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 Companys primary area of oil exploration and production is in Kansas. The Companys primary area of natural gas exploration and production has been the Swan Creek Field in Tennessee. The Company sold all of its oil and gas leases and producing assets in Tennessee on August 16, 2013.

The Companys wholly-owned subsidiary, Tengasco Pipeline Corporation, owned and operated a 65 mile intrastate pipeline which it constructed to transport natural gas from the Companys Swan Creek Field to customers in Kingsport, Tennessee. As the Company had entered into an agreement to sell the pipeline asset, it had been classified as Assets held for sale in the Consolidated Balance Sheet as of December 31, 2012 and the related results of operations have been classified as (Loss) from discontinued operations, net of income tax benefit in the Consolidated Statement of Operations for the years ended December 31, 2013, 2012, and 2011. The Company sold of all its pipeline related assets on August 16, 2013. (See Note 7. Assets Held for Sale and Discontinued Operations)

The Companys wholly-owned subsidiary, Manufactured Methane Corporation (MMC) operates treatment and delivery facilities for the extraction of methane gas from nonconventional sources for eventual sale to natural gas and electricity customers.

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, 2014, 2013 or 2012. Methane gas and electricity sales meters are located at the Carter Valley landfill site and sales of electricity are billed each month. No methane gas was sold during 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.

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 Companys Tennessee wells. At December 31, 2013, this amount was recorded in the Consolidated Balance Sheets under Restricted cash. On August 11, 2014, the State of Tennessee notified the holder of the Certificate of Deposit that the Company had fulfilled its obligations to the State with regard to future asset retirement obligations and therefore the Certificate of Deposit could be released. The Company received these funds from the holder of the Certificate of Deposit in September 2014. In addition, during the 4th quarter of 2012, the Company placed $386,000 as collateral for a bond with RLI Insurance Company to appeal a civil penalty related to issuance of an Incident of Non-Compliance by the Bureau of Safety and Environmental Enforcement (BSEE) concerning one of the Hoactzin properties operated by the Company pursuant to the Management Agreement (see Note 4). At December 31, 2014 and 2013, this amount was recorded in the Consolidated Balance Sheets under Restricted cash (see Note 11).

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 Companys 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, 2014 and 2013, inventory consisted of the following (in thousands):


		December 31, 2014		December 31, 2013
Oil carried at lower of cost or market	$	573	$	765
Equipment and materials carried at cost		231		488
Total inventory	$	804	$	1,253

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 $462,000 and $736,000 in unevaluated properties as of December 31, 2014 and 2013, 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.

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 $32,000 in 2014, $(28,000) in 2013, and $52,000 in 2012. Compensation expense in 2013 was impacted by a reversal of $59,500 previously recognized as compensation expense.

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


		December 31, 2014			December 31, 2013
Revenue	$	845		$	1,179
Joint interest		24			35
Other		22			85
Allowance for doubtful accounts		(14	)		(14	)
Total accounts receivable	$	877		$	1,285

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.

At December 31, 2014, federal net operating loss carryforwards amounted to approximately $20.2 million which expire between 2019 and 2031. The total deferred tax asset was $7.35 million and $7.34 million at December 31, 2014 and 2013, respectively.

Realization of deferred tax assets is contingent on the generation of future taxable income. As a result, management considers whether it is more likely than not that all or a portion of such assets will be realized during periods when they are available, and if not, management provides a valuation allowance for amounts not likely to be recognized.

Management periodically evaluates tax reporting methods to determine if any uncertain tax positions exist that would require the establishment of a loss contingency. A loss contingency would be recognized if it were probable that a liability has been incurred as of the date of the financial statements and the amount of the loss can be reasonably estimated.

The amount recognized is subject to estimates and managements 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.

Although management considers our valuation allowance as of December 31, 2014 and 2013 adequate, material changes in these amounts may occur in the future based on tax audits and changes in legislation.

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. We have never experienced any losses related to these balances.

The Companys 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 Companys projected results of operations.

Revenue from the top three purchasers accounted for 79.3%, 16.5%, and 3.8% of total revenues for year ended December 31, 2014. Revenue from the top three purchasers accounted for 79.8%, 14.9%, and 1.7% of total revenues for year ended December 31, 2013. Revenue from the top three purchasers accounted for 79.9%, 14.3% and 2.2% of total revenues for the year ended December 31, 2012. As of December 31, 2014 and 2013, two of our oil purchasers accounted for 84.5% and 92.6%, respectively of our accounts receivable, of which one oil purchaser accounted for 67.8% and 80.7%, respectively.

Earnings per Common Share

We report 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 our basic and diluted earnings per share, (in thousands except for share and per share amounts):


	For the years ended December 31,
		2014			2013			2012

Income (numerator):
Net income (loss) from continuing operations	$	(788	)	$	2,956		$	4,244
Net loss from discontinued operations		-		$	(137	)	$	(4,311	)
Weighted average shares (denominator):
Weighted average shares - basic		60,842,413			60,842,413			60,778,356
Dilution effect of share-based compensation,
treasury method		7,518			77,465			376,275
Weighted average shares - dilutive		60,849,931			60,919,878			61,154,631
Earnings (loss) per share Basic and Dilutive:
Continuing Operations	$	(0.01	)	$	0.05		$	0.07
Discontinued Operations		-		$	(0.00	)	$	(0.07	)

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, 2014 and 2013.

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, 2014 and 2013, 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.

Discontinued Operations

During 2012, the Company committed to a plan to sell the Swan Creek and Pipeline assets. On March 1, 2013, the Company entered into an agreement to sell the Companys Swan Creek and Pipeline assets for $1.5 million. Closing of this transaction occurred on August 16, 2013. The related results of operations have been classified as (Loss) from discontinued operations, net of income tax benefit in the Consolidated Statements of Operations for the years ended December 31, 2013 and 2012. The related cash flows have been 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 oil and gas assets represented only a small portion of the Companys full cost pool, these assets remained in oil and gas properties and the gain or loss on the sale was recorded against the full cost pool. Until these properties were sold in August 2013, the related operations were classified in continuing operations. (See Note 7. Assets Held for Sale and Discontinued Operations)