas (the “Litigation”) filed
in October 2016. Tengasco, Inc. was served by mail postmarked January 6, 2017. Defendant Prime8 Offshore, LLC
(“Prime8”) was previously served.
The Litigation seeks recovery of approximately $188,000 in unpaid material and labor costs (plus plaintiff’s attorney’s fees
and interest) for offshore operations contracted by Prime8 to be performed by the plaintiff Offshore Oildfield Services, Inc.
(“Offshore Oilfield”) upon several properties owned by Hoactzin Partners, LP (“Hoactzin”) in the Gulf of Mexico under a
master services agreement signed between Prime8 and Offshore Oilfield in May 2014 (“MSA”). Offshore Oilfield alleges
breach of the MSA by Prime8 and Tengasco for failure to pay for materials provided or services performed in 2014 and 2015.
Tengasco did not sign the MSA and had no knowledge of it or any other such agreement utilized in operation by Hoactzin,
Prime8, or any subcontractor concerning Hoactzin’s Gulf properties. No allegation is made in the Litigation that Tengasco
specifically directed or was otherwise involved in the performance of the services rendered or materials provided or failure to
pay for same. Hoactzin, as opposed to Tengasco, directed Prime8 in the conduct of all matters described in the Litigation and
22
either paid or failed to pay any and all charges for services and materials for which Prime8 had contracted with
subcontractors such as Offshore Oilfield to be provided at all of Hoactzin’s properties in the Gulf owned and physically
operated exclusively by Hoactzin.
The Litigation concerns events occurring during the period covered by that certain Transition Agreement between Hoactzin
and Tengasco made effective December 18, 2012. Pursuant to part 5 of that agreement, Hoactzin is made subject to certain
indemnity obligations to Tengasco.
Hoactzin has also specifically agreed in writing to protect, defend, indemnify, and hold harmless Tengasco from and against
any and all claims, demands, and causes of action made or awarded against Tengasco in the Litigation and to pay in the first
instance all related losses, damages, costs and expenses relating to the Litigation including damages and plaintiff’s attorney’s
fees awarded, and all litigation expenses incurred, the Company’s currently billed attorneys’ fees and court costs, relating to
or arising out of Tengasco’s status as a defendant in the Litigation. Hoactzin has also agreed that counsel currently
representing Prime8 may also represent Tengasco in the Litigation as the positions of Tengasco and Prime8 appear to be
aligned for purposes of the Litigation.
The case is currently set for trial in October 2017 but the setting may be continued to a later date.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is listed on the NYSE MKT exchange under the symbol TGC. The range of high
and low sales prices for shares of common stock of the Company as reported on the NYSE MKT during the fiscal years
ended December 31, 2016 and December 31, 2015 are set forth below.
For the Quarters Ending
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
High
Low
1.60 $
1.60 $
1.59 $
1.25 $
3.20 $
2.80 $
5.80 $
2.90 $
1.00
0.60
0.67
0.52
2.30
2.20
1.50
0.80
$
$
$
$
$
$
$
$
Some of the share prices above have been adjusted to reflect the impact of the 1 for 10 reverse split approved at the
shareholder meeting on March 21, 2016 and effective with trading on March 24, 2016.
Holders
As of March 24, 2017, the number of shareholders of record of the Company’s common stock was 275 and
management believes that there are approximately 5,200 beneficial owners of the Company’s common stock.
Dividends
The Company did not pay any dividends with respect to the Company’s common stock in 2016 or 2015 and has no
present plans to declare any dividends with respect to its common stock.
23
Recent Sales of Unregistered Securities
During the fourth quarter of fiscal 2016, the Company did not sell or issue any unregistered securities. Any
unregistered equity securities that were sold or issued by the Company during the first three quarters of fiscal 2016 were
previously reported in Reports filed by the Company with the SEC.
Purchases of Equity Securities by the Company and Affiliated Purchasers
Neither the Company nor any of its affiliates repurchased any of the Company’s equity securities during 2016.
Equity Compensation Plan Information
See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matter”
for information regarding the Company’s equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
The Company reported net loss from continuing operations of $(4.2) million or $(0.69) per share in 2016 compared
to $(24.7) million or $(4.06) per share in 2015 and $(788,000) or $(0.13) per share in 2014. Per share information has been
adjusted to reflect the impact of the 1 for 10 reverse stock split approved at the shareholder meeting on March 21, 2016 and
effective with trading on March 24, 2016.
The Company realized revenues of approximately $4.7 million in 2016 compared to $6.2 million in 2015 and $13.8
million in 2014. During 2016, revenues decreased approximately $1.5 million of which $555,000 of this decrease related to a
$5.13 per barrel decrease in the average oil price received from $42.66 per barrel received in 2015 to $37.53 per barrel
received in 2016. Approximately $961,000 of the decrease was related to decreases in oil sales volumes from 130.9 MBbl in
2015 to 108.3 MBbl in 2016. The more significant production declines were experienced in the Albers B, Croffoot, Hilgers
B, Howard A, Liebenau, McElhaney A, and Veverka B leases. These decreases were primarily due to natural declines. Also
during 2016, the Company recorded electricity revenues from the Methane facility of $559,000 compared to $533,000 during
2015. During 2015, oil revenues decreased approximately $7.6 million of which $5.7 million of this decrease related to a
$43.39 per barrel decrease in the average oil price received from $86.05 per barrel received in 2014 to $42.66 per barrel
received in 2015. Approximately $1.9 million of the decrease was related to decreases in oil sales volumes from 153.5 MBbl
in 2014 to 130.9 MBbl in 2015. The more significant production declines were experienced in the Albers, Liebenau,
McElhaney A, Veverka B, and Veverka D leases. These decreases were primarily due to natural declines. These production
declines were partially offset by production from the successful drilling during late 2014 of the Howard A #1 well. Also
during 2015, the Company recorded electricity revenues from the Methane facility of $533,000 compared to $524,000 during
2014.
The Company’s production costs and taxes were approximately $3.4 million in 2016, $4.2 million in 2015, and $6.0
million in 2014. The $803,000 decrease in 2016 primarily related to a $415,000 decrease related to change in oil inventory, a
$172,000 decreased in methane facility costs, a $136,000 decrease in chemical costs, and a $133,000 decrease in utility costs.
The $1.8 million decrease in 2015 primarily related to a one-time $386,000 expense recorded during 2014 as a result of the
civil penalty related to the 2012 Incident of Non-Compliance by the BSEE on one of Hoactzin’s properties, a $691,000
decrease in well workover and repair cost primary related to work done on the Croffoot B #6 SWD, M. Rogers #2, H Karst
SWD, Liebenau #8 and Wehrli #1 wells during 2014, a $171,000 reduction in chemical costs, and a $121,000 decrease in
Kansas property taxes related to natural declines as well as successful appeals. .
Depreciation, depletion, and amortization was approximately $1.1 million in 2016, $2.7 million in 2015, and $3.0
million in 2014. The $1.6 million decrease in 2016 was primarily related to a $1.1 million decrease related to a decrease in
the oil and gas depletion rate due principally to ceiling test impairments in 2015 and 2016, and $437,000 decrease related to
lower sales volumes. The $354,000 decrease in 2015 was primarily related to $407,000 decrease due to lower oil sales
24
volumes, and a $103,000 decrease in the methane facilities depreciation primarily related to impairment of the methane
facility in 2014, partially offset by $180,000 related to an increase in the oil and gas depletion rate.
The Company’s general and administrative cost was approximately $1.4 million in 2016, $2.1 million in 2015, and
$2.7 million in 2014. The $664,000 decrease in 2016 was primarily related to a $324,000 decrease in salaries and wages as a
result of temporary payroll reductions commencing in the first and second quarter of 2015 as well as personnel reductions
which took place during the first quarter of 2016, $126,000 reduction in legal and accounting costs, and a $99,000 reduction
in consulting costs. The $638,000 decrease in 2015 was primarily related to $290,000 of costs incurred in 2014 for
personnel, relocation cost, and office cost related to set up of the Denver office, $268,000 decrease in employee, officer, and
director compensation expense primarily as a result of salary decreases initiated during the first quarter of 2015, and $66,000
of consulting cost incurred in 2014 related to evaluating potential opportunities and review of the methane facility.
Due to the low oil prices experienced since the quarter ended September 30, 2014, during 2016 and 2015 the
Company experienced ceiling test failures resulting in recording non-cash impairments of $2.7 million and $14.5 million,
respectively. This impairment charge reduces the carrying cost of the Company’s oil and gas properties, excluding
unevaluated properties to a value which approximates the future net cash flows of the year end reserves discounted at 10%.
Should prices continue at depressed levels during future periods, the Company may be required to record additional
impairment of its oil properties. In 2016, the Company also recorded an $88,000 impairment of its equipment inventory due
to reduction in market value. In 2014, the Company recorded a non-cash impairment of its Manufactured Methane facilities
in the amount of $2.8 million ($1.7 million net of tax effect). The impairment resulted from the Company’s assessment that
future cash flows, using historical costs and runtimes, were insufficient to recover the Manufactured Methane facilities’ net
book value. The Manufactured Methane facilities were written down to fair value amount calculated from future discounted
cash flows, using the same historical costs and runtimes, as well as certain expressions of interest with regards to the
purchase by outside parties of the Company’s Manufactured Methane facilities. Although the Company believes the value
realized from continued use of the Manufactured Methane facilities will be higher than the current carrying value, there can
be no assurance that the Company will be able to increase runtime or reduce operating costs. Even if the Company is able to
increase runtime and reduce operating cost, the impairment recorded in 2014 cannot be reversed in a later period.
Net interest expense was $102,000 in 2016, $80,000 in 2015, and $88,000 in 2014. The $22,000 increase during
2016 was primarily due to a $1.2 million increase in the average credit facility balance from $868,000 during 2015 to $2.1
million during 2016. The credit facility increase was primarily due to capital spending and lower oil prices, partially offset
by lower operating and general and administrative costs.
During 2016, 2015 and 2014, the Company did not have any open derivative positions.
The Company recorded income tax expense of $0 in 2016, $7.4 million in 2015, and an income tax benefit of $6,000
in 2014. The $7.4 million expense in 2015 related to recording a full allowance of the deferred tax asset primarily due to
cumulative losses incurred during the 3 year period ending December 31, 2015. In addition, a full allowance of the deferred
tax asset was also recorded in 2016.
Liquidity and Capital Resources
At December 31, 2016, the Company had a revolving credit facility with Prosperity Bank. This is the Company’s
primary source to fund working capital and future 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 $40 million or the
Company’s borrowing base in effect from time to time. As of December 31, 2016, the Company’s borrowing base was $3.0
million. The borrowing base was reduced to approximately $1.25 million with the March 16, 2017 amendment to the credit
agreement. This reduction was primarily related to limiting the borrow base to a level in which the Company would be in
compliance with certain credit facility covenants. The credit facility is secured by substantially all of the Company’s
producing and non-producing oil and gas properties and the Company’s Manufactured Methane facilities. The credit facility
includes certain covenants with which the Company is required to comply. At December 31, 2016, these covenants include
leverage, interest coverage, minimum liquidity ratios, and debt to equity ratios. During the quarter ended December 31,
2016, the Company was not in compliance with the minimum liquidity ratio. After the covenant modifications and waivers
included in the March 16, 2017 amendment, the Company is now in compliance with all covenants.
On March 16, 2017, the Company’s senior credit facility with Prosperity Bank after Prosperity Bank’s most recent
review of the Company’s currently owned producing properties was amended to decrease the Company’s borrowing base
from $3.0 million to approximately $1.25 million, and extend the term of the facility to July 31, 2018. In addition, all the
25
covenants were removed and replaced with the following: (a) Current Ratio > 1:1; (b) Funded Debt to EBITDA < 3.5x; and
(c) Interest Coverage > 3.0x. The borrowing base remains subject to the existing periodic redetermination provisions in the
credit facility. The interest rate remained prime plus 0.50% per annum. This rate was 4.50% at the date of the amendment.
The maximum line of credit of the Company under the Prosperity Bank credit facility remained $40 million and the
Company had no outstanding borrowing under the facility as of March 30, 2017.
For the quarter ended December 31, 2016, the Company was in default on compliance with the minimum liquidity
ratio. On March 16, 2017, the Company received a waiver from Prosperity Bank. Although the Company was in default of
the minimum liquidity covenant for the quarter ended December 31, 2016, the Company is now in compliance as a result of
the waiver. In addition, the Company also received a waiver from Prosperity Bank for an anticipated default on the debt to
equity covenant. Had the Company not received this waiver, it would have been in default on the debt to equity covenant for
the quarter ended December 31, 2016. In February 2017, the Company paid off the credit facility using proceeds from the
Company’s rights offering which closed on February 2, 2017. The Company will use the additional proceeds for operations
and potentially for capital spending. The Company will manage its capital spending in order to remain in compliance with
bank covenants as well as to maintain its ability to pay operating and general and administrative expenses. If necessary, the
Company could borrow funds against the credit facility as this facility currently has a $1.25 million borrowing base with no
funds currently drawn. In addition, if required, the Company could also issue additional shares of stock and/or sell assets as
needed to further fund operations.
For the quarter ended December 31, 2015, the Company was in default on compliance with the Leverage Ratio
covenant. On March 28, 2016, the credit facility was amended to delete the leverage ratio covenant. In addition, the
amendment also added a Debt to Tangible Net Worth covenant, waived the default on the Interest Coverage ratio for the
quarter ended December 31, 2015, waived the anticipated default for the quarter ended March 31, 2016, and waived
compliance with the Interest Coverage ratio for all applicable periods through the maturity date. Although the Company was
in default of the Leverage and Interest Coverage ratios for the quarter ended December 31, 2015, the Company was in
compliance at March 28, 2016 as a result of the amendment and waivers. For the quarter ended June 30, 2016, the Company
was in default on compliance with the Debt to Tangible Net Worth covenant. On August 10, 2016, the Company received a
waiver of the covenant default for the quarter ended June 30, 2016 as well as a waiver for the anticipated default for the
quarter ended September 30, 2016.
The total borrowing by the Company under the facility at December 31, 2016 and December 31, 2015 was $2.4
million and $869,000, respectively. The Company’s borrowings under the facility were fully repaid in February 2017 with
the use of funds raised in the Company’s rights offering which closed on February 2, 2017. The next borrowing base review
will take place in July 2017.
Net cash used in operating activities was $(1.0) million, net cash provided by operating activities was $482,000 in
2015, and $6.6 million in 2014. The change in cash used in operating activities during 2016 was primarily related to
decreased revenues as a result of lower oil prices and sales volumes. The decrease in cash provided by operating activities in
2015 was primarily related to a $7.6 million decrease due to lower oil volumes and prices, and a $872,000 decrease in cash
provided by working capital, partially offset by a $1.8 million increase due to a decrease in production costs and taxes, a
$638,000 increase due to a decrease in general and administrative expense.
Net cash used in investing activities was $(401,000) in 2016, $(541,000) in 2015, and $(4.0 million) in 2014. The
$140,000 decrease in cash used in investing activities during 2016 was due primarily to a decrease in land and seismic costs.
The $3.5 million decrease in cash used in investing activities during 2015 as compared to 2014 was due primarily to a $3.1
million decrease in drilling and recompletion activities during 2015 as compared to 2014, and a $282,000 decrease in
Manufactured Methane facility costs primarily related to equipment and reconfiguration of the electric generator which
occurred in 2014.
Net cash provided by financing activities was $1.4 million in 2016, $64,000 in 2015, and net cash used in financing
activities from continuing operations was $(2.6 million) in 2014. The increase in net cash provided by financing activities
primarily related to an increase in credit facility borrowings due to a decrease in oil prices, partially offset by a decrease in
operating and general and administrative costs.
Critical Accounting Policies
The Company prepares its Consolidated Financial Statements in conformity with accounting principles generally
accepted in the United States of America, which require the Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
26
statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those
estimates. The Company considers the following policies to be the most critical in understanding the judgments that are
involved in preparing the Company’s financial statements and the uncertainties that could impact the Company’s results of
operations, financial condition and cash flows.
