(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 oil exploration and production is in Kansas. The Company's primary area of natural gas exploration and production was the Swan Creek Field in Tennessee. In late 2012, the Company committed to a plan to sell the Swan Creek assets as well as other Tennessee oil and gas related acreage, on March 1, 2013 the Company entered into a formal agreement to sell these assets, and on August 16, 2013 the Company closed the sale of the Swan Creek assets and the other Tennessee oil and gas related acreage.

The Company's wholly-owned subsidiary, Tengasco Pipeline Corporation ("TPC"), owned and operated a 65 mile intrastate pipeline which it constructed to transport natural gas from the Company's Swan Creek Field to customers in Kingsport, Tennessee. In late 2012, the Company committed to a plan to sell the pipeline assets, on March 1, 2013 the Company entered into a formal agreement to sell these assets, and on August 16, 2013 the Company closed a sale of these pipeline related assets. The related results of operations were classified as "(Loss) from discontinued operations, net of income tax benefit" in the Consolidated Statement of Operations for the three months ended March 31, 2013.

The Company's wholly-owned subsidiary, Manufactured Methane Corporation ("MMC") operates a treatment facility for the extraction of methane gas from nonconventional sources for eventual sale to natural gas customer and generation of electricity. This facility is located at the Carter Valley landfill site in Church Hill, Tennessee.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Principles of Consolidation

The accompanying condensed 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 requires 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 impairment 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 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, 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 material natural gas imbalances at March 31, 2014 or December 31, 2013. Methane gas and electricity sales meters are located at the Carter Valley landfill site and sales of methane and electricity are billed each month.

Cash and Cash Equivalents

Cash and cash equivalents include temporary cash investments with a maturity of ninety days or less at date of purchase.

Restricted Cash

As security required by Tennessee oil and gas regulations, the Company placed $120,500 in a Certificate of Deposit to cover future asset retirement obligations for the Company's Tennessee wells. At March 31, 2014 and December 31, 2013, this amount was recorded in the Consolidated Balance Sheets under "Restricted cash". The Company is currently working with the state of Tennessee and the purchaser of the Swan Creek assets to get the Certificate of Deposit released. In addition, during the 4th quarter of 2012, the Company placed $386,000 as collateral for a bond to appeal a civil penalty related to issuance of an "Incidence of Non-Compliance" by the Bureau of Ocean Energy Management ("BOEM") concerning one of the Hoactzin wells operated by the Company pursuant to the Management Agreement (see Note 4). At March 31, 2014 and December 31, 2013, this amount was recorded in the Consolidated Balance Sheets under "Restricted cash".

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 March 2014 and December 2013 oil sales prices received from the Company's Kansas properties. In addition, the Company also carried equipment and materials in inventory 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 as of March 31, 2014 and December 31, 2013. The following table sets forth information concerning the Company's inventory (in thousands):


		March 31, 2014		December 31, 2013

Oil – carried at cost	$	805	$	765
Equipment and materials – carried at cost		434		488
Total inventory	$	1,239	$	1,253

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 acquisition costs, 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.. 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 $736,000 in unevaluated properties at both March 31, 2014 and December 31, 2013. 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.

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 March 31, 2014 and December 31, 2013. At March 31, 2014 and December 31, 2013, accounts receivable consisted of the following (in thousands):


		March 31, 2014			December 31, 2013

Revenue	$	1,271		$	1,214
Joint interest		27			35
Other		38			50
Allowance for doubtful accounts		(14	)		(14	)
Total accounts receivable	$	1,322		$	1,285

Discontinued Operations

During 2012, the Company committed to a plan to sell its Swan Creek and Pipeline assets. On March 1, 2013, the Company entered into an agreement to sell the Company's Swan Creek and Pipeline assets for $1.5 million. Closing of this transaction occurred on August 16, 2013. The related results of the pipeline operations were classified as "(Loss) from discontinued operations, net of income tax benefit" in the Consolidated Statement of Operations for the three months ended March 31, 2013. The pipeline related cash flows were classified as "Net cash (used in) operating activities – discontinued operations", "Net cash (used in) investing activities –discontinued operations", and Net cash (used in) financing activities – discontinued operations". As the Swan Creek assets represented only a small portion of the Company's full cost pool, these assets were classified in continuing operations for the three months ended March 31, 2013.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation with no effect on net income.