NOTE

Basis of Presentation and Summary of Significant Accounting Policies

Presentation.

In the opinion of management, the unaudited interim condensed consolidated and combined financial statements of the Company as of

March 31, 2021

and

December 31, 2020

and for the

three

months ended

March 31, 2021 (

Successor), and for the

three

months ended

March 31, 2020 (

Predecessor) include all adjustments and accruals, consisting only of normal, recurring adjustments and accruals necessary for a fair presentation of the results for the interim periods in conformity with generally accepted accounting principles in the United States ("GAAP"). The operating results for the

three

months ended

March 31, 2021

are

not

indicative of results for a full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These unaudited interim condensed consolidated and combined financial statements should be read together with the consolidated and combined financial statements and notes thereto included in the Company's Annual Report on Form

-K for the year ended

December 31, 2020.

Principles of consolidation.

The condensed consolidated and combined financial statements include the accounts of the Company and its wholly owned subsidiaries since

August 22, 2020,

and its Predecessors and their wholly owned subsidiaries since their acquisition or formation for all periods prior to

August 21, 2020.

All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.

Use of estimates in the preparation of financial statements.

Preparation of the Company's unaudited interim condensed consolidated and combined financial statements in

conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Depletion of oil and natural gas properties and evaluations for impairment of proved and unproved oil and natural gas properties, in part, is determined using estimates of proved, probable and possible oil, NGL and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and future undiscounted and discounted net cash flows. Other items subject to such estimates and assumptions include, but are

not

limited to, the carrying value of oil and natural gas properties, asset retirement obligations, equity-based compensation and estimates of income taxes. Actual results could differ from the estimates and assumptions utilized.

Cash and cash equivalents.

The Company's cash and cash equivalents include depository accounts held by banks with original issuance maturities of

days or less. The Company's cash and cash equivalents are generally held in financial institutions in amounts that

may

exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company's counterparty risks are minimal based on the reputation and history of the institutions selected.

Accounts receivable.

The Company's accounts receivables are primarily comprised of oil, NGL and natural gas sales receivables, a current U.S. federal income tax receivable, joint interest receivables and other receivables for which the Company does

not

require collateral security. The Company's share of oil, NGL and natural gas production is sold to various purchasers who must be prequalified under the Company's credit risk policies and procedures. The Company records allowances for doubtful accounts based on the age of accounts receivables and the financial condition of its purchasers. The Company's credit risk related to collecting accounts receivables is mitigated by using credit and other financial criteria to evaluate the credit standing of the entity obligated to make payment on the accounts receivable, and where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the counterparty or other credit support.

As of

March 31, 2021

and

December 31, 2020,

the Company's accounts receivables primarily consist of amounts due from the sale of crude oil, NGL and natural gas of

$13.4

million and

$4.2

million, respectively, and are based on estimates of sales volumes and realized prices the Company anticipates it will receive, a current U.S. federal income tax receivable of

$3.2

million and

$3.2

million, respectively, and joint interest receivables of

$311,000

and

$345,000,

respectively. The Company routinely reviews outstanding balances and establishes allowances for bad debts equal to the estimable portions of accounts receivable for which failure to collect is considered probable. As of

March 31, 2021

and

December 31, 2020,

the Company had

allowance for doubtful accounts.

Subscription receivable.

In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”)

505

“

Receivables for Issuance of Equity,

”

the Company recorded a subscription receivable as of

December 31, 2020

related to the exercise of warrants prior to

December 31, 2020

as the cash was collected before the financial statements were issued or available to be issued. Prior to

December 31, 2020,

312,711

warrants were exercised for cash proceeds of

$3.6

million. Due to the timing of the exercises, the shares underlying the warrants were issued in

December 2020

and the proceeds were received subsequent to

December 31, 2020.

The outstanding proceeds were recorded as a subscription receivable in the accompanying balance sheets as of

December 31, 2020.

There is

subscription receivable as of

March 31, 2021

as all cash related to exercises of warrants was received prior to the balance sheet date.

Inventory.

Inventory is comprised primarily of oil and natural gas drilling or repair items such as tubing, casing, proppant used to fracture-stimulate oil and natural gas wells, water, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or net realizable value, on a weighted average cost basis. Valuation allowances for materials and supplies inventories are recorded as reductions to the carrying values of the materials and supplies inventories in the Company's condensed consolidated balance sheet and as charges to other expense in the condensed consolidated statements of operations. The Company's materials and supplies inventory as of

March 31, 2021

and

December 31, 2020

$109,000

and

$120,000,

respectively, and the Company has

not

recognized any valuation allowance to date.

Oil and natural gas properties.

The Company utilizes the successful efforts method of accounting for its oil and natural gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs and geological and geophysical expenditures are expensed.

The Company does

not

carry the costs of drilling an exploratory well as an asset in its consolidated balance sheet following the completion of drilling unless both of the following conditions are met: (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.

Due to the capital-intensive nature and the geographical location of certain projects, it

may

take an extended period of time to evaluate the future potential of an exploration project and the economics associated with making a determination on its commercial viability. In these instances, the project's feasibility is

not

contingent upon price improvements or advances in technology, but rather the Company's ongoing efforts and expenditures related to accurately predict the hydrocarbon recoverability based on well information, gaining access to other companies' production data in the area, transportation or processing facilities and/or getting partner approval to drill additional appraisal wells. These activities are ongoing and are being pursued constantly. Consequently, the Company's assessment of suspended exploratory well costs is continuous until a decision can be made that the project has found sufficient proved reserves to sanction the project or is noncommercial and is charged to exploration and abandonment expense. See Note

for additional information.

The capitalized costs of proved properties are depleted using the unit-of-production method based on proved reserves for leasehold costs and proved reserves for drilling, completion and other oil and natural gas property costs. Costs of unproved leasehold costs are excluded from depletion until proved reserves are established or, if unsuccessful, impairment is determined.

Proceeds from the sales of individual properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depletion, depreciation and amortization, if doing so does

not

materially impact the depletion rate of an amortization base. Generally,

gain or loss is recorded until an entire amortization base is sold. However, gain or loss is recorded from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base.

The Company performs assessments of its long-lived assets to be held and used, including proved oil and natural gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets

may

not

be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In these circumstances, the Company recognizes an impairment charge for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.

Unproved oil and natural gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects. If the estimated future net cash flows attributable to such projects are

not

expected to be sufficient to fully recover the costs invested in each project, the Company will recognize an impairment charge at that time.

Other property and equipment, net.

Other property and equipment is recorded at cost. The carrying values of other property and equipment, net of accumulated depreciation of

$285,000

and

$237,000

as of

March 31, 2021

and

December 31, 2020,

respectively, are as follows (in thousands):

	March 31, 2021		December 31, 2020
Land	$	725	$	725
Information technology		250		292
Transportation equipment		39		41
Leasehold improvements		20		24
Field equipment		10		10
Total other property and equipment, net	$	1,044	$	1,092

Other property and equipment is depreciated over its estimated useful life on a straight-line basis. Land is

not

depreciated. Information technology is generally depreciated over

three

years, transportation equipment is generally depreciated over

five

years and field equipment is generally depreciated over

seven

years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the underlying terms of the associated leases.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. If such assets are considered to be impaired, the impairment to be recorded is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value. The estimated fair value is determined using either a discounted future cash flow model or another appropriate fair value method.

Debt issuance costs.

The Company has paid a total of

$407,000

in debt issuance costs,

$2,000

of which was incurred during the

three

months ended

March 31, 2021,

related to its new revolving credit facility. Amortization based on the straight-line method over the term of the revolving credit facility which approximates the interest rate method was

$29,000

and

zero

during the

three

months ended

March 31, 2021

and

2020,

respectively. As of

March 31, 2021

and

December 31, 2020,

the net debt issuance costs are included in noncurrent assets on the accompanying consolidated balance sheet due to the fact that the revolving credit facility was undrawn at the time. In the future, these net costs will be included with long-term debt, if any, in accordance with GAAP. See Note

for additional information regarding the Company's new revolving credit facility.

Leases.

The Company enters into leases for drilling rigs, storage tanks, equipment and buildings and recognizes lease expense on a straight-line basis over the lease term. Lease right-of-use assets and liabilities are initially recorded on the lease commencement date based on the present value of lease payments over the lease term. As most of the Company's lease contracts do

not

provide an implicit discount rate, the Company uses its incremental borrowing rate, which is determined based on information available at the commencement date of a lease. Leases

may

include renewal, purchase or termination options that can extend or shorten the term of a lease. The exercise of those options is at the Company's sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required. Leases with an initial term of

months or less are

not

recorded as lease right-of-use assets and liability. See Note

for additional information.

Accounts payable and accrued liabilities.

Accounts payable and accrued liabilities as of

March 31, 2021

and

December 31, 2020

totaled approximately

$34.8

million and

$22.4

million, respectively, including trade accounts payable, revenues payable and accruals for capital expenditures, operating and general and administrative expenses, operating leases and other miscellaneous items.

Asset retirement obligations.

The Company records a liability for the fair value of an asset retirement obligation in the period in which the associated asset is acquired or placed into service, if a reasonable estimate of fair value can be made. Asset retirement obligations are generally capitalized as part of the carrying value of the long-lived asset to which it relates. Conditional asset retirement obligations meet the definition of liabilities and are recorded when incurred and when fair value can be reasonably estimated. See Note

for additional information.

Revenue recognition

The Company follows FASB ASC

606,

“Revenue from Contracts with Customers,” (“ASC

606”

) whereby the Company recognizes revenues from the sales of oil and natural gas to its purchasers and presents them disaggregated on the Company's condensed consolidated and combined statements of operations.

The Company enters into contracts with purchasers to sell its oil and natural gas production. Revenue on these contracts is recognized in accordance with the

five

-step revenue recognition model prescribed in ASC

606.

Specifically, revenue is recognized when the Company's performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser

one

two

months after production. At

March 31, 2021

and

December 31, 2020,

the Company had receivables related to contracts with purchasers of approximately

$13.4

million and

$4.2

million, respectively.

Oil Contracts.

The Company's oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the oil has been transferred to the purchaser. The oil produced is sold under contracts using market-based pricing which is then adjusted for the differentials based upon delivery location and oil quality. Since the differentials are incurred after the transfer of control of the oil, the differentials are included in oil sales on the consolidated and combined statements of operations as they represent part of the transaction price of the contract.

Natural Gas Contracts.

The majority of the Company's natural gas is sold at the lease location, which is generally when control of the natural gas has been transferred to the purchaser. The natural gas is sold under (i) percentage of proceeds processing contracts or (ii) a hybrid of percentage of proceeds and fee-based contracts. Under the majority of the Company's contracts, the purchaser gathers the natural gas in the field where it is produced and transports it to natural gas processing plants where NGL products are extracted. The NGL products and remaining residue natural gas are then sold by the purchaser. Under percentage of proceeds and hybrid percentage of proceeds and fee-based contracts, the Company receives a percentage of the value for the extracted liquids and the residue natural gas. Since control of the natural gas transfers upstream of the transportation and processing activities, revenue is recognized as the net amount received from the purchaser.

The Company does

not

disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with ASC

606.

The exemption, as described in ASC

606

(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is

not

required.

Income taxes.

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date.

The Company reviews its deferred tax assets for recoverability and establishes a valuation allowance based on projected future taxable income, applicable tax strategies and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than

not

(likelihood of greater than

percent) that some portion or all the deferred tax assets will

not

be realized. The Company has

not

established a valuation allowance as of

March 31, 2021

and

December 31, 2020.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than

not

that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. If all or a portion of the unrecognized tax benefit is sustained upon examination by the taxing authorities, the tax benefit will be recognized as a reduction to the Company's deferred tax liability and will affect the Company's effective tax rate in the period it is recognized. See Note

for addition information.

The Company records any tax-related interest charges as interest expense and any tax-related penalties as other expense in the condensed consolidated and combined statements of operations of which there have been

none

to date.

Prior to

August 21, 2020,

the Predecessors did

not

record a provision for U.S. federal income tax because the Predecessors were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessors reported their share of the Company's income or loss on their respective income tax returns. The Predecessors were required to file tax returns on Form

1065

with the Internal Revenue Service (“IRS”). The

2017

2019

tax years remain open to examination.

The Predecessors recognize in their condensed consolidated and combined financial statements the effect of a tax position, if that position is more likely than

not

to be sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. Tax positions taken related to the Predecessors' status as limited partnerships, and state filing requirements have been reviewed, and management is of the opinion that they would more likely than

not

be sustained by examination. Accordingly, the Company has

not

recorded an income tax liability for uncertain tax benefits for periods prior to

August 21, 2020.

Under the new centralized partnership audit rules effective for tax years beginning after

2017,

the IRS assesses and collects underpayments of tax from the partnership instead of from each partner. The partnership

may

be able to pass the adjustments through to its partners by making a push-out election or, if eligible, by electing out of the centralized partnership audit rules. The collection of tax from the partnership is only an administrative convenience for the IRS to collect any underpayment of income taxes including interest and penalties. Income taxes on partnership income, regardless of who pays the tax or when the tax is paid, is attributed to the partners. Any payment made by the Company as a result of an IRS examination will be treated as an expense from the Company in the condensed consolidated and combined financial statements.

The Company is also subject to Texas Margin Tax. The Company realized

Texas Margin Tax in the accompanying condensed consolidated and combined financial statements as we do

not

anticipate owing any Texas Margin Tax for the periods presented.

Stock-based compensation.

Stock-based compensation expense for stock options (“Equity Awards”) is measured at the grant date or modification date, as applicable, using the fair value of the award, and is recorded, net of forfeitures, on a straight-line basis over the requisite service period of the respective award. The fair value of Equity Awards is determined on the grant date or modification date, as applicable, using a Black-Scholes option valuation model with the following inputs; (i) the grant date's closing stock price, (ii) the exercise price of the stock options, (iii) the expected term of the stock option, (iv) the estimated risk-free adjusted interest rate for the duration of the option's expected term, (v) the expected annual dividend yield on the underlying stock and (vi) the expected volatility over the option's expected term.

Stock-based compensation for HighPeak Energy common stock issued to directors with

restrictions thereon, is measured at the grant date using the fair value of the award and is recorded as stock-based compensation in the accompanying financial statements immediately. If restricted stock is awarded to employees or directors in the future, as the case

may

be, stock-based compensation will be recognized on a straight-line basis over the requisite service period of the respective award.

Segments.

Based on the Company's organizational structure, the Company has

one

operating segment, which is oil and natural gas development, exploration and production. In addition, the Company has a single, company-wide management team that allocates capital resources to maximize profitability and measures financial performance as a single enterprise.

Impact of the COVID-

Pandemic.

A novel strain of the coronavirus disease

2019

("COVID-

19"

) surfaced in late

2019

and spread around the world,

including to the United States. In

March 2020,

the World Health Organization declared COVID-

a pandemic, and the President of the United States declared the COVID-

outbreak a national emergency. The COVID-

pandemic significantly affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the COVID-

pandemic resulted in travel restrictions, business closures and other restrictions that have disrupted the demand for oil throughout the world and when combined with pressures on the global supply-demand balance for oil and related products, resulted in significant volatility in oil prices beginning late

February 2020.

The length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact of the effects of the COVID-

pandemic to global oil demand.

Adoption of new accounting standards.

December 2019,

the FASB issued Accounting Standards Update (“ASU”)

No.

2019

12,

“

Simplifying the Accounting for Income Taxes (Topic

740

)

”. The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative effect adjustment recorded to retained earnings. The Company adopted ASU

2019

January 1, 2021,

which did

not

have a material impact on the Company's condensed consolidated and combined financial statements.

New accounting pronouncements.

The Company has evaluated recently issued, but

not

yet effective, accounting pronouncements and does

not

believe they would have a material effect on the Company's condensed consolidated and combined financial statements.