U.S.
Securities and Exchange Commission


Washington,
D.C. 20549





Form
10-Q








QUARTERLY
REPORT PURSANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934








For
the Quarterly period ended March 31,
2010





Commission
File No. 1-15555







Tengasco,
Inc.


(Exact
name of issuer as specified in its charter)








Tennessee
            87-0267438State
      or other jurisdiction of
            (IRS
      Employer Identification No.)Incorporation
      or organization





11121
Kingston Pike Suite E, Knoxville, TN 37934


(Address
of principal executive offices)





(865-675-1554)


(Issuer’s
telephone number, including area code)








Indicate
by check mark whether the issuer (1) has  filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.


Yes XNo__





Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 231.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). [  ] Yes
[  ] No




Indicate
by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See the
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer_____
              Non-accelerated
      filer ___
            Accelerated
      filer___
              Smaller
      reporting company
              (Do
      not check if a smaller reporting company)


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes____ No X





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 60,687,413common shares at May 3,
2010.


2





TENGASCO,
INC.





TABLE OF
CONTENTS





PART
      I.
            FINANCIAL
      INFORMATION
            PAGEITEM
      1. FINANCIAL STATEMENTS*    Condensed
      Consolidated Balance Sheets as of March 31, 2010 and December 31,
      2009
            3*    Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2010 and 2009
            5*    Condensed  Consolidated
      Statement of Stockholders’ Equity for the three months ended March 31,
      2010
            6*    Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2010 and 2009
            7*    Notes
      to Condensed  Consolidated Financial Statements
            8ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
            21ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
            26ITEM
      4T.  CONTROLS AND PROCEDURES
            28PART
      II.
            OTHER
      INFORMATION
            29ITEM
      1. LEGAL PROCEEDINGS
            29ITEM
      1A. RISK FACTORS
            29ITEM
      2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
            29ITEM
      3. DEFAULTS UPON SENIOR SECURITIES
            29ITEM
      4. (REMOVED AND RESERVED)
            29ITEM
      5. OTHER INFORMATION
            29ITEM
      6. EXHIBITS
            30*    SIGNATURES
            31*    CERTIFICATIONS
            32


2
 
 Tengasco,
Inc. and Subsidiaries
 Consolidated
Balance Sheets
 (In
thousands, except share data)


March
      31,2010
            
            December
      31,2009(unaudited)AssetsCurrentCash
      and cash equivalents
            
            $       463
            
            $     
       422Accounts
      receivable
            
            1,124
            
            1,130Participant
      receivables
            
            17
            
            18Accounts
      receivable – related party
            
            1,708
            
            -Inventory
            
            702
            
            581Deferred
      tax asset - current
            
            285
            
            254Other
      current assets
            
            66
            
            20Total
      current assets
            
            4,365
            
            2,425Restricted
      cash
            
            121
            
            121Loan
      fees
            
            118
            
            146Oil
      and gas properties, net (full cost accounting
      method)
            
            12,299
            
            12,360Pipeline
      facilities, net
            
            12,292
            
            12,397Methane
      project, net
            
            4,384
            
            4,403Other
      property and equipment, net
            
            265
            
            306Deferred
      tax asset - noncurrent
            
            8,848
            
            9,016Total
      assets
            
            $   42,692
            
            $  
      41,174








See
accompanying notes to condensed consolidated financial
statements


3
 
 Tengasco,
Inc. and Subsidiaries
 Consolidated
Balance Sheets
 (In
thousands, except share data)


March
      31, 2010
            
            December
      31, 2009(unaudited)Liabilities
      and Stockholders’ EquityCurrent
      liabilitiesCurrent
      maturities of long-term debt
            
            $     111
            
            $      119Accounts
      payable - trade
            
            513
            
            742Accounts
      payable - other
            
            1,708
            
            -Accrued liabilities
            
            448
            
            302Unrealized
      derivative liability
            
            837
            
            748Deferred
      conveyance oil and gas properties
            
            286
            
            490Prepaid
      revenues - current
            
            299
            
            153Total
      current liabilities
            
            4,202
            
            2,554Asset
      retirement obligation
            
            448
            
            450Prepaid
      revenues – non current
            
            554
            
            700Long
      term debt, less current maturities
            
            10,043
            
            10,062Unrealized
      derivative liability
            
            314
            
            565Total liabilities
            
            15,561
            
            14,331Stockholders’
      equityCommon
      stock, $.001 par value: authorized 100,000,000Shares;
      59,760,661 and  59,350,661 shares issued and
      outstanding
            
            60
            
            60Additional
      paid in capital
            
            55,297
            
            55,277Accumulated
      deficit
            
            (28,226)
            
            (28,494)Total
      stockholders’ equity
            
            27,131
            
            26,843Total
      liabilities and stockholders’ equity
            
            $   42,692
            
            $   41,174












See
accompanying notes to condensed consolidated financial statements








4
 
 Tengasco, Inc. and
Subsidiaries
 Consolidated
Statements of Operations
 (Unaudited)
 (In
thousands, except share and per share data)


For
      the Three Months
              Ended
      March 31, 2010
            For
      the Three Months
              Ended
      March 31, 2009RevenuesOil
      and gas revenues
            $ 2,851
            $ 1,898Pipeline
      transportation revenues
            -
            1Total
      revenues
            2,851
            1,899Costs
      and expensesProduction
      costs and taxes
            1,316
            1,064Depreciation,
      depletion and amortization
            523
            476General
      and administrative
            459
            428Public
      relations
            9
            16Professional
      fees
            124
            163Total
      costs and expenses
            2,431
            2,147Net
      income(loss) from operations
            420
            (248)Other
      income (expense)Interest
      expense
            (177)
            (154)Unrealized
      gain on derivatives
            162
            -Total
      other income (expenses)
            (15)
            (154)Deferred
      tax expense
            (137)
            -Net
      income (loss)
            $      268
            $      (402)Net
      income (loss) per share
            $    0.00
            $    (0.01)Basic
      and diluted:Shares
      used in computing earnings per shareBasic
            59,760,661
            59,350,661Diluted
            61,691,661
            59,350,661








See
accompanying notes to condensed consolidated financial statements
























5
 
 Tengasco,
Inc. and Subsidiaries
 Consolidated
Statements of Stockholders’ Equity
 (Unaudited)
 (In
thousands, except share data)





Common
      StockShares
            
            Amount
            
            Additional
      Paid in Capital
            
            Accumulated
      Deficit
            
            TotalBalance
      at December 31, 2009
            59,760,661
            
            $   60
            
            $  55,277
            
            $   (28,494)
            
            $   26,843Net
      income
            -
            
            -
            
            -
            
            268
            
            268Options
      & compensation expense
            -
            
            -
            
            20
            
            -
            
            20Balance,
      March 31, 2010
            59,760,661
            
            $   60
            
            $  55,297
            
            $   (28,226)
            
            $   27,131








See
accompanying notes to condensed consolidated financial statements







6
 
 Tengasco,
Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
 (Unaudited)
 (In
thousands)


March
      31, 2010
            
            March
      31, 2009Operating
      activitiesNet
      income (loss)
            $          268
            $         (402)Adjustments
      to reconcile net income (loss) to net cash
              provided by (used in) operating activities:Depreciation,
      depletion and amortization
            523
            476Amortization
      of loan fees interest expense
            28
            -Accretion
      on asset retirement obligation
            13
            (27)Compensation
      and services paid in stock options
            20
            71Deferred
      tax expense
            137
            -Unrealized
      loss (gain) on derivatives
            (162)
            -Changes
      in assets and liabilities:Accounts
      receivable
            6
            415Participant  receivables
            1
            8Accounts
      receivable – related party
            (1,708)
            -Inventory
            (121)
            (23)Other
      current assets
            (46)
            -Accounts
      payable - trade
            (229)
            (11)Accounts
      payable –other
            1,708
            -Accrued
      liabilities
            146
            6Settlement
      on asset retirement obligation
            (20)
            -Net
      cash provided by operating activities
            564
            513Investing
      activitiesAdditions
      to oil and gas properties
            (496)
            (163)Additions
      to methane project
            -
            (92)Additions
      to pipeline facilities
            -
            (3)Additions
      to other property & equipment
            -
            (39)Net
      cash used in investing activities
            (496)
            (297)Financing
      activitiesProceeds
      from borrowings
            -
            39Repayments
      of borrowings
            (27)
            (42)Net
      cash used in financing activities
            (27)
            (3)Net
      change in cash and cash equivalents
            41
            213Cash
      and cash equivalents, beginning of period
            422
            245Cash
      and cash equivalents, end of period
            $        463
            $          458Supplemental  cash
      flow information:Interest
      paid
            $      149
            $         154





See
accompanying notes to condensed consolidated financial
statement


7
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


(1)    Description
of Business and Significant Accounting Policies





Tengasco,
Inc. is a Tennessee corporation (“Tengasco” or the “Company”).  The
Company is in the business of exploration and production of oil and natural
gas.  The Company’s primary area of oil exploration and production is
in Kansas.  The Company’s primary area of gas exploration and
production is the Swan Creek Field in Tennessee.





The
Company’s wholly-owned subsidiary, Tengasco Pipeline Corporation (“TPC”), owns
and operates a 65 mile intrastate pipeline which it constructed to transport
natural gas from the Company’s Swan Creek Field to customers in Kingsport,
Tennessee.





The
Company’s wholly-owned subsidiary, Manufactured Methane Corporation (“MMC”) owns
and operates treatment and delivery facilities using the latest developments in
available treatment technologies for the extraction of methane gas from
nonconventional sources for delivery through the nations existing natural gas
pipeline system, including the Company’s TPC pipeline system in Tennessee for
eventual sale to natural gas customers.





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America (“U.S. GAAP”) for interim financial information and
with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2010 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2010. For further information, refer to
the Company’s consolidated financial statements and footnotes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2009.





Principles
of Consolidation





The
accompanying consolidated financial statements are presented in accordance with
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 and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.  The
actual results could differ from those estimates.


8
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


Revenue
Recognition





The
Company uses the sales method of accounting for oil and natural gas
revenues.  Under this method, revenues are recognized based on actual
volumes of oil and gas sold to purchasers.





Reclassifications





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





(2)    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 asset 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.  Temporary differences result principally from federal and state
net operating loss carry-forwards, differences in oil and gas property values
resulting from a 2008 ceiling test write down, and differences in methods of
reporting depreciation and amortization.





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 provides a valuation allowance for amounts not
likely to be recovered.





At
December 31, 2009 federal net operating loss carry forwards amounted to
approximately $18.9 million which expire 2012 to 2024. The total deferred tax
asset at March 31, 2010 and December 31, 2009 was $9.1 million and $9.3 million
respectively.





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 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 sustained for an individual uncertain tax position or for all
uncertain tax positions in the aggregate could differ from the amount
recognized.  Management has determined that no significant uncertain
tax positions existed as of March 31, 2010, and December 31,
2009.


9
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


(3)    Earnings
per Share





In
accordance with Financial Accounting Standards Board (“FASB’) Accounting
Standards Codification (“ASC”) 260, Earnings Per Share, basic income (loss) per
share is based on 59,760,661 and 59,350,661 weighted average shares outstanding
for the quarters ended March 31, 2010, and March 31, 2009, respectively. Diluted
earnings per common share are computed by dividing income available to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period increased to include the number of additional
shares of common stock that would have been outstanding if the dilutive
potential shares of common stock had been issued. The dilutive effect of
outstanding options is reflected in diluted earnings per share for March 31,
2010. Dilutive shares outstanding at March 31, 2009 were 2,244,000, related to
outstanding options. These shares were not included in the Earnings Per Share
for the first quarter of 2009 as they were anti-dilutive.





(4)   Recent
Accounting Pronouncements





In
February, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09,
effective immediately, which amended ASC Topic 855, Subsequent
Events.  The amendment was made to address concerns about conflicts
with SEC guidance and other practice issues.  Among the provisions of
the amendment, the FASB defined a new type of entity, termed an “SEC filer,”
which is an entity required to file with or furnish its financial statements to
the SEC.  Entities other than registrants whose financial statements
are included in SEC filings (e.g., businesses or real estate operations acquired
or to be acquired, equity method investees, and entities whose securities
collateralize registered securities) are not SEC filers.  While an SEC
filer is still required by U.S. GAAP to evaluate subsequent events through the
date its financial statements are issued, it is no longer required to disclose
in the financial statements that it has done so or the date through which
subsequent events have been evaluated.  The Company does not believe
the changes have a material impact on our results of operations or financial
position.





In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements”.  This update requires more robust disclosures about
valuation techniques and inputs to fair value measurements.  The
update is effective for interim and annual reporting periods beginning after
December 15, 2009.  This update will have no material effect on the
Company’s consolidated financial statements.





In July
2009, the FASB issued ASC 855-10-50, “Subsequent Events”, which requires an
entity to recognize in the financial statements the effects of all subsequent
events that provide additional evidence about conditions that existed at the
date of the balance sheet, including the estimates inherent in the preparation
of the financial statements. The final rules were effective for interim and
annual periods issued after June 15, 2009. The Company has adopted the policy
effective September, 2009.  There was no material effect on the
Company’s consolidated financial statements as a result of the
adoption.


10
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


In June
2009, the FASB issued ASC 105, Codification which establishes FASB Codification
as the source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. The final rule was effective for interim and annual
periods issued after September 15, 2009. The Company has adopted the policy
effective September 30, 2009. There was no material effect on the presentation
of the Company’s consolidated financial statements as a result of the adoption
of ASC 105.





On
December 31, 2008, the SEC published the final rules and interpretations
updating its oil and gas reporting requirements (“Modernization of Oil and Gas
Reporting”).  In January 2010, the FASB released ASU 2010-03,
Extractive Activities - Oil and Gas (“Topic 932”); Oil and Gas Reserve
Estimation and Disclosures aligning U.S. GAAP standards with the SEC’s new
rules.  Many of the revisions are updates to definitions in the
existing oil and gas rules to make them consistent with the petroleum resource
management system, which is a widely accepted standard for the management of
petroleum resources that was developed by several industry
organizations.  Key revisions include: (a) changes to the pricing used
to estimate reserves utilizing a 12-month average price rather than a single day
spot price which eliminates the ability to utilize subsequent prices to the end
of a reporting period when the full cost ceiling was exceeded and subsequent
pricing exceeds pricing at the end of a reporting period, (b) the ability to
include nontraditional resources in reserves, (c) the use of new technology for
determining reserves, and (d) permitting disclosure of probable and possible
reserves.  The SEC will require companies to comply with the amended
disclosure requirements for registration statements filed after January 1, 2010,
and for annual reports on Form 10-K for fiscal years ending on or after December
15, 2009.  ASU 2010-03 is effective for annual periods ending on or
after December 31, 2009.  Adoption of Topic 932 did not have a
material impact on the Company’s results of operations or financial position. In
April 2010, the FASB issued ASU 2010-14, Accounting for Extractive
Activities-Oil & Gas: Amendments to Paragraph 932-10-S99-1.  This
ASU amends terminology as defined in Topic 932-10-S99-1.





(5)
    Related Party Transactions





On
September 17, 2007, the Company entered into a drilling program with Hoactzin
Partners, L.P. (“Hoactzin”) for ten wells consisting of approximately three
wildcat wells and seven developmental wells to be drilled on the Company’s
Kansas Properties (the “Ten Well Program”). Peter E. Salas, the Chairman of the
Board of Directors of the Company, is the controlling person of Hoactzin. He is
also the sole shareholder and controlling person of Dolphin Management, Inc. and
the general partner of Dolphin Offshore Partners, L.P., which is the Company’s
largest shareholder.


11
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


Carlos P.
Salas, a director of the Company, has an interest in Hoactzin but is not a
controlling person of Hoactzin. Under the terms of the Ten Well Program,
Hoactzin was to pay the Company $0.4 million for each well in the Ten Well
Program completed as a producing well and $0.25 million for each well drilled
that was non-productive. The terms of the Ten Well Program also provide that
Hoactzin will receive all the working interest in the ten wells in the Program,
but will pay an initial fee to the Company of 25% of its working interest
revenues net of operating expenses.  This is referred to as a
management fee but, as defined, is in the nature of a net profits
interest.  The fee paid to the Company by Hoactzin will increase to
85% of working interest revenues when and if net revenues received by Hoactzin
reach an agreed payout point of approximately 1.35 times Hoactzin’s purchase
price (the “Payout Point”) for its interest in the Ten Well
Program.





In March
2008, the Company drilled and completed the tenth and final well in the Ten Well
Program. Of the ten wells drilled, nine were completed as oil producers and are
currently producing approximately 49 barrels per day in total. Hoactzin paid a
total of $3.85 million (the “Purchase Price”) for its interest in the Ten Well
Program resulting in the Payout Point being determined as $5.2
million.  The amount paid by Hoactzin for its interest in the Program
wells exceeded the Company’s actual drilling costs of approximately $2.8 million
for the ten wells by more than $1 million.





Although
production level of the Program wells will decline with time in accordance with
expected decline curves for these types of wells, based on the drilling results
of the wells in the Ten Well Program and the current price of oil, the Program
wells would be expected to reach the Payout Point in approximately four years
solely from the oil revenues from the wells. However, under the terms of the
Company’s agreement with Hoactzin, reaching the Payout Point may be accelerated
by operation of a second agreement by which Hoactzin will apply 75% of the net
proceeds it receives from a methane extraction project discussed below developed
by the Company’s wholly-owned subsidiary, Manufactured Methane Corporation
(“MMC”), to the Payout Point. Those methane project proceeds when applied may
result in the Payout Point being achieved sooner than the estimated four year
period based solely upon revenues from the Program wells.





On
September 17, 2007, Hoactzin, simultaneously with subscribing to participate in
the Ten Well Program, pursuant to an additional agreement with the Company was
conveyed a 75% net profits interest in the methane extraction project developed
by MMC at the Carter Valley landfill owned and operated by Republic Services in
Church Hill, Tennessee (the "Methane Project"). Revenues from the Project
received by Hoactzin will be applied towards the determination of the Payout
Point (as defined above) for the Ten Well Program.  When the Payout
Point is reached from either the revenues from the wells drilled in the Ten Well
Program or the Methane Project or a combination thereof, Hoactzin’s net profits
interest in the Methane Project will decrease to a 7.5% net profits
interest.


12
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


On
September 17, 2007, the Company also entered into an additional agreement with
Hoactzin providing that if the Program and the Methane Project interest in
combination failed to return net revenues to Hoactzin equal to 25% of the
Purchase Price it paid for its interest in the Ten Well Program by December 31,
2009, then Hoactzin would have an option to exchange up to 20% of its net
profits interest in the Methane Project for convertible preferred stock to be
issued by the Company with a liquidation value equal to 20% of the Purchase
Price less the net proceeds received at the time of any exchange. At the time
the agreement was negotiated, the Company's forecast of the probable results of
the projects indicated that there was little risk that the option to acquire
preferred stock would ever arise, so the Company placed no significant value to
the preferred stock option. By March 31, 2010 the amount of net revenues
received by Hoactzin from the Ten Well Program has reduced the Company’s
obligation to Hoactzin for the amount of the funds it had advanced for the
Purchase Price from $3.85 million to $1.1 million. The conversion option would
be set at issuance of the preferred stock at the then twenty business day
trailing average closing price of Company stock on the NYSE Amex. Hoactzin has a
similar option each year after 2009 in which Hoactzin’s then-unrecovered
Purchase Price at the beginning of the year is not reduced 20% further by the
end of that year, using the same conversion option calculation at date of the
subsequent year’s issuance if any.  The Company, however, may in any
year make a cash payment from any source in the amount required to prevent such
an exchange option for preferred stock from arising.  In addition, the
conversion right is limited to no more than 19% of the outstanding common shares
of the Company.





In the
event Hoactzin’s 75% net profits interest in the Methane Project were fully
exchanged for preferred stock, by definition the reduction of that 75% interest
to a 7.5% net profits interest that was agreed to occur upon the receipt of
1.3547 of the Purchase Price by Hoactzin could not happen because the larger
percentage interest then exchanged, no longer exists to be
reduced.  Accordingly, Hoactzin would retain no net profits interest
in the Methane Project after a full exchange of Hoactzin’s 75% net profits
interest for preferred stock.





Under
this exchange agreement, if no proceeds at all were received by Hoactzin through
2009 or in any year thereafter (i.e. a worst-case scenario already highly
unlikely  in view of the success of the Program), then Hoactzin would
have an option to exchange 20% of its interest in the Methane Project in 2010
and each year thereafter for preferred stock with liquidation value of 100% of
the Purchase Price (not 135%) convertible at the trailing average price before
each year’s issuance of the preferred stock.  The maximum number of
common shares into which all such preferred stock could be converted cannot be
calculated given the formulaic determination of conversion price based on future
stock price.





However,
as of March 31, 2010 revenues from the Ten Well Program have resulted in 70% of
the Purchase Price having already been reached. Accordingly, it is highly
unlikely that any requirement to issue preferred stock will arise in 2010 or any
succeeding years.


13
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


On
December 18, 2007, the Company entered into a Management Agreement with
Hoactzin.  On that same date, the Company also entered into an
agreement with Charles Patrick McInturff employing him as a Vice-President of
the Company.  Pursuant to the Management Agreement with Hoactzin, Mr.
McInturff’s duties while he is employed as Vice-President of the Company will
include the management on behalf of Hoactzin of its working interest in certain
oil and gas properties owned by Hoactzin and located in the onshore Texas Gulf
Coast, and offshore Texas and offshore Louisiana.





As
consideration for the Company entering into the Management Agreement, Hoactzin
has agreed that it will be responsible to reimburse the Company for the payment
of one-half of Mr. McInturff’s salary, as well as certain other benefits he
receives during his employment by the Company.  In further
consideration for the Company’s agreement to enter into the Management
Agreement, Hoactzin has granted to the Company an option to participate in up to
a 15% working interest on a dollar for dollar cost basis in any new drilling or
workover activities undertaken on Hoactzin’s managed properties during the term
of the Management Agreement.  The term of the Management Agreement
ends on the earlier of the date Hoactzin sells its interest in its managed
properties or five years (December 2012).





The
Company became the operator of certain properties owned by Hoactzin in
connection with the Management Agreeement.  Tengasco obtained from
IndemCo over time approximately $14.5 million of bonds covering plugging and
abandonment obligations for operated properties located in federal offshore
waters in favor of both the Minerals Management Service and certain private
parties.  In connection with the issuance of these bonds, Tengasco
entered into a Payment and Indemnity Agreement with IndemCo that guarantees
payment of any liabilities incurred by IndemCo.  Dolphin Direct Equity
Partners, LP co-signed the Payment and Indemnity Agreement, thereby becoming
jointly and severally liable with Tengasco for the obligations to IndemCo and
also provided $6.5 million in collateral in the form of cash and a letter of
credit to IndemCo.  Dolphin Direct Equity Partners is a private equity
fund controlled by Peter E. Salas that has a significant economic interest in
Hoactzin.





As
operator, the Company will routinely contract in its name for goods and services
with vendors in connection with its operation of the Hoactzin
properties.  In practice, Hoactzin pays directly these invoices for
goods and services that are contracted in the Company’s name.  At
December 31, 2009, no vendor payables related to the Management Agreement were
recorded by the Company because the amounts were
insignificant.  During the first quarter of 2010, Hoactzin undertook
several significant operations, for which Tengasco contracted in the ordinary
course.  Payables related to these and ongoing operations remained
outstanding at the end of the first quarter 2010 in the amount of
$1,708,000.  Because this amount is material, the Company has recorded
the Hoactzin-related payables and the corresponding receivable from Hoactzin as
of March 31, 2010 under “Accounts payable – other” and “Accounts
receivable-related party”.  The Company has neither made any payments
to vendors from its own funds nor incurred any other losses related to the
execution of its duties under the Management Agreement.


14
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


(6)  Deferred
Conveyance/Prepaid Revenues





The
Company has adopted a deferred conveyance/prepaid revenues presentation of the
transactions between the Company and Hoactzin Partners, L.P. on September 17,
2007 to more clearly present the effects of the three-part transaction
consisting of the Ten Well Program, the Methane Project and a contingent
exchange option agreement.  To reflect the deferred conveyance, the
Company allocated $0.85 million of the $3.85 million Purchase Price paid by
Hoactzin for its interest in the Ten Well Program to the Methane Project, based
on a relative fair value calculation of the Methane Project’s portion of the
projected payout stream of the combined two projects as seen at the inception of
the agreement, utilizing then current prices and anticipated time periods when
the Methane Project would come on stream.  The Ten Well Program at
inception was $2.95 million and the prepaid revenues were $0.85
million.





The
Company has established separate deferred conveyance and prepaid revenue
accounts for the Ten Well Program and the Methane Project.  Release of
the deferred amounts to the Ten Well Program will be made as proceeds are
actually distributed to Hoactzin.  Release will be made on the
respective proceeds only as to each project until either one or both satisfy the
threshold amount that removes the contingent equity exchange
option.  The prepaid revenues will be released using the units of
production method.





The
reserve information for the parties’ respective Ten Well Program interests as of
December 31, 2009 is indicated in the table below. Reserve reports are obtained
annually and estimates related to those reports are updated upon receipt of the
report.   These calculations were made using commodity prices
based on the twelve month arithmetic average of the first day of the month price
for the period January through December 2009 as required by SEC regulations. The
table below reflects eventual pay as occurring through the realization of
proceeds at prices used in the reserve report dated December 31, 2009 of
approximately $53.81 per barrel.





Reserve
Information for Ten Well Program Interests


For
Year Ended December 31, 2009





Barrels
      Attributable to Party’s Interest
              MBbl
            Future
      Cash Flows Attributable to Party’s Interest
              (in
      thousands)
            Present
      Value of Future Cash Flows Attributable to Party’s Interest
              (in
      thousands)Tengasco
            29.5
            $    706
            $    432Hoactzin
      Partners, L.P.
            88.5
            $ 2,118
            $ 1,295





As of
March 31, 2010, the original invested amount of $3.85 million has been reduced
to $1.1 million.  This amount is the total of the deferred conveyance
of $0.3 million and the prepaid revenue account of $0.85 million. Hoactzin’s
first right to convert its invested amount of $3.85





15
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


million
into preferred stock is only exercisable to the extent Hoactzin’s investment has
not been reduced by 25% by the end of 2009. For each year after 2010 in which
Hoactzin’s then-unrecovered invested amount at the beginning of the year is not
reduced 20% further by the end of that year, Hoactzin has a similar
option.  Consequently, Hoactzin is already precluded by these results
from any possibility of exercising its contingent option under the exchange
agreement to convert into preferred stock until the year ending December 31,
2011 at the earliest. All of the $2.5 million paid from the program has been
from the Ten Well Program and the deferred conveyance account has been reduced
from $3 million to $0.3 million.





As noted,
in future periods, the Company anticipates that this Hoactzin investment will
continue to be further reduced by sales of oil produced from the Ten Well
Program, or methane produced from the Methane Project, or
both.   From inception of the project through December 31, 2010,
the Company projects that the original $3.85 million Purchase Price will be
reduced by 82% to $0.7 million.  For the year ending December 31,
2011, the amount is projected to be reduced to zero. As a result, Hoactzin’s
contingent option to exchange for preferred stock would fully terminate without
any further annual reduction tests.  These projections are based upon
expected production levels from the oil wells in the Ten Well Program and an
estimated 400 Mcf/day production from the Methane Project using $53.81 oil
prices and a $5 per Mcf gas sales price net of operating
expenses.   The projection will vary with the actual oil and gas
prices, production volumes, and expenses experienced in 2010 and
2011.  Based on these projections the Company considers that it is a
remote contingency that any right of Hoactzin to elect to exchange its Methane
Project interest for Company preferred stock will ever arise. However, in the
event of a conversion of Hoactzin’s Methane Project interest for Company
preferred stock as set out in limited circumstances in the applicable agreement,
and which the Company anticipates is highly unlikely, there would be a debit to
the deferred conveyance liability and the prepaid revenue account for both the
Ten Well Program and Methane Project because no contingent option would remain
on such a conversion and the Company would simultaneously credit preferred stock
in the converted amount.





In the
event of the termination of the option to convert into preferred stock because
the $3.85 million has been repaid from the Ten Well Program or Methane Project
or both, the applicable oil and gas properties will be deemed to have been fully
conveyed to Hoactzin and the Ten Well Program account, will be credited and the
liability will be removed, as at this time the price received for the program
will be fixed and determinable.





(7)
    Oil and Gas Properties





The
following table sets forth information concerning the Company’s oil and gas
properties (in thousands):


16
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


March
      31, 2010
            December
      31, 2009Oil
      and gas properties, at cost
            $    24,448
            $    24,182Unevaluated
      properties
            140
            109Accumulated
      depreciation
            (12,289)
            (11,931)Oil
      and gas properties, net
            $    12,299
            $    12,360





The
Company recorded $0.4 million in depletion expense for the first three months of
2010 and $0.3 million in the first three months of 2009.





(8)
    Asset Retirement Obligation





The
Company follows the requirements of FASB ASC 410, “Asset Retirement Obligations
and Environmental Obligations”.  Among other things, FASB ASC 410
requires entities to record a liability and corresponding increase in long-lived
assets for the present value of material obligations associated with the
retirement of tangible long-lived assets. Over the passage of time, accretion of
the liability is recognized as an operating expense and the capitalized cost is
depleted over the estimated useful life of the related asset.  The
Company’s asset retirement obligations relate primarily to the plugging,
dismantling and removal of wells drilled to date. The Company’s calculation of
Asset Retirement Obligation used a credit-adjusted risk free rate of 12%, when
the original liability for wells drilled prior to 2009 was recognized. In 2009,
the retirement obligation for the Albers #2 SWD was recognized using a current
credit adjusted risk free rate of 8%. During the quarter ended March 31, 2010,
the retirement obligations for the Veverka C#2 and Ververka B#3 were recognized
using a credit adjusted risk free rate of 8%.  In addition, the
Iannitti #2, #3 and #8, and the Urban K#7 were plugged and therefore removed
from the Asset Retirement Obligation liability.





The
Company used an estimated useful life of wells ranging from 10-40 years and an
estimated plugging and abandonment cost of $5,000 per well. Management continues
to periodically evaluate the appropriateness of these assumptions





(9)
    Restricted Cash





As
security required by Tennessee oil and gas regulations, the Company placed
$120,500 in a Certificate of Deposit to cover future asset retirement
obligations for the Company’s Tennessee wells.





(10)Bank
Debt





The
Company has a revolving credit facility with Sovereign Bank of Dallas, Texas
(“Sovereign”).  Under the facility, loans and letters of credit are
available to the Company on a revolving basis in an amount outstanding not to
exceed the lesser of $20 million or the Company’s borrowing base in effect from
time to time. The Sovereign facility is secured by substantially all of the
Company’s producing and non-producing oil and gas properties
and


17
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


pipeline
and the Company’s Methane Project assets.  The credit facility
includes certain covenants in which the Company is required to
comply.  These covenants include leverage, interest coverage, minimum
liquidity, and general and administrative coverage ratios.  The
Company’s initial borrowing base with Sovereign was set at $7.0
million.  On June 2, 2008, the Company’s borrowing base was raised by
Sovereign as a result of its review of the Company’s owned producing properties
to $11 million at that time the interest rate was set to the greater of prime
plus 0.25% or 6% per annum. On January 19, 2009 the Company entered into an
amendment to its credit facility which established a monthly commitment
reduction of $0.15 million.





As of
September 30, 2009, the Company was out of compliance on the Leverage Ratio and
Interest Coverage Ratio covenants under the credit facility. The Company was in
compliance with the remaining financial covenants under the credit
facility.  The noncompliance occurred primarily as a result of the low
commodity prices in the last quarter of 2008 and first and second quarters of
2009 that are included in the covenant compliance calculations.  The
Company received a waiver from Sovereign Bank for noncompliance of these
covenants for the quarter ended September 30, 2009. As of March 31, 2010, the
Company was in compliance with all covenants.  There can be no
assurances that Sovereign Bank will waive noncompliance of covenants should
future instances occur.





On
February 23, 2010, the Company entered into an amendment to its credit facility
which reduced the monthly commitment reduction from $0.15 million to $0.1
million.  The amendment also changed the maturity date to June 30,
2011.





The next
borrowing base review will take place in June 2010.  The total
borrowing by the Company under the facility at March 31, 2010 and 2009 was $9.9
million.





(11)
    Methane Project





On
October 24, 2006, the Company signed a twenty-year Landfill Gas Sale and
Purchase Agreement (the “Agreement”) with BFI Waste Systems of Tennessee, LLC
(“BFI”), an affiliate of Allied Waste Industries (“Allied”). In 2008, Allied
merged into Republic Services, Inc. (“Republic”). The Company assigned its
interest in the Agreement to MMC and provides that MMC will purchase the entire
naturally produced gas stream being collected at the Carter Valley municipal
solid waste landfill owned and operated by Republic in Church Hill, Tennessee
serving the metropolitan area of Kingsport, Tennessee.  Republic’s
facility is located about two miles from the Company’s pipeline.  The
Company installed a proprietary combination of advanced gas treatment technology
to extract the methane component of the purchased gas stream.  Methane is
the principal component of natural gas and makes up about half of the purchased
raw gas stream by volume.  The Company has constructed a pipeline to
deliver the extracted methane gas to the Company’s existing pipeline (the
“Methane Project”).





The total
cost for the Methane Project, including pipeline construction, was approximately
$4.5 million.  Methane gas produced by the project facilities was
initially mixed in


18
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


the
Company’s pipeline and delivered and sold to Eastman under the terms of the
Company’s natural gas purchase and sale agreement with Eastman. At current gas
production rates in the landfill itself and expected extraction efficiencies,
the Company estimates it will be able to produce and deliver about 400 Mcfd of
methane sales gas.  The gas supply from this landfill is projected to
grow over the years as the underlying operating landfill continues to expand and
generate additional naturally produced gas, and for several years following the
closing of the landfill, estimated by Republic to occur in 2041.  Gas
production is expected to continue in commercial quantities up to 10 years after
closure of the landfill.





On August
27, 2009, the Company entered into a five-year fixed price gas sales contract
with Atmos Energy Marketing, LLC, (“AEM”) in Houston, Texas, a nonregulated unit
of Atmos Energy Corporation (NYSE: ATO) for the sale of the methane component of
landfill gas produced by MMC at the Carter Valley Landfill.  The
agreement provides for the sale of up to 600 MMBtu per day.  The
contract was effective September 1, 2009 and ends July 31, 2014. The agreed
contract price of over $6 per MMBtu was a premium to the then current five-year
strip


price for
natural gas on the NYMEX futures market.  MMC’s plant is capable of
producing a daily average of approximately 400 Mcf of methane from the Carter
Valley landfill at current raw gas volumes.  During the quarter ended
March 31, 2010, MMC averaged 67% uptime days and production of 329 Mcfd during
the uptime period.  Uptime was 39%, 61%, and 100% for January 2010,
February 2010, and March 2010 respectively.  Production during the
uptime days was 276 Mcfd, 320 Mcfd, and 354 Mcfd for January 2010, February
2010, and March 2010 respectively.





(12)   Fair
Value Measurements





FASB ASC
820, “Fair Value Measurements and Disclosures”, establishes a framework for
measuring fair value. That framework provides a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markers for identical assets and liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels
of the fair value hierarchy under FASB ASC 820 are described as
follows:





Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical
assets or liabilities in active markets. Level 2 Inputs to the valuation
methodology include:





·
            Quoted
      prices for similar assets or liabilities in active markets; Quoted prices
      for identical or similar assets or liabilities in inactive
      markets;


·
            Inputs
      other than quoted prices that are observable for the asset or
      liability;


·
            Inputs
      that are derived principally from or corroborated by observable market
      data by correlation or other means.





If the
asset or liability has a specified (contractual) term, the Level 2 input must be
observable for substantially the full term of the asset or
liability.


19
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


Level 3
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.





The
assets or liabilities fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize the use of
observable inputs and minimize the use of unobservable inputs.





The
methods described above may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values.
Furthermore, although the Company believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at the reporting
date.





The
following table sets forth by level, within the fair value hierarchy, the
Company’s liabilities at fair value as of March 31, 2010. (in
thousands)





Level
      1
            
            Level
      2
            
            Level
      3Derivative
      liabilities
            $-
            
            $1,151
            
            $ -Total
      liabilities at fair value
            $
      -
            
            $1,151
            
            $-





(13)   Derivatives





On July
28, 2009 the Company entered into a two-year agreement on crude oil pricing
applicable to a specified number of barrels of oil that currently constitutes
approximately two-thirds of the Company’s daily production.





This
“costless collar” agreement was effective beginning August 1, 2009 and has a
$60.00 per barrel floor an $81.50 per barrel cap on a volume of 9,500 barrels
per month during the period from August 1, 2009 through December 31, 2010, and
7,375 barrels per month from January 1 through July 31, 2011. The prices
referenced in this agreement are WTI NYMEX. While the agreement is based on WTI
NYMEX prices, the Company receives a price based on Kansas Common plus bonus,
which results in approximately $7 per barrel less than current WTI NYMEX
prices.





Under the
“costless collar” agreement, no payment would be made or received by the
Company, as long as the settlement price is between the floor price and cap
price (“within the collar”).  However, if the settlement price is
above the cap, the Company would be required to pay the counterparty an amount
equal to the excess of the settlement price over the cap times the monthly
volumes hedged.


20
 
 Tengasco,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements


Also, if
the settlement price is below the floor, the counterparty would be required to
pay the Company the deficit of the settlement price below the floor times the
monthly volumes hedged.





This
agreement is primarily intended to help maintain and stabilize cash flow from
operations if lower oil prices return, while providing at least some upside if
prices increase above the cap.  If lower oil prices return, this
agreement may allow the Company to maintain production levels of crude oil by
enabling the Company to perform some ongoing polymer or other workover
treatments on then existing producing wells in Kansas.





As of
March 31, 2010, the Company’s open forward positions on our outstanding
“costless collar” agreement, all of which are with Macquarie Bank Limited
(“Macquarie”), were as follows:





Period
            Monthly
      Volume
            Total
      Volume
            Floor/Cap
      NYMEX
            Fair
      Value at
              March
      31, 2010Oil
      (Bbls)
            Oil
      (Bbls)
            $
      per Bbl
            (in
      thousands)2nd
      Qtr 2010
            9,500
            28,500
            $60.00-$81.50
            $        (133)3rd
      Qtr 2010
            9,500
            28,500
            $60.00-$81.50
            $        (219)4th
      Qtr 2010
            9,500
            28,500
            $60.00-$81.50
            $        (263)1st
      Qtr 2011
            7,375
            22,125
            $60.00-$81.50
            $       
      (222)2nd
      Qtr 2011
            7,375
            22,125
            $60.00-$81.50
            $        (234)3rd
      Qtr 2011
            7,375
            7,375
            $60.00-$81.50
            $         
      (80)$     (1,151)Current
      Liability
            $        (837)Non-current
      Liability
            $        (314)





The Fair
Value amounts noted in the above table are based on valuations provided by
Macquarie.  Management has engaged Risked Revenue Energy Associates to
perform an independent valuation which confirmed the amounts provided by
Macquarie.  The Company records changes in the unrealized derivative
asset or liability as an unrealized gain or loss in the Consolidated Statements
of Operations.





Through
March 31, 2010, no settlement payment has been required under the agreement as
WTI NYMEX prices through that date remained within the collar.





ITEM
2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Results
of Operations and Financial
Condition





During
the first three months of 2010, the Company sold 48 gross MBbl of oil from its
Kansas Properties comprised of 186 producing oil wells. Of the 48 MBbl, 35 MBbl
were


21
 
 Tengasco,
Inc. and Subsidiaries


net to
the Company after required payments to all of the drilling program participants
and royalty interests.  The Company’s net sales for the first three
months of 2010 of 35 MBbl of oil compares to 48 MBbl sold to the Company’s
interest in the first three months of 2009. The Company’s net revenues from the
Kansas properties were $2.5 million in the first three months of 2010 compared
to $1.7 million in 2009. This increase was due to an increase in oil prices from
an average of $35.74 per barrel in 2009 to an average of $71.24 in 2010
partially offset by a 13MBbl reduction in sales in volumes in
2010.  The Company’s sales from Tennessee included $0.1 million from
Swan Creek and $0.1 million from Manufactured Methane sales.





Comparison
of the Quarters Ended March 31, 2010 and 2009.





The
Company recognized $2.9 million in revenues during the first quarter of 2010
compared to $1.9 million in the first quarter of 2009. The increase in revenues
was due to an increase in oil prices in 2010 partially offset by a decrease in
oil sales volumes.  Kansas oil prices in the first quarter of 2010
averaged $71.24 per barrel compared to $35.74 per barrel in the first quarter of
2009. The Company realized net income attributable to common shareholders of
$0.3 million or $0.00 per share of common stock during the first quarter of
2010, compared to a net loss in the first quarter of 2009 to common shareholders
of $(0.4) million or $(0.01) per share of common stock. In the first quarter of
2010, the Company had income from operations of $0.4 million compared to a loss
from operations of $(0.2) million in the first quarter of 2009. Production costs
and taxes in the first quarter of 2010 increased to $1.3 million from $1.1
million in the first quarter of 2009.





Depreciation,
depletion, and amortization expense was $0.52 million and $0.48 million for the
first quarters of 2010 and 2009, respectively.





General
and administrative, public relations, and professional fees were $0.6 million
for both the first quarter of 2010 and 2009.





During
the first quarter 2010, the Company recorded a $0.2 million non-cash unrealized
gain on derivatives.  Interest expense was $0.18 million and $0.15
million for the first quarter of 2010 and 2009,
respectively.  Interest expense in 2010 included amortization of loan
cost.





Liquidity
and Capital Resources





The
Company has a revolving credit facility with Sovereign Bank of Dallas, Texas
(“Sovereign”).  Under the facility, loans and letters of credit are
available to the Company on a revolving basis in an amount outstanding not to
exceed the lesser of $20 million or the Company’s borrowing base in effect from
time to time. The Sovereign facility is secured by substantially all of the
Company’s producing and non-producing oil and gas properties and pipeline and
the Company’s Methane Project assets.  The credit facility includes
certain covenants in which the Company is required to comply. These covenants
include leverage, interest coverage, minimum liquidity, and general and
administrative coverage ratios.  The Company’s initial borrowing base
with Sovereign was set at $7.0 million. On June 2, 2008





22
 
 Tengasco,
Inc. and Subsidiaries


the
Company’s borrowing base was raised by Sovereign as a result of its review of
the Company’s owned producing properties to $11 million at that time the
interest rate was set to the greater of prime plus 0.25% or 6% per
annum.  On January 19, 2009 the Company entered into an amendment to
its credit facility which established a monthly commitment reduction of $0.15
million.





As of
September 30, 2009, the Company was out of compliance on the Leverage Ratio and
Interest Coverage Ratio covenants under the credit facility. The Company was in
compliance with the remaining financial covenants under the credit
facility.  The noncompliance occurred primarily as a result of the low
commodity prices in the last quarter of 2008 and first and second quarters of
2009 that are included in the covenant compliance calculations.  The
Company received a waiver from Sovereign Bank for noncompliance of these
covenants for the quarter ended September 30, 2009. As of March 31, 2010, the
Company was in compliance with all covenants.  There can be no
assurances that Sovereign Bank will waive noncompliance of covenants should
future instances occur.





On
February 23, 2010, the Company entered into an amendment to its credit facility
which reduced the monthly commitment reduction from $0.15 million to $0.1
million.  The amendment also changed the maturity date to June 30,
2011.





The next
borrowing base review will take place in June 2010.  The total
borrowing by the Company under the facility at March 31, 2010 and 2009 was $9.9
million.





Although
the Company has not been required as of the date of this Report to make any
payment of principal, the Company can make no assurance that in view of the
conditions in the national and world economies, including the realistic
possibility of low commodity prices, that Sovereign will not in the future make
a redetermination of the Company’s borrowing base to a point below the level of
current borrowings.  In such event, Sovereign may require installment
or other payments in such amount in order to reduce the principal of the
Company’s outstanding borrowing to a level not in excess of the borrowing base
as it may be redetermined.





During
2009 and 2010, the Company remained focused on production and carefully used its
cash flow and available credit to do so.  However, the Company can
make no assurance that it can continue normal operations indefinitely or for any
specific period of time in the event of extended periods of low commodity
prices, such as occurred in late 2008 and early 2009, or upon the occurrence of
any significant downturn or losses in operations.  In such event, the
Company may be required to reduce costs of operations by various means,
including not undertaking certain maintenance or reworking operations that may
be necessary to keep some of the Company’s properties in production or to seek
additional working capital by additional means such as issuance of equity
including preferred stock or such other means as may be considered and
authorized by the Company’s Board of Directors from time to time.





During
the first quarter, net cash provided by operating activities was $0.56 million
in 2010 and $0.51 million in 2009.  The increase of cash provided by
operating activities from 2009





23
 
 Tengasco,
Inc. and Subsidiaries


to 2010
was primarily due to higher product prices received during 2010 compared to 2009
partially offset by changes to working capital.  Cash flow used for
working capital was $0.3 in 2010.  Cash provided by working capital
was $0.4 million in 2009.  Net cash used in investing activities was
$0.5 million in 2010 and $0.3 million in 2009.  The increase in
investing activities was primarily due to drilling and polymer work performed in
2010





In the
first quarter of 2010 and 2009 no significant cash was provided by or used in
financing activities.





Critical
Accounting Policies





The
Company prepares its Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America, which
require the Company to make estimates and assumptions that affect 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 year.  Actual results could differ
from those estimates.  The Company considers the following policies to
be the most critical in understanding the judgments that are involved in
preparing the Company financial statements and the uncertainties that could
impact the Company’s results of operations, financial condition and cash
flows.





Revenue
Recognition





The
Company recognizes revenues based on actual volumes of oil and gas sold and
delivered to its customers.  Natural gas meters are placed at the
customer’s location and usage is billed each month.  Crude oil is
stored and at the time of delivery to the purchasers, revenues are
recognized.





Inventory





Inventory
consists of crude oil in tanks and is carried at lower of cost or market
value.





Full
Cost Method of Accounting





The
Company follows the full cost method of accounting for oil and gas property
acquisition, exploration and development activities.  Under this
method, all productive and non-productive costs incurred in connection with the
acquisition of, exploration for and development of oil and gas reserves for each
cost center are capitalized.  Capitalized costs include lease
acquisitions, geological and geophysical work, day rate rentals and costs of
drilling, completing and equipping oil and gas wells.





Costs,
however, associated with production and general corporate activities are
expensed in the period incurred.  Interest costs related to unproved
properties and properties under development are also capitalized to oil and gas
properties.


24
 
 Tengasco,
Inc. and Subsidiaries


Gains or
losses are recognized only upon sales or dispositions of significant amounts of
oil and gas reserves representing an entire cost center.  Proceeds
from all other sales or dispositions are treated as reductions to capitalized
costs.  The capitalized oil and gas property, less accumulated
depreciation, depletion and amortization and related deferred income taxes, if
any, are generally limited to an amount (the ceiling limitation) equal to the
sum of: (a) the present value of estimated future net revenues computed by
applying commodity prices based on the twelve month arithmetic average of the
first of the month price to estimated future production of proved oil and gas
reserves, less estimated future expenditures (based on current costs) to be
incurred in developing and producing the reserves using a discount factor of 10%
and assuming continuation of existing economic conditions; and (b) the cost of
investments in unevaluated properties excluded from the costs being
amortized.





Oil
and Gas Reserves/Depletion Depreciation and Amortization of Oil and Gas
Properties





The
capitalized costs of oil and gas properties, plus estimated future development
costs relating to proved reserves and estimated costs of plugging and
abandonment, net of costs relating to proved reserves and estimated costs of
plugging and abandonment, net of estimated salvage value, are amortized on the
unit-of-production method based on total proved reserves.  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’s proved oil and gas reserves as of December 31, 2009 were determined by
LaRoche Petroleum Consultants, Ltd.  Projecting the effects of
commodity prices on production, and timing of development expenditures includes
many factors beyond the Company’s control.  The future estimates of
net cash flows from the Company’s proved reserves and their present value are
based upon various assumptions about future production levels, prices, and costs
that may prove to be incorrect over time.  Any significant variance
from assumptions could result in the actual future net cash flows being
materially different from the estimates.





Asset
Retirement Obligations





The
Company follows the requirements of FASB ASC 410, “Asset Retirement Obligations
and Environmental Obligations”.  Among other things, FASB ASC 410
requires entities to record a liability and corresponding increase in long-lived
assets for the present value of material obligations associated with the
retirement of tangible long-lived assets. Over the passage of time, accretion of
the liability is recognized as an operating expense and the capitalized cost is
depleted over the estimated useful life of the related asset.  The
Company’s asset retirement obligations relate primarily to the plugging,
dismantling and removal of wells





25
 
 Tengasco,
Inc. and Subsidiaries


drilled
to date. The Company’s calculation of Asset Retirement Obligation used a
credit-adjusted risk free rate of 12%, when the original liability for wells
drilled prior to 2009 was recognized. In 2009, the retirement obligation for the
Albers #2 SWD was recognized using a current credit adjusted risk free rate of
8%. During the quarter ended March 31, 2010, the retirement obligations for the
Veverka C#2 and Ververka B#3 were recognized using a credit adjusted risk free
rate of 8%.  In addition, the Iannitti #2, #3 and #8, and the Urban
K#7 were plugged and therefore removed from the Asset Retirement Obligation
liability.  The Company used an estimated useful life of wells ranging
from 10-40 years and an estimated plugging and abandonment cost of $5,000 per
well. Management continues to periodically evaluate the appropriateness of these
assumptions





ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS





The Company’s Borrowing Base under
its Credit Facility may be reduced by Sovereign Bank.







The
borrowing base under the Company’s revolving credit facility with Sovereign Bank
will be determined from time to time by the lender, consistent with its
customary natural gas and crude oil lending
practices.   Reductions in estimates of the Company’s natural gas
and crude oil reserves could result in a reduction in the Company’s borrowing
base, which would reduce the amount of financial resources available under the
Company’s revolving credit facility to meet its capital requirements. Such a
reduction could be the result of lower commodity prices or production, inability
to drill or unfavorable drilling results, changes in natural gas and crude oil
reserve engineering, the lenders’ inability to agree to an adequate borrowing
base or adverse changes in the lenders’ practices regarding estimation of
reserves.   If cash flow from operations or the Company’s
borrowing base decrease for any reason, the Company’s ability to undertake
exploration and development activities could be adversely affected.





As a
result, the Company’s ability to replace production may be limited. In addition,
if the borrowing base is reduced, it would be required to pay down its
borrowings under the revolving credit facility so that outstanding borrowings do
not exceed the reduced borrowing base. This requirement could further reduce the
cash available to the Company for capital spending and, if the Company did not
have sufficient capital to reduce its borrowing level, could cause the Company
to default under its revolving credit facility with Sovereign
Bank.  As of March 31, 2010, the Company’s current borrowing base is
set at 10.9 million dollars of which 9.9 million has been drawn down by the
Company. The Company’s next periodic borrowing base review is scheduled to occur
in June 2010.





Commodity
Risk





The
Company's major market risk exposure is in the pricing applicable to its oil and
gas production. Realized pricing is primarily driven by the prevailing worldwide
price for crude oil and spot prices applicable to natural gas
production.  Historically, prices received for oil and gas production
have been volatile and unpredictable and price volatility is expected to
continue.





26
 
 Tengasco,
Inc. and Subsidiaries


Monthly
Kansas oil prices during the first three months of 2010 ranged from a low of
$69.03 per barrel to a high of $73.87 per barrel.   Swan Creek
gas prices ranged from a monthly low of $4.81 per Mcf to a monthly high of $5.82
per Mcf during the same period.   In order to help mitigate
commodity price risk, the Company has entered into a long term fixed price
contract for MMC gas sales.  In addition the Company has entered into
a derivative agreement on a specified number of barrels of oil that currently
constitutes about two-thirds of the Company’s daily production.





On August
27, 2009, the Company entered into a five-year fixed price gas sales contract
with Atmos Energy Marketing, LLC, (“AEM”) in Houston, Texas, a nonregulated unit
of Atmos Energy Corporation (NYSE: ATO) for the sale of the methane component of
landfill gas produced by MMC at the Carter Valley Landfill.  The
agreement provides for the sale of up to 600 MMBtu per day.  The
contract is effective beginning with September 2009 gas production and ends July
31, 2014.  The agreed contract price of over $6 per MMBtu was a
premium to the then current five-year strip price for natural gas on the NYMEX
futures market.





On July
28, 2009 the Company entered into a two-year agreement on crude oil pricing
applicable to a specified number of barrels of oil that currently constitutes
about two-thirds of the Company’s daily production.  This “costless
collar” agreement was effective beginning August 1, 2009 and has a $60.00 per
barrel floor and $81.50 per barrel cap on a volume of 9,500 barrels per month
during the period from August 1, 2009 through December 31, 2010, and 7,375
barrels per month from January 1 through July 31, 2011. The prices referenced in
this agreement are WTI NYMEX.  While the agreement is based on WTI
NYMEX prices, the Company receives a price based on Kansas Common plus bonus,
which results in approximately $7 per barrel less than current WTI NYMEX
prices.





Under a
“costless collar” agreement, no payment would be made or received by the
Company, as long as the settlement price is between the floor price and cap
price (“within the collar”).  However, if the settlement price is
above the cap, the Company would be required to pay the counterparty an amount
equal to the excess of the settlement price over the cap times the monthly
volumes hedged.  Also, if the settlement price is below the floor, the
counterparty would be required to pay the Company the deficit of the settlement
price below the floor times the monthly volumes hedged.





This
agreement is primarily intended to help maintain and stabilize cash flow from
operations if lower oil prices return, while providing some upside if prices
increase above the cap.  If lower oil prices return, this agreement
may help to maintain the Company’s production levels of crude oil by enabling
the company to perform some ongoing polymer or other workover treatments on
then-existing producing wells in Kansas.





The
Company did not enter into any new hedging agreements in the first quarter of
2010 to limit exposure to oil and gas price fluctuations.


27
 
 Tengasco,
Inc. and Subsidiaries


Interest
Rate Risk





At March
31, 2010, the Company had debt outstanding of $10.2 million including, as of
that date, $9.9 million owed on its credit facility with Sovereign Bank. The
interest rate on the Sovereign credit facility is variable at a rate equal to
the greater of prime plus 0.25% or 6% per annum.  During the first
three months of 2010, all interest on credit facility borrowings was calculated
using 6%.  The Company’s debt owed to other parties of $0.3 million
has fixed interest rates ranging from 5.5% to 8.25%.  The annual
impact on interest expense and the Company’s cash flows of a 10 percent increase
in the interest rate on the Sovereign Credit facility would be approximately
$59,400 assuming borrowed amounts under the Sovereign credit facility remained
at the same amount owed as of March 31, 2010. The Company did not have any open
derivative contracts relating to interest rates at March 31, 2009 or
2010.





Forward-Looking
Statements and Risk





Certain
statements in this report, including statements of the future plans, objectives,
and expected performance of the Company, are forward-looking statements that are
dependent upon certain events, risks and uncertainties that may be outside the
Company's control, and which could cause actual results to differ materially
from those anticipated. Some of these include, but are not limited to, the
market prices of oil and gas, economic and competitive conditions, inflation
rates, legislative and regulatory changes, financial market conditions,
political and economic uncertainties of foreign governments, future business
decisions, and other uncertainties, all of which are difficult to predict. There
are numerous uncertainties inherent in projecting future rates of production and
the timing of development expenditures. The total amount or timing of actual
future production may vary significantly from estimates. The drilling of
exploratory wells can involve significant risks, including those related to
timing, success rates and cost overruns. Lease and rig availability, complex
geology and other factors can also affect these risks. Additionally,
fluctuations in oil and gas prices, or a prolonged period of low prices, may
substantially adversely affect the Company's financial position, results of
operations, and cash flows.





ITEM
4T.     CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





The
Company’s Chief Executive Officer and Principal Financial Officer, and other
members of management team have evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)). Based on such evaluation, the Company’s Chief Executive Officer
and Principal Financial Officer have concluded that the Company’s disclosure
controls and procedures, as of the end of the period covered by this Report,
were adequate and effective to provide reasonable assurance that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act, is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. The effectiveness of a
system of disclosure controls and procedures


28
 
 Tengasco,
Inc. and Subsidiaries


is
subject to various inherent limitations, including cost limitations, judgments
used in decision making, assumptions about the likelihood of future events, the
soundness of internal controls, and fraud. Due to such inherent limitations,
there can be no assurance that any system of disclosure controls and procedures
will be successful in preventing all errors or fraud, or in making all material
information known in a timely manner to the appropriate levels of
management.





Changes
in Internal Controls





During
the period covered by this report, there have been no changes to the Company’s
system of internal controls over financial reporting that have materially
affected, or is reasonably likely to materially affect, the Company’s system of
controls over financial reporting.





As part
of a continuing effort to improve the Company’s business processes, management
is evaluating its internal controls and may update certain controls to
accommodate any modifications to its business processes or accounting
procedures.





PART
II OTHER INFORMATION





ITEM
1.     LEGAL MATTERS





None








ITEM
1A.    RISK FACTORS





Refer to Item 1A Risk Factors in the
Company’s Report on Form 10K for the year ended December 31, 2009 filed on March
31, 2010 which is incorporated by this reference.








ITEM
2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS





None








ITEM
3.    DEFAULT UPON SENIOR SECURITIES





None








ITEM
4.    (REMOVED AND RESERVED)





ITEM
5.     OTHER INFORMATION





None


29
 
 Tengasco,
Inc. and Subsidiaries





ITEM
6.   EXHIBITS





The
following exhibits are filed with this report:





31.1
Certification of the Chief Executive Officer, pursuant to Exchange Act Rule,
Rule 13a-14a/15d-14a.





31.2
Certification of Chief Financial Officer, pursuant Exchange Act Rule, Rule
13a-14a/15d-14.





32.1
Certification of the Chief Executive Officer, pursuant to 18 U.S.C Section 1350
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.





32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.





30
 
 Tengasco,
Inc. and Subsidiaries


SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
duly caused this report to be signed on its behalf by the undersigned hereto
duly authorized.





Dated:
May 17, 2010





TENGASCO,
INC.








By:   S/Jeffrey R.
Bailey


Jeffrey R. Bailey


Chief Executive Officer











By: S/Michael J.
Rugen


Michael J. Rugen


Chief Financial
Officer


31


Exhibit
31.1   CERTIFICATION





I,
Jeffrey R. Bailey, certify that:





1. I have reviewed this Quarterly
Report on Form 10-Q of Tengasco, Inc. for the quarter ended March 31,
2010.





2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;





3. Based on my knowledge, the financial
statements, and other information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;





4. The registrant’s other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-(f) for the registrant and we have:





(a)
            designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;





(b)
            designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





(c)
            evaluated
      the effectiveness of the registrant’s disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





(d)
            disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter ( the registrant’s fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and





5. The
Registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):





(a)      All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and





(b)      Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.







Dated:  May
17, 2010




By: S/Jeffrey R.
Bailey


Jeffrey
R. Bailey


Chief
Executive Officer





32





Exhibit 31.2CERTIFICATION





I,
Michael Rugen, certify that:





1. I have reviewed this Quarterly
Report on Form 10-Q of Tengasco, Inc. for the quarter March 31,
2010.





2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;





3. Based on my knowledge, the financial
statements, and other information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;





4. The registrant’s other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-(f) for the registrant and we have:





(a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;





(b)
designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;





(c)
evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and





(d)
disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter ( the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting;
and





5. The Registrant’s other certifying
officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):





(a)           All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and





(b)           Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.








Dated:
May 17, 2010





By: s/ Michael J.
Rugen


Michael
J. Rugen


Chief
Financial Officer





33


Exhibit
32.1


CERTIFICATION




Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 I hereby certify
that:






I
have reviewed the Quarterly Report on Form 10-Q for the quarter ended March 31,
2010.






To
the best of my knowledge this Quarterly Report on Form 10-Q (i) fully complies
with the requirements of section 13(a) or 15(d) of the Securities and Exchange
Act of 1934 (15 U.S.C. 78m (a) or 78o (d)); and, (ii) the information contained
in this Report fairly present, in all material respects, the financial condition
and results of operations of Tengasco, Inc. and its subsidiaries during the
period covered by this report.






Dated:
May 17, 2010











By:
      s/Jeffrey R. Bailey_
              Jeffrey
      R. Bailey
              Chief
      Executive Officer





34


Exhibit
32.2


CERTIFICATION




Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 I hereby certify
that:






I
have reviewed the Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2010.






To
the best of my knowledge this Quarterly Report on Form 10-Q (i) fully complies
with the requirements of section 13(a) or 15(d) of the Securities and Exchange
Act of 1934 (15 U.S.C. 78m (a) or 78o (d)); and, (ii) the information contained
in this Report fairly present, in all material respects, the financial condition
and results of operations of Tengasco, Inc. and its subsidiaries during the
period covered by this report.




Dated:
May 17, 2010








By:s/ Michael J. Rugen Michael J.
      Rugen
              Chief
      Financial Officer























35