Revenue Recognition
Revenues are recognized based on actual volumes of oil, natural gas, methane gas, and electricity sold to purchasers
at a fixed or determinable price, when delivery has occurred and title has transferred, and collectability is reasonably
assured. Crude oil is stored and at the time of delivery to the purchasers, revenues are recognized. Natural gas meters are
placed at the customer’s location and usage is billed each month. There were no natural gas imbalances at December 31,
2016, 2015 and 2014. Methane gas and electricity sales meters are located at the Carter Valley landfill site and electricity
generation sales are billed each month. No methane gas was sold during 2016, 2015 or 2014.
Full Cost Method of Accounting
The Company follows the full cost method of accounting for oil and gas property acquisition, exploration, and
development activities. Under this method, all costs incurred in connection with acquisition, exploration and development of
oil and gas reserves are capitalized. Capitalized costs include lease acquisitions, seismic related costs, certain internal
exploration costs, drilling, completion, and estimated asset retirement costs. The capitalized costs of oil and gas properties,
plus estimated future development costs relating to proved reserves and estimated asset retirement costs which are not already
included net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The
Company has determined its reserves based upon reserve reports provided by LaRoche Petroleum Consultants Ltd. since
2009. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual
assessment of whether impairment has occurred. The Company had $106,000 and $552,000 in unevaluated properties as of
December 31, 2016 and 2015, respectively. Proceeds from the sale of oil and gas properties are accounted for as reductions
to capitalized costs unless such sales cause a significant change in the relationship between costs and the estimated value of
proved reserves, in which case a gain or loss is recognized. At the end of each reporting period, the Company performs a
“ceiling test” on the value of the net capitalized cost of oil and gas properties. This test compares the net capitalized cost
(capitalized cost of oil and gas properties, net of accumulated depreciation, depletion and amortization and related deferred
income taxes) to the present value of estimated future net revenues from oil and gas properties using an average price
(arithmetic average of the beginning of month prices for the prior 12 months) and current cost discounted at 10% plus cost of
properties not being amortized and the lower of cost or estimated fair value of unproven properties included in the cost being
amortized (ceiling). If the net capitalized cost is greater than the ceiling, a write-down or impairment is required. A write-
down of the carrying value of the asset is a non-cash charge that reduces earnings in the current period. Once incurred, a
write-down cannot be reversed in a later period.
Oil and Gas Reserves/Depletion, Depreciation, and Amortization of Oil and Gas Properties
The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves
and estimated asset retirement costs which are not already included net of estimated salvage value, are amortized on the unit-
of-production method based on total proved reserves. The costs of unproved properties are excluded from amortization until
the properties are evaluated, subject to an annual assessment of whether impairment has occurred.
The Company’s proved oil and gas reserves as of December 31, 2016 were determined by LaRoche Petroleum
Consultants, Ltd. Projecting the effects of commodity prices on production, and timing of development expenditures
includes many factors beyond the Company’s control. The future estimates of net cash flows from the Company’s proved
reserves and their present value are based upon various assumptions about future production levels, prices, and costs that may
prove to be incorrect over time. Any significant variance from assumptions could result in the actual future net cash flows
being materially different from the estimates.
Asset Retirement Obligations
The Company’s asset retirement obligations relate to the plugging, dismantling, and removal of wells drilled to date.
The Company follows the requirements of FASB ASC 410, “Asset Retirement Obligations and Environmental Obligations”.
Among other things, FASB ASC 410 requires entities to record a liability and corresponding increase in long-lived assets for
the present value of material obligations associated with the retirement of tangible long-lived assets. Over the passage of
time, accretion of the liability is recognized as an operating expense and the capitalized cost is depleted over the estimated
useful life of the related asset. If the estimated future cost of the asset retirement obligation changes, an adjustment is
27
recorded to both the asset retirement obligation and the long-lived asset. Revisions to estimated asset retirement obligations
can result from changes in retirement cost estimates, revisions to estimated inflation rates and changes in the estimated timing
of abandonment. The Company currently uses an estimated useful life of wells ranging from 20-40 years. Management
continues to periodically evaluate the appropriateness of these assumptions.
Income Taxes
Income taxes are reported in accordance with U.S. GAAP, which requires the establishment of deferred tax accounts
for all temporary differences between the financial reporting and tax bases of assets and liabilities, using currently enacted
federal and state income tax rates. In addition, deferred tax accounts must be adjusted to reflect new rates if enacted into
law. Temporary differences result principally from federal and state net operating loss carryforwards, differences in oil and
gas property values resulting from ceiling test write downs, and differences in methods of reporting depreciation and
amortization. Management routinely assesses the ability to realize our deferred tax assets and reduces such assets by a
valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be recognized.
At December 31, 2016, federal net operating loss carryforwards amounted to approximately $26.4 million which
expire between 2019 and 2036. The total deferred tax asset was $0 at December 31, 2016 and 2015. The Company recorded
a full allowance of the deferred tax asset primarily due to cumulated losses incurred during the 3 years ended December 31,
2016 and 2015.
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 recovered.
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.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The objective of this update
is to clarify the principles for recognizing revenue and to develop a common revenue standard. The FASB subsequently
issued ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, which deferred the effective date of ASU 2014-09 and
provided additional implementation guidance. The standard is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period. We are currently assessing the potential impact,
but the Company does not believe the adoption of the standard will have a significant impact on our consolidated financial
statements and results of operations.
In August 2014, the FASB issued Update No. 2014-15—Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This was issued to
provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to
continue as a going concern or to provide related footnote disclosures. The guidance is effective for annual periods ending
after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is
permitted. There was no impact on the Company’s operating results or cash flows.
In November 2015, the FASB issued ASU 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes. This guidance eliminates the current requirement for organizations to present deferred tax liabilities and
assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred
tax assets and liabilities as noncurrent. This guidance is effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The amendments may be applied prospectively to
all deferred tax liabilities and assets or retrospectively to all periods presented. The Company does not expect this to impact
its operating results or cash flows.
In February 2016, the FASB issued Update 2016-02—Leases (Topic 842). This guidance was issued to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and
28
disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted
for all entities. The Company does not expect this to impact its operating results or cash flows.
In March 2016, the FASB issued Update 2016-09 Compensation—Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. This guidance simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15,
2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual
period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning
of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in
the same period. The Company does not expect this to impact operating results or cash flows.
In August 2016, the FASB issued Update 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. This amendment provides guidance on certain cash flow classification issues, thereby
reducing the current and potential future diversity in practice. This guidance is effective for annual periods beginning after
December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim
or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the
amendments in the same period. The Company does not expect this to impact operating results or cash flows.
Contractual Obligations
The following table summarizes the Company’s contractual obligations due by period as of December 31, 2016 (in
thousands):
Contractual Obligations
Long-Term Debt Obligations1
Operating Lease Obligations
Estimated Interest on Long-Term Debt Obligations
Total
Total
2017
2018
$
$
2,502 $
22
158
2,682 $
55 $
22
106
183 $
2,447
—
52
2,499
____________________
(1) The credit facility maturity date of July 31, 2018 is based on the March 16, 2017 amendment to the credit agreement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Commodity Risk
The Company’s major market risk exposure is in the pricing applicable to its oil and gas production. Realized
pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas
production. Historically, prices received for oil and gas production have been volatile and unpredictable and price volatility
is expected to continue. Monthly oil price realizations during 2016 ranged from a low of $24.50 per barrel to a high of
$46.45 per barrel.
In addition, during 2010, 2011, and 2012 the Company participated in derivative agreements on a specified number
of barrels of oil of its production. The Company did not participate in any derivative agreements during 2015, 2014 or 2013,
but may participate in derivative activities in the future.
Interest Rate Risk
At December 31, 2016, the Company had debt outstanding of approximately $2.5 million including, as of that date,
$2.4 million owed on its credit facility with Prosperity Bank. In February 2017, the Company paid off the borrowings on its
credit facility through use of funds raised in the Company’s rights offering which closed on February 2, 2017. The interest
rate on the credit facility is variable at a rate equal to the prime rate plus 0.50%. This rate was 4.25% at December 31, 2016.
29
The Company’s remaining debt of $102,000 has fixed interest rates ranging from 4.16% to 4.6%. As a result, the Company’s
annual interest cost in 2016 fluctuated based on short-term interest rates on approximately 96% of its total debt outstanding at
December 31, 2016. During 2016, the Company paid approximately $91,000 of interest on the Prosperity Bank line of
credit. The impact on interest expense and the Company’s cash flows of a 10% increase in the interest rate on the Prosperity
Bank credit facility would be approximately $10,000 assuming borrowed amounts under the credit facility remained at the
same amount owed as of December 31, 2016. The Company did not have any open derivative contracts relating to interest
rates at December 31, 2016.
Forward-Looking Statements and Risk
Certain statements in this Report including statements of the future plans, 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 would 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 prolonged periods of low prices may substantially adversely affect the Company’s financial position, results of operations,
and cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data commence on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer, and other members of management have
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 have
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. Michael J. Rugen, the Company’s Chief Financial Officer is currently also serving as
Company’s Chief Executive Officer on an interim basis. Mr. Rugen is acting in both capacities and has executed the
accompanying certifications as to both offices.
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.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934.
Internal control over financial reporting refers to the process designed by, or under the supervision of the Company’s Chief
Executive Officer and Chief Financial Officer, and effected by the Company’s Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
30
statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and
procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of the Company’s management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness into future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of the Company’s management, including the Chief Executive
Officer and the Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the
Company internal control over financial reporting as of December 31, 2016. In making this assessment, the Company’s
management used the criteria set forth in the framework in “Internal Control-Integrated-Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). This framework was updated in 2013.
Based on the evaluation conducted under the framework in “Internal Control- Integrated Framework,” issued by COSO the
Company’s management concluded that the Company’s internal control over financial reporting was effective as of
December 31, 2016.
This annual report does not include an attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm
pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report
in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2016, the Company implemented a process to more fully analyze the impact of
the Company’s tax position on its quarterly ceiling test calculation. Other than this process, there have been no other 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 modification to its business process or accounting procedures.
ITEM 9B. OTHER INFORMATION
On January 4, 2017, 5,264 common shares were issued in the aggregate to the Company’s four directors and CFO
and interim CEO. This issuance will result in compensation expense of approximately $4,000 to be recorded during the
quarter ended March 31, 2017.
On February 13, 2017, 4,498,698 common shares were issued to participants of the Company’s rights offering
which closed on February 2, 2017. Of the 4,498,698 common shares issued, 3,293,407 were issued to the Company’s
directors, management, and affiliates. The Company received approximately $2.7 million in proceed from this offering. The
proceeds were used primarily to pay off the Company’s credit facility
On March 16, 2017, the Company’s senior credit facility with Prosperity Bank after Prosperity Bank’s most recent
review of the Company’s currently owned producing properties was amended to decrease the Company’s borrowing base
from $3.0 million to approximately $1.25 million, and extend the term of the facility to July 31, 2018. In addition, all the
covenants were removed and replaced with the following: (a) Current Ratio > 1:1; (b) Funded Debt to EBITDA < 3.5x; and
(c) Interest Coverage > 3.0x. The borrowing base remains subject to the existing periodic redetermination provisions in the
credit facility. The interest rate remained prime plus 0.50% per annum. This rate was 4.50% at the date of the amendment.
The maximum line of credit of the Company under the Prosperity Bank credit facility remained $40 million and the
Company had no outstanding borrowing under the facility as of March 30, 2017. For the quarter ended December 31, 2016,
the Company was in default on compliance with the minimum liquidity ratio. On March 16, 2017, the Company received a
31
waiver from Prosperity Bank. Although the Company was in default of the minimum liquidity covenant for the quarter
ended December 31, 2016, the Company is now in compliance as a result of the waiver.
On March 17, 2017, the Company announced the adoption of a Rights Plan intended to help preserve assets related
to the Company’s net operating losses. As of December 31, 2016, the Company had cumulative net operating loss
carryforwards of approximately $ 28.2 million, which are usable in certain circumstances to offset future U.S. taxable
income.
Tengasco’s ability to use these tax benefits would be limited if it were to experience an “ownership change” under
Section 382 of the Internal Revenue Code. This would occur if stockholders that own at least 5% of outstanding common
stock increased their ownership in the Company by more than 50 percentage points within a rolling three-year period. After
considering the estimated value of the Company’s tax benefits and the potential for limitations to the NOL’s occurring upon
an “ownership change,” the Board adopted the Rights Plan.
To implement the Rights Plan, the Board declared a dividend of one preferred share purchase right for each
outstanding share of its common stock to shareholders of record on March 27, 2017. The rights are further described in a
Registration Statement on Form 8-A filed with the Securities and Exchange Commission. The rights will become exercisable
if a person acquires 4.95% or more of Tengasco common stock or if a person that already owns 4.95% or more of common
stock acquires additional shares above the percentage currently owned. Tengasco’s stockholders that currently own more
than 4.95% of the common stock will be “grandfathered” at their current ownership level. If the rights become exercisable,
all holders of rights, other than the person triggering the exercisability of the rights, would become entitled to purchase
Tengasco stock at an approximate 50% discount. Rights held by the person triggering the rights will become void and will
not be exercisable. Unless the rights are triggered in this manner, the rights will not be exercisable and no stock would be
issued under the Rights Plan.
The rights will trade with Tengasco’s common stock, will not be evidenced by any separate rights certificate, and
will expire on the day after the 2017 annual shareholders meeting unless ratified at the meeting, in which case they would
expire in three years. The Board may terminate the plan at any time or redeem the rights prior to the time they are
exercisable.
The Rights Plan will be administered by Continental Stock Transfer & Trust Company as Rights Agent under a
Rights Agreement between the Company and the Rights Agent, dated March 16, 2017. The Rights Agreement described all
details of the Rights Plan and is attached in full as an exhibit to the Company’s Form 8-K filed with SEC on March 17, 2017.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
Identification of Directors and Executive Officers
NAME
Matthew K. Behrent
Hughree F. Brooks
Peter E. Salas
Richard M. Thon
Michael J. Rugen
Cary V. Sorensen
POSITIONS HELD
Director
Director
Director;
Chairman of the Board
Director
Chief Financial Officer;
Chief Executive Officer (interim)
Vice-President; General Counsel; Secretary
DATE OF INITIAL
ELECTION OR
DESIGNATION
AGE
3/27/2007
12/3/2010
10/8/2002
10/21/2004
11/22/2013
9/28/2009
6/24/2013
7/9/1999
46
62
62
61
56
68
32
Business Experience
Directors
Matthew K. Behrent is currently the Executive Vice President, Corporate Development of EDCI Holdings, Inc., a
company that is currently engaged in carrying out a plan of dissolution. Before joining EDCI in June, 2005, Mr. Behrent was
an investment banker, working as a Vice-President at Revolution Partners, a technology focused investment bank in Boston,
from March 2004 until June 2005 and as an associate in Credit Suisse First Boston Corporation's technology mergers and
acquisitions group from June 2000 until January 2003. From June 1997 to May 2000, Mr. Behrent practiced law, most
recently with Cleary, Gottlieb, Steen & Hamilton in New York, advising financial sponsors and corporate clients in
connection with financings and mergers and acquisitions transactions. Mr. Behrent received his J.D. from Stanford Law
School in 1997, and his B.A. in Political Science and Political Theory from Hampshire College in 1992. He became a
Director of the Company on March 27, 2007. He is also a Director and Chairman of the Audit Committee of Asure
Software, Inc. (NASDAQ: ASUR). The experience, qualifications, attributes, and skills gained by Mr. Behrent in these
sophisticated legal and financial positions directly apply to and support the financial oversight of the Company’s operations
and lead to the conclusion that Mr. Behrent should serve as a Director of the Company.
Hughree F. Brooks in 2010 co-founded Powerhouse Energy Solutions LLC, a company engaged in providing
equipment and services to clients in renewable and alternative energy industries in the United States and abroad. Powerhouse
is a provider of solar energy systems as well as advisory services to biofuel producers. Since 1998, Mr. Brooks has
continuously provided consulting services in the oil and gas exploration industry. These services include land management,
landowner representation, deal structuring and financing, and expert witness services. Mr. Brooks has 35 years of experience
as a land manager with independent and major oil companies including Amoco Production, Mitchell Energy, Ladd
Petroleum, Phoenix Exploration and Renown Petroleum Inc. His clients own in excess of 16,000 acres in South Louisiana
with a long history of oil and gas production. In 2002, he founded and continues to serve as the Executive Director of Friends
Of The Farm, a Texas nonprofit. Mr. Brooks is a licensed attorney who received his J.D. from Loyola Law School in 1980.
He received a Bachelor of Science Degree in 1976 from Loyola University in New Orleans. The experience, qualifications,
and skills of Mr. Brooks gained in an extensive career in the oil and gas exploration and production industry are directly
related to the operations of the Company and lead to the conclusion that Mr. Brooks should serve as a Director of the
Company.
Peter E. Salas has been President of Dolphin Asset Management Corp. and its related companies since he founded it
in 1988. Prior to establishing Dolphin, he was with J.P. Morgan Investment Management, Inc. for ten years, becoming Co-
manager, Small Company Fund and Director-Small Cap Research. He received an A.B. degree in Economics from Harvard
in 1978. Mr. Salas was elected to the Board of Directors on October 8, 2002. During a portion of the last five years, Mr.
Salas also served on the Board of Directors of Southwall Technologies, Inc. and Williams Controls, Inc. The business
experience, attributes, and skills gained by Mr. Salas in these sophisticated financial positions, together with his service as
director of other public companies and his capacity as controlling person of the Company’s largest shareholder directly apply
to and support his qualification as a director, and lead to the conclusion that Mr. Salas should serve as a Director of the
Company.
Richard M. Thon began a career with ARAMARK Corporation in 1987. ARAMARK is based in Philadelphia, has
250,000 employees worldwide, and provides food services, facilities management, and uniform and career apparel to health
care institutions, universities, and businesses in 22 countries. Mr. Thon served in various capacities in the Corporate Finance
Department of ARAMARK culminating with the position of Assistant Treasurer when he retired in June 2002. His
responsibilities included bank credit agreements, public debt issuance, interest rate risk management, foreign subsidiary
credit agreements, foreign exchange, letters of credit, insurance finance, off-balance-sheet finance, and real estate and
equipment leasing. Prior to joining ARAMARK, Mr. Thon was a Vice President in the International Department of Mellon
Bank. Since his retirement in 2002, Mr. Thon has served in a variety of volunteer charitable and civic activities. In addition,
during a portion of the past five years, he served on the board of ACT Conferencing, Inc. Mr. Thon received a B.A. in
Economics degree from Yale College in 1977 and a Masters of Business Administration degree in Finance from The
Wharton School, University of Pennsylvania in 1979. Mr. Thon’s experience in the fields of banking and finance directly
apply to the business needs of the Company and lead to the conclusion that he will provide significant benefit to the Board
and that he is qualified to serve as a Director of the Company.
Officers
Michael J. Rugen was named Chief Financial Officer of the Company in September 2009 and as interim Chief
Executive Officer in June 2013. He is a certified public accountant (Texas) with over 30 years of experience in exploration,
33
production and oilfield service. Prior to joining the Company, Mr. Rugen spent 2 years as Vice President of Accounting and
Finance for Nighthawk Oilfield Services. From 2001 to June 2007, he was a Manager/Sr. Manager with UHY Advisors,
primarily responsible for managing internal audit and Sarbanes-Oxley 404 engagements for various oil and gas clients. In
1999 and 2000, Mr. Rugen provided finance and accounting consulting services with Jefferson Wells International. From
1982 to 1998, Mr. Rugen held various accounting and management positions at BHP Petroleum, with accounting
responsibilities for onshore and offshore US operations as well as operations in Trinidad and Bolivia. Mr. Rugen earned a
Bachelor of Science in Accounting in 1982 from Indiana University.
Cary V. Sorensen is a 1976 graduate of the University of Texas School of Law and has undergraduate and graduate
degrees from North Texas State University and Catholic University in Washington, D.C. Prior to joining the Company in
July 1999, he had been continuously engaged in the practice of law in Houston, Texas relating to the energy industry since
1977, both in private law firms and a corporate law department, serving for seven years as senior counsel with the oil and gas
litigation department of a Fortune 100 energy corporation in Houston before entering private practice in June, 1996. He has
represented virtually all of the major oil companies headquartered in Houston as well as local distribution companies and
electric utilities in a variety of litigated and administrative cases before state and federal courts and agencies in nine states.
These matters involved gas contracts, gas marketing, exploration and production disputes involving royalties or operating
interests, land titles, oil pipelines and gas pipeline tariff matters at the state and federal levels, and general operation and
regulation of interstate and intrastate gas pipelines. He has served as General Counsel of the Company since July 9, 1999.
Family and Other Relationships
There are no family relationships between any of the present directors or executive officers of the Company.
Involvement in Certain Legal Proceedings
To the knowledge of management, no director, executive officer or affiliate of the Company or owner of record or
beneficially 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.
To the knowledge of management, during the past ten years, unless specifically indicated below with respect to any
numbered item, no present director, executive officer or person nominated to become a director or an executive officer of the
Company:
(1)
(2)
(3)
Filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal
agent or similar officer appointed by a court for the business or property of such person, or any partnership
in which he or she was a general partner at or within two years before the time of such filing, or any
corporation or business association of which he or she was an executive officer at or within two years
before the time of such filing; provided however that the Company’s Chief Financial Officer Michael J.
Rugen during 2007 through mid-2009 was Vice President of Accounting and Finance for Nighthawk
Oilfield Services in Houston, Texas (Nighthawk); Nighthawk filed for bankruptcy protection under Chapter
7 of the bankruptcy laws on July 10, 2009 and such fact was affirmatively disclosed to the Company’s
Board before Mr. Rugen was appointed to the position of Chief Financial Officer of the Company in
September, 2009, and the Board determined that the circumstances surrounding bankruptcy filing did not
disclose any reason to question the integrity or qualifications of Mr. Rugen for the position of Chief
Financial Officer of the Company.
Was convicted in a criminal proceeding or named the subject of a pending criminal proceeding (excluding
traffic violations and other minor offenses);
Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting
the following activities: (a) acting as a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person
regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing,
or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or
employee of any investment company, bank, savings and loan association or insurance company, or
engaging in or continuing any conduct or practice in connection with such activity; (b) engaging in any
type of business practice; or (c) engaging in any activity in connection with the purchase or sale of any
34
(4)
(5)
(6)
(7)
(8)
security or commodity or in connection with any violation of federal or state securities laws or federal
commodities laws;
Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any
Federal or State authority barring, suspending or otherwise limiting him or her for more than 60 days from
engaging in any activity described in paragraph 3(a) above, or being associated with any persons engaging
in any such activity;
Was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal
or state securities law, and the judgment in such civil action or finding by the SEC has not been
subsequently reversed, suspended, or vacated;
Was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading
Commission (“CFTC”) to have violated any federal commodities law, and the judgment in such civil
action or finding by the CFTC has not been subsequently reversed, suspended, or vacated;
Was the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or
finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal
or state securities or commodities law or regulation; (ii) any law or regulation respecting financial
institutions or insurance companies including but not limited to a temporary or permanent injunction, order
of disgorgement or restitution, civil money penalty or temporary or permanent cease and desist order, or
removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in
connection with any business entity; or
Was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of
any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act [15 U.S.C.
78c(a)(26)], any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act [7 U.S.C.
1(a)(29)], or any equivalent exchange, association, entity or organization that has disciplinary authority
over its members or persons associated with a member.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and
persons who beneficially own more than 10% of the Company’s common stock to file initial reports of ownership and reports
of changes in ownership with the SEC no later than the second business day after the date on which the transaction occurred
unless certain exceptions apply. In fiscal 2016, the Company, its officers, directors, and shareholders owning more than 10%
of its common stock were not delinquent in filing of any of their Form 3, 4, and 5 reports.
Code of Ethics
The Company’s Board of Directors has adopted a Code of Ethics that applies to the Company’s financial officers
and executives officers, including its Chief Executive Officer and Chief Financial Officer. The Company’s Board of
Directors has also adopted a Code of Conduct and Ethics for Directors, Officers and Employees. A copy of these codes can
be found at the Company’s internet website at www.tengasco.com. The Company intends to disclose any amendments to its
Codes of Ethics, and any waiver from a provision of the Code of Ethics granted to the Company’s President, Chief Financial
Officer or persons performing similar functions, on the Company’s internet website within five business days following such
amendment or waiver. A copy of the Code of Ethics can be obtained free of charge by writing to Cary V. Sorensen,
Secretary, Tengasco, Inc., 6021 S. Syracuse Way, Suite 117, Greenwood Village, CO 80111.
Audit Committee
During 2016, directors Matthew K. Behrent and Richard M. Thon were the members of the Board’s Audit
Committee. Mr. Behrent was the Chairman of the Committee and the Board of Directors determined that both Mr. Behrent
and Mr. Thon were each an “audit committee financial expert” as defined by applicable Securities and Exchange
Commission (“SEC”) regulations and the NYSE MKT Rules. Each of the members of the Audit Committee met the
independence and experience requirements of the NYSE MKT Rules, the applicable Securities Laws, and the regulations and
rules promulgated by the SEC. The Audit Committee met each quarter and a total of four (4) times in Fiscal 2016 with the
Company’s auditors, including discussing the audit of the Company’s year-end financial statements.
35
The Audit Committee adopted an Audit Committee Charter during fiscal 2001. In 2004, the Board adopted an
amended Audit Committee Charter, a copy of which is available on the Company’s internet website, www.tengasco.com.
The Audit Committee Charter fully complies with the requirements of the NYSE MKT Rules. The Audit Committee reviews
and reassesses the Audit Committee Charter annually.
The Audit Committee's functions are:
•
•
•
•
•
•
•
To review with management and the Company’s independent auditors the scope of the annual audit and
quarterly statements, significant financial reporting issues and judgments made in connection with the
preparation of the Company’s financial statements;
To review major changes to the Company’s auditing and accounting principles and practices suggested by
the independent auditors;
To monitor the independent auditor's relationship with the Company;
To advise and assist the Board of Directors in evaluating the independent auditor's examination;
To supervise the Company's financial and accounting organization and financial reporting;
To nominate, for approval of the Board of Directors, a firm of certified public accountants whose duty it is
to audit the financial records of the Company for the fiscal year for which it is appointed; and
To review and consider fee arrangements with, and fees charged by, the Company’s independent auditors.
Changes in Board Nomination Procedures
In 2016, there were no changes to the procedures adopted by the Board for nominations for the Board of Directors.
Those procedures were last set forth in the Company’s Proxy Statement filed on October 3, 2014 for the Company’s Annual
Meeting held on November 14, 2014 and are posted on the Company’s internet website at www.tengasco.com. In the event
of any such amendment to the procedures, the Company intends to disclose the amendments on the Company's internet
website within five business days following such amendment.
ITEM 11. EXECUTIVE COMPENSATION
Executive Officer Compensation
The following table sets forth a summary of all compensation awarded to, earned or paid to, the Company's Chief
Executive Officer, Chief Financial Officer and other executive officers whose compensation exceeded $100,000 during fiscal
years ended December 31, 2016 and December 31, 2015.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Michael J. Rugen,
Chief Financial Officer
Chief Executive Officer (interim)3
Cary V. Sorensen,
General Counsel
Year
Salary
($)
2016
2015
163,857
168,008
Bonus
($)
21,685
29,442
Stock
Awards
($)
6,931
—
All Other
Compensation2
($)
6,737
8,394
Total
($)
199,210
205,844
2016
2015
81,900
92,677
—
—
—
—
3,495
4,662
85,395
97,339
____________________
(2) The amounts in this column consist of the Company’s matching contributions to its 401 (k) plan, personal use of company vehicles, and the portion of
company-wide group term life insurance premiums allocable to these named executive officers.
(3) Mr. Rugen was appointed interim Chief Executive Officer on June 28, 2013. The bonus and stock award information for Mr. Rugen for 2016 and 2015
represents his compensation for his services as both CEO and CFO.
36
Outstanding Equity Awards at Fiscal Year-End
OPTION AWARDS
Number of securities
underlying unexercised
options exercisable
Number of securities
underlying unexercised
options unexercisable
Option exercise
price
Option
expiration date
—
—
— $
— $
—
—
Name
Michael J. Rugen
Cary V. Sorensen
Option and Award Exercises
No other options were exercised during 2016 or 2015.
Employment Contracts and Compensation Agreements
On September 18, 2013, the Company and its Chief Financial Officer and interim Chief Executive Officer Michael
J. Rugen entered into a written Compensation Agreement as reported on Form 8-K filed on September 24, 2013. Under the
terms of the Compensation Agreement, Mr. Rugen’s annual salary will increase from $150,000 to $170,000 per year in his
capacity as Chief Financial Officer, and he will receive a bonus of $7,500 per quarter for each quarter during which he also
serves as interim Chief Executive Officer. At June 1, 2014, Mr. Rugen’s salary was increased to $199,826 per year in his
capacity as Chief Financial Officer, the quarterly bonus received while in the capacity as interim Chief Financial Officer was
increased to $8,815 per quarter. The increases at June 1, 2014 were for cost of living adjustments related to the relocation of
the corporate office from Knoxville to Greenwood Village. The Compensation agreement is not an employment contract, but
does provide that in the event Mr. Rugen were terminated without cause, he would receive a severance payment in the
amount of six month’s salary in effect at the time of any such termination.
On February 25, 2015, the Company and its Vice President, General Counsel, and Corporate Secretary Cary V.
Sorensen entered into a written Compensation Agreement as reported on Form 8-K filed on February 19, 2015. Under the
terms of the Compensation Agreement, effective March 2, 2015, Mr. Sorensen’s annual salary will be reduced from $137,500
to $91,000 in consideration of the Company's agreement to permit Mr. Sorensen to serve as a full time employee from a
virtual office in Galveston, Texas with presence in the Denver area headquarters as required. He will remain eligible for
certain existing benefits: 401-K plan, bonus potential; Company-paid state bar membership dues and charges, and mobile
phone charges. The Company also pays reasonable and customary office operating expenses. The Company would pay for
business travel on a mileage basis and out of pocket travel costs. However, as to health insurance, Mr. Sorensen will obtain a
combination of private/governmental health and disability insurance in lieu of the Company plans, with the Company
reimbursing up to $13,000 per year in premiums incurred by him. The Compensation agreement is not an employment
contract, but does provide that in the event Mr. Sorensen were terminated without cause, he would receive a severance
payment in the amount of six month’s salary in effect at the time of any such termination.
On February 19, 2015, in response to the current global market factors affecting revenues from sales of the
Company’s production of crude oil, the Board of Directors of the Company implemented reductions in the current
compensation of the Company’s officers.
As to the Company’s Chief Financial Officer and interim Chief Executive Officer Michael J. Rugen, Mr. Rugen’s
salary as CFO and bonus as CEO was reduced effective February 2, 2015 by 18% from current levels, or about $42,000 per
year. The 18% reduction will remain in place until 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 when his
compensation shall revert 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 to Mr. Rugen if he is still
employed by the Company. Mr. Rugen expressly consented to this reduction as not constituting a “termination without
Cause” under the terms of his Compensation Agreement dated September 18, 2013 but permitting him to invoke that
provision in the event prices do recover as set out above but the compensation reduction is not rescinded or the reductions are
not repaid.
As to the Company’s Vice President, General Counsel, and Corporate Secretary Cary V Sorensen, the Company and
Mr. Sorensen reached agreement on February 25, 2015 that as of March 2, 2015 his annual salary would be set at $91,000 per
37
annum, a reduction from his current salary of $137,500 per annum as described above. In addition, Mr. Sorensen’s $91,000
salary will be reduced effective March 2, 2015 by 10%. In like manner as set out above for Mr. Rugen, the 10% reduction on
Mr. Sorensen’s salary will remain in place until 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 when his salary
shall revert to $91,000 per annum. 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 from the $91,000 salary level will be reimbursed to Mr. Sorensen if he is still employed by the
Company. This agreement is not an employment contract, but does provide that in the event Mr. Sorensen were terminated
without cause during the year following, he would receive a severance payment in the amount of six months’ salary in effect
at time of any such termination.
There are presently no other employment contracts relating to any member of management. However, depending
upon the Company's operations and requirements, the Company may offer long-term contracts to executive officers or key
employees in the future.
Compensation and Stock Option Committee
The members of the Compensation/Stock Option Committee during 2016 were Matthew K. Behrent, Hughree F.
Brooks, and Richard M. Thon, with Mr. Brooks acting as Chairman. Messrs. Behrent, Brooks, and Thon meet the current
independence standards established by the NYSE MKT Rules to serve on this Committee.
The Board of Directors has adopted a charter for the Compensation/Stock Option Committee which is available at
the Company’s internet website, www.tengasco.com.
The Compensation/Stock Option Committee’s functions, in conjunction with the Board of Directors, are to provide
recommendations with respect to general and specific compensation policies and practices of the Company for directors,
officers and other employees of the Company. The Compensation/Stock Option Committee expects to periodically review
the approach to executive compensation and to make changes as competitive conditions and other circumstances warrant and
will seek to ensure the Company's compensation philosophy is consistent with the Company's best interests and is properly
implemented. The Committee determines or recommends to the Board of Directors for determination the specific
compensation of the Company’s Chief Executive Officer and all of the Company’s other officers. Although the Committee
may seek the input of the Company’s Chief Executive Officer in determining the compensation of the Company’s other
executive officers, the Chief Executive Officer may not be present during the voting or deliberations with respect to his
compensation. The Committee may not delegate any of its responsibilities unless it is to a subcommittee formed by the
Committee, but only if such subcommittee consists entirely of directors who meet the independence requirements of the
NYSE MKT Rules.
The Compensation/Stock Option Committee is also charged with administering the Tengasco, Inc. Stock Incentive
Plan (the “Stock Incentive Plan”). The Compensation/Stock Option Committee has complete discretionary authority with
respect to the awarding of options, stock, and Stock Appreciation Rights (“SARs”), under the Stock Incentive Plan,
including, but not limited to, determining the individuals who shall receive options and SARs; the times when they shall
receive them; whether an option shall be an incentive or a non-qualified stock option; whether an SAR shall be granted
separately, in tandem with or in addition to an option; the number of shares to be subject to each option and SAR; the term of
each option and SAR; the date each option and SAR shall become exercisable; whether an option or SAR shall be exercisable
in whole, in part or in installments and the terms relating to such installments; the exercise price of each option and the base
price of each SAR; the form of payment of the exercise price; the form of payment by the Company upon the exercise of an
SAR; whether to restrict the sale or other disposition of the shares of common stock acquired upon the exercise of an option
or SAR; to subject the exercise of all or any portion of an option or SAR to the fulfillment of a contingency, and to determine
whether such contingencies have been met; with the consent of the person receiving such option or SAR, to cancel or modify
an option or SAR, provided such option or SAR as modified would be permitted to be granted on such date under the terms
of the Stock Incentive Plan; and to make all other determinations necessary or advisable for administering the Plan.
The Compensation/Stock Option Committee met two (2) times in Fiscal 2016. The Committee has the authority to
retain a compensation consultant or other advisors to assist it in the evaluation of compensation and has the sole authority to
approve the fees and other terms of retention of such consultants and advisors and to terminate their services. The Committee
did not retain any such consultants or advisors in 2015.
38
Compensation of Directors
The Board of Directors has resolved to compensate members of the Board of Directors for attendance at meetings at
the rate of $250 per day, together with direct out-of-pocket expenses incurred in attendance at the meetings, including travel.
The Directors, as of the date of this Report, have waived all such fees due to them for prior meetings.
Members of the Board of Directors may also be requested to perform consulting or other professional services for
the Company from time to time, although at this time no such arrangements are in place. The Board of Directors has
reserved to itself the right to review all directors' claims for compensation on an ad hoc basis.
Board members currently receive fees from the Company for their services as director. They may also from time to
time be granted stock options or common stock under the Tengasco, Inc. Stock Incentive Plan. A separate plan to issue cash
and/or shares of stock to independent directors for service on the Board and various committees was authorized by the Board
of Directors and approved by the Company’s shareholders. A copy of that separate plan is posted at the Company’s website
at www.tengasco.com. However, no award was made to any independent director under that separate plan in Fiscal 2016.
DIRECTOR COMPENSATION FOR FISCAL 2016
Name
Matthew K. Behrent
Hughree F. Brooks
Richard M. Thon
Peter E. Salas
____________________
Fees earned or
paid in cash
($)
7,500 $
7,500 $
7,500 $
7,500 $
$
$
$
$
Stock awards
compensation
Option awards
compensation 4
($)
1,700 $
1,700 $
1,700 $
1,700 $
631 $
631 $
631 $
631 $
Total
($)
9,831
9,831
9,831
9,831
(4) The amounts represented in this column are equal to the aggregate grant date fair value of the award computed in accordance with FASB ASC Topic
718, Compensation-Stock Compensation, in connection with options granted under the Tengasco, Inc. Stock Incentive Plan. See Note 11 Stock and
Stock Options in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016 for information on the relevant valuation assumptions.
As of December 31, 2016, Mr. Behrent held 10,000 unexercised options; Mr. Brooks held 10,000 unexercised options; Mr. Salas held 10,000
unexercised options; and Mr. Thon held 5,6250 unexercised options. The number of unexercised options have been adjusted to reflect the impact of
the 1 for 10 reverse stock split approved at the shareholder meeting dated March 21, 2015, effective with trading on March 24, 2016.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
The following table sets forth the shareholdings of those persons who own more than 5% of the Company's common
stock as of March 24, 2017 with these computations being based upon 10,601,685 shares of common stock being outstanding
as of that date and as to each shareholder, as it may pertain, assumes the exercise of options or warrants granted or held by
such shareholder that are exercisable as of March 24, 2017.
FIVE PERCENT STOCKHOLDERS 5
Name and Address
Dolphin Offshore Partners, L.P.
c/o Dolphin Mgmt. Services, Inc.
P.O. Box 16867
Fernandina Beach, FL 32035
____________________
Title
Stockholder
Number of Shares
Beneficially Owned
5,290,241
Percent of Class
49.9%
(5) Unless otherwise stated, all shares of Common Stock are directly held with sole voting and dispositive power. The shares set forth in the table are as of
March 24, 2017.
39
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
Number of Shares
Percent of
Title
Beneficially Owned 6
Name and Address
Matthew K. Behrent (8)
Hughree F. Brooks (9)
Michael J. Rugen (10)
Peter E. Salas (11)
Cary V. Sorensen (12)
Richard M. Thon (13)
All Officers and Directors as a group (14)
____________________
Director
Director
Chief Executive Officer
(interim);
Chief Financial Officer
Director;
Chairman of the Board
Vice President;
General Counsel;
Secretary
Director
66,900
15,000
23,187
Class 7
Less than 1%
Less than 1%
—
5,300,241
50.0%
23,623
Less than 1%
30,625
5,459,576
Less than 1%
51.3%
(6) Unless otherwise stated, all shares of common stock are directly held with sole voting and dispositive power. The shares set forth in the table are as of
March 24, 2017.
(7) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of 1934 based upon 10,601,685 shares of common stock being outstanding as
of March 24, 2017. Shares not outstanding that are subject to options or warrants exercisable by the holder thereof within 60 days of March 24, 2017
are deemed outstanding for the purposes of calculating the number and percentage owned by such stockholder, but not deemed outstanding for the
purpose of calculating the percentage of any other person. Unless otherwise noted, all shares listed as beneficially owned by a stockholder are actually
outstanding.
(8) Consists of 56,900 shares held directly and vested, fully exercisable options to purchase 10,000 shares.
(9) Consists of 5,000 shares held directly and vested, fully exercisable options to purchase 10,000 shares.
(10) Consists of 23,187 shares held directly.
(11) Consists of directly, vested, fully exercisable options to purchase 10,000 shares, 2,000 shares held individually, and 5,288,241 shares held directly by
Dolphin Offshore Partners, L.P. (“Dolphin”). Peter E. Salas is the sole shareholder of and controlling person of Dolphin Mgmt. Services, Inc. which is
the general partner of Dolphin.
(12) Consists of 23,623 shares held directly.
(13) Consists of 25,000 shares held directly and vested, fully exercisable options to purchase 5,625 shares.
(14) Consists of 135,710 shares held directly by directors and management, 5,288,241 shares held by Dolphin and vested, and fully exercisable options to
purchase 35,625 shares.
Change in Control
To the knowledge of the Company’s management, there are no present arrangements or pledges of the Company’s
securities which may result in a change in control of the Company.
40
Equity Compensation Plan Information
The following table sets forth information regarding the Company’s equity compensation plans as of December 31,
2016.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights(a)
Weighted-average
exercise price of
outstanding, options,
warrants and rights(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) (c)
37,500 $
—
37,500 $
4.70
—
4.70
3,118,118
—
3,118,118
Plan Category
Equity compensation plans
approve by security holders 15
Equity compensation plans not
approved by security holders
Total
____________________
(15) Refers to Tengasco, Inc. Stock Incentive Plan (the “Plan”) which was adopted to provide an incentive to key employees, officers, directors and
consultants of the Company and its present and future subsidiary corporations, and to offer an additional inducement in obtaining the services of such
individuals. The Plan provides for the grant to employees of the Company of “Incentive Stock Options” within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, nonqualified stock options to outside Directors and consultants the Company and stock appreciation
rights. The Plan was approved by the Company’s shareholders on June 26, 2001. Initially, the Plan provided for the issuance of a maximum of
1,000,000 shares of the Company’s $.001 par value common stock. Thereafter, the Company’s Board of Directors adopted and the shareholders
approved amendments to the Plan to increase the aggregate number of shares that may be issued under the Plan to 7,000,000 shares. The most recent
amendment to the Plan increasing the number of shares that may be issued under the Plan by 3,500,000 shares and extending the Plan for another 10
years was approved by the Company Board of Directors on February 1, 2008 and approved by the Company’s shareholders at the Annual Meeting of
Stockholders held June 2, 2008.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Transactions
There have been no material transactions, series of similar transactions or currently proposed transactions entered
into during 2016 and 2015, to which the Company or any of its subsidiaries was or is to be a party, in which the amount
involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for its last
two completed fiscal years in which any director or executive officer or any security holder who is known to the Company to
own of record or beneficially more than 5% of the Company's common stock, or any member of the immediate family of any
of the foregoing persons, had a material interest.
In this Report on Form 10-K for the year ended December 31, 2016, the Company describes two transactions of the
type described above, that the Company entered into with Hoactzin in 2007 that remained in existence in 2016 and 2015. As
noted above in Item 1, Business, page 7, Peter E. Salas, the Chairman of the Board of Directors of the Company, is the
controlling person of Hoactzin and of Dolphin Offshore Partners, L.P., the Company’s largest shareholder. These two 2007
transactions between the Company and Hoactzin are described at the following page locations in this Report and in the
attached Notes to Consolidated Financial Statements: (1) the Ten Well Program, see Item 1, Business pages 7; and (2) the
net profits agreement at the Methane Project, see Item 1, Business, pages 8 and F-12.
The approximate dollar value of the amount of Hoactzin’s interest in each of these two 2007 transactions during
each of the years 2016 and 2015 was as follows: (1) Ten Well Program - $25,000 in 2016; and $31,000 in 2015 (calculated as
the total payments attributable to Hoactzin for its program interest); and (2) Net Profits agreement at the Methane Project - $0
in 2016 and 2015 (calculated as the amount of net profits payable to Hoactzin; the project generated no net profits as
described in the agreement, and therefore no amount was paid to Hoactzin for net profits, in either 2016 or 2015).
In addition to the two 2007 transactions, Hoactzin owns a drilling program interest in the Company’s “6 Well
Program” in Kansas, acquired in 2005 by Hoactzin in exchange for surrender of the Company’s promissory notes given by
the Company for borrowings to fund the redemption in 2004 of the Company’s three series of preferred stock, all as
previously disclosed. Hoactzin’s interest in the 6 Well Program was $4,000 in 2016; and $13,000 in 2015 (calculated as the
total payments attributable to Hoactzin for its program interest) and is expected to decrease in the future as the wells involved
naturally decline in produced volumes.
41
In addition to the above, one transaction of the type described above was entered into in 2007 but has expired by its
own terms. On December 18, 2007, the Company entered into a Management Agreement with Hoactzin to manage on behalf
of Hoactzin all of its working interest in certain oil and gas properties owned by Hoactzin and located in the onshore Texas
Gulf Coast, and offshore Texas and offshore Louisiana. As part of the consideration for the Company’s agreement to enter
into the Management Agreement, Hoactzin granted to the Company an option to participate in up to a 15% working interest
on a dollar for dollar cost basis in any new drilling or workover activities undertaken on Hoactzin’s managed properties
during the term of the Management Agreement. The Management Agreement expired on December 18, 2012.
The Company has entered into a transition agreement with Hoactzin whereby the Company will no longer perform
operations, but will administratively assist Hoactzin in becoming operator of record of these wells and administratively assist
Hoactzin in the transfer of the corresponding bonds from the Company to Hoactzin. This assistance is primarily related to
signing the necessary documents to effectuate this transition. Hoactzin and its controlling member are indemnifying the
Company for any costs or liabilities incurred by the Company resulting from such assistance, or the fact that the Company is
the operator of record on certain of these wells. As of the date of this Report, the Company continues to administratively
assist Hoactzin with this transition process.
During the term of the Management Agreement, the Company became the operator of certain properties owned by
Hoactzin. The Company obtained over time, bonds for the purpose of covering plugging and abandonment obligations for
Hoactzin’s operated properties located in federal offshore waters in favor of the BSEE, as well as certain private parties. As
of May 15, 2014, all such operator bonds as to the Company have been released by the BSEE and have been cancelled by the
issuer of the bonds. Accordingly, the exposure to the Company under any of the now cancelled IndemCo bonds or the
indemnity agreement relating to those now cancelled bonds has decreased to zero.
As operator during the term of the Management Agreement that expired in 2012, the Company routinely contracted
in its name for goods and services with vendors in connection with its operation of the Hoactzin properties. In practice,
Hoactzin directly paid these invoices for goods and services that were contracted in the Company’s name. As a result of the
operations performed by Hoactzin in late 2009 and 2010, Hoactzin had significant past due balances to several vendors, a
portion of which were included on the Company’s balance sheet. Payables related to these past due and ongoing operations
remained outstanding at December 31, 2016 and 2015 in the amount of $159,000. The Company has recorded the Hoactzin-
related payables and the corresponding receivable from Hoactzin as of December 31, 2016 and 2015 in its Consolidated
Balance Sheets under “Accounts payable – other” and “Accounts receivable – related party”. The outstanding balance of
$159,000 should not increase in the future. However, Hoactzin has not made payments to reduce the $159,000 of past due
balances from 2009 and 2010 since the second quarter of 2012. Based on these circumstances, the Company has elected to
establish an allowance in the amount of $159,000 for the balances outstanding at December 31, 2016 and 2015. This
allowance was recorded in the Company’s Consolidated Balance Sheets under “Accounts receivable – related party”. The
resulting balances recorded in the Company’s Consolidated Balance Sheets under “Accounts receivable – related party, less
allowance for doubtful accounts of $159” are $0 at December 31, 2016 and 2015.
The Company as designated operator of the Hoactzin properties was administratively issued an “Incident of Non-
Compliance” by BSEE during the quarter ended September 30, 2012 concerning one of Hoactzin’s operated properties. This
action called for payment of a civil penalty of $386,000 for failure to provide, upon request, documentation to the BSEE
evidencing that certain safety inspections and tests had been conducted in 2011. On July 14, 2015, the federal district court
in the Eastern District of Louisiana affirmed the determination by the IBLA without reduction. The Company did not further
appeal. In the third quarter of 2015, the Company paid the civil penalty and statutory interest thereon from funds borrowed
under its credit facility. In the fourth quarter of 2015, the Company received a return of the cash collateral previously
provided to RLI Insurance Company. The Company has not advanced any funds to pay any obligations of Hoactzin and no
borrowing capability of the Company has been used in connection with its obligations under the Management Agreement,
except for those funds used to pay the civil penalty and interest thereon.
During the second quarter of 2015, the Company received from Hoactzin a copy of an internal analysis prepared by
Hoactzin setting out certain issues that Hoactzin may consider to form the basis of operational and other claims against the
Company primarily under the Management Agreement. This analysis raised issues other than the “Incident of Non-
Compliance” discussed previously. The Company is discussing this analysis, as well as the civil penalty discussed
previously, with Hoactzin in an effort to determine whether there is possibility of a reasonable resolution of some or all of
these matters on a negotiated basis.
42
Director Independence
The Rules of the NYSE MKT (the “NYSE MKT Rules”) of which the Company is a member require that an issuer,
such as the Company, which is a Smaller Reporting Company pursuant to Regulation S-K Item 10(f)(1), maintain a board of
directors of which at least one-half of the members are independent in that they are not officers of the Company and are free
of any relationship that would interfere with the exercise of their independent judgment. The NYSE MKT Rules also require
that as a Smaller Reporting Company, the Company’s Board of Directors’ Audit Committee be comprised of at least two
members all of whom qualify as independent under the criteria set forth in Rule 10 A-3 of the Securities Exchange Act of
1934 and NYSE MKT Rule 803(b)(2)(c). The Board of Directors has determined that the Company’s directors, Matthew K.
Behrent, Hughree F. Brooks, and Richard M. Thon, are independent as defined by the NYSE MKT Rules, and that Matthew
K. Behrent, Richard M. Thon, and Hughree F. Brooks are also independent as defined by Section 10A(m)(3) of the Securities
Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission; and that none of these
directors have any relationship which would interfere with the exercise of his independent judgment in carrying out his
responsibilities as a director. In reaching its determination, the Board of Directors reviewed certain categorical independence
standards to provide assistance in the determination of director independence. The categorical standards are set forth below
and provide that a director will not qualify as an independent director under the NYSE MKT Rules if:
The Director is, or has been during the last three years, an employee or an officer of the Company or any of
its affiliates;
The Director has received, or has an immediate family member 18 who has received, during any twelve
consecutive months in the last three years any compensation from the Company in excess of $120,000, other than
compensation for service on the Board of Directors, compensation to an immediate family member who is an
employee of the Company other than an executive officer, compensation received as an interim executive officer or
benefits under a tax-qualified retirement plan, or non-discretionary compensation;
The Director is a member of the immediate family of an individual who is, or has been in any of the past
three years, employed by the Company or any of its affiliates as an executive officer;
The Director, or an immediate family member, is a partner in, or controlling shareholder or an executive
officer of, any for-profit business organization to which the Company made, or received, payments (other than those
arising solely from investments in the Company’s securities) that exceed 5% of the Company’s or business
organization’s consolidated gross revenues for that year, or $200,000, whichever is more, in any of the past three
years;
The Director, or an immediate family member, is employed as an executive officer of another entity where
at any time during the most recent three fiscal years any of the Company’s executives serve on that entity’s
compensation committee; or
The Director, or an immediate family member, is a current partner of the Company’s outside auditors, or
was a partner or employee of the Company’s outside auditors who worked on the Company’s audit at any time
during the past three years.
The following additional categorical standards were employed by the Board in determining whether a
director qualified as independent to serve on the Audit Committee and provide that a director will not qualify if:
•
•
•
The Director directly or indirectly accepts any consulting, advisory, or other compensatory fee
from the Company or any of its subsidiaries; or
The Director is an affiliated person19 of the Company or any of its subsidiaries.
The Director participated in the preparation of the Company’s financial statements at any time
during the past three years.
The independent members of the Board meet as often as necessary to fulfill their responsibilities, but meet
at least annually in executive session without the presence of non-independent directors and management.
____________________
(16) Under these categorical standards “immediate family member” includes a person’s spouse, parents, children, siblings, mother-in-law, father-in-law,
brother-in-law, sister-in-law, son-in-law, daughter-in-law, and anyone who resides in such person’s home (other than a domestic employee).
43
(17) For purposes of this categorical standard, an “affiliated person of the Company” means a person that directly or indirectly through intermediaries’
controls, or is controlled by, or is under common control with the Company. A person will not be considered to be in control of the Company, and
therefore not an affiliate of the Company, if he is not the beneficial owner, directly or indirectly of more than 10% of any class of voting securities of
the Company and he is not an executive officer of the Company. Executive officers of an affiliate of the Company as well as a director who is also an
employee of an affiliate of the Company will be deemed to be affiliates of the Company.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit and Non-Audit Fees
The following table presents the fees for professional audit services rendered by the Company’s current independent
accountants, Hein & Associates (“Hein”), for the audit of the Company’s annual consolidated financial statements and fees
for professional audit services rendered for the quarterly reviews for the fiscal years ended December 31, 2016 and December
31, 2015:
AUDIT AND NON-AUDIT FEES
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total Fees
2016
111,300 $
18,322
—
—
129,622 $
2015
111,400
—
—
—
111,400
$
$
Audit fees include fees related to the services rendered in connection with the annual audit of the Company’s
consolidated financial statements, the quarterly reviews of the Company’s quarterly reports on Form 10-Q and the reviews of
and other services related to statutory filings or engagements for the subject fiscal years.
Audit-related fees are for assurance and related services by the principal accountants that are reasonably related to
the performance of the audit or review of the Company’s financial statements.
Tax Fees include services for (i) tax compliance, (ii) tax advice, (iii) tax planning and (iv) tax reporting.
All Other Fees includes fees for all other services provided by the principal accountants not covered in the other
categories such as litigation support, etc.
All of the services for 2016 and 2015 were performed by the full-time, permanent employees of Hein.
All of the 2016 services described above were approved by the Audit Committee pursuant to the SEC rule that
requires audit committee pre-approval of audit and non-audit services provided by the Company’s independent auditors. The
Audit Committee considered whether the provisions of such services, including non-audit services, by Hein were compatible
with maintaining its independence and concluded they were.
44
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
A. The following documents are filed as part of this Report:
1.
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Financial Schedules:
Schedules have been omitted because the information required to be set forth therein is not applicable or is
included in the Consolidated Financial Statements or notes thereto.
3.
Exhibits.
The following exhibits are filed with, or incorporated by reference into this Report:
Exhibit Index
Exhibit Number Description
3.1
Amended and Restated Certificate of Incorporation as of March 23, 2016 (Incorporated by reference to
Exhibit 3 to registrant’s Report on Form 10-Q for the period ended September 30, 2016 filed November 14,
2016).
Amended and Restated Bylaws as of November 13, 2014 (Incorporated by reference to Exhibit 3.2 to the
registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 30, 2015).
Agreement and Plan of Merger of Tengasco, Inc. (a Tennessee corporation with and into Tengasco, Inc., a
Delaware corporation dated as of April 15, 2011 (Incorporated by reference to Exhibit B to registrant’s
Definitive Proxy Statement pursuant to Schedule 14a filed May 2, 2011).
Tengasco, Inc. Incentive Stock Plan, as amended March 21, 2016 (Incorporated by reference to Attachment
B to the registrant’s Definitive Proxy Statement pursuant to Schedule 14a filed February 10, 2016)
Loan and Security Agreement dated as of June 29, 2006 between Tengasco, Inc. and Citibank Texas, N.A.
(Incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated June 29,
2006).
Subscription Agreement of Hoactzin Partners, L.P. for the Company’s ten well drilling program on its
Kansas Properties dated August 3, 2007 (Incorporated by reference to Exhibit 10.15 to the registrant’s
Annual Report on Form 10-K for the year ended December 31, 2007 filed March 31, 2008 [the “2007 Form
10-K”]).
Agreement and Conveyance of Net Profits Interest dated September 17, 2007 between Manufactured
Methane Corporation as Grantor and Hoactzin Partners, LP as Grantee (Incorporated by reference to Exhibit
10.16 to the 2007 Form 10-K).
Agreement for Conditional Option for Exchange of Net Profits Interest for Convertible Preferred Stock
dated September 17, 2007 between Tengasco, Inc., as Grantor and Hoactzin Partners, L.P., as Grantee
(Incorporated by reference to Exhibit 10.17 to the 2007 Form 10-K).
Assignment of Notes and Liens Dated December 17, 2007 between Citibank, N.A., as Assignor, Sovereign
Bank, as Assignee and Tengasco, Inc., Tengasco Land & Mineral Corporation and Tengasco Pipeline
Corporation as Debtors (Incorporated by reference to Exhibit 10.18 to the 2007 Form 10-K).
Management Agreement dated December 18, 2007 between Tengasco, Inc. and Hoactzin Partners, L.P.
(Incorporated by reference to Exhibit 10.20 to the 2007 Form 10-K).
Assignment of Credit Facility to F&M Bank and Trust Company (Incorporated by reference to Exhibit
3.2
3.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
45
10.9
10.10
10.11
10.12
10.13
14
23.1*
31*
32*
99.1*
10.15 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March
31, 2011).
Fourteenth Amendment to Loan and Security Agreement dated October 24, 2013 between Tengasco, Inc. as
borrower and F&M Bank & Trust Company as Lender (Incorporated by reference to Exhibit 10.16 to the
registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 31, 2014).
Fifteenth Amendment to Loan and Security Agreement dated March 17, 2014 between Tengasco, Inc. as
borrower and F&M Bank & Trust Company as Lender (Incorporated by reference to Exhibit 10.17 to the
registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 31, 2014).
Sixteenth Amendment to Loan and Security Agreement dated September 23, 2014 between Tengasco, Inc.
as borrower and Prosperity Bank as Lender (Incorporated by reference to Exhibit 10.18 to the registrant’s
Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 30, 2015).
Seventeenth Amendment to Loan and Security Agreement dated March 16, 2015 between Tengasco, Inc. as
borrower and Prosperity Bank as Lender (Incorporated by reference to Exhibit 10.19 to the registrant’s
Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 30, 2015).
Eighteenth Amendment to Loan and Security Agreement between Tengasco, Inc. as borrower and Prosperity
Bank as Lender dated March 28, 2016 (Incorporated by reference to Exhibit 10.20 to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015 filed on March 30, 2016).
Code of Ethics (Incorporated by reference to Exhibit 14 to the registrant’s Annual Report on Form 10-K
filed March 30, 2004).
Consent of LaRoche Petroleum Consultants, Ltd.
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Report of LaRoche Petroleum Consultants, Ltd. has been added to the filing for the year ended December,
31, 2016
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Definition Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
* Exhibit filed with this Report
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2017
Tengasco, Inc.
(Registrant)
By: s/ Michael J. Rugen
Michael J. Rugen,
Chief Executive Officer
Principal Financial and Accounting 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
s/ Matthew K. Behrent
Matthew K. Behrent
s/ Hughree F. Brooks
Hughree F. Brooks
s/ Peter E. Salas
Peter E. Salas
s/ Richard M. Thon
Richard M. Thon
Title
Director
Director
Director
Director
s/ Michael J. Rugen
Michael J. Rugen
Chief Executive Officer and
Principal Financial Accounting Officer
Date
March 30, 2017
March 30, 2017
March 30, 2017
March 30, 2017
March 30, 2017
47
[This page has been intentionally left blank.]
Report of Independent Registered Public Accounting Firms
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Tengasco, Inc.
and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2016, 2015, and 2014
F-Error!
Bookmark
not
defined.
F-3
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Tengasco, Inc.
We have audited the accompanying consolidated balance sheets of Tengasco, Inc. and subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, 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. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Tengasco, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their
operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ Hein & Associates LLP
Denver, Colorado
March 30, 2017
F-2
Tengasco, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share and share data)
December 31,
2016
2015
Assets
Current
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $14
$
76 $
490
40
446
Accounts receivable-related party, less allowance for doubtful accounts
of $159
Inventory
Other current assets
Total current assets
Oil and gas properties, net (full cost accounting method)
Manufactured Methane facilities, net
Other property and equipment, net
Total assets
—
627
421
1,614
5,225
1,559
140
8,538 $
—
542
354
1,382
8,838
1,573
200
11,993
$
See accompanying Notes to Consolidated Financial Statements
F-3
Tengasco, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share and share data)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable – trade
Accounts payable – other
Accounts payable – related party
Accrued liabilities
Current maturities of long-term debt
Total current liabilities
Asset retirement obligation
Long term debt, less current maturities
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ equity
December 31,
2016
2015
$
303 $
159
-
274
55
791
2,046
2,423
5,260
151
159
634
356
65
1,365
2,222
946
4,533
Common stock, $.001 par value: authorized 100,000,000 Shares;
6,097,723 and 6,084,241 shares issued and outstanding
Additional paid in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
See accompanying Notes to Consolidated Financial Statements
6
55,787
(52,515)
3,278
8,538 $
6
55,770
(48,316)
7,460
11,993
F-4
Tengasco, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share and share data)
Year ended December 31,
2015
2014
2016
Revenues
Oil and gas properties
Methane facility
Total revenues
Cost and expenses
Production costs and taxes
Depreciation, depletion, and amortization
General and administrative
Impairment
Total cost and expenses
Net loss from operations
Other income (expense)
Net interest expense
Gain on sale of assets
Total other (expense)
Loss from operations before income tax
Deferred income tax benefit (expense)
Current income tax expense
Net loss
Net loss per share
Basic
Fully diluted
Shares used in computing earnings per share
Basic
Diluted
$
4,113 $
559
4,672
5,631 $
533
6,164
3,421
1,139
1,405
2,805
8,770
(4,098)
4,224
2,676
2,069
14,526
23,495
(17,331)
(102)
1
(101)
(4,199)
—
—
(4,199) $
(80)
41
(39)
(17,370)
(7,351)
—
(24,721) $
13,264
524
13,788
5,994
3,030
2,707
2,796
14,527
(739)
(88)
33
(55)
(794)
12
(6)
(788)
$
$
$
(0.69) $
(0.69) $
(4.06) $
(4.06) $
(0.13)
(0.13)
6,091,028
6,091,028
6,084,241
6,084,241
6,084,241
6,084,993
See accompanying Notes to Consolidated Financial Statements
F-5
Tengasco, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands, except per share and share data)
Common Stock
Shares
Amount
Paid-in
Capital
Balance, December 31, 2013
Net loss
Compensation expense related to options issued
Balance, December 31, 2014
Net loss
Compensation expense related to options issued
Balance, December 31, 2015
Net loss
Compensation expense related to options issued
Compensation expense related to stock issued
True up shares due to reverse stock split
Balance, December 31, 2016
6,084,241 $
—
—
6,084,241 $
—
—
6,084,241 $
—
—
12,641
841
6,097,723 $
6 $
—
—
6 $
—
—
6 $
—
—
—
—
6 $
55,726 $
Accumulated
Deficit
(22,807) $
(788)
—
—
32
55,758 $
—
12
55,770 $
—
3
14
—
(23,595) $
(24,721)
—
(48,316) $
(4,199)
—
—
—
55,787 $
(52,515) $
Total
32,925
(788)
32
32,169
(24,721)
12
7,460
(4,199)
3
14
—
3,278
See accompanying Notes to Consolidated Financial Statements
F-6
Tengasco, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net loss from operations
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation, depletion, and amortization
Amortization of loan fees-interest expenses
Accretion of discount on asset retirement obligation
Impairment
Gain on sale of vehicles/equipment
Compensation and services paid in stock options / equipment
Deferred income tax expense
Changes in assets and liabilities
Restricted cash
Accounts receivable
Inventory and other assets
Accounts payable
Accrued liabilities
Settlement on asset retirement obligations
Net cash provided by (used in) operating activities
Investing activities
Additions to oil and gas properties
Sale of oil and gas properties
Additions to Manufactured Methane facilities
Additions to other property & equipment
Proceeds from sale of other property & equipment
Net cash (used in) investing activities
Financing activities
Proceeds from borrowings
Repayment of borrowings
Loan fees
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental cash flow information:
Cash interest payments
Supplemental non-cash investing and financing activities:
Financed company vehicles
Asset retirement obligations incurred
Revisions to asset retirement obligations
Capital expenditures included in accounts payable and accrued liabilities
Year Ended December 31,
2015
2016
2014
$
(4,199) $
(24,721) $
(788)
1,139
11
143
2,805
—
17
—
—
(46)
(238)
(482)
(89)
(73)
(1,012)
(397)
44
(47)
(5)
4
(401)
2,676
10
126
14,526
(41)
12
7,351
386
432
198
(58)
(398)
(17)
482
(570)
—
—
(1)
30
(541)
3,850
(2,376)
(25)
1,449
36
40
76 $
4,300
(4,234)
(2)
64
5
35
40 $
91 $
70 $
23 $
2 $
(210) $
7 $
140 $
— $
112 $
— $
$
$
$
$
$
$
3,030
17
114
2,796
(33)
32
(12)
121
576
450
58
323
(113)
6,571
(3,708)
—
(282)
(21)
17
(3,994)
7,709
(10,305)
—
(2,596)
(19)
54
35
71
47
46
138
207
See accompanying Notes to Consolidated Financial Statements
F-7
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business and Significant Accounting Policies
Tengasco, Inc. (the “Company”) is a Delaware corporation. The Company is in the business of exploration for and
production of oil and natural gas. The Company’s primary area of exploration and production is in Kansas.
The Company’s wholly-owned subsidiary, Tengasco Pipeline Corporation (“TPC”) owned and operated a pipeline
which it constructed to transport natural gas from the Company’s Swan Creek Field to customers in Kingsport, Tennessee.
The Company sold all its pipeline assets on August 16, 2013.
The Company’s wholly-owned subsidiary, Manufactured Methane Corporation (“MMC”) operates treatment and
delivery facilities in Church Hill, Tennessee for the extraction of methane gas from a landfill for eventual sale as natural gas
and for the generation of electricity.
Principles of Consolidation
The accompanying consolidated financial statements are presented in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”). The consolidated financial statements include the accounts of the
Company, and its wholly-owned subsidiaries after elimination of all significant intercompany transactions and balances.
Use of Estimates
The accompanying consolidated financial statements are prepared in conformity with U.S. GAAP which require
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates
include reserve quantities and estimated future cash flows associated with proved reserves, which significantly impact
depletion expense and potential impairments of oil and natural gas properties, income taxes and the valuation of deferred tax
assets, stock-based compensation and commitments and contingencies. We analyze our estimates based on historical
experience and various other assumptions that we believe to be reasonable. While we believe that our estimates and
assumptions used in preparation of the consolidated financial statements are appropriate, actual results could differ from
those estimates.
Revenue Recognition
Revenues are recognized based on actual volumes of oil, natural gas, methane gas, and electricity sold to purchasers
at a fixed or determinable price, when delivery has occurred and title has transferred, and collectability is reasonably assured.
Crude oil is stored and at the time of delivery to the purchasers, revenues are recognized. There were no material natural gas
imbalances at December 31, 2016 or 2015. Methane gas and electricity sales meters are located at the Carter Valley landfill
site and sales of electricity are recognized each month based on metered volumes. No methane gas was sold during 2016,
2015 or 2014.
Cash and Cash Equivalents
Cash and cash equivalents include temporary cash investments with a maturity of ninety days or less at date of
purchase. The Company has elected to enter into a sweep account arrangement allowing excess cash balances to be used to
temporarily pay down the credit facility, thereby, reducing overall interest cost.
F-8
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Inventory
Inventory consists of crude oil in tanks and is carried at lower of cost or market value. The cost component of the
oil inventory is calculated using the average per barrel cost which includes production costs and taxes, allocated general and
administrative costs, and allocated interest cost. The market component is calculated using the average December oil sales
price for the Company’s Kansas properties. In addition, the Company also carried equipment and materials to be used in its
Kansas operation and is carried at the lower of cost or market value. The cost component of the equipment and materials
inventory represents the original cost paid for the equipment and materials. The market component is based on estimated
sales value for similar equipment and materials at the end of each year. At December 31, 2016 and 2015, inventory consisted
of the following (in thousands):
Oil – carried at market
Equipment and materials – carried at market
Total inventory
December 31,
2016
2015
$
$
505 $
122
627 $
332
210
542
During 2016, the Company recorded an $88,000 impairment of its equipment and materials inventory. This impairment was
a result of a 2016 decrease in the estimated sales value for similar equipment.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas property acquisition, exploration, and
development activities. Under this method, all costs incurred in connection with acquisition, exploration, and development of
oil and gas reserves are capitalized. Capitalized costs include lease acquisitions, seismic related costs, certain internal
exploration costs, drilling, completion, and estimated asset retirement costs. The capitalized costs of oil and gas properties,
plus estimated future development costs relating to proved reserves and estimated asset retirement costs which are not already
included net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The
Company has determined its reserves based upon reserve reports provided by LaRoche Petroleum Consultants Ltd. since
2009. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual
assessment of whether impairment has occurred. The Company had $106,000 and $552,000 in unevaluated properties as of
December 31, 2016 and 2015, respectively. Proceeds from the sale of oil and gas properties are accounted for as reductions
to capitalized costs unless such sales cause a significant change in the relationship between costs and the estimated value of
proved reserves, in which case a gain or loss is recognized.
At the end of each reporting period, the Company performs a “ceiling test” on the value of the net capitalized cost of
oil and gas properties. This test compares the net capitalized cost (capitalized cost of oil and gas properties, net of
accumulated depreciation, depletion and amortization and related deferred income taxes) to the present value of estimated
future net revenues from oil and gas properties using an average price (arithmetic average of the beginning of month prices
for the prior 12 months) and current cost discounted at 10% plus cost of properties not being amortized and the lower of cost
or estimated fair value of unproven properties included in the cost being amortized (ceiling). If the net capitalized cost is
greater than the ceiling, a write-down or impairment is required. A write-down of the carrying value of the asset is a non-
cash charge that reduces earnings in the current period. Once incurred, a write-down may not be reversed in a later period.
Asset Retirement Obligation
An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability
in the period incurred, with an associated increase in the carrying amount of the related long-lived asset, our oil and natural
gas properties. The cost of the tangible asset, including the asset retirement cost, is depleted over the useful life of the asset.
The asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash
outflows required to satisfy the retirement obligation discounted at our credit-adjusted risk-free interest rate. Accretion
expense is recognized over time as the discounted liability is accreted to its expected settlement value. Accretion expense is
recorded as “Production costs and taxes” in the Consolidated Statements of Operations. If the estimated future cost of the
asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the long-lived asset.
Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates, revisions to
estimated inflation rates, and changes in the estimated timing of abandonment.
F-9
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Manufactured Methane Facilities
The Manufactured Methane facilities were placed into service in April 2009 and are being depreciated using the
straight-line method over the useful life based on the estimated landfill closure date of December 2041.
Other Property and Equipment
Other property and equipment is carried at cost. The Company provides for depreciation of other property and
equipment using the straight-line method over the estimated useful lives of the assets which range from two to seven years.
Net gains or losses on other property and equipment disposed of are included in operating income in the period in which the
transaction occurs.
Stock-Based Compensation
The Company records stock-based compensation to employees based on the estimated fair value of the award at
grant date. We recognize expense on a straight line basis over the requisite service period. For stock-based compensation that
vests immediately, the Company recognizes the entire expense in the quarter in which the stock-based compensation is
granted. The Company recorded compensation expense of $17,000 in 2016, $12,000 in 2015, and $32,000 in 2014.
Accounts Receivable
Accounts receivable consist of uncollateralized joint interest owner obligations due within 30 days of the invoice
date, uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 days of
production, and other miscellaneous receivables. No interest is charged on past-due balances. Payments made on accounts
receivable are applied to the earliest unpaid items. We review accounts receivable periodically and reduce the carrying
amount by a valuation allowance that reflects our best estimate of the amount that may not be collectible. An allowance was
recorded at December 31, 2016 and 2015. At December 31, 2016 and 2015, accounts receivable consisted of the following
(in thousands):
Revenue
Joint interest
Other
Allowance for doubtful accounts
Total accounts receivable
Income Taxes
December 31,
2016
2015
$
476 $
21
7
(14)
$
490 $
417
21
22
(14)
446
Income taxes are reported in accordance with U.S. GAAP, which requires the establishment of deferred tax accounts
for all temporary differences between the financial reporting and tax bases of assets and liabilities, using currently enacted
federal and state income tax rates. In addition, deferred tax accounts must be adjusted to reflect new rates if enacted into law.
At December 31, 2016, federal net operating loss carryforwards amounted to approximately $26.4 million which
expire between 2019 and 2036. The total deferred tax asset was $0 at December 31, 2016 and 2015. The Company recorded
a full allowance of the deferred tax asset primarily due to cumulated losses incurred during the 3 years ended December 31,
2016 and 2015.
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.
F-10
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of
cash and accounts receivable. Cash and cash equivalents are maintained at financial institutions and, at times, balances may
exceed federally insured limits. The Company has never experienced any losses related to these balances.
The Company’s primary business activities include oil and electricity sales to a limited number of customers in the
states of Kansas and Tennessee. The related trade receivables subject the Company to a concentration of credit risk.
The Company sells a majority of its crude oil primarily to two customers in Kansas. In addition, the Company sells
the electricity generated at the Carter Valley landfill site to a local utility. Although management believes that customers
could be replaced in the ordinary course of business, if the present customers were to discontinue business with the
Company, it may have a significant adverse effect on the Company’s projected results of operations.
Revenue from the top three purchasers accounted for 73.9%, 13.1%, and 12.0% of total revenues for year ended
December 31, 2016. Revenue from the top three purchasers accounted for 74.5%, 16.1%, and 8.6% of total revenues for year
ended December 31, 2015. Revenue from the top three purchasers accounted for 79.3%, 16.5%, and 3.8% of total revenues
for year ended December 31, 2014. As of December 31, 2016 and 2015, two of the Company’s oil purchasers accounted for
84.1% and 75.7%, respectively of accounts receivable, of which one oil purchaser accounted for 71.0% and 66.5%,
respectively.
Earnings per Common Share
The Company reports basic earnings per common share, which excludes the effect of potentially dilutive securities,
and diluted earnings per common share which include the effect of all potentially dilutive securities unless their impact is
anti-dilutive. The following are reconciliations of the numerators and denominators of the Company’s basic and diluted
earnings per share, (in thousands except for share and per share amounts):
Income (numerator):
Net loss
Weighted average shares (denominator):
Weighted average shares - basic
Dilution effect of share-based compensation, treasury method
Weighted average shares - dilutive
Loss per share – Basic and Dilutive:
Basic
Dilutive
For the years ended December 31,
2015
2016
2014
$
(4,199) $
(24,721) $
(788)
6,091,028
—
6,091,028
6,084,241
—
6,084,241
6,084,241
752
6,084,993
$
$
(0.69) $
(0.69) $
(4.06) $
(4.06) $
(0.13)
(0.13)
Share and per share information has been adjusted to reflect the impact of the 1 for 10 reverse stock split approved at the
shareholder meeting on March 21, 2016, effective with trading on March 24, 2016. The total number of shares issued and
outstanding represent estimates after adjustments to reflect the impact of the reverse stock split.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts
payables, accrued liabilities and long term debt approximates fair value as of December 31, 2016 and 2015.
F-11
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Derivative Financial Instruments
The Company uses derivative instruments to manage our exposure to commodity price risk on sales of oil
production. The Company does not enter into derivative instruments for speculative trading purposes. The Company
presents the fair value of derivative contracts on a net basis where the right to offset is provided for in our counterparty
agreements. As of December 31, 2016 and 2015, the Company did not have any open derivatives.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation with no effect on net
income.
2. Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The objective of this update
is to clarify the principles for recognizing revenue and to develop a common revenue standard. The FASB subsequently
issued ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, which deferred the effective date of ASU 2014-09 and
provided additional implementation guidance. The standard is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period. We are currently assessing the potential impact,
but the Company does not believe the adoption of the standard will have a significant impact on our consolidated financial
statements and results of operations.
In August 2014, the FASB issued Update No. 2014-15—Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This was issued to
provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to
continue as a going concern or to provide related footnote disclosures. The guidance is effective for annual periods ending
after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is
permitted. There was no impact on the Company’s operating results or cash flows.
In November 2015, the FASB issued ASU 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes. This guidance eliminates the current requirement for organizations to present deferred tax liabilities and
assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred
tax assets and liabilities as noncurrent. This guidance is effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The amendments may be applied prospectively to
all deferred tax liabilities and assets or retrospectively to all periods presented. The Company does not expect this to impact
its operating results or cash flows.
In February 2016, the FASB issued Update 2016-02—Leases (Topic 842). This guidance was issued to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted
for all entities. The Company does not expect this to impact its operating results or cash flows.
In March 2016, the FASB issued Update 2016-09 Compensation—Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. This guidance simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15,
2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual
period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning
of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in
the same period. The Company does not expect this to impact operating results or cash flows.
In August 2016, the FASB issued Update 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. This amendment provides guidance on certain cash flow classification issues, thereby
reducing the current and potential future diversity in practice. This guidance is effective for annual periods beginning after
December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim
F-12
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the
amendments in the same period. The Company does not expect this to impact operating results or cash flows.
3. Related Party Transactions
On September 17, 2007, Hoactzin, simultaneously with subscribing to participate in the Program, and pursuant to a
separate agreement with the Company, was conveyed a 75% net profits interest in the Company’s Methane Project. Because
the Payout Point had been reached in February 2014 as described above in the Program, Hoactzin’s net profits interest in the
Methane Project was simultaneously decreased from 75% to 7.5%. The agreed method of calculation of net profits takes into
account specific costs and expenses as well as gross gas revenues for the project. As a result of the startup costs, ongoing
operating expenses, and gas production levels experienced, no net profits as defined were realized during the period from the
project startup in April, 2009 through December 31, 2016 for payment to Hoactzin under the net profits interest. Since the
start of 2014, there have been no methane gas sales or revenues, and consequently no net profits attributable to Hoactzin’s net
profits interest.
In addition to the Program and Net Profits Interest above, one transaction of the type described above was entered
into in 2007 but has expired by its own terms. On December 18, 2007, the Company entered into a Management Agreement
with Hoactzin to manage on behalf of Hoactzin all of its working interest in certain oil and gas properties owned by Hoactzin
and located in the onshore Texas Gulf Coast, and offshore Texas and offshore Louisiana. As part of the consideration for the
Company’s agreement to enter into the Management Agreement, Hoactzin granted to the Company an option to participate in
up to a 15% working interest on a dollar for dollar cost basis in any new drilling or workover activities undertaken on
Hoactzin’s managed properties during the term of the Management Agreement. The Management Agreement expired on
December 18, 2012.
The Company has entered into a transition agreement with Hoactzin whereby the Company will no longer perform
operations, but will administratively assist Hoactzin in becoming operator of record of these wells and administratively assist
Hoactzin in the transfer of the corresponding bonds from the Company to Hoactzin. This assistance is primarily related to
signing the necessary documents to effectuate this transition. Hoactzin and its controlling member are indemnifying the
Company for any costs or liabilities incurred by the Company resulting from such assistance, or the fact that the Company is
the operator of record on certain of these wells. As of the date of this Report, the Company continues to administratively
assist Hoactzin with this transition process.
During the term of the Management Agreement, the Company became the operator of certain properties owned by
Hoactzin. The Company obtained over time, bonds for the purpose of covering substantial plugging and abandonment
obligations on Hoactzin’s properties located in federal offshore waters in favor of the BSEE, as well as certain private
parties. As of May 15, 2014, all such operator bonds as to the Company have been released by the BSEE and have been
cancelled by the issuer of the bonds. As of December 31, 2016, the transfer of all RUE’s and associated bonds and the
transfer of operations to Hoactzin was completed. Accordingly, the exposure to the Company under any bonds or any
indemnity agreements relating to all bonds has decreased to zero.
As operator during the term of the Management Agreement that expired in 2012, the Company routinely contracted
in its name for goods and services with vendors in connection with its operation of the Hoactzin properties. In practice,
Hoactzin directly paid these invoices for goods and services that were contracted in the Company’s name. As a result of the
operations performed in late 2009 and early 2010, Hoactzin had significant past due balances to several vendors, a portion of
which were included on the Company’s balance sheet. Payables related to these past due and ongoing operations remained
outstanding at December 31, 2016 and 2015 in the amount of $159,000. The Company has recorded the Hoactzin-related
payables and the corresponding receivable from Hoactzin as of December 31, 2016 and 2015 in its Consolidated Balance
Sheets under “Accounts payable – other” and “Accounts receivable – related party”. The outstanding balance of $159,000
should not increase in the future. However, Hoactzin has not made payments to reduce the $159,000 of past due balances
from 2009 and 2010 since the second quarter of 2012. Based on these circumstances, the Company has elected to establish
an allowance in the amount of $159,000 for the balances outstanding at December 31, 2016 and 2015. This allowance was
recorded in the Company’s Consolidated Balance Sheets under “Accounts receivable – related party”. The resulting balances
recorded in the Company’s Consolidated Balance Sheets under “Accounts receivable – related party, less allowance for
doubtful accounts of $159” are $0 at December 31, 2016 and 2015.
F-13
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Oil and Gas Properties
The following table sets forth information concerning the Company’s oil and gas properties: (in thousands):
Oil and gas properties
Unevaluated properties
Accumulated depreciation, depletion and amortization
Oil and gas properties, net
December 31,
2016
2015
$
$
5,315 $
106
(196)
5,225 $
8,286
552
—
8,838
During the years ended December 31, 2016, 2015, and 2014, the Company recorded depletion expense of $1.0
million, $2.5 million, and $2.8 million, respectively. In addition, as a result of the ceiling test impairments during 2015 and
the first three quarters of 2016, the accumulated depreciation, depletion, and amortization was been netted against the cost to
reflect the post impairment value of the oil and gas properties. As no ceiling test impairment was recorded during the quarter
ended December 31, 2016, this amount was not netted against cost, but remained in accumulated depreciation, depletion, and
amortization at December 31, 2016.
5. Manufactured Methane Facilities
The following table sets forth information concerning the Manufactured Methane facilities: (in thousands):
Manufactured Methane facilities, net of impairment
Accumulated depreciation
Manufactured Methane facilities, net
December 31,
2016
2015
$
$
1,681 $
(122)
1,559 $
1,633
(60)
1,573
During each of the years ended December 31, 2016, 2015, and 2014, the Company recorded depreciation expense of
$62,000, $60,000, and $163,000, respectively. In 2014, the Company recognized a non-cash impairment of the
Manufactured Methane facilities in the amount of $2.8 million ($1.7 million net of tax effect). The impairment resulted from
the Company’s assessment that future cash flows, using historical costs and runtimes, were insufficient to recover the
Manufactured Methane facilities’ net book value. The Manufactured Methane facilities were written down to fair value
amount calculated from estimated discounted cash flows, as well as certain expressions of interest with regards to the
purchase by outside parties of the Company’s Manufactured Methane facilities. (See Note 10. Fair Value Measurements)
6. Other Property and Equipment
Other property and equipment consisted of the following as of December 31, 2016: (in thousands)
Type
Machinery and equipment
Vehicles
Other
Total
Depreciable
Life
5-7 yrs
2-5 yrs
5 yrs
$
$
Gross Cost
Accumulated
Depreciation
Net Book
Value
20 $
339
63
422 $
20 $
199
63
282 $
—
140
—
140
F-14
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Other property and equipment consisted of the following as of December 31, 2015: (in thousands)
Type
Machinery and equipment
Vehicles
Other
Total
Depreciable
Life
5-7 yrs
2-5 yrs
5 yrs
Gross Cost
Accumulated
Depreciation
Net Book
Value
$
20 $
20 $
362
63
162
63
$
445 $
245 $
—
200
—
200
The Company uses the straight-line method of depreciation for other property and equipment. During each of the
years ended December 31, 2016, 2015, and 2014, the Company recorded depreciation expense of $69,000, $77,000, and
$101,000, respectively.
7. Long-Term Debt
Long-term debt consisted of the following: (in thousands)
Note payable to a bank, with interest only payment until maturity.
$
2,400 $
Less unamortized debt issuance cost
Note payable to a financial institution, net of unamortized debt issuance cost
(24)
2,376
869
(10)
859
December 31,
2016
2015
Installment notes bearing interest at the rate of 4.16% to 4.6% per annum collateralized
by vehicles with monthly payments including interest, insurance and maintenance of
approximately $10
102
152
Future debt payments to unrelated entities as of December 31, 2016 consisted of the following: (in thousands)
Bank Credit Facility
Company Vehicles
Total
2017
2018
Total
$
$
$
— $
55 $
55 $
2,400 $
47 $
2,447 $
2,400
102
2,502
At December 31, 2016, the Company had a revolving credit facility with Prosperity Bank. This is the Company’s
primary source to fund working capital and future 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 $40 million or the
Company’s borrowing base in effect from time to time. As of December 31, 2016, the Company’s borrowing base was $3.0
million. The borrowing base was reduced to approximately $1.25 million with the March 16, 2017 amendment to the credit
agreement. This reduction was primarily related to limiting the borrow base to a level in which the Company would be in
compliance with certain credit facility covenants. The credit facility is secured by substantially all of the Company’s
producing and non-producing oil and gas properties and the Company’s Manufactured Methane facilities. The credit facility
includes certain covenants with which the Company is required to comply. At December 31, 2016, these covenants include
leverage, interest coverage, minimum liquidity ratios, and debt to equity ratios. During the quarter ended December 31,
2016, the Company was not in compliance with the minimum liquidity ratio. After the covenant modifications and waivers
included in the March 16, 2017 amendment, the Company is now in compliance with all covenants.
On March 16, 2017, the Company’s senior credit facility with Prosperity Bank after Prosperity Bank’s most recent
review of the Company’s currently owned producing properties was amended to decrease the Company’s borrowing base
from $3.0 million to approximately $1.25 million, and extend the term of the facility to July 31, 2018. In addition, all the
covenants were removed and replaced with the following: (a) Current Ration > 1:1; (b) Funded Debt to EBITDA < 3.5x; and
F-15
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(c) Interest Coverage > 3.0x. The borrowing base remains subject to the existing periodic redetermination provisions in the
credit facility. The interest rate remained prime plus 0.50% per annum. This rate was 4.50% at the date of the amendment.
The maximum line of credit of the Company under the Prosperity Bank credit facility remained $40 million and the
Company had no outstanding borrowing under the facility as of March 30, 2017.
For the quarter ended December 31, 2016, the Company was in default on compliance with the minimum liquidity
ratio. On March 16, 2017, the Company received a waiver from Prosperity Bank. Although the Company was in default of
the minimum liquidity covenant for the quarter ended December 31, 2016, the Company is now in compliance as a result of
the waiver. In addition, the Company also received a waiver from Prosperity Bank for an anticipated default on the debt to
equity covenant. Had the Company not received this waiver, it would have been in default on the debt to equity covenant for
the quarter ended December 31, 2016. In February 2017, the Company paid off the credit facility using proceeds from the
Company’s rights offering which closed on February 2, 2017. The Company was able to record the credit facility balance as
of December 31, 2016 as a non-current liability since the Company had the ability and the intent to repay this debt using
proceeds from the equity offering.
For the quarter ended December 31, 2015, the Company was in default on compliance with the Leverage Ratio
covenant. On March 28, 2016, the credit facility was amended to delete the leverage ratio covenant. In addition, the
amendment also added a Debt to Tangible Net Worth covenant, waived the default on the Interest Coverage ratio for the
quarter ended December 31, 2015, waived the anticipated default for the quarter ended March 31, 2016, and waived
compliance with the Interest Coverage ratio for all applicable periods through the maturity date. Although the Company was
in default of the Leverage and Interest Coverage ratios for the quarter ended December 31, 2015, the Company was in
compliance at March 28, 2016 as a result of the amendment and waivers. For the quarter ended June 30, 2016, the Company
was in default on compliance with the Debt to Tangible Net Worth covenant. On August 10, 2016, the Company received a
waiver of the covenant default for the quarter ended June 30, 2016 as well as a waiver for the anticipated default for the
quarter ended September 30, 2016.
The total borrowing by the Company under the Prosperity Bank facility at December 31, 2016 and December 31,
2015 was $2.4 million and $869,000, respectively. The next borrowing base review will take place in July 2017.
8. Liquidity
During 2016, the Company incurred a net loss of approximately $4.2 million. In addition as of December 31, 2016,
as discussed in Note 7 Long-Term Debt, the Company was in default with various covenants included in its credit facility
with Prosperity Bank. Each of these defaults was cured either through a waiver or an amendment to its credit facility.
During 2017, the Company believes its revenues will be sufficient to fund operating and general and administrative expenses
and to remain in compliance with its bank covenants. If revenues are not sufficient to fund these expenses or if the Company
needs additional funds for capital spending, the Company could borrow funds against the credit facility as this facility
currently has a $1.25 million borrowing base with no funds currently drawn. In addition, if required, the Company could also
issue additional shares of stock and/or sell assets as needed to further fund operations.
9. Commitments and Contingencies
The Company as designated operator of the Hoactzin properties was administratively issued an “Incident of Non-
Compliance” by BSEE during the quarter ended September 30, 2012 concerning one of Hoactzin’s operated properties. This
action called for payment of a civil penalty of $386,000 for failure to provide, upon request, documentation to the BSEE
evidencing that certain safety inspections and tests had been conducted in 2011. On July 14, 2015, the federal district court
in the Eastern District of Louisiana affirmed the determination by the IBLA without reduction. The Company did not further
appeal. In the third quarter of 2015, the Company paid the civil penalty and statutory interest thereon from funds borrowed
under its credit facility. In the fourth quarter of 2015, the Company received a return of the cash collateral previously
provided to RLI Insurance Company. The Company has not advanced any funds to pay any obligations of Hoactzin and no
borrowing capability of the Company has been used in connection with its obligations under the Management Agreement,
except for those funds used to pay the civil penalty and interest thereon.
During the second quarter of 2015, the Company received from Hoactzin a copy of an internal analysis prepared by
Hoactzin setting out certain issues that Hoactzin may consider to form the basis of operational and other claims against the
Company primarily under the Management Agreement. This analysis raised issues other than the “Incident of Non-
Compliance” discussed above. The Company is discussing this analysis, as well as the civil penalty discussed above, with
F-16
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Hoactzin in an effort to determine whether there is possibility of a reasonable resolution of some or all of these matters on a
negotiated basis.
Cost Reduction Measures
Commencing in the quarter ended March 31, 2015 and continuing through the quarter ended December 31, 2016,
the Company implemented cost reduction measures including compensation reductions for each employee as well as
members of the Board of Directors. These compensation reductions will 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 when compensation shall revert 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. As of December 31, 2016, the
reductions were approximately $243,000. The Company has not accrued any liabilities associated with these compensation
reductions.
10. Fair Value Measurements
FASB ASC 820, “Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value.
That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy under FASB ASC 820 are described as follows:
Level 1 – Observable inputs, such as unadjusted quoted prices in active markets, for substantially identical assets and
liabilities.
Level 2 – Observable inputs other than quoted prices within Level 1 for similar assets and liabilities. These include quoted
prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are
not active, or other inputs that are observable or can be corroborated by observable market data. If the asset or liability has a
specified or contractual term, the input must be observable for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs that are supported by little or no market activity, generally requiring a significant amount of
judgment by management. The assets or liabilities fair value measurement level within the fair value hierarchy is based on
the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize
the use of observable inputs and minimize the use of unobservable inputs.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value
or reflective of future fair values. Further, although the Company believes its valuation methods are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different fair value measurement at the reporting date.
Upon completion of wells, the Company records an asset retirement obligation at fair value using Level 3
assumptions.
Nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis upon impairment. The carrying
amounts of other financial instruments including cash and cash equivalents, accounts receivable, account payables, accrued
liabilities and long term debt in our balance sheet approximates fair value as of December 31, 2016 and December 31, 2015.
F-17
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Asset Retirement Obligation
Our asset retirement obligations represent the estimated present value of the amount we will incur to plug, abandon
and remediate our producing properties at the end of their productive lives in accordance with applicable laws. The following
table summarizes the Company’s Asset Retirement Obligation transactions for the years ended December 31, 2015 and 2016
(in thousands):
Balance December 31, 2014
Accretion expense
Liabilities incurred
Liabilities settled
Revision in estimated liabilities
Balance December 31, 2015
Accretion expense
Liabilities incurred
Liabilities settled
Liabilities sold properties
Revisions in estimated liabilities
Balance December 31, 2016
$
2,008
126
—
(24)
112
2,222
143
2
(86)
(25)
(210)
2,046
$
$
The revisions in estimated liabilities in 2015 resulted primarily from change in timing of wells to be plugged. The
revision in estimated liabilities in 2016 resulted from change in timing of wills to be plugged, change in inflation factor, and
change in current plugging costs.
12. Stock and Stock Options
In October 2000, the Company approved a Stock Incentive Plan which was effective for a ten-year period
commencing on October 25, 2000 and ending on October 24, 2010. The aggregate number of shares of Common Stock as to
which options and Stock Appreciation Rights may be granted to participants under the original Plan was not to exceed
7,000,000. An amendment to the Plan increasing the number of shares that may be issued under the Plan by 3,500,000 shares
and extending the Plan for another ten years was approved by the Company’s Board of Directors on February 1, 2008 and
approved by the Company’s shareholders at the Annual Meeting of Stockholders held on June 2, 2008. On March 21, 2016
at a special meeting of the shareholders, the Plan was amended to permit grant of common stock. Options are not
transferable, are exercisable for 3 months after voluntary resignation from the Company, and terminate immediately upon
involuntary termination from the Company. The purchase price of shares subject to this Plan shall be determined at the time
the options are granted, but are not permitted to be less than 85% of the fair market value of such shares on the date of grant.
On March 21, 2016, the Company’s shareholders approved a 1 for 10 reverse stock split, effective with trading on
March 24, 2016. All share and per share information in the following tables has been adjusted to reflect the impact of this
reverse stock split.
F-18
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes stock option activity in 2016, 2015, and 2014:
Outstanding, beginning of year
Granted
Exercised
Expired/cancelled
Outstanding, end of year
Exercisable, end of year
2016
Weighted
Average
Exercise
Price
2015
Weighted
Average
Exercise
Price
Shares
2014
Weighted
Average
Exercise
Price
Shares
Shares
45,625 $
2,500 $
— $
(10,625) $
37,500 $
37,500 $
6.10
1.20
—
9.88
4.70
4.70
90,025 $
10,000 $
— $
(54,400) $
45,625 $
45,625 $
5.70
2.40
—
4.80
6.10
6.10
87,025 $
10,000 $
— $
(7,000) $
90,025 $
90,025 $
5.90
4.40
—
6.30
5.70
5.70
The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:
Weighted Average
Exercise Price
Options Outstanding
(shares)
Weighted Average
Remaining Contractual Life
(years)
Options Exercisable
(shares)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
7.50
10.70
8.10
7.30
6.40
6.20
4.80
4.10
4.10
4.80
4.40
4.40
2.50
2.30
2.70
2.20
1.20
1,875
1,875
1,875
1,875
1,875
1,875
1,875
1,875
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
37,500
—
0.3
0.5
0.8
1.0
1.2
1.5
1.8
2.0
2.2
2.5
2.8
3.0
3.2
3.5
3.8
4.0
1,875
1,875
1,875
1,875
1,875
1,875
1,875
1,875
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
37,500
During 2016, the Company issued the following options to each of the four non-executive directors that remain
outstanding as of December 31, 2016. These options vested upon grant date.
Options Issued to
Each Non-executive
Director
Total Options Issued to
Non-executive Directors
Exercise Price
Grant Date
Expiration Date
625
2,500 $
1.20
1/4/2016
1/3/2021
The weighted average fair value per share of options granted in 2016 was $1.01 and 2015 was $2.40 calculated
using the Black Scholes option pricing model.
F-19
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Compensation expense related to stock options was $3,000 in 2016, $12,000 in 2015 and $32,000 in 2014. This
expense is recorded in “General and administrative” in the Consolidated Statements of Operations. The fair value of stock
options used to compute share based compensation is the estimated present value at grant date using the Black Scholes option
pricing model with weighted average assumptions for 2016 were an expected volatility of 122.7%; a risk free interest rate of
2.67%; and an expected option life remaining from 0.3 to 4.8 years. The weighted average assumptions for 2015 were an
expected volatility of 61.7%; a risk free interest rate of 2.53%; and an expected option life remaining from 0.3 to 4.8 years.
The weighted average assumptions for 2014 were an expected volatility of 53.3%; a risk free interest rate of 3.27%; and an
expected option life remaining from 0.1 to 4.8 years.
In addition, during 2016, the Company issued 12,641 shares of common stock to the Directors and to the CEO. The
shares issued to Directors was in lieu of stock options. The shares issued to the CEO was in lieu of a portion of the quarter
cash payment paid for service as the Company’s CEO. The company recorded compensation expense of $14,000 as a result
of the stock issuances.
13. Income Taxes
The Company did not have taxable income for the years ended December 31, 2016, 2015, and 2014.
A reconciliation of the statutory U.S. Federal income tax and the income tax provision included in the
accompanying consolidated statements of operations is as follows (in thousands):
Year Ended December 31, 2016
Statutory rate
Tax (benefit) expense at statutory rate
State income tax (benefit) expense
Permanent difference
Other
Net change in deferred tax asset valuation allowance
Total income tax provision (benefit)
Year Ended December 31, 2015
Statutory rate
Tax (benefit) expense at statutory rate
State income tax (benefit) expense
Permanent difference
Other
Net change in deferred tax asset valuation allowance
Total income tax provision (benefit)
Year Ended December 31, 2014
Statutory rate
Tax (benefit) expense at statutory rate
State income tax (benefit) expense
Permanent difference
Other
Net change in deferred tax asset valuation allowance
Total income tax provision (benefit)
F-20
Total
34 %
(1,428)
(216)
1
—
1,643
—
Total
34 %
(5,906)
(893)
3
—
14,147
7,351
Total
34 %
(270)
(40)
304
—
—
(6)
$
$
$
$
$
$
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Management has evaluated the positions taken in connection with the tax provisions and tax compliance for the
years included in these financial statements. The Company believes that all of the positions it has taken will prevail on a
more likely than not basis. As such no disclosure of such positions was deemed necessary. Management continuously
estimates its ability to recognize a deferred tax asset related to prior period net operating loss carry forwards based on its
anticipation of the likely timing and adequacy of future net income.
In 2013, management determined using the “more likely than not” criteria for recognition that upon sale of the
Pipeline asset, the Company would not be able to utilize the state net operating loss carryforwards associated with TPC and
the Tennessee oil and gas properties, and therefore established an allowance for these state net operating loss carryforwards.
At December 31, 2015 and 2016, the Company recorded a full allowance of the deferred tax asset primarily due to cumulated
losses incurred during the 3 years ended December 31, 2015 and 2016. The total valuation allowance at December 31, 2015
was $16.6 million, $15.0 million at December 31, 2015, and $790,000 at December 31, 2014.
As of December 31, 2016, the Company had net operating loss carry forwards of approximately $26.4 million which
will expire between 2018 and 2036 if not utilized. The Company recognizes the excess income tax benefit associated with
certain stock compensation deductions when such deductions produce a reduction in the Company’s current tax liability
under the “with” and “without” approach. Due to cumulative net operating loss carryforwards (“NOLs”) that exceeded the
excess income tax benefits generated in prior reporting periods, the Company has not recognized the excess benefit of the tax
deductions upon the exercise of stock options in any prior reporting period. As of December 31, 2016 and 2015, the
Company’s estimated net operating losses for tax return filing purposes exceeds the gross amount for financial reporting
purposes by $1.8 million. The tax effect of this excess tax benefit will be recorded as a reduction to APIC in a future
reporting period when the cash benefit is realized. Our open tax years include all returns filed for 2011 and later. In addition,
any of the Company’s NOLs for tax reporting purposes are still subject to review and adjustment by both the Company and
the IRS to the extent such NOLs should be carried forward into an open tax year.
The Company’s deferred tax assets and liabilities are as follows: (in thousands)
Net deferred tax assets – current:
Bad debt
Valuation allowance
Total deferred tax assets – current
Net deferred tax assets (liabilities) – noncurrent:
Net operating loss carryforwards
Oil and gas properties
Property, Plant and Equipment
Asset retirement obligation
Tax credits
Miscellaneous
Valuation allowance
Total deferred tax assets – noncurrent
Net deferred tax asset
Year Ended December 31,
2015
2016
68 $
(68)
— $
68
(68)
—
10,339 $
4,445
646
801
260
78
(16,569)
— $
8,963
4,112
668
870
260
53
(14,926)
—
— $
—
$
$
$
$
$
F-21
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. Quarterly Data and Share Information (unaudited)
The following tables sets forth for the fiscal periods indicated, selected consolidated financial data (In thousands,
except per share data)
Fiscal Year Ended 2016
Revenues
Net loss from continuing operations
Loss per common share from continuing operations
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
$
932 $
(1,404)
$
(0.23) $
1,282 $
(1,627)
(0.27) $
1,242 $
(908)
(0.15) $
1,216
(260)
(0.04)
Fiscal Year Ended 2015
Revenues
Net income (loss) from continuing operations
$
Loss per common share from continuing operations
$
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
1,634 $
(515)
(0.08) $
1,899 $
(76)
(0.01) $
1,425 $
(4,963)
1,206
(19,167)
(0.82) $
(3.15)
15. Supplemental Oil and Gas Information (unaudited)
Information with respect to the Company’s oil and gas producing activities is presented in the following tables.
Estimates of reserves quantities, as well as future production and discounted cash flows before income taxes, were
determined by LaRoche Petroleum Consultants Ltd. All of the Company’s reserves were located in the United States.
Capitalized Costs Related to Oil and Gas Producing Activities
The table below reflects our capitalized costs related to our oil and gas producing activities at December 31, 2016
and 2015 (in thousands):
Proved oil and gas properties
Unproved properties
Total proved and unproved oil and gas properties
Less accumulated depreciation, depletion and amortization
Net oil and gas properties
Years Ended December 31,
2015
2016
$
$
$
5,315 $
106
5,421 $
(196)
5,225 $
8,286
552
8,838
—
8,838
As a result of the ceiling test impairments during 2015 and the first three quarters of 2016, the accumulated
depreciation, depletion, and amortization was been netted against the cost to reflect the post impairment value of the oil and
gas properties. As no ceiling test impairment was recorded during the quarter ended December 31, 2016, this amount was
not netted against cost, but remained in accumulated depreciation, depletion, and amortization at December 31, 2106.
F-22
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Oil and Gas Related Costs
The following table sets forth information concerning costs incurred, including accruals, related to the Company’s
oil and gas property acquisition, exploration and development activities (in thousands):
Property acquisitions proved
Property acquisitions unproved
Exploration cost
Development cost
Total
Years Ended December 31,
2015
2016
2014
$
$
— $
8
396
—
404 $
— $
90
22
252
364 $
—
598
2,367
864
3,829
Results of Operations from Oil and Gas Producing Activities
The following table sets forth the Company’s results of operations from oil and gas producing activities (in
thousands):
Revenues
Production costs and taxes
Depreciation, depletion and amortization
Impairment
Income (loss) from oil and gas producing activities
Years Ended December 31,
2015
2016
2014
$
$
4,113 $
(3,064)
(1,009)
(2,805)
(2,765) $
5,631 $
(3,360)
(2,538)
(14,526)
(14,793) $
13,260
(4,876)
(2,766)
—
5,618
In the presentation above, no deduction has been made for indirect costs such as general corporate overhead or
interest expense. No income taxes are reflected above due to the Company’s operating tax loss carry-forward position.
F-23
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Estimated Quantities of Oil and Gas Reserves
The following table sets forth the Company’s net proved oil and gas reserves and the changes in net proved oil and
gas reserves for the years ended December 31, 2014, 2015 and 2016. All of the Company’s proved reserves are located in the
United States of America.
Oil (MBbl)
Gas (MMcf)
MBOE
Proved reserves at December 31, 2013
Revisions of previous estimates
Improved recovery
Purchase of reserves in place
Extensions and discoveries
Production
Sales of reserves in place
Proved reserves at December 31, 2014
Revisions of previous estimates
Improved recovery
Purchase of reserves in place
Extensions and discoveries
Production
Sales of reserves in place
Proved reserves at December 31, 2015
Revisions of previous estimates
Improved recovery
Purchase of reserves in place
Extensions and discoveries
Production
Sales of reserves in place
Proved reserves at December 31, 2016
Proved developed reserves at:
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
Proved undeveloped reserves at:
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
2,040
(253)
—
—
164
(154)
—
1,797
(790)
—
—
1
(131)
—
877
(36)
—
—
3
(108)
(6)
730
1,575
1,438
877
730
465
359
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,040
(253)
—
—
164
(154)
—
1,797
(790)
—
—
1
(131)
—
877
(36)
—
—
3
(108)
(6)
730
1,575
1,438
877
730
465
359
—
—
The Company’s Proved Undeveloped Reserves at December 31, 2016 and 2015 included no locations as compared
to 27 locations at December 31, 2014. During 2016 and 2015, all Proved Undeveloped locations were removed from the
Company’s Proved Reserves primarily due to the low oil prices experienced during these years.
F-24
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table identifies the reserve value by category and the respective present values, before income taxes,
discounted at 10% as a percentage of total proved reserves (in thousands):
Year Ended 12/31/2016
Gas
Oil
Total
Year Ended 12/31/2015
Gas
Oil
Total
Year Ended 12/31/2014
Gas
Oil
Total
Total proved reserves
year-end reserve
report
Proved developed
producing reserves
(PDP)
% of PDP reserves to
total proved reserves
Proved developed non-
producing reserves
% of PDNP reserves to
total proved reserves
Proved undeveloped
reserves (PUD)
% of PUD reserves to
total proved reserves
$
5,815
— $
5,815 $
8,287
— $
8,287 $
40,417
— $
40,417
$
5,397
— $
5,397 $
7,686
— $
7,686 $
32,059
— $
32,059
93%
—
93%
93%
—
93%
79%
—
79%
$
418
— $
418 $
601
— $
601 $
2,956
— $
2,956
7%
—
7%
7%
—
7%
7%
—
7%
$
—
— $
— $
—
— $
— $
5,402
— $
5,402
—
—
—
—
—
—
14%
—
14%
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows from the Company’s proved oil and gas reserves is
presented in the following table (in thousands):
Future cash inflows
Future production costs and taxes
Future development costs
Future income tax expenses
Future net cash flows
$
Years Ended December 31,
2015
2016
27,253 $
(16,270)
(553)
—
10,430
38,566 $
(23,500)
(951)
—
14,115
2014
158,792
(71,951)
(10,014)
(13,092)
63,735
Discount at 10% for timing of cash flows
Standardized measure of discounted future net cash flows
(4,615)
5,815 $
(5,828)
8,287 $
(29,204)
34,531
$
F-25
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following are the principal sources of change in the standardized measure of discounted future net cash flows
from the Company’s proved oil and gas reserves (in thousands):
Balance, beginning of year
Sales, net of production costs and taxes
Discoveries and extensions, net of costs
Purchase of reserves in place
Sale of reserves in place
Net changes in prices and production costs
Revisions of quantity estimates
Previously estimated development cost incurred during the year
Changes in future development costs
Changes in timing and other
Accretion of discount
Net change in income taxes
Balance, end of year
Years Ended December 31,
2015
2016
2014
8,287 $
(2,037)
35
—
(10)
(863)
(412)
—
196
(20)
639
—
5,815 $
34,531 $
(1,901)
5
—
—
(16,009)
(22,431)
—
4,890
(56)
3,373
5,885
8,287 $
38,708
(8,385)
4,231
—
—
(829)
(6,610)
508
(1,913)
1,312
4,247
3,262
34,531
$
$
Estimated future net cash flows represent an estimate of future net revenues from the production of proved reserves
using average sales prices, along with estimates of the operating costs, production taxes and future development and
abandonment cost (less salvage value) necessary to produce such reserves. Future income taxes were calculated by applying
the statutory federal and state income tax rates to pre-tax future net cash flows, net of the tax basis of the properties and
utilizing available tax loss carryforwards related to oil and gas operations. The oil prices used for December 31, 2016, 2015,
and 2014 were $37.35, and $43.98, and $88.34 per barrel of oil, respectively. The Company’s proved reserves as of
December 31, 2016, 2015 and 2014 were measured by using commodity prices based on the twelve month unweighted
arithmetic average of the first day of the month price for the period January through December. No deduction has been made
for depreciation, depletion or any indirect costs such as general corporate overhead or interest expense.
16. Subsequent Events
On January 4, 2017, 5,264 common shares were issued in the aggregate to the Company’s four directors and CFO
and interim CEO. This issuance will result in compensation expense of approximately $4,000 to be recorded during the
quarter ended March 31, 2017.
On February 13, 2017, 4,498,698 common shares were issued to participants of the Company’s rights offering
which closed on February 2, 2017. Of the 4,498,698 common shares issued, 3,293,407 were issued to the Company’s
directors, management, and affiliates. The Company received approximately $2.7 million in proceed from this offering. The
proceeds were used primarily to pay off the Company’s credit facility
As included in Note 7. Long-Term Debt, on March 16, 2017, the Company amended its credit facility with
Prosperity Bank. Also included in Note 7, the Company paid down the credit facility and as of March 30, 2017 has no
amounts drawn on this facility.
On March 17, 2017, the Company announced the adoption of a Rights Plan intended to help preserve assets related
to the Company’s net operating losses. As of December 31, 2016, the Company had cumulative net operating loss
carryforwards of approximately $ 28.2 million, which are usable in certain circumstances to offset future U.S. taxable
income.
Tengasco’s ability to use these tax benefits would be limited if it were to experience an “ownership change” under
Section 382 of the Internal Revenue Code. This would occur if stockholders that own at least 5% of outstanding common
stock increased their ownership in the Company by more than 50 percentage points within a rolling three-year period. After
F-26
Tengasco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
considering the estimated value of the Company’s tax benefits and the potential for limitations to the NOL’s occurring upon
an “ownership change,” the Board adopted the Rights Plan.
To implement the Rights Plan, the Board declared a dividend of one preferred share purchase right for each
outstanding share of its common stock to shareholders of record on March 27, 2017. The rights are further described in a
Registration Statement on Form 8-A filed with the Securities and Exchange Commission. The rights will become exercisable
if a person acquires 4.95% or more of Tengasco common stock or if a person that already owns 4.95% or more of common
stock acquires additional shares above the percentage currently owned. Tengasco’s stockholders that currently own more
than 4.95% of the common stock will be “grandfathered” at their current ownership level. If the rights become exercisable,
all holders of rights, other than the person triggering the exercisability of the rights, would become entitled to purchase
Tengasco stock at an approximate 50% discount. Rights held by the person triggering the rights will become void and will
not be exercisable. Unless the rights are triggered in this manner, the rights will not be exercisable and no stock would be
issued under the Rights Plan.
The rights will trade with Tengasco’s common stock, will not be evidenced by any separate rights certificate, and
will expire on the day after the 2017 annual shareholders meeting unless ratified at the meeting, in which case they would
expire in three years. The Board may terminate the plan at any time or redeem the rights prior to the time they are
exercisable.
The Rights Plan will be administered by Continental Stock Transfer & Trust Company as Rights Agent under a
Rights Agreement between the Company and the Rights Agent, dated March 16, 2017. The Rights Agreement described all
details of the Rights Plan and is attached in full as an exhibit to the Company’s Form 8-K filed with SEC on March 17, 2017.
F-27
Tengasco, Inc.
Annual Report
2016