NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020

Banner Oil & Gas, LLC (“Banner”) was formed as a limited liability company in the state of Oklahoma on December 13, 2010. Its major operations consist of the exploration for and acquisition, production, and sale of crude oil and natural gas with an area of concentration in Oklahoma, Texas, Kansas and Mississippi. Banner will continue perpetually until terminated pursuant to statute or any provision of the limited liability company agreement. No member shall be liable for the expenses, liabilities or obligations of Banner.

On November 23, 2020, Banner’s board of managers approved a plan of division whereby Banner Holdings, LLC (“Banner Holdings”) was formed and became the sole member of Banner. All existing capital interests and incentive units of Banner were exchanged for an equal amount of capital interests and incentive units in Banner Holdings. Banner Holdings assumed all obligations regarding the prior revolving credit facility. Additionally, oil and gas assets of two companies under common control were merged with Banner effective October 1, 2020 (K3 AssetCo, LLC and 2W AssetCo, LLC). (See Note 4).

The consolidated financial statements include the accounts of Banner and its wholly owned subsidiaries, Pennant Oil & Gas, LLC, Banner Oilfield Services, LLC, BOG-Osage, LLC, K3 AssetCo, LLC and 2W AssetCo, LLC (collectively referred to as the “Company” or “Banner”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP), management makes estimates and assumptions in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and changes in these estimates are recorded when known. Significant estimates, which are subject to change in the near term, affecting these financial statements include estimates for quantities of proved oil and natural gas reserves and future cash flows, which is used to compute depreciation, depletion and amortization and impairment of oil and natural gas properties, period end oil and natural gas sales and accruals, and asset retirement obligations.

Cash and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts and money market funds which may not be fully federally insured. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on such accounts.

Accounts Receivable - The Company’s accounts receivables are primarily from companies in the oil and natural gas industry located in the southwestern part of the United States. Credit for oil and natural gas sales is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable from working interest owners also does not require collateral, although the Company generally has the right to apply their portion of oil and natural gas sales to their accounts receivable balance. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due.

The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. At December 31, 2021 and 2020, management considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required.

Oil Inventory - At December 31, 2021 and 2020 inventory consisted of crude oil produced and stored in tanks prior to delivery to the purchaser in the amount of approximately $132,000 and $178,000, respectively. Inventory is presented on the balance sheet at the lower of cost to produce or market.

Oil and Natural Gas Properties - The full cost method of accounting is used to account for oil and natural gas properties. Under this method of accounting, all costs incident to the acquisition, exploration, and development of properties (both developed and undeveloped), including costs of abandoned leaseholds, delay lease rentals, unproductive wells, and well drilling and equipment costs, are capitalized. The Company capitalizes internal costs that can be directly identified with acquisition, exploration and development activities, but does not include any costs related to production, general corporate overhead or similar activities. Capitalized costs include geological and geophysical work, seismic, delay rentals, drilling and completing and equipping oil and natural gas wells, including salaries, benefits and other internal costs directly attributable to these activities.

Capitalized costs as well as future development costs on proved undeveloped properties are amortized using the units-of-production method, based on estimates of proved oil and natural gas reserves and production, which are converted to a common unit of measure based upon their relative energy content. The computation of depreciation, depletion and amortization takes into consideration restoration, dismantlement and abandonment costs and the anticipated proceeds from salvaging equipment. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised significantly in the near term. If the Company’s unamortized costs exceed the cost center ceiling (defined as the sum of the present value, discounted at 10%, of estimated future net revenues from proved reserves plus the lower of cost or estimated fair value of unproved properties), the excess is charged to expense in the year in which the excess occurs.

Generally, no gains or losses are recognized on the sale or disposition of oil and natural gas properties unless such dispositions involve a significant alteration in the depletion rate. Management’s evaluation concluded that due to the decline in oil prices during 2020, there was an impairment required for the year ended December 31, 2020 of approximately $9,111,000. There was no impairment for the year ended December 31, 2021.

Other Property and Equipment - Other property and equipment is recorded at cost. Upon retirement or disposition of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet with the resulting gain or loss, if any, reflected in the consolidated statement of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, typically from 3 to 10 years. Depreciation expense related to other property and equipment was approximately $49,000 and $56,000 for the years ended December 31, 2021 and 2020, respectively.

Revenue Recognition - Oil and natural gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability of the revenue is probable. Delivery occurs and title is transferred when production has been delivered to a pipeline or picked up by the purchaser. Taxes assessed by governmental authorities on oil and natural gas revenues are presented separately from such revenues as production taxes in the consolidated statements of operations. Well supervision fees and overhead reimbursements associated with producing properties are recognized as expense reimbursements when the services are performed.

Income Taxes - The Company is a limited liability company and therefore substantially all taxes are passed through to the individual members. There is no provision for income taxes provided for in these financial statements. The Company’s 2018 through 2020 federal income tax and state income tax returns remain open to examination by various tax jurisdictions which include Oklahoma.

Additionally, the Company’s state margin tax returns for 2018 through 2020 remain open to examination for the state of Texas.

Management has evaluated the Company’s tax positions and concluded that there are no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of authoritative guidance.

Concentrations of Credit Risk and Major Customers - The Company extends credit to purchasers of oil and natural gas, which are primarily large energy companies. The Company had five purchasers during the year ended December 31, 2021 whose individual purchases exceeded 10% of oil and natural gas sales and collectively accounted for approximately 73% of total oil and natural gas sales. The Company had three purchasers during the year ended December 31, 2020 whose individual purchases exceeded 10% of oil and natural gas sales and collectively accounted for approximately 63% of total oil and natural gas sales.

The Company had six purchasers whose outstanding balance was approximately 85% of accounts receivable from oil and natural gas sales at December 31, 2021, and five purchasers whose outstanding balance was approximately 67% of accounts receivable from oil and natural gas sales at December 31, 2020.

Gas Balancing - In certain instances, the owners of the natural gas produced from a well will select different purchasers for their respective ownership interest in the wells. If one purchaser takes more than its ratable portion of the natural gas, the owners selling to that purchaser will be required to satisfy the imbalance in the future by cash payments or by allowing the other owners to sell more than their share of production. To the extent future reserves exist to enable the other owners to sell more than their ratable share of natural gas, no liability is recorded for the Company’s obligation for natural gas taken by its purchasers which exceeds the Company’s ownership interest of the well’s total production. The Company has no significant imbalances at December 31, 2021 and 2020.

Debt Issuance Costs - The Company amortizes loan origination fees for financing agreements over the life of the loan using the straight-line method, which does not differ significantly from the effective interest method. Amortization expense totaled approximately $30,000 and $16,000 for December 31, 2021 and 2020, respectively.

Accounting standards require debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standards allow companies to report debt issuance costs related to line of credit agreements as unamortized costs on the balance sheet. The Company reports debt issuance costs related to its revolving credit facility as unamortized debt issuance costs on the consolidated balance sheets.

Derivative Instruments and Hedge Transactions - The Company recognizes derivatives as either an asset or a liability measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative and the resulting designation. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through income or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a hedge’s change in fair value will be immediately recognized in income. The Company has not designated its derivative financial instruments for hedge accounting, and as such, changes in fair value are reported in earnings as a component of risk management income (expense) (See Note 6).

Fair Value of Financial Instruments - The carrying value of items comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments. The carrying value of the long-term debt approximates fair value as a result of the long-term debt having a variable interest rate, or the current rates offered to the Company for long-term debt are substantially the same. The Company’s derivative financial instruments are reported at fair value.

Accounting for Asset Retirement Obligations - The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The Company’s asset retirement obligations relate to estimated future plugging and abandonment costs on its oil and natural gas properties and related facilities disposal. These obligations to abandon and restore properties are based upon estimated future costs which may change based upon future inflation rates and changes in statutory remediation rules or changes in future cost estimates.

At December 31, 2021, the Company has cash held in escrow with a fair market value of $169,264 that is legally restricted for potential plugging and abandonment liability in the Wildhorse Unit located in Osage County, Oklahoma. The cash held related to this escrow account is included in deposits on the consolidated balance sheets.

The activities incurred in the asset retirement obligations are as follows for the years ended December 31, 2021 and 2020:

Recent accounting pronouncements – In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842).” The purpose of the guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements. On April 8, 2020, the FASB voted to defer the effective date for ASU 2016-02 for private companies. As such the new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2021, though early adoption is permitted. Management is currently evaluating the impact adopting this recent accounting pronouncement will have on the Company’s financial statements in future reporting periods.

Revolving Credit Facility with Firstbank Southwest

In November 2020, the Company entered into a four-year credit agreement with Firstbank Southwest as administrative agent, which provides for a revolving line of credit with an initial borrowing base of $5,000,000. The maximum amount available is subject to semi-annual redeterminations of the borrowing base in April and October of each year until maturity, based on the value of the Company’s proved oil and natural gas reserves in accordance with the lenders’ customary procedures and practices. Both the Company and the lenders have the right to request one additional redetermination each year.

Interest on the outstanding amounts under the credit facility will accrue at an interest rate equal to either (i) the Alternate Base Rate (as defined in the credit agreement) plus an applicable margin (as defined in the credit agreement) that ranges between 1.00% to 2.00% depending on utilization or (ii) the Adjusted LIBO Rate (as defined in the credit agreement) plus an applicable margin that ranges between 4.00% to 5.00% depending on utilization. In the case that an event of default (as defined under the credit agreement) occurs, the outstanding amounts will bear an additional 2.00% interest plus the applicable Alternate Base Rate or Adjusted LIBO Rate and corresponding applicable margin.

As of December 31, 2021, outstanding borrowings were accruing interest at the Alternate Base Rate plus the applicable margin which resulted in an interest rate of 4.86%. A commitment fee of 0.500%, accrues on the average daily amount of the unused portion of the borrowing base and is included as a component of interest expense. The Company generally has the right to make prepayments of the borrowings at any time without penalty or premium. Letter of credit fees will accrue at 0.125% plus the Applicable Margin used to determine the interest rate applicable to borrowings that are based on Adjusted LIBO Rate.

Small Business Administration Loans

In May 2020 Banner applied for and received an unsecured forgivable loan guaranteed by the federal government as part of the Small Business Administration (SBA) Paycheck Protection Program in the amount of $300,900 bearing interest at 1%. Principal and interest of this loan can be fully forgiven based on the Company incurring qualifying expenses during the defined covered period as well as meeting other criteria related to employee retention. The Company applied for forgiveness of this loan in November 2020, which was subsequently approved and forgiven in May 2021.

In September 2020, the Company applied for and received a loan from the federal government as part of the SBA Economic Injury Disaster Loan in the amount of $149,900 bearing interest of 3.75% per annum. Repayment of this loan begins in September 2022 with 348 monthly payments of $731 of principal and interest with a final payment due in September 2050 for all remaining unpaid principal and interest. This loan is secured generally by all assets of the Company.

In January 2021 Banner applied for and received a second unsecured forgivable loan guaranteed by the federal government as part of the Small Business Administration (SBA) Paycheck Protection Program in the amount of $309,775 bearing interest at 1%. Principal and interest of this loan can be fully forgiven based on the Company incurring qualifying expenses during the defined covered period as well as meeting other criteria related to employee retention. The Company applied for forgiveness of this loan in October 2021, which was subsequently approved and forgiven in October 2021.

Fourth Amended Operating Agreement

Effective January 17, 2019, the Company adopted the Fourth Amended Operating Agreement. This operating agreement, among other things, updated sharing ratios and further defined management incentive units as follows:

In October, 2019, Sage Road purchased the Series A Preferred Interests from WFEC.

Management incentive units were administered under two separate plans by the Company’s Board of Managers. The first plan, the Management Incentive Units Plan includes units awarded to members of Pennant (“Pennant MIU Plan”) and the second plan, the 2018 Management Incentive Pool Plan (“2018 MIU Plan”) were each authorized to issue 100,000 units. The Pennant MIU Plan calls for units to vest at 20% on each of the first four anniversaries of the date of the grant with any unvested units fully vesting on the date of a Vesting Event, as defined. The 2018 MIU Plan calls for units to vest at 25% on each of the first three anniversaries of the date of the grant with any unvested units fully vesting on the date of a Vesting Event, as defined. Additionally, all management incentive units lack voting rights and are subject to transfer restrictions unless waived by the board of managers. Both plans and their corresponding units were cancelled in 2020 as discussed below.

Fifth Amended and Restated Operating Agreement

Effective November 24, 2020, the Company adopted the Fifth Amended and Restated Operating Agreement. This operating agreement amends and restates the previous agreement in its entirety. This agreement, among other things, confirmed the Plan of Division approved by the Company’s board of managers on November 23, 2020, whereby Banner Holdings was formed becoming Banner’s parent company. All existing capital interests and incentive units of Banner were exchanged by Banner’s existing members for an equal amount of capital interests and incentive units in Banner Holdings.

Banner Holdings received 100% of Banner’s capital interests in exchange for assuming all of Banner’s obligations regarding the revolving credit facility formerly held by Wells Fargo Bank, N.A. and subsequently purchased by Sage Road. As a result, Banner eliminated the note payable of $18,892,165, and the related paid-in-kind interest payable of $1,580,162 and recorded a capital contribution of $20,472,327.

The new operating agreement cancelled all previously issued management incentive units (“MIU’s”), converted all previous Series A Preferred Interests and Capital Interests into new Capital Interests, admitted new members through receipt of capital contributions, and issued new MIU’s under the 2020 Incentive Pool Plan (“2020 MIU Plan”). The 2020 MIU Plan allows a maximum of 100,000 authorized units to be issued, and calls for units to vest at 25% on each of the first three anniversaries of the date of the grant with any unvested units fully vesting on the date of a vesting event, as defined. Additionally, all management incentive units lack voting rights and are subject to transfer restrictions unless waived by the board of managers. A total of 75,000 shares were issued and outstanding at December 31, 2021.

Transactions Between Entities Under Common Control

Effective October 1, 2020, capital contributions were received primarily in the form of oil and gas assets from two commonly controlled companies, K3 Oil, LLC (“K3”) and 2W Energy Partners, LLC (“2W”) and were recorded as an exchange between entities under common control. Both companies created subsidiaries to contain the assets contributed, K3 AssetCo, LLC and 2W AssetCo, LLC. The subsidiaries were contributed to Banner in exchange for Banner capital interests. Sage Road owned approximately, 97%, 92% and 94% of Banner Holdings, K3 and 2W, respectively prior to the transactions. In accordance with accounting guidance, Banner recorded the assets and liabilities contributed by K3 and 2W at historical cost with operations recorded prospectively from the effective contribution date.

The following amounts were recorded on October 1, 2020 as a result of this activity: