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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of
the
Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): November 17, 2023
Prairie
Operating Co.
(Exact
name of registrant as specified in its charter)
Delaware |
|
000-33383 |
|
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 |
None |
|
N/A |
|
N/A |
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. ☐
Item
8.01 Other Events.
In
connection with the filing of an amendment to the registration statement on Form S-1 (File No. 333-272743) registering the resale of
certain securities, Prairie Operating Co. (the “Company”) is filing (i) updated business disclosures set forth in Exhibit
99.1 and (ii) updated risk factors set forth in Exhibit 99.2 and to update the disclosures previously provided in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2022 and Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2023, each as filed with the Securities and Exchange Commission, and as may be further updated by the Company’s Current Reports
on Form 8-K. In addition, the Company is filing as Exhibit 99.3 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. The disclosures set forth in Exhibits 99.1, 99.2
and 99.3 are incorporated herein by reference.
Item
9.01 Financial Statements and Exhibits.
(d)
Exhibits
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:
November 20, 2023 |
|
|
|
By: |
/s/
Edward Kovalik |
|
|
Edward
Kovalik |
|
|
Chief
Executive Officer |
Exhibit 99.1
Business
Background
On
May 3, 2023, the Company completed its previously announced Merger with Prairie LLC pursuant to the terms of the Merger Agreement, pursuant
to which, among other things, Merger Sub merged 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.
Upon
consummation of the Merger, the Company changed its name from “Creek Road Miners, Inc.” to “Prairie Operating Co.”
The Company traded under its former name and ticker symbol “CRKR” until October 16, 2023. From October 16, 2023 to November
12, 2023, the Company traded under symbol “CRKRD,” a transitionary ticker symbol. The Company began trading under
its current ticker symbol, “PROP,” on November 13, 2023. On November 16, 2023, the closing price of
our Common Stock was $14.00.
Prior
to the consummation of the Merger, the Company effectuated the 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:
(i)
the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, plus accrued dividends, were converted, in the
aggregate, into shares of Common Stock;
(ii)
the Original Debentures, plus accrued but unpaid interest and a 30% premium, were exchanged, in the aggregate, for (a) 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 Board 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 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 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, all membership interests in Prairie LLC were converted into the right to receive each member’s pro rata share
of 2,297,669 shares of Common Stock.
At
the Effective Time, the Company assumed and converted options to purchase membership interests of Prairie LLC outstanding and unexercised
as of immediately prior to the Effective Time into Non-Compensatory Options to acquire an aggregate of 8,000,000 shares of Common
Stock for $0.25 per share, which are only exercisable if specific production hurdles are achieved, and the Company entered into the Option
Agreements 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 PIPE Investors, based on their then percentage ownership of Series D Preferred
Stock to the aggregate Series D Preferred Stock outstanding and held by all PIPE Investors as of the Closing Date, if the
Company does not meet certain performance metrics by May 3, 2026.
In
addition, in connection with the Closing of the Merger, the Company consummated the purchase of oil and gas
leases, including all of Exok’s right, title and interest in, to and under certain undeveloped oil and gas leases located in Weld
County, Colorado, together with certain other associated assets, data and records, consisting of approximately 3,157 net mineral acres
in, on and under approximately 4,494 gross acres from Exok for $3,000,000 pursuant to the Exok Agreement.
On
August 1, 2023, all compensatory options that survived the Merger expired.
On
August 30, 2023, the Company, Gary C. Hanna, Edward Kovalik, Bristol Capital and Georgina Asset Management, LLC (“Georgina Asset
Management”) entered into a non-compensatory option purchase agreement, pursuant to which Georgina Asset Management agreed to purchase,
and each of Gary C. Hanna, Edward Kovalik and Bristol Capital (collectively, the “Sellers”) agreed to sell to Georgina Asset
Management Non-Compensatory Options to acquire an aggregate of 200,000 shares of Common Stock for an aggregate purchase price of $2,000
(the “Option Purchase”). The Option Purchase closed on August 30, 2023. In connection with the Option Purchase, the Company
entered into an amendment to the Option Agreements with each of the Sellers (or an assignee thereof) to reflect that each Seller owns
a lesser number of Non-Compensatory Options after the Option Purchase.
On
September 18, 2023, the Company submitted its initial permit application with the Colorado Energy and Carbon Management Commission for
the Genesis Oil & Gas Development Plan (“OGDP”) in Weld County, Colorado. The Genesis OGDP encompasses seventy-two (72)
wells on two (2) pads, developing 9-square miles of subsurface minerals in rural Weld County, Colorado. The two (2) pads, the Burnett
and Oasis, will develop eighteen (18) three-mile lateral wells and fifty-four (54) two-mile lateral wells, respectively.
On
October 13, 2023, the holders of the AR Debentures elected to convert their AR Debentures into an aggregate of 400,667 shares of Common
Stock.
On
October 16, 2023, the Company effected the Reverse Stock Split at a ratio of 1:28.5714286. The share counts listed above have been
retroactively adjusted to reflect the Reverse Stock Split. The following table shows the share counts before and after the Reverse
Stock Split:
Source
of shares | |
Shares prior to Reverse Stock
Split | | |
Shares following Reverse Stock
Split | |
Restructuring Transaction | |
| 96,436,808 | | |
| 3,375,288 | |
Merger Consideration | |
| 65,647,676 | | |
| 2,297,669 | |
Shares underlying Series D Preferred Stock | |
| 99,292,858 | | |
| 3,475,250 | |
Shares underlying Series D A Warrants | |
| 99,292,858 | | |
| 3,475,250 | |
Shares underlying Series D B Warrants | |
| 99,292,858 | | |
| 3,475,250 | |
Shares issued to Exok in the Exok Option Purchase | |
| 19,157,123 | | |
| 670,499 | |
Shares underlying Exok Warrants | |
| 19,157,123 | | |
| 670,499 | |
Shares issued to the Series E PIPE Investor | |
| 1,131,856 | | |
| 39,614 | |
Shares underlying Series E Preferred Stock | |
| 114,285,714 | | |
| 4,000,000 | |
Shares underlying Series E A Warrants | |
| 114,285,714 | | |
| 4,000,000 | |
Shares underlying Series E B Warrants | |
| 114,285,714 | | |
| 4,000,000 | |
Shares issued upon conversion of AR Debentures | |
| 11,447,619 | | |
| 400,667 | |
In
addition, the exercise prices and conversion rates of the Preferred Stock and Warrants were adjusted pursuant to their respective terms
to reflect the Reverse Stock Split. The following table shows the applicable exercise prices and conversion rates before and after the
Reverse Stock Split:
Securities | |
Pre-Split
Conversion Rate or Exercise Price, as applicable | | |
Post-Split Conversion Rate or Exercise Price, as applicable | |
Series D A Warrant | |
$ | 0.21 | | |
$ | 6.00 | |
Series D B Warrant | |
$ | 0.21 | | |
$ | 6.00 | |
Series D Preferred Stock | |
$ | 0.175 | | |
$ | 5.00 | |
Exok Warrant | |
$ | 0.2620 | | |
$ | 7.4857 | |
Series E A Warrant | |
$ | 0.21 | | |
$ | 6.00 | |
Series E B Warrant | |
$ | 0.21 | | |
$ | 6.00 | |
Series E Preferred Stock | |
$ | 0.175 | | |
$ | 5.00 | |
On
November 13, 2023, the 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”).
The Company intends to use the proceeds from the Warrant Exercise for general working capital purposes, which may include drilling activity
or opportunistic acquisitions. Each of the warrants held by the O’Neill Trust, as well as the Series D Preferred Stock and Series
E Preferred Stock was subject to a limitation on exercise or conversion, as applicable, if as a result of such exercise or conversion,
the holder would own more than 4.99% of the outstanding shares of Common Stock (the “Beneficial Ownership Limitation”), which
may be increased by the holder upon written notice to the Company, to any specified percentage not in excess of 9.99% (the “Beneficial
Ownership Limitation Ceiling”). In connection with the Warrant Exercise, the O’Neill Trust entered into an agreement with
the Company pursuant to which it amended the terms of each of its Series D Warrants and Series E Warrants to increase the Beneficial
Ownership Limitation Ceiling from 9.99% to 25% and gave notice to the Company that it was increasing its Beneficial Ownership Limitation
to 25% with respect to each of its remaining warrants. The Beneficial Ownership Limitation Ceiling on the Series D Preferred Stock and
Series E Preferred Stock remains at 9.99%.
Nature
of Business
E&P
We
are engaged in the development, exploration and production of oil, natural gas, and NGLs with operations focused on unconventional oil
and natural gas reservoirs located in Colorado focused on the Niobrara and Codell formations. All of the Company’s E&P assets
were acquired in the Exok Transaction and Exok Option Purchase and consist of certain oil and gas leasehold interests with no existing
oil and gas production or revenue. Our current activities are focused on obtaining requisite permits to begin drilling wells and, as
such, we have no current drilling or completion operations.
The Exok Assets
Prairie acquired
the following assets from Exok in the Exok Transaction and the Exok Option Purchase:
|
● |
all of Exok’s right, title and interest in, to and under the
fee oil and gas leases described more particularly in the Exok Agreement, including all working interests, operating rights, record
title interests and other interests of every kind and character (the “Fee Leases”), that include and convey no less than
a 75% net revenue interest (“NRI,” being the share of production of all hydrocarbons produced, saved and sold, after
all burdens, such as royalty and overriding royalty, have been deducted from the working interest) in each Fee Lease; |
|
|
|
|
● |
all of Exok’s right, title and interest in, to and under the
State of Colorado Oil and Gas Lease described more particularly in the Exok Agreement, including all working interests, operating
rights, record title interests and other interests of every kind and character (the “State Leases”), that include and
convey no less than a 77.5% NRI in the State Leases; |
|
|
|
|
● |
100% of Exok’s leasehold interest (Fee Leases and State Leases
collectively referred to as the “Leases”) in approximately 23,485 net mineral acres in, on and under approximately 37,189
gross acres located in Weld County, Colorado, as described more particularly in the Exok Agreement (the “Lands”); |
|
|
|
|
● |
to the extent transferable, Exok’s interests in and under
all contracts, agreements and instruments by which the other Exok Assets are bound or that relate to or are used or useful in connection
with the ownership, development or operation of the Leases or the Lands, to the extent applicable to the Leases or Lands, including
all surface use agreements, surface rights, surface permits and other similar rights and instruments; and |
|
● |
all of Exok’s records, files and geological and geophysical
data directly related to the Exok Assets, including without limitation all seismic data and interpretations thereof, logs, core analyses,
formation tests, films, surveyors’ notes, plane table sheets, shot point data bases, land files, contract files, lease files,
title files (including title reports, title opinions, runsheets, abstracts, evidence of bonus and rental payments), maps, surveys
and data sheets. |
The
assets are undeveloped oil and gas leasehold acreage located in northern Colorado, in Weld County covering approximately 4,494 gross
acres and 3,157 net acres. The operating area is rural and free of development. Access to the leases is by paved and dirt country roads
and private road access. Approximately 70% of the net leasehold is held under fee leases, with the remaining 30% held under State of
Colorado leases. Prairie does not hold any interest in federal oil and gas leases. All of the acreage is held by crude oil and natural
gas leases with varying expiration dates, some with options to extend ranging from 1 to 4 years. The fee leases are burdened with total
royalties of 25%. The State of Colorado leases are burdened with total royalties of 22.5%. The leases can be held indefinitely by production.
Unless production is established within the spacing units covering the undeveloped acreage, the leases for such acreage will eventually
expire. There are no lease expirations prior to July 23, 2025.
The
Exok Assets are located in and around wells drilled in both the Niobrara Shale and the Codell Sandstone formations within the D-J Basin.
While production activities in the D-J Basin date back to the 1970s, production within the D-J Basin has increased rapidly since the
horizontal drilling boom in 2009, with both the Niobrara and Codell formations contributing to this activity. Within the D-J Basin operating
area, there are over 1,300 legacy vertical wells, with Noble Energy, Inc. (now Chevron Corporation), Civitas Resources, Inc., EOG Resources,
Inc. and Samson Energy Company, LLC operating a substantial number of such wells.
The
primary drilling objective in this area is crude oil production from the fractured Codell and Niobrara formations. The area has seen
a renewed interest in drilling activity over the past decade in conjunction with drilling success in the Niobrara in the D-J Basin on
the front range of Colorado. Active operators in the area have included Noble Energy, Inc. (now Chevron Corporation), Civitas Resources,
Inc., EOG Resources, Inc., Samson Energy Company, LLC and others. There is ample takeaway infrastructure in place within several miles
of the Exok Assets, including multiple midstream operators such as Summit Midstream Partners LP, Outrigger Energy II LLC, Rimrock Energy
Partners LLC and Roaring Fork Midstream LLC.
Pursuant
to the Exok Agreement, the Company has the option to purchase, from the Closing Date until the
later of (x) the date that is ninety (90) days following the Closing Date and (y) August 15, 2023, approximately 20,327 net mineral acres
in, on and under approximately 32,695 additional gross acres from Exok for a purchase price of $22,182,000, payable in (a) $18,000,000
in cash and (b) $4,182,000 in total equity consideration, consisting of (1) a number of shares of Common Stock equal to the quotient
of $4,182,000 divided by the volume weighted average price for shares of Common Stock for twenty (20) consecutive trading days ending
on the date such option is exercised by the Company and (2) an equal number of warrants to purchase shares of Common Stock (the “Exok
Option”).
On
August 14, 2023, Prairie LLC exercised the Exok Option and purchased oil and gas leases, including all of Exok’s right, title and
interest in, to and under certain undeveloped oil and gas leases located in Weld County, Colorado, together with certain other associated
assets, data and records, consisting of approximately 20,328 net mineral acres in, on and under approximately 32,695 gross acres from
Exok. The Company paid $18.0 million in cash to Exok and issued equity consideration to certain affiliates of Exok, consisting
of (i) 670,499 shares of Common Stock and (ii) Exok Warrants providing the right to purchase 670,499 shares of Common Stock at $7.43.
To
fund the Exok Option Purchase, the Company entered into a securities purchase agreement with the Series E PIPE Investor on August
15, 2023, pursuant to which the Series E PIPE Investor agreed to purchase, and the Company agreed to sell to the Series E PIPE
Investor, for an aggregate of $20.0 million, securities consisting of (i) 39,614 shares of Common Stock, (ii) 20,000 shares
of Series E Preferred Stock and (iii) Series E PIPE Warrants to purchase 8,000,000 shares of Common Stock, in a private placement.
The
Exok Option Purchase and the Series E PIPE closed on August 15, 2023.
The
Company is currently applying for permits to begin drilling. We expect to begin drilling in the first quarter of 2024, subject to receiving
approvals for the requisite permits and obtaining sufficient financing.
Summary
of Our Possible Reserve Estimates
The
Company’s estimated possible reserves as of August 1, 2023, as shown in the following table, have been prepared by
Collarini Energy Experts, an independent Petroleum Reserve Evaluation Firm, in
accordance with the Society of Petroleum Engineers’ Petroleum Resources Management System guidelines and guidelines
established by the SEC, utilizing NYMEX Strip Pricing as of July 31, 2023. A copy of Collarini’s reserve report as of
August 1, 2023 is included as an exhibit to this Registration Statement.
Reserve Category | |
Formation | |
Well Count | | |
Net Oil (MBbl) | | |
Net Gas (MMCF) | | |
Net NGL (MGal) | | |
Net Equiv. (MBoe) | | |
PV10 ($000s) | |
POSS | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Codell | |
| 148 | | |
| 45,947 | | |
| 99,806 | | |
| 15,852 | | |
| 78,434 | | |
| 641,081 | |
| |
Niobrara | |
| 264 | | |
| 96,688 | | |
| 338,511 | | |
| 53,766 | | |
| 206,873 | | |
| 1,722,856 | |
Total | |
| |
| 412 | | |
| 142,635 | | |
| 438,318 | | |
| 69,618 | | |
| 285,306 | | |
| 2,363,937 | |
Note:
PV-10 is a non-GAAP financial measure. PV-10 is derived from the Standardized Measure of Discounted Future Net Cash Flows (“Standardized
Measure”), which is the most directly comparable GAAP financial measure for proved reserves. PV-10 is a computation of the Standardized
Measure on a pre-tax basis. PV-10 is equal to the Standardized Measure at the applicable date, before deducting future income taxes,
discounted at 10%. We believe that the presentation of PV10 is relevant and useful to our investors as supplemental disclosure to the
standardized measure, or after-tax amount, because it presents the discounted future net cash flows attributable to our possible reserves
before considering future corporate income taxes and our current tax structure. While the standardized measure is dependent on the unique
tax situation of each company, PV10 is based on prices and discount factors that are consistent for all companies. Our possible reserves
were derived from wells of offset operators in the same development area. We have shown possible reserves as we will not have proven
reserves until our development plan commences.
Preparation
of reserves estimates.
Collarini is
a registered d.b.a of Collarini Energy Staffing Inc., a Louisiana S Corporation registered in Louisiana in 1995. It employs
petroleum engineers, geoscientists and other experienced professionals. The report was prepared under the direction of Collarini’s Chairman and Project Supervisor,
Reserves and Economics Expert, Cheryl Collarini, P.E. Ms. Collarini holds a B.S. in civil engineering from Massachusetts Institute
of Technology and an MBA from the University of New Orleans, is a registered professional engineer in the state of Louisiana
(License #PE.0022246) and has approximately 50 years of experience in production engineering, reservoir engineering, acquisitions
and divestments, field operations and management. Ms. Collarini is a member of the Society of Petroleum Engineers, the Society of
Women Engineers, and the Houston Producers’ Forum. She is also a member of the Advisory Board of the University of
Houston’s Petroleum Engineering Department. Ms. Collarini meets or exceeds the education, training and experience requirements
set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society
of Petroleum Engineers. Ms. Collarini is proficient in judiciously applying industry standard practices to engineering and
geoscience evaluations as well as applying SEC and other industry reserves definitions and guidelines.
Bryan
Freeman, our Executive Vice President of Operations, works closely with our independent reserve engineers to ensure the integrity,
accuracy and timeliness of data furnished to our independent reserve engineers in their preparation of reserve estimates. Mr.
Freeman is primarily responsible for overseeing the preparation of both our internal and external reserve estimates. Mr. Freeman is responsible for reservoir engineering, is a qualified reserve
estimator and auditor and is primarily responsible for overseeing our independent reserve engineers during the preparation of our external
reserve estimates. His professional qualifications meet or exceed the qualifications of reserve estimators and auditors set forth in the
“Standards Pertaining to Estimation and Auditing of Oil and Natural Gas Reserves Information” promulgated by the Society of
Petroleum Engineers. His qualifications include a Masters and Bachelor of Science degrees in Engineering from University of Texas; a member
of the Society of Petroleum Engineers; and more than 19 years of practical experience in estimating and evaluating reserve information
with more than 10 of those years overseeing estimating and evaluating reserves. For additional
discussion of Mr. Freeman’s qualifications, please see Mr. Freeman’s biography in the section entitled
“Management.”
Our
independent reserve engineers were selected for their historical experience and geographic expertise in engineering similar resources.
Under SEC rules, possible reserves are reserves which, by analysis of geoscience and engineering data, are those additional reserves
that are less certain to be recovered than probable reserves. When deterministic methods are used, the total quantities ultimately recovered
from a project have a low probability of exceeding proved plus probable plus possible reserves. When probabilistic methods are used,
there should be at least a 10% probability that the total quantities ultimately recovered will equal or exceed the proved plus probable
plus possible reserves estimates. Possible reserves may be assigned to areas of a reservoir adjacent to probable reserves where data
control and interpretations of available data are progressively less certain. Frequently, this will be in areas where geoscience and
engineering data are unable to define clearly the area and vertical limits of commercial production from the reservoir by a defined project.
Possible reserves also include incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than
the recovery quantities assumed for probable reserves. The technical and economic data used in the estimation of our possible reserves
include, but are not limited to, lease positions, estimated working and net revenue interests, indicative drilling and completion costs,
facility and pipeline costs, expected operating expenses and schedules for proposed drilling and permitting, as well as regional production,
well information and directional surveys from the Enverus PRISM data service. Our independent reserve engineers use this technical data,
together with standard engineering and geoscience methods, or a combination of methods, including performance analysis, volumetric analysis
and analogy. The reserve volumes and their respective classifications and categorizations were estimated by performance
methods, volumetric methods, analogy, or combination of methods. Performance methods generally included decline-curve analysis and material
balance analysis where representative data was available. Volumetric estimates generally included a combination of geological and engineering
interpretations, while analogy methods included reserve estimates from historical performance of similar wells and reservoirs in the field
or nearby fields. Regional production, well information, and directional surveys were sourced from Enverus PRISM data service.
We
maintain adequate and effective internal controls over our reserve estimation process as well as the underlying data upon which reserve
estimates are based. The primary inputs to the reserve estimation process were technical information, financial data, ownership interest
and third-party production data. The reserve estimates prepared by our independent reserve engineers were reviewed and compared to our
internal estimates by Mr. Freeman and our technical staff. Material reserve estimation differences were reviewed between our independent
reserve engineers and us, and additional data was provided to address the differences. If the supporting documentation did not justify
additional changes, our independent reserve engineers reserves were accepted.
The
accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As
a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions
of such estimates. Accordingly, reserve estimates often differ from the quantities of oil, natural gas and NGLs that are ultimately recovered.
See “Risk Factors—Our estimated natural gas, NGL and oil reserve are based on many assumptions that may prove to be inaccurate.
Any material inaccuracies in the reserve estimates or the underlying assumptions will materially affect the quantities and present value
of our reserves.” for more information.
Cryptocurrency
Mining
During
2022, the Company participated in mining pools that pool the resources of groups of miners and split cryptocurrency rewards earned according
to the “hashing” capacity each miner contributes to the mining pool. Cryptocurrency mined by the Company has historically
been held short-term and sold to fund operations. As described further in the table provided below, the Company earned approximately
19 Bitcoin, net of fees, from its mining operations during the fourth quarter of 2021 and first half of 2022. Substantially all such
Bitcoin was sold during the second quarter of 2022 in order to fund operations. The average period between receipt of crypto assets and
the subsequent sale date from October 2021, when the Company began holding cryptocurrency, to December 2022, when the Company sold the
last of its cryptocurrency, was 136 days. Historically, the Company’s liquidity and value of its Bitcoin held was subject to the
risks associated with the volatility in Bitcoin pricing. The Company ceased its cryptocurrency mining operations in mid-2022
and began the process to reinitiate such operations upon the entering of the Master Services Agreement in March 2023 as described below.
The Company measures its
operations by the number and U.S. Dollar (US$) value of the cryptocurrency rewards it earns from its cryptocurrency mining activities.
The following table presents additional information regarding our cryptocurrency mining operations:
| |
Quantity of Bitcoin | | |
US$
Amounts | |
Balance September 30, 2021 | |
| — | | |
$ | — | |
Revenue recognized from cryptocurrency mined | |
| 6.7 | | |
| 369,804 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (7,398 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (59,752 | ) |
Balance December 31, 2021 | |
| 6.6 | | |
$ | 302,654 | |
Revenue recognized from cryptocurrency mined | |
| 8.3 | | |
| 343,055 | |
Mining pool operating fees | |
| (0.2 | ) | |
| (6,868 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (106,105 | ) |
Balance March 31, 2022 | |
| 14.7 | | |
$ | 532,736 | |
Revenue recognized from cryptocurrency mined | |
| 4.6 | | |
| 166,592 | |
Mining pool operating fees | |
| (0.1 | ) | |
| (3,428 | ) |
Proceeds from the sale of cryptocurrency | |
| (18.9 | ) | |
| (564,205 | ) |
Realized loss on the sale of cryptocurrency | |
| — | | |
| (131,075 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (34 | ) |
Balance June 30, 2022 (1) | |
| 0.3 | | |
$ | 586 | |
Revenue recognized from cryptocurrency mined | |
| 0.3 | | |
| 7,955 | |
Mining pool operating fees | |
| — | | |
| (156 | ) |
Impairment of cryptocurrencies | |
| — | | |
| (1,035 | ) |
Balance September 30, 2022 (1) | |
| 0.6 | | |
$ | 7,350 | |
| |
| | | |
| | |
Revenue recognized from cryptocurrency mined | |
| — | | |
| — | |
Mining pool operating fees | |
| — | | |
| — | |
Proceeds from the sale of cryptocurrency | |
| (0.6 | ) | |
| (11,203 | ) |
Realized gain on the sale of cryptocurrency | |
| — | | |
| 3,853 | |
| |
| | | |
| | |
Balance December 31, 2022 (1) | |
| — | | |
$ | — | |
(1) |
After June 30, 2022 and
through December 31, 2022 the Company did not receive meaningful cryptocurrency awards nor generate meaningful revenue from cryptocurrency
mining. |
On March 2, 2023, the Company
entered into the Master Services Agreement with Atlas and began the process of reinitiating its cryptocurrency mining operations. Currently, we generate
all our revenue through our cyptocurrency mining activities from assets we acquired in the Merger. We currently do not expect to receive
rewards in the form of cryptocurrency in the future. We do not own, control or take custody of Bitcoin, and we currently do not have
any policies regarding how long the Company holds any crypto assets it receives as payment or when the Company will sell any such received
crypto assets. Atlas, our service provider, retains all Bitcoin rewards, deducts a hosting service fee from the monthly total mined currency
produced by our miners and remits the net mined currency to us in cash. We currently do not intend to mine crypto assets other than Bitcoin.
The Company currently does not have, and does not intend to enter into, any agreements with mining
pool operators.
All
of our miners were manufactured by Bitmain, and incorporate application-specific integrated circuit chips specialized to solve blocks
on the Bitcoin blockchains using the 256-bit secure hashing algorithm in return for Bitcoin cryptocurrency rewards. At May 3, 2023,
the assets acquired by the Company in the Merger included 606 Bitmain S19 XP miners for which deposits had been made and were located
in Asia. On May 31, 2023, the Company paid a shipping fee of $54,000 and the miners were delivered
to the Company on June 17, 2023. All of the miners are newly manufactured. Upon delivery of the last batch of products to the Company
on June 17, 2023, the Bitmain Agreement terminated pursuant to its terms.
Factors
Affecting Profitability
Our
business is heavily dependent on the market price of Bitcoin. The prices of cryptocurrencies, specifically Bitcoin, have experienced
substantial volatility and dropped throughout 2022 and Bitcoin reached its lowest price since December 2020 in late 2022. As of September
30, 2023, the market price of Bitcoin was approximately $26,911, which reflects a decrease of approximately 43% from
the beginning of 2022, and a decrease of approximately 60% from its all-time high of approximately $67,000. Further affecting
the industry, and particularly for the Bitcoin blockchain, the cryptocurrency reward for solving a block is subject to periodic incremental
halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work
consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving.” For Bitcoin the
reward was initially set at 50 Bitcoin currency rewards per block. The Bitcoin blockchain has undergone halving three times since its
inception as follows: (1) on November 28, 2012 at block 210,000; (2) on July 9, 2016 at block 420,000; and (3) on May 11, 2020 at block
630,000, when the reward was reduced to its current level of 6.25 Bitcoin per block. While a precise date for the next halving of the
Bitcoin blockchain is not known, based on industry data, we anticipate this to occur in the first half of 2024 at block 840,000, when
the reward will be reduced to 3.125 Bitcoin per block. This process will reoccur until the total amount of Bitcoin currency rewards issued
reaches 21 million and the theoretical supply of new Bitcoin is exhausted, which is currently estimated to occur in 2140. While Bitcoin
prices have historically increased around these halving events, which increases in price have correspondingly mitigated the decrease
in mining reward, there is no guarantee that the price change would be favorable or would compensate for the reduction in mining reward.
If a corresponding and proportionate increase in the trading price of Bitcoin or a proportionate decrease in mining difficulty does not
follow these anticipated halving events, the revenue we earn from our bitcoin mining operations would see a corresponding decrease. Many
factors influence the price of Bitcoin, and potential increases or decreases in prices in advance of, or following, a future halving
is unknown.
In addition to the
market price of Bitcoin, the price of electricity can impact the profitability of Bitcoin mining operations. We use special cryptocurrency
mining computers to solve complex cryptographic algorithms to support the Bitcoin blockchain and, in return, received Bitcoin as our
reward through the third quarter of 2022 and beginning in March 2023, we receive the dollar value of Bitcoin net of costs as our reward.
Miners measure their processing power, which is known as “hashing” power, in terms of the number of hashing algorithms solved
per second, which is the miner’s “hash rate.” A miner with a higher hash rate consumes more electricity to run than
a miner with a lower hash rate. The “hash rate”
capacity of our miners was 159.5 PH/s as of September 30, 2023.
Adverse movements
in Bitcoin market price, electricity costs and “hash rate” can result in decreased cryptocurrency mining revenue and increased
cryptocurrency mining costs, each of which has had a material adverse effect on our business, financial condition and results of operations
for certain periods, most notably in June 2022 when we decided to pause Bitcoin mining activities due to an inability to source power
at rates that would justify ongoing mining activity during that period. After entering into the Master Services Agreement and relocating
our miners to the Atlas facility, we re-initiated Bitcoin mining activities in 2023. We continue to monitor the economic benefits and
risks of our cryptocurrency mining operations and may reduce or pause such operations from time to time, or may exit such operations
altogether, if we determine that such operations are no longer beneficial to the Company.
The term “hashing”
power also relates to the total Bitcoin network’s mining difficulty of a given blockchain. When a new blockchain is launched, it
sets a specific time frame to produce new blocks. If new miners join the network or performance of miners increases, the hash rate goes
up, and blocks are mined faster than the set time. In such cases, the network increases the mining difficulty. The inverse is also true
– if there are fewer miners, the hash rate decreases, blocks take longer to mine and the difficulty is lowered. When the Bitcoin
network’s difficulty goes up, it takes every mining machine longer and requires more “hashing” power to maintain the
same level of mining profits. We do not control nor attempt to forecast the Bitcoin network’s difficulty or the resulting network
“hashing” rate. In general, the Bitcoin network hash rate has increased over time due to both additional miners coming online
as well as increased efficiencies in mining technology. For the third quarter of 2023, the average hash rate of the Bitcoin network
was approximately 388.8 EH/s. For the twelve-month period ended November 14, 2023, the average hash rate of the Bitcoin
network was approximately 348.1 EH/s. The following graph shows the Bitcoin network hash rate for the twelve months ended November
14, 2023, according to Blockchain.com:
The Company’s cost
to earn a Bitcoin is predominantly driven by the cost of power or electricity which fluctuates based on many factors, including the impacts
of weather and the price of natural gas. Through the third quarter of 2022, the Company paid the prevailing market rate for power without
the benefit of a fixed cost. The price of natural gas can be volatile and increased substantially from the beginning of 2022 through
the end of the year which increased the Company’s cost of power. This increase when coupled with the decrease in the price of Bitcoin
throughout 2022 resulted in decreased cryptocurrency mining revenue, increased cryptocurrency mining costs and negative operating margins
all of which had a material adverse effect on our business, financial condition and results of operations leading to the Company’s
cessation of cryptocurrency mining operations in mid-2022.
In
March 2023 and as described below, we entered into a Master Services Agreement with Atlas and began the process to reinitiate our cryptocurrency
mining operations. Through this contract, we sought to normalize our mining costs and agreed to pay Atlas a flat fee of $20.00 per miner
to cover set-up costs and thereafter pay a monthly fee to Atlas for the quantity of electricity consumed by the miners at a rate of $0.08
per kWh. As such, the Company’s per unit cost of electricity is currently fixed through the term of the contract which expires
on March 2, 2025. However, the cost that Atlas is required to pay its electricity provider may not be fixed and could be greater than
$0.08 per kWh or $80 per MW. In such cases, it can and does shut down the Company’s miners thereby reducing both our ability to
earn revenue and our electricity costs. During the third quarter of 2023 there were six days whereby Atlas shut down miners due to its cost of electricity. As such, the Company’s operations
continue to have exposure to increased power costs driven by market factors.
Our
Bitcoin mining business breaks even so long as it
is economically beneficial for us to continue to operate our mining machines, and that is essentially when the mining machines contribute
positive cash flow (i.e., when the variable cost to mine one Bitcoin, namely the electricity cost, equals the market price of a Bitcoin).
Based on this overarching principle, our assumed cash cost to mine one Bitcoin is approximately $11,000 on go-forward basis (or
$37,000 inclusive of hardware costs). Such estimates are based on the following inputs: (i) a Bitcoin network hash rate of
344.15 EH/s, which was the approximate network hash rate as of April 14, 2023, the date we reinitiated our Bitcoin mining business, according
to Blockchain.com and is also a close approximation to both the average Bitcoin network hash rate of 388.8 EH/s for the three
months ended September 30, 2023 and the trailing twelve month average Bitcoin network hash rate of 348.1 EH/s as of November
14, 2023, according to Blockchain.com; (ii) our average mining machine energy consumption at 27.1 joules/terahash, which
represents the average mining machine energy consumption as of September 30, 2023; (iii) electricity cost at $0.08 kWh, which
is the contracted price we pay per kWh under the Master Services Agreement and (iv) depreciation cost of our investment in mining
equipment, which is described in more detail below. We believe using the April 14, 2023 hash rate, which also reflects an approximate
network hash rate over the past year, is appropriate currently and we will continue to monitor historical rates and reassess the network
hash rate used in our breakeven forecast going forward. As a result, $11,000 represents our “shutdown Bitcoin price” for
our Bitcoin mining business, indicating that as long as the Bitcoin price is higher than $11,000 on average, we would continue to operate
our existing mining machines and such operation would be economically beneficial to us.
As
of September 30, 2023, we have invested approximately $12 million to acquire our miners. We paid for these miners in cash and
have not historically financed the miners and do not have any current plans to finance miners we may purchase in the future. Our
mining equipment is expected to have a useful life of 2 to 5 years and depreciation of $132,851 and $425,468 was recognized
with respect to our mining equipment for the three months ended June 30, 2023 and September 30, 2023,
respectively. Since all of our mining equipment is fully paid, we do not take into account the replacement or depreciation
costs of such machines in determining our “shutdown Bitcoin price” for our existing equipment. In addition, since
the AR Debentures were fully extinguished in October 2023, we do not have debt or financing costs to allocate to our
breakeven analysis. While we do not consider sunk costs, depreciation of existing equipment or replacement costs in our forecasted
breakeven analysis or in our decisions to continue or
to pause existing mining operations, such costs are substantial and will
be an important factor in determining whether to invest in new mining equipment to replace our existing equipment as it
ages. For the three months ended June 30, 2023 and September
30, 2023, we estimate that such hardware costs were $20,427 and $25,877, respectively, per Bitcoin based upon our depreciation
expense in each period. Such costs fluctuate due to the timing of placing equipment into service and amount of Bitcoin mined in a
given period among other factors. Based on our current mining equipment, estimates of useful lives, network hash rate and other factors, we expect
approximately $26,000 per Bitcoin to be representative of such cost in our forecast. In addition, based on current prices for
miners with comparable hashing capacity as our existing miners and an assumed useful life of 36 months, we estimate that the
replacement costs of our existing equipment would be approximately $345,000 per quarter, or $21,044 per Bitcoin based on the
amount of Bitcoin mined in the third quarter of 2023. Such replacement costs are based on assumptions that are subject to
significant uncertainty. For example, miners currently available for purchase from Bitmain have a hashing capacity 123% higher than
the weighted average hashing capacity of our existing equipment. Such technology developments may result in higher efficiency and
lower electricity cost per Bitcoin in the future. However, pricing of such new miners may fluctuate significantly over time based on
both demand and efficiency. In addition, we are not able to predict at this time the actual useful life of our existing miners or
any miners we may acquire in the future, each of which could have a material effect on the breakeven cost of maintaining our mining
operations. For information regarding the
inherent uncertainties in our breakeven analysis, please see “Risk Factors—Our breakeven costs are based on a number of assumptions, including the price of Bitcoin, which are subject to inherent
uncertainty, may prove to be inaccurate or may not be sustained over time. Such factors could
adversely our business and results of operations.”
During the three
months ended June 30, 2023, our cash operating cost was $14,872 per Bitcoin. Our cash operating costs during this period
reflected inefficiencies related to re-initiating our mining operations and continued deployment of additional miners into Atlas’
facility that are not expected to recur in subsequent periods. Despite these cash operating costs being higher than our assumed
costs, our Bitcoin mining operations were still profitable on a cash basis due to the price of Bitcoin far exceeding our “shutdown
Bitcoin price.” As expected, mining costs per Bitcoin normalized during the third quarter of 2023 after the Company brought
the remaining miners online at the end of June 2023. Average cash operating costs per Bitcoin were $11,005 per Bitcoin
in the three months ended September 30, 2023 in line with our expectations.
A breakeven analysis of the
Company’s Bitcoin mining operations in terms of one Bitcoin for the three months ended June 30, 2023 and three months ended
September 30, 2023 and key inputs for our breakeven forecast follows:
| |
Average Second Quarter 2023 | | |
Average Third Quarter 2023 | |
Bitcoin price | |
$ | 28,053 | | |
$ | 27,852 | |
Power cost per Bitcoin | |
| (14,872 | ) | |
| (11,005 | ) |
Cash operating margin per Bitcoin | |
| 13,181 | | |
| 16,847 | |
Hardware cost per Bitcoin | |
| (20,427 | ) | |
| (25,877 | ) |
Total operating margin per Bitcoin | |
$ | (7,246 | ) | |
$ | (9,029 | ) |
| |
| | | |
| | |
Key inputs to power cost: | |
| | | |
| | |
Approximate average network hash rate (EH/s) | |
| 356.8 | | |
| 388.8 | |
Average energy consumption per miner (watts) (1) | |
| 3,098 | | |
| 3,112 | |
Electricity cost ($ per kWh) | |
$ | 0.08 | | |
$ | 0.08 | |
Approximate average energy consumption per Bitcoin (kWh) | |
| 185,900 | | |
| 137,563 | |
(1)
This value represents the weighted average energy consumption per miner. This is a rated value as measured by the manufacturer of our
miners, Bitmain.
Our electricity
costs are determined by multiplying the price per kWh by the number of hours in the month by the metered rated power consumption of our
miners hosted by Atlas. The more miners we have hosted by Atlas, the higher our electricity costs in total are. Conversely, when the
price of electricity rises to the point where Atlas shuts off our miners, we experience lower electricity costs. The cost of electricity
under the Master Services Agreement ranged from a low of $9,772 per Bitcoin to a high of $34,123 per Bitcoin for the three months
ended June 30, 2023 and $9,213 per Bitcoin to a high of $18,608 per Bitcoin for the three months ended September 30, 2023
The average trading price of
Bitcoin was $28,053 and $27,852 for the three months ended June 30, 2023 and September 30, 2023, respectively. Our
cash costs averaged $14,872 per Bitcoin and $11,005 per Bitcoin in these periods, respectively, and was solely from the
power cost of $0.08 per kWh. On average, our miners used 185,900 kWh and 137,563 kWh to mine one Bitcoin. There were no set-up
or other costs under the Master Services Agreement incurred during these periods. This resulted in an average cash operating
margin of $13,181 per Bitcoin and $16,847 per Bitcoin during the three months ended June 30, 2023 and three months ended
September 30, 2023, respectively. This cost is based on the following factors: (i) the average Bitcoin network hash rate of approximately
356.8 EH/s in the second quarter of 2023 and 388.8 EH/s in the third quarter of 2023 (4612.0 EH/s as of November 14, 2023),
(ii) our average mining machine energy consumption of 3,098 watts and 3,112 watts, respectively, and (iii) electricity cost of
$0.08 per kWh. As a result, the Company’s average cash breakeven cost to mine one Bitcoin was equal to $14,872 per Bitcoin
and $11,005 per Bitcoin in the three months ended June 30, 2023 and September 30, 2023, respectively. We experienced some inefficiencies
in the second quarter of 2023, such as beginning operations on April 14, 2023, that affected results for this quarter. We do not expect
such inefficiencies to occur in future quarters. When including the cost of hardware, the Company’s total costs to mine one
Bitcoin was $35,299 and $36,882 in the three months ended June 30, 2023 and September 30, 2023, respectively, and resulted in a total
operating loss of $7,246 per Bitcoin and $9,029 per Bitcoin in these periods, respectively.
Recent
industry-wide developments, including the continued industry-wide fallout from the recent Chapter 11 bankruptcy filings of cryptocurrency
exchange FTX (including its affiliated hedge fund Alameda Research), crypto hedge fund Three Arrows, crypto miners Compute North and
Core Scientific and crypto lenders Celsius Network, Voyager Digital and BlockFi are beyond our control. We are not directly affected
by these recent incidents, as we do not have any counterparty credit exposure to the above-mentioned firms nor expect their potential
bankruptcy to have any direct impact on our business or operations. We do not believe that our share price has been adversely affected
by such incidents since June 30, 2023, but likely was adversely impacted in 2022 and the first half of 2023. The Company has no exposure
to any of the cryptocurrency market participants that recently filed for Chapter 11 bankruptcy or any other counterparties, customers,
custodians or other participants in crypto asset markets, or who are known to have experienced excessive redemptions, suspended redemptions,
withdrawals of crypto assets or have crypto assets of their customers unaccounted for or material corporate compliance failures; and
the Company does not have any assets, material or otherwise, that may not be recovered due to these bankruptcies or excessive or suspended
redemptions. The price of Common Stock may still not be immune to unfavorable investor sentiment resulting from these recent developments
in the broader cryptocurrency industry and you may experience depreciation of the price of Common Stock.
Master
Services Agreement – Atlas
On
March 2, 2023, the Company entered into the Master Services Agreement with Atlas pursuant to which Atlas will provide the Company with
cryptocurrency mining services for the Company’s cryptocurrency miners at its facility in North Dakota for a term of two years.
The Company has approximately 750 miners at the Atlas Facility and approximately 600 additional miners were shipped to the Company and
deployed to the Atlas Facility on June 28, 2023.
Under
the Master Services Agreement, the Company agreed to pay an initial flat fee of $20.00 per miner to cover set-up costs and thereafter
pay a monthly fee to Atlas for the quantity of electricity consumed by the miners at a rate of $0.08 per kWh. Under the Master Services
Agreement, the Company’s electricity costs are determined by multiplying the price per kWh by the number of hours in the month
by the metered rated power consumption of the Company’s miners hosted by Atlas. In exchange for such payment, Atlas hosts the miners
at its North Dakota facility, including providing rack space, electrical power, internet connectivity, physical security, installation,
configuration and monitoring of the miners for any downtime, with a guarantee to maintain a minimum of 95% uptime for all of our miners,
not including any power outages or other force majeure events.
The
electricity fee is invoiced monthly, within five (5) business days following the end of each calendar month. Any mined cryptocurrency
produced by the Company’s miners is deposited directly to wallets in the custody and control of Atlas on a daily basis.
In exchange, the Company receives a corresponding credit to its account on a daily basis for any mined cryptocurrency that was deposited
to the wallets in the custody and control of Atlas. The Company does not maintain any cryptocurrency assets or wallets and does not take
possession of any cryptocurrency mined. Instead, Atlas maintains an account for the credit of the Company. Within five (5) business
days following the end of each calendar month, Atlas first deducts the electricity fee from the monthly total mined currency produced
by the miners, and then remits to the Company the net mined currency in cash. As a result, the Master Services Agreement does not
contain any contractual arrangements for Atlas to store the Company’s crypto assets and does not address any security precautions
Atlas is required to undertake, any inspection rights the Company has or what type of insurance Atlas is required to have to protect
the Company from loss.
The
term of the Master Services Agreement is two years. The Company has the right to terminate the Master Services Agreement if (a) Atlas
fails to perform any of its obligations under the Master Services Agreement in any material respect that is not cured within 30 business
days of receiving written notice from the Company or (b) Atlas enters into bankruptcy, dissolution, financial failure or insolvency which
is not dismissed or otherwise remedied within thirty (30) days.
Atlas
has the right to terminate the Master Services Agreement if the Company (a) (i) fails to deliver miners to Atlas; (ii) fails to make
any payment(s) when due pursuant to the Master Services Agreement; (iii) breaches any of its representations or warranties in the Master
Services Agreement; (iv) violates, or fails to perform or fulfill any covenant or provision of the Master Services Agreement, and any
such breach of (a) is not cured within ten (10) business days after receipt of written notice from Atlas; or (b) enters into bankruptcy,
dissolution, financial failure or insolvency which is not dismissed or otherwise remedied within thirty (30) days.
Upon
expiration or termination of the Master Services Agreement and upon payment of all undisputed amounts owed under the Master Services
Agreement, Atlas shall decommission and return all of the Company’s miners to the Company.
Government
Regulation
Cryptocurrency
is increasingly becoming subject to governmental regulation, both in the U.S. and internationally. State and local regulations also may
apply to our activities and other activities in which we may participate in the future. Numerous regulatory bodies have shown an interest
in regulating blockchain or cryptocurrency activities. For example, on March 9, 2022, President Biden signed an executive order on cryptocurrencies.
While the executive order does not mandate any specific regulations, it instructs various federal agencies to consider potential regulatory
measures, including the evaluation of the creation of a U.S. Central Bank digital currency. Future changes to existing regulations or
entirely new regulations may affect our business in ways it is not presently possible for us to predict with any reasonable degree of
reliability. As the regulatory and legal environment evolves, we may become subject to new laws and regulation which may affect our mining
and other activities. For additional discussion regarding our belief about the potential risks existing and future regulation pose to
our business, see the Section entitled “Risk Factors.”
Intellectual
Property
We
do not currently own any patents in connection with our existing and planned blockchain and cryptocurrency related operations.
Environmental
and Occupational Health and Safety Regulations
Our
planned oil, natural gas, and NGL exploration and production operations will be subject to stringent federal, regional, state and local
laws and regulations regulating worker health and safety, the release or disposal of materials into the environment, or otherwise relating
to protection of the environmental and natural resources. These laws and regulations may impose significant obligations on our operations,
including the need to obtain permits to conduct drilling or other regulated activities; limit or prohibit drilling activities on certain
lands lying within wilderness, wetlands and other protected areas; restrict the types, quantities and concentration of materials that
can be released into the environment in the performance of drilling and production activities; apply workplace health and safety standards
for the benefit of employees; require remedial activities or corrective actions to mitigate environmental impacts from former or current
operations, such as restoration of drilling pits and plugging of abandoned wells; and impose substantial liabilities for pollution or
unauthorized releases of hazardous materials resulting from our operations.
The
following is a summary of the more significant existing federal environmental and occupational health and safety laws and regulations,
as amended from time to time, to which our planned oil, natural gas and NGL operations will be subject to.
|
● |
The
Clean Air Act (“CAA”), which restricts the emission of air pollutants from many sources, imposes various pre-construction,
operational, monitoring and reporting requirements and has been relied upon by the EPA as authority for adopting climate change regulatory
initiatives relating to GHG emissions. |
|
|
|
|
● |
The
Federal Water Pollution Control Act, also known as the “Clean Water Act,” which regulates discharges of pollutants from
facilities to state and federal waters and establishes the extent to which waterways are subject to federal jurisdiction and rulemaking
as protected waters of the United States. |
|
|
|
|
● |
The
Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), which imposes strict liability on generators,
transporters, disposers and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening
to occur. |
|
|
|
|
● |
The
Resource Conservation and Recovery Act (“RCRA”), which governs the generation, treatment, storage, transport and disposal
of non-hazardous and hazardous wastes. |
|
|
|
|
● |
The
Oil Pollution Act (“OPA”), which subjects owners and operators of vessels, onshore facilities and pipelines, as well
as lessees or permittees of areas in which offshore facilities are located, to strict liability for removal costs and damages arising
from an oil spill in waters of the United States. |
|
|
|
|
● |
The
Safe Drinking Water Act (“SDWA”), which ensures the quality of the nation’s public drinking water through adoption
of drinking water standards and controlling the injection of waste fluids into below-ground formations that may adversely affect
drinking water sources. |
|
|
|
|
● |
The
Occupational Safety and Health Act (“OSH Act”), which establishes workplace standards for the protection of the health
and safety of employees, including the implementation of hazard communications programs designed to inform employees about hazardous
substances in the workplace, potential harmful effects of these substances, and appropriate control measures. |
|
|
|
|
● |
The
Emergency Planning and Community Right-to-Know Act (“EPCRA”), which requires reporting on the storage, use, and release
of certain chemicals to federal, state, tribal, and/or local governments to help protect communities from potential risks. |
|
|
|
|
● |
The
Endangered Species Act (“ESA”), which restricts activities that may affect federally identified endangered and threatened
species or their habitats through the implementation of operating restrictions or a temporary, seasonal, or permanent ban in affected
areas. |
Additionally,
Colorado, where our operations are conducted, has analogous environmental and occupational health and safety laws and regulations governing
many of these same types of activities. In some cases these regulations may impose additional or more stringent conditions or controls
that can significantly restrict, delay or cancel the permitting, development or expansion of our operations or substantially increase
the cost of doing business. In 2019, Colorado passed SB 19-181, which changed Colorado Oil & Gas Conservation Commission’s
mission from “fostering” oil and gas development to “regulating oil and gas development in a manner than protects public
health, safety, welfare, the environment and wildlife resources.” The agency has since promulgated, and continues to develop, a
number of rulemakings reflecting that mission change and imposing additional and stricter regulations on oil and natural gas operations
throughout the state.
Our
operations will also be subject to a variety of local environmental and regulatory requirements, including land use, zoning, building,
and transportation requirements. Any failure to comply with these laws, regulations and regulatory initiatives or controls may result
in the assessment of sanctions, including administrative, civil, and criminal penalties; the imposition of investigatory, remedial, and
corrective action obligations or the incurrence of capital expenditures; the occurrence of restrictions, delays or cancellations in the
permitting, development or expansion of projects; and issuance of injunctions restricting or prohibiting some or all of our activities
in a particular area.
The
trend in environmental and occupational health and safety laws and regulations over time has been the imposition of increasingly restrictive
and limiting regulations on activities that may adversely affect the environment and natural resources or expose workers to injury. If
existing regulatory requirements or enforcement policies change or new executive action or regulatory or enforcement initiatives are
developed and implemented in the future, we may be required to make significant, unanticipated capital and operating expenditures which
could have a material adverse impact on our financial condition or results of operations.
Additionally,
the federal OSH Act and analogous state occupational safety and health laws that impose rigorous standards to prevent or mitigate workers’
exposure to injury will require us to organize information about materials, some of which may be hazardous or toxic, that are used, released
or produced in our planned oil, natural gas, and NGL exploration and production operations. Moreover, the OSHA hazard communication standard,
the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable
state statutes require that information be maintained concerning hazardous materials used or produced in our operations and that this
information be provided to employees, state, local and other applicable government authorities and citizens.
Employees
As
of November 17, 2023, we have eleven
employees. We have never experienced a work stoppage, and believe we maintain positive relationships with our employees.
Facilities
Our
primary office is located at 602 Sawyer Street, Suite 710, Houston, Texas 77007.
Legal
Proceedings
The
Company is not involved in any disputes and does not have any litigation matters pending which the Company believes could have a materially
adverse effect on the Company’s financial condition or results of operations. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge
of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our Common Stock, any
of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as
such, in which an adverse decision could have a material adverse effect.
Exhibit 99.2
Risk Factors
Investing
in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed
above under “Cautionary Statement Regarding Forward-Looking Statements,” you should carefully consider the specific risks
set forth herein, the risks set forth in our Annual Report on Form 10-K, filed with SEC on March 31, 2023 under the heading “Risk
Factors” and the risks set forth in our subsequent Quarterly Reports on Form 10-Q and other filings we make with the SEC from time
to time, which are incorporated by reference herein, together with other information in this prospectus and the information
incorporated by reference herein. If any of these risks actually occur, it may materially harm our business, financial condition,
liquidity and results of operations. As a result, the market price of our securities could decline, and you could lose all or part of
your investment. Additionally, the risks and uncertainties described in this prospectus or any prospectus supplement and any document
incorporated by reference are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial may become material and adversely affect our business.
Risks
Related to Our Company
We
have historically incurred significant losses, and may be unable to generate profitability. If we continue to incur significant
losses, we may have to curtail our operations, which may prevent us from successfully operating and expanding our business.
Historically, we have relied
upon cash from financing activities to fund substantially all of the cash requirements of our activities and have incurred significant
losses and experienced negative cash flow. For the nine months ended September 30, 2023, we incurred a net loss of $55,626,937,
and for the year ended December 31, 2022, we incurred a net loss of $13,783,198. We had stockholders’ equity of $(64,047,831)
and members’ deficit of $381,520 as of September 30, 2023 and December 31, 2022, respectively. We cannot predict if
we will be profitable. We may continue to incur losses for an indeterminate period of time and may be unable to sustain profitability.
An extended period of losses and negative cash flow may prevent us from successfully operating and expanding our business. We may be
unable to sustain or increase our profitability on a quarterly or annual basis.
We
may not achieve the perceived benefits of the Merger and the market price of our Common Stock following the Merger may decline.
The
market price of our Common Stock may decline as a result of the Merger for a number of reasons, including if: investors react negatively
to the prospects of the Company’s business; the effect of the Merger on the Company’s business and prospects is not consistent
with the expectations of our management or of financial or industry analysts; or the Company does not achieve the perceived benefits
of the Merger as rapidly or to the extent anticipated by our management or financial or industry analysts.
Our
stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with
the Merger.
If
the Company is unable to realize the strategic and financial benefits currently anticipated from the Merger, our pre-closing stockholders
will have experienced substantial dilution of their ownership interests without receiving the expected commensurate benefit, or only
receiving part of the commensurate benefit to the extent the Company is able to realize only part of the expected strategic and financial
benefits currently anticipated from the Merger.
We
may require significant additional capital to fund our growing operations; we may not be able to obtain sufficient capital and
may be forced to limit the scope of our operations.
We
may not have sufficient capital to fund our future operations without significant additional capital investments, including the planned
drilling of oil and gas wells. If adequate additional financing is not available on reasonable terms or at all, we may not be able to
carry out our corporate strategy and we would be forced to modify our business plans (e.g., limit our growth, and/or decrease or eliminate
capital expenditures), any of which may adversely affect our financial condition, results of operations and cash flow. Such reduction
could materially adversely affect our business and our ability to compete. There can be no assurance that financing will be available
in a timely manner or in amounts or on terms acceptable to the Company, or at all.
The
Company’s ability to obtain external financing in the future may be subject to a variety of uncertainties, including its future
financial condition, results of operations, cash flows and the liquidity of international capital and lending markets. In light of conditions
impacting the industry, it may be more difficult for the Company to obtain equity or debt financing currently and/or in the future. Specifically,
the crypto assets industry has been negatively impacted by recent events such as the bankruptcies of Compute North LLC (“Compute
North”), Core Scientific Inc. (“Core Scientific”), Alameda Research LLC (“Alameda Research”), BlockFi Inc.
(“BlockFi”), Celsius Network LLC (“Celsius Network”), Voyager Digital Ltd. (“Voyager Digital”), Three
Arrows Capital (“Three Arrows”) and FTX Trading Ltd. (“FTX”). In response to these events, the digital asset
markets, including the market for Bitcoin specifically, have experienced extreme price volatility and several other entities in the digital
asset industry have been, and may continue to be, negatively affected, further undermining confidence in the digital assets markets and
in Bitcoin. We may need to undertake equity, equity-linked
or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities,
our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and
privileges superior to those of holders of our Common Stock. Any debt financing that we secure in the future could involve restrictive
covenants relating to our capital raising activities and other financial and operational matters, including the ability to pay dividends.
This may make it more difficult for us to obtain additional capital and to pursue business opportunities. A
large amount of bank borrowings and other debt may result in a significant increase in interest expense while at the same time exposing
the Company to increased interest rate risks.
We
may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and respond to business
challenges could be significantly impaired, and our business may be adversely affected. Our capital needs will depend on numerous factors,
including, without limitation, our profitability, and the amount of our capital expenditures, including acquisitions. Moreover, the costs
involved may exceed those originally contemplated. Failure to obtain intended economic benefits could adversely affect our business,
financial condition and operating performances.
The
cost of obtaining new cryptocurrency mining equipment is capital intensive, and may increase.
The
cost of obtaining new cryptocurrency mining equipment is capital intensive, and may increase in the future. If we are unable to obtain
adequate numbers of new and replacement miners at scale, we may not be able to mine cryptocurrency as efficiently or in similar amounts
as our competition and, as a result, our business and financial results could suffer. The price of new miners may be linked to the market
price of Bitcoin and other cryptocurrencies, and, our costs of obtaining new and replacement miners may increase, which may have a material
and adverse effect on our financial condition and results of operations.
Any
disruption of service experienced by Atlas or our failure to manage and maintain existing relationships or identify and engage or hire
other qualified third-party service providers or employees to perform similar functions could harm our business, financial condition,
operating results, cash flows and prospects.
We
depend upon outside service providers who may not be available on reasonable terms as needed. On March 2, 2023, we entered into a Master
Services Agreement and the Order Form thereunder (the “Master Services Agreement”) with Atlas Power Hosting, LLC (“Atlas”). Pursuant to the Master Services Agreement, we engaged Atlas to provide cryptocurrency mining services for our
miners at its facility in North Dakota. We are wholly reliant on Atlas to operate our miners on a daily basis. If Atlas experiences
difficulty providing the services we require, or if they experience disruptions or financial distress or cease operations
temporarily or permanently, it will negatively affect our ability to operate our Bitcoin mining operations. If we are unsuccessful
in identifying or finding highly qualified third-party service providers or employees, if we fail to negotiate cost-effective
relationships with them or if we are ineffective in managing and maintaining these relationships, it could materially and adversely
affect our Bitcoin mining business and our financial condition, operating results, cash flows and prospects.
We
may not have adequate sources of recovery if the cryptocurrencies held by Atlas are lost, stolen or destroyed due to third-party cryptocurrencies
custodial services. Such incidents could have a material adverse effect on our business, financial condition and results of operations.
All
of the bitcoin mined by our miners at the Atlas’ facility in North Dakota (the “Atlas Facility”) are
placed into a wallet under the custody and control of Atlas. Atlas will deduct a hosting service fee from the monthly total mined currency
produced by our miners and remit the net mined currency to us in cash. We are reliant on Atlas’s security procedures and policies
to safeguard its bitcoin. We cannot guarantee that Atlas’s security procedures will prevent any loss due to a security breach,
software defect or act of God. In addition, Atlas may experience the loss of any cryptocurrencies stored in wallets under its custody
and control. If such cryptocurrencies are lost, stolen or destroyed under circumstances rendering Atlas liable to a third party, it is
possible that Atlas may not have the financial resources or insurance sufficient to satisfy any or all of a third party’s claims,
or have the ability to retrieve, restore or replace the lost, stolen or destroyed cryptocurrencies due to governing network protocols
and the strength of the cryptographic systems associated with such cryptocurrencies. To the extent that Atlas is unable to recover on
any of its claims against any such third party, such loss could have a material adverse effect on Atlas’s ability to continue operations,
which could materially affect our business, financial condition and results of operations.
Bitcoin
is subject to halving; and will halve several times in the future and Bitcoin value may not adjust to compensate us for the reduction
in the rewards we receive from our mining efforts.
The
primary currency for which we mine, Bitcoin, is subject to “halving.” Halving is a process incorporated into many proof-of-work
consensus algorithms that reduces the coin reward paid to miners over time according to a pre-determined schedule. This reduction in
reward spreads out the release of crypto assets over a long period of time resulting in an ever smaller number of coins being mined,
reducing the risk of coin-based inflation. At a predetermined block, the mining reward is cut in half, hence the term “halving.”
For Bitcoin, the reward was initially set at 50 Bitcoin currency rewards per block and this was cut in half to 25 on November 28, 2012,
at block 210,000, then again to 12.5 on July 9, 2016, at block 420,000. The most recent halving for Bitcoin happened on May 11, 2020,
at block 630,000 and the reward reduced to 6.25. The next halving will likely occur in 2024. This process will reoccur until the total
amount of Bitcoin currency rewards issued reaches 21 million, which is expected around 2140. While Bitcoin prices have had a history
of price fluctuations around the halving of their respective cryptocurrency rewards, there is no guarantee that the price change will
be favorable or would compensate for the reduction in mining reward. We plan to keep our operating costs low by, among other means, acquiring
our own energy-producing assets and more efficient mining machines, but there can be no assurance that the price of Bitcoin will sufficiently
increase upon the next halving to justify the increasingly high costs of mining for Bitcoin. If a corresponding and proportionate increase
in the trading price of these cryptocurrencies does not follow these anticipated halving events, the revenue we earn from our mining
operations would see a corresponding decrease, which would have a material adverse effect on our business and operations.
We
need to manage growth in operations to maximize our potential growth and achieve our expected revenues. Our failure to manage growth
can cause a disruption of our operations that may result in the failure to generate revenues at levels we expect.
In
order to maximize potential growth, we may have to expand our operations. Such expansion will place a significant strain on our management
and our operations. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues
we expect.
Our
mining operating costs could outpace our mining revenues, which could materially impact our business.
Our
mining operations expenses may increase in the future, and may not be offset by a corresponding increase in revenue. Our expenses may
be greater than we anticipate, and our investments to make our business more efficient may not succeed and may outpace monetization efforts.
Increases in our costs without a corresponding increase in our revenue would increase our losses and could have a material adverse effect
on our business, results of operations and financial condition.
Insiders
have substantial control over the Company, and they could delay or prevent a change in our corporate control even if our other stockholders
want it to occur.
As
of the date of this filing, our executive officers and directors, collectively beneficially own approximately 43.1% of our outstanding
shares of Common Stock and the O’Neill Trust beneficially owns 25% of our outstanding shares of Common Stock. These stockholders
are able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with our Company even if
our other stockholders want it to occur. This may also limit your ability to influence the Company in other ways. In addition, certain
investors own significant numbers of convertible securities, that if exercised or converted, could result in ownership of a significant
portion of the outstanding shares of Common Stock of the Company. For example, assuming full exercise or conversion, as applicable, of
their respective convertible securities and no exercise or conversion by other security holders, certain holders could acquire a controlling
position in the Company’s Common Stock. The exercise or conversion, as applicable, of the Series D Preferred Stock, Series D PIPE
Warrants, Series E Preferred Stock and Series E PIPE Warrants are subject to a beneficial ownership limitation of 4.99% of
the outstanding shares of Common Stock, which may be increased by the holder upon written notice to the Company, to any specified percentage
not in excess of 9.99%. The 9.99% beneficial ownership limitation may only be modified, amended or waived with the written consent of
both the Company and the security holder. In connection with the Warrant Exercise, the O’Neill Trust entered into an agreement
with the Company pursuant to which it amended the terms of each of its Series D PIPE Warrants and Series E PIPE Warrants to increase
the beneficial ownership limitation from 9.99% to 25% and gave notice to the Company that it was increasing its beneficial ownership
limitation to 25% with respect to each of its remaining warrants. The beneficial ownership limitation on the Series D Preferred Stock
and Series E Preferred Stock remains at 4.99%, subject to increase to 9.99% by O’Neill Trust upon written notice to the Company.
If such beneficial ownership limitation were to be amended or waived for the O’Neill Trust or other holders, certain holders
would be able to convert their preferred shares or warrants for a significant portion of the outstanding shares of Common Stock of the
Company, and such holders would be able to exercise significant control over all matters requiring stockholder approval. See the section
entitled “Description of Securities” for more information regarding the beneficial ownership limitation provisions.
We
rely on a small number of cryptocurrency mining equipment suppliers, and the loss of any supplier might significantly reduce our revenue
and adversely affect our results of operations.
We
rely on a small number of cryptocurrency mining equipment suppliers, which is essential to our cryptocurrency mining revenue. The loss
of any or all of these suppliers would significantly reduce our revenue, which would have a material adverse effect on our results of
operations. We can provide no assurance that these suppliers will continue to supply us cryptocurrency mining equipment in the future.
We
are exposed to credit risk on our prepayments to cryptocurrency mining equipment suppliers. This risk is heightened during periods when
economic conditions worsen.
We
have made prepayments to suppliers of cryptocurrency mining equipment, and there can be no assurance that we will effectively limit our
credit risk and avoid losses, which could have a material adverse effect on our business, results of operations and financial condition.
We
may not be able to secure adequate insurance, or any insurance at all, on our cryptocurrency mining equipment that are subject to physical
and environmental damage.
Our
miners and mobile data centers are located in areas where we may not be able to secure adequate insurance, or any insurance at all. Our
miners and mobile data centers are subject to physical and environmental damage and any damage, including a complete loss, if it occurs
without being adequately insured, or insured at all, could have a material adverse effect on our business, results of operations and
financial condition.
Additionally,
although we seek to control our insurance risk and costs, the premiums we pay to obtain insurance coverage have increased over time and
are likely to continue to increase in the future. These increases in insurance premiums can occur unexpectedly and without regard to
our efforts to limit them, and, because of these rising costs, we may not be able to obtain similar levels of insurance coverage on reasonable
terms, or at all. If this occurs, we may choose or be forced to self-insure our assets, which could expose us to significant financial
risk due to the high cost of new miners. If insurance costs become unacceptably high and we elect to self-insure, and we experience a
significant casualty event resulting in the loss of some or all of our miners, we could be forced to expend significant capital resources
to acquire new miners to replace those we lose.
Furthermore,
if such casualty loss of our miners is not adequately covered by insurance and we do not have access to sufficient capital resources
to acquire replacement miners, we may not be able to compete in our rapidly evolving and highly competitive industry, which could materially
and adversely affect our financial condition and results of operations, and our business could suffer.
We
may lose our private key to our digital wallet, causing a loss of all of our digital assets.
Digital
assets, such as cryptocurrencies, are stored in a so-called “digital wallet”, which may be accessed to exchange a holder’s
digital assets, and is controllable by the processor of both the public key and the private key relating to this digital wallet in which
the digital assets are held, both of which are unique. We will publish the public key relating to digital wallets in use when we verify
the receipt of transfers and disseminate such information into the network, but we will need to safeguard the private keys relating to
such digital wallets, which are stored in the possession of certain of our officers. If the private key is lost, destroyed, or otherwise
compromised, we may be unable to access our cryptocurrencies held in the related digital wallet which will essentially be lost. If the
private key is acquired by a third party, then this third party may be able to gain access to our cryptocurrencies. Any loss of private
keys relating to digital wallets used to store our cryptocurrencies could have a material adverse effect on our ability to continue as
a going concern or could have a material adverse effect on our business, prospects, financial condition, and operating results.
The
storage and custody of our Bitcoin assets and any other cryptocurrencies that we may potentially acquire or hold in the future are subject
to cybersecurity breaches and adverse software events.
In
addition to the risk of a private key loss to our digital wallet, see “—We may lose our private key to our digital wallet,
causing a loss of all of our digital assets,” the storage and custody of our digital assets could also be subject to cybersecurity
breaches and adverse software events. All of the bitcoin mined by our miners at the Atlas Facility
are placed into a wallet under the custody and control of Atlas. Atlas will deduct a hosting service fee from the monthly total mined
currency produced by our miners and remit the net mined currency to us in cash. We currently do not store or hold, or expect to
acquire or hold, any cryptocurrencies. If and when we decide to acquire or hold cryptocurrencies, in order to minimize risk, we plan
to establish processes to manage wallets, or software programs where assets are held, prior to holding cryptocurrency. We intend to adopt
policies that are in line with industry standards. However, our investors will not have a chance to evaluate what our custody policies
and procedures will be until they are already implemented and may disagree with our policies and procedures.
A
“hot wallet” refers to any cryptocurrency wallet that is connected to the Internet. Generally, hot wallets are easier to
set up and access than wallets in “cold” storage, but they are also more susceptible to hackers and other technical vulnerabilities.
“Cold
storage” refers to any cryptocurrency wallet that is not connected to the Internet. Cold storage is generally more secure than
hot storage, but is not ideal for quick or regular transactions and we may experience lag time in our ability to respond to market fluctuations
in the price of our digital assets.
If and when we decide
to acquire or hold cryptocurrencies, we plan to hold the majority
of our cryptocurrencies in cold storage to reduce the risk of malfeasance; however we may also use third-party custodial wallets and,
from time to time, we may use hot wallets or rely on other options that may develop in the future. If we use a custodial wallet, there
can be no assurance that such services will be more secure than cold storage or other alternatives. Human error and the constantly evolving
state of cybercrime and hacking techniques may render present security protocols and procedures ineffective in ways which we cannot predict.
The Master Services Agreement currently does not contain any contractual arrangements for Atlas to store the Company’s crypto
assets and does not address any security precautions Atlas is required to undertake, any inspection rights the Company has or what type
of insurance Atlas is required to have to protect the Company from loss. As a result, if and when we decide to acquire or hold cryptocurrencies,
we will need to enter into a revised agreement to address the storage of the Company’s crypto assets, including insurance, inspection
rights and security precautions. There is no guarantee that we will successfully come to an agreement with Atlas on such matters.
Regardless
of the storage method, the risk of damage to or loss of our digital assets cannot be wholly eliminated. If our security procedures and
protocols are ineffective and our cryptocurrency assets are compromised by cybercriminals, we may not have adequate recourse to recover
our losses stemming from such compromise. A security breach could also harm our reputation. A resulting perception that our measures
do not adequately protect our digital assets could have a material adverse effect on our business, prospects, financial condition, and
operating results.
Bitcoin
exchanges and wallets, and to a lesser extent, the Bitcoin network itself, may suffer from hacking and fraud risks, which may adversely
erode user confidence in Bitcoin which would decrease the demand for the Company’s products and services. Further, digital asset
exchanges on which crypto assets trade are relatively new and largely unregulated, and thus may be exposed to fraud and failure. Incorrect
or fraudulent cryptocurrency transactions may be irreversible.
Bitcoin
transactions are entirely digital and, as with any virtual system, are at risk from hackers, malware and operational glitches. Hackers
can target Bitcoin exchanges and Bitcoin transactions, to gain access to thousands of accounts and digital wallets where Bitcoins are
stored. Bitcoin transactions and accounts are not insured by any type of government program and all Bitcoin transactions are permanent
because there is no third party or payment processor. Bitcoin has suffered from hacking and cyber-theft as such incidents have been reported
by several cryptocurrency exchanges and miners, highlighting concerns about the security of Bitcoin and therefore affecting its demand
and price.
To
the extent that cryptocurrency exchanges or other trading venues are involved in fraud or experience security failures or other operational
issues, a reduction in cryptocurrency prices could occur. Cryptocurrency market prices depend, directly or indirectly, on the prices
set on exchanges and other trading venues, which are new and, in most cases, largely unregulated as compared to established, regulated
exchanges for securities, derivatives and other currencies. For example, during the past three years, a number of Bitcoin exchanges
have been closed due to fraud, business failure or security breaches. In many of these instances, the customers of the closed Bitcoin
exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Bitcoin exchanges.
Also, the price and exchange of Bitcoin may be affected due to fraud risk. While Bitcoin uses private key encryption to verify owners
and register transactions, fraudsters and scammers may attempt to sell false Bitcoins. All of the above may adversely affect the operation
of the Bitcoin network which would erode user confidence in Bitcoin, which would negatively affect demand for the Company’s products
and services. In addition, smaller exchanges are less likely to have the infrastructure and capitalization that provide larger exchanges
with additional stability, larger exchanges may be more likely to be appealing targets for hackers and “malware” (i.e.,
software used or programmed by attackers to disrupt computer operation, gather sensitive information, or gain access to private computer
systems) and may be more likely to be targets of regulatory enforcement action.
For
example, during the past three years, a number of Bitcoin exchanges have been closed due to fraud, business failure or security breaches.
In many of these instances, the customers of the closed Bitcoin exchanges were not compensated or made whole for the partial or complete
losses of their account balances in such Bitcoin exchanges. While smaller exchanges are less likely to have the infrastructure and capitalization
that provide larger exchanges with additional stability, larger exchanges may be more likely to be appealing targets for hackers and
“malware” (i.e.,
software used or programmed by attackers to disrupt computer operation, gather
sensitive information, or gain access to private computer systems) and may be more likely to be targets of regulatory enforcement action.
Further,
digital asset exchanges on which cryptocurrencies trade are relatively new and, in most cases, largely unregulated. Many digital exchanges
do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or
regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, cryptocurrency exchanges,
including prominent exchanges handling a significant portion of the volume of digital asset trading. During 2022, a number of companies
in the crypto industry have declared bankruptcy, including Compute North, Core Scientific, Alameda Research, Celsius Network, Voyager
Digital, Three Arrows, BlockFi, and FTX. In June 2022, Celsius began pausing all withdrawals and transfers between accounts on its platform,
and in July 2022, it filed for Chapter 11 bankruptcy protection. Further, in November 2022, FTX, one of the major cryptocurrency exchanges,
also filed for Chapter 11 bankruptcy. Such bankruptcies have contributed, at least in part, to further price decreases in Bitcoin, a
loss of confidence in the participants of the digital asset ecosystem and negative publicity surrounding digital assets more broadly,
and other participants and entities in the digital asset industry have been, and may continue to be, negatively affected. These events
have also negatively impacted the liquidity of the digital assets markets as certain entities affiliated with FTX engaged in significant
trading activity.
The
Company has not been directly impacted by any of the recent bankruptcies in the crypto asset space, as it has no contractual privity
or relationship to the relevant parties. However, the Company is dependent on the overall crypto assets industry, and such recent events
have contributed, at least in part, to its peers’ stock price as well as the price of Bitcoin. If the liquidity of the digital
assets markets continues to be negatively impacted, digital asset prices (including the price of Bitcoin) may continue to experience
significant volatility and confidence in the digital asset markets may be further undermined. A perceived lack of stability in the digital
asset exchange market and the closure or temporary shutdown of digital asset exchanges due to business failure, hackers or malware, government-mandated
regulation, or fraud, may reduce confidence in digital asset networks and result in greater volatility in cryptocurrency values. These
potential consequences of a digital asset exchange’s failure could adversely affect an investment in the Company, discourage overall
participation in the cryptocurrency industry, and result in loss of customer demand for the Company’s products and services. Cryptocurrency
investments may be subject to losses or impairments if cryptocurrency values decrease as a result of failure of any digital asset exchange,
however, the Company does not anticipate to actively participate in such activities in the foreseeable future.
Our
breakeven costs are based on a number of assumptions, including the price of Bitcoin, which are subject to inherent uncertainty, may
prove to be inaccurate or may not be sustained over time. Such factors could adversely our business and results of operations.
Our
ability to generate economic benefits (i.e., positive cash flow or profits) from Bitcoin mining is directly affected by the market price
of Bitcoin and the costs of operating our miners. The Bitcoin price may impact the use of our mining machines and our business decisions
and investment strategy related to our Bitcoin mining operations. When the market price of a Bitcoin drops below certain thresholds,
the operation of our existing mining machines may not be economically beneficial for us. For a breakeven analysis and a discussion of
our “shutdown Bitcoin price”, see the section entitled “Business—Factors Affecting Profitability.” Our
breakeven analysis is based on certain estimates and assumptions regarding market prices of Bitcoin, electricity costs and hash rate,
as well as the ongoing efficiency of our miners, each of which is subject to inherent uncertainty. In particular, the global Bitcoin
network hash rate, electricity prices and the market price of Bitcoin are constantly changing and are affected by global market conditions
outside of our control. Adverse movements in Bitcoin market price, electricity costs and hash rate can result in decreased cryptocurrency
mining revenue and increased cryptocurrency mining costs, each of which has had a material adverse effect on our business, financial
condition and results of operations for certain periods, most notably in June 2022 when we decided to pause Bitcoin mining activities
due to an inability to source power at rates that would justify ongoing mining activity during that period.
In
addition, our assumptions regarding the efficiency and electricity demand of our miners is based on a limited period of operation and
data provided by the manufacturer, each of which may prove to be inaccurate or may not be sustained over time. In particular, we are
not able to predict whether and to what extent our miners may use more electricity or otherwise become less efficient over time, which
could result in higher costs to mine each Bitcoin and an increase to our breakeven price. Since all of our mining equipment is fully
paid, we do not take into account the replacement or depreciation costs of such machines in determining our “shutdown Bitcoin price”
for our existing equipment. In addition, since the AR Debentures were fully extinguished in October 2023, we do not have debt or financing
costs to allocate to our breakeven analysis. While we do not consider sunk costs, depreciation of existing equipment or replacement costs
in our forecasted breakeven analysis or in our decisions to continue or to pause existing mining operations, such costs are substantial
and will be an important factor in determining whether to invest in new mining equipment to replace our existing equipment as it ages.
In addition, our estimated replacement costs are based on assumptions that are subject to significant uncertainty. For example, miners
currently available for purchase from Bitmain have a hashing capacity 123% higher than the weighted average hashing capacity of our existing
equipment. Such technology developments may result in higher efficiency and lower electricity cost per Bitcoin in the future. However,
pricing of such new miners may fluctuate significantly over time based on both demand and efficiency. In addition, we are not able to
predict at this time the actual useful life of our existing miners or any miners we may acquire in the future, each of which could have
a material effect on the breakeven cost of maintaining our mining operations. Similarly, the depreciation
and impairment potential of our mining machines may be affected by the volatility of the market prices of Bitcoin and other cryptocurrencies.
Any
future significant reductions in the price of Bitcoin or increases to our operating costs may have a material and adverse effect on
the results of our mining operations. There is no assurance that the Bitcoin price will remain high enough to justify continuing to
operate our existing miners or investing in maintaining or growing our operations, or that the Bitcoin
price will not decline significantly in the future. We
continue to monitor the economic benefits and risks of our cryptocurrency mining operations and may reduce or pause such operations
from time to time, or may exit such operations altogether, if we determine that such operations are no longer beneficial to the
Company.
We
are subject to risks associated with our need for significant power for our miners. Government regulators may potentially restrict the
ability of electricity suppliers to provide electricity to mining operations.
Our
Bitcoin mining operations have required significant amounts of power, and, as we continue to expand, we anticipate our demand for power
will continue to grow. If we are unable to continue to obtain sufficient power to operate our miners on a cost-effective basis, we may
not realize the anticipated benefits of our significant capital investments in new miners. There may be significant competition for suitable
mine locations, and government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining
operations in times of electricity shortage, or may otherwise potentially restrict or prohibit the provision or electricity to mining
operations. Additionally, our mining operations could be materially adversely affected by prolonged power outages. Our cryptocurrency
mining operations require that our miners and mining equipment function without interruption. If we experience and any unplanned or prolonged
outages that re not remediated in a timely manner, or at all, could disrupt our operations. Given the power requirement, it would not
be feasible to run miners on back-up power generators in the event of a government restriction on electricity or a power outage. If we
are unable to receive adequate power supply and are forced to reduce our operations due to the availability or cost of electrical power,
it could have a material adverse effect on our business, results of operations and financial condition.
Interruptions
to our internet access could disrupt our operations, which could adversely affect our business and results of operations.
Our
cryptocurrency mining operations require access to high-speed internet to be successful. If we lose internet access for a prolonged period,
we may be required to reduce our operations or cease them altogether. If this occurs, it could have a material adverse effect on our
business, results of operations and financial condition.
Our
reliance primarily on a single model of miner may subject our operations to increased risk.
We
currently only use Bitmain Antminer type miners, if there are issues with those machines, such as a design flaw in the application-specific
integrated circuit chips they employ, our entire system could be affected. Any system error or failure may significantly delay response
times or even cause our system to fail. Any disruption in our ability to continue mining could result in lower yields and harm our reputation
and business. Any exploitable weakness, flaw, or error common to Bitmain miners affects all our miners; therefore, if a defect or other
flaw exists and is exploited, our entire mine could go offline simultaneously. Any interruption, delay or system failure could have a
material adverse effect on our business, results of operations and financial condition.
We
may not be able to find suitable locations, or any locations at all, for our mobile data centers.
Our
mobile data centers are located close to natural gas wellheads, and we may be forced to leave our current location, not be able to find
suitable locations, or any locations at all, for our current and/or future mobile data centers. If this occurs it could have a material
adverse effect on our business, results of operations and financial condition.
We
depend on the services of a small number of key personnel, and may not be able to operate and grow our business effectively if we lose
their services or are unable to attract qualified personnel in the future.
Our
success depends in part upon the continued service of a small number of key personnel. They are critical to the overall management of
our company, and our strategic direction. We rely heavily on them because they have substantial experience with our company and business
strategies. Our ability to retain them is therefore very important to our future success. We have employment agreements with our key
personnel, but these employment agreements do not ensure that they will not voluntarily terminate their employment with us. The loss
of any key personnel would require the remaining key personnel to divert immediate attention to seeking a replacement. Competition for
senior management personnel is intense, and our inability to find a suitable replacement for any departing key personnel in a timely
basis could adversely affect our ability to operate and grow our business.
Our
future success depends upon, in large part, our continuing ability to attract and retain qualified personnel.
Expansion
of our business and operations may require additional managers and employees with industry experience, in which case our success will
be dependent on our ability to attract and retain experienced management personnel and other employees. There can be no assurance that
we will be able to attract or retain qualified personnel. Competition may also make it more difficult and expensive to attract, hire
and retain qualified managers and employees. If we fail to attract, train and retain sufficient numbers of the qualified personnel, our
prospects, business, financial condition and results of operations will be materially and adversely affected.
We
rely on key contracts and business relationships, and if our current or future business partners or contracting counterparties fail to
perform or terminate any of their contractual arrangements with us for any reason or cease operations, or should we fail to adequately
identify key business relationships, our business could be disrupted and our reputation may be harmed.
If
any of our business partners or contracting counterparties fails to perform or terminates their agreement(s) with us for any reason,
or if our business partners or contracting counterparties with which we have short-term agreements refuse to extend or renew the agreement
or enter into a similar agreement, our ability to carry on operations may be impaired. In addition, we depend on the continued operation
of our long-term business partners and contracting counterparties and on maintaining good relations with them. If one of our long-term
partners or counterparties is unable (including as a result of bankruptcy or a liquidation proceeding) or unwilling to continue operating
in the line of business that is the subject of our contract, we may not be able to obtain similar relationships and agreements on terms
acceptable to us or at all. If a partner or counterparty fails to perform or terminates any of the agreements with us or discontinues
operations, and we are unable to obtain similar relationships or agreements, such events could have an adverse effect on our operating
results and financial condition.
Breaches
of our data systems or unintended disclosure of data could result in large expenditures to repair or replace such systems, to remedy
any security breaches and to protect us from similar events in the future.
Our
infrastructure may be vulnerable to physical or electronic break-ins, computer viruses, or similar disruptive problems. In addition to
shutdowns, our systems are subject to risks caused by misappropriation, misuse, leakage, falsification and accidental release or loss
of information. Disruptions or security compromises of our systems could result in large expenditures to repair or replace such systems,
to remedy any security breaches and protect us from similar events in the future. We also could be exposed to negligence claims or other
legal proceedings, and we could incur significant legal expenses and our management’s attention may be diverted from our operations
in defending ourselves against and resolving lawsuits or claims. In addition, if we were to suffer damage to our reputation as a result
of any system failure or security compromise, it could have a material adverse effect on our business, results of operations and financial
condition.
We
are exposed to risks associated with PCI compliance.
The
PCI Data Security Standard (“PCI DSS”) is a specific set of comprehensive security standards required by credit card brands
for enhancing payment account data security, including but not limited to requirements for security management, policies, procedures,
network architecture, and software design. PCI DSS compliance is required in order to maintain credit card processing services. Compliance
does not guarantee a completely secure environment and notwithstanding the results of this assessment there can be no assurance that
payment card brands will not request further compliance assessments or set forth additional requirements to maintain access to credit
card processing services. Compliance is an ongoing effort and the requirements evolve as new threats are identified. In the event that
we were to lose PCI DSS compliance status (or fail to renew compliance under a future version of the PCI DSS), we could be exposed to
increased operating costs, fines and penalties and, in extreme circumstances, may have our credit card processing privileges revoked,
which would have a material adverse effect on our business.
Our
Board or management have experience in risk management. However, if we are not able to timely and appropriately adapt to changes in our
business environment or to accurately assess where we are positioned within a business cycle and make adjustments to our risk management
policies, our business, financial condition, or results of operations may be materially and adversely affected.
Our
Board or management have experience in risk management. Our Board or management is evaluating the risk exposure on a regular basis and
constantly adapting to the latest trend of the industry. Specifically, in light of current crypto asset market conditions and to mitigate
the effect of Bitcoin price volatility, our risk management policies focus on finding cost-effective hosting sites, raising funds with
a low financing cost, and renegotiating with existing site hosts to reduce cost.
However,
the Bitcoin mining and related industries are emerging and evolving, which may lead to period-to-period variability and may make it difficult
to evaluate our risk exposures. If we are not able to timely and appropriately adapt to changes in our business environment or to accurately
assess where we are positioned within a business cycle and make adjustments to our risk management policies, our business, financial
condition, or results of operations may be materially and adversely affected.
The
ability to generate enough cash flows to meet, our future debt obligations could adversely affect our business.
While
we currently do not have any long-term debt obligations, in
the past, we have had outstanding debt obligations, such as the loan agreement with the Small Business Administration entered
into on May 31, 2020 (the “SBA Loan”). We repaid the SBA Loan in full in September 2023 and do not currently
have any long-term debt obligations. Our ability to pay interest and principal on our indebtedness and to satisfy our other obligations
will depend on our future operating performance, our financial condition and the availability of refinancing indebtedness, which will
be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We may
not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, and borrowings or equity financing
may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital
stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need
capital.
In
the future, we may incur significant indebtedness in order to make future acquisitions or to develop our properties. If we were to take
on future debt, a substantial decrease in our operating cash flow or an increase in our expenses could make it difficult for
us to meet debt service requirements and could require us to modify our operations, including by selling assets, reducing or delaying
capital investments, seeking to raise additional capital or refinancing or restructuring our debt. We may or may not be able to complete
any such steps on satisfactory terms. Any ability to generate sufficient cash flows to satisfy our debt obligations or contractual commitments,
or to refinance our debt on commercially reasonable terms, could materially and adversely affect our financial condition and results
of operations.
We
encounter competition in our business, and any failure to compete effectively could adversely affect our results of operations.
We
anticipate that our competitors will continue to expand and aggressive expansion of our competitors or the entrance of new competitors
into our markets could have a material adverse effect on our business, results of operations and financial condition.
Acquisitions,
joint ventures or similar strategic relationships may disrupt or otherwise have a material adverse effect on our business and financial
results.
As
part of our strategy, we may explore strategic acquisitions and combinations, or enter into joint ventures or similar strategic relationships.
These transactions are subject to the following risks:
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Acquisitions,
joint ventures or similar relationships may cause a disruption in our ongoing business, distract our management and make it difficult
to maintain our standards, controls and procedures; |
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We
may not be able to integrate successfully the services, products, and personnel of any such transaction into our operations; |
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We
may not derive the revenue improvements, cost savings and other intended benefits of any such transaction; and |
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There
may be risks, exposures and liabilities of acquired entities or other third parties with whom we undertake a transaction, that may
arise from such third parties’ activities prior to undertaking a transaction with us. |
Acquisitions
may result in significant impairment charges and may operate at losses. We can provide no assurance that future acquisitions, joint ventures
or strategic relationships will be accretive to our business overall or will result in profitable operations.
Our
business and financial condition will be materially adversely affected if we are required to register as an investment company under
the Investment Company Act.
We
are not, and do not intend to become, an “investment company” as defined in the U.S. Investment Company Act of 1940, as amended
(the “Investment Company Act”). Although the SEC and courts are providing increasing guidance on the treatment of cryptocurrencies
for purposes of federal securities law, this continues to be an evolving area of law. Therefore, it is possible that the SEC or a court
could take a position that may be adverse to the position we have taken on these matters. If we are required to register as an investment
company but fails to do so, the consequences may be severe. Among the various remedies it may pursue, the SEC may seek an order of a
court to enjoin us from continuing to operate as an unregistered investment company. In addition, all contracts that we have entered
into in the course of our business, including securities that we have offered and sold to investors, will be rendered unenforceable except
to the extent of any equitable remedies that might apply. An affected investor in such case may pursue the remedy of rescission. If we
were to register as an investment company, we may be forced to significantly change our structure and operations in order to comply with
the substantive requirements of the Investment Company Act. In particular, we may be forced to change our capital structure in order
to satisfy the limits on leverage and classes of securities imposed by the Investment Company Act, modify the composition of our Board
in order to maintain the required number of independent directors and the requirements of “independence” set forth in rules
under the Investment Company Act, restrict transactions that we may engage in with affiliated persons, fair value our assets in the manner
required by the Investment Company Act, etc. Compliance with the requirements of the Investment Company Act applicable to registered
investment companies may make it difficult for us to continue our operations as a company that is engaged in the business of developing
blockchain infrastructure and in activities related to cryptocurrency mining.
The
unaudited pro forma condensed combined financial information included in this document may not be indicative of what our actual financial
position or results of operations would have been.
The
unaudited pro forma condensed combined financial information for the Company in this registration statement on Form S-1 is presented
for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would
have been had the Merger been completed on the dates indicated. See the section entitled “Unaudited Pro Forma Condensed Combined
Financial Information” for more information.
The
COVID-19 pandemic could negatively impact our future operations and results.
We
are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our
business is highly uncertain and difficult to predict, as the responses that we, other businesses and governments are taking continue
to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is
possible that it could cause a local and/or global economic recession. Policymakers around the globe have responded with fiscal policy
actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.
The
severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the
duration and severity of the pandemic and the extent and severity of the impact on our service providers and suppliers, all of which
are uncertain and cannot be predicted. As of the date of issuance of our financial statements, the extent to which the COVID-19 pandemic
may in the future materially impact our financial condition, liquidity or results of operations is uncertain.
Our
Charter provides for indemnification of officers and directors at our expense and limits their liability, which may result in a major
cost to us and hurt the interests of our stockholders because corporate resources may be expended for the benefit of officers and/or
directors.
Our
Charter and applicable Delaware law provide for the indemnification of our directors and officers against attorney’s fees and other
expenses incurred by them in any action to which they become a party arising from their association with or activities on our behalf.
This indemnification policy could result in substantial expenditures by us that we will be unable to recoup.
We
have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities
arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection
with the securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent)
submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter, if it were to
occur, is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially
reduce the market and price for our shares if such a market ever develops.
Risks
Related to Government Regulation Matters
Government
regulations related to the Internet could increase our cost of doing business, affect our ability to grow or may otherwise negatively
affect our business.
Governmental
agencies and federal and state legislatures have adopted, and may continue to adopt, new laws and regulatory practices in response to
the increasing use of the Internet and other online services. These new laws may be related to issues such as online privacy and data
protection requirements, copyrights, trademarks and service mark, sales taxes, fair business practices, domain name ownership, and the
requirement that our operating units register to do business as foreign entities or otherwise be licensed to do business in jurisdictions
where they have no physical location or other presence. In addition, these new laws, regulations or interpretations relating to doing
business through the Internet could increase our costs materially and adversely affect our revenue and results of operations.
Regulatory
changes or actions may restrict the use of cryptocurrencies in a manner that adversely affects an investment in us.
As
cryptocurrencies have grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g.,
the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation)
have begun to examine cryptocurrencies. On March 9, 2022, President Biden signed an executive order on cryptocurrencies. While the executive
order did not mandate any specific regulations, it instructs various federal agencies to consider potential regulatory measures, including
the evaluation of the creation of a U.S. Central Bank digital currency. Future changes to existing regulations or entirely new regulations
may affect our business in ways it is not presently possible for us to predict with any reasonable degree of reliability.
Digital
assets currently face an uncertain regulatory landscape in not only the United States but also in such foreign jurisdictions as the European
Union and China. While certain governments such as Germany, have issued guidance as to how to treat cryptocurrencies, most regulatory
bodies have not issued specific policy determinations.
Future
changes to existing regulations or entirely new regulations may affect our business in ways it is not presently possible for us to predict
with any reasonable degree of reliability, but such change could be substantial and adverse to us and could adversely affect an investment
in us. For example, several tax proposals have been set forth that would, if enacted, make significant changes to U.S. tax laws applicable
to cryptocurrencies. Such proposals include the Biden Administration’s budget proposal, released on March 9, 2023, which includes
(i) the imposition of an excise tax of up to 30 percent of the costs of electricity used in digital asset mining, and (ii) the imposition
of information reporting requirements with respect to digital assets and digital asset brokers. Further, the Infrastructure Investment
and Jobs Act (the “IIJA”), enacted November 15, 2021, contains, among other things, an expanded definition of the term “broker”
for certain tax and information reporting obligations that could require cryptocurrency miners, including us, to provide to the IRS information
relating to cryptocurrency transactions that cryptocurrency miners, including us, generally do not, and may not be able to, obtain, potentially
rendering compliance impossible. Generally, the cryptocurrency provisions contained in the IIJA began applying to digital transactions
beginning in 2023. The IRS has suspended the application of those provisions of the IIJA until the Treasury Department issues final regulations,
which may provide further guidance on whether we are a “broker” under the IIJA. The U.S. Congress may consider, and could
include, one or both of these proposals in connection with tax reform that may be undertaken. It is unclear whether these or similar
changes will be enacted and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these
proposals and other similar changes in U.S. federal income tax laws could adversely affect our business and future profitability.
The
Company is subject to a highly-evolving regulatory landscape and any adverse changes to, or its failure to comply with, any laws and
regulations could adversely affect its business, reputation, prospects or operations.
Until
recently, relatively little regulatory attention has been directed toward the crypto assets market by U.S. federal and state governments,
non-U.S. governments and self-regulatory agencies. As crypto assets have grown in popularity and in market size, the U.S. regulatory
regime — namely the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the SEC,
the U.S. Commodity Futures Trading Commission (the “CFTC”), the Financial Crimes Enforcement Network (the “FinCEN”)
and the Federal Bureau of Investigation), and local and foreign governmental organizations, consumer agencies and public advocacy groups
have been examining the operations of crypto networks, users and platforms, with a focus on how crypto assets can be used to launder
the proceeds of illegal activities, fund criminal or terrorist enterprises, and the safety and soundness of platforms and other service
providers that hold crypto assets for users. Many of these entities have called for heightened regulatory oversight, and have issued
consumer advisories describing the risks posed by crypto assets to users and investors. For instance, in March 2022, Federal Reserve
Chair Jerome Powell expressed the need for regulation to prevent “cryptocurrencies from serving as a vehicle for terrorist finance
and just general criminal behavior.” On March 8, 2022, President Biden announced an executive order on cryptocurrencies which seeks
to establish a unified federal regulatory regime for cryptocurrencies. The significant uncertainty surrounding the regulation of the
crypto assets industry requires the Company to exercise its judgment as to whether certain laws, rules and regulations apply to it,
and it is possible that governmental bodies and regulators may disagree with its conclusions. To the extent the Company has not complied
with such laws, rules and regulations, the Company could be subject to significant fines, revocation of licenses, limitations on its
products and services, reputational harm, and other regulatory consequences, each of which may be significant and could adversely affect
its business, operating results and financial condition.
Additionally,
the recent bankruptcy filings of FTX, the third largest digital asset exchange by volume at the time of its filing, and its affiliated
hedge fund Alameda Research, in addition to other bankruptcy filings of crypto companies throughout calendar year 2022, will likely attract
heightened regulatory scrutiny from U.S. regulatory agencies such as the SEC and CFTC. Increasing regulation and regulatory scrutiny
may result in additional costs for the Company and our management having to devote increased time and attention to regulatory matters,
change aspects of the Company’s business or result in limits on the utility of Bitcoin. In addition, regulatory developments and/or
the Company’s business activities may require us to comply with certain regulatory regimes. Increasingly strict legal and regulatory
requirements and any regulatory investigations and enforcement may result in changes to the Company’s business, as well as increased
costs, supervision and examination. Moreover, new laws, regulations or interpretations may result in additional litigation, regulatory
investigations and enforcement or other actions. Adverse changes to, or the Company’s failure to comply with, any laws and regulations
may have, an adverse effect on the Company’s reputation and brand and its business, operating results and financial condition.
Although
the Company is not directly connected to the recent cryptocurrency market events, the Company may still suffer reputational harm due
to its association with the cryptocurrency industry in light of the recent disruption in the crypto asset markets. Customers and counterparties
may lose confidence with us and may deem our business to be risky. This may result in a loss of customer demand for our products and
services. Counterparties and may be hesitant to enter into a business relationship with us, and it may be difficult for us to reach favorable
business terms with counterparties. Ongoing and future regulation and regulatory actions could significantly restrict or eliminate the
market for or uses of Bitcoin and/or may adversely affect the Company’s business, reputation, financial condition and results of
operations.
The
Company is subject to risks associated with legal, political or other conditions or developments regarding holding, using or mining of
cryptocurrencies, in particular Bitcoin, which could negatively affect its business, results of operations and financial position.
Changes
in government policies, taxes, general economic and fiscal conditions, as well as political, diplomatic or social events, expose the
Company to financial and business risks. In particular, changes in policies and laws regarding holding, using and/or mining of Bitcoins
could result in an adverse effect on the Company’s business operations and results of operations.
There
are significant uncertainties regarding future regulations pertaining to the holding, using or mining of Bitcoins, which may adversely
affect the Company’s results of operations. While Bitcoin has gradually gained more market acceptance and attention, it is anonymous
and may be used for black market transactions, money laundering, illegal activities or tax evasion. As a result, governments may seek
to regulate, restrict, control or ban the mining, use and holding of Bitcoins.
With
advances in technology, cryptocurrencies are likely to undergo significant changes in the future. It remains uncertain whether Bitcoin
will be able to cope with, or benefit from, those changes. In addition, as Bitcoin mining employs sophisticated and high computing power
devices that need to consume a lot of electricity to operate, future developments in the regulation of energy consumption, including
possible restrictions on energy usage in the jurisdictions where the Company mines, may also affect the Company’s business operations.
For example, in the United States, certain local governments of the State of Washington have discussed measures to address environmental
impacts of Bitcoin-related operations, such as the high electricity consumption of Bitcoin mining activities. We continue to monitor
the economic benefits and risks of our cryptocurrency mining operations and may reduce or pause such operations from time to time, or
may exit such operations altogether, if we determine that such operations are no longer beneficial to the Company.
Unfavorable
general economic conditions in the United States, Europe, Asia, or in other major markets could negatively impact our financial performance.
Unfavorable
general economic conditions, such as a recession or economic slowdown in the United States, Europe, Asia, or in one or more of our other
major markets, could negatively affect demand for our services and our results of operations. Under difficult economic conditions, businesses
may seek to reduce spending on our services, or shift away from our services to in-house alternatives.
Increased
political scrutiny regarding the energy use and climate change impacts of crypto asset mining operations could result in new laws, regulations
and policies that impose restrictions or compliance costs on our Bitcoin mining operations.
Crypto
asset mining has become heavily scrutinized from a climate change and energy consumption perspective in recent years. Politicians, environmental
groups and climate activists alike have called for increased oversight, regulation and reporting of energy use and greenhouse gas (“GHG”)
emissions of crypto asset mining companies, among other measures. Certain members of the U.S. Congress and other non-governmental organizations
have made investigations into, and published claims and reports regarding, the crypto asset mining industry’s impact on global
GHG emissions and energy consumption and have raised concerns over the diversion of power sources for crypto mining and possible impacts
on consumer electricity prices. For example, in early 2022, a group of U.S. Senators solicited information from various crypto asset
mining companies on their respective energy use and emissions. Then, in July 2022, that same group of Senators authored a letter to the
Environmental Protection Agency (“EPA”) and Department of Energy urging the agencies to investigate energy and climate impacts
of mining companies and to consider regulations requiring the monitoring and reporting of emissions and energy consumption by certain
crypto asset operations. Moreover, the Crypto Asset Environmental Transparency Act was introduced to the U.S. Senate on March 6, 2023,
and, if passed, would impose emissions reporting obligations on mining operations that consume electricity above a specified threshold
and would direct the EPA to investigate the environmental and climate impacts of the crypto asset mining industry. Separately, in September
2022, the Biden Administration released its report on Climate and Energy Implications of Crypto-Assets in the United States, which recommends
that the federal government take action to develop environmental performance standards for crypto asset technologies, assess the impact
of crypto asset mining on electricity system reliability, and minimize emissions and other environmental impacts associated with crypto
asset mining, among other recommendations. Certain state governments have also introduced legislation imposing restrictions on the crypto
asset mining industry, citing similar concerns. We are unable to predict whether currently proposed legislation or regulatory initiatives
will be implemented, but any action by the federal government or the states in which we operate to restrict, limit, condition or otherwise
regulate our crypto asset mining operations, whether as part of a climate change or energy transition policy initiative or otherwise,
could adversely affect our business, financial condition and results of operations. Similarly, public statements by government officials
and non-governmental organizations regarding the impact of crypto asset mining on global energy consumption, GHG emissions and grid stability,
whether valid or not, could harm our reputation and stakeholder goodwill.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoin, ether, or other cryptocurrencies, participate in blockchains
or utilize similar cryptocurrency assets in one or more countries, the ruling of which would adversely affect us.
Although
currently cryptocurrencies generally are not regulated or are lightly regulated in most countries, several countries continue taking
regulatory actions in the future that could severely restrict the right to acquire, own, hold, sell or use these cryptocurrency assets
or to exchange for fiat currency. In September 2021, China instituted a blanket ban on all crypto transactions and mining, including
services provided by overseas crypto exchanges in mainland China, effectively making all crypto-related activities illegal in China.
In other nations, including Russia, it is illegal to accept payment in Bitcoin or other crypto assets for consumer transactions, and
banking institutions are barred from accepting deposits of Bitcoin. In January 2022, the Central Bank of Russia called for a ban on cryptocurrency
activities ranging from mining to trading. Such restrictions may adversely affect us as the large-scale use of cryptocurrencies as a
means of exchange is presently confined to certain regions globally. Such circumstances could have a material adverse effect on us, which
could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or other cryptocurrencies
we mine or otherwise acquire or hold for our own account, and thus harm investors.
The
cryptoeconomy is novel and has little to no access to policymakers or lobbying organizations, which may harm our ability to effectively
react to proposed legislation and regulation of crypto assets or crypto asset platforms adverse to our business.
As
crypto assets have grown in both popularity and market size, various U.S. federal, state, and local and foreign governmental organizations,
consumer agencies and public advocacy groups have been examining the operations of crypto networks, users and platforms, with a focus
on how crypto assets can be used to launder the proceeds of illegal activities, fund criminal or terrorist enterprises, and the safety
and soundness of platforms and other service providers that hold crypto assets for users. Many of these entities have called for heightened
regulatory oversight, and have issued consumer advisories describing the risks posed by crypto assets to users and investors. For instance,
in July 2019, then-U.S. Treasury Secretary Steven Mnuchin stated that he had “very serious concerns” about crypto assets.
In recent months, members of Congress have made inquiries into the regulation of crypto assets, and Gary Gensler, Chair of the SEC, has
made public statements regarding increased regulatory oversight of crypto assets. Outside the United States, several jurisdictions have
banned so-called initial coin offerings, such as China and South Korea, while Canada, Singapore, Hong Kong, have opined that token offerings
may constitute securities offerings subject to local securities regulations. In July 2019, the United Kingdom’s Financial Conduct
Authority proposed rules to address harm to retail customers arising from the sale of derivatives and exchange-traded notes that reference
certain types of crypto assets, contending that they are “ill-suited” to retail investors due to extreme volatility, valuation
challenges and association with financial crimes. In May 2021, the Chinese government called for a crackdown on Bitcoin mining and trading,
and in September 2021, Chinese regulators instituted a blanket ban on all crypto mining and transactions, including overseas crypto exchange
services taking place in China, effectively making all crypto-related activities illegal in China. In January 2022, the Central Bank
of Russia called for a ban on cryptocurrency activities ranging from mining to trading, and on March 8, 2022, President Biden announced
an executive order on cryptocurrencies which seeks to establish a unified federal regulatory regime for currencies.
The
crypto economy is novel and has little to no access to policymakers and lobbying organizations in many jurisdictions. Competitors from
other, more established industries, including traditional financial services, may have greater access to lobbyists or governmental officials,
and regulators that are concerned about the potential for crypto assets for illicit usage may affect statutory and regulatory changes
with minimal or discounted inputs from the cryptoeconomy. As a result, new laws and regulations may be proposed and adopted in the United
States and internationally, or existing laws and regulations may be interpreted in new ways, that harm the cryptoeconomy or crypto asset
platforms, which could adversely impact our business.
Bitcoin’s status as a “security,”
a “commodity” or a “financial instrument” in any relevant jurisdiction is subject to a high degree of uncertainty
and if we are unable to properly characterize a crypto asset, we may be subject to regulatory scrutiny, investigations, fines and other
penalties, which may adversely affect our business, operating results and financial condition.
The SEC and its staff have
taken the position that certain crypto assets fall within the definition of a “security” under the U.S. federal securities
laws. To date, the SEC staff has treated Bitcoin as a commodity. The legal test for determining whether any given crypto asset is a security
is a highly complex, fact-driven analysis and the outcome is difficult to predict. Several foreign jurisdictions have taken a broad-based
approach to classifying crypto assets as “securities,” while other foreign jurisdictions, such as Switzerland, Malta and
Singapore, have adopted a narrower approach. As a result, certain crypto assets may be deemed to be a “security” under the
laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations or directives
that affect the characterization of crypto assets as “securities.” The crypto assets we mine or any crypto assets that we
hold could be deemed securities and the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular
crypto asset could be deemed a “security” under applicable laws could be incorrect.
If Bitcoin or any other supported
crypto asset is deemed to be a security under any U.S. federal, state or foreign jurisdiction, or in a proceeding in a court of law or
otherwise, it may have adverse consequences for such supported crypto asset. For instance, all transactions in such supported crypto
asset would have to be registered with the SEC or other foreign authority, or conducted in accordance with an exemption from registration,
which could severely limit its liquidity, usability and transactability. Moreover, the networks on which such supported crypto assets
are utilized may be required to be regulated as securities intermediaries, and subject to applicable rules, which could effectively render
the network impracticable for its existing purposes. Further, it could draw negative publicity and a decline in the general acceptance
of the crypto asset. Also, it may make it difficult for such supported crypto asset to be traded, cleared and custodied as compared to
other crypto assets that are not considered to be securities. If we are unable to properly characterize a crypto asset, we may be subject
to regulatory scrutiny, investigations, fines and other penalties, which may adversely affect our business, operating results
and financial condition.
Risks
Related to Ownership of our Common Stock
Our
ability to uplist our Common Stock is subject to us meeting applicable listing criteria.
We
intend to apply for our Common Stock to be listed on a national securities exchange. National securities exchanges require companies
desiring to list their common stock to meet certain listing criteria including total number of stockholders; minimum stock price, total
value of public float, and in some cases total shareholders’ equity and market capitalization. Our failure to meet such applicable
listing criteria could prevent us from listing our Common Stock on a national securities exchange. In the event we are unable
to uplist our Common Stock, our Common Stock will continue to trade on the OTCQB, which is generally considered less liquid and more
volatile than a national securities exchange. Our failure to uplist our Common Stock could make it more difficult for you to trade
our Common Stock, could prevent our Common Stock trading on a frequent and liquid basis and could result in the value of our Common Stock
being less than it would be if we were able to uplist.
In
order to raise sufficient funds to expand our operations, we may have to issue additional securities at prices which may result in substantial
dilution to our stockholders.
If
we raise additional funds through the sale of equity or convertible debt, our current stockholders’ percentage ownership will be
reduced. In addition, these transactions may dilute the value of our Common Stock outstanding. We may also have to issue securities that
may have rights, preferences and privileges senior to our Common Stock.
Our
Common Stock is quoted on the OTCQB, which may have an unfavorable impact on our stock price and liquidity.
Our
Common Stock is quoted on the OTCQB. The quotation of our shares on the OTCQB may result in a less liquid market available for existing
and potential stockholders to trade shares of our Common Stock, could depress the trading price of our Common Stock and could have a
long-term adverse impact on our ability to raise capital in the future.
There
is limited liquidity on the OTCQB, which enhances the volatile nature of our equity.
When
fewer shares of a security are being traded on the OTCQB, volatility of prices may increase and price movement may outpace the ability
to deliver accurate quote information. Due to lower trading volumes in shares of our Common Stock, there may be a lower likelihood that
orders for shares of our Common Stock will be executed, and current prices may differ significantly from the price that was quoted at
the time of entry of the order.
Our
stock price is likely to be highly volatile because of our limited public float.
The
market price of our Common Stock is likely to be highly volatile because there has been a relatively thin trading market for our Common
Stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell shares
of our Common Stock following periods of volatility because of the market’s adverse reaction to volatility. Other factors that
could cause such volatility may include, among other things: actual or anticipated fluctuations in our operating results; the absence
of securities analysts covering us and distributing research and recommendations about us; overall stock market fluctuations; economic
conditions generally; announcements concerning our business or those of our competitors; our ability to raise capital when we require
it, and to raise such capital on favorable terms; conditions or trends in the industry; litigation; changes in market valuations of other
similar companies; announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships or joint ventures;
future sales of Common Stock; actions initiated by the SEC or other regulatory bodies; and general market conditions. Any of these factors
could have a significant and adverse impact on the market price of our Common Stock. These broad market fluctuations may adversely affect
the trading price of our Common Stock.
Our
Common Stock may be subject to significant price volatility which may have an adverse effect on your ability to liquidate your investment
in our Common Stock.
The
market for our Common Stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that
our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is
attributable to a number of factors. First, our Common Stock may be sporadically and/or thinly traded. As a consequence of this lack
of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of
those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number
of our Common Stock are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those
sales without adverse impact on its share price. Secondly, an investment in us is a speculative or “risky” investment due
to our lack of meaningful profits to date and uncertainty of future profits. As a consequence of this enhanced risk, more risk-adverse
investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
Additionally,
the market price of our Common Stock could be subject to extreme volatility and fluctuations in response to industry-wide developments
beyond its control, such as continued industry-wide fallout from the recent Chapter 11 bankruptcy filings of cryptocurrency exchanges
FTX (including its affiliated hedge fund Alameda Research), crypto hedge fund Three Arrows, crypto miners Compute North and Core Scientific
and crypto lenders Celsius Network, Voyager Digital and BlockFi. Although, as mentioned elsewhere in this Registration Statement, the
Company has no exposure to any of the cryptocurrency market participants that recently filed for Chapter 11 bankruptcy, or who are known
to have experienced excessive redemptions, suspended redemptions or have crypto assets of their customers unaccounted for; and the Company
does not have any assets, material or otherwise, that may not be recovered due to these bankruptcies or excessive or suspended redemptions;
the price of Common Stock may still not be immune to unfavorable investor sentiment resulting from these recent developments in the broader
cryptocurrency industry and you may experience depreciation of the price of Common Stock.
Our
Common Stock is thinly traded, so an investor may be unable to sell at or near ask prices or at all.
The
shares of our Common Stock are traded on the OTCQB and are thinly traded, meaning that the number of persons interested in purchasing
our Common Stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a
number of factors, including the fact that we are a smaller reporting company that is relatively unknown to stock analysts, stockbrokers,
institutional investors and others in the investment community who generate or influence sales volume. Even in the event that we come
to the attention of such persons, they would likely be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we become more seasoned and viable. As a consequence, our stock price may not reflect an
actual or perceived value. Also, there may be periods of several days or more when trading activity in our shares is minimal or non-existent,
as is currently the case, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally
support continuous sales without an adverse effect on share price. A broader or more active public trading market for our Common Stock
may not develop or if developed, may not be sustained. Due to these conditions, you may not be able to sell your shares at or near ask
prices or at all if you need money or otherwise desire to liquidate your shares.
Currently,
there is a limited public market for our securities, and there can be no assurances that any public market will ever develop and, even
if developed, it is likely to be subject to significant price fluctuations.
We
have a trading symbol for our Common Stock, namely “PROP.” However, our Common Stock has been thinly traded, if at
all. Consequently, there can be no assurances as to whether:
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any
market for our shares will develop; |
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the
prices at which our Common Stock will trade; or |
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the
extent to which investor interest in us will lead to the development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy and sell orders for investors. |
Until
our Common Stock is fully distributed and an orderly market develops in our Common Stock, if ever, the price at which it trades is likely
to fluctuate significantly. Prices for our Common Stock will be determined in the marketplace and may be influenced by many factors,
including the depth and liquidity of the market for shares of our Common Stock, developments affecting our business, including the impact
of the factors referred to elsewhere in these risk factors and general economic and market conditions. No assurances can be given that
an orderly or liquid market will ever develop for the shares of our Common Stock.
We
cannot predict the extent to which an active public trading market for our Common Stock will develop or be sustained. If an active public
trading market does not develop or cannot be sustained, you may be unable to liquidate your investment in our Common Stock.
We
cannot predict the extent to which an active public market for our Common Stock will develop or be sustained due to a number of factors,
including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors,
and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons,
they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of
our shares of Common Stock until such time as we became more seasoned and viable. As a consequence, there may be periods of several days
or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you
any assurance that an active public trading market for our Common Stock will develop or be sustained. If such a market cannot be sustained,
you may be unable to liquidate your investment in our Common Stock.
Other
factors which could cause volatility in the market price of our Common Stock include, but are not limited to:
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actual
or anticipated fluctuations in our financial condition and operating results or those of companies perceived to be similar to us; |
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actual
or anticipated changes in our growth rate relative to our competitors; |
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commercial
success and market acceptance of blockchain, Bitcoin and other cryptocurrencies; |
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actions
by our competitors, such as new business initiatives, acquisitions and divestitures; |
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strategic
transactions undertaken by us; |
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integration
of new businesses and opportunities into our existing business; |
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implementation
of new technologies in the industry; |
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additions
or departures of key personnel; |
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prevailing
economic conditions; |
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sales
of our common stock by our officers, directors or significant stockholders; |
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other
actions taken by our stockholders; |
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future
sales or issuances of equity or debt securities by us; |
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business
disruptions caused by earthquakes, tornadoes or other natural disasters; |
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legal
proceedings involving our company, our industry or both; |
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changes
in market valuations of companies similar to ours; and |
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the
prospects of the industry in which we operate. |
We
have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on your investment
may be limited to increases in the market price of our Common Stock.
We
have never paid cash dividends on our Common Stock and do not anticipate paying cash dividends on our Common Stock in the foreseeable
future. The payment of dividends on our Common Stock will depend on our earnings, financial condition and other business and economic
factors affecting us at such time as the Board may consider relevant. If we do not pay dividends, our Common Stock may be less valuable
because a return on your investment might only occur if the market price of our Common Stock appreciates.
Our
Board has broad discretion to issue additional securities.
We
are entitled under our Charter to issue up to 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, although these
amounts may change in the future subject to stockholder approval. Shares of our Preferred Stock provide our Board broad authority to
determine voting, dividend, conversion and other rights. Any additional stock issuances could be made at a price that reflects a discount
or premium to the then-current market price of our Common Stock. In addition, in order to raise capital, we may need to issue securities
that are convertible into or exchangeable for a significant amount of our Common Stock. Our Board may generally issue those shares of
Common Stock and Preferred Stock, or convertible securities to purchase those shares, without further approval by our stockholders. Any
Preferred Stock we may issue could have such rights, preferences, privileges and restrictions as may be designated from time-to-time
by our Board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.
We may also issue additional securities to our directors, officers, employees and consultants as compensatory grants in connection with
their services, both in the form of stand-alone grants or under our stock incentive plans. The issuance of additional securities may
cause substantial dilution to our stockholders.
The
conversion or exercise, as applicable, of the outstanding Series D Preferred Stock, Series E Preferred Stock, Series D
PIPE Warrants, Series E PIPE Warrants, Non-Compensatory Options and Exok Warrants could substantially dilute your
investment and adversely affect the market price of our Common Stock.
Following the Reverse
Stock Split and the Warrant Exercise, the Series D Preferred Stock are convertible into an aggregate of 3,475,250 shares of Common
Stock and the Series D PIPE Warrants are exercisable for an aggregate of 4,950,500 shares of Common Stock. The Series E Preferred
Stock are convertible into an aggregate of 4,000,000 shares of Common Stock and the Series E PIPE Warrants are exercisable for an aggregate
of 8,000,000 shares of Common Stock. The Exok Warrants are exercisable for an aggregate of 670,499 shares of Common Stock. In addition,
there are outstanding Non-Compensatory Options to purchase an aggregate of 8,000,000 shares of Common Stock for $7.14 per share which
are only exercisable if specific production hurdles are achieved, pursuant to the Option Agreements. 4,423 outstanding Series D Preferred
Stock were issued in connection with the exchange of the Original Debentures for the AR Debentures.
In
addition, sales of a substantial number of shares of Common Stock issued upon the conversion or exercise, as applicable, of the outstanding
Series E Preferred Stock, Series E PIPE Warrants, Exok Warrants, Series D Preferred Stock, Series D PIPE Warrants, Non-Compensatory Options,
or even the perception that such sales could occur, could adversely affect the market price of our Common Stock. The
conversion or exercise of such securities could result in dilution in the interests of our other stockholders and adversely affect
the market price of our Common Stock. For example, as a result of the Warrant Exercise, the Company issued an additional 2,000,000
shares of Common Stock to the O’Neill Trust, resulting in immediate dilution to existing stockholders of approximately 21.1%.
Failure
to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could result in
a restatement of our financial statements, cause investors to lose confidence in our financial statements and our Company and have a
material adverse effect on our business and stock price.
We
produce our financial statements in accordance with GAAP. Effective internal controls are necessary for us to provide reliable financial
reports to help mitigate the risk of fraud and to operate successfully as a publicly traded company. As a public company, we are required
to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002, or Section 404. Further, Section 404 requires annual management assessments of the effectiveness of our internal controls over
financial reporting. Testing and maintaining internal controls can divert our management’s attention from other matters that are
important to our business. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404. If we are unable to conclude that we have effective internal controls over financial reporting,
investors could lose confidence in our reported financial information and our company, which could result in a decline in the market
price of our Common Stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability
to raise additional financing if needed in the future.
Risks
Related to the Price of Bitcoin
The
trading price of shares of our Common Stock has appeared at times to have a correlation with the trading price of Bitcoin, which may
be subject to pricing risks, including “bubble” type risks, and has historically been subject to wide swings.
From
time to time, the trading price of our Common Stock
has appeared to have a correlation with the trading price of Bitcoin. Specifically, we have experienced adverse effects on our stock
price when the value of Bitcoin has fallen, and we may experience similar outcomes if our stock price tracks the general status of that
cryptocurrency. Furthermore, if the market for Bitcoin company stocks or the stock market in general experiences a loss of investor confidence,
the trading price of our stock could decline for reasons unrelated to our business, operating results or financial condition. The trading
price of our Common Stock could be subject to arbitrary pricing factors that are not necessarily associated with traditional factors
that influence stock prices or the value of non-cryptocurrency assets such as revenue, cash flows, profitability, growth prospects or
business activity levels since the value and price, as determined by the investing public, may be influenced by future anticipated adoption
or appreciation in value of cryptocurrencies or blockchains generally, factors over which we have little or no influence or control.
We
may face risks of Internet disruptions, which could have an adverse effect on the price of cryptocurrencies.
A
disruption of the Internet may affect the use of cryptocurrencies and subsequently the value of our securities. Generally, cryptocurrencies
and our business of mining cryptocurrencies is dependent upon the Internet. A significant disruption in Internet connectivity could disrupt
a currency’s network operations until the disruption is resolved and have an adverse effect on the price of cryptocurrencies and
our ability to mine cryptocurrencies.
The
impact of geopolitical and economic events on the supply and demand for cryptocurrencies is uncertain.
Geopolitical
crises may motivate large-scale purchases of Bitcoin and other cryptocurrencies, which could increase the price of Bitcoin and other
cryptocurrencies rapidly. Our business and the infrastructure on which our business relies is vulnerable to damage or interruption from
catastrophic occurrences, such as war, civil unrest, terrorist attacks, geopolitical events, disease, such as the COVID-19 pandemic,
and similar events. Specifically, the uncertain nature, magnitude and duration of hostilities stemming from Russia’s recent military
invasion of Ukraine, including the potential effects of sanctions limitations, retaliatory cyber-attacks on the world economy and markets,
and potential shipping delays, as well as the conflict in the Israel-Gaza region and any potential increase in hostilities in the
Middle East have and may contribute to increased market volatility and uncertainty, which could have an adverse impact on macroeconomic
factors that affect our business. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior
dissipates, adversely affecting the value of our inventory following such downward adjustment. Such risks are similar to the risks of
purchasing commodities in general uncertain times, such as the risk of purchasing, holding or selling gold. Alternatively, as an emerging
asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment
in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment risk. As
an alternative to fiat currencies that are backed by central governments, Bitcoin, which is relatively new, is subject to supply and
demand forces. How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us and
investors in our Common Stock. Political or economic crises may motivate large-scale acquisitions or sales of Bitcoin either globally
or locally. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our strategy
at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin
we mine or otherwise acquire or hold for our own account.
Acceptance
and/or widespread use of cryptocurrency is uncertain.
There
is a relatively limited use of any cryptocurrency in the retail and commercial marketplace, thus contributing to price volatility that
could adversely affect an investment in our securities. Banks and other established financial institutions may refuse to process funds
for cryptocurrency transactions, process wire transfers to or from cryptocurrency exchanges, cryptocurrency-related companies or service
providers, or maintain accounts for persons or entities transacting in cryptocurrency. Conversely, a significant portion of Bitcoin demand
is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of
the asset. Price volatility undermines Bitcoin’s role as a medium of exchange, as retailers are much less likely to accept it as
a form of payment. Market capitalization for Bitcoin as a medium of exchange and payment method may always be low. The relative lack
of acceptance of cryptocurrencies in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users
to use them to pay for goods and services. Such lack of acceptance or decline in acceptance could have a material adverse effect on our
ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business,
prospects or operations and potentially the value of Bitcoin or any other cryptocurrencies we mine or otherwise acquire or hold for our
own account.
The
markets for Bitcoin may be under-regulated and, as a result, the market price of Bitcoin may be subject to significant volatility or
manipulation, which could decrease consumer confidence in cryptocurrencies and have a materially adverse effect on our business and results
of operations.
Cryptocurrencies
that are represented and trade on a ledger-based platform and those who hold them may not enjoy the same benefits as traditional securities
available on trading markets and their investors. Stock exchanges have listing requirements and vet issuers, requiring them to be subjected
to rigorous listing standards and rules, and monitor investors transacting on such platform for fraud and other improprieties. These
conditions may not necessarily be replicated on a distributed ledger platform, depending on the platform’s controls and other policies.
The more lax a distributed ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform,
the higher the potential risk for fraud or the manipulation of the ledger due to a control event. We believe that Bitcoin is not a security
under federal and state law.
Bitcoin
and other cryptocurrency market prices have historically been volatile, are impacted by a variety of factors, and are determined primarily
using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors
such as those that impact commodities, more so than business activities, which could be subjected to additional influence from fraudulent
or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result
of, and may continue to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share price, making
their market prices more volatile or creating “bubble” type risks for both Bitcoin and shares of our Common Stock.
These
factors may inhibit consumer trust in and market acceptance of cryptocurrencies as a means of exchange which could have a material adverse
effect on our business, prospects, or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine or otherwise
acquire.
Our
cryptocurrencies may be subject to loss, theft or restriction on access.
There
is a risk that some or all of our cryptocurrencies could be lost or stolen. Access to our cryptocurrency assets could also be restricted
by cybercrime. Hackers or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, The loss or destruction
of a private key required to access our digital wallets may be irreversible and we may be denied access for all time to our cryptocurrency
holdings or the holdings of others held in those compromised wallets. Our loss of access to our private keys or our experience of a data
loss relating to our digital wallets could adversely affect our investments and assets. Such events could have a material adverse effect
on our business.
Demand
for Bitcoin is driven, in part, by its status as the most prominent and secure crypto asset. It is possible that crypto assets other
than Bitcoin could have features that make them more desirable to a material portion of the crypto asset user base, resulting in a reduction
in demand for Bitcoin, which could have a negative impact on the price of Bitcoin and adversely affect an investment in us.
Bitcoin,
as an asset, holds “first-to-market” advantages over other crypto assets. This first-to-market advantage is driven in large
part by having the largest user base and, more importantly, the largest mining power in use to secure its blockchain and transaction
verification system. Having a large mining network results in greater user confidence regarding the security and long-term stability
of a crypto asset’s network and its blockchain; as a result, the advantage of more users and miners makes a crypto asset more secure,
which makes it more attractive to new users and miners, resulting in a network effect that strengthens the first-to-market advantage.
Despite
the marked first-mover advantage of the Bitcoin network over other crypto asset networks, it is possible that another crypto asset could
become materially popular due to either a perceived or exposed shortcoming of the Bitcoin network protocol that is not immediately addressed
by the Bitcoin contributor community or a perceived advantage of an altcoin that includes features not incorporated into Bitcoin. If
a crypto asset obtains significant market share (either in market capitalization, mining power or use as a payment technology), this
could reduce Bitcoin’s market share as well as other crypto assets we may become involved in and have a negative impact on the
demand for, and price of, such crypto assets and could adversely affect an investment in us. It is possible that we will mine alternative
crypto assets in the future, but we may not have as much experience to date in comparison to our experience mining Bitcoin, which may
put us at a competitive disadvantage.
Bitcoin
has forked multiple times and additional forks may occur in the future which may affect the value of Bitcoin we hold or mine.
To
the extent that a significant majority of users and mining companies on a cryptocurrency network install software that changes the cryptocurrency
network or properties of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency,
the cryptocurrency network would be subject to new protocols and software. However, if less than a significant majority of users and
mining companies on the cryptocurrency network consent to the proposed modification, and the modification is not compatible with the
software prior to its modification, the consequence would be what is known as a “fork” of the network, with one prong running
the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions
of the cryptocurrency running in parallel yet lacking interchangeability and necessitating exchange-type transaction to convert currencies
between the two forks. Additionally, it may be unclear following a fork which fork represents the original cryptocurrency and which is
the new cryptocurrency. Different metrics adopted by industry participants to determine which is the original asset include: referring
to the wishes of the core developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners
or validators; or blockchains with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an
investment in our securities or our ability to operate.
Since
August 1, 2017, Bitcoin’s blockchain was forked multiple times creating alternative versions of the cryptocurrency such as Bitcoin
Cash, Bitcoin Gold and Bitcoin SV. The forks resulted in a new blockchain being created with a shared history, and a new path forward.
The value of the newly created versions including Bitcoin Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run
and may affect the price of Bitcoin if interest is shifted away from Bitcoin to the newly created cryptocurrencies. The value of Bitcoin
after the creation of a fork is subject to many factors including the value of the fork product, market reaction to the creation of the
fork product, and the occurrence of forks in the future. As such, the value of Bitcoin could be materially reduced if existing and future
forks have a negative effect on Bitcoin’s value.
Incorrect
or fraudulent cryptocurrency transactions may be irreversible.
Cryptocurrency
transactions are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly
executed or fraudulent cryptocurrency transactions could have a material adverse effect on our ability to continue as a going concern
or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations of and potentially
the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Cryptocurrencies,
including those maintained by or for us, may be exposed to cybersecurity threats and hacks.
Flaws
in cryptocurrency codes may be exposed by malicious actors. Several errors and defects have been found previously, including those that
disabled some functionality for users and exposed users’ information. Exploitations of flaws in the source code that allow malicious
actors to take or create money have previously occurred. Our devices, as well as our miners, computer systems and those of third parties
that we use in our operations, are vulnerable to cyber security risks, including cyber-attacks such as viruses and worms, phishing attacks,
denial-of-service attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering
with our miners and computer systems or those of third parties that we use in our operations. As technological change occurs, the security
threats to our cryptocurrencies will likely change and previously unknown threats may emerge. Human error and the constantly evolving
state of cybercrime and hacking techniques may render present security protocols and procedures ineffective in ways which we cannot predict.
Such events could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or
other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Risks
Related to the Exok Assets
Oil,
natural gas and NGL prices are highly volatile. An extended decline in commodity prices may adversely affect our business, financial
condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.
Following
our acquisition and development of the Exok Assets, a portion of our revenues, profitability and cash flows will depend upon the prices
for oil, natural gas and NGL. The prices we would receive for oil, natural gas and NGL production are volatile and a decrease
in prices can materially and adversely affect our financial results and impede our growth, including our ability to maintain or increase
our borrowing capacity, to repay current or future indebtedness and to obtain additional capital on attractive terms. Changes in oil,
natural gas and NGL prices have a significant impact on the amount of oil, natural gas and NGL that we can produce economically, the
value of our reserves and on our cash flows. Historically, world-wide oil, natural gas and NGL prices and markets have been subject to
significant change and may continue to change in the future. Prices for oil, natural gas and NGLs may fluctuate widely in response to
relatively minor changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, such
as:
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the
domestic and foreign supply of and demand for oil, natural gas and NGL; |
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the
price and quantity of foreign imports of oil, natural gas and NGL; |
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political
and economic conditions and events in foreign oil and natural gas producing countries, including embargoes, continued hostilities
in the Middle East, Ukraine and other sustained military campaigns, the armed conflict in Ukraine and associated economic sanctions
on Russia, conditions in South America, Central America, China and Russia, and acts of terrorism or sabotage; |
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the
ability of and actions taken by members of Organization of the Petroleum Exporting Countries and other oil-producing nations in connection
with their arrangements to maintain oil prices and production controls; |
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the
impact on worldwide economic activity of an epidemic, outbreak or other public health events, such as COVID-19; |
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the
proximity of our production to and capacity of oil, natural gas and NGL pipelines and other transportation and storage facilities; |
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federal
regulations applicable to exports of liquefied natural gas (“LNG”), including the export of the first quantities of LNG
liquefied from natural gas produced in the lower 48 states of the United States; |
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the
level of consumer product demand; |
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weather
conditions; |
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U.S.
and non-U.S. governmental regulations, including environmental initiatives and taxation; |
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overall
domestic and global economic conditions; |
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the
value of the dollar relative to the currencies of other countries; |
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stockholder
activism or activities by non-governmental organizations to restrict the exploration, development and production of oil, natural
gas and NGL to minimize emissions of carbon dioxide, a greenhouse gas; |
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technological
advances affecting energy consumption, energy conservation and energy supply; |
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the
price and availability of alternative fuels; and |
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the
impact of energy consumption, supply, and conservation policies and activities by governmental authorities, international agreements,
and non-governmental organizations to limit, restrict, suspend or prohibit the performance or financing of oil, natural gas and NGL
exploration, production, development or marketing activities. |
Drilling
for and producing oil and gas wells is a high-risk activity with many uncertainties that could adversely affect our business, financial
condition or results of operations.
Drilling
oil and gas wells, including development wells, involves numerous risks, including the risk that we may not encounter commercially productive
oil, natural gas and NGL reserves (including “dry holes”). We must incur significant expenditures to drill and complete wells,
the costs of which are often uncertain. It is possible that we will make substantial expenditures on drilling and not discover reserves
in commercially viable quantities. Specifically, we often are uncertain as to the future cost or timing of drilling, completing and operating
wells, and our drilling operations and those of our third-party operators may be curtailed, delayed or canceled. The cost of our drilling,
completing and operating wells may increase and our results of operations and cash flows from such operations may be impacted, as a result
of a variety of factors, including:
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unexpected
drilling conditions; |
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title
problems; |
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pressure
or irregularities in formations; |
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equipment
failures or accidents; |
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adverse
weather conditions, such as winter storms, flooding and hurricanes, and changes in weather patterns; |
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compliance
with, or changes in, environmental laws and regulations relating to air emissions, hydraulic fracturing and disposal of produced
water, drilling fluids and other wastes, laws and regulations imposing conditions and restrictions on drilling and completion operations
and other laws and regulations, such as tax laws and regulations; |
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the
availability and timely issuance of required governmental permits and licenses; |
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the
availability of, costs associated with and terms of contractual arrangements for properties, including mineral licenses and leases,
pipelines, rail cars, crude oil hauling trucks and qualified drivers and related services, facilities and equipment to gather, process,
compress, store, transport and market crude oil, natural gas and related commodities; |
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compliance
with environmental and other governmental requirements; and |
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environmental
hazards, such as natural gas leaks, oil and produced water spills, pipeline or tank ruptures, encountering naturally occurring radioactive
materials, and unauthorized discharges of brine, well stimulation and completion fluids, toxic gases or other pollutants into the
air, surface and subsurface environment. |
A
failure to recover our investment in the Exok Assets, increases in the costs of our drilling operations or those of third-party operators,
and/or curtailments, delays or cancellations of our drilling operations or those of our third-party operators in each case due to any
of the above factors or other factors, may materially and adversely affect our business, financial condition and results of operations.
The
Exok Assets currently have no producing properties and there is no assurance that we will be able to successfully drill producing wells.
If the Exok Assets are not commercially productive of crude oil or natural gas, any funds spent on exploration and production may be
lost.
All
of the Exok Assets are in the pre-production stage and there is no assurance that we will be able to obtain the requisite permits to
begin drilling or successfully drill producing wells. We are dependent on establishing sufficient reserves at the Exok Assets for additional
cash flow and a return of our investment. If the Exok Assets are not economic, all of the funds that we have invested, or will invest,
will be lost. In addition, the failure of the Exok Assets to produce commercially may make it more difficult for us to raise additional
funds in the form of additional sale of our equity securities or working interests in other property in which we may acquire an interest.
Since
we will operate a new business segment and have no operating history related to the exploration and production of oil and gas assets,
investors have no basis to evaluate our ability to operate profitably in this segment.
We
began cryptocurrency mining operations in October 2021 and have not generated any revenue in the exploration and production of oil and
gas assets to date. We face many of the risks commonly encountered by other new businesses, including the lack of an established operating
history, need for additional capital and personnel, and competition. There is no assurance that our business will be successful or that
we can ever operate profitably. Additionally, our management will have less time to devote to the Company’s crypto operations.
We may not be able to effectively manage the demands required of a new business segment in a new industry, such that we may be unable
to successfully maintain our current business or implement our business plan or achieve profitability.
There
may be conflicts of interest between certain of our officers and directors and our non-management stockholders.
Conflicts
of interest create the risk that management may have an incentive to act adversely to the interests of other stockholders. A conflict
of interest may arise between our officers and directors’ personal pecuniary interests and their fiduciary duty to our stockholders.
Furthermore, our officers and directors’ own pecuniary interests may not align with their fiduciary duties to our stockholders.
As further described in the section entitled “Certain
Relationships and Related Transactions,” Edward Kovalik (Chief Executive Officer and Chair),
Gary C. Hanna (President and Director) and Paul Kessler (Director) have certain overriding royalty interests in the Exok Assets. To avoid
any potential conflict of interest with certain members of the Board and management owning certain overriding royalty interests under
the Exok Assets, all of the Company’s drilling programs will be approved by an independent committee of the Board on a quarterly
basis.
Our
plan to develop the Exok Assets may require substantial additional capital, which we may be unable to raise
on acceptable terms in the future.
We
currently plan to develop the Exok Assets. Obtaining permits, seismic data, as well as exploration, development and production activities
entail considerable costs, and we may need to raise substantial additional capital, through future private or public equity offerings,
strategic alliances or debt financing.
Our
future capital requirements will depend on many factors, including:
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the
scope, rate of progress and cost of our exploration, appraisal, development and production activities; |
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oil
and natural gas prices; |
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our
ability to obtain the requisite permits to begin drilling; |
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ability to locate and acquire hydrocarbon reserves; |
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our
ability to produce oil or natural gas from those reserves; |
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the
terms and timing of any drilling and other production-related arrangements that we may enter into; |
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cost and timing of governmental approvals and/or concessions; and |
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the
effects of competition by larger companies operating in the oil and gas industry. |
Even
if we succeed in selling additional equity securities to raise funds, at such time the ownership percentage of our existing stockholders
would be diluted, and new investors may demand rights, preferences or privileges senior to those of existing stockholders. If we raise
additional capital through debt financing, the financing may involve covenants that restrict our business activities. If we are not successful
in raising additional capital, we may be unable to continue our future exploration, development and production activities.
Our
estimated natural gas, NGL and oil reserve are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in
the reserve estimates or the underlying assumptions will materially affect the quantities and present value of our reserves.
Numerous
uncertainties are inherent in estimating quantities of natural gas, NGL and oil reserves. The process of estimating natural gas, NGL
and oil reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, engineering
and economic data for each reservoir, including assumptions regarding future natural gas, NGL and oil prices, subsurface
characterization, production levels and operating and development costs. Our estimates of possible reserves and related projections
as of August 1, 2023 were prepared by Collarini Energy Experts (“Collarini”). Collarini conducted a detailed review of
all of our properties for the period covered by its reserve report using information provided by us. Over time, we may make material
changes to reserve estimates taking into account the results of actual drilling, testing and production. As a result of the
uncertainties, estimated quantities of natural gas, NGL and oil reserves and projections of future production rates and the timing
of development expenditures may prove to be inaccurate. Over time, we may make material changes to our reserve estimates. Any
significant variance in our assumptions and actual results could greatly affect our estimates of reserves, the economically
recoverable quantities of natural gas, NGL and oil attributable to any particular group of properties, the classifications of
reserves based on risk of non-recovery and estimates of future net cash flows. Estimates of possible reserves, and
the future cash flows related to such estimates, are also inherently imprecise and are more uncertain than estimates of proved and
probable reserves, respectively, and the respective future cash flows related to such estimates, but have not been adjusted for risk
due to that uncertainty. Because of such uncertainty, estimates of possible reserves,
and the future cash flows related to such estimates, may not be comparable to estimates of proved and probable reserves,
respectively, and the respective future cash flows related to such estimates, and should not be summed arithmetically with
estimates of either proved or probable reserves, respectively, and the respective future cash flows related to such estimates. When
producing an estimate of the amount of natural gas, NGLs and oil that is recoverable from a particular reservoir, an estimated quantity
of possible reserves is an estimate
that might be achieved, but only under more favorable circumstances than are likely. Estimates of possible reserves are also
continually subject to revisions based on production history, results of additional exploration and development, price changes and
other factors. When deterministic methods are used, the total quantities ultimately recovered from a project have a low
probability of exceeding proved plus probable plus possible reserves. Possible reserves may be assigned to areas of a reservoir
adjacent to probable reserve where data control and interpretations of available data are progressively less certain. Frequently,
this will be in areas where geoscience and engineering data are unable to define clearly the area and vertical limits of commercial
production from the reservoir. Possible reserves also include incremental quantities associated with a greater percentage of
recovery of the hydrocarbons in place than the recovery quantities assumed for probable reserves. Possible reserves may be assigned
where geoscience and engineering data identify directly adjacent portions of a reservoir within the same accumulation that may be
separated from proved areas by faults with displacement less than formation thickness or other geological discontinuities and that
have not been penetrated by a wellbore, and we believe that such adjacent portions are in communication with the known (proved)
reservoir. Possible reserves may be assigned to areas that are structurally higher or lower than the proved area if these areas are
in communication with the proved reservoir.
We
will face strong competition from other oil and gas companies.
We
will encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of exploratory
prospects and proven properties. Our competitors include major integrated oil and gas companies and numerous independent oil and gas
companies, individuals and drilling and income programs. Many of our competitors are large, well-established companies that have been
engaged in the oil and gas business much longer than we have and possess substantially larger operating staffs and greater capital resources
than we do. These companies may be able to pay more for exploratory projects and productive oil and gas properties and may be able to
define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In
addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe are and will
be increasingly important to attaining success in the industry. Such competitors may also be in a better position to secure oilfield
services and equipment on a timely basis or on favorable terms. These companies may also have a greater ability to continue drilling
activities during periods of low oil and gas prices, such as the current commodity price environment, and to absorb the burden of current
and future governmental regulations and taxation. We may not be able to conduct our operations, evaluate and select suitable properties
and consummate transactions successfully in this highly competitive environment.
Government
regulation and liability for oil and natural gas operations may adversely affect our business and results of operations.
If
we are successful in our exploration, production and development activities, we will be subject to extensive federal, state, and local
government regulations, which may change from time to time. Matters subject to regulation include discharge permits for drilling operations,
drilling bonds and other financial assurance, reports concerning operations, the spacing of wells, unitization and pooling of properties,
and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate
of flow of oil and natural gas from wells below actual production capacity in order to conserve supplies of oil and natural gas. These
laws and regulations may affect the costs, manner, and feasibility of our operations by, among other things, requiring us to make significant
expenditures in order to comply and restricting the areas available for oil and gas production. Failure to comply with these laws and
regulations may result in substantial liabilities to third-parties or governmental entities. We are also subject to changing and extensive
tax laws, the effects of which cannot be predicted. The implementation of new, or the modification of existing, laws or regulations,
could have a material adverse effect on us, such as by imposing, penalties, fines and/or fees, taxes and tariffs on carbon that could
have the effect of raising prices to the end user and thereby reducing the demand for our products.
Our
operations will be subject to federal, state and local laws and regulations related to environmental and natural resources protection
and occupational health and safety which may expose us to significant costs and liabilities and result in increased costs and additional
operating restrictions or delays.
Our
planned oil, natural gas and NGL exploration, production and development operations will be subject to stringent federal, state, local
and other applicable laws and regulations governing worker health and safety, the release or disposal of materials into the environment
or otherwise relating to environmental protection. Numerous governmental entities, including the EPA, the U.S. Occupational Safety and
Health Administration (“OSHA”), and analogous state agencies, including the Colorado Department of Public Health & Environment
(“CDPHE”) have the power to enforce compliance with these laws and regulations. These laws and regulations may, among other
things, require the acquisition of permits to conduct drilling; govern the amounts and types of substances that may be released into
the environment; limit or prohibit construction or drilling activities in environmentally-sensitive areas such as wetlands, wilderness
areas or areas inhabited by endangered species; require investigatory and remedial actions to mitigate pollution conditions; impose obligations
to reclaim and abandon well sites and pits; and impose specific criteria addressing worker protection. Compliance with such laws and
regulations may impact our operations and production, require us to install new or modified emission controls on equipment or processes,
incur longer permitting timelines, restrict the areas in which some or all operational activities may be conducted, and incur significantly
increased capital or operating expenditures, which costs may be significant. The regulatory burden on the oil and gas industry increases
the cost of doing business in the industry and consequently affects profitability.
Additionally,
certain environmental laws impose strict, joint and several liability for costs required to remediate and restore sites where hydrocarbons,
materials or wastes have been stored or released. Failure to comply with these laws and regulations may also result in the assessment
of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial and corrective action
obligations or the incurrence of capital expenditures, the occurrence of restrictions, delays or cancellations in the permitting, development
or expansion of projects and the issuance of orders enjoining some or all of our operations in affected areas. Moreover, accidental spills
or other releases may occur in the course of our operations, and we cannot assure you that we will not incur significant costs and liabilities
as a result of such spills or releases, including any third-party claims for damage to property, natural resources or persons. We may
not be able to fully recover such costs from insurance. One or more of these developments that impact us, our service providers or our
customers could have a material adverse effect on our business, results of operations and financial condition and reduce demand for our
products.
Our
oil and gas exploration, production, and development activities may be subject to a series of risks related to climate change and energy
transition initiatives.
The
threat of climate change continues to attract considerable attention in the United States and around the world. Numerous proposals have
been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit
emissions of GHGs. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG disclosure obligations and
regulations that directly limit GHG emissions from certain sources. President Biden highlighted addressing climate change as a priority
under his Administration and has issued, and may continue to issue, executive orders related to this.
At
the federal level, the EPA has adopted rules that, among other things, establish construction and operating permit reviews for GHG emissions
from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural
gas system sources, and impose new standards reducing methane emissions from oil and gas operations through limitations on venting and
flaring and the implementation of enhanced emission leak detection and repair requirements. Although there has recently been considerable
uncertainty surrounding regulation of methane emissions from oil and gas facilities, the EPA is currently also proposing new and updated
rules for both new and existing sources. The EPA’s proposed rules, if finalized, would making existing regulations more stringent,
expand the scope of source types covered by the rules, and require states to develop plans to reduce methane and volatile organic compound
(“VOC”) emissions from existing sources that must be at least as effective as presumptive standards set by EPA. In addition,
the U.S. Congress may continue to consider and pass legislation related to the reduction of GHG emissions, including methane and carbon
dioxide. For example, the Inflation Reduction Act of 2022 (the “IRA”), which appropriates significant federal funding for
renewable energy initiatives and, for the first time ever, imposes a fee on GHG emissions from certain facilities, was signed into law
in August 2022. Furthermore, the SEC has proposed rules that, amongst other matters, will establish a framework for the reporting of
climate risks. Separately, the SEC has also announced that it is scrutinizing existing climate-change related disclosures in public filings,
increasing the potential for enforcement if the SEC were to allege an issuer’s existing climate disclosures misleading or deficient.
These ongoing regulatory actions and the emissions fee and funding provisions of the IRA could increase operating costs within the oil
and gas industry and accelerate the transition away from fossil fuels, which could in turn adversely affect our business and results
of operations. We note that the regulatory activities discussed above are subject to intense political debate and could be subject to
major modification depending upon the outcome of the 2024 election cycle.
At
the international level, the United Nations-sponsored Paris Agreement, though non-binding, calls for signatory nations to limit their
GHG emissions through individually-determined reduction goals every five years after 2020. In February 2021, President Biden recommitted
the United States to long-term international goals to reduce emissions, including those under the Paris Agreement. President Biden announced
in April 2021 a new, more rigorous nationally determined emissions reduction level of 50 to 52 percent from 2005 levels in economy-wide
net GHG emissions by 2030. Moreover, the international community convenes annually to negotiate further pledges and initiatives, such
as the Global Methane Pledge (a collective goal to reduce global methane emissions by 30 percent from 2020 levels by 2030). The impacts
of these orders, pledges, agreements and any legislation or regulation promulgated to fulfill the United States’ commitments under
the Paris Agreement or other international agreements cannot be predicted at this time.
Litigation
risks are also increasing, as a number of states, municipalities and other plaintiffs have sought to bring suit against oil and natural
gas exploration and production companies in state or federal court, alleging, among other things, that such energy companies created
public nuisances by producing fuels that contributed to global warming effects, such as rising sea levels, and therefore, are responsible
for roadway and infrastructure damages as a result, or alleging that the companies have been aware of the adverse effects of climate
change for some time but defrauded their investors by failing to adequately disclose those impacts. Involvement in such a case, regardless
of the substance of the allegations, could have adverse reputational impacts and an unfavorable ruling in any such case could significantly
impact our operations and could have an adverse impact on our financial condition or operations.
There
are also increasing financial risks for oil and gas producers as certain shareholders, bondholders and lenders may elect in the future
to shift some or all of their investments into non-fossil fuel energy related sectors. Certain institutional lenders who provide financing
to fossil-fuel energy companies have shifted their investment practices to those that favor “clean” power sources, such as
wind and solar, making those sources more attractive, and some of them may elect not to provide funding for fossil fuel energy companies
in the short or long term. Many of the largest U.S. banks have made “net zero” carbon emission commitments and have announced
that they will be assessing financed emissions across their portfolios and taking steps to quantify and reduce those emissions. Additionally,
there is also the possibility that financial institutions will be pressured or required to adopt policies that limit funding for fossil
fuel energy companies. Although there has been recent political support to counteract these initiatives, these and other developments
in the financial sector could lead to some lenders restricting access to capital for or divesting from certain industries or companies,
including the oil and gas sector, or requiring that borrowers take additional steps to reduce their GHG emissions. Any material reduction
in the capital available to us or our fossil fuel-related customers could make it more difficult to secure funding for exploration, development,
production, transportation, and processing activities, which could reduce the demand for our products and services.
Our
oil and gas exploration, production, and development activities may be subject to physical risks related to potential climate change
impacts.
Increasing
concentrations of GHGs in the Earth’s atmosphere may produce climate changes that could have significant physical effects, such
as increased frequency and severity of storms, droughts, wildfires, and floods and other climatic events, as well as chronic shifts in
temperature and precipitation patterns. These climatic developments have the potential to cause physical damage to our assets or those
of our vendors and suppliers and could disrupt our supply chains and thus could have an adverse effect on our operations.
Additionally,
changing meteorological conditions, particularly temperature, may result in changes to the amount, timing, or location of demand for
energy or its production. While our operational consideration of changing climatic conditions and inclusion of safety factors in design
is intended to reduce the uncertainties that climate change and other events may potentially introduce, our ability to mitigate the adverse
impacts of these events depends in part on the effectiveness of our facilities and disaster preparedness and response and business continuity
planning, which may not have considered or be prepared for every eventuality.
Our
business and ability to secure financing may be adversely impacted by increasing stakeholder and market attention to ESG matters.
Businesses
across all industries are facing increasing scrutiny from stakeholders related to their ESG practices. Businesses that are perceived
to be operating in contrast to investor or stakeholder expectations and standards, which are continuing to evolve, or businesses that
are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement
to do so, may suffer from reputational damage and the business, financial condition, and/or stock price of such business entity could
be materially and adversely affected. Increasing attention to climate change, societal expectations on companies to address climate change,
investor and societal expectations regarding voluntary ESG related disclosures, increasing mandatory ESG disclosures, and consumer demand
for alternative forms of energy may result in increased operating and compliance costs, reduced demand for our products, reduced profits,
increased legislative and judicial scrutiny, investigations and litigation, reputational damage, and negative impacts on our access to
capital markets. To the extent that societal pressures or political or other factors are involved, it is possible that the Company could
be subject to additional governmental investigations, private litigation or activist campaigns as stockholders may attempt to effect
changes to the Company’s business or governance practices.
While
we may elect to seek out various voluntary ESG targets in the future, such targets are aspirational. We may not be able to meet such
targets in the manner or on such a timeline as initially contemplated, including as a result of unforeseen costs or technical difficulties
associated with achieving such results. Similarly, while we may decide to participate in various voluntary ESG frameworks and certification
programs, such participation may not have the intended results on our ESG profile. In addition, voluntary disclosures regarding ESG matters,
as well as any ESG disclosures currently required or required in the future, could result in private litigation or government investigation
or enforcement action regarding the sufficiency or validity of such disclosures. Moreover, failure or a perception (whether or not valid)
of failure to implement ESG strategies or achieve ESG goals or commitments, including any GHG emission reduction or carbon intensity
goals or commitments, could result in private litigation and damage our reputation, cause investors or consumers to lose confidence in
us, and negatively impact our operations and goodwill. Notwithstanding our election to pursue aspirational ESG-related targets in the
future, we may receive pressure from investors, lenders or other groups to adopt more aggressive climate or other ESG-related goals,
but we cannot guarantee that we will be able to implement such goals because of potential costs, technical or operational obstacles or
other market or technological developments beyond our control.
Restrictions
and regulations regarding hydraulic fracturing could result in increased costs, delays and cancellations in our planned oil, natural
gas, and NGL exploration, production and development activities.
Our
drilling operations will include hydraulic fracturing activities. Hydraulic fracturing is typically regulated by state oil and gas commissions,
but the practice continues to attract considerable public, scientific and governmental attention in certain parts of the country, resulting
in increased scrutiny and regulation, including by federal agencies. Many states have adopted rules that impose new or more stringent
permitting, public disclosure or well construction requirements on hydraulic fracturing activities. For example, Colorado requires the
disclosure of chemicals used in hydraulic fracturing and recently extended setback requirements for drilling activities. Local governments
may also impose, or attempt to impose restrictions on the time, place, and manner in which hydraulic fracturing activities may occur.
The EPA has also asserted federal regulatory authority over certain aspects of hydraulic fracturing. Additionally, certain federal and
state agencies have evaluated or are evaluating potential impacts of hydraulic fracturing on drinking water sources or seismic events.
These ongoing studies could spur initiatives to further regulate hydraulic fracturing or otherwise make it more difficult and costly
to perform hydraulic fracturing activities. Any new or more stringent federal, state, local or other applicable legal requirements such
as presidential executive orders or state or local ballot initiatives relating to hydraulic fracturing that impose restrictions, delays
or cancellations in areas where we plan to operate could cause us to incur potentially significant added costs to comply with such requirements
or experience delays, curtailment, or preclusion from the pursuit of exploration, development or production activities.
Our
planned oil, natural gas and NGL exploration and production activities could be adversely impacted by restrictions on our ability to
obtain water or dispose of produced water.
Our
operations will require water for our planned oil and natural gas exploration during drilling and completion activities. Our access to
water may be limited due to reasons such as prolonged drought, private third party competition for water in localized areas or our inability
to acquire or maintain water sourcing permits or other rights as well as governmental regulations or restrictions adopted in the future.
For example, the Governor of Colorado recently signed into law HB 1242 which places restrictions on the use of fresh water for oil and
gas operations and requires oil and gas operators to report their water use. Any difficulty or restriction on locating or contractually
acquiring sufficient amounts of water in an economical manner could adversely impact our planned operations.
Additionally,
we must dispose of the fluids produced during oil and natural gas production, including produced water. We may choose to dispose of produced
water into deep wells by means of injection, either directly ourselves or through third party contractors. While we may seek to reuse
or recycle produced water instead of disposing of such water, our costs for disposing of produced water could increase significantly
as a result of increased regulation or if reusing and recycling water becomes impractical. Disposal wells are regulated pursuant to the
Underground Injection Control (“UIC”) program established under the federal Safe Drinking Water Act (“SDWA”)
and analogous state laws. The UIC program requires permits from the EPA or an analogous state agency for construction and operation of
such disposal wells, establishes minimum standards for disposal well operations, and restricts the types and quantities of fluids that
may be disposed.
In
recent years, wells used for the disposal by injection of flowback water or certain other oilfield fluids below ground into non-producing
formations have been associated with an increased number of seismic events, with research suggesting that the link between seismic events
and wastewater disposal may vary by region and local geology. The U.S. geological survey has recently identified Colorado as one of six
states with the most significant hazards from induced seismicity. Concerns by the public and governmental authorities have prompted several
state agencies to require operators to take certain prescriptive actions or limit disposal volumes following unusual seismic activity.
The Colorado Oil and Gas Conservation Commission (“COGCC”) requires operators to monitor and evaluate for seismicity risks
in certain situations. Restrictions on produced water disposal well injection activities or suspensions of such activities, whether due
to the occurrence of seismic events or other regulatory actions could increase our costs to dispose of produced water and adversely impact
our results of operations.
Laws
and regulations pertaining to the protection of threatened and endangered species and their habitats could delay, restrict or prohibit
our planned oil, natural gas, and NGL exploration and production operations and adversely affect the development and production of our
reserves.
The
Endangered Species Act (“ESA”) and comparable state laws protect endangered and threatened species and their habitats. Under
the ESA, the U.S. Fish and Wildlife Service (“FWS”) may designate critical habitat areas that it believes are necessary for
survival of species listed as threatened or endangered. Similar protections are offered to migratory birds under the MBTA. Such designations
could require us to develop mitigation plans to avoid potential adverse effects to protected species and their habitats, and our oil
and gas operations may be delayed, restricted or prohibited in certain locations or during certain seasons, such as breeding and nesting
seasons, when those operations could have an adverse effect on the species. Moreover, the future listing of previously unprotected species
as threatened or endangered in areas where we are operating in the future could cause us to incur increased costs arising from species
protection measures or could result in delays, restrictions or prohibitions on our planned development and production activities.
Exhibit
99.3
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Unless
otherwise indicated, defined terms included below shall have the same meaning as terms defined and included elsewhere in the prospectus
included in the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on November 17,
2023 (as supplemented or amended from time to time, the “Prospectus”).
The
Company is providing the following unaudited pro forma condensed combined financial information to aid in the analysis of the financial
aspects of the Merger, Series D PIPE and Exok Transaction (collectively, 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 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 and the historical statements of operations of the Company, as
applicable, for such periods on a pro forma basis in accordance with Article 11 of Regulation S-X, as amended, as if the Transactions,
summarized below, 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 for the fiscal year ended 2022 included in the Prospectus, (b)
the Company’s unaudited historical condensed consolidated financial statements and related notes for the three and nine months
ended September 30, 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 Prospectus, and (d) the section entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations of Prairie Operating Co.” incorporated by reference into this
prospectus.
The
unaudited pro forma condensed combined financial information has been presented for illustrative purposes only and does not necessarily
reflect what the 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 also may not
be useful in predicting the 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 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 Company completed its previously announced Merger with Prairie LLC pursuant to the terms of the Merger Agreement, pursuant
to which, among other things, Merger Sub merged 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.
Upon
consummation of the Merger, the Company changed its name from “Creek Road Miners, Inc.” to “Prairie Operating Co.”
The Company traded under its former name and ticker symbol “CRKR” until October 16, 2023 and under “CRKRD,” a
transitionary ticker symbol, until November 10, 2023. Our Common Stock (as defined below) began trading on the OTCQB under the symbol
“PROP” on November 13, 2023.
Prior
to the consummation of the Merger, the Company effectuated the 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:
(i)
the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, plus accrued dividends, were converted, in the aggregate,
into shares of Common Stock;
(ii)
the Original Debentures, plus accrued but unpaid interest and a 30% premium, were exchanged, in the aggregate, for (a) 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 Board 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 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 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, 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, the Company assumed and converted options to purchase membership interests of Prairie LLC outstanding and unexercised
as of immediately prior to the Effective Time into Non-Compensatory Options to acquire 8,000,000 shares of Common Stock for $7.14 per
share, which are only exercisable if specific production hurdles are achieved, and the Company entered into the Option Agreements 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 PIPE Investors, based on their then percentage ownership of PIPE Preferred Stock to the aggregate PIPE
Preferred Stock outstanding and held by all PIPE Investors as of the Closing Date, if the Company does not meet certain performance metrics
by May 3, 2026.
In
addition, in connection with the Closing of the Merger, the Company consummated the purchase of oil and gas leases, including all of
Exok’s right, title and interest in, to and under certain undeveloped oil and gas leases located in Weld County, Colorado, together
with certain other associated assets, data and records, consisting of approximately 3,157 net mineral acres in, on and under approximately
4,494 gross acres from Exok for $3,000,000 pursuant to the Exok Agreement.
To
fund the Exok Transaction, the Company received an aggregate of approximately $17.4 million in proceeds from the PIPE Investors, and
the PIPE Investors were issued PIPE 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, and 100% warrant coverage for each of the Series D A Warrants and Series D B Warrants in the Series D
PIPE pursuant to the Series D Securities Purchase Agreement entered into with each Series D PIPE Investor.
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 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 May 3, 2023
other than the Reverse Stock Split, conversion of the AR Debentures and the exercise of the Series D B Warrants, each of which is 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
Transactions
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 the Reverse Stock (see Note 2). The Reverse Stock Split became effective on October 16,
2023. 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 affect 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”).
Unaudited
Pro Forma Condensed Combined Balance Sheet
as
of September 30, 2023
| |
Prairie Operating | | |
Pro Forma | | |
| | |
| |
| |
Co. | | |
Transaction | | |
| | |
Combined | |
| |
(Historical) | | |
Adjustments | | |
Note 3 | | |
Pro Forma | |
Assets | |
| | | |
| | | |
| | |
| | |
Current assets: | |
| | | |
| | | |
| | |
| | |
Cash and cash equivalents | |
$ | 7,241,811 | | |
$ | (60,000 | ) | |
(a) | | |
$ | 19,181,811 | |
| |
| | | |
| 12,000,000 | | |
(b) | | |
| | |
Accounts and other receivable | |
| 97,293 | | |
| - | | |
| | |
| 97,293 | |
Prepaid expenses | |
| 271,839 | | |
| - | | |
| | |
| 271,839 | |
Total current assets | |
| 7,610,943 | | |
| 11,940,000 | | |
| | |
| 19,550,943 | |
| |
| | | |
| | | |
| | |
| | |
Property and equipment | |
| | | |
| | | |
| | |
| | |
Oil and natural gas properties | |
| 28,595,051 | | |
| - | | |
| | |
| 28,595,051 | |
Cryptocurrency mining equipment | |
| 4,293,422 | | |
| - | | |
| | |
| 4,293,422 | |
Less: Accumulated depreciation, depletion and amortization | |
| (558,319 | ) | |
| - | | |
| | |
| (558,319 | ) |
Total property and equipment, net | |
| 32,330,154 | | |
| - | | |
| | |
| 32,330,154 | |
Deposits on mining equipment | |
| 150,000 | | |
| - | | |
| | |
| 150,000 | |
Total assets | |
$ | 40,091,097 | | |
$ | 11,940,000 | | |
| | |
$ | 52,031,097 | |
| |
| | | |
| | | |
| | |
| | |
Liabilities, Mezzanine Equity and Stockholders’ Equity | |
| | | |
| | | |
| | |
| | |
Current liabilities: | |
| | | |
| | | |
| | |
| | |
Accounts payable and accrued expenses | |
$ | 6,708,498 | | |
$ | (30,000 | ) | |
(a) | | |
$ | 6,678,498 | |
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) | | |
| - | |
Total current liabilities | |
| 11,601,498 | | |
| (4,923,000 | ) | |
| | |
| 6,678,498 | |
| |
| | | |
| | | |
| | |
| | |
Long-term liabilities: | |
| | | |
| | | |
| | |
| | |
Warrant liabilities | |
| 50,738,180 | | |
| (50,738,180 | ) | |
(c) | | |
| - | |
Total long-term liabilities | |
| 50,738,180 | | |
| (50,738,180 | ) | |
| | |
| - | |
Total liabilities | |
| 62,339,678 | | |
| (55,661,180 | ) | |
| | |
| 6,678,498 | |
| |
| | | |
| | | |
| | |
| | |
Commitments and contingencies | |
| | | |
| | | |
| | |
| - | |
| |
| | | |
| | | |
| | |
| | |
Mezzanine equity | |
| | | |
| | | |
| | |
| | |
Series D convertible preferred stock; $0.01 par value; 21,799 shares issued and outstanding at September 30, 2023 | |
| 21,799,250 | | |
| (21,799,250 | ) | |
(c) | | |
| - | |
Series E convertible preferred stock; $0.01 par value; 20,000 shares issued and outstanding at September 30, 2023 | |
| 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 at September 30, 2023 | |
| - | | |
| 218 | | |
(c) | | |
| 218 | |
| |
| | | |
| | | |
| | |
| | |
Series E convertible preferred stock; $0.01 par value; zero shares issued and outstanding at September 30, 2023 | |
| - | | |
| 200 | | |
(c) | | |
| 200 | |
Common stock; $0.01 par value; 500,000,000 shares authorized and 7,074,668 shares issued and outstanding at September 30, 2023* | |
| 70,747 | | |
| 4,007 | | |
(a) | | |
| 94,754 | |
| |
| | | |
| 20,000 | | |
(b) | | |
| | |
Additional paid-in capital | |
| (8,716,827 | ) | |
| 4,858,993 | | |
(a) | | |
| 100,659,178 | |
| |
| - | | |
| 11,980,000 | | |
(b) | | |
| - | |
| |
| - | | |
| 50,738,180 | | |
(c) | | |
| - | |
| |
| - | | |
| 21,799,032 | | |
(c) | | |
| - | |
| |
| - | | |
| 19,999,800 | | |
(c) | | |
| - | |
Accumulated deficit | |
| (55,401,751 | ) | |
| - | | |
| | |
| (55,401,751 | ) |
Total stockholders’ equity | |
| (64,047,831 | ) | |
| 109,400,430 | | |
| | |
| 45,352,599 | |
Total liabilities, mezzanine equity and stockholders’ equity | |
$ | 40,091,097 | | |
$ | 11,940,000 | | |
| | |
$ | 52,031,097 | |
*The
shares issued and outstanding at December 31, 2022 was 428,611 for Creek Road Miners, Inc.
Unaudited
Pro Forma Condensed Combined Statement of Operations
Nine
Months Ended September 30, 2023
| |
| | |
Creek Road | | |
| | |
| | |
| |
| |
| | |
Miners, Inc. | | |
| | |
| | |
| |
| |
Prairie Operating Co. (Historical) | | |
January 1, 2023 through May 2, 2023 (Historical) | | |
Pro Forma Transaction Adjustments | | |
Note 3 | | |
Combined Pro Forma | |
| |
| | |
| | |
| | |
| | |
| |
Revenue: | |
| | | |
| | | |
| | | |
| | |
| | |
Cryptocurrency mining | |
$ | 637,269 | | |
$ | 73,584 | | |
$ | - | | |
| | |
$ | 710,853 | |
Operating costs and expenses: | |
| | | |
| | | |
| | | |
| | |
| | |
Cryptocurrency mining costs (exclusive of depreciation and amortization shown below) | |
| 303,172 | | |
| 80,140 | | |
| - | | |
| | |
| 383,312 | |
Depreciation and amortization | |
| 558,319 | | |
| 116,724 | | |
| (93,172 | ) | |
(d) | | |
| 581,871 | |
Stock based compensation | |
| - | | |
| 170,120 | | |
| (170,120 | ) | |
(e) | | |
| - | |
General and administrative | |
| 9,236,815 | | |
| 1,119,277 | | |
| 170,120 | | |
(e) | | |
| 10,526,212 | |
Impairment of cryptocurrency mining equipment | |
| 16,794,688 | | |
| - | | |
| - | | |
| | |
| 16,794,688 | |
Total operating expenses | |
| 26,892,994 | | |
| 1,486,261 | | |
| (93,172 | ) | |
| | |
| 28,286,083 | |
Loss from operations | |
| (26,255,725 | ) | |
| (1,412,677 | ) | |
| 93,172 | | |
| | |
| (27,575,230 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
| | |
Interest income | |
| 128,202 | | |
| - | | |
| - | | |
| | |
| 128,202 | |
Interest expense | |
| (111,463 | ) | |
| (214,344 | ) | |
| 141,588 | | |
(f) | | |
| (4,219 | ) |
| |
| - | | |
| - | | |
| 180,000 | | |
(g) | | |
| - | |
Loss on adjustment to fair value – warrant liabilities | |
| (24,855,085 | ) | |
| - | | |
| 24,855,085 | | |
(h) | | |
| - | |
Loss on adjustment to fair value - AR Debentures | |
| (2,882,000 | ) | |
| - | | |
| 2,882,000 | | |
(i) | | |
| - | |
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 | ) | |
| 28,058,673 | | |
| | |
| (1,526,883 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Income (loss) from operations before provision for income taxes | |
| (55,626,937 | ) | |
| (1,627,021 | ) | |
| 28,151,845 | | |
| | |
| (29,102,113 | ) |
Provision for income taxes | |
| - | | |
| - | | |
| - | | |
| | |
| - | |
Net income (loss) | |
| (55,626,937 | ) | |
| (1,627,021 | ) | |
| 28,151,845 | | |
| | |
| (29,102,113 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Dividends on preferred stock | |
| - | | |
| (95,472 | ) | |
| 95,472 | | |
(j) | | |
| - | |
Net income (loss) attributable to common stockholders | |
$ | (55,626,937 | ) | |
$ | (1,722,493 | ) | |
$ | 28,247,317 | | |
| | |
$ | (29,102,113 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Income (loss) per common share: | |
| | | |
| | | |
| | | |
| | |
| | |
Loss per share from continuing operations, basic and diluted | |
$ | (15.80 | ) | |
$ | (4.02 | ) | |
$ | - | | |
| | |
$ | (3.35 | ) |
Loss per share, basic and diluted | |
$ | (15.80 | ) | |
$ | (4.02 | ) | |
$ | - | | |
| | |
$ | (3.35 | ) |
Weighted average common shares outstanding, basic and diluted – Note 3(k) | |
| 3,520,843 | | |
| 428,611 | | |
| - | | |
| | |
| 8,696,258 | |
Unaudited
Pro Forma Condensed Combined Statement of Operations
Year
Ended December 31, 2022
| |
Prairie Operating | | |
| | |
| | |
| | |
| |
| |
Co., LLC | | |
| | |
| | |
| | |
| |
| |
June
7, 2022 (date of inception) through December 31, 2022 (Historical) | | |
Creek Road Miners, Inc. (Historical) | | |
Pro Forma Transaction Adjustments | | |
Note 3 | | |
Combined Pro Forma | |
| |
| | |
| | |
| | |
| | |
| |
Revenue: | |
| | | |
| | | |
| | | |
| | |
| | |
Cryptocurrency mining | |
$ | - | | |
$ | 517,602 | | |
$ | - | | |
| | |
$ | 517,602 | |
Operating costs and expenses: | |
| | | |
| | | |
| | | |
| | |
| | |
Cryptocurrency mining costs (exclusive of depreciation and amortization shown below) | |
| - | | |
| 1,071,458 | | |
| - | | |
| | |
| 1,071,458 | |
Depreciation and amortization | |
| - | | |
| 658,080 | | |
| 117,748 | | |
(d) | | |
| 775,828 | |
Stock based compensation | |
| - | | |
| 2,681,201 | | |
| (2,681,201 | ) | |
(e) | | |
| - | |
General and administrative | |
| 461,520 | | |
| 3,606,522 | | |
| 2,681,201 | | |
(e) | | |
| 6,749,243 | |
Impairment of mined cryptocurrency | |
| - | | |
| 107,174 | | |
| - | | |
| | |
| 107,174 | |
Total operating expenses | |
| 461,520 | | |
| 8,124,435 | | |
| 117,748 | | |
| | |
| 8,703,703 | |
Loss from operations | |
| (461,520 | ) | |
| (7,606,833 | ) | |
| (117,748 | ) | |
| | |
| (8,186,101 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
| | |
Realized loss on sale of cryptocurrency | |
| - | | |
| (127,222 | ) | |
| - | | |
| | |
| (127,222 | ) |
Impairment on fixed assets | |
| - | | |
| (5,231,752 | ) | |
| - | | |
| | |
| (5,231,752 | ) |
Loss on sale of investment | |
| - | | |
| (19,104 | ) | |
| - | | |
| | |
| (19,104 | ) |
PPP loan forgiveness | |
| - | | |
| 197,662 | | |
| - | | |
| | |
| 197,662 | |
Interest expense | |
| - | | |
| (613,827 | ) | |
| 368,202 | | |
(f) | | |
| (5,625 | ) |
| |
| - | | |
| | | |
| 240,000 | | |
(g) | | |
| - | |
Total other income (expense) | |
| - | | |
| (5,794,243 | ) | |
| 608,202 | | |
| | |
| (5,186,041 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Income (loss) from operations before provision for income taxes | |
| (461,520 | ) | |
| (13,401,076 | ) | |
| 490,454 | | |
| | |
| (13,372,142 | ) |
Provision for income taxes | |
| - | | |
| - | | |
| - | | |
| | |
| - | |
Income (loss) from continuing operations | |
| (461,520 | ) | |
| (13,401,076 | ) | |
| 490,454 | | |
| | |
| (13,372,142 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Discontinued operations: | |
| | | |
| | | |
| | | |
| | |
| | |
Income (loss) from discontinued operations | |
| - | | |
| (17,738 | ) | |
| - | | |
| | |
| (17,738 | ) |
Net loss from discontinued operations | |
| - | | |
| (17,738 | ) | |
| - | | |
| | |
| (17,738 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Net income (loss) | |
$ | (461,520 | ) | |
$ | (13,418,814 | ) | |
$ | 490,454 | | |
| | |
$ | (13,389,880 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Dividends on preferred stock | |
| - | | |
| (364,384 | ) | |
| 364,384 | | |
(j) | | |
| - | |
Net income (loss) attributable to common stockholders | |
$ | (461,520 | ) | |
$ | (13,783,198 | ) | |
$ | 854,838 | | |
| | |
$ | (13,389,880 | ) |
| |
| | | |
| | | |
| | | |
| | |
| | |
Loss per common share: | |
| | | |
| | | |
| | | |
| | |
| | |
Loss per share from continuing operations, basic and diluted | |
$ | - | | |
$ | (33.78 | ) | |
$ | - | | |
| | |
$ | (1.56 | ) |
Loss per share from discontinued operations, basic and diluted | |
$ | - | | |
$ | (0.04 | ) | |
$ | - | | |
| | |
$ | - | |
Loss per share, basic and diluted | |
| - | | |
$ | (33.82 | ) | |
$ | - | | |
| | |
$ | (1.56 | ) |
Weighted average common shares outstanding, basic and diluted - Note 3(k) | |
| - | | |
| 407,711 | | |
| - | | |
| | |
| 8,559,252 | |
Note
1. Basis of Pro Forma Presentation
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.
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 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 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 and the historical statements of operations of the Company 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 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 and the Company and the notes thereto, the unaudited historical financial statements of the
Company 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.” contained elsewhere in the Prospectus.
The
unaudited pro forma condensed combined financial information has been presented for illustrative purposes only and does not necessarily
reflect what the 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 also may not
be useful in predicting the 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 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 a Certificate of Amendment to its Certificate of Incorporation with the Delaware Secretary of State
to effect a reverse stock split of outstanding shares of the Company’s common stock, par value $0.01 per share at an exchange ratio
of 1:28.5714286 (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 affect the conversion. As a result, the AR Debentures were fully extinguished in October 2023.
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”).
Note
3. Unaudited Pro Forma Adjustments
The
pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2023 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 upon the consummation of the Reverse
Stock Split |
The
pro forma adjustments included 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:
|
d) |
Reflects
the adjustment to depreciation expense due to fair value allocated at the Merger and useful life of the acquired assets. |
|
|
|
|
e) |
Reflects
the reclassification of stock based compensation to conform to the Company’s financial statement presentation |
|
|
|
|
f) |
Reflects
the adjustment to interest expense from the conversion of notes payable and the Original Debentures. |
|
|
|
|
g) |
Reflects
the adjustment to interest expense from the conversion of the AR Debentures. |
|
|
|
|
h) |
Reflects
the adjustment required to reflect classification of warrant liabilities within stockholders’ equity in conjunction with the
Reverse Stock Split |
|
|
|
|
i) |
Reflects
the adjustment to reflect the conversion of the AR Debentures into shares of Common Stock. |
|
|
|
|
j) |
Reflects
the adjustment to dividends due to the conversion of preferred stock upon the Merger. |
|
|
|
|
k) |
Reflects
weighted average shares of Common Stock after the impact of the Transactions and the subsequent events described in Note 2. Shares
of Common Stock issuable upon conversion of Series D Preferred Stock, Series E Preferred Stock, Series A Warrants, Series B Warrants
(other than those exercised as described in Note 2), options, warrants and restricted stock units were excluded in the calculation
of diluted net earnings per share as inclusion would have been anti-dilutive. 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 O’Neill Trust Series D B Warrant exercise | |
| 2,000,000 | | |
| 2,000,000 | |
| |
| | | |
| | |
Weighted average shares of Common Stock outstanding, basic and diluted (Pro Forma) | |
| 8,696,258 | | |
| 8,559,252 | |
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