What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-31 compared with 2024-04-01 · 144 added, 126 removed, 234 unchanged (54% of the section changed)

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For more information, see “ Special note regarding forward-looking statements .”

We are an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States.

During 2017, we acquired certain properties in the Delaware Basin and divested our assets located in the Williston Basin in North Dakota and in the El Halcón area of East Texas.

As a result, our properties and drilling activities are currently focused in the Delaware Basin, where we have an extensive drilling inventory that we believe offers attractive economics.

We are an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States (“U.S.”).

Our properties and drilling activities are currently focused in the Delaware Basin of West Texas, where we have an extensive drilling inventory that we believe offers attractive economics.

Our financial results depend upon many factors but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production.

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Recent Developments

Term Loan Credit Facility

On December 26, 2024, we and our wholly-owned subsidiary Halcón Holdings, LLC entered into the 2024 Term Loan Agreement with Fortress Credit Corp., as administrative agent, and certain other financial institutions party thereto, as lenders.

Pursuant to the 2024 Term Loan Agreement, the lenders agreed to provide us with (i) an initial term loan facility in the aggregate principal amount of $162.0 million, funded on December 26, 2024 and (ii) an incremental term loan facility in the aggregate principal amount of up to $63.0 million, of which such incremental borrowings in the amount of $63.0 million were incurred on January 9, 2025 pursuant to the First Amendment to our 2024 Term Loan Agreement.

The 2024 Amended Term Loan Agreement matures on December 26, 2028.

All obligations under the 2021 Amended Term Loan Agreement were refunded, refinanced and repaid in full by the loans under the 2024 Term Loan Agreement as the net proceeds of the 2024 Term Loan Agreement were used to repay all outstanding indebtedness under the 2021 Amended Term Loan Agreement in an aggregate amount of approximately $152.1 million, including accrued and unpaid interest, and to pay related fees and expenses related to the new credit agreement.

Borrowings under the 2024 Amended Term Loan Agreement bear interest at a rate per annum equal to a forward-looking term rate based on the SOFR for a tenor of three months (with a credit spread adjustment of 0.15% per annum) (or another applicable reference rate, as determined pursuant to the terms of the 2024 Amended Term Loan Agreement) plus an applicable margin of 7.75%.

The 2024 Amended Term Loan agreement contains certain financial covenants (as defined in the 2024 Term Loan Agreement), including maintenance of the following ratios.

● Asset Coverage Ratio not to fall below 1.70x as of March 31, 2025 through and including June 30, 2025, 1.85x as of September 30, 2025 through and including December 31, 2025 and 2.00x for each fiscal quarter thereafter, determined as of the last day of each fiscal quarter;

● Total Net Leverage Ratio not to exceed 2.75x as of March 31, 2025 through and including June 30, 2025 and 2.50x for each fiscal quarter thereafter, determined as of the last day of each fiscal quarter;

● Current Ratio not to fall below 1.00x, determined on the last day of each calendar month commencing with the calendar month ending March 31, 2025;

● Liquidity not to fall below the greater of (x) $10,000,000 and (y) the amount equal to the scheduled principal and interest payments for the immediately succeeding three-month period, determined as of the last day of any fiscal quarter.

Under the 2024 Amended Term Loan Agreement, we are required to hedge approximately 85% to 50% of our anticipated oil and natural gas production, in varying percentages by year, on a rolling basis for the next four years.

The 2024 Amended Term Loan Agreement also contains certain events of default, including non-payment;

breaches of representations and warranties;

non-compliance with covenants or other agreements;

cross-default to material indebtedness;

change of control;

and voluntary and involuntary bankruptcy.

We are required to make scheduled quarterly amortization payments in an aggregate principal amount equal to 2.50% of the aggregate principal amount of the loans outstanding on the Initial Closing Date, and subsequently on the amount of the loans outstanding on the Initial Closing Date plus the Incremental Term Loans, commencing with the fiscal quarter ending June 30, 2025.

Under the 2024 Amended Term Loan Agreement, we must make scheduled amortization payments in the aggregate amount of $16.9 million in 2025 and $22.5 million in 2026.

For the year ended December 31, 2024, we recognized a loss on extinguishment of debt in the amount of $7.5 million resulting from the credit agreement refinancing on December 26, 2024 which includes a $3.6 million non-cash write-off of deferred financing costs, original issue discounts and embedded derivatives associated with the extinguished debt and $3.9 million in fees and debt issuance costs paid for the new debt.

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 December 14, 2023, we entered into the Merger Agreement with Parent and Merger Sub, a Delaware corporation and a direct, wholly owned subsidiary of Parent.

The Merger Agreement provided, that upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub would merge with and into us, 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”) were to be converted into the right to receive cash, without interest, and such shares would cease to be outstanding, would automatically be canceled and retired and cease to exist;

and each outstanding share of redeemable convertible preferred stock would 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 was consummated, our shares of Common Stock would no longer trade on the NYSE American and would be deregistered under the Securities Exchange Act of 1934, as amended.

As a result, we would have 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.

The distribution was initially recorded as a deposit liability in “Other” long-term liabilities on the consolidated balance sheet.

Upon termination of the Merger, the $10.0 million was recognized as “Other income” on the consolidated statement of operations for the year ended December 31, 2024.

Subsequent to several amendments to the Merger Agreement and upon failure of Parent to meet the funding and closing requirements of the Merger Agreement, we terminated the Merger Agreement on December 20, 2024.

We incurred approximately $5.5 million as of December 31, 2024, in costs and expenses, including fees for professional services and other transaction costs, in connection with the terminated Merger.

Preferred Stock Equity Issuance

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.

During the third quarter of 2023, we obtained a 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.

On March 27, 2024, we sold, in a private placement, the remaining 20,000 shares of preferred stock under the commitment letter received during the third quarter of 2023 to certain funds managed by Luminus Management, LLC, Oaktree Capital Management, LP, and LSP Investment Advisors, LLC, who represent our largest three existing stockholders (the “Investors”).

We received $19.5 million in proceeds, net of $0.5 million in original issue discount.

On May 13, 2024, we sold, in a private placement, an aggregate of 20,000 shares of preferred stock to the Investors for $19.5 million in proceeds, net of $0.5 million in original issue discount, and such proceeds were used to make a $17.3 million prepayment of outstanding borrowings under the 2021 Amended Term Loan Agreement to cure noncompliance of the Total Net Leverage Ratio as of March 31, 2024.

During the third quarter of 2024, we obtained support letters from the Investors to purchase up to $30.0 million of additional preferred equity securities on or before August 29, 2025 and all remain undrawn.

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.

For a further discussion of the redemption and conversion provisions associated with the preferred stock 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.

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

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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.

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.

Consistent with the terms of the 2021 Amended Term Loan Agreement, an election of the cash payment option by holders in a change of control scenario is not permitted until (i) a termination of or certain amendments to the 2024 Amended Term Loan Agreement or (ii) one year past the maturity date of the 2024 Amended Term Loan Agreement.

For additional information, see Item 8.

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H 2 S Treating Joint Venture

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

In May 2022, we entered into a joint venture agreement with Caracara to develop the AGI 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.

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 H 2 S and CO 2 .

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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.

The AGI 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.

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

To fund this workover operation, we advanced capital contributions totaling approximately $18.5 million to date as of September 30, 2024 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.

Once in service, the GTA has a tiered-rate structure which is expected to drive a greater than 50 percent reduction in treating fees.

Our current estimates of facility in-service dates and future treating fee reductions are subject to various operational and other risk factors, some of which are beyond our control, which could impact the timing and extent of these estimates.

Pursuant to such, we initially recorded the advanced amount as a contract asset.

During the fourth quarter of 2024, Caracara delivered a demand notice disputing our claims, indicating that the carrying value of the contract asset may not be recoverable and as a result, we recognized $18.5 million of impairment of charges to reduce the carrying value of the contract asset to zero at December 31, 2024.

The AGI Facility has been processing gas since March 9, 2024 and continues to process gas currently.

In addition to general facility downtime, the AGI Facility has experienced interruption in processing due to the completion of improvement and maintenance projects, including pump and other facility equipment replacement.

The continued processing delays and interruptions in 2024 have resulted in higher processing fees than forecasted as we pay higher processing rates with other service providers.

Under the GTA, we pay a treating rate that varies based on volumes delivered to the AGI Facility and have a minimum volume commitment of 20 MMcf per day.

The GTA has a tiered-rate structure based on actual volumes delivered.

Our current estimates of future treating fee reductions are subject to various operational and other risk factors, some of which are beyond our control, which could impact the timing and extent of these estimates.

Capital Resources and Liquidity

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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, 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.

We generated a net loss of $64.1 million for the year ended December 31, 2024 and had negative working capital of $23.6 million as of December 31, 2024.

As of December 31, 2024, we had $19.7 million of cash and cash equivalents, $63.0 million of Incremental Term Loans borrowing capacity remaining under our 2024 Amended

Term Loan Agreement (see Item 8.

Consolidated Financial Statements and Supplementary Date – Note 7, Debt ) and a total of $12.2 million in debt repayments due under our 2024 Term Loan Agreement through December 2025.

During January 2025, in conjunction with the entry into the Incremental Term Loans, the required repayments under our 2024 Amended Term Loan Agreement increased to a total of $16.9 million due through December 31, 2025.

At December 31, 2024, $30.0 million remained available for issuance on or before August 29, 2025 under a support letter from the Investors.

Our 2024 Amended Term Loan Agreement contains certain restrictive covenants as well as a mandatory repayment schedule.

We are required to make scheduled quarterly amortization payments in an aggregate principal amount equal to 2.50% of the aggregate principal amount of the loans outstanding commencing with the fiscal quarter ending June 30, 2025.

We continued to execute on a plan to reduce operating and capital costs to improve cash flow, including the issuance of preferred stock totaling $134.6 million during the years ended December 31, 2024 and 2023 and entry into our 2024 Amended Term Loan Agreement.

We believe that, based upon our operational forecasts, cash and cash equivalents on hand and 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 7, 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.

We will, however, continue to consider 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.

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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, 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.

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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During 2024, 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.

We drilled and cased 4.0 gross (3.95 net) operated wells, completed 4.0 gross (3.95 net), and put online 4.0 gross (3.88 net) operated wells during the year.

Debt Obligations .

On November 24, 2021, we and our wholly owned subsidiary, Halcón Holdings, LLC (‘ Borrower’ ), entered into a Term Loan Agreement with Macquarie Bank Limited, as administrative agent, and certain other financial institutions party thereto, as lenders.

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

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) )

On December 26, 2024 (the “Initial Closing Date”), we and our wholly-owned subsidiary Halcón Holdings, LLC (the “Borrower”), entered into the 2024 Term Loan Agreement.

Pursuant to the 2024 Term Loan Agreement, the lenders party thereto agreed to provide the Borrower with (i) an initial term loan facility in the aggregate principal amount of $162.0 million, funded on December 26, 2024 and (ii) an incremental term loan facility in the aggregate principal amount of up to $63.0 million to be made available to the Borrower from January 3, 2025 until the date that is the earliest to occur of (x) the date on which such incremental term facility is fully drawn, (y) the date on which such incremental term facility is terminated and (z) January 11, 2025, subject to the satisfaction of certain conditions.

On January 9, 2025, the Borrower entered into the First Amendment to its 2024 Term Loan Agreement.

Pursuant to the First Amendment, the Borrower incurred $63.0 million of Incremental Term Loans.

The maturity date of the 2024 Amended Term Loan Agreement is December 26, 2028.

Borrowings under the 2024 Amended Term Loan Agreement bear interest at a rate per annum equal to a forward-looking term rate based on SOFR for a tenor of three months (with a credit spread adjustment of 0.15% per annum) (or another applicable reference rate, as determined pursuant to the terms of the 2024 Amended Term Loan Agreement) plus an applicable margin of 7.75%.

We may elect, at our option, to prepay any borrowing outstanding under the 2024 Amended Term Loan Agreement.

Such voluntary prepayments, certain mandatory prepayments and change of control prepayments are subject to the following prepayment premium, as applicable:

Months 0 - 12

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Months 13 - 30

Months 25 - 36

In the event we shall receive a disapproval notice (as defined in the 2024 Term Loan Agreement) from the required lenders under the 2024 Amended Term Loan Agreement rejecting or otherwise disqualifying a proposed buyer in connection with a permitted change in control thereunder to be consummated within 12 months following the Initial Closing Date, such voluntary prepayments, certain mandatory prepayments and change of control prepayments are subject to the following prepayment premium, as applicable:

Make-whole amount equal to 9 months of interest plus 2.00%

Months 10 - 30

(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.

For each fiscal quarter after January 1, 2023, we are required to make mandatory prepayments when the Consolidated Cash Balance, as defined in the Amended Term Loan Agreement, exceeds $20.0 million.

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.

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.

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

The Amended Term Loan Agreement also contains an APOD for our Monument Draw acreage through the drilling and completion of certain wells.

The Term Loan Agreement contains a proved developed producing production test and an APOD economic test which we must maintain compliance with;

otherwise, subject to any available remedies or waivers, we are required to immediately cease making expenditures in respect of the approved plan of development other than any expenditures deemed necessary by us in respect of no more than six additional approved plan of development wells.

We may be required to make mandatory prepayments of the loans under the 2024 Amended Term Loan Agreement in connection with the incurrence of non-permitted debt, certain asset sales and with excess cash on hand in excess of certain maximum levels.

Amounts outstanding under the 2024 Amended Term Loan Agreement are guaranteed by certain of our 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 the Company.

The 2024 Amended Term Loan agreement contains certain financial covenants (as defined in the 2024 Term Loan Agreement), including the maintenance of the following ratios.

● Current Ratio not to fall below 1.00x, determined on the last day of each calendar month commencing with the calendar month ending March 31, 2025;

● Liquidity not to fall below the greater of (x) $10,000,000 and (y) the amount equal to the scheduled principal and interest payments for the immediately succeeding three month period, determined as of the last day of any fiscal quarter.

The 2024 Amended Term Loan Agreement also contains certain events of default, including non-payment;

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and voluntary and involuntary bankruptcy.

Changes in the level and timing of our production, drilling and completion costs, the cost and availability of transportation for our production and other factors varying from our expectations can affect our ability to comply with the covenants under our Amended Term Loan Agreement.

the covenants under our 2024 Amended Term Loan Agreement.

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 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.

Even if successful, alternative sources of financing could prove more expensive than borrowings under our Amended Term Loan Agreement.

The results presented in this Form 10-K are not necessarily indicative of future operating results.

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 for the periods presented (in thousands):

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

Years Ended December 31,

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Cash flows used in investing activities

Cash flows provided by financing activities

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

Cash flows (used in) provided by financing activities

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

Operating Activities.

Net cash flows provided by operating activities for the years ended December 31, 2024 and 2023 were $35.4 million and $17.6 million, respectively.

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.

Operating cash flows for the year ended December 31, 2024 increased from the prior year primarily due to lower gathering and transportation expense, decreased interest expense associated with lower outstanding debt balance during the year, the inclusion of the merger termination payment of $10.0 million and changes in working capital.

The increase in operating cash flows in 2024 were partially offset by decreased oil and natural gas revenues as a result of lower realized commodity prices and lower production volumes than the comparable prior year period.

Investing Activities.

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Financing Activities.

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.

Net cash flows used in financing activities for the year ended December 31, 2024 were $7.7 million compared to net cash flows provided by financing activities for the year ended December 31, 2023 of $59.1 million.

During the year ended December 31, 2024, prior to the refinancing transaction, we made principal payments of $52.4 million under our 2021 Amended Term Loan Agreement.

On December 26, 2024, we entered into the 2024 Term Loan Agreement, incurring $162.0 million in borrowings, which such proceeds were used to repay all amounts outstanding under the 2021 Amended Term Loan Agreement in the amount of $147.7 million.

Additionally, we incurred $8.2 million of debt issuance costs related to the new credit agreement.

We received $38.8 million in proceeds from the sales and issuance of preferred stock during the year ended December 31, 2024.

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 2021 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.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets, liabilities and proved oil and natural gas reserves.

Some accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.

Some accounting policies involve judgments and uncertainties to such an extent that there is reasonable

likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.

Actual results may differ from the estimates and assumptions used in the preparation of our consolidated financial statements.

Described below are the significant policies we apply in preparing our consolidated financial statements, some of which are subject to alternative treatments under accounting principles generally accepted in the United States.

Described below are the significant policies we apply in preparing our consolidated financial statements, some of which are subject to alternative treatments under U.S.

We also describe the significant estimates and assumptions we make in applying these policies.

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Proved Oil and Natural Gas Reserves

Estimates of our proved reserves included in this report are prepared in accordance with accounting principles generally accepted in the United States and SEC guidelines.

Estimates of our proved reserves included in this report are prepared in accordance with U.S.

GAAP and SEC guidelines.

Our engineering estimates of proved oil and natural gas reserves directly impact financial accounting estimates, including depletion, depreciation and accretion expense and the full cost ceiling test limitation.

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In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties to our full cost pool, capital spending and other factors will determine our actual ceiling test calculation and impairment analyses in future periods.

Using the first-day-of-the-month average for the 12-months ended December 31, 2023 of the WTI crude oil spot price of $78.21 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month average for the 12-months ended December 31, 2023 of the Henry Hub natural gas price of $2.64 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials, our ceiling test calculation would not have generated an impairment at December 31, 2023, holding all other inputs and factors constant.

Additionally, a 10% reduction in respective commodity prices at December 31, 2023, while all other factors remained constant, would not have generated an impairment.

Using the first-day-of-the-month average for the 12-months ended December 31, 2024 of the WTI crude oil spot price of $76.32 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month average for the 12-months ended December 31, 2024 of the Henry Hub natural gas price of $2.13 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials, our ceiling test calculation did not generate an impairment at December 31, 2024, holding all other inputs and factors constant.

Based on SEC prices as of March 1, 2025, the prices utilized in the first quarter 2025 full cost ceiling test limitation calculation will be $75.33 per barrel of oil and $2.44 per MMBtu of natural gas.

Applying these first quarter 2025 prices and holding all other inputs constant to those used in the calculation of our December 31, 2024 ceiling test, no full cost ceiling limitation impairment is indicated for March 31, 2025.

However, a full cost ceiling limitation impairment may still be realized in the future based on the outcome of numerous other factors such as declines in the actual trailing twelve-month SEC prices, production, lower commodity prices, changes in estimated future development costs and operating expenses, and other revisions to our proved reserves.

Any such ceiling test impairments in the future could be material to our net earnings.

Future Development Costs

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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.

Accordingly, we record the net change in the mark-to-market valuation of these positions, as well as payments and receipts on settled contracts, in “Net gain (loss) on derivative contracts” on the consolidated statements of operations.

Our provision for taxes includes both state and federal taxes.

Our provision for income taxes includes both state and federal taxes.

We account for income taxes using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

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Accretion expense

Impairment of contract asset

Other income (expenses):

Net gain (loss) on derivative contracts

Net gain on derivative contracts

Interest expense and other

Net (loss) income

Loss on extinguishment of debt

Crude oil – MBbls

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Gathering and other

Restructuring

General and administrative:

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Operating Revenues .

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 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.

Oil, natural gas and NGLs revenues were $193.2 million and $218.5 million for the years ended December 31, 2024 and 2023, respectively.

The decrease of $25.3 million in revenue is primarily attributable to a $7.6 million decrease resulting from lower average realized prices and a $17.7 million decrease due to lower production volumes in 2024 compared to 2023.

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.

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Production is lower in 2024 compared with 2023 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.

In 2024, we put online 4.0 gross (3.88 net) operated wells while in 2023 we put online 3.0 gross (3.00 net) operated wells.

However, two of the four operated wells placed online in 2024 were put online during the fourth quarter.

As such, these wells had minimal impact on 2024 production.

Lease Operating Expenses .

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On a per unit basis, lease operating expenses were $9.77 per Boe and $8.92 per Boe for the years ended December 31, 2024 and 2023, respectively.

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.

The increase year over year in lease operating expenses and 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 $5.2 million and $7.2 million for the years ended December 31, 2024 and 2023, 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.

The increased workover and other expenses in 2023 relate to more significant workover projects undertaken in the current year as well as inflationary market increases in service and material costs in 2023.

On a per unit basis, workover and other expenses were $1.12 per Boe and $1.42 per Boe for the years ended December 31, 2024 and 2023, respectively.

The decreased workover and other expenses in 2024 relate to fewer significant workover projects undertaken in the current year compared to 2023.

Taxes Other than Income .

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Most production taxes are based on production volumes and realized prices at the wellhead.

As revenues or volumes from oil and natural gas sales increase or decrease, production taxes on these sales also increase or decrease.

As revenues or volumes from oil and natural gas sales increase or decrease, production taxes on these sales also increase or decrease, as such, taxes other than income decreased due to the decrease in revenues.

On a per unit basis, taxes other than income were $2.42 per Boe and $2.37 per Boe for the years ended December 31, 2024 and 2023, respectively.

Gathering and Other Expenses.

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, 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.

Gathering and other expenses were $54.1 million and $63.6 million for the years ended December 31, 2024 and 2023, respectively.

On a per unit basis, gathering and other expenses were $11.67 per Boe and $12.64 per Boe for the years ended December 31, 2024 and 2023, respectively.

Our gathering and other expenses are primarily driven by the amount and location of natural gas production, the concentration of H 2 S in our sour gas produced and the amounts paid to treat our sour gas volumes, either through the AGI Facility or through third parties.

For the year ended December 31, 2024, overall natural gas production volumes decreased compared to 2023 in addition to cost savings realized with the AGI Facility coming online .

General and Administrative Expense .

General and administrative expense was $18.2 million and $20.1 million for the years ended December 31, 2024 and 2023, respectively.

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.

The decrease in general and administrative expense for 2024 is primarily associated with a decrease in payroll and employee benefits, partially offset by an increase in professional fees and nonrecurring costs related to the terminated merger.

On a per unit basis, general and administrative expense were $3.93 per Boe and $3.99 per Boe for the years ended December 31, 2024 and 2023, respectively.

Depletion, Depreciation, and Amortization Expense.

Depletion for oil and natural gas properties is calculated using the unit-of-production method, which depletes the capitalized costs of evaluated properties plus future development costs based on the ratio of production for the current period to total reserve volumes of evaluated properties as of the beginning of the period.

Depletion expense was $51.3 million and $55.2 million for the years ended December 31, 2024 and 2023, respectively.

On a per unit basis, depletion expense was $11.06 per Boe and $10.97 per Boe for the years ended December 31, 2024 and 2023, respectively.

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

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 .

The decrease of $3.9 million in depletion expense for the year ended December 31, 2024 compared to 2023 is primarily due to the decrease in production when comparing 2024 to 2023 .

The increase in our depletion rate for the year ended December 31, 2024 compared to 2023 is primarily due to

decreased proved reserves relative to the change in future development costs associated with those reserves when comparing 2024 to 2023.

Impairment of contract asset.

We had advanced total capital contributions of approximately $18.5 million on behalf of our joint venture partner in WAT to fund a workover operation on the AGI Facility, of which $15.1 million was incurred during 2023 and the remaining $3.4 million during 2024.

Pursuant to the terms of the agreement governing the joint venture, 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 advances, none of which would occur until the expiration of the current tolling agreement between the parties.

Pursuant to such, we initially recorded the advance as a Contract asset in the Consolidated Balance Sheet and assessed the fair value of the contract asset on a quarterly basis for possible impairment.

Net gain on derivative contracts .

We enter into derivative commodity instruments to economically hedge our exposure to price fluctuations on our anticipated oil and natural gas production.

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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 gain of $2.3 million ($11.1 million net gain on unsettled contracts and $8.8 million net loss on settled contracts) for the year ended December 31, 2024 and 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.

At December 31, 2024, we had a $11.0 million derivative asset, $7.0 million of which was classified as current, and we had a $19.3 million derivative liability, $12.3 million of which was classified as current.

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Interest expense and other was $15.0 million and $33.3 million for the years ended December 31, 2024 and 2023, respectively.

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.

Interest expense and other primarily decreased in the current year period compared to the same period in the prior year due to receipt of a $10.0 million payment for the merger termination combined with a $7.5 million decrease in interest expense resulting from lower average debt balances from repayment of borrowings associated with our 2021 Amended Term Loan Agreement .

Our weighted average interest rate for the year ended December 31, 2024, was approximately 12.88%.

For the first quarter of 2025, we anticipate our interest rate will be 12.23% on outstanding borrowings.

Loss on extinguishment of debt.

On December 26, 2024, we entered into the 2024 Amended Term Loan Agreement to fully refinance and repay our 2021 Amended Term Loan Agreement and recognized a $7.5 million loss on extinguishment of debt, which includes a $3.6 million non-cash write-off of deferred financing costs, original issue discounts and embedded derivatives associated with the extinguished debt and $3.9 million in fees and debt issuance costs paid for the new debt.

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