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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K/A
Amendment
No. 1
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of
the
Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): February 9, 2024
Prairie
Operating Co.
(Exact
name of registrant as specified in its charter)
Delaware |
|
001-41895 |
|
98-0357690 |
(State
or other jurisdiction
of
incorporation) |
|
(Commission
File
Number) |
|
(IRS
Employer
Identification
No.) |
602
Sawyer Street, Suite 710
Houston,
TX |
|
77007 |
(Address
of principal executive offices) |
|
(Zip
Code) |
Registrant’s
telephone number, including area code: (713) 424-4247
N/A
(Former
Name or Former Address, If Changed Since Last Report)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under
any of the following provisions (see General Instruction A.2. below):
☐ |
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|
|
☐ |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
|
|
☐ |
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
|
|
☐ |
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
Common
Stock, par value $0.01 per share |
|
PROP |
|
The
Nasdaq Stock Market LLC |
Indicate
by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405)
or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2).
Emerging
Growth Company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory
Note
On
January 12, 2024, Prairie Operating Co. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”)
to announce the Company’s entry into an asset purchase agreement to acquire the assets of Nickel Road Operating LLC (“NRO”).
This Amendment No. 1 to the Original Form 8-K (this “Amendment No. 1”) is being filed with the Securities and Exchange Commission
solely to amend and supplement Item 9.01 of the Original Form 8-K, as described in Item 9.01 below. This Amendment No. 1 makes no other
amendments to the Original Form 8-K.
Item
9.01 Financial Statements and Exhibits.
(a)
Financial Statements of Businesses Acquired
The
audited financial statements of NRO as of and for the years ended December 31, 2022 and December 31, 2021 and the unaudited financial
statements of NRO as of and for the nine months ended September 30, 2023 and September 30, 2022 are filed as Exhibits 99.1 and 99.2 hereto
and are incorporated herein by reference.
The
report prepared by Cawley, Gillespie & Associates, Inc., independent petroleum engineers, relating to the Company’s estimated
quantities of its pro forma reserves as of February 1, 2024, is filed as Exhibit 99.3 hereto and is incorporated herein by reference.
The
report prepared by Cawley, Gillespie & Associates, Inc., independent petroleum engineers, relating to NRO’s estimated quantities
of its proved reserves as of December 31, 2022, is filed as Exhibit 99.4 hereto and is incorporated herein by reference.
(b)
Pro Forma Financial Information
The
unaudited pro forma condensed combined financial information of the Company as of and for the nine months ended September 30, 2023 and
for the year ended December 31, 2022 is filed as Exhibit 99.5 hereto and incorporated herein by reference.
(d)
Exhibits
Exhibit
Number |
|
Description |
23.1 |
|
Consent of Moss Adams LLP. |
23.2 |
|
Consent of Cawley Gillespie & Associates Inc. |
99.1 |
|
Audited financial statements of Nickel Road Operating LLC, as of and for the years ended December 31, 2022 and December 31, 2021. |
99.2 |
|
Unaudited financial statements of Nickel Road Operating LLC, as of and for the nine months ended September 30, 2023 and September 30, 2022. |
99.3 |
|
Report
of Cawley, Gillespie & Associates Inc., dated January 11, 2024, as to the pro forma reserves of Prairie Operating Co.
as of February 1, 2024. |
99.4 |
|
Report
of Cawley, Gillespie & Associates, Inc., dated November 6, 2023, as to the reserves of Nickel Road Operating LLC as of
December 31, 2022. |
99.5 |
|
Unaudited Pro Forma Condensed Combined Financial Information as of and for the nine months ended September 30, 2023 and for the year ended December 31, 2022. |
104 |
|
Cover
Page Interactive Data File (embedded within the Inline XBRL document). |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
|
Prairie
Operating Co. |
Date:
February 9, 2024 |
|
|
|
By:
|
/s/
Daniel T. Sweeney |
|
|
Daniel T. Sweeney |
|
|
General Counsel & Corporate Secretary |
Exhibit
23.1
Consent
of Independent Auditors
We
consent to the incorporation by reference in the Registration Statement on Form S-1 (No. 333-272743) of Prairie Operating Co. of our
report dated March 30, 2023, relating to the consolidated financial statements of Nickel Road Operating LLC and Subsidiaries as of and
for the years ended December 31, 2022 and 2021, appearing in this Amendment No. 1 to the Current Report on Form 8-K of Prairie Operating
Co.
/s/
Moss Adams LLP
Denver,
Colorado
February
9, 2024
Exhibit
23.2
CONSENT
OF INDEPENDENT PETROLEUM RESERVE EXPERTS
We
hereby consent to the references to our firm in the form and context in which they appear, and the inclusion of (i)
our report dated January 11, 2024, with respect to the estimates of reserves and future net revenues of the Prairie Operating Co. (the
“Company”), as of February 1, 2024 and (ii) our report dated November 6, 2023, with respect to the estimates of reserves
and future net revenues of Nickel Road Operating LLC, as of December 31, 2022, in this Amendment
No. 1 to the Current Report on Form 8-K/A of the Company, and to the incorporation by reference of such reports in the Registration Statement
(No. 333-272743) on Form S-1 of the Company, filed with the U.S. Securities and Exchange Commission.
/s/ Cawley,
Gillespie & Associates, Inc.
Fort
Worth, Texas
February
9, 2024
Exhibit
99.1
Report
of Independent Auditors
and
Consolidated Financial Statements
Nickel
Road Operating LLC and Subsidiaries
December
31, 2022 and 2021
Table
of Contents
Report
of Independent Auditors
The
Management Committee
Nickel
Road Operating LLC and Subsidiaries
Report
on the Audit of the Financial Statements
Opinion
We
have audited the consolidated financial statements of Nickel Road Operating LLC and Subsidiaries, which comprise the consolidated balance
sheets as of December 31, 2022 and 2021, and the related consolidated statements of income, changes in members’ capital, and cash
flows for the years then ended, and the related notes to the consolidated financial statements.
In
our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Nickel
Road Operating LLC and Subsidiaries, as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the
years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis
for Opinion
We
conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section
of our report. We are required to be independent of Nickel Road Operating LLC and Subsidiaries and to meet our other ethical responsibilities,
in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Responsibilities
of Management for the Financial Statements
Management
is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In
preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about Nickel Road Operating LLC and Subsidiaries’ ability to continue as a going concern within one
year after the date that the financial statements are available to be issued.
Auditor’s
Responsibilities for the Audit of the Financial Statements
Our
objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level
of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always
detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate,
they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In
performing an audit in accordance with GAAS, we:
● |
Exercise
professional judgment and maintain professional skepticism throughout the audit. |
|
|
● |
Identify
and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design
and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. |
|
|
● |
Obtain
an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of Nickel Road Operating LLC and Subsidiaries’ internal
control. Accordingly, no such opinion is expressed. |
|
|
● |
Evaluate
the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as
well as evaluate the overall presentation of the consolidated financial statements. |
|
|
● |
Conclude
whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Nickel
Road Operating LLC and Subsidiaries’ ability to continue as a going concern for a reasonable period of time. |
We
are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit,
significant audit findings, and certain internal control–related matters that we identified during the audit.
Other
Supplementary Information
Our
audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplemental
schedules concerning oil and gas producing properties in Note 9 and Note 10 are presented for purposes of additional analysis and is
not a required part of the consolidated financial statements. Because of the significance of the matter described above, it is inappropriate
to, and we do not, express an opinion on this supplementary information.
Denver,
Colorado
March
30, 2023
Consolidated
Financial Statements
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Balance Sheets
December
31, 2022 and 2021
| |
2022 | | |
2021 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT
ASSETS | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 276,039 | | |
$ | 148,372 | |
Restricted
cash | |
| 3,200,000 | | |
| - | |
Joint
interest receivable | |
| 197,655 | | |
| 189,757 | |
Accrued
oil and gas sales | |
| 3,861,311 | | |
| 8,374,954 | |
Prepaid
expenses | |
| 693,325 | | |
| 651,207 | |
| |
| | | |
| | |
Total
current assets | |
| 8,228,330 | | |
| 9,364,290 | |
| |
| | | |
| | |
OIL
AND GAS PROPERTIES, at cost (successful efforts method) | |
| | | |
| | |
Proved
properties | |
| 113,415,744 | | |
| 116,315,420 | |
Unproved
properties | |
| 1,068,954 | | |
| 7,659,295 | |
Accumulated
depletion | |
| (25,691,574 | ) | |
| (19,392,383 | ) |
| |
| | | |
| | |
Total
oil and gas properties | |
| 88,793,124 | | |
| 104,582,332 | |
| |
| | | |
| | |
TOTAL
ASSETS | |
$ | 97,021,454 | | |
$ | 113,946,622 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Balance Sheets
December
31, 2022 and 2021
| |
2022 | | |
2021 | |
| |
| | |
| |
LIABILITIES
AND MEMBERS’ CAPITAL | |
| | | |
| | |
| |
| | | |
| | |
CURRENT
LIABILITIES | |
| | | |
| | |
Accounts
payable | |
$ | 1,921,542 | | |
$ | 1,815,862 | |
Accrued
liabilities | |
| 9,150,627 | | |
| 10,454,882 | |
Due
to related party | |
| 255,743 | | |
| 87,750 | |
Current
maturities of long-term debt, net of deferred financing costs | |
| - | | |
| 12,000,000 | |
Derivative
liability, current | |
| 2,727,867 | | |
| 5,952,686 | |
| |
| | | |
| | |
Total
current liabilities | |
| 14,055,779 | | |
| 30,311,180 | |
| |
| | | |
| | |
NON-CURRENT
LIABILITIES | |
| | | |
| | |
Long-term
debt, net of current portion and deferred financing costs | |
| 25,036,040 | | |
| 8,389,476 | |
Derivative
liability, non-current | |
| - | | |
| 61,958 | |
Asset
retirement obligations | |
| 1,167,701 | | |
| 1,201,468 | |
| |
| | | |
| | |
Total
non-current liabilities | |
| 26,203,741 | | |
| 9,652,902 | |
| |
| | | |
| | |
Total
liabilities | |
| 40,259,520 | | |
| 39,964,082 | |
| |
| | | |
| | |
COMMITMENTS
AND CONTINGENCIES (Note 6) | |
| | | |
| | |
| |
| | | |
| | |
MEMBERS’
CAPITAL | |
| | | |
| | |
Contributed
capital | |
| 64,025,830 | | |
| 64,025,830 | |
Distributed
capital | |
| (58,000,000 | ) | |
| - | |
Retained
earnings | |
| 50,736,104 | | |
| 9,956,710 | |
| |
| | | |
| | |
Total
members’ capital | |
| 56,761,934 | | |
| 73,982,540 | |
| |
| | | |
| | |
TOTAL
LIABILITIES AND MEMBERS’ CAPITAL | |
$ | 97,021,454 | | |
$ | 113,946,622 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Statements of Income
Years
Ended December 31, 2022 and 2021
| |
2022 | | |
2021 | |
REVENUES | |
| | |
| |
Oil
and gas sales | |
$ | 66,059,962 | | |
$ | 43,452,456 | |
| |
| | | |
| | |
Total
revenues | |
| 66,059,962 | | |
| 43,452,456 | |
| |
| | | |
| | |
OPERATING
EXPENSES | |
| | | |
| | |
Production
taxes | |
| 4,975,383 | | |
| 3,464,066 | |
Lease
operating | |
| 3,942,294 | | |
| 2,104,831 | |
Depreciation,
depletion, and amortization | |
| 17,760,179 | | |
| 11,061,218 | |
General
and administrative | |
| 4,264,687 | | |
| 3,842,550 | |
Lease
expirations | |
| 329,911 | | |
| 282,786 | |
| |
| | | |
| | |
Total
operating expenses | |
| 31,272,454 | | |
| 20,755,451 | |
| |
| | | |
| | |
INCOME
FROM OPERATIONS | |
| 34,787,508 | | |
| 22,697,005 | |
| |
| | | |
| | |
OTHER
INCOME (EXPENSE) | |
| | | |
| | |
Interest
expense | |
| (936,453 | ) | |
| (466,495 | ) |
Gain
on sale of oil and gas properties | |
| 25,331,465 | | |
| - | |
Realized
loss on derivative instruments | |
| (21,751,084 | ) | |
| (8,690,199 | ) |
Unrealized
gain (loss) on derivative instruments | |
| 3,286,777 | | |
| (4,403,945 | ) |
Other
income (expense) | |
| 20,029 | | |
| (95,440 | ) |
Interest
income | |
| 41,152 | | |
| 2,612 | |
| |
| | | |
| | |
Total
other income (expense) | |
| 5,991,886 | | |
| (13,653,467 | ) |
| |
| | | |
| | |
NET
INCOME | |
$ | 40,779,394 | | |
$ | 9,043,538 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Statements of Changes in Members’ Capital
Years
Ended December 31, 2022 and 2021
| |
| | |
| | |
Retained | | |
Total | |
| |
Class
A
Capital | | |
Class
B
Capital | | |
Earnings
(Deficit) | | |
Members’
Equity | |
| |
| | |
| | |
| | |
| |
BALANCE,
January 1, 2021 | |
$ | 64,025,830 | | |
$ | - | | |
$ | 913,172 | | |
$ | 64,939,002 | |
| |
| | | |
| | | |
| | | |
| | |
Capital
contributions | |
| - | | |
| - | | |
| - | | |
| - | |
Net
income | |
| - | | |
| - | | |
| 9,043,538 | | |
| 9,043,538 | |
| |
| | | |
| | | |
| | | |
| | |
BALANCE, December 31,
2021 | |
| 64,025,830 | | |
| - | | |
| 9,956,710 | | |
| 73,982,540 | |
| |
| | | |
| | | |
| | | |
| | |
Capital
distributions | |
| (58,000,000 | ) | |
| - | | |
| - | | |
| (58,000,000 | ) |
Net
income | |
| - | | |
| - | | |
| 40,779,394 | | |
| 40,779,394 | |
| |
| | | |
| | | |
| | | |
| | |
BALANCE,
December 31, 2022 | |
$ | 6,025,830 | | |
$ | - | | |
$ | 50,736,104 | | |
$ | 56,761,934 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2022 and 2021
| |
2022 | | |
2021 | |
CASH
FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
Net
income | |
$ | 40,779,394 | | |
$ | 9,043,538 | |
Adjustments
to reconcile net income to net cash from operating activities | |
| | | |
| | |
Depreciation,
depletion, and amortization | |
| 17,760,179 | | |
| 11,061,218 | |
Amortization
of debt issuance costs | |
| 140,941 | | |
| 79,360 | |
Gain
on sale of oil and gas properties | |
| (25,331,465 | ) | |
| - | |
Lease
expirations | |
| 329,911 | | |
| 282,786 | |
Unrealized
loss on derivative instruments | |
| (3,286,777 | ) | |
| 4,403,945 | |
Change
in operating assets and liabilities | |
| | | |
| | |
Accounts
receivable | |
| 4,505,745 | | |
| (5,539,212 | ) |
Prepaid
expenses | |
| (42,120 | ) | |
| (327,200 | ) |
Accounts
payables | |
| 105,677 | | |
| 1,399,477 | |
Due
to related party | |
| 167,993 | | |
| 15,731 | |
Accrued
liabilities | |
| 24,449 | | |
| 4,986,467 | |
| |
| | | |
| | |
Net
cash from operating activities | |
| 35,153,927 | | |
| 25,406,110 | |
| |
| | | |
| | |
CASH
FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Purchases
of oil and gas properties | |
| (37,025,536 | ) | |
| (51,137,515 | ) |
Proceeds
from the sale of oil and gas properties | |
| 58,693,653 | | |
| - | |
| |
| | | |
| | |
Net
cash from investing activities | |
| 21,668,117 | | |
| (51,137,515 | ) |
| |
| | | |
| | |
CASH
FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds
from long-term debt | |
| 29,700,000 | | |
| 30,000,000 | |
Repayment
of long-term debt | |
| (25,175,000 | ) | |
| (9,425,000 | ) |
Debt
issuance costs | |
| (19,377 | ) | |
| (264,884 | ) |
Capital
distributions | |
| (58,000,000 | ) | |
| - | |
| |
| | | |
| | |
Net
cash from financing activities | |
| (53,494,377 | ) | |
| 20,310,116 | |
| |
| | | |
| | |
NET
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | |
| 3,327,667 | | |
| (5,421,289 | ) |
| |
| | | |
| | |
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, beginning of year | |
| 148,372 | | |
| 5,569,661 | |
| |
| | | |
| | |
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, end of year | |
$ | 3,476,039 | | |
$ | 148,372 | |
| |
| | | |
| | |
RECONCILIATION
OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of year | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 276,039 | | |
$ | 148,372 | |
Restricted
cash | |
| 3,200,000 | | |
| - | |
| |
| | | |
| | |
Cash,
cash equivalents, and restricted cash, end of year | |
$ | 3,476,039 | | |
$ | 148,372 | |
| |
| | | |
| | |
SUPPLEMENTAL
CASH FLOW INFORMATION | |
| | | |
| | |
Capital
expenditures in accounts payable and accrued liabilities | |
$ | - | | |
$ | 1,328,700 | |
| |
| | | |
| | |
Asset
retirement obligations incurred | |
$ | 209,652 | | |
$ | 859,363 | |
| |
| | | |
| | |
Cash
paid for interest | |
$ | 853,027 | | |
$ | 269,664 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Note
1 – Organization and Summary of Significant Accounting Policies
Organization
– Nickel Road Operating LLC , a Delaware limited liability company (the Company), was formed on July 25, 2017, for the purpose
of engaging in the evaluation, acquisition, exploration, drilling, development, and production of oil and gas in the United States of
America. The Company shall continue in existence until it is liquidated or dissolved under the terms of the Amended Limited Liability
Company Agreement (the LLC Agreement).
As
a Limited Liability Company (LLC), the amount of loss at risk for each individual member is limited to the amount of capital contributed
to the LLC, and unless otherwise noted, the individual member’s liability for indebtedness of an LLC is limited to the member’s
capital contributions.
Basis
of presentation – The Company follows accounting standards established by the Financial Accounting Standards Board (FASB).
The FASB sets accounting principles generally accepted in the United States of America (GAAP) to ensure consistent reporting of the Company’s
financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB
Accounting Standards Codification (ASC) or “Codification.”
Use
of estimates in the preparation of financial statements – The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Depreciation,
depletion, and amortization of oil and gas properties and the impairment of proved oil and gas properties are determined using estimates
of oil and gas reserves. There are numerous uncertainties in estimating the quantity of reserves and in projecting the future rates of
production and timing of development expenditures, including future costs to dismantle, dispose, and restore the Company’s properties.
Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way.
Fair
value of financial instruments – The Company’s financial instruments consist of cash and cash equivalents, restricted
cash, trade receivables, trade payables, accrued liabilities, and derivative financial instruments. The carrying value of cash and cash
equivalents, restricted cash, trade payables, accrued liabilities, and derivative financial instruments are considered to be representative
of their fair market value due to the short maturity of these instruments. The carrying amount of debt reflected on the consolidated
balance sheets approximates fair value as this debt has a variable interest rate that approximates a market interest rate.
Principles
of consolidation – The accompanying consolidated financial statements are consolidated and include the accounts of the Company
and its wholly owned subsidiaries, Source Rock Royalty LLC, Nickel Road Development LLC, and Peak Stone Properties LLC. All significant
intercompany amounts have been eliminated in consolidation.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Cash
and cash equivalents – The Company considers all highly liquid investments with a maturity of three months or less, when purchased,
to be cash equivalents. Cash and cash equivalents are maintained at financial institutions, and, at times, balances may exceed federally
insured limits. The Company has not experienced any losses related to such balances, and management believes that the Company is not
exposed to any significant risks on the balances.
Restricted
cash – As of December 31, 2022, the Company held restricted cash of approximately $3,200,000 for accounts held in escrow related
to the Company’s sale of Oil and Gas Properties. Per the terms of the Asset Purchase Agreement, see oil and gas properties within
Note 1, entered on June 1, 2022, the escrow period is defined as one year from the closing date.
Accounts
receivable – Accounts receivable consist of uncollateralized joint interest owner obligations due within 30 days of the invoice
date, uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 days of production, and other
miscellaneous receivables. All receivables are reviewed periodically, and appropriate actions are taken on past-due amounts and those
deemed uncollectible, if any. No allowance for bad debts has been recorded as of December 31, 2022 and 2021.
Significant
customers – As of and for the year ended December 31, 2022, the Company’s two largest customers generated approximately
82% and 15% of sales, and one customer accounted for approximately 88% of accrued oil and gas sales.
As
of and for the year ended December 31, 2021, the Company’s two largest customers generated approximately 80% and 15% of sales,
and two customers accounted for approximately 86% and 11% of accrued oil and gas sales.
Oil
and gas properties – The Company accounts for its oil and gas operations using the successful efforts method of accounting.
Under this method, all costs associated with property acquisitions, successful exploratory wells, and development wells are capitalized.
Items charged to expense generally include geological and geophysical costs, costs of unsuccessful exploratory wells, delay rentals,
and oil and gas production costs. Capitalized costs of proved leasehold costs are depleted on a well-by-well basis using the units-of-production
method based on total proved developed producing oil and gas reserves. Other capitalized costs of producing properties are also depleted
based on total proved developed producing reserves. Depletion expense for the years ended December 31, 2022 and 2021 was approximately
$17,712,000 and $11,034,000, respectively.
The
Company assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of
the assets may not be recoverable, but at least annually. The impairment test compares undiscounted future net cash flows to the assets’
net book value. If the net capitalized costs exceed future net cash flows, then the cost of the property is written down to the estimated
fair value. Fair value for oil and natural gas properties is generally determined based on an analysis of discounted future net cash
flows adjusted for certain risk factors. There were no impairments of proved oil and gas properties as of December 31, 2022 and 2021.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Unproved
properties are assessed periodically on a project-by-project basis to determine whether an impairment has occurred. Management’s
assessment includes consideration of the results of exploration activities, commodity price predictions or forecasts, planned future
sales, or expiration of all or a portion of such projects. At December 31, 2022, management determined there was no impairment of unproved
properties.
Gains
and losses arising from sales of oil and gas properties are included in other income. However, a partial sale of proved properties
within an existing field that does not significantly affect the unit-of-production depletion rate will be accounted for as a normal
retirement with no gain or loss recognized. The sale of a partial interest within a proved property is accounted for as a recovery
of cost. The partial sale of unproved property is accounted for as a recovery of cost when there is uncertainty of the ultimate
recovery of the cost applicable to the interest retained.
On
June 1, 2022, the Company entered into an Asset Purchase Agreement with a third party to sell a portion of the Company’s proved
and unproved oil and gas properties. The Company sold various oil and gas properties held in the DJ Basin to a third party for $64,000,000;
after purchase price adjustments total proceeds were approximately $58,694,000. The oil and gas properties sold by the Company had a
carrying value of approximately $33,363,000, resulting in a gain of approximately $25,331,000.
Derivative
financial instruments – The Company enters into derivative contracts, primarily swaps, and collars to hedge future crude oil
and natural gas production in order to mitigate the risk of market price fluctuations. All derivative instruments are recorded on the
balance sheet at fair value. The Company has elected not to apply hedge accounting to any of its derivative transactions; consequently,
the Company recognizes mark to-market gains and losses in earnings currently, rather than deferring such amounts in other comprehensive
income for those commodity derivatives that qualify as cash flow hedges.
Asset
retirement obligations – An asset retirement obligation associated with the retirement
of a tangible long-lived asset is recognized as a liability in the period incurred, with an associated increase in the carrying amount
of the related long-lived asset and oil and natural gas properties. The cost of the tangible asset, including the asset retirement cost,
is depleted over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference
to the expected future cash outflows required to satisfy the retirement obligation discounted at our credit-adjusted risk-free interest
rate. Accretion expense is recognized over time, as the discounted liability is accreted to its expected settlement value. Accretion
expense is recorded within “Depletion, depreciation, and amortization” in the consolidated statements of operations. If the
estimated future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and
the long-lived asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates, revisions
to estimated inflation rates, and changes in the estimated timing of abandonment.
Deferred
financing costs – Deferred financing costs are capitalized and amortized over the contractual
term of the related obligations. Debt issuance costs of approximately $281,000 were recognized within long-term debt as a reduction of
the current outstanding balance in 2022, net of approximately $216,000 of
amortization expense which is recorded as interest expense. See Note 7 for further details.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Revenue
recognition – The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from
Contracts with Customers. Revenue from the sale of oil, natural gas liquids (NGLs), and gas is recognized as the product is delivered
to the customers’ custody transfer points, and collectability is reasonably assured. The Company fulfills the performance obligations
under the customer contracts through daily delivery of oil, NGLs, and gas to the customers’ custody transfer points, and revenues
are recorded on a monthly basis. The prices received for oil, NGLs, and natural gas sales under the Company’s contracts are generally
derived from stated market prices, which are then adjusted to reflect deductions, including transportation, fractionation, and processing.
As a result, the revenues from the sale of oil, natural gas, and NGLs will decrease if market prices decline. The sales of oil, NGLs,
and gas, as presented on the condensed consolidated statements of operations, represent the Company’s share of revenues, net of
royalties and excluding revenue interests owned by others. When selling oil, NGLs, and gas on behalf of royalty owners or working interest
owners, the Company is acting as an agent and, thus, reports the revenue on a net basis. To the extent actual volumes and prices of oil
and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties,
the expected sales volumes and prices for those properties are estimated and recorded.
Income
taxes – The Company is an LLC, which is not subject to U.S. federal income taxes. Rather, the Company’s taxable income
flows through to the owners, who are responsible for paying the applicable income taxes on the income allocated to them. For tax years
beginning on or after January 1, 2018, the Company is subject to audit rules enacted as part of the Bipartisan Budget Act of 2015 (the
Centralized Partnership Audit Regime). Under the Centralized Partnership Audit Regime, any IRS audit of the Company would be conducted
at the Company level, and if the IRS determines an adjustment, the default rule is that the Company would pay an “imputed underpayment,”
including interest and penalties, if applicable. The Company may, instead, elect to make a “push-out” election, in which
case the partners for the year that is under audit would be required to take into account the adjustments on their own personal income
tax returns.
The
LLC Agreement does not stipulate how the Company will address imputed underpayments. If the Company receives an imputed underpayment,
a determination will be made based on the relevant facts and circumstances that exist at that time. Any payments that the Company ultimately
makes on behalf of its current partners will be reflected as a dividend, rather than as a tax expense, at the time that such dividend
is declared.
The
Company has not recorded any liabilities as of December 31, 2022 or 2021 related to uncertain tax provisions. As of December 31, 2022
or 2021, the Company made no provision for interest or penalties related to uncertain tax positions. The Company files income tax returns
in the U.S. federal jurisdiction and in various states. There are currently no federal or state income tax examinations underway for
these jurisdictions.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Leases
– In February 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2016-02,
“Leases (Topic 842)” which amended the existing lease accounting guidance to require lessees to recognize a right of use
asset and lease liability on the consolidated balance sheets for all leases with terms greater than 12 months. The Company adopted the
new lease standard and all related amendments on January 1, 2022. The Company applied a modified retrospective transition approach when
adopting this new guidance which resulted in no cumulative-effect adjustments to the opening balance of retained earnings. The Company
also elected the package of practical expedients permitted under the transition guidance that retain the lease classification and initial
direct costs for any leases that existed prior to adoption of the standard. In addition, the Company has not reassessed the accounting
treatment of contracts entered into prior to adoption of the new lease guidance. The Company evaluated whether its contractual arrangements
entered into on or after
January 1, 2022, contain leases. Specifically, the Company considered whether it can control the underlying asset and have the right
to obtain substantially all of the economic benefits or outputs from the asset. The Company evaluated the contractual arrangements, including
the agreements governing the operation of both the Company and Company’s ownership interests in oil and natural gas properties,
and concluded the Company does not represent a lessee or lessor as defined in Topic 842. Accordingly, the adoption of Topic 842 had no
impact on the Company’s consolidated financial statements and the Company has not recognized any lease liabilities or right-of-use
assets relating to Topic 842.
Note
2 – Members’ Capital
The
Company is a limited liability company with membership interests issued and held by various members. The LLC Agreement authorizes Class
A units and Class B units. Class A members are eligible to receive distributions. Upon formation, the Company issued a total of approximately
19,000 Class A units to members in proportion to their initial contributions. As of December 31, 2022 and 2021, $64,025,830 in cumulative
capital contributions had been received.
Upon
formation, 100 Class B units were granted to certain executives. Class B units are intended to provide compensation to the Class B member
upon a liquidation event, subject to returns as described in the LLC Agreement. The requirements to provide compensation to the Class
B members had not been met under the arrangement, nor was it considered probable the requirements would be met. Therefore, the grant-date
fair values were inconsequential, and no amounts were recorded as of December 31, 2022 and 2021 in the accompanying consolidated financial
statements.
By
the terms of the LLC Agreement, distributions occur according to their respective equity interests, as defined. For the years ending
December 31, 2022 and 2021 the Company made distributions to members of approximately $58,000,000 and $0, respectively.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Note
3 – Asset Retirement Obligations
Asset
retirement obligations represent the estimated present value of the amount to plug, abandon, and remediate producing properties at the
end of their productive lives in accordance with applicable laws. The following table summarizes the Company’s
asset retirement obligation transactions for the years ending December 31, 2022 and 2021:
| |
2022 | | |
2021 | |
| |
| | | |
| | |
Asset
retirement obligations, beginning of year | |
$ | 1,201,468 | | |
$ | 315,220 | |
| |
| | | |
| | |
Liabilities
incurred during the year | |
| 209,652 | | |
| 859,363 | |
Change
in estimated plugging costs | |
| (106,690 | ) | |
| - | |
Liabilities
settled during the year | |
| (185,440 | ) | |
| - | |
Accretion
of discount | |
| 48,711 | | |
| 26,885 | |
| |
| | | |
| | |
Asset
retirement obligation, end of year | |
$ | 1,167,701 | | |
$ | 1,201,468 | |
Note
4 – Hedging and Derivative Financial Instruments
Commodity
derivative agreements – The Company utilizes swap and collar contracts to hedge the effect of price changes on a portion of
its future oil and natural gas production. The objective of the Company’s hedging activities and the use of derivative financial
instruments is to achieve more predictable cash flows. The use of derivatives involves the risk that the counterparties to such instruments
will be unable to meet the financial terms of such contracts. The derivative contracts may be terminated by a non-defaulting party in
the event of default by one of the parties to the agreement.
The
Company has elected not to apply hedge accounting to any of its derivative transactions, and, consequently, the Company recognizes mark-to-market
gains and losses in earnings currently, rather than deferring such amounts in accumulated other comprehensive income for those commodity
derivatives that would otherwise qualify as cash flow hedges. All derivative instruments are recorded on the balance sheet at fair value.
As
of December 31, 2022, the Company had the following commodity derivative instruments outstanding through 2023, as summarized in the table
below:
| |
Collars | | |
Fixed-Price
Swaps | |
| |
| | |
| | |
Weighted
Average
Contract
Price | | |
| | |
| | |
Weighted
Average
Contract | |
Commodity/Index/Maturity
Period | |
Quantity | | |
Units | | |
Floor | | |
Ceiling | | |
Quantity | | |
Units | | |
Price | |
Crude
Oil | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NYMEX | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2023 | |
| 320,200 | | |
| BBL
| | |
$ | 60.00 | | |
$ | 75.85 | | |
| - | | |
| | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Natural
Gas | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NYMEX | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2023 | |
| 195,200 | | |
| MMBTU
| | |
| 3.91 | | |
| 4.89 | | |
| - | | |
| | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
CIG | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
2023 | |
| - | | |
| | | |
| - | | |
| - | | |
| 106,200 | | |
| MMBTU
| | |
| (0.14 | ) |
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Derivative
liabilities fair value – The fair value of the derivative commodity contracts was a net liability of approximately $2,728,000
and $6,015,000 at December 31, 2022 and 2021, respectively. The following table details the fair value of derivatives recorded in the
accompanying consolidated balance sheets, by category:
| |
Fair
Value | | |
Fair
Value | |
| |
December
31, | | |
December
31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Derivative
liability - current | |
$ | 2,727,867 | | |
$ | 5,952,686 | |
Derivative
liability - non-current | |
$ | - | | |
$ | 61,958 | |
Derivative
gain (loss) – The following table summarizes the components of the net derivative gain (loss) line item presented in the accompanying
consolidated statements of operations during the years ended December 31:
| |
2022 | | |
2021 | |
| |
| | |
| |
Unrealized
gain (loss) on derivatives | |
$ | 3,286,777 | | |
$ | (4,403,945 | ) |
Realized
loss on derivatives | |
| (21,751,084 | ) | |
| (8,690,199 | ) |
| |
| | | |
| | |
Total
loss on derivatives | |
$ | (18,464,307 | ) | |
$ | (13,094,144 | ) |
Note
5 – Fair Value Measurements
The
Company follows ASC 820, Fair Value Measurements and Disclosures, which establishes a hierarchy for the inputs utilized in measuring
fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level
1 – Quoted prices for identical assets or liabilities in active markets;
Level
2 – Quoted prices for similar assets or liabilities in active markets; and
Level
3 – Unobservable inputs for the asset or liability, such as discounted cash models.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
The
following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December
31, 2022 and 2021:
| |
Fair
Value Measurement at December 31, 2022 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Derivative
instruments | |
$ | - | | |
$ | 2,727,867 | | |
$ | - | | |
$ | 2,727,867 | |
| |
| | | |
| | | |
| | | |
| | |
Total
investments | |
$ | - | | |
$ | 2,727,867 | | |
$ | - | | |
$ | 2,727,867 | |
| |
Fair
Value Measurement at December 31, 2021 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Derivative
instruments | |
$ | - | | |
$ | 6,014,644 | | |
$ | - | | |
$ | 6,014,644 | |
| |
| | | |
| | | |
| | | |
| | |
Total
investments | |
$ | - | | |
$ | 6,014,644 | | |
$ | - | | |
$ | 6,014,644 | |
The
inputs used to determine such fair value are primarily based upon observable market data for similar instruments, including the forward
curve for commodity prices based on quoted market prices and would be classified within Level 2.
Note
6 – Commitments and Contingencies
Government
regulation – Many aspects of the oil and gas industry are extensively regulated by federal, state, and local governments in
all areas in which the Company has operations. Regulations govern such things as drilling permits, environmental protection and pollution
control, spacing of wells, the unitization and pooling of properties, reports concerning operations, royalty rates, and various other
matters, including taxation. Oil and gas industry legislation and administrative regulations are periodically changed for a variety of
political, economic, and other reasons. As of December 31, 2022 or 2021, the Company has not been fined or cited for any violations of
governmental regulations that would have a material adverse effect upon the financial condition, capital expenditures, earnings, or competitive
position of the Company in the oil and gas industry.
Litigation
– From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal
course of business. As of the date of this report, no legal proceedings are ongoing or pending that management believes could have a
materially adverse effect upon the Company’s financial condition or results of operations.
Note
7 – Long-term Debt
Revolving
loan – On February 22, 2021, the Company entered into a revolving loan agreement (the Loan Agreement) with a maturity of February
22, 2024. The Loan Agreement provides for a maximum revolving loan (the Revolving Loan) of $35,000,000 with an initial borrowing base
of $10,000,000. In October 2022, the Loan Agreement was amended. The total borrowing base and sublimit increased to $30,000,000 for the
Revolving Loan.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
All
sums advanced under the Revolving Loan, together with all accrued but unpaid interest thereon, are due in full at maturity. The Loan
Agreement requires the Company to maintain certain affirmative and negative covenants, including certain financial ratios defined in
the Loan Agreement, and provides the lender with a first security interest in substantially all of the Company assets. The interest rate
of the Revolving Loan is the lesser of the (1) Wall Street Journal prime rate, plus the applicable margin, or (2) the Maximum Rate as
defined per the Loan Agreement. The interest rate as of December 31, 2022, was 8.75%. Commitment fees equal to 0.5% of the undrawn amount
are payable quarterly under this agreement. The outstanding balance on the Revolving Loan as of December 31, 2022, was $25,036,000, net
of debt issuance cost of approximately $64,000. The full outstanding balance of approximately $25,100,000 is due in full on the maturity
date of February 22, 2024.
Term
loan – On September 1, 2021, the Loan Agreement was amended to establish a term loan (the Term Loan) in the amount of $12,000,000
that matured on August 31, 2022. The Term Loan was payable in monthly principal installments commencing January 31, 2022, plus all accrued
interest. Interest for the Term Loan was fixed at 5.25%. The Term Loan also provides the lender with a first security interest in substantially
all of the Company assets. As of December 31, 2022, this loan matured and was paid off in full.
Interest
expense related to the Revolving Loan and the Term Loan for the years ended December 31, 2022 and 2021, was approximately $795,000 and
$387,000, respectively.
On
March 30, 2023, the Company amended its Loan Agreement to provide for a maximum Revolving Loan of $50,000,000 which matures on February
22, 2026. As of the date of the amendment the borrowing base was increased to $35,000,000, with a sublimit of $25,000,000, and continues
to be subject to regular redeterminations by the lender. Permitted distributions are subject to limitations defined within the amendment
and required hedge transactions are amended such that as of December 31, 2022, and thereafter, so long as the borrowing base utilization
exceeds 60%, the Company is required to maintain crude oil hedges of at least 60% of the Company’s anticipated crude oil production
for a period of not less than 12 months, to be complied with on a quarterly basis.
In
addition to the $25,000,000 sublimit, the amended Loan Agreement also allows for a new Term Loan in the amount of $10,000,000 which commences
on the date of the amendment and continues through July 31, 2023, after which the Lender shall have no further commitment to make an
advance on the Term Loan, so long as the aggregate advances do not exceed $10,000,000. The Term Loan shall be payable in monthly principal
installments commencing on August 1, 2023, plus all accrued interest, and matures on July 1, 2024. The Term Loan bears interest at a
rate equal to the sum of the Prime Rate, plus the Applicable Margin (as defined in the Loan Agreement); provided, however, that the interest
rate on the Term Note shall never fall below 3.75%.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Note
8 – Related Parties
Management
fees – The Company receives management services from Nickel Road Management LLC under the Management Services Agreement dated
March 30, 2018 (the Services Agreement). In accordance with the Service Agreement, Nickel Road Management LLC provides management services,
including office space and employment of all employees. The Company pays Nickel Road Management LLC a monthly amount equal to the allocated
costs for monthly general and administrative expenses approved by the managers (the Development Plan and Budget). The Services Agreement
will remain in effect for three years and will automatically extend for successive one-year terms coinciding with the period covered
by the Development Plan and Budget unless terminated under the terms of the Services Agreement. For the years ended December 31, 2022
and 2021, the Company incurred service agreement reimbursement costs of approximately $4,122,000 and $3,668,000, respectively. For the
years ending December 31, 2022 and 2021, the Company had approximately $256,000 and $88,000 in management fees due to Nickel Road Management
LLC, respectively.
Note
9 – Estimated Quantities of Oil and Gas Reserves (unaudited)
Costs
Incurred
The
following table sets forth the costs incurred for property acquisitions, exploration, and development activities:
| |
Years
Ended December 31, | |
| |
2022 | | |
2021 | |
Acquisition
costs | |
| | | |
| | |
Proved | |
$ | 1,028,411 | | |
$ | 6,537,937 | |
Unproved | |
| 1,213,079 | | |
| 400,638 | |
Exploration
costs | |
| | | |
| | |
Geological
and geophysical | |
| - | | |
| 112,627 | |
Development
costs | |
| 34,719,791 | | |
| 50,924,901 | |
Total
costs incurred | |
$ | 36,961,281 | | |
$ | 57,976,103 | |
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Oil
and Natural Gas Reserves
The
following table sets forth the Company’s net proved oil and gas reserves and the changes in net proved oil and gas reserves for
the years ended December 31, 2020, 2021, and 2022. All of the Company’s proved reserves are located in the state of Colorado in
the United States of America.
| |
Oil
(Bbl) | | |
Gas
(Mcf) | | |
Liquids
(Bbl) | | |
BOE | |
Proved
reserves at December 31, 2020 | |
| 7,523,571 | | |
| 15,643,734 | | |
| 4,479,670 | | |
| 14,610,530 | |
Revisions | |
| (713,886 | ) | |
| (2,534,693 | ) | |
| (1,003,525 | ) | |
| (2,139,860 | ) |
Extensions | |
| 2,901,457 | | |
| 4,087,821 | | |
| 800,146 | | |
| 4,382,907 | |
Divestiture of reserves | |
| - | | |
| - | | |
| - | | |
| - | |
Acquisition of reserves | |
| - | | |
| - | | |
| - | | |
| - | |
Production | |
| (561,018 | ) | |
| (810,683 | ) | |
| (150,232 | ) | |
| (846,364 | ) |
| |
| | | |
| | | |
| | | |
| | |
Proved
reserves at December 31, 2021 | |
| 9,150,124 | | |
| 16,386,179 | | |
| 4,126,059 | | |
| 16,007,213 | |
Revisions | |
| (1,806,746 | ) | |
| 875,476 | | |
| (850,846 | ) | |
| (2,511,679 | ) |
Extensions | |
| 2,238,184 | | |
| 5,752,187 | | |
| 1,031,821 | | |
| 4,228,703 | |
Divestiture of reserves | |
| (1,705,171 | ) | |
| (3,197,920 | ) | |
| (785,350 | ) | |
| (3,023,508 | ) |
Acquisition of reserves | |
| - | | |
| - | | |
| - | | |
| - | |
Production | |
| (618,787 | ) | |
| (919,804 | ) | |
| (161,585 | ) | |
| (933,673 | ) |
| |
| | | |
| | | |
| | | |
| | |
Proved
reserves at December 31, 2022 | |
| 7,257,604 | | |
| 18,896,118 | | |
| 3,360,099 | | |
| 13,767,056 | |
| |
| | | |
| | | |
| | | |
| | |
Proved
developed reserves at: | |
| | | |
| | | |
| | | |
| | |
December 31, 2020 | |
| 1,415,209 | | |
| 4,193,520 | | |
| 1,010,929 | | |
| 3,125,058 | |
December 31, 2021 | |
| 3,731,662 | | |
| 6,669,807 | | |
| 1,182,570 | | |
| 6,025,867 | |
December 31, 2022 | |
| 2,599,724 | | |
| 6,452,542 | | |
| 1,103,821 | | |
| 4,778,969 | |
| |
| | | |
| | | |
| | | |
| | |
Proved
undeveloped reserves at: | |
| | | |
| | | |
| | | |
| | |
December 31, 2020 | |
| 6,108,362 | | |
| 11,450,214 | | |
| 3,468,741 | | |
| 11,485,472 | |
December 31, 2021 | |
| 5,418,462 | | |
| 9,716,372 | | |
| 2,943,489 | | |
| 9,981,346 | |
December 31, 2022 | |
| 4,657,880 | | |
| 12,443,576 | | |
| 2,256,278 | | |
| 8,988,087 | |
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Note
10 – Standardized Measure of Discounted Future Net Cash Flows (unaudited)
The
standardized measure of discounted future net cash flows from the Company’s proved oil and gas reserves is presented in the following
table:
| |
Years
Ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Future
cash inflows | |
$ | 883,016,626 | | |
$ | 762,792,704 | |
Future
production costs and taxes | |
| (293,548,055 | ) | |
| (202,378,828 | ) |
Future
development costs | |
| (147,621,778 | ) | |
| (90,494,378 | ) |
Future
income tax expense | |
| - | | |
| - | |
| |
| | | |
| | |
Future
net cash flows | |
| 441,846,793 | | |
| 469,919,498 | |
10%
annual discount for estimated timing of cash flows | |
| (197,175,725 | ) | |
| (209,994,570 | ) |
| |
| | | |
| | |
Standardized
measure of discounted future net cash flows | |
$ | 244,671,068 | | |
$ | 259,924,928 | |
The
following are the principal sources of change in the standardized measure of discounted future net cash flows from the Company’s
proved oil and gas reserves:
| |
Years
Ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Balance,
beginning of year | |
$ | 259,924,928 | | |
$ | 57,068,129 | |
Net
change in prices and production costs | |
| 66,158,782 | | |
| 124,014,280 | |
Net
change in future development costs | |
| (18,682,942 | ) | |
| 447,826 | |
Oil
& Gas net revenue | |
| (57,149,450 | ) | |
| (37,892,101 | ) |
Extensions | |
| 52,216,906 | | |
| 118,176,519 | |
Acquisition
of reserves | |
| - | | |
| - | |
Divestiture
of reserves | |
| (48,657,637 | ) | |
| - | |
Revisions
of previous quantity estimates | |
| (49,945,233 | ) | |
| (14,044,829 | ) |
Previously
estimated development costs incurred | |
| 15,239,276 | | |
| - | |
Net
change in taxes | |
| - | | |
| - | |
Accretion
of discount | |
| 25,992,493 | | |
| 5,706,813 | |
Changes
in timing and other | |
| (426,055 | ) | |
| 6,448,291 | |
| |
| | | |
| | |
Balance,
end of year | |
$ | 244,671,068 | | |
$ | 259,924,928 | |
Estimated
net future cash flows represent an estimate of future net revenues from the production of proved reserves using average sales prices
along with estimates of the operating costs, production taxes, and future development and abandonment costs necessary to produce such
reserves. The Company’s proved reserves as of December 31, 2022 and 2021 were measured using commodity prices based on the twelve-month
unweighted arithmetic mean of the first day of the month price for the period January through December. No deduction has been reflected
for depreciation, depletion, or any direct cost, such as general and administrative costs.
Note
11 – Subsequent Events
The
Company has reviewed all subsequent events through March 30, 2023, the date the consolidated financial statements were available to be
issued.
Exhibit
99.2
Table
of Contents
Consolidated
Financial Statements
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Balance Sheets
September
30, 2023 and 2022
| |
2023 | | |
2022 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash and cash equivalents | |
$ | 3,897,937 | | |
$ | 3,474,056 | |
Restricted cash | |
| - | | |
| 3,200,000 | |
Joint interest receivable | |
| 832,883 | | |
| 188,697 | |
Accrued oil and gas sales | |
| 4,785,376 | | |
| 3,716,319 | |
Prepaid expenses | |
| 565,834 | | |
| 465,037 | |
| |
| | | |
| | |
Total current assets | |
| 10,082,030 | | |
| 11,044,109 | |
| |
| | | |
| | |
OIL AND GAS PROPERTIES, at cost (successful efforts method) | |
| | | |
| | |
Proved properties | |
| 140,552,991 | | |
| 97,792,407 | |
Unproved properties | |
| 1,253,263 | | |
| 1,258,984 | |
Accumulated depletion | |
| (37,757,172 | ) | |
| (17,992,847 | ) |
| |
| | | |
| | |
Total oil and gas properties | |
| 104,049,082 | | |
| 81,058,544 | |
| |
| | | |
| | |
OTHER NON-CURRENT ASSETS | |
| | | |
| | |
Right-of-use asset, net | |
| 372,586 | | |
| - | |
| |
| | | |
| | |
Total other non-current assets | |
| 372,586 | | |
| - | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 114,503,698 | | |
$ | 92,102,653 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Balance Sheets
September
30, 2023 and 2022
| |
2023 | | |
2022 | |
| |
| | |
| |
LIABILITIES AND MEMBERS’ CAPITAL |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 13,721,369 | | |
$ | 3,850,638 | |
Accrued liabilities | |
| 11,268,874 | | |
| 13,082,620 | |
Current maturities of long-term debt | |
| 5,700,000 | | |
| - | |
Derivative liability, current | |
| 2,303,718 | | |
| 2,786,213 | |
Short-term lease liability | |
| 190,060 | | |
| - | |
| |
| | | |
| | |
Total current liabilities | |
| 33,184,021 | | |
| 19,719,471 | |
| |
| | | |
| | |
NON-CURRENT LIABILITIES | |
| | | |
| | |
Long-term debt, net of current portion and deferred financing costs | |
| 7,280,670 | | |
| 7,033,656 | |
Derivative liability, non-current | |
| 106,225 | | |
| 112,967 | |
Asset retirement obligations | |
| 1,211,157 | | |
| 1,058,190 | |
Long-term lease liability | |
| 182,526 | | |
| - | |
| |
| | | |
| | |
Total non-current liabilities | |
| 8,780,578 | | |
| 8,204,813 | |
| |
| | | |
| | |
Total liabilities | |
| 41,964,599 | | |
| 27,924,284 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES (Note 7) | |
| | | |
| | |
| |
| | | |
| | |
MEMBERS’ CAPITAL | |
| | | |
| | |
Contributed capital | |
| 64,025,830 | | |
| 64,025,830 | |
Distributed capital | |
| (58,000,000 | ) | |
| (58,000,000 | ) |
Retained earnings | |
| 66,513,269 | | |
| 58,152,539 | |
| |
| | | |
| | |
Total members’ capital | |
| 72,539,099 | | |
| 64,178,369 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND MEMBERS’ CAPITAL | |
$ | 114,503,698 | | |
$ | 92,102,653 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Statements of Income
Periods
Ended September 30, 2023 and 2022
| |
2023 | | |
2022 | |
REVENUES | |
| | | |
| | |
Oil and gas sales | |
$ | 34,210,491 | | |
$ | 58,172,696 | |
| |
| | | |
| | |
Total revenues | |
| 34,210,491 | | |
| 58,172,696 | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Production taxes | |
| 3,422,294 | | |
| 4,352,423 | |
Lease operating | |
| 3,316,866 | | |
| 3,142,012 | |
Depreciation, depletion, and amortization | |
| 12,852,983 | | |
| 10,054,903 | |
General and administrative | |
| 3,098,777 | | |
| 3,353,479 | |
Lease expirations | |
| - | | |
| 139,881 | |
| |
| | | |
| | |
Total operating expenses | |
| 22,690,920 | | |
| 21,042,698 | |
| |
| | | |
| | |
INCOME FROM OPERATIONS | |
| 11,519,571 | | |
| 37,129,998 | |
| |
| | | |
| | |
OTHER INCOME (EXPENSE) | |
| | | |
| | |
Interest expense | |
| (1,524,751 | ) | |
| (548,703 | ) |
Gain on sale of oil and gas properties | |
| 6,261,551 | | |
| 28,439,708 | |
Realized loss on derivative instruments | |
| (789,972 | ) | |
| (19,968,789 | ) |
Unrealized gain on derivative instruments | |
| 317,924 | | |
| 3,115,464 | |
Other income (expense) | |
| (7,158 | ) | |
| 28,151 | |
| |
| | | |
| | |
Total other income (expense) | |
| 4,257,594 | | |
| 11,065,831 | |
| |
| | | |
| | |
NET INCOME | |
$ | 15,777,165 | | |
$ | 48,195,829 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Statements of Changes in Members’ Capital
Periods
Ended September 30, 2023 and 2022
| |
Class A | | |
Class B | | |
Retained | | |
Total | |
| |
Capital | | |
Capital | | |
Earnings (Deficit) | | |
Members’ Equity | |
| |
| | |
| | |
| | |
| |
BALANCE, January 1, 2022 | |
$ | 64,025,830 | | |
$ | - | | |
$ | 9,956,710 | | |
$ | 73,982,540 | |
| |
| | | |
| | | |
| | | |
| | |
Capital distributions | |
| (58,000,000 | ) | |
| - | | |
| - | | |
| (58,000,000 | ) |
Net income | |
| - | | |
| - | | |
| 48,195,829 | | |
| 48,195,829 | |
| |
| | | |
| | | |
| | | |
| | |
BALANCE, September 30, 2022 | |
$ | 6,025,830 | | |
$ | - | | |
$ | 58,152,539 | | |
$ | 64,178,369 | |
| |
| | | |
| | | |
| | | |
| | |
BALANCE, January 1, 2023 | |
$ | 6,025,830 | | |
$ | - | | |
$ | 50,736,104 | | |
$ | 56,761,934 | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
| - | | |
| - | | |
| 15,777,165 | | |
| 15,777,165 | |
| |
| | | |
| | | |
| | | |
| | |
BALANCE, September 30, 2023 | |
$ | 6,025,830 | | |
$ | - | | |
$ | 66,513,269 | | |
$ | 72,539,099 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Consolidated
Statements of Cash Flows
Periods
Ended September 30, 2023 and 2022
| |
2023 | | |
2022 | |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
Net income | |
$ | 15,777,165 | | |
$ | 48,195,829 | |
Adjustments to reconcile net income to net cash from operating activities | |
| | | |
| | |
Depreciation, depletion, and amortization | |
| 12,852,983 | | |
| 10,054,903 | |
Amortization of debt issuance costs | |
| 74,949 | | |
| 126,142 | |
Gain on sale of oil and gas properties | |
| (6,261,551 | ) | |
| (28,439,708 | ) |
Lease expirations | |
| - | | |
| 139,881 | |
Unrealized gain on derivative instruments | |
| (317,924 | ) | |
| (3,115,464 | ) |
Change in operating assets and liabilities | |
| | | |
| | |
Accounts receivable | |
| (1,559,293 | ) | |
| 4,659,695 | |
Prepaid expenses | |
| 127,491 | | |
| 186,171 | |
Accounts payables | |
| 11,799,827 | | |
| 2,034,773 | |
Accrued liabilities | |
| 3,623,569 | | |
| 3,868,690 | |
| |
| | | |
| | |
Net cash from operating activities | |
| 36,117,216 | | |
| 37,710,912 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Purchases of oil and gas properties | |
| (30,112,374 | ) | |
| (20,847,399 | ) |
Proceeds from the sale of oil and gas properties | |
| 6,547,375 | | |
| 61,144,133 | |
| |
| | | |
| | |
Net cash from investing activities | |
| (23,564,999 | ) | |
| 40,296,734 | |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from short-term and long-term debt | |
| 47,366,667 | | |
| 11,700,000 | |
Repayment of short-term and long-term debt | |
| (59,333,334 | ) | |
| (25,175,000 | ) |
Debt issuance costs | |
| (163,652 | ) | |
| (6,962 | ) |
Capital distributions | |
| - | | |
| (58,000,000 | ) |
| |
| | | |
| | |
Net cash from financing activities | |
| (12,130,319 | ) | |
| (71,481,962 | ) |
| |
| | | |
| | |
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | |
| 421,898 | | |
| 6,525,684 | |
| |
| | | |
| | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period | |
| 3,476,039 | | |
| 148,372 | |
| |
| | | |
| | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period | |
$ | 3,897,937 | | |
$ | 6,674,056 | |
| |
| | | |
| | |
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | |
| | | |
| | |
Cash and cash equivalents | |
$ | 3,897,937 | | |
$ | 3,474,056 | |
Restricted cash | |
| - | | |
| 3,200,000 | |
| |
| | | |
| | |
Cash, cash equivalents, and restricted cash, end of period | |
$ | 3,897,937 | | |
$ | 6,674,056 | |
| |
| | | |
| | |
SUPPLEMENTAL CASH FLOW INFORMATION | |
| | | |
| | |
Right-of-use asset obtained in exchange for lease obligations | |
$ | 388,011 | | |
$ | - | |
| |
| | | |
| | |
Cash paid for interest | |
$ | 1,419,053 | | |
$ | 143,209 | |
| |
| | | |
| | |
Accrued capital expenditures | |
$ | - | | |
$ | 658,614 | |
See
accompanying notes.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Note
1 – Organization and Summary of Significant Accounting Policies
Organization
– Nickel Road Operating LLC, a Delaware limited liability company (the Company), was formed on July 25, 2017, for the purpose
of engaging in the evaluation, acquisition, exploration, drilling, development, and production of oil and gas in the United States of
America. The Company shall continue in existence until it is liquidated or dissolved under the terms of the Amended Limited Liability
Company Agreement (the LLC Agreement).
As
a Limited Liability Company (LLC), the amount of loss at risk for each individual member is limited to the amount of capital contributed
to the LLC, and unless otherwise noted, the individual member’s liability for indebtedness of an LLC is limited to the member’s
capital contributions.
Basis
of presentation – The Company follows accounting standards established by the Financial Accounting Standards Board (FASB).
The FASB sets accounting principles generally accepted in the United States of America (GAAP) to ensure consistent reporting of the Company’s
financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB
Accounting Standards Codification (ASC) or “Codification.”
Use
of estimates in the preparation of financial statements – The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Depreciation,
depletion, and amortization of oil and gas properties and the impairment of proved oil and gas properties are determined using estimates
of oil and gas reserves. There are numerous uncertainties in estimating the quantity of reserves and in projecting the future rates of
production and timing of development expenditures, including future costs to dismantle, dispose, and restore the Company’s properties.
Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way.
Fair
value of financial instruments – The Company’s financial instruments consist of cash and cash equivalents, restricted
cash, trade receivables, trade payables, accrued liabilities, and derivative financial instruments. The carrying value of cash and cash
equivalents, restricted cash, trade payables, accrued liabilities, and derivative financial instruments are considered to be representative
of their fair market value due to the short maturity of these instruments. The carrying amount of debt reflected on the consolidated
balance sheets approximates fair value as this debt has a variable interest rate that approximates a market interest rate.
Principles
of consolidation – The accompanying consolidated financial statements are consolidated and include the accounts of the Company
and its wholly owned subsidiaries, Source Rock Royalty LLC, Nickel Road Development LLC, and Peak Stone Properties LLC. All significant
intercompany amounts have been eliminated in consolidation.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Cash
and cash equivalents – The Company considers all highly liquid investments with a maturity of three months or less, when purchased,
to be cash equivalents. Cash and cash equivalents are maintained at financial institutions, and, at times, balances may exceed federally
insured limits. The Company has not experienced any losses related to such balances, and management believes that the Company is not
exposed to any significant risks on the balances.
Restricted
cash – As of September 30, 2022, the Company held restricted cash of approximately $3,200,000 for accounts held in escrow related
to the Company’s sale of oil and gas properties. Per the terms of the Asset Purchase Agreement, see oil and gas properties within
Note 1, entered on June 1, 2022, the escrow period is defined as one year from the closing date. The restricted cash balance was released
during the period ended September 30, 2023. The Company did not hold any restricted cash as of September 30, 2023.
Accounts
receivable – Accounts receivable consist of uncollateralized joint interest owner obligations due within 30 days of the invoice
date, uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 days of production, and other
miscellaneous receivables. All receivables are reviewed periodically, and appropriate actions are taken on past-due amounts and those
deemed uncollectible, if any. No allowance for bad debts has been recorded as of September 30, 2023 and 2022. The accounts receivable
balance on January 1, 2023 and 2022 was $4,059,000 and $8,565,000, respectively.
Significant
customers – As of and for the period ended September 30, 2023, the Company’s largest customer generated approximately
90% of sales, and one customer accounted for approximately 93% of accrued oil and gas sales.
As
of and for the period ended September 30, 2022, the Company’s two largest customers generated approximately 82% and 15% of sales,
and two customers accounted for approximately 70% and 22% of revenue receivable.
Oil
and gas properties – The Company accounts for its oil and gas operations using the successful efforts method of accounting.
Under this method, all costs associated with property acquisitions, successful exploratory wells, and development wells are capitalized.
Items charged to expense generally include geological and geophysical costs, costs of unsuccessful exploratory wells, delay rentals,
and oil and gas production costs. Capitalized costs of proved leasehold costs are depleted on a well-by-well basis using the units-of-production
method based on total proved developed producing oil and gas reserves. Other capitalized costs of producing properties are also depleted
based on total proved developed producing reserves. Depletion expense for the periods ended September 30, 2023 and 2022 was approximately
$12,810,000 and $10,013,000, respectively.
The
Company assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of
the assets may not be recoverable, but at least annually. The impairment test compares undiscounted future net cash flows to the assets’
net book value. If the net capitalized costs exceed future net cash flows, then the cost of the property is written down to the estimated
fair value. Fair value for oil and natural gas properties is generally determined based on an analysis of discounted future net cash
flows adjusted for certain risk factors. There were no impairments of proved oil and gas properties as of September 30, 2023 and 2022.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Unproved
properties are assessed periodically on a project-by-project basis to determine whether an impairment has occurred. Management’s
assessment includes consideration of the results of exploration activities, commodity price predictions or forecasts, planned future
sales, or expiration of all or a portion of such projects. At September 30, 2023, management determined there was no impairment of unproved
properties.
Gains
and losses arising from sales of oil and gas properties are included in other income. However, a partial sale of proved properties
within an existing field that does not significantly affect the unit-of-production depletion rate will be accounted for as a normal
retirement with no gain or loss recognized. The sale of a partial interest within a proved property is accounted for as a recovery
of cost. The partial sale of unproved property is accounted for as a recovery of cost when there is uncertainty of the ultimate
recovery of the cost applicable to the interest retained.
On
June 1, 2022, the Company entered into an Asset Purchase Agreement with a third party to sell a portion of the Company’s proved
and unproved oil and gas properties. The Company sold various oil and gas properties held in the DJ Basin to a third party for $64,000,000;
after purchase price adjustments total proceeds received through September 30, 2022 were approximately $61,144,000. In the fourth quarter
of 2022, the Company paid final net purchase price adjustments totaling approximately $3,109,000. The oil and gas properties sold by
the Company had a carrying value of approximately $32,704,000, resulting in a gain of approximately $28,440,000.
On
March 1, 2023, the Company entered into an Asset Purchase Agreement with a third party to sell a portion of the Company’s royalty
interests in oil and gas properties. The Company sold various royalty interests in oil and gas properties held in the DJ Basin to a third
party for $7,000,000; after purchase price adjustments total proceeds were approximately $6,503,000. The oil and gas properties sold
by the Company had a carrying value of approximately $2,017,000, resulting in a gain of approximately $4,486,000.
Derivative
financial instruments – The Company enters into derivative contracts, primarily swaps, and collars to hedge future crude oil
and natural gas production in order to mitigate the risk of market price fluctuations. All derivative instruments are recorded on the
consolidated balance sheets at fair value. The Company has elected not to apply hedge accounting to any of its derivative transactions;
consequently, the Company recognizes mark-to-market gains and losses in earnings currently, rather than deferring such amounts in other
comprehensive income for those commodity derivatives that qualify as cash flow hedges.
Asset
retirement obligations – An asset retirement obligation associated with the retirement
of a tangible long-lived asset is recognized as a liability in the period incurred, with an associated increase in the carrying amount
of the related long-lived asset and oil and natural gas properties. The cost of the tangible asset, including the asset retirement cost,
is depleted over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference
to the expected future cash outflows required to satisfy the retirement obligation discounted at our credit-adjusted risk-free interest
rate. Accretion expense is recognized over time, as the discounted liability is accreted to its expected settlement value. Accretion
expense is recorded within “Depletion, depreciation, and amortization” in the consolidated statements of income. If the estimated
future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the long-lived
asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates, revisions to estimated
inflation rates, and changes in the estimated timing of abandonment.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Deferred
financing costs – Deferred financing costs are capitalized and amortized over the contractual
term of the related obligations. Debt issuance costs of approximately $444,000 and $272,000 were recognized within long-term debt as
a reduction of the current outstanding balance during the periods ended September 30, 2023 and 2022,
respectively, net of approximately $75,000 and $126,000 of amortization expense which is
recorded as interest expense. See Note 8 for further details.
Revenue
recognition – The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from
Contracts with Customers. Revenue from the sale of oil, natural gas liquids (NGLs), and natural gas is recognized as the product
is delivered to the customers’ custody transfer points, and collectability is reasonably assured. The Company fulfills the performance
obligations under the customer contracts through daily delivery of oil, NGLs, and natural gas to the customers’ custody transfer
points, and revenues are recorded on a monthly basis. The prices received for oil, NGLs, and natural gas sales under the Company’s
contracts are generally derived from stated market prices, which are then adjusted to reflect deductions, including transportation, fractionation,
and processing. As a result, the revenues from the sale of oil, NGLs and natural gas, will decrease if market prices decline. The sales
of oil, NGLs, and natural gas, as presented on the condensed consolidated statements of income, represent the Company’s share of
revenues, net of royalties and excluding revenue interests owned by others. When selling oil, NGLs, and natural gas on behalf of royalty
owners or working interest owners, the Company is acting as an agent and, thus, reports the revenue on a net basis. To the extent actual
volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received
from third parties, the expected sales volumes and prices for those properties are estimated and recorded.
Income
taxes – The Company is an LLC, which is not subject to U.S. federal income taxes. Rather, the Company’s taxable income
flows through to the owners, who are responsible for paying the applicable income taxes on the income allocated to them. For tax years
beginning on or after January 1, 2018, the Company is subject to audit rules enacted as part of the Bipartisan Budget Act of 2015 (the
Centralized Partnership Audit Regime). Under the Centralized Partnership Audit Regime, any IRS audit of the Company would be conducted
at the Company level, and if the IRS determines an adjustment, the default rule is that the Company would pay an “imputed underpayment,”
including interest and penalties, if applicable. The Company may, instead, elect to make a “push-out” election, in which
case the partners for the period that is under audit would be required to take into account the adjustments on their own personal income
tax returns.
The
LLC Agreement does not stipulate how the Company will address imputed underpayments. If the Company receives an imputed underpayment,
a determination will be made based on the relevant facts and circumstances that exist at that time. Any payments that the Company ultimately
makes on behalf of its current partners will be reflected as a dividend, rather than as a tax expense, at the time that such dividend
is declared.
The
Company has not recorded any liabilities as of September 30, 2023 or 2022 related to uncertain tax provisions. As of September 30, 2023
or 2022, the Company made no provision for interest or penalties related to uncertain tax positions. The Company files income tax returns
in the U.S. federal jurisdiction and in various states. There are currently no federal or state income tax examinations underway for
these jurisdictions.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Leases –
In February 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2016-02,
“Leases (Topic 842)” which amended the existing lease accounting guidance to require lessees to recognize a right of use
asset and lease liability on the consolidated balance sheets for all leases with terms greater than 12 months. The Company adopted
the new lease standard and all related amendments on January 1, 2022. The Company applied a modified retrospective transition
approach when adopting this new guidance which resulted in no cumulative-effect adjustments to the opening balance of retained
earnings. The Company also elected the package of practical expedients permitted under the transition guidance that retain the lease
classification and initial direct costs for any leases that existed prior to adoption of the standard. In addition, the Company has
not reassessed the accounting treatment of contracts entered into prior to adoption of the new lease guidance. The Company evaluated
whether its contractual arrangements entered into on or after January 1, 2022, contain leases. Specifically, the Company
considered whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or
outputs from the asset. The Company evaluated the contractual arrangements, including the agreements governing the operation of both
the Company and Company’s ownership interests in oil and natural gas properties. At adoption the Company concluded it did not
have leases that represented a lessee or lessor as defined in Topic 842. The Company has recognized a lease under Topic 842 during
2023.
Note
2 – Members’ Capital
The
Company is a limited liability company with membership interests issued and held by various members. The LLC Agreement authorizes Class
A units and Class B units. Class A members are eligible to receive distributions. As of September 30, 2023 and 2022, approximately 64.7
Class A units were outstanding to members.
Upon
formation, 100 Class B units were granted to certain executives. Class B units are intended to provide compensation to the Class B member
upon a liquidation event, subject to returns as described in the LLC Agreement. The requirements to provide compensation to the Class
B members had not been met under the arrangement, nor was it considered probable the requirements would be met. Therefore, the grant-date
fair values were inconsequential, and no amounts were recorded as of September 30, 2023 and 2022 in the accompanying consolidated financial
statements.
By
the terms of the LLC Agreement, distributions occur according to their respective equity interests, as defined. For the periods ending
September 30, 2023 and 2022 the Company made distributions to members of approximately $0 and $58,000,000, respectively.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Note
3 – Asset Retirement Obligations
Asset
retirement obligations represent the estimated present value of the amount to plug, abandon, and remediate producing properties at the
end of their productive lives in accordance with applicable laws. The following table summarizes the Company’s
asset retirement obligation transactions for the periods ending September 30, 2023 and 2022:
| |
2023 | | |
2022 | |
| |
| | |
| |
Asset retirement obligations, beginning of year | |
$ | 1,167,701 | | |
$ | 1,201,468 | |
| |
| | | |
| | |
Liabilities settled during the year | |
| - | | |
| (185,440 | ) |
Accretion of discount | |
| 43,456 | | |
| 42,162 | |
| |
| | | |
| | |
Asset retirement obligation, end of year | |
$ | 1,211,157 | | |
$ | 1,058,190 | |
Note
4 – Hedging and Derivative Financial Instruments
Commodity
derivative agreements – The Company utilizes swap and collar contracts to hedge the effect of price changes on a portion of
its future oil and natural gas production. The objective of the Company’s hedging activities and the use of derivative financial
instruments is to achieve more predictable cash flows. The use of derivatives involves the risk that the counterparties to such instruments
will be unable to meet the financial terms of such contracts. The derivative contracts may be terminated by a non-defaulting party in
the event of default by one of the parties to the agreement.
The
Company has elected not to apply hedge accounting to any of its derivative transactions, and, consequently, the Company recognizes mark-to-market
gains and losses in earnings currently, rather than deferring such amounts in accumulated other comprehensive income for those commodity
derivatives that would otherwise qualify as cash flow hedges. All derivative instruments are recorded on the balance sheet at fair value.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
As
of September 30, 2023, the Company had the following commodity derivative instruments outstanding through 2024, as summarized in the
table below:
| |
Collars | | |
Fixed-Price
Swaps | |
| |
| | |
| |
Weighted-Average
Contract Price | | |
| | |
| |
| |
Commodity/Index/Maturity
Period | |
Quantity | | |
Units | |
Floor | | |
Ceiling | | |
Quantity | | |
Units | |
Weighted-Average
Contract Price | |
Crude
Oil | |
| | | |
| |
| | | |
| | | |
| | | |
| |
| | |
NYMEX | |
| | | |
| |
| | | |
| | | |
| | | |
| |
| | |
Oct
23 – Sep 24 | |
| 284,100 | | |
BBL | |
$ | 64.92 | | |
$ | 78.18 | | |
| 3,000 | | |
BBL | |
$ | 74.40 | |
| |
| | | |
| |
| | | |
| | | |
| | | |
| |
| | |
Natural
Gas | |
| | | |
| |
| | | |
| | | |
| | | |
| |
| | |
NYMEX | |
| | | |
| |
| | | |
| | | |
| | | |
| |
| | |
Oct
23 – Sep 24 | |
| 18,000 | | |
MMBTU | |
| 5.00 | | |
| 6.65 | | |
| - | | |
MMBTU | |
$ | - | |
| |
Collars | | |
Fixed-Price
Swaps | |
| |
| | |
| |
Weighted-Average
Contract Price | | |
| | |
| |
| |
Commodity/Index/Maturity
Period | |
Quantity | | |
Units | |
Floor | | |
Ceiling | | |
Quantity | | |
Units | |
Weighted-Average
Contract Price | |
Crude
Oil | |
| | | |
| |
| | | |
| | | |
| | | |
| |
| | |
NYMEX | |
| | | |
| |
| | | |
| | | |
| | | |
| |
| | |
Oct
24 – Dec 24 | |
| 47,500 | | |
BBL | |
$ | 67.50 | | |
$ | 81.07 | | |
| - | | |
BBL | |
$ | - | |
Derivative
liabilities fair value – The fair value of the derivative commodity contracts was a net liability of approximately $2,410,000
and $2,899,000 at September 30, 2023 and 2022, respectively. The following table details the fair value of derivatives recorded in the
accompanying consolidated balance sheets, by category:
| |
Fair Value | | |
Fair Value | |
| |
September 30, | | |
September 30, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Derivative liability - current | |
$ | 2,303,718 | | |
$ | 2,786,213 | |
Derivative liability - non-current | |
| 106,225 | | |
| 112,967 | |
| |
| | | |
| | |
Total derivative liabilities | |
$ | 2,409,943 | | |
$ | 2,899,180 | |
Derivative
gain (loss) – The following table summarizes the components of the net derivative gain (loss) line item presented in the accompanying
consolidated statements of income during the periods ended September 30:
| |
2023 | | |
2022 | |
| |
| | |
| |
Unrealized gain on derivatives | |
$ | 317,924 | | |
$ | 3,115,464 | |
Realized loss on derivatives | |
| (789,972 | ) | |
| (19,968,789 | ) |
| |
| | | |
| | |
Net loss on derivatives | |
$ | (472,048 | ) | |
$ | (16,853,325 | ) |
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Note
5 – Fair Value Measurements
The
Company follows ASC 820, Fair Value Measurements and Disclosures, which establishes a hierarchy for the inputs utilized in measuring
fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level
1 – Quoted prices for identical assets or liabilities in active markets;
Level
2 – Quoted prices for similar assets or liabilities in active markets; and
Level
3 – Unobservable inputs for the asset or liability, such as discounted cash models.
The
following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September
30, 2023 and 2022:
| |
Fair Value Measurement at September 30, 2023 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Derivative instruments | |
$ | - | | |
$ | 2,409,943 | | |
$ | - | | |
$ | 2,409,943 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets and liabilities measured at fair value | |
$ | - | | |
$ | 2,409,943 | | |
$ | - | | |
$ | 2,409,943 | |
| |
Fair Value Measurement at September 30, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Derivative instruments | |
$ | - | | |
$ | 2,899,180 | | |
$ | - | | |
$ | 2,899,180 | |
| |
| | | |
| | | |
| | | |
| | |
Total assets and liabilities measured at fair value | |
$ | - | | |
$ | 2,899,180 | | |
$ | - | | |
$ | 2,899,180 | |
The
inputs used to determine such fair value are primarily based upon observable market data for similar instruments, including the forward
curve for commodity prices based on quoted market prices and would be classified within Level 2.
Note
6 – Leases
The
Company leases a compressor under a non-cancellable operating lease agreement. It has been determined that the lease does not constitute
finance leases. Operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments
over the lease term at commencement date. The Company believes any option to terminate is not reasonably certain for the operating lease
agreement.
For
the period ended September 30, 2023, components of lease expense were as follows:
Operating lease cost | |
$ | 17,000 | |
Short-term lease cost | |
$ | 717,000 | |
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
All
components of lease costs are expensed within lease operating expenses on the consolidated statement of income.
There
was not any lease expense under ASC 842 during the period ended September 30, 2022.
For
the period ended September 30, 2023, supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in measurement of lease liabilities | |
| |
Operating cash flows used for operating leases (including short-term) | |
$ | 17,000 | |
| |
| | |
Right-of-use assets obtained in exchange for lease obligations (non-cash) | |
| | |
Operating leases | |
$ | 388,011 | |
| |
| | |
Weighted-average remaining lease term (years) | |
| | |
Operating leases | |
| 1.9 | |
| |
| | |
Weighted-average discount rate | |
| | |
Operating leases | |
| 4.9 | % |
The
following is the future maturities of the annual undiscounted cash flows of the operating lease liability as of September 30, 2023:
Years Ending | |
| |
September 30, | |
| |
| |
| |
2024 | |
$ | 204,000 | |
2025 | |
| 187,000 | |
| |
| | |
Total minimum lease payments | |
| 391,000 | |
| |
| | |
Less imputed interest | |
| (18,414 | ) |
| |
| | |
Present value of lease liability | |
$ | 372,586 | |
Note
7 – Commitments and Contingencies
Government
regulation – Many aspects of the oil and gas industry are extensively regulated by federal, state, and local governments in
all areas in which the Company has operations. Regulations govern such things as drilling permits, environmental protection and pollution
control, spacing of wells, the unitization and pooling of properties, reports concerning operations, royalty rates, and various other
matters, including taxation. Oil and gas industry legislation and administrative regulations are periodically changed for a variety of
political, economic, and other reasons. As of September 30, 2023 or 2022, the Company has not been fined or cited for any violations
of governmental regulations that would have a material adverse effect upon the financial condition, capital expenditures, earnings, or
competitive position of the Company in the oil and gas industry.
Nickel
Road Operating LLC and Subsidiaries
Notes
to Consolidated Financial Statements
Litigation
– From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal
course of business. As of the date of this report, no legal proceedings are ongoing or pending that management believes could have a
materially adverse effect upon the Company’s financial condition or results of operations.
Note
8 – Long-term Debt
Revolving
loan – On February 22, 2021, the Company entered into a revolving loan agreement (the Loan Agreement) with a
maturity of February 22, 2024. The Loan Agreement provides for a maximum revolving loan (the Revolving Loan) of $35,000,000 with an
initial borrowing base of $10,000,000. In October 2022, the Loan Agreement was amended. The total borrowing base and sublimit
increased to $30,000,000 for the Revolving Loan.
All
sums advanced under the Revolving Loan, together with all accrued but unpaid interest thereon, are due in full at maturity. The Loan
Agreement requires the Company to maintain certain affirmative and negative covenants, including certain financial ratios defined in
the Loan Agreement, and provides the lender with a first security interest in substantially all of the Company assets. The interest
rate of the Revolving Loan is the lesser of the (1) Wall Street Journal prime rate, plus the applicable margin, or (2) the
Maximum Rate as defined per the Loan Agreement. The interest rate as of September 30, 2023, was 8.75%. Commitment fees equal to 0.5%
of the undrawn amount are payable quarterly under this agreement. The outstanding balance on the Revolving Loan as of September 30,
2023, was $7,280,000, net of debt issuance cost of approximately $153,000. The outstanding balance of approximately $7,433,000 is
due in full on the maturity date of February 22, 2026.
On
March 30, 2023, the Company amended its Loan Agreement to provide for a maximum Revolving Loan of $50,000,000 which matures on February
22, 2026. As of the date of the amendment the borrowing base was increased to $35,000,000, with a sublimit of $25,000,000, and continues
to be subject to regular redeterminations by the lender. Permitted distributions are subject to limitations defined within the amendment
and required hedge transactions are amended such that as of September 30, 2023, and thereafter, so long as the borrowing base utilization
exceeds 60%, the Company is required to maintain crude oil hedges of at least 60% of the Company’s anticipated crude oil production
for a period of not less than 12 months, to be complied with on a quarterly basis.
On
August 31, 2023, the Company amended its Loan Agreement to decrease the borrowing base to $33,000,000.
March
2023 Term Loan – The March 2023 amended Loan Agreement also allows for a new Term Loan (March 2023 Term Loan) in the amount
of $10,000,000 which commences on the date of the amendment and continues through July 31, 2023, after which the Lender shall have no
further commitment to make an advance on the March 2023 Term Loan, so long as the aggregate advances do not exceed $10,000,000. The March
2023 Term Loan shall be payable in monthly principal installments commencing on August 1, 2023, plus all accrued interest, and matures
on July 1, 2024. The March 2023 Term Loan bears interest at a rate equal to the sum of the Prime Rate, plus the Applicable Margin (as
defined in the Loan Agreement); provided, however, that the interest rate on the March 2023 Term Loan shall never fall below 3.75%. The
outstanding balance on the March 2023 Term Loan as of September 30, 2023, was $5,700,000. The full outstanding balance is due in full
on the maturity date of July 1, 2024.
September
2021 Term Loan – On September 1, 2021, the Loan Agreement was amended to establish a term loan (September 2021 Term Loan) in
the amount of $12,000,000 that matured on August 31, 2022. The September 2021 Term Loan was payable in monthly principal installments
commencing January 31, 2022, plus all accrued interest. Interest for the September 2021 Term Loan was fixed at 5.25%. The September 2021
Term Loan also provides the lender with a first security interest in substantially all of the Company assets. As of September 30, 2023,
this loan matured and was paid off in full.
Interest
expense related to the Revolving Loan and the Term Loans for the periods ended September 30, 2023 and 2022, was approximately $1,450,000,000
and $423,000, respectively.
Note
9 – Related Parties
Management
fees – The Company receives management services from Nickel Road Management LLC under the Management Services Agreement dated
March 30, 2018 (the Services Agreement). In accordance with the Service Agreement, Nickel Road Management LLC provides management services,
including office space and employment of all employees. The Company pays Nickel Road Management LLC a monthly amount equal to the
allocated costs for monthly general and administrative expenses approved by the managers (the Development Plan and Budget). The Services
Agreement will remain in effect for three years and will automatically extend for successive one-year terms coinciding with the period
covered by the Development Plan and Budget unless terminated under the terms of the Services Agreement. For the periods ended September
30, 2023 and 2022, the Company incurred service agreement reimbursement costs of approximately $2,947,000 and $3,205,000, respectively.
For the periods ending September 30, 2023 and 2022, the Company had approximately $1,300 and $139,000 in management fees due to Nickel
Road Management LLC, respectively. These balances are included accrued liabilities on the consolidated balance sheets.
Note
10 – Subsequent Events
The
Company has reviewed all subsequent events through December 7, 2023, the date the consolidated financial statements were available to
be issued.
Exhibit 99.3
Exhibit 99.4
Exhibit
99.5
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
As
previously disclosed, Prairie Operating Co. (the “Company”) entered into an asset purchase agreement, dated January 11, 2024
(the “NRO Agreement”), by and among the Company, Nickel Road Development LLC, Nickel Road Operating LLC (“NRO”)
and Prairie Operating Co., LLC (“Prairie LLC”), to acquire the assets of NRO for total consideration of $94.5 million (the
“Purchase Price”), subject to certain closing price adjustments and other customary closing conditions (the “NRO Acquisition”).
The Purchase Price consists of $83.0 million in cash and $11.5 million in deferred cash payments. The Company deposited $9 million of
the Purchase Price into an escrow account on January 11, 2024 (the “Deposit”), which will be released to NRO upon the earlier
of the date of the closing of the NRO Acquisition pursuant to the NRO Agreement (the “Closing”) and August 15, 2024. Portions
of the Deposit are subject to earlier release under certain circumstances if the Closing has not occurred on or prior to June 17, 2024.
The
Company is providing the following unaudited pro forma condensed combined financial information to aid in the analysis of the financial
aspects of the following:
|
(i) |
the
proposed issuance and sale of shares of common stock of the Company, par value $0.01 per share (“Common Stock”), in an
underwritten public offering (the “Offering”); |
|
|
|
|
(ii) |
the
NRO Acquisition; |
|
|
|
|
(iii) |
the
sale of all of the Company’s cryptocurrency miners (the “Mining Equipment”) and the assignment of all of the Company’s
rights and obligations under the Master Services Agreement, dated February 16, 2023, by and between Atlas Power Hosting, LLC and
the Company, to a private purchaser pursuant to an asset purchase agreement, dated January 23, 2024 (the “Crypto Sale”); |
|
|
|
|
(iv) |
the
merger of Creek Road Merger Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Merger
Sub”), with and into Prairie LLC, with Prairie LLC surviving and continuing to exist as a Delaware limited liability company
and a wholly owned subsidiary of the Company pursuant to that certain Amended and Restated Agreement and Plan of Merger, dated as
of May 3, 2023, by and among the Company, Merger Sub and Prairie LLC (the “Merger”); |
|
|
|
|
(v) |
the
Series D PIPE (as defined below); and |
|
|
|
|
(vi) |
the
Exok Transaction (as defined below and collectively, with the Offering, [the Genesis Bolt-on Acquisition,] the NRO Acquisition, the
Crypto Sale, the Merger and the Series D PIPE, the “Transactions”). |
The
following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation
S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”
and presents the combination of historical financial information of the Company and Prairie LLC, adjusted to give effect to the Transactions
and subsequent events as described in Note 2 below.
The
unaudited pro forma condensed combined balance sheet as of September 30, 2023 combines the historical balance sheet of the Company as
of September 30, 2023 on a pro forma basis as if the Transactions and the subsequent events, described in Note 2 below, had been consummated
on September 30, 2023.
The
unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and the year ended December
31, 2022 combine the historical statements of operations of Prairie LLC, the historical statements of operations of the Company, and
the historical consolidated statements of operations of NRO, as applicable, for such periods on a pro forma as if the Transactions and
subsequent events, described in Note 2 below, had been consummated on January 1, 2022.
The
unaudited pro forma condensed combined financial information is based on, and should be read in conjunction with:
|
(a) |
the
Company’s audited historical consolidated financial statements and related notes included in its Annual Report on Form 10-K
for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 31,
2023; |
|
|
|
|
(b) |
the
Company’s unaudited historical condensed consolidated financial statements and related notes for the three and nine months
ended September 30, 2023, included in its Quarterly Report on Form 10-Q for the period ended September 30, 2023, filed with the SEC
on November 14, 2023; |
|
|
|
|
(c) |
Prairie
LLC’s audited financial statements for the period from June 7, 2022 (date of inception) to December 31, 2022 and related notes
included in the Company’s Amendment to its Current Report on Form 8-K/A, filed with the SEC on June 16, 2023; |
|
|
|
|
(d) |
the
section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Prairie
Operating Co.” included in the Company’s Annual Report on Form 10-K for the fiscal year ended 2022, filed with the
SEC on March 31, 2023, and in the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2023, filed with
the SEC on November 14, 2023; |
|
|
|
|
(e) |
NRO’s
unaudited consolidated financial statements for the nine months ended September 30, 2023, included in the Company’s Amendment
to its Current Report on Form 8-K/A, filed with the SEC on February 9, 2024; |
|
|
|
|
(f) |
NRO’s
audited consolidated financial statements for the year ended December 31, 2022, included in the Company’s Amendment to its
Current Report on Form 8-K/A, filed with the SEC on February 9, 2024; and |
|
|
|
|
(g) |
the
section in this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations
of Nickel Road Operating LLC .” |
The
unaudited pro forma condensed combined financial information has been presented for illustrative purposes only and does not necessarily
reflect what the Company’s financial condition or results of operations would have been had the Transactions or subsequent events,
described in Note 2 below, occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial information
do not project the Company’s future financial condition and results of operations. The actual financial position and results of
operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma
adjustments represent management’s estimates based on information available as of the date of this filing and certain assumptions
that management believes are factually supportable and are expected to have a continuing impact on the Company’s results of operations,
and are subject to change as additional information becomes available and analyses are performed.
Description
of the Merger and Related Transactions
On
May 3, 2023 (the “Merger Closing Date”), the Company completed the Merger, and upon consummation thereof, the Company changed
its name from “Creek Road Miners, Inc.” to “Prairie Operating Co.” (the “Merger Closing”). Prior
to the consummation of the Merger, the Company effectuated certain restructuring transactions in the following order and issued an aggregate
of 3,375,288 shares of Common Stock (excluding shares reserved for issuance and unissued subject to certain beneficial ownership limitations)
and 4,423 shares of Series D preferred stock, par value $0.01 per share (“Series D Preferred Stock”):
|
(i) |
the
Company’s Series A preferred stock, par value $0.0001 per share (“Series A Preferred Stock”), Series B preferred
stock, par value $0.0001 per share (“Series B Preferred Stock”), and Series C preferred stock, par value $0.0001 per
share (“Series C Preferred Stock”), plus accrued dividends, were converted, in the aggregate, into shares of Common Stock; |
|
|
|
|
(ii) |
the
Company’s 12% senior secured convertible debentures (the “Original Debentures”), plus accrued but unpaid interest
and a 30% premium, were exchanged, in the aggregate, for (a) the 12% amended and restated senior secured convertible debentures (collectively,
the “AR Debentures”) in the principal amount of $1,000,000 in substantially the same form as their respective Original
Debentures, (b) shares of Common Stock and (c) shares of Series D Preferred Stock; |
|
|
|
|
(iii) |
accrued
fees payable to the certain members of the board of directors of the Company in the amount of $110,250 were converted into shares
of Common Stock; |
|
|
|
|
(iv) |
accrued
consulting fees of the Company in the amount of $318,750 payable to Bristol Capital, LLC (“Bristol Capital”) were converted
into shares of Common Stock; and |
|
|
|
|
(v) |
all
amounts payable pursuant to certain convertible promissory notes were converted into shares of Common Stock. |
Prior
to the Merger Closing, the Company’s then-existing warrants to purchase shares of Common Stock, warrants to purchase shares of
Series B Preferred Stock and options to purchase shares of Common Stock were cancelled and retired and ceased to exist without the payment
of any consideration to the holders thereof.
At
the effective time of the Merger, all membership interests in Prairie LLC were converted into the right to receive each member’s
pro rata share of 2,297,668 shares of Common Stock.
At
the effective time of the Merger, the Company assumed and converted options to purchase membership interests of Prairie LLC outstanding
and unexercised as of immediately prior to the effective time of the Merger into non-compensatory options to acquire 8,000,000 shares
of Common Stock for $7.14 per share (“Non-Compensatory Options”), which are only exercisable if specific production hurdles
are achieved, and the Company entered into option agreements at the effective time of the Merger with each of Gary C. Hanna, Edward Kovalik,
Paul Kessler and a third-party investor. An aggregate of 2,000,000 Non-Compensatory Options are subject to be transferred to the Series
D PIPE Investors (as defined below), based on their then percentage ownership of Series D Preferred Stock to the aggregate Series D Preferred
Stock issued in connection with the Series D PIPE outstanding and held by all Series D PIPE Investors as of the Merger Closing Date,
if the Company does not meet certain performance metrics by May 3, 2026.
In
addition, in connection with the Merger Closing, the Company consummated the purchase of oil and gas leases, including all of the right,
title and interest in, to and under certain undeveloped oil and gas leases in Weld County, Colorado in the DJ Basin of Exok, Inc., an
Oklahoma corporation (“Exok”), together with certain other associated assets, data and records, consisting of approximately
3,158 net mineral acres in, on and under approximately 4,494 gross acres from Exok for $3,000,000 pursuant to that certain Amended
and Restated Purchase and Sale Agreement, dated as of May 3, 2023 (the “Exok Agreement”), by and among the Company, Prairie
LLC and Exok (the “Exok Transaction”).
To
fund the Exok Transaction, the Company sold an aggregate of approximately $17.38 million of Series D Preferred Stock with a stated value
of $1,000 per share and convertible into shares of Common Stock at a price of $5.00 per share, Series A warrants to purchase 3,475,250
shares of Common Stock at an exercise price of $6.00 per share (“Series D A Warrants”) and Series B warrants to purchase
3,475,250 shares of Common Stock at an exercise price of $6.00 per share (“Series D B Warrants”) in a private placement (the
“Series D PIPE”) pursuant to securities purchase agreements, dated May 3, 2023, by and between the Company and each of the
investors thereto (the “Series D PIPE Investors”).
The
Merger has been accounted for as a reverse asset acquisition under existing GAAP. For accounting purposes, Prairie LLC was treated as
acquiring Merger Sub in the Merger. See Note 1 for further discussion.
Accordingly,
for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Prairie LLC
with the acquisition being treated as the equivalent of Prairie LLC issuing stock for the net assets of the Company. On the Merger Closing
Date, the assets and liabilities of the Company were recorded based upon relative fair values, with no goodwill or other intangible assets
recorded.
The
assumptions and estimates underlying the unaudited pro forma adjustments are described in the accompanying notes. Actual results may
differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial information.
The pro forma adjustments do not consider borrowings, financings and other transactions that may have occurred subsequent to September
30, 2023 other than the subsequent events described in Note 2 below and reflected in the pro forma financial information, nor do they
reflect anticipated financings or other transactions that may occur in the future, other than the Offering.
NRO
Acquisition
On
January 11, 2024, the Company entered into the NRO Agreement to acquire the assets of NRO for total consideration of $94.5 million, subject
to certain closing price adjustments and other customary closing conditions. The Purchase Price consists of $83.0 million in cash and
$11.5 million in deferred cash payments. The Company deposited $9 million of the Purchase Price into an escrow account on January 11,
2024, which will be released to NRO upon the earlier of the date of the Closing and August 15, 2024. Portions of the Deposit are subject
to earlier release under certain circumstances if the Closing has not occurred on or prior to June 17, 2024.
The
NRO Acquisition is expected to be accounted for as an asset acquisition in accordance with ASC 805. The estimated fair value of the consideration
to be paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, will be recorded on
our books as of the date of the Closing of the NRO Acquisition. Additionally, costs directly related to the NRO Acquisition are capitalized
as a component of the Purchase Price.
Subsequent
Events
Reverse
Stock Split
On
October 12, 2023, the Company filed a Certificate of Amendment to its Certificate of Incorporation (the “Certificate of Amendment”)
with the Delaware Secretary of State to effect a reverse stock split of the Company’s Common Stock, effective October 16, 2023,
at a ratio of 1:28.5714286 (the “Reverse Stock Split”) (see Note 2). Unless otherwise noted, all per share and share amounts
presented herein have been retroactively adjusted for the effect of the Reverse Stock Split for all periods presented.
Conversion
of AR Debentures
In
October 2023, conversion notices were received from holders of the AR Debentures and the Company issued 400,667 shares of Common Stock
to effect the conversion. This represented the full conversion of the AR Debentures and accrued interest due to one of the holders.
Exercise
of Series D B Warrants
On
November 13, 2023, Narrogal Nominees Pty Ltd ATF Gregory K O’Neill Family Trust (“O’Neill Trust”) delivered notice
to the Company of the exercise of Series D B Warrants to purchase 2,000,000 shares of Common Stock at an exercise price of $6.00 per
share for total proceeds to the Company of $12 million (the “Warrant Exercise”).
Deposit
on NRO Acquisition
In
conjunction with the NRO Acquisition, the Company deposited $9 million of the Purchase Price into an escrow account on January 11, 2024,
which will be released to NRO upon the earlier of the date of the Closing and August 15, 2024, or earlier under certain circumstances.
Sale
of Cryptocurrency Mining Equipment
On
January 23, 2024, the Company completed the Crypto Sale, for consideration consisting of (i) $1.0 million in cash and (ii) $1.0 million
(plus accrued interest) in deferred cash payments to be made out of a portion of the future net revenues associated with the Mining Equipment.
Genesis
Bolt-on Acquisition
On
February 5, 2024, the Company acquired oil and natural gas properties comprised of a 1,280 acre drillable spacing unit and eight permitted
drilling locations in the DJ Basin from a private seller for $900,000.
Unaudited
Pro Forma Condensed Combined Balance Sheet
as
of September 30, 2023
| |
| | |
| | |
Nickel
Road Transaction Accounting Adjustments | | |
| | |
| | |
| | |
| |
| |
Prairie
Operating Co. (Historical) | | |
Nickel
Road (Historical) | | |
Removal of
Nickel Road (Historical) | | |
Nickel
Road Acquisition Adjustments | | |
Cryptocurrency
Asset Sale
Adjustments | | |
Subsequent
Event Adjustments | | |
Equity Financing | | |
Combined Pro
Forma | |
| |
| | |
| | |
(See
Note 5(d)) | | |
(See
Note 5) | | |
(See
Notes 4 and 5) | | |
(See
Notes 2 and 5) | | |
(See
Note
6) | | |
| |
Assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 7,241,811 | | |
$ | 3,897,937 | | |
$ | (3,897,937 | ) | |
$ | (74,000,000 | )(f) | |
$ | 1,000,000 | (g) | |
$ | (60,000 | )(a) | |
$ | 90,000,000 | | |
$ | 26,281,811 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| 12,000,000 | (b) | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| (9,000,000 | )(e) | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| (900,000 | )(q) | |
| | | |
| | |
Accounts and other receivable | |
| 97,293 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 97,293 | |
Joint interest receivable | |
| — | | |
| 832,883 | | |
| (832,883 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Accrued oil and gas sales | |
| — | | |
| 4,785,376 | | |
| (4,785,376 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Prepaid expenses | |
| 271,839 | | |
| 565,834 | | |
| (565,834 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 271,839 | |
Note receivable | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,000,000 | (g) | |
| — | | |
| — | | |
| 1,000,000 | |
Total current assets | |
| 7,610,943 | | |
| 10,082,030 | | |
| (10,082,030 | ) | |
| (74,000,000 | ) | |
| 2,000,000 | | |
| 2,904,000 | | |
| 90,000,000 | | |
| 27,650,943 | |
Property and equipment | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Oil and natural gas properties, successful efforts
method of accounting | |
| 28,595,051 | | |
| — | | |
| — | | |
| 93,904,482 | (f) | |
| — | | |
| 900,000 | (q) | |
| — | | |
| 123,399,533 | |
Proved properties | |
| — | | |
| 140,552,991 | | |
| (140,552,991 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Unproved properties | |
| — | | |
| 1,253,263 | | |
| (1,253,263 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Accumulated depletion | |
| — | | |
| (37,757,172 | ) | |
| 37,757,172 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Cryptocurrency mining equipment | |
| 4,293,422 | | |
| — | | |
| — | | |
| — | | |
| (4,293,422 | )(g) | |
| — | | |
| — | | |
| — | |
Less: Accumulated depreciation, depletion and amortization | |
| (558,319 | ) | |
| — | | |
| — | | |
| — | | |
| 558,319 | (g) | |
| — | | |
| — | | |
| — | |
Total property and equipment, net | |
| 32,330,154 | | |
| 104,049,082 | | |
| (104,049,082 | ) | |
| 93,904,482 | | |
| (3,735,103 | ) | |
| 900,000 | | |
| — | | |
| 123,399,533 | |
Deposits on mining equipment | |
| 150,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 150,000 | |
Deposits on oil and natural gas properties | |
| — | | |
| — | | |
| — | | |
| (9,000,000 | )(f) | |
| — | | |
| 9,000,000 | (e) | |
| — | | |
| — | |
Right-of-use asset, net | |
| — | | |
| 372,586 | | |
| (372,586 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total assets | |
$ | 40,091,097 | | |
$ | 114,503,698 | | |
$ | (114,503,698 | ) | |
$ | 10,904,482 | | |
$ | (1,735,103 | ) | |
$ | 11,940,000 | | |
$ | 90,000,000 | | |
$ | 151,200,476 | |
Liabilities, Members’ Capital, Mezzanine Equity
and Stockholders’ Equity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 6,708,498 | | |
$ | — | | |
$ | — | | |
$ | 175,000 | (f) | |
$ | — | | |
$ | (30,000 | )(a) | |
$ | — | | |
$ | 6,853,498 | |
Accounts payable | |
| — | | |
| 13,721,369 | | |
| (13,721,369 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Accrued liabilities | |
| — | | |
| 11,268,874 | | |
| (11,268,874 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Accrued interest and expenses - related parties | |
| 30,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (30,000 | )(a) | |
| — | | |
| — | |
Secured convertible debenture (related party) | |
| 2,431,500 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,431,500 | )(a) | |
| — | | |
| — | |
Secured convertible debenture | |
| 2,431,500 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,431,500 | )(a) | |
| — | | |
| — | |
Current maturities of long-term debt | |
| — | | |
| 5,700,000 | | |
| (5,700,000 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Derivative liability, current | |
| — | | |
| 2,303,718 | | |
| (2,303,718 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Short-term lease liability | |
| — | | |
| 190,060 | | |
| (190,060 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Deferred acquisition cost, current | |
| — | | |
| — | | |
| — | | |
| 3,123,533 | (f) | |
| — | | |
| — | | |
| — | | |
| 3,123,533 | |
Total current liabilities | |
| 11,601,498 | | |
| 33,184,021 | | |
| (33,184,021 | ) | |
| 3,298,533 | | |
| — | | |
| (4,923,000 | ) | |
| — | | |
| 9,977,031 | |
Long-term liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrant liabilities | |
| 50,738,180 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (50,738,180 | )(c) | |
| — | | |
| — | |
Long-term debt, net of current portion and deferred
financing costs | |
| — | | |
| 7,280,670 | | |
| (7,280,670 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Deferred acquisition cost, long-term | |
| — | | |
| — | | |
| — | | |
| 6,855,806 | (f) | |
| — | | |
| — | | |
| — | | |
| 6,855,806 | |
Derivative liability, non-current | |
| — | | |
| 106,225 | | |
| (106,225 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Asset retirement obligations | |
| — | | |
| 1,211,157 | | |
| (1,211,157 | )(f) | |
| 750,142 | (f) | |
| — | | |
| — | | |
| — | | |
| 750,142 | |
Long-term lease liability | |
| — | | |
| 182,526 | | |
| (182,526 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total long-term liabilities | |
| 50,738,180 | | |
| 8,780,578 | | |
| (8,780,578 | ) | |
| 7,605,948 | | |
| — | | |
| (50,738,180 | ) | |
| — | | |
| 7,605,948 | |
Total liabilities | |
| 62,339,678 | | |
| 41,964,599 | | |
| (41,964,599 | ) | |
| 10,904,482 | | |
| — | | |
| (55,661,180 | ) | |
| — | | |
| 17,582,980 | |
Commitments and contingencies | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Members’ capital | |
| — | | |
| 72,539,099 | | |
| (72,539,099 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Mezzanine equity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Series D convertible preferred stock; $0.01 par value;
21,799 shares issued and outstanding | |
| 21,799,250 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (21,799,250 | )(c) | |
| — | | |
| — | |
Series E convertible preferred stock; $0.01 par value;
20,000 shares issued and outstanding | |
| 20,000,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (20,000,000 | )(c) | |
| — | | |
| — | |
Stockholders’ equity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred stock; 50,000 shares authorized: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Series D convertible preferred stock; $0.01 par value;
21,799 shares issued and outstanding | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 218 | (c) | |
| — | | |
| 218 | |
Series E convertible preferred stock; $0.01 par value;
20,000 shares issued and outstanding | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 200 | (c) | |
| — | | |
| 200 | |
Common stock; $0.01 par value; 500,000,000 shares authorized
and 7,074,742 shares issued and outstanding, actual* and 19,574,742 shares issued and outstanding, as adjusted | |
| 70,747 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 4,007 | (a) | |
| 121,359 | | |
| 216,113 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| 20,000 | (b) | |
| | | |
| | |
Additional paid-in capital | |
| (8,716,827 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 4,858,993 | (a) | |
| 89,878,641 | | |
| 190,537,819 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| 11,980,000 | (b) | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| 50,738,180 | (c) | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| 21,799,032 | (c) | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| 19,999,800 | (c) | |
| | | |
| | |
Accumulated deficit | |
| (55,401,751 | ) | |
| — | | |
| — | | |
| — | | |
| (1,735,103 | )(g) | |
| — | | |
| — | | |
| (57,136,854 | ) |
Total stockholders’ equity | |
| (64,047,831 | ) | |
| — | | |
| — | | |
| — | | |
| (1,735,103 | ) | |
| 109,400,430 | | |
| 90,000,000 | | |
| 133,617,496 | |
Total liabilities, members’ capital, mezzanine
equity and stockholders’ equity | |
$ | 40,091,097 | | |
$ | 114,503,698 | | |
$ | (114,503,698 | ) | |
$ | 10,904,482 | | |
$ | (1,735,103 | ) | |
$ | 11,940,000 | | |
$ | 90,000,000 | | |
$ | 151,200,476 | |
Unaudited
Pro Forma Condensed Combined Statement of Operations
Nine
Months Ended September 30, 2023
| |
| | |
| | |
| | |
| | |
Nickel
Road Transaction Accounting Adjustments | | |
| | |
| | |
| | |
| |
| |
Prairie
Operating Co. (Historical) | | |
Creek
Road Miners,
Inc. (Historical) | | |
Nickel
Road (Historical) | | |
Creek
Road Miners, Inc. Acquisition Adjustments | | |
Removal of
Nickel Road (Historical) | | |
Nickel
Road Acquisition Adjustments | | |
Cryptocurrency
Asset Sale
Adjustments | | |
Subsequent
Event Adjustments | | |
Equity Financing | | |
Combined Pro
Forma | |
| |
| | |
| | |
| | |
(See
Note 5) | | |
(See
Note 5(d)) | | |
(See
Note 5) | | |
(See
Notes 4 and 5) | | |
(See
Notes 2 and 5) | | |
(See
Note 6) | | |
| |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Cryptocurrency mining | |
$ | 637,269 | | |
$ | 73,584 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (710,853 | )(g) | |
$ | — | | |
$ | — | | |
$ | — | |
Oil and gas sales | |
| — | | |
| — | | |
| 34,210,491 | | |
| — | | |
| (34,210,491 | ) | |
| 33,311,139 | (k) | |
| — | | |
| — | | |
| — | | |
| 33,311,139 | |
Total revenues | |
| 637,269 | | |
| 73,584 | | |
| 34,210,491 | | |
| — | | |
| (34,210,491 | ) | |
| 33,311,139 | | |
| (710,853 | ) | |
| — | | |
| — | | |
| 33,311,139 | |
Operating costs and expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cryptocurrency mining costs (exclusive of depreciation
and amortization shown below) | |
| 303,172 | | |
| 80,140 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (383,312 | )(g) | |
| — | | |
| — | | |
| — | |
Depreciation, depletion and amortization | |
| 558,319 | | |
| 116,724 | | |
| 12,852,983 | | |
| 141,885 | (h) | |
| (12,852,983 | ) | |
| 3,394,509 | (k) | |
| (816,928 | )(g) | |
| — | | |
| — | | |
| 3,394,509 | |
Production taxes | |
| — | | |
| — | | |
| 3,422,294 | | |
| — | | |
| (3,422,294 | ) | |
| 2,983,356 | (k) | |
| — | | |
| — | | |
| — | | |
| 2,983,356 | |
Lease operating | |
| — | | |
| — | | |
| 3,316,866 | | |
| — | | |
| (3,316,866 | ) | |
| 3,316,866 | (k) | |
| — | | |
| — | | |
| — | | |
| 3,316,866 | |
General and administrative | |
| 9,236,815 | | |
| 1,119,277 | | |
| 3,098,777 | | |
| 170,120 | (i) | |
| (3,098,777 | ) | |
| 3,098,777 | (k) | |
| — | | |
| — | | |
| — | | |
| 13,624,989 | |
Stock based compensation | |
| — | | |
| 170,120 | | |
| — | | |
| (170,120 | )(i) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Impairment of cryptocurrency mining equipment | |
| 16,794,688 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (16,794,688 | )(g) | |
| — | | |
| — | | |
| — | |
Total operating expenses | |
| 26,892,994 | | |
| 1,486,261 | | |
| 22,690,920 | | |
| 141,885 | | |
| (22,690,920 | ) | |
| 12,793,507 | | |
| (17,994,928 | ) | |
| — | | |
| — | | |
| 23,319,719 | |
Income (loss) from operations | |
| (26,255,725 | ) | |
| (1,412,677 | ) | |
| 11,519,571 | | |
| (141,885 | ) | |
| 11,519,571 | | |
| 20,517,632 | | |
| 17,284,075 | | |
| — | | |
| — | | |
| 9,991,420 | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 128,202 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 128,202 | |
Interest expense | |
| (111,463 | ) | |
| (214,344 | ) | |
| (1,524,751 | ) | |
| 141,588 | (j) | |
| 1,524,751 | | |
| (748,450 | )(l) | |
| — | | |
| 180,000 | (n) | |
| — | | |
| (752,669 | ) |
Gain on sale of oil and gas properties | |
| — | | |
| — | | |
| 6,261,551 | | |
| — | | |
| (6,261,551 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Realized loss on derivative instruments | |
| — | | |
| — | | |
| (789,972 | ) | |
| — | | |
| 789,972 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Unrealized gain (loss) on derivative instruments | |
| — | | |
| — | | |
| 317,924 | | |
| — | | |
| (317,924 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Other income (expense) | |
| — | | |
| — | | |
| (7,158 | ) | |
| — | | |
| 7,158 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss on adjustment to fair value - warrant liabilities | |
| (24,855,085 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 24,855,085 | (o) | |
| — | | |
| — | |
Loss on adjustment to fair value - AR Debentures | |
| (2,882,000 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2,882,000 | (p) | |
| — | | |
| — | |
Loss on adjustment to fair value - Obligation Shares | |
| (1,477,103 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,477,103 | ) |
Liquidated damages | |
| (173,763 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (173,763 | ) |
Total other income (expense) | |
| (29,371,212 | ) | |
| (214,344 | ) | |
| 4,257,594 | | |
| 141,588 | | |
| (4,257,594 | ) | |
| (748,450 | ) | |
| — | | |
| 27,917,085 | | |
| — | | |
| (2,275,333 | ) |
Income (loss) from operations before provision for
income taxes | |
| (55,626,937 | ) | |
| (1,627,021 | ) | |
| 15,777,165 | | |
| (297 | ) | |
| (15,777,165 | ) | |
| 19,769,181 | | |
| 17,284,075 | | |
| 27,917,085 | | |
| — | | |
| 7,716,087 | |
Provision for income taxes | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,959,886 | )(m) | |
| — | | |
| — | | |
| — | | |
| (1,959,886 | ) |
Income (loss) from continuing operations | |
$ | (55,626,937 | ) | |
$ | (1,627,021 | ) | |
$ | 15,777,165 | | |
$ | (297 | ) | |
$ | (15,777,165 | ) | |
$ | 17,809,298 | | |
$ | 17,284,075 | | |
$ | 27,917,085 | | |
$ | — | | |
$ | 5,756,201 | |
Income (loss) per common share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) per share, basic | |
$ | (15.80 | ) | |
$ | (4.02 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 0.28 | |
Income (loss) per share, diluted | |
$ | (15.80 | ) | |
$ | (4.02 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 0.13 | |
Weighted average common shares outstanding, basic -
Note 4(r) | |
| 3,520,843 | | |
| 428,611 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 12,135,922 | | |
| 20,832,180 | |
Weighted average common shares outstanding, diluted
- Note 4(r) | |
| 3,520,843 | | |
| 428,611 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 12,135,922 | | |
| 42,866,918 | |
Unaudited
Pro Forma Condensed Combined Statement of Operations
Year
Ended December 31, 2022
| |
| | |
| | |
| | |
| | |
Nickel
Road Transaction Accounting Adjustments | | |
| | |
| | |
| | |
| |
| |
Prairie
Operating Co.,
LLC (Historical) | | |
Creek
Road Miners,
Inc. (Historical) | | |
Nickel
Road (Historical) | | |
Creek
Road Miners, Inc. Acquisition
Pro-Forma Adjustments | | |
Removal of
Nickel Road (Historical) | | |
Nickel
Road Acquisition Adjustments | | |
Cryptocurrency
Asset Sale Adjustments | | |
Subsequent
Event Adjustments | | |
Equity Financing | | |
Combined Pro
Forma | |
| |
| | |
| | |
| | |
(See
Note 5) | | |
(See
Note 5(d)) | | |
(See
Note 5) | | |
(See
Notes 4 and 5) | | |
(See
Notes 2 and 5) | | |
(See
Note 6) | | |
| |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Cryptocurrency mining | |
$ | — | | |
$ | 517,602 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (517,602 | )(g) | |
$ | — | | |
$ | — | | |
$ | — | |
Oil and gas sales | |
| — | | |
| — | | |
| 66,059,962 | | |
| — | | |
| (66,059,962 | ) | |
| 52,378,105 | (k) | |
| — | | |
| — | | |
| — | | |
| 52,378,105 | |
Total revenues | |
| — | | |
| 517,602 | | |
| 66,059,962 | | |
| — | | |
| (66,059,962 | ) | |
| 52,378,105 | | |
| (517,602 | ) | |
| — | | |
| — | | |
| 52,378,105 | |
Operating costs and expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cryptocurrency mining costs (exclusive of depreciation
and amortization shown below) | |
| — | | |
| 1,071,458 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,071,458 | )(g) | |
| — | | |
| — | | |
| — | |
Depreciation, depletion and amortization | |
| — | | |
| 658,080 | | |
| 17,760,179 | | |
| 117,748 | (h) | |
| (17,760,179 | ) | |
| 3,896,094 | (k) | |
| (775,828 | )(g) | |
| — | | |
| — | | |
| 3,896,094 | |
Production taxes | |
| — | | |
| — | | |
| 4,975,383 | | |
| — | | |
| (4,975,383 | ) | |
| 3,958,274 | (k) | |
| — | | |
| — | | |
| — | | |
| 3,958,274 | |
Lease operating | |
| — | | |
| — | | |
| 3,942,294 | | |
| — | | |
| (3,942,294 | ) | |
| 3,345,854 | (k) | |
| — | | |
| — | | |
| — | | |
| 3,345,854 | |
General and administrative | |
| 461,520 | | |
| 3,606,522 | | |
| 4,264,687 | | |
| 2,681,201 | (i) | |
| (4,264,687 | ) | |
| 4,264,687 | (k) | |
| — | | |
| — | | |
| — | | |
| 11,013,930 | |
Stock based compensation | |
| — | | |
| 2,681,201 | | |
| — | | |
| (2,681,201 | )(i) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Lease expirations | |
| — | | |
| — | | |
| 329,911 | | |
| — | | |
| (329,911 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Impairment of mined cryptocurrency | |
| — | | |
| 107,174 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (107,174 | )(g) | |
| — | | |
| — | | |
| — | |
Total operating expenses | |
| 461,520 | | |
| 8,124,435 | | |
| 31,272,454 | | |
| 117,748 | | |
| (31,272,454 | ) | |
| 15,464,908 | | |
| (1,954,460 | ) | |
| — | | |
| — | | |
| 22,214,151 | |
Income (loss) from operations | |
| (461,520 | ) | |
| (7,606,833 | ) | |
| 34,787,508 | | |
| (117,748 | ) | |
| (34,787,508 | ) | |
| 36,913,197 | | |
| 1,436,858 | | |
| — | | |
| — | | |
| 30,163,954 | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| — | | |
| — | | |
| 41,152 | | |
| — | | |
| (41,152 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Interest expense | |
| — | | |
| (613,827 | ) | |
| (936,453 | ) | |
| 368,202 | (j) | |
| 936,453 | | |
| (997,934 | )(l) | |
| — | | |
| 240,000 | (n) | |
| — | | |
| (1,003,559 | ) |
Realized loss on sale of cryptocurrency | |
| — | | |
| (127,222 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 127,222 | (g) | |
| — | | |
| — | | |
| — | |
Impairment on fixed assets | |
| — | | |
| (5,231,752 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,231,752 | (g) | |
| — | | |
| — | | |
| — | |
Loss on sale of investment | |
| — | | |
| (19,104 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (19,104 | ) |
PPP loan forgiveness | |
| — | | |
| 197,662 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 197,662 | |
Loss on sale of cryptocurrency mining equipment | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| —(g) | | |
| — | | |
| — | | |
| — | |
Gain on sale of oil and gas properties | |
| — | | |
| — | | |
| 25,331,465 | | |
| — | | |
| (25,331,465 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Realized loss on derivative instruments | |
| — | | |
| — | | |
| (21,751,084 | ) | |
| — | | |
| 21,751,084 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Unrealized gain (loss) on derivative instruments | |
| — | | |
| — | | |
| 3,286,777 | | |
| — | | |
| (3,286,777 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Other income (expense) | |
| — | | |
| — | | |
| 20,029 | | |
| — | | |
| (20,029 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total other income (expense) | |
| — | | |
| (5,794,243 | ) | |
| 5,991,886 | | |
| 368,202 | | |
| (5,991,886 | ) | |
| (997,934 | ) | |
| 5,358,974 | | |
| 240,000 | | |
| — | | |
| (825,001 | ) |
Income (loss) from operations before provision for
income taxes | |
| (461,520 | ) | |
| (13,401,076 | ) | |
| 40,779,394 | | |
| 250,454 | | |
| (40,779,394 | ) | |
| 35,915,263 | | |
| 6,795,832 | | |
| 240,000 | | |
| — | | |
| 29,338,953 | |
Provision for income taxes | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (7,452,094 | )(m) | |
| — | | |
| — | | |
| — | | |
| (7,452,094 | ) |
Income (loss) from continuing operations | |
$ | (461,520 | ) | |
$ | (13,401,076 | ) | |
$ | 40,779,394 | | |
$ | 250,454 | | |
$ | (40,779,394 | ) | |
$ | 28,463,469 | | |
$ | 6,795,832 | | |
$ | 240,000 | | |
$ | — | | |
$ | 21,886,859 | |
Income (loss) per common share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) per share from continuing operations,
basic | |
$ | — | | |
$ | (33.78 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 1.06 | |
Income (loss) per share from continuing operations,
diluted | |
$ | — | | |
$ | (33.78 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 0.51 | |
Weighted average common shares outstanding, basic -
Note 4(r) | |
| — | | |
| 407,711 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 12,135,922 | | |
| 20,695,174 | |
Weighted average common shares outstanding, diluted
- Note 4(r) | |
| — | | |
| 407,711 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 12,135,922 | | |
| 42,729,912 | |
Note
1. Basis of Pro Forma Presentation
The
NRO Acquisition is expected to be accounted for as an asset acquisition in accordance with ASC 805. The estimated fair value of the consideration
to be paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, will be recorded on
our books as of the date of the Closing of the NRO Acquisition. Additionally, costs directly related to the NRO Acquisition are capitalized
as a component of the Purchase Price.
The
Crypto Sale requires presentation as discontinued operations upon the issuance of future financial statements in accordance with GAAP.
Pursuant to the requirements of Article 3 of Regulation S-X, the Crypto Sale is considered a significant disposition and requires pro
forma presentation in accordance with Article 11 of Regulation S-X.
The
Merger was accounted for as a reverse asset acquisition under existing GAAP. For accounting purposes, Prairie LLC was treated as acquiring
Merger Sub in the Merger.
Accordingly,
for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Prairie LLC
with the acquisition being treated as the equivalent of Prairie LLC issuing stock for the net assets of the Company. On the Merger Closing
Date, the assets and liabilities of the Company were recorded based upon relative fair values, with no goodwill or other intangible assets
recorded.
The
unaudited pro forma condensed combined balance sheet as of September 30, 2023 combines the historical balance sheet of the Company as
of September 30, 2023 on a pro forma basis in accordance with Article 11 of Regulation S-X, as amended, as if the Transactions and the
Subsequent Events, described in Note 2 below, had been consummated on September 30, 2023.
The
unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and year ended December
31, 2022 combine the historical statements of operations of Prairie LLC, the historical statements of operations of the Company and the
historical consolidated statements of operations of NRO, as applicable, for such periods on a pro forma basis as if the Transactions
and Subsequent Events, described in Note 2 below, had been consummated on January 1, 2022.
The
pro forma basic and diluted earnings (loss) per share amounts presented in the unaudited pro forma condensed combined statements of operations
are based upon the number of shares of Common Stock outstanding, assuming the Transactions and Subsequent Events, described
in Note 2 below, occurred on January 1, 2022.
The
unaudited pro forma condensed combined financial information is based on, and should be read in conjunction with, the audited historical
financial statements of each of Prairie LLC as of December 31, 2022 and for the period from June 7, 2022 (date of inception) to December
31, 2022, the Company as of and for the year ended December 31, 2022, and NRO as of and for the year ended December 31, 2022 and the
notes thereto, the unaudited historical financial statements of the Company and NRO as of and for the nine months ended September 30,
2023 and the notes thereto, as well as the disclosures contained in the section “Management’s Discussion and Analysis
of Financial Condition and Results of Operations of Prairie Operating Co.” included in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 31, 2023, and in the Company’s Quarterly Report
on Form 10-Q for the period ended September 30, 2023, filed with the SEC on November 14, 2023, and the section in this prospectus entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations of Nickel Road Operating LLC.”
The
unaudited pro forma condensed combined financial information has been presented for illustrative purposes only and does not necessarily
reflect what the Company’s financial condition or results of operations would have been had the Transactions or Subsequent
Events, described in Note 2 below, occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial
information do not project the Company’s future financial condition and results of operations. The actual financial position and
results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited
pro forma adjustments represent management’s estimates based on information available as of the date of this filing and certain
assumptions that management believes are factually supportable and are expected to have a continuing impact on the Company’s results
of operations, and are subject to change as additional information becomes available and analyses are performed.
Note
2. Subsequent Events
Reverse
Stock Split
On
October 12, 2023, the Company filed the Certificate of Amendment with the Delaware Secretary of State to effect the Reverse Stock Split.
The Reverse Stock Split became effective on October 16, 2023. The Reverse Stock Split decreased the number of outstanding shares and
increased net loss per common share. All per share and share amounts presented have been retroactively adjusted for the effect of this
reverse stock split for all periods presented.
Conversion
of AR Debentures
In
October 2023, conversion notices were received from holders of the AR Debentures and the Company issued 400,667 shares of Common Stock
to effect the conversion. As a result, the AR Debentures were fully extinguished in October 2023.
Exercise
of Series D B Warrants
On
November 13, 2023, O’Neill Trust delivered notice to the Company of the exercise of Series D B Warrants to purchase 2,000,000 shares
of Common Stock at an exercise price of $6.00 per share for total proceeds to the Company of $12 million.
Deposit
on NRO Acquisition
In
conjunction with the NRO Acquisition, the Company deposited $9 million of the Purchase Price into an escrow account on January 11, 2024,
which will be released to NRO upon the earlier of the date of the Closing and August 15, 2024, or earlier under certain circumstances.
Sale
of Cryptocurrency Mining Equipment
On
January 23, 2024, the Company completed the sale of all of the Mining Equipment for consideration consisting of (i) $1.0 million in cash
and (ii) $1.0 million (plus accrued interest) in deferred cash payments to be made out of a portion of the future net revenues associated
with the Mining Equipment.
Genesis
Bolt-on Acquisition
On
February 5, 2024, the Company acquired oil and natural gas properties comprised of a 1,280 acre drillable spacing unit and eight permitted
drilling locations in the DJ Basin from a private seller for $900,000.
Note
3. Preliminary Purchase Price
The
preliminary allocation of the total Purchase Price in the NRO Acquisition, on a relative fair value basis, is based upon management’s
estimates of and assumptions related to the fair value of assets to be acquired and liabilities to be assumed as of the date of the Closing
of the transaction using currently available information. Because the unaudited pro forma condensed combined financial information has
been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on our financial position
and results of operations may differ significantly from the pro forma amounts included herein.
The
preliminary purchase price allocation is subject to change due to several factors, including but not limited to changes in the estimated
fair value of assets acquired and liabilities assumed as of the date of the Closing of the transaction, which could result from changes
in future oil and natural gas commodity prices, reserve estimates, interest rates, as well as other factors.
The
consideration transferred, assets acquired and liabilities assumed by the Company are expected to be initially recorded as follows:
Consideration: | |
| |
Cash consideration (1) | |
$ | 74,000,000 | |
Deposit on oil and gas properties (2) | |
| 9,000,000 | |
Deferred cash consideration (3) | |
| 9,979,340 | |
Direct transaction costs (4) | |
| 175,000 | |
Total consideration | |
$ | 93,154,340 | |
Assets acquired: | |
| | |
Oil and gas properties | |
$ | 93,904,482 | |
Liabilities assumed: | |
| | |
Asset retirement obligation, long-term | |
$ | 750,142 | |
(1) |
Includes
preliminary customary purchase price adjustments. |
(2) |
Represents
the Deposit paid by the Company to NRO (See Note 2). |
(3) |
Represents
the estimated fair value of $11.5 million of spud fee cash payments to be paid to NRO over a period of up to 18 months from the date
of the Closing. |
(4) |
Represents
estimated transaction costs associated with the NRO Acquisition which have been capitalized in accordance with ASC 805-50. |
The
consideration will be allocated to the assets acquired and liabilities assumed on a relative fair value basis. The fair value measurements
of assets acquired and liabilities assumed, on a relative fair value basis, are based on inputs that are not observable in the market
and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using
the discounted cash flow technique of valuation.
Significant
inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii)
future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted
average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.
Note
4. Crypto Sale
On
January 23, 2024, we completed the Crypto Sale for consideration consisting of (i) $1.0 million in cash and (ii) $1.0 million (plus accrued
interest) in deferred cash payments to be made out of a portion of the future revenues associated with the Mining Equipment. For purposes
of the pro forma financial statements, this was a significant disposition and resulted in a net loss of $1.7 million. It requires presentation
within discontinued operations upon the issuance of future financial statements.
Note
5. Unaudited Pro Forma Adjustments
The
pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2023 and in the unaudited
pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and year ended December 31, 2022 are
as follows:
|
(a) |
Reflects
the conversion of the AR Debentures into common shares and payment of accrued interest in cash. |
|
|
|
|
(b) |
Reflects
the exercise of Series D B Warrants for $12.0 million and issuance of 2,000,000 shares of Common Stock. |
|
|
|
|
(c) |
Reflects
the reclassification of warrant liabilities, Series D Preferred Stock and Series E preferred stock of the Company, par value $0.01
per share, upon the consummation of the Reverse Stock Split. |
|
|
|
|
(d) |
Reflect
the adjustments to remove the historical financial results of NRO. |
|
|
|
|
(e) |
Reflects
the adjustment for the Company’s Deposit utilized to partially fund the NRO Acquisition. |
|
|
|
|
(f) |
Reflects
the adjustment to record the assets acquired and liabilities assumed, on a relative fair value basis, in the NRO Acquisition along
with transfer of consideration. |
|
|
|
|
(g) |
Reflects
the adjustment to record the Crypto Sale. |
|
|
|
|
(h) |
Reflects
the adjustment to depreciation expense due to fair value allocated at the Merger and useful life of the acquired assets. |
|
(i) |
Reflects
the reclassification of stock based compensation to conform to the Company’s financial statement presentation. |
|
|
|
|
(j) |
Reflects
the adjustment to interest expense from the conversion of notes payable and the Original Debentures. |
|
|
|
|
(k) |
Reflect
the adjustments to reflect the NRO acquisition based on information provided by NRO and adjust for depreciation, depletion and amortization
expense associated with the NRO Acquisition. |
|
|
|
|
(l) |
Reflects
the adjustment to recognize interest expense on the deferred cash consideration on an effective interest method. |
|
|
|
|
(m) |
Reflects
the estimated income tax effects of the adjustments calculated using the federal statutory tax rate of 21% and a statutory Colorado
income tax rate of 4.4%. |
|
|
|
|
(n) |
Reflects
the adjustment to interest expense from the conversion of the AR Debentures. |
|
|
|
|
(o) |
Reflects
the adjustment required to reflect classification of warrant liabilities within stockholders’ equity in conjunction with the
Reverse Stock Split. |
|
|
|
|
(p) |
Reflects
the adjustment to reflect the conversion of the AR Debentures into shares of Common Stock. |
|
|
|
|
(q) |
Reflects
the adjustment to record the Genesis Bolt-on Acquisition. |
|
|
|
|
(r) |
Reflects
weighted average shares of Common Stock after the impact of the Transactions and the Subsequent Events described in
Note 2. The following table sets forth the computation of pro forma weighted average shares of Common Stock for the nine months ended
September 30, 2023 and year ended December 31, 2022: |
| |
Nine months ended
September 30, 2023 | | |
Year ended
December 31, 2022 | |
Weighted average shares of Common Stock outstanding, basic and diluted (prior to the Transactions) | |
| 137,006 | | |
| — | |
Net adjustment upon consummation of the Transactions to reflect the issuance of shares of Common Stock | |
| 6,158,585 | | |
| 6,158,585 | |
Adjustment upon issuance of shares of Common Stock associated with conversion of the AR Debentures | |
| 400,667 | | |
| 400,667 | |
Adjustment upon the issuance of shares of Common Stock associated with the Warrant Exercise | |
| 2,000,000 | | |
| 2,000,000 | |
Adjustment from the Common Stock expected to be issued in the Offering (see Note 6) | |
| 12,135,922 | | |
| 12,135,922 | |
Weighted average shares of Common Stock outstanding, basic (Pro Forma) | |
| 20,832,180 | | |
| 20,695,174 | |
Common Stock warrants | |
| 13,674,938 | | |
| 13,674,938 | |
Series D Preferred Stock | |
| 4,359,800 | | |
| 4,359,800 | |
Series E Preferred Stock | |
| 4,000,000 | | |
| 4,000,000 | |
Weighted average shares of Common Stock outstanding, diluted (Pro Forma) | |
| 42,866,918 | | |
| 42,729,912 | |
Note
6. Equity Financing
We
expect to generate gross proceeds of $100.0 million (before underwriting discounts and commissions and offering expenses) from the Offering,
which we intend to use to fund the remaining cash consideration in the NRO Acquisition, and for general corporate purposes. After deducting
the underwriting discounts and commissions and offering expenses payable by us, the total net proceeds are expected to be approximately
$90.0 million. Based on the closing price of the Company’s Common Stock on February 1, 2024 of $8.24, we expect to issue approximately
12.1 million shares of Common Stock (assuming no exercise of the underwriters’ option to purchase additional shares). The following
table summarizes the estimated Common Stock to be issued resulting from a 10% fluctuation in the market price of the shares of Common
Stock:
| |
Share Price | | |
Common Stock Issued | |
As presented | |
$ | 8.24 | | |
| 12,135,922 | |
10% increase | |
| 9.06 | | |
| 11,037,528 | |
10% decrease | |
| 7.42 | | |
| 13,477,089 | |
Note
7. Supplemental Unaudited Combined Oil and Natural Gas Reserves and Standardized Measure Information
The
following table sets forth information with respect to the historical and combined estimated oil and natural gas reserves as of December
31, 2022 for Prairie LLC and NRO. Future exploration, exploitation and development expenditures, as well as future commodity prices and
service costs, will affect the quantity of reserve volumes. The reserve estimates shown below were determined using the average first
day of the month price for each of the preceding 12 months for oil and natural gas for the year ended December 31, 2022.
| |
Prairie | | |
Nickel Road (Total) | | |
Nickel Road (Unacquired) | | |
Nickel Road (Acquired) (1) | | |
Pro Forma Combined | |
Estimated Proved Developed Reserves: | |
| | | |
| | | |
| | | |
| | | |
| | |
Oil (Bbl) | |
| — | | |
| 2,599,723 | | |
| (128,190 | ) | |
| 2,471,533 | | |
| 2,471,533 | |
Natural Gas (Mcf) | |
| — | | |
| 6,452,542 | | |
| (213,658 | ) | |
| 6,238,884 | | |
| 6,238,884 | |
Natural Gas Liquids (Bbl) | |
| — | | |
| 1,103,821 | | |
| (36,684 | ) | |
| 1,067,137 | | |
| 1,067,137 | |
Total (Boe)(2) | |
| — | | |
| 4,778,968 | | |
| (200,484 | ) | |
| 4,578,483 | | |
| 4,578,483 | |
Estimated Proved Undeveloped Reserves: | |
| | | |
| | | |
| | | |
| | | |
| | |
Oil (Bbl) | |
| — | | |
| 4,657,880 | | |
| (27,183 | ) | |
| 4,630,697 | | |
| 4,630,697 | |
Natural Gas (Mcf) | |
| — | | |
| 12,443,577 | | |
| (72,494 | ) | |
| 12,371,083 | | |
| 12,371,083 | |
Natural Gas Liquids (Bbl) | |
| — | | |
| 2,256,278 | | |
| (13,048 | ) | |
| 2,243,230 | | |
| 2,243,230 | |
Total (Boe)(2) | |
| — | | |
| 8,988,088 | | |
| (52,313 | ) | |
| 8,935,774 | | |
| 8,935,774 | |
Estimated Proved Reserves: | |
| | | |
| | | |
| | | |
| | | |
| | |
Oil (Bbl) | |
| — | | |
| 7,257,603 | | |
| (155,373 | ) | |
| 7,102,230 | | |
| 7,102,230 | |
Natural Gas (Mcf) | |
| — | | |
| 18,896,119 | | |
| (286,151 | ) | |
| 18,609,968 | | |
| 18,609,968 | |
Natural Gas Liquids (Bbl) | |
| — | | |
| 3,360,099 | | |
| (49,733 | ) | |
| 3,310,366 | | |
| 3,310,366 | |
Total (Boe)(2) | |
| — | | |
| 13,767,055 | | |
| (252,798 | ) | |
| 13,514,257 | | |
| 13,514,257 | |
(1) |
Represents
reserves associated with the assets acquired from NRO. |
(2) |
Assumes
a ratio of 6 Mcf of natural gas per Boe. |
The
following table sets forth summary information with respect to historical and combined oil and natural gas production for the year ended
December 31, 2022 for Prairie LLC and NRO. The NRO oil and natural gas production data presented below was derived from the supplemental
oil and gas reserve information (unaudited) included in notes to the audited financial statements for the year ended December 31, 2022
of NRO and information provided by NRO.
| |
Prairie
| | |
Nickel Road (Total) | | |
NRO (Unacquired) | | |
NRO Acquired (1) | | |
Pro Forma Combined | |
Oil (Bbl) | |
| — | | |
| 618,787 | | |
| (123,681 | ) | |
| 495,106 | | |
| 495,106 | |
Natural Gas (Mcf) | |
| — | | |
| 919,804 | | |
| (188,311 | ) | |
| 731,493 | | |
| 731,493 | |
Natural Gas Liquids (Bbl) | |
| — | | |
| 161,585 | | |
| (32,078 | ) | |
| 129,507 | | |
| 129,507 | |
Total (Boe)(2) | |
| — | | |
| 933,673 | | |
| (187,144 | ) | |
| 746,529 | | |
| 746,529 | |
(1) |
Represents
production data associated with the assets acquired from NRO. |
(2) |
Assumes
a ratio of 6 Mcf of natural gas per Boe. |
The
following unaudited combined estimated discounted future net cash flows reflect Prairie and NRO as of December 31, 2022. The unaudited
combined standardized measure of discounted future net cash flows are as follows:
| |
Prairie | | |
NRO (Total) (1) | | |
Combined | |
Future cash inflows | |
$ | — | | |
$ | 883,016,626 | | |
$ | 883,016,626 | |
Future production costs | |
| — | | |
| (293,548,055 | ) | |
| (293,548,055 | ) |
Future development costs | |
| — | | |
| (147,621,778 | ) | |
| (147,621,778 | ) |
Future income tax expense | |
| — | | |
| — | | |
| — | |
Future net cash flows | |
| — | | |
| 441,846,793 | | |
| 441,846,793 | |
10% annual discount for estimated timing of cash flows | |
| — | | |
| (197,175,725 | ) | |
| (197,175,725 | ) |
Standardized measure of discounted future net cash flows | |
$ | — | | |
$ | 244,671,068 | | |
$ | 244,671,068 | |
(1) |
Represents
the total amounts as reported in NRO’s consolidated financial statements as of and for the year ended December 31, 2022. |
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