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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-30 · 124 added, 100 removed, 236 unchanged (49% of the section changed)

19 unchanged sentences

Recent Developments

Merger with Fury Resources.

On December 14, 2023, we entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) with Fury Resources, Inc., a Delaware corporation (“Parent”) and San Jacinto Merger Sub, Inc.

(“Merger Sub”), a Delaware corporation and a direct, wholly owned subsidiary of Parent.

The Merger Agreement provides, that upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into us (the “Merger”), with us surviving as a wholly owned subsidiary of Parent.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger, each of our issued and outstanding shares of Common Stock, par value $0.0001 per share (“Common Stock”) shall be converted into the right to receive $9.80 in cash, without interest, which represents a total transaction value of approximately $450.

million (the “Merger Consideration”), and such shares shall otherwise cease to be outstanding, shall automatically be canceled and retired and cease to exist;

and each outstanding share of redeemable convertible preferred

stock will be contributed to Parent in exchange for new preferred shares of Parent, or sold to Parent for cash, in each case at valuation based on the conversion or redemption value of such preferred stock.

If the Merger is consummated, our shares of Common Stock will no longer trade on the NYSE American and will be deregistered under the Securities Exchange Act of 1934, as amended.

As a result, we will become a private company.

On January 24, 2024, Parent and we agreed to cause an amount equal to $10.0 million to be distributed from the escrow account to the Company.

Conditions to Closing

The obligations of us, Parent and Merger Sub to consummate the Merger are subject to the satisfaction or waiver of certain customary closing conditions, including, among other things:

(a) the absence of any law or order of any Governmental Authority having jurisdiction over a party to the Merger Agreement prohibiting or making illegal the consummation of the Merger, and (b) the adoption of the Merger Agreement by a majority vote of the issued and outstanding shares of Company Common Stock.

We have incurred approximately $3.2 million as of March 20, 2024, and will continue to incur significant costs and expenses, including fees for professional services and other transaction costs, in connection with the Merger.

Preferred Stock Equity Issuance.

On March 28, 2023, we sold, in a private placement, an aggregate of 25,000 shares of Series A Convertible Preferred Stock (the “preferred stock”) to certain funds managed by Luminus Management, LLC, Oaktree Capital Management, LP, and LSP Investment Advisors, LLC, who represent our largest three existing shareholders.

We received $24,375,000 in proceeds, net of $625,000 in original issue discount.

The issuance of preferred stock was approved by our board of directors upon recommendation by a special committee of disinterested directors that was established to evaluate the proposed terms of the preferred stock.

Holders will have no voting rights with respect to the shares of preferred stock.

The preferred stock will receive annual dividends, paid either in cash at a fixed rate of 14.5% annually or accrued (“PIK accrual”) at a fixed rate of 16.0% annually at the option of the Company.

Currently, the Company’s Amended Term Loan Agreement prohibits the payment of cash dividends.

PIK dividends will be cumulative, compound and accrue quarterly in arrears and will be added to the Liquidation Preference.

During the third quarter of 2023, we obtained an additional support letter from the Investors to purchase additional preferred equity securities in an amount up to $55.0 million over the next 12 months and an aggregate of 35,000 shares of preferred stock were sold on December 15, 2023 under such support letter to the Investors for proceeds of $34.1 million, net of $0.9 million of original issue discount.

At December 31, 2023, $20.0 million remained available for issuance under the support letter from the Investors.

The issuances of preferred stock were approved by our board of directors upon recommendation by a special committee of disinterested directors that was established to evaluate the proposed terms of the preferred stock.

On March 27, 2024, we sold, in a private placement, the remaining 20,000 shares under the support letter to the Investors for proceeds of $19.5 million, net of $0.5 million of original issue discount.

Holders have no voting rights with respect to the shares of preferred stock.

The preferred stock receives annual dividends, paid either in cash at a fixed rate of 14.5% annually or accrued at a fixed rate of 16.0% annually (“PIK accrual”) at our option.

Currently, our Amended Term Loan Agreement prohibits the payment of cash dividends.

Paid-in-kind (“PIK”) dividends are cumulative, compound and accrue quarterly in arrears and are added to the Liquidation Preference.

Shares of preferred stock will be convertible, subject to conversion ratios and prices stipulated in the agreement, at any time by the holders and by Battalion after meeting certain other agreement requirements.

Battalion will also have the right to redeem the preferred stock in cash at an amount equal to between 100-120% of the Liquidation Preference

($1,000 per share, or $25.0 million, increased for any PIK accruals) determined according to the redemption date.

Battalion will also have the right to redeem the preferred stock in cash at an amount equal to between 100-120% of the Liquidation Preference ($1,000 per share, increased for any PIK accruals) determined according to the redemption date.

Additionally, in the event of a change of control, holders have the right to receive, (i) at any time on or prior to 150 days following the closing date, and at the election of the Company, a cash payment equal to the Liquidation Preference or equity consideration equal to the 107.5% of the Liquidation Preference, or (ii) at any time after 150 days following the closing date, a cash payment equal to between 100-120% of the Liquidation Preference determined by the redemption date or conversion into common stock.

Until (i) a termination of or certain amendments to the Amended Term Loan Agreement or (ii) one year past the maturity date of the Amended Term Loan Agreement, an election of the cash payment option by holders in a change of control scenario is not permitted.

For additional information, see Item 9B.

Other Information.

For additional information, see Item 8.

Consolidated Financial Statements and Supplementary Date – Note 11, Redeemable Convertible Preferred Stock.

H2S Treating Joint Venture.

In May 2022, we entered into a joint venture agreement with Caracara Services, LLC (“Caracara”) to develop a strategic acid gas treatment and carbon sequestration facility (the “Facility”) in Winkler County, Texas.

The joint venture, operating as Brazos Amine Treater, LLC (“BAT”), has also entered into a Gas Treating Agreement (“GTA”) with us for gas production from our Monument Draw area.

In exchange for contributing to the joint venture a wellbore with an approved permit for the injection of acid gas and surface land , we retained a 5% equity interest in BAT, an unconsolidated subsidiary.

Caracara provided all necessary capital for the construction of the Facility, which is expected to have an initial capacity of approximately 30 MMcf per day, and a design capacity to treat up to 10% combined concentrations for H2S and CO2.

We expect the AGI facility will be mechanically complete in early April 2023 and expect the facility to be in service in the second quarter of 2023.

In May 2022, we entered into a joint venture agreement with Caracara to develop the Facility in Winkler County, Texas.

The joint venture, operating as WAT, also entered into a GTA with us for natural gas production from our Monument Draw area.

In exchange for contributing to the joint venture a wellbore with an approved

permit for the injection of acid gas and surface land , we retained a 5% equity interest in WAT, an unconsolidated subsidiary.

Caracara provided the initial capital for the construction of the Facility, which is expected to have an initial capacity of approximately 30 MMcf per day, and a design capacity to treat up to 10% combined concentrations for H2S and CO2.

We initially expected the AGI facility to be mechanically complete in early April 2023 and the facility to be in service in the second quarter of 2023.

However, d uring commissioning and initial operations, it was determined that additional pressure was required to initiate gas injection.

To correct this issue, a positive displacement pump was ordered and installed.

The Facility’s injection well also experienced pressure communication between the tubing and annular space after an injection procedure.

We commenced workover operations to remediate this issue.

During the third quarter of 2023, additional complications were encountered with the workover operation at the Facility causing higher than expected costs.

To fund this workover operation, we advanced capital contributions totaling approximately $15.1 million during the year ended December 31, 2023 on behalf of our joint venture partner in WAT.

Pursuant to the terms of the agreement governing the joint venture, we believe we have multiple remedies to recover such advance, including (1) declaring such payment a loan, which pursuant to the agreement would have an interest rate of the lesser of 15% or the maximum rate permitted by law, (2) recoupment from distributions from the joint venture and (3) reallocation of equity of the joint venture based on the relative level of total capital contributions by the parties after taking into account the advance.

We advanced additional capital contributions on behalf of our joint venture partner during the first quarter of 2024 of approximately $3.0 million to fund WAT with the necessary capital required to complete the sidetrack of the AGI well.

All well work is currently complete, and our current forecast assumes the AGI facility will be processing 20,000 Mcf of natural gas per day in the second quarter of 2024.

It is possible that the existing remedial facility work by WAT could extend past this estimate.

Any delays in commissioning past the first quarter of 2024 will result in higher processing fees than currently forecasted until such time the Facility comes online.

Under the GTA, we will pay a treating rate that varies based on volumes delivered to the Facility for a term that will last 20 years from the in-service date of the Facility and have a minimum volume commitment of 20 MMcf per day, with certain rollover rights and start-up flexibility, for an initial term of five years from the in service date of the Facility, which can be extended up to seven years under certain conditions.

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Capital Resources and Liquidity

Our ability to execute our operating strategy is dependent on our ability to maintain adequate liquidity and access additional capital, as needed.

Our future capital resources and liquidity depend, in part, on our success in developing our leasehold interests, growing our reserves and production and finding additional reserves.

Sufficient levels of available cash are required to fund capital expenditures necessary to offset inherent declines in our production and proven reserves.

As of December 31, 2022, we had $32.7 million of cash and cash equivalents, and no additional borrowing capacity under the Amended Term Loan.

On March 28, 2023, we received approximately $24.4 million in additional cash proceeds upon the issuance of 25,000 shares of preferred stock as described above.

Our Amended Term Loan Agreement contains certain restrictive covenants (namely our Current Ratio covenant) as well as a mandatory repayment schedule ($5 million due March 31, 2023 and $10 million due at the end of each succeeding quarter in 2023 and in the aggregate, $120.0 million due from the fiscal quarter ending March 31, 2023 through the fiscal quarter ending September 30, 2025).

In November 2022, we were required to seek an amendment to our Term Loan to alleviate Current Ratio covenant compliance requirements through the first quarter of 2023 as a result of reduced commodity prices, higher interest rates, and the high capital costs experienced in our 2022 drilling program, which are by nature difficult to predict and subject to factors outside the Company’s control.

In December of 2022 and January of 2023, commodity prices, cost conditions and interest rates continued to deteriorate, which further constrained our liquidity.

As a result, we projected near-term future covenant (Current Ratio) breaches beginning with the first quarter of 2023 coupled with inadequate liquidity resources available to fully fund all of our collective upcoming obligations, including debt repayments and interest, capital expenditures and operating costs.

In the absence of obtaining additional liquidity from other sources prior to March 2023, we obtained $24.4 million of additional preferred equity funding as noted above.

We believe our forecasted cash flows from operations, cash on hand (including $24.4 million from our March 2023 preferred stock issuance) and our hedging program provide us with sufficient liquidity to address our near-term debt

maturities of approximately $45.0 million through the first quarter of 2024, maintain compliance with our debt covenants, address concerns around future covenant compliance, and meet our drilling requirements under our leases.

However, without additional future capital funding, our liquidity may continue to be constrained and will not provide for growth in our drilling program or maintenance or growth in production volumes.

As of December 31, 2023, we had $57.5 million of cash and cash equivalents, no additional borrowing capacity under our Amended Term Loan Agreement (in Item 8.

Consolidated Financial Statements and Supplementary Date – Note 6, Debt ) and a total of $50.0 million in debt repayments due under our Amended Term Loan Agreement through December 2024.

At December 31, 2023, $20.0 million remained available for issuance under the support letter from the Investors.

Our Amended Term Loan Agreement contains certain restrictive covenants (namely our Current Ratio covenant) as well as a mandatory repayment schedule.

We are required to make scheduled payments in the aggregate amount of $85.0 million from the fiscal quarter ending March 31, 2024 through the fiscal quarter ending September 30, 2025 with $10.0 million due at the end of the first quarter of 2024, $12.5 million due at the end of each of the second and third quarters of 2024, $15.0 million due at the end of the fourth quarter of 2024 and the first quarter of 2025, and $10.0 million due at the end of each of the second and third quarters of 2025.

We will be required to make a final payment of $115.0 million at maturity on November 24, 2025.

In November 2022, we were required to seek an amendment to our Term Loan Agreement (as defined in Item 8.

Consolidated Financial Statements and Supplementary Date – Note 6, Debt) to alleviate Current Ratio covenant

compliance requirements through the first quarter of 2023 as a result of reduced commodity prices, higher interest rates, and the high capital costs experienced in our 2022 drilling program, which are by nature difficult to predict and subject to factors outside the Company’s control.

In the first quarter of 2023, commodity prices, cost conditions and interest rates continued to deteriorate, which further constrained our liquidity.

As a result, we projected near-term future covenant breaches (specifically the Current Ratio) beginning with the first quarter of 2023, coupled with inadequate liquidity resources available to fully fund all of our upcoming obligations, including debt repayments and interest, capital expenditures and operating costs.

In the absence of additional liquidity from other sources with agreeable economic terms, we obtained $95.6 million preferred equity funding from our three largest existing stockholders during 2023.

We have continued to execute on a plan to reduce operating and capital costs to improve cash flow, including a reduction in headcount in April 2023 to align with planned drilling activity and the issuance of preferred stock totaling $95.6 million during 2023.

On March 27, 2024, we completed the sale of the additional $19.5 million of available preferred equity securities under the support letter from the Investors received in November 2023.

Management believes that based upon its operational forecasts, cash and cash equivalents on hand, including the $10.0 million Initial Deposit Amount under the Merger Agreement, the March 2024 sale of $19.5 million in additional preferred equity and continued cost reduction measures, it is probable that we will have sufficient liquidity to fund our operations, meet our debt requirements and maintain compliance with our future debt covenants as described in Item 8.

Consolidated Financial Statements and Supplementary Date – Note 6, Debt for the next 12 months from the issuance of these consolidated financial statements.

We will, however, continue to pursue alternative liquidity sources which could include entering into other financing arrangements (e.g.

future equity raises), a sale of a portion of our non-core assets, seeking capital partners for our drilling program, pursuing strategic merger opportunities or joint ventures, the sale of the Company, or pursuing additional general and administrative or other cost reduction opportunities.

Our estimates and forecasts are based upon assumptions that may prove to be incorrect due to many factors that are currently unknown, such as prevailing economic conditions, many of which are beyond our control.

In the event the assumptions underlying our estimates and forecasts prove to be incorrect, our operating plans, capital requirements, and covenant compliance may be adversely impacted.

In the event our cash flows are materially less than anticipated or our costs are materially greater than anticipated and other sources of capital we historically have utilized are not available on acceptable terms, we may be required to curtail drilling, development, land acquisitions and other activities to reduce our capital spending.

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We continuously monitor changes in market conditions and will continue to adapt our operational plans as necessary to strive to maintain sufficient liquidity, facilitate drilling on our undeveloped acreage position and permit us to selectively expand our acreage, as well as meet our debt obligations and restrictive covenants.

The Company has been, and continues to, explore strategic transactions to address these concerns, while also looking at opportunities to significantly reduce expenses in the near term.

In this regard, the Company has considered whether it is advisable to continue to bear the ongoing costs of the listing of its common stock on the NYSE American and of being a reporting Company under the Securities Exchange Act of 1934.

The Company believes that it currently qualifies to suspend these obligations should it elect to do so.

While such a determination has not yet been made, the Company expects that the cost savings, particularly over the longer term, would be significant.

Accordingly, the Company will continue to consider the matter while it simultaneously pursues strategic and financial alternatives that may render it unnecessary.

We have been, and continue to, explore strategic transactions to address these concerns, while also looking at opportunities to significantly reduce expenses in the near term.

In this regard, we have considered whether it is advisable to continue to bear the ongoing costs of the listing of our common stock on the NYSE American and of being a reporting Company under the Securities Exchange Act of 1934.

We believe that we currently qualify to suspend these obligations should we elect to do so.

While such a determination has not yet been made, we expect that the cost savings, particularly over the longer term, would be significant.

Accordingly, we will continue to consider the matter while we simultaneously pursue strategic and financial alternatives that may render it unnecessary.

We will continue to pursue additional liquidity sources which could include entering into other financing arrangements (e.g.

future equity raises), a sale of a portion of our non-core assets, pursuing strategic merger opportunities or joint ventures, further reducing our discretionary capital program, or pursuing other general and administrative or other cost reduction opportunities including aligning our workforce headcount with planned drilling activity.

future equity raises), a sale of a portion of our non-core assets, for example deep rights, pursuing strategic merger opportunities or joint ventures, further reducing our discretionary capital program, or pursuing other general and administrative or other cost reduction opportunities including aligning our workforce headcount with planned drilling activity.

However, there can be no assurance that, absent additional capital, reducing costs or other material favorable developments, the company will not experience liquidity and covenant compliance issues in the future.

Other Risks and Uncertainties.

Our ability to complete transactions and maintain or increase our liquidity is subject to a number of variables, including our level of oil and natural gas production, proved reserves and commodity prices, the amount and cost of our indebtedness, as well as various economic and market conditions that have historically affected the oil and natural gas industry.

affected the oil and natural gas industry.

Even if we are otherwise successful in growing our proved reserves and production, if oil and natural gas prices decline for a sustained period of time, our ability to fund our capital expenditures, complete acquisitions, reduce debt, meet our financial obligations and become profitable may be materially impacted.

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Lastly, actual or anticipated declines in domestic or foreign economic activity or growth rates, regional or worldwide increases in tariffs or other trade restrictions, turmoil affecting the U.S.

or global financial system and markets and a severe economic contraction either regionally or worldwide, resulting from international conflicts, efforts to contain the COVID-19 pandemic or other factors, could materially affect our business and financial condition and impact our ability to finance operations by worsening the actual or anticipated future drop in worldwide oil demand, negatively impacting the price received for oil and natural gas production or adversely impacting our ability to comply with covenants in our Amended Term Loan Agreement.

or global financial system and markets and a severe economic contraction either regionally or worldwide, resulting from international conflicts, efforts to contain pandemics or other factors, could materially affect our business and financial condition and impact our ability to finance operations by worsening the actual or anticipated future drop in worldwide oil demand, negatively impacting the price received for oil and natural gas production or adversely impacting our ability to comply with covenants in our Amended Term Loan Agreement.

Negative economic conditions could also adversely affect the collectability of our trade receivables or performance by our vendors and suppliers or cause our commodity hedging arrangements to be ineffective if our counterparties are unable to perform their obligations.

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During 2023, we spent approximately $46.6 million in capital expenditures, including drilling, completion, support infrastructure and other capital costs.

In 2022, we ran one operated rig in the Delaware Basin.

We drilled, completed, and brought online 9 gross (8.5 net) operated wells during the year.

We had one drilled well awaiting completion as of December 31, 2022.

During 2023, we ran one operated rig in the Delaware Basin.

We drilled and completed 2 gross (2 net) operated wells and put online 3 gross (3 net) operated wells during the year.

Debt Obligations .

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The Term Loan Agreement amended and restated in its entirety our previous revolving credit agreement entered into in 2019.

On November 14, 2022, the Company paid approximately $2.4 million and entered into a further Amended Credit Agreement (the “Amended Term Loan Agreement”) with its lenders which modified certain provisions of its original Term Loan Agreement including, but not limited to, the following:

● Current Ratio .

Our Current Ratio financial covenant decreased to 0.90 to 1.00 as of September 30, 2022, to 0.70 to 1.00 for the quarter ended December 31, 2022, and to 0.75 to 1.00 for the quarter ended March 31, 2023, returning to 1.00 to 1.00 for the quarter ended June 30, 2023 and for each fiscal quarter thereafter as further described below.

● Interest Rate.

We converted our benchmark interest rate from LIBOR to a Secured Overnight Financing Rate (SOFR) plus 0.15% and increased the applicable margin on borrowings by 0.50%, such that borrowings under the Amended Term Loan Agreement will now bear interest at a rate per annum equal to the SOFR benchmark rate plus 7.65%.

● Prepayment Premium.

We reset the prepayment periods (for outstanding borrowings) beginning on the amendment date with the following prepayment premiums, subject to the conditions described in the table and further discussion below:

Period (after amendment date)

On November 14, 2022, we paid approximately $2.4 million and entered into the Amended Term Loan Agreement with our lenders which modified certain provisions of our original Term Loan Agreement and includes the maintenance of the following ratios (as defined in the Amended Term Loan Agreement):

● Asset Coverage Ratio of not less than 1.80 to 1.00 as of December 31, 2023 and the last day of each fiscal quarter thereafter,

● Total Net Leverage Ratio of not greater than 2.50 to 1.00 as of December 31, 2023 and each fiscal quarter thereafter, and

● Current Ratio of not less than 1.00 to 1.00, determined as of the last day of any fiscal quarter period, as of December 31, 2023 and each fiscal quarter thereafter.

We may elect, at our option, to prepay any borrowing outstanding under the Amended Term Loan Agreement subject to the following prepayment premiums:

Period (after applicable borrowing date (1) )

Months 0 - 12

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Months 13 - 24

In the following scenarios, our prepayment premiums would differ from those noted in the table above:

(i) if within 6 months after the November 14, 2022 amendment date the Company raises a minimum of $20 million of new capital in the form of equity, equity-linked, preferred equity, or unsecured debt, in all cases bearing no cash dividend or cash interest, to bolster liquidity or repay debt, our prepayment premiums will reset to those in the original Term Loan Agreement or (ii) should a change of control result in prepayment within the second anniversary of the amendment date, a 2% payment premium will apply.

As of December 31, 2022, we had $235.0 million of indebtedness outstanding and approximately $1.4 million of letters of credit outstanding under the Amended Term Loan Agreement.

An additional $3.6 million is available for the issuance of letters of credit.

The maturity date of the Amended Term Loan Agreement is November 24, 2025.

Months 25 - 36

Months 37 - 48

(1) Applicable borrowing dates are November 2021 for the original $200.0 million borrowed and April and November 2022 for the $20.0 million and $15.0 million in delayed draw borrowings, respectively.

We may be required to make mandatory prepayments of the loans under the Amended Term Loan Agreement in connection with the incurrence of non-permitted debt, certain asset sales, and with cash on hand in excess of certain maximum levels beginning in 2023.

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Until December 31, 2024, the forecasted approved plan of development (“APOD”) capital expenditures for the succeeding fiscal quarter are excluded for purposes of determining the Consolidated Cash Balance.

We are required to make scheduled amortization payments in the aggregate amount of $120.0 million from the fiscal quarter ending March 31, 2023 through the fiscal quarter ending September 30, 2025.

Amounts outstanding under the Amended Term Loan Agreement are guaranteed by certain of the Borrower’s direct and indirect subsidiaries and secured

by a security interest in substantially all of the assets of the Borrower and such direct and indirect subsidiaries, and of the equity interests of the Borrower held by us.

As of December 31, 2023, the Consolidated Cash Balance, as defined in the Amended Term Loan Agreement, did not exceed $20.0 million when considering forecasted APOD capital expenditures and cash held in unrestricted subsidiaries;

therefore, no mandatory prepayment was necessary.

Our prepayment premiums would differ from those noted in the table above should a change of control result in prepayment within the second anniversary of the amendment date, as a 2% payment premium will apply.

As of December 31, 2023, we had $200.0 million of indebtedness outstanding and approximately $0.3 million of letters of credit outstanding under the Amended Term Loan Agreement.

We currently, as of March 25, 2024, have $4.7 million available for the issuance of letters of credit.

The maturity date of the Amended Term Loan Agreement is November 24, 2025.

We are required to make scheduled amortization payments in the aggregate amount of $85.0 million from the fiscal quarter ending March 31, 2024 through the fiscal quarter ending September 30, 2025 with $10.0 million due at the end of the first quarter of 2024, $12.5 million due at the end of each of the second and third quarters of 2024, $15.0 million due at the end of the fourth quarter of 2024 and the first quarter of 2025, and $10.0 million due at the end of each of the second and third quarters of 2025.

We will be required to make a final payment of $115.0 million at maturity on November 24, 2025.

Amounts outstanding under the Amended Term Loan Agreement are guaranteed by certain of the Borrower’s direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Borrower and such direct and indirect subsidiaries, and of the equity interests of the Borrower held by us.

As part of the Amended Term Loan Agreement there are certain restrictions on the transfer of assets, including cash, to Battalion from the guarantor subsidiaries.

The Amended Term Loan Agreement contains certain financial covenants (as defined), including maintenance of the following rations:

● an Asset Coverage Ratio of not less than 1.80 to 1.00 as of December 31, 2022 and each fiscal quarter thereafter;

● Total Net Leverage Ratio of not greater than 3.00 to 1.00 as of December 31, 2022, 2.75 to 1.00 as of March 31, 2023, and 2.50 to 1.00 as of each fiscal quarter thereafter;

● a Current Ratio of not less than 1.00 to 1.00, each determined as of the last day of any fiscal quarter period, other than as amended in November 2022 to 0.70 to 1.00 as of December 31, 2022, and to 0.75 to 1.00 as of March 31, 2023.

As of December 31, 2023, the Company was in compliance with the financial covenants under the Amended Term Loan Agreement.

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As a consequence, we endeavor to anticipate potential covenant compliance issues and work with our lenders to address any such issues ahead of time.

While we have largely been successful in obtaining modifications of our covenants as needed, as evidenced most recently by the amendment of our Term Loan Agreement in November 2022 which reduced the Current Ratio covenant as of September 30, 2022 and each successive quarter through the quarter ended March 31, 2023, there can be no assurance that we will be successful in the future.

While we have largely been successful in obtaining modifications of our covenants as needed, as evidenced most recently by the amendment of our Term Loan Agreement in November 2022 which reduced the Current Ratio covenant as of September 30, 2022 through March 31, 2023, there can be no assurance that we will be successful in the future.

In the event we are not successful in obtaining covenant modifications, if needed, there is no assurance that we will be successful in implementing alternatives that allow us to maintain compliance with our covenants or that we will be successful in obtaining alternative financing that provides us with the liquidity that we need to operate our business.

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For further information regarding these risks and uncertainties on us, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

Net increase (decrease) in cash, cash equivalents and restricted cash is summarized as follows (in thousands):

Net increase (decrease) in cash, cash equivalents and restricted cash is summarized as follows for the periods presented (in thousands):

Years Ended December 31,

Cash flows provided by (used in) operating activities

Cash flows provided by (used in) investing activities

Cash flows provided by (used in) financing activities

Cash flows provided by operating activities

Cash flows used in investing activities

Cash flows provided by financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

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Net cash flows provided by operating activities for the years ended December 31, 2023 and 2022 were $17.6 million and $78.8 million, respectively.

Items impacting operating cash flows were (i) higher total operating revenues resulting from an approximate $15.50 per Boe increase in average realized prices (excluding the impact of hedging arrangements) for the year ended December 31, 2022 compared to the year ended December 31, 2021 partially offset by realized losses from derivative contracts, (ii) increased operating and interest costs in 2022, and (iii) changes in working capital.

Items impacting the reduction in operating cash flows were (i) lower total operating revenues resulting from an approximate $20.00 per Boe decrease in average realized prices (excluding the impact of hedging arrangements) for the year ended December 31, 2023 compared to the year ended December 31, 2022, (ii) increased operating and interest costs in 2023, and (iii) changes in working capital.

Investing Activities.

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Net cash flows provided by financing activities for the years ended December 31, 2023 and 2022 were approximately $59.1 million and $31.8 million, respectively.

During the year ended December 31, 2023, we received $95.6 million in proceeds from the sales and issuance of preferred stock and we made $35.0 million of repayments under our Amended Term Loan Agreement.

During the year ended December 31, 2022, we borrowed the remaining $35.0 million available under the Amended Term Loan Agreement and paid approximately $2.9 million in deferred financing costs, including $2.4 million upon entering into the Amended Term Loan Agreement with its lenders in November 2022.

During the year ended December 31, 2021, we borrowed $200.0 million under the Term Loan Agreement and paid in cash $14.2 million in debt issuance costs associated with the loan.

A portion of the funds received from the Term Loan Agreement were used to refinance all amounts owed under the Senior Credit Agreement.

Critical Accounting Policies and Estimates

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Oil and Natural Gas Activities

Accounting for oil and natural gas activities is subject to unique rules.

Two generally accepted methods of accounting for oil and natural gas activities are available - successful efforts and full cost.

The most significant differences between these two methods are the treatment of unsuccessful exploration costs and the manner in which the carrying value of oil and natural gas properties are amortized and evaluated for impairment.

The successful efforts method requires unsuccessful exploration costs to be expensed as they are incurred upon a determination that the well is uneconomical while the full cost method provides for the capitalization of these costs.

Both methods generally provide for the periodic amortization of capitalized costs based on proved reserve quantities.

Impairment of oil and natural gas properties under the successful efforts method is based on an evaluation of the carrying value of individual oil and natural gas properties against their estimated fair value, while impairment under the full cost method requires an evaluation of the carrying value of oil and natural gas properties included in a cost center against the net present value of future cash flows from the related proved reserves, using the unweighted arithmetic average of the first day of the month for each of the 12-month prices for oil and natural gas within the period, holding prices and costs constant and applying a 10% discount rate.

Full Cost Method

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Changes in oil and natural gas prices, operating costs and expected performance from a given reservoir also will result in revisions to the amount of our estimated proved reserves.

Our estimated proved reserves for the years ended December 31, 2022, 2021 and 2020 were prepared by Netherland, Sewell, an independent oil and natural gas reservoir engineering consulting firm.

Our estimated proved reserves for the years ended December 31, 2023 and 2022 were prepared by NSAI, an independent oil and natural gas reservoir engineering consulting firm.

For more information regarding reserve estimation, including historical reserve revisions, refer to Item 8.

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Our rate of recording depletion expense is primarily dependent upon our estimate of proved reserves, which is utilized in our unit-of-production method calculation.

If the estimates of proved reserves were to be reduced, the rate at

which we record depletion expense would increase, reducing net income.

If the estimates of proved reserves were to be reduced, the rate at which we record depletion expense would increase, reducing net income.

Such a reduction in reserves may result from calculated lower market prices, which may make it non-economic to drill for and produce higher cost reserves.

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Accounting for Derivative Instruments and Hedging Activities

We account for our derivative activities under the provisions of ASC 815, Derivatives and Hedging (ASC 815).

We account for our derivative activities under the provisions of the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC” Topic 815, Derivatives and Hedging (“ASC 815”).

ASC 815 establishes accounting and reporting that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value.

From time to time, in accordance with our policy, we may hedge a portion of our forecasted oil and natural gas production.

From time to time, in accordance with our policy, we may hedge a portion of our

forecasted oil and natural gas production.

We elected to not designate any of our positions for hedge accounting.

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Based upon the evaluation of available evidence, a valuation allowance of $425.0 million has been applied against our deferred tax asset balance as of December 31, 2023.

ASC 740, Income Taxes (ASC 740) creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the financial statements.

ASC Topic 740, Income Taxes (“ASC 740”) creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the financial statements.

We apply significant judgment in evaluating our tax positions and estimating our provision for income taxes.

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

We reported net income (loss) of $17.7 million and ($28.3) million for the year ended December 31, 2022 and 2021, respectively.

The table included below sets forth financial information for the periods presented.

The table below set forth financial information for the periods presented.

In thousands (except per unit and per Boe amounts)

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Interest expense and other

Gain (loss) on extinguishment of debt

Net income (loss)

Net (loss) income

Crude oil – MBbls

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Oil, natural gas and natural gas liquids revenues were $218.5 million and $357.4 million for the years ended December 31, 2023 and 2022, respectively.

The increase in revenue is primarily attributable to an approximately $91.8 million increase in average realized prices partially offset by approximately $18.6 million attributable to slightly lower production volumes in 2022 compared to 2021.

Average realized prices (excluding the effects of hedging arrangements) increased approximately $15.50 per Boe for the year ended December 31, 2022 when compared with the same period in 2021.

The decrease of $138.9 million in revenue is primarily attributable to a decrease in average realized prices and lower production volumes in 2023 compared to 2022.

The decrease is comprised of $38.3 million due to lower production volumes and $100.6 million due to lower average realized prices.

The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, transportation take-away capacity constraints, inventory storage levels, quality of production, basis differentials and other factors.

Production for the years ended December 31, 2023 and 2022 averaged 13,784 Boe/d and 15,438 Boe/d, respectively.

While production is lower in 2022 compared with 2021 in total due largely to the timing of capital expenditures spent to bring new wells online and natural production declines on our existing producing wells, our production has increased from 14,767 Boe/d in the first quarter of 2022 to 15,696 Boe/d and 15,438 Boe/d for the quarter and year ended December 31, 2022, respectively.

We have put online 9 gross (8.5 net) operated wells in 2022.

Also impacting 2021 production volumes was temporarily shut-in production due to inclement weather which decreased average daily production by approximately 300 Boe/d for the year ended December 31, 2021.

Production is lower in 2023 compared with 2022 in total due largely to the timing of capital expenditures spent to bring new wells online and natural production declines on our existing producing wells.

In 2023, we have put online 3 gross (3 net) operated wells while in 2022 we put online 9 gross (8.5 net) operated wells.

In addition, 2 of the 3 operated wells we put online in 2023 were put online at the end of December.

As such, these wells had minimal impact on 2023 productions.

Also impacting 2023 production volumes was curtailment in Monument Draw in the second half of the year due to downstream throughput limitations.

Lease Operating Expenses .

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On a per unit basis, lease operating expenses were $8.92 per Boe and $8.54 per Boe for the years ended December 31, 2023 and 2022, respectively.

The increase in lease operating expenses in 2022 results primarily from an inflationary market increase in maintenance, power, and chemical costs.

The decrease in lease operating expenses in 2023 results primarily from lower production in 2023 compared to 2022 while the increase year over year in lease operating expenses on a per unit basis is primarily a result of an inflationary market increase in maintenance, power, and chemical costs.

Workover and Other Expenses .

Workover and other expenses were $6.7 million and $3.2 million for the year ended December 31, 2022 and 2021, respectively.

Workover and other expenses were $7.2 million and $6.7 million for the years ended December 31, 2023 and 2022, respectively.

On a per unit basis, workover and other expenses were $1.42 per Boe and $1.19 per Boe for the year ended December 31, 2023 and 2022, respectively.

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Gathering and Other Expenses.

Gathering and other expenses were $64.1 million ($11.38 per Boe) and $60.4 million ($10.19 per Boe) for the year ended December 31, 2022 and 2021, respectively.

Gathering and other expenses were $63.6 million ($12.64 per Boe) and $64.1 million ($11.38 per Boe) for the years ended December 31, 2023 and 2022, respectively.

Our gathering and other expenses are primarily driven by the amount and location of natural gas production, the concentration of H2S in our sour gas produced, and the amounts paid to treat our sour gas volumes, either through our own hydrogen sulfide treating plant or through third parties.

For the year ended December 31, 2022, overall natural gas production volumes were relatively flat compared to 2021;

however, increased production of sour natural gas in our Monument Draw area in 2022 requiring H2S treatment contributed to higher gathering and other expenses compared to 2021.

For the year ended December 31, 2023, overall natural gas production volumes slightly decreased compared to 2022;

however, a higher concentration of sour natural gas in our Monument Draw area requiring H2S treatment in 2023 contributed to higher gathering and other expenses on a per unit basis compared to 2022.

General and Administrative Expense .

General and administrative expense was $20.1 million and $15.4 million for the years ended December 31, 2023 and 2022, respectively.

The increase in general and administrative expense for 2022 is primarily associated with an increase in professional fees partially offset by a decrease in corporate office lease expense.

The increase in general and administrative expense for 2023 is primarily associated with an increase in professional fees and nonrecurring costs related to the merger partially offset by a decrease in payroll and employee benefits.

On a per unit basis, general and administrative expense were $3.99 per Boe and $2.74 per Boe for the years ended December 31, 2023 and 2022, respectively.

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The increase in our depletion rate for the year ended December 31, 2023

compared to 2021 is primarily due to increased future development costs associated with proved reserve additions relative to the change in proved reserves when comparing 2022 to 2021 .

compared to 2022 is primarily due to decreased proved reserves relative to the change in future development costs associated with those proved reserves when comparing 2023 to 2022 .

Net gain (loss) on derivative contracts .

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Accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in the consolidated statements of operations.

We recorded a net derivative gain of $12.7 million ($21.9 million net gain on unsettled contracts and $9.2 million net loss on settled contracts) for the year ended December 31, 2023.

We recorded a net derivative loss of $110.0 million ($20.3 million net gain on unsettled contracts and $130.3 million net loss on settled contracts) for the year ended December 31, 2022.

We recorded a net derivative loss of $125.6 million ($47.7 million net loss on unsettled contracts and $77.9 million net loss on settled contracts) for the year ended December 31, 2021.

At December 31, 2023, we had a $13.9 million derivative asset, $9.0 million of which was classified as current, and we had a $33.3 million derivative liability, $17.2 million of which was classified as current.

1 unchanged sentence

Interest expense and other was $33.3 million and $23.6 million for the years ended December 31, 2023 and 2022, respectively.

Interest expense and other increased in the current year due primarily to increased interest rates, higher debt balances in 2022, and amortization/accretion of financing related costs associated with our Term Loan Agreement entered into in November 2021 and further amended in November 2022.

Interest expense and other increased in the current year due primarily to increased interest rates and amortization/accretion of financing related costs associated with our amendment to the Amended Term Loan Agreement entered into in November 2022.

Our weighted average interest rate for the year ended December 31, 2023, was approximately 12.68%.

For the first quarter of 2024, we anticipate our interest rate will be 12.99% on outstanding borrowings.

Gain (Loss) on Extinguishment of Debt .

During the year ended December 31, 2021, we recorded a gain on the extinguishment of the forgiven portion of the Paycheck Protection Program (PPP) Loan and related accrued interest of $2.1 million.

We applied for forgiveness of the amount due on the PPP Loan based on the use of the loan proceeds on eligible expenses in accordance with the terms of the CARES Act.

Effective August 13, 2021, the principal amount of our PPP Loan was reduced from $2.2 million to $0.2 million by the Small Business Administration.

During the first quarter of 2022, the $0.2 million principal amount of the PPP loan was repaid in full.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis