Unless the context clearly indicates otherwise, references in this Quarterly Report on Form 10-Q to "Falcon," the "Company," "we," "our," "us" or similar terms refer to Falcon Minerals Corporation and its subsidiaries.

You should read the following discussion of our historical performance, financial condition and future prospects in conjunction with our unaudited financial statements and accompanying notes included herein and "Selected Financial Data," and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 13, 2020. The information provided below supplements, but does not form part of, our financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the section entitled "Risk Factors" beginning on page 17 of our Annual Report on Form 10-K filed with the SEC on March 13, 2020.

Overview

We were formed to own and acquire royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests, or ORRIs, ("Royalties") in oil and natural gas properties in North America, substantially all of which are located in the Eagle Ford Shale. These Royalties entitle the holder to a portion of the production of oil and natural gas from the underlying acreage at the sales price received by the operator, net of any applicable post-production expenses and taxes. The holder of these interests has no obligation to fund exploration and development costs, lease operating expenses or plugging and abandonment costs at the end of a well's productive life, which we believe results in low breakeven costs.

We own Royalties that entitle us to a portion of the production of oil, natural gas and NGLs from the underlying acreage at the sales price received by the operator, net of production expenses and taxes. We have no obligation to fund finding and development costs, lease operating expenses or pay capital expenditures such as plugging and abandonment costs. As such, we have historically operated with high cash margins, converting a large percentage of revenue to free cash flow, the majority of which has been distributed to our stockholders in the form of a dividend.

Recent Developments

The COVID-19 pandemic has adversely affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. To protect the health and well-being of our workforce in the wake of COVID-19, we have implemented remote work arrangements for all employees. We do not expect these arrangements to impact our ability to maintain operations.

The impact of the COVID-19 pandemic and geopolitical events that increased the supply of low-priced oil have also negatively affected the oil and natural gas business environment, significantly reducing prices of oil, natural gas, and NGLs. Our revenues and operating results depend significantly upon the prevailing prices for oil and natural gas. The current price environment may cause some of our operators' wells to become uneconomic, which may result in the future, in suspension of production from those wells or a significant reduction in or no royalty revenues from existing production. Some operators may also attempt to shut in producing wells and avoid lease termination or payment of shut-in royalties by claiming force majeure, if provided for in the applicable lease. Because these events have happened so recently, and no operator has, to our knowledge claimed force majeure, we have not been able to quantify their impact on our future revenues.

In a prolonged period of low commodity prices, we may be required to impair certain oil and gas producing properties and the borrowing base under our Credit Facility could be further reduced. In light of the challenging business environment and uncertainty caused by the pandemic, the Company's Board of Directors also approved a reduction in the quarterly dividend that reflects a decrease in the payout ratio as compared to previous quarters.



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Sources of Our Revenue

Our revenues are derived from royalty payments we receive from our operators based on the sale of oil and natural gas production, as well as the sale of NGLs that are extracted from natural gas during processing. As of March 31, 2020, our Royalties represented the right to receive an average of 1.31% from the producing wells on the underlying acreage at the sales price received by our operators net of any applicable post-production expenses and taxes. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. Oil, NGLs and natural gas prices have historically been volatile, and at March 31, 2020 and December 31, 2019, we did not hedge any of our exposure to changes in commodity prices. During the year ended December 31, 2019, West Texas Intermediate posted prices that ranged from $51.55 to $63.87 per Bbl and the NYMEX monthly settlement price of natural gas ranged from $2.14 to $3.64 per MMBtu. During the three months ended March 31, 2020, the West Texas Intermediate posted prices for crude oil ranged from $30.44 to $57.86 per Bbl and the NYMEX monthly settlement price of natural gas ranged from $1.82 to $2.16 per MMBtu.



The following table presents the breakdown of our revenue for the following
periods:



                                               Three Months Ended
                                                    March 31,
                                              2020            2019
                Royalty Income:
                Oil sales                          81 %            78 %
                Natural gas sales                  12 %            16 %
                Natural gas liquids sales           7 %             6 %
                Total                             100 %           100 %




Commodity prices are inherently volatile, and changes in such prices have
historically had an impact on our revenue. The following table sets forth the
average realized prices for oil, natural gas and NGLs for the three months ended
March 31, 2020 and 2019:



                                                Three Months Ended
                                                     March 31,
                                                 2020          2019
                 Oil (Bbls)                   $    43.10      $ 59.46
                 Natural gas (Mcf)            $     1.94      $  3.29
                 Natural gas liquids (Bbls)   $    14.05      $ 18.23

The COVID-19 pandemic and related economic repercussions have resulted in a significant reduction in demand for and prices of oil, natural gas and NGLs. The effect of this was amplified late in the first quarter of 2020 when the Organization of Petroleum Exporting Countries and its broader partners ("OPEC+") were unable to reach an agreement on production levels for oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. While OPEC+ agreed in April 2020 to cut production, downward pressure on commodity prices has remained and could continue for the foreseeable future. In addition, concerns over the saturation of storage capacity for oil has further depressed prices. We expect these market conditions to result in a decline in drilling activity as operators revise their capital budgets downward and adjust their operations, including shutting in currently producing wells, in response to lower commodity prices. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related market conditions will persist.

Principal Components of Our Cost Structure

Production and Ad Valorem Taxes

Production taxes are paid on produced oil and natural gas based on a percentage of revenues from products sold at fixed rates established by federal, state and local taxing authorities. Where available, we have historically benefited from tax credits and exemptions in our various taxing jurisdictions. We also directly paid ad valorem taxes in the counties where our production was located. Ad valorem taxes were generally based on the state government's appraisal of our oil and natural gas properties.

Marketing and Transportation

Marketing and transportation expenses include the costs to process and transport our production to applicable sales points. Generally, the terms of the lease governing the development of our properties permit the operator to pass through these expenses to us by deducting a pro rata portion of such expenses from our production revenues.



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Amortization

Our Royalties are recorded at cost and capitalized as tangible assets. Acquisition costs are amortized on a units of production basis over the life of the proved reserves.

General and Administrative

General and administrative expenses are costs not directly associated with the production of oil, natural gas and NGLs and include the cost of executives and employees and related benefits (including stock-based compensation expenses), office expenses and fees for professional services. In addition, we incur incremental G&A expenses relating to be a publicly traded company, including but not limited to, expenses associated with SEC reporting requirements, including annual and quarterly reports to shareholders, tax return preparation and dividend expenses, Sarbanes-Oxley Act compliance expenses, expenses associated with listing our securities, independent auditor fees, legal expenses and investor relations expenses.

Interest Expense

We finance a portion of our working capital requirements and acquisitions with borrowings under our Credit Facility. As a result, we incur interest expense that is affected by both fluctuations in interest rates and our financing decisions. We reflect interest paid to the lenders under our credit facility in interest expense on our statement of operations. Please read "-Liquidity and Capital Resources-Indebtedness" for further details of our credit facility.

Income Tax Expense

Income taxes reflect the tax effects of transactions reported in the financial statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when assets are recovered or settled. Deferred income taxes are also recognized for tax credits that are available to offset future income taxes. Deferred income taxes are measured by applying current tax rates to the differences between financial statement and income tax reporting. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, projected future taxable income and tax planning strategies in making this assessment. We will continue to evaluate whether the valuation allowance is needed in future reporting periods. We are subject to taxation in many jurisdictions, and the calculation of our income tax liabilities involves dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. We recognize certain income tax positions that meet a more-likely-than not recognition threshold. If we ultimately determine that the payment of these liabilities will be unnecessary, we will reverse the liability and recognize an income tax benefit during the period in which we determine the liability no longer applies.



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Overview of Our Results of Operations

The following table summarizes our revenue and expenses and production data for the periods indicated (in thousands, except production data).





                                                              Three Months Ended
                                                                  March 31,
                                                            2020              2019
Revenues:
Oil and gas sales                                       $      13,600     $     21,258
Expenses:
Production and ad valorem taxes                                   854            1,128
Marketing and transportation                                      397              784
Amortization of royalty interests in oil and natural            3,674            3,511
gas properties
General, administrative and other                               3,073            2,504
Total operating expenses                                        7,998            7,927
Operating income                                                5,602           13,331
Other income (expense):
Other income                                                       31               31
Interest expense                                                 (680 )           (654 )
Total other income (expense)                                     (649 )           (623 )
Income before income taxes                                      4,953           12,708
Provision for income taxes                                        444            1,405
Net income                                                      4,509           11,303
Net income attributable to non-controlling interests           (2,304 )         (5,921 )

Net income attributable to common shareholders $ 2,205 $ 5,382 Other Financial Data: Adjusted EBITDA (1)

$      10,057     $     16,890

(1) Adjusted EBITDA is a non-GAAP financial measure. For additional information


    regarding our calculation of Adjusted EBITDA as well as a reconciliation of
    net income to Adjusted EBITDA, please see "-Adjusted EBITDA" below.




                                                     Three Months Ended
                                                          March 31,
                                                     2020          2019
           Production Data:
           Oil (Bbls)                                253,528       274,978
           Natural gas (BOE)                         144,835       172,687
           Natural gas liquids (Bbls)                 70,474        72,891
           Combined volumes (BOE)                    468,837       520,556
           Average daily combined volume (BOE/d)       5,152         5,784
           % Oil                                          54 %          53 %

           Average sales prices:
           Oil (Bbls)                              $   43.10     $   59.46
           Natural gas (Mcf)                       $    1.94     $    3.29
           Natural gas liquids (Bbls)              $   14.05     $   18.23
           Combined per (BOE)                      $   28.70     $   39.63

           Average Costs ($/BOE):
           Production and ad valorem taxes         $    1.82     $    2.17
           Marketing and transportation expense    $    0.85     $    1.51
           General and administrative              $    6.55     $    4.81
           Interest expense, net                   $    1.45     $    1.26
           Depletion                               $    7.84     $    6.74




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Comparison of the three months ended March 31, 2020 to the three months ended March 31, 2019:

Oil and Gas Revenues

Oil and gas revenues decreased $7.7 million, or 36%, to $13.6 million for the three months ended March 31, 2020, from $21.3 million for the three months ended March 31, 2019. The decrease in oil and gas revenues was attributable to a decrease in oil and natural gas production in addition to a significant decline in realized oil and natural gas prices. We received an average price of $43.10 per Bbl of oil and $1.94 per Mcf of gas sold in the three months ended March 31, 2020 compared to $59.46 per Bbl of oil and $3.29 per Mcf of gas sold during the three months ended March 31, 2019.

Production and Ad Valorem Taxes

Production and ad valorem taxes decreased $0.3 million, or 24%, to $0.9 million for the three months ended March 31, 2020, from $1.1 million for the three months ended March 31, 2019. The decrease in production and ad valorem taxes was attributable to the decrease in oil and natural gas production partially offset by an increase in ad valorem taxes. As a percentage of revenue, production and ad valorem taxes were 6% and 5%, respectively, for the three months ended March 31, 2020 and 2019.

Marketing and Transportation Expense

Marketing and transportation expense decreased $0.4 million, or 49%, to $0.4 million for the three months ended March 31, 2020, from $0.8 million for the three months ended March 31, 2019. For the three months ended March 31, 2020 and 2019, as a percentage of revenue, marketing and transportation expense was 3% and 4%, respectively. The decrease in marketing and transportation expense as a percentage of revenue during 2020 is attributable to an increase in production from leases that are not burdened by marketing and transportation costs.

Amortization of Royalty Interests in Oil and Gas Properties Expense

Amortization of royalty interests in oil and gas properties expense increased $0.2 million, or 5%, to $3.7 million for the three months ended March 31, 2020, from $3.5 million for the three months ended March 31, 2019. The increase in amortization of royalty interests in oil and gas properties expense was primarily attributable to the impact of higher depletion rates which was partially offset by lower production. The higher depletion rates were primarily driven by decreases in estimated proved developed producing reserve quantities in the Eagle Ford as adjusted in our year-end reserve report.

General, Administrative and Other Expense

General, administrative and other expense increased $0.6 million, or 23%, to $3.1 million for the three months ended March 31, 2020, from $2.5 million for the three months ended March 31, 2019. The increase in general, administrative and other expense was attributable to an increase in stock-based compensation of $0.6 million offset by a reduction in compensation expense of $0.1 million.

Interest Expense

Interest expense increased by less than $0.1 million to $0.7 million for the three months ended March 31, 2020, from $0.7 million for the three months ended March 31, 2019. The increase in interest expense was attributable to greater average outstanding borrowings under our Credit Facility offset by a lower average interest rate.

Income Taxes

Income tax expense decreased by $1.0 million for the three months ended March 31, 2020, from $1.4 million for the three months ended March 31, 2019. The decrease in income taxes was attributed to a decrease in taxable income during the first quarter of 2020 as compared to the first quarter of 2019.

Adjusted EBITDA

Adjusted EBITDA is a supplemental non-GAAP financial measure used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to evaluate our performance and compare the results of our operations period to period without regard to our financing methods or capital structure. In addition, management uses Adjusted EBITDA to evaluate cash flow available to pay dividends to our common stockholders.

We define Adjusted EBITDA as net income plus interest expense, net, depletion expense, provision for (benefit from) income taxes and share-based compensation. Adjusted EBITDA is not a measure of net income as determined by GAAP. We exclude the items listed above from net income in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as historic costs of depreciable assets, none of which are components of Adjusted EBITDA.

Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, royalty income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.



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The following table presents a reconciliation of net income to Adjusted EBITDA,
our most directly comparable GAAP financial measure for the periods indicated
(in thousands).

                                              Three Months Ended
                                                   March 31,
                                               2020          2019
                 Net income                 $    4,509     $ 11,303
                 Interest expense, net             680          654
                 Depletion                       3,674        3,511
                 Depreciation                       26            -
                 Income taxes                      444        1,405
                 Share-based compensation          724           17
                 Adjusted EBITDA            $   10,057     $ 16,890

Liquidity and Capital Resources

Overview

Our primary sources of liquidity have historically been cash flows from operations and equity and debt financings, and our primary uses of cash are for dividends and for the acquisition of additional Royalties. We intend to finance potential future acquisitions through a combination of cash on hand, borrowings under our Credit Facility and, subject to market conditions and other factors, proceeds from one or more capital market transactions, which may include debt or equity offerings. Our ability to generate cash is subject to a number of factors, some of which are beyond our control, including commodity prices and general economic, financial, competitive, legislative, regulatory and other factors, including weather.

Our shareholders agreement does not require us to distribute any of the cash we generate from operations. We believe, however, that it is in the best interests of our stockholders if we distribute a substantial portion of the cash we generate from operations. Cash dividends are made to the common stockholders of record on the applicable record date, generally within 60 days after the end of each quarter. Available cash for each quarter's dividend is determined by the Board of Directors following the end of such quarter. Available cash for each quarter generally equals Adjusted EBITDA reduced for cash needed for debt service, income tax requirements and other contractual obligations and fixed charges that the Board of Directors deems necessary or appropriate, if any.

The effects of the COVID-19 outbreak and the recent oil price decline could have significant adverse consequences for general economic, financial and business conditions, as well as for our business and financial position and the business and financial position of the operators of our mineral interests and may, among other things, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our Credit Facility. In addition to our potential sources of funding, the effects of such global events may impact our liquidity or need to alter our allocation or sources of capital, implement further cost reduction measures and change our financial strategy. Although the COVID-19 outbreak and the recent oil price decline could have a broad range of effects on our sources and uses of liquidity, the ultimate effect thereon, if any, will depend on future developments, which cannot be predicted at this time.

The following table presents cash distributions approved by the Board of Directors of our general partner for the periods presented.





                                Total
                              Quarterly
                              Dividend
                             Per Class A       Total Cash                            Stockholders
     Quarter Ended          Common Share        Dividends        Payment Date         Record Date
March 31, 2020             $        0.0250     $ 1,149,695     June 8, 2020        May 25, 2020
December 31, 2019          $        0.1350     $ 6,205,102     March 9, 2020       February 25, 2020
September 30, 2019         $        0.1350     $ 6,203,347     December 3, 2019    November 20, 2019
June 30, 2019              $        0.1500     $ 6,879,245     September 6, 2019   August 26, 2019
March 31, 2019             $        0.1750     $ 8,025,786     May 29, 2019        May 17, 2019


Indebtedness

Falcon Credit Facility

On the Closing Date, we entered into a credit facility with Citibank, N.A., as administrative agent and collateral agent for the lenders from time to time party thereto (the "Credit Facility"). The Credit Facility provides for a maximum credit amount of $500.0 million and a borrowing base based on its oil and natural gas reserves and other factors of $90.0 million, subject to scheduled semi-annual and other borrowing base redeterminations and expires on the fifth anniversary of the Closing Date. Effective November 8, 2019, in connection with the Company's fall 2019 redetermination, the borrowing base decreased from $105.0 million to $90 million



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and, as of March 31, 2020, the Company had borrowings of $45.3 million under the Credit Facility at an interest rate of 3.49% and $44.8 million available for future borrowings under the Credit Facility. Subsequent to March 31, 2020, the Company completed the scheduled spring redetermination process and the Company's borrowing based was reduced to $70.0 million. Therefore, based upon the borrowings outstanding under the Credit Facility at March 31, 2020, the amount available for future borrowings would be reduced to $24.8 million. The Company has repaid an additional $2.5 million during the period of March 31, 2020 through the date of issuance of this Quarterly Report on Form 10-Q.

Principal amounts borrowed are payable on the maturity date. We have a choice of borrowing at the base rate or LIBOR, with such borrowings bearing interest, payable quarterly in arrears for base rate loans and one month, two-month, three month or six-month periods for LIBOR loans. LIBOR loans bear interest at a rate per annum equal to the rate appearing on the Reuters Reference LIBOR01 or LIBOR02 page as the LIBOR, for deposits in dollars at 12:00 noon (London, England time) for one, two, three, or six months plus an applicable margin ranging from 200 to 300 basis points. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank's reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one-month LIBOR loans plus 1%, plus an applicable margin ranging from 100 to 200 basis points. The scheduled redeterminations of our borrowing base take place on April 1st and October 1st of each year.

Obligations under the Credit Facility are guaranteed by us and each of our existing and future, direct and indirect domestic subsidiaries (the "Credit Parties") and are secured by all of the present and future assets of the Credit Parties, subject to customary carve-outs.

The Credit Facility contains certain customary representations and warranties, affirmative covenants, negative covenants and events of default. As of March 31, 2020, the Company was in compliance with such covenants. The negative covenants include restrictions on the Company's ability to incur additional indebtedness, acquire and sell assets, create liens, enter into certain lease agreements, make investments and make distributions.

Cash Flows



The following table presents our cash flows for the periods indicated (in
thousands).



                                            For the Three Months Ended March 31,
                                              2020                       2019
Net cash flows provided by (used in):
Operating activities                    $          10,658         $            15,926
Investing activities                               (2,115 )                    (9,910 )
Financing activities                               (8,897 )                   (10,245 )


Operating activities

Our operating cash flow has historically been sensitive to many variables, the most significant of which is the volatility of prices for the oil and natural gas for which we receive royalty revenue. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict.

The decrease in cash flow provided by operating activities for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 was primarily related to a 8% decrease in oil production, a 16% decrease in natural gas production coupled with a 28% decrease in realized oil prices and a 41% decrease in realized natural gas prices period over period partially offset by an increase in working capital primarily driven by the timing of collection of accounts receivables and the timing of payments of accounts payable and accrued expenses.

Investing activities

Investing activities are primarily related to the acquisition and disposition of oil and natural gas interests. Cash used in investing activities for the three months ended March 31, 2020 was $2.1 million and the majority was related to the acquisition of certain royalty interests in oil and natural gas properties. Cash used in investing activities for the three months ended March 31, 2019 was $9.9 million and the majority was related to the acquisition of certain royalty interests in oil and natural gas properties.

Financing activities

Cash used in financing activities for the three months ended March 31, 2020 was $8.9 million. It was primarily related to distributions and dividends totaling $11.6 million partially offset by a net increase in borrowings under our Credit Facility of $2.8 million. The borrowings under our Credit Facility were primarily used to fund the acquisition of certain royalty interests in oil and gas properties during the period. Cash used in financing activities for the three months ended March 31, 2019 was $10.2 million, primarily related to distributions and dividends totaling $17.7 million partially offset by a net increase in borrowings under our Credit



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Facility of $7.5 million. The borrowings under our Credit Facility were primarily used to fund the acquisition of certain royalty interests in oil and gas properties during the quarter.

Contractual Obligations

There were no material changes in our contractual obligations and other commitments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

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