Note 1 – Organization and Significant Accounting Policies

Organization/ Nature of Operations

Wishbone Energy Partners, LLC (“Wishbone”) is a Delaware limited liability company that was formed on February 11, 2013. Wishbone is engaged in the acquisition, exploration, development and production of crude oil and natural gas. Pursuant to Wishbone’s limited liability company agreement dated February 28, 2013 (the “LLC Agreement”), Wishbone was to continue in existence for six years following February 28, 2013 subject to extension by the Board of Directors. During February 2017, the Board of Directors approved an extension of Wishbone’s term of existence to February 28, 2020. Another extension was approved by the Board of Directors during June 2018 to further extend the term of Wishbone’s existence to February 28, 2022, unless further extended or earlier terminated in accordance with the terms of the LLC Agreement. The Company’s current operations and assets are located in the states of Texas and New Mexico.

Principles of Consolidation

The consolidated financial statements include the accounts of Wishbone Energy Partners, LLC and its wholly owned subsidiaries, Wishbone Texas Operating Company LLC and WB WaterWorks, LLC (hereinafter collectively referred to as the “Company”). All material intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers cash and unrestricted, interest-bearing deposits with original maturities of three months or less to be cash equivalents. As of December 31, 2018 and 2017, the Company had $5,565,356 and $0, respectively, of short-term investments classified as cash equivalents.

Revenue and Accounts Receivable

Oil and gas revenues are recorded using the sales method. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers.

Accounts receivable-trade consists of uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 days of delivery. No interest is charged on past-due balances. Accounts receivable-joint interest billings consist of uncollateralized joint interest owner obligations due within 15 days of delivery of the invoice. Accounts receivable-other consist of amounts due to the Company related to settlements of derivative contracts and other miscellaneous receivables. Management reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. No such allowance was indicated as of December 31, 2018 and 2017.

Concentration of Credit Risk

The Company primarily maintains its cash in large financial institutions. Management does not believe a significant credit risk exists as of December 31, 2018 and 2017.

The Company extends credit to various companies in the oil and gas industry, which are subject to the same industry market conditions as the Company. However, management believes that credit risk associated with collection of its oil sales receivable is significantly mitigated by the size, nature and credit-worthiness of the major oil purchasers that the Company selects to do business with.

Note 1 – Organization and Significant Accounting Policies (continued)

For the years ended December 31, 2018 and 2017, the Company had two purchasers accounting for approximately 94% and 84% of total revenue, respectively, and accounting for approximately 94% and 91% of trade accounts receivable as of December 31, 2018 and 2017, respectively.

Oil and Gas Producing Activities

The Company follows the full-cost method of accounting for oil and gas properties. Under this method of accounting, the costs of both successful and unsuccessful exploration and development activities are capitalized as property and equipment. This includes any internal costs that are directly related to acquisition, exploration and development activities, including salaries and benefits, but does not include any costs related to production, general corporate overhead or similar activities. The Company capitalized $3,894,926 and $2,916,982 of these internal costs during 2018 and 2017, respectively. Proceeds from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless a significant portion of the Company’s reserve quantities are sold, in which case a gain or loss may be recognized in income.

The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated costs of dismantlement and abandonment, net of salvage value, are amortized on a unit-of-production method over the estimated productive life of the proved oil and gas reserves. Unevaluated oil and gas properties are excluded from this calculation. Depletion and depreciation expense for the Company’s oil and gas properties totaled $15,252,699 and $6,280,591 for the years ended December 31, 2018 and 2017, respectively.

Capitalized oil and gas property costs are limited to an amount (the ceiling limitation) equal to the sum of the following:

If capitalized costs exceed this ceiling, the excess is charged to expense and reflected as impairment in the accompanying consolidated statements of operations. As of December 31, 2018 and 2017, an impairment charge was not considered necessary.

The costs of certain unevaluated leasehold acreage and certain wells being drilled are not amortized. The Company excludes all costs until proved reserves are found or until it is determined that the costs are impaired. Costs not amortized are periodically assessed for possible impairments or reductions in value. If a reduction in value has occurred, costs being amortized are increased. At December 31, 2018 and 2017, the Company held $19,859,783 and $13,579,280, respectively, in unevaluated properties.

Note 1 – Organization and Significant Accounting Policies (continued)

Asset Retirement Obligations

An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is to be recognized as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized ARO, is depleted such that the cost of the ARO is recognized over the useful life of the asset. The ARO is initially recorded at fair value. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The initial fair value of the ARO is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. Fair value, to the extent possible, includes a market risk premium for unforeseeable circumstances. No market risk premium was included in the Company’s initial ARO fair value estimate since a reasonable estimate could not be made.

Inherent in the initial fair value calculation of ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance.

The following table is a reconciliation of the asset retirement obligations for the years ended December 31, 2018 and 2017:

Other Property and Equipment

Other property and equipment consists of office furniture, fixtures, computer equipment and leasehold improvements, which are carried at cost. Depreciation is provided using the straight-line method over estimated useful lives ranging from three to seven years. Depreciation expense for the years ended December 31, 2018 and 2017 was $8,761 and $25,006, respectively. Gain or loss on retirement, sale, or other disposition of these assets is included in income in the period of disposition. Costs of major repairs that extend the useful life are capitalized. Costs for maintenance and repairs are expensed as incurred.

Note 1 – Organization and Significant Accounting Policies (continued)

Long-Lived Assets

The Company reviews the carrying value of other property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there was no impairment indicator at December 31, 2018 and 2017.

Deferred Financing Costs

Certain costs, such as lender’s fees and related attorney’s fees, incurred in connection with obtaining financing, are capitalized and amortized to interest expense using the straight-line method, which approximates the effective interest method over the terms of the related debt. The Company presented its line-of-credit related deferred financing costs as an asset rather than netted with the related debt. During the years ended December 31, 2018 and 2017, the Company recorded $329,873 and $204,425 in amortization of deferred financing costs, respectively, and included such costs in interest expense.

Derivatives

The Company enters into derivative contracts on its oil and natural gas products primarily to stabilize cash flows and reduce the risk and financial impact of downward commodity price movements on commodity sales. These derivatives are reflected as assets and liabilities on the consolidated balance sheets. All derivatives are marked-to-market each period with the unrealized gain or loss reflected in the consolidated statements of operations.

The determination of fair value of derivative instruments incorporates various factors. These factors include the credit standing of the counterparties for the Company’s assets and the impact of the Company’s own nonperformance risk on its liabilities. As of December 31, 2018 and 2017, the Company’s derivative contracts were placed at major financial institutions with investment grade credit ratings which are believed to have a minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed; however, the Company does not anticipate such nonperformance.

Fair Value Measurements

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.

Note 1 – Organization and Significant Accounting Policies (continued)

ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company estimates asset retirement obligations pursuant to the provisions of Financial Accounting Standards Board (“FASB”) ASC Topic 410, Asset Retirement and Environmental Obligations . The income valuation technique is utilized by the Company to determine the fair value of the liability at the point of inception by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.

The estimated fair values of the Company’s short-term financial instruments (primarily cash and cash equivalents, accounts receivable and accounts payable) approximate their individual carrying amounts due to the relatively short period between their origination and expected realization. The carrying value of the Company’s debt approximate its fair value due to the market rate of interest.

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets that were accounted for at fair value as of December 31, 2018 and 2017. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

Note 1 – Organization and Significant Accounting Policies (continued)

In general, the determination of the fair values incorporates various factors. These factors include the credit standing of the counterparties for the Company’s assets and the impact of the Company’s own nonperformance risk on any liabilities. As of December 31, 2018 and 2017, the Company’s derivative contracts were placed at major corporations with investment grade credit ratings which have a low credit risk. The Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed; however, the Company does not anticipate such nonperformance.

Income Taxes

The Company is classified as a partnership for federal income tax purposes, and, as such, any federal taxable income or loss generated will be included in the tax returns of its members.

The Company is subject to the Texas franchise tax, commonly referred to as Texas margin tax. The margin to which the tax rate will be applied generally will be calculated as the Company’s revenues for federal income tax purposes less the cost of the products sold for federal income tax purposes, in the State of Texas. The Company had no Texas margin tax expense for the years ended December 31, 2018 or 2017.

As of December 31, 2018 and 2017, the Company had no unrecognized tax benefits or accrued interest or penalties associated with unrecognized tax benefits. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months. The Company’s policy is to recognize interest related to any unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns, and that its accruals for state tax liabilities are adequate for all open years based on assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The actual results could differ from those estimates.

The Company’s consolidated financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and amortization and impairment of oil and gas properties. The Company’s January 1, 2019 reserve estimates are determined by an external petroleum engineer engaged by the Company. Management emphasizes that reserve estimates are inherently imprecise and that estimates of non-producing properties and more recent discoveries are more imprecise than those for properties with long production histories.

In addition to the uncertainties inherent in the reserve estimation process, these amounts are affected by historical and projected prices for oil and natural gas which have typically been volatile. It is probable that the Company’s oil and gas reserve estimates will materially change in subsequent years.

Note 1 – Organization and Significant Accounting Policies (continued)

New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC 606) . This standard provides a five-step approach to be applied to all contracts with customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the assets recognized from costs incurred to obtain or fulfill a contract. The standard requires either a full retrospective method or modified retrospective method of adoption. In 2015, the FASB voted to defer the effective date of this standard, which becomes effective for the Company in 2019. The Company is currently evaluating the impact of this accounting standard and has not yet selected a transition method; however, the Company anticipates significant change to its disclosures surrounding revenue recognition.

In February 2016, the FASB issued ASU 2016-02, Leases . ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key information about leasing arrangements. ASU 2016-02 is effective for the Company beginning 2020, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments , which addressees eight classification issues related to the statement of cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for the Company beginning 2019. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard.

In January 2017, the FASB issued ASU 2017-01, Business Combinations , to clarify the definition of a business by adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of a business. This ASU provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If the screen is not met, this ASU (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace the missing elements. ASU 2017-01 is effective for the Company beginning 2019 and interim periods beginning after December 15, 2019. Early adoption is permitted under circumstances as prescribed in this ASU. The Company is currently evaluating the impact of this accounting standard.

Note 1 – Organization and Significant Accounting Policies (continued)

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which modifies the disclosure requirements on fair value measurements per ASC 820. This ASU removes the disclosure requirement of valuation process for level 3 fair value measurements and also adds certain optional disclosures for nonpublic entities. This ASU is effective for the Company for fiscal years beginning after December 15, 2019. An entity may early-adopt any removed or modified disclosures from this ASU and delay adoption of the additional disclosures until the effective date. The Company is currently evaluating the impact of this accounting standard.

Note 2 – Acquisition of Oil and Gas Properties

On February 22, 2017, the Company closed on its transaction with an operator in which the Company acquired certain Permian Basin oil and gas properties in Lea County, New Mexico (the “NM Acquisition”), for total cash consideration of $13,865,443. In connection therewith, the Company incurred approximately $295,000 in acquisition-related costs during 2017 that were expensed as incurred.

The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed:

Note 3 – Credit Agreement

On January 9, 2014, the Company entered into a borrowing base credit agreement with a bank with a maximum credit amount of $500,000,000 (the “Credit Agreement”). On August 14, 2015, the Credit Agreement was amended, and the maturity date was fixed at January 9, 2019. On January 6, 2016, the Credit Agreement was amended to establish an initial borrowing base of $11,000,000 and reduce the syndicate to a total of four lenders.

On January 18, 2017, by mutual agreement with Company management, the Administrative Agent under the pre-existing Credit Agreement resigned and was concurrently succeeded as Administrative Agent by another Lender based upon the unanimous approval of the remaining Lenders. In addition, the bank syndicate was concurrently reduced to a total of three lenders. On February 22, 2017, the Company executed Amendment No. 4 to the Credit Agreement concurrent with the closing of the NM Acquisition (see Note 2) and the borrowing base was increased to $26,500,000 to fund the acquisition. This amendment also required the Company to enter into swap agreements for predetermined monthly notional volumes through December 31, 2018.

Note 3 – Credit Agreement (continued)

On July 27, 2017, the Company executed Amendment No. 5 to the Credit Agreement. This amendment revised certain definitions contained in the Credit Agreement and modified certain limitations on the Company’s swap agreements, including the maximum allowable net notional volumes that the Company can hedge when entering into incremental swap agreements.

On March 2, 2018, the Company executed Letter Amendment No. 1 to the Credit Agreement. This Letter Amendment is effective as of December 31, 2017 and amends the Current Ratio requirement, for the fiscal quarter ended December 31, 2017, to not be less than 0.90 to 1.00.

On June 27, 2018, the Company executed Amendment No. 6 to the Credit Agreement. This amendment revised and added to certain definitions, terms and covenants contained in the Credit Agreement, increased the borrowing base to $125,000,000 and extended the maturity date to January 9, 2021.

On December 20, 2018, the Company executed Amendment No. 7 and Master Assignment Agreement to the Credit Agreement (“Amendment No. 7”). Amendment No. 7 revised and added to certain definitions, terms and covenants contained in the Credit Agreement, increased the borrowing base to $225,000,000, added two additional Lenders to increase the bank syndicate to a total of five Lenders, and reallocated the Maximum Credit Amounts and Elected Commitment amounts, as defined in the Credit Agreement respectively, amongst the Lenders. In addition, the Aggregate Elected Commitment Amount, as defined in the Credit Agreement, was set at $175,000,000.

As of December 31, 2018, the Company’s total borrowings under the Credit Agreement were $141,600,000 from a borrowing base of $225,000,000 subject to the Lender’s Aggregate Elected Commitment Amount of $175,000,000. As of December 31, 2017, the Company’s total borrowings under the Credit Agreement were $55,500,000 from a borrowing base of $70,000,000.

The borrowing base under the Credit Agreement is determined at the discretion of the Lenders based on the collateral value of the Company’s proved reserves that have been mortgaged to the Lenders, and is subject to regular quarterly redeterminations on January 1, April 1, July 1 and October 1 of each year, as well as special interim redeterminations described in the Credit Agreement. The Company has the option to permanently convert to regular semi-annual redeterminations on April 1 and October 1 of each year. Subject to the terms of the Credit Agreement, a portion of the revolving credit facility in an aggregate amount not to exceed the lesser of $10,000,000 or the borrowing base in effect at such time may be used to issue letters of credit for the account of Wishbone or designated subsidiaries.

Note 3 – Credit Agreement (continued)

Interest accrues at the Company’s option at either (i) a base rate for an alternate base rate (“ABR”) loan plus the margin in the following utilization grids, where ABR is defined as the greatest of the prime rate, the federal funds rate plus 0.50% or an adjusted London interbank offered (“LIBO”) rate for a one month period plus 1.00%, or (ii) a LIBO rate for a Eurodollar loan plus the margin in the following utilization grids below. As of December 31, 2018, the Company’s interest rate was 4.63% on its Eurodollar loan and 6.75% on its ABR loan. As of December 31, 2017, the Company’s interest rate was 3.61% on its Eurodollar loan and 5.50% on its ABR loans. Additionally, the Company will also incur commitment fees, as set forth in the following utilization grids. Commitment fees will be included as a component of interest expense.

The respective utilization grids below dictate, for any ABR or Eurodollar loan margin, or for any commitment fee rate, the applicable rate per annum based upon a) when the dates the loans/ unused commitments were outstanding and b) the Borrowing Base Utilization Percentage then in effect. The Borrowing Base Utilization Percentage reflects the ratio of revolving credit exposures divided by the lesser of i) the Maximum Credit Amount of the facility, ii) the borrowing base then in effect or iii) the Lender’s Aggregate Elected Commitment Amount.

Utilization Grid through and including December 31, 2018:

The Credit Agreement contains restrictive covenants that may limit the Company’s ability to, among other things, incur additional indebtedness, incur liens, sell assets, enter into mergers, and engage in certain other transactions without the prior consent of its Lenders. The Credit Agreement requires the Company, as of the last day of any quarter, (i) to not exceed a total debt to the last four quarters’ EBITDAX (as defined and calculated in the Credit Agreement, as amended) ratio of 4.0 to 1.0 and (ii) to have a consolidated current assets to consolidated current liabilities ratio (the “Current Ratio”, as defined and calculated in the Credit Agreement) of not less than 1.0 to 1.0. As of December 31, 2018, the Company was in compliance with its financial covenants.

Utilization Grid effective January 1, 2019 and thereafter:

Note 4 – Derivative Instruments

The Company entered into various derivatives for the purpose of hedging the impact of market fluctuations of crude oil prices. These derivatives included crude oil costless collars and swaps. The Company’s commodity derivative instruments generally serve as effective economic hedges of commodity risk exposure; however, the Company has elected not to account for the derivatives as cash flow hedges. As such, the Company recognizes all changes in fair value of its derivatives in earnings.

As of December 31, 2018, the Company had crude oil commodity contracts in place as follows:

As of December 31, 2017, the Company had crude oil commodity contracts in place as follows